1
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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 September 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 1-11392
CLARK REFINING & MARKETING, 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)
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 Echange Act
1934 during the preceeding 12 months (or 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 October 20, 1994: 100, all of which are indirectly owned by The Horsham
Corporation.
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2
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of
Clark Refining & Marketing, Inc.:
We have reviewed the accompanying balance sheet of Clark Refining &
Marketing, Inc. (a Delaware corporation and wholly-owned subsidiary of Clark
USA, Inc.) as of September 30, 1994, and the related statements of earnings
for the three and nine-month periods ended September 30, 1994 and 1993 and
cash flows for the nine-month periods ended September 30, 1994 and 1993.
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 obtaining an understanding of
the system for the preparation of interim financial information, applying
analytical review procedures to the financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally
accepted auditing standards, 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 the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Clark Refining & Marketing, Inc. as
of December 31, 1993, and the related statements of earnings, stockholder's
equity, and cash flows for the year then ended (not presented herein); and in
our report dated January 28, 1994, we expressed an unqualified opinion on
those statements.
In our opinion, the information set forth in the accompanying balance
sheet as of December 31, 1993 is fairly stated, in all material respects,
in relation to the financial statements from which it has been derived.
Coopers & Lybrand L.L.P.
St. Louis, Missouri,
October 24, 1994
3
CLARK REFINING & MARKETING, INC.
BALANCE SHEETS
(Dollars in thousands except per share data)
Reference September 30, December 31,
Note 1994 1993
--------- ------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 40,558 $ 60,771
Short-term investments 2 122,275 133,752
Accounts receivable 81,951 58,103
Inventories 3 151,217 147,961
Prepaid expenses and other 17,726 15,573
------- -------
Total current assets 413,727 416,160
PROPERTY, PLANT AND EQUIPMENT 394,875 360,945
OTHER ASSETS 4 35,846 34,349
-------- --------
$844,448 $811,454
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $144,759 $138,321
Accrued expenses and other 5 38,518 43,151
Accrued taxes other than income 33,223 30,860
------- -------
Total current liabilities 216,500 212,332
LONG-TERM DEBT 400,451 401,038
DEFERRED TAXES 39,900 35,248
LIABILITY FOR POSTRETIREMENT BENEFITS 17,811 16,858
CONTINGENCIES 6 -- --
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and 100
shares issued and outstanding)
Paid-in capital 30,000 30,000
Retained earnings 2 139,786 115,978
------- -------
Total stockholder's equity 169,786 145,978
------- -------
$844,448 $811,454
======= =======
The accompanying notes are an integral part of these statements.
4
CLARK REFINING & MARKETING, INC.
STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands)
For the three months
Reference ended September 30,
Note 1994 1993
--------- --------- ---------
NET SALES AND OPERATING REVENUES $ 689,265 $ 549,024
EXPENSES:
Cost of sales (597,442) (459,053)
Operating expenses (58,611) (56,219)
General and administrative expenses (7,742) (6,667)
Depreciation (6,726) (5,864)
Amortization 4 (2,354) (3,141)
Reversal of inventory write-down to market 3 -- --
--------- ---------
(672,875) (530,944)
--------- ---------
OPERATING INCOME 16,390 18,080
Interest and financing costs, net 4,5 (8,772) (8,607)
Other income -- --
-------- -----
EARNINGS BEFORE TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,618 9,473
Income tax provision (2,568) (3,244)
------ ------
EARNINGS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 5,050 6,229
Cumulative effect of change in accounting
principle -- --
------- -----
NET EARNINGS 5,050 6,229
======= =======
The accompanying notes are an integral part of these statements.
5
CLARK REFINING & MARKETING, INC.
STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands)
For the nine months
Reference ended September 30,
Note 1994 1993
--------- ---------- ----------
NET SALES AND OPERATING REVENUES $ 1,842,209 $ 1,719,067
EXPENSES:
Cost of sales (1,574,837) (1,485,186)
Operating expenses (174,392) (162,009)
General and administrative expenses (23,103) (19,350)
Depreciation (19,853) (17,244)
Amortization 4 (8,087) (8,652)
Reversal of inventory write-down to market 3 26,500 --
---------- ----------
(1,773,772) (1,692,441)
---------- ----------
OPERATING INCOME 68,437 26,626
Interest and financing costs, net 4,5 (25,738) (21,714)
Other income -- 11,370
--------- ---------
EARNINGS BEFORE TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 42,699 16,282
Income tax provision (15,691) (5,841)
--------- ---------
EARNINGS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 27,008 10,441
Cumulative effect of change in accounting
principle (net of taxes of $5,992) -- (9,595)
-------- ---------
NET EARNINGS 27,008 846
========= =========
The accompanying notes are an integral part of these statements.
6
CLARK REFINING & MARKETING, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the nine months
ended September 30,
1994 1993
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 27,008 $ 846
Cumulative effect of change in accounting principle -- 9,595
Adjustments:
Depreciation 19,853 17,244
Amortization 8,969 9,540
Share of earnings of affiliates, net of dividends (610) 15
Deferred taxes 17,133 6,935
Reversal of inventory write-down to market (26,500) --
Other 953 953
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other (38,971) (3,647)
Inventories 23,244 (11,349)
Accounts payable, accrued expenses, taxes other
than income, and other 1,261 (14,324)
-------- --------
Net cash provided by operating activities 32,340 15,808
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (94,498) (92,835)
Sales of short-term investments 100,875 160,902
Expenditures for property, plant and equipment (56,846) (55,381)
Expenditures for refinery turnaround (5,873) (17,989)
Proceeds from disposals of property, plant
and equipment 5,268 4,477
Payment received on note receivable -- 10,000
Other investing activity -- (201)
------- -------
Net cash provided by (used in) investing activities (51,074) 8,973
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (587) (315)
Deferred financing costs (892) (579)
Other -- 299
-------- --------
Net cash used in financing activities (1,479) (595)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (20,213) 24,186
CASH AND CASH EQUIVALENTS, beginning of period 60,771 18,643
------- -------
CASH AND CASH EQUIVALENTS, end of period 40,558 42,829
======== ========
The accompanying notes are an integral part of these statements.
7
FORM 10-Q - PART I
ITEM 1 FINANCIAL STATEMENTS (continued)
Clark Refining & Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 1994
(tabular dollar amounts in thousands of US dollars)
1. Basis of Preparation
The unaudited balance sheet of Clark Refining & Marketing, Inc. (the
"Company"), a Delaware corporation and wholly-owned subsidiary of Clark USA,
Inc., as of September 30, 1994, and the related statements of earnings for the
three month and nine month periods ended September 30, 1994 and 1993, and
statements of cash flows for the nine month periods ended September 30, 1994
and 1993, 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 results of this interim period
are not necessarily indicative of results for the entire year.
The financial statements have been prepared in accordance with the
instructions to Form 10-Q. Accordingly, certain information and disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These unaudited statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1993.
2. Short-term Investments
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). This standard requires the
classification of short-term investments into three categories and many debt
securities to be shown at fair value on the balance sheet. The Company's
short-term investments are all considered "Available-for-Sale" and are
carried at fair value with the resulting unrealized gain or loss shown as a
component of retained earnings.
Short-term investments consisted of the following:
September 30, 1994 December 31, 1993
Major Security Amortized Unrealized Aggregate Amortized Unrealized Aggregate
Type Cost Gain/(Loss) Fair Value Cost Gain/(Loss) Fair Value
- -------------------------------------------------------------------------------
U.S. Debt
Securities $ 42,819 $(1,597) $ 41,222 $ 52,646 $ 43 $ 52,689
Variable Rate Government
Funds 54,726 (3,158) 51,568 55,506 (423) 55,083
Corporate Debt
Securities 20,158 (115) 20,043 12,651 146 12,797
Mortgage Backed Debt
Securities 9,672 (230) 9,442 12,949 (173) 12,776
------- ------- ------ ------ ------ --------
$127,375 $(5,100) $122,275 $133,752 $ (407) $ 133,345
======= ======= ======= ======= ====== ========
The contractual maturities of the short-term investments at
September 30, 1994 were:
Amortized Aggregate
Cost Fair Value
--------- ----------
Due in one year or less* $ 78,306 $ 75,121
Due after one year through
five years 44,105 42,314
Due after five years 4,964 4,840
------- ------
$ 127,375 $ 122,275
========= =========
*Includes the Variable Rate Government Funds for which the underlying
investments may have contractual maturities greater than one year.
8
Although some of the contractual maturities of these short-term
investments are over one year,management's intent is to use the funds for
current operations and not hold the investments to maturity.
For the three month and nine month periods ended September 30, 1994,
the proceeds from sales of Available-for-Sale securities was $50.8 million
and $99.1 million, respectively, with $1.0 million and $1.8 million,
respectively, of realized losses recorded for the three month and nine
month periods. For the same periods in 1993, the proceeds from the sale of
Available-for-Sale securities was $64.0 million and $160.9 million,
respectively, with immaterial realized gains in each period. Realized gains
and losses are computed using the specific identification method. In October
1994, the Company sold investments totaling $96.6 million at cost and realized
a loss of approximately $3.4 million that had previously been recorded as a
reduction of stockholder s equity.
The change in the unrealized holding gains or losses on Available-for-
Sale securities for the three month and nine month periods ended
September 30, 1994, was $0.1 million ($0.0 million after taxes) and $5.1
million ($3.2 million after taxes), respectively. This net unrealized loss is
included as a component of retained earnings. The unrealized loss was not
recognized in 1993 as SFAS 115 had not yet been adopted by the Company,
therefore, the carrying value at December 31, 1993 was the adjusted cost of
the short-term investments.
3. Inventories
The carrying value of inventories consisted of the following:
September 30, December 31,
1994 1993
----------- -----------
Crude oil......................... $ 59,943 $ 53,860
Refined and blendstocks........... 72,000 102,604
Convenience products.............. 13,645 12,044
Warehouse stock and other......... 5,629 5,953
Inventory write-down to market.... -- (26,500)
----------- -----------
$ 151,217 $ 147,961
=========== ===========
The market value of these inventories at September 30, 1994, was
approximately $5.2 million above the carrying value. Inventories at
December 31, 1993 were written down to market value which was $26.5 million
lower than the carrying cost. In the first half of 1994, crude oil and
related refined product prices rose substantially, allowing the reversal of
the inventory write-down to market.
In the third quarter, the Company increased its line of credit, used
primarily for the issuance of letters of credit for securing purchases of
crude oil, from $100 million to $120 million principally due to rising
crude oil costs and a change in crude oil supply.
4. Other Assets
Amortization of deferred financing costs for the three month and nine
month periods ended September 30, 1994, was $0.3 million (1993 - $0.3 million)
and $0.9 million (1993 - $0.9 million), respectively, and is included in
"Interest and financing costs, net".
Amortization of turnaround costs for the three month and nine month
periods ended September 30, 1994, was $2.4 million (1993 - $3.1 million) and
$8.1 million (1993 - $8.6 million), respectively.
9
5. Interest and Financing Costs, Net
Interest and financing costs, net, consisted of the following:
For the three months For the nine months
ended September 30, ended September 30,
1994 1993 1994 1993
-------- -------- -------- --------
Interest expense $ 10,118 $ 11,351 $ 30,466 $ 30,298
Financing costs 352 376 1,025 1,147
Interest income (918) (2,309) (4,268) (7,403)
-------- -------- -------- --------
9,552 9,418 27,223 24,042
Capitalized interest (780) (811) (1,485) (2,328)
-------- -------- -------- --------
$ 8,772 $ 8,607 $ 25,738 $ 21,714
======== ======== ======== ========
Accrued interest payable at September 30, 1994, of $8.7 million
(December 31, 1993 - $6.9 million) is included in "Accrued expenses and other".
6. Contingencies
Forty-one civil suits by residents of Hartford, Illinois have been filed
against the Company in Madison County Illinois, alleging damage from
groundwater contamination. The relief sought in each of these cases is an
unspecified dollar amount. The litigation proceedings are in the initial
stages. Discovery, which could be lengthy and complex, is still in the early
stages. The Company moved to dismiss thirty-four cases filed in December 1991
on the ground that the Company is not liable for alleged activity of Old
Clark. On September 4, 1992, the trial court granted the Company's motions to
dismiss. The plaintiffs were given leave to re-file their complaints but
based only on alleged activity of the Company occurring since November 8,
1988, the date on which the bankruptcy court with jurisdiction over Old
Clark's bankruptcy proceedings issued its "free and clear" order. In November
1992, the plaintiffs filed thirty-three amended complaints. In addition, one
new complaint involving nine plaintiffs was filed. It is too early to predict
whether any of these cases will go to trial on the merits and if so, what the
risk of exposure to the Company would be at trial. It is also not possible to
determine whether or to what extent the Company will have any liability to
other individuals arising from the groundwater contamination.
The Company is subject to various legal proceedings related to an age
discrimination class action lawsuit, 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 such
contingent liabilities, the Company is of the opinion that the aggregate
amount of any such liabilities, for which provision has not been made, will
not have a material adverse effect on its financial position, however, an
adverse outcome of these matters could have a material effect on quarterly or
annual operating results when resolved in a future period.
7. Pending Asset Acquisition
On August 18, 1994, the Company entered into an asset purchase agreement
(the "Purchase Agreement" ) for the purchase of Chevron USA, Inc.'s Port
Arthur, Texas refinery and certain related terminals, pipelines, and other
assets for $74 million, plus approximately $140 million for inventory and
spare parts (depending upon prevailing market prices for inventory at
closing). The Purchase Agreement also provides for contingent payments to
Chevron of up to $125 million over a five year period from the closing date
of the acquisition in the event refining industry margin indicators exceed
certain escalating levels. Chevron will retain primary responsibility for
required remediation of most pre-closing environmental contamination with the
Company retaining responsibility for the soil under the active operating
units.
The closing is subject to the completion of certain environmental
assessments and agreements with certain collective bargaining units. A late
1994 closing is expected for the transaction.
10
8. Public Stock and Debt Offering
In order to finance a portion of the Port Arthur refinery acquisition,
Clark anticipates receiving a capital contribution from Clark USA as a result
of their public offering of 7,500,000 shares of common stock and a $100
million note offering. The closing of the common stock offering and the note
offering are conditional upon the closing of each other and upon the closing
of the Port Arthur acquisition.
In anticipation of the initial public offering by Clark USA and prior to
its effective date, Clark is seeking consents from the holders of its 9 1/2%
Notes and its 10 1/2% Notes, to waive or modify the terms of certain covenants
under the indentures governing these securities.
The purpose of the consent solicitation is, among other things, to permit
Clark to increase the amount of its authorized working capital facility in
connection with the Port Arthur acquisition and to incur additional tax-exempt
indebtedness for capital expenditures.
In the event the consents are effected, Clark will make a payment to each
holder whose duly executed consent is received and not revoked. A consent
payment, in an amount to be determined, will be made in cash for each $1,000
in principal amount of the 9 1/2% Notes and the 10 1/2% Notes.
In connection with the above transactions, Clark proposes to enter into a
new three year revolving credit facility, collateralized by all of Clark's
current assets and certain intangibles. The amount of the facility will
initially be the lesser of $220 million or the amount available under a
borrowing base, as defined, representing specified percentages of cash,
investments, receivables, inventory and other working capital items. Upon
consummation of the common stock offering, the note offering and the Port
Arthur acquisition, the facility will increase to the lesser of $450 million
or the amount available under the borrowing base.
11
ITEM 2 Management's
Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three and nine month periods ended September 30, 1994 and
1993. All dollars listed are in millions except per barrel, per gallon and
per store information.
Financial Results: (a)
For the three months For the nine months
ended September 30, ended September 30,
1994 1993 1994 1993
-------------------- -------------------
Net sales and operating
revenues $ 689.3 $ 549.0 $1,842.2 $ 1,719.1
Cost of sales (597.4) (459.1) (1,574.8) (1,485.2)
Operating expenses (58.6) (56.2) (174.4) (162.0)
General and administrative
expenses (7.7) (6.7) (23.1) (19.4)
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Adjusted EBITDA (b) 25.6 27.0 69.9 52.5
Depreciation and amortization (9.1) (9.0) (27.9) (25.9)
Interest and financing costs,
net (8.8) (8.6) (25.7) (21.7)
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Earnings before income taxes (c) 7.7 9.4 16.3 4.9
Income tax (provision)
benefit (c) (2.6) (3.2) (5.7) (1.7)
-----------------------------------------------------------------------------
Earnings before unusual items (c) 5.1 6.2 10.6 3.2
Unusual items, after taxes (c) -- -- 16.4 (2.4)
-----------------------------------------------------------------------------
Net earnings (loss) $ 5.1 $ 6.2 $ 27.0 $ 0.8
-----------------------------------------------------------------------------
(a) This table provides supplementary data and is not intended to
represent an income statement presented in accordance with generally accepted
accounting principles.
(b) Earnings before interest, taxes, depreciation and amortization,
adjusted for "unusual items."
(c) The Company considers certain items for the nine months ended
September 30, 1994 and 1993 as "unusual." Detail on these items is presented
below.
Net earnings, excluding "unusual items" for the first nine months of
1994, improved compared to the nine months ended September 30, 1993. Improved
refining productivity and improved first quarter 1994 market conditions
contributed to the increased earnings. In addition, refining production was
reduced in the first half of 1993 when the Blue Island refinery underwent a
scheduled maintenance turnaround which reduced the volume of refined product
production by approximately three million barrels. The first phase of a
maintenance turnaround on the FCC and alkylation units at the Hartford
refinery began in mid-September and was completed in mid-October of 1994.
The second phase of the turnaround on the crude unit is planned for early in
1995. The phase of the turnaround performed in 1994 reduced production of
refined product at the Hartford refinery by approximately 30,000 barrels per
day, and increased the production of lower value intermediate feedstocks by
approximately 25,000 barrels per day. The second phase of the turnaround to
be performed in 1995 is expected to reduce the refined product output by
approximately 37,000 barrels per day for approximately four weeks. Net
earnings in the third quarter of 1994 declined versus the prior year due to
the maintenance turnaround at the Hartford refinery and increased operating
and interest expenses. Net sales and operating revenues in the first nine
months and third quarter of 1994 were higher than the prior year period due
to an increase in crude oil and product prices since the first quarter of
1994 that resulted in both increased selling prices and costs of goods sold.
Adjusted EBDITDA approved to $69.9 million for the first nine months of 1994
from $52.5 million in the first nine months of 1993.
12
Unusual Items:
For the three months For the nine months
ended September 30, ended September 30,
1994 1993 1994 1993
-------------------- ------------------
Reversal of inventory write-down
to market $ -- $ -- $ 26.5 $ --
-----------------------------------------------------------------------------
Impact on operating income -- -- 26.5 --
Gain on sale of stores -- -- -- 2.9
Litigation settlements -- -- -- 8.5
Change in accounting principle -- -- -- (15.6)
-----------------------------------------------------------------------------
Total $ -- $ -- $ 26.5 $ (4.2)
-----------------------------------------------------------------------------
Net of Taxes $ -- $ -- $ 16.4 $ (2.4)
-----------------------------------------------------------------------------
Several items which are considered by management as "unusual" are
excluded throughout this discussion of the Company's results of operations.
A non-cash write-down of $26.5 million was taken in the fourth quarter of
1993 to reflect the decline in the value of petroleum inventories below
carrying value caused by a substantial drop in petroleum prices. Crude oil
and related refined product prices rose substantially in the first nine months
of 1994 allowing the Company to recover the original charge. Accordingly, a
reversal of the inventory write-down to market was recorded in the first half
of 1994. A return to lower prices could result in future charges. Effective
January 1, 1993, the Company adopted SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions," reflected as a change in
accounting principle, and SFAS No. 109 "Accounting for Income Taxes," which
was accounted for by restating prior periods. An unusual credit was recorded
in the first quarter of 1993 related to the favorable settlement of
litigation. Second quarter 1993 earnings benefited from the sale of certain
retail stores in non-core markets.
Refining
Refining Division Operating Statistics:
For the three months For the nine months
ended September 30, ended September 30,
1994 1993 1994 1993
------------------- -------------------
Crude oil throughput
(m bbls/day) 143.0 131.4 139.9 119.8
Production (m bbls/day) 135.8 139.5 140.0 130.1
Gross margin ($/barrel) $ 3.34 $ 3.28 $ 3.56 $ 3.10
Gross margin $ 41.7 $ 42.0 $ 135.9 $ 110.2
Operating expenses $ (29.4) $ (28.2) $ (87.3) $ (79.9)
Divisional G & A expenses $ (2.8) $ (2.0) $ (8.2) $ (6.0)
Contribution to operating
income $ 9.5 $ 11.8 $ 40.4 $ 24.3
The refining division contributed $9.5 million (1993 -$11.8 million) in
the third quarter and $40.4 million (1993 - $24.3 million) in the first nine
months of 1994 to the Company's operating income. In addition to the 1993
maintenance turnaround and the impact of market conditions mentioned above,
earnings for the first nine months of 1994 improved over the prior year period
due to increased refining productivity. These productivity improvements
resulted from the processing of lower cost sour crude oil representing 25% of
crude oil throughput compared to none in the prior year period, a 10% higher
crude oil processing rate at the Blue Island refinery, the implementation of
several yield improvement projects at the Hartford refinery, which among other
things allowed the recovery of an additional 900 barrels per day of light
cycle oil from slurry and 300 barrels per day of hydrocarbon product
previously being lost to the flare, and record wholesale marketing volumes at
enhanced margins.
Earnings were negatively impacted by market factors largely beyond the
Company's control, principally the narrowing price benefit of using heavy sour
crude oil (the predominant input at the Hartford refinery) versus sweet crude
oil and the decreased availability of Canadian light sweet crude oil (the
predominant input at the Blue Island refinery) in the first nine months of
1994. After a strong first quarter, refining margins for the industry and for
the Company weakened in the second quarter as product prices did not keep pace
with rising crude oil costs. Third quarter industry margins stabilized and
were comparable to 1993. Margins weakened in the later part of September due
13
to market uncertainty regarding demand and storage for conventional fuel in
advance of the mandated fourth quarter transition to reformulated gasoline in
certain markets. Such uncertainty and logistical concerns may cause short-
term market volatility in the transition period. The above mentioned
maintenance turnaround at the Hartford refinery reduced third quarter
production and will also impact fourth quarter production. The Company does
not view these factors as long-term trends. Operating and divisional general
and administrative expenses were higher in the third quarter and first nine
months of 1994 compared to the prior period. These expenses for the first
nine months of 1994 increased over the same period in 1993 due to increased
labor hours to meet operating needs related to colder than normal weather
($0.8 million), new labor ($1.2 million) and sulfur processing ($1.4
million), contracts and enhanced refinery planning and operations support
services ($1.8 million).
Retail
Retail Division Operating Statistics
For the three months For the nine months
ended September 30, ended September 30,
1994 1993 1994 1993
------- ------ ------ ------
Gasoline volume (mm gals.) 261.8 257.6 771.7 770.0
Gasoline volume (m gals. pmps) 106.1 101.3 102.7 98.8
Gasoline gross margin
(cents/gal) 13.1 12.9 11.4 10.6
Gasoline gross margin $34.4 $33.2 $88.0 $81.3
Company operated stores
(at period end) 811 838 811 838
Dealer operated stores
(at period end) 10 10 10 10
Convenience product sales $ 61.4 $ 58.2 $ 174.8 $ 166.2
Convenience product sales
(pmps) $24,885 $22,892 $23,256 $21,328
Convenience product gross
margin (% of sales) 25.6% 25.4% 24.9% 25.5%
Convenience product gross
margin $ 15.7 $ 14.7 $ 43.4 $ 42.4
Convenience product gross
margin (pmps) $ 6,376 $ 5,798 $ 5,784 $ 5,437
Operating expenses $ (29.2) $ (28.0) $ (87.1) $ (82.1)
Divisional G & A expenses $ (1.3) $ (0.6) $ (4.5) $ (2.8)
Contribution to operating
income $ 19.6 $ 19.3 $ 39.8 $ 38.8
pmps = per month per store
The retail division contributed $19.6 million (1993 - $19.3 million) in
the third quarter and $39.8 million (1993--$38.8 million) in the first nine
months of 1994 to the Company's operating income. Average monthly gasoline
volumes and convenience product margins per store for the third quarter and
the first nine months of 1994 increased compared to the prior year period.
Gross margins were also impacted by a decrease in the average number of
stores in operation. Results for the third quarter and the first nine months
of 1994 were strengthened by favorable retail market conditions and the
repeat of a three-week first quarter promotion (also run in 1993) which
offered all grades of gasoline for the same price as regular unleaded
gasoline. These improvements were partially offset by increased operating
and divisional general and administrative expenses in the third quarter and
the first nine months of 1994 related to increased store operating hours,
increased insurance coverage, marketing support for training, merchandising
and advertising, and information services.
While the number of stores declined in the third quarter of 1994 from
840 to 821 due principally to the Company's sale of 14 stores in the
Evansville, Indiana market, the Company entered into an operating lease on
October 24, 1994 for 21 stores in the Chicago metropolitan area which will
strengthen that key market. Under the terms of the operating lease, an
additional 14 stores are expected to be added over the next year. In
addition, the Company is negotiating an operating lease for an additional 35
stores in another key Illinois market. Although the Company expects to
enter into this operating lease in late 1994 or early 1995, no assurance can
be given that such operating lease will be entered into.
14
Other Financial Highlights
Corporate general and administrative expenses were $3.5 million (1993 -
$4.1 million) for the third quarter and $10.3 million in the first nine
months of 1994, a decrease of $0.4 million from the prior year period due
principally to a reduction in allowances for bad debts.
Depreciation and amortization expenses in the third quarter and first
nine months of 1994 increased by $0.1 million and $2.1 million, respectively,
compared to the prior year period, principally due to higher levels of
property, plant and equipment, partially offset by decreased amortization
related to the Company's ability to extend the amortization period by five
months on the previous Hartford maintenance turnaround due to a postponement
of the Hartford maintenance turnaround to late in 1994 and early in 1995.
Net interest and financing costs increased in the third quarter and
first nine months of 1994 compared to the prior year period primarily due
to lower returns on funds invested.
Liquidity and Capital Resources
Operating cash flow (cash generated from operating activities before
working capital changes), improved to $46.8 million in the first nine months
of 1994 from $45.1 million in the prior year comparable period. Cash flow
was impacted by the fluctuation in the Company's net earnings in the quarter
and the first nine months. Working capital at September 30, 1994 was $197.2
million, a 1.91 to 1 current ratio, versus $203.8 million, a 1.96 to 1
current ratio at December 31, 1993. The increased earnings along with
decreased inventory levels, decreased accounts payable balances and
increased accounts receivable balances, all of which fluctuate with market
opportunities and operational needs, combined to result in relatively
unchanged working capital. However, pipeline movement restrictions and
refinery crude oil supply economics in recent months favoring purchases of
cargos of crude oil that have shorter payment terms than pipeline
purchases, have reduced cash and short-term investments at September 30,
1994 by approximately 20.0 million.
In general, the Company's short-term working capital requirements
fluctuate with the pricing and sourcing of crude oil. Historically, the
Company's internally generated cash flows have been sufficient to meet its
needs. The Company has in place a committed revolving line of credit for
short-term cash borrowings and for the issuance of letters of credit
primarily for purchases of crude oil, other feedstocks and refined
products. The existing line of credit was increased from $100 million to
$120 million in the first half of 1994. The facility will be refinanced in
connection with the Company's proposed debt and equity offerings and the
closing of the acquisition of Chevron's Port Arthur, Texas refinery (see
below). At September 30, 1994, $67.1 million of the line of credit was
utilized for letters of credit. There were no direct borrowings under
Clark's line of credit at September 30, 1994.
Cash flows from investing activities, (excluding short-term investment
activities which the Company manages similar to cash and cash equivalents)
are primarily affected by capital expenditures including maintenance
turnarounds. The reduction in cash used in investing activities in the first
nine months of 1994 compared to the prior year period resulted from lower
capital expenditures and the absence of major maintenance turnaround
expenditures (1994 - $5.9 million; 1993 - $18.0 million) during the nine
months ended September 30, 1994. Total capital expenditures equaled $56.8
million during the first nine months of 1994 (1993 - $55.4 million) Refining
division capital expenditures totaled $36.7 million in the first nine months
of 1994 (1993 - $32.8 million). Two-thirds of the refining capital
expenditures were directed towards discretionary productivity improvement
projects and the balance were related to regulatory compliance. Retail
division capital expenditures of $18.5 million (1993 - $20.7 million) were
related to store reimaging and upgrades, installation of store security
packages and regulatory compliance.
In August 1994, Clark entered into a purchase agreement to acquire
Chevron U.S.A. Inc.'s ("Chevron") 200,000 barrel per day Port Arthur, Texas
refinery and certain related assets for $74 million plus inventory and spare
parts of approximately $140 million, ($5.0 million of which has been paid as
a deposit). The purchase agreement provides for contingent payments to
Chevron of up to $125 million over a five year period from the closing date
of the acquisition in the event that refining industry margin indicators
exceed certain escalating levels. The Company believes that even if such
contingent payments would be required to be made, they would not have a
material adverse effect on the Company's results of operations as the
Company would also benefit by receiving one half of such increased margins.
Such contingent payments would not be payable based on these industry margin
indicators through September 30, 1994. The acquisition is expected to
close in late 1994. The Company expects to incur
15
additional costs of approximately $12 million related to business and
environmental due diligence and capital expenditures during the two years
following the acquisition.
Clark and Clark USA plan to finance the acquisition with existing cash
and short-term investments and the net proceeds of a $150 million common
stock offering and $100 million debt offering. The common stock offering
would result in the mandatory redemption of one-half of Clark USA's
outstanding Zero Coupon Notes at 110% of accreted value (estimated at
approximately $83 million) and a contingent consideration payment due AOC
L.P. related to the December 1992 purchase of the minority interest. Based
on initial due diligence, the Company estimates that during the period 1995-
1998, capital and turnaround expenditures at the Port Arthur refinery should
average approximately $50 - $60 million per year, including wastewater and
safety projects required to be completed under the purchase agreement. It is
anticipated the capital expenditures will approximately be divided among on-
going maintenance projects (40%), environmental projects (30%) and
productivity improvement projects (30%.) The Port Arthur refinery completed
a major maintenance turnaround in May 1994. The Company expects that the
cash flow from the Port Arthur refinery will be sufficient to cover capital
expenditures and any potential contingent payments to Chevron.
The Company is refinancing its existing working capital facility. The
new working capital facility is expected to provide the Company with
sufficient liquidity to support the expanded letter of credit needs related
to the acquisition of the Port Arthur refinery. It is currently expected
that the new credit agreement will contain convenants that are customary
for agreements of this type. The Company's ability to affect its inventory
management strategies will not be hindered by convenants in the new credit
facility.
Funds generated from operating activities and the financings, together
with existing cash, cash equivalents and short-term investments, are expected
to be adequate to fund existing requirements for working capital and capital
expenditure programs, including those related to the Port Arthur refinery,
for the next year. Future working capital, discretionary capital
expenditures, environmentally-mandated spending and acquisitions may
require additional debt or equity capital.
16
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
Clark received an Administrative Complaint from the EPA on January 5,
1993 alleging record keeping and related violations of the Clean Air Act
concerning the Hartford refinery and seeking civil penalties of $0.1
million. On July 11, 1994, the EPA filed an Amended Complaint alleging
additional violations and increasing the amount of the total penalty sought
to $0.2 million.
On May 5, 1993, Clark received correspondence from the Michigan
Department of Natural Resources ("MDNR") indicating that the MDNR believes
Clark may be a PRP in connection with groundwater contamination in the
vicinity of one of its etail stores in the Sashabaw Road area north of
Woodhull Lake and Lake Oakland, Oakland County Michigan. Clark has begun an
initial investigation into the matters raised by the MDNR. At the request of
the MDNR, Clark has conducted an investigation into the historical use of its
site, potential contaminants used at the site, third party sites which may
be the source of contaminants and is also conducting a subsurface
investigation of its site and the surrounding area. On July 22, 1994,
MDNR commenced suit against Clark and Chevron U.S.A. Inc. seeking $0.3
million for past response activity costs incurred by MDNR in connection
with this site. Clark is still assessing the allegations contained in the
Complaint, but believes it has good defenses to the allegations.
On May 4, 1994, the United States Equal Employment Opportunity
Commission ("EEOC") filed a class action lawsuit against Clark in the United
States District Court for the Northern District of Illinois alleging that
Clark had engaged in a pattern of practice of unlawful discrimination against
certain employees over the age of forty. The relief sought by the EEOC
includes reinstatement or reassignment of the individuals allegedly affected,
payment of back wages, an injunction prohibiting employment practices which
discriminate on the basis of age, and institution of policies to eradicate
the effects of any past discriminatory practices. Clark believes the
allegations to be without merit. It is too early to predict whether this
case will go to trial and, if so, what the risk of exposure to Clark would
be at trial.
On October 7, 1994, the FCC processing unit at the Blue Island refinery
experienced an on-site electrical malfunction which resulted in the release
to the atmosphere of used catalyst, containing low levels of heavy metals,
including antimony, nickel and vanadium. The release resulted in the
temporary evacuation of certain areas near the refinery, including a high
school. Approximately 50 people were taken to area hospitals. The Company
has undertaken to reimburse the medical expenses incurred by people receiving
treatment. As of October 25, 1994, no lawsuits have been filed in connection
with this incident, nor have any enforcement actions been initiated by any
regulatory agencies. The Company does not believe that the resolution of any
legal proceedings from this incident, including any governmental proceedings,
will have a material adverse effect, individually or in the aggregate, on the
Company's financial position.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
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.
CLARK REFINING & MARKETING, INC.
(Registrant)
/s/ James A. Zweifel
-------------------------------------
James A. Zweifel
Vice President - Controller
October 27, 1994