UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 10, 1999: 100, all of which were owned by
Clark USA, Inc.
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Form 10-Q for the
quarterly period ended September 30, 1999 as set forth in the pages
attached hereto:
(list all such items, financial statements, exhibits or other portions amended)
1. Item 1 Financial Statements - Amended to insert $4.3 million
omitted from the September 30, 1999 "Discontinued operations"
line in the Consolidated Statement of Cash Flows. No other
amounts or totals from the Consolidated Statement of Cash Flows
or any other financial statement or the notes thereto changed
due to this omission.
1
INDEPENDENT ACCOUNTANTS' REPORT
--------------------------------
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 September 30, 1999,
and the related consolidated statements of operations for the three and nine
month periods ended September 30, 1998 and 1999, and the consolidated
statements of cash flows for the nine month periods 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 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 (except Note 3 for which the date was July
8, 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
November 9, 1999
2
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
Reference December 31, September 30,
Note 1998 1999
--------- ------------ -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 147.5 $ 231.3
Short-term investments 4.5 1.5
Accounts receivable 130.7 182.1
Receivable from affiliates 2.3 7.0
Inventories 3 267.7 326.7
Prepaid expenses and other 31.6 38.1
Net assets held for sale 7 143.2 --
------------ -------------
Total current assets 727.5 786.7
PROPERTY, PLANT, AND EQUIPMENT, NET 627.4 620.5
OTHER ASSETS 4 92.1 110.6
------------ -------------
$1,447.0 $1,517.8
============ =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 250.3 $ 318.5
Payable to affiliates 25.2 26.2
Accrued expenses and other 5 64.3 65.5
Accrued taxes other than income 25.9 30.7
------------ -------------
Total current liabilities 365.7 440.9
LONG-TERM DEBT 805.2 802.9
OTHER LONG-TERM LIABILITIES 51.1 63.0
COMMITMENTS AND CONTINGENCIES 8 -- --
COMMON STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per
share; 1,000 shares authorized and 100
shares issued and outstanding) -- --
Paid-in capital 234.2 194.7
Retained earnings (deficit) (9.2) 16.3
------------ -------------
Total stockholder's equity 225.0 211.0
------------ -------------
$ 1,447.0 $1,517.8
============ =============
The accompanying notes are an integral part of these statements.
3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
For the Three Months
Ended September 30,
Reference ----------------------
Note 1998 1999
------------ ---------- ----------
NET SALES AND OPERATING REVENUES $ 1,019.1 $ 1,137.5
EXPENSES:
Cost of sales (880.5) (1,015.8)
Operating expenses (89.0) (104.5)
General and administrative expenses (12.6) (12.5)
Depreciation (7.3) (9.1)
Amortization (6.9) (6.5)
Inventory recovery (write-down) to market 3 20.5 --
---------- ----------
(975.8) (1,148.4)
---------- ----------
GAIN ON SALE OF PIPELINE INTERESTS 69.3 --
---------- ----------
OPERATING INCOME (LOSS) 112.6 (10.9)
Interest and finance costs, net 4, 5 (13.5) (14.4)
---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 99.1 (25.3)
Income tax benefit 6 3.9 13.2
---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS 103.0 (12.1)
Discontinued operations, net of income tax
benefit of $5.7 (1998 - provision of $3.9) 7 6.3 (9.2)
Gain on disposal of discontinued operations,
net of taxes of $23.3 7 -- 36.6
---------- ----------
NET EARNINGS $ 109.3 $ 15.3
========== ==========
The accompanying notes are an integral part of these statements.
4
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
For the Nine Months
Ended September 30,
Reference ----------------------
Note 1998 1999
------------ ----------- ----------
NET SALES AND OPERATING REVENUES $ 2,599.9 $ 3,094.1
EXPENSES:
Cost of sales (2,228.3) (2,796.0)
Operating expenses (241.2) (297.0)
General and administrative expenses (36.2) (38.1)
Depreciation (20.2) (26.5)
Amortization (18.7) (18.5)
Inventory recovery (write-down) to market 3 (10.4) 105.8
----------- ----------
(2,555.0) (3,070.3)
----------- ----------
GAIN ON SALE OF PIPELINE INTERESTS 69.3 --
----------- ----------
OPERATING INCOME 114.2 23.8
Interest and finance costs, net 4, 5 (35.5) (46.4)
----------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 78.7 (22.6)
Income tax benefit 6 3.7 15.8
----------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS 82.4 (6.8)
Discontinued operations, net of income
tax benefit of $2.7 (1998 - provision
of $3.9) 7 6.3 (4.3)
Gain on disposal of discontinued operations,
net of taxes of $23.3 7 -- 36.6
----------- ----------
NET EARNINGS $ 88.7 $ 25.5
=========== ==========
The accompanying notes are an integral part of these statements.
5
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
For the Nine Months
Ended September 30,
1998 1999
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 88.7 $ 25.5
Discontinued operations (6.3) 4.3
Adjustments:
Depreciation 20.2 26.5
Amortization 20.3 23.0
Deferred income taxes -- 8.2
Gain on sale of pipeline and retail interests (69.3) (59.9)
Inventory (recovery) write-down to market 10.4 (105.8)
Other, net 6.9 20.4
Cash provided by (reinvested in) working capital
Accounts receivable, prepaid expenses and other (145.0) (54.6)
Inventories (176.2) 48.1
Accounts payable, accrued expenses,
taxes other than income and other 125.2 68.5
---------- ---------
Net cash provided by (used in) operating
activities Of continuing operations (125.1) 4.2
Net cash provided by (used in) operating
activities of discontinued operations 10.2 (1.6)
---------- ---------
Net cash provided by (used in) operating
activities (114.9) 2.6
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (38.0) (49.9)
Expenditures for turnaround (13.8) (66.3)
Refinery acquisition expenditures (177.7) --
Proceeds from sale of assets 76.4 214.9
Proceeds from transfer of assets to Port Arthur
Coker Company L.P.,net (8.1) 26.6
Purchases of short-term investments -- (3.2)
Sales and maturities of short-term investments -- 2.9
Discontinued operations -- (1.8)
---------- ---------
Net cash provided by (used in)
investing activities (161.2) 123.2
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (5.9) (2.5)
Proceeds from issuance of long-term debt 224.7 --
Capital contribution returned (9.5) (39.5)
Deferred financing costs (7.9) --
---------- ---------
Net cash provided by (used in)
financing activities 201.4 (42.0)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (74.7) 83.8
CASH AND CASH EQUIVALENTS, beginning of period 228.1 147.5
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 153.4 $ 231.3
========== =========
The accompanying notes are an integral part of these statements.
6
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark Refining & Marketing, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1999
(tabular dollar amounts in millions of U.S. 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/A.
The Company has made certain reclassifications to the prior period to
conform to current period presentation.
2. Accounting Changes
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." 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, 2001. 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, September 30,
1998 1999
------------ -------------
Crude oil ............................... $ 165.3 $ 103.6
Refined and blendstocks ................. 186.4 199.0
LIFO inventory cost excess over market .. (105.8) --
Warehouse stock and other ............... 21.8 24.1
------------ -------------
$ 267.7 $ 326.7
============ =============
The market value of the crude oil and refined product inventories at
September 30, 1999 was approximately $116.8 million above carrying value.
7
4. Other Assets
Amortization of deferred financing costs for the three-month and nine-month
periods ended September 30, 1999 was $1.5 million (1998 - $0.5 million) and
$4.4 million (1998 - $1.5 million), respectively, and was included in
"Interest and finance costs, net."
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
1998 1999 1998 1999
---------- -------- --------- ---------
Interest expense $ 16.0 $ 18.3 $ 42.9 $ 55.4
Financing costs 0.5 1.7 1.4 4.7
Interest and finance
income (2.3) (3.3) (7.1) (6.2)
---------- -------- --------- ---------
14.2 16.7 37.2 53.9
Capitalized interest (0.7) (2.3) (1.7) (7.5)
---------- -------- --------- ---------
$ 13.5 $ 14.4 $ 35.5 $ 46.4
========== ======== ========= =========
Cash paid for interest expense for the three-month and nine-month periods
ended September 30, 1999 was $18.7 million (1998 - $12.0 million) and $55.9
million (1998 - $38.7 million), respectively. Accrued interest payable as of
September 30, 1999 of $13.0 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 $0.5 million for
the three months ended September 30, 1999 (1998 - net cash income tax payments
of $0.1 million), and received net cash income tax refunds totaling $0.5
million for the nine-month period ended September 30, 1999 (1998 - net cash
income tax payments $1.0 million).
The income tax benefit on the Earnings (Loss) from Continuing Operations of
$13.2 million and $15.8 million for the three and nine-month periods ended
September 30, 1999 reflects the effects of intraperiod tax allocations
resulting from the utilization of net operating losses to offset the income
tax provision resulting from the Gain on Disposal of Discontinued Operations
and the income tax benefit from Discontinued Operations, as well as the write-
down of a net deferred tax asset.
7. Disposition of Retail Division
In July 1999, the Company sold its retail marketing operation in a
recapitalization transaction to a company controlled by Apollo Management L.P.
for approximately $230 million. The retail marketing operation sold included
all Company and independently-operated Clark-branded stores and the Clark
trade name. After all transaction costs, the sale generated cash proceeds of
approximately $215 million. See Exhibit 10.0 Asset Contribution and
Recapitalization Agreement filed with the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1999. In general, the buyer assumed
unknown environmental liabilities at the retail stores they acquired up to
$50,000 per site, as well as responsibility for any post closing
contamination. Subject to certain risk sharing arrangements, the Company
retained responsibility for all pre-existing, known contamination. The
Company's indirect parent, Clark Refining Holdings Inc., acquired 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 buyer may cancel the supply agreement with
90 days notice. The retail marketing operation was sold in order to allow the
Company to focus its human and financial
8
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 beginning with the periods ended March
31, 1998 and 1999. A pre-tax gain on the sale of $59.9 million ($36.6 million,
net of income taxes) was recognized in the third quarter of 1999.
The net sales revenue from the retail marketing operation for the three-month
and nine-month periods ended September 30, 1999 was $20.2 million (1998 -
$238.6 million) and $485.1 million (1998 - $719.7 million), respectively.
"Net assets held for sale" included in the Company's Consolidated Balance
Sheet as of December 31, 1998 consisted of the following:
December 31,
1998
--------------
Current Assets .................. $ 43.1
Noncurrent Assets ............... 187.5
--------------
Total Assets .................... 230.6
==============
Current Liabilities ............. 62.7
Noncurrent Liabilities .......... 24.7
--------------
Total Liabilities ............... 87.4
==============
Net Assets Held For Sale $ 143.2
==============
8. Commitments and 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.
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 includes the
construction of additional coking and hydrocracking capability, and the
expansion of crude unit capacity to approximately 250,000 barrels per day.
Financing for the new major processing units in the project was arranged by
Port Arthur Coker Company L.P., a company that is an affiliate of, but not
controlled by, the Company in the third quarter of 1999. The oil supply
agreement with PMI and the construction work-in-progress related to the new
processing units were transferred for value to Port Arthur Coker Company L.P.
in the third quarter of 1999. In connection with the project, the Company
will lease certain existing processing units to Port Arthur Coker Company
L.P. on fair market terms and, pursuant to this lease, will be obligated to
make certain modifications, infrastructure improvements and incur certain
development costs during 1999 and 2000 at an estimated cost up to $120
million. To secure this commitment, the Company posted a letter of credit in
the amount of $97.0 million at the closing, all of which was outstanding at
September 30, 1999. As of September 30, 1999, the Company had expended
approximately $35.8 million towards this commitment. In addition, the
Company entered into agreements with Port Arthur Coker Company L.P. pursuant
to which the Company will provide certain operating, maintenance and other
services and will purchase the output from the new coking and hydrocracking
equipment for further processing into finished products. The Company also
entered into agreements under which Port Arthur Coker Company L.P. will
process certain hydrocarbon streams owned by the Company. The Company will
receive and pay compensation at fair market value under these agreements,
which in the aggregate are expected to be favorable to the Company.
9
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Financial Highlights
The following table reflects Clark Refining & Marketing, Inc.'s (the
"Company") financial and operating highlights for the three and nine-month
periods ended September 30, 1998 and 1999. The Company is a wholly-owned
subsidiary of Clark USA, Inc., which is wholly-owned by Clark Refining
Holdings Inc. ("Holdings"). All amounts listed are dollars in millions,
except per barrel information. Certain information was restated to reflect
current period presentation. The table provides supplementary data and is not
intended to represent an income statement presented in accordance with
generally accepted accounting principles.
Operating Income:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1998 1999 1998 1999
--------- --------- --------- ---------
Port Arthur Refinery
Crude oil throughput
(thousand bbls per day) 223.6 189.8 226.3 205.2
Production (thousand bbls per day) 219.9 208.6 226.7 217.3
Gross margin
($ per barrel of production) $ 3.12 $ 2.43 $ 3.71 $ 2.14
Gulf Coast 3/2/1 crack spread
($ per barrel) 1.99 2.54 2.63 1.73
Operating expenses (44.9) (44.9) (132.9) (124.0)
Net margin $ 18.2 $ 1.8 $ 96.7 $ 3.0
Midwest Refineries and Other
Crude oil throughput
(thousand bbls per day) 221.6 245.2 153.4 252.4
Production (thousand bbls per day) 216.0 257.4 152.7 266.8
Gross margin
($ per barrel of production) $ 2.74 $ 2.24 $ 3.44 $ 1.97
Chicago 3/2/1 crack spread
($ per barrel) 3.30 3.72 3.68 2.83
Operating expenses (44.0) (59.6) (108.2) (173.0)
Net margin $ 10.3 $ (6.6) $ 35.1 $ (29.4)
General and administrative expenses (12.6) (12.5) (36.2) (38.1)
--------- --------- --------- ---------
Operating contribution (loss) $ 15.9 $ (17.3) $ 95.6 $ (64.5)
Inventory timing adjustment gain
(loss) (a) 21.1 22.0 (1.4) 27.5
Inventory recovery (write-down)
to market 20.5 - (10.4) 105.8
Gain on sale of assets 69.3 - 69.3 -
Depreciation and amortization (14.2) (15.6) (38.9) (45.0)
--------- --------- --------- ---------
Operating income (loss) $112.6 $ (10.9) $ 114.2 $ 23.8
========= ========= ========= =========
(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.
The Company recorded net earnings of $15.3 million in the third quarter of
1999 versus net earnings of $109.3 million in the same period a year ago.
For the first nine months of 1999, the Company recorded net earnings of $25.5
million versus net earnings of $88.7 million in the same period a year ago.
Net earnings in the third quarter of 1999 included a pre-tax gain on the sale
of the company's retail division of $59.9 million and net earnings in the
third quarter of 1998 included a pre-tax gain on the sale of certain pipeline
interests of $69.3 million. Earnings in the first nine months of 1999 also
benefited from rising petroleum prices as demonstrated by an over $12.00 per
barrel increase in benchmark West Texas Intermediate ("WTI") crude oil
prices. Associated inventory gains in the first nine months of 1999 were a
result of a recovery of previous non-cash inventory writedowns of $105.8
million (1998 - loss of $10.4 million) and the cash benefit of the price
increases on the lag between crude oil purchases and product sales of $27.5
million (1998 - loss of $1.4 million).
10
Net sales and operating revenues increased approximately 12% and 19% in the
three and nine months ended September 30, 1999, respectively, as compared to
the same periods of 1998. These increases were principally due to additional
sales volumes resulting from the acquisition of the Lima refinery in August
1998.
Operating Contribution (earnings before interest, depreciation,
amortization, inventory-related items and taxes) from continuing operations
was a loss of $17.3 million in the third quarter of 1999 versus a
contribution of $15.9 million for the same period a year ago. Operating
Contribution from continuing operations was a loss of $64.5 million in the
first nine months of 1999 versus a contribution of $95.6 million in the same
period of 1998. Operating Contribution in both the third quarter and first
nine months of 1999 trailed the prior year due to weaker market conditions
and significant planned and unplanned downtime, particularly in the third
quarter of 1999.
Three of the Company's four refineries had curtailed operations during the
third quarter of 1999. During September, a planned maintenance turnaround was
performed on the Company's Lima, Ohio refinery that reduced production and
resulted in a lost gross margin opportunity of an estimated $15 million with
similar activities resulting in an estimated $5 million lost gross margin
opportunity in the first quarter of 1999. Operating Contribution was further
reduced by an estimated $18 million in the third quarter of 1999 due to
unplanned downtime. The Lima refinery ran at reduced rates in August due to
an interruption of crude oil deliveries caused by a fire in a Chevron crude
oil pipeline. In addition, a lightning-induced power outage and related
downtime at the Company's Port Arthur, Texas refinery and operating problems
with the Hartford, Illinois refinery's coker unit reduced Operating
Contribution.
Industry light product margins improved in the third quarter from anemic
first half levels on improving inventory fundamentals, but this improvement
was more than offset by lower margins on by-products whose prices did not
track third quarter crude price increases and by narrower discounts for heavy
and light sour crude oil. Gulf Coast 3/2/1 crack spread refining margin
indicators in the first nine months of 1999 decreased to $1.73 per barrel
(1998 - $2.63 per barrel) as the third consecutive warmer-than-normal winter
heating season resulted in high industry inventories on a historical basis.
As of November 9, 1999, light product inventories had improved to below 1998
levels and approached five-year averages. The Company believes the narrower
crude oil differentials were due principally to Latin American oil exporters
disproportionately reducing supplies of heavy crude oil sales as part of the
accord reached among OPEC and non-OPEC producers to reduce the world oil glut
that existed earlier this year. Discounts for the benchmark Maya/WTI
differentials narrowed to $4.35 per barrel (1998 - $5.17) in the third quarter
and to $4.67 per barrel (1998 - $5.94) for the year to date. Refining market
conditions in the first nine months of 1999 were the most unfavorable of the
last 15 years.
Crude oil throughput and related production in the Company's Midwest
refineries was higher in the third quarter and first nine months of 1999
principally because of the addition of the Lima refinery in August 1998.
However, the increase in production resulting from the Lima refinery
acquisition was partially offset by a reduction in throughput due to the poor
refining margins in the first nine months of 1999, leaks in major interstate
crude oil pipelines supplying the Midwest refineries and other planned and
unplanned downtime. Crude oil throughput and production was also reduced at
the Port Arthur refinery in the third quarter and first nine months of 1999
due to weak market conditions.
Midwest refining operating expenses increased because of the addition of
the Lima refinery. Port Arthur operating expenses were reduced in the first
nine months of 1999 due to lower maintenance and gain sharing expenses and
the positive impact of lower natural gas prices early in 1999 on fuel costs.
Other Financial Highlights
The Company has expended $5.2 million from inception of its year 2000
systems remediation program through September 30, 1999. The Company believes
that as of October 1999 its mission critical embedded processors at refineries
and mission critical systems, including hardware and software, were ready for
the year 2000. In addition, the Company's mission critical business partners
had represented that their mission critical systems were remediated. In the
event the Company incurs year 2000-related problems with its mission critical
systems or processes, contingency plans have been developed to handle such
occurrences. More information on the Company's year 2000 program is discussed
in the Company's Annual Report on Form 10-K/A for the year ended December 31,
1998.
11
Depreciation and amortization expenses increased in the three and nine
months ended September 30, 1999 over the comparable periods in 1998
principally because of the acquisition of the Lima refinery. Interest and
finance costs, net for the three and nine months ended September 30, 1999
increased over the comparable periods in 1998 principally because of increased
debt associated with the acquisition of the Lima refinery.
The income tax benefit on the Earnings (Loss) from Continuing Operations of
$13.2 million and $15.8 million for the three and nine-month periods ended
September 30, 1999 reflects the effects of intraperiod tax allocations
resulting from the utilization of net operating losses to offset the income
tax provision resulting from the gain on the sale of the retail division
($23.7 million) and the income tax benefit from Discontinued Operations, as
well as the write-down of a net deferred tax asset.
Sale of Retail Division
In July 1999, the Company sold its retail marketing operation in a
recapitalization transaction to a company controlled by Apollo Management L.P.
for approximately $230 million. The retail marketing operation sold included
all Company and independently-operated retail stores and the Clark trade name.
After all transaction costs, the sale generated cash proceeds of approximately
$215 million. See Exhibit 10.0 Asset Contribution and Recapitalization
Agreement filed with the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1999. In general, the buyer assumed unknown
environmental liabilities at the retail stores they acquired up to $50,000 per
site, as well as responsibility for any post closing contamination. Subject
to certain risk sharing arrangements, the Company retained responsibility for
all pre-existing known contamination. Holdings acquired 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 buyer may cancel the supply agreement with 90 days
notice. The retail marketing operation was 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 beginning with the periods ended March
31, 1998 and 1999. A pre-tax gain on the sale of $59.9 million ($36.6
million, net of income taxes) was recognized in the third quarter of 1999.
12
Liquidity and Capital Resources
Net cash used in operating activities, excluding working capital changes,
for the nine months ended September 30, 1999 was $57.8 million compared to
cash provided by operating activities of $70.9 million in the year-earlier
period. Working capital as of September 30, 1999 was $345.8 million, a 1.78-
to-1 current ratio, versus $361.8 million as of December 31, 1998, a 1.99-to-1
current ratio. Working capital at December 31, 1998 included the retail
division net assets held for sale. The benefit to working capital from
increased petroleum prices and the sale of the retail division for a gain in
the first nine months of 1999 was offset by cash flow from operating
activities and capital expenditures.
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 September 30, 1999 was $695 million and approximately $426
million of the facility was utilized for letters of credit. As of September
30, 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 November 1999.
Cash flows generated from investing activities in the first nine months of
1999 were $123.2 million as compared to cash flows used in investing
activities of $161.2 million in the year-earlier period. The variance between
the first nine months of 1999 and 1998 was principally due to proceeds from
the sale of the Company's retail division and the transfer of assets to Port
Arthur Coker Company L.P. in 1999, while the prior year included expenditures
of $177.7 million related to the acquisition the Lima refinery that were only
partially offset by the proceeds from the sale of minority pipeline interests.
Scheduled maintenance turnaround expenditures in the first nine months of 1999
exceeded that same period in the prior year due to increased turnaround
activity at the Lima and Port Arthur refineries. Expenditures for property,
plant and equipment totaled $49.9 million in the first nine months of 1999
(1998 - $38.0 million) and included $18.6 million related to the Company's
portion of a project being undertaken in conjunction with Port Arthur Coker
Company L.P. to upgrade the Port Arthur refinery to allow it to process up to
80% heavy sour crude oil.
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 includes the
construction of additional coking and hydrocracking capability, and the
expansion of crude unit capacity to approximately 250,000 barrels per day.
Financing for the new major processing units in the project was arranged by
Port Arthur Coker Company L.P., a company that is an affiliate of, but not
controlled by, the Company and its subsidiaries in the third quarter of 1999.
The oil supply agreement with PMI and the construction work-in-progress
related to the new processing units were transferred for value to Port Arthur
Coker Company L.P. in the third quarter of 1999. In connection with the
project, the Company will lease certain existing processing units to Port
Arthur Coker Company L.P. on fair market terms and, pursuant to this lease,
will be obligated to make certain modifications, infrastructure improvements
and incur certain development costs during 1999 and 2000 at an estimated cost
up to $120 million. To secure this commitment, the Company posted a letter of
credit in the amount of $97.0 million at the closing, all of which was
outstanding at September 30, 1999. As of September 30, 1999, the Company had
expended approximately $35.8 million towards this commitment. In addition,
the Company entered into agreements with Port Arthur Coker Company L.P.
pursuant to which the Company will provide certain operating, maintenance and
other services and will purchase the output from the new coking and
hydrocracking equipment for further processing into finished products. The
Company also entered into agreements under which Port Arthur Coker Company
L.P. will process certain hydrocarbon streams owned by the Company.
13
The Company will receive and pay compensation at fair market value under these
agreements, which in the aggregate are expected to be favorable to the
Company.
In June 1999, the Company signed a non-binding letter of intent to pursue
the acquisition of Equilon Enterprises, L.L.C.'s ("Equilon") 295,000 barrel
per day Wood River, Illinois refinery, which is adjacent to the Company's
Hartford, Illinois refinery. Separately, the Company signed a non-binding
letter of intent to sell 12 distribution terminals to Equilon.
Cash flows from financing activities for first nine months of 1999 were
reduced compared to the same period in 1998 principally because of the
proceeds received in 1998 to partially finance the acquisition of the Lima
refinery.
Funds generated from the Company's operating activities together with
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 investments, discretionary
and non-discretionary capital expenditures, and 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, among others, 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,
and governmental actions
* Market volatility due to world and regional events
* Availability and cost of debt and equity financing
* Labor relations
* U.S. and world economic conditions
* 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. Such hazards include equipment malfunctions, plant
construction/repair delays, explosions, fires, oil spills and the impact of
severe weather
* Actions taken by competitors which may include both pricing and expansion
or retirement of refinery capacity
* The enforceability of contracts
* Civil, criminal, regulatory or administrative actions, claims or
proceedings 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.
14
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
On July 6, 1999, Clark Refining & Marketing, Inc. was served with a civil
administrative complaint by the United States Environmental Protection Agency,
Region 5, alleging certain violations of the Emergency Planning and Community
Right-to-Know Act, and regulations promulgated thereunder, with respect to
certain record-keeping and reporting requirements relating to the Hartford
refinery. The administrative complaint seeks a civil penalty of $498,000. No
estimate can be made at this time of the Company's potential liability, if
any, as a result of this matter.
ITEM 5 - Other Information
Director Change
Richard C. Lappin, 54, was appointed director of the Company, Holdings and
Clark R&M effective October 12, 1999. Mr. Lappin has served as a Senior
Managing Director of The Blackstone Group L.P. since February 1999. Prior to
joining Blackstone, Mr. Lappin served as President of Farley Industries which
included West Point-Pepperell, Inc., Acme Boot Company, Inc., Tool and
Engineering, Inc., Magnus Metals, Inc. and Fruit of the Loom, Inc. from 1989
to 1998. Mr. Lappin replaced David A. Stockman on the board of directors.
Mr. Stockman resigned as a director of the Company, Holdings and Clark R&M
effective September 9, 1999.
Sale of Retail Division
In July 1999, the Company sold its retail marketing operation in a
recapitalization transaction to a company controlled by Apollo Management L.P.
for approximately $230 million. The retail marketing operation sold included
all Company and independently-operated retail stores and the Clark trade name.
After all transaction costs, the sale generated cash proceeds of approximately
$215 million. See Exhibit 10.0 Asset Contribution and Recapitalization
Agreement filed with the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1999. In general, the buyer assumed unknown
environmental liabilities at the retail stores they acquired up to $50,000 per
site, as well as responsibility for any post closing contamination. Subject
to certain risk sharing arrangements, the Company retained responsibility for
all pre-existing known contamination. Holdings acquired 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 buyer may cancel the supply agreement with 90 days
notice. The retail marketing operation was 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 beginning with the periods ended March
31, 1998 and 1999. A pre-tax gain on the sale of $59.9 million ($36.6
million, net of income taxes) was recognized in the third quarter of 1999.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
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 12, 1999