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 March 31, 1997
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 May 9, 1997: 100, all of which are owned by Clark
USA, Inc.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Clark Refining & Marketing, Inc.
We have reviewed the accompanying consolidated balance sheet of Clark
Refining & Marketing, Inc. and its subsidiary as of March 31, 1997, and
the related consolidated statements of earnings and of cash flows for
the three month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquires of persons responsible
for financial and accounting matters. It is substantially less in
scope than an audit conducted 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 accompanying 1997 consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
The consolidated financial statements of the Company for the three
months ended March 31, 1996 were reviewed by other accountants whose
report dated April 30, 1996 expressed that they were not aware of any
material modifications that should be made to those financial statements
in order for them to be in conformity with generally accepted accounting
principles.
The consolidated balance sheet of the Company at December 31, 1996 and
the related consolidated statements of earnings, cash flows and
stockholders' equity for the year then ended (not presented herein) were
audited by other independent accountants whose report dated February 4,
1997 expressed an unqualified opinion on those statements.
Price Waterhouse LLP
May 6, 1997
3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
Reference December 31, March 31,
ASSETS Note 1996 1997
CURRENT ASSETS:
Cash and cash equivalents $ 319,378 $ 190,728
Short-term investments 2 14,881 14,793
Accounts receivable 171,733 137,448
Inventories 3 277,095 339,826
Prepaid expenses and other 15,411 16,656
---------- ----------
Total current assets 798,498 699,451
PROPERTY, PLANT AND EQUIPMENT 555,691 573,398
OTHER ASSETS 4 39,131 61,865
---------- ----------
$1,393,320 $1,334,714
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 303,141 $ 287,935
Accrued expenses and other 5 49,384 41,169
Accrued taxes other than income 46,484 49,161
---------- ---------
Total current liabilities 399,009 378,265
LONG-TERM DEBT 417,606 416,824
DEFERRED INCOME TAXES 802 802
OTHER LONG-TERM LIABILITIES 41,774 42,088
CONTINGENCIES 6 -- --
STOCKHOLDERS' EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and 100 shares
issued and outstanding) -- --
Paid-in capital 464,210 464,210
Retained earnings 2 69,919 32,525
---------- ----------
Total stockholder's equity 534,129 496,735
---------- ----------
$1,393,320 $1,334,714
========== ==========
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
Reference ended March 31,
Note 1996 1997
----------- -------- ---------
NET SALES AND OPERATING REVENUES
$ 1,140,200 $ 999,008
EXPENSES:
Cost of sales (1,025,208) (893,630)
Operating expenses (100,451) (107,348)
General and administrative expenses (14,008) (14,904)
Depreciation (9,039) (9,556)
Amortization 4 (3,613) (2,912)
------------ -----------
(1,152,319) (1,028,350)
------------ -----------
OPERATING LOSS (12,119) (29,342)
Interest and financing costs,
net 2, 4, 5 (9,851) (8,052)
------------ ---------
LOSS BEFORE INCOME TAXES (21,970) (37,394)
Income tax benefit 8,349 --
------------ ----------
NET LOSS $ (13,621) $ (37,394)
============ ==========
The accompanying notes are an integral part of these statements.
5
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the three months
ended March 31,
1996 1997
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,621) $(37,394)
Adjustments:
Depreciation 9,039 9,556
Amortization 5,332 4,684
Share of earnings of affiliates, net of dividends 333 52
Deferred income taxes (8,349) --
Other, net (1,418) 325
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other (8,578) 33,090
Inventories (20,987) (62,731)
Accounts payable, accrued expenses, taxes
other than income and other 39,889 (18,662)
-------- --------
Net cash provided by (used in) operating
activities 1,640 (71,080)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments 14 88
Sales of short-term investments 4,000 --
Expenditures for property, plant and equipment (7,387) (30,925)
Expenditures for turnaround (3,574) (27,412)
Proceeds from disposals of property, plant and
equipment 3,621 1,527
-------- --------
Net cash used in investing activities (3,326) (56,722)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (1,347) (782)
Capital contribution 33,600 --
Deferred financing costs (254) (66)
-------- --------
Net cash provided by (used in)
financing activities 31,999 (848)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,313 (128,650)
CASH AND CASH EQUIVALENTS, beginning of period 60,477 319,378
------- ---------
CASH AND CASH EQUIVALENTS, end of period $90,790 $190,728
======= ========
The accompanying notes are an integral part of these statements.
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FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark Refining & Marketing, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1997
(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") as of March 31, 1997, and
the related consolidated statements of earnings and cash flows for the
three month periods ended March 31, 1996 and 1997, have been reviewed by
independent accountants. Clark Port Arthur Pipeline 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.
Certain reclassifications have been made to the operating and
general administrative expenses in the 1996 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, 1996.
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, 1996 March 31, 1997
------------------------------- ------------------------------
Major Amortized Unrealized Aggregate Amortized Unrealized Aggregate
Security Type Cost Gain/(Loss) Fair Value Cost Gain/(Loss)Fair Value
- ------------- --------- ----------- ---------- --------- ----------- ---------
U.S. Debt
Securities $ 14,981 $ (100) $ 14,881 $ 14,893 $ (100) $ 14,793
The net unrealized position at March 31, 1997, included gains of
$0.0 million and losses of $0.1 million (1996 -- gains of $0.0 million
and losses of $0.1 million).
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The contractual maturities of the short-term investments at March
31, 1997, were:
Amortized Aggregate
Cost Fair Value
--------- ----------
Due in one year or less $ 3,013 $ 2,996
Due after one year through five years 11,880 11,797
_________ _________
$14,893 $14,793
========= =========
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 period ended March 31, 1997, there were no
sales of Available-for-Sale securities. For the same period in 1996,
proceeds from the sale of Available-for-Sale securities were $4.0
million with no realized gains or losses recorded for the period.
Realized gains and losses are presented in "Interest and financing
costs, net" and are computed using the specific identification method.
For the three month period ended March 31, 1997, there was no
change in the net unrealized holding gains or losses on Available-for-
Sale securities. For the same period in 1996, the change in the net
unrealized holding gains or losses on Available-for-Sale securities was
a loss of $0.2 million ($0.1 million after taxes).
3. Inventories
The carrying value of inventories consisted of the following:
December 31, March 31,
1996 1997
----------- ---------
Crude oil $105,786 $106,535
Refined and blendstocks 136,747 192,788
Convenience products 17,643 25,459
Warehouse stock and other 16,919 15,044
----------- ---------
$277,095 $339,826
=========== =========
The market value of the crude oil and refined product inventories
at March 31, 1997, was approximately $21.0 million above the carrying
value (December 31, 1996 - $81.7 million).
4. Other Assets
Amortization of deferred financing costs for the three month
period ended March 31, 1997, was $1.8 million (1996 - $1.6 million), and
is included in " Interest and financing costs, net ".
Amortization of refinery maintenance turnaround costs for the
three month period ended March 31, 1997, was $2.9 million (1996 - $3.6
million).
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5. Interest Expense and Finance Income, Net
Interest and financing costs, net, consisted of the following:
For the three months
ended March 31,
--------------------
1996 1997
------ ------
Interest expense $10,737 $10,641
Financing costs 1,615 1,753
Interest income (2,273) (3,920)
-------- -------
10,079 8,474
Capitalized interest (228) (422)
-------- --------
Interest and financing costs, net $ 9,851 $ 8,052
======== ========
Accrued interest payable at March 31, 1997, of $8.6 million
(December 31, 1996 - $6.8 million) is included in "Accrued expenses and
other".
6. Contingencies
Clark is subject to various legal proceedings related to governmental
regulations and other actions arising out of the normal course of
business, including legal proceedings related to environmental matters.
While it is not possible at this time to establish the ultimate amount
of liability with respect to such contingent liabilities, Clark is of
the opinion that the aggregate amount of any such liabilities, for which
provision has not been made, will not have a material adverse effect on
their financial position, 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.
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ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three month periods ended March 31, 1996 and 1997.
All dollars listed are in millions. The tables provide supplementary
and pro forma data and are not intended to represent an income statement
presented in accordance with generally accepted accounting principles.
For the three months
ended March 31,
--------------------
1996 1997
------ ------
Financial Results:
Net sales and operating revenues $1,140.2 $ 999.0
Cost of sales 1,025.2 893.6
Operating expenses 100.5 107.4
General and administrative expenses 14.0 14.9
Depreciation and amortization 12.6 12.4
Interest and financing costs 12.1 12.0
Interest and finance income 2.3 3.9
-------- ---------
Loss before income taxes (21.9) (37.4)
Income tax benefit 8.3 --
-------- ---------
Net loss $ (13.6) $ (37.4)
======== =========
Operating Income:
Pro forma refining contribution to
operating income (a) $ (14.6) $ 29.8
Retail contribution to operating income 9.1 4.2
Corporate general and administrative expenses 3.3 3.9
-------- ---------
(8.8) 30.1
Depreciation and amortization
12.6 12.4
Special items (a) 9.3 (47.0)
-------- ---------
Operating loss $(12.1) $ (29.3)
======== =========
(a) Special items are described in detail below.
The Company reported a net loss of $37.4 million for the first
quarter of 1997 as compared to a net loss of $13.6 million in the same
period of 1996. Excluding the effect of special items discussed below,
first quarter operating contribution would have increased $38.9 million
to $30.1 million in 1997 versus a loss of $8.8 million in 1996. Special
items reduced pre-tax earnings on a pro forma basis by $47.0 million in
1997 as compared to a pre-tax gain of $9.3 million in the first quarter
of 1996. Unlike 1996, the Company did not record a tax provision
benefit on its 1997 pretax loss due to its current tax loss carryforward
position.
Special items associated with the estimated impact of a fall in
crude oil prices on feedstock costs and the Company's estimate of the
hypothetical cost of lost production associated with a major maintenance
turnaround reduced first quarter pre-tax earnings by $47.0 million on a
pro forma basis in 1997. A decrease in crude oil prices of approximately $5.50
per barrel in the quarter had a negative impact on the Company's pretax
earnings of approximately $30.7 million, resulting from the fact that
feedstock acquisition costs are fixed on average two to three weeks prior
to the manufacture and sale of the finished products. The Company has not
historically hedged this price risk because of the unrecoverable cost of
entering into appropriate hedge-related derivatives, especially in a
backwardated market. In 1996, this policy resulted in gains of $9.3 million
in the first quarter because crude oil prices increased almost $2 per
barrel in that period. The Company successfully completed an extensive
planned maintenance turnaround on most units at its Port Arthur refinery in
the first quarter of 1997. The opportunity cost of lost production from
essentially the entire refinery being out of service for one month was $16.3
million on a pro forma basis.
10
Net sales and operating revenues decreased approximately 12% in the
first quarter of 1997 as compared to the prior year. This decrease was
principally the result of the above mentioned crude oil price decline
and the major maintenance turnaround at the Port Arthur refinery, which
reduced the Company's production and sales of refined products.
Refining
Refining Division Operating Statistics:
(dollars in millions, except per barrel data)
For the three months
ended March 31,
--------------------
1996 1997
------ ------
Port Arthur Refinery
Crude oil throughput (m bbls/day) 199.0 166.5
Production (m bbls/day) 203.7 166.1
Pro forma gross margin ($/barrel of production) (a) $ 2.00 $ 3.91
Operating expenses 38.7 43.1
Net margin including turnaround impact $ (1.6) $ 15.4
Estimated turnaround impact (b) -- 16.3
Pro forma net margin (b) $ (1.6) $ 31.7
Blue Island, Hartford and other refining
Crude oil throughput (m bbls/day) 125.5 133.4
Production (m bbls/day) 132.3 136.7
Pro forma gross margin ($/barrel of production) (a) $ 2.00 $ 2.88
Operating expenses 31.5 32.0
Pro forma net margin $ (7.4) $ 3.4
Divisional G & A expenses 5.6 5.3
Pro forma contribution to earnings (b) $ (14.6) $ 29.8
(a) Excludes the impact of the change in crude oil prices on feedstock
costs. Actual gross margin per barrel was as follows:
Port Arthur, 1996 - $2.39; 1997 - $2.53. Blue Island, Hartford and
other refining, 1996 - $2.17; 1997 - $2.06.
(b) Includes hypothetical cost of lost production at foregone margins
during the period of the turnaround shutdown.
On a pro forma basis, the refining division contributed $29.8
million to operating income in the first quarter of 1997 (1996 - loss
of $14.6 million). Excluding special items in both periods, pro forma
refining contribution in the quarter increased $44.4 million versus
1996. Actual first quarter contribution was a loss of $17.2 million in
1997 versus a loss of $5.3 million in 1996. Midwest refining results
improved despite a 5% decline in Midwest refining margin indicators.
This improvement was principally due to improved yields and throughput
and better crude oil quality differentials. Crude oil quality
differential indicators for sour crude oil improved from $0.81 per
barrel to $2.19 per barrel and the discount for heavy sour crude oil
improved from $4.33 per barrel to $6.35 per barrel from the first
quarter of 1996 to the first quarter of 1997. The Company believes
these crude oil quality differential indicators improved primarily due
to increased availability of light and heavy sour crude oil, higher
levels of industry refinery maintenance turnarounds and milder winter
weather in the first quarter of 1997. Results for the Port Arthur
refinery were also buoyed by the strong crude oil quality
differentials, a 17% improvement in Gulf Coast refining margin
indicators and outstanding operating performance following the
turnaround.
Port Arthur refinery crude oil throughput and production in the first
quarter of 1997 was reduced due to the planned maintenance turnaround.
First quarter Midwest refining crude oil throughput and production
increased over the prior year due to lower levels of routine maintenance
in 1997. Operating expenses were flat year over year in Midwest
refining. First quarter Port Arthur refinery operating expenses were
$4.4 million higher than the previous year principally because of higher
natural gas prices in January of 1997. Natural gas is consumed as a
fuel in the refining process. Natural gas prices decreased in February
and March of this year.
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Retail
Retail Division Operating Statistics:
(dollars in millions, except per gallon and per store data)
For the three months
ended March 31,
--------------------
1996 1997
------ ------
Gasoline volume (mm gals.) 236.5 238.1
Gasoline gross margin (cents/gal) 11.9 10.8
Gasoline gross margin $ 28.2 $ 25.8
Convenience product sales $ 58.5 $ 60.3
Convenience product margin and other income 14.5 16.4
Gain on asset sales $ 1.8 $ --
Operating expenses 30.3 32.3
Divisional G & A expenses 5.1 5.7
Contribution to operating income $ 9.1 $ 4.2
Per Month Per Store
Company operated stores (average) 826 814
Gasoline volume (m gals.) 95.4 98.2
Convenience product sales (m) $ 23.6 $ 24.7
Convenience product gross margin (m) $ 5.8 $ 6.7
First quarter retail contribution to operating income of $4.2
million was below the 1996 contribution ($9.1 million) because of a
$1.8 million gain on the sale of stores in the prior year and weaker
retail fuel margins in 1997. Certain store operating measures did show
improvement in 1997, including a 15% improvement in convenience product
margins per store on nearly 5% higher sales. Fuel volume on both an
absolute and per store basis was also improved over 1996, despite a
lower store count. Fuel margins improved over one cent per gallon from
a weak second half of 1996 trend, but were still one cent per gallon
below year ago levels. Retail margins have historically benefited when
wholesale prices fall, but the benefit of a first quarter crude oil
price decline was not fully realized because of a highly competitive
retail market. Operating expenses increased principally because of
lease expenses and operating costs for larger stores acquired in the
last year. General and administrative expenses increased primarily
due to higher labor costs.
Other Financial Highlights
Interest and financing costs, net for the first quarter of 1997
decreased over the comparable period of 1996 because of interest earned
on higher cash balances in 1997, resulting from the contribution of an
advance crude oil purchase receivable from Clark USA in late 1996 that
was converted to cash.
Liquidity and Capital Resources
Net cash used in operating activities, excluding working capital
changes, for the first quarter of 1997 was $22.8 million compared to
$8.7 million in the year-earlier period. Working capital at March 31,
1997 was $321.2 million, a 1.85 to 1 current ratio, versus $399.5
million at December 31, 1996, a 2.00 to 1 current ratio. Working
capital at March 31, 1997 decreased from the end of the year because of
the first quarter loss, a retail store acquisition that was financed
with cash and the capital cost and related temporary working capital
impact of the Port Arthur refinery maintenance turnaround.
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In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil and refined
petroleum products. The Company has in place a $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 March 31, 1997 was $400
million and approximately $328 million of the facility was utilized for
letters of credit. There were no direct borrowings under the Company's
line of credit at March 31, 1997.
Cash flows used in investing activities in the first quarter of 1997,
excluding short-term investment activities which management treats
similar to cash and cash equivalents, was $56.8 million as compared to
$7.3 million in the year-earlier period. The higher investing
activities in 1997 resulted principally from the Port Arthur refinery
turnaround ($27.4 million) and the acquisition of 48 retail stores in
Michigan ($18.6 million). Refinery capital expenditures totaled $9.0
million in the first three months of 1997 (1996 - $3.9 million), most of
which related to discretionary and non-discretionary projects undertaken
in conjunction with the Port Arthur refinery turnaround. Retail capital
expenditures for the first three months of 1997, excluding the Michigan
acquisition, totaled $3.3 million (1996 - $3.4 million) and was
principally for underground storage tank-related work.
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.
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
On May 5, 1997 a Complaint, entitled AOC Limited Partnership ("AOC
L.P.") et al., vs. TrizecHahn Corporation, et al., Case No. 97 CH 05543
naming Clark USA as a defendant was filed in the Circuit Court of Cook
County. The Complaint seeks $21 million, plus continuing interest,
related to the sale of equity by Clark USA to finance the Port Arthur
Refinery acquisition. The sale of such equity triggered a calculation
of a potential contingent payment to AOC L.P. (the "AOC L.P. Contingent
Payment"), pursuant to the agreement related to the December 1992
purchase of their minority interest in Clark USA. Based upon such
calculation, Clark USA believes no payment is required. The Complaint
disputes the method of calculation. The AOC L.P. Contingent Payment is
an amount which shall not exceed in the aggregate $33.9 million and is
payable 89% by Clark USA and 11% by TrizecHahn. TrizecHahn has
indemnified Clark USA for any AOC L.P. Contingent Payment in excess of
$7 million.
In April 1997, the Company was advised of the termination of an
investigation by the Office of the United States Attorney concerning a
1994 gasoline spill at the Company's St. Louis, Missouri terminal. In
May 1997, the Company received correspondence from the State of Missouri
seeking to resolve any dispute arising from the events of January 1994
and seeking the payment of a penalty of less than $200,000.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
April 15 and 23, 1997 - Changes in Registrant's Certifying
Accountant
13
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)
May 12, 1997