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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11392
CLARK REFINING & MARKETING, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1491230
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8182 Maryland Avenue 63105-3721
St. Louis, Missouri (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (314) 854-9696
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of May 14, 1999: 100, all of which were owned by Clark
USA, Inc.
1
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 Subsidiaries (the "Company") as of March 31, 1999, and
the related consolidated statements of operations and cash flows for the three
month periods ended March 31, 1998 and 1999. 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 such consolidated financial statements 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 the Company as of December 31,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated February 6, 1999, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1998
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Deloitte & Touche LLP
St. Louis, Missouri
May 14, 1999
2
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
Reference December 31, March 31,
Note 1998 1999
---------- ------------ ----------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 147.5 $ 103.3
Short-term investments 4.5 4.8
Accounts receivable 130.9 141.6
Receivable from affiliates 2.3 3.0
Inventories 3 267.7 277.4
Prepaid expenses and other 28.8 27.2
Net assets helf for sale 7 141.0 141.8
------------ ----------
Total current assets 722.7 699.1
PROPERTY, PLANT AND EQUIPMENT, NET 627.3 659.2
OTHER ASSETS 4,5 93.8 113.2
------------ ----------
$ 1,443.8 $ 1,471.5
============ ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 250.3 $ 237.1
Payable to affiliates 25.2 25.7
Accrued expenses and other 5 64.4 68.6
Accrued taxes other than income 25.9 26.9
------------ ----------
Total current liabilities 365.8 358.3
LONG-TERM DEBT 805.2 804.4
OTHER LONG-TERM LIABILITIES 47.8 48.1
COMMITMENTS AND CONTINGENCIES 8 -- --
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and 100 shares
issued and outstanding) -- --
Paid-in capital 234.2 234.2
Retained earnings (deficit) (9.2) 26.5
------------ -----------
225.0 260.7
------------ -----------
$ 1,443.8 $ 1,471.5
============ ===========
The accompanying notes are an integral part of these statements.
3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions)
For the three months
ended March 31,
----------------------------
Reference
Note 1998 1999
----------- ------------- -------------
(unaudited) (unaudited)
NET SALES AND OPERATING REVENUES $ 589.6 $ 802.9
EXPENSES:
Cost of sales (497.7) (726.1)
Operating expenses (77.5) (97.1)
General and administrative expenses (10.8) (13.2)
Depreciation (6.4) (8.7)
Amortization 4 (5.9) (5.1)
Inventory recovery (write-down)
to market 3 (22.7) 96.2
------------- -------------
(621.0) (754.0)
------------- -------------
OPERATING INCOME (LOSS) (31.4) 48.9
Interest expense and finance
income, net 4,5 (11.0) (16.2)
------------- -------------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (42.4) 32.7
Income tax (provision) benefit 6 (0.2) 1.1
------------- -------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (42.6) 33.8
Discontinued operations, net of
income taxes of $1.1 (1998 - $--) 7 (0.1) 1.9
------------- -------------
NET EARNINGS (LOSS) $ (42.7) $ 35.7
============= =============
The accompanying notes are an integral part of these statements.
4
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
For the three months
ended March 31,
----------------------------
1998 March 31,
------------- -------------
(unaudited) (unaudited)
CASH FLOWS OPERATING ACTIVITIES:
Net earnings (loss) $ (42.7) $ 35.7
Discontinued operations 0.1 (1.9)
Adjustments:
Depreciation 6.4 8.7
Amortization 6.4 6.4
Inventory (recovery) write-down to market 22.7 (96.2)
Other (1.3) (1.1)
Cash provided by (reinvested in) working capital
Accounts receivable, prepaid expenses and other 13.5 (9.3)
Inventories (44.6) 86.5
Accounts payable, accrued expenses, taxes
other than income and other (55.0) (8.1)
------------- -------------
Net cash provided by (used in)
operating activities (94.5) 20.7
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments -- (3.2)
Sales and maturities of short-term investments -- 2.9
Expenditures for property, plant and equipment (5.8) (40.6)
Expenditures for turnaround (3.5) (24.3)
Discontinued operations 7.3 1.1
------------- -------------
Net cash used in financing
activities (2.0) (64.1)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (4.1) (0.8)
------------- -------------
Net cash used in financing activities (4.1) (0.8)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (100.6) (44.2)
CASH AND CASH EQUIVALENTS, beginning of period 288.1 147.5
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 127.5 $ 103.3
============= =============
The accompanying notes are an integral part of these statements.
5
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark Refining & Marketing, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1999
(tabular dollar amounts in millions of US dollars)
1. Basis of Preparation
The consolidated interim financial statements of Clark Refining &
Marketing, Inc. and Subsidiaries (the "Company") have been reviewed by
independent accountants. 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
financial statements are presented in accordance with the disclosure
requirements for Form 10-Q. These unaudited financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's 1998 Annual Report on Form 10-K.
The Company has made certain reclassifications to the prior period to
conform to current period presentation.
2. Accounting Changes
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company is required to adopt this statement effective January 1, 2000. SFAS
No. 133 will require the Company to record all derivatives on the balance
sheet at fair value. Changes in derivative fair value will either be
recognized in earnings as offsets to the changes in fair value of related
hedged assets, liabilities, and firm commitments or, for forecasted
transactions, deferred and recorded as a component of comprehensive income
until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will be
recognized in earnings immediately. The Company is currently evaluating when
it will adopt this standard and the impact of the standard on the Company.
The impact of SFAS No. 133 will depend on a variety of factors, including
future interpretive guidance, the future level of hedging activity, the types
of hedging instruments used, and the effectiveness of such instruments.
3. Inventories
The carrying value of inventories consisted of the following:
December 31, March 31,
1998 1999
------------- ------------
Crude oil ................................ $ 165.3 $ 89.7
Refined and blendstocks .................. 186.4 176.1
LIFO inventory value excess over market .. (105.8) (9.6)
Warehouse stock and other ................ 21.8 21.2
------------- ------------
$ 267.7 $ 277.4
============= ============
6
4. Other Assets
Amortization of deferred financing costs for the three-month period ended
March 31, 1999 was $1.2 million (1998- $0.5 million) and was included in
"Interest and finance costs, net."
Amortization of refinery maintenance turnaround costs for the three-month
period ended March 31, 1999 was $5.1 million (1998- $5.9 million).
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
For the three months
ended March 31,
----------------------
1998 1999
---------- ----------
Interest expense ........................ $ 13.6 $ 18.6
Financing costs ......................... 0.4 1.3
Interest and finance income ............. (2.6) (1.7)
---------- ----------
11.4 18.2
Capitalized interest .................... (0.4) (2.0)
---------- ----------
Interest and finance costs, net $ 11.0 $ 16.2
========== ==========
Cash paid for interest expense for the three-month period ended March 31,
1999 was $19.0 million (1998- $11.9 million). Accrued interest payable as of
March 31, 1999 of $12.8 million (December 31, 1998- $13.3 million) was
included in "Accrued expenses and other."
6. Income Taxes
The Company received net cash income tax refunds totaling $0.4 million
during the first quarter of 1999 (1998 - net cash income tax payments of $0.3
million). The income tax provision (benefit) related to Discontinued
Operations for the three-month period ended March 31, 1999 was $1.1 million
(1998 - nil). The income tax provision (benefit) for Continuing Operations
for the same periods was $(1.1) million and $0.2 million, respectively, which
reflects the intraperiod utilization of net operating losses.
7. Disposition of Retail Division
In May, 1999, the Company signed a definitive agreement to sell its retail
marketing operation in a recapitalization transaction to a company controlled
by Apollo Management L.P. for cash proceeds of approximately $230 million.
An affiliate of the Company's principal shareholder will hold a six percent
equity interest in the retail marketing operation. As part of the sale
agreement, the Company also entered into a two-year, market-based supply
agreement for refined products that will be provided to the retail business
through the Company's Midwest refining and distribution network. This network
was not included in the sale. The supply agreement may be cancelled with 90
days notice by the buyer
The sale of the business is expected to close in the third quarter of
1999. The retail marketing operation sold included all Company-operated
retail stores, approximately 200 independently-operated, Clark-branded stores
and the Clark trade name. Accordingly, the operating results of the retail
marketing operations, including the provision for income taxes, have been
segregated from the Company's continuing operations and reported as a separate
line item as Discontinued Operations in the Consolidated Statements of
Operations for all periods presented.
7
The retail operations' net sales revenue for the three-month period ended
March 31, 1999 was $202.8 million (1998 - $234.0 million). The components of
"Net assets held for sale" included in the Company's Consolidated Balance
Sheets for March 31, 1999 and December 31, 1998 are as follows:
December 31, March 31,
1998 1999
--------------- -------------
Current Assets ..................... $ 43.0 $ 48.9
Noncurrent Assets .................. 187.5 182.2
--------------- -------------
Total Assets ....................... 230.5 231.1
--------------- -------------
Current Liabilities ................ 62.7 61.8
Noncurrent Liabilities ............. 26.8 27.5
--------------- -------------
Total Liabilities .................. 89.5 89.3
--------------- -------------
Net Assets Held For Sale $ 141.0 $ 141.8
=============== =============
8. Commitments and Contingencies
Clark USA and the Company are 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 USA and the
Company are 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.
In March 1998, the Company announced that it had entered into a long-term
crude oil supply agreement with P.M.I. Comercio Internacional, S.A. de C.V.
("PMI"), an affiliate of Petroleos Mexicanos, the Mexican state oil company.
The contract provided the Company with the foundation necessary to continue
developing a project to upgrade its Port Arthur, Texas refinery to process
primarily lower-cost, heavy sour crude oil. The project is expected to cost
$600-$700 million and includes the construction of additional coking and
hydrocracking capability, and the expansion of crude unit capacity to
approximately 250,000 barrels per day. Although the Company and its
shareholders are currently evaluating alternatives for financing the project,
it is expected that the financing will be on a non-recourse basis to the
Company. The oil supply agreement with PMI and the construction work-in-
progress are expected to be transferred for value to a non-recourse entity
that will likely be an affiliate of, but not be controlled by, the Company
and its subsidiaries. The Company expects to enter into agreements with this
affiliate pursuant to which the Company would provide certain operating,
maintenance and other services and would purchase the output from the new
coking and hydrocracking equipment for further processing into finished
products. The Company expects to receive compensation under these agreements
at fair market value that is expected to be favorable to the Company.
In the event the project financing cannot be completed on a non-recourse
basis to the Company as contemplated, the restrictions in the Company's
existing debt instruments would likely prohibit the Company and its
subsidiaries from raising the financing themselves and thus completing the
project. Notwithstanding the foregoing, however, the Company has begun
entering into purchase orders, some of which contain cancellation penalties
and provisions, for material, equipment and services related to this project.
As of March 31, 1999, non-cancelable amounts of approximately $65 million had
accumulated under these purchase orders. Additional purchase orders and
commitments have been made and are expected to continue to be made during
1999. If the project were cancelled, the Company would be required to pay a
termination fee of $200,000 per month to PMI from September 1, 1998 to the
cancellation date. In addition, the Company would be subject to payment of
the non-cancelable commitments and required to record a charge to earnings for
all expenditures to date. Although the financing is expected to be completed
by mid-1999, there can be no assurance that the financing for the project will
be successful or that the project can be completed as contemplated.
8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Financial Highlights
The following table reflects the Company's financial and operating
highlights for the three month periods ended March 31, 1998 and 1999. All
amounts listed are dollars in millions, except per barrel information. The
table provides supplementary data and is not intended to represent an income
statement presented in accordance with generally accepted accounting
principles.
Operating Income:
For the three months
ended March 31,
--------------- ------------
1998 1999
--------------- ------------
Port Arthur Refinery
Crude oil throughput (m bbls/day) 222.2 213.0
Production (m bbls/day) 218.9 214.0
Gross margin ($/barrel of production) $ 3.89 $ 2.10
Gulf Coast 3/2/1 crack spread ($/barrel) 2.50 1.21
Operating expenses (45.4) (40.2)
Net margin $ 31.3 $ 0.2
Midwest Refineries and Other
Crude oil throughput (m bbls/day) 109.5 242.4
Production (m bbls/day) 116.1 261.4
Gross margin ($/barrel of production) $ 2.74 $ 1.22
Chicago 3/2/1 crack spread ($/barrel) 2.65 1.79
Operating expenses (32.1) (56.9)
Net margin $ (3.5) $ (28.2)
General and administrative expenses (10.8) (13.2)
--------------- ------------
Operating Contribution 17.0 (41.2)
Inventory timing adjustment gain (loss) (a) (13.4) 7.7
Inventory recovery (write-down) to market (22.7) 96.2
Depreciation and amortization (12.3) (13.8)
--------------- ------------
Operating income (loss) $ (31.4) $ 48.9
=============== ============
(a) Includes gains and losses caused by the timing differences between when
crude oil is actually purchased and refined products are actually sold,
and a daily "market in, market out" operations measurement methodology.
In the first quarter of 1999, the Company recorded net earnings from
continuing operations of $33.8 million versus a loss of $42.6 million in the
same period a year ago. Net earnings in 1999 benefited from an increase in
crude oil prices during the quarter as demonstrated by the over $4.60 per
barrel in WTI crude oil prices along with a larger increase in refined
product prices. This increase resulted in inventory gains of $103.9 million
as compared to inventory losses of $36.1 million in 1998. In 1999, these
inventory gains were made up of a recovery of previous non-cash inventory
writedowns of $96.2 million (1998 - loss of $22.7 million) and the cash
benefit of the price increases on the lag between crude oil purchases and
product sales of $7.7 million (1998 - loss of $13.4 million).
Net sales and operating revenues increased approximately 36% in the first
three months of 1999 as compared to the same period of 1998. This increase
was due to additional sales volumes principally resulting from the acquisition
of the Lima refinery in August 1998 that were only partially offset in the
period by lower average petroleum prices.
9
Operating Contribution (earnings before interest, depreciation,
amortization, inventory-related items and taxes) was a loss of $41.2 million
in the first quarter of 1999, which was below the Operating Contribution of
$17.0 million in the same period a year ago principally due to lower refining
margins. Gulf Coast refining margin indicators decreased $1.29 per barrel and
Midwest indicators decreased $0.86 per barrel in the first quarter of 1999 as
the third consecutive warmer-than-normal winter heating season bloated
industry inventories. In addition, discounts for heavy and sour crude oil
were compressed relative to year-ago levels. This compression was due to the
low absolute crude oil prices, reduced Canadian heavy sour crude oil
production, and OPEC production cuts disproportionately affecting heavy crude
oil barrels.
Crude oil throughput and related production in the Company's Midwest
refineries was higher in the first quarter of 1999 principally because of the
addition of the Lima refinery in August 1998. However, the increase in
production resulting from the Lima refinery was partially offset by a
reduction in throughput due to the poor refining margins, a leak in a major
interstate crude oil pipeline supplying the Midwest refineries and lower
throughput associated with a maintenance turnaround at the Lima refinery.
The lower production associated with the maintenance turnaround resulted in a
lost margin opportunity of approximately $5 million for the quarter. Crude
oil throughput and production was also reduced at the Port Arthur refinery
due to the poor first quarter 1999 refining margins.
Midwest refining operating expenses increased because of the addition of
the Lima refinery. Port Arthur operating expenses were reduced in the first
quarter of 1999 due to lower maintenance and gain sharing expenses and the
positive impact of lower natural gas prices on fuel costs.
Other Financial Highlights
General and administrative expenses increased in the first quarter of 1999
over the comparable periods of 1998 principally because of costs related to
the addition of the Lima refinery and costs associated with year 2000
remediation and upgrades. The Company has expended $3.1 million from
inception of its year 2000 program through March 31, 1999. The Company is on
target with its year 2000 program that is discussed in more detail in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Interest and finance costs, net for the three months ended March 31, 1999
increased over the comparable period in 1998 principally because of increased
debt associated with the acquisition of the Lima refinery. Depreciation and
amortization expense also increased in the three months ended March 31, 1999
over the comparable period in 1998 principally because of the acquisition of
the Lima refinery.
Sale of Retail Division
In May 1999, the Company signed a definitive agreement to sell its retail
marketing operation in a recapitalization transaction to a company controlled
by Apollo Management L.P. for cash proceeds of approximately $230 million.
See Exhibit 10.0 Asset Contribution and Recapitalization Agreement. An
affiliate of the Company's principal shareholder will hold a six percent
equity interest in the retail marketing operation. As part of the sale
agreement, the Company also entered into a two-year market-based supply
agreement for refined products that will be provided to the retail business
through the Company's Midwest refining and distribution network. This network
was not included in the sale. The supply agreement may be cancelled with 90
days notice by the buyer. The retail marketing operation is being sold in
order to allow the Company to focus its human and financial resources on the
continued improvement and expansion of its refining business, which it
believes will generate higher future returns.
The retail marketing operations were classified as a discontinued operation
and the results of operations were excluded from continuing operations in the
consolidated statements of operations for the periods ending
March 31, 1998 and 1999. A gain on the sale is expected to be recognized
and the transaction is expected to close in the third quarter of 1999.
The retail marketing operation sold includes all Company-operated retail
stores, approximately 200 independently-operated, Clark-branded stores
and the Clark trade name.
10
Liquidity and Capital Resources
Net cash used in operating activities, excluding working capital changes,
for the three months ended March 31, 1999 was $48.4 million compared to cash
used of $8.4 million in the year-earlier period. Working capital as of March
31, 1999 was $340.8 million, a 1.95-to-1 current ratio, versus $356.9 million
as of December 31, 1998, a 1.97-to-1 current ratio. Working capital at
December 31, 1998 and March 31, 1999 included the retail division net assets
held for sale. Total working capital decreased in the first quarter of 1999
principally due to the cash used in operating activities and significant
capital expenditures, which were only partially offset by the positive impact
of increased petroleum prices on inventory.
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 credit agreement (the "Credit Agreement") which
provides for borrowings and the issuance of letters of credit up to the lesser
of $700 million, or the amount of a borrowing base calculated with respect to
the Company's cash, short-term investments, eligible receivables and
hydrocarbon inventories. Direct borrowings under the Credit Agreement are
limited to the principal amount of $150 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 March 31, 1999 was $450 million and approximately $292
million of the facility was utilized for letters of credit. As of March 31,
1999, there were no direct borrowings under the Credit Agreement. The Credit
Agreement expires on December 31, 1999 and the Company expects to amend or
replace the agreement by the end of 1999.
Cash flows used in investing activities in the first three months of 1999
were $64.1 million as compared to $2.0 million in the year-earlier period.
Cash flow used in investing activities in 1999 was higher than the previous
year's first quarter principally due to increased scheduled maintenance
turnaround expenditures at the Lima and Port Arthur refineries ($24.3
million), and increased capital expenditures. Expenditures for property, plant
and equipment totaled $40.6 million (1998 - $5.8 million) in the first three
months of 1999 principally related to a project to upgrade the Port Arthur
refinery to allow it to process up to 80% heavy sour crude oil ($33.3
million).
In March 1998, the Company announced that it had entered into a long-term
crude oil supply agreement with P.M.I. Comercio Internacional, S.A. de C.V.
("PMI"), an affiliate of Petroleos Mexicanos, the Mexican state oil company.
The contract provided the Company with the foundation necessary to continue
developing a project to upgrade its Port Arthur, Texas refinery to process
primarily lower-cost, heavy sour crude oil. The project is expected to cost
$600-$700 million and includes the construction of additional coking and
hydrocracking capability, and the expansion of crude unit capacity to
approximately 250,000 barrels per day. Although the Company and its
shareholders are currently evaluating alternatives for financing the project,
it is expected that the financing will be on a non-recourse basis to the
Company. The oil supply agreement with PMI and the construction work-in-
progress are expected to be transferred for value to a non-recourse entity
that will likely be an affiliate of, but not be controlled by, the Company
and its subsidiaries. The Company expects to enter into agreements with this
affiliate pursuant to which the Company would provide certain operating,
maintenance and other services and would purchase the output from the new
coking and hydrocracking equipment for further processing into finished
products. The Company expects to receive compensation under these agreements
at fair market value that is expected to be favorable to the Company.
In the event the project financing cannot be completed on a non-recourse
basis to the Company as contemplated, the restrictions in the Company's
existing debt instruments would likely prohibit the Company and its
subsidiaries from raising the financing themselves and thus completing the
project. Notwithstanding the foregoing, however, the Company has begun
entering into purchase orders, some of which contain cancellation penalties
and similar provisions, for material, equipment and services related to this
project. As of March 31, 1999, non-cancelable amounts of approximately $65
million had accumulated under these purchase orders. Additional purchase
orders and commitments have been made and are expected to continue to be made
during 1999. If the project were canceled, the Company would be required to
pay a termination fee of $200,000 per month to PMI from September 1, 1998 to
the cancellation date. In addition, the Company would be subject to payment
11
of the non-cancelable commitments and required to record a charge to earnings
for all expenditures to date. Although the financing is expected to be
completed by mid-1999, there can be no assurance that the financing for the
project will be successful or that the project can be completed as
contemplated.
Cash flows used in financing activities for first quarter of 1999 decreased
as compared to the same period in 1998 principally because of the repurchase
in 1998 of the Company's 9 1/2% Senior Unsecured Notes, due 2004 tendered
under its required Change of Control offer ($3.3 million).
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, excluding the Port Arthur heavy sour crude oil
upgrade project which the Company expects to finance by mid-1999. Future
working capital investments, discretionary or non-discretionary capital
expenditures, or acquisitions may require additional debt or equity financing.
Forward-Looking Statements
Certain statements in this document are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These statements are subject to the
safe harbor provisions of this legislation. Words such as "expects,"
"intends," "plans," "projects," "believes," "estimates" and similar
expressions typically identify such forward-looking statements.
Even though the Company believes its expectations regarding future events
are based on reasonable assumptions, forward-looking statements are not
guarantees of future performance. There are many reasons why actual results
could, and probably will, differ from those contemplated in the Company's
forward-looking statements. These include changes in:
* Industry-wide refining margins
* Crude oil and other raw material costs, embargoes, industry expenditures
for the discovery and production of crude oil, and military conflicts
between (or internal instability in) one or more oil-producing countries
* Market volatility due to world and regional events
* Availability and cost of debt and equity financing
* Labor relations
* U.S. and world economic conditions (including recessionary trends,
inflation and interest rates)
* Supply and demand for refined petroleum products
* Reliability and efficiency of the Company's operating facilities. There
are many hazards common to operating oil refining and distribution
facilities (including equipment malfunctions, plant construction/repair
delays, explosions, fires, oil spills and the impact of severe weather)
* Actions taken by competitors (including both pricing and expansion or
retirement of refinery capacity)
* Civil, criminal, regulatory or administrative actions, claims or
proceedings (both domestic and international), and regulations dealing with
protection of the environment (including refined petroleum product
composition and characteristics)
* Other unpredictable or unknown factors not discussed
Because of all of these uncertainties, and others, you should not place
undue reliance on the Company's forward-looking statements.
12
PART II - OTHER INFORMATION
ITEM 5 - Other Information
Resignation of Director
Effective May 4, 1998, Glenn H. Hutchins resigned as a director of the
Company and Clark USA. No replacement was immediately named to replace Mr.
Hutchins.
Sale of Retail Division
In May 1999, the Company signed a definitive agreement to sell its retail
marketing operation in a recapitalization transaction to a company controlled
by Apollo Management L.P. for cash proceeds of approximately $230 million.
See Exhibit 10.0 Asset Contribution and Recapitalization Agreement. An
affiliate of the Company's principal shareholder will hold a six percent
equity interest in the retail marketing operation. As part of the sale
agreement, the Company also entered into a two-year market-based supply
agreement for refined products that will be provided to the retail business
through the Company's Midwest refining and distribution network. This network
was not included in the sale. The supply agreement may be cancelled with 90
days notice by the buyer. The retail marketing operation is being sold in
order to allow the Company to focus its human and financial resources on the
continued improvement and expansion of its refining business, which it
believes will generate higher future returns.
The retail marketing operations were classified as a discontinued operation
and the results of operations were excluded from continuing operations in the
consolidated statements of operations for the periods ending March 31, 1998
and 1999. A gain on the sale is expected to be recognized and the transaction
is expected to close in the third quarter of 1999. The retail marketing
operation sold includes all Company-operated retail stores, approximately 200
independently-operated, Clark-branded stores and the Clark trade name.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.0 - Asset Contribution and Recapitalization Agreement
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
None
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 14, 1999