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, 1996
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
(*) No ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of November 12, 1996: 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, 1996, and the related consolidated statements of earnings
for the three and nine month periods ended September 30, 1995 and 1996
and cash flows for the nine month periods ended September 30, 1995 and
1996. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying analytical
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 consolidated balance sheet of Clark Refining &
Marketing, Inc. and subsidiary as of December 31, 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated
February 2, 1996, we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1995 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 29, 1996
3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
Reference December 31, September 30,
ASSETS Note 1995 1996
------------- ------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 60,477 $ 52,639
Short-term investments 2 46,116 26,731
Accounts receivable 179,200 164,790
Inventories 3 290,444 285,109
Prepaid expenses and other 18,875 19,039
------------ -----------
Total current assets 595,112 548,308
PROPERTY, PLANT AND EQUIPMENT 7 549,292 543,430
OTHER ASSETS 4 43,930 38,133
------------ -----------
$ 1,188,334 $ 1,129,871
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 315,236 $ 259,984
Accrued expenses and other 5 41,501 43,458
Accrued taxes other than income 45,240 47,716
------------ -----------
Total current liabilities 401,977 351,158
LONG-TERM DEBT 420,441 417,188
DEFERRED INCOME TAXES 22,861 7,782
OTHER LONG-TERM LIABILITIES 38,937 40,133
CONTINGENCIES 8 -- --
STOCKHOLDER'S EQUITY:
Common stock ($ 0.01 par value per share;
1,000 shares authorized and 100 shares
issued and outstanding) -- --
Paid-in capital 195,610 229,210
Retained earnings 2 108,508 84,400
------------ -----------
Total stockholder's equity 304,118 313,610
------------ -----------
$ 1,188,334 $ 1,129,871
============ ===========
The accompanying notes are an integral part of these statements.
4
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
For the three months
ended September 30,
Reference ---------------------
Note 1995 1996
----------- ----------- ---------
NET SALES AND OPERATING REVENUES $1,211,760 $1,249,468
EXPENSES:
Cost of sales (1,062,982) (1,121,246)
Operating expenses (100,685) (104,320)
General and administrative expenses (14,631) (15,823)
Depreciation (8,004) (9,870)
Amortization 4 (3,021) (2,509)
----------- ----------
(1,189,323) (1,253,768)
----------- ----------
OPERATING INCOME (LOSS) 22,437 (4,300)
Interest and financing costs, net 2, 4, 5 (9,915) (10,746)
----------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES 12,522 (15,046)
Income tax (provision) benefit (4,758) 5,718
----------- ----------
NET EARNINGS (LOSS) $ 7,764 $ (9,328)
=========== ==========
The accompanying notes are an integral part of these statements
5
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
For the nine months
ended September 30,
Reference ---------------------
Note 1995 1996
----------- ----------- ---------
NET SALES AND OPERATING REVENUES $ 3,376,857 $ 3,724,393
EXPENSES:
Cost of sales (3,027,788) (3,346,318)
Operating expenses (269,604) (303,200)
General and administrative expenses (42,338) (45,313)
Depreciation (22,613) (28,134)
Amortization 4 (8,848) (8,835)
----------- -----------
(3,371,191) (3,731,800)
----------- -----------
OPERATING INCOME (LOSS) 5,666 (7,407)
Interest and financing costs, net 2, 4, 5 (28,424) (31,177)
----------- -----------
LOSS BEFORE INCOME TAXES (22,758) (38,584)
Income tax benefit 8,648 14,662
----------- -----------
NET LOSS $ (14,110) $ (23,922)
=========== ===========
The accompanying notes are an integral part of these statements
6
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the nine months
ended September 30,
---------------------
1995 1996
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,110) $(23,922)
Adjustments:
Depreciation 22,613 28,134
Amortization 12,623 13,898
Share of earnings of affiliates, net of dividends (741) (139)
Deferred income taxes (8,648) (14,965)
Other 1,008 (617)
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other (80,899) 10,467
Inventories (149,884) 5,252
Accounts payable, accrued expenses, taxes other
than income, and other 132,290 (48,450)
----------- ---------
Net cash used in operating activities (85,748) (30,342)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (25,701) 85
Sales of short-term investments 25,942 19,000
Expenditures for property, plant and equipment (24,187) (23,327)
Expenditures for turnaround (2,764) (7,174)
Refinery acquisition expenditures (69,746) --
Proceeds from disposals of property, plant
and equipment 15,934 3,890
----------- ---------
Net cash used in investing activities (80,522) (7,526)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (119) (3,253)
Capital contribution 150,000 33,600
Deferred financing costs (12,219) (317)
----------- ---------
Net cash provided by financing activities 137,662 30,030
----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (28,608) (7,838)
CASH AND CASH EQUIVALENTS, beginning of period 105,450 60,477
----------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 76,842 $ 52,639
=========== =========
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, 1996
(tabular dollar amounts in thousands of US dollars)
1. Basis of Preparation
The unaudited consolidated balance sheet of Clark Refining &
Marketing, Inc., a Delaware corporation, and Subsidiary (the "Company" or
"Clark"), as of September 30, 1996, and the related consolidated
statements of earnings for the three month and nine month periods ended
September 30, 1995 and 1996, and statements of cash flows for the nine
month periods ended September 30, 1995 and 1996, have been reviewed by
independent accountants as noted in their report included herein. Clark
Port Arthur Pipeline Company, a Delaware corporation, 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.
Certain reclassifications have been made to the operating and
general administrative expenses in the 1995 financial statements to
conform to current year presentation.
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, 1995.
The Company's earnings and cash flow from operations are primarily
dependent upon processing crude oil and selling quantities of refined
petroleum products at margins sufficient to cover operating expenses.
Crude oil and refined petroleum products are commodities, and factors
largely out of the Company's control can cause prices to vary, in a wide
range, over a short period of time. This potential margin volatility can
have a material effect on financial position, current period earnings and
cash flow.
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:
December 31, 1995 September 30, 1996
------------------------------- --------------------------------
Major Amortized Unrealized Aggregate Amortized Unrealized Aggregate
Security Type Cost Gain/(Loss) Fair Value Cost Gain/(Loss) Fair Value
- - ------------- --------- ----------- ---------- --------- ----------- ----------
U.S. Debt
Securities $ 46,116 $ -- $ 46,116 $ 27,031 $ (300) $ 26,731
The net unrealized position at September 30, 1996 included gains of
$0.0 million and losses of $0.3 million (1995 -- gains of $0.1 million and
losses of $0.1 million).
8
The contractual maturities of the short-term investments at
September 30, 1996 were:
Amortized Aggregate
Cost Fair Value
---------- ----------
Due in one year or less $ 15,063 $ 14,966
Due after one year through five years 11,968 11,765
---------- ----------
$ 27,031 $ 26,731
========== ==========
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, 1996,
proceeds from the sale of Available-for-Sale securities was $0.0 million
and $19.0 million, respectively, with no realized gains or losses recorded
for the period. For the same three and nine month periods in 1995,
proceeds from the sale of Available-for-Sale securities was $18.0 million
and $25.9 million, respectively, with no realized gains or losses recorded
for the periods. Realized gains and losses are presented in "Interest and
financing costs, net" and are computed using the specific identification
method.
The change in the net unrealized holding gains or losses on
Available-for-Sale securities for the three month and nine month periods
ended September 30, 1996, was $0.0 million and a loss of $0.3 million
($0.2 million after taxes), respectively. For the same three and nine
month periods in 1995, the change in the net unrealized holding gains or
losses 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.
3. Inventories
The carrying value of inventories consisted of the following:
December 31, September 30,
1995 1996
----------- ------------
Crude oil $ 90,635 $ 80,618
Refined and blendstocks 163,915 170,803
Convenience products 20,532 19,698
Warehouse stock and other 15,362 13,990
----------- ------------
$290,444 $285,109
========== ============
The market value of these inventories at September 30, 1996 was
approximately $69.3 million above the carrying value (December 31, 1995 -
$5.4 million).
4. Other Assets
Amortization of deferred financing costs for the three month and
nine month periods ended September 30, 1996, was $1.6 million (1995 - $1.5
million) and $4.9 million (1995 - $3.7 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, 1996, was $2.5 million (1995 - $3.0 million)
and $8.8 million (1995 - $8.8 million), respectively.
9
5. Interest and Financing Costs, Net
Interest and financing costs, net, consisted of the following:
For the three months For the nine months
ended September 30, ended September 30,
1995 1996 1995 1996
--------- --------- --------- ---------
Interest expense $ 10,155 $ 10,633 $ 30,730 $ 32,207
Financing costs 1,454 1,649 3,749 4,922
Interest income (1,570) (1,250) (4,780) (5,198)
--------- --------- --------- ---------
10,039 11,032 29,699 31,931
Capitalized interest (124) (286) (1,275) (754)
--------- --------- --------- ---------
$ 9,915 $ 10,746 $ 28,424 $ 31,177
========= ========= ========= =========
Accrued interest payable at September 30, 1996, of $8.6 million
(December 31, 1995 - $6.8 million) is included in "Accrued Expenses and
Other".
6. Equity Contribution
On October 3, 1996, Clark USA, Inc. contributed to Clark an advance
crude oil purchase receivable together with certain associated hedge
contracts at fair market value. Clark recorded the transaction as an
equity contribution and sold the contributed asset for cash proceeds of
$235.4 million on October 4, 1996.
7. New Accounting Standard Adopted
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The
standard requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable with future cash flows. Implementation of this SFAS did not
result in an impairment loss.
The Company has expended approximately $25 million on a project to
produce low sulfur diesel fuel at the Hartford refinery ("DHDS Project")
which was delayed in 1992. Should the Company determine in the future to
permanently discontinue this project, the carrying value of the DHDS
Project would likely not be fully recoverable.
8. Contingencies
The Company is subject to various legal proceedings related to
governmental regulations and other actions arising out of the normal
course of business, including legal proceedings related to environmental
matters.
In early April, 1996, Clark learned that its Hartford, Illinois
refinery is the subject of a Clean Air Act enforcement referral by the
United States Environmental Protection Agency to the United States
Department of Justice. The referral pertains to alleged violations of the
Clean Air Act and regulations promulgated thereunder in the operation and
permitting of the Hartford refinery fluid catalytic cracking unit ("FCCU")
and alleged modification of the FCCU. Although a complaint has not yet
been filed, the government requested additional information from Clark
pursuant to Section 114 of the Clean Air Act for the stated purpose of
completing its pre-enforcement evaluation. Clark is gathering the
requested information and is otherwise cooperating with the
<PAGE 10>
government in its investigation. No estimate can be made at this time
of Clark's potential liability, if any, as a result of this enforcement
referral.
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 their 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.
11
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"). The Company
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.
Certain reclassifications were made to 1995 operating expenses and
general and administrative expenses to conform to current period
presentation. In addition, certain reclassifications were made to 1995
refining division results for the Port Arthur refinery and Blue Island,
Hartford and Other Refining to allocate certain crude oil acquisition
and inventory management results and conform to current period
presentation. Such reclassifications did not change the Company's total
results of operations.
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three and nine month periods ended September 30, 1995
and 1996. All dollars listed are in millions except per barrel, per
gallon and other statistical data.
For the three months For the nine months
ended September 30, ended September 30,
Financial Results: 1995 1996 1995 1996
Net sales and operating revenues $1,211.8 $1,249.5 $3,376.8 $3,724.4
Cost of sales 1,063.0 1,121.2 3,027.8 3,346.3
Operating expenses 100.7 104.3 269.6 303.2
General and administrative expenses 14.7 15.9 42.3 45.3
Depreciation and amortization 11.0 12.4 31.5 37.0
Interest and financing costs 11.5 12.0 33.2 36.4
Interest and finance income 1.6 1.3 4.8 5.2
Earnings (loss) before income taxes 12.5 (15.0) (22.8) (38.6)
Income tax (provision) benefit (4.7) 5.7 8.7 14.7
Net earnings (loss) $ 7.8 $ (9.3) $(14.1) $ (23.9)
Operating Income:
Refining contribution to
operating income $ 21.0 $ 6.8 $ 13.1 $ 16.0
Retail contribution to
operating income 16.0 5.3 35.5 24.4
Corporate general and administrative 3.6 4.0 11.4 10.8
Depreciation and amortization 11.0 12.4 31.5 37.0
Operating income (loss) $ 22.4 $ (4.3) $ 5.7 $ (7.4)
The Company reported a net loss of $9.3 million for the third quarter
of 1996 versus net earnings of $7.8 million in the third quarter of
1995. Refining and retail market conditions were weak in the quarter as
rising and volatile crude oil prices squeezed margins and more than
offset the positive impact of improved operations versus the prior year.
For the first nine months of 1996, Clark reported a net loss of $23.9
million as compared to a $14.1 million net loss in the same period of
1995. Despite a first quarter rebound in refining margins reflecting
more normal winter demand for distillates, nine month results were
reduced versus the prior year because of rising crude oil prices and
extreme crude oil market volatility. These factors effectively raised
the cost of the Company's feedstocks. The majority of the Company's
products are commodities that are subject to seasonal and market
volatility. Net sales and operating revenues increased approximately 3%
in the third quarter of 1996 as compared to the prior year because of
higher crude oil prices, and the first nine months of 1996 increased
approximately 10% over 1995 because of the higher crude oil prices and
the inclusion in 1996 of a full nine months of incremental sales from
production at the Port Arthur refinery, which was acquired on February
27, 1995.
12
Refining
Refining Division Operating Statistics:
For the three months For the nine months
ended September 30, ended September 30,
1995 1996 1995 1996
Port Arthur Refinery (acquired February 27, 1995)
Crude oil throughput (m bbls/day) 210.2 196.4 203.8 201.7
Production (m bbls/day) 222.5 210.7 210.6 212.0
Gross margin ($/barrel of production) $ 2.37 $ 2.72 $ 2.41 $ 2.49
Operating expenses($/barrel of production) 1.81 2.19 1.90 2.06
Net margin (millions) $ 11.6 $ 10.4 $ 23.2 $ 25.0
Blue Island, Hartford and other refining
Crude oil throughput (m bbls/day) 141.1 140.1 133.3 135.1
Production (m bbls/day) 139.1 144.3 133.1 136.2
Gross margin ($/barrel of production) $ 3.72 $ 2.43 $ 2.80 $ 2.66
Operating expenses ($/barrel of production) 2.52 2.24 2.62 2.44
Net margin (millions) $ 15.3 $ 2.5 $ 6.5 $ 8.2
Divisional G & A expenses (millions) 5.9 6.1 16.6 17.2
Contribution to earnings (millions) $ 21.0 $ 6.8 $ 13.1 $ 16.0
The refining division contribution to operating income in the third
quarter of 1996 was $6.8 million (1995 - $21.0 million). Refining
results in the third quarter continued to be hampered by weak market
conditions. Rising crude oil prices combined with weaker than expected
summer gasoline demand squeezed margins. Clark's Midwest and Gulf Coast
markets were both negatively impacted, as reflected by $1.80 and $0.80
per barrel respective declines in industry refining margin indicators
from the second quarter. In addition, high absolute crude oil prices
weakened margins on by-products that do not immediately track crude oil
price changes, and higher refinery fuel gas prices increased operating
expenses at the Port Arthur refinery by approximately 30 cents per
barrel. For the first nine months of 1996, the refining division
improved its contribution to $16.0 million (1995 - $13.1 million). Nine
month refining division results reflected year over year operational
improvements, including improved yields, but these improvements were
tempered by the volatile crude oil markets, increased refinery fuel gas
costs and lower chemical and by-product margins. Industry margins in
early 1995 were particularly weak due to the transition to reformulated
gasoline in certain markets and an unseasonably warm winter, which
reduced demand for heating oil.
Port Arthur crude oil throughput and production in the third quarter
was below 1995 levels due to maintenance on the FCC unit. Midwest
refining production during the first nine months was below capacity as
routine maintenance was successfully completed on several units.
Refinery production was reduced by an average of approximately 9,000
barrels per day in the first nine months of 1995 due to the poor
industry refining margins and a fire in an operating unit at the Blue
Island refinery. Production in the fourth quarter of 1996 is expected
to be five to ten percent less than capacity at Clark's Blue Island
refinery due to two units being out of service for approximately three
weeks.
In 1996, the commodity markets for crude oil and refined products
have been characterized by rising crude oil prices, daily price
volatility and steep premiums for prompt crude oil and product
deliveries. These type of commodity market conditions disrupt many
normal options and futures relationships making it difficult for the
Company to effectively hedge short-term price risk.
13
Retail
Retail Division Operating Statistics:
For the three months For the nine months
ended September 30, ended September 30,
1995 1996 1995 1996
Gasoline volume (mm gals.) 278.4 270.1 807.2 777.7
Gasoline gross margin (cents/gal) 12.9 9.4 11.1 10.6
Gasoline gross margin (millions) $ 35.8 $ 25.4 $ 89.9 $ 82.3
Convenience product sales (millions) $ 72.5 $ 68.3 $ 190.0 $193.7
Convenience product and
other income (millions) 16.8 17.9 47.7 52.1
Operating expenses (millions) $ 31.4 $ 32.2 $ 87.8 $ 92.7
Divisional G & A expenses (millions) 5.2 5.8 14.3 17.3
Contribution to operating
income (millions) $ 16.0 $ 5.3 $ 35.5 $ 24.4
Per Month Per Store
Company operated stores (average) 863 827 852 828
Gasoline volume (m gals.) 107.5 108.9 105.3 104.4
Convenience product sales (m) $ 28.0 $ 27.5 $ 24.7 $ 26.0
Convenience product gross margin (m) $ 6.5 $ 7.2 $ 6.2 $ 6.7
The retail division contributed $5.3 million to operating income in
the third quarter of 1996 (1995 - $16.0 million). The third quarter
retail division contribution was below 1995 levels due almost entirely
to a sharp drop in retail gasoline margins. This resulted from an
increase in wholesale gasoline costs associated with higher crude oil
prices that was not fully captured in retail selling prices due to an
extremely competitive Midwest retail market environment. This was
particularly the case in the last half of the third quarter.
Convenience product sales were below year ago levels, but overall
margin contribution was higher due to improved pricing and product mix.
Nine month results were also below year ago levels because of the
squeeze in overall fuel margin contribution. Retail margins generally
are compressed in periods of rapid oil price increases and widen as
prices stabilize or fall. Operating and general and administrative
expenses increased over the prior year principally due to operating
leases and other costs related to new store properties and increased
costs related to the expansion of Clark's credit card programs.
The Company continued to implement its targeted retail growth
strategy in 1996 by adding 10 high volume stores in its core Chicago
market which raised its Chicago market share to approximately 10%.
Early in 1996, the Company completed its withdrawal from the Minnesota
market, recognizing a modest gain. As part of its overall growth
strategy, the Company expects to continue to consider retail store
growth in both existing and new markets while also evaluating current
markets for possible divestiture.
Other Financial Highlights
Depreciation and amortization expenses for the third quarter and
first nine months of 1996 exceeded the comparable periods of 1995
principally because of the acquisition of Port Arthur refinery in early
1995.
For the third quarter and first nine months of 1996, interest
expense increased over 1995 due to costs related to an expanded working
capital facility and amortization of bondholder consent fees, both
incurred during 1995.
14
Liquidity and Capital Resources
Net cash generated from operating activities, excluding working
capital changes, for the first nine months of 1996 was $2.4 million
compared to $12.7 million in the year-earlier period as a result of
weaker market conditions. Working capital at September 30, 1996 was
$197.2 million, a 1.56 to 1 current ratio, and was comparable to $193.1
million at December 31, 1995, a 1.48 to 1 current ratio.
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
December 31, 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 borrowing base associated with such
facility at September 30, 1996 was $393 million and approximately $286
million of the facility was utilized for letters of credit. There were
no direct borrowings under the Company's line of credit at September 30,
1996.
Cash flows used in investing activities in the first nine months of
1996, excluding short-term investment activities which management treats
similar to cash and cash equivalents, decreased to $26.6
million from $80.8 million in the year-earlier period. The higher
investing activities in 1995 resulted principally from the Port Arthur
refinery acquisition which closed on February 27, 1995. Capital
expenditures for property, plant and equipment during the first nine
months of 1996 totaled $23.3 million (1995 - $24.2 million) with an
additional $7.2 million (1995 - $2.8 million) for refinery maintenance
turnaround expenditures. Refinery capital expenditures totaled $12.5
million in the first nine months of 1996 (1995 - $4.8 million), most of
which was for discretionary projects at the Port Arthur and Hartford
refineries. Retail capital expenditures for the first nine months of
1996 totaled $10.5 million (1995 - $18.5 million) principally for the
purchase of equipment related to new stores and underground storage
tank-related work.
In early October, the Company sold for net cash proceeds of $235.4
million one of the advance crude oil purchase receivables Clark USA
acquired in December, 1995 and certain associated hedge contracts. The
receivable together with the associated hedge contracts was assigned to
the Company by Clark USA in early October at fair market value and
recorded as an equity contribution. The Company has historically
maintained substantial cash reserves to mitigate the cyclical nature of
its business. Such cash reserves may also be used to enhance existing
assets, for acquisitions, to reduce debt or may be distributed to Clark
USA.
Cash flows from financing activities declined in the first nine
months of 1996 as compared to the prior year. Financing activities in
1995 related to the financing of the Port Arthur refinery 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. Future working capital,
discretionary or non-discretionary capital expenditures, or acquisitions
may require additional debt or equity financing.
15
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
In early April, 1996, Clark learned that its Hartford, Illinois
refinery is the subject of a Clean Air Act enforcement referral by the
United States Environmental Protection Agency ("USEPA") to the United
States Department of Justice. The referral pertains to alleged
violations of the Clean Air Act and regulations promulgated thereunder in
the operation and permitting of the Hartford refinery fluid catalytic
cracking unit ("FCCU") and alleged modification of the FCCU. Although a
complaint has not yet been filed, the government requested additional
information from Clark pursuant to Section 114 of the Clean Air Act for
the stated purpose of completing its pre-enforcement evaluation. Clark
is gathering the requested information and is otherwise cooperating with
the government in its investigation. No estimate can be made at this
time of Clark's potential liability, if any, as a result of this
enforcement referral.
On January 5, 1995, Clark received a Unilateral Administrative Order
from the USEPA pursuant to CERCLA alleging that "Clark Oil & Refining
Corp." is a potential responsible party ("PRP") with respect to
shipments of hazardous substances to a solid waste disposal site known
as the Ninth Avenue Site, Gary, Indiana. The alleged shipments all
occurred prior to 1987. The Order instructs Clark and the other
approximately ninety PRPs to design and implement certain remedial work
at the site. Clark has informed the USEPA that it is not a proper party
to this matter, because its purchase of certain assets of a company
previously operating under the "Clark" name ("Old Clark") was "free and
clear" of all Old Clark liabilities. Information provided with the
Order estimates that the remedial work may cost approximately $25
million. No estimate of liability can be made with respect to this
proceeding at this time. In addition, on December 28, 1994, Clark was
served with a summons and complaint brought by certain private parties
seeking to recover all past and future response costs with respect to
that site on the basis of shipments of hazardous substances allegedly
made prior to 1987. Clark moved to dismiss this action on the basis
that the action is barred by the "free and clear" Order pursuant to
which Clark purchased certain assets of Old Clark. The plaintiffs and
one co-defendant opposed Clark's motion to dismiss. On April 19, 1996,
the District Court denied Clark's Motion to Dismiss holding that at this
early procedural stage of the case and prior to gathering facts
regarding the plaintiffs opportunity to participate in the bankruptcy
case which issued the "free and clear" order, the Court would not
dismiss the case. No estimate of any liability with respect to this
case can be made at this time.
On September 30, 1996, the USEPA sent a combined Finding of Violation
alleging that fugitive emissions had been released from Clark's Blue
Island refinery and a Notice of Violation alleging that the total annual
benzene calculation pursuant to the National Emissions Standards for
Hazardous Air Pollutants was incorrectly determined. Clark has
scheduled an administrative conference to discuss this matter with the
USEPA. No estimate of liability, if any, with respect to any of these
matters can be made at this time.
Following an explosion on October 19, 1996 in a propane gas line at
the Blue Island refinery, the State of Illinois brought an action seeking a
temporary restraining order requiring the refinery to cease operations,
temporarily, pending a safety review. On November 8, 1996, the court
denied the requested order. The State's time for appeal has not yet run
out.
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ITEM 5 - Other Information
Clark signed a new three year collective bargaining agreement,
expiring August 31, 1999, for certain Blue Island refinery employees.
The previous agreement would have expired August 31, 1996.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Fifth Amendment to Amended and Restated Credit
Agreement, dated as of October 4, 1996
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
October 4, 1996 - Announcement of the sale of an advance
crude oil purchase receivable
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CLARK REFINING & MARKETING, INC.
(Registrant)
/s/ Dennis R. Eichholz
Dennis R. Eichholz
Controller and Treasurer (Authorized
Officer and Chief Accounting Officer)
November 12, 1996