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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 1-13175
VALERO SAVINGS PLAN
VALERO ENERGY CORPORATION
One Valero Place
San Antonio, TX 78212-3186
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VALERO SAVINGS PLAN
Index
Page
----
Report of Independent Auditors.................................................................. 3
Statements of Net Assets Available for Benefits as of December 31, 2002 and 2001................ 4
Statements of Changes in Net Assets Available for Benefits for the Years Ended
December 31, 2002 and 2001................................................................... 5
Notes to Financial Statements................................................................... 6
Schedule H, Line 4i - Schedule of Assets (Held at End of Year) as of December 31, 2002.......... 13
Signature....................................................................................... 14
Consent of Independent Auditors................................................................. 15
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002..................................................................... 16
2
REPORT OF INDEPENDENT AUDITORS
To the Administrative Committee of
Valero Savings Plan
We have audited the accompanying statements of net assets available for benefits
of Valero Savings Plan as of December 31, 2002 and 2001, and the related
statements of changes in net assets available for benefits for the years then
ended. These financial statements are the responsibility of the Plan'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 net assets available for benefits of the Plan as of
December 31, 2002 and 2001, and the changes in its net assets available for
benefits for the years then ended, in conformity with accounting principles
generally accepted in the United States.
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedule of assets
(held at end of year) as of December 31, 2002 is presented for the purpose of
additional analysis and is not a required part of the financial statements but
is supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. This supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the auditing
procedures applied in our audit of the financial statements and, in our opinion,
is fairly stated in all material respects in relation to the financial
statements taken as a whole.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
June 24, 2003
3
VALERO SAVINGS PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31,
------------
2002 2001
---- ----
Assets:
Investments:
Common stock................................... $ 9,726,656 $ 72,759,294
Common/collective trusts....................... 10,338,552 38,472,131
Mutual funds................................... 8,931,594 142,540,740
Participant loans.............................. 1,930,471 7,071,335
Self-directed investments...................... 7,944 54,264
---------- -----------
Total investments............................ 30,935,217 260,897,764
---------- -----------
Receivables:
Employer contributions......................... 3,902,528 908,205
Employee contributions......................... 80,417 2,462,133
Interest....................................... 289 -
Due from brokers for securities sold........... 4,692 -
---------- -----------
Total receivables............................ 3,987,926 3,370,338
Cash............................................ 3,474 -
---------- -----------
Net assets available for benefits............... $ 34,926,617 $ 264,268,102
========== ===========
See Notes to Financial Statements.
4
VALERO SAVINGS PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
Years Ended December 31,
-----------------------
2002 2001
---- ----
Additions to net assets:
Investment income:
Interest income................................................. $ 1,227,230 $ 2,651,173
Dividend income................................................. 1,330,903 5,391,527
----------- -----------
2,558,133 8,042,700
----------- -----------
Contributions:
Employee........................................................ 7,255,556 16,151,623
Employer........................................................ 7,553,105 6,623,279
----------- -----------
14,808,661 22,774,902
----------- -----------
Asset transfers in from other plans:
Valley Shamrock, Inc. Plan...................................... - 405,837
UDS ESOP1 Stock Fund............................................ - 101,527
UDS ESOP2 Stock Fund............................................ - 17,127
Valero Retail Plan.............................................. 250,450 -
----------- -----------
250,450 524,491
----------- -----------
Total additions................................................ 17,617,244 31,342,093
----------- -----------
Deductions from net assets:
Withdrawals by participants...................................... (57,062,470) (19,482,198)
Asset transfers out to Valero Energy Corporation Thrift Plan..... (189,152,944) -
----------- -----------
Total deductions............................................... (246,215,414) (19,482,198)
----------- -----------
Net appreciation (depreciation) in fair value of investments..... (743,315) 12,970,272
----------- -----------
Net increase (decrease) in net assets available for benefits...... (229,341,485) 24,830,167
Net assets available for benefits:
Beginning of year................................................ 264,268,102 239,437,935
----------- -----------
End of year...................................................... $ 34,926,617 $ 264,268,102
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See Notes to Financial Statements.
5
VALERO SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
1. Description of the Plan
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 Energy Corporation is a publicly held independent refining and marketing
company with approximately 20,000 employees. Valero owns and operates 12
refineries in the United States and Canada with a combined throughput capacity
of approximately 1.9 million barrels per day. Valero markets refined products
through an extensive bulk and rack marketing network and a network of
approximately 4,100 retail outlets in the United States and eastern Canada under
various brand names including Diamond Shamrock(R), Shamrock(R), Ultramar(R),
Valero(R), Beacon(R), Total(R) and Exxon(R).
Valero's common stock trades on the New York Stock Exchange under the symbol
"VLO".
The following description of the Valero Savings Plan (the Plan) provides only
general information. Participants should refer to the Plan document for a
complete description of the Plan's provisions.
General
The Plan is a defined contribution plan that previously covered all eligible
employees of Ultramar Diamond Shamrock Corporation (UDS), which was acquired by
Valero on December 31, 2001. The Plan was previously referred to as the UDS
401(k) Retirement Savings Plan (renamed effective April 1, 2002). The Plan is
subject to the provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
Valero is the Plan sponsor. An administrative committee, consisting of persons
selected by Valero, administers the Plan. The members of the Administrative
Committee serve without compensation for services in that capacity. Vanguard
Fiduciary Trust Company was the trustee and record keeper of the Plan until June
30, 2002. Effective July 1, 2002, Merrill Lynch Trust Company, FSB became the
trustee and has custody of the securities and investments of the Plan. Merrill
Lynch, Pierce, Fenner & Smith Incorporated is the record keeper of the Plan.
Plan Merger and Acquisitions
Asset transfers in from other plans and asset transfers out to other plans
include amounts related to the following:
o Effective August 1, 2001, the Valley Shamrock, Inc. Employee's 401(k)
Plan was merged into the Plan. Valley Shamrock, Inc. was previously
acquired by UDS.
o During 2001, participant account balances remaining in the UDS
Employee Stock Ownership Plan 1 and 2 were transferred to the Plan.
o Effective May 1, 2002, Valero merged the account balances related to
UDS non-store employees (other than union personnel and HSB employees
(defined below)), and effective August 1, 2002 merged the account
balances related to certain union employees, into the Valero Energy
Corporation Thrift Plan, representing a total transfer of
$180,881,797.
o Effective May 16, 2002, Valero sold certain assets and facilities
related to its Golden Eagle Refinery to Tesoro Refining and Marketing
Company (Tesoro), as a result of which certain employees of Valero
(Held Separate Business Employees or HSB employees) became employees
6
VALERO SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS - (Continued)
of Tesoro. HSB employees were treated as having incurred a termination
of employment and became eligible for distributions of their account
balances. Eligible HSB employees could elect to make direct rollover
transfers from the Plan to a defined contribution plan maintained by
Tesoro. Account balances of $8,271,147 for HSB employees who did not
make direct rollover transfers were merged into the Valero Energy
Corporation Thrift Plan.
o Prior to September 1, 2002, Valero maintained the Valero Retail Plan
for the benefit of certain Valero store employees. Effective September
1, 2002, the Valero Retail Plan was merged into the Plan. Any
employees previously eligible to participate in the Valero Retail Plan
became eligible to participate in the Plan.
Participation
Participation in the Plan is voluntary and is open to Valero retail employees
who become eligible to participate. Prior to April 1, 2002, eligible employees
included all former UDS non-union employees and certain union employees who had
completed one year of service and who were at least 18 years old. Effective
April 1, 2002, for non-store employees other than certain union personnel and
HSB employees, effective May 16, 2002 for HSB employees, and effective July 1,
2002 for certain union employees, such former UDS non-store employees were no
longer eligible to participate in the Plan but became eligible to participate in
the Valero Energy Corporation Thrift Plan. Employees are eligible to participate
in Valero's employer matching contributions after completion of one year of
continuous service.
Contributions
Participants could contribute from 1% to 15% of their compensation, as defined
in the Plan, through July 31, 2002. Effective August 1, 2002, participants can
contribute up to 30% of their compensation. In addition, any employee may make
rollover contributions. For the years ended December 31, 2002 and 2001, rollover
contributions totaled $467,131 and $1,314,842, respectively, and are included in
employee contributions in the statements of changes in net assets available for
benefits. Valero contributes $0.60 for every $1.00 of the participant's
contribution up to 6% of compensation.
For each Plan Year beginning with the first Plan Year after December 31, 2001,
Valero may, at the discretion of the Valero Energy Corporation Board of
Directors or such other party as designated by such Board, make profit sharing
contributions to the Plan to be allocated to the accounts of the "Eligible
Members" as described in the plan document. For the year ended December 31,
2002, the Administrative Committee approved a $3,867,055 profit sharing
contribution, which was funded in February of 2003.
The Internal Revenue Code (the Code) establishes an annual limitation on the
amount of individual pre-tax salary deferral contributions. This limit was
$11,000 and $10,500 for the years ended December 31, 2002 and 2001,
respectively. Effective September 1, 2002, participants who are eligible to make
pre-tax contributions and who have attained age 50 before the end of the year
are eligible to make an additional catch-up pre-tax contribution of up to
$1,000.
Forfeitures
In the event a participant terminates before becoming 100% vested in the
employer contributions, the nonvested employer contribution amounts held in the
participant's account will be forfeited. If the terminated participant receives
a distribution from the vested portion of his account and he resumes
7
VALERO SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS - (Continued)
employment as an employee, any portion of the participant's account forfeited
shall be restored if the participant repays to the Plan the full amount of his
distribution within five years after re-employment. If the participant incurs
five consecutive one-year breaks in service or fails to repay the distribution
received from the vested portion of his account, the participant will
permanently forfeit the nonvested portion of his account. Forfeited amounts are
used to reduce future employer contributions or defray Plan administrative
expenses. During the years ended December 31, 2002 and 2001, employer
contributions were reduced by $10,193 and $159,066, respectively, from forfeited
nonvested accounts. As of December 31, 2002, $26 in unused forfeitures is
available for future use under the Plan.
Participant Accounts
Employer contributions are credited to an employer account for each participant
and employee contributions are credited to an employee account maintained under
the Plan for each participant. The employer and employee accounts for each
participant are adjusted to reflect all contributions, withdrawals, income,
expenses, gains and losses attributable to these accounts.
Vesting
Participants are vested 100% in their employee account at all times. Effective
January 1, 2002, participants become 20% vested in their employer account for
each year of service with 100% vesting after five years of service. Certain
participants are subject to accelerated vesting as a result of special Plan
provisions associated with past mergers. Participants vest in 100% of profit
sharing contributions if and when years of vesting service are five years or
more. However, a participant will be vested in 100% of his account balance upon
his death, disability, attainment of normal retirement age, as defined in the
Plan, and termination or partial termination of the Plan, as defined in the
Plan.
Investment Options
Participants direct the investment of 100% of their employee contributions and
may transfer existing account balances into any of the funds offered. The funds
offered include the Valero Energy Corporation Common Stock Fund, mutual funds,
and common/collective trusts investments. Employer contributions are invested in
Valero common stock. Effective January 1, 2002, participants may transfer 100%
of Valero's employer contributions to any other investment option offered.
Withdrawals and Distributions
A participant's vested account balance will be distributed after the later of
reaching normal retirement age (generally age 65) or termination from
employment, unless the participant elects an earlier distribution of his vested
account balance at the earlier of termination from employment or age 59 1/2.
Distributions can be made in the form of a single cash lump sum payment or
monthly installments not to exceed five years. The participant can also elect
that those funds in the Valero Common Stock Fund be distributed in the form of
Valero common stock as:
o A single payment; or
o For distributions elected through June 30, 2002, annual installments
over a period not to exceed the greater of his life expectancy or ten
years; or
o For distributions effective on or after July 1, 2002, annual
installments over a period not to exceed five years.
If the participant's vested account balance is less than $5,000, the
distribution cannot be deferred.
8
VALERO SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS - (Continued)
In the event of hardship, participants may withdraw a portion of their vested
account balance, subject to Administrative Committee approval. Effective August
1, 2002, hardship distributions may not be made more often than once in any
six-month period.
Upon completion of five years of participation in the Plan, a participant can
elect to withdraw any amount credited to his after-tax contribution account,
matching contributions account and profit sharing contributions account.
Additionally, the participant is eligible to elect another withdrawal upon the
completion of 36 months from the date of a previous withdrawal.
Participant Loans
Participants may borrow a minimum of $500 ($1,000 prior to August 1, 2002) up to
a maximum equal to the lesser of $50,000 or 50% of their vested account balance.
The participant may elect a repayment term of up to five years for
general-purpose loans or up to 15 years for the purchase of a primary residence
(10 years prior to August 1, 2002). The loan is secured by a lien on the
participant's vested account balance and bears interest at a reasonable rate as
determined by the Administrative Committee. Principal and interest is repaid
through payroll deductions. Effective August 1, 2002, a participant can have two
loans outstanding at any time.
Plan Expenses
Valero pays the administrative expenses of the Plan and provides certain other
services at no cost to the Plan.
2. Summary of Significant Accounting Policies
Basis of Accounting
The Plan's financial statements are prepared on the accrual basis of accounting
in accordance with United States generally accepted accounting principles.
Use of Estimates
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
that affect the amounts of assets and changes therein reported in the financial
statements, and disclosure of contingent assets and liabilities. Actual results
could differ from those estimates.
Valuation of Investments
Investments in mutual funds are valued at quoted market prices, which represent
the net asset value of shares held by the Plan as of December 31. The
investments in common/collective trusts are stated at fair value as determined
by the issuer of the fund based on the fair value of the underlying assets.
Self-directed investments are valued at quoted market prices as of December 31.
Participant loans are valued at cost which approximates fair value. Valero
common stock is valued at its quoted market price as of December 31.
9
VALERO SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS - (Continued)
Income Recognition
Purchases and sales of investments are recorded on a trade-date basis. Interest
income is recorded on the accrual basis. Dividends are recorded on the
ex-dividend date.
Net appreciation (depreciation) in fair value of investments consists of net
realized gains and losses on the sale of investments and net unrealized
appreciation (depreciation) of investments.
Withdrawals by Participants
Withdrawals by participants are recorded when paid.
Risks and Uncertainties
The Plan's investments, in general, are exposed to various risks, such as
interest rate, credit and overall market volatility risk. Due to the level of
risk associated with certain investments, it is reasonably possible that changes
in the value of investments will occur in the near term and that such changes
could materially affect participants' account balances and amounts presented in
the statements of net assets available for benefits.
3. Investments
Investments that represent 5% or more of the Plan's net assets are as follows:
December 31,
------------
2002 2001
---- ----
Vanguard PRIMECAP Fund.......................... $ - $ 50,876,590
Vanguard Retirement Savings Trust............... - 38,472,131
Vanguard Wellington Fund Investor Shares........ - 33,173,502
Vanguard 500 Index Fund Investor Shares......... - 26,106,977
UDS common stock:
UDS Common Stock Fund.......................... - 14,389,188
UDS ESOP1 Stock Fund*.......................... - 46,726,029
UDS ESOP2 Stock Fund*.......................... - 11,644,077
Valero Energy Corporation common stock.......... 9,726,656 -
Merrill Lynch Retirement Preservation Trust..... 9,051,856 -
The Oakmark Equity & Income Fund................ 4,319,806 -
------------------------------------------
* Nonparticipant-directed.
10
VALERO SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS - (Continued)
During the years ended December 31, 2002 and 2001, the Plan's investments
(including gains and losses on investments bought and sold, as well as held
during the year) appreciated (depreciated) in value as follows:
Years Ended December 31,
------------------------
2002 2001
---- ----
Mutual funds.......................................... $ (12,464,050) $ (17,924,869)
Common stock.......................................... 11,744,666 30,894,359
Self-directed investments............................. (23,931) 782
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Net appreciation (depreciation) in fair value of
investments......................................... $ (743,315) $ 12,970,272
============ ==========
4. Nonparticipant-Directed Investments
Effective January 1, 2002, employer contributions, including existing employer
contributions, can immediately be diversified into other funds. As a result, the
December 31, 2001 balance of nonparticipant-directed investments was transferred
to participant-directed investments effective January 1, 2002. Information about
the net assets and the changes in net assets relating to nonparticipant-directed
investments (comprised of the UDS ESOP1 Stock Fund and UDS ESOP2 Stock Fund) is
as follows:
December 31,
------------
2002 2001
---- ----
UDS common stock........................................... $ - $ 58,370,106
========== ==========
Years Ended December 31,
-----------------------
2002 2001
---- ----
Changes in nonparticipant-directed investments:
Interest and dividend income........................... $ - $ 856,465
Net appreciation in fair value of investments.......... - 25,441,892
Participant loan repayments............................ - 1,048
Asset transfers in from other plans.................... - 118,654
Benefits paid to participants.......................... - (3,619,969)
Transfers to participant-directed investments.......... (58,370,106) (9,598,156)
----------- -----------
Net increase (decrease) in nonparticipant-
directed investments................................ (58,370,106) 13,199,934
Balance as of beginning of year........................... 58,370,106 45,170,172
----------- ----------
Balance as of end of year................................. $ - $ 58,370,106
=========== ==========
11
VALERO SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS - (Continued)
5. Party In Interest Transactions
Certain Plan investments are shares of Valero common stock, and mutual funds and
common/collective trusts managed by Merrill Lynch. Transactions in these
investments qualify as party in interest transactions.
6. Plan Termination
Although it has not expressed any intent to do so, Valero has the right under
the Plan to discontinue or reduce its contributions and to terminate the Plan at
any time subject to the provisions of ERISA. In the event of plan termination,
participants will become 100% vested in their employer accounts.
7. Tax Status
The Internal Revenue Service has determined and informed Valero by a letter
dated September 30, 2002, that the Plan is designed in accordance with
applicable sections of the Code. Although the Plan has been amended since
receiving the determination letter, the Administrative Committee believes that
the Plan is designed and is currently being operated in compliance with the
applicable requirements of the Code.
8. Reconciliation of Financial Statements to Form 5500
The following is a reconciliation of net assets available for benefits per the
financial statements to the Form 5500 Annual Return/Report of Employee
Benefit Plan:
December 31,
------------
2002 2001
---- ----
Net assets available for benefits per the financial statements...... $ 34,926,617 $ 264,268,102
Amounts allocated to withdrawing participants..................... (3,907) (16,326)
---------- -----------
Net assets available for benefits per the Form 5500................. $ 34,922,710 $ 264,251,776
========== ===========
The following is a reconciliation of withdrawals by participants per the
financial statements to the Form 5500 Annual Return/Report of Employee Benefit
Plan:
Years Ended December 31,
------------------------
2002 2001
---- ----
Withdrawals by participants per the financial statements............ $ 57,062,470 $ 19,482,198
Add: Amounts allocated to withdrawing participants
as of end of year................................................ 3,907 16,326
Less: Amounts allocated to withdrawing participants
as of beginning of year.......................................... (16,326) (1,167)
---------- ----------
Benefits paid to participants per the Form 5500..................... $ 57,050,051 $ 19,497,357
========== ==========
12
SCHEDULE H, Line 4i
VALERO SAVINGS PLAN
EIN: 13-3663331
Plan No. 008
Schedule of Assets (Held at End of Year)
As of December 31, 2002
Identity of Issue/Description of Investment Current Value
------------------------------------------- -------------
Common stock:
*Valero Energy Corporation.................................... $ 9,726,656
----------
Common/collective trusts:
*Merrill Lynch Retirement Preservation Trust.................. 9,051,856
*Merrill Lynch Equity Index Trust............................. 1,286,696
----------
10,338,552
----------
Mutual funds:
The Oakmark Equity and Income Fund............................ 4,319,806
Multi-Cap Core Fund........................................... 1,488,627
*Merrill Lynch Basic Value Fund............................... 1,364,521
*Merrill Lynch Intermediate Corporate Bond Fund............... 794,818
American Century Ultra Fund................................... 661,058
Templeton Foreign Fund........................................ 148,927
American Funds EuroPacific Growth Fund........................ 116,612
Fidelity Magellan Fund........................................ 13,933
MFS Massachusetts Investors Growth Stock Fund................. 13,819
AIM Income Fund............................................... 5,383
*Merrill Lynch Global Allocation Fund......................... 4,090
----------
8,931,594
----------
*Participant loans (interest rates range from 7% - 11.5%)..... 1,930,471
Self-directed investments..................................... 7,944
----------
Total........................................................ $ 30,935,217
==========
-------------------------------------------------------------
* Party in interest to the Plan.
13
SIGNATURE
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934,
the Administrative Committee has duly caused this annual report to be signed on
its behalf by the undersigned hereunto duly authorized.
Valero Savings Plan
By: /s/ John D. Gibbons
------------------------------------------------
John D. Gibbons
Chairman, Administrative Committee and
Executive Vice President and Chief Financial Officer,
Valero Energy Corporation
Date: June 30, 2003
14