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, 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 November 7, 1997: 100, all of which were 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. and its subsidiary as of September 30, 1997,
and the related consolidated statements of earnings for the three and
nine months then ended and the statement of cash flows for the nine
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 inquiries 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 and
nine months ended September 30, 1996 were reviewed by other accountants
whose report dated October 29, 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
stockholder's 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
St. Louis, Missouri
October 17, 1997, except
for Note 8 which is as of
November 3, 1997
3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands except per share data)
Reference December 31, September 30,
ASSETS Note 1996 1997
--------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 319,378 $271,112
Short-term investments 14,881 14,818
Accounts receivable 171,733 109,462
Inventories 2 277,095 335,216
Prepaid expenses and other 15,411 17,830
---------- ----------
Total current assets 798,498 748,438
PROPERTY, PLANT AND EQUIPMENT 555,691 572,765
OTHER ASSETS 3 39,131 54,729
---------- ----------
$1,393,320 $1,375,932
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable 5 $ 303,141 $ 230,605
Accrued expenses and other 4, 5 49,384 51,011
Accrued taxes other than income 46,484 45,030
---------- ----------
Total current liabilities 399,009 326,646
LONG-TERM DEBT 417,606 415,296
DEFERRED INCOME TAXES 802 128
OTHER LONG-TERM LIABILITIES 41,774 43,362
CONTINGENCIES 6 -- --
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and
100 shares issued and outstanding) -- --
Paid-in capital 464,210 464,210
Retained earnings 69,919 126,290
---------- ----------
Total stockholder's equity 534,129 590,500
---------- ----------
$1,393,320 $1,375,932
========== ==========
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)
For the three months
Reference ended September 30,
Note 1996 1997
--------- ----------- -----------
NET SALES AND OPERATING REVENUES $ 1,249,468 $ 1,123,629
EXPENSES:
Cost of sales (1,121,246) (916,697)
Operating expenses (104,602) (107,450)
General and administrative expenses (15,541) (18,368)
Depreciation (9,870) (11,013)
Amortization 3 (2,509) (5,529)
----------- -----------
(1,253,768) (1,059,057)
----------- -----------
OPERATING INCOME (LOSS) (4,300) 64,572
Interest and financing costs, net 3, 4 (10,746) (8,708)
----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (15,046) 55,864
Income tax benefit (provision) 5,718 (4,697)
----------- -----------
NET EARNINGS (LOSS) $ (9,328) $ 51,167
=========== ===========
The accompanying notes are in integral part of these statements.
5
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, dollars in thousands)
For the nine months
Reference ended September 30,
Note 1996 1997
--------- ----------- -----------
NET SALES AND OPERATING REVENUES $ 3,724,393 $ 3,296,367
EXPENSES:
Cost of sales (3,346,318) (2,791,363)
Operating expenses (304,559) (319,001)
General and administrative expenses (43,954) (47,393)
Depreciation (28,134) (30,249)
Amortization 3 (8,835) (14,095)
----------- -----------
(3,731,800) (3,202,101)
----------- -----------
OPERATING INCOME (LOSS) (7,407) 94,266
Interest and financing
costs, net, 3,4 (31,177) (26,240)
----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (38,584) 68,026
Income tax benefit (provision) 14,662 (11,697)
----------- -----------
NET EARNINGS (LOSS) $ (23,922) $ 56,329
=========== ===========
The accompanying notes are 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,
1996 1997
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (23,922) $ 56,329
Adjustments:
Depreciation 28,134 30,249
Amortization 13,898 19,442
Share of earnings of affiliates,
net of dividends (139) (103)
Deferred income taxes (14,965) (700)
Other, net (617) 655
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses
and other 10,467 70,425
Inventories 5,252 (57,847)
Accounts payable, accrued expenses,
taxes other than income and other (48,450) (79,234)
---------- --------
Net cash provided by (used in)
operating activities (30,342) 39,216
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments 85 131
Sales of short-term investments 19,000 --
Expenditures for property, plant and equipment (23,327) (53,999)
Expenditures for turnaround (7,174) (31,230)
Proceeds from disposals of property, plant
and equipment 3,890 3,691
---------- --------
Net cash used in investing activities (7,526) (81,407)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (3,253) (2,310)
Capital contribution 33,600 --
Deferred financing costs (317) (3,765)
---------- --------
Net cash provided by (used in)
financing activities 30,030 (6,075)
---------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,838) (48,266)
CASH AND CASH EQUIVALENTS, beginning of period 60,477 319,378
---------- --------
CASH AND CASH EQUIVALENTS, end of period $ 52,639 $271,112
========== =========
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, 1997
(unaudited, 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 September 30, 1997,
and the related consolidated statements of earnings and cash flows for
the three and nine month periods ended September 30, 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
and 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. Inventories
The carrying value of inventories consisted of the following:
December 31, September 30,
1996 1997
------------ ------------
Crude oil $ 105,786 $ 108,574
Refined and blendstocks 136,747 186,275
Convenience products 17,643 22,899
Warehouse stock and other 16,919 17,468
------------ ------------
$ 277,095 $ 335,216
============ ===========
The market value of the crude oil and refined product inventories at
September 30, 1997, was approximately $35.0 million above the carrying
value (December 31, 1996 - $81.7 million).
8
3. Other Assets
Amortization of deferred financing costs for the three and nine month
periods ended September 30, 1997, was $1.8 million (1996 - $1.6 million)
and $5.3 million (1996 - $4.9 million) respectively, and was included in
"Interest and financing costs, net".
Amortization of refinery maintenance turnaround costs for the three
and nine month periods ended September 30, 1997, was $5.5 million (1996
- - $2.5 million) and $14.1 million (1996 - $8.8 million), respectively.
4. 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,
1996 1997 1996 1997
---------- --------- --------- --------
Interest expense $10,633 $10,884 $32,207 $32,281
Financing costs 1,649 1,778 4,922 5,285
Interest income (1,250) (3,629) (5,198) (10,354)
---------- --------- --------- --------
11,032 9,033 31,931 27,212
Capitalized interest (286) (325) (754) (972)
---------- --------- --------- --------
$10,746 $8,708 $31,177 $26,240
========== ======== ======== ========
Accrued interest payable at September 30, 1997, of $8.6 million
(December 31, 1996 - $6.8 million) was included in "Accrued expenses and
other".
5. Income Taxes
The income tax provision of $11.7 million for the nine month period
ended September 30, 1997, was primarily related to the resolution of an
Internal Revenue Service examination for the years 1993 and 1994 as
determined under the Company's tax sharing agreement with Clark USA,
Inc. ("Clark USA"). The resolution had the effect of accelerating the
recognition of certain net taxable temporary differences and, as a
result, required an increase in the valuation allowance related to the
Company's net deferred tax asset. The provision includes $2.0 million
of associated interest.
6. 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. 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.
7. Working Capital Facility
On September 25, 1997, the Company entered into a new $400 million
revolving credit facility. The credit facility, which expires on
December 31, 1999, provides for borrowings and the issuance of letters
of credit of up to the lesser of $400 million or the amount available
under a defined borrowing base calculated with respect to the Company's
9
cash, investments, eligible receivables and hydrocarbon inventories.
Direct borrowings under the credit facility are limited to $50 million.
The Company will use the facility primarily for the issuance of letters
of credit to secure purchases of crude oil. The Company is required to
comply with certain financial covenants including maintaining defined
levels of working capital, cash, tangible net worth, and cumulative cash
flow, as defined.
8. Subsequent Event
On October 1, 1997, Clark USA, the Company's parent, reclassified all
shares of Class A Common Stock held by Tiger Management to a new Class E
Common Stock. Subsequently, Trizec Hahn Corporation purchased all of the
Class E Common Stock for $7.00 per share in cash totaling $63 million.
The new Class E Common Stock was then converted into 63,000 shares
($1,000 liquidation preference per share) of 11 1/2% Senior Cumulative
Exchangeable Preferred Stock, par value $0.01 per share, which was sold
on October 1, 1997 for face value to qualified institutional buyers in
reliance on Rule 144A under the Securities Act of 1933.
In connection with the above transactions all remaining shares of
Class A Common Stock were converted to Common Stock. In addition,
Common Stock held by affiliates of Occidental Petroleum ("Oxy") was
converted to a new Class F Common Stock which has voting rights limited
to 19.9% of the total voting power of all classes of Clark USA's voting
stock, but is convertible into Common Stock by any holder other than
affiliates of Occidental Petroleum. Oxy was also issued an additional
545,455 shares of Class F Common Stock in full satisfaction of certain
terms in the Oxy Stockholders' Agreement.
On November 3, 1997, an affiliate of Blackstone Capital Partners III
Merchant Banking Fund L.P. ("Blackstone") acquired the 13,500,000 shares
of Common Stock of Clark USA previously held by Trizec Hahn Corporation
and certain of its subsidiaries, as a result of which Blackstone
obtained a 65% controlling interest in Clark USA. This transaction
triggered the Change of Control covenant in Clark USA's Senior Secured
Zero Coupon Notes, due 2000 ("Zero Coupon Notes") and the Company's 9 1/2%
Senior Notes, due 2004 and 10 1/2% Senior Notes, due 2001 ("10 1/2% Notes")
and may trigger the Change of Control covenant in Clark USA's 10 7/8%
Senior Notes, 2005 if it results in a Ratings Decline (as defined).
Under such covenants, noteholders would have the right to require the
Company and Clark USA to repurchase their notes at 101% of face value
or, in the case of the Zero Coupon Notes, accreted value. However,
market quotations for these notes were higher than 101% on November 4,
1997 and as a result, the Company does not believe this Change of
Control will have a material adverse effect on the Company. The
Company's credit facility was amended to permit the acquisition by
Blackstone of Clark USA's Common Stock.
In addition, the Blackstone transaction caused an "ownership change"
of the Clark USA consolidated tax return group (the "Group") under
Section 382 of Internal Revenue Code of 1986, as amended. The result of
the ownership change is that utilization of the Group's tax attribute
carryovers will be limited in tax periods subsequent to the ownership
change. While the Group has not finally determined the effect of the
limitation, it is possible that the book value of the Group's tax
attribute carryovers would be incrementally reduced by as much as $13
million. The Company expects to make a final determination by the end
of the year.
Subject to certain market conditions and other factors, Clark USA
intends to purchase and/or redeem its Zero Coupon Notes with available
cash prior to the end of 1997 and the Company intends to refinance its
10 1/2% Notes with the proceeds of a $400 million debt offering. Clark
USA has a tender offer outstanding for the repurchase of its Zero Coupon
Notes which currently expires on November 14, 1997.
The aforementioned repurchase and redemptions and costs associated
with the Blackstone transaction are intended to be funded with the
proceeds of the debt offering and available cash. As a result of the
aforementioned transactions, the Company expects to record an
extraordinary charge to earnings for redemption premiums and unamortized
deferred financing costs of approximately $9.7 million on a pre-tax
basis, pay fees and expenses of $9.0 million associated with the
Blackstone transaction, and pay cash dividend to Clark USA of
approximately $207.4 million (based on the accreted value of the Zero
Coupon Notes at September 30, 1997).
10
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three and nine month periods ended September 30, 1996
and 1997. All dollar amounts listed are in millions. The tables
provide supplementary data and are not intended to represent an income
statement presented in accordance with generally accepted accounting
principles.
For the three months For the nine months
ended September 30, ended September 30,
Financial Results: 1996 1997 1996 1997
------- ------- ------- --------
Net sales and operating revenues $1,249.5 $1,123.6 $3,724.4 $ 3,296.4
Cost of sales 1,121.2 916.7 3,346.3 2,791.4
Operating expenses 104.6 107.4 304.6 319.0
General and administrative expenses 15.6 18.4 43.9 47.4
Depreciation and amortization 12.4 16.5 37.0 44.3
Interest and financing costs 12.0 12.3 36.4 36.6
Interest and finance income 1.3 3.6 5.2 10.3
-------- ------- ------- --------
Earnings (loss) before income taxes (15.0) 55.9 (38.6) 68.0
Income tax (provision) benefit 5.7 (4.7) 14.7 (11.7)
-------- --------- ------- --------
Net earnings (loss) $ (9.3) $ 51.2 $ (23.9) $ 56.3
======== ========= ========= ========
Operating Income:
Refining contribution to
operating income $ 6.8 $ 78.2 $ 16.0 $ 132.9
Retail contribution to
operating income 5.3 8.0 24.4 18.1
Corporate general and
administrative expenses 4.0 5.1 10.8 12.4
------- ------- ------- --------
8.1 81.1 29.6 138.6
Depreciation and amortization 12.4 16.5 37.0 44.3
-------- ------- ------- --------
Operating income (loss) $ (4.3) $ 64.6 $ (7.4) $ 94.3
======== ======= ======== ========
The Company reported record net earnings of $51.2 million for the
third quarter of 1997 which compared to a net loss of $9.3 million in
the same period of 1996. The Company also reported record earnings
before interest, taxes, depreciation and amortization ("EBITDA") of
$81.1 million in the third quarter of 1997 versus $8.1 million in the
third quarter of 1996. The previous records for net earnings and EBITDA
were achieved in the second quarter of 1997. Earnings improved in the
current year principally because of significantly higher refining
division contribution due to improved market conditions and stronger
operations.
The Company reported EBITDA of $138.6 million for the first nine
months of 1997 versus $29.6 million in the year ago period. Year-to-
date net earnings were $56.3 million through September 30, 1997 versus a
net loss of $23.9 million in the same period of 1996. After adjusting
for the negative impact of two special items totaling an estimated $42
million that occurred principally in the first quarter, year-to-date pro
forma EBITDA would have been an estimated $181 million in 1997. Year-
to-date pro forma EBITDA on a similar basis in 1996 would have been an
estimated $9 million. A fall in crude oil prices of over $6 per barrel
in the first quarter cost the Company approximately $27 million (1996 -
$20 million gain) resulting from the fact that feedstock costs are fixed
on average two to three weeks prior to the manufacture and sale of the
finished products. The Company does not currently hedge this price risk
because of the unrecoverable cost of entering into appropriate hedge-
related derivatives, especially in a backwardated market. The Company
also 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 estimated at
11
approximately $15 million. The Company recorded an income tax provision
of $11.7 million for the first nine months of 1997 primarily for the
settlement of prior-period audit examinations as determined under the
Company's tax sharing agreement with Clark USA. As compared to 1996,
the Company recorded a lower tax provision for current-year earnings due
to its cumulative tax loss carryforward position.
Net sales and operating revenues decreased approximately 10% in the
third quarter and 11% in the first nine months of 1997 as compared to
the prior year. These decreases were principally the result of the
crude oil price decline, noted above, that reduced both sales and cost
of goods sold. In addition, the major maintenance turnaround at the
Port Arthur refinery reduced the Company's production and sales of
refined products.
Refining
Refining Division Operating Statistics:
(dollars in millions, except per barrel data)
For the three months For the nine months
ended September 30, ended September 30,
1996 1997 1996 1997
--------- --------- -------- ---------
Port Arthur Refinery
Crude oil throughput (m bbls/day) 196.4 218.3 201.7 201.3
Production (m bbls/day) 210.7 228.2 212.0 208.5
Gross margin
($/bbl of production) (a)$ 2.72 $ 4.45 $ 2.49 $ 3.84
Operating expenses 42.5 43.4 119.7 127.1
Net margin $ 10.4 $ 50.0 $ 25.0 $ 91.5
Blue Island, Hartford and
other refining
Crude oil throughput (m bbls/day) 140.1 136.0 135.1 135.6
Production (m bbls/day) 144.3 141.6 136.2 141.4
Gross margin
($/barrel of production) (a) $ 2.43 $ 4.96 $ 2.66 $ 3.94
Operating expenses 29.7 29.3 91.1 92.6
Net margin $ 2.5 $ 35.2 $ 8.2 $ 59.1
Divisional G & A expenses 6.1 7.0 17.2 17.7
Contribution to earnings $ 6.8 $ 78.2 $ 16.0 $ 132.9
(a) Refining gross margins per barrel adjusted for the impact of a
decline in crude oil prices on unhedged fixed purchase commitments
were as follows: For the three months ended September 30, Port
Arthur, 1996 - $2.10; 1997 - $4.55, Blue Island, Hartford and other
refining, 1996 - $1.97; 1997 - $4.68; For the nine months ended
September 30, Port Arthur, 1996 - $2.18; 1997 - $4.17, Blue Island,
Hartford and other refining, 1996 - $2.59; 1997 - $4.15
The refining division contributed a record $78.2 million to
operating income in the third quarter of 1997 (1996 - $6.8 million).
These improved results were achieved principally due to near record
refining production levels, good refinery reliability and increased
processing of lower cost, heavy and sour crude oil. Refining market
conditions, particularly fuels margins, were much improved in the third
quarter of 1997 over 1996 as strong demand, tight capacity and plant
downtime in the U.S. and Europe supported margins. Refining
contribution for the nine months ended September 30, 1997 was $132.9
million versus $16.0 million in 1996. Earnings for the first nine
months of 1997 benefited from improved yields and throughput and wider
crude oil quality differentials. Crude oil quality differential
indicators for light sour crude oil improved from $1.06 per barrel to
$1.71 per barrel and the benefit for heavy sour crude oil improved from
$4.75 per barrel to $5.63 per barrel from the first nine months of 1996
to the same period in 1997. The Company believes these crude oil
quality discounts improved primarily due to increased availability of
12
Canadian light and heavy sour crude oil from the Express and
Interprovincial pipelines, higher levels of industry refinery
maintenance turnarounds and milder winter weather in the first quarter
of 1997. Hartford refinery results particularly benefited from
improved access to lower-cost Canadian heavy sour crude oil. Port
Arthur refinery results were also buoyed by the operational benefits
realized from the first quarter maintenance turnaround. On a
comparative basis, refining gross margins in the third quarter and
first nine months of 1996 were negatively impacted by crude oil market
volatility and backwardation that raised the cost of the Company's
feedstocks.
Port Arthur refinery crude oil throughput and production reached
record and near record levels in the second and third quarters of 1997,
but were relatively flat compared to 1996 levels on a year-to-date basis
due to the planned maintenance turnaround in the first quarter of 1997.
Port Arthur refinery operating expenses for the first nine months of
1997 were higher than the previous year principally because of higher
natural gas prices and higher incentive compensation due to strong
earnings. Natural gas is consumed as a fuel in the refining process.
Retail
Retail Division Operating Statistics:
(dollars in millions, except per gallon and per store data)
For the three months For the nine months
ended September 30, ended September 30,
1996 1997 1996 1997
--------- --------- -------- ---------
Gasoline volume (mm gals.) 270.1 270.8 777.7 771.1
Gasoline gross margin (cents/gal) 9.4 10.6 10.6 10.3
Gasoline gross margin $ 25.4 $ 28.6 $ 82.3 $ 79.0
Convenience product sales $ 68.3 $ 78.3 $193.7 $ 214.3
Convenience product margin and
other income 17.9 20.3 50.3 55.7
Gain on asset sales $ -- $ -- $ 1.8 $ --
Operating expenses 32.7 34.6 94.4 99.3
Divisional G & A expenses 5.3 6.3 15.6 17.3
Contribution to operating income $ 5.3 $ 8.0 $ 24.4 $ 18.1
12
Per Month Per Store
Company operated stores (average)(a) 827 814 828 815
Gasoline volume (m gals.) 108.9 112.3 104.4 106.3
Convenience product sales
(thousands) $ 27.5 $ 32.1 $ 26.0 $ 29.2
Convenience product gross margin
(thousands) 7.2 8.3 6.7 7.6
(a) Ten stores included in 1997 operated as convenience stores only.
Retail division contribution to operating income of $8.0 million for
the third quarter of 1997 exceeded its contribution in each of the
previous four quarters. The retail fuel margin environment, which has
been weak since the second half of 1996, showed improvement late in the
third quarter with fuel margins in September averaging over 12 cents per
gallon. Monthly fuel volumes and convenience sales per store were at
record levels in the third quarter of 1997, increasing by 3% and 17%,
respectively, over the year-ago period. Retail contribution to
operating income decreased to $18.1 million in the first nine months of
1997 from $24.4 million in the same period of 1996. Retail
contribution declined on a year-to-date basis primarily because of
weaker same store retail fuel margins in the first half of 1997 and a
$1.8 million gain on the sale of stores in the prior year. This was
partially offset by the fuel and convenience margin contribution from
the 48 Michigan stores acquired in early 1997. Retail margins have
13
historically benefited when wholesale prices fall, but the benefit of
the crude oil price decline in the first half of 1997 was not fully
realized because wholesale prices did not fall as much as crude oil
prices and due to highly competitive retail markets. Certain monthly
average store operating measures showed improvement for the nine months
ended September 30, 1997, including a 13% improvement in convenience
product margins per store on 12% higher sales. Operating expenses
increased principally because of lease expenses and operating costs for
larger stores acquired in the last year.
Other Financial Highlights
Corporate and divisional general and administrative expenses
increased in the third quarter and first nine months of 1997 over the
comparable periods in 1996 principally because of accruals for higher
incentive compensation resulting from the Company's stronger earnings.
Interest and finance income for the third quarter and first nine
months of 1997 decreased over the comparable periods of 1996 principally
because of interest earned on higher cash balances in 1997, resulting
from the contribution of an advance crude oil purchase receivable by
Clark USA in late 1996 that was subsequently converted to cash.
Depreciation and amortization expense increased in the third quarter
and first nine months of 1997 over the comparable periods in 1996
principally because of amortization related to the first quarter Port
Arthur maintenance turnaround.
Historically, the Company has recorded seasonally lower earnings in
the fourth and first quarters of calendar years due to lower demand for
refined products. Entering the fourth quarter of 1997, refining margins
have declined in line with this seasonal trend.
Liquidity and Capital Resources
Net cash generated by operating activities, excluding working capital
changes, for the nine months ended September 30, 1997 was $105.9 million
compared to $2.4 million in the year-earlier period. Working capital as
of September 30, 1997 was $421.8 million, a 2.29-to-1 current ratio,
versus $399.5 million as of December 31, 1996, a 2.00-to-1 current
ratio. Working capital as of September 30, 1997 increased from the end
of 1996 because of increased operating contribution, partially offset by
a retail store acquisition that was financed with cash and the capital
cost of the Port Arthur refinery turnaround.
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil and refined
petroleum products. On September 25, 1997, the Company entered into a
new Credit Agreement which provides for borrowings and the issuance of
letters of credit of up to the lesser of $400 million or the amount of
the borrowing base calculated with respect to the Company's cash,
investments, eligible receivables and hydrocarbon inventories. Direct
borrowings are limited to the principal amount of $50 million.
Borrowings under the Credit Agreement are secured by a lien on
substantially all of the Company's cash and cash equivalents,
receivables, crude oil and refined product inventories and trademarks.
The amount available under the borrowing base associated with such
facility at September 30, 1997 was $400 million and approximately $238
million of the facility was utilized for letters of credit. As of
September 30, 1997, there were no direct borrowings under the Credit
Agreement.
Cash flows used in investing activities in the first nine months of
1997, excluding short-term investment activities which management treats
similar to cash and cash equivalents, were $81.5 million as compared to
$26.6 million in the year-earlier period. The higher investing
activities in 1997 resulted principally from the Port Arthur refinery
turnaround ($30.0 million) and the acquisition and subsequent image
conversion of 48 retail stores in Michigan ($21.0 million). Refinery
capital expenditures totaled $17.6 million in the first nine months of
1997 (1996 - $12.5 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
nine months of 1997, excluding the Michigan acquisition, totaled $13.9
14
million (1996 - $10.5 million) and were principally for underground
storage tank-related work.
On November 3, 1997, Blackstone Capital Partners III Merchant
Banking Fund L.P. and its affiliates ("Blackstone") acquired the
13,500,000 shares of Common Stock of Clark USA previously held by
Trizec Hahn Corporation ("TrizecHahn") and certain of its subsidiaries
(referred to herein as the "Blackstone Transaction"), as a result of which
Blackstone obtained a 65% equity interest (73.3% voting interest) in Clark USA.
Clark USA has tendered for all of its outstanding Zero Coupon Notes
and intends to redeem any Zero Coupon Notes not tendered. Prior to
consummation of the offering of certain debt securities (described
below), the Company expects to return capital to Clark USA (the "Special
Dividend") in the amount of approximately $207.4 million (based on the
accreted value of the Zero Coupon Notes at September 30, 1997) in order
for it to repurchase the Zero Coupon Notes. The Company expects to
place $400 million of debt securities with private institutional
investors by the end of 1997. As a result of this offering, the Company
will have higher levels of debt outstanding and will be required to make
increased annual interest payments. In addition, as a result of the
Special Dividend, the application of the net proceeds from the offering
of debt securities and the payment of fees and expenses in connection
with the Blackstone Transaction, the Company's cash and short-term
investments will be reduced by approximately $56.3 million and its
stockholder's equity will be reduced to approximately $364.4 million.
Finally, as a result of the Blackstone Transaction, the $175 million of
9 1/2% Notes, and (in the event of a Rating Decline) $175 million of 10
7/8% Notes of Clark USA, will be subject to a repurchase offer.
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. 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. At this
time no estimate can be made as to Clark USA's potential liability, if
any, with respect to this matter.
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 5 - Other Information
In connection with the Blackstone Transaction, directors appointed by
TrizecHahn resigned, specifically, Peter Munk, C. William D. Birchall and
Gregory C. Wilkins and Blackstone appointed four new directors, Marshall A.
Cohen, David A. Stockman, John R. Woodard and David I. Foley.
Marshall A. Cohen, 62, has served as a director of the Company since
November 3, 1997. Mr. Cohen has served as Counsel at Cassels Brook &
Blackwell since October 1996. Mr. Cohen previously served as President
and Chief Executive Officer of The Molson Companies Limited from November 1988
to September 1996.
David A. Stockman, 50, has served as a director of the Company since
November 3, 1997. Mr. Stockman is also a Co-Chairman of the board of directors
of Collins & Aikman Corporation and a director of Haynes International, Inc.
and Bar Technologies, Inc.
John R. Woodard, 33, has served as a director of the Company since
November 3, 1997. Mr. Woodard joined The Blackstone Group L.P. as a Managing
Director in 1996. Prior thereto, he was a Vice President at Vestar
Capital Partners from 1990 to 1996. He is a member of the board of directors
of Prime Succession, Inc.
David I. Foley, 30, has served as a director of the Company since
November 3, 1997. Mr. Foley is an Associate at The Blackstone Group L.P.,
which he joined in 1995. Prior to joining Blackstone, Mr. Foley was a
member of AEA Investors, Inc. and The Monitor Company. He currently serves
on the board of directors of Rose Hills Company.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
October 1, 1997 - Clark USA issues Exchangeable Preferred
Stock
15
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 10, 1997