1
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, 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 November 10, 1995: 100, all of which are owned by Clark
USA, Inc.
2
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
September 30, 1995, and the related consolidated statements of earnings for
the three and nine month periods ended September 30, 1995 and 1994 and cash
flows for the nine month period ended September 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,
October 23, 1995, except for
Note 10 for which the date is
November 3, 1995
3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
Reference September 30, December 31,
ASSETS Note 1995 1994
--------- ------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents 2 $ 76,842 $ 105,450
Short-term investments 3 29,917 28,658
Accounts receivable 153,344 77,794
Inventories 4 301,350 151,466
Prepaid expenses and other 15,851 15,659
------------- -------------
Total current assets 577,304 379,027
PROPERTY, PLANT AND EQUIPMENT 7 518,962 429,805
OTHER ASSETS 5 42,413 50,717
------------- -------------
$ 1,138,679 $ 859,549
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable 2 $ 288,750 $ 165,610
Accrued expenses and other 6 47,967 41,639
Accrued taxes other than income 41,438 41,407
------------- -------------
Total current liabilities 378,155 248,656
LONG-TERM DEBT 400,615 400,734
DEFERRED INCOME TAXES 21,101 29,178
OTHER LONG-TERM LIABILITIES 39,137 18,129
CONTINGENCIES 9 -- --
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and 100 shares
issued and outstanding) -- --
Paid-in capital 8 180,000 30,000
Retained earnings 119,671 132,852
------------- -------------
Total stockholder's equity 299,671 162,852
------------- -------------
$ 1,138,679 $ 859,549
============= =============
The accompanying notes are an integral part of these statements.
4
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands)
Reference For the three months
Note ended September 30,
--------- -----------------------------
1995 1994
---------- ----------
NET SALES AND OPERATING REVENUES $ 1,211,760 $ 689,265
EXPENSES:
Cost of sales (1,062,982) (597,442)
Operating expenses (107,760) (58,611)
General and administrative expenses (7,556) (7,742)
Depreciation (8,004) (6,726)
Amortization (3,021) (2,354)
Recovery of inventory write-down
to market value 5 -- --
---------------- ---------------
(1,189,323) (672,875)
OPERATING INCOME 22,437 16,390
Interest and financing costs, net 5,6 (9,915) (8,772)
---------------- ---------------
EARNINGS BEFORE INCOME TAXES 12,522 7,618
Income tax provision (4,758) (2,568)
---------------- ---------------
NET EARNINGS $ 7,764 $ 5,050
================ ===============
The accompanying notes are an integral part of these statements.
5
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands)
Reference For the nine months
Note ended September 30,
--------- -----------------------------
1995 1994
---------- ----------
NET SALES AND OPERATING REVENUES $ 3,376,857 $ 1,842,209
EXPENSES:
Cost of sales (3,027,788) (1,574,837)
Operating expenses (288,656) (174,392)
General and administrative expenses (23,286) (23,103)
Depreciation (22,613) (19,853)
Amortization 5 (8,848) (8,087)
Recovery of inventory write-down
to market value 4 -- 26,500
------------- ------------
(3,371,191) (1,773,772)
------------- ------------
OPERATING INCOME 5,666 68,437
Interest and financing costs, net 5,6 (28,424) (25,738)
Other income -- --
------------- ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (22,758) 42,699
Income tax benefit (provision) 8,648 (15,691)
------------- ------------
NET EARNINGS (LOSS) $ (14,110) $ 27,008
============= =============
The accompanying notes are an integral part of these statements.
6
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the nine months
ended September 30,
-----------------------------
1995 1994
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (14,110) $ 27,008
Adjustments:
Depreciation 22,613 19,853
Amortization 12,623 8,969
Realized loss on sales of investments -- 1,774
Share of earnings of affiliates, net of
dividends (741) (610)
Deferred income taxes (8,648) 17,133
Recovery of inventory write-down to market value -- (26,500)
Other 1,008 953
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other (80,899) (38,971)
Inventories (149,884) 23,244
Accounts payable, accrued expenses, taxes other
than income, and other 132,290 (10,200)
--------------- ----------------
Net cash provided by (used in) operating
activities (85,748) 22,653
=============== ================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (25,701) (94,498)
Sales of short-term investments 25,942 99,101
Expenditures for property, plant and equipment (24,187) (56,846)
Expenditures for refinery turnaround (2,764) (5,873)
Refinery acquisition expenditures (69,746) --
Proceeds from disposals of property, plant and
equipment 15,934 5,268
--------------- ---------------
Net cash used in investing activities (80,522) (52,848)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (119) (587)
Capital contribution 150,000 --
Deferred financing costs (12,219) (892)
--------------- ---------------
Net cash provided by (used in) financing
activities 137,662 (1,479)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (28,608) (31,674)
CASH AND CASH EQUIVALENTS, beginning of period 105,450 78,344
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 76,842 $ 46,670
=============== ===============
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. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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"), a Delaware corporation, as of September
30, 1995, and the related consolidated statements of earnings for the three
month and nine month periods ended September 30, 1995 and 1994, and statements
of cash flows for the nine month period ended September 30, 1995 and 1994,
have been reviewed by independent accountants. Clark Port Arthur Pipeline
Company, a Delaware corporation, the new wholly-owned subsidiary of The
Company, 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. Cash and Cash Equivalents
As a result of the Company's cash management system, checks issued but
not yet presented to the banks for payment may create negative book cash
balances. Historically, such negative balances were reflected as an
adjustment to cash. At September 30, 1995 the Company included these negative
balances in accounts payable and has restated prior periods to reflect this
presentation. Such negative balances included in accounts payable were $12.4
million and $10.2 million at September 30, 1995 and December 31, 1994,
respectively.
3. 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:
September 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 $ 30,317 $ (400) $ 29,917 $ 30,558 $ (1,900) $ 28,658
8
The contractual maturities of the short-term investments at
September 30, 1995 were:
Amortized Aggregate
Cost Fair Value
---------- ----------
Due in one year or less $ 6,013 $ 5,984
Due after one year through five years 24,304 23,933
--------- ---------
$ 30,317 $ 29,917
========= =========
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, 1995, the
proceeds from sales of Available-for-Sale securities was $18.0 million and
$25.9 million, respectively, with no realized gain or loss in either period.
For the three month and nine month periods ended September 30, 1994, the
proceeds from the sale of Available-for-Sale securities were $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.
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 nine month periods ended September 30,
1995, was a gain of $0.1 million ($0.1 million after taxes) and a gain of $1.5
million ($0.9 million after taxes), respectively. The net unrealized gain or
loss is included as a component of retained earnings.
4. Inventories
The carrying value of inventories consisted of the following:
September 30, December 31,
1995 1994
------------- ------------
Crude oil . . . . . . . . . . . . . $ 86,933 $ 42,760
Refined products and blendstocks . . 178,129 87,957
Convenience products . . . . . . . . 21,116 14,904
Warehouse stock and other. . . . . . 15,172 5,845
------------ ------------
$ 301,350 $ 151,466
============ ============
The market value of these inventories at September 30, 1995 was
approximately $5.3 million above the carrying value (December 31, 1994 - $1.9
million above the carrying value). At September 30, 1995, the Company had
$0.6 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 7,
"Acquisition of Port Arthur Refinery"), the Company 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
September 30, 1995 was $400 million. This credit facility is collateralized
by substantially all of the Company s current assets and certain intangibles.
9
5. Other Assets
Amortization of deferred financing costs for the three month and nine
month periods ended September 30, 1995, was $1.5 million (1994 - $0.3
million) and $3.7 million (1994 - $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, 1995, was $3.0 million (1994 - $2.4 million) and
$8.8 million (1994 - $8.1 million), respectively.
6. Interest and Financing Costs, Net
Interest and financing costs, net, consisted of the following:
<CAPTIVE>
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ---------------------
1995 1994 1995 1994
------ ------ ------ ------
Interest expense. . . . $ 10,155 $ 10,118 $ 30,730 $ 30,466
Financing costs . . . . 1,454 352 3,749 1,025
Interest income . . . . (1,570) (918) (4,780) (4,268)
--------- -------- -------- --------
10,039 9,552 29,699 27,223
Capitalized interest (124) (780) (1,275) (1,485)
--------- -------- -------- --------
$ 9,915 $ 8,772 $ 28,424 $ 25,738
========= ======== ======== ========
Accrued interest payable at September 30, 1995 of $8.7 million (December
31, 1994 - $6.9 million) is included in "Accrued expenses and other".
7. Acquisition of Port Arthur Refinery
On February 27, 1995, the Company 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, the Company 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 in the fourth quarter of 1995 when appraisals and
other studies are completed.
The Company 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, the
Company has entered into supply agreements with Chevron and Chevron Chemical
Company providing for the purchase and sale by the Company 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, The Company assumed responsibility for
environmental contamination beneath and within 25 to 100 feet of the
facility's active processing units.
10
8. 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 the Company for the purchase of the refinery.
In connection with the financing and closing of the Port Arthur
acquisition, the Company 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, the Company received the requisite consents from its note holders.
These consents (i) permitted the Company 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.
The Company 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, the Company entered into a new three year revolving credit
facility, collateralized by substantially all of its current assets and
certain intangibles (see Note 4 "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.
9. Contingencies
The Company 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 the Company, have all voluntarily dismissed their lawsuits
without prejudice. The plaintiffs have one year from such dismissal in which
to refile their claims.
The United States Equal Employment Opportunity Commission ("EEOC") has
filed a class action lawsuit against the Company alleging that they had
engaged in a pattern or 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. The plaintiff class consists
of 40 class members and is now tentatively closed. Discovery is ongoing. A
scheduling order has been entered indicating that a trial will not be held
before mid to late 1996, unless earlier dismissed. The Company believes the
allegations to be without merit and intends to vigorously defend this action.
A class action lawsuit was filed against the Company and two of its
employees on behalf of purported plaintiff classes including residents of Blue
Island, Illinois and Eisenhower High School students arising out of
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the Blue Island refinery spent catalyst release of October 7, 1994. The
complaint alleges claims based on common law nuisance, negligence, willful and
wanton negligence and the Illinois Family Expenses Act. Plaintiffs seek to
recover damages in an unspecified amount for alleged medical expenses,
diminished property values, pain and suffering and other damages. Plaintiffs
also seek punitive damages in an unspecified amount. The Company believes the
alleged claims to be without merit and intends to vigorously defend this
action.
The Company is subject to various other 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 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 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.
10. Subsequent Events
In early November 1995, Clark USA entered into a merger agreement with
subsidiaries of Occidental Petroleum Corporation ("Occidental"). Pursuant to
the merger agreement and a series of related agreements Clark USA will acquire
the right to receive the equivalent of 17.661 million barrels of West Texas
Intermediate crude oil to be delivered over the next six years according to
a defined schedule. In connection with the transaction, Clark USA will issue
3,954,545 shares of common stock and 1,500,000 shares of non-voting class D
common stock valued at approximately $120 million, or $22 per share, and pay
$100 million in cash to Occidental. Clark USA's right to receive oil in
accordance with the contract schedule is unconditional until $220 million
(plus interest of 10% per year on any unrecovered portion of the first $100
million) is received by Clark USA from the sale of such oil. Clark USA will
contract to resell the oil delivered under the agreements to a subsidiary of
Occidental immediately after delivery at then current market prices.
Occidental has guaranteed the obligations of its subsidiaries as described
above.
Clark USA also entered into a merger agreement and a series of related oil
contract agreements with a newly formed subsidiary of Gulf Resources
Corporation ("Gulf"), pursuant to which Clark USA will acquire the right to
receive 3.164 million barrels of certain royalty oil to be received by Gulf
pursuant to agreements among Gulf, an Occidental subsidiary and the Government
of the Congo. Provided certain underlying arrangements remain in effect,
Clark USA will resell the Gulf oil to Gulf immediately after delivery at the
then current selling price for Djeno crude oil, less an agreed transportation
fee. In connection with the Gulf transactions, Clark USA will issue 1,222,273
shares of non-voting class D common stock valued at $26.9 million, or $22 per
share. The shares issued to Gulf will be pledged to Clark USA and will be
released to Gulf as proceeds from the sales of the Gulf oil are received by
Clark USA. Clark USA will be entitled to foreclose on pledged shares under
certain circumstances where the Gulf oil is not received as and when currently
anticipated. Clark USA's recourse under such circumstances is limited to the
value of such shares.
In order to finance a portion of the above described transactions, Clark
USA anticipates receiving proceeds from a $150 million private note offering.
In connection with this financing and the above transactions, Clark USA is
seeking consents from the holders of its Zero Coupon Notes to waive or amend
the terms of certain covenants under the indenture governing these securities
and the Company is seeking approval from its bank group. The offering is
conditioned upon the closing of the Occidental transaction, the completion of
the consent solicitation with respect to the Company's Zero Coupon Notes and
the Company's bank group approval.
12
In connection with the above-described transactions, Clark USA will pay
upfront fees of $9.4 million and commission over the future delivery periods
of up to approximately $7 million to an affiliate of Gulf which provided
consulting and advisory services in the formulation of the terms and structure
of these transactions and will continue to assist the Company in the delivery,
acceptance and loading procedures of the oil.
13
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
In 1995, Clark Refining & Marketing, Inc. (the "Company") changed its
internal pricing methodology to better reflect external market prices for
valuing product transferred between its retail and refining divisions. This
change was necessitated by new regulations and logistics associated with
blended gasoline products. Divisional results for 1994 have been restated to
be consistent with this new methodology. The restatement did not impact the
Company s consolidated results of operations or financial position. Results
that were impacted include the refining and retail division contributions to
operating income. Related retail gasoline gross margins and refining margins
per barrel were also adjusted.
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, 1995 and
1994. All dollars listed are in millions except per barrel, per gallon and
other statistical data.
Financial Results: (a)
<CAPTIVE>
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ---------------------
1995 1994 1995 1994
------ ------ ------ ------
Net sales and operating revenues $ 1,211.8 $ 689.3 $ 3,376.9 $ 1,842.2
Cost of sales 1,063.0 597.4 3,027.8 1,574.8
Operating expenses 107.8 58.6 288.7 174.4
General and administrative expenses 7.6 7.7 23.3 23.1
Depreciation and amortization 11.0 9.1 31.5 27.9
Interest and financing costs, net 9.9 7.1 28.4 24.0
--------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (b) 12.5 9.4 (22.8) 18.0
Income tax (provision) benefit (b) (4.7) (3.2) 8.7 (6.3)
--------------------------------------------------------------------------------------------------------------
Earnings (loss) before unusual items (b) 7.8 6.2 (14.1) 11.7
Unusual items, after taxes (b) -- (1.1) -- 15.3
--------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 7.8 $ 5.1 $ (14.1) $ 27.0
==============================================================================================================
Operating Income: (a)
Refining contribution to operating income (c) $ 21.0 $ 10.5 $ 13.1 $ 52.2
Retail contribution to operating income (c) 16.0 18.7 35.5 28.1
Corporate general and administrative 3.6 3.7 11.4 10.5
Depreciation and amortization 11.0 9.1 31.5 27.9
Unusual items, net (b) -- -- -- 26.5
--------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 22.4 $ 16.4 $ 5.7 $ 68.4
==============================================================================================================
(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 certain items in 1994 which are discussed below
to be "unusual".
(c) In 1995, the Company changed its internal pricing methodology to better
reflect external market prices for valuing product transferred between
its retail and refining divisions. Divisional results for 1994 have been
restated to be consistent with this new methodology.
14
The Company has recorded an increase in net earnings in each quarter of
1995 following a net loss of $21.9 million in the first quarter. Results for
the third quarter of 1995 improved over the comparable period in 1994 and the
second quarter of 1995 because of improved refining operations, seasonal
retail marketing strength (as compared to the second quarter) and a strong
contribution from the recently acquired Port Arthur refinery. Results for the
nine months ended September 30, 1995 were negatively impacted by an extremely
poor industry refining margin environment in the first quarter of 1995 and
therefore were significantly lower than the same period a year ago. Also net
earnings in the first nine months of 1994 benefited from an unusual item that
resulted principally from an increase in crude oil and product prices that
allowed for the recovery of an inventory write-down originally taken in 1993.
Net sales and operating revenues reached record levels in the first nine
months of 1995 because of the inclusion of incremental sales from production
at the Port Arthur refinery.
Refining
Refining Division Operating Statistics:
<CAPTIVE>
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ---------------------
1995 1994 1995 1994
------ ------ ------ ------
Crude oil throughput (m bbls/day) 210.2 -- 202.1 --
Production (m bbls/day) 222.5 -- 210.6 --
Gross margin ($/barrel of production) $2.60 -- $2.63 --
Operating expenses ($/barrel of production) $1.86 -- $1.96 --
Net margin (millions) $15.2 -- $30.6 --
Blue Island, Hartford and other refining(a)
Crude oil throughput (m bbls/day) 141.1 143.0 133.3 139.9
Production (m bbls/day) 139.1 135.8 133.1 140.0
Gross margin ($/barrel of production) (b) $3.36 $3.41 $2.52 $3.86
Operating expenses ($/barrel of production) $2.70 $2.35 $2.78 $2.28
Net margin (millions) (b) $8.4 $13.3 $(9.3) $60.4
Divisional G & A expenses (millions) $2.6 $2.8 $8.2 $8.2
Contribution to earnings (millions) (b) $21.0 $10.5 $13.1 $52.2
(a) Other refining includes results from all crude oil acquisition and
inventory management activities.
(b) In 1995, the Company changed its internal pricing methodology to better
reflect external market prices for valuing product transferred between
its retail and refining divisions. Divisional results for 1994 have been
restated to be consistent with this new methodology.
The refining division contributed earnings of $21.0 million in the third
quarter of 1995 (1994 - $10.5 million) and $13.1 million in the first nine
months of 1995 (1994 - $52.2 million) to operating income. 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
nine months 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 concern in the marketplace, and caused gasoline prices to fall
relative to the price of crude oil.
15
Second and third quarter 1995 results improved over the first quarter
of 1995 with better industry gasoline margins and a strong contribution from
the newly acquired Port Arthur refinery. Industry gasoline margins improved
following a weak first quarter, but the Company's results continued to be
affected by weak distillate margins and substantially higher costs for heavy
crude oil as compared to the prior year. The price of heavy crude oil has
risen substantially relative to more expensive light sweet crude oil such as
West Texas Intermediate, eroding some of the cost advantages of more highly
complex refiners such as Clark, which has the capability to process
approximately 25% of its crude slate in heavy crude oil. Results in 1995 were
also adversely affected by downtime at two of the Blue Island refinery s
gasoline producing units. On a comparative basis, the first nine months of
1994 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 the first nine months of
1995. Industry refining margins in October 1995 were weak and will be
reflected in the Company's fourth quarter results of operations.
The Company's crude oil throughput and refinery production increased over
the prior year due almost entirely to the acquisition of the Port Arthur
refinery. The poor industry margins in the first quarter of 1995 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 5,500 barrels per day for the
first nine months of 1995. The Blue Island refinery returned to full
production in mid-August 1995.
Refining division operating expenses for the third quarter and first
nine months of 1995 increased over the comparable periods in 1994 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 difficulties. Reduced throughput at Clark's Illinois refineries due
to poor first quarter market conditions and the previously mentioned operating
difficulties also contributed to a higher per barrel operating cost.
Retail
Retail Division Operating Statistics:
<CAPTIVE>
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ---------------------
1995 1994 1995 1994
------ ------ ------ ------
Gasoline volume (mm gals.) 278.4 261.8 807.2 771.7
Gasoline gross margin (c/gal) (a) 12.9c 12.8c 11.1c 9.9c
Gasoline gross margin (millions) (a) $35.8 $33.5 $89.9 $76.3
Convenience product sales (millions) $72.5 $61.4 $190.0 $174.8
Convenience product gross margin(millions) $16.8 $15.7 $47.7 $43.4
Operating expenses (millions) $35.2 $29.2 $98.4 $87.1
Divisional G & A expenses (millions) $1.4 $1.3 $3.7 $4.5
Contribution to operating income (millions) (a) $16.0 $18.7 $35.5 $28.1
Per Month Per Store
Company operated stores (average) 863 822 852 835
Gasoline volume (m gals.) 107.5 106.1 105.3 102.7
Convenience product sales (m) $28.0 $24.9 $24.7 $23.3
Convenience product gross margin (m) $6.5 $6.4 $6.2 $5.8
16
(a) In 1995, the Company changed its internal pricing methodology to better
reflect external market prices for valuing product transferred between
its retail and refining divisions. Divisional results for 1994 have been
restated to be consistent with this new methodology.
Clark continued to expand its retail network in core markets during the
first nine months of 1995, resulting in a net increase in store count over the
third 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 expects to divest 41 stores in
the Kansas, western Missouri and Minnesota markets in late 1995 or early 1996.
The retail division contributed earnings of $16.0 million to operating
income in the third quarter of 1995 (1994 - $18.7 million) and $35.5 million
in the first nine months of 1995 (1994 - $28.1 million). Retail contribution
for the third quarter of 1995 was slightly lower than year ago levels
principally because of competitive pressures in certain markets and weak
results from non-reimaged markets. For the first nine months of 1995,
significant improvements in gasoline and convenience product gross margins
more than offset higher store operating expenses.
Gasoline gross margins improved in the first nine months of 1995
compared to the first nine months of 1994 despite volatile unit margins,
especially in the first half of 1995, 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 and
supported by the positive impact from the Company's reimaging program, Clark
implemented a pricing strategy to narrow the historical street gasoline
pricing difference relative to its higher priced competitors, thus improving
per gallon margin and overall gasoline gross margins.
Convenience product gross margins increased in the third quarter and
first nine months of 1995 over the same periods in 1994 due to an improvement
in the mix of higher margin On The Go products (42% of sales in the first
nine months of 1995 versus 39% in the comparable period of 1994) and the
favorable margin impact from the newly acquired stores, which more than offset
lower cigarette margins. In addition to incremental lease and operating
expenses associated with the new stores added since the third quarter of 1994,
expenses increased due to higher store labor costs and higher credit card
processing expenses (due to a 44% increase in credit card sales), partially
offset by lower administrative costs.
Other Financial Highlights
Corporate general and administrative expenses for the third quarter of
1995 were flat as compared to the same period in 1994, but expenses for the
first nine months 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 third quarter and first
nine months of 1995 exceeded the comparable periods a year ago principally
because of the newly acquired Port Arthur refinery.
Net interest and financing costs increased due principally to the 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
On November 6, 1995, Clark USA, Inc. ("Clark USA") the Company"s parent
announced two separate merger agreements (the "Transactions"), one with a
subsidiary of Occidental Petroleum
17
Corporation and the other with Gulf Resources Corporation and one of its
subsidiaries, which will result in Occidental and Gulf owning approximately
19% and 4%, respectively of the shares of Clark USA. Consequently, The
Horsham Corporation's interest in Clark USA will drop to approximately 46% and
Tiger Management Corporation s interest will drop to approximately 31%. The
agreements will result in Clark USA acquiring the right to receive
approximately 21 million barrels of crude oil over the next six years in
exchange for $100 million of cash and the issuance of 6,676,818 new common
shares with a value of $146.9 million. Clark USA intends to finance the cash
portion of the proposed transactions with the proceeds of a long-term $150
million private financing. The mergers and the financing will require the
consent of Clark USA's existing zero coupon bondholders and certain other
customary approvals. Closing is expected by the end of 1995.
Net cash from operating activities for the first nine months of 1995,
excluding working capital changes, was a $12.7 million compared to a $48.6
million 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 September 30, 1995 was $199.1 million, a 1.53 to 1 current ratio,
versus $130.4 million at December 31, 1994, a 1.52 to 1 current ratio.
Working capital increased due to the acquisition and partial financing with
equity of the Port Arthur refinery working capital requirements.
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil. 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 September 30, 1995 was $400 million. At September 30, 1995,
approximately $235 million of the facility was utilized for letters of credit.
There were no direct borrowings under Clark's line of credit at September 30,
1995.
In November 1994, Clark refinanced its previous working capital facility
(the "Clark Credit Agreement") with a group of banks. The working capital
facility provides the Company with sufficient liquidity to support the
expanded letter of credit needs related to the acquisition of the Port Arthur
Refinery. The Clark Credit Agreement contains covenants and conditions which,
among other things, limit dividends, indebtedness, liens, investments,
contingent obligations and capital expenditures, and require Clark to maintain
its property and insurance, to pay all taxes and comply with all laws, and to
provide periodic information and conduct periodic audits on behalf of the
lenders. Clark is also required to comply with certain financial covenants.
However, Clark is currently renegotiating the covenant package in the Clark
Credit Agreement and seeking consent for the Transactions, the related $150
million note offering and consent solicitation. The proposed new financial
covenants as approved by the lead banks include: (i) a reduction in the
minimum required ratio of adjusted cash flow to debt service; (ii) a reduction
in the minimum required tangible net worth; (iii) a reduction in minimum
working capital requirements; (iv) a reduction in the minimum required level
of Horsham ownership; (v) an increase in the length of certain cure periods;
(vi) a revision in the provisions for payment of dividends from Clark to Clark
USA; (vii) an increase in the maximum ratio of debt to tangible net worth, and
(viii) a reduction in the portion of the credit facility available for cash
borrowings.
Cash flows used in investing activities in the first nine months of
1995, excluding short-term investment activities for which management's intent
is similar to cash and cash equivalents, increased to $80.8 million in 1995
from $57.5 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 $24.2 million (1994 -
$56.8 million) during the first nine months of 1995. Refinery capital
expenditures totaled $4.8 million of this amount in the first nine months of
1995 (1994 - $36.7 million) mostly directed towards miscellaneous regulatory
projects. Retail capital expenditures for the first nine months of 1995
totaled $18.5 million (1994 - $18.5 million) and consisted of approximately
one-half for regulatory compliance, principally related to Stage II vapor
recovery that was required to be completed in the first half of the 1995, and
approximately one-half for discretionary projects primarily related to the
18
Company's reimaging 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 nine months of 1995
reflected the partial financing of the Port Arthur refinery acquisition with
an 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 Port Arthur 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, including those relating to the Port Arthur refinery for the next
year. In response to the industry refining conditions during the latter part
of 1994 and first quarter of 1995, 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 other routine maintenance activities) and certain additional
strategies. While the Company believes that these programs will be sufficient
to provide the Company with adequate liquidity for the next year, 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.
19
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. Clark has now resumed operation of all
units which had been out of service in connection with the incident. The
Occupational Safety and Health Administration ("OSHA") conducted an
investigation of the incident and on September 13, 1995 Clark and OSHA entered
into a settlement agreement pursuant to which Clark agreed to pay a $1.257
million penalty, make certain safety improvements and perform a safety audit.
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.
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
alkylation 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 alkylation 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
at least $1.8 million, and is still evaluating the feasibility of additional
measures that the order requires Clark to consider.
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
including the October 7, 1994 and March 13, and March 16, 1995 incidents.
Clark 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 "release incidents" at Clark's
Hartford, Illinois refinery some of which 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.
On April 13, 1995 Clark 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.
20
Clark 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., 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 premature to predict
whether this case will go to trial, and, if so, what the level of exposure,
if any, 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. An amended petition has been filed
increasing the number of plaintiffs to forty. 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.
On August 25, 1995, the IEPA sent a pre-enforcement conference letter
to Clark in which it alleged that certain wastewater flows at the Hartford
refinery constituted a listed hazardous waste within the meaning of the
Resource Conservation and Recovery Act ("RCRA"). Clark disputes the
characterization of the wastewater as hazardous waste. On September 22, 1995
the IEPA sent a pre-enforcement conference letter to Clark in which it alleged
that certain releases had occurred at Clark s Hartford refinery. No estimate
of any liability with respect to these matters can be made at this time.
On October 11, 1995 a class action lawsuit entitled Rosolowski et al v.
Clark Refining & Marketing, Inc., et al, was filed in the Circuit Court of
Cook County, Illinois against Clark and two Clark employees on behalf of
purported plaintiff classes including residents of Blue Island, Illinois and
Eisenhower High School students arising out of the Blue Island refinery spent
catalyst release of October 7, 1994. The complaint alleges claims based on
common law nuisance, negligence, willful and wanton negligence and the
Illinois Family Expense Act. Plaintiffs seek to recover damages in an
unspecified amount for alleged medical expenses, diminished property values,
pain and suffering and other damages. Plaintiffs also seek punitive damages
in an unspecified amount. At this time no estimate can be made as to Clark s
potential loss contingency, if any, with respect to this lawsuit.
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 voluntarily dismiss their lawsuits without
prejudice. The plaintiffs have one year within which to refile their claims.
While it is not possible at this time to establish the ultimate amount
of liability with respect to the environmental and legal matters described
above, the Company if of the opinion that the aggregate amount of any such
liability will not have a material adverse effect on its financial position,
cash flows or results of
21
operations, however, an adverse outcome of these matters could have a material
effect on quarterly or annual operating results or cash flows when resolved
in a future period.
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 and Clark. 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.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
November 10, 1995 - Announcement of certain agreements with
Occidental Petroleum Corporation and Gulf Resources
Corporation and announcement of solicitation of bondholder consents
22
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)
November 13, 1995