UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
Commission File Number 1-11154
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification No. 13-3663331
6000 North Loop 1604 West
San Antonio, Texas 78249-1112
Telephone number: (210) 592-2000
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 ____
As of July 31, 2000, 86,931,000 shares of Common Stock, $0.01 par value, were
outstanding and the aggregate market value of such stock as of July 31, 2000 was
$1,988,553,000.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
FORM 10-Q
JUNE 30, 2000
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999................................ 3
Consolidated Statements of Income for the Three
and Six Months Ended June 30, 2000 and 1999.......... 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999.................. 5
Consolidated Statements of Comprehensive Income
(Loss) for the Three and Six Months Ended
June 30, 2000 and 1999............................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 27
SIGNATURE................................................... 28
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
June 30, December 31,
2000 1999
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents........................ $ 124.2 $ 92.8
Accounts and notes receivable, net............... 787.4 616.5
Inventories...................................... 643.4 556.8
Prepaid expenses and other current assets........ 31.8 20.3
Deferred income taxes............................ 109.5 110.4
--------- ---------
Total current assets.......................... 1,696.3 1,396.8
--------- ---------
Property, plant and equipment....................... 4,361.1 4,345.8
Less accumulated depreciation and amortization...... (1,403.7) (1,315.9)
--------- ----------
Property, plant and equipment, net............... 2,957.4 3,029.9
Other assets, net................................... 509.1 509.3
--------- ----------
Total assets.................................... $ 5,162.8 $ 4,936.0
========= ==========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term
debt........................................ $ 15.7 $ 14.0
Accounts payable................................. 627.5 489.2
Accrued liabilities.............................. 372.0 392.4
Taxes other than income taxes.................... 230.1 293.8
Income taxes payable............................. 58.3 68.7
--------- ----------
Total current liabilities..................... 1,303.6 1,258.1
--------- ----------
Long-term debt, less current portion................ 1,336.5 1,327.6
Other long-term liabilities......................... 354.9 372.8
Deferred income taxes............................... 336.1 284.2
Commitments and contingencies
Company obligated preferred stock of subsidiary..... 200.0 200.0
Stockholders' equity:
Common Stock, par value $0.01 per share:
250,000,000 shares authorized, 86,928,000 and
86,700,000 shares issued and outstanding as of
June 30, 2000 and December 31, 1999........... 0.9 0.9
Additional paid-in capital....................... 1,514.5 1,516.3
Treasury stock................................... (1.2) (0.7)
Grantor trust stock ownership program............ (96.1) (100.0)
Retained earnings................................ 310.2 160.4
Accumulated other comprehensive loss ............ (96.6) (83.6)
--------- ----------
Total stockholders' equity..................... 1,631.7 1,493.3
--------- ----------
Total liabilities and stockholders' equity..... $ 5,162.8 $ 4,936.0
========= ==========
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in millions, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Sales and other revenues...................................... $ 3,999.8 $ 3,380.1 $ 7,639.2 $ 6,100.3
--------- --------- --------- ---------
Operating costs and expenses:
Cost of products sold...................................... 2,702.7 2,114.4 5,163.8 3,667.8
Operating expenses......................................... 239.8 252.1 471.5 501.2
Selling, general and administrative expenses............... 68.9 70.8 143.5 146.4
Taxes other than income taxes.............................. 690.5 768.2 1,362.0 1,480.8
Depreciation and amortization.............................. 60.4 59.3 122.5 116.5
Restructuring and other expenses, net...................... 0.8 1.8 0.1 9.2
--------- --------- --------- ---------
Total operating costs and expenses...................... 3,763.1 3,266.6 7,263.4 5,921.9
--------- --------- --------- ---------
Operating income.............................................. 236.7 113.5 375.8 178.4
Interest income............................................. 3.3 2.9 6.2 5.8
Interest expense............................................ (32.0) (37.4) (61.5) (76.0)
Equity income from joint ventures........................... 6.1 6.8 12.3 8.9
--------- --------- --------- ---------
Income before income taxes and dividends of subsidiary........ 214.1 85.8 332.8 117.1
Provision for income taxes.................................. 83.1 34.9 130.1 47.6
Dividends on preferred stock of subsidiary.................. 2.5 2.5 5.1 5.1
--------- --------- --------- ---------
Net income.................................................... $ 128.5 $ 48.4 $ 197.6 $ 64.4
========= ========= ========= =========
Net income per share:
Basic...................................................... $ 1.48 $ 0.56 $ 2.28 $ 0.74
Diluted.................................................... $ 1.47 $ 0.56 $ 2.27 $ 0.74
Weighted average number of shares (in thousands):
Basic...................................................... 86,767 86,593 86,741 86,575
Diluted.................................................... 87,024 86,703 86,894 86,673
Dividends per Common Share.................................... $ 0.275 $ 0.275 $ 0.550 $ 0.550
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
Six Months Ended June 30,
2000 1999
---- ----
Cash Flows from Operating Activities:
Net income ........................................................ $ 197.6 $ 64.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................... 122.5 116.5
Provision for losses on receivables............................. 5.6 3.6
Restructuring charges - write-down of property, plant
and equipment and goodwill.................................... 5.2 -
Equity income from joint ventures............................... (12.3) (8.9)
Loss (gain) on sale of property, plant and equipment............ (5.1) 1.8
Deferred income tax provision................................... 49.8 33.7
Other, net...................................................... 2.3 1.5
Changes in operating assets and liabilities:
Decrease (increase) in accounts and notes receivable.......... (180.5) 216.2
Decrease (increase) in inventories............................ (91.5) 79.6
Decrease (increase) in prepaid expenses and other
current assets.............................................. (12.4) 4.3
Increase (decrease) in accounts payable and other
current liabilities......................................... 52.1 (120.6)
Increase in other long-term assets................................. (4.4) (1.6)
Decrease in other long-term liabilities............................ (10.9) (17.7)
------- --------
Net cash provided by operating activities................. 118.0 372.8
------- --------
Cash Flows from Investing Activities:
Capital expenditures............................................... (53.0) (73.8)
Deferred refinery maintenance turnaround costs..................... (14.2) (24.1)
Proceeds from sales of property, plant and equipment............... 16.8 10.7
------- --------
Net cash used in investing activities..................... (50.4) (87.2)
------- --------
Cash Flows from Financing Activities:
Net change in commercial paper and short-term borrowings........... 14.0 (238.6)
Repayment of long-term debt........................................ (3.4) (35.7)
Payment of cash dividends.......................................... (47.8) (47.6)
Other, net......................................................... 1.7 1.5
------- --------
Net cash used in financing activities..................... (35.5) (320.4)
------- --------
Effect of exchange rate changes on cash............................ (0.7) 3.6
------- --------
Net Increase (Decrease) in Cash and Cash Equivalents............... 31.4 (31.2)
Cash and Cash Equivalents at Beginning of Period................... 92.8 176.1
------- --------
Cash and Cash Equivalents at End of Period......................... $ 124.2 $ 144.9
======= ========
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in millions)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Net income...................................................... $128.5 $48.4 $197.6 $64.4
Other comprehensive income (loss):
Foreign currency translation adjustment...................... (11.1) 12.6 (13.0) 19.8
Minimum pension liability adjustment,
net of income tax benefit.................................. - - - (1.1)
------ ----- ------ ----
Comprehensive income............................................ $117.4 $61.0 $184.6 $83.1
====== ===== ====== =====
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000
(unaudited)
NOTE 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by Ultramar Diamond Shamrock Corporation (the Company), in accordance with
United States' generally accepted accounting principles for interim financial
reporting and with Securities and Exchange Commission rules and regulations for
Form 10-Q. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1999.
Operating results for the three and six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. The results of operations may be affected by seasonal
factors, such as the demand for petroleum products and working capital
requirements in the Northeast System, which vary during the year; or industry
factors that may be specific to a particular period, such as movements in and
the general level of crude oil prices, the demand for and prices of refined
products, industry supply capacity and maintenance turnarounds.
Certain previously reported amounts have been reclassified to conform to the
2000 presentation.
NOTE 2: Inventories
Inventories consisted of the following:
June 30, December 31,
2000 1999
---- ----
(in millions)
Crude oil and other feedstocks............... $210.8 $155.4
Refined and other finished products and
convenience store items................ 370.5 346.9
Materials and supplies....................... 62.1 54.5
------ ------
Total inventories..................... $643.4 $556.8
====== ======
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Notes to Consolidated Financial Statements - (Continued)
NOTE 3: Computation of Net Income Per Share
Basic net income per share is calculated as net income divided by the weighted
average number of common shares outstanding. Diluted net income per share
assumes, when dilutive, issuance of the net incremental shares from stock
options and restricted shares. The following table reconciles the net income
amounts and share numbers used in the computation of net income per share.
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(in millions, except share and per share data)
Basic Net Income Per Share:
Weighted average common shares outstanding
(in thousands)............................................... 86,767 86,593 86,741 86,575
======= ======= ======= ======
Net income applicable to Common Stock............................ $ 128.5 $ 48.4 $ 197.6 $ 64.4
======= ======= ======= ======
Basic net income per share....................................... $ 1.48 $ 0.56 $ 2.28 $ 0.74
======= ======= ======= ======
Diluted Net Income Per Share:
Weighted average common shares outstanding
(in thousands)............................................... 86,767 86,593 86,741 86,575
Net effect of dilutive stock options based on the treasury
stock method using the average market price................... 257 110 153 98
------- ------- ------- ------
Weighted average common equivalent shares........................ 87,024 86,703 86,894 86,673
======= ======= ======= ======
Net income....................................................... $ 128.5 $ 48.4 $ 197.6 $ 64.4
======= ======= ======= ======
Diluted net income per share..................................... $ 1.47 $ 0.56 $ 2.27 $ 0.74
======= ======= ======= ======
NOTE 4: Restructuring and Other Expenses
Restructuring and other expenses consisted of the following:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(in millions)
Loss (gain) on sale of property, plant and equipment $ (4.4) $ 1.8 $ (5.1) $ 1.8
Write-down of property, plant and equipment................. 5.2 5.2 -
Transaction costs related to the terminated
Diamond 66 joint venture................................. 11.0
Restructuring reserve reductions (3.6)
------- ------- ------- ------
- - -
Restructuring and other expenses, net.................. $ 0.8 $ 1.8 $ 0.1 $ 9.2
======= ======= ======= ======
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Notes to Consolidated Financial Statements - (Continued)
In June 2000, the Company recognized a $5.2 million impairment charge to
writedown property, plant and equipment related to certain pipeline assets
(carrying value prior to write-down was $5.7 million).
In March 1999, the Company and Phillips Petroleum Company terminated discussions
related to the formation of a proposed joint venture (Diamond 66) between the
two companies. During the first quarter of 1999, the Company expensed $11.0
million of transaction costs related to the formation of Diamond 66.
In June 1998, the Company adopted a three-year restructuring plan to reduce its
retail cost structure by eliminating 250 positions to improve operating
efficiencies and to close and sell 316 under-performing convenience stores. In
addition, the Company restructured certain pipeline and terminal operations and
support infrastructure resulting in the elimination of 62 positions. During the
six months ended June 30, 2000, 34 convenience stores were sold or closed and 15
employees were terminated under the retail and pipeline and terminal
restructuring plans. From June 1998 through December 1999, 227 convenience
stores were sold or closed and 235 retail employees and 62 pipeline and terminal
employees were terminated.
Changes in accrued restructuring costs for the six months ended June 30, 2000
were as follows (in millions):
Balance at Balance at
December 31, 1999 Payments June 30, 2000
----------------- -------- -------------
Severance and related costs $ 5.1 $(1.5) $ 3.6
Lease buyout costs 6.0 - 6.0
Fuel system removal costs 2.5 (0.3) 2.2
---- ---- ----
$13.6 $(1.8) $11.8
==== ===== ====
NOTE 5: Commitments and Contingencies
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities. Site restoration and environmental
remediation and clean-up obligations are accrued either when known or when
considered probable and reasonably estimable. Total future environmental costs
are difficult to assess and estimate due to unknown factors such as the
magnitude of possible contamination, the timing and extent of remediation, the
determination of the Company's liability in proportion to other parties,
improvements in cleanup technologies and the extent to which environmental laws
and regulations may change in the future. Although environmental costs may have
a significant impact on results of operations for any single year, the Company
believes that such costs will not have a material adverse effect on the
Company's financial position.
There are various legal proceedings and claims pending against the Company that
arise in the ordinary course of business. It is management's opinion, based upon
advice of legal counsel, that these matters, individually or in the aggregate,
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE 6: Business Segments
The Company has three reportable segments: Refining, Retail and
Petrochemical/NGL. The Refining segment includes refinery, wholesale, product
supply and distribution, and transportation operations. The Retail segment
includes Company-operated convenience stores, dealers/jobbers and truckstop
facilities, cardlock and home heating oil operations. The Petrochemical/NGL
segment includes earnings from Nitromite fertilizer, NGL marketing and certain
NGL pipeline operations. Equity income from Diamond-Koch and Skelly-Belvieu are
not included in operating income. Operations that are not included in any of the
three reportable segments are included in the Corporate category and consist
primarily of corporate office expenditures.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Notes to Consolidated Financial Statements - (Continued)
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each business
requires unique technology and marketing strategies. The Company evaluates
performance based on earnings before interest, taxes and depreciation and
amortization (EBITDA). Intersegment sales are generally derived from
transactions made at prevailing market rates.
Petrochemical/
Refining Retail NGL Corporate Total
-------- ------ --- --------- -----
(in millions)
Six months ended June 30, 2000:
Sales and other revenues from
external customers............... $5,372.9 $2,187.0 $ 79.3 $ - $7,639.2
Intersegment sales.................. 1,622.2 - 1.4 - 1,623.6
EBITDA.............................. 436.3 111.0 14.1 (50.8) 510.6
Depreciation and amortization....... 81.3 35.4 0.3 5.5 122.5
Operating income (loss)............. 355.0 75.6 1.5 (56.3) 375.8
Total assets........................ 3,494.7 1,214.1 115.4 338.6 5,162.8
Six months ended June 30, 1999:
Sales and other revenues from
external customers............... $3,320.3 $2,722.9 $ 57.1 $ - $6,100.3
Intersegment sales.................. 1,137.0 4.4 - - 1,141.4
EBITDA.............................. 248.3 111.2 10.2 (65.9) 303.8
Depreciation and amortization....... 81.2 32.9 0.7 1.7 116.5
Operating income (loss)............. 167.1 78.3 0.6 (67.6) 178.4
Total assets........................ 3,144.3 1,270.7 155.4 436.9 5,007.3
Three months ended June 30, 2000:
Sales and other revenues from
external customers............... $2,923.7 $1,036.9 $ 39.2 $ - $3,999.8
Intersegment sales.................. 830.9 - - - 830.9
EBITDA.............................. 270.2 51.9 5.2 (24.1) 303.2
Depreciation and amortization....... 40.3 17.2 0.1 2.8 60.4
Operating income (loss)............. 229.9 34.7 (1.0) (26.9) 236.7
Three months ended June 30, 1999:
Sales and other revenues from
external customers............... $1,890.6 $1,456.9 $ 32.6 $ - $3,380.1
Intersegment sales.................. 648.8 2.3 - - 651.1
EBITDA.............................. 137.9 58.3 7.7 (24.3) 179.6
Depreciation and amortization....... 41.3 16.7 0.4 0.9 59.3
Operating income (loss)............. 96.6 41.6 0.5 $(25.2) 113.5
The following summarizes the reconciliation of reportable segment operating
income to consolidated operating income:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in millions)
Operating income:
Total operating income for reportable segments... $259.4 $138.7 $427.9 $246.0
Other income (loss).............................. (22.7) (25.2) (52.1) (67.6)
----- ----- ----- -----
Consolidated operating income................. $236.7 $113.5 $375.8 $178.4
===== ===== ===== =====
NOTE 7: Subsequent Events
On August 1, 2000, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on August 31, 2000 to holders of record on
August 17, 2000.
On August 4, 2000, the Company announced it signed a definitive Asset Purchase
and Sale Agreement to acquire Tosco Corporation's 168,000 barrel per day Avon
Refinery located in the San Francisco bay area of California. The purchase price
will be $650.0 million plus a contingency payment of up to $150.0 million to be
paid over eight years if annual West Coast refining industry margins are above
average. The transaction has been approved by the Boards of Directors of both
companies and is subject to regulatory approval. The purchase will be financed
with available cash and existing credit facilities and is expected to close
before year end..
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company
Ultramar Diamond Shamrock Corporation (the Company) is a leading independent
refiner and retailer of high-quality refined products and convenience store
merchandise in the central and southwest regions of the United States (the US
System), and the northeast United States and eastern Canada (the Northeast
System). Its operations consist of six refineries with a combined throughput of
682,000 barrels per day, approximately 5,000 convenience stores, pipelines, a
home heating oil business, and related petrochemical operations.
The Company's operating results are affected by Company-specific factors,
primarily its refinery utilization rates and refinery maintenance turnarounds;
seasonal factors, such as the demand for petroleum products and working capital
requirements; and industry factors, such as movements in and the level of crude
oil prices, the demand for and prices of refined products and industry supply
capacity. The effect of crude oil price changes on the Company's operating
results is determined, in part, by the rate at which refined product prices
adjust to reflect such changes. As a result, the Company's earnings have been
volatile in the past and may be volatile in the future.
Seasonality
In the Northeast System, demand for refined products varies significantly during
the year. Distillate demand during the first and fourth quarters can range from
30% to 40% above the average demand during the second and third quarters. The
substantial increase in demand for home heating oil during the winter months
results in the Company's Northeast System having significantly higher accounts
receivable and inventory levels during the first and fourth quarters of each
year. The Company's US System is less affected by seasonal fluctuations in
demand than its operations in the Northeast System. The working capital
requirements of the US System, though substantial, show little fluctuation
throughout the year. Both the US and Northeast Systems are impacted by the
increased demand for gasoline during the summer driving season.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Financial and operating data by geographic area for the three months ended June
30, 2000 and 1999 are as follows:
Financial Data:
Three Months Ended June 30,
--------------------------------------------------------------------------
2000 1999 (1)
---------------------------------- ----------------------------------
US Northeast Total US Northeast Total
-- --------- ----- -- --------- -----
(in millions)
Sales and other revenues............... $3,007.2 $992.6 $3,999.8 $2,725.4 $654.7 $3,380.1
Cost of products sold ................. 2,028.0 674.7 2,702.7 1,727.9 386.5 2,114.4
Operating expenses..................... 217.7 22.1 239.8 231.3 20.8 252.1
Selling, general and
administrative expenses.............. 26.7 42.2 68.9 33.6 37.2 70.8
Taxes other than income taxes.......... 498.6 191.9 690.5 581.4 186.8 768.2
Depreciation and amortization.......... 49.1 11.3 60.4 49.5 9.8 59.3
Restructuring and other expenses....... 1.0 (0.2) 0.8 1.8 - 1.8
-------- ------ -------- -------- ------ --------
Operating income....................... $ 186.1 $ 50.6 236.7 $ 99.9 $ 13.6 113.5
======== ====== ======== ======
Interest income........................ 3.3 2.9
Interest expense....................... (32.0) (37.4)
Equity income from joint ventures...... 6.1 6.8
-------- --------
Income before income taxes
and dividends of subsidiary.......... 214.1 85.8
Provision for income taxes............. 83.1 34.9
Dividends on subsidiary stock.......... 2.5 2.5
-------- --------
Net income ............................ $ 128.5 $ 48.4
======== ========
Operating Data:
- --------------
Three Months Ended June 30,
---------------------------
2000 1999
---- ----
US System
Mid-Continent Refineries (2):
Throughput (barrels per day).............. 375,200 416,300
Margin ($/barrel)......................... $ 8.51 $ 3.04
Operating cost ($/barrel)................. $ 1.87 $ 1.77
Wilmington Refinery:
Throughput (barrels per day).............. 143,300 127,600
Margin ($/barrel)......................... $ 2.49 $ 5.81
Operating cost ($/barrel)................. $ 1.64 $ 1.78
Retail:
Fuel volume (barrels per day)............. 162,800 180,900
Fuel margin (cents per gallon)............ 11.6 12.3
Merchandise sales ($1,000/day)............ $ 3,130 $ 3,677
Merchandise margin (%).................... 27.3% 26.6%
Northeast System
Three Months Ended June 30,
---------------------------
2000 1999
---- ----
Quebec Refinery:
Throughput (barrels per day).............. 161,400 153,400
Margin ($/barrel)......................... $ 4.73 $ 1.71
Operating cost ($/barrel)................. $ 0.81 $ 0.92
Retail:
Fuel volume (barrels per day)............. 67,900 63,300
Overall margins (cents per gallon) (3)....... 22.1 24.6
- ---------------------
(1) Certain 1999 amounts have been reclassified to conform to the 2000
presentation.
(2) In December 1999, the Alma Refinery was permanently shutdown and ceased
operations. Excluding the Alma Refinery operations from the Mid-Continent
Refineries' second quarter 1999 results in the following:
Throughput (barrels per day) ........................... 362,300
Margin ($/barrel)....................................... $ 3.07
Operating cost ($/barrel)............................... $ 1.70
(3) Retail marketing overall margin reported for the Northeast System represents
a blend of gross margin for Company and dealer-operated retail outlets and
convenience stores, home heating oil sales and cardlock operations.
General
Net income for the quarter ended June 30, 2000 totaled $128.5 million as
compared to $48.4 million for the quarter ended June 30, 1999. During the second
quarter of 2000, the Company recognized $18.7 million of recoveries on
environmental insurance claims which were partially offset by one-time accruals
of $14.0 million for litigation, SAP system training, and various other
expenses. There were no unusual charges or credits during the second quarter of
1999.
For the quarter ended June 30, 2000, diluted net income per share was $1.47. For
the quarter ended June 30, 1999, diluted net income per share was $0.56.
Sales and other revenues for the quarter ended June 30, 2000 increased 18.3%
over 1999 levels primarily as a result of the increase in refined product prices
resulting from increasing crude oil costs during 2000. The retail price of
gasoline and diesel increased approximately 40% in the second quarter of 2000 as
compared to the same period in 1999. Partially offsetting the increased sales
prices of refined products were lower sales volumes in the US System as a result
of closing down the Alma Refinery in December 1999 and selling 416 company-owned
convenience stores during 1999.
US System
Operating income for the US System was $186.1 million for the second quarter of
2000 as compared to $99.9 million for the second quarter of 1999, an increase of
86.3%. The improvement in US System operating income resulted from:
o increased sales and other revenues of 10.3% resulting from higher
refined product prices,
o higher refining margins for the Mid-Continent Refineries, and
o lower operating expenses as a result of the sale of 416 convenience
stores in 1999 and the closure of the Alma Refinery in December 1999.
The Mid-Continent Refineries' refining margin increased $5.47 per barrel to
$8.51 per barrel as all four refineries continued to operate at high throughput
levels as gasoline and distillate prices reached four-year highs. The decrease
in refining throughput for the Mid-Continent Refineries from 416,300 barrels per
day in 1999 to 375,200 barrels per day in 2000 was due mainly to the permanent
shutdown of the Alma Refinery in December 1999. During the second quarter of
1999, the Alma Refinery contributed 54,000 barrels per day of throughput.
Throughput at the Wilmington Refinery increased 12.3% from 127,600 barrels per
day in 1999 to 143,300 barrels per day in 2000 as a result of processing greater
quantities of higher cost blendstocks and feedstocks (i.e., MTBE, gasoil, etc.)
than in 1999. During 1999, the processing capacity of the Wilmington Refinery's
sulfur plant was limited. During 2000, the sulfur plant returned to normal
processing capacity, which resulted in increased throughput. These additional
quantities of lower margin blendstocks and feedstocks, however, caused the
refining margin to decline from $5.81 per barrel to $2.49 per barrel during the
second quarter of 2000. In addition, during the second quarter of 1999, the
Wilmington Refinery benefited from the supply imbalance in the California market
caused by unplanned shutdowns at several West Coast refineries which boosted
industry refining margins.
During 1999, 416 convenience stores were sold or closed. Consequently, US retail
fuel volumes and merchandise sales declined from 1999 levels. The US retail
operations continued to be negatively impacted by the run up in wholesale
gasoline prices resulting in a drop in fuel margin of 5.7% per gallon during the
second quarter of 2000 as compared to 1999. Merchandise margins, however,
increased to 27.3% in 2000 from 26.6% in 1999 due to cigarette price increases
over the past year and a more profitable mix of merchandise being sold. The US
retail operating income for the second quarter of 2000 was $21.7 million as
compared to $24.4 million in 1999 due to improved profitability at the remaining
convenience stores which partially offset the decline in business from the sold
stores.
Selling, general and administrative expenses for the second quarter of 2000
decreased $6.9 million from the second quarter of 1999. As noted above,
administrative expenses includes $18.7 million in pre-tax gains from
environmental insurance recoveries, net of $14.0 million of one-time expense
accruals. In addition, selling expenses were lower in 2000 as compared to 1999
as the Company has reduced advertising spending.
Northeast System
Sales and other revenues in the Northeast System increased $337.9 million, a
51.6% increase, from the second quarter in 1999 to the second quarter in 2000.
The increase in sales was due to higher retail volumes being sold and higher
selling prices of refined products as a result of higher crude oil prices
compared to 1999.
Throughput at the Quebec Refinery increased from 153,400 barrels per day for the
quarter ended June 30, 1999 to 161,400 barrels per day for the quarter ended
June 30, 2000. The increase in throughput was due to production maximization
following strong refining margins. In addition, the Quebec Refinery's refining
margin rose from $1.71 in the second quarter of 1999 to $4.73 for the same
period in 2000, a 176.6% increase. This significant increase in refining margin
was due to strong product demand while industry inventories were low.
Retail fuel volumes in the Northeast System improved 7.3% as a result of higher
motorist and home heating oil sales. The retail margin for the Northeast System,
however, dropped 2.5 cents per gallon from 24.6 cents per gallon in 1999 to 22.1
cents per gallon in 2000 due to the quick rise in import parity wholesale
gasoline prices which outpaced the increase in retail pump prices in eastern
Canada.
Selling, general and administrative expenses for the second quarter of 2000
increased $5.0 million over the second quarter of 1999 due to higher selling
expenses incurred to support the higher sales volumes in the motorist and home
heating oil businesses.
Corporate
Interest expense for the second quarter of 2000 decreased 14.4% from the second
quarter of 1999 due to the repayment of $602.8 million of debt primarily during
the second half of 1999.
Equity income from joint ventures, which includes the Company's investment in
Diamond-Koch, totaled $6.1 million for the second quarter of 2000 as compared to
$6.8 million for 1999's second quarter. Petrochemical sales volumes continued to
increase while product margins were squeezed due to the sharp run up in
feedstock prices.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Financial and operating data by geographic area for the six months ended June
30, 2000 and 1999 are as follows:
Financial Data:
Six Months Ended June 30,
--------------------------------------------------------------------------
2000 1999 (1)
----------------------------------- ----------------------------------
US Northeast Total US Northeast Total
-- --------- ----- -- --------- -----
(in millions)
Sales and other revenues............... $5,612.3 $2,026.9 $7,639.2 $4,871.4 $1,228.9 $6,100.3
Cost of products sold ................. 3,774.9 1,388.9 5,163.8 2,973.3 694.5 3,667.8
Operating expenses..................... 425.2 46.3 471.5 458.8 42.4 501.2
Selling, general and
administrative expenses.............. 58.9 84.6 143.5 70.6 75.8 146.4
Taxes other than income taxes.......... 987.3 374.7 1,362.0 1,124.8 356.0 1,480.8
Depreciation and amortization.......... 100.2 22.3 122.5 97.4 19.1 116.5
Restructuring and other expenses....... 0.2 (0.1) 0.1 9.2 - 9.2
-------- -------- -------- -------- -------- --------
Operating income....................... $ 265.6 $ 110.2 375.8 $ 137.3 $ 41.1 178.4
======== ======== ======== ========
Interest income........................ 6.2 5.8
Interest expense....................... (61.5) (76.0)
Equity income from joint ventures...... 12.3 8.9
--------- --------
Income before income taxes and dividends
of subsidiary........................ 332.8 117.1
Provision for income taxes............. 130.1 47.6
Dividends on subsidiary stock.......... 5.1 5.1
--------- --------
Net income............................. $ 197.6 $ 64.4
========= ========
Operating Data:
Six Months Ended June 30,
------------------------
2000 1999
---- ----
US System
Mid-Continent Refineries2:
Throughput (barrels per day).................. 364,100 403,500
Margin ($/barrel)............................. $6.68 $3.15
Operating cost ($/barrel)..................... $1.89 $1.82
Wilmington Refinery:
Throughput (barrels per day).................. 142,700 129,700
Margin (dollars per barrel)................... $4.17 $5.67
Operating cost ($/barrel)..................... $1.64 $1.74
Retail:
Fuel volume (barrels per day)................. 157,900 175,900
Fuel margin (cents per gallon)................ 10.1 11.6
Merchandise sales ($1,000/day)................ $2,949 $3,493
Merchandise margin (%)........................ 27.7% 26.6%
Northeast System
Quebec Refinery:
Throughput (barrels per day).................. 162,000 155,800
Margin ($/barrel)............................. $4.86 $1.69
Operating cost ($/barrel)..................... $0.84 $0.89
Retail:
Fuel volume (barrels per day)................. 72,900 68,400
Overall margins (cents per gallon)3........... 23.0 25.3
- ---------------------
(1) Certain 1999 amounts have been reclassified to conform to the 2000
presentation.
(2) In December 1999, the Alma Refinery was permanently shutdown and ceased
operations. Excluding the Alma Refinery operations from the Mid-Continent
Refineries' amounts for the six months ended June 30, 1999 results in the
following:
Throughput (barrels per day) ................ 351,400
Margin ($/barrel)............................ $ 3.16
Operating cost ($/barrel).................... $ 1.73
(3) Retail marketing overall margin reported for the Northeast System
represents a blend of gross margin for Company and dealer-operated retail
outlets and convenience stores, home heating oil sales and cardlock operations.
General
Net income for the six months ended June 30, 2000 was $197.6 million as compared
to $64.4 million for the six months ended June 30, 1999. On a per share basis,
earnings are up 206.8% with diluted net income per share of $2.27 in the first
six months of 2000 as compared to $0.74 per share in the first six months of
1999.
o Factors contributing to this improved profitability for the six
months ended June 30, 2000 were:
o a reduction in operating expenses as a result of the sale of 416
convenience stores during 1999 and the permanent shut down of the
Alma Refinery in December 1999,
o a 25.2% increase in sales and other revenues due primarily to the
increase in refined product prices resulting from increasing crude
oil costs in 2000. The cost of crude oil increased from
approximately $17 per barrel at June 30, 1999 to above $30 per barrel
at June 30, 2000.
o a $14.5 million decrease in interest expense as a result of the
repayment of $602.8 million of debt primarily during the second half
of 1999.
US System
The US System had operating income of $265.6 million for the six months ended
June 30, 2000 as compared to $137.3 million for the six months ended June 30,
1999, which was generated mainly from the refining segment. Operating income for
the US System's refining segment was $286.0 million through June 30, 2000 as
compared to $153.4 million for the same period in 1999 as a result of
dramatically improved refining margins.
The Mid-Continent Refineries' refining margin increased to $6.68 in 2000 from
$3.15 in 1999 as prices for gasoline and distallate products continued to remain
high. Throughput at the Mid-Continent Refineries declined during 2000 as a
result of the permanent shutdown of the Alma Refinery in December 1999, which
generated throughput of 52,100 barrels per day in the first half of 1999.
Throughput at the Wilmington Refinery increased 10.0% from 129,700 barrels per
day in 1999 to 142,700 barrels per day in 2000. During 2000, the Wilmington
Refinery processed greater quantities of lower margin blendstocks and feedstocks
than in 1999 which improved the throughput but, at the same time, caused the
refining margin to decline $1.50 per barrel to $4.17 per barrel during the first
six months of 2000. During the first six months of 1999, the Wilmington Refinery
benefited from strong margins caused by the supply imbalance in the California
market due to unplanned shutdowns at several West Coast refineries.
The US retail operations continued to be negatively impacted by the decline in
fuel margins as a result of wholesale gasoline prices increasing faster than
retail pump prices. The decrease in US retail fuel volumes is due mainly to the
sale of 416 convenience stores during 1999. Fuel volumes sold per store,
however, increased from 3,833 gallons per day in 1999 to 4,281 gallons per day
in 2000 and merchandise sales per store increased from $1,792 per day in 1999 to
$1,901 per day in 2000. In addition, the merchandise margin increased to 27.7%
in the first half of 2000 as compared to 26.6% in 1999 due to higher margin
merchandise sales, including cigarettes, the prices of which have steadily
increased over the past year.
Selling, general and administrative expenses for the first six months of 2000
were $11.7 million lower than in the first six months of 1999. This decrease was
due to lower selling expenses as a result of 416 fewer convenience stores and
the recovery of $18.7 million of environmental insurance claims, which were
partially offset by $14.0 million of one-time expense accruals for litigation,
SAP system training, and other charges.
Restructuring and other expenses for the six months ended June 30, 1999 included
$11.0 million of transaction costs associated with the termination of the
proposed Diamond 66 joint venture, $3.6 million of restructuring reserve
reductions and $1.8 million of net losses on asset sales.
Northeast System
Operating income of $110.2 million for the Northeast System more than doubled
for the six months ended June 30, 2000 as compared to the six months ended June
30, 1999. Sales and other revenues increased $798.0 million from $1,228.9
million during the first six months of 1999 to $2,026.9 million for the same
period in 2000. The increase in sales was due to higher selling prices of
refined products as a result of higher crude oil prices compared to 1999
combined with a 1.6% increase in sales volume.
Throughput at the Quebec Refinery improved to 162,000 barrels per day during
2000 compared to 155,800 barrels per day during 1999. In addition, the refinery
margin increased 187.6% to $4.86 per barrel during 2000 due to lower industry
inventory levels and increased demand. These improvements combined with lower
operating costs per barrel resulted in operating income for the refinery segment
of $95.8 million for the six months ended June 30, 2000 compared to $13.8
million for the same period in 1999.
Retail fuel volumes in the Northeast System improved 6.6% as a result of higher
motorist and home heating oil sales. The retail margin for the Northeast System,
however, dropped 2.3 cents per gallon from 25.3 cents per gallon in 1999 to 23.0
cents per gallon in 2000 due to the quick rise in wholesale gasoline prices
which outpaced the increase in retail pump prices in eastern Canada.
Selling, general and administrative expenses were 11.6% higher for the six
months ended June 30, 2000 than in 1999 due to the additional selling expenses
associated with higher sales volumes.
Corporate
Interest expense for the first six months of 2000 decreased 19.1% compared to
the first six months of 1999 due to the repayment of $602.8 million of debt
during the last six months of 1999.
The consolidated income tax provisions for the six months ended June 30, 2000
and 1999 were based upon the Company's estimated effective income tax rates for
the years ending December 31, 2000 and 1999 of 39.1% and 41.7%, respectively.
The consolidated effective income tax rates exceed the U.S. Federal statutory
income tax rate primarily due to state income taxes, the effects of foreign
operations and the amortization of nondeductible goodwill.
Outlook
The Company's earnings depend largely on refining and retail margins. The
petroleum refining and marketing industry has been and continues to be volatile
and highly competitive. The cost of crude oil purchased by the Company as well
as the price of refined products sold by the Company have fluctuated widely in
the past. As a result of the historic volatility of refining and retail margins
and the fact that they are affected by numerous diverse factors, it is
impossible to predict future margin levels.
Industry refining margins during the second quarter of 2000 more than doubled
from a year ago due to low refined product inventories throughout North America
and strong consumer demand. At the start of the summer driving season, most
heavily populated cities in the United States require gasoline retailers to sell
more expensive reformulated gasoline to minimize air pollution. Since the
reformulated gasoline is not produced at all refineries, there is a limited
supply. This limited supply coupled with a temporary shutdown of a Midwest
refined product pipeline resulted in a supply imbalance in the Midwest region
causing retail pump prices in some areas to exceed $2.00 per gallon. Gasoline
demand was higher in the second quarter of 2000 versus 1999 which helped keep
inventories low even as producers seasonally increased production. While
refining margins moved higher, wholesale and retail fuel margins eroded as
wholesale and retail prices could not keep pace with the steep escalation of
crude oil prices. Crude oil prices remained high during the quarter but an
increase in crude oil production announced by OPEC in late June resulted in
crude oil prices dropping over $2.00 per barrel from $35 per barrel. Crude oil
prices continue to decline and, in recent weeks have settled in the $30 per
barrel range.
Operating results in the early part of the third quarter of 2000 continue at the
strong levels experienced in the first half of the year. Continued strong
industry fundamentals are keeping refining margins above historical levels as
the end of the summer driving season nears. Low gasoline inventories and steady
demand should continue to stabilize refined product prices, and retail margins
should recover resulting in a better balance between the refining and retail
segments. In addition, per store volumes for both fuel and merchandise continue
to trend higher than last year.
See "Certain Forward-Looking Statements."
Capital Expenditures
The petroleum refining and marketing industry is a capital-intensive business.
Significant capital requirements include expenditures to upgrade or enhance
refinery operations to meet environmental regulations and maintain the Company's
competitive position, as well as to acquire, build and maintain broad-based
retail networks. The capital requirements of the Company's operations consist
primarily of:
o maintenance expenditures, such as those required to maintain
equipment reliability and safety and to address environmental
regulations; and
o growth opportunity expenditures, such as those planned to expand and
upgrade its retail business, to increase the capacity of certain
refinery processing units and pipelines and to construct additional
petrochemical processing units.
During the six months ended June 30, 2000, capital expenditures totaled $53.0
million of which $37.2 million related to maintenance expenditures and $15.8
million related to growth opportunity expenditures. Approximately $13.7 million
and $12.4 million of costs have been incurred at the refineries and at the
retail level, respectively, for various maintenance expenditures. During the six
months ended June 30, 2000, the Company also incurred $14.2 million in refinery
maintenance turnaround costs primarily at the Three Rivers and McKee Refineries.
The Company plans to invest $40.0 million to expand its Quebec Refinery from
160,000 barrels per day to 190,000 barrels per day to meet the growing demand in
eastern Canada and the northeast area of the United States. The expansion, which
is still subject to permitting approvals, is expected to further reduce unit
operating and feedstock costs. The project is included in the capital
expenditures budget for 2000 and is slated for completion in the latter part of
2001.
On August 4, 2000, the Company announced it signed a definitive Asset Purchase
and Sale Agreement with Tosco Corporation to buy its Avon refinery in
California. The refinery, located in the San Francisco bay area of California,
is a complex, 168,000 barrels per day refinery that processes sour and heavy
crude oil. The purchase price will be $650.0 million plus a contingency payment
of up to $150.0 million to be paid over eight years if annual West Coast
refining industry margins are above average. The transaction has been approved
by the Boards of Directors of both companies and is subject to regulatory
approval. The purchase will be financed with available cash and existing credit
facilities and is expected to close before year end.
The Company is continually investigating strategic acquisitions and other
business opportunities, some of which may be material that will complement its
current business activities.
The Company expects to fund its capital expenditures from cash provided by
operations and, to the extent necessary, from the proceeds of borrowings under
its bank credit facilities and its commercial paper program discussed below. In
addition, depending upon its future needs and the cost and availability of
various financing alternatives, the Company may, from time to time, seek
additional debt or equity financing in the public or private markets under its
universal shelf registration.
Liquidity and Capital Resources
Financing
As of June 30, 2000, the Company had cash and cash equivalents of $124.2
million. The Company currently has two committed, unsecured bank facilities
which provide a maximum of $700.0 million U.S. and $200.0 million Cdn. of
available credit, and a $700.0 million commercial paper program supported by the
committed, unsecured U.S. bank facility.
As of June 30, 2000, the Company had borrowing capacity of approximately $827.4
million remaining under its committed bank facilities and commercial paper
program and had approximately $600.2 million under uncommitted, unsecured
short-term lines of credit with various financial institutions.
In addition to its bank credit facilities, the Company has $1.0 billion
available under universal shelf registrations previously filed with the
Securities and Exchange Commission. The net proceeds from any debt or equity
offering under the universal shelf registrations would add to the Company's
working capital and would be available for general corporate purposes.
The Company also has $74.9 million available pursuant to committed lease
facilities aggregating $355.0 million under which the lessors will construct or
acquire and lease to the Company primarily convenience stores.
The bank facilities and other debt agreements require that the Company maintain
certain financial ratios and other restrictive covenants. The Company is in
compliance with such covenants and believes that such covenants will not have a
significant impact on the Company's liquidity or its ability to pay dividends.
The Company believes its current sources of funds will be sufficient to satisfy
its capital expenditure, working capital, debt service and dividend requirements
for at least the next twelve months.
Effective March 29, 1999, the Company established a revolving accounts
receivable securitization facility (Securitization Facility) which provides the
Company with the ability to sell up to $250.0 million of accounts receivable on
an ongoing basis. In connection with the Securitization Facility, the Company
sells, on a revolving basis, an undivided interest in certain of its trade and
credit card receivables. The proceeds from the sale of accounts receivable,
which totaled $237.6 million during 1999, were used to reduce the Company's
outstanding indebtedness, including indebtedness under its commercial paper
program. At June 30, 2000 and December 31, 1999, the balance of receivables sold
was $89.8 million and $39.8 million, respectively.
The Company is considering the formation of a master limited partnership (MLP),
which would operate most of the Company's pipeline and terminal assets. A
wholly-owned subsidiary of the Company would be the general partner of the MLP
and operate the assets on its behalf. It is contemplated that the MLP, through
an initial public offering, would sell limited partnership units to the public
representing a minority of the ownership interest. Management expects to form
the MLP and complete the initial public offering during the second half of 2000
subject to acceptable market conditions and other considerations.
Equity
On August 1, 2000, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on August 31, 2000 to holders of record on
August 17, 2000.
Cash Flows for the Six Months Ended June 30, 2000
During the six months ended June 30, 2000, the Company's cash position increased
$31.4 million to $124.2 million. Net cash provided by operating activities was
$118.0 million due to improved profitability despite an increase in accounts and
notes receivable of $180.5 million resulting primarily from higher refined
product prices in the first six months of 2000.
Net cash used in investing activities during the six months ended June 30, 2000
totaled $50.4 million which included $53.0 million for capital expenditures and
$14.2 million for refinery maintenance turnaround costs. The Company received
$16.8 million of proceeds from mainly retail asset sales.
Net cash used in financing activities during the six months ended June 30, 2000
totaled $35.5 million. During the six months ended June 30, 2000, the Company's
commercial paper and short-term borrowings increased $14.0 million to fund the
higher investment in accounts and notes receivable explained above. The Company
also paid cash dividends totaling $47.8 million during the six months ended June
30, 2000.
Cash Flows for the Six Months Ended June 30, 1999
During the six months ended June 30, 1999, the Company's cash position decreased
$31.2 million to $144.9 million. Net cash provided by operating activities was
$372.8 million including the receipt of $237.6 million from the sale of trade
and credit card receivables under the Company's Securitization Facility.
Net cash used in investing activities during the six months ended June 30, 1999
totaled $87.2 million including $73.8 million for capital expenditures, $24.1
million for refinery maintenance turnaround costs and $10.7 million from
proceeds from asset sales.
Net cash used in financing activities during the six months ended June 30, 1999
totaled $320.4 million, including payments to reduce short-term borrowings and
long-term debt of $274.3 million and for cash dividends totaling $47.6 million.
Exchange Rates
The value of the Canadian dollar relative to the U.S. dollar has weakened
substantially since the acquisition of the Canadian operations in 1992. As the
Company's Canadian operations are in a net asset position, the weaker Canadian
dollar has reduced, in U.S. dollars, the Company's net equity at June 30, 2000
by $95.5 million. Although the Company expects the exchange rate to fluctuate
during 2000, it cannot reasonably predict its future movement.
With the exception of its crude oil costs, which are U.S. dollar denominated,
fluctuations in the Canadian dollar exchange rate will affect the U.S. dollar
amount of revenues and related costs and expenses reported by the Canadian
operations. The potential impact on the refining margin of fluctuating exchange
rates together with U.S. dollar denominated crude oil costs is mitigated by the
Company's pricing policies in the Northeast System, which generally pass on any
change in the cost of crude oil. Retail margins, on the other hand, have been
adversely affected by exchange rate fluctuations as competitive pressures have,
from time to time, limited the Company's ability to promptly pass on the
increased costs to the ultimate consumer. The Company has considered various
strategies to manage currency risk, and it hedges the Canadian currency risk
when such hedging is considered economically appropriate.
Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133." FASB Statement No. 138 amends the accounting and reporting standards of
FASB Statement No. 133 for certain derivative instruments and certain hedging
activities. The Company is currently evaluating the impact of adopting this new
standard.
Certain Forward-Looking Statements
This quarterly report on Form 10-Q contains certain "forward-looking" statements
as such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Act of 1934, and information relating to the Company and
its subsidiaries that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When used
in this report, the words "anticipate," "believe," "estimate," "expect," and
"intend" and words or phrases of similar expressions, as they relate to the
Company or its subsidiaries or management, identify forward-looking statements.
Such statements reflect the current views of management with respect to future
events and are subject to certain risks, uncertainties and assumptions relating
to the operations and results of operations, including as a result of
competitive factors and pricing pressures, shifts in market demand and general
economic conditions and other factors.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes in interest
rates, foreign currency rates and commodity prices related to crude oil, refined
products and natural gas. To manage or reduce these market risks, the Company
uses interest rate swaps, foreign exchange contracts, and commodity futures and
price swap contracts. The Company's policies allow using derivatives for the
purchase of physical quantities of crude oil and refined products as well as for
the management of crude oil costs. Generally, the derivatives relate to an
underlying, offsetting position, anticipated transaction or firm commitment.
During 1999 and 2000, as part of the Company's crude oil procurement activities,
commodity futures contracts were used to manage the price of crude oil supplied
to its refineries. The Company has from time to time, on a very limited basis,
used derivative instruments for trading purposes; however, the gains and losses
from such activities have been immaterial. A discussion of the Company's primary
market risk exposures in derivative financial instruments is presented below.
Interest Rate Risk
The Company is subject to interest rate risk on its long-term fixed interest
rate debt. Commercial paper borrowings and borrowings under revolving credit
facilities do not give rise to significant interest rate risk because these
borrowings have maturities of less than three months. The carrying amount of the
Company's floating interest rate debt approximates fair value. Generally, the
fair market value of debt with a fixed interest rate will increase as interest
rates fall, and the fair market value will decrease as interest rates rise. This
exposure to interest rate risk is managed by obtaining debt that has a floating
interest rate or using interest rate swaps to change fixed interest rate debt to
floating interest rate debt. Since mid-1999, the Federal Reserve has raised
interest rates six times and may continue with further rate increases in order
to slow growth and keep inflation in line. As a result, the fair value of the
Company's fixed rate debt has declined, as shown in the following tables.
The following table provides information about the Company's long-term debt and
interest rate swaps, both of which are sensitive to changes in interest rates.
For long-term debt, principal cash flows and related weighted average interest
rates by expected maturity dates, after consideration of refinancing, are
presented. For interest rate swaps, the table presents notional amounts and
weighted average interest rates by expected (contractual) maturity dates.
Notional amounts are used to calculate the contractual payments to be exchanged
under the contract. Weighted average floating rates shown in the tables below
are based on implied forward rates in the yield curve at June 30, 2000 and
December 31, 1999.
June 30, 2000
-------------------------------------------------------------------------------------------
Expected Maturity - Year Ending December 31,
-------------------------------------------------------------------------------------------
There- Fair
2000 2001 2002 2003 2004 after Total Value
---- ---- ---- ---- ---- ----- ------- ------
(in millions, except interest rates)
Long-term Debt:
Fixed rate................ $11.4 $84.3 $284.8 $33.3 $0.6 $911.3 $1,325.7 $1,272.7
Average interest rate... 8.9% 9.6% 8.7% 8.7% 7.7% 7.6% 8.0% N/A
Floating rate............. $ - $ - $ 26.5 $ - $ - $ - $ 26.5 $ 26.5
Average interest rate... -% -% 7.5% -% -% -% 7.5% N/A
Interest Rate Swaps:
Fixed to floating......... $ - $ - $200.0 $ - $ - $250.0 $ 450.0 $450.0
Average pay rate........ 6.6% 6.7% 6.7% 6.8% 6.8% 7.0% 6.9% N/A
Average receive rate.... 6.4% 6.4% 6.4% 6.6% 6.6% 6.9% 6.7% N/A
December 31, 1999
-------------------------------------------------------------------------------------------
Expected Maturity - Year Ending December 31,
-------------------------------------------------------------------------------------------
There- Fair
2000 2001 2002 2003 2004 After Total Value
---- ---- ---- ---- ---- ----- ----- -----
(in millions, except interest rates)
Long-term Debt:
Fixed rate................ $14.0 $84.5 $285.0 $33.5 $0.6 $911.4 $1,329.0 $1,295.2
Average interest rate... 8.8% 9.6% 8.7% 8.8% 7.7% 7.6% 8.0% N/A
Floating rate............. $ - $ - $ 12.6 $ - $ - $ - $ 12.6 $ 12.6
Average interest rate... - -% 5.7% -% -% -% 5.7% N/A
Interest Rate Swaps:
Fixed to floating......... $ - $ - $200.0 $ - $ - $250.0 $ 450.0 $450.0
Average pay rate........ 6.22% 6.91% 7.00% 7.09% 7.13% 7.50% 7.18% N/A
Average receive rate.... 6.43% 6.43% 6.43% 6.59% 6.59% 6.88% 6.69% N/A
Foreign Currency Risk
The Company periodically enters into short-term foreign exchange contracts to
manage its exposure to exchange rate fluctuations on the trade payables of its
Canadian operations that are denominated in U.S. dollars. These contracts
involve the exchange of Canadian and U.S. currency at future dates. Gains and
losses on these contracts generally offset losses and gains on the U.S. dollar
denominated trade payables. At June 30, 2000, the Company did not have any
short-term foreign exchange contracts.
The Company generally does not hedge for the effects of foreign exchange rate
fluctuations on the translation of its foreign results of operations or
financial position.
Commodity Price Risk
The Company is subject to the market risk associated with changes in market
prices of its underlying crude oil, refined products and natural gas; however,
such changes in values are generally offset by changes in the sales price of the
Company's refined products. Price swaps are price hedges for which gains and
losses are recognized when the hedged transactions occur; however, losses are
recognized when future prices are not expected to recover.
During the six months ended June 30, 2000, the Company purchased $2.2 billion of
crude oil to supply its various refineries. In conjunction with these purchases,
the Company entered into commodity futures contracts. The commodity futures
contracts are generally satisfied by the Company taking physical delivery of the
underlying crude oil or refined product; however, there are contracts which are
closed without taking physical delivery of the underlying barrels.
As of June 30, 2000, the Company did not hold any commodity futures contracts
not designated as hedges. However during the six months ended June 30, 2000, the
Company incurred a loss of $1.8 million associated with such contracts not
designated as hedges which are marked to market value and recognized currently
in cost of products sold.
As of June 30, 2000, the Company had outstanding commodity futures and price
swap contracts to buy $337.7 million and sell $301.7 million of crude oil and
refined products or to settle differences between a fixed price and market price
on aggregate notional quantities of 6.4 million barrels of crude oil and refined
products which will mature on various dates through June 2002. As of December
31, 1999, the Company had outstanding commodity futures and price swap contracts
to buy $351.8 million and sell $194.0 million of crude oil and refined products
or to settle differences between a fixed price and market price on aggregate
notional quantities of 6.4 million barrels of crude oil and refined products
which mature on various dates through June 2002. The fair value of commodity
futures contracts designated as hedges is based on quoted market prices. The
fair value of price swap contracts is determined by comparing the contract price
with current broker quotes for futures contracts corresponding to the period
that the anticipated transactions are expected to occur.
The information below reflects the Company's futures contracts and price swaps
that are sensitive to changes in crude oil or refined product commodity prices.
The tables present the notional amounts in barrels for crude oil and refined
product, the weighted average contract prices and the total contract amount by
expected maturity dates. Contract amounts are used to calculate the contractual
payments and quantity of barrels of crude oil or refined product to be exchanged
under the futures contract.
June 30, 2000
--------------------------------------------------------------------------
Fair
Carrying Value Weighted
Amount Amount Contract Contract Average
Gain (Loss) Gain (Loss) Amount Volumes Price
----------- ----------- -------- -------- ---------
(in millions, except weighted average price)
Procurement:
Futures contracts - long:
2000 (mbbls).................. $0.8 $2.5 $197.7 6.9 $28.82
Futures contracts - short:
2000 (mbbls)................... (0.6) (10.0) 301.7 9.3 32.46
Price swaps:
2002........................... (9.1) 8.9 140.0 6.4 22.00
December 31, 1999
-----------------------------------------------------------------------------
Fair
Carrying Value Weighted
Amount Amount Contract Contract Average
Gain (Loss) Gain (Loss) Amount Volumes Price
----------- ----------- -------- -------- ---------
(mbbl)
(in millions, except weighted average price)
Procurement:
Futures contracts - long:
2000........................... $0.9 $2.3 $211.8 9.5 $22.26
Futures contracts - short:
2000........................... 0.1 0.4 194.0 8.8 22.02
Price swaps:
2002........................... (9.1) (19.9) 140.0 6.4 22.00
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Unocal Patent Infringement Action (Update) On March 29, 2000 the U. S. Court of
Appeals upheld a California trial court's decision that Unocal Corporation holds
a valid patent with respect to certain reformulated gasoline compositions, and
assessed damages of 5.75 cents per gallon for gasoline infringing on the patent.
The defendants in the suit, Arco, Chevron, Exxon Mobil, Shell, and Texaco, have
filed a petition for rehearing with the U.S. Court of Appeals. The Company is
not a party to the suit and is therefore not bound by its outcome. The Company's
exposure, if any, depends on numerous factors, including the availability of
alternate gasoline formulations and its ability to recover any additional costs
in the marketplace.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1. Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: /s/ H. Pete Smith
- --------------------------------------
H. PETE SMITH
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
August 14, 2000