UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 1-11392
THE PREMCOR REFINING GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1491230
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8182 Maryland Avenue 63105-3721
St. Louis, Missouri (Zip Code)
(Address of principal executive offices)
CLARK REFINING & MARKETING, INC.
(Former name of registrant)
Registrant's telephone number, including area code (314) 854-9696
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 ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of August 11, 2000, 100, all of which were owned by
Premcor USA Inc.
1
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To the Board of Directors of The Premcor Refining Group Inc:
We have reviewed the accompanying consolidated balance sheet of The
Premcor Refining Group Inc. and Subsidiaries (the "Company") as of
June 30, 2000 and the related consolidated statements of operations for
the three-month and six-month periods ended June 30, 1999 and 2000, and
consolidated statements of cash flows for the six-month periods then
ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States of America, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be
in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated
balance sheet of the Company as of December 31, 1999, and the related
consolidated statements of operations, stockholder's equity, and cash
flows for the year then ended (not presented herein); and in our report
dated February 16, 2000, we expressed an unqualified opinion on those
consolidated financial statements.
Deloitte & Touche LLP
St. Louis, Missouri
August 2, 2000
2
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
Reference December 31, June 30,
Note 1999 2000
---------- ------------ ----------
(unaudited)
<S)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 284.9 $ 167.4
Short-term investments 1.4 1.4
Accounts receivable 197.1 346.6
Receivable from affiliates 7.4 5.4
Inventories 3 252.2 451.0
Prepaid expenses and other 37.1 34.2
------------ ----------
Total current assets 780.1 1,006.0
PROPERTY, PLANT, AND EQUIPMENT, NET 615.3 674.2
OTHER ASSETS 4 118.4 122.0
------------ ----------
$ 1,513.8 $ 1,802.2
============ ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 331.1 $ 552.3
Payable to affiliates 26.9 27.6
Accrued expenses and other 5 73.4 57.7
Accrued taxes other than income 39.4 38.5
------------ ----------
Total current liabilities 470.8 676.1
LONG-TERM DEBT 794.9 795.0
OTHER LONG-TERM LIABILITIES 64.8 67.7
COMMITMENTS AND CONTINGENCIES 8 -- --
COMMON STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and 100 shares
issued and outstanding) -- --
Paid-in capital 194.7 194.7
Retained earnings (deficit) (11.4) 68.7
------------ ----------
Total stockholder's equity 183.3 263.4
------------ ----------
$ 1,513.8 $ 1,802.2
============ ==========
The accompanying notes are an integral part of these statements.
3
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
For the Three Months
Ended June 30,
Reference ----------------------
Note 1999 2000
----------- ---------- ----------
NET SALES AND OPERATING REVENUES $ 1,059.6 $ 1,720.4
EXPENSES:
Cost of sales (960.0) (1,475.5)
Operating expenses (95.4) (109.0)
General and administrative expenses (12.4) (12.2)
Depreciation (8.7) (8.3)
Amortization 4 (6.9) (8.9)
Inventory recovery to market 3 9.6 --
---------- ----------
(1,073.8) (1,613.9)
---------- ----------
OPERATING INCOME (LOSS) (14.2) 106.5
Interest and finance costs, net 4, 5 (15.8) (15.4)
---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (30.0) 91.1
Income tax (provision) benefit 6 1.5 (0.2)
---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (28.5) 90.9
Discontinued operations, net of income
tax provision of $1.9 6 3.0 --
---------- ----------
NET EARNINGS (LOSS) $ (25.5) $ 90.9
========== ==========
The accompanying notes are an integral part of these statements.
4
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
For the Six Months
Ended June 30,
Reference ----------------------
Note 1999 2000
--------- ----------- ----------
NET SALES AND OPERATING REVENUES $ 1,956.6 $ 3,279.8
EXPENSES:
Cost of sales (1,780.2) (2,899.9)
Operating expenses (192.5) (212.9)
General and administrative expenses (25.6) (22.6)
Depreciation (17.4) (16.9)
Amortization 4 (12.0) (16.4)
Inventory recovery to market 3 105.8 --
----------- ----------
(1,921.9) (3,168.7)
----------- ----------
OPERATING INCOME 34.7 111.1
Interest and finance costs, net 4, 5 (32.0) (30.5)
---------- ----------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 2.7 80.6
Income tax (provision) benefit 6 2.6 (0.4)
----------- ----------
EARNINGS FROM CONTINUING OPERATIONS 5.3 80.2
Discontinued operations, net of income
tax provision of $3.0 6 4.9 --
----------- ----------
NET EARNINGS $ 10.2 $ 80.2
=========== ==========
The accompanying notes are an integral part of these statements.
5
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
For the Six Months
Ended June 30,
----------------------
1999 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 10.2 $ 80.2
Discontinued operations (4.9) --
Adjustments:
Depreciation 17.4 16.9
Amortization 14.9 20.4
Inventory recovery to market (105.8) --
Other, net 4.4 2.5
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other 12.0 (146.6)
Inventories 86.5 (198.8)
Accounts payable, accrued expenses, taxes other
than income and other 82.7 213.8
----------- ----------
Net cash provided by (used in)
operating activities of continuing operations 117.4 (11.6)
Net cash provided by operating activities of
discontinued operations 3.1 --
----------- ----------
Net cash provided by (used in)
operating activities 120.5 (11.6)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (112.9) (76.2)
Expenditures for turnaround (36.0) (21.7)
Proceeds from disposals of property, plant and
equipment -- 0.5
Purchases of short-term investments (3.2) (1.5)
Sales and maturities of short-term investments 2.9 1.5
Discontinued operations (1.8) --
----------- ----------
Net cash used in investing activities (151.0) (97.4)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments (1.6) (6.6)
Capital contribution returned (9.5) --
Deferred financing costs -- (1.9)
----------- ----------
Net cash used in financing activities (11.1) (8.5)
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (41.6) (117.5)
CASH AND CASH EQUIVALENTS, beginning of period 147.5 284.9
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 105.9 $ 167.4
=========== ==========
The accompanying notes are an integral part of these statements.
6
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
The Premcor Refining Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2000
(tabular dollar amounts in millions of U.S. dollars)
1. Basis of Preparation
The consolidated interim financial statements of The Premcor Refining
Group Inc. and Subsidiaries (formerly Clark Refining & Marketing, Inc.
and Subsidiaries, the "Company") have been reviewed by independent
accountants. In the opinion of the management of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of the financial statements have been included
therein. The financial statements are presented in accordance with the
disclosure requirements for Form 10-Q. These unaudited financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's 1999 Annual
Report on Form 10-K/A.
The Company changed its name effective May 10, 2000 pursuant to the
terms of a 1999 transaction with Apollo Management L.C. in which the
Company sold the retail marketing division as well as the Clark trade
name.
2. New Accounting Standard
In June 1998, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement, as amended, will
be adopted by the Company effective January 1, 2001. Management is
continuing to evaluate the impact the adoption of this standard will
have on the Company's financial position and results of operations.
Based on an initial analysis, management believes no material effect of
adoption is currently expected.
3. Inventories
The carrying value of inventories consisted of the following:
December 31, June 30,
1999 2000
------------ -----------
Crude oil ........................... $ 95.1 $ 208.5
Refined products and blendstocks .... 134.6 220.0
Warehouse stock and other............ 22.5 22.5
------------ -----------
$ 252.2 $ 451.0
=========== ===========
The market value of crude oil and refined product inventories at June
30, 2000 was approximately $179 million (December 31, 1999 - $78
million) above carrying value. In the first six months of 1999 there was
a $105.8 million recovery of a prior year write-down of inventory costs
to market. Included in inventory at June 30, 2000 were 1.6 million
barrels of crude oil, valued at $42.8 million, for which the Company did
not hold title but was obligated to repurchase at a fixed price on a
future date.
7
4. Other Assets
Amortization of deferred financing costs for the three- and six-month
periods ended June 30, 2000 was $2.0 million (1999 - $1.7 million) and
$3.9 million (1999 - $2.9 million) and was included in "Interest and
finance costs, net."
Amortization of refinery maintenance turnaround costs for the three-
and six-month periods ended June 30, 2000 was $8.9 million (1999 -
$6.9 million) and $16.4 million (1999 - $12.0 million).
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
1999 2000 1999 2000
--------- --------- -------- --------
Interest expense............. $ 18.5 $ 18.3 $ 37.1 $ 36.7
Financing costs.............. 1.7 2.0 3.0 4.0
Interest and finance income.. (1.2) (3.2) (2.9) (6.8)
--------- --------- -------- --------
19.0 17.1 37.2 33.9
Capitalized interest......... (3.2) (1.7) (5.2) (3.4)
--------- --------- -------- --------
$ 15.8 $ 15.4 $ 32.0 $ 30.5
========= ========= ======== ========
Cash paid for interest expense for the three- and six-month periods
ended June 30, 2000 was $17.7 million (1999 - $18.2 million) and $36.5
million (1999 - $37.2 million), respectively. Accrued interest payable
as of June 30, 2000 of $13.7 million (December 31, 1999 - $13.6 million)
was included in "Accrued expenses and other."
6. Income Taxes
The Company made net cash income tax payments during the three- and
six-month periods ended June 30, 2000 of $0.1 million (1999 - $0.8
million) and $0.8 million (1999 - $0.5 million). The income tax
provision that related to Discontinued Operations for the three- and
six-month periods ended June 30, 1999 was $1.9 million and $3.0
million, respectively. The income tax benefit for Continuing
Operations for the same periods was $1.5 million and $2.6 million,
respectively, which reflected the intraperiod utilization of net
operating losses.
7. Related Party Transactions
At June 30, 2000, the Company had a net outstanding receivable
balance of $0.5 million (December 31, 1999 - $0.4 million) from Port
Arthur Coker Company L.P. ("PACC"), consisting of a receivable of $0.6
million for services provided under a services and supply agreement and
fees paid by the Company on PACC's behalf and a $0.1 million payable for
the overpayment of such services in a prior period. These amounts may
be offset.
8. Commitments and Contingencies
The Company is subject to various legal proceedings related to
governmental regulations and other actions arising out of the normal
course of business, including legal proceedings related to environmental
matters. While it is not possible at this time to establish the ultimate
amount of liability with respect to the Company's contingent
liabilities, the Company is of the opinion that the aggregate amount of
any such liabilities, for which a provision has not been made, will not
have a material adverse effect on its financial position. However, an
adverse outcome of any one or more of these matters could have a
material effect on quarterly or annual operating results or cash flows
when resolved in a future period.
8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Financial Highlights
The following table reflects The Premcor Refining Group Inc.'s
(formerly Clark Refining & Marketing, Inc., the "Company") financial
and operating highlights for the three- and six-month periods ended June
30, 1999 and 2000. All amounts listed are dollars in millions, except
barrel and per barrel information. Certain information was restated to
reflect current period presentation. The table provides supplementary
data and is not intended to represent an income statement presented in
accordance with generally accepted accounting principles.
Operating Income:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
1999 2000 1999 2000
--------- -------- --------- --------
Port Arthur Refinery
Crude oil throughput (000 barrels 213.0 110.2 213.0 156.9
per day)
Production (000 barrels per day) 218.2 159.6 211.4 185.0
Gross margin
(per barrel of production) $ 1.99 $ 5.12 $ 2.09 $ 4.45
Gulf Coast 3/2/1 crack spread
(per barrel) 1.44 5.13 1.33 4.29
Operating expenses (38.9) (50.8) (79.1) (98.0)
Net margin $ 0.8 $ 23.7 $ 0.9 $ 51.9
Midwest Refineries and Other
Crude oil throughput (000 barrels 269.7 280.3 256.1 258.3
per day)
Production (000 barrels per day) 263.5 277.3 255.8 260.0
Gross margin
(per barrel of production) $ 2.56 $ 7.59 $ 1.95 $ 5.66
Chicago 3/2/1 crack spread
(per barrel) 2.97 8.19 2.38 6.33
Operating expenses (56.5) (58.2) (113.4) (114.9)
Net margin $ 4.9 $133.4 $ (23.2) $ 152.7
General and administrative expenses (12.4) (12.2) (25.6) (22.6)
--------- -------- --------- --------
Operating Contribution (loss) $ (6.7) $144.9 $ (47.9) $ 182.0
Inventory timing adjustment gain
(loss) (a) (1.5) (21.2) 6.2 (37.6)
Inventory recovery to market 9.6 -- 105.8 --
Depreciation and amortization (15.6) (17.2) (29.4) (33.3)
--------- -------- --------- --------
Operating income (loss) $(14.2) $106.5 $ 34.7 $ 111.1
========= ======== ========= ========
(a) Includes adjustments to inventory costs caused by differences
between when and how crude oil is actually purchased, refined products
are actually sold and inventories are managed, and a daily "market in,
market out" operations measurement methodology.
The Company had record net earnings from continuing operations of
$90.9 million in the second quarter of 2000 as compared to a net loss
from continuing operations of $28.5 million in the same period a year
ago. For the six-month period ended June 30, 2000, the Company had net
earnings from continuing operations of $80.2 million as compared to $5.3
million for the same period last year. Net earnings from continuing
operations in the three- and six-month periods ended June 30, 1999
included $9.6 million and $105.8 million, respectively, of after-tax
recoveries of previous writedowns of inventory costs to market value.
Excluding these non-cash items, net earnings from continuing operations
improved $129.0 million and $180.7 million in the second quarter and
first half of 2000, respectively, from the year-ago period. Net sales
and operating revenues increased approximately 62% and 68% in the second
quarter and first half of 2000 as compared to the same periods of 1999,
and cost of sales increased approximately 54% and 63% in the second
quarter and first half of 2000 as compared to the same period of 1999.
The increase in net sales and operating revenues and cost of sales was
principally due to higher petroleum prices resulting from lower world-
wide petroleum inventories.
9
Operating Contribution (earnings before interest, depreciation,
amortization, inventory-related items and taxes) of $144.9 million in
the second quarter of 2000 was improved versus an Operating Contribution
loss of $6.7 million in the same period of 1999. Operating Contribution
of $182.0 million in the first half of 2000 was also improved versus an
Operating Contribution loss of $47.9 million in the same period of 1999.
Both the second quarter and year-to-date 2000 results were impacted by
dramatic improvements in margins for light products (gasoline and
distillates) versus 1999. Operating income was reduced by $21.2 million
and $37.6 million in the second quarter and first half of 2000 due to
the negative impact of inventory timing adjustments. Market conditions
were volatile and backwardated in the second quarter and first half of
2000 resulting in the negative impact of inventory timing adjustments.
Backwardation occurs when the future price of a product is less than the
price in the current trading month.
Operating Contribution improved in the second quarter and first
half of 2000 as compared to the same periods last year due to strong
refined product market conditions, particularly in the Midwest as low
U.S. inventory levels, the mandated introduction of a new summer-grade
reformulated gasoline, supply disruptions, and solid demand combined to
tighten the supply and demand balance. The improvement in light product
margins was reflected by improvements in 3/2/1 crack spreads, which are
indicators of refining margins based on quoted market prices. The 3/2/1
crack spread is calculated by subtracting the price for three barrels of
WTI crude oil from the price of two barrels of regular unleaded gasoline
and one barrel of high sulfur diesel fuel, and dividing the total by
three. In the second quarter of 2000, the Gulf Coast crack spread
averaged $5.13 per barrel versus $1.44 per barrel in 1999, and the
average Chicago crack spread increased to $8.19 per barrel compared to
$2.97 per barrel last year. The particularly steep increase in the
Chicago crack spread was attributed to supply disruptions caused by
leaks and other interruptions in pipelines and to industry production
challenges in the manufacturing of the mandated phase II reformulated
gasoline requirement for the Chicago and Milwaukee markets. In the
first half of 2000, 3/2/1 crack spreads in the Gulf Coast market
averaged $4.29 per barrel versus only $1.33 per barrel for the same
period in 1999, and the Chicago market averaged $6.33 per barrel versus
$2.38 per barrel for the same period in 1999. Crack spreads in both
markets began the third quarter at lower levels, but in excess of 1999.
The improved light product margins were partially offset by high and
volatile feedstock costs. This was particularly evident in margins for
heavy products, such as petroleum coke and residual fuel, that did not
track the increase in feedstock prices in the period.
Crude oil throughput rates at the Port Arthur refinery were
significantly reduced in the second quarter of 2000 by a planned 33-day
maintenance turnaround of the crude unit and subsequent unscheduled 11-
day downtime of the crude unit. The maintenance turnaround reduced
crude oil throughput in the second quarter of 2000 by approximately
80,000 barrels per day, and the unscheduled downtime reduced crude oil
throughput by approximately 30,000 barrels per day. During these
periods the refinery was able to produce some products, but at a reduced
rate. Crude oil throughput rates at the Port Arthur refinery were lower
for the six-month period ended June 30, 2000 principally due to the
maintenance turnaround in the second quarter and reduced rates
associated with weak margins early in the first quarter. The Company
planned lower operating rates at all four facilities due to weak margin
conditions in the fourth quarter of 1999 and early in the first quarter
of 2000.
During the second quarter of 2000, the Midwest refineries ran
close to full crude oil throughput rates, with only a week of reduced
rates at the Blue Island refinery due to a power disruption from an
electrical supplier. During the first six months of 2000, the Midwest
refineries were below full utilization due to reduced rates associated
with weak margins early in the first quarter and unplanned downtime.
Operating expenses at the Port Arthur refinery increased during
the second quarter and first half of 2000 due to higher energy and
repair and maintenance expenses. Natural gas prices increased in the
second quarter and first half of 2000 increasing operating expenses by
$5 million and $12 million, respectively, versus 1999. General and
administrative expenses in the first half of 2000 were lower than 1999
due to costs eliminated by the sale of the Company's refined product
terminals and Y2K remediation costs incurred in 1999.
10
Other Financial Highlights
Depreciation and amortization expenses increased in the three- and
six-month periods ended June 30, 2000 over the comparable periods in
1999 principally because of higher amortization of turnaround costs
associated with Lima refinery turnarounds performed in 1999. Interest
and finance costs, net for the three- and six-month periods ended June
30, 2000 were lower than 1999 principally due to increased interest
income resulting from higher invested balances and interest rates.
Liquidity and Capital Resources
Net cash provided by operating activities, excluding working
capital changes, for the six months ended June 30, 2000 was $120.0
million compared to cash used of $63.8 million in the year-earlier
period. Working capital as of June 30, 2000 was $329.9 million, a 1.49-
to-1 current ratio, versus $309.3 million as of December 31, 1999, a
1.66-to-1 current ratio. The improvement in net cash provided by
operating activities, excluding working capital changes, principally
resulted from the improved industry market conditions.
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil and refined
petroleum products. The Company has in place a credit agreement which
provides for the issuance of letters of credit up to the lesser of $625
million or the amount of a borrowing base calculated with respect to the
Company's cash and eligible cash equivalents, eligible investments,
eligible receivables, eligible petroleum inventories, paid but unexpired
letters of credit, and net obligations on swap contracts. The credit
agreement also provides for direct cash borrowings up to $50 million.
Borrowings under the credit agreement are secured by a lien on
substantially all of the Company's cash and cash equivalents,
receivables, crude oil and refined product inventories and trademarks.
The borrowing base associated with such facility at June 30, 2000 was
$896 million and approximately $525 million of the facility was utilized
for letters of credit. In addition, the Company had cash collateralized
arrangements with certain lenders to issue up to $70 million of letters
of credit for the Company's commitments associated with a heavy oil
upgrade project at its Port Arthur refinery and for non-hydrocarbon
items. The total outstanding letters of credit under this arrangement
was $60.8 million as of June 30, 2000. As of June 30, 2000, there were
no direct borrowings under the credit agreement. The credit agreement
expires on June 30, 2001.
In 1998, the Company began an upgrade project at its Port Arthur
refinery that included the construction of new coking, hydrocracking,
sulfur removal capability, and the expansion of the existing crude unit
capacity to 250,000 barrels per day (the "Refinery Upgrade Project").
The Refinery Upgrade Project will allow the refinery to process
primarily lower-cost, heavy sour crude oil. In the third quarter of
1999, the Company sold a portion of the work in progress and certain
other assets to Port Arthur Coker Company L.P. ("PACC"), a company that
is an affiliate of, but not controlled by, the Company. PACC financed
and is completing the construction of the new coking, hydrocracking, and
sulfur removal facilities. The Company expanded its crude unit capacity
and is making certain other improvements that are part of Refinery
Upgrade Project. With the completion of the second quarter maintenance
turnaround, the crude unit capacity was expanded to 250,000 barrels per
day from 232,000 barrels per day. As of June 30, 2000, the Company's
portion of the Refinery Upgrade Project was over 85% complete. PACC and
the Company have entered into certain agreements associated with the
Refinery Upgrade Project and continuing operations. The Refinery
Upgrade Project is expected to begin operations and revenue generation
in the first quarter of 2001 with operations in the initial three to six
months at less than full capacity. PACC currently plans to turn over the
sulfur plant to operations in September of 2000 and the coker and
hydrocracker in late October or early November at which time
commissioning activities are expected to begin. This schedule is
subject to change. Operator training began on a full time basis in May
2000. Additional information regarding the Refinery Upgrade Project is
included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1999.
11
Cash flows used in investing activities in the first half of 2000
were $97.4 million as compared to $151.0 million in the year-earlier
period reflecting lower maintenance turnaround and capital expenditures
in 2000. In the first half of 1999, the Lima, Port Arthur, and Blue
Island refineries had maintenance turnaround activity totaling $36.0
million, while most of the $21.7 million of maintenance turnaround costs
in 2000 were due to the Port Arthur turnaround in the second quarter.
Capital expenditures were $76.2 million in the first six months of 2000
versus $112.9 million in the same period of 1999. Capital expenditures
associated with the Refinery Upgrade Project were $57.0 million in the
first half of 2000 versus $96.9 million in the first half of 1999. As
noted above, a portion of the Refinery Upgrade Project expenditures
incurred in 1998 and 1999 were sold to PACC in August 1999. The Company
has invested $107.8 million, net in the Refinery Upgrade Project since
its inception.
Cash flows used in financing activities for the first six months
of 2000 were lower as compared to the same period in 1999 principally
because of the return of a capital contribution of $9.5 million to
Premcor USA Inc. in 1999 for its interest payment on 10 7/8% Senior
Notes. The decrease was offset by a balloon payment due upon expiration
of a capital lease and additional costs of expanding the Company's
credit agreement in 2000 to $625 million from the $540 million
originally put into place in November 1999.
Premcor USA Inc., the 100% owner of the Company, relies on the
Company for substantially all of its liquidity in order to meet its
interest and other costs. Premcor USA Inc. is required to make interest
payments on its 10 7/8% Notes due 2005 of $9.5 million on June 1 and
December 1 of each year and expects its other costs to total less than
$1 million per year. As of June 30, 2000, cash, cash equivalents, and
short-term investments owned by Premcor USA Inc. without restriction
amounted to $12.1 million. In August 2000, the Company returned capital
of $26 million to Premcor USA Inc. for future interest payments.
Funds generated from operating activities together with existing
cash, cash equivalents and short-term investments and proceeds from
asset sales are expected to be adequate to fund existing requirements
for working capital and capital expenditure programs for the Company for
the next year. Due to the commodity nature of its feedstocks and
products, the Company's operating results are subject to rapid and wide
fluctuations. While the Company believes its maintenance of large cash,
cash equivalents and short-term investment balances and its operating
philosophies will be sufficient to provide the Company with adequate
liquidity through the next year, there can be no assurance that market
conditions will not be worse than anticipated. Future working capital,
discretionary capital expenditures, environmentally mandated spending
and acquisitions may require additional debt or equity capital.
Forward-Looking Statements
Certain statements in this document are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements
are subject to the safe harbor provisions of this legislation. Words
such as "expects," "intends," "plans," "projects," "believes,"
"estimates" and similar expressions typically identify such forward-
looking statements.
Even though the Company believes its expectations regarding future
events are based on reasonable assumptions, forward-looking statements
are not guarantees of future performance. There are many reasons why
actual results could, and probably will, differ from those contemplated
in the Company's forward-looking statements. These include, among
others, changes in:
* Industry-wide refining margins
* Crude oil and other raw material costs, embargoes, industry
expenditures for the discovery and production of crude oil, and
military conflicts between, or internal instability in, one or more
oil-producing countries, and governmental actions
* Market volatility due to world and regional events
12
* Availability and cost of debt and equity financing
* Labor relations
* U.S. and world economic conditions
* Supply and demand for refined petroleum products
* Reliability and efficiency of the Company's operating facilities.
There are many hazards common to operating oil refining and
distribution facilities. Such hazards include equipment
malfunctions, plant construction/repair delays, explosions, fires,
oil spills and the impact of severe weather
* Actions taken by competitors which may include both pricing and
expansion or retirement of refinery capacity
* The enforceability of contracts
* Civil, criminal, regulatory or administrative actions, claims or
proceedings and regulations dealing with protection of the
environment, including refined petroleum product composition and
characteristics
* Other unpredictable or unknown factors not discussed
Because of all of these uncertainties, and others, you should not
place undue reliance on the Company's forward-looking statements.
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
During the start up of the fluid catalytic cracking unit at the Blue
Island refinery in June 2000, following a power outage, a malfunction
resulted in the accidental release into the air of an estimated 22 tons
of non-toxic catalyst. The Company immediately commenced and is
continuing an effort to address and resolve the claims and concerns of
the communities and local residents impacted by the release. However,
as a result of this release two class actions (Madrigal et al. v. Clark
and Mason et al. v. Clark) were filed against the Company seeking
unspecified recovery for alleged property damage and personal injury.
The Company is in the process of reviewing the complaints in order to
prepare its answers and plans to vigorously defend these lawsuits.
As a result of a multimedia investigation by the Environmental
Protection Agency at the Blue Island refinery during March 1997, civil
and criminal proceedings were initiated by the federal government. The
Company, federal agencies, and state agencies have reached an agreement
in principle on a resolution of the civil issues arising from that
investigation as well as all outstanding state enforcement issues. The
agreement requires the payment of a fine by the Company of
approximately $2.5 million, changes and enhancements to certain
operating practices and procedures, and installation of a wet gas
scrubber on the fluid catalytic cracker unit at the refinery. The
parties have begun the process of negotiating the language of a consent
decree incorporating these agreements in principle. The Company
anticipates that an agreement will be reached and the consent decree
will be entered by the end of the year. The Company does not believe
that compliance with the proposed consent decree will have a material
adverse effect on the results of operations or financial position of
the Company.
The criminal proceeding arising out of the multimedia investigation
was commenced by issuance of a grand jury subpoena in March 1997
requesting certain documents relating to wastewater discharges. Since
that time the Company has been cooperating fully in the grand jury
investigation. The investigation is on-going and during 2000 a number
of current and former Company employees have been interviewed by the
United States Attorney and/or have appeared before the grand jury.
The Company believes that the Company and two former employees are
targets of the investigation. The Company also believes the
investigation relates to alleged incomplete reporting of the analytical
results of sampling of non-hazardous wastewater sent to the local
Metropolitan Water Reclamation District for treatment during 1994
through 1996. Wastewater from the Blue Island refinery is sent to the
Metropolitan Water Reclamation District, which further treats the
wastewater and then discharges it. The Company is engaged in on-going
discussions with the United States Attorney in an attempt to resolve
this matter. However, there can be no certainty that an agreement will
be reached. The Company does not believe that this matter will have a
material adverse effect on the results of operations or financial
position of the Company.
A tentative resolution has been reached in a civil administrative
action initiated by the federal government at the Hartford refinery in
July 1999. This action alleged violations of the Emergency Planning and
Community Right-to-Know Act, and regulations promulgated thereunder
with respect to certain record keeping and reporting requirements. The
matter was tentatively resolved by agreement by the Company to pay a
civil penalty of $50,000 and undertake a supplemental environmental
project valued at $175,000. The parties are in the process of
negotiating a definitive agreement incorporating the terms of this
conceptual settlement. However, there can be no certainty that such
an agreement will be successfully negotiated.
ITEM 5 - Other Information
Company Name Change
Effective May 10, 2000 the Company changed its name to The Premcor
Refining Group Inc. from Clark Refining & Marketing, Inc. In connection
with this name change, the following affiliated companies have also
changed their names:
New Name Former Name
----------- -------------
Ultimate Parent:
Premcor Inc. Clark Refining Holdings Inc.
Parent Company and Subsidiary:
Premcor USA Inc. Clark USA, Inc.
The Premcor Pipeline Co. Clark Pipe Line Company
Subsidiaries:
Premcor Investments Inc. Clark Investments, Inc.
Premcor P.A. Pipeline Company Clark Port Arthur Pipe Line Company
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
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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.
THE PREMCOR REFINING GROUP INC.
(Registrant)
/s/ Dennis R. Eichholz
-----------------------------------
Dennis R. Eichholz
Controller and Treasurer
(Principal Accounting Officer)
August 11, 2000