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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950134-01-001719.txt : 20010226
<SEC-HEADER>0000950134-01-001719.hdr.sgml : 20010226
ACCESSION NUMBER: 0000950134-01-001719
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010223
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: VALERO ENERGY CORP/TX
CENTRAL INDEX KEY: 0001035002
STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911]
IRS NUMBER: 741828067
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-13175
FILM NUMBER: 1553259
BUSINESS ADDRESS:
STREET 1: ONE VALERO PLACE
CITY: SAN ANTONIO
STATE: TX
ZIP: 78212
BUSINESS PHONE: 2103702000
MAIL ADDRESS:
STREET 1: ONE VALERO PLACE
CITY: SAN ANTONIO
STATE: TX
ZIP: 78230
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d84423e10-k405.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2000
<TEXT>
<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from____________ to_________
COMMISSION FILE NUMBER 1-13175
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-1828067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE VALERO PLACE
SAN ANTONIO, TEXAS 78212
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (210) 370-2000
Securities registered pursuant to Section
12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
PREMIUM EQUITY PARTICIPATING SECURITY UNITS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value on February 1, 2001, of the registrant's
Common Stock, $.01 par value, held by nonaffiliates of the registrant, based on
the average of the high and low prices as quoted in the New York Stock Exchange
Composite Transactions listing for that date, was approximately $2.0 billion. As
of February 1, 2001, 61,038,088 shares of the registrant's Common Stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Valero intends to file with the Securities and Exchange Commission in
March 2001 a definitive Proxy Statement for Valero's Annual Meeting of
Stockholders scheduled for May 10, 2001, at which directors of Valero will be
elected. Portions of the 2001 Proxy Statement are incorporated by reference in
Part III of this Form 10-K and shall be deemed to be a part hereof.
<PAGE> 2
CROSS-REFERENCE SHEET
The following table indicates the headings in the 2001 Proxy Statement
where the information required in Part III of Form 10-K may be found.
<TABLE>
<CAPTION>
FORM 10-K ITEM NO. AND CAPTION HEADING IN 2001 PROXY STATEMENT
- ------------------------------ -------------------------------
<S> <C>
10. "Directors and Executive Officers of the
Registrant"................................... "Proposal No. 1 - Election of Directors," and "Information
Concerning Nominees and Other Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance"
11. "Executive Compensation"......................... "Executive Compensation," "Stock Option Grants and Related
Information," "Report of the Compensation Committee of the
Board of Directors on Executive Compensation," "Retirement
Benefits," "Arrangements with Certain Officers and Directors"
and "Performance Graph"
12. "Security Ownership of Certain Beneficial
Owners and Management"........................ "Beneficial Ownership of Valero Securities"
13. "Certain Relationships and Related
Transactions"................................. "Transactions with Management and Others"
</TABLE>
Copies of all documents incorporated by reference, other than exhibits
to such documents, will be provided without charge to each person who receives a
copy of this Form 10-K upon written request to Jay D. Browning, Corporate
Secretary, Valero Energy Corporation, P.O. Box 500, San Antonio, Texas
78292-0500.
ii
<PAGE> 3
<TABLE>
<CAPTION>
CONTENTS
PAGE
<S> <C> <C>
Cross Reference Sheet..................................................................... ii
PART I
Item 1. Business.................................................................................. 1
Acquisition of California Refining and Marketing Assets................................... 2
Valero's Strategic Direction.............................................................. 2
Refining, Marketing and Feedstock Supply.................................................. 4
Refining............................................................................... 4
Gulf Coast.......................................................................... 4
East Coast.......................................................................... 6
West Coast.......................................................................... 6
Selected Operating Results.......................................................... 7
Marketing.............................................................................. 8
Feedstock Supply....................................................................... 9
Factors Affecting Operating Results....................................................... 9
Competition............................................................................... 11
Environmental Matters..................................................................... 12
Executive Officers of the Registrant...................................................... 15
Employees................................................................................. 16
Item 2. Properties................................................................................ 16
Item 3. Legal Proceedings......................................................................... 16
Environmental Proceedings.............................................................. 16
Other Litigation....................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 19
Item 6. Selected Financial Data................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 37
Item 8. Financial Statements...................................................................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................... 85
PART III
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 85
</TABLE>
iii
<PAGE> 4
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
This Form 10-K contains certain estimates, predictions, projections and other
"forward-looking statements" (as defined in Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934) that involve
various risks and uncertainties. While these forward-looking statements, and any
assumptions upon which they are based, are made in good faith and reflect
Valero's current judgment regarding the direction of its business, actual
results will almost always vary, sometimes materially, from any estimates,
predictions, projections, assumptions, or other future performance suggested
herein. These forward-looking statements can generally be identified by the
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "budget," "forecast," "will," "could," "should," "may" and similar
expressions. Some important factors (but not necessarily all factors) that could
affect Valero's sales volumes, growth strategies, future profitability and
operating results, or that otherwise could cause actual results to differ
materially from those expressed or forecast by Valero are discussed in "Item 1.
Business" under the headings "Factors Affecting Operating Results,"
"Competition," and "Environmental Matters," and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the heading
"Forward-Looking Statements" as well as in Valero's other filings with the
Securities and Exchange Commission. Valero does not intend to update these
statements unless the securities laws require Valero to do so. Valero undertakes
no obligation to publicly release the result of any revisions to any
forward-looking statements that may be made to reflect events or circumstances
after the date of this Form 10-K or to reflect the occurrence of unanticipated
events.
PART I
ITEM 1. BUSINESS
Valero Energy Corporation(1) is one of the largest and most
geographically diverse independent petroleum refining and marketing companies in
the United States. Valero owns and operates six refineries in Texas, California,
Louisiana and New Jersey with a combined throughput capacity of approximately
1,000,000 barrels per day, or BPD (723,000 BPD of crude capacity). Valero
produces premium, environmentally clean products such as reformulated gasoline,
low-sulfur diesel and oxygenates, and is able to produce gasoline meeting
specifications of the California Air Resources Board, or CARB gasoline. Valero
also produces a substantial slate of middle distillates, jet fuel and
petrochemicals. Valero markets its products in 34 states through an extensive
wholesale bulk and rack marketing network, and in California through
approximately 350 retail locations. Valero's principal executive offices are
located at One Valero Place, San Antonio, Texas, 78212 and its telephone number
is (210) 370-2000.
- -----------------------
(1) Valero was incorporated in Delaware in 1981 under the name Valero
Refining and Marketing Company as a wholly owned subsidiary of Valero Energy
Corporation, referred to as Old Valero. Old Valero was engaged in both the
refining and marketing business and the natural gas related services business.
On July 31, 1997, Old Valero spun off Valero to Old Valero's stockholders by
distributing all of the common stock of Valero. Immediately after this
distribution, Old Valero, with its remaining natural gas related services
business, merged with a wholly owned subsidiary of PG&E Corporation. The
distribution of Valero to Old Valero's stockholders and the merger of Old Valero
with the subsidiary of PG&E Corporation are collectively referred to as the
"Restructuring." Upon completion of the Restructuring, Valero's name was changed
from Valero Refining and Marketing Company to Valero Energy Corporation and its
common stock was listed for trading on the New York Stock Exchange under the
symbol "VLO."
1
<PAGE> 5
As used in this report, the term "Valero" may, depending upon the
context, refer to Valero Energy Corporation, to one or more of its consolidated
subsidiaries or to all of them taken as a whole.
For financial and statistical information regarding Valero's
operations, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations." For a discussion of cash flows
provided by and used in Valero's operations, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
ACQUISITION OF CALIFORNIA REFINING AND MARKETING ASSETS
On May 15, 2000, Valero acquired from Exxon Mobil Corporation the
Benicia Refinery and certain Exxon-branded supplier relationships with over 260
independently owned service stations. On June 15, 2000, Valero closed the
remaining retail component of the transaction, which included approximately 80
Exxon-branded California service stations. The aggregate purchase price was $895
million plus approximately $150 million for refinery inventories and certain
other costs associated with the transaction. This transaction is hereafter
collectively referred to as the "Benicia Acquisition." The Benicia Refinery is
more fully discussed below in "Item 1. Business" under the heading "Refining,
Marketing and Feedstock Supply - Refining - Benicia Refinery."
The Benicia Acquisition was funded through a senior notes offering, an
offering of premium equity participating security units, or PEPS Units, a common
stock offering and borrowings under Valero's existing bank credit facilities.
See Notes 5, 6 and 7 of Notes to Consolidated Financial Statements for details
regarding these offerings. In addition, Valero entered into a structured lease
arrangement for the 80 service stations and the refinery's dock facility. See
Notes 3 and 14 of Notes to Consolidated Financial Statements.
VALERO'S STRATEGIC DIRECTION
Valero has distinguished itself among independent refiners by
cost-effectively upgrading its refineries to increase both output and overall
refining complexity and flexibility, thus enhancing Valero's ability to process
lower-cost feedstocks into higher value-added premium products. Valero processes
a wide slate of feedstocks including sour crude oils, intermediates and residual
fuel oils, or resid, which can typically be purchased at a discount to West
Texas Intermediate, a benchmark crude oil. Approximately 75% of Valero's
feedstock slate is comprised of sour crudes, intermediates and resid.
Approximately 60% of Valero's total gasoline production is
premium-grade gasoline, reformulated gasoline, or RFG, and gasoline that meets
the specifications of the California Air Resources Board, or CARB gasoline, all
of which sell at a premium over conventional grades of gasoline. Valero also can
produce up to 75% of its distillate slate as low-sulfur diesel and jet fuel,
which sell for a premium over high-sulfur heating oil. In addition to its
feedstock and product advantages, Valero has synergies among its Gulf Coast
refineries that allow Valero to transfer intermediate feedstocks such as
deasphalted oil and atmospheric tower bottoms, or ATBs, among the Texas City,
Houston and Corpus Christi Refineries.
2
<PAGE> 6
Valero intends to remain a premier, independent refining and marketing
company that focuses on innovative, efficient upgrading of low-cost feedstocks
into higher-value premium products. Valero's strategic objectives include the
following:
Accretive Growth through Acquisitions. Valero intends to
selectively pursue acquisitions in order to increase growth and
diversification. As part of this strategy, Valero regularly searches
for acquisition opportunities that it believes will be immediately
accretive to earnings and cash flow and provide acceptable rates of
return.
Upgrading Refineries in a Cost-Effective Manner. Valero
continually evaluates opportunities to maximize the value of its
refineries through cost-effective upgrades and expansions. Valero
believes that refineries that are more flexible with regard to
processing lower-cost feedstocks and that are able to produce higher
value-added premium products such as RFG and low-sulfur diesel are
better positioned to exploit increases in refining margins and mitigate
the effects of decreases in refining margins than refineries that
produce more conventional forms of gasoline and distillates from
higher-cost feedstocks.
Dedication to Safety and Environmental Concerns. Valero
continues to focus on and devote significant time and resources to
safety training and accountability programs throughout its operations.
Valero seeks to be environmentally proactive and will continue to
actively monitor developments with the EPA's proposed air emissions
reduction rules and other regulatory changes.
Maintaining Financial Flexibility. Valero intends to maintain
discipline in its overall financial plan to maintain its investment
grade rating and remain flexible for the purpose of financing
acquisitions. Valero intends to maintain sufficient committed and
uncommitted bank credit lines and letter of credit facilities as
necessary to reduce borrowing costs and enhance liquidity. Valero seeks
to maintain a discipline in its capital expenditures program consistent
with the financial ratio requirements of its credit facilities.
3
<PAGE> 7
REFINING, MARKETING AND FEEDSTOCK SUPPLY
REFINING
Valero's six refineries have a combined total throughput capacity of
approximately 1,000,000 BPD. The following table lists the location of each of
Valero's refineries and their respective feedstock throughput capacities as of
December 31, 2000.
<TABLE>
<CAPTION>
FEEDSTOCK THROUGHPUT
REFINERY LOCATION CAPACITY IN BPD
<S> <C> <C>
Gulf Coast
Corpus Christi Refinery Corpus Christi, Texas 225,000
Texas City Refinery Texas City, Texas 210,000
Houston Refinery Houston, Texas 115,000
Krotz Springs Refinery Krotz Springs, Louisiana 85,000
East Coast
Paulsboro Refinery Paulsboro, New Jersey 185,000
West Coast
Benicia Refinery Benicia, California 165,000
-------
TOTAL 985,000 (a)
========
</TABLE>
- -----------------------
(a) Crude unit capacity = 723,000 BPD
Gulf Coast
Corpus Christi Refinery. The Corpus Christi Refinery is located along
the Corpus Christi Ship Channel. The Corpus Christi Refinery is a complex
refinery that specializes in processing primarily lower-cost sour crude oil and
resid into premium products, such as RFG and CARB gasoline. The Corpus Christi
Refinery produces primarily premium-grade gasoline and gasoline-related
products and low-sulfur diesel. The refinery can produce most of its gasoline as
RFG and all of its diesel fuel as low-sulfur diesel. The refinery can also
produce certain petrochemicals, including propylene and xylene. The refinery
typically receives and delivers its feedstocks and products by tanker and barge
via deep-water docking facilities along the Corpus Christi Ship Channel, and
utilizes the Coastal, Colonial, Explorer and other major pipelines for
distribution of its products.
The Corpus Christi Refinery has substantial flexibility to vary its mix
of gasoline products to meet changing market conditions. The refinery's primary
operating units include a heavy oil cracker, or HOC, a hydrodesulfurization
unit, or HDS unit, a hydrocracker and a reformer complex. It also operates
certain units that produce oxygenates(2) such
- --------
(2) "Oxygenates" are liquid hydrocarbon compounds containing oxygen. Gasoline
that contains oxygenates usually has lower carbon monoxide emissions than
conventional gasoline. MTBE is an oxygen-rich, high-octane gasoline blendstock
produced by reacting methanol and isobutylene, and is used to manufacture
oxygenated and reformulated gasolines. TAME, like MTBE, is an oxygen-rich,
high-octane gasoline blendstock.
4
<PAGE> 8
as MTBE (methyl tertiary butyl ether) and TAME (tertiary amyl methyl ether),
which are blended into Valero's gasoline production and also sold separately.
These units and related facilities diversify the refinery's operations, giving
the refinery the flexibility to pursue potentially higher-margin product markets
utilizing lower-cost feedstocks. Turnarounds of the hydrocracker and reformer
complexes were completed in early 2000. Turnarounds of the hydrodesulfurization
unit and the oleflex and related units were completed in the fourth quarter of
2000. No major turnarounds are currently planned for 2001.
Texas City Refinery. The Texas City Refinery is capable of refining
lower-cost sour crudes into a slate of gasolines and distillates, including home
heating oil, low-sulfur diesel, kerosene and jet fuel. Other products include
chemical-grade propylene and propane. The Texas City Refinery can also provide
intermediate feedstocks such as deasphalted oil and ATBs to the Corpus Christi
Refinery and/or the Houston Refinery. The refinery typically receives and
delivers its feedstocks and products by tanker and barge via deep-water docking
facilities along the Texas City Ship Channel, and also has access to the
Colonial, Explorer and TEPPCO pipelines for distribution of its products.
The Texas City Refinery's primary operating units include a crude
distillation complex, a fluid catalytic cracking unit, or FCC Unit, a Residfiner
(which reduces the sulfur content and improves the cracking characteristics of
the feedstocks for the FCC Unit), and a Residual Oil Supercritical Extraction
unit, or ROSE unit (which recovers deasphalted oil from the vacuum tower bottoms
for feed to the FCC Unit). In 2000, Valero increased net refinery throughput
capacity by approximately 8,000 BPD by expanding the refinery's hydrotreating
unit and FCC Unit. Valero also completed a turnaround of the Residfiner in 2000.
In early February 2001, in conjunction with a scheduled turnaround, Valero
completed an upgrade of two of the refinery's crude units to increase net
refinery throughput capacity by approximately 20,000 BPD, and to increase the
efficiency and reliability of these units. At this time, a turnaround of the
Residfiner was also completed.
Houston Refinery. The Houston Refinery primarily processes sour crude
oils to produce conventional gasoline, high-sulfur diesel and other distillates.
The refinery also produces chemical-grade propylene. The refinery's primary
operating units include a crude distillation complex and an FCC Unit. The
refinery typically receives its feedstocks via tanker at deep-water docking
facilities along the Houston Ship Channel. This facility also typically delivers
its products through major product pipelines, including the Colonial, Explorer
and TEPPCO pipelines.
In the first quarter of 2001, Valero expects to complete the first
plantwide turnaround at this refinery since Valero acquired it in 1997. During
the turnaround, expansions and modifications of the refinery's FCC Unit and
crude unit are expected to increase the refinery's production capacity by over
5,000 BPD and provide enhanced feedstock processing flexibility. The turnaround
is also expected to substantially enhance the reliability of the FCC Unit and
improve the yields of light products.
Krotz Springs Refinery. The Krotz Springs Refinery processes primarily
local, light Louisiana sweet crude oil to produce conventional gasoline,
high-sulfur diesel and other distillates. The refinery is geographically located
to benefit from access to upriver markets on the Mississippi River, and has
docking facilities along the Atchafalaya River sufficiently deep to allow barge
access. The facility is also connected to the Colonial pipeline for product
transportation to the Southeast and Northeast. Initially completed around 1982,
the refinery is a relatively new facility compared to other U.S. refineries.
Primary units include a crude distillation complex, an FCC Unit and a reformer
complex. No major turnarounds were performed in 2000, and none are currently
planned for 2001.
5
<PAGE> 9
East Coast
Paulsboro Refinery. On September 16, 1998, Valero purchased
substantially all of the assets related to Mobil Oil Corporation's refinery in
Paulsboro, New Jersey, and assumed certain of its liabilities. This transaction
is hereafter called the "Paulsboro Acquisition." The Paulsboro Acquisition
improved Valero's geographic diversity by providing better access to Northeast
markets and diversified Valero's product mix through the refinery's production
of lubricant basestocks and asphalt.
The Paulsboro Refinery processes primarily sour crudes into a wide
slate of gasoline, distillates, lubricant basestocks and asphalt. Major units at
the refinery include a lubricants crude unit, a fuels crude unit, an FCC Unit, a
naphtha reformer unit, an asphalt rack and blend facility and a lubricants
plant. Feedstocks and refined products are typically transported via
refinery-owned dock facilities along the Delaware River, ExxonMobil's product
distribution system or the refinery's access to the Colonial pipeline, which
allows products to be sold into the New York Harbor market.
In the second quarter of 2000, Valero completed expansions of the
refinery's FCC Unit and one of its crude units in conjunction with a scheduled
turnaround. Valero completed a turnaround of the reformer unit in the fourth
quarter of 2000. Valero intends to upgrade the refinery's lubricants crude unit
and lubricants plant in the third quarter of 2001.
West Coast
Benicia Refinery. Valero acquired the Benicia Refinery on May 15, 2000
from ExxonMobil. The refinery is located on the Carquinez Straits of the San
Francisco Bay. It is a complex refinery which processes sour crude oils and
produces a high percentage of light products, with limited production of other
products. Over 70% of the refinery's production is gasoline, approximately 95%
of which meets the California Air Resources Board specifications for CARB II
gasoline sold in California. The refinery can produce approximately 120,000 BPD
of gasoline (115,000 BPD of which is CARB II gasoline). The refinery's other
products include jet fuel, low-sulfur diesel, oxygenates and natural gas
liquids.
The Benicia Refinery's primary operating units include a crude
distillation unit, a vacuum distillation unit, an FCC Unit, a hydrocracking
unit, a reforming unit and a fluidized coking unit. Also included with the
refinery assets are a deep-water dock located offsite on the Carquinez Straits
that is capable of berthing large crude carriers, a 20-inch crude pipeline
connecting the refinery to a southern California crude delivery system, and an
adjacent truck terminal for regional truck rack sales. The majority of the
refinery's products are distributed via the Kinder Morgan pipeline in
California.
During a turnaround in the first quarter of 2001, Valero completed an
upgrade of the refinery's hydrogen plant, hydrotreater and hydrocracker units to
increase CARB II gasoline production. No other turnarounds are scheduled for the
remainder of 2001.
6
<PAGE> 10
Selected Operating Results
The following tables set forth certain consolidated operating results
for the last three fiscal years (volumes are stated in thousand barrels per day
or MBPD). Amounts for 2000 include the results of operations related to the
Benicia Refinery and related distribution assets beginning May 16, 2000, and the
operations related to the retail service stations beginning June 16, 2000.
Amounts for 1998 include the results of operations of the Paulsboro Refinery
after September 16, 1998. Average throughput margin per barrel is computed by
subtracting total direct product cost of sales from product sales revenues and
dividing the result by throughput volumes. Aggregate refinery charges and yields
are expressed as percentages of total charges and yields, respectively.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------ ----- ------
<S> <C> <C> <C>
Refinery Throughput Volumes ............. 857 712 579
Sales Volumes ........................... 1,142 1,033 894
Average Throughput Margin per Barrel .... $5.08 $2.90 $3.50
Average Operating Cost per Barrel:
Cash (Fixed and Variable) .......... $2.18 $1.83 $2.03
Depreciation and Amortization ...... .52 .52 .55
----- ----- -----
Total Operating Cost per Barrel $2.70 $2.35 $2.58
===== ===== =====
Charges:
Crude Oils:
Sour ........................... 55% 48% 37%
Heavy Sweet .................... 8 12 20
Light Sweet .................... 8 9 11
----- ----- -----
Total Crude Oils .......... 71 69 68
High-Sulfur Residual Fuel Oil ...... 4 3 9
Low-Sulfur Residual Fuel Oil ....... 3 6 3
Other Feedstocks and Blendstocks ... 22 22 20
----- ----- -----
Total Charges .................. 100% 100% 100%
===== ===== =====
Yields:
Gasolines and Blendstocks .......... 53% 51% 53%
Distillates ........................ 28 29 28
Petrochemicals ..................... 3 5 4
Lubes and Asphalts ................. 3 3 1
Other Products ..................... 13 12 14
----- ----- -----
Total Yields ................... 100% 100% 100%
===== ===== =====
</TABLE>
For additional information regarding Valero's operating results for the
three years ended December 31, 2000, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
7
<PAGE> 11
MARKETING
Over 85% of Valero's product slate is comprised of premium products
such as gasoline and related components, distillates, lubricant basestocks and
petrochemicals. Valero sells refined products under spot and term contracts to
bulk and truck rack customers at over 200 locations in 34 states throughout the
United States and selected export markets in Latin America. Valero also sells
its gasoline at retail service stations in California. Valero's bulk sales are
made to various oil companies and gasoline distributors, and are transported by
pipeline, barges and tankers. Valero markets over 200,000 BPD of gasoline and
distillates through truck rack facilities. The principal purchasers of its
products from truck racks are wholesalers and distributors in the Northeast,
Southeast, Midwest, West Coast and Gulf Coast. Each of Valero's refineries has
access to deep-water transportation facilities. Interconnects with
common-carrier pipelines give Valero the flexibility to sell products in most
major geographic regions of the United States.
Total product sales volumes in 2000 averaged approximately 1,142,000
BPD. Sales volumes included amounts produced at Valero's refineries and amounts
purchased from third parties and resold in connection with its marketing
activities. In 2000, substantially all of the light products from the Paulsboro
Refinery were sold to ExxonMobil at market-related prices pursuant to long-term
agreements. In 2000, approximately 11.7% of Valero's consolidated operating
revenues were derived from ExxonMobil. Other than sales to ExxonMobil, no single
purchaser of Valero's products accounted for more than 10% of total sales during
2000. As part of the Paulsboro Acquisition, Valero and Mobil signed long-term
agreements for the Paulsboro Refinery to supply Mobil's adjacent lube oil
blending and packaging facility with fuels and lubricant basestocks. In
addition, Valero and Mobil signed long-term agreements for the Paulsboro
Refinery to supply portions of Mobil's marketing operations with light products
at market-related prices.
Approximately 60% of Valero's gasoline production is RFG, CARB
gasoline, and premium-grade gasoline. Approximately 65,000 BPD of Valero's RFG
production is under contract at market-related prices to gasoline marketers in
Texas and the Northeast. Approximately 43,000 BPD of the Benicia Refinery's CARB
gasoline is sold under contract at market-related prices to gasoline marketers
in California. When market conditions are favorable, Valero can also supply CARB
gasoline to West Coast markets from its Corpus Christi Refinery.
Included in the Benicia Acquisition were certain service stations,
including 10 company-owned and operated sites and 70 lessee-dealer sites, all of
which are in the greater San Francisco Bay area. Valero offers its own brand of
retail petroleum products at these locations. Dealers at these locations have
entered into a franchise agreement with Valero to market products under the new
Valero brand. In July 2000, these dealers were offered an option to purchase the
stations that they were leasing. If exercised, the purchase option requires the
dealers to enter into a fuels purchase agreement with Valero for a term of 15
years. Any purchases of stations by these dealers resulting from the exercise of
their purchase options are expected to be completed by the end of the first
quarter of 2001. Valero also acquired ExxonMobil's California distributor
contracts to supply Exxon-branded products to over 260 independently owned and
operated service stations outside the San Francisco Bay area. These sites
retained the right to use the Exxon brand, and continue to accept the Exxon
proprietary credit card and receive Exxon brand support. Valero enjoys the
exclusive right to offer the Exxon brand in California (except in the San
Francisco Bay area) until 2010.
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FEEDSTOCK SUPPLY
Refinery acquisitions and capital improvements since 1997 have expanded
and diversified the slate of feedstocks Valero can process. Prior to these
investments, Valero's primary feedstock was resid processed at the Corpus
Christi Refinery, representing 50-70% of total feedstocks. But now,
approximately 75% of Valero's feedstock slate is comprised of sour crude oil,
intermediates and resid. The remaining feedstocks are primarily low-sulfur crude
oil and other feedstocks such as methanol and butane.
Approximately 556,000 BPD, or 77%, of Valero's total crude oil
feedstock requirements are purchased through term feedstock contracts. The
remainder of its feedstock requirements are generally purchased on the spot
market. The term agreements include contracts to purchase feedstocks from
various foreign national oil companies and domestic integrated oil companies at
market-related prices. In particular, a significant portion of Valero's
feedstock requirements are served through suppliers in the Middle East, and,
therefore, Valero is subject to the political, geographic and economic risks
attendant to doing business with suppliers located in that area. If one or more
of Valero's term contracts were terminated, Valero presently believes that it
would be able to find alternative sources of supply without material adverse
effect on its business, but Valero cannot provide assurance that satisfactory
alternative sources of supply will continue to be available.
In connection with the Benicia Acquisition, Valero entered into a
ten-year contract providing for ExxonMobil to supply to Valero's Benicia
Refinery certain quantities of Alaska North Slope crude oil, or ANS crude, at
market-related prices. The contract provides for ExxonMobil to supply up to
65,000 BPD of ANS crude during 2001. Under the contract, Valero will have an
option to reduce the required volumes by 20,000 BPD once per year beginning
January 1, 2002.
Valero owns feedstock and refined product storage facilities and leases
feedstock and refined product storage facilities in various locations. Valero
believes its storage facilities are adequate for its refining and marketing
operations.
FACTORS AFFECTING OPERATING RESULTS
Valero's earnings and cash flow from operations are primarily affected
by the relationship, or margins, between refined product prices and the prices
for crude oil and other feedstocks. Valero's cost to acquire feedstocks and the
price for which Valero ultimately can sell refined products depend on numerous
factors beyond Valero's control, including regional and global supply and demand
for crude oil, gasoline, diesel and other feedstocks and refined products, which
in turn are dependent upon, among other things, the availability of imports, the
production levels of domestic and foreign suppliers, competitive fuels,
political affairs and the extent of governmental regulation. Historically,
refining margins have been volatile, and they are likely to continue to be
volatile in the future. For example, in 1998, significant declines in feedstock
and refined product prices resulted in non-cash inventory write-downs of $171
million, which decreased earnings by $111 million. In some prior years, there
was a substantial excess supply of refined products, which led to low prices and
weak refining margins. Although these refining fundamentals and refining margins
improved significantly in 2000, there can be no assurance that these
improvements will continue or be sustainable. Some specific
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<PAGE> 13
factors that may affect Valero's refining margins are listed below in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements."
Feedstock and refined product prices are also affected by other
factors, such as product pipeline capacity, local market conditions and the
operating levels of competing refineries. Crude oil costs and the price of
refined products have historically been subject to wide fluctuation. Industry
expansion, installation of additional refinery facilities, price volatility,
international political and economic developments and other factors beyond
Valero's control are likely to continue to play an important role in refining
industry economics. These factors can impact, among other things, the level of
inventories in the market resulting in price volatility and a reduction in
product margins. Moreover, the industry typically experiences seasonal
fluctuations in demand for refined products, such as for gasoline during the
summer driving season and for home heating oil during the winter in the
Northeast. For example, three consecutive unseasonably warm winters in the
Northeast resulted in reduced demand, unusually high inventories and
considerably lower prices for heating oil during 1999.
A large portion of Valero's feedstock supplies are secured under term
contracts. There is no assurance of renewal of these contracts upon their
expiration or that economically equivalent substitute feedstock supplies can be
secured. Feedstock supplies from international producers are loaded aboard
chartered vessels and are subject to the usual maritime hazards. If foreign
sources of crude oil or access to the marine system for delivering crude oil
were curtailed, Valero's operations could be adversely affected. In addition,
the loss of, or an adverse change in the terms of, certain of its feedstock
supply agreements or the loss of sources or means of delivery of its feedstock
supplies, could adversely affect its operating results. The volatility of prices
and quantities of feedstocks that may be purchased on the spot market or
pursuant to term contracts could also have a material adverse effect on
operating results.
Valero's operations are subject to extensive federal, state and local
environmental laws and regulations, including those relating to the discharge of
materials into the environment, waste management, pollution prevention measures
and characteristics and compositions of gasoline and diesel fuels. Environmental
laws are increasingly becoming more stringent and new environmental laws and
regulations that affect Valero's operations are continuously being enacted or
proposed, such as those relating to MTBE, CARB gasoline, and the Clean Air Act's
Tier II gasoline standards and Maximum Available Control Technology rule. These
laws and regulations, and their potential effect on Valero's results of
operations, are more fully discussed below under the heading "Environmental
Matters."
Because Valero's refineries are generally more complex than many
conventional refineries and are designed to process heavy and sour crude oils,
including resid, its operating costs per barrel are generally higher than those
of most conventional refiners. But because Valero's primary feedstocks usually
sell at discounts to benchmark crude oil, Valero has generally been able to
recover its higher operating costs by generating higher margins than many
conventional refiners that use lighter crudes as their principal feedstocks.
Moreover, through recent acquisitions, improvements in technology and
modifications to its operating units, Valero has improved its flexibility to
process different types of feedstocks, including heavier crude oils. Valero
expects that its primary feedstocks will continue to sell at a discount to
benchmark crude oil, but is unable to predict future relationships between the
supply of and demand for its feedstocks.
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In late 2000, the availability of electric power in California
decreased dramatically due to rising demand resulting from colder than normal
temperatures and shrinking supplies resulting from generation plant outages and
reduced power imports. The electricity crisis escalated in early 2001 resulting
in periodic blackouts and power cutbacks to industrial and residential users by
the state's electrical utilities, one of which is Pacific Gas and Electric
Company, the electricity supplier to the Benicia Refinery. The electricity
crisis and the financial troubles of certain of California's utilities,
including Pacific Gas and Electric, have not to date had any impact on the
Benicia Refinery. The refinery's contract with Pacific Gas and Electric is not
interruptible. However, there can be no assurance that the electricity crisis in
California will soon abate or that the California utilities will be able to
continue to supply energy to the Benicia Refinery or to the pipelines that
distribute the refinery's products at historical rates or in historical
quantities.
In April 1995, six major oil refiners filed a lawsuit against Unocal
Corporation concerning the validity of a patent claimed by Unocal on certain
gasoline compositions required by the CARB Phase II regulations in California.
In 1997, a federal court jury upheld the validity of Unocal's patent and awarded
Unocal royalty damages based on infringement of the patent. The decision was
appealed, and in March 2000, a panel of the Court of Appeals for the Federal
Circuit affirmed the lower court decision. On February 20, 2001, the United
States Supreme Court denied the oil refiners' petition for review of the
decision. Unocal also has four other patents for gasoline compositions that are
not involved in the litigation. Valero is not a party to the patent lawsuit, but
if Valero were required to pay a royalty on the gasoline compositions claimed by
Unocal's several patents, such amounts could affect Valero's operating results
and alter the blending economics for compositions not covered by the patents.
COMPETITION
Many of Valero's competitors in the petroleum industry are fully
integrated companies engaged on a national or international basis in many
segments of the petroleum business, including exploration, production,
transportation, refining and marketing, on scales much larger than Valero's.
Such competitors may have greater flexibility in responding to or absorbing
market changes occurring in one or more of such segments. All of Valero's crude
oil and feedstock supplies are purchased from third-party sources, while some
competitors have proprietary sources of crude oil available for their own
refineries.
The refining industry is highly competitive with respect to both
feedstock supply and marketing. Valero competes with numerous other companies
for available supplies of feedstocks and for outlets for its refined products.
Valero does not produce any of its crude oil feedstocks, and, following the
Benicia Acquisition, controls only limited retail outlets for its refined
products. Many of Valero's competitors obtain a significant portion of their
feedstocks from company-owned production and have extensive retail outlets.
Competitors that have their own production or extensive retail outlets
(including brand-name recognition) are at times able to offset losses from
refining operations with profits from producing or retailing operations, and may
be better positioned than Valero to withstand periods of depressed refining
margins or feedstock shortages.
Valero expects its industry to continue to restructure and consolidate
through mergers, acquisitions, divestitures, joint ventures and similar
transactions, making for a more competitive business environment, yet providing
opportunities for Valero to expand its operations. As refining margins merit,
Valero expects to continue to make capital improvements to increase the
throughput capacity of its refinery facilities and increase their operational
flexibility.
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ENVIRONMENTAL MATTERS
Valero's operations are subject to environmental regulation by federal,
state and local authorities, including but not limited to, the EPA, the Texas
Natural Resource Conservation Commission (TNRCC), the New Jersey Department of
Environmental Protection, the California Environmental Protection Agency and the
Louisiana Department of Environmental Quality. The regulatory requirements
relate primarily to discharge of materials into the environment, waste
management and pollution prevention measures. The significant federal laws
applicable to Valero's operations include the Clean Air Act; the Clean Water
Act; the Comprehensive Environmental Response, Compensation and Liability Act,
or CERCLA; and the Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act, or RCRA. The Clean Air Act establishes stringent
criteria for regulating conventional air pollutants as well as toxic pollutants
at operating facilities, and requires refiners to market cleaner-burning
gasoline in specific regions of the country to reduce ozone-forming pollutants
and toxic emissions.
In February 2000, the EPA's "Tier II" gasoline standard was published
in final form pursuant to the Clean Air Act. The standard will ultimately
require the sulfur content in gasoline to be reduced from approximately 300
parts per million to 30 parts per million; the regulation will be phased in
beginning in 2004. In addition, the EPA finalized its Tier II distillate
standard to reduce the sulfur content of diesel fuel sold to highway consumers
by 97%, from 500 parts per million to 15 parts per million, beginning June 1,
2006. The new Tier II specifications for the reduction of sulfur in both
gasoline and distillates are expected to cost the refining industry as much as
$16 billion to meet. Valero has determined that modifications will be required
at each of its refineries as a result of the Tier II standards. Based on
preliminary estimates, Valero believes that the new Tier II specifications will
require approximately $270 million in capital expenditures for Valero's
refineries to comply, split evenly between expenditures to meet the gasoline
standard and expenditures to meet the distillate standard, but excluding the
cost to install hydrogen production facilities. Valero currently plans to begin
implementing the modifications in 2001 and expects all modifications to be
complete by 2006.
The EPA has proposed a Maximum Available Control Technology rule, or
MACT II rule, under the Clean Air Act. The EPA is expected to issue the final
rule in the second quarter of 2001. The MACT II rule contains a three-year
compliance schedule for refiners to install any pollution control technology
that may be required in order to meet emissions limitations of the rule
applicable to FCC units, sulfur recovery units and reformers. Valero does not
anticipate that significant capital expenditures will be required in order for
Valero to comply with the MACT II rule.
In 2000, the EPA issued to a majority of refiners operating in the
United States a series of information requests pursuant to Section 114 of the
Clean Air Act as part of an enforcement initiative. Valero received a Section
114 information request pertaining to all of its refineries owned at that time.
Valero has completed its response to the request and has provided additional
clarification requested by the EPA. Valero has not been named in any proceeding.
However, based in part upon recently announced settlements and evaluation of its
relative position, Valero expects total penalties and related expenses of less
than $5 million in connection with this enforcement initiative. Valero's
estimate of expenses to be incurred related to this issue, which has been
provided for in the accompanying consolidated financial statements, is
immaterial to its financial position and results of operations. Valero believes
that any settlement with the EPA in this matter may require various capital
improvements or changes in operating parameters or both at some or all of
Valero's refineries.
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Because Valero manufactures a significant portion of its gasoline as
RFG, certain federal and state clean-fuel programs significantly affect its
operations. Valero cannot control or precisely predict the effect that these
clean-fuel programs may have on the cost to manufacture, demand for or supply of
refined products. The EPA's oxygenated fuel program under the Clean Air Act
requires that areas designated "nonattainment" for carbon monoxide use gasoline
that contains a prescribed amount of clean-burning oxygenates during certain
winter months. In addition, over 50 United States metropolitan areas participate
in the EPA's RFG program which requires year-round usage of RFG to decrease
emissions of hydrocarbons and toxic pollutants. Phase II of the federal RFG
program became effective in January 2000, further restricting the acceptable
levels of nitrous oxides, volatile organic compounds and toxics in gasoline. In
order to meet the new restrictions, refiners will necessarily need to reduce the
sulfur, benzene and vapor pressure of gasoline, which could effectively reduce
the production capacity of U.S. refiners.
The general growth in worldwide demand for cleaner-burning gasolines
could lead to continued growth in the demand for MTBE. However, the presence of
MTBE in some water supplies in California and other states, resulting from
gasoline leaks primarily from underground and aboveground storage tanks, has led
to public concern that MTBE has contaminated drinking water supplies and thus
poses a possible health risk. As a result of heightened public concern,
initiatives have been passed in California which are intended to ban the use of
MTBE as a gasoline component in California by the end of 2002. The California
Air Resources Board has finalized specifications for CARB Phase III gasoline,
which will become effective at the end of 2002. Valero estimates that the cost
for permitting and modification of the Benicia Refinery in order to comply with
CARB Phase III specifications and eliminate MTBE as a gasoline component is less
than $20 million. In addition, several oil companies (but not Valero) have been
ordered by the EPA to help replace contaminated water supplies in California. In
New York, Valero has been served with a complaint seeking to certify a class
action which alleges that numerous gasoline suppliers, including Valero,
produced and/or distributed in New York gasoline that is alleged to be defective
because it contains MTBE. See "Item 3. Legal Proceedings - Environmental
Proceedings" below. Valero, like other producers of MTBE, is subject to the
possibility of other litigation or proceedings involving the environmental
effects of MTBE.
In addition, other states and the EPA have either passed or proposed or
are considering proposals to restrict or ban the use of MTBE. If MTBE were to be
restricted or banned throughout the United States, Valero believes that its
major MTBE-producing facilities could be modified to produce other gasoline
blendstocks or other petrochemicals for a capital investment of approximately
$22 million. However, the volume of alternative products that could be produced
would be less than Valero's current production volumes of MTBE. Valero believes,
however, that if MTBE were restricted or banned, the economics related to
Valero's various alternative products could change, and such an action would not
be expected to have a material adverse effect on Valero's results of operations.
Because of CERCLA and RCRA, and related state law, Valero is subject to
potential obligations to remove or mitigate environmental impacts related to the
disposal or release of certain pollutants from Valero's facilities and at
formerly owned or operated sites or third-party waste disposal sites. Under
CERCLA, Valero is subject to potential joint and several liability for the costs
of remediation at "superfund" sites if Valero is identified as a "potentially
responsible party." As of December 31, 2000, Valero has not been designated as a
"potentially responsible party" under CERCLA for any sites or costs not covered
by indemnity.
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In Texas, Valero is leading an industry initiative to permit
voluntarily its "grandfathered" emissions sources by participating in the
Governor's Clean Air Responsibility Enterprise program at the Houston Refinery
and by using a flexible permitting process for the Texas City Refinery. The
Corpus Christi Refinery was issued a flexible operating permit by the TNRCC in
March 1999, and the TNRCC approved a flexible operating permit for the Texas
City Refinery in February 2000. This flexible permitting process allows
companies that have committed to install advanced pollution- control technology
greater operational flexibility, including increased throughput capacities, as
long as a facility-wide emissions cap is not exceeded. As part of Valero's
efforts to permit all of its "grandfathered" emissions sources and achieve
operational flexibility and increased production capability, a flue gas scrubber
will be installed on the FCC Unit at the Texas City Refinery and additional
emission control devices are planned for the Houston Refinery.
In late 2000, the Houston/Galveston State Implementation Plan, or SIP,
was submitted to the EPA for approval. The SIP will require the
Houston/Galveston area to reduce NOx emissions by 90% from both stationary and
mobile sources to comply with the SIP's proposed rules. The SIP will require the
area to demonstrate compliance with the Clean Air Act's ozone standard by 2007.
Valero's Texas City and Houston refineries are included within the region
covered by the SIP. To achieve compliance, Valero would be required to install
advanced emission control technology at its Texas City and Houston refineries by
the end of 2004, at a cost estimated by Valero to be over $50 million. The SIP
also tightens diesel fuel standards for cetane and aromatics to reduce emissions
from on-road and off-road vehicles by 2002.
In 2000, Valero's capital expenditures attributable to compliance with
environmental regulations were approximately $12 million, and are currently
estimated to be $30 million for 2001 and $95 million for 2002. These estimates
for 2001 and 2002 do not include expenditures for the installation of the flue
gas scrubber at the Texas City Refinery discussed above (financed through a
lease arrangement), or any amounts related to constructed facilities for which
the portion of expenditures relating to compliance with environmental
regulations is not determinable.
Governmental regulations are complex, are subject to different
interpretations, and are becoming increasingly more stringent. Therefore, future
action and regulatory initiatives could result in changes to expected operating
permits, additional remedial actions or increased capital expenditures and
operating costs that cannot be assessed with certainty at this time. In
addition, because certain air emissions at Valero's refineries have been
grandfathered under particular environmental laws, any major upgrades in any of
the refineries could require potentially material additional expenditures to
comply with environmental laws and regulations.
The environmental obligations and associated indemnities related to the
Paulsboro Acquisition and the Benicia Acquisition are described in Note 3 of
Notes to Consolidated Financial Statements. There can be no assurance, however,
that these indemnifying parties will indemnify Valero pursuant to the terms of
the acquisition agreements. If these indemnifying parties fail to do so, Valero
could be liable for the costs of environmental matters covered under these
indemnities, the costs of which could be material.
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD WITH VALERO OFFICER SINCE
<S> <C> <C>
WILLIAM E. GREEHEY 64 Chairman of the Board, President and Chief Executive Officer 1979
GREGORY C. KING 40 Executive Vice President and Chief Operating Officer 1997
JOHN D. GIBBONS 47 Executive Vice President and Chief Financial Officer 1997
KEITH D. BOOKE 42 Executive Vice President and Chief Administrative Officer 1997
S. EUGENE EDWARDS 44 Senior Vice President 1998
JOHN F. HOHNHOLT 48 Senior Vice President 1998
GARY L. ARTHUR, JR. 44 Vice President 2000
</TABLE>
MR. GREEHEY served as Chief Executive Officer and a director of Old
Valero from 1979, and as Chairman of the Board of Old Valero from 1983. He
retired from his position as Chief Executive Officer in June 1996 but, upon
request of the Board, resumed this position in November 1996. Mr. Greehey has
served as Valero's Chairman of the Board and Chief Executive Officer since the
Restructuring, positions he also held with Valero prior to the Restructuring
when Valero was a wholly owned subsidiary of Old Valero, and was elected
President of Valero upon the retirement of Edward Benninger at the end of 1998.
Mr. Greehey also serves as a director of Devon Energy Corp.
MR. KING was elected Executive Vice President and Chief Operating
Officer of Valero in January 2001. Prior to that time he had served as Senior
Vice President and Chief Operating Officer since 1999. He was elected Vice
President and General Counsel of Valero in 1997. He joined Old Valero in 1993 as
Associate General Counsel and prior to that was a partner in the Houston law
firm of Bracewell and Patterson.
MR. GIBBONS was elected Executive Vice President and Chief Financial
Officer of Valero in January 2001. He was first elected as Chief Financial
Officer in 1998. Previously, he was elected Vice President - Finance and
Treasurer of Valero in 1997, and was elected Treasurer of Old Valero in 1992. He
joined Old Valero in 1981 and held various other positions with Old Valero prior
to the Restructuring.
MR. BOOKE was elected Executive Vice President and Chief Administrative
Officer in January 2001. He was first elected as Chief Administrative Officer in
1999. Until that time he had served as Vice President-Administration and Human
Resources of Valero since 1998. Prior to that he served as Vice
President-Administration of Valero since 1997 and Vice President-Investor
Relations of Old Valero since 1994. He joined Old Valero in 1983 and held
various other positions with Old Valero prior to the Restructuring.
MR. EDWARDS was elected Senior Vice President of Valero in January
2001, and functions as the head of the Planning, Business Development and Risk
Management Division. He was previously elected as Vice President in 1998, and
has served as the head of Valero's Marketing, Supply and Transportation
Division. Mr. Edwards joined Old Valero in 1982 and held various positions
within Old Valero's refining operations, planning and economics, business
development and marketing departments prior to the Restructuring.
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MR. HOHNHOLT was elected Senior Vice President of Valero in January
2001, and functions as the head of the Refining Operations Division. He was
previously elected as Vice President in 1998. Prior to that he was General
Manager of the Corpus Christi Refinery. Mr. Hohnholt joined Old Valero in 1982
and held various positions within Old Valero's refining operations and
engineering departments prior to the Restructuring.
MR. ARTHUR was elected Vice President of Valero in August 2000, and
functions as the head of the Marketing, Supply and Transportation Division.
Prior to joining Valero in 2000, Mr. Arthur worked for Colonial Oil Industries
as Vice President of Supply and Distribution, and worked as a consultant in
Houston, Texas. Prior to that, Mr. Arthur worked for nearly 20 years at Ashland
Petroleum, where his latest position was President of Business Operations for
Ashland's largest refining, marketing and distribution unit.
EMPLOYEES
As of January 31, 2001, Valero had 3,180 employees.
ITEM 2. PROPERTIES
Valero's properties include its six refineries described above and
related facilities located in Texas, California, Louisiana and New Jersey. See
"Item 1. Business - Refining, Marketing and Feedstock Supply" for additional
information regarding properties of Valero. Valero believes that its facilities
are generally adequate for their respective operations and that its facilities
are maintained in a good state of repair. Valero is the lessee under a number of
cancelable and non-cancelable leases for certain properties, including the
California service station sites, the Benicia Refinery dock facility, office
facilities and equipment, transportation equipment, and various facilities and
equipment used to store, transport and produce refinery feedstocks and/or
refined products. See Note 14 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Environmental Proceedings
New Jersey Department of Environmental Protection. On July 17, 2000,
Valero Refining Company-New Jersey received an Administrative Order (EA ID No.
PEA000002-55006) from the New Jersey Department of Environmental Protection, or
NJDEP, related to alleged excess emissions from the Paulsboro Refinery. NJDEP is
seeking penalties of $394,000 and compliance. Valero is contesting the
Administrative Order.
United States Environmental Protection Agency - Section 114 Information
Request. In 2000, the EPA issued to a majority of refiners operating in the
United States a series of information requests pursuant to Section 114 of the
Clean Air Act as part of an enforcement initiative. Valero received a Section
114 information request pertaining to all of its refineries owned at that time.
Valero has completed its response to the request and has provided additional
clarification requested by the EPA. Valero has not been named in any proceeding.
However, based in part upon recently announced settlements and evaluation of its
relative position, Valero expects total penalties and related expenses of less
than $5 million in connection with this enforcement initiative. Valero's
estimate of expenses to be incurred
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related to this issue, which has been provided for in the accompanying
consolidated financial statements, is immaterial to its financial position and
results of operations. Valero believes that any settlement with the EPA in this
matter may require various capital improvements or changes in operating
parameters or both at some or all of Valero's refineries.
La Susa, et al. v. Amerada Hess Corp., et al., Case No.
00-CIV-1898-[SAS], United States District Court for the Southern District of New
York (formerly styled as Berisha, et al. v. Amerada Hess Corp., et al.). On May
24, 2000, Valero was served with a complaint seeking to certify a class action
that alleged that numerous gasoline suppliers, including Valero, contaminated
groundwater in New York with MTBE. As a result of certain procedural changes,
the plaintiffs filed a new master complaint on January 8, 2001. The new
complaint alleges that the gasoline suppliers produced and/or distributed
gasoline that is alleged to be defective because it contains MTBE. The
plaintiffs have not claimed a specific amount of monetary damages, but seek
several equitable remedies, including the institution of a court-mandated
well-testing program and the enjoining of further distribution of MTBE in New
York. No class has been certified. Valero has filed a motion to dismiss the
lawsuit based upon a failure to state a claim and based upon federal preemption
under the Clean Air Act. The Judicial Panel on Multidistrict Litigation
consolidated this case with certain other MTBE class action lawsuits for
pretrial purposes. Discovery has been allowed and is proceeding.
Texas City Terminal Railway Company d/b/a Port of Texas City v.
Marathon Ashland Petroleum, LLC, et al., Civil Action No. G-00-239, United
States District Court for the Southern District of Texas (Galveston Division).
The April 28, 2000 complaint filed in federal court by Texas City Railway
Company was dismissed on September 6, 2000 pursuant to a tolling agreement.
Texas City Railway Company had filed a complaint alleging that several
companies, including Valero, are liable under CERCLA, other environmental laws,
and tort law theories for alleged contamination of the plaintiff's marine
loading and tankering facilities. The parties are presently seeking to resolve
the matter through mediation which is expected to conclude by the end of the
first quarter of 2001.
Other Litigation
Teco Pipeline Company v. Valero Energy Corporation, et al., 215th State
District Court, Harris County, Texas (filed April 24, 1996). Old Valero and
certain of its natural gas related subsidiaries, and Valero, were sued by Teco
Pipeline Company regarding the operation of a 340-mile pipeline in West Texas in
which a subsidiary of Old Valero holds a 50% undivided interest. In 1985, a
subsidiary of Old Valero sold a 50% undivided interest in the pipeline and
entered into a joint venture through an ownership agreement and an operating
agreement, with the purchaser of the interest. In 1988, Teco succeeded to that
purchaser's 50% interest. A subsidiary of Old Valero has at all times been the
operator of the pipeline. The plaintiff contends that the defendants acted in
bad faith and negatively affected the economics of the joint venture in order to
provide financial advantages to facilities or entities owned by the defendants,
and by allegedly taking for the defendants' own benefit certain opportunities
available to the joint venture. The plaintiff asserts causes of action for
breach of fiduciary duty, fraud, tortious interference with business
relationships, professional malpractice and other claims. Old Valero's motion to
require arbitration of the case as required in the written agreements was denied
by the trial court, but Old Valero appealed, and in August 1999, the court of
appeals ruled in Old Valero's favor and ordered arbitration of the entire
dispute. Teco has since waived efforts to further appeal this ruling, and an
arbitration panel has been selected. Valero was formally added to this
proceeding. In January 2001, the panel dismissed the plaintiff's legal
malpractice claims, and the arbitration hearing began on February 5, 2001. On
February 5, 2001, Teco dismissed its claims against Valero, but Valero continues
to participate in the hearing. Although
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PG&E previously acquired Teco and owned both Teco and Old Valero (prior to El
Paso Corporation's acquisition of Old Valero in December 2000), PG&E's Teco
acquisition agreement purports to assign the benefit or detriment of this
lawsuit to the former shareholders of Teco. In connection with the
Restructuring, Valero agreed to indemnify Old Valero with respect to this
lawsuit for 50% of any final judgment or settlement amount up to $30 million,
and 100% of that part of any final judgment or settlement amount over $30
million. El Paso Corporation has assumed Old Valero's liability in this matter.
Valero Energy Corporation, et al. v. M.W. Kellogg, et al., 117th
Judicial District Court, Nueces County, Texas (filed July 11, 1986). In 1986,
Valero filed suit against M.W. Kellogg Company for damages arising from certain
alleged design and construction defects in connection with a major construction
project at the Corpus Christi Refinery. Ingersoll-Rand Company was added as a
defendant in 1989. In 1991, the trial court granted summary judgment against
Valero based in part on certain exculpatory provisions in various agreements
connected with the project. In 1993, the court of appeals affirmed the summary
judgment and the Texas Supreme Court denied review. Subsequent to the summary
judgment, Kellogg and Ingersoll-Rand brought indemnity claims against Valero for
attorneys' fees and expenses incurred in defending the original action. In 1996,
the trial court rendered summary judgment against Kellogg and Ingersoll-Rand
based on procedural grounds, and the court of appeals affirmed that ruling in
1997. However, in 1999, the Texas Supreme Court reversed the court of appeals
and remanded Kellogg's and Ingersoll-Rand's claims for attorneys' fees and
expenses to the trial court. The case went to trial in August 2000. During
trial, the claims of Ingersoll-Rand were settled for an immaterial amount. The
jury returned a verdict on Kellogg's claims that resulted in a judgment of $6.3
million. Valero plans to appeal the judgment.
Valero is also a party to additional claims and legal proceedings
arising in the ordinary course of business. Valero believes it is unlikely that
the final outcome of any of the claims or proceedings to which it is a party
would have a material adverse effect on its consolidated financial statements;
however, due to the inherent uncertainty of litigation, the range of possible
loss, if any, cannot be estimated with a reasonable degree of precision and
there can be no assurance that the resolution of any particular claim or
proceeding would not have an adverse effect on Valero's results of operations,
financial condition, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
18
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock. Valero's common stock has been trading on the New York
Stock Exchange since August 1, 1997 (the business day immediately following the
Restructuring) under the symbol "VLO." As of February 1, 2001, there were 3,101
holders of record and an estimated 14,000 additional beneficial owners of
Valero's common stock.
The following table sets forth for each quarter in the preceding two
years the range of the high and low sales prices of Valero's common stock as
reported by the NYSE and the amount of per share dividends.
<TABLE>
<CAPTION>
SALES PRICES OF THE
COMMON STOCK DIVIDENDS
----------------------- PER
QUARTER ENDED HIGH LOW COMMON SHARE
------------- -------- --------- --------------
<S> <C> <C> <C>
2000:
March 31......................................... $31 15/16 $18 15/16 $.08
June 30.......................................... 32 3/4 26 7/16 .08
September 30..................................... 35 1/2 24 15/16 .08
December 31...................................... 38 5/8 30 1/16 .08
1999:
March 31......................................... $24 7/8 $16 3/4 $.08
June 30.......................................... 25 19 .08
September 30..................................... 23 13/16 19 1/4 .08
December 31...................................... 23 1/8 17 3/8 .08
</TABLE>
On January 18, 2001, Valero's Board of Directors declared a regular
quarterly cash dividend of $.08 per common share payable March 14, 2001, to
holders of record at the close of business on February 14, 2001. Dividends are
considered quarterly by the Board of Directors and may be paid only when
approved by the Board.
19
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the year ended December
31, 2000 is derived from Valero's Consolidated Financial Statements contained in
this report. The selected financial data for the years ended prior to December
31, 2000 is derived from the selected financial data contained in Valero's
Annual Report on Form 10-K for the year ended December 31, 1999, except as noted
below.
The following summaries are in thousands of dollars except for per
share amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
2000(a) 1999 1998(b)(c) 1997(d) 1996
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES ............................... $14,671,087 $ 7,961,168 $ 5,539,346 $ 5,756,220 $ 2,757,853
OPERATING INCOME (LOSS) (e) ...................... $ 610,979 $ 72,029 $ (48,347) $ 213,885 $ 92,602
INCOME (LOSS) FROM
CONTINUING OPERATIONS .......................... $ 339,120 $ 14,287 $ (47,291) $ 111,768 $ 22,472
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES (f) ............ $ -- $ -- $ -- $ (15,672) $ 50,229
NET INCOME (LOSS) ................................ $ 339,120 $ 14,287 $ (47,291) $ 96,096 $ 72,701
Less: Preferred stock dividend requirements and
redemption premium ................. -- -- -- 4,592 11,327
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK ................................... $ 339,120 $ 14,287 $ (47,291) $ 91,504 $ 61,374
=========== =========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Continuing operations ........................ $ 5.79 $ .25 $ (.84) $ 2.16 $ .51
Discontinued operations ...................... -- -- -- (.39) .89
----------- ----------- ----------- ----------- -----------
Total ...................................... $ 5.79 $ .25 $ (.84) $ 1.77 $ 1.40
=========== =========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK - ASSUMING DILUTION:
Continuing operations......................... $ 5.60 $ .25 $ (.84) $ 2.03 $ .44
Discontinued operations....................... -- -- -- (.29) .98
----------- ----------- ----------- ----------- -----------
Total....................................... $ 5.60 $ .25 $ (.84) $ 1.74 $ 1.42
=========== =========== =========== =========== ===========
TOTAL ASSETS...................................... $ 4,307,704 $ 2,979,272 $ 2,725,664 $ 2,493,043 $ 1,985,631
LONG-TERM OBLIGATIONS AND
REDEEMABLE PREFERRED STOCK...................... $ 1,042,417 $ 785,472 $ 822,335 $ 430,183 $ 354,457
VALERO-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED CAPITAL TRUST SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY
VALERO SENIOR NOTES............................ $ 172,500 $ -- $ -- $ -- $ --
DIVIDENDS PER SHARE OF COMMON
STOCK........................................... $ .32 $ .32 $ .32 $ .42 $ .52
</TABLE>
- ----------------
(a) Includes the operations related to the Benicia Refinery and the
Distribution Assets beginning May 16, 2000 and the operations related
to the Service Stations beginning June 16, 2000.
(b) Includes the operations of the Paulsboro Refinery beginning September
17, 1998.
(c) The 1998 operating loss includes a $170.9 million write-down of
inventories to market value, which resulted in a $111.1 million
reduction in net income, or $1.98 per share.
(d) Includes the operations of the Texas City, Houston and Krotz Springs
refineries beginning May 1, 1997.
(e) Operating income (loss) for the years ended December 31, 1999 through
1996 have been restated from the amounts presented in Valero's December
31, 1999 Form 10-K to conform with the consensus reached by the EITF in
May 2000 in connection with its Issue No. 00-1. See Note 1 of Notes to
Consolidated Financial Statements under "NEW ACCOUNTING
PRONOUNCEMENTS." Previously reported operating income (loss) amounts
for the years ended December 31, 1999 through 1996 were $69,141,
$(51,198), $211,034, and $89,748, respectively.
(f) Reflects the results of Old Valero's natural gas related services
business for periods prior to the July 31, 1997 Restructuring.
See Notes to Consolidated Financial Statements.
20
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following review of the results of operations and financial
condition of Valero should be read in conjunction with Item 1. Business and Item
8. Financial Statements included elsewhere in this report. In the discussions
that follow, all "per share" amounts are on a diluted basis.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain estimates, predictions, projections and
other "forward-looking statements" (as defined in Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934) that involve
various risks and uncertainties. While these forward-looking statements, and any
assumptions upon which they are based, are made in good faith and reflect
Valero's current judgment regarding the direction of its business, actual
results will almost always vary, sometimes materially, from any estimates,
predictions, projections, assumptions, or other future performance suggested
herein. These forward-looking statements can generally be identified by the
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "budget," "forecast," "will," "could," "should," "may" and similar
expressions. These forward-looking statements include, among other things,
statements regarding:
- - future refining margins, including gasoline and heating oil margins;
- - expectations regarding feedstock costs, including crude oil discounts, and
operating costs;
- - anticipated levels of crude oil and refined product inventories;
- - Valero's anticipated level of capital investments, including deferred
turnaround and catalyst costs and capital expenditures for environmental and
other purposes, and the effect of these capital investments on Valero's
results of operations;
- - anticipated trends in the supply and demand for crude oil feedstocks and
refined products in the United States and elsewhere;
- - expectations regarding environmental and other regulatory initiatives; and
- - the effect of general economic and other conditions on refining industry
fundamentals.
Valero's forward-looking statements are based on its beliefs and
assumptions derived from information available at the time the statements are
made. Differences between actual results and any future performance suggested in
these forward-looking statements could result from a variety of factors,
including the following:
- - the domestic and foreign supplies of refined products such as gasoline,
diesel, heating oil and petrochemicals;
- - the domestic and foreign supplies of crude oil and other feedstocks;
- - the ability of the members of the Organization of Petroleum Exporting
Countries to agree on and to maintain oil price and production controls;
- - the level of consumer demand, including seasonal fluctuations;
- - refinery overcapacity or undercapacity;
- - the actions taken by competitors, including both pricing and the expansion
and retirement of refining capacity in response to market conditions;
- - environmental and other regulations at both the state and federal levels and
in foreign countries;
21
<PAGE> 25
- - political conditions in oil producing regions, including the Middle East;
- - the level of foreign imports;
- - accidents or other unscheduled shutdowns affecting Valero's plants,
machinery, pipelines or equipment, or those of Valero's suppliers or
customers;
- - changes in the cost or availability of transportation for feedstocks and
refined products;
- - the price, availability and acceptance of alternative fuels and
alternative-fuel vehicles;
- - cancellation of or failure to implement planned capital projects and realize
the various assumptions and benefits projected for such projects;
- - irregular weather, which can unforeseeably affect the price or availability
of feedstocks and refined products;
- - rulings, judgments, or settlements in litigation or other legal or
regulatory matters, including unexpected environmental remediation costs in
excess of any reserves;
- - the introduction or enactment of federal or state legislation which may
adversely affect Valero's business or operations;
- - changes in the credit ratings assigned to Valero's debt securities and trade
credit; and
- - overall economic conditions.
Any one of these factors, or a combination of these factors, could
materially affect Valero's future results of operations and whether any
forward-looking statements ultimately prove to be accurate. Valero's
forward-looking statements are not guarantees of future performance, and actual
results and future performance may differ materially from those suggested in any
forward-looking statement. Valero does not intend to update these statements
unless it is required by the securities laws to do so.
All subsequent written and oral forward-looking statements attributable
to Valero or persons acting on its behalf are expressly qualified in their
entirety by the foregoing. Valero undertakes no obligation to publicly release
the result of any revisions to any such forward-looking statements that may be
made to reflect events or circumstances after the date of this report or to
reflect the occurrence of unanticipated events.
ACQUISITION OF CALIFORNIA REFINING AND MARKETING ASSETS
During the second quarter of 2000, Valero completed the acquisition of
Exxon Mobil Corporation's Benicia, California refinery (the "Benicia Refinery")
and Exxon-branded California retail assets, which consisted of approximately 80
service stations (the "Service Stations") and branded supplier relationships
with over 260 Exxon-branded service stations (the "Distribution Assets")
(collectively, the "Benicia Acquisition"). ExxonMobil agreed to sell these
assets as a result of consent decrees issued by the Federal Trade Commission and
the State of California requiring certain assets to be divested by ExxonMobil to
satisfy anticompetitive issues in connection with the 1999 fourth quarter merger
of Exxon Corporation and Mobil Corporation. See Note 3 of Notes to Consolidated
Financial Statements.
22
<PAGE> 26
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
Change
----------------------
2000 (a) 1999 Amount %
-------- ---- ------ -
<S> <C> <C> <C> <C>
Operating revenues ........................................ $ 14,671,087 $ 7,961,168 $ 6,709,919 84%
Cost of sales ............................................. (13,076,849) (7,206,903) (5,869,946) (81)
Operating costs:
Cash (fixed and variable) ............................. (682,742) (473,787) (208,955) (44)
Depreciation and amortization ......................... (164,008) (135,764) (28,244) (21)
Selling and administrative expenses (including related
depreciation expense) ................................. (136,509) (72,685) (63,824) (88)
------------ ----------- -----------
Total operating income ............................ $ 610,979 $ 72,029 $ 538,950 -- (b)
============ =========== ===========
Other income, net ......................................... $ 282 $ 3,587 $ (3,305) (92)
Interest and debt expense, net ............................ $ (76,245) $ (55,429) $ (20,816) (38)
Distributions on preferred securities of subsidiary trust.. $ (6,796) $ -- $ (6,796) -- (b)
Income tax expense ........................................ $ (189,100) $ (5,900) $ (183,200) -- (b)
Net income ................................................ $ 339,120 $ 14,287 $ 324,833 -- (b)
Earnings per share of common stock - assuming
dilution .............................................. $ 5.60 $ .25 $ 5.35 -- (b)
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") ........................... $ 785,744 (c) $ 216,769 $ 568,975 -- (b)
Ratio of EBITDA to interest incurred ...................... 8.7x(c) 3.5x 5.2x -- (b)
</TABLE>
- ----------
(a) Includes the operations related to the Benicia Refinery and the Distribution
Assets beginning May 16, 2000 and the operations related to the Service
Stations beginning June 16, 2000.
(b) Percentage variance is greater than 100%.
(c) For purposes of this calculation, distributions on preferred securities of
subsidiary trust are included in interest incurred.
23
<PAGE> 27
OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
Change
------------------
2000 (a) 1999 Amount %
-------- ---- ------ -
<S> <C> <C> <C> <C>
Sales volumes (MBPD) ........................ 1,142 1,033 109 11%
Throughput volumes (MBPD) ................... 857(b) 712 145 20
Average throughput margin per barrel ........ $5.08 $2.90 $2.18 75
Operating costs per barrel:
Cash (fixed and variable) ............... $2.18 $1.83 $.35 19
Depreciation and amortization ........... .52 .52 -- --
----- ----- ----
Total operating costs per barrel .... $2.70 $2.35 $.35 15
===== ===== ====
Charges:
Crude oils:
Sour ................................ 55% 48% 7% 15
Heavy sweet ......................... 8 12 (4) (33)
Light sweet ......................... 8 9 (1) (11)
----- ----- ----
Total crude oils ................ 71 69 2 3
High-sulfur residual fuel oil, or "resid" 4 3 1 33
Low-sulfur resid ........................ 3 6 (3) (50)
Other feedstocks and blendstocks ........ 22 22 -- --
----- ----- ----
Total charges ....................... 100% 100% --% --
===== ===== ====
Yields:
Gasolines and blendstocks ............... 53% 51% 2% 4
Distillates ............................. 28 29 (1) (3)
Petrochemicals .......................... 3 5 (2) (40)
Lubes and asphalts ...................... 3 3 -- --
Other products .......................... 13 12 1 8
----- ----- ----
Total yields ........................ 100% 100% --% --
===== ===== ====
</TABLE>
AVERAGE MARKET REFERENCE PRICES AND DIFFERENTIALS (DOLLARS PER BARREL)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
Change
---------------
2000 1999 Amount %
---- ---- ------ -
<S> <C> <C> <C> <C>
Feedstocks (at U.S. Gulf Coast, except as noted):
West Texas Intermediate, or "WTI," crude oil $30.36 $19.28 $11.08 57%
WTI less sour crude oil (c) (f) ............. $ 3.53 $ 2.44 $ 1.09 45
WTI less ANS (U.S. West Coast) (d) .......... $ 2.04 $ 1.55 $ .49 32
WTI less sweet crude oil (e) (f) ............ $ (.49) $ (.06) $ (.43) --(g)
Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI ....... $ 4.66 $ 2.53 $ 2.13 84
No. 2 fuel oil less WTI ................. $ 3.60 $ .33 $ 3.27 --(g)
Propylene less WTI ...................... $ 4.88 $ .93 $ 3.95 --(g)
U.S. East Coast:
Conventional 87 gasoline less WTI ....... $ 5.62 $ 3.47 $ 2.15 62
No. 2 fuel oil less WTI ................. $ 5.73 $ 1.16 $ 4.57 --(g)
Lube oils less WTI ...................... $16.35 $11.43 $ 4.92 43
U.S. West Coast (d):
CARB less ANS ........................... $14.74 $12.13 $ 2.61 22
Low-sulfur diesel less ANS .............. $10.63 $ 6.86 $ 3.77 55
</TABLE>
- --------------------------------------
(a) Includes the operations related to the Benicia Refinery and the Distribution
Assets beginning May 16, 2000 and the operations related to the Service
Stations beginning June 16, 2000.
(b) Includes 106 MBPD for 2000 related to the Benicia Refinery.
(c) The market reference differential for sour crude oil is based on posted
prices for 35% Arab medium, 30% Arab light, 20% Basrah and 15% Oriente crude
oils.
(d) The market reference differentials for the U.S. West Coast are total year
differentials presented for informational purposes only. The comparison is
not relevant to Valero since the Benicia Acquisition did not occur until the
second quarter of 2000.
(e) The market reference differential for sweet crude oil is based on posted
prices for 50% light Louisiana sweet, or "LLS," and 50% Cusiana crude oils,
with LLS adjusted for backwardation.
(f) The market reference differential for the 1999 period has been restated from
the amount reported in the 1999 Form 10-K to conform to the components used
in the 2000 period.
(g) Percentage variance is greater than 100%.
24
<PAGE> 28
GENERAL
Valero reported net income of $339.1 million, or $5.60 per share, for
the year ended December 31, 2000 compared to net income of $14.3 million, or
$.25 per share, for the year ended December 31, 1999. For the fourth quarter of
2000, Valero reported net income of $93.3 million, or $1.47 per share, compared
to net income of $16.5 million, or $.29 per share, for the fourth quarter of
1999. The substantial increase in full year results was due primarily to
dramatically improved refining industry fundamentals which resulted in a
significant increase in throughput margins, and the contribution from the
Benicia Acquisition ($1.80 per share) completed in the second quarter of 2000.
Also contributing to higher full year results was the effect in the first
quarter of 1999 of a major maintenance turnaround of the heavy oil cracker and
related units at the Corpus Christi Refinery, as well as certain unit expansions
implemented during that downtime, which both reduced results for the 1999 period
and increased results for the 2000 period. Partially offsetting the increases in
income resulting from these factors for Valero's operations excluding Benicia
were higher cash operating costs and selling and administrative expenses, an
increase in income tax expense, the effect of certain scheduled and unscheduled
refinery downtime experienced primarily during the 2000 second quarter, and the
nonrecurrence in 2000 of benefits to income in 1999 related to reductions in
LIFO inventories.
Results for the fourth quarter of 2000 increased from fourth quarter
1999 levels due primarily to the significant contribution from the Benicia
Acquisition ($.71 per share) and substantially higher throughput margins for
Valero's operations excluding Benicia resulting from exceptionally strong
refining industry fundamentals and higher throughput volumes in the 2000
quarter. Partially offsetting the increase in throughput margins for Valero's
operations excluding Benicia were increases in cash operating costs, including
substantially higher natural gas costs, selling and administrative expenses, and
income tax expense.
OPERATING REVENUES
Operating revenues increased $6.7 billion, or 84%, to $14.7 billion
during 2000 compared to 1999 due to a $13.88, or 66%, increase in the average
sales price per barrel and an 11% increase in average daily sales volumes. The
increase in average sales prices was due primarily to significantly higher
refined product prices resulting from reduced refined product inventories and an
increase in crude oil prices. The decline in refined product inventory levels
was attributable primarily to (i) lower crude oil supplies resulting from the
continued impact of OPEC's decision in March 1999 to significantly reduce
production, (ii) lower refinery utilization rates in late 1999 and early 2000,
(iii) reduced refinery production due to more stringent fuel specifications in
the U.S. and Europe that became effective in 2000, and (iv) improved demand for
distillates. Average daily sales volumes increased due primarily to additional
volumes attributable to the Benicia Acquisition.
OPERATING INCOME
Operating income increased $539 million, from $72 million in 1999 to
$611 million in 2000, due in part to the contribution from the Benicia
Acquisition noted above. Excluding the effect of the Benicia Acquisition,
operating income increased due to an approximate $471 million increase in total
throughput margins (discussed below), partially offset by an approximate $99
million increase in cash operating costs and an approximate $49 million increase
in selling and administrative expenses (including related depreciation expense).
Cash operating costs were higher due primarily to higher fuel and electricity
costs attributable mainly to an increase in natural gas prices, an increase in
employee salaries, benefits and variable compensation, and higher maintenance
costs related primarily to certain unscheduled
25
<PAGE> 29
refinery downtime, tank cleanings and lower than normal maintenance activities
in 1999. Selling and administrative expenses (including related depreciation
expense) increased primarily as a result of an increase in employee salaries,
benefits, variable compensation and other employee-related costs, and costs
associated with litigation and other matters described in Note 15 of Notes to
Consolidated Financial Statements.
Total throughput margins (operating revenues less cost of sales),
excluding the effect of the Benicia Acquisition, increased due to (i)
significantly higher distillate margins resulting primarily from strong demand
and extremely low inventory levels, (ii) higher gasoline margins resulting
primarily from supply constraints and low inventories, (iii) improved feedstock
discounts for sour crude oil resulting primarily from increases in sour crude
oil production by OPEC and a shift in demand from sour crude oil to sweet crude
oil due to lower sulfur requirements for certain refined products, (iv) higher
RFG premiums and oxygenate margins due to improved demand and the tightening of
fuel specifications in the U.S. and Europe noted above, (v) significantly higher
lube oil margins resulting mainly from improved market conditions, (vi) higher
petrochemical margins resulting from improved worldwide demand, particularly in
Asia, and (vii) higher throughput volumes. The strong demand for distillate
noted above was attributable mainly to cold weather and high natural gas prices.
These high natural gas prices caused various power producers to switch to
heating oil to fuel their plants, which also served to further reduce distillate
inventories. Partially offsetting the increases in total throughput margins
resulting from the above factors were (i) lower prices for No. 6 fuel oil and
other heavy products relative to crude oil prices, (ii) an increase in sweet
crude oil costs to amounts in excess of WTI, (iii) the effect of scheduled and
unscheduled refinery downtime experienced primarily during the 2000 second
quarter, (iv) a decrease in gains from trading activities and (v) the
nonrecurrence in 2000 of benefits resulting from the liquidation of LIFO
inventories in the first and fourth quarters of 1999 of $10.5 million and $9.3
million, respectively.
OTHER INCOME
Other income, net, decreased $3.3 million to $.3 million during 2000
compared to 1999 due primarily to increased costs in 2000 related to the
agreement entered into by Valero in September 1999 to sell a portion of its
accounts receivable, partially offset by improved results of $2.6 million from
Valero's 20% equity interest in the Javelina off-gas processing plant in Corpus
Christi (see Note 1 of Notes to Consolidated Financial Statements under
"DEFERRED CHARGES AND OTHER ASSETS"). The increase in Javelina's results was
attributable primarily to significantly higher prices for natural gas liquids
and increases in prices for ethylene and other products, partially offset by
significantly higher natural gas feedstock costs.
NET INTEREST AND DEBT EXPENSE
Net interest and debt expense increased $20.8 million, or 38%, to $76.2
million during 2000 compared to 1999 due primarily to increased borrowings to
fund the Benicia Acquisition, including the issuance of the senior notes in June
2000 and borrowings under Valero's bank credit facilities (the effects of which
are included in the $1.80 per share contribution from the Benicia Acquisition
noted above), partially offset by a paydown of bank borrowings during 2000
resulting from Valero's strong earnings and cash flow.
INCOME TAX EXPENSE
Income tax expense increased from $5.9 million in 1999 to $189.1
million in 2000 due primarily to the significant increase in pre-tax income. See
Note 11 of Notes to Consolidated Financial Statements.
26
<PAGE> 30
1999 COMPARED TO 1998
FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
Change
------------------------
1999 1998 (a) Amount %
---- -------- ------ -
<S> <C> <C> <C> <C>
Operating revenues ................................... $ 7,961,168 $ 5,539,346 $ 2,421,822 44%
Cost of sales ........................................ (7,206,903) (4,799,723) (2,407,180) (50)
Operating costs:
Cash (fixed and variable) ........................ (473,787) (428,484) (45,303) (11)
Depreciation and amortization .................... (135,764) (116,697) (19,067) (16)
Selling and administrative expenses (including related
depreciation expense) ............................ (72,685) (71,860) (825) (1)
----------- ----------- -----------
Operating income, before inventory write-down ........ 72,029 122,582 (50,553) (41)
Write-down of inventories to market value ............ -- (170,929) 170,929 100
----------- ----------- -----------
Total operating income (loss) .................... $ 72,029 $ (48,347) $ 120,376 --(b)
=========== =========== ===========
Other income (expense), net .......................... $ 3,587 $ (2,265) $ 5,852 --(b)
Interest and debt expense, net ....................... $ (55,429) $ (32,479) $ (22,950) (71)
Income tax (expense) benefit ......................... $ (5,900) $ 35,800 $ (41,700) --(b)
Net income (loss) .................................... $ 14,287 $ (47,291)(c) $ 61,578 --(b)
Earnings (loss) per share of common stock - assuming
dilution ......................................... $ .25 $ (.84)(c) $ 1.09 --(b)
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") ...................... $ 216,769 $ 241,672 (d) $ (24,903) (10)
Ratio of EBITDA to interest incurred ................. 3.5x 6.4x (2.9)x (45)
</TABLE>
- -------------------------------------------
(a) Includes the operations of the Paulsboro Refinery beginning September 17,
1998.
(b) Percentage variance exceeds 100%.
(c) Includes a $111.1 million, or $1.98 per share, effect resulting from the
$170.9 million pre-tax write-down of inventories to market value.
(d) Excludes the $170.9 million pre-tax write-down of inventories to market
value.
27
<PAGE> 31
OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
Change
-------------------
1999 1998(a) Amount %
---- ------- ------ -
<S> <C> <C> <C> <C>
Sales volumes (MBPD) ................... 1,033 894 139 16%
Throughput volumes (MBPD) (b) .......... 712 579 133 23
Average throughput margin per barrel ... $2.90 $3.50(c) $(.60) (17)
Operating costs per barrel:
Cash (fixed and variable) .......... $1.83 $2.03 $(.20) (10)
Depreciation and amortization ...... .52 .55 (.03) (5)
----- ----- -----
Total operating costs per barrel $2.35 $2.58 $(.23) (9)
===== ===== =====
Charges:
Crude oils:
Sour ........................... 48% 37% 11% 30
Heavy sweet .................... 12 20 (8) (40)
Light sweet .................... 9 11 (2) (18)
----- ----- -----
Total crude oils ........... 69 68 1 1
High-sulfur resid .................. 3 9 (6) (67)
Low-sulfur resid ................... 6 3 3 100
Other feedstocks and blendstocks ... 22 20 2 10
----- ----- -----
Total charges .................. 100% 100% --% --
===== ===== =====
Yields:
Gasolines and blendstocks .......... 51% 53% (2)% (4)
Distillates ........................ 29 28 1 4
Petrochemicals ..................... 5 4 1 25
Lubes and asphalts ................. 3 1 2 --(h)
Other products ..................... 12 14 (2) (14)
----- ----- -----
Total yields ................... 100% 100% --% --
===== ===== =====
</TABLE>
AVERAGE MARKET REFERENCE PRICES AND DIFFERENTIALS (DOLLARS PER BARREL)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
Change
------------------
1999 1998 Amount %
---- ---- ------ -
<S> <C> <C> <C> <C>
Feedstocks:
WTI crude oil ....................... $19.28 $14.41 $ 4.87 34%
WTI less sour crude oil (d) (g) ..... $ 2.44 $ 2.84 $ (.40) (14)
WTI less ANS (U.S. West Coast) (e) .. $ 1.55 $ 1.87 $ (.32) (17)
WTI less sweet crude oil (f) (g) .... $ (.06) $ 0.24 $ (.30) --(h)
Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI $ 2.53 $ 2.98 $ (.45) (15)
No. 2 fuel oil less WTI ......... $ .33 $ 1.45 $(1.12) (77)
Propylene less WTI .............. $ .93 $ 2.23 $(1.30) (58)
U.S. East Coast:
Conventional 87 gasoline less WTI $ 3.47 $ 3.20 $ .27 8
No. 2 fuel oil less WTI ......... $ 1.16 $ 1.91 $ (.75) (39)
Lube oils less WTI .............. $11.43 $16.55 $(5.12) (31)
U.S. West Coast (e):
CARB less ANS ................... $12.13 $ 9.12 $ 3.01 33
Low-sulfur diesel less ANS ...... $ 6.86 $ 5.63 $ 1.23 22
</TABLE>
- ----------
(a) Includes the operations of the Paulsboro Refinery beginning September 17,
1998.
(b) Includes 173 MBPD and 46 MBPD for 1999 and 1998, respectively, related to
the Paulsboro Refinery.
(c) Excludes an $.81 per barrel reduction resulting from the $170.9 million
pre-tax write-down of inventories to market value.
(d) The market reference differential for sour crude oil is based on posted
prices for 35% Arab Medium, 30% Arab light, 20% Basrah and 15% Oriente crude
oils.
(e) The market reference differentials for the U.S. West Coast are presented for
informational purposes only. The comparison is not relevant to Valero since
the Benicia Acquisition did not occur until 2000.
(f) The market reference differential for sweet crude oil is based on posted
prices for 50% LLS and 50% Cusiana crude oils, with LLS adjusted for
backwardation.
(g) The market reference differentials for the 1999 and 1998 periods have been
restated from the amounts reported in the 1999 Form 10-K to conform to the
components used in 2000.
(h) Percentage variance is greater than 100%.
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<PAGE> 32
GENERAL
Valero reported net income of $14.3 million, or $.25 per share, for the
year ended December 31, 1999 compared to a net loss of $47.3 million, or $.84
per share, for the year ended December 31, 1998. For the fourth quarter of 1999,
Valero reported net income of $16.5 million, or $.29 per share, compared to a
net loss of $85.7 million, or $1.53 per share, for the fourth quarter of 1998.
Non-cash inventory write-downs resulting from significant declines in feedstock
and refined product prices reduced the fourth quarter and total year 1998
results by $133.2 million and $170.9 million, respectively. Before the effect of
the inventory write-downs, net income for the fourth quarter of 1998 was $.9
million, or $.02 per share, and net income for the full year of 1998 was $63.8
million, or $1.14 per share.
Excluding the effect of the 1998 inventory write-down, results for the
fourth quarter of 1999 increased from fourth quarter 1998 levels due to higher
throughput volumes combined with an improvement in product margins, reductions
in cash operating costs, and reduced LIFO inventories. Partially offsetting
these increases in fourth quarter income were lower discounts for Valero's crude
oil feedstocks. Full year 1999 results were well below 1998 levels, before the
effects of the 1998 inventory write-downs, due to historically weak refining
industry fundamentals during the first half of 1999, the effect of significant
downtime at Valero's Corpus Christi refinery in early 1999 due to a major
maintenance turnaround and expansion of the heavy oil cracker and related units,
and increased interest expense. Partially offsetting these decreases in full
year income were improvements in industry conditions in the second half of 1999,
a significant reduction in cash operating costs (excluding the effect of the
Paulsboro Refinery) resulting from Valero's comprehensive cost reduction
efforts, and benefits to income related to reductions in LIFO inventories during
the first and fourth quarters of 1999.
OPERATING REVENUES
Operating revenues increased $2.4 billion, or 44%, to $8.0 billion
during 1999 compared to 1998 due to a $4.14, or 24%, increase in the average
sales price per barrel and a 16% increase in average daily sales volumes. The
increase in sales volumes was due primarily to the September 1998 acquisition of
the Paulsboro Refinery, while the increase in sales prices was due primarily to
higher crude oil prices attributable to OPEC production cuts announced in March
1999 and lower refined product inventories in the second half of the year.
OPERATING INCOME (LOSS)
Operating income increased $120.4 million, from a $48.4 million
operating loss in 1998 to operating income of $72 million in 1999, due in large
part to the 1998 inventory write-downs of $170.9 million noted above. Excluding
the effect of these write-downs, operating income decreased $50.6 million, or
41%, during 1999 compared to 1998. This decrease was due primarily to an
approximate $98 million increase in operating costs attributable to a full year
of operations in 1999 for the Paulsboro Refinery, and an approximate $9 million
increase in depreciation expense and amortization of deferred turnaround and
catalyst costs for all refineries exclusive of the Paulsboro Refinery. Partially
offsetting these decreases was an approximate $43 million reduction in cash
operating costs for all refineries exclusive of the Paulsboro Refinery,
primarily due to lower maintenance expense, energy savings and improved energy
efficiencies, and reduced catalyst and chemical costs, all resulting from
Valero's cost savings initiatives implemented in early 1999. Also partially
offsetting the above-noted decreases in operating income was an increase in
total throughput margins of approximately $15 million.
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<PAGE> 33
Total throughput margins (operating revenues less cost of sales)
increased in 1999 compared to 1998 due primarily to (i) the contribution from
the Paulsboro Refinery resulting from a full year of operations in 1999, (ii)
benefits from higher sales volumes (excluding higher volumes resulting from the
full-year effect of Paulsboro Refinery operations), including benefits resulting
from the liquidation of LIFO inventories in the first and fourth quarters of
1999 of $10.5 million and $9.3 million, respectively, and (iii) benefits from
trading activities of approximately $17 million in 1999 compared to $1 million
in 1998. The positive effect on throughput margins resulting from these factors
was offset to a large extent by extremely depressed refining industry
fundamentals in the first half of 1999. Distillate and gasoline margins were
significantly below 1998 levels during this period (average distillate margins
were negative in the first half of 1999) as above-average refined product
inventory levels resulted in depressed refined product prices, while crude oil
prices increased due to the OPEC production cuts announced in March 1999.
Furthermore, petrochemical margins were lower during the first half of 1999
resulting from depressed demand for petrochemical feedstocks primarily due to
the Asian economic crisis. Although industry conditions improved in the second
half of 1999 as refined product inventories declined due to both an increase in
demand and reduced refinery utilization rates, increasingly higher crude oil
prices resulting from a continuation of reduced OPEC production limited the
improvement in product margins during this period. Total throughput margins were
also negatively affected in 1999 compared to 1998 by a decrease in crude oil
feedstock discounts relative to WTI.
OTHER INCOME (EXPENSE)
Other income (expense), net, increased by $5.9 million to income of
$3.6 million during 1999 compared to expense of $2.3 million in 1998 due
primarily to improved results from Valero's 20% equity interest in the Javelina
off-gas processing plant in Corpus Christi attributable mainly to higher
ethylene and other product prices, partially offset by higher natural gas
feedstock costs.
NET INTEREST AND DEBT EXPENSE
Net interest and debt expense increased $22.9 million, or 71%, to $55.4
million during 1999 compared to 1998 primarily due to the full-year effect of
higher borrowings resulting from the acquisition of the Paulsboro Refinery in
September 1998, and to a lesser extent, to an increase in average interest
rates.
INCOME TAX EXPENSE (BENEFIT)
Income taxes increased from a $35.8 million benefit in 1998 to a $5.9
million expense in 1999 due primarily to the significant increase in pre-tax
income and, to a lesser extent, to the recognition in 1998 of $5.8 million
related to a research and experimentation tax credit. See Note 11 of Notes to
Consolidated Financial Statements.
30
<PAGE> 34
OUTLOOK
Thus far in the first quarter of 2001, margins across Valero's business
remain strong. In January 2001, average Gulf Coast and East Coast gasoline
margins relative to WTI increased to $6.49 and $5.30 per barrel, respectively,
from average fourth quarter 2000 margins of $2.49 and $4.37 per barrel,
respectively, and were significantly higher than January 2000 margins of $1.87
and $2.32, respectively. This improvement was due to a decline in U.S. gasoline
production during late 2000 and early 2001 resulting from a significant number
of refinery turnarounds and high natural gas prices which resulted in a
significant amount of gasoline blendstocks being taken out of the gasoline pool.
Average West Coast gasoline margins relative to ANS have also remained strong,
averaging $13.91 per barrel in January 2001, due to a tight balance between
supply and demand and the effect of substantial scheduled and unscheduled
refinery turnaround activity. These margins, although slightly lower than the
average fourth quarter 2000 margin of $14.41 per barrel, were significantly in
excess of January 2000 margins which were less than $6.00 per barrel. Heating
oil margins declined somewhat in January 2001 from the high levels achieved
during the fourth quarter of 2000 due to moderating weather patterns and record
import levels, but were still in excess of average first quarter 2000 margins.
Average lube oil margins in January 2001 remained strong, and were more than
triple first quarter 2000 margins, due to continued strong market conditions and
an improvement in the pricing structure related to Valero's lube oil contract
with ExxonMobil. Propylene margins in January 2001 remained under pressure and
were below average first quarter 2000 levels due to high crude oil prices.
Average discounts for sour crude oil thus far in 2001 have improved
from already favorable fourth quarter 2000 levels due to increasing worldwide
supplies of sour crude oil and continuing higher demand for sweet crudes, and
are well in excess of first quarter 2000 discounts. On the West Coast, the
average discount to WTI for ANS in January 2001 was $5.20 per barrel compared to
$2.60 in the fourth quarter of 2000 and $1.52 in January 2000. Outside of the
West Coast, sour crude oil discounts to WTI averaged $5.60 per barrel in January
2001 compared to $4.76 in the fourth quarter of 2000 and $2.44 in January 2000.
Sweet crude oil continues to trade at a premium to WTI due to increasing demand
for sweet crudes as a result of the new stringent fuel specifications
implemented in 2000 and higher margins for light products. Valero expects to
continue to recognize significant benefits from its ability to meet current fuel
specifications using predominantly sour crude oil feedstocks as the supply of
sour crudes and the demand for sweet crudes continue to increase in the future.
With regard to operating costs, the cost of natural gas remained high
in January 2001 at an average of $8.45 per MMBtu, continuing the high levels
experienced in the fourth quarter of 2000, due to continued strong demand and
decreasing supplies. These high natural gas costs, combined with lower
throughput volumes resulting from the turnarounds described below, are expected
to result in an increase in per-barrel cash operating costs for the first
quarter of 2001. After the first quarter 2001 turnarounds are completed, Valero
expects cash operating costs to trend downward during the rest of the year due
to increasing throughput volumes and a decline in natural gas costs.
Electricity for the Benicia Refinery is supplied by Pacific Gas and
Electric Company. As more fully described in Item 1 of this Form 10-K under
"FACTORS AFFECTING OPERATING RESULTS," in early 2001 the electricity crisis in
California escalated resulting in periodic blackouts and power cutbacks to
industrial and residential users by Pacific Gas and Electric and the state's
other electrical utilities. To date, the California electricity crisis has not
impacted the supply of power to the Benicia Refinery as its contract with
Pacific Gas and Electric is noninterruptible. However, there can be no assurance
that the electricity crisis in California will soon abate or that the California
utilities will be able to
31
<PAGE> 35
continue to supply power to the Benicia Refinery or to the pipelines that
distribute the refinery's products at historical rates or in historical
quantities.
In February 2001, Valero completed a 42-day turnaround and upgrade of
two crude units at the Texas City Refinery which increased net throughput
capacity by approximately 20,000 BPD and improved reliability and energy
efficiency of the units, as well as a turnaround and catalyst change of the
Texas City Refinery's residfiner unit. At the Benicia Refinery, Valero completed
a 34-day turnaround and upgrade of the hydrogen, hydrotreater and hydrocracker
units in February 2001, which increased its gasoline production capacity to
approximately 120,000 BPD. The Houston Refinery is currently undergoing its
first major plantwide turnaround since Valero acquired the facility in 1997.
During this turnaround, the refinery's FCC unit and crude unit are being
expanded and modified, increasing the refinery's production capacity by over
5,000 BPD. The turnaround is expected to enhance feedstock processing
flexibility, improve the reliability of the FCC unit, and improve energy
efficiency and the yields of light products. This turnaround commenced January
20 and is expected to be completed on February 23. At the Paulsboro Refinery,
Valero intends to upgrade the lubricants crude unit and lubricants plant in the
third quarter of 2001. At the Corpus Christi and Krotz Springs refineries, no
major turnarounds are currently planned for 2001. As refining margins merit,
Valero expects to continue making capital improvements at its refinery
facilities to increase, among other things, throughput capacity, resid
conversion, operational efficiency and feedstock flexibility and to improve
mechanical reliability. The majority of these capital improvements are planned
to be performed during scheduled maintenance turnarounds.
For the remainder of 2001 and beyond, Valero anticipates, based on
projected supply and demand fundamentals, that refining margins should remain
strong. Refined product supply and demand balances are expected to tighten in
the U.S., Europe and Asia as the combined effect of increasing demand, more
stringent gasoline specifications, and refinery closures resulting from
increased capital requirements to meet the increasingly stringent fuel
specifications should more than offset the effect of refinery capacity
additions, conversion unit expansions, and certain new refineries that are being
put into service in Asia. Crude oil demand is expected to continue to grow
longer term. Valero anticipates that the percentage of total crude oil
production representing heavier crudes will continue to increase and that the
demand for sweeter crudes will also continue to increase. As a result, Valero
expects that the spread between light and heavy crudes should remain wide, which
should result in continuing favorable discounts for Valero on the purchase of
heavier feedstocks. Although incremental coking capacity has recently been added
in the United States and more such units are under construction in both the
United States and other countries, Valero does not expect this additional
capacity to have a major impact on its sour crude oil discounts for two primary
reasons. First, additional resid conversion capacity will be necessary to
consume the incremental resid that will be produced from projected increases in
sour crude oil production of over one million BPD each year until at least 2005.
Second, most of the cokers under construction process heavier Venezuelan and
Mexican crudes under long-term contracts and thus, to that extent, will not
compete for the sour crudes processed by Valero.
Demand, both domestically and worldwide, for clean-burning fuels such
as RFG is expected to continue to increase as a result of the worldwide movement
to reduce lead and certain other pollutants and contaminants in gasoline. This
increasing demand for clean-burning fuels should sustain increased demand for
oxygenates such as MTBE. However, certain initiatives have been passed in
California which are intended to ban the use of MTBE as a gasoline component by
the end of 2002. In addition, other states and the EPA have either passed or
proposed or are considering proposals to restrict or ban the use of MTBE. If
MTBE were to be restricted or banned throughout the United States, Valero
believes that its major MTBE-producing facilities could be modified to produce
other gasoline blendstocks or
32
<PAGE> 36
other petrochemicals for a capital investment of approximately $22 million.
However, the volume of alternative products that could be produced would be less
than Valero's current production volumes of MTBE. Valero believes, however, that
if MTBE were restricted or banned, the economics related to Valero's various
alternative products could change, and such an action would not be expected to
have a material adverse effect on Valero's results of operations.
Significant industry consolidations through mergers and acquisitions
have occurred in the past and are continuing. Valero expects that industry
consolidations will continue, providing Valero with additional opportunities to
expand its operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased $166.2 million to
$601.3 million during 2000 compared to 1999, due primarily to the significant
increase in earnings discussed above under "Results of Operations," partially
offset by a decrease in the amount of cash provided by reductions in working
capital. During 2000, Valero reduced the amount of cash utilized for working
capital purposes by $3.5 million, following Valero's proactive efforts during
1999 which reduced working capital levels approximately $294 million. During
2000, there were significant changes in individual components of working
capital, as detailed in "STATEMENTS OF CASH FLOWS" in Note 1 of Notes to
Consolidated Financial Statements. Approximately $123 million, $7 million, $2
million, $109 million and $36 million, respectively, of the increases reflected
in accounts receivable, inventories, prepaid expenses, accounts payable and
accrued expenses for the year 2000 were attributable to the operations
associated with the Benicia Acquisition, which was completed in the second
quarter of 2000. The remaining changes were primarily attributable to increased
accounts receivable and accounts payable resulting from an increase in commodity
prices from December 31, 1999 to December 31, 2000, somewhat higher product
inventory levels, and an increase in accrued expenses resulting mainly from
larger accruals for taxes and variable compensation. During 1999, both accounts
receivable and accounts payable increased significantly as crude oil, gasoline,
and heating oil prices more than doubled from December 31, 1998 to December 31,
1999. However, concerted efforts by Valero to collect accounts receivable, the
sale of receivables as described in Note 2 of Notes to Consolidated Financial
Statements, and a significant reduction in inventory levels all helped to offset
the effect of higher commodity prices. During 2000, cash provided by (i)
operating activities, (ii) existing cash balances, (iii) proceeds from the
senior notes, PEPS Units and common stock offerings described in Notes 5, 6 and
7, respectively, of Notes to Consolidated Financial Statements, and (iv)
issuances of common stock related to Valero's benefit plans was utilized to (i)
fund the Benicia Acquisition, capital expenditures, deferred turnaround and
catalyst costs and investments in joint ventures, (ii) repurchase shares of
Valero common stock, (iii) pay common stock dividends, and (iv) reduce
borrowings under Valero's bank credit agreements.
Valero currently maintains an unsecured $835 million revolving bank
credit and letter of credit facility which matures in November 2002 and is
available for general corporate purposes including working capital needs and
letters of credit. Borrowings under this facility bear interest at either LIBOR
plus a margin, a base rate or a money market rate. Valero is also charged
various fees and expenses in connection with this facility, including a facility
fee and various letter of credit fees. The interest rate and fees under this
credit facility are subject to adjustment based upon the credit ratings assigned
to Valero's long-term debt. The credit facility includes certain restrictive
covenants including a coverage ratio, a capitalization ratio, and a minimum net
worth test. In connection with Valero's interim financing plan for the Benicia
Acquisition, in April 2000, this credit facility was amended to, among other
things, increase the total debt-to-capitalization limit from 50% to 65%. This
ratio limit was subsequently decreased to 60% upon the completion
33
<PAGE> 37
of the PEPS Units and common stock offerings described in Notes 6 and 7,
respectively, and will further decrease to 55% on September 30, 2001. These
amendments to the credit facility became effective upon the closing of the
acquisition of the Benicia Refinery and the Distribution Assets. As of December
31, 2000, there were no outstanding borrowings under this committed facility,
while letters of credit outstanding were approximately $184 million. Valero also
currently has various uncommitted short-term bank credit facilities, along with
various uncommitted bank letter of credit facilities. As of December 31, 2000,
$27 million was outstanding under the short-term bank credit facilities, and
letters of credit totaling approximately $89 million were outstanding under the
uncommitted letter of credit facilities. As of December 31, 2000, Valero's
debt-to-capitalization ratio was 39.9%, a decrease from 42% as of December 31,
1999 and a decrease from 48.4% as of June 30, 2000, shortly after the
consummation of the Benicia Acquisition (with 20% of the aggregate liquidation
amount of trust preferred securities issued as part of the PEPS Units deemed to
be debt for purposes of the 2000 computations). See Notes 4 and 5 of Notes to
Consolidated Financial Statements.
As discussed in Note 3 of Notes to Consolidated Financial Statements,
the Benicia Acquisition was completed in May and June of 2000 for a purchase
price of $895 million, plus approximately $150 million for refinery inventories
acquired in the transaction and certain other acquisition costs. Interim
financing for the acquisition was provided by a $600 million bank bridge loan
facility, borrowings under Valero's existing bank credit facilities, and an
interim lease arrangement for the Benicia Refinery's dock facility. The $600
million of borrowings under the bridge loan facility, which bore interest at
LIBOR plus an applicable margin, and approximately $128 million of the
borrowings under Valero's existing bank credit facilities were subsequently
repaid with the proceeds of the senior notes, PEPS Units, and common stock
offerings described in Notes 5, 6 and 7, respectively, of Notes to Consolidated
Financial Statements. The Service Stations were funded through, and the interim
lease arrangement for the dock facility was replaced with, a $155 million
structured lease arrangement. This structured lease, which is being accounted
for as an operating lease, has a remaining primary term of approximately 4.5
years.
As described in Note 3 of Notes to Consolidated Financial Statements,
Mobil (now ExxonMobil) is entitled to receive payments in any of the five years
following the September 1998 acquisition of the Paulsboro Refinery, if certain
average refining margins during any of these years exceed a specified level.
Also, if certain average refining margins exceed a specified level in any of the
ten years following the May 1997 acquisition of Basis Petroleum, Inc. from
Salomon Inc, Salomon is entitled to receive payments from Valero. Based on
refining margins during the years ended May 2000 and September 2000, no earn-out
payments were due to Salomon or Mobil during 2000. Based on actual margins since
May and September of 2000, and estimated margin levels through May and September
of 2001, earn-out payments due to Salomon and Mobil during 2001 would be
$35 million and $20 million, respectively. Payments would be due May 31 and
October 16, respectively.
During 2000, Valero expended approximately $304 million for capital
investments (excluding the cost of the Benicia Acquisition), including capital
expenditures of $195 million, deferred turnaround and catalyst costs of $107
million, and investments in joint ventures of $2 million. Capital expenditures
included approximately $12 million for projects related to environmental control
and protection (excluding approximately $11 million of costs related to a flue
gas scrubber at the Texas City Refinery which is being financed through a lease
arrangement). For 2001, Valero currently expects to incur approximately $390
million for capital investments, including approximately $290 million for
capital expenditures and approximately $100 million for deferred turnaround and
catalyst costs. The capital expenditure estimate includes approximately $30
million for projects related to environmental control and protection
34
<PAGE> 38
(excluding approximately $22 million of costs related to the Texas City Refinery
flue gas scrubber discussed above) and excludes anticipated expenditures related
to the earn-out contingency agreements discussed above and in Note 3 of Notes to
Consolidated Financial Statements. Any major upgrades in any of Valero's
refineries would most likely require additional expenditures to comply with
environmental laws and regulations. However, because environmental laws and
regulations are increasingly becoming more stringent and new environmental laws
and regulations are continuously being enacted or proposed, Valero cannot
predict with certainty the level of future expenditures that will be required
for environmental matters.
Under common stock repurchase programs approved by Valero's Board of
Directors, Valero repurchases shares of its common stock from time to time for
use in connection with its employee benefit plans and other general corporate
purposes. During the fourth quarter and total year of 2000, Valero repurchased
shares of its common stock under these programs at a cost of approximately $14
million and $64 million, respectively.
Dividends on Valero's common stock are considered quarterly by Valero's
Board of Directors, are determined by the Board on the basis of earnings and
cash flows, and may be paid only when approved by the Board. Valero has declared
a dividend of $.08 per common share for each quarter since the Restructuring.
Valero believes it has sufficient funds from operations, and to the
extent necessary, from the public and private capital markets and bank markets,
to fund its ongoing operating requirements. Valero expects that, to the extent
necessary, it can raise additional funds from time to time through equity or
debt financings. However, there can be no assurances regarding the availability
of any future financings or whether such financings can be made available on
terms acceptable to Valero.
On March 31, 2000, Valero filed a $1.3 billion universal shelf
registration statement on Form S-3, which was declared effective by the SEC on
May 30, 2000. Securities registered pursuant to this registration statement
included common stock, preferred stock, debt securities and warrants. The senior
notes, PEPS Units and common stock offerings issued in connection with funding
the Benicia Acquisition were issued under this shelf registration statement.
Proceeds from any additional issuances under this shelf registration statement,
if any, are expected to be used for general corporate purposes, including
acquisitions, working capital requirements, capital expenditures, repayment of
debt or other business purposes. As of the date of this Form 10-K, Valero is not
currently contemplating any additional issuances under this shelf registration
statement.
Valero's refining and marketing operations have a concentration of
customers in the oil refining industry and petroleum products markets. These
concentrations of customers may impact Valero's overall exposure to credit risk,
either positively or negatively, in that these customers may be similarly
affected by changes in economic or other conditions. However, Valero believes
that its portfolio of accounts receivable is sufficiently diversified to the
extent necessary to minimize potential credit risk. Historically, Valero has not
had any significant problems collecting its accounts receivable. Valero's
accounts receivable are not collateralized. See Note 2 of Notes to Consolidated
Financial Statements for information regarding a program entered into by Valero
in September 1999 to sell up to $100 million of an undivided percentage
ownership interest in a designated pool of accounts receivable.
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<PAGE> 39
NEW ACCOUNTING PRONOUNCEMENTS
As discussed in Note 1 of Notes to Consolidated Financial Statements,
certain new financial accounting pronouncements have been issued by the FASB,
EITF and SEC which either have already been reflected in the accompanying
consolidated financial statements, or will become effective for Valero's
financial statements at various dates in the future. Except for FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," for
which the transition impact is reflected in Note 1 under "NEW ACCOUNTING
PRONOUNCEMENTS - FASB 133," the adoption of these pronouncements has not had, or
is not expected to have, a material effect on Valero's consolidated financial
statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
As discussed in Item 1. Business - Factors Affecting Operating Results,
Valero is exposed to market risks related to the volatility of crude oil and
refined product prices, as well as volatility in the price of natural gas used
in its refining operations. In order to reduce the risks of these price
fluctuations, Valero uses derivative commodity instruments to hedge certain
refinery feedstock and refined product inventories. Valero also uses derivative
commodity instruments to hedge the price risk of anticipated transactions such
as anticipated feedstock, product and natural gas purchases, product sales and
refining operating margins. In addition, Valero uses derivative commodity
instruments for trading purposes using its fundamental and technical analysis of
market conditions to earn additional income.
The types of instruments used in Valero's hedging and trading
activities described above include futures, options and swaps with third
parties. Valero's positions in derivative commodity instruments are monitored
and managed on a daily basis by a risk control group to ensure compliance with
Valero's stated risk management policy which has been approved by Valero's Board
of Directors. See Note 1 of Notes to Consolidated Financial Statements under
"PRICE RISK MANAGEMENT ACTIVITIES" for a discussion of Valero's accounting
policies related to its derivative commodity instrument transactions, including
Valero's adoption of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, effective January 1, 2001.
In the tables below detailing Valero's open derivative commodity
instruments as of December 31, 2000 and 1999, the total gain or (loss) as of
either date on swaps is the net of the fixed price payor and receiver fair value
amounts, while the total gain or (loss) on futures and options is (i) the excess
of the fair value amount over the contract amount for fixed price payor
positions, combined with (ii) the excess of the contract amount over the fair
value amount for fixed price receiver positions. As discussed in Note 1 of Notes
to Consolidated Financial Statements under "PRICE RISK MANAGEMENT ACTIVITIES,"
gains and losses on hedging activities are deferred and recognized when the
hedged transaction occurs while gains and losses on trading activities are
recognized currently.
HEDGING ACTIVITIES
Valero uses derivative commodity instruments to hedge certain refinery
feedstock and refined product inventories in order to reduce the impact of
adverse price changes on these inventories before the conversion of the
feedstock to finished products and ultimate sale. Swaps and futures contracts
held to hedge refining inventories at the end of 2000 and 1999 had remaining
terms of less than one year. As of December 31, 2000 and 1999, 14.9% and 19.5%,
respectively, of Valero's refining inventory position was hedged. As of December
31, 2000 and 1999, $3.1 million and $2.1 million, respectively, of deferred
hedge losses were included as an increase in refining inventories.
The following table provides information about Valero's derivative
commodity instruments held to hedge refining inventories as of December 31, 2000
(which mature in 2001) and December 31, 1999 (which matured in 2000) (dollars in
thousands, except amounts per barrel, or bbl, or per million British thermal
units, or MMBtus). Volumes shown for swaps represent notional volumes which are
used to calculate amounts due under the agreements.
37
<PAGE> 41
<TABLE>
<CAPTION>
December 31, 2000 December 31, 1999
(mature in 2001) (matured in 2000)
---------------------- ------------------------
Fixed Price Fixed Price
---------------------- ------------------------
Payor Receiver Payor Receiver
----- -------- ----- --------
<S> <C> <C> <C> <C>
Swaps:
Notional volumes (thousands of barrels, or Mbbls) 150 1,800 1,200 2,850
Weighted average pay price (per bbl) ............ $ 1.62 $ 7.14 $ 1.87 $ 1.68
Weighted average receive price (per bbl) ........ $ 4.27 $ 4.18 $ 1.70 $ 1.88
Fair value ...................................... $ 398 $ (5,326) $ (203) $ 568
Futures:
Volumes (Mbbls) ................................. 10,898 12,263 6,821 7,410
Weighted average price (per bbl) ................ $ 31.58 $ 32.42 $ 27.72 $ 28.71
Contract amount ................................. $344,201 $397,625 $189,061 $212,729
Fair value ...................................... $345,732 $398,612 $186,176 $208,327
Volumes (billion Btus, or BBtus) ................ 1,200 1,200 -- --
Weighted average price (per MMBtu) .............. $ 4.56 $ 4.71 -- --
Contract amount ................................. $ 5,471 $ 5,652 -- --
Fair value ...................................... $ 11,730 $ 11,730 -- --
</TABLE>
Valero also uses derivative commodity instruments to hedge the price
risk of anticipated transactions. In 2000 and 1999, swaps and futures were used
to hedge anticipated feedstock and product purchases, product sales and refining
operating margins by locking in purchase or sales prices or components of the
margins, including feedstock discounts, conventional gasoline and heating oil
crack spreads and premium product differentials. Swaps were also used in 2000
and 1999 to hedge anticipated purchases of natural gas used in Valero's refining
operations. The majority of contracts hedging anticipated transactions mature in
2001 with certain contracts extending through 2002. There were no significant
explicit deferrals of hedging gains or losses related to these anticipated
transactions as of the end of 2000 or 1999.
The following table provides information about Valero's derivative
commodity instruments held to hedge anticipated feedstock and product purchases,
product sales and refining margins as of December 31, 2000 (which mature in
2001) and December 31, 1999 (which matured in 2000) (dollars in thousands,
except amounts per barrel). Volumes shown for swaps represent notional volumes
which are used to calculate amounts due under the agreements.
<TABLE>
<CAPTION>
December 31, 2000 December 31, 1999
(mature in 2001) (matured in 2000)
------------------------ -------------------------
Fixed Price Fixed Price
------------------------ -------------------------
Payor Receiver Payor Receiver
------- -------- ------ --------
<S> <C> <C> <C> <C>
Swaps:
Notional volumes (Mbbls) ............... 750 9,000 6,000 7,950
Weighted average pay price (per bbl) ... $ 1.62 $ 3.39 $ 1.87 $ 1.70
Weighted average receive price (per bbl) $ 2.35 $ 3.60 $ 1.66 $ 2.04
Fair value ............................. $ 547 $ 1,845 $(1,287) $2,704
Futures:
Volumes (Mbbls) ........................ 1,012 1,066 105 101
Weighted average price (per bbl) ....... $ 26.53 $ 30.67 $ 23.66 $24.22
Contract amount ........................ $26,844 $32,689 $ 2,484 $2,446
Fair value ............................. $25,955 $32,485 $ 2,501 $2,446
</TABLE>
38
<PAGE> 42
In addition to the above, as of December 31, 2000 and 1999, Valero was
the fixed price payor under certain swap contracts held to hedge anticipated
purchases of refinery feedstocks and refined products that mature in 2002, have
notional volumes totaling approximately 7.5 million barrels, and have a weighted
average pay price of $20.11 per barrel. As of December 31, 2000, these swaps had
a weighted average receive price of $22.75 per barrel and a net unrecognized
fair value of approximately $42.9 million. As of December 31, 1999, these swaps
had a weighted average receive price of $18.02 per barrel and a net unrecognized
fair value of approximately $7.4 million.
TRADING ACTIVITIES
Valero also uses derivative commodity instruments for trading purposes
using its fundamental and technical analysis of market conditions to earn
additional income. Contracts outstanding as of December 31, 2000 will mature in
2001 or January 2002.
The following table provides information about Valero's derivative
commodity instruments held or issued for trading purposes as of December 31,
2000 (which mature in 2001 or 2002) and December 31, 1999 (which matured in 2000
or 2001) (dollars in thousands, except amounts per barrel or per million British
thermal units). Volumes shown for swaps represent notional volumes which are
used to calculate amounts due under the agreements.
<TABLE>
<CAPTION>
December 31, 2000 December 31, 1999
--------------------------------------- ---------------------------------------------
Mature in 2001 Mature in 2002 Matured in 2000 Mature in 2001
-------------------- ----------------- --------------------- ---------------------
Fixed Price Fixed Price Fixed Price Fixed Price
-------------------- ----------------- --------------------- ---------------------
Payor Receiver Payor Receiver Payor Receiver Payor Receiver
-------- ---------- ------ --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Notional volumes (Mbbls).................... 6,450 7,400 -- -- 21,600 23,125 600 600
Weighted average pay price (per bbl)........ $ 4.08 $ 4.44 -- -- $ 2.93 $ 2.43 $ 1.95 $ 1.91
Weighted average receive price (per bbl).... $ 5.09 $ 3.55 -- -- $ 2.94 $ 2.62 $ 1.90 $ 2.18
Fair value.................................. $ 6,512 $ (6,571) -- -- $ 204 $ 4,377 $ (28) $ 163
Notional volumes (BBtus).................... 56,070 56,060 -- -- -- -- -- --
Weighted average pay price (per MMBtu)...... $ 4.82 $ 7.85 -- -- -- -- -- --
Weighted average receive price (per MMBtu).. $ 7.85 $ 4.81 -- -- -- -- -- --
Fair value.................................. $169,488 $(170,182) -- -- -- -- -- --
Options:
Volumes (Mbbls)............................. -- -- -- -- 1,400 1,400 -- --
Weighted average strike price (per bbl)..... -- -- -- -- $ 24.36 $ 24.36 -- --
Contract amount............................. -- -- -- -- $ (11) $ (220) -- --
Fair value.................................. -- -- -- -- $ 200 $ 200 -- --
Futures:
Volumes (Mbbls)............................. 7,720 6,670 8 -- 25,933 26,158 3,125 3,125
Weighted average price (per bbl)............ $ 24.54 $ 24.19 $26.10 -- $ 21.39 $ 21.48 $ 19.48 $ 18.90
Contract amount............................. $189,430 $ 161,334 $ 209 -- $554,604 $561,979 $60,883 $59,050
Fair value.................................. $200,701 $ 179,454 $ 189 -- $621,949 $623,768 $60,938 $60,938
Volumes (BBtus)............................. 14,410 15,920 -- -- 750 750 -- --
Weighted average price (per MMBtu).......... $ 5.28 $ 5.18 -- -- $ 2.77 $ 2.69 -- --
Contract amount............................. $ 76,050 $ 82,472 -- -- $ 2,074 $ 2,020 -- --
Fair value.................................. $130,356 $ 139,205 -- -- $ 1,747 $ 1,747 -- --
</TABLE>
39
<PAGE> 43
The following table discloses the net gains (losses) from trading
activities and average fair values of contracts held or issued for trading
purposes for the years ended December 31, 2000 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Average Fair Value
of
Net Gains (Losses) Assets (Liabilities)
-------------------- --------------------
2000 1999 2000 1999
------- ------ ------ ------
<S> <C> <C> <C> <C>
Swaps.............................. $(1,524) $13,521 $1,547 $3,810
Options............................ 45 (115) (31) (39)
Futures............................ (7,922) 3,764 375 1,715
------- -------
Total.......................... $(9,401) $17,170
======= =======
</TABLE>
INTEREST RATE RISK
Valero's primary market risk exposure for changes in interest rates
relates to its long-term debt obligations. Valero manages its exposure to
changing interest rates principally through the use of a combination of fixed
and floating rate debt (see Note 5 of Notes to Consolidated Financial
Statements) and currently does not use derivative financial instruments to
manage such risk.
40
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Valero Energy Corporation:
We have audited the accompanying consolidated balance sheets of Valero
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of income, common
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Valero Energy
Corporation and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 19, 2001
41
<PAGE> 45
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
December 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments .................................. $ 14,596 $ 60,087
Receivables, less allowance for doubtful accounts of $5,612 (2000) and
$3,038 (1999) ...................................................... 585,892 372,542
Inventories .......................................................... 539,882 298,047
Current deferred income tax assets ................................... 105,817 79,307
Prepaid expenses and other ........................................... 38,880 13,534
----------- -----------
1,285,067 823,517
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - including construction in
progress of $158,445 (2000) and $114,747 (1999), at cost ............. 3,481,117 2,606,454
Less: Accumulated depreciation .................................... 804,437 692,383
----------- -----------
2,676,680 1,914,071
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS ...................................... 345,957 241,684
----------- -----------
$ 4,307,704 $ 2,979,272
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt ...................................................... $ 27,000 $ --
Accounts payable ..................................................... 806,879 616,895
Accrued expenses ..................................................... 205,113 102,087
----------- -----------
1,038,992 718,982
----------- -----------
LONG-TERM DEBT ......................................................... 1,042,417 785,472
----------- -----------
DEFERRED INCOME TAXES .................................................. 406,634 275,521
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES ................................. 120,106 114,528
----------- -----------
VALERO-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED CAPITAL TRUST SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY VALERO SENIOR NOTES ............................ 172,500 --
----------- -----------
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - 150,000,000 shares authorized;
issued 62,311,166 (2000) and 56,331,166 (1999) shares .............. 623 563
Additional paid-in capital ........................................... 1,249,127 1,092,348
Retained earnings (accumulated deficit) .............................. 321,566 (3,331)
Treasury stock, 1,472,698 (2000) and 264,464 (1999) shares, at cost .. (44,261) (4,811)
----------- -----------
1,527,055 1,084,769
----------- -----------
$ 4,307,704 $ 2,979,272
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE> 46
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES .......................................... $ 14,671,087 $ 7,961,168 $ 5,539,346
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales and operating expenses ...................... 13,817,524 7,731,151 5,271,473
Write-down of inventories to market value ................. -- -- 170,929
Selling and administrative expenses ....................... 130,506 68,463 69,482
Depreciation expense ...................................... 112,078 89,525 75,809
------------ ------------ ------------
Total ................................................... 14,060,108 7,889,139 5,587,693
------------ ------------ ------------
OPERATING INCOME (LOSS) ..................................... 610,979 72,029 (48,347)
OTHER INCOME (EXPENSE), NET ................................. 282 3,587 (2,265)
INTEREST AND DEBT EXPENSE:
Incurred .................................................. (83,678) (61,182) (37,819)
Capitalized ............................................... 7,433 5,753 5,340
DISTRIBUTIONS ON PREFERRED SECURITIES OF
SUBSIDIARY TRUST ......................................... (6,796) -- --
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ........................... 528,220 20,187 (83,091)
INCOME TAX EXPENSE (BENEFIT) ................................ 189,100 5,900 (35,800)
------------ ------------ ------------
NET INCOME (LOSS) ........................................... $ 339,120 $ 14,287 $ (47,291)
============ ============ ============
EARNINGS (LOSS) PER SHARE OF COMMON STOCK ................... $ 5.79 $ .25 $ (.84)
Weighted average common shares outstanding (in thousands) 58,532 56,086 56,078
EARNINGS (LOSS) PER SHARE OF COMMON STOCK -
ASSUMING DILUTION ......................................... $ 5.60 $ .25 $ (.84)
Weighted average common shares outstanding (in thousands) 60,525 56,758 56,078
DIVIDENDS PER SHARE OF COMMON STOCK ......................... $ .32 $ .32 $ .32
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE> 47
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Retained
Number of Additional Earnings
Common Common Paid-in (Accumulated Treasury
Shares Stock Capital Deficit) Stock
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 ............................ 56,136,032 $ 561 $ 1,110,654 $ 47,626 $ --
Net loss ............................................ -- -- -- (47,291) --
Dividends on common stock ........................... -- -- -- (17,953) --
Shares repurchased and shares issued
in connection with employee
stock plans and other ............................. 178,766 2 2,072 -- (10,384)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 ............................ 56,314,798 563 1,112,726 (17,618) (10,384)
Net income .......................................... -- -- -- 14,287 --
Dividends on common stock ........................... -- -- (17,931) -- --
Shares repurchased and shares issued
in connection with employee
stock plans and other ............................. 16,368 -- (2,447) -- 5,573
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1999 ............................ 56,331,166 563 1,092,348 (3,331) (4,811)
Net income .......................................... -- -- -- 339,120 --
Dividends on common stock ........................... -- -- (4,469) (14,223) --
Proceeds from common stock offering, net ............ 5,980,000 60 166,693 -- --
Shares repurchased and shares issued
in connection with employee
stock plans and other ............................. -- -- 339 -- (39,450)
Issuance costs of PEPS Units ........................ -- -- (5,784) -- --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2000 ............................ 62,311,166 $ 623 $ 1,249,127 $ 321,566 $ (44,261)
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE> 48
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ 339,120 $ 14,287 $ (47,291)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation expense ............................................... 112,078 89,525 75,809
Amortization of deferred charges and other, net .................... 60,978 49,498 50,740
Write-down of inventories to market value .......................... -- -- 170,929
Changes in current assets and current liabilities .................. 3,492 293,822 (44,874)
Deferred income tax expense (benefit) .............................. 103,100 (9,400) (31,700)
Changes in deferred items and other, net ........................... (17,466) (2,621) (7,788)
----------- ----------- -----------
Net cash provided by operating activities ........................ 601,302 435,111 165,825
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................... (194,889) (100,594) (165,507)
Deferred turnaround and catalyst costs ................................. (107,495) (72,681) (56,346)
Benicia Acquisition .................................................... (889,730) -- --
Paulsboro acquisition .................................................. -- -- (335,249)
Earn-out payment in connection with Basis acquisition .................. -- -- (10,325)
Investment in joint ventures and other, net ............................ (1,873) 1,107 1,159
----------- ----------- -----------
Net cash used in investing activities ................................ (1,193,987) (172,168) (566,268)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt, net ............................ 27,000 (160,000) 38,000
Long-term borrowings ................................................... 1,899,344 922,794 538,434
Long-term debt reduction ............................................... (1,647,000) (961,000) (147,000)
Proceeds from common stock offering, net ............................... 166,753 -- --
Issuance of common stock in connection with employee benefit plans ..... 17,365 15,620 6,677
Proceeds from offering of preferred securities of subsidiary trust, net 166,716 -- --
Common stock dividends ................................................. (18,692) (17,931) (17,953)
Purchase of treasury stock ............................................. (64,292) (13,538) (16,451)
----------- ----------- -----------
Net cash provided by (used in) financing activities .................. 547,194 (214,055) 401,707
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS ....................................................... (45,491) 48,888 1,264
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD .................................................... 60,087 11,199 9,935
----------- ----------- -----------
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD .......................................................... $ 14,596 $ 60,087 $ 11,199
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE> 49
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
As used in this report, the term "Valero" may refer, depending upon the
context, to Valero Energy Corporation, one or more of its consolidated
subsidiaries, or all of them taken as a whole.
Valero was incorporated in Delaware in 1981 under the name Valero
Refining and Marketing Company as a wholly owned subsidiary of a separate
corporation named at that time Valero Energy Corporation, or Old Valero. Old
Valero was engaged in both the refining and marketing business and the natural
gas related services business. On July 31, 1997, Old Valero spun off Valero to
Old Valero's stockholders and, with its remaining natural gas related services
business, merged with a wholly owned subsidiary of PG&E Corporation (the
"Restructuring"). Upon completion of the Restructuring, Valero's name was
changed from Valero Refining and Marketing Company to Valero Energy Corporation.
All significant intercompany transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified for
comparative purposes. See "NEW ACCOUNTING PRONOUNCEMENTS" with regard to certain
reclassifications made in connection with Valero's adoption in 2000 of the
consensus under the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force ("EITF") Issue No. 00-1, "Investor Balance Sheet and Income
Statement Display under the Equity Method for Investments in Certain
Partnerships and Other Ventures."
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues generally are recorded when title has transferred, and include
any shipping and handling fees charged to sales customers.
SHIPPING AND HANDLING COSTS
Costs incurred for shipping and handling are included in the
accompanying Consolidated Statements of Income under "Cost of sales and
operating expenses."
46
<PAGE> 50
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRICE RISK MANAGEMENT ACTIVITIES
The accounting policies described below in this section reflect the
policies followed by Valero with respect to its price risk management activities
in the preparation of the accompanying consolidated financial statements, prior
to the adoption, effective January 1, 2001, of FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended. See
"NEW ACCOUNTING PRONOUNCEMENTS" for a detailed description of FASB 133,
including how the adoption of this statement is expected to affect Valero's
consolidated financial statements in the future.
Valero uses derivative commodity instruments such as futures, options
and swaps with third parties to hedge certain refinery feedstock and refined
product inventories in order to reduce the impact of adverse price changes on
these inventories before the conversion of the feedstock to finished products
and ultimate sale. Hedges of inventories were accounted for under the deferral
method with gains and losses included in the carrying amounts of inventories and
ultimately recognized in cost of sales as those inventories were sold.
Valero also uses derivative commodity instruments such as futures,
options and swaps with third parties to hedge the price risk of anticipated
transactions. These instruments are used to hedge anticipated feedstock, product
and natural gas purchases, product sales, and refining operating margins by
locking in purchase or sales prices or components of refining operating margins,
including feedstock discounts, crack spreads and premium product differentials.
Hedges of anticipated transactions were also accounted for under the deferral
method with gains and losses on these transactions recognized when the hedged
transaction occurred, or when the amount of the hedged transaction, combined
with the hedging instrument, was not deemed to be recoverable.
Derivative commodity contracts were designated at inception as a hedge
when there was a direct relationship to the price risk associated with Valero's
inventories, future purchases and sales of commodities used in Valero's
operations, or components of Valero's refining operating margins. If this direct
relationship ceased to exist, the related contract was designated "for trading
purposes" and accounted for as described below.
Gains and losses on early terminations of financial instrument contracts
designated as hedges were deferred and included in cost of sales in the
measurement of the hedged transaction. When an anticipated transaction being
hedged was no longer likely to occur, the related derivative contract was
accounted for similar to a contract entered into for trading purposes.
Valero also uses derivative commodity instruments such as futures,
options and swaps with third parties for trading purposes using its fundamental
and technical analysis of market conditions to earn additional income. Contracts
entered into for trading purposes were accounted for under the fair value
method. Changes in the fair value of these contracts were recognized as gains or
losses in cost of sales currently and were recorded in the Consolidated Balance
Sheets in "Prepaid expenses and other" and "Accounts payable" at fair value at
the reporting date.
47
<PAGE> 51
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Valero determined the fair value of its exchange-traded contracts based
on the settlement prices for open contracts, which were established by the
exchange on which the instruments were traded. The fair value of Valero's
over-the-counter contracts was determined based on market-related indexes or by
obtaining quotes from brokers.
Valero's derivative contracts and their related gains and losses were
reported in the Consolidated Balance Sheets and Consolidated Statements of
Income as discussed above, depending on whether they were designated as a hedge
or for trading purposes. In the Consolidated Statements of Cash Flows, cash
transactions related to derivative contracts were included in "Changes in
current assets and current liabilities."
CASH AND TEMPORARY CASH INVESTMENTS
Valero's temporary cash investments are highly liquid, low-risk debt
instruments which have a maturity of three months or less when acquired.
INVENTORIES
Inventories are carried at the lower of cost or market. The cost of
refinery feedstocks purchased for processing and produced products are
determined primarily under the last-in, first-out ("LIFO") method of inventory
pricing, and the cost of feedstocks and products purchased for resale are
determined under the weighted average cost method. At December 31, 2000, the
replacement cost of Valero's LIFO inventories exceeded their LIFO carrying
values by approximately $230 million. The cost of materials and supplies is
determined principally under the weighted average cost method. Inventories as of
December 31, 2000 and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Refinery feedstocks ............ $142,522 $ 61,649
Refined products and blendstocks 332,653 183,519
Materials and supplies ......... 64,707 52,879
-------- --------
$539,882 $298,047
======== ========
</TABLE>
Refinery feedstock and refined product and blendstock inventory volumes
totaled 21.7 million barrels and 15.2 million barrels as of December 31, 2000
and 1999, respectively. The increase was primarily attributable to the
inventories purchased as part of the Benicia Acquisition described in Note 3.
See Note 8 for information concerning Valero's hedging activities related to its
refinery feedstock and refined product inventories.
48
<PAGE> 52
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property additions and betterments include capitalized interest and
acquisition costs allocable to construction and property purchases.
The costs of minor property units (or components of property units), net
of salvage, retired or abandoned are charged or credited to accumulated
depreciation under the composite method of depreciation. Gains or losses on
sales or other dispositions of major units of property are credited or charged
to income.
Major classes of property, plant and equipment as of December 31, 2000
and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Crude oil processing facilities $2,927,763 $2,123,518
Butane processing facilities .. 243,686 243,050
Other ......................... 151,223 125,139
Construction in progress ...... 158,445 114,747
---------- ----------
$3,481,117 $2,606,454
========== ==========
</TABLE>
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. A summary of the principal rates used in computing the
annual provision for depreciation, primarily utilizing the composite method and
including estimated salvage values, is as follows:
<TABLE>
<CAPTION>
Weighted
Range Average
------------ --------
<S> <C> <C>
Crude oil processing facilities 3.2% - 5.1% 3.6%
Butane processing facilities... 3.3% 3.3%
Other.......................... 2.3% - 47.8% 14.9%
</TABLE>
DEFERRED CHARGES AND OTHER ASSETS
Refinery Turnaround Costs
Costs incurred in connection with planned major maintenance activities
at Valero's refineries (refinery turnaround costs) are deferred when incurred
and amortized on a straight-line basis over that period of time estimated to
lapse until the next turnaround occurs. These costs include, among other things,
the cost to repair, restore, refurbish or replace refinery equipment such as (i)
vessels, tanks and reactors, (ii) piping, valves and fittings, (iii) rotating
49
<PAGE> 53
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
equipment, (iv) instrumentation, (v) electrical equipment, (vi) heat exchangers
and (vii) fired heaters. As of December 31, 2000 and 1999, the balance of
deferred turnaround costs was $90.2 million and $49.2 million, respectively.
Fixed-Bed Catalyst Costs
Fixed-bed catalyst costs are deferred when incurred and amortized on a
straight-line basis over the estimated useful life of that catalyst, normally
one to three years. As of December 31, 2000 and 1999, the balance of deferred
catalyst costs was $27.3 million and $16.8 million, respectively.
Technological Royalties and Licenses
Technological royalties and licenses are deferred when incurred and
amortized on a straight-line basis over the estimated useful life of each
particular royalty or license. As of December 31, 2000 and 1999, the balance of
deferred royalties and licenses was $26.2 million and $25.7 million,
respectively.
Retail Branding Rights
As discussed in Note 3, Valero acquired Exxon Mobil Corporation's
Exxon-branded California retail assets in the second quarter of 2000. In
connection with this acquisition, Valero received the exclusive rights to offer
the Exxon brand throughout the state of California (except for the San Francisco
Bay area) for a ten-year period. The value assigned to this right of $35 million
was deferred and is being amortized over the ten-year term of the rights
agreement.
Other Deferred Charges and Other Assets
Other deferred charges and other assets include Valero's 20% interest in
Javelina Company, a general partnership that owns a refinery off-gas processing
plant in Corpus Christi, Texas. Valero accounts for its interest in Javelina on
the equity method of accounting. Also included in other deferred charges and
other assets is Valero's interest in the Clear Lake, Texas methanol plant, which
is owned by a joint venture between a Valero subsidiary and Celanese Ltd.
Effective in the second quarter of 2000, Valero changed the financial statement
presentation of its interest in this methanol plant from a proportionate gross
presentation to a single-amount equity method presentation in connection with
adopting the consensus under EITF Issue No. 00-1. See "NEW ACCOUNTING
PRONOUNCEMENTS." Other deferred charges and other assets also include prefunded
benefit costs, debt issuance costs and certain other costs.
50
<PAGE> 54
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ACCRUED EXPENSES
Accrued expenses as of December 31, 2000 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Accrued interest expense ..... $ 11,204 $ 9,906
Accrued taxes ................ 100,731 52,020
Accrued employee benefit costs 45,270 21,053
Other ........................ 47,908 19,108
-------- --------
$205,113 $102,087
======== ========
</TABLE>
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities consist primarily of obligations
under Valero's employee benefit plans (see Note 12) and environmental
remediation obligations incurred in connection with Valero's acquisition of the
Paulsboro Refinery (see Note 3).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Valero's financial instruments approximate fair
value, except for certain long-term debt and financial instruments used in
price risk management activities. See Notes 5 and 8.
STOCK-BASED COMPENSATION
Valero accounts for its employee stock compensation plans using the
"intrinsic value" method of accounting set forth in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of Valero's common stock at the
date of the grant over the amount an employee must pay to acquire the stock.
FASB Statement No. 123, "Accounting for Stock-Based Compensation," encourages,
but does not require companies to measure and recognize in their financial
statements a compensation cost for stock-based employee compensation plans based
on the "fair value" method of accounting set forth in the statement. See Note 12
for the pro forma effects on net income and earnings per share had compensation
cost for Valero's stock-based compensation plans been determined consistent with
FASB 123.
51
<PAGE> 55
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EARNINGS PER SHARE
Basic and diluted earnings per share are presented on the face of the
accompanying Consolidated Statements of Income in accordance with the provisions
of FASB Statement No. 128, "Earnings per Share." Basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of Valero's outstanding stock options and
performance awards granted to employees in connection with Valero's stock
compensation plans (see Note 12) for all periods presented. The weighted average
number of common shares outstanding for the years ended December 31, 2000, 1999
and 1998 was 58,532,326, 56,086,381 and 56,077,671, respectively.
The computation of basic and diluted per share amounts, as required by
FASB 128, is as follows (dollars and shares in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- ------------------------------
Per Per Per
Net Share Net Share Net Share
Income Shares Amt. Income Shares Amt. (Loss) Shares Amt.
-------- -------- ----- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)...... $339,120 $ 14,287 $(47,291)
======== ======== ========
BASIC EARNINGS PER SHARE:
Net income (loss) available
to common stockholders .... $339,120 58,532 $5.79 $ 14,287 56,086 $ .25 $(47,291) 56,078 $(.84)
===== ===== =====
EFFECT OF DILUTIVE SECURITIES:
Stock options ................ -- 1,304 -- 292 -- --
Performance awards ........... -- 689 -- 380 -- --
-------- -------- -------- -------- -------- --------
DILUTED EARNINGS PER SHARE:
Net income (loss) available
to common stockholders plus
assumed conversions ....... $339,120 60,525 $5.60 $ 14,287 56,758 $ .25 $(47,291) 56,078 $(.84)
======== ======== ===== ======== ======== ===== ======== ======== =====
</TABLE>
Because Valero reported a net loss for the year ended December 31, 1998,
various stock options and performance awards which were granted to employees in
connection with Valero's stock compensation plans and were outstanding during
1998 were not included in the computation of diluted earnings per share because
the effect would have been antidilutive. At December 31, 1998, options to
purchase approximately 5.5 million common shares and performance awards totaling
approximately 100,000 shares were outstanding.
52
<PAGE> 56
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STATEMENTS OF CASH FLOWS
In order to determine net cash provided by operating activities, net
income (loss) has been adjusted by, among other things, changes in current
assets and current liabilities. The changes in Valero's current assets and
current liabilities are shown in the following table as an (increase)/decrease
in current assets and an increase/(decrease) in current liabilities (in
thousands). These amounts exclude changes in "Cash and temporary cash
investments," "Current deferred income tax assets," and "Short-term debt." Also
excluded from the following table are (i) the current assets and current
liabilities acquired in connection with the Benicia Acquisition in 2000 and the
purchase of the Paulsboro Refinery in 1998 (see Note 3), both of which are
reflected separately in the accompanying Consolidated Statements of Cash Flows,
and (ii) noncash write-downs of inventories to market value in 1998 totaling
$170.9 million.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Receivables, net ......... $(213,350) $ (89,086) $ 83,103
Inventories .............. (70,364) 8,747 (8,657)
Prepaid expenses and other (10,346) 10,265 1,980
Accounts payable ......... 189,955 326,536 (116,502)
Accrued expenses ......... 107,597 37,360 (4,798)
--------- --------- ---------
Total ................ $ 3,492 $ 293,822 $ (44,874)
========= ========= =========
</TABLE>
Cash flows related to interest and income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Interest paid (net of amount capitalized) $71,789 $49,023 $30,735
Income taxes paid ....................... 49,578 13,582 5,284
Income tax refunds received ............. 565 7,530 15,513
</TABLE>
Noncash investing and financing activities for 1999 and 1998 included
various adjustments to property, plant and equipment and certain current assets
and current liabilities resulting from the completion of independent appraisals
performed in connection with the September 1998 acquisition of the Paulsboro
Refinery and the May 1997 acquisition of Basis Petroleum, Inc. from Salomon Inc,
and the allocation of the respective purchase prices to the assets acquired and
liabilities assumed.
53
<PAGE> 57
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
FASB 140
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement replaces Statement 125 with the same name. Statement 140 revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of Statement 125's provisions without reconsideration. Statement 140
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. However, certain provisions
regarding the recognition and reclassification of collateral and certain
disclosures relating to securitization transactions and collateral are effective
for Valero's financial statements for the year ended December 31, 2000. The
adoption of this statement with regard to the provisions for the recognition and
reclassification of collateral did not affect Valero's accompanying consolidated
financial statements. In addition, Valero believes that the adoption of this
statement with regard to the revised accounting standards effective for
transactions occurring after March 31, 2001 will not have a material effect on
its consolidated financial statements in the future. See Note 2 for disclosures
relating to securitization transactions and collateral as required by this
statement.
SAB 101
In December 1999, the SEC staff issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition," to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB 101 reflects
the basic principles of revenue recognition in existing generally accepted
accounting principles and does not supercede any existing authoritative
literature. For calendar year-end companies, SAB 101, as amended, was required
to be adopted beginning in the fourth quarter of 2000. Valero believes that its
revenue recognition policies are consistent with those described in SAB 101. The
adoption of this SAB did not have a material effect on Valero's accompanying
consolidated financial statements.
EITF 00-10
In the third quarter of 2000, the EITF finalized various consensuses in
connection with its Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Costs." The EITF concluded that (i) all amounts billed to a customer in a
sale transaction related to shipping and handling, if any, represent revenues
earned for the goods provided and should be classified as revenues in the income
statement, (ii) costs incurred for shipping and handling should not be deducted
from revenues (i.e., netted against shipping and handling revenues) in the
income statement and (iii) the classification in the income statement of costs
incurred for shipping and handling is an accounting policy decision that should
be disclosed under the requirements of APB Opinion No. 22, "Disclosure of
Accounting Policies," and if shipping or handling costs are significant and are
not included in cost of sales, both the amount(s) of these costs and the line
item(s) on the income statement that includes them should be disclosed. The
guidance in these consensuses was
54
<PAGE> 58
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
required to be adopted beginning in the fourth quarter of 2000, consistent with
the required adoption date for SAB 101 as described above. Valero believes that
its accounting policies are consistent with the guidance in these consensuses
(see "SHIPPING AND HANDLING COSTS" above for Valero's required accounting
policy disclosure). The adoption of these consensuses did not have a material
effect on Valero's accompanying consolidated financial statements.
EITF 00-1
In May 2000, the EITF reached a consensus in connection with its Issue
No. 00-1, "Investor Balance Sheet and Income Statement Display under the Equity
Method for Investments in Certain Partnerships and Other Ventures." This
consensus concluded that a proportionate gross financial statement presentation
is not appropriate for an investment in an unincorporated legal entity accounted
for by the equity method unless the investee is in either the construction
industry or an extractive industry (such as oil and gas exploration and
production but not related activities such as refining, marketing or
transporting extracted mineral resources) where there is a longstanding practice
of its use. In connection with adopting this consensus, Valero changed the
financial statement presentation of its interest in the Clear Lake, Texas
methanol plant from a proportionate gross presentation to a single-amount equity
method presentation. This change was effective with Valero's Form 10-Q for the
quarter ended June 30, 2000 at which time comparative financial statements were
restated to conform with the consensus. The comparative financial statements
included in this Form 10-K have also been restated to conform with the
consensus. This single-amount presentation related to Valero's investment in the
Clear Lake methanol plant is included in the accompanying Consolidated Balance
Sheets under "Deferred charges and other assets" and is included in the
accompanying Consolidated Statements of Income under "Other income (expense),
net."
FIN 44
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation." This interpretation
clarifies the application of APB No. 25, "Accounting for Stock Issued to
Employees," for certain issues including, among other things, (i) the definition
of employee for purposes of applying Opinion 25, (ii) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (iii) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (iv) the accounting for an exchange of stock
compensation awards in a business combination. This interpretation became
effective for Valero's consolidated financial statements beginning July 1, 2000,
including the effects of applying this interpretation to certain specific events
that occurred prior to July 1, 2000. The adoption of this interpretation did not
have a material effect on Valero's consolidated financial statements.
FASB 133
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
Statement No. 137 which delayed the effective date of Statement 133 for
55
<PAGE> 59
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
one year to fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued Statement No. 138 which amended various provisions of Statement 133.
Statement 133, as amended, establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in hybrid instruments) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in a derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges, as described further below, allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. Statement 133 will
become effective for Valero's consolidated financial statements beginning
January 1, 2001 and is not allowed to be applied retroactively to financial
statements of prior periods. With respect to hybrid instruments, Valero will
apply Statement 133, as allowed by the statement, to only those hybrid
instruments that were issued, acquired or substantively modified on or after
January 1, 1999. The adoption of this statement will not result in any
significant changes in Valero's business practices, including its hedging and
trading activities as described in Note 8 and in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk; however, various systems
modifications have been required.
Statement 133, in part, allows special hedge accounting for fair value
and cash flow hedges. Statement 133 provides that the gain or loss on a
derivative instrument designated and qualifying as a fair value hedging
instrument, as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk, be recognized currently in earnings in the same
accounting period. Statement 133 provides that the effective portion of the gain
or loss on a derivative instrument designated and qualifying as a cash flow
hedging instrument be reported as a component of other comprehensive income and
be reclassified into earnings in the same period or periods during which the
hedged forecasted transaction affects earnings. The remaining ineffective
portion of the gain or loss on the derivative instrument, if any, must be
recognized currently in earnings.
The transition adjustments recorded by Valero in connection with its
adoption of FASB 133 had the following effect on its financial statements as of
January 1, 2001 (in thousands):
<TABLE>
<CAPTION>
Amount
Balance sheet Debit (Credit)
- ------------- --------------
<S> <C>
Inventories ................................ $ 3,215
Deferred charges, deferred credits and other 42,865
Accounts payable ........................... (2,536)
Deferred income taxes ...................... (15,240)
Other comprehensive income ................. (28,304)
</TABLE>
56
<PAGE> 60
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACCOUNTS RECEIVABLE SECURITIZATION
In September 1999, Valero, through a wholly owned special purpose
subsidiary, entered into an agreement with a financial institution
("Transferee") to sell, on a revolving basis, up to $100 million of an undivided
percentage ownership interest in a designated pool of trade accounts receivable.
At the inception of the agreement in 1999, proceeds of $100 million were
received under this program which were used to reduce indebtedness under
Valero's bank credit facilities. Under the agreement, which matures in September
of 2002, Valero retains the residual interest in the designated pool of
receivables. This retained interest, which is included in the receivables
balance reflected in the accompanying Consolidated Balance Sheets, is recorded
at fair value. Due to (i) a short average collection cycle for such receivables
of less than one month, (ii) Valero's collection experience history, and (iii)
the composition of the designated pool of trade accounts receivable that are
part of this program, the fair value of Valero's retained interest approximates
the total amount of the designated pool of receivables reduced by the
outstanding balance of receivables sold to the Transferee under the program.
Under this receivable securitization agreement, the Transferee has no
recourse to any other assets of Valero. Valero remains responsible for servicing
the transferred receivables and pays certain fees to the Transferee related to
its sale of receivables under this program. During 2000 and 1999, the costs
incurred by Valero related to this program, which are included in "Other Income
(Expense), Net" in the accompanying Consolidated Statements of Income, were $6.8
million and $1.6 million, respectively. During 2000, as a result of the short
average collection cycle discussed above, proceeds from collections under this
revolving agreement of $2.9 billion were reinvested in the program by the
Transferee. However, the Transferee's interest in Valero's receivables was never
in excess of $100 million at any point in time under this program. No
receivables included in this program were written off during 2000 or 1999.
As of December 31, 2000, $238 million of Valero's accounts receivable
comprised the designated pool of trade receivables included in this program. Of
this amount, $100 million had been sold to the Transferee and $138 million was
retained by Valero.
3. ACQUISITIONS
CALIFORNIA REFINING AND MARKETING ASSETS
During the second quarter of 2000, Valero completed the acquisition of
Exxon Mobil Corporation's Benicia, California refinery (the "Benicia Refinery")
and Exxon-branded California retail assets, which consisted of approximately 80
service stations (the "Service Stations") and branded supplier relationships
with over 260 Exxon-branded service stations (the "Distribution Assets")
(collectively, the "Benicia Acquisition"). ExxonMobil agreed to sell these
assets as a result of consent decrees issued by the Federal Trade Commission and
the State of California requiring certain assets to be divested by ExxonMobil to
satisfy anticompetitive issues in connection with the 1999 fourth quarter merger
of Exxon Corporation and Mobil Corporation. The purchase price for the Benicia
Refinery, the
57
<PAGE> 61
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Distribution Assets and the Service Stations was $895 million, plus
approximately $150 million for (i) refinery inventories acquired in the
transaction (based on market-related prices at the time of closing) and (ii)
certain costs incurred in connection with the acquisition. As described further
below, $155 million of the total purchase price was funded through a structured
lease arrangement for the Service Stations and the Benicia Refinery's dock
facility. The acquisition of the Benicia Refinery and the Distribution Assets
closed on May 15, 2000, and the structured lease transaction closed on June 15,
2000.
In connection with the Benicia Acquisition, Valero assumed all
liabilities, including environmental liabilities, of ExxonMobil related to the
acquired California assets with certain exceptions, including those exceptions
enumerated below. ExxonMobil retained liability for, and agreed to indemnify
Valero for, (i) pending penalties assessed for violations relating to the
Benicia Refinery, (ii) pending lawsuits, (iii) personal injury or exposure,
including asbestos exposure, suffered by ExxonMobil employees, contractors or
subcontractors prior to closing, (iv) all costs associated with compliance with
a variance issued in connection with control of nitrogen oxides, (v) claims in
connection with offsite transportation and disposal of wastes prior to closing
asserted within three years of closing or asserted with respect to abandoned
disposal sites, (vi) the capital costs incurred within five years of closing for
specified corrective action of groundwater and soil contamination, (vii) all
covered contamination at the Service Stations caused by ExxonMobil or its
lessees that is reflected in baseline reports prepared prior to closing
(provided that the indemnity for covered contamination is for five years),
(viii) the repair or replacement of any underground storage tanks at the Service
Stations found to be leaking prior to closing and (ix) fines and penalties
imposed within five years of closing arising out of a request for information
from the United States Environmental Protection Agency ("EPA") relating to
certain provisions of the Clean Air Act that are attributable to actions taken
prior to closing or untimely or unresponsive responses to the request. In
addition, ExxonMobil will indemnify Valero for breaches of its representations
and warranties to the extent that the aggregate amount of Valero's losses
resulting from such breaches exceeds $1 million and ExxonMobil receives notice
of such losses within one year after the closing date.
The Benicia Refinery is located on the Carquinez Straits of the San
Francisco Bay. It is considered a highly complex refinery and has a total
throughput capacity of approximately 165,000 barrels per day, or "BPD." The
Benicia Refinery produces a high percentage of light products, with limited
production of other products. Approximately 95% of the gasoline produced by the
Benicia Refinery meets the California Air Resources Board ("CARB")
specifications for CARB II gasoline sold in California. The refinery has
significant liquid storage capacity, including storage for crude oil and other
feedstocks. The refinery assets also include a deep-water dock located offsite
on the Carquinez Straits that is capable of berthing large crude carriers,
petroleum coke storage silos located on an adjacent dock, a 20-inch crude
pipeline connecting the refinery to a southern California crude delivery system,
and an adjacent truck terminal for regional truck rack sales. Under the consent
decrees, ExxonMobil was required to offer the buyer of the divested assets a
crude oil supply contract. As a consequence, in connection with the closing of
the Benicia Acquisition, Valero entered into a ten-year term contract providing
for ExxonMobil to supply and for Valero to purchase 100,000 BPD of Alaska North
Slope ("ANS") crude oil at market-related prices, to be reduced to
58
<PAGE> 62
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
65,000 BPD on January 1, 2001. Subsequent to 2001, Valero will have an option to
reduce the required volumes by an additional 20,000 BPD once per year.
The Service Stations included 10 company-operated service stations and
approximately 70 lessee-dealer service stations, all of which are in the greater
San Francisco Bay area. In connection with the consent decrees issued by the
Federal Trade Commission and the State of California, ExxonMobil was required to
withdraw the "Exxon" brand name from the San Francisco Bay area. As a result,
ExxonMobil notified the dealers in this market area that their franchise right
to market "Exxon" branded products was being terminated effective June 15, 2000.
Valero has introduced its own brand of retail petroleum products in the San
Francisco Bay area and the dealers at these locations have entered into a
franchise agreement with Valero to market products under the new Valero brand.
In July 2000, these dealers were offered an option to purchase the stations that
they were leasing. If exercised, the purchase option requires that the dealers
enter into a fuels purchase agreement with Valero for a term of 15 years. Any
purchases of stations by these dealers resulting from the exercise of their
purchase options are expected to be completed by the end of the first quarter of
2001.
The Distribution Assets included over 260 independently-owned and
operated distributor facilities which are located outside of the San Francisco
Bay area. These distributor locations retained the right to use the Exxon brand
and continue to receive Exxon brand support, while Valero received the exclusive
right to offer the Exxon brand throughout the state of California (except for
the San Francisco Bay area) for a ten-year period. In connection with the
Benicia Acquisition, ExxonMobil assigned to Valero all of the existing Exxon
California distributor contracts under which the distributors now purchase
Exxon-branded products from Valero.
The Benicia Acquisition was funded through a senior notes offering, an
offering of premium equity participating security units ("PEPS Units"), a common
stock offering and borrowings under Valero's existing bank credit facilities.
See Notes 5, 6 and 7 for details regarding the senior notes, PEPS Units, and
common stock offerings, respectively. In addition, Valero entered into a $155
million structured lease arrangement for the Service Stations and the Benicia
Refinery's dock facility. This structured lease is being accounted for as an
operating lease and has a remaining primary term of approximately 4.5 years. See
Note 14.
The acquisition of the Benicia Refinery and Distribution Assets was
accounted for under the purchase method of accounting. In accordance with the
purchase method, the accompanying Consolidated Balance Sheet as of December 31,
2000 includes the assets acquired and liabilities assumed based on a preliminary
purchase price allocation, which will be finalized upon the completion of
independent appraisals and other evaluations. The accompanying Consolidated
Statement of Income for the year ended December 31, 2000 includes the results of
operations related to the Benicia Refinery and the Distribution Assets beginning
May 16, 2000 and the results of operations related to the Service Stations
beginning June 16, 2000.
59
<PAGE> 63
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The preliminary purchase price allocation as of December 31, 2000,
including transaction costs incurred in the acquisition, is as follows (in
thousands):
<TABLE>
<S> <C>
Inventories (including certain base inventories and supplies inventories
included in the $895 million base purchase price) .................. $ 171,471
Prepaid expenses and other ............................................. 15,000
Property, plant and equipment .......................................... 679,898
Deferred charges and other assets ...................................... 38,243
Accrued expenses ....................................................... (3,914)
Deferred credits and other liabilities ................................. (10,968)
---------
$ 889,730
=========
</TABLE>
PAULSBORO REFINERY
On September 16, 1998, Valero and Mobil Oil Corporation entered into an
asset sale and purchase agreement for the acquisition by Valero of substantially
all of the assets and the assumption of certain liabilities related to Mobil's
155,000 barrel-per-day refinery in Paulsboro, New Jersey. The purchase price was
$228 million plus approximately $107 million representing the value of
inventories and certain other items acquired in the transaction and was paid in
cash from borrowings under Valero's bank credit facilities. The acquisition was
accounted for using the purchase method of accounting and the purchase price was
allocated to the assets acquired and liabilities assumed based on fair values as
determined by an independent appraisal. Under the purchase method of accounting,
the accompanying Consolidated Statements of Income include the results of
operations of the Paulsboro Refinery beginning September 17, 1998. See
"CONTINGENT EARN-OUT AGREEMENTS" below for information regarding Mobil's right
to receive certain payments if certain average refining margins exceed a
specified level.
In connection with the acquisition of the Paulsboro Refinery, Mobil
agreed to indemnify Valero for certain environmental matters and conditions
existing on or prior to the acquisition and Valero agreed to assume Mobil's
environmental liabilities, with certain limited exceptions (including
"superfund" liability for off-site waste disposal). Mobil's indemnities and the
periods of indemnification, measured from the September 16, 1998 closing date,
include (i) third party environmental claims for a period of five years, (ii)
governmental fines and/or penalties for a period of five years, (iii) required
remediation of known environmental conditions for a period of five years,
subject to a cumulative deductible, (iv) required remediation of unknown
environmental conditions for a period of seven years, subject to a sharing
arrangement with a cap on Valero's obligation and subject to a cumulative
deductible, and (v) certain capital expenditures required by a governmental
entity for a three-year period, to the extent required to cure a breach of
certain representations of Mobil concerning compliance with environmental laws,
subject to a specified deductible. Valero's assumed liabilities include
remediation obligations to the New Jersey Department of Environmental
Protection. These remediation obligations relate primarily to clean-up costs
associated with groundwater contamination, landfill closure and post-closure
monitoring costs, and tank farm spill prevention costs. As of December 31, 2000,
60
<PAGE> 64
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
approximately $19 million is included in "Accrued expenses" and "Deferred
credits and other liabilities" representing Valero's best estimate of its
remaining costs to be borne related to these remediation obligations. The
majority of these costs are expected to be incurred in relatively level amounts
over the next 18 years.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of Valero for
the years ended December 31, 2000, 1999 and 1998 assumes that the Benicia
Acquisition and the senior notes, PEPS Units and common stock offerings
discussed above occurred at the beginning of 2000 and 1999, and that the
acquisition of the Paulsboro Refinery occurred at the beginning of 1998. This
pro forma information is not necessarily indicative of the results of future
operations. (Dollars in thousands, except per share amounts.)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues ................................. $15,393,371 $ 9,312,743 $ 6,246,790
Operating income (loss) ............................ 660,957 221,519 (14,422)
Net income (loss) .................................. 357,172 70,963 (33,663)
Earnings (loss) per common share ................... 5.81 1.14 (.60)
Earnings (loss) per common share - assuming dilution 5.63 1.13 (.60)
</TABLE>
CONTINGENT EARN-OUT AGREEMENTS
In connection with Valero's September 1998 acquisition of the Paulsboro
Refinery described above, Mobil (now ExxonMobil) is entitled to receive payments
in any of the five years following the acquisition if certain average refining
margins during any of these years exceed a specified level. Any payments under
this earn-out arrangement, which are determined in September of each year
beginning in 1999, are limited to $20 million in any year and $50 million in the
aggregate. No earn-out amount was due for the year ended September 16, 2000.
Also, in connection with Valero's May 1997 acquisition of Basis, Salomon is
entitled to receive payments in any of the ten years following the acquisition
if certain average refining margins during any of these years exceed a specified
level. Any payments under this earn-out arrangement, which are determined as of
May 1 of each year beginning in 1998, are limited to $35 million in any year and
$200 million in the aggregate. The earn-out amount for the year ended May 1,
1998 was $10.3 million, while no earn-out amounts were due for the years ended
May 1, 1999 and 2000. Based on actual margins since May and September of 2000,
and estimated margin levels through May and September of 2001, earn-out payments
due to Salomon and Mobil during 2001 would be $35 million and $20 million,
respectively. Valero accounts for any payments under these arrangements as an
additional cost of the respective acquisition which is depreciated over the
remaining lives of the assets to which the additional cost is allocated.
61
<PAGE> 65
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. SHORT-TERM DEBT
Valero currently has various uncommitted short-term bank credit
facilities which bear interest at each respective bank's quoted money market
rate, have no commitment or other fees or compensating balance requirements and
are unsecured and unrestricted as to use. As of December 31, 2000, $27 million
was outstanding under these facilities at a weighted average interest rate of
7.23%.
5. LONG-TERM DEBT AND BANK CREDIT FACILITIES
Long-term debt balances as of December 31, 2000 and 1999 were as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Industrial revenue bonds:
Tax-exempt Revenue Refunding Bonds:
Series 1997A, 5.45%, due April 1, 2027 ................... $ 24,400 $ 24,400
Series 1997B, 5.40%, due April 1, 2018 ................... 32,800 32,800
Series 1997C, 5.40%, due April 1, 2018 ................... 32,800 32,800
Series 1997D, 5.13%, due April 1, 2009 ................... 8,500 8,500
Tax-exempt Waste Disposal Revenue Bonds:
Series 1999, 5.7%, due April 1, 2032 ..................... 25,000 25,000
Series 1998, 5.6%, due April 1, 2032 ..................... 25,000 25,000
Series 1997, 5.6%, due December 1, 2031 .................. 25,000 25,000
Taxable Waste Disposal Revenue Bonds,
Series 1998, 6.75% at December 31, 2000, due April 1, 2032 18,500 18,500
8 3/8% notes, due June 15, 2005 .................................. 200,000 --
8 3/4% notes, due June 15, 2030 .................................. 200,000 --
7 3/8% notes, due March 15, 2006 ................................. 300,000 300,000
6 3/4% notes, due December 15, 2032 (notes are callable or putable
on December 15, 2002) ........................................ 150,000 150,000
$835 million revolving bank credit and letter of credit facility,
due November 28, 2002 ........................................ -- 140,000
Net unamortized premium and discount ............................. 417 3,472
---------- ----------
Total long-term debt (no current maturities) ............. $1,042,417 $ 785,472
========== ==========
</TABLE>
Valero currently maintains an unsecured $835 million revolving bank
credit and letter of credit facility which matures in November 2002 and is
available for general corporate purposes including working capital needs and
letters of credit. Borrowings under this facility bear interest at either LIBOR
plus a margin, a base rate or a money market rate.
62
<PAGE> 66
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Valero is also charged various fees and expenses in connection with this
facility, including a facility fee and various letter of credit fees. The
interest rate and fees under this credit facility are subject to adjustment
based upon the credit ratings assigned to Valero's long-term debt. The credit
facility includes certain restrictive covenants including a coverage ratio, a
capitalization ratio, and a minimum net worth test. The credit facility was
amended in April 2000 in connection with Valero's financing plan for the Benicia
Acquisition resulting in, among other things, an increase in the total debt-to-
capitalization limit from 50% to the current limit of 60%. This ratio limit will
decrease to 55% on September 30, 2001. These amendments to the credit facility
became effective upon the closing of the acquisition of the Benicia Refinery and
the Distribution Assets. As of December 31, 2000, there were no outstanding
borrowings under this credit facility, while letters of credit outstanding were
approximately $184 million. Valero also currently has various uncommitted bank
letter of credit facilities under which approximately $89 million was
outstanding as of December 31, 2000.
On June 29, 2000, Valero issued to the public $200 million aggregate
principal amount of 8 3/8% notes which are due on June 15, 2005, and $200
million aggregate principal amount of 8 3/4% notes which are due on June 15,
2030. These notes were issued under Valero's $1.3 billion universal shelf
registration statement on Form S-3 which was filed with the SEC on March 31,
2000 and declared effective on May 30, 2000. The net proceeds received by Valero
from this offering, which were used in connection with funding the Benicia
Acquisition as described in Note 3, were approximately $394 million, including
an aggregate discount of approximately $1.8 million related to the two
issuances. Interest payments on the notes will be made semi-annually on June 15
and December 15 of each year, beginning December 15, 2000. These notes are
unsecured and unsubordinated, rank equally with all of Valero's other unsecured
and unsubordinated debt, have no sinking fund requirements, and are redeemable
at any time, in whole or in part, at Valero's option.
In March 1999, Valero completed a public offering of $300 million
principal amount of 7 3/8% notes which are due on March 15, 2006. These notes
were issued under a $600 million universal shelf registration statement which
was previously declared effective by the SEC in June 1998. These notes are also
unsecured and unsubordinated, rank equally with all of Valero's other unsecured
and unsubordinated debt, have no sinking fund requirements, and are redeemable
at any time, in whole or in part, at Valero's option. The net proceeds from this
financing of approximately $297.5 million were used to pay down borrowings under
Valero's bank credit facilities.
In March 1999, the Gulf Coast Waste Disposal Authority issued and sold
for the benefit of Valero $25 million of new tax-exempt Waste Disposal Revenue
Bonds which have a fixed interest rate of 5.7% and mature on April 1, 2032. The
proceeds from the sale of these tax-exempt fixed-rate bonds were used to redeem
$25 million of the $43.5 million of taxable variable-rate Waste Disposal Revenue
Bonds which were issued in March 1998 at an initial interest rate of 5.7% and
also mature on April 1, 2032. The remaining $18.5 million of Series 1998 taxable
bonds bear interest at a variable rate determined weekly, with Valero having the
right to convert this rate to a daily, weekly, short-term or long-term rate, or
to a fixed rate. Valero expects to complete the refinancing of these remaining
taxable variable-rate bonds with $18.5 million of tax-exempt fixed-rate bonds by
the end of the first quarter of 2001. In March 1998, the Gulf Coast Waste
Disposal Authority issued and sold for the benefit of Valero $25 million of tax-
63
<PAGE> 67
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
exempt Waste Disposal Revenue Bonds at a fixed interest rate of 5.6%. Also at
this time, Valero converted the interest rates on its $98.5 million of Series
1997 tax-exempt Revenue Refunding Bonds and $25 million of Series 1997
tax-exempt Waste Disposal Revenue Bonds from variable rates to a weighted
average fixed rate of approximately 5.4%. The Series 1997 Revenue Refunding
Bonds were issued in four series with due dates ranging from 2009 to 2027, while
the Series 1997 Waste Disposal Revenue Bonds were issued in one series and
mature on December 1, 2031.
In December 1997, Valero issued $150 million principal amount of 6 3/4%
notes for net proceeds of approximately $156 million. These notes are unsecured
and unsubordinated and rank equally with all of Valero's other unsecured and
unsubordinated debt. The notes were issued to the Valero Pass-Through Asset
Trust 1997-1 which funded the acquisition of the notes through a private
placement of $150 million principal amount of 6 3/4% Pass-Through Asset Trust
Securities, or PATS. The PATS represent a fractional undivided beneficial
interest in the trust. In exchange for certain consideration paid to the trust,
a third party has an option to purchase the notes under certain circumstances at
par on December 15, 2002, at which time the term of the notes would be extended
30 years to December 15, 2032. If the third party does not exercise its purchase
option, then under the terms of the notes, Valero would be required to
repurchase the notes at par on December 15, 2002.
As of December 31, 2000, Valero's debt-to-capitalization ratio was 39.9%
(with 20% of the aggregate liquidation amount of trust preferred securities
issued as part of the PEPS Units deemed to be debt for purposes of this
computation), a decrease from 42% as of December 31, 1999.
Based on long-term debt outstanding at December 31, 2000, Valero has no
maturities of long-term debt during the next five years except for the $200
million of 8 3/8% notes due in June 2005. See above for maturities under the
terms of the 6 3/4% notes issued in 1997.
As of December 31, 2000 and 1999, the carrying amounts of Valero's
taxable industrial revenue bonds approximated fair value due to their variable
interest rates. In addition, as of December 31, 1999, the carrying amount of
Valero's revolving bank credit facility approximated fair value due to its
variable interest rate. For Valero's fixed-rate industrial revenue bonds, 8 3/8%
notes, 8 3/4% notes, 7 3/8% notes and 6 3/4% notes, their estimated fair value
as of December 31, 2000 was approximately $1,051.1 million compared to a
carrying amount of $1,023.9 million. As of December 31, 1999, the estimated fair
value of Valero's fixed-rate industrial revenue bonds, 7 3/8% notes and 6 3/4%
notes was approximately $563 million compared to a carrying amount of $627
million. The fair values of these instruments were estimated based on borrowing
rates available to Valero for long-term debt with similar terms and average
maturities.
6. PREMIUM EQUITY PARTICIPATING SECURITY UNITS
On June 28, 2000, Valero issued to the public 6,900,000 7 3/4% PEPS
Units at $25.00 per unit. The PEPS Units were issued under Valero's $1.3 billion
universal shelf registration statement on Form S-3 which was filed
64
<PAGE> 68
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
with the SEC on March 31, 2000 and declared effective on May 30, 2000. The net
proceeds received by Valero from this offering, which were used in connection
with funding the Benicia Acquisition as described in Note 3, were approximately
$167 million. Each PEPS Unit consists of (i) a purchase contract for shares of
Valero common stock and (ii) a trust preferred security.
Each purchase contract obligates the holder to purchase from Valero on
August 18, 2003, for a price of $25 per contract, the following number of shares
of Valero common stock based on the average closing price of Valero's common
stock over the 20-day trading period ending on the third trading day prior to
August 18, 2003: (i) .71531 shares if the average closing price equals or
exceeds $34.95; (ii) a number of shares having a value equal to $25 if the
average closing price is less than $34.95 but greater than $29.125; and (iii)
.85837 shares if the average closing price is less than or equal to $29.125. The
holder has the option to settle a purchase contract early for a price of $25 in
exchange for .71531 shares of Valero common stock.
Each trust preferred security represents an undivided interest in the
assets of VEC Trust I (a wholly owned subsidiary trust of Valero), has a stated
liquidation amount of $25 and matures on August 18, 2005. The trust preferred
security is pledged as collateral to secure the PEPS Unit holder's obligation to
purchase Valero common stock under the related purchase contract. VEC Trust I
will pay a cash distribution on each trust preferred security of $1.9375 per
year (equal to 7.75% of the $25 stated liquidation amount) prior to August 18,
2003, and from August 18, 2003 until August 18, 2005, at a reset rate that may
be less than, equal to or greater than this amount. The cash distribution
payments will be made quarterly on February 18, May 18, August 18 and November
18 of each year, beginning August 18, 2000.
The assets of VEC Trust I consist solely of Valero senior deferrable
notes maturing on August 18, 2005. VEC Trust I's sole source of funds for
distributions on the trust preferred securities is the interest payments it
receives from Valero on the senior deferrable notes. Valero has the right to
defer interest on the senior deferrable notes until August 18, 2003, in which
case distributions on the trust preferred securities would also be deferred. Any
deferred distributions will accumulate and compound quarterly at the rate of
7.75% per year. Valero guarantees the payment of distributions on the trust
preferred securities to the extent interest is paid on the senior deferrable
notes.
The financial statements of VEC Trust I are included in the accompanying
consolidated financial statements of Valero, with the trust preferred securities
shown on the accompanying Consolidated Balance Sheet as of December 31, 2000 as
"Valero-obligated mandatorily redeemable preferred capital trust securities of
subsidiary trust holding solely Valero senior notes." Distributions on the trust
preferred securities, whether paid or accumulated, are reflected as a charge to
income and are shown on the accompanying Consolidated Statement of Income for
the year ended December 31, 2000 as "Distributions on preferred securities of
subsidiary trust."
Prior to the issuance of shares of Valero common stock upon settlement
of the purchase contracts, the PEPS Units are reflected in Valero's earnings per
share calculations using the treasury stock method. Consequently, the PEPS Units
will have a dilutive effect on earnings per share for reporting periods during
which the average market price per share of Valero common stock exceeds $34.95.
For reporting periods during which the average market price per share of Valero
common stock is $34.95 or less, the PEPS Units will have a dilutive effect on
earnings per share
65
<PAGE> 69
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
only when that average market price per share is above the average closing price
for the 20-day trading period ending on the third trading day prior to the end
of the reporting period.
7. COMMON STOCK OFFERING
On June 28, 2000, Valero issued to the public 5,980,000 shares of its
common stock at $29.125 per share. These shares were issued under Valero's $1.3
billion universal shelf registration statement on Form S-3 which was filed with
the SEC on March 31, 2000 and declared effective on May 30, 2000. The net
proceeds received by Valero from this offering, which were used in connection
with funding the Benicia Acquisition as described in Note 3, were approximately
$167 million.
8. PRICE RISK MANAGEMENT ACTIVITIES
Valero is exposed to market risks related to the volatility of crude oil
and refined product prices, as well as volatility in the price of natural gas
used in its refining operations. In order to reduce the risks of these price
fluctuations, Valero uses derivative commodity instruments such as futures,
options and swaps with third parties to hedge certain refinery inventories and
anticipated transactions. Valero also uses these types of derivative commodity
instruments for trading purposes. The disclosures detailed below in this note
reflect the disclosures required by generally accepted accounting principles
prior to the adoption, effective January 1, 2001, of FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended. See
Note 1 under "NEW ACCOUNTING PRONOUNCEMENTS" for a detailed description of FASB
133, including how the adoption of this statement is expected to affect Valero's
consolidated financial statements in the future.
In the tables below detailing Valero's open derivative commodity
instruments as of December 31, 2000 and 1999, the total gain or (loss) as of
either date on swaps is the net of the fixed price payor and receiver fair value
amounts, while the total gain or (loss) on futures and options is (i) the excess
of the fair value amount over the contract amount for fixed price payor
positions, combined with (ii) the excess of the contract amount over the fair
value amount for fixed price receiver positions. As discussed above in Note 1
under "PRICE RISK MANAGEMENT ACTIVITIES," gains and losses on hedging activities
are deferred and recognized when the hedged transaction occurs while gains and
losses on trading activities are recognized currently.
HEDGING ACTIVITIES
Valero uses derivative commodity instruments to hedge certain refinery
feedstock and refined product inventories in order to reduce the impact of
adverse price changes on these inventories before the conversion of the
feedstock to finished products and ultimate sale. Swaps and futures contracts
held to hedge refining inventories at the end of 2000 and 1999 had remaining
terms of less than one year. As of December 31, 2000 and 1999, 14.9% and 19.5%,
respectively, of Valero's refining inventory position was hedged. As of December
31, 2000 and 1999, $3.1 million and $2.1 million, respectively, of deferred
hedge losses were included as an increase in refining inventories.
66
<PAGE> 70
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table provides information about Valero's derivative
commodity instruments held to hedge refining inventories as of December 31, 2000
(which mature in 2001) and December 31, 1999 (which matured in 2000) (dollars in
thousands, except amounts per barrel, or bbl, or per million British thermal
units, or MMBtus). Volumes shown for swaps represent notional volumes which are
used to calculate amounts due under the agreements.
<TABLE>
<CAPTION>
December 31, 2000 December 31, 1999
(mature in 2001) (matured in 2000)
------------------------ ------------------------
Fixed Price Fixed Price
------------------------ ------------------------
Payor Receiver Payor Receiver
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Swaps:
Notional volumes (thousands of barrels, or Mbbls) 150 1,800 1,200 2,850
Weighted average pay price (per bbl) ............ $ 1.62 $ 7.14 $ 1.87 $ 1.68
Weighted average receive price (per bbl) ........ $ 4.27 $ 4.18 $ 1.70 $ 1.88
Fair value ...................................... $ 398 $ (5,326) $ (203) $ 568
Futures:
Volumes (Mbbls) ................................. 10,898 12,263 6,821 7,410
Weighted average price (per bbl) ................ $ 31.58 $ 32.42 $ 27.72 $ 28.71
Contract amount ................................. $ 344,201 $ 397,625 $ 189,061 $ 212,729
Fair value ...................................... $ 345,732 $ 398,612 $ 186,176 $ 208,327
Volumes (billion Btus, or BBtus) ................ 1,200 1,200 -- --
Weighted average price (per MMBtu) .............. $ 4.56 $ 4.71 -- --
Contract amount ................................. $ 5,471 $ 5,652 -- --
Fair value ...................................... $ 11,730 $ 11,730 -- --
</TABLE>
Valero also uses derivative commodity instruments to hedge the price
risk of anticipated transactions. In 2000 and 1999, swaps and futures were used
to hedge anticipated feedstock and product purchases, product sales and refining
operating margins by locking in purchase or sales prices or components of the
margins, including feedstock discounts, conventional gasoline and heating oil
crack spreads and premium product differentials. Swaps were also used in 2000
and 1999 to hedge anticipated purchases of natural gas used in Valero's refining
operations. The majority of contracts hedging anticipated transactions mature in
2001 with certain contracts extending through 2002. There were no significant
explicit deferrals of hedging gains or losses related to these anticipated
transactions as of the end of 2000 or 1999.
The following table provides information about Valero's derivative
commodity instruments held to hedge anticipated feedstock and product purchases,
product sales and refining margins as of December 31, 2000 (which mature in
2001) and December 31, 1999 (which matured in 2000) (dollars in thousands,
except amounts per barrel). Volumes shown for swaps represent notional volumes
which are used to calculate amounts due under the agreements.
67
<PAGE> 71
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
December 31, 2000 December 31, 1999
(mature in 2001) (matured in 2000)
---------------------- ----------------------
Fixed Price Fixed Price
---------------------- ----------------------
Payor Receiver Payor Receiver
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Swaps:
Notional volumes (Mbbls) ............... 750 9,000 6,000 7,950
Weighted average pay price (per bbl) .. $ 1.62 $ 3.39 $ 1.87 $ 1.70
Weighted average receive price (per bbl) $ 2.35 $ 3.60 $ 1.66 $ 2.04
Fair value ............................. $ 547 $ 1,845 $ (1,287) $ 2,704
Futures:
Volumes (Mbbls) ........................ 1,012 1,066 105 101
Weighted average price (per bbl) ....... $ 26.53 $ 30.67 $ 23.66 $ 24.22
Contract amount ........................ $ 26,844 $ 32,689 $ 2,484 $ 2,446
Fair value ............................. $ 25,955 $ 32,485 $ 2,501 $ 2,446
</TABLE>
In addition to the above, as of December 31, 2000 and 1999, Valero was
the fixed price payor under certain swap contracts held to hedge anticipated
purchases of refinery feedstocks and refined products that mature in 2002, have
notional volumes totaling approximately 7.5 million barrels, and have a weighted
average pay price of $20.11 per barrel. As of December 31, 2000, these swaps had
a weighted average receive price of $22.75 per barrel and a net unrecognized
fair value of approximately $42.9 million. As of December 31, 1999, these swaps
had a weighted average receive price of $18.02 per barrel and a net unrecognized
fair value of approximately $7.4 million.
TRADING ACTIVITIES
Valero also uses derivative commodity instruments for trading purposes
using its fundamental and technical analysis of market conditions to earn
additional income. Contracts outstanding as of December 31, 2000 will mature in
2001 or January 2002.
The following table provides information about Valero's derivative
commodity instruments held or issued for trading purposes as of December 31,
2000 (which mature in 2001 or 2002) and December 31, 1999 (which matured in 2000
or 2001) (dollars in thousands, except amounts per barrel or per million British
thermal units). Volumes shown for swaps represent notional volumes which are
used to calculate amounts due under the agreements.
68
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
December 31, 2000 December 31, 1999
----------------------------------------- -----------------------------------------
Mature in 2001 Mature in 2002 Matured in 2000 Mature in 2001
------------------- ------------------- ------------------- -------------------
Fixed Price Fixed Price Fixed Price Fixed Price
------------------- ------------------- ------------------- -------------------
Payor Receiver Payor Receiver Payor Receiver Payor Receiver
-------- --------- -------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Notional volumes (Mbbls) ................. 6,450 7,400 -- -- 21,600 23,125 600 600
Weighted average pay price (per bbl) ..... $ 4.08 $ 4.44 -- -- $ 2.93 $ 2.43 $ 1.95 $ 1.91
Weighted average receive price (per bbl) . $ 5.09 $ 3.55 -- -- $ 2.94 $ 2.62 $ 1.90 $ 2.18
Fair value ............................... $ 6,512 $ (6,571) -- -- $ 204 $ 4,377 $ (28) $ 163
Notional volumes (BBtus) ................. 56,070 56,060 -- -- -- -- -- --
Weighted average pay price (per MMBtu) ... $ 4.82 $ 7.85 -- -- -- -- -- --
Weighted average receive price (per MMBtu) $ 7.85 $ 4.81 -- -- -- -- -- --
Fair value ............................... $169,488 $(170,182) -- -- -- -- -- --
Options:
Volumes (Mbbls) .......................... -- -- -- -- 1,400 1,400 -- --
Weighted average strike price (per bbl) .. -- -- -- -- $ 24.36 $ 24.36 -- --
Contract amount .......................... -- -- -- -- $ (11) $ (220) -- --
Fair value ............................... -- -- -- -- $ 200 $ 200 -- --
Futures:
Volumes (Mbbls) .......................... 7,720 6,670 8 -- 25,933 26,158 3,125 3,125
Weighted average price (per bbl) ......... $ 24.54 $ 24.19 $ 26.10 -- $ 21.39 $ 21.48 $ 19.48 $ 18.90
Contract amount .......................... $189,430 $ 161,334 $ 209 -- $554,604 $561,979 $ 60,883 $ 59,050
Fair value ............................... $200,701 $ 179,454 $ 189 -- $621,949 $623,768 $ 60,938 $ 60,938
Volumes (BBtus) .......................... 14,410 15,920 -- -- 750 750 -- --
Weighted average price (per MMBtu) ....... $ 5.28 $ 5.18 -- -- $ 2.77 $ 2.69 -- --
Contract amount .......................... $ 76,050 $ 82,472 -- -- $ 2,074 $ 2,020 -- --
Fair value ............................... $130,356 $ 139,205 -- -- $ 1,747 $ 1,747 -- --
</TABLE>
The following table discloses the net gains (losses) from trading
activities and average fair values of contracts held or issued for trading
purposes for the years ended December 31, 2000 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Average Fair Value
of
Net Gains (Losses) Assets (Liabilities)
-------------------- --------------------
2000 1999 2000 1999
------- ------ ------ ------
<S> <C> <C> <C> <C>
Swaps.............................. $(1,524) $13,521 $1,547 $3,810
Options............................ 45 (115) (31) (39)
Futures............................ (7,922) 3,764 375 1,715
------- -------
Total.......................... $(9,401) $17,170
======= =======
</TABLE>
69
<PAGE> 73
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARKET AND CREDIT RISK
Valero's price risk management activities involve the receipt or
payment of fixed price commitments into the future. These transactions give rise
to market risk, the risk that future changes in market conditions may make an
instrument less valuable. Valero closely monitors and manages its exposure to
market risk on a daily basis in accordance with policies approved by its Board
of Directors. Market risks are monitored by a risk control group to ensure
compliance with Valero's stated risk management policy. Concentrations of
customers in the refining industry may impact Valero's overall exposure to
credit risk, in that these customers may be similarly affected by changes in
economic or other conditions. Valero believes that its counterparties will be
able to satisfy their obligations under contracts.
9. PREFERRED SHARE PURCHASE RIGHTS
Each outstanding share of Valero's common stock is accompanied by one
Preferred Share Purchase Right, or Right. With certain exceptions, each Right
entitles the registered holder to purchase from Valero one one-hundredth of a
share of Valero's Junior Participating Preferred Stock, Series I at a price of
$100 per one one-hundredth of a share, subject to adjustment for certain
recapitalization events.
The Rights are transferable only with the common stock until the
earlier of (i) 10 days following a public announcement that a person or group of
affiliated or associated persons, any such person, group or associates being
referred to as an Acquiring Person, has acquired beneficial ownership of 15% or
more of the outstanding shares of Valero's common stock, (ii) 10 business days
(or later date as may be determined by action of Valero's Board of Directors)
following the initiation of a tender offer or exchange offer which would result
in an Acquiring Person having beneficial ownership of 15% or more of Valero's
outstanding common stock (the earlier of the date of the occurrence of (i) or
(ii) being called the Rights Separation Date), or (iii) the earlier redemption
or expiration of the Rights. The Rights are not exercisable until the Rights
Separation Date. At any time prior to the acquisition by an Acquiring Person of
beneficial ownership of 15% or more of the outstanding common stock, Valero's
Board of Directors may redeem the Rights at a price of $.01 per Right. The
Rights will expire on June 30, 2007, unless extended or the Rights are earlier
redeemed or exchanged by Valero.
If after the Rights Separation Date, Valero is acquired in a merger or
other business combination transaction, or if 50% or more of its consolidated
assets or earning power are sold, each holder of a Right will have the right to
receive, upon the exercise of the Right at its then current exercise price, that
number of shares of common stock of the acquiring company which at the time of
the transaction will have a market value of two times the exercise price of the
Right. In the event that any Acquiring Person becomes the beneficial owner of
15% or more of the outstanding common stock, each holder of a Right, other than
Rights beneficially owned by the Acquiring Person (which will thereafter be
void), will thereafter have the right to receive upon exercise that number of
shares of common stock having a market value of two times the exercise price of
the Right.
70
<PAGE> 74
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At any time after an Acquiring Person acquires beneficial ownership of
15% or more of the outstanding common stock and prior to the acquisition by the
Acquiring Person of 50% or more of the outstanding common stock, Valero's Board
of Directors may exchange the Right (other than Rights owned by the Acquiring
Person which have become void), at an exchange ratio of one share of common
stock, or one one-hundredth of a share of Junior Preferred Stock, per Right
(subject to adjustment).
Until a Right is exercised, the holder will have no rights as a
stockholder of Valero including, without limitation, the right to vote or to
receive dividends.
The Rights may have certain anti-takeover effects. The Rights will
cause substantial dilution to any Acquiring Person that attempts to acquire
Valero on terms not approved by Valero's Board of Directors, except pursuant to
an offer conditioned on a substantial number of Rights being acquired. The
Rights should not interfere with any merger or other business combination
approved by Valero's Board of Directors since the Rights may be redeemed by
Valero prior to the time that an Acquiring Person has acquired beneficial
ownership of 15% or more of the common stock.
10. SEGMENT INFORMATION
Valero's operations consist primarily of six petroleum refineries
located in Texas at Corpus Christi, Texas City and Houston, in Louisiana at
Krotz Springs, in New Jersey at Paulsboro, and in California at Benicia, the
products of which are marketed through an extensive wholesale bulk and rack
marketing network and through certain retail operations in California which were
acquired in connection with the Benicia Acquisition as described in Note 3. The
refineries have a combined throughput capacity of approximately one million
barrels per day. In applying the requirements of FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," Valero's
six refineries, each of which represents an operating segment as defined by the
statement, have been aggregated as allowed by the statement for reporting
purposes. As a result, Valero has one reportable segment, which is the refining
and marketing of premium, environmentally clean products.
Valero's principal products include conventional, reformulated and CARB
gasolines, low-sulfur diesel, and oxygenates and other gasoline blendstocks.
Valero also produces a substantial slate of middle distillates, jet fuel and
petrochemicals, in addition to lube oils and asphalt. Valero currently markets
its products in 34 states through an extensive wholesale bulk and rack marketing
network, in California through approximately 80 Valero branded retail and 270
other retail distributor locations, and in selected export markets in Latin
America. Revenues from external customers for Valero's principal products for
the years ended December 31, 2000, 1999 and 1998 were as follows (in thousands):
71
<PAGE> 75
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Gasolines and blendstocks............................ $ 7,831,464 $ 4,381,112 $ 3,040,103
Distillates.......................................... 3,747,128 1,848,621 1,270,859
Petrochemicals....................................... 386,909 258,850 166,769
Lubes and asphalts................................... 295,300 178,653 44,239
Other products and revenues.......................... 2,410,286 1,293,932 1,017,376
----------- ----------- -----------
Total operating revenues......................... $14,671,087 $ 7,961,168 $ 5,539,346
=========== =========== ===========
</TABLE>
In 2000, 1999 and 1998, Valero had no significant amount of export
sales and no significant foreign operations. In 2000 and 1999, approximately
$1.7 billion (11.7%) and $1.2 billion (15.4%), respectively, of Valero's
consolidated operating revenues were derived from sales to ExxonMobil, while in
1998, no single customer accounted for more than 10% of Valero's consolidated
operating revenues.
11. INCOME TAXES
Components of income tax expense (benefit) were as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $ 80,021 $ 14,896 $ (3,196)
State............................................. 5,979 404 (904)
-------- -------- --------
Total current................................. 86,000 15,300 (4,100)
-------- -------- --------
Deferred:
Federal........................................... 102,076 (9,400) (31,700)
State............................................. 1,024 -- --
-------- -------- --------
Total deferred................................ 103,100 (9,400) (31,700)
-------- -------- --------
Total income tax expense (benefit)............ $189,100 $ 5,900 $(35,800)
======== ======== ========
</TABLE>
72
<PAGE> 76
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following is a reconciliation of total income tax expense (benefit)
to income taxes computed by applying the statutory federal income tax rate (35%
for all years presented) to income (loss) before income taxes (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Federal income tax expense (benefit) at the
statutory rate....................................... $184,877 $ 7,065 $(29,082)
State income taxes, net of federal income tax effect..... 4,553 263 (588)
Research and experimentation tax credit.................. (3,022) -- (5,800)
Basis difference on disposition of investment............ -- (1,894) --
Other - net.............................................. 2,692 466 (330)
-------- -------- --------
Total income tax expense (benefit)................... $189,100 $ 5,900 $(35,800)
======== ======== ========
</TABLE>
The tax effects of significant temporary differences representing
deferred income tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Tax credit carryforwards.......................... $ 47,468 $ 34,131
Net operating loss carryforward................... -- 48,682
Compensation and employee benefit liabilities..... 35,953 28,437
Environmental liabilities......................... 9,759 9,868
Inventory and related adjustments................. 54,870 36,047
Accrued liabilities and other..................... 11,131 9,585
--------- ----------
Total deferred income tax assets.............. $ 159,181 $ 166,750
========= ==========
Deferred income tax liabilities:
Turnaround....................................... $ (30,978) $ (15,990)
Depreciation...................................... (413,689) (334,077)
Other............................................. (15,331) (12,897)
--------- ----------
Total deferred income tax liabilities......... $(459,998) $ (362,964)
========= ==========
</TABLE>
As of December 31, 2000, Valero had an alternative minimum tax credit
carryforward of approximately $38 million, and a research and experimentation
credit carryforward of approximately $9 million, both of which are available to
reduce future federal income tax liabilities. The alternative minimum tax credit
carryforward has no expiration date, while the research and experimentation
credit carryforward expires between 2004 and 2013. No valuation allowances were
recorded against deferred income tax assets as of December 31, 2000 and 1999.
73
<PAGE> 77
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Valero's taxable years through 1995 are closed to adjustment by the
Internal Revenue Service. Valero believes that adequate provisions for income
taxes have been reflected in the accompanying consolidated financial statements.
12. EMPLOYEE BENEFIT PLANS
PENSION PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Valero's pension plan, which is subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), is
designed to provide eligible employees with retirement income. Participation in
the plan commences upon the completion of one year of continuous service. Upon
becoming a participant, all service since date of hire is included in
determining vesting and credited service, except for individuals who became
employees of Valero as a result of an acquisition by Valero, for whom benefits
are determined by the terms of the acquisition agreement. For the former
ExxonMobil refinery and retail marketing employees continuing employment with
Valero in connection with the Benicia Acquisition, full credit was given for
service with ExxonMobil prior to May 15, 2000 or June 15, 2000, as applicable,
for purposes of eligibility, benefit accrual and vesting, with the benefits
under Valero's plan offset by benefits payable to these employees under the
ExxonMobil Pension Plan. Former ExxonMobil retail store employees continuing
employment with Valero were excluded from participation in Valero's plan. For
former Mobil employees continuing employment with Valero in connection with the
purchase of the Paulsboro Refinery, full credit was given for service with Mobil
prior to September 17, 1998 for vesting and eligibility purposes, but for
benefit accrual purposes, only service on and after this date is counted under
the plan. A participant vests in plan benefits after five years of vesting
service.
As a result of the Restructuring, Valero is solely responsible for (i)
pension liabilities that existed immediately prior to the Restructuring to, or
relating to, employees of Old Valero who became employees of PG&E after the
Restructuring, which will become payable upon their retirement, (ii) all
liabilities to, or relating to, former employees of Valero and Old Valero, and
(iii) all liabilities to, or relating to, current Valero employees. Also, Valero
became the sponsor of Old Valero's nonqualified Supplemental Executive
Retirement Plan, or SERP, which is designed to provide additional pension
benefits to executive officers and certain other employees, and assumed all
liabilities with respect to current and former employees of both Valero and Old
Valero under this plan.
The pension plan provides a monthly pension payable upon normal
retirement of an amount equal to a set formula which is based on the
participant's 60 consecutive highest months of compensation during the latest 10
years of credited service under the plan. Any contributions to the plan are made
by Valero and contributions by participants are neither required nor permitted.
Valero's contributions, if and when permitted under ERISA, are actuarially
determined in an amount sufficient to fund the currently accruing benefits and
amortize any prior service cost over the expected life of the then current work
force. Valero's contributions to the pension plan and SERP in 2000, 1999 and
1998 were approximately $10 million, $7.4 million and $7.2 million,
respectively, and are currently estimated to be $7.2 million in 2001.
74
<PAGE> 78
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Valero also provides certain health care and life insurance benefits
for retired employees, referred to as postretirement benefits other than
pensions. Substantially all of Valero's employees may become eligible for these
benefits if, while still working for Valero, they either reach normal retirement
age or take early retirement. Health care benefits are offered by Valero through
a self-insured plan and a health maintenance organization while life insurance
benefits are provided through an insurance company. Valero funds its
postretirement benefits other than pensions on a pay-as-you-go basis.
Individuals who became Valero employees as a result of an acquisition by Valero
became eligible for postretirement benefits other than pensions under Valero's
plan effective on their respective acquisition dates. As a result of the
Restructuring, Valero is responsible for all liabilities to former employees of
both Valero and Old Valero as well as current Valero employees arising under Old
Valero's health care and life insurance programs.
The following tables set forth for Valero's (i) pension plans,
including the SERP, and (ii) postretirement benefits other than pensions, the
funded status of the plans and amounts recognized in Valero's consolidated
financial statements as of December 31, 2000 and 1999, as well as changes in the
benefit obligation and plan assets for the years then ended (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1........................ $ 163,342 $ 152,430 $ 42,629 $ 42,325
Service cost..................................... 11,009 9,466 2,206 2,047
Interest cost.................................... 12,297 10,114 3,392 2,818
Benicia Acquisition ............................. 5,756 -- 5,212 --
Participant contributions........................ -- -- 152 131
Benefits paid.................................... (6,490) (6,399) (2,091) (1,986)
Actuarial loss (gain)............................ 2,395 (2,269) 11,218 (2,706)
--------- --------- --------- ---------
Benefit obligation, December 31...................... $ 188,309 $ 163,342 $ 62,718 $ 42,629
========= ========= ========= =========
CHANGE IN PLAN ASSETS:
Plan assets at fair value, January 1................. $ 171,715 $ 139,262 $ -- $ --
Actual return on plan assets..................... 7,032 31,498 -- --
Company contributions............................ 10,003 7,354 1,939 1,855
Participant contributions........................ -- -- 152 131
Benefits paid.................................... (6,490) (6,399) (2,091) (1,986)
--------- --------- --------- ---------
Plan assets at fair value, December 31............... $ 182,260 $ 171,715 $ -- $ --
========= ========= ========= =========
</TABLE>
75
<PAGE> 79
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
RECONCILIATION OF FUNDED STATUS, DECEMBER 31:
Plan assets at fair value............................ $ 182,260 $ 171,715 $ -- $ --
Less: Benefit obligation............................. 188,309 163,342 62,718 42,629
--------- --------- --------- ---------
Funded status........................................ (6,049) 8,373 (62,718) (42,629)
Unrecognized net transition obligation (asset)....... (738) (913) 3,754 4,071
Unrecognized prior service cost...................... 6,051 6,921 1,444 1,558
Unrecognized net loss (gain)......................... (5,085) (16,121) 10,530 (688)
--------- --------- --------- ---------
Accrued benefit cost............................. $ (5,821) $ (1,740) $ (46,990) $ (37,688)
========= ========= ========= =========
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE
SHEETS AS OF DECEMBER 31:
Prepaid benefit cost................................. $ 13,402 $ 15,054 $ -- $ --
Accrued benefit liability............................ (19,223) (16,794) (46,990) (37,688)
--------- --------- --------- ---------
Accrued benefit cost............................. $ (5,821) $ (1,740) $ (46,990) $ (37,688)
========= ========= ========= =========
</TABLE>
Total benefit cost for the years ended December 31, 2000, 1999 and 1998
included the following components (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------- --------------------------------
Year Ended December 31, Year Ended December 31,
-------------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF TOTAL BENEFIT COST:
Service cost...................................... $ 11,009 $ 9,466 $ 6,934 $ 2,206 $ 2,047 $ 1,703
Interest cost..................................... 12,297 10,114 9,031 3,392 2,818 2,411
Expected return on plan assets.................... (15,704) (12,642) (11,149) -- -- --
Amortization of transition obligation (asset)..... (175) (144) (142) 317 317 317
Amortization of prior service cost................ 870 866 747 114 114 114
Amortization of net loss (gain)................... 31 343 53 -- -- --
-------- -------- -------- -------- -------- --------
Total benefit cost............................ $ 8,328 $ 8,003 $ 5,474 $ 6,029 $ 5,296 $ 4,545
======== ======== ======== ======== ======== ========
</TABLE>
Amortization of prior service cost as shown in the above table is based
on the average remaining service period of employees expected to receive
benefits under the plan. The weighted-average assumptions used in computing the
actuarial present value of the pension benefit and other postretirement benefit
obligations for the years ended December 31, 2000 and 1999 were as follows:
76
<PAGE> 80
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS, DECEMBER 31:
Discount rate.......................................... 7.50% 7.50% 7.50% 7.50%
Expected long-term rate of return on plan assets....... 9.25% 9.25% -- --
Rate of compensation increase.......................... 5.00% 5.05% -- --
Health care cost trend rate............................ -- -- 5.00% 5.00%
</TABLE>
For measurement purposes, the health care cost trend rate is assumed to
remain at five percent for all years after 2000. Assumed health care cost trend
rates have a significant effect on the amounts reported for health care plans. A
one percentage-point change in assumed health care cost trend rates would have
the following effects on postretirement benefits other than pensions:
<TABLE>
<CAPTION>
One One
Percentage-Point Percentage-Point
Increase Decrease
---------------- ----------------
<S> <C> <C>
Effect on total of service and interest cost components.............. $ 1,618 $ (1,376)
Effect on benefit obligation......................................... $ 11,594 $ (9,975)
</TABLE>
PROFIT-SHARING/SAVINGS PLANS
Valero is the sponsor of the Valero Energy Corporation Thrift Plan
which is a qualified employee profit-sharing plan. The purpose of the Thrift
Plan is to provide a program whereby contributions of participating employees
and their employers are systematically invested to provide the employees an
interest in Valero and to further their financial independence. Participation in
the Thrift Plan is voluntary and is open to Valero employees who become eligible
to participate upon the completion of one month of continuous service. This
service may include prior employment with other companies prior to individuals
becoming employees of Valero through an acquisition by Valero. Former ExxonMobil
refinery and certain retail marketing employees who became employees of Valero
in connection with the Benicia Acquisition became eligible to participate in the
Thrift Plan on May 16, 2000 and June 16, 2000, respectively, under the same
service requirements as required for other Valero employees, with service
including prior employment with ExxonMobil. These employees could elect to
transfer their balances from the ExxonMobil employee savings plan into the
Thrift Plan or maintain these amounts in the ExxonMobil plan. Former Mobil
employees who became employees of Valero in connection with the purchase of the
Paulsboro Refinery became eligible to participate in the Thrift Plan on
September 17, 1998 under the same service requirements as required for other
Valero employees, with service including prior employment with Mobil. Effective
January 1999, these employees could elect to transfer their balances from the
Mobil employee savings plan into the Thrift Plan or maintain these amounts in
the Mobil plan.
Participating employees may contribute from 2% up to 8% of their total
annual compensation as basic contributions, with those participants making a
basic contribution of 8% allowed to make a supplemental contribution
77
<PAGE> 81
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of up to 14% of their total annual compensation. Participants may elect to make
contributions on a before-tax and/or after-tax basis, with federal income taxes
on before-tax contributions being deferred until a distribution is made to the
participant. Participants' basic contributions of up to 8% of their base annual
compensation are matched 75% by Valero, with an additional match of up to 25%
subject to certain conditions. Participants' basic contributions in excess of 8%
of their base annual compensation and supplemental contributions are not matched
by Valero. In January 2001, the compensation committee of Valero's Board of
Directors approved an increase in Valero's matching percentage from 75% to 100%
for the 12-month period beginning February 1, 2001. Valero's contributions to
the Thrift Plan for the years 2000, 1999 and 1998 were $8,153,543, $6,670,841
and $5,298,870, respectively.
STOCK COMPENSATION PLANS
Valero has various fixed and performance-based stock compensation
plans. Valero's Executive Stock Incentive Plan, or ESIP, authorizes the grant of
various stock and stock-related awards to executive officers and other key
employees. Awards available under the ESIP include options to purchase shares of
common stock, performance awards which vest upon the achievement of an objective
performance goal, and restricted stock which vests over a period determined by
Valero's compensation committee. A total of 2,500,000 shares of Valero common
stock may be issued under the ESIP, of which no more than 1,000,000 shares may
be issued as restricted stock. Valero also has a non-qualified stock option
plan under which awards are granted to key officers, employees and prospective
employees. A total of 2,000,000 shares of Valero common stock may be issued
under this plan. Valero also maintains an Executive Incentive Bonus Plan, under
which 200,000 shares of Valero common stock may be issued, that provides bonus
compensation to key employees based on individual contributions to company
profitability. Bonuses are payable either in cash, Valero common stock, or both.
Valero also has a non-employee director stock option plan, under which 200,000
shares of Valero common stock may be issued, and a non-employee director
restricted stock plan, under which 100,000 shares of Valero common stock may be
issued.
The number and weighted-average grant-date fair value of shares of
Valero common stock granted under the above-noted plans (other than shares
related to stock options which are presented in a separate table below) during
2000, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Grant-Date Shares Grant-Date Shares Grant-Date
Plan Granted Fair Value Granted Fair Value Granted Fair Value
- ------------------------------------ ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
ESIP:
Restricted stock................ 17,619 $29.14 85,937 $19.57 163,986 $31.51
Performance awards.............. 146,100 21.81 225,500 21.31 54,000 31.25
Executive Incentive Bonus Plan...... 134,362 21.81 -- -- 2,516 31.25
Non-employee director
restricted stock plan........... 1,608 28.00 4,190 21.48 -- --
</TABLE>
78
<PAGE> 82
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the terms of the ESIP, the stock option plan and the non-employee
director stock option plan, the exercise price of options granted will not be
less than the fair market value of Valero's common stock at the date of grant.
Stock options become exercisable pursuant to the individual written agreements
between Valero and the participants, usually in three equal annual installments
beginning one year after the date of grant, with unexercised options generally
expiring ten years from the date of grant.
A summary of the status of Valero's stock option plans, including
options granted under the ESIP, the stock option plan, the non-employee director
stock option plan and Old Valero's previously existing stock compensation plans,
as of December 31, 2000, 1999 and 1998, and changes during the years then ended
is presented in the table below.
<TABLE>
<CAPTION>
2000 1999 1998
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period..................... 7,061,575 $20.86 5,528,996 $21.01 3,780,418 $19.15
Granted ......................... 1,854,460 28.00 1,580,062 20.29 2,049,755 24.00
Exercised......................... (1,215,573) 19.11 (17,806) 14.77 (235,235) 15.80
Forfeited......................... (176,763) 22.58 (29,677) 23.41 (65,942) 25.62
---------- ---------- ----------
Outstanding at end of period...... 7,523,699 22.86 7,061,575 20.86 5,528,996 21.01
========== ========== ==========
Exercisable at end of period...... 4,212,683 21.10 3,788,724 19.93 2,524,643 18.16
Weighted-average fair value of
options granted............... $ 9.64 $ 6.61 $ 5.53
</TABLE>
The following table summarizes information about stock options
outstanding under the ESIP, the stock option plan and the non-employee director
stock option plan as of December 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------
Range Number Weighted-Avg. Number
of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$11.47 - $17.50...... 1,262,077 5.09 years $14.76 859,376 $13.48
$18.03 - $26.63...... 3,830,675 7.08 21.72 2,905,954 21.81
$28.00 - $34.91...... 2,430,947 8.75 28.86 447,353 31.09
--------- -----------
$11.47 - $34.91...... 7,523,699 7.29 22.86 4,212,683 21.10
========= ===========
</TABLE>
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998, respectively: risk-free
interest rates of 6.7 percent, 5.5 percent and 5.0 percent; expected dividend
yields of 1.1 percent, 1.6 percent and 1.4 percent; expected lives of 3.1 years,
3.2 years and 3.1 years; and expected volatility of 42.8 percent, 42.3 percent
79
<PAGE> 83
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and 28.2 percent. The expected volatility assumption for grants in 1998 was
based on the stock price history of Old Valero due to insufficient stock price
history for Valero subsequent to the Restructuring, whereas the expected
volatility assumption for grants in 1999 and 2000 was based on the stock price
history of Valero subsequent to the Restructuring.
Valero applies APB 25 and related interpretations in accounting for its
plans (see Note 1 under "STOCK-BASED COMPENSATION" and "NEW ACCOUNTING
PRONOUNCEMENTS - FIN 44"). Accordingly, no compensation cost has been recognized
for its fixed stock option plans. The after-tax compensation cost reflected in
net income for other stock-based compensation plans for 2000, 1999 and 1998 was
$8.8 million, $4 million and $3 million, respectively. Had compensation cost for
Valero's stock-based compensation plans been determined based on the grant date
fair value of awards in 2000, 1999 and 1998 consistent with the method set forth
in FASB 123, Valero's net income and earnings per share for the years ended
December 31, 2000 and 1999 would have been reduced, and Valero's net loss and
loss per share for the year ended December 31, 1998 would have increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
2000 1999 1998
-------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss)........................................... As Reported $339,120 $14,287 $(47,291)
Pro Forma $331,321 $ 7,869 $(52,398)
Earnings (loss) per common share............................ As Reported $ 5.79 $ .25 $ (.84)
Pro Forma $ 5.66 $ .14 $ (.93)
Earnings (loss) per common share - assuming dilution........ As Reported $ 5.60 $ .25 $ (.84)
Pro Forma $ 5.47 $ .14 $ (.93)
</TABLE>
13. STRATEGIC PETROLEUM RESERVE CRUDE OIL
In September of 2000, the Department of Energy ("D.O.E.") announced its
intention to solicit offers for the time exchange of certain crude oil in the
Strategic Petroleum Reserve ("SPR"). In the fourth quarter of 2000, the D.O.E.
approved a bid by Valero to receive 1,000,000 barrels of crude oil under this
program. In November and December of 2000, Valero received 1,000,000 barrels of
crude oil in exchange for the obligation to redeliver 1,026,000 barrels of crude
oil to the SPR during the third and fourth quarters of 2001. Valero also entered
into a derivative contract to lock in the cost of the crude oil that will be
purchased and redelivered to the SPR in 2001. As of December 31, 2000, Valero's
obligation to redeliver crude oil is recorded in "Accounts payable" in the
accompanying Consolidated Balance Sheets at the fair market value of the crude
oil to be redelivered. Both the crude oil payable and the related derivative
contract are adjusted for changes in fair market value, with such adjustments
reflected in income.
80
<PAGE> 84
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. LEASE AND OTHER COMMITMENTS
Valero has long-term operating lease commitments in connection with
land, office facilities and equipment, transportation equipment, and various
facilities and equipment used in the storage, transportation and production of
refinery feedstocks and refined products. In addition, in connection with the
Benicia Acquisition as described in Note 3, Valero entered into a long-term
operating lease for various service stations and the Benicia Refinery's dock
facility. Long-term leases for land have remaining primary terms of up to 23.7
years, long-term leases for office facilities have remaining primary terms of up
to 4.5 years and long-term leases for transportation equipment have remaining
primary terms of up to 4 years. Valero's long-term leases for production
equipment, feedstock and refined product storage facilities and transportation
assets have remaining primary terms of up to 4.25 years and in certain cases
provide for various contingent payments based on, among other things, throughput
volumes in excess of a base amount. The long-term lease for the California
service stations and Benicia Refinery dock facility has a remaining term of
approximately 4.5 years.
Future minimum lease payments and minimum rentals to be received under
subleases as of December 31, 2000 for operating leases having initial or
remaining noncancelable lease terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
2001............................................................... $ 49,835
2002 .............................................................. 35,745
2003............................................................... 28,109
2004............................................................... 22,993
2005............................................................... 8,742
Remainder.......................................................... 10,244
--------
155,668
Less future minimum rentals to be received under subleases......... 68
--------
$155,600
========
</TABLE>
Consolidated rental expense under operating leases for 2000, 1999 and
1998 was approximately $72,236,000, $57,005,000 and $47,779,000, respectively.
These amounts are included in the accompanying Consolidated Statements of Income
under "Cost of sales and operating expenses" and "Selling and administrative
expenses" and include various month-to-month and other short-term rentals in
addition to rents paid and accrued under long-term lease commitments.
In addition to commitments under operating leases, Valero has a
commitment under a product supply arrangement to pay a reservation fee of
approximately $11.3 million annually through August 2002. Valero also has an
obligation under certain long-term hydrogen supply arrangements to make fixed
minimum payments of approximately $4.9 million annually, as well as other
minimum payments which vary based on certain natural gas reference prices. These
arrangements, which were entered into in 1999 for the purpose of securing a firm
supply of hydrogen for the Texas City Refinery, have remaining terms of
approximately 15 years.
81
<PAGE> 85
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. LITIGATION AND CONTINGENCIES
Old Valero, together with certain of its natural gas related
subsidiaries, and Valero were sued by Teco Pipeline Company regarding the
operation of a 340-mile pipeline in West Texas in which a subsidiary of Old
Valero holds a 50% undivided interest. The case was filed April 24, 1996. In
1985, a subsidiary of Old Valero sold a 50% undivided interest in the pipeline
and entered into a joint venture through an ownership agreement and an operating
agreement, with the purchaser of the interest. In 1988, Teco succeeded to that
purchaser's 50% interest. A subsidiary of Old Valero has at all times been the
operator of the pipeline. The plaintiff contends that the defendants acted in
bad faith and negatively affected the economics of the joint venture in order to
provide financial advantages to facilities or entities owned by the defendants,
and by allegedly taking for the defendants' own benefit certain opportunities
available to the joint venture. The plaintiff asserts causes of action for
breach of fiduciary duty, fraud, tortious interference with business
relationships, professional malpractice and other claims. Old Valero's motion to
require arbitration of the case as required in the written agreements was denied
by the trial court, but Old Valero appealed, and in August 1999, the court of
appeals ruled in Old Valero's favor and ordered arbitration of the entire
dispute. Teco has since waived efforts to further appeal this ruling, and an
arbitration panel has been selected. Valero was formally added to this
proceeding. In January 2001, the panel dismissed the plaintiff's legal
malpractice claims, and the arbitration hearing began on February 5, 2001. On
February 5, 2001, Teco dismissed its claims against Valero, but Valero continues
to participate in the hearing. Although PG&E previously acquired Teco and owned
both Teco and Old Valero (prior to El Paso Corporation's acquisition of Old
Valero in December 2000), PG&E's agreement for the acquisition of Teco purports
to assign the benefit or detriment of this lawsuit to the former shareholders of
Teco. In connection with the Restructuring, Valero has agreed to indemnify Old
Valero with respect to this lawsuit for 50% of any final judgment or settlement
amount up to $30 million, and 100% of that part of any final judgment or
settlement amount over $30 million. El Paso Corporation has assumed Old Valero's
liability in this matter.
In 1986, Valero filed suit against M.W. Kellogg Company for damages
arising from certain alleged design and construction defects in connection with
a major construction project at the Corpus Christi Refinery. Ingersoll-Rand
Company was added as a defendant in 1989. In 1991, the trial court granted
summary judgment against Valero based in part on certain exculpatory provisions
in various agreements connected with the project. In 1993, the court of appeals
affirmed the summary judgment and the Texas Supreme Court denied review.
Subsequent to the summary judgment, Kellogg and Ingersoll-Rand brought indemnity
claims against Valero for attorneys' fees and expenses incurred in defending the
original action. In 1996, the trial court rendered summary judgment against
Kellogg and Ingersoll-Rand based on procedural grounds, and the court of appeals
affirmed that ruling in 1997. However, in 1999, the Texas Supreme Court reversed
the court of appeals and remanded Kellogg's and Ingersoll-Rand's claims for
attorneys' fees and expenses to the trial court. The case went to trial in
August 2000. During trial, the claims of Ingersoll-Rand were settled for an
immaterial amount. The jury returned a verdict on Kellogg's claims that resulted
in a judgment of $6.3 million. Valero plans to appeal the judgment.
82
<PAGE> 86
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Valero had previously received notice of, but was not served with, a
complaint filed April 28, 2000 in federal court by Texas City Railway Company
alleging that several companies, including Valero, are liable under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
other environmental laws and tort law theories for alleged contamination of the
plaintiff's marine loading and tankering facilities. On September 6, 2000, the
complaint was dismissed pursuant to a tolling agreement. The parties are
presently seeking to resolve the matter through mediation which is expected to
conclude by the end of the first quarter of 2001.
On May 24, 2000, Valero was served with a complaint seeking to certify
a class action that alleged that numerous gasoline suppliers, including Valero,
contaminated groundwater in New York with MTBE. As a result of certain
procedural changes, the plaintiffs filed a new master complaint on January 8,
2001. The new complaint alleges that the gasoline suppliers produced and/or
distributed gasoline that is alleged to be defective because it contains MTBE.
The plaintiffs have not claimed a specific amount of monetary damages, but seek
several equitable remedies, including the institution of a court-mandated
well-testing program and the enjoining of further distribution of MTBE in New
York. No class has been certified. Valero has filed a motion to dismiss the
complaint based upon a failure to state a claim and based upon federal
preemption under the Clean Air Act. The Judicial Panel on Multidistrict
Litigation consolidated this case with certain other MTBE class action lawsuits
for pretrial purposes. Discovery has been allowed and is proceeding.
In 2000, the EPA issued to a majority of refiners operating in the
United States a series of information requests pursuant to Section 114 of the
Clean Air Act as part of an enforcement initiative. Valero received a Section
114 information request pertaining to all of its refineries owned at that time.
Valero has completed its response to the request and has provided additional
clarification requested by the EPA. Valero has not been named in any proceeding.
However, based in part upon recently announced settlements and evaluation of its
relative position, Valero expects total penalties and related expenses of less
than $5 million in connection with this enforcement initiative. Valero's
estimate of expenses to be incurred related to this issue, which has been
provided for in the accompanying consolidated financial statements, is
immaterial to its financial position and results of operations. Valero believes
that any settlement with the EPA in this matter may require various capital
improvements or changes in operating parameters or both at some or all of
Valero's refineries.
Valero is also a party to additional claims and legal proceedings
arising in the ordinary course of business. Valero believes it is unlikely that
the final outcome of any of the claims or proceedings to which it is a party
would have a material adverse effect on its consolidated financial statements;
however, due to the inherent uncertainty of litigation, the range of possible
loss, if any, cannot be estimated with a reasonable degree of precision and
there can be no assurance that the resolution of any particular claim or
proceeding would not have an adverse effect on Valero's results of operations,
financial position or liquidity.
83
<PAGE> 87
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Valero's results of operations by quarter for the years ended December
31, 2000 and 1999 were as follows (in thousands of dollars, except per share
amounts):
<TABLE>
<CAPTION>
2000 - Quarter Ended (a)
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues.............................. $2,928,617 $3,372,502 $4,248,831 $4,121,137 $14,671,087
Operating income................................ 57,767 (b) 158,392 223,910 170,910 610,979
Net income ..................................... 30,739 87,680 127,356 93,345 339,120
Earnings per common share....................... .55 1.56 2.08 1.53 5.79
Earnings per common share - assuming dilution... .54 1.51 2.01 1.47 5.60
</TABLE>
<TABLE>
<CAPTION>
1999 - Quarter Ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues.............................. $1,337,103 $1,824,450 $2,161,938 $2,637,677 $7,961,168
Operating income (loss) (b)..................... 9,235 (20,017) 48,153 34,658 72,029
Net income (loss)............................... (2,716) (22,085) 22,612 16,476 14,287
Earnings (loss) per common share................ (.05) (.39) .40 .29 .25
Earnings (loss) per common share - assuming
dilution...................................... (.05) (.39) .40 .29 .25
</TABLE>
- ---------
(a) Includes the operations related to the Benicia Refinery and the
Distribution Assets beginning May 16, 2000 and the operations related to
the Service Stations beginning June 16, 2000.
(b) Operating income (loss) for the first quarter of 2000 and all quarters of
1999 have been restated from the amounts presented in Valero's March 31,
2000 Form 10-Q and December 31, 1999 Form 10-K, respectively, to conform
with the consensus reached by the EITF in May 2000 in connection with its
Issue No. 00-1. See Note 1 under "NEW ACCOUNTING PRONOUNCEMENTS."
Previously reported operating income (loss) amounts for (i) the quarters
ended March 31, 2000 and March 31, June 30, September 30 and December 31 of
1999, and (ii) the year ended December 31, 1999 were $57,052, $8,520,
$(20,733), $47,438, $33,916 and $69,141, respectively.
17. SUBSEQUENT EVENTS
On January 18, 2001, Valero's Board of Directors declared a regular
quarterly cash dividend of $.08 per common share payable March 14, 2001, to
holders of record at the close of business on February 14, 2001.
84
<PAGE> 88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on directors required by Items 401 and 405 of
Regulation S-K is incorporated herein by reference to Valero's definitive Proxy
Statement which will be filed with the Commission by April 30, 2001.
Information concerning Valero's executive officers appears in Part I of
this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS. The following Consolidated Financial
Statements of Valero Energy Corporation and its subsidiaries are included in
Part II, Item 8 of this Form 10-K:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of independent public accountants..................................................................... 41
Consolidated balance sheets as of December 31, 2000 and 1999................................................. 42
Consolidated statements of income for the years ended December 31, 2000, 1999 and 1998....................... 43
Consolidated statements of common stockholders' equity for the years ended
December 31, 2000, 1999 and 1998........................................................................ 44
Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998................... 45
Notes to consolidated financial statements................................................................... 46
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES AND OTHER FINANCIAL INFORMATION. No
financial statement schedules are submitted because either they are inapplicable
or because the required information is included in the Consolidated Financial
Statements or notes thereto.
3. EXHIBITS. Filed as part of this Form 10-K are the following
exhibits:
2.1 -- Agreement and Plan of Merger, dated as of January 31, 1997,
as amended, by and among Valero Energy Corporation, PG&E
Corporation, and PG&E Acquisition Corporation--incorporated by
reference from Exhibit 2.1 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
85
<PAGE> 89
2.2 -- Form of Agreement and Plan of Distribution between Valero
Energy Corporation and Valero Refining and Marketing
Company--incorporated by reference from Exhibit 2.2 to
Valero's Registration Statement on Form S-1 (File No.
333-27013), filed May 13, 1997.
2.3 -- Stock Purchase Agreement dated as of April 22, 1997, among
Valero Energy Corporation, Valero Refining and Marketing
Company, Salomon Inc and Basis Petroleum, Inc.--incorporated
by reference from Exhibit 2.1 to Valero Energy Corporation's
(File No. 1-4718) Current Report on Form 8-K dated May 1,
1997, and filed May 16, 1997.
2.4 -- Asset Sale and Purchase Agreement, dated September 16,
1998, by and between Mobil Oil Corporation and Valero Refining
Company-New Jersey--incorporated by reference from Exhibit 2.1
to Valero's Current Report on Form 8-K dated September 16,
1998, and filed September 30, 1998.
2.5 -- Sale and Purchase Agreement For Exxon California Refining
and Marketing Assets, dated March 2, 2000, between ExxonMobil
Corporation and Valero Refining
Company-California--incorporated by reference from Exhibit 2.7
to Valero's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000.
2.6 -- First Amendment dated May 14, 2000, to the Sale and
Purchase Agreement For Exxon California Refining and Marketing
Assets between Exxon Mobil Corporation and Valero Refining
Company- California--incorporated by reference from Exhibit
2.1 to Valero's Current Report on Form 8-K dated May 15, 2000,
and filed May 30, 2000.
3.1 -- Amended and Restated Certificate of Incorporation of Valero
Energy Corporation (formerly known as Valero Refining and
Marketing Company)--incorporated by reference from Exhibit 3.1
to Valero's Registration Statement on Form S-1 (File No.
333-27013), filed May 13, 1997.
3.2 -- Amended and Restated By-Laws of Valero Energy
Corporation--incorporated by reference from Exhibit 3.3 to
Valero's Annual Report on Form 10-K for the year ended
December 31, 1999.
4.1 -- Rights Agreement between Valero Refining and Marketing
Company and Harris Trust and Savings Bank, as Rights
Agent--incorporated by reference from Exhibit 4.1 to Valero's
Registration Statement on Form S-8 (File No. 333-31709), filed
July 21, 1997.
4.2 -- Amended and Restated Declaration of Trust, dated as of June
28, 2000, of VEC Trust I (including Form of Preferred
Security)--incorporated by reference from Exhibit 4.1 to
Valero's Current Report on Form 8-K dated June 28, 2000, and
filed June 30, 2000.
4.3 -- Valero Energy Corporation Guarantee Agreement, dated as of
June 28, 2000, relating to VEC Trust I (including Form of
Preferred Security)--incorporated by reference from Exhibit
4.3 to Valero's Current Report on Form 8-K dated June 28,
2000, and filed June 30, 2000.
86
<PAGE> 90
4.4 -- Purchase Contract Agreement, dated as of June 28, 2000,
between Valero Energy Corporation and The Bank of New
York--incorporated by reference from Exhibit 4.4 to Valero's
Current Report on Form 8-K dated June 28, 2000, and filed June
30, 2000.
4.5 -- Pledge Agreement, dated as of June 28, 2000, among Valero
Energy Corporation, Bank One Trust Company, N.A. and The Bank
of New York--incorporated by reference from Exhibit 4.5 to
Valero's Current Report on Form 8-K dated June 28, 2000, and
filed June 30, 2000.
4.6 -- Indenture, dated as of December 12, 1997, between Valero
Energy Corporation and The Bank of New York--incorporated by
reference from Exhibit 3.4 to Valero's Registration Statement
on Form S-3 (File No. 333-56599), filed June 11, 1998.
4.7 -- First Supplemental Indenture, dated as of June 28, 2000,
between Valero Energy Corporation and The Bank of New York
(including Form of 7 3/4% Senior Deferrable Note due
2005)--incorporated by reference from Exhibit 4.6 to Valero's
Current Report on Form 8-K dated June 28, 2000, and filed June
30, 2000.
4.8 -- Remarketing Agreement, dated as of June 28, 2000, among
Valero Energy Corporation, VEC Trust I and Morgan Stanley &
Co. Incorporated--incorporated by reference from Exhibit 4.8
to Valero's Current Report on Form 8-K dated June 28, 2000,
and filed June 30, 2000.
4.9 -- Officer's Certificate delivered pursuant to Sections 102,
301 and 303 of the Indenture dated as of December 12, 1997,
providing for the terms of the Notes by Valero Energy
Corporation (including Form of Note)--incorporated by
reference from Exhibit 4.9 to Valero's Current Report on Form
8-K dated June 28, 2000, and filed June 30, 2000.
+10.1 -- Valero Energy Corporation Executive Incentive Bonus Plan,
as amended, dated as of April 23, 1997--incorporated by
reference from Exhibit 10.1 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
+10.2 -- Valero Energy Corporation Executive Stock Incentive Plan,
as amended, dated as of April 23, 1997--incorporated by
reference from Exhibit 10.2 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
+10.3 -- Valero Energy Corporation Stock Option Plan, as amended,
dated as of April 23, 1997--incorporated by reference from
Exhibit 10.3 to Valero's Registration Statement on Form S-1
(File No. 333-27013), filed May 13, 1997.
+10.4 -- Valero Energy Corporation Restricted Stock Plan for
Non-Employee Directors, as amended, dated as of April 23,
1997--incorporated by reference from Exhibit 10.4 to Valero's
Registration Statement on Form S-1 (File No. 333-27013), filed
May 13, 1997.
87
<PAGE> 91
+10.5 -- Valero Energy Corporation Non-Employee Director Stock
Option Plan, as amended, dated as of April 23,
1997--incorporated by reference from Exhibit 10.5 to Valero's
Registration Statement on Form S-1 (File No. 333-27013), filed
May 13, 1997.
+10.6 -- Executive Severance Agreement between Valero Energy
Corporation and William E. Greehey, dated as of December 15,
1982, as adopted and ratified by Valero Refining and Marketing
Company--incorporated by reference from Exhibit 10.6 to
Valero's Registration Statement on Form S-1 (File No.
333-27013), filed May 13, 1997.
+10.7 -- Schedule of Executive Severance Agreements--incorporated by
reference from Exhibit 10.7 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
+10.8 -- Form of Indemnity Agreement between Valero Refining and
Marketing Company and William E. Greehey-incorporated by
reference from Exhibit 10.8 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
+10.9 -- Schedule of Indemnity Agreements--incorporated by reference
from Exhibit 10.9 to Valero's Registration Statement on Form
S-1 (File No. 333-27013), filed May 13, 1997.
+10.10 -- Form of Incentive Bonus Agreement between Valero Refining and
Marketing Company and Gregory C. King--incorporated by
reference from Exhibit 10.10 to Valero's Registration
Statement on Form S-1 (File No. 333-27013), filed May 13,
1997.
+10.11 -- Schedule of Incentive Bonus Agreements--incorporated by
reference from Exhibit 10.11 to Valero's Registration
Statement on Form S-1 (File No. 333-27013), filed May 13,
1997.
+10.12 -- Form of Management Stability Agreement between Valero Energy
Corporation and Gregory C. King--incorporated by reference
from Exhibit 10.14 to Valero's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
*+10.13 -- Schedule of Management Stability Agreements.
+10.14 -- Employment Agreement dated March 25, 1999, effective as of
April 29, 1999 between Valero Energy Corporation and William
E. Greehey--incorporated by reference from Exhibit 10.18 to
Valero's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
*+10.15 -- Extension of Employment Agreement dated January 30, 2001,
between Valero Energy Corporation and William E. Greehey.
10.16 -- Amended and Restated Credit Agreement dated as of November 28,
1997, among Valero Energy Corporation, the Banks listed
therein, Morgan Guaranty Trust Company of New York, as
Administrative Agent, and Bank of Montreal, as Syndicating
Agent and Issuing Bank--incorporated by reference from Exhibit
4.2 to Valero's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
88
<PAGE> 92
10.17 -- Amendment No. 1, dated December 23, 1998, to Credit Agreement
among Valero Energy Corporation, the Banks listed therein,
Morgan Guaranty Trust Company of New York, as Administrative
Agent, and Bank of Montreal, as Syndicating Agent and Issuing
Bank--incorporated by reference from Exhibit 4.3 to Valero's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998.
*10.18 -- Amendment No. 2, dated May 15, 2000, to Credit Agreement among
Valero Energy Corporation, the Banks listed therein, Morgan
Guaranty Trust Company of New York, as Administrative Agent,
and Bank of Montreal, as Syndicating Agent and Issuing Bank.
*21.1 -- Valero Energy Corporation subsidiaries, including state or
other jurisdiction of incorporation or organization.
*23.1 -- Consent of Arthur Andersen LLP, dated February 19, 2001.
*24.1 -- Power of Attorney, dated February 22, 2001 (set forth on the
signatures page of this Form 10-K).
- --------------
* Filed herewith
+ Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to Item 14(c) of Form
10-K.
Copies of exhibits filed as a part of this Form 10-K may be obtained by
stockholders of record at a charge of $.15 per page, minimum $5.00 each request.
Direct inquiries to Jay D. Browning, Corporate Secretary, Valero Energy
Corporation, P.O. Box 500, San Antonio, Texas 78292.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the
registrant has omitted from the foregoing listing of exhibits, and hereby agrees
to furnish to the Commission upon its request, copies of certain instruments,
each relating to long-term debt not exceeding 10% of the total assets of the
registrant and its subsidiaries on a consolidated basis.
(b) REPORTS ON FORM 8-K. Valero did not file any Current Reports on
Form 8-K during the quarter ended December 31, 2000.
89
<PAGE> 93
For the purposes of complying with the rules governing Form S-8 under
the Securities Act of 1933, the undersigned registrant hereby undertakes as
follows, which undertaking shall be incorporated by reference into registrant's
Registration Statements on Form S-8 No. 333-31709 (filed July 21, 1997), No.
333-31721 (filed July 21, 1997), No. 333-31723 (filed July 21, 1997) and No.
333-31727 (filed July 21, 1997):
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
90
<PAGE> 94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By /s/ William E. Greehey
---------------------------------
(William E. Greehey)
Chairman of the Board, President and
Chief Executive Officer
Date: February 22, 2001
91
<PAGE> 95
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS WILLIAM E. GREEHEY, JOHN D.
GIBBONS AND JAY D. BROWNING, OR ANY OF THEM, EACH WITH POWER TO ACT WITHOUT THE
OTHER, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL SUBSEQUENT AMENDMENTS AND SUPPLEMENTS
TO THIS ANNUAL REPORT ON FORM 10-K, AND TO FILE THE SAME, OR CAUSE TO BE FILED
THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION
THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH SAID
ATTORNEY-IN-FACT AND AGENT FULL POWER TO DO AND PERFORM EACH AND EVERY ACT AND
THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY QUALIFYING
AND CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR
SUBSTITUTES MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director, Chairman of the
Board, President and Chief
Executive Officer (Principal
/s/ William E. Greehey Executive Officer) February 22, 2001
- -------------------------------
(William E. Greehey)
Chief Financial Officer
(Principal Financial and
/s/ John D. Gibbons Accounting Officer) February 22, 2001
- -------------------------------
(John D. Gibbons)
/s/ Ronald K. Calgaard Director February 22, 2001
- -------------------------------
(Ronald K. Calgaard)
/s/ Donald M. Carlton Director February 22, 2001
- -------------------------------
(Donald M. Carlton)
/s/ Jerry D. Choate Director February 22, 2001
- -------------------------------
(Jerry D. Choate)
/s/ Robert G. Dettmer Director February 22, 2001
- -------------------------------
(Robert G. Dettmer)
/s/ Ruben M. Escobedo Director February 22, 2001
- -------------------------------
(Ruben M. Escobedo)
/s/ Lowell H. Lebermann Director February 22, 2001
- -------------------------------
(Lowell H. Lebermann)
/s/ Susan Kaufman Purcell Director February 22, 2001
- -------------------------------
(Susan Kaufman Purcell)
</TABLE>
92
<PAGE> 96
INDEX TO EXHIBITS
-----------------
Exhibits Description
- -------- ----------
2.1 -- Agreement and Plan of Merger, dated as of January 31, 1997,
as amended, by and among Valero Energy Corporation, PG&E
Corporation, and PG&E Acquisition Corporation--incorporated by
reference from Exhibit 2.1 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
2.2 -- Form of Agreement and Plan of Distribution between Valero
Energy Corporation and Valero Refining and Marketing
Company--incorporated by reference from Exhibit 2.2 to
Valero's Registration Statement on Form S-1 (File No.
333-27013), filed May 13, 1997.
2.3 -- Stock Purchase Agreement dated as of April 22, 1997, among
Valero Energy Corporation, Valero Refining and Marketing
Company, Salomon Inc and Basis Petroleum, Inc.--incorporated
by reference from Exhibit 2.1 to Valero Energy Corporation's
(File No. 1-4718) Current Report on Form 8-K dated May 1,
1997, and filed May 16, 1997.
2.4 -- Asset Sale and Purchase Agreement, dated September 16,
1998, by and between Mobil Oil Corporation and Valero Refining
Company-New Jersey--incorporated by reference from Exhibit 2.1
to Valero's Current Report on Form 8-K dated September 16,
1998, and filed September 30, 1998.
2.5 -- Sale and Purchase Agreement For Exxon California Refining
and Marketing Assets, dated March 2, 2000, between ExxonMobil
Corporation and Valero Refining Company-California--
incorporated by reference from Exhibit 2.7 to Valero's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000.
2.6 -- First Amendment dated May 14, 2000, to the Sale and
Purchase Agreement For Exxon California Refining and Marketing
Assets between Exxon Mobil Corporation and Valero Refining
Company-California--incorporated by reference from Exhibit
2.1 to Valero's Current Report on Form 8-K dated May 15, 2000,
and filed May 30, 2000.
3.1 -- Amended and Restated Certificate of Incorporation of Valero
Energy Corporation (formerly known as Valero Refining and
Marketing Company)--incorporated by reference from Exhibit 3.1
to Valero's Registration Statement on Form S-1 (File No.
333-27013), filed May 13, 1997.
3.2 -- Amended and Restated By-Laws of Valero Energy
Corporation--incorporated by reference from Exhibit 3.3 to
Valero's Annual Report on Form 10-K for the year ended
December 31, 1999.
4.1 -- Rights Agreement between Valero Refining and Marketing
Company and Harris Trust and Savings Bank, as Rights
Agent--incorporated by reference from Exhibit 4.1 to Valero's
Registration Statement on Form S-8 (File No. 333-31709), filed
July 21, 1997.
4.2 -- Amended and Restated Declaration of Trust, dated as of June
28, 2000, of VEC Trust I (including Form of Preferred
Security)--incorporated by reference from Exhibit 4.1 to
Valero's Current Report on Form 8-K dated June 28, 2000, and
filed June 30, 2000.
4.3 -- Valero Energy Corporation Guarantee Agreement, dated as of
June 28, 2000, relating to VEC Trust I (including Form of
Preferred Security)--incorporated by reference from Exhibit
4.3 to Valero's Current Report on Form 8-K dated June 28,
2000, and filed June 30, 2000.
<PAGE> 97
4.4 -- Purchase Contract Agreement, dated as of June 28, 2000,
between Valero Energy Corporation and The Bank of New
York--incorporated by reference from Exhibit 4.4 to Valero's
Current Report on Form 8-K dated June 28, 2000, and filed June
30, 2000.
4.5 -- Pledge Agreement, dated as of June 28, 2000, among Valero
Energy Corporation, Bank One Trust Company, N.A. and The Bank
of New York--incorporated by reference from Exhibit 4.5 to
Valero's Current Report on Form 8-K dated June 28, 2000, and
filed June 30, 2000.
4.6 -- Indenture, dated as of December 12, 1997, between Valero
Energy Corporation and The Bank of New York--incorporated by
reference from Exhibit 3.4 to Valero's Registration Statement
on Form S-3 (File No. 333-56599), filed June 11, 1998.
4.7 -- First Supplemental Indenture, dated as of June 28, 2000,
between Valero Energy Corporation and The Bank of New York
(including Form of 7 3/4% Senior Deferrable Note due
2005)--incorporated by reference from Exhibit 4.6 to Valero's
Current Report on Form 8-K dated June 28, 2000, and filed June
30, 2000.
4.8 -- Remarketing Agreement, dated as of June 28, 2000, among
Valero Energy Corporation, VEC Trust I and Morgan Stanley &
Co. Incorporated--incorporated by reference from Exhibit 4.8
to Valero's Current Report on Form 8-K dated June 28, 2000,
and filed June 30, 2000.
4.9 -- Officer's Certificate delivered pursuant to Sections 102,
301 and 303 of the Indenture dated as of December 12, 1997,
providing for the terms of the Notes by Valero Energy
Corporation (including Form of Note)--incorporated by
reference from Exhibit 4.9 to Valero's Current Report on Form
8-K dated June 28, 2000, and filed June 30, 2000.
+10.1 -- Valero Energy Corporation Executive Incentive Bonus Plan,
as amended, dated as of April 23, 1997--incorporated by
reference from Exhibit 10.1 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
+10.2 -- Valero Energy Corporation Executive Stock Incentive Plan,
as amended, dated as of April 23, 1997--incorporated by
reference from Exhibit 10.2 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
+10.3 -- Valero Energy Corporation Stock Option Plan, as amended,
dated as of April 23, 1997--incorporated by reference from
Exhibit 10.3 to Valero's Registration Statement on Form S-1
(File No. 333-27013), filed May 13, 1997.
+10.4 -- Valero Energy Corporation Restricted Stock Plan for
Non-Employee Directors, as amended, dated as of April 23,
1997--incorporated by reference from Exhibit 10.4 to Valero's
Registration Statement on Form S-1 (File No. 333-27013), filed
May 13, 1997.
<PAGE> 98
+10.5 -- Valero Energy Corporation Non-Employee Director Stock
Option Plan, as amended, dated as of April 23,
1997--incorporated by reference from Exhibit 10.5 to Valero's
Registration Statement on Form S-1 (File No. 333-27013), filed
May 13, 1997.
+10.6 -- Executive Severance Agreement between Valero Energy
Corporation and William E. Greehey, dated as of December 15,
1982, as adopted and ratified by Valero Refining and Marketing
Company--incorporated by reference from Exhibit 10.6 to
Valero's Registration Statement on Form S-1 (File No.
333-27013), filed May 13, 1997.
+10.7 -- Schedule of Executive Severance Agreements--incorporated by
reference from Exhibit 10.7 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
+10.8 -- Form of Indemnity Agreement between Valero Refining and
Marketing Company and William E. Greehey-incorporated by
reference from Exhibit 10.8 to Valero's Registration Statement
on Form S-1 (File No. 333-27013), filed May 13, 1997.
+10.9 -- Schedule of Indemnity Agreements--incorporated by reference
from Exhibit 10.9 to Valero's Registration Statement on Form
S-1 (File No. 333-27013), filed May 13, 1997.
+10.10 -- Form of Incentive Bonus Agreement between Valero Refining and
Marketing Company and Gregory C. King--incorporated by
reference from Exhibit 10.10 to Valero's Registration
Statement on Form S-1 (File No. 333-27013), filed May 13,
1997.
+10.11 -- Schedule of Incentive Bonus Agreements--incorporated by
reference from Exhibit 10.11 to Valero's Registration
Statement on Form S-1 (File No. 333-27013), filed May 13,
1997.
+10.12 -- Form of Management Stability Agreement between Valero Energy
Corporation and Gregory C. King--incorporated by reference
from Exhibit 10.14 to Valero's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
*+10.13 -- Schedule of Management Stability Agreements.
+10.14 -- Employment Agreement dated March 25, 1999, effective as of
April 29, 1999 between Valero Energy Corporation and William
E. Greehey--incorporated by reference from Exhibit 10.18 to
Valero's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
*+10.15 -- Extension of Employment Agreement dated January 30, 2001,
between Valero Energy Corporation and William E. Greehey.
10.16 -- Amended and Restated Credit Agreement dated as of November 28,
1997, among Valero Energy Corporation, the Banks listed
therein, Morgan Guaranty Trust Company of New York, as
Administrative Agent, and Bank of Montreal, as Syndicating
Agent and Issuing Bank--incorporated by reference from Exhibit
4.2 to Valero's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
<PAGE> 99
10.17 -- Amendment No. 1, dated December 23, 1998, to Credit Agreement
among Valero Energy Corporation, the Banks listed therein,
Morgan Guaranty Trust Company of New York, as Administrative
Agent, and Bank of Montreal, as Syndicating Agent and Issuing
Bank--incorporated by reference from Exhibit 4.3 to Valero's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998.
*10.18 -- Amendment No. 2, dated May 15, 2000, to Credit Agreement among
Valero Energy Corporation, the Banks listed therein, Morgan
Guaranty Trust Company of New York, as Administrative Agent,
and Bank of Montreal, as Syndicating Agent and Issuing Bank.
*21.1 -- Valero Energy Corporation subsidiaries, including state or
other jurisdiction of incorporation or organization.
*23.1 -- Consent of Arthur Andersen LLP, dated February 19, 2001.
*24.1 -- Power of Attorney, dated February 22, 2001 (set forth on the
signatures page of this Form 10-K).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.13
<SEQUENCE>2
<FILENAME>d84423ex10-13.txt
<DESCRIPTION>SCHEDULE OF MANAGEMENT STABILITY
<TEXT>
<PAGE> 1
EXHIBIT 10.13
SCHEDULE OF MANAGEMENT STABILITY AGREEMENTS
EMPLOYEE DATE OF AGREEMENT
- -------- -----------------
Keith D. Booke August 1, 1997
S. Eugene Edwards February 25, 1999
John D. Gibbons August 1, 1997
John F. Hohnholt February 25, 1999
Gregory C. King August 1, 1997
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>3
<FILENAME>d84423ex10-15.txt
<DESCRIPTION>EXTENSION OF EMPLOYMENT AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 10.15
EXTENSION OF EMPLOYMENT AGREEMENT
THIS EXTENSION OF EMPLOYMENT AGREEMENT is between William E. Greehey, a
resident of San Antonio, Texas ("Mr. Greehey"), and Valero Energy Corporation, a
Delaware corporation ("Valero"), and is made and delivered effective as of the
30th day of January 2001 ("Effective Date"). Valero and Mr. Greehey are
sometimes referred to herein individually as a "Party," and collectively as the
"Parties."
WHEREAS, Mr. Greehey and Valero entered into that certain Employment
Agreement dated March 25, 1999 (the "Employment Agreement") (capitalized terms
not defined herein shall have the respective meanings ascribed to such terms in
the Employment Agreement);
WHEREAS, paragraph two of the Employment Agreement provides that (i)
the Initial Period of the Employment Agreement shall expire on July 31, 2001,
(ii) if Mr. Greehey notifies Valero at least ninety (90) calendar days prior to
the end of the Initial Period of his intention to extend the Employment
Agreement, then the Agreement shall be extended on a month-to-month basis
("Extension Period"), and (iii) that Mr. Greehey may terminate the Employment
Agreement within the Extension Period by giving Valero ninety (90) calendar days
written notice of termination;
NOW THEREFORE, the parties hereto agree that by signing below, Mr.
Greehey is hereby delivering notice to Valero of his intention to extend the
Employment Agreement, and that the term of the Employment Agreement is hereby
extended beyond the end of the Initial Period on a month-to-month basis in
accordance with paragraph two of the Employment Agreement.
IN WITNESS WHEREOF, the Parties have executed this Extension of
Employment Agreement as of the Effective Date.
/s/ William E. Greehey
WILLIAM E. GREEHEY
VALERO ENERGY CORPORATION
By: /s/ Keith D. Booke
Keith D. Booke, Executive Vice President and Chief Administrative Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.18
<SEQUENCE>4
<FILENAME>d84423ex10-18.txt
<DESCRIPTION>AMENDMENT NO. 2 TO CREDIT AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 10.18
AMENDMENT NO. 2 TO CREDIT AGREEMENT
AMENDMENT dated as of May 15, 2000 to the Amended and Restated Credit
Agreement dated as of November 28, 1997 (as heretofore amended, the "CREDIT
AGREEMENT") among VALERO ENERGY CORPORATION (the "BORROWER"), the BANKS party
thereto (the "BANKS"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Administrative Agent (the "ADMINISTRATIVE AGENT") and BANK OF MONTREAL, as
Syndication Agent and Issuing Bank.
The parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically
defined herein, each capitalized term used herein which is defined in the Credit
Agreement has the meaning assigned to such term in the Credit Agreement. Each
reference to "hereof", "hereunder", "herein" and "hereby" and each other similar
reference and each reference to "this Agreement" and each other similar
reference contained in the Credit Agreement shall, after this Amendment becomes
effective, refer to the Credit Agreement as amended hereby.
SECTION 2. Amendment of Section 6.07. Section 6.07(a) of the Credit
Agreement is amended to read as follows:
(a) the sum (without duplication) of (i) Consolidated Net
Income (excluding extraordinary items) of the Borrower for the
applicable period, plus (ii) interest expense for the Borrower and its
Subsidiaries on the consolidated basis for such period, plus (iii)
deferred federal and state income taxes deducted in determining such
Consolidated Net Income for such period, plus (iv) depreciation and
amortization expense deducted in determining such Consolidated Net
Income for such period, plus (v) cash dividends paid by the Borrower on
its preferred stock (other than dividends paid on preferred stock held
by the Borrower or a Subsidiary of the Borrower) deducted in
determining such Consolidated Net Income for such period, plus (vi)
other noncash charges deducted in determining such Consolidated Net
Income for such period, minus (vii) other noncash credits added in
determining such Consolidated Net Income for such period, plus (viii)
Deferred Turnaround and Catalyst Cost for such period, to
SECTION 3. Amendment of Section 6.08. Section 6.08 of the Credit
Agreement is amended to read as follows:
SECTION 6.08. Debt. The ratio of (i) Consolidated Debt of the
Borrower to (ii) the sum of Consolidated Debt of the Borrower plus the
Consolidated Net Worth of the Borrower plus the involuntary
liquidation value of outstanding shares of redeemable preferred stock
of the Borrower will at no time during any period set forth below
exceed the applicable maximum ratio for such period:
<PAGE> 2
Period Maximum Ratio
------ -------------
Effective Date - March 30, 2001 0.65 : 1.00
March 31, 2001 - September 29, 2001 0.60 : 1.00
September 30, 2001 and thereafter 0.55 : 1.00
provided, that if the Borrower shall issue at least $300 million in
equity or equity-hybrid securities prior to March 31, 2001, the ratio
applicable to the period beginning on March 31, 2001 shall become
applicable from the date of such issuance to and including September
29, 2001; provided further, that for purposes of calculating the
treatment of an equity-hybrid security which is not otherwise included
in Consolidated Net Worth but which is mandatorily convertible into,
or otherwise mandatorily refundable with the proceeds of, equity
securities which will be included in Consolidated Net Worth, in each
case within three years of the date of issuance of such equity-hybrid
security, then until such conversion or refunding is effected, (x) if
such equity-hybrid security represents senior unsecured indebtedness,
the total issuance amount of such security shall be allocated 20% to
Consolidated Debt and 80% to Consolidated Net Worth, and (y) if such
equity-hybrid security represents subordinated indebtedness, the total
issuance amount of such security shall be allocated 100% to
Consolidated Net Worth.
SECTION 4. Amendment of Section 6.11. Section 6.11 of the Credit
Agreement is amended to read as follows:
SECTION 6.11. Subsidiary Debt. The total Debt of all
Consolidated Subsidiaries (excluding (i) Debt secured by a Lien
permitted by clauses (a) through (r) of Section 6.10, (ii) Debt of a
Person existing at the time such Person becomes a Subsidiary and not
created in contemplation of such event, (iii) the Additional IDB, (iv)
Debt of the Borrower owing to any Subsidiary or Debt of a Subsidiary
owing to the Borrower or to any other Subsidiary, (v) refinancings,
extensions, renewals or refundings of any Debt permitted by the
foregoing clauses of this Section, provided that the principal amount
of such Debt referred to in clauses (i), (ii) and (iii) is not
increased and (vi) Guarantees pursuant to Section 6.12) will at no time
exceed $5,000,000 in aggregate outstanding principal amount.
SECTION 5. Increase of Interest Rates. The Pricing Schedule attached to
the Credit Agreement (the "EXISTING PRICING SCHEDULE") is deleted and replaced
by the Pricing Schedule attached to this Amendment (the "NEW PRICING SCHEDULE").
The New Pricing Schedule shall apply to interest and fees accruing under the
Credit Agreement on
<PAGE> 3
and after the date hereof. The Existing Pricing Schedule shall continue to apply
to interest and fees accruing under the Credit Agreement prior to the date
hereof.
SECTION 6. Representations of Borrower. The Borrower represents and
warrants that (i) the representations and warranties of the Borrower set forth
in Article 5 of the Credit Agreement are true on and as of the date hereof and
(ii) no Default has occurred and is continuing on the date hereof.
SECTION 7. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 8. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 9. Effectiveness. This Amendment shall become effective as of
the date hereof when the following conditions are met (the "EFFECTIVE DATE"):
(a) the Administrative Agent shall have received from each of
the Borrower and the Required Banks a counterpart hereof signed by such
party or facsimile or other written confirmation (in form satisfactory
to the Administrative Agent) that such party has signed a counterpart
hereof;
(b) the Administrative Agent shall have received an amendment
fee for the account of each Bank that has delivered to the
Administrative Agent on or before the close of business (New York City
time) on April 11, 2000 a counterpart hereof signed by such Bank or
facsimile or other written confirmation (in form satisfactory to the
Administrative Agent) that such party has signed a counterpart hereof,
such fee in an amount equal to 0.25% of such Bank's Commitment; and
(c) the acquisition contemplated by the Sale and Purchase
Agreement for Exxon California Refining and Marketing Assets between
Exxon Mobil Corporation and Valero Refining Company-California dated as
of March 2, 2000 shall have closed.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
VALERO ENERGY CORPORATION
By:
-----------------------------------------
Name:
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By:
-----------------------------------------
Name:
Title:
BANK OF MONTREAL
By:
-----------------------------------------
Name:
Title:
BANK OF TOKYO-MITSUBISHI,
LTD.
By:
-----------------------------------------
Name:
Title:
BANKBOSTON, N.A.
By:
-----------------------------------------
Name:
Title:
BANQUE NATIONALE DE
PARIS, HOUSTON AGENCY
By:
-----------------------------------------
Name:
Title:
<PAGE> 5
BHF-BANK AKTIENGESELLSCHAFT
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
CIBC INC.
By:
-----------------------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK
BRANCH
By:
-----------------------------------------
Name:
Title:
BANKONE, NA
(Main Office-Chicago)
By:
-----------------------------------------
Name:
Title:
THE FUJI BANK, LIMITED
By:
-----------------------------------------
Name:
Title:
ROYAL BANK OF CANADA
By:
-----------------------------------------
Name:
Title:
<PAGE> 6
SOCIETE GENERALE
By:
-----------------------------------------
Name:
Title:
TORONTO DOMINION (TEXAS), INC.
By:
-----------------------------------------
Name:
Title:
BARCLAYS BANK PLC
By:
-----------------------------------------
Name:
Title:
CHRISTIANIA BANK, NEW YORK
BRANCH
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
DEN NORSKE BANK ASA
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
GUARANTY FEDERAL BANK,
F.S.B.
By:
-----------------------------------------
Name:
Title:
<PAGE> 7
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
-----------------------------------------
Name:
Title:
THE BANK OF NOVIA SCOTIA
By:
-----------------------------------------
Name:
Title:
CREDIT AGRICOEL INDOSUEZ
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
THE DAI-ICHI KANGYO BANK, LTD.
By:
-----------------------------------------
Name:
Title:
THE FROST NATIONAL BANK
By:
-----------------------------------------
Name:
Title:
MELLON BANK, N.A.
By:
-----------------------------------------
Name:
Title:
THE SANWA BANK, LIMITED
By:
-----------------------------------------
Name:
Title:
<PAGE> 8
UBS AG, STAMFORD BRANCH
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
<PAGE> 9
PRICING SCHEDULE
The "EURO-DOLLAR MARGIN", "FACILITY FEE RATE" and "LETTER OF CREDIT
RATE" for any day are the respective percentages set forth below in the
applicable row under the column corresponding to the Status that exists on such
day:
<TABLE>
<CAPTION>
Status Level I Level II Level III Level IV Level V
- ------ ------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Facility Fee Rate 0.125% 0.150% 0.175% 0.250% 0.375%
Euro-Dollar Margin
Usage less than 25% 0.375% 0.475% 0.825% 1.00% 1.125%
Usage greater than
or equal to 25% 0.500% 0.600% 0.950% 1.00% 1.125%
Letter of Credit Rate
Performance 0.250% 0.300% 0.475% 0.500% .5625%
Financial 0.500% 0.600% 0.950% 1.00% 1.125%
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings (subject to the last paragraph of this Schedule):
"LEVEL I STATUS" exists at any date if, at such date, the Borrower's
long-term debt is rated at least BBB+ by S&P or at least Baa1 by Moody's.
"LEVEL II STATUS" exists at any date if, at such date, (i) the
Borrower's long-term debt is rated at least BBB by S&P or at least Baa2 by
Moody's and (ii) Level I Status does not exist.
"LEVEL III STATUS" exists at any date if, at such date, (i) the
Borrower's long-term debt is rated at least BBB- by S&P or at least Baa3 by
Moody's and (ii) neither Level I Status nor Level II Status exists.
"LEVEL IV STATUS" exists at any date if, at such date, (i) the
Borrower's long-term debt is rated at least BB+ by S&P and at least Ba1 by
Moody's and (ii) none of Level I Status, Level II Status and Level III Status
exists.
"LEVEL V STATUS" exists at any date if, at such date, no other Status
exists.
"STATUS" refers to the determination of which of Level I Status, Level
II Status, Level III Status, Level IV Status or Level V Status exists at any
date.
"USAGE" means, at any date, the percentage equivalent of a fraction (i)
the numerator of which is the sum of the aggregate principal amount of the Loans
outstanding at such date and the Letter of Credit Outstandings at such date and
(ii) the denominator of which is the aggregate amount of the Commitments at such
date. If for any reason there are outstanding Loans or Letter of Credit
Outstandings following termination of the Commitments, Usage shall be deemed to
exceed 25%.
<PAGE> 10
The credit ratings to be utilized for purposes of this Schedule are
those assigned to the senior unsecured long-term debt securities of the Borrower
without third-party credit enhancement, and any rating assigned to any other
debt security of the Borrower shall be disregarded. The rating in effect at any
date is that in effect at the close of business on such date.
So long as the Borrower is rated at least BB+ by S&P and at least Ba1
by Moody's, if the Borrower is split-rated and the ratings differential is one
level, the higher of the two ratings will apply (e.g., BBB/Baa3 results in Level
II Status). If the Borrower is split-rated and the ratings differential is more
than one level, the average of the two ratings (or the higher or two
intermediate ratings) shall be used (e.g., BBB/A3 results in Level I Status, as
does BBB-/A3).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>5
<FILENAME>d84423ex21-1.txt
<DESCRIPTION>VALERO ENERGY SCHEDULE OF SUBSIDIARIES
<TEXT>
<PAGE> 1
EXHIBIT 21.1
VALERO ENERGY CORPORATION
SCHEDULE OF SUBSIDIARIES
AS OF DECEMBER 31, 2000
NAME OF SUBSIDIARY STATE OF ORGANIZATION
------------------ ---------------------
Valero Energy Corporation Delaware
Valero Corporate Services Company Delaware
Valero Coal Company Delaware
Valero Producing Company Delaware
VMGA Company Delaware
Valero Refining and Marketing Company Delaware
Valero Capital Corporation Delaware
Valero Marketing and Supply Company Delaware
Valero Natural Gas Pipeline Company Delaware
Valero Refining Company-California Delaware
Valero Refining Company-Louisiana Delaware
Valero Refining Company-New Jersey Delaware
Valero Refining Company-Texas Texas
Valero Javelina, Inc. Delaware
Valero Javelina, L.P. Delaware
Valero Mediterranean Company Delaware
Valero MTBE Investments Company Delaware
Valero Technical Services Company Delaware
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>6
<FILENAME>d84423ex23-1.txt
<DESCRIPTION>CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
<TEXT>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 333-31709, 333-31721, 333-31723
and 333-31727) and Form S-3 (File No. 333-33846).
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 19, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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