-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, IPdWVu14OTPfhSnzvCaYUNZ0XFZA80Q1ZzHJZmzXhFIvng2DgzRv8X8sGRopkqqO 7m0j7+ad7V8nKnYH7Iqwag== 0000021271-94-000016.txt : 19940816 0000021271-94-000016.hdr.sgml : 19940816 ACCESSION NUMBER: 0000021271-94-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALERO ENERGY CORP CENTRAL INDEX KEY: 0000021271 STANDARD INDUSTRIAL CLASSIFICATION: 2911 IRS NUMBER: 741244795 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04718 FILM NUMBER: 94542964 BUSINESS ADDRESS: STREET 1: 530 MCCULLOUGH AVE CITY: SAN ANTONIO STATE: TX ZIP: 78215 BUSINESS PHONE: 2102462000 FORMER COMPANY: FORMER CONFORMED NAME: COASTAL STATES GAS PRODUCING CO DATE OF NAME CHANGE: 19791115 10-Q 1 VEC 2ND QUARTER 10-Q 1994 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 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 1-4718 VALERO ENERGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 74-1244795 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 530 McCullough Avenue San Antonio, Texas (Address of principal executive offices) 78215 (Zip Code) (210) 246-2000 (Registrant's telephone number, including area code) 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 Indicated below is the number of shares outstanding of the registrant's only class of common stock, as of August 5, 1994. Number of Shares Title of Class Outstanding Common Stock, $1 Par Value 43,398,809 VALERO ENERGY CORPORATION AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Consolidated Balance Sheets - June 30, 1994 and December 31, 1993. . . . . . . . . . . . . . . . . . . Consolidated Statements of Income - For the Three Months Ended and Six Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 1994 and 1993. . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . PART I - FINANCIAL INFORMATION VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars)
June 30, 1994 December 31, (Unaudited) 1993 ASSETS CURRENT ASSETS: Cash and temporary cash investments. . . . . . . . . . . . . . . . . $ 47,994 $ 7,252 Cash held in debt service escrow . . . . . . . . . . . . . . . . . . 20,262 - Receivables, less allowance for doubtful accounts of $2,609 (1994) and $359 (1993). . . . . . . . . . . . . . . . . . . 226,581 64,521 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,472 113,384 Current deferred income tax assets . . . . . . . . . . . . . . . . . 14,037 12,304 Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . 30,707 38,025 482,053 235,486 PROPERTY, PLANT AND EQUIPMENT - including construction in progress of $37,679 (1994) and $10,158 (1993), at cost. . . . . . . . . . . . . . . . . . . . . 2,567,303 1,640,136 Less: Accumulated depreciation. . . . . . . . . . . . . . . . . . 484,821 346,570 2,082,482 1,293,566 INVESTMENT IN AND LEASES RECEIVABLE FROM VALERO NATURAL GAS PARTNERS, L.P.. . . . . . . . . . . . . . . . . . - 130,557 INVESTMENT IN AND ADVANCES TO JOINT VENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,239 28,343 DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . . . . . . . 117,367 76,485 $2,712,141 $1,764,437 See Notes to Consolidated Financial Statements.
PART I - FINANCIAL INFORMATION VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars)
June 30, 1994 December 31, (Unaudited) 1993 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt . . . . . . . . . . . . . . . . $ 77,161 $ 28,737 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 290,732 90,994 Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . 19,753 5,063 Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 33,431 28,233 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 104 - 421,181 153,027 LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . 972,616 485,621 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 237,085 232,564 DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . 58,004 37,128 REDEEMABLE PREFERRED STOCK, SERIES A . . . . . . . . . . . . . . . . . 13,800 13,800 COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY: Preferred stock, $1 par value - 20,000,000 shares authorized: Redeemable Preferred Stock, Series A, issued 1,150,000 shares, outstanding 138,000 (1994 and 1993) shares . . . . . . - - $3.125 Convertible Preferred Stock, issued and outstanding 3,450,000 (1994) and -0- (1993) shares ($172,500 aggregate involuntary liquidation value) . . . . . . . . . . . 3,450 - Common stock, $1 par value - 75,000,000 shares authorized; issued 43,400,060 (1994) and 43,391,685 (1993) shares . . . . . . 43,400 43,392 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 534,421 371,303 Unearned Valero Employees' Stock Ownership Plan Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . (14,848) (15,958) Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 443,545 446,931 Treasury stock, 22,238 (1994) and 145,119 (1993) common shares, at cost. . . . . . . . . . . . . . . . . . . . . . (513) (3,371) 1,009,455 842,297 $2,712,141 $1,764,437 See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars, Except Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 OPERATING REVENUES . . . . . . . . . . . . . . . . . . $416,143 $321,072 $697,420 $616,834 COSTS AND EXPENSES: Cost of sales. . . . . . . . . . . . . . . . . . . . 338,273 238,422 548,380 467,135 Operating expenses . . . . . . . . . . . . . . . . . 29,252 31,633 59,276 61,389 Depreciation expense . . . . . . . . . . . . . . . . 18,542 12,899 34,110 25,539 Total. . . . . . . . . . . . . . . . . . . . . . . 386,067 282,954 641,766 554,063 OPERATING INCOME . . . . . . . . . . . . . . . . . . . 30,076 38,118 55,654 62,771 EQUITY IN EARNINGS (LOSSES) OF AND INCOME FROM VALERO NATURAL GAS PARTNERS, L.P. . . . . . . . . . . . . . . . . . . . (7,790) 7,926 (10,698) 14,575 OTHER INCOME (EXPENSE), NET. . . . . . . . . . . . . . 438 (516) (480) (49) INTEREST AND DEBT EXPENSE: Incurred . . . . . . . . . . . . . . . . . . . . . . (16,323) (12,685) (28,371) (25,383) Capitalized. . . . . . . . . . . . . . . . . . . . . 521 6,040 800 11,280 INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . 6,922 38,883 16,905 63,194 INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . 2,700 14,200 6,400 22,900 NET INCOME . . . . . . . . . . . . . . . . . . . . . . 4,222 24,683 10,505 40,294 Less: Preferred stock dividend requirements . . . . 2,989 317 3,521 635 NET INCOME APPLICABLE TO COMMON STOCK. . . . . . . . . . . . . . . . . . . $ 1,233 $ 24,366 $ 6,984 $ 39,659 EARNINGS PER SHARE OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . $ .03 $ .56 $ .16 $ .92 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (in thousands) . . . . . . . . . . . . . 43,347 43,072 43,334 43,055 DIVIDENDS PER SHARE OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . $ .13 $ .11 $ .26 $ .22 See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) (Unaudited)
Six Months Ended June 30, 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,505 $ 40,294 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . 34,110 25,539 Amortization of deferred charges and other, net. . . . . . . . . 7,705 10,455 Changes in current assets and current liabilities. . . . . . . . (52,398) (17,226) Deferred income tax expense. . . . . . . . . . . . . . . . . . . 3,900 12,300 Equity in (earnings) losses of Valero Natural Gas Partners, L.P. in excess of distributions. . . . . . . . . . . 16,179 (5,261) Changes in deferred items and other, net . . . . . . . . . . . . (87) (8,536) Net cash provided by operating activities. . . . . . . . . . . 19,914 57,565 CASH FLOWS FROM INVESTING ACTIVITIES: Capital additions. . . . . . . . . . . . . . . . . . . . . . . . . . (31,362) (71,626) Deferred turnaround and catalyst costs . . . . . . . . . . . . . . . (869) (7,202) Investment in and advances to joint ventures, net. . . . . . . . . . (3,864) (3,459) Investment in Valero Natural Gas Partners, L.P.. . . . . . . . . . . (124,264) - Distributions from Valero Natural Gas Partners, L.P. . . . . . . . . 2,789 - Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,278 884 Net cash used in investing activities. . . . . . . . . . . . . . . (156,292) (81,403) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings, net. . . . . . . . . . . . . . . . . . . . . . 29,700 32,000 Increase in notes payable. . . . . . . . . . . . . . . . . . . . . . - 200 Increase in cash held in debt service escrow for principal . . . . . (7,589) - Common stock dividends . . . . . . . . . . . . . . . . . . . . . . . (11,268) (9,473) Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . (2,623) (635) Issuance of Convertible Preferred Stock, net . . . . . . . . . . . . 167,878 - Issuance of common stock, net. . . . . . . . . . . . . . . . . . . . 1,022 1,378 Net cash provided by financing activities. . . . . . . . . . . . . 177,120 23,470 NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . 40,742 (368) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . 7,252 8,174 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,994 $ 7,806 See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Basis of Presentation The consolidated financial statements included herein have been prepared by Valero Energy Corporation ("Energy") and subsidiaries (collectively referred to as the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. However, all adjustments have been made to the accompanying financial statements which are, in the opinion of the Company's management, necessary for a fair presentation of the Company's results of operations for the periods covered. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented herein not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. Certain prior period amounts have been reclassified for comparative purposes. Note 2 Acquisition of Valero Natural Gas Partners, L.P. In March 1994, Energy issued 3,450,000 shares of $3.125 convertible preferred stock ("Convertible Preferred Stock") with a stated value of $50 per share and received cash proceeds, net of underwriting discounts and certain issuance costs, of approximately $168 million. The Convertible Preferred Stock was primarily issued to fund the merger (the "Merger") of Valero Natural Gas Partners, L.P. ("VNGP, L.P.") with a wholly owned subsidiary of Energy. On May 31, 1994, the holders of common units of limited partner interests ("Common Units") of VNGP, L.P. approved the Merger. Upon consummation of the Merger, VNGP, L.P. became a wholly owned subsidiary of Energy and the publicly traded Common Units (the "Public Units") were converted into the right to receive cash in the amount of $12.10 per Common Unit. The Company utilized $117.5 million of the net proceeds from the Convertible Preferred Stock issuance to fund the acquisition of the Public Units. The remaining net proceeds of $50.4 million were used to reduce outstanding indebtedness under bank credit lines and to pay expenses of the acquisition. As a result of the Merger, all of the outstanding Common Units are held by the Company. As a result of the Merger, the Company changed its method of accounting for its investment in VNGP, L.P. and its consolidated subsidiaries, collectively referred to herein as the "Partnership," from the equity method to the full consolidation method of accounting as of May 31, 1994. The acquisition has been accounted for as a purchase. The consolidated statements of income of the Company for the three months and six months ended June 30, 1994 and 1993, reflect the Company's effective equity interest of approximately 49% in the Partnership's operations for periods prior to and including May 31, 1994, and reflect 100% of the Partnership's operations for the month of June 1994. The following unaudited pro forma financial information of Valero Energy Corporation and subsidiaries assumes that the above described transactions occurred at the beginning of each period presented. Such pro forma information is not necessarily indicative of the results of future operations.
Six Months Ended June 30, 1994 1993 (Thousands of dollars, except per share amounts) Operating revenues. . . . . . . . . . . . . . . . . . . . $1,193,962 $1,129,722 Operating income. . . . . . . . . . . . . . . . . . . . . 55,672 109,461 Net income. . . . . . . . . . . . . . . . . . . . . . . . 3,012 44,958 Net income (loss) applicable to common stock. . . . . . . (2,966) 38,932 Earnings (loss) per share of common stock . . . . . . . . (.07) .90
Note 3 Statements of Cash Flows In order to determine net cash provided by operating activities, net income has been adjusted by, among other things, changes in current assets and current liabilities, excluding changes in cash and temporary cash investments, cash held in debt service escrow for principal, current maturities of long-term debt and notes payable. Also excluded are the Partnership's current assets and current liabilities as of the acquisition date (see Note 2). Changes in the Company'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. The Company's temporary cash investments are highly liquid, low-risk debt instruments which have a maturity of three months or less when acquired and whose carrying amounts approximate fair value. (Dollars in thousands.)
Six Months Ended June 30, 1994 1993 Cash held in debt service escrow for interest . . . . . . . . . . $(12,673) $ - Receivables, net. . . . . . . . . . . . . . . . . . . . . . . . . (58,628) 766 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,647 (523) Current deferred income tax assets. . . . . . . . . . . . . . . . (1,733) (3,132) Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . 9,637 (115) Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 4,743 (13,904) Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . 3,961 394 Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . (456) (1,819) Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . 104 1,107 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(52,398) $(17,226)
The following table provides information related to cash interest and income taxes paid by the Company for the periods indicated (in thousands):
Six Months Ended June 30, 1994 1993 Interest (net of amount capitalized of $800 (1994) and $11,280 (1993)). . . . . . . . . . . . . . . . . . . . . . $22,968 $12,883 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,962 9,242
Note 4 Inventories Valero Refining and Marketing Company, a wholly owned subsidiary of Energy, and its principal subsidiary, Valero Refining Company ("VRC"), are collectively referred to herein as "Refining." Refining's inventories (refinery feedstocks and blendstocks and refined products) are carried at the lower of cost or market with cost determined primarily under the last-in, first-out ("LIFO") method of inventory pricing. The Company's other inventories are carried principally at weighted average cost not in excess of market. Inventories as of June 30, 1994 and December 31, 1993 were as follows (in thousands):
June 30, December 31, 1994 1993 Refinery feedstocks and blendstocks . . . . . . . . . . . . . . . $ 75,823 $ 70,807 Refined products. . . . . . . . . . . . . . . . . . . . . . . . . 40,998 42,577 Natural gas in underground storage. . . . . . . . . . . . . . . . 17,631 - Natural gas liquids ("NGLs"). . . . . . . . . . . . . . . . . . . 8,020 - $142,472 $113,384
Refining's inventory volumes totalled 8.2 million barrels ("MMbbls") and 8.1 MMbbls at June 30, 1994 and December 31, 1993, respectively. Natural gas volumes in underground storage and in third-party storage facilities totalled approximately 7.3 trillion British thermal units ("TBtus") at June 30, 1994. Amounts relating to natural gas volumes in third-party storage facilities are included in receivables in the accompanying June 30, 1994 consolidated balance sheet. The excess of the replacement cost of Refining's inventories over their LIFO values was approximately $23 million at June 30, 1994. Note 5 Price Risk Management Activities The Company enters into various exchange-traded and other financial instrument contracts with third parties to hedge the purchase costs and sales prices of inventories, operating margins and certain anticipated purchases of natural gas to be consumed in operations. Changes in the market value of such contracts are deferred until the gain or loss is recognized on the hedged transaction. The Company also enters into a limited amount of contracts that are not specific hedges, and gains or losses resulting from changes in the market value of these contracts are recognized in income currently. As of June 30, 1994, the Company had outstanding contracts for natural gas with notional or contract volumes totalling approximately 30.5 TBtus for which the Company is the fixed price payor and 25.1 TBtus for which the Company is the fixed price receiver. These contracts run for a period of one to eight months. As of June 30, 1994, the Company also had outstanding contracts for refinery feedstocks and refined products with notional or contract volumes totalling 3.6 MMbbls for which the Company is the fixed price payor and 3.9 MMbbls for which the Company is the fixed price receiver. These contracts run for a period of one to six months. As of December 31, 1993, such amounts were 2.7 MMbbls and 2.6 MMbbls, respectively. Note 6 Bank Credit Agreement Energy has entered into an unsecured $250 million revolving bank credit and letter of credit facility that is available for working capital and general corporate purposes. This bank credit facility became effective upon the consummation of the Merger on May 31, 1994 and replaced Refining's $160 million secured revolving credit facility, Energy's $30 million unsecured revolving credit facility, and all of the Partnership's committed unsecured revolving credit facilities. This new facility, which will expire March 29, 1996, permits direct advances of up to $200 million and up to $150 million for letters of credit, subject to the overall $250 million commitment limit. The commitment amount will be reduced $16.7 million per quarter beginning June 30, 1995, with 80% of each reduction applied to direct advances and 20% to letters of credit. Borrowings under the facility bear interest, at the Company's option, at LIBOR plus 1.25% or at the agent bank's prime rate. The Company is charged various fees, including commitment fees on the unutilized portion, and various letter of credit and facility fees. The new bank credit facility contains covenants limiting Energy's ability to make certain "restricted payments," including dividend payments on and purchases, redemptions or exchanges of its capital stock, to make certain "restricted disbursements," including the restricted payments described above plus capital expenditures and certain capital investments, and to make advances and capital contributions to the Partnership. The facility also contains covenants which require Energy to maintain a minimum consolidated working capital and net worth and also contains various financial tests including debt-to- capitalization, fixed charge and earnings coverage ratios. The Company was in compliance with all of its restrictive covenants as of June 30, 1994. Note 7 Litigation and Contingencies In a letter dated September 1, 1993 from the City of Houston (the "City") to Valero Transmission Company ("VTC"), the City stated its intent to bring suit against VTC for certain claims asserted by the City under the franchise agreement between the City and VTC. VTC is the general partner of Valero Transmission, L.P. ("VT, L.P."). The franchise agreement was assigned to and assumed by VT, L.P. upon formation of the Partnership in 1987. In the letter, the City declared a conditional forfeiture of the franchise rights based on the City's claims. In a letter dated October 27, 1993, the City claimed that VTC owed to the City franchise fees and accrued interest thereon aggregating approximately $13.5 million. In a letter dated November 9, 1993, the City claimed an additional $18 million in damages related to the City's allegations that VTC engaged in unauthorized activities under the franchise agreement by transmitting gas for resale and by transporting gas for third parties on the franchised premises. During the second quarter of 1994, the Company, the Partnership and the City executed a settlement agreement with respect to this dispute under which VT, L.P. agreed to a total settlement of $14 million payable in three approximately equal payments. The first of these payments was made in June 1994, with the remaining payments to be made in January 1995 and January 1996. Energy and certain of its subsidiaries are defendants in a lawsuit originally filed in January 1993. The lawsuit is based upon construction work performed by the plaintiff at certain of the Partnership's gas processing plants in 1991 and 1992. The plaintiff alleges that it performed work for the defendants for which it was not compensated. The plaintiff's second amended petition, filed April 30, 1994, asserts claims for breach of contract, quantum meruit, wrongful failure to pay retainage, fraudulent misrepresentation, conspiracy, breach of the implied covenant of good faith and fair dealing, and other commercial tort claims. The plaintiff alleges actual damages of approximately $9.7 million and punitive damages of $45.5 million. The defendants have filed a motion for summary judgment and a motion to transfer venue to Bexar County. In 1987, VT, L.P. and a producer from whom VT, L.P. has purchased natural gas entered into an agreement resolving certain take-or-pay issues between the parties in which VT, L.P. agreed to pay one-half of certain excess royalty claims arising after the date of the agreement. The royalty owners of the producer recently completed an audit of the producer and have presented to the producer a claim for additional royalty payments in the amount of approximately $17.3 million, and accrued interest thereon of approximately $19.8 million. Approximately $8 million of the royalty owners' claim, excluding interest, accrued after the effective date of the agreement between the producer and VT, L.P. The producer and VT, L.P. are reviewing the royalty owners' claims. VT, L.P. has received no indication that any lawsuit has been filed by the royalty owners. The Company believes that various defenses may reduce or eliminate any liability of VT, L.P. to the producer in this matter. VTC and one of its gas suppliers are parties to various gas purchase contracts assigned to and assumed by VT, L.P. upon formation of the Partnership in 1987. The supplier is also a party to a series of gas purchase contracts between the supplier, as buyer, and certain trusts, as seller. In 1989, the trusts brought suit against the supplier, alleging breach of various minimum take, take-or-pay and other contractual provisions, and asserting a statutory nonratability claim. In the trusts' claims against the supplier, the trusts seek alleged actual damages, including interest, of approximately $30 million. Neither VTC nor VT, L.P. was originally a party to the lawsuit. However, because of the relationship between VTC's contracts with the supplier and the supplier's contracts with the trusts, and in order to resolve existing and potential disputes, the supplier, VTC and VT, L.P. agreed in March 1991 to cooperate in the conduct of the litigation, and agreed that VTC and VT, L.P. will bear a substantial portion of the costs of any appeal and any nonappealable final judgment rendered against the supplier. In January 1993, the District Court ruled on the trusts' motion for summary judgment, finding that as a matter of law the three gas purchase contracts at issue were fully binding and enforceable, the supplier breached the minimum take obligations under one of the contracts, the supplier is not entitled to claimed offsets for gas purchased by third parties and the "availability" of gas for take-or-pay purposes is established solely by the delivery capacity testing procedures in the contracts. Damages, if any, were not determined. On April 15, 1994, the trusts named VTC and VT, L.P. as additional defendants (the "Valero Defendants") to the lawsuit, alleging that the Valero Defendants maliciously interfered with the trusts' contracts with the supplier. In the trusts' claim against the Valero Defendants, the trusts seek unspecified actual and punitive damages. The Company believes that the claims brought by the trusts have been significantly overstated, and that the supplier and the Valero Defendants have a number of meritorious defenses to the claims. This litigation is not currently set for trial. In June 1994, VRC was added as a defendant in a lawsuit filed by several plaintiffs who are residents of San Patricio County, Texas. The suit was brought against numerous defendants whom the plaintiffs allege are either owners or operators of a landfill site in San Patricio County, or generators of hazardous wastes accepted into the landfill. VRC is named as a "generator" of hazardous wastes accepted into the landfill. The plaintiffs claim that hazardous wastes escaped from the landfill and were released into the surrounding ground, water and air, allegedly causing damages including bodily injury, emotional distress, costs for medical monitoring and devaluation of property. The plaintiffs seek an unspecified amount of actual and punitive damages. A lawsuit was filed against VRC in June 1994 by certain residents of the Mobile Estate subdivision located near the Refinery in Corpus Christi, Texas, alleging that air, soil and water in the subdivision have been contaminated by emissions of allegedly hazardous chemicals and toxic hydrocarbons produced by VRC. The plaintiffs' claims include negligence, gross negligence, strict liability, nuisance and trespass. The plaintiffs seek certification as a class and an unspecified amount of damages, based on an alleged diminution in the value of their property, loss of use and enjoyment of property, emotional distress and other costs. Valero Javelina Company, a wholly owned subsidiary of Energy, owns a 20% general partner interest in Javelina Company, a general partnership. Javelina Company has been named as a defendant in six lawsuits filed since 1992 in state district courts in Nueces County, Texas. Four of the suits include as defendants other companies that own refineries or other industrial facilities in Nueces County. These suits were brought by a number of plaintiffs who reside in neighborhoods near the facilities. The plaintiffs claim injuries relating to an alleged exposure to toxic chemicals, and generally claim that the defendants were negligent, grossly negligent and committed trespass. The plaintiffs claim personal injury and property damages resulting from soil and ground water contamination and air pollution allegedly caused by the operations of the defendants. One of the suits seeks certification of the litigation as a class action. The plaintiffs seek unspecified actual and punitive damages. The other two suits were brought by plaintiffs who either live or have businesses near the Javelina Plant. The suits allege claims similar to those described above. These plaintiffs do not specify an amount of damages claimed. The Company is also a party to additional claims and legal proceedings arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims or proceedings to which the Company is a party, including those described above, would have a material adverse effect on the Company's financial position or results of operations; however, due to the inherent uncertainty of litigation, the range of possible loss, if any, cannot be estimated with a reasonable degree of precision and there can be no assurance that the resolution of any particular claim or proceeding would not have an adverse effect on the Company's results of operations for the fiscal period in which such resolution occurred. VALERO ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACQUISITION OF VNGP, L.P. As described in Note 2 of Notes to Consolidated Financial Statements, the merger of VNGP, L.P. with a wholly owned subsidiary of Energy was consummated on May 31, 1994. As a result of the merger, all of the outstanding Common Units of VNGP, L.P. are held by the Company and VNGP, L.P. has become a wholly owned subsidiary of Energy. The accompanying consolidated statements of income of the Company for the three months and six months ended June 30, 1994 and 1993 include the Company's approximate 49% effective equity interest in the Partnership's operations for all periods prior to and including May 31, 1994 and include 100% of the Partnership's operations for the month of June 1994. However, the discussion of the Company's natural gas and natural gas liquids operations which follows includes 100% of the Partnership's operations rather than only the Company's effective interest in the Partnership's operating results. Such discussion is based on pro forma operating results assuming that the merger of VNGP, L.P. with a subsidiary of Energy occurred at the beginning of 1994 and 1993, respectively. RESULTS OF OPERATIONS The following are the Company's financial and operating highlights for the three months ended and six months ended June 30, 1994 and 1993. The 1993 amounts of operating revenues and operating income (loss) by segment have been restated to conform to the 1994 segment presentation. The amounts in the following table are in thousands of dollars, unless otherwise noted:
Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 OPERATING REVENUES: Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . $284,161 $275,263 $531,687 $524,571 Natural gas : Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,195 11,701 67,218 22,247 Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . 5,486 1,116 5,561 2,214 Natural gas liquids . . . . . . . . . . . . . . . . . . . . . . 49,518 13,837 61,698 29,353 Other operations . . . . . . . . . . . . . . . . . . . . . . . . . . 21,033 21,183 42,506 42,105 Intersegment eliminations. . . . . . . . . . . . . . . . . . . . . . (11,250) (2,028) (11,250) (3,656) Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $416,143 $321,072 $697,420 $616,834 OPERATING INCOME (LOSS): Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . $ 16,735 $ 38,516 $ 45,175 $ 60,860 Natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . 5,377 807 5,367 2,557 Natural gas liquids . . . . . . . . . . . . . . . . . . . . . . 5,612 2,923 6,801 6,294 Corporate expenses, net. . . . . . . . . . . . . . . . . . . . . . . 2,352 (4,128) (1,689) (6,940) Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,076 $ 38,118 $ 55,654 $ 62,771 Equity in earnings (losses) of Valero Natural Gas Partners, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,984) $ 4,630 $(16,179) $ 7,998 Interest and debt expense, net . . . . . . . . . . . . . . . . . . . . $ 15,802 $ 6,645 $ 27,571 $ 14,103 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,222 $ 24,683 $ 10,505 $ 40,294 Net income applicable to common stock. . . . . . . . . . . . . . . . . $ 1,233 $ 24,366 $ 6,984 $ 39,659 Earnings per share of common stock . . . . . . . . . . . . . . . . . . $ .03 $ .56 $ .16 $ .92 PRO FORMA OPERATING INCOME (LOSS) : Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . $ 16,735 $ 38,516 $ 45,175 $ 60,860 Natural gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,301 19,729 9,465 32,730 Natural gas liquids. . . . . . . . . . . . . . . . . . . . . . . . . 9,444 13,315 10,528 31,550 Corporate expenses, net. . . . . . . . . . . . . . . . . . . . . . . (723) (8,626) (9,496) (15,679) Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,757 $ 62,934 $ 55,672 $109,461 OPERATING STATISTICS: Refining and marketing: Throughput volumes (Mbbls per day) . . . . . . . . . . . . . . . . 149 137 147 129 Average throughput margin per barrel . . . . . . . . . . . . . . . $ 4.95 $ 6.94 $ 5.50 $ 6.47 Sales volumes (Mbbls per day). . . . . . . . . . . . . . . . . . . 147 127 145 126 Natural gas : Gas volumes (BBtu per day): Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080 1,083 1,184 1,123 Transportation . . . . . . . . . . . . . . . . . . . . . . . . . 1,606 1,816 1,622 1,734 Total gas volumes. . . . . . . . . . . . . . . . . . . . . . . 2,686 2,899 2,806 2,857 Average gas sales price per MMBtu. . . . . . . . . . . . . . . . . $ 2.08 $ 2.38 $ 2.24 $ 2.29 Average gas transportation fee per MMBtu . . . . . . . . . . . . . $ .111 $ .097 $ .112 $ .097 Natural gas liquids : Plant production (Mbbls per day) . . . . . . . . . . . . . . . . . 78.0 77.5 78.1 77.4 Average market price per gallon. . . . . . . . . . . . . . . . . . $ .266 $ .310 $ .259 $ .313 Average gas cost per MMBtu . . . . . . . . . . . . . . . . . . . . $ 1.79 $ 2.06 $ 1.92 $ 1.92 Includes 100% of the operations of the Partnership commencing June 1, 1994. Represents the Company's approximate 49% effective equity interest in the operations of the Partnership for the periods prior to June 1, 1994.
Consolidated Results The Company reported net income of $4.2 million or $.03 per share for the second quarter of 1994 compared to $24.7 million or $.56 per share for the second quarter of 1993. For the first six months of 1994, net income was $10.5 million or $.16 per share compared to $40.3 million or $.92 per share for the first six months of 1993. The decrease in net income and earnings per share for the current quarter and year-to-date periods was due primarily to a decrease in equity in earnings of the Partnership, an increase in net interest expense and a decrease in operating income. Earnings per share were also reduced by an increase in preferred stock dividend requirements resulting from the issuance in the first quarter of 1994 of 3.45 million shares of Energy's $3.125 Convertible Preferred Stock. See Note 2 of Notes to Consolidated Financial Statements. Operating revenues increased $95.1 million or 30% and $80.6 million or 13% during the second quarter and first six months of 1994, respectively, compared to the same periods in 1993 due primarily to the inclusion in the 1994 periods of operating revenues for the month of June 1994 attributable to the Partnership which was merged with the Company effective May 31, 1994, and to a lesser extent to increases in operating revenues from refining and marketing operations which are explained below under "Segment Results." The increases attributable to these factors were partially offset by decreases in natural gas sales and transportation revenues from certain of the Company's natural gas distribution operations which were sold in the latter half of 1993. Operating income decreased $8 million or 21% and $7.1 million or 11% during the second quarter and first six months of 1994, respectively, compared to the same periods in 1993 due primarily to a decrease in operating income from refining and marketing operations as explained below. This decrease was partially offset by the inclusion of $8.4 million of Partnership operating income for the month of June 1994 resulting from the May 31, 1994 merger. Operating income further benefitted from a decrease in corporate expenses, net, due primarily to the recognition in income in the 1994 periods of the $6.7 million remaining balance of deferred management fees resulting from the merger. Such fees were recorded upon the formation of the Partnership in March 1987 and were being amortized to income over the ten-year period during which Valero Natural Gas Company agreed not to withdraw as general partner of VNGP, L.P. The Company's equity in losses of the Partnership for the second quarter and first six months of 1994 were $10 million and $16.2 million, respectively, compared to equity in earnings of $4.6 million and $8 million for the same periods in 1993. Included in the 1994 amounts was the Company's approximate 49% equity interest in the $14 million cost of a settlement among the Company, the Partnership and the City of Houston regarding a franchise fee dispute. See Note 7 of Notes to Consolidated Financial Statements. The Company's equity in losses of the Partnership for the 1994 periods includes the Company's effective equity interest in the Partnership's operations for the periods prior to the merger on May 31, 1994. See "Segment Results" below for a discussion of the Company's natural gas and natural gas liquids operations. Net interest and debt expense increased $9.2 million and $13.5 million during the second quarter and first six months of 1994, respectively, compared to the same periods in 1993 due primarily to decreases in capitalized interest resulting from the placing in service in the second quarter of 1993 of the Refinery's butane upgrade facility, and the inclusion in the 1994 amounts of interest expense attributable to the Partnership for the month of June 1994. Income tax expense decreased in the 1994 second quarter and year-to-date periods compared to the same periods in 1993 due primarily to lower pre-tax income. Segment Results Refining and Marketing Operating revenues from the Company's refining and marketing operations increased $8.9 million, or 3%, during the second quarter of 1994 compared to the same period in 1993 due primarily to a 16% increase in average daily sales volumes partially offset by a 10% decrease in the average sales price per barrel. Sales and throughput volumes increased as a result of the placing in service of the Refinery's butane upgrade facility and other Refinery units during the second and fourth quarters of 1993, respectively. Although the average sales price per barrel in the second quarter of 1994 still remained below second quarter 1993 levels, such price improved compared to the first quarter of 1994 as a result of rising crude oil and refined product prices. Operating income from the Company's refining and marketing operations decreased $21.8 million, or 57%, during the second quarter of 1994 compared to the same period in 1993 due primarily to a decrease in throughput margins resulting from lower refined product prices as noted above and narrower discounts for the Company's residual oil feedstocks, more than offsetting a 9% increase in average daily throughput volumes. The Refinery's average throughput margin per barrel, before operating costs and depreciation expense, decreased from $6.94 during the second quarter of 1993 to $4.95 for the second quarter of 1994. Refining and marketing operating income was also reduced by an increase in depreciation expense due to the placing in service of various Refinery assets in 1993 described above. Operating revenues from the Company's refining and marketing operations increased $7.1 million, or 1%, during the first six months of 1994 compared to the same period in 1993 as a 15% increase in average daily sales volumes was mostly offset by a 12% decrease in the average sales price per barrel. Operating income decreased $15.7 million, or 26%, during the first six months of 1994 compared to the same period in 1993 primarily due to a decrease in throughput margins and an increase in depreciation expense and other operating costs resulting from the above noted placing in service of various Refinery units in 1993. Operating costs per barrel decreased, however, due to a 14% increase in average daily throughput volumes. The Refinery's average throughput margin per barrel decreased from $6.47 during the first six months of 1993 to $5.50 for the first six months of 1994. Natural Gas Pro forma operating income from the Company's natural gas operations decreased $18.4 million, or 93%, during the second quarter of 1994 compared to the same period in 1993 due to an increase in operating and general expenses, lower gas sales margins and reduced fixed cost recoveries. Operating and general expenses increased due primarily to the City of Houston settlement discussed above. Gas sales margins were lower for the special marketing programs due primarily to a $7 million decrease in income generated by the Market Center Services Program and the return to service of the South Texas Project nuclear plant ("STP") during the 1994 second quarter. VT, L.P.'s fixed cost recoveries, principally related to gas gathering costs, decreased as the result of a customer audit settlement effective July 1, 1993. The decreases in operating income resulting from these factors were partially offset by an increase in income from new term sales business generated during the latter part of 1993 in connection with the implementation of FERC Order 636. Transportation revenues were essentially flat in the second quarter of 1994 compared to the 1993 period as a 14% increase in average transportation fees was largely offset by a 12% decrease in average daily transportation volumes. The increase in average transportation fees was due primarily to higher fees received on existing transportation business and reduced deliveries to PEMEX at below-average rates, while the decrease in average transportation volumes resulted from the expiration of certain contracts, reduced deliveries to PEMEX and decreased gas shrinkage volumes transported for the Company's NGL operations. Pro forma operating income from the Company's natural gas operations decreased $23.3 million, or 71%, during the first six months of 1994 compared to the same period in 1993 due to the factors noted above, partially offset by an increase in transportation revenues. Average transportation fees for the first six months of 1994 increased 15% compared to the same period in 1993, more than offsetting a 6% decrease in transportation volumes. Natural Gas Liquids Pro forma operating income from the Company's NGL operations decreased $3.9 million, or 29%, during the second quarter of 1994 compared to the same period in 1993 due to a 14% decrease in the average NGL market price and an increase in transportation and fractionation expense, partially offset by a decrease in fuel and shrinkage costs resulting from a 13% decrease in the average cost of natural gas and lower operating and general expenses. Although NGL market prices in the second quarter of 1994 still remained below second quarter 1993 levels, such prices improved compared to the first quarter of 1994 as a result of rising crude oil and refined product prices. Average natural gas costs decreased as a result of milder weather experienced during a majority of the second quarter of 1994, higher industry-wide natural gas storage inventories and the return to service of the STP during the 1994 second quarter. Pro forma NGL operating income decreased $21 million, or 67%, during the first six months of 1994 compared to the same period in 1993 due to the factors noted above and a decrease in third party transportation and fractionation volumes. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by the Company's operating activities totalled $19.9 million during the first half of 1994 compared to $57.6 million during the first half of 1993. The decrease in 1994 from 1993 was due primarily to the decrease in income described above under "Results of Operations" and an increase in refining and marketing working capital requirements. During the 1994 period, the Company utilized the cash provided by its operating activities, additional bank borrowings and cash distributions received from the Partnership prior to the merger to fund capital expenditures and investments in joint ventures, to pay common and preferred stock dividends and to make principal escrow payments under the Partnership's First Mortgage Notes. As described in Note 2 of Notes to Consolidated Financial Statements, the Company used a portion of the approximate $168 million proceeds from its March 1994 Convertible Preferred Stock issuance to fund the acquisition of the publicly traded Common Units of VNGP, L.P. and to pay expenses of the acquisition. The remaining proceeds were used to reduce bank borrowings. As described in Note 6 of Notes to Consolidated Financial Statements, Energy's unsecured $250 million revolving bank credit and letter of credit facility became effective on May 31, 1994, replacing all of the Company's and the Partnership's then existing committed bank credit facilities. As of June 30, 1994, Energy had approximately $113 million available under this committed bank credit facility for additional borrowings and letters of credit. Energy also currently has $75 million of unsecured short-term credit lines, no more than $50 million of which may be outstanding at any one time, which are unrestricted as to use but which, if used, reduce the availability under the $250 million credit facility. As of June 30, 1994, no amounts were outstanding under these short-term lines. Energy's new revolving bank credit and letter of credit facility (which is the most restrictive of the Company's various financing agreements) contains various restrictive covenants, including restrictions on its ability to pay dividends and make certain other "restricted payments." The Company was in compliance with all of the restrictive covenants under this facility at June 30, 1994, and under the most restrictive of such covenants had the ability to pay approximately $46 million in common and preferred stock dividends and other restricted payments. For total year 1994, the Company currently expects to expend approximately $115 million for capital expenditures, deferred turnaround and catalyst costs and investments in joint ventures, $37.4 million of which was expended during the first half of 1994. The Company believes it has sufficient funds from operations, and to the extent necessary, from the public and private capital markets and bank market, to fund its current and ongoing operating requirements. PART II - OTHER INFORMATION Item 1. Legal Proceedings Garcia, et al. v. Coastal Chemical Company, Inc., Valero Refining Company, Javelina Company, et al., 347th Judicial District Court, Nueces County, Texas (filed August 31, 1993). This action was brought by certain residents of the Oak Park Triangle area of Corpus Christi, Texas, against several defendants including VRC. All named defendants are either refiners or gas processors having facilities located at or near Up River Road in Corpus Christi. Plaintiffs allege in general terms damages resulting from ground water contamination and air pollution allegedly caused by the operations of the defendants. On August 5, 1994, VRC was dismissed from this lawsuit by order of the court. Harding, et al. v. Browning-Ferris Industries, Inc., Valero Refining Company, et al., 229th State District Court, Duval County, Texas (filed March 1, 1994). VRC was added as a defendant in this case by service dated June 10, 1994. The several named plaintiffs, residents of San Patricio County, Texas, brought suit against numerous defendants whom the plaintiffs allege are either owners or operators of a landfill site in San Patricio County, or generators of hazardous wastes accepted into the landfill. VRC is named as a "generator" of hazardous wastes accepted into the landfill. The plaintiffs claim that hazardous wastes escaped from the landfill and were released into the surrounding ground, water and air, allegedly causing damages including bodily injury, emotional distress, costs for medical monitoring and devaluation of property. The plaintiffs seek an unspecified amount of actual and punitive damages. NationsBank of Texas, N.A., Trustee of The Charles Gilpin Hunter Trust, et al. v. Coastal Oil & Gas Corporation, Valero Transmission Company, et al., 160th State District Court, Dallas County, Texas (filed February 2, 1993). In a lawsuit filed in 1988, certain plaintiffs alleged that defendants Coastal Oil & Gas Corporation ("Coastal") and Energy, VTC, VNGP, L.P., Valero Management Partnership, L.P. and VT, L.P. (the "Valero Defendants") were liable for failure to take minimum quantities of gas, failure to make take-or-pay payments and other breach of contract and breach of fiduciary duty claims. This lawsuit was settled on terms immaterial to the Valero Defendants, and the parties agreed to a dismissal of the lawsuit. However, in February 1993, NationsBank of Texas, N.A., as trustee for certain trusts, filed a separate suit against all prior defendants, substantially adopting the allegations and claims of the original litigation. In June 1994, the parties executed a settlement agreement with respect to this lawsuit on terms immaterial to the Company. Valero Energy Corporation, et al. v. M.W. Kellogg Company, et al., 117th Judicial District Court, Nueces County, Texas (filed July 11, 1986). In the Company's suit against the defendants, the Company asserted breach of contract and warranty claims, Deceptive Trade Practices Act ("DTPA") claims, and negligence, fraud and other common law claims. The Company claimed actual damages in excess of $165 million plus exemplary damages, statutory penalties, attorneys' fees and costs of court. In 1991, the court entered judgment granting the motions for summary judgment of defendants Kellogg and Ingersoll-Rand with respect to the contract and DTPA claims, and entered a take nothing judgment against the Company. In 1993, the Company appealed the trial court's decision to the Thirteenth Court of Appeals, Corpus Christi, Texas, which affirmed the trial court's decision. The Texas Supreme Court denied the Company's application for writ of error, and in May 1994 denied the Company's motion for rehearing. The trial court has scheduled a conference for August 25, 1994, to consider the status of remaining claims of the Company and to consider claims asserted by the defendants against the Company for attorneys' fees and costs. In re Valero Natural Gas Partners, L.P. Litigation, Consolidated Civil Action No. 13194, Court of Chancery, New Castle County, Delaware (first suit filed October 15, 1993; all suits consolidated November 23, 1993). Seven lawsuits were filed in the Delaware Court of Chancery for New Castle County (the "Chancery Court") in response to the announcement of Energy's proposal to acquire the publicly traded Common Units of VNGP, L.P. pursuant to a proposed merger of VNGP, L.P. with a wholly owned subsidiary of Energy. In December 1993, attorneys representing the plaintiffs entered into a memorandum of understanding with Energy and VNGP, L.P. pursuant to which the attorneys agreed to recommend that the Chancery Court approve a settlement of the litigation. The settlement was approved by the Chancery Court on May 31, 1994. The settlement did not require a material payment by the Company. Ventura, et al. v. Valero Refining Company, 105th State District Court, Nueces County, Texas (filed June 17, 1994). A lawsuit was filed against VRC by certain residents of the Mobile Estate subdivision located near the Refinery in Corpus Christi, Texas, alleging that air, soil and water in the subdivision have been contaminated by emissions of allegedly hazardous chemicals and toxic hydrocarbons produced by VRC. The plaintiffs' claims include negligence, gross negligence, strict liability, nuisance and trespass. The plaintiffs seek certification as a class and an unspecified amount of damages, based on an alleged diminution in the value of their property, loss of use and enjoyment of property, emotional distress and other costs. White, et al. v. Coastal Javelina, Inc., Valero Energy Corporation, et al., 94th State District Court, Nueces County, Texas (filed November 27, 1991). Plaintiffs, as owners of real property near the Javelina Plant, alleged that the operation and maintenance of the Javelina Plant interfered with the use and enjoyment of their property and caused depreciation in the value of their property and other damages. In June 1994, the parties executed a settlement agreement with respect to this lawsuit on terms immaterial to the Company. City of Houston Claim. Beginning in a letter dated September 1, 1993, from the City of Houston to VTC, the City asserted certain claims against VTC under the franchise agreement between the City and VTC. VTC is the general partner of VT, L.P. The franchise agreement was assumed by VT, L.P. upon formation of the Partnership in 1987. The City claimed that VTC owed to the City approximately $13.5 million in franchise fees and accrued interest thereon, and an additional $18 million in damages related to the City's allegations that VTC engaged in unauthorized activities under the franchise agreement by transmitting gas for resale and by transporting gas for third parties on the franchised premises. On June 1, 1994, the parties executed a settlement agreement with respect to the City's claims pursuant to which VT, L.P. agreed to pay approximately $14 million to the City by January 1, 1996. VT, L.P. paid an initial installment of approximately $5.5 million on June 1, 1994. VT, L.P. will pay approximately $4.2 million to the City on January 1, 1995, with a final installment of approximately $4.2 million payable on January 1, 1996. Item 4. Submission of Matters to a Vote of Security Holders Energy's Annual Meeting of Stockholders was held on April 28, 1994. Matters voted upon at the meeting and the results thereof included (i) a proposal to ratify the appointment of Arthur Andersen & Co. as independent public accountants (approved with 39,256,949 affirmative votes, 109,538 negative votes, and 92,695 abstentions); and (ii) a proposal to elect the following Class II directors to serve until 1997: Edward C. Benninger (approved with 39,315,845 affirmative votes, and 143,337 abstentions); A. Ray Dudley (approved with 39,317,861 affirmative votes, and 141,321 abstentions); and James L. Johnson (approved with 39,317,865 affirmative votes, and 141,317 abstentions). There were no broker non-votes with respect to the matters voted upon at the Annual Meeting. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. *11 Computation of Earnings Per Share. 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 percent of the total assets of the registrant and its subsidiaries on a consolidated basis. (b) Reports on Form 8-K. A report on Form 8-K dated May 31, 1994, was filed electronically on June 2, 1994, reporting Item 2. Acquisition or Disposition of Assets and Item 7. Financial Statements and Exhibits, in connection with the merger of Valero Natural Gas Partners, L.P. with a wholly owned subsidiary of Energy on May 31, 1994. The following financial statements were filed in connection with Item 7. of the Form 8-K: (1) The following Consolidated Financial Statements of Valero Natural Gas Partners, L.P.: Audited Financial Statements Consolidated Balance Sheets -- December 31, 1993 and 1992 Consolidated Statements of Income -- For the Years Ended December 31, 1993, 1992 and 1991 Consolidated Statements of Partners' Capital -- For the Years Ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements Unaudited Financial Statements Consolidated Balance Sheets -- March 31, 1994 and December 31, 1993 (audited) Consolidated Statements of Income -- For the Three Months Ended March 31, 1994 and 1993 Consolidated Statements of Partners' Capital -- For the Three Months Ended March 31, 1994 and 1993 Consolidated Statements of Cash Flows -- For the Three Months Ended March 31, 1994 and 1993 Notes to Consolidated Financial Statements (2) The following pro forma information of Valero Energy Corporation and its consolidated subsidiaries: Pro Forma Condensed Consolidated Balance Sheet -- March 31, 1994 Pro Forma Consolidated Statement of Income -- For the Three Months Ended March 31, 1994 Pro Forma Consolidated Statement of Income -- For the Year Ended December 31, 1993 Notes to Pro Forma Condensed Consolidated Financial Statements *Filed herewith. SIGNATURE Pursuant to the requirements 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/ Don M. Heep Don M. Heep Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) Date: August 11, 1994 EX-11 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 VALERO ENERGY CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Thousands of Dollars, Except Per Share Amounts)
Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 COMPUTATION OF EARNINGS PER SHARE ASSUMING NO DILUTION: Net income. . . . . . . . . . . . . . . . . . . . . $ 4,222 $ 24,683 $ 10,505 $ 40,294 Less: Preferred stock dividend requirements. . . . (2,989) (317) (3,521) (635) Net income applicable to common stock . . . . . . . $ 1,233 $ 24,366 $ 6,984 $ 39,659 Weighted average number of shares of common stock outstanding. . . . . . . . . . . . . 43,347,260 43,072,410 43,333,843 43,055,181 Earnings per share assuming no dilution . . . . . . $ .03 $ .56 $ .16 $ .92 COMPUTATION OF EARNINGS PER SHARE ASSUMING FULL DILUTION: Net income. . . . . . . . . . . . . . . . . . . . . $ 4,222 $ 24,683 $ 10,505 $ 40,294 Less: Preferred stock dividend requirements. . . . (2,989) (317) (3,521) (635) Add: Reduction of preferred stock dividends applicable to the assumed conversion of Convertible Preferred Stock . . . . 2,695 - 2,934 - Net income applicable to common stock assuming full dilution . . . . . . . . . . . . . $ 3,928 $ 24,366 $ 9,918 $ 39,659 Weighted average number of shares of common stock outstanding. . . . . . . . . . . . . 43,347,260 43,072,410 43,333,843 43,055,181 Weighted average common stock equivalents applicable to stock options . . . . . 30,374 70,167 39,694 72,427 Weighted average shares issuable upon conversion of Convertible Preferred Stock . . . . 6,381,798 - 3,490,597 - Weighted average shares used for computation. . . . 49,759,432 43,142,577 46,864,134 43,127,608 Earnings per share assuming full dilution . . . . . $ .08 $ .56 $ .21 $ .92 This calculation is submitted in accordance with paragraph 601(b)(11) of Regulation S-K although it is contrary to APB Opinion No. 15 because it produces an antidilutive result.
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