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 June 30, 1995
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 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 8, 1995: 100, all of which are owned by Clark
USA, Inc.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Clark Refining & Marketing, Inc.:
We have reviewed the accompanying consolidated balance sheet of
Clark Refining & Marketing, Inc. (a Delaware corporation) and subsidiary
as of June 30, 1995, and the related consolidated statements of earnings
for the three and six month periods ended June 30, 1995 and 1994 and cash
flows for the six month periods ended June 30, 1995 and 1994. 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, 1994, 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 February 3, 1995, we
expressed an unqualified opinion on those statements.
In our opinion, the information set forth in the accompanying
balance sheet as of December 31, 1994 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,
July 25, 1995
3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
Reference June 30, December 31,
ASSETS Note 1995 1994
------ --------- -------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 82,159 $ 95,282
Short-term investments 2 47,856 28,658
Accounts receivable 179,406 77,794
Inventories 3 254,672 151,466
Prepaid expenses and other 18,043 15,659
----------- -----------
Total current assets 582,136 368,859
PROPERTY, PLANT AND EQUIPMENT 6 521,146 429,805
OTHER ASSETS 4 46,862 50,717
----------- -----------
$ 1,150,144 $ 849,381
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 311,007 $ 155,442
Accrued expenses and other 5 46,406 41,639
Accrued taxes other than income 45,093 41,407
----------- -----------
Total current liabilities 402,506 238,488
LONG-TERM DEBT 400,721 400,734
DEFERRED INCOME TAXES 16,257 29,178
OTHER LONG-TERM LIABILITIES 38,767 18,129
CONTINGENCIES 8 -- --
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and 100 shares
issued and outstanding) -- --
Paid-in capital 7 180,000 30,000
Retained earnings 111,893 132,852
----------- -----------
Total stockholder's equity 291,893 162,852
----------- -----------
$ 1,150,144 $ 849,381
=========== ===========
The accompanying notes are an integral part of these statements.
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CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands)
For the three months
Reference ended June 30,
-----------------------------
Note 1995 1994
--------- ----------- -----------
NET SALES AND OPERATING REVENUES $ 1,337,799 $ 585,691
EXPENSES:
Cost of sales (1,205,166) (500,388)
Operating expenses (104,651) (58,107)
General and administrative expenses (7,713) (7,909)
Depreciation (7,589) (6,566)
Amortization 4 (2,937) (2,415)
Reversal of inventory write-down to market -- 11,500
----------- -----------
(1,328,056) (563,885)
----------- -----------
OPERATING INCOME 9,743 21,806
Interest and financing costs, net 4, 5 (9,657) (8,632)
----------- -----------
EARNINGS BEFORE INCOME TAXES 86 13,174
Income tax provision (11) (4,952)
----------- -----------
NET EARNINGS $ 75 $ 8,222
=========== ===========
The accompanying notes are an integral part of these statements.
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CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands)
For the six months
Reference ended June 30,
-----------------------------
Note 1995 1994
--------- ----------- -----------
NET SALES AND OPERATING REVENUES $ 2,165,097 $ 1,152,944
EXPENSES:
Cost of sales (1,964,806) (977,395)
Operating expenses (180,896) (115,781)
General and administrative expenses (15,730) (15,361)
Depreciation (14,609) (13,127)
Amortization 4 (5,827) (5,733)
Reversal of inventory write-down to market 3 -- 26,500
----------- -----------
(2,181,868) (1,100,897)
----------- -----------
OPERATING INCOME (LOSS) (16,771) 52,047
Interest and financing costs, net 4, 5 (18,509) (16,966)
Other income -- --
----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (35,280) 35,081
Income tax benefit (provision) 13,406 (13,123)
----------- -----------
NET EARNINGS (LOSS) $ (21,874) $ 21,958
=========== ===========
The accompanying notes are an integral part of these statements.
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CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the six months
ended June 30,
-----------------------------
1995 1994
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (21,874) $ 21,958
Adjustments:
Depreciation 14,609 13,127
Amortization 8,133 6,321
Share of earnings of affiliates, net of dividends (908) (457)
Deferred income taxes (13,406) 17,522
Reversal of inventory write-down to market -- (26,500)
Other 638 636
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other (105,199) (39,772)
Inventories (103,206) 32,758
Accounts payable, accrued expenses, taxes other than
income, and other 163,159 (8,758)
----------- -----------
Net cash provided by (used in) operating activities (58,054) 16,835
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (25,740) (50,584)
Sales of short-term investments 7,942 49,126
Expenditures for property, plant and equipment (18,070) (28,059)
Expenditures for refinery turnaround (2,596) (1,617)
Refinery acquisition expenditures (69,746) --
Proceeds from disposals of property, plant and equipment 15,354 4,628
----------- -----------
Net cash used in investing activities (92,856) (26,506)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (13) (507)
Capital contribution 150,000 --
Deferred financing costs (12,200) --
----------- -----------
Net cash provided by (used in) financing activities 137,787 (507)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (13,123) (10,178)
CASH AND CASH EQUIVALENTS, beginning of period 95,282 60,771
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 82,159 $ 50,593
=========== ===========
The accompanying notes are an integral part of these statements.
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FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark Refining & Marketing, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1995
(tabular dollar amounts in thousands of US dollars)
1. Basis of Preparation
The unaudited consolidated balance sheet of Clark Refining & Marketing,
Inc. and Subsidiary (the "Company" or "Clark"), a Delaware
corporation, as of June 30, 1995, and the related consolidated statements
of earnings for the three month and six month periods ended
June 30, 1995 and 1994, and cash flows for the six month periods ended
June 30, 1995 and 1994, have been reviewed by independent accountants.
Clark Port Arthur Pipeline Company, a Delaware corporation, the new
wholly-owned subsidiary of Clark, is included in the consolidated
results of the Company. 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 financial statements should be
read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1994.
2. Short-term Investments
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 (net of applicable taxes) shown as a component of retained
earnings.
Short-term investments consisted of the following:
June 30, 1995 December 31, 1994
---------------------------------- ----------------------------------
Amortized Unrealized Aggregate Amortized Unrealized Aggregate
Major Security Type Cost Gain/(Loss) Fair Value Cost Gain/(Loss) Fair Value
------------------- --------- ----------- ---------- --------- ----------- ----------
U.S. Debt Securities $ 48,356 $ (500) $ 47,856 $ 30,558 $ (1,900) $ 28,658
The contractual maturities of the short-term investments at June 30, 1995 were:
Amortized Aggregate
Cost Fair Value
--------- ----------
Due in one year or less $ 23,984 $ 23,934
Due after one year through five years 24,372 23,922
--------- ---------
$ 48,356 $ 47,856
========= =========
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.
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For the three month and six month periods ended June 30, 1995, the
proceeds from sales of Available-for-Sale securities was $7.9 million
with no realized gain or loss. For the three month and six month
periods ended June 30, 1994, the proceeds from the sale of Available-for-Sale
securities were $37.7 million and $48.3 million, respectively,
with $0.8 million of realized losses recorded for the three month and
six month periods. Realized gains and losses are computed using the
specific identification method.
The change in the unrealized holding gains or losses on Available-for-Sale
securities for the three month and six month periods ended June 30, 1995, was
a gain of $0.7 million ($0.5 million after taxes) and a gain of $1.4 million
($0.9 million after taxes), respectively. This net unrealized gain is included
as a component of retained earnings.
3. Inventories
The carrying value of inventories consisted of the following:
June 30, December 31,
1995 1994
-------- ------------
Crude oil . . . . . . . . . . . . . . . $ 84,649 $ 42,760
Refined products and blendstocks . . . 132,739 87,957
Convenience products. . . . . . . . . . 23,723 14,904
Warehouse stock and other . . . . . . . 13,561 5,845
---------- ----------
$ 254,672 $ 151,466
========== ==========
The market value of these inventories at June 30, 1995 was approximately $10.8
million above the carrying value (December 31, 1994 - $1.9 million above the
carrying value). At June 30, 1995, Clark had $0.4 million of unrealized losses
(December 31, 1994 - $2.0 million) from its hedging activities which limit risk
related to price fluctuations in crude oil and refined products.
In connection with the Port Arthur refinery acquisition (see Note 6,
Acquisition of Port Arthur Refinery), Clark purchased crude oil and
product inventory and also entered into a new three year revolving
credit facility used primarily for the issuance of letters of credit to
secure purchases of crude oil. The amount of the new facility is the
lesser of $400 million or the amount available under a defined borrowing
base, representing specified percentages of cash, investments, accounts
receivable, inventory and other working capital items. The amount
available under the facility at June 30, 1995 was approximately $380
million. This credit facility is collateralized by substantially all of
Clark's current assets and certain intangibles.
4. Other Assets
Amortization of deferred financing costs for the three month and six
month periods ended June 30, 1995, was $1.4 million (1994 - $0.3 million)
and $2.3 million (1994 - $0.6 million), respectively and is
included in "Interest and financing costs, net".
Amortization of turnaround costs for the three month and six month
periods ended June 30, 1995, was $2.9 million (1994 - $2.4 million) and
$5.8 million (1994 - $5.7 million), respectively.
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5. Interest and Financing Costs, Net
Interest and financing costs, net, consisted of the following:
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
1995 1994 1995 1994
Interest expense . . . . . . $ 10,304 $ 10,111 $ 20,575 $ 20,348
Financing costs . . . . . . 1,444 325 2,295 673
Interest income . . . . . . (1,591) (1,420) (3,210) (3,350)
-------- -------- -------- --------
10,157 9,016 19,660 17,671
Capitalized interest . . . . (500) (384) (1,151) (705)
-------- -------- -------- --------
$ 9,657 $ 8,632 $ 18,509 $ 16,966
======== ======== ======== ========
Accrued interest payable at June 30, 1995 of $7.0 million (December
31, 1994 - $6.9 million) is included in "Accrued Expenses and Other".
6. Acquisition of Port Arthur Refinery
On February 27, 1995, Clark purchased Chevron U.S.A. Inc.'s ("Chevron")
Port Arthur, Texas refinery, acquiring the refinery assets
and certain related terminals, pipelines, and other assets for a purchase
price of approximately $70 million. The purchase price of the
assets, including all acquisition costs and assumed liabilities will be
allocated over all of the refinery and related assets using the purchase
method of accounting. In addition, Clark purchased the related petroleum
inventory in storage and pipelines, and various spare parts
and supplies for approximately $136 million, as revised in the second
quarter. A final allocation of the purchase price will be determined
later in 1995 when appraisals and other studies are completed.
Clark has agreements to sell to Chevron, at market prices, 40,000
barrels per day of gasoline and 6,500 barrels per day of low-sulfur
diesel and jet fuel for one year from the date of the Acquisition. In
addition, Clark has entered into supply agreements with Chevron and
Chevron Chemical Company providing for the purchase and sale by Clark of
various quantities of products and commodities at market prices.
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. These contingent payments will be
calculated annually and the appropriate liability, if any, will be
recorded at that time. While Chevron retained primary responsibility
for required remediation of most pre-closing environmental contamination,
Clark assumed responsibility for environmental contamination beneath and
within 25 to 100 feet of the facility's active
processing units.
7. Certain Financings
On February 27, 1995, Clark USA, Inc. ("Clark USA"), Clark's parent
company, obtained a portion of the funds necessary to finance the Port
Arthur acquisition from a subsidiary of its parent company, The Horsham
Corporation, a Quebec corporation ("Horsham"), by selling to the subsidiary
shares of new classes of common stock ("New Common Stock") of
Clark USA for $135 million. Subsequently, the Horsham subsidiary resold
$120 million of such New Common Stock, representing an interest of from
35.6% to 40.0% in Clark USA, to an institutional money manager. Clark USA
subsequently contributed $150 million to Clark for the purchase of
the refinery.
10
In connection with the financing and closing of the Port Arthur
acquisition, Clark'sought consents from the holders of its 9 1/2% Senior
Notes and its 10 1/2% Senior Notes to waive or amend the terms of certain
covenants under the indentures governing these securities. On February
17, 1995, Clark received the requisite consents from their respective
noteholders.
These consents (i) permitted Clark to increase the amount of its
authorized working capital and letter of credit facility to the greater
of $400 million or the amount available under a defined borrowing base,
(ii) permitted the incurrence of $75 million of additional tax-exempt
indebtedness for qualifying projects, (iii) exempted the contingent
payment obligation to Chevron of up to $125 million over a five year
period from the definition of "Indebtedness", (iv) amended provisions
relating to the use of asset disposition proceeds.
Clark has made payments to each holder whose duly executed consent
was received and not revoked of $7.50 per $1,000 aggregate principal
amount of the 9 1/2% Notes and 10 1/2% Notes.
In connection with the Port Arthur acquisition and the above financing
transactions, Clark entered into a new three year revolving
credit facility, collateralized by substantially all of Clark's current
assets and certain intangibles (see Note 3 "Inventories"). With the
acquisition, the amount of the amended facility is the lesser of $400
million or the amount available under a borrowing base, as defined,
representing specified percentages of cash, investments, accounts
receivable, inventory and other working capital items.
8. Contingencies
Clark has been named as a defendant in forty civil lawsuits filed
by residents of Hartford, Illinois, seeking unspecified damages for the
presence of gasoline in the soil and groundwater beneath the plaintiffs'
properties. Shell Oil has been named as a co-defendant in six of the
above-referenced lawsuits. The plaintiffs in thirty-four of the lawsuits,
which are pending solely against Clark, have all filed motions
to voluntarily dismiss their lawsuits. It is anticipated that these
motions will be granted by the court and once they are granted, the
plaintiffs will have one year within which to refile their claims.
While it is 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 believes that the outcome of
these complaints will not have a material adverse effect on the Company's
financial position.
Clark 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, Clark 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 their financial
position or results of operations, however, an adverse outcome of these
matters could have a material effect on quarterly or annual operating
results when resolved in a future period.
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ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Clark Refining & Marketing, Inc. (the "Company" or "Clark") is a
wholly-owned subsidiary of Clark USA, Inc. ("Clark USA"). Clark also
owns all of the outstanding capital stock of Clark Port Arthur Pipeline
Company which is reported as a component of the Company's refining
division.
Effective January 1, 1995, the Company adjusted its basis for the
internal pricing of sales and purchases of petroleum products between
its retail and refining divisions to better reflect retail product costs.
Analysis for the three and six months ended June 30, 1995 indicated
that this transfer pricing change may materially affect the comparability
of divisional results versus the prior year. The Company is quantifying
this impact and is evaluating the need to restate the prior year's divisional
results and will file an amended Form 10-Q, if necessary. Any restatement
will not impact the Company's consolidated results of operations or financial
position. Results that could be impacted include the refining division
contribution to operating income of $11.0 million and $30.9 million for the
three and six months ended June 30, 1994 and the retail division
contribution to operating income of $11.8 million and $20.2 million for the
three and six months ended June 30, 1994. Related retail gasoline gross margins
and refining margins per barrel would also be adjusted.
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three and six month periods ended June 30, 1995 and
1994. All dollars listed are in millions except statistical data.
Financial Results: (a)
----------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
1995 1994 1995 1994
Net sales and operating revenues $ 1,337.8 $ 585.7 $ 2,165.1 $ 1,152.9
Cost of sales 1,205.2 500.4 1,964.8 977.4
Operating expenses 104.7 58.1 180.9 115.8
General and administrative expenses 7.7 7.9 15.7 15.4
Depreciation and amortization 10.5 9.0 20.4 18.8
Interest and financing costs, net 9.6 8.6 18.5 17.0
----------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (b) 0.1 1.7 (35.2) 8.5
Income tax (provision) benefit (b) -- (0.6) 13.3 (2.9)
----------------------------------------------------------------------------------------------------
Earnings (loss) before unusual items (b) 0.1 1.1 (21.9) 5.6
Unusual items, after taxes (b) -- 7.1 -- 16.4
----------------------------------------------------------------------------------------------------
Net earnings (loss) $ 0.1 $ 8.2 $ (21.9) $ 22.0
====================================================================================================
Operating Income: (a)
Refining contribution to operating income $ 12.7 $ 11.0 $ (7.8) $ 30.9
Retail contribution to operating income 11.4 11.8 19.5 20.2
Corporate general and administrative 3.9 3.6 8.0 6.8
Depreciation and amortization 10.5 9.0 20.4 18.8
Unusual items, net (b) -- 11.5 -- 26.5
----------------------------------------------------------------------------------------------------
Operating income (loss) $ 9.7 $ 21.7 $ (16.7) $ 52.0
====================================================================================================
(a) This table provides supplementary data and is not intended to
represent an income statement presented in accordance with
generally accepted accounting principles.
(b) The Company considers an item in 1994 which is discussed below
to be "unusual".
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Net earnings before unusual items for the second quarter of 1995
improved significantly over the first quarter of 1995, but were relatively
flat as compared to the second quarter of 1994. For the six
months ended June 30, 1995 Clark reported significantly lower earnings
than the same period a year ago. Six month results were negatively
impacted by an extremely poor industry refining margin environment in
the first quarter of 1995. Net earnings in the second quarter and first
half of 1994 benefited from an unusual item that resulted from an
increase in crude oil and product prices that allowed for the reversal
of an inventory writedown originally taken in 1993. Net sales and
operating revenues in the second quarter and first six months of 1995
were up dramatically over the comparable periods of 1994 because of the
inclusion of incremental sales from production at the 200,000 barrel per
day Port Arthur, Texas refinery acquired by Clark on February 27, 1995.
Refining
Refining Division Operating Statistics:
----------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
1995 1994 1995 1994
----------------------------------------------------------------------------------------------------
Port Arthur Refinery (acquired February 27, 1995)
Crude oil throughput (m bbls/day) 202.2 -- 196.2 --
Production (m bbls/day) 215.5 -- 201.8 --
Gross margin ($/barrel) $2.81 -- $2.66 --
Operating expenses ($/barrel) $1.93 -- $2.04 --
Net margin (millions) $17.2 -- $15.4 --
Blue Island, Hartford and other refining
Crude oil throughput (m bbls/day) 134.9 141.1 129.3 138.3
Production (m bbls/day) 129.1 144.9 130.1 142.1
Gross margin ($/barrel) $2.64 $3.25 $2.06 $3.66
Operating expenses ($/barrel) $2.83 $2.18 $2.82 $2.25
Net margin (millions) $(1.8) $13.6 $(17.7) $36.3
Divisional G & A expenses (millions) $2.7 $2.6 $5.5 $5.4
Contribution to earnings (millions) $12.7 $11.0 $(7.8) $30.9
The refining division contributed earnings of $12.7 million (1994 -
earnings of $11.0 million) to operating income in the second quarter
of 1995 and a loss of $7.8 million (1994 - earnings of $30.9 million) in
the first half of 1995. Industry margin conditions in the first quarter
of 1995 were at their lowest point since 1987 and this was the primary
reason for the Company's operating loss in the first half of 1995. The
principal factors that contributed to the poor industry margins were the
unseasonably warm winter, which reduced demand for heating oil especially
compared to the strong demand in the prior year, and the transition to
reformulated gasoline. Several geographical areas unexpectedly opted not to
switch to reformulated gasoline which caused confusion and oversupply in the
marketplace, and that caused gasoline prices to fall relative to the cost of
crude oil.
Second quarter 1995 results improved over the first quarter of
1995 with better industry gasoline margins and contribution from the
newly acquired Port Arthur refinery. Although industry gasoline margins
improved considerably in the second quarter, the Company's results,
including Port Arthur's, were affected by weak distillate margins and
substantially higher costs for heavy and sour crude oils as compared to
the prior year. The price of heavy and sour crude oils have risen
substantially relative to more expensive light sweet crude oil such as
West Texas Intermediate, eroding some of the cost
13
advantages of more highly complex refiners such as Clark, which has the
capability to process nearly 80% of its crude slate in heavy and sour crude
oils. Second quarter results were also adversely affected by downtime at two
of the Blue Island refinery's gasoline producing units. See Part II,
Other Information - Item 1, Legal Proceedings. On a comparative basis,
the 1994 second quarter included a significant contribution from crude
oil and product acquisition activities because of a substantial rise in
crude oil and product prices in that period, which was not repeated in
this year s second quarter.
The Company's crude oil throughput and refinery production increased over
the prior year due almost entirely to the previously mentioned acquisition of
the Port Arthur refinery. Despite the net increase in production, the poor
industry margins in the first quarter caused the Company to reduce refinery
production by an average of approximately 10,000 barrels per day in that
quarter. Additionally, a fire in the isomax unit and unscheduled downtime
in the alkylation unit at the Blue Island refinery reduced yields and
production by approximately 7,300 barrels per day in the second quarter and
8,400 barrels per day for the first half. The Blue Island refinery returned
to full production in mid-August.
Refining division operating expenses for the second quarter and
first half of 1995 increased over the comparable periods a year ago due
principally to the addition of the Port Arthur refinery and related
terminal expenses in the current period and expenses associated with the
Blue Island operating problems. Reduced throughput at Clark's Illinois
refineries also contributed to a higher per barrel operating cost.
Retail
Retail Division Operating Statistics:
----------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
1995 1994 1995 1994
----------------------------------------------------------------------------------------------------
Company operated stores (average) 855 838 846 839
Gasoline volume (mm gals.) 277.8 265.6 528.7 510.0
Gasoline gross margin (c / gal) 10.5c 10.3c 10.2c 10.5c
Gasoline gross margin (millions) $29.4 $27.3 $54.2 $53.6
Convenience product sales (millions) $65.7 $61.1 $117.5 $113.4
Convenience product gross margin(millions) $16.4 $15.6 $30.8 $27.7
Operating expenses (millions) $33.5 $29.4 $63.3 $57.9
Divisional G & A expenses (millions) $1.2 $1.7 $2.2 $3.2
Contribution to operating income (millions) $11.4 $11.8 $19.5 $20.2
Per Month Per Store
Gasoline volume (m gals.) 108.3 105.4 104.2 101.2
Convenience product sales (m ) $25.6 $24.2 $23.1 $22.5
Clark continued to expand its retail network in core markets
during the second quarter of 1995, resulting in a net increase in store
count over the second quarter of 1994. The Company acquired 35 retail
stores in April 1995 in Peoria, Illinois, one of its core markets and is
continuing to seek expansion opportunities in other core markets.
Consistent with the Company's strategy to exit non-core markets, the
Company is actively seeking to divest 41 stores in the Kansas, western
Missouri and Minnesota markets.
The retail division contributed earnings of $11.4 million (1994 -
$11.8 million) to operating income in the second quarter of 1995 and
$19.5 million (1994 - $20.2 million) in the first half of 1995.
Improvements in gasoline and convenience product gross margins were
offset by higher operating expenses.
14
Gasoline gross margins were improved over 1994 in the second
quarter and first half of 1995 despite extremely volatile unit margins
caused by consumer resistance to paying for the higher cost of newly
introduced reformulated gasoline and general increases in gasoline cost.
In response to these market conditions, Clark implemented a pricing
strategy to narrow the historical street gasoline pricing difference
relative to its higher priced competitors. This strategy enabled Clark
to optimize unit margins especially in June when costs began to decline.
Convenience product gross margins increased in the second quarter
and first half over the same periods in 1994 due to an improvement in the
mix of higher margin "On The Go" products (41% of sales in the first
half of 1995 versus 38% in the year-ago period) as well as the favorable
margin impact from the newly acquired stores. In addition to incremental
lease and operating expenses associated with the new stores added since
1994, expenses increased due to higher store labor costs and higher
credit card processing expenses due to a 50% increase in credit card sales,
partially offset by lower administrative costs.
Other Financial Highlights
Corporate general and administrative expenses for the first half
of 1995 exceeded the same period a year ago due principally to adjustments of
bad debt and other reserves in the prior year.
Depreciation and amortization expenses for the second quarter and
first half of 1995 exceeded the comparable periods a year ago principally
because of the newly acquired Port Arthur refinery.
Net interest and financing costs increased principally because of
higher financing cost amortization associated with Clark's larger working
capital facility which was increased to support the crude oil
supply needs of the Port Arthur refinery.
Liquidity and Capital Resources
Net cash from operating activities for the first six months of
1995, excluding working capital changes, was a $12.8 million deficit
compared to a $32.6 million contribution in the year-earlier period.
The deterioration of cash flows was due principally to the Company's net
loss in the first quarter of 1995. Working capital at June 30, 1995 was
$179.6 million, a 1.45 to 1 current ratio, versus $130.4 million at
December 31, 1994, a 1.55 to 1 current ratio. Working capital increased
due to the acquisition and partial financing with equity of the Port
Arthur refinery working capital requirements. The current ratio declined
due to the relative increase in accounts payable associated
with the Port Arthur refinery acquisition, a deficit in cash flow from
operating activities excluding working capital changes, and capital
expenditures.
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil. The Company
expects internally generated cash flows will be sufficient to meet its
needs. Clark has in place a $400 million committed revolving line of
credit expiring November 30, 1997 for the issuance of letters of credit
primarily to support purchases of crude oil, other feedstocks and
refined products. The amount available under the facility at June 30,
1995 was approximately $380 million. The line of credit has a sub-limit
of $100 million for cash borrowings. At June 30, 1995, $276.1 million
of the line of credit was utilized for letters of credit. There were no
direct borrowings under Clark's line of credit at June 30, 1995.
Cash flows used in investing activities in the first half, excluding
short-term investment activities for which management's intent
is similar to cash and cash equivalents, increased to $75.1 million in
1995 from $25.0 million in the year-earlier period. The increase was
due to the Port Arthur refinery acquisition which closed on February 27,
1995. Capital expenditures for property, plant and equipment totaled
$18.1 million (1994 - $28.1 million) during the first half of 1995.
Refinery capital expenditures totaled $2.8 million of this amount in the
first half (1994 - $17.2 million) mostly directed towards miscellaneous
15
regulatory projects. First half retail capital expenditures totaled
$14.4 million in 1995 (1994 - $9.8 million) and consisted of one-half
for regulatory compliance, principally related to Stage II vapor recovery
that was required to be completed in the first half of the
current year, and one-half for discretionary projects primarily related
to the Company's image program as well as the purchase of the existing
equipment for stores acquired in the second quarter. Approximately
$15.0 million was generated in 1995 from the sale and leaseback of
certain Hartford refinery assets acquired in last year's maintenance
turnaround.
Cash flows from financing activities in the first six months of 1995
reflected the partial financing of the Port Arthur refinery acquisition with
the equity contribution from Clark USA, and fees related to the larger working
capital facility associated with the expanded working capital needs of the
Company following the acquisition.
Funds generated from operating activities together with the
Company's existing cash, cash equivalents and short-term investments,
are expected to be adequate to fund requirements for working capital and
capital expenditure programs for the next year. In response to the
industry refining conditions during the latter part of 1994 and first
quarter of 1995 and the planned acquisition of the Port Arthur refinery,
the Company initiated a number of programs aimed at conserving liquidity. These
programs include inventory reductions (including inventory reductions at the
Port Arthur refinery), reduced or delayed
capital expenditures (other than mandatory and environmental capital
expenditures) and certain additional strategies. These programs resulted in the
Company's cash, cash equivalents and short-term investments balance at June 30,
1995 being relatively flat compared with year-end despite completing the Port
Arthur refinery acquisition in the first quarter and a deficit cash flow from
operating activities before working capital changes. While the Company believes
that these programs will be sufficient to provide the Company with adequate
liquidity through the end of 1995, there can be no assurance that the depressed
industry conditions will not return and continue longer than anticipated.
Future working capital, discretionary capital expenditures, environmentally-
mandated spending and acquisitions may require additional debt or equity
financing.
16
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
On March 13, 1995, a fire occurred in the isomax unit at the Blue
Island refinery. Two employees were fatally injured in the fire; three
other employees were injured. The isomax unit and two other units were
out of service at the time of the incident. The cause of the incident
is under investigation by Clark and the Occupational Safety and Health
Administration ("OSHA") and was thoroughly investigated by the Illinois
Attorney General prior to the restart of the affected units. Clark has
now resumed operation of all units which had been out of service in
connection with the incident. Property damage and related costs are
expected to be covered by Clark's property, business interruption and
workers' compensation insurance coverages in excess of aggregate
deductibles of $1.4 million. Clark has not been notified of any fines
or penalties at this time from any regulatory agency in connection with
this incident and no enforcement action has been initiated by OSHA in
connection with this incident.
On May 16, 1995, there was a minor (less than 15 pounds) release
of hydrogen fluoride ("HF") from a catalyst regeneration portion of the
HF unit at the Blue Island refinery. At the request of the Illinois
Attorney General, and with the Company's consent, the Circuit Court of
Cook County, Illinois entered an order prohibiting the restart of the
regeneration portion of the HF unit pending the outcome of an investigation
of the cause of the release. On August 8, 1995, an order
was entered by the Court allowing Clark to resume operation of the HF
regeneration unit. The order also requires Clark, pursuant to an
agreement between Clark and the Illinois Attorney General, to implement
certain HF release mitigation and detection measures. Clark has not yet
ascertained the actual cost of these measures, although Clark has
initially estimated that these measures may cost $1.4 million over the
next two years.
Case No. 95 CH 2311, People ex rel. Ryan vs. Clark Refining &
Marketing, Inc., is currently pending in the Circuit Court of Cook
County, Illinois. This lawsuit, originally filed by the Illinois
Attorney General following the isomax incident at the Blue Island
refinery on March 13, 1995, was amended just after the HF release of May
16, 1995 to include all releases into the air or water that had occurred
in the past three years at the Blue Island plant. The Company has filed
an answer denying most of the material allegations. No estimate can be
made at this time of either the likelihood or the magnitude of any
potential liability that may result from this litigation.
On June 7, 1995, Clark was served with a complaint in People of
the State of Illinois v. Clark Refining & Marketing, Inc., PCB No. 95-163,
which is presently pending before the Illinois Pollution Control
Board. The complaint alleges violations relating to the 13 "release
incidents" at Clark's Hartford, Illinois refinery that were the subject
of the "Pre-Enforcement Conference Letters" sent to Clark by the IEPA in
October, 1994. The complaint also alleges violations relating to the
operation of certain process units at the Hartford refinery and a number
of permit, recordkeeping and reporting violations. Clark has filed an
answer with the Illinois Pollution Control Board denying most of the
material allegations and has also filed a motion to dismiss ten entire
counts and portions of two other counts of the complaint on jurisdictional
grounds. No estimate of any liability with respect to this complaint can
be made at this time.
Clark received an administrative complaint from the EPA on January
5, 1993 alleging recordkeeping and related violations of the Clean Air
Act concerning the Hartford refinery and seeking civil penalties of
$100,000. On July 11, 1994, the EPA filed an amended complaint alleging
additional violations and increasing the amount of the total penalty
sought to $200,000. The case was tried before an administrative law
judge on August 23-24, 1994. On March 21, 1995, Clark received the
initial decision of the Administrative Law Judge, finding liability
against Clark and assessing a civil penalty of $140,000. Clark paid
this penalty in May 1995.
17
On April 13, 1995 the Company was served with two Grand Jury
Records Subpoenas issued by the Office of the United States Attorney,
Environmental Crimes Section, in St. Louis. The Subpoenas seek documentary
information primarily about the gasoline spill at the St.
Louis Terminal which occurred in January, 1994. The Company is cooperating
fully with the U.S. Attorney Office's investigation and on
June 26, 1995 produced responsive documents to the Subpoenas. It is not
possible to estimate at this time any potential exposure to Clark from
this inquiry.
On May 4, 1994, the United States Equal Employment Opportunity
Commission (''EEOC'') filed a class action lawsuit, Case No. 94 C 2779,
EEOC v. Clark Refining & Marketing, Inc., 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 and intends to vigorously defend this action. The plaintiff class
consists of 40 class members and is now tentatively closed. 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 May 23, 1995 the Company was served with a petition entitled
Anderson, et al vs. Chevron and Clark, filed in Jefferson County, Texas
by twenty-four individual plaintiffs who were Chevron employees who did
not receive offers of employment from Clark at the time of the purchase
of the Port Arthur Refinery. Chevron is named as a co-defendant as well
as the outplacement service retained by Chevron. Clark has filed an
answer denying all of the allegations. Subsequent to the filing of the
petition, the plaintiffs have each filed individual charges with the
United States Equal Employment Opportunity Commission and the Texas
Commission of Human Rights. The Company believes the allegations in
both the petition and the individual charges to be without merit and
intends to vigorously defend these matters. No estimate can be made at
this time of either the likelihood or the magnitude of any potential
liability that may result from this litigation or the individual charges
filed.
Clark has been named as a defendant in forty civil lawsuits filed
by residents of Hartford, Illinois pending in the Circuit Court for the
Third Judicial Circuit, Madison County, Illinois, seeking unspecified
damages for the presence of gasoline in the soil and groundwater beneath
the plaintiffs' properties. Shell Oil has been named as a co-defendant
in six of the above-referenced lawsuits. The plaintiffs in thirty-four
of the lawsuits, which are pending solely against Clark, have all filed
motions to voluntarily dismiss their lawsuits. It is anticipated that
these motions will be granted by the court and once they are granted,
the plaintiffs will have one year within which to refile their claims.
While it is 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 believes that the outcome of
these complaints will not have a material adverse effect on the Company's
financial position.
ITEM 5 - Other Information
Effective August 1, 1995, Maura J. Clark, 36, was elected as
Executive Vice President Corporate Development and Chief Financial
Officer of the Company. Ms. Clark is an employee of The Horsham Corporation
serving under a consulting contract with Clark. Ms. Clark previously served
as Vice President-Finance at North American Life Assurance Company, a financial
services company, from September 1993 through July 1995. From May 1990 to
September 1993, Ms. Clark served as Vice President Corporate Finance and
Corporate Development of North American Trust Company (formerly First City
Trust Company), a subsidiary of North American Life Assurance Company.
Effective July 31, 1995, Kevin P. Pennington resigned as Executive
Vice President Corporate Services of the Company.
18
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
19
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/ Dennis R. Eichholz
_______________________
Dennis R. Eichholz
Controller and Treasurer
(Authorized Officer and
Chief Accounting Officer)
August 10, 1995