UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-11154
ULTRAMAR DIAMOND SHAMROCK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3663331
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9830 Colonnade Boulevard
San Antonio, Texas 78230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (210) 641-6800
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
Common Stock, $.01 Par Value -- 74,770,404 shares outstanding as of April
30, 1997.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
FORM 10-Q
March 31, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Income for the Three Month
Periods Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
(Unaudited)
(in millions)
Assets
Current assets:
Cash and cash equivalents $ 99.4 $ 197.9
Accounts and notes receivable, net 434.9 503.1
Inventories 543.4 633.3
Prepaid expenses and other current assets 39.3 35.0
Deferred income taxes 32.0 30.0
Total current assets 1,149.0 1,399.3
Property, plant and equipment 3,674.0 3,685.2
Less accumulated depreciation and amortization (976.7) (954.4)
2,697.3 2,730.8
Other assets 282.0 289.9
Total assets $4,128.3 $4,420.0
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt $ 9.9 $ 3.2
Accounts payable 397.2 540.7
Accrued liabilities 287.7 328.9
Taxes other than income taxes 194.4 191.3
Income taxes payable 30.3 32.1
Total current liabilities 919.5 1,096.2
Long-term debt, less current portion 1,579.8 1,646.3
Other long-term liabilities 304.7 349.6
Deferred income taxes 80.3 87.0
Commitments and contingencies (Note 4)
Stockholders' equity:
Convertible Preferred Stock, par value $.01
per share:
25,000,000 shares authorized, 1,725,000 shares
issued and outstanding at March 31, 1997 and
December 31, 1996 0.0 0.0
Common Stock, par value $.01 per share:
250,000,000 shares authorized, 74,772,291
and 74,710,000 shares issued and outstanding
at March 31, 1997 and December 31, 1996,
respectively 0.7 0.7
Additional paid-in capital 1,138.1 1,137.0
ESOP, treasury stock and other (32.2) (32.2)
Retained earnings 199.6 193.7
Foreign currency translation adjustment (62.2) (58.3)
Total stockholders' equity 1,244.0 1,240.9
Total liabilities and stockholders' equity $4,128.3 $4,420.0
The accompanying notes are an integral part of these consolidated financial
statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1997 1996
(in millions, except per share data)
Sales and other revenues (including
excise taxes) $2,550.2 $2,369.6
Operating costs and expenses:
Cost of products sold 1,649.7 1,487.4
Operating expenses 210.2 219.2
Selling, general and administrative expenses 72.0 70.9
Taxes other than income taxes 509.2 488.8
Depreciation and amortization 44.2 41.7
Total operating costs and expenses 2,485.3 2,308.0
Operating income 64.9 61.6
Interest income 2.4 3.6
Interest expense (32.5) (28.4)
Gain on sale of office building 11.0 -
Income before income taxes 45.8 36.8
Provision for income taxes 18.2 14.8
Net income 27.6 22.0
Dividend requirements on preferred stock 1.1 1.1
Net income applicable to common shares $26.5 $20.9
Net income per common share:
Primary $.35 $.28
Fully diluted $.35 $.28
Weighted average number of common shares
used in computation (in thousands):
Primary 75,561 74,861
Fully diluted 79,049 78,348
Dividends per share:
Common shares $.275 $.275
Cumulative convertible preferred stock $.625 $.625
The accompanying notes are an integral part of these consolidated financial
statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1997 1996
(in millions)
Cash Flows from Operating Activities
Net income $ 27.6 $ 22.0
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 44.2 41.7
(Gain) loss on sale of fixed assets (18.8) 0.4
Provision for deferred income taxes 14.8 3.3
Other, net 1.3 1.0
Changes in operating assets and liabilities:
(Increase) decrease in accounts and notes
receivable 63.4 (59.1)
Decrease in inventories 88.2 66.3
(Increase) decrease in prepaid expenses
and other current assets (6.6) 16.4
(Increase) decrease in other assets 21.5 (3.3)
Decrease in accounts payable and other
current liabilities (193.2) (106.7)
Decrease in other long-term liabilities (44.5) (1.1)
Other, net 8.0 3.2
Net cash provided by (used in) operating
activities 5.9 (15.9)
Cash Flows from Investing Activities
Capital expenditures (51.6) (70.3)
Acquisition of marketing operations (8.4) -
Deferred turnaround costs 0.5 (8.3)
Expenditures for investments (5.1) (2.1)
Proceeds from sales of property, plant
and equipment 45.6 0.6
Net cash used in investing activities (19.0) (80.1)
Cash Flows from Financing Activities
Increase in long-term debt 7.9 152.8
Repayment of long-term debt (72.2) (42.1)
Proceeds from issuances of Common Stock 0.8 3.7
Payment of dividends (21.6) (17.3)
Other, net 0.0 (1.0)
Net cash provided by (used in) provided by
financing activities (85.1) 96.1
Effect of exchange rate changes on cash (0.3) 0.4
Net Increase (Decrease) in Cash and Cash
Equivalents (98.5) 0.5
Cash and Cash Equivalents at Beginning of
Period 197.9 175.5
Cash and Cash Equivalents at End of Period $ 99.4 $176.0
The accompanying notes are an integral part of these consolidated financial
statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared for Ultramar Diamond Shamrock Corporation (the "Company"), in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three month period ended March 31, 1997, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
The results of operations may be affected by seasonal factors, such as the
demand for petroleum products and working capital requirements in the
Northeast, which vary significantly 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. For
further information, see the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1996. Prior period amounts have been
reclassified to reflect the merger of Diamond Shamrock, Inc., with and into
the Company effective December 3, 1996, in a transaction accounted for as a
pooling of interests. Certain reclassifications of historical financial
data have been made to conform the accounting policies of the two companies
as further described in the Company's annual report on Form 10-K for the
year ended December 31, 1996.
NOTE 2: Inventories
Inventories consisted of the following:
March 31, December 31,
1997 1996
(in millions)
Crude oil and other feedstocks $224.6 $309.2
Refined and other finished products 266.4 264.7
Materials and supplies and convenience
store items 52.4 59.4
$543.4 $633.3
NOTE 3: Gain on Sale of Assets
Earnings for the first quarter of 1997 include a pre-tax gain of $11.0
million, resulting from the sale of an office building in San Antonio,
Texas which was originally purchased to serve as the Company's new
corporate headquarters.
NOTE 4: 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 cannot be reasonably estimated 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 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.
NOTE 5: Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," in
June 1996. This statement provides accounting and reporting standards for,
among other things, the transfer and servicing of financial assets, such as
factoring receivables with recourse, and will require the Company to
classify its financial assets pledged as collateral separately in the
financial statements. This statement is effective for transactions
occurring after December 31, 1996, and is to be applied prospectively.
Earlier or retroactive application is not permitted. In December 1996, the
FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125." SFAS No. 127 postpones some, but not all, of
the provisions of SFAS No. 125 to December 31, 1997. The Company believes
the adoption of these statements will not have a material impact on the
financial position or results of operations of the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
establishes standards for computing and presenting earnings per share
("EPS") for entities with publicly held common stock. SFAS No. 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share", and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS, and requires dual
presentation of basic and diluted EPS on the face of the income statement.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997,
and early adoption is not permitted. The Company has not completed its
calculations of EPS data under SFAS No. 128; however, management of the
Company does not anticipate the adopting of this pronouncement will have a
material impact on the Company's results of operations.
NOTE 6: Subsequent Events
On April 15, 1997, the Company entered into a definitive agreement to
acquire Total Petroleum (North America) Ltd. ("Total"), a Denver, Colorado
based petroleum refining and marketing company. The agreement provides for
the issuance of .322 shares of Common Stock for each outstanding share of
Total Common Stock. The Company expects to issue approximately 13.0
million shares of Common Stock and will assume approximately $414.0 million
of Total debt. The transaction is subject to the approval of Total
shareholders, completion of due diligence and customary approvals. The
transaction is expected to be completed near the end of the second quarter
of 1997.
On May 6, 1997, the Board of Directors declared a quarterly dividend of
$.275 per common share payable on June 6, 1997 to holders of record on May
20, 1997. In addition, the Board of Directors declared a quarterly
dividend of $.625 per share on the Company's 5% Cumulative Convertible
Preferred Stock payable on June 13, 1997, to holders of record on May 20,
1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of 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 for the Northeast, both of which vary
significantly during the year; and industry factors, such as movements in
and the general 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.
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
Financial and operating data by geographic area for the three month periods
ended March 31, 1997 and 1996 are as follows:
Financial Data:
Three Months Ended March 31,
1997 1996
Southwest Northeast Total Southwest Northeast Total
(in millions)
Sales and
other
revenues $1,732.1 $818.1 $2,550.2 $1,631.5 $738.1 $2,369.6
Cost of
products
sold 1,145.4 504.3 1,649.7 1,031.2 456.2 1,487.4
Operating
expenses 177.4 32.8 210.2 187.3 31.9 219.2
Selling,
general and
administra-
tive expenses 29.7 42.3 72.0 32.2 38.7 70.9
Taxes other
than income
taxes 319.8 189.4 509.2 321.2 167.6 488.8
Depreciation
and amorti-
zation 36.9 7.3 44.2 35.4 6.3 41.7
Operating
income $ 22.9 $ 42.0 64.9 $ 24.2 $ 37.4 61.6
Interest
expense, net 30.1 24.8
Gain on sale
of office
building 11.0 -
Income be-
fore income
taxes 45.8 36.8
Provision for
income taxes 18.2 14.8
Net income $ 27.6 $ 22.0
Operating Data: Three Months Ended
March 31,
1997 1996
Southwest
McKee and Three Rivers Refineries
Throughput (BPD) 222,700 224,900
Margin (dollars per barrel) 4.68 4.32
Wilmington Refinery
Throughput (BPD) 104,900 83,600
Margin (dollars per barrel) 5.01 3.63
Retail Marketing
Fuel volume (BPD) 104,500 101,800
Fuel margin (cents per gallon) 9.1 11.4
Merchandise volume ($1,000/day) 2,145 2,288
Merchandise margin (%) 30.2 30.1
Northeast
Quebec Refinery
Throughput (BPD) 148,600 144,400
Margin (dollars per barrel) 2.47 3.87
Retail Marketing
Fuel volume (BPD) 70,600 63,500
Overall margin (cents per gallon) (1) 29.2 24.1
(1) Retail marketing overall margin reported for the Northeast represent a
blend of gross margin from company and dealer operated service
stations, heating oil sales and the cardlock business segment.
General
Net income for the quarter ended March 31, 1997 totaled $27.6 million as
compared to $22.0 million for the quarter ended March 31, 1996. In the
Southwest, the Company had operating income of $22.9 million for the first
quarter of 1997, as compared to $24.2 million for the first quarter of
1996. The increase in refining margins and throughput in the Southwest
was offset by a decrease in retail fuel margins. In the Northeast,
operating income of $42.0 million was $4.6 million higher than that of the
first quarter of 1996, as strong retail marketing margins and volumes more
than offset weak refining margins during the first quarter of 1997.
Southwest Operations
Sales and other revenues in the Southwest in the first quarter of 1997
totaled $1.7 billion and were 6.2% higher than for the first quarter of
1996, primarily due to a 6.2% increase in refinery throughput and a 2.7%
increase in retail fuel volumes as compared to the first quarter of 1996.
The refining margin for the McKee and Three Rivers refineries of $4.68 per
barrel in the first quarter of 1997 increased by 8.3% as compared to $4.32
per barrel in the first quarter of 1996, reflecting strong margin
improvement late in the quarter as a result of declining crude oil costs.
The refining margin for the Wilmington refinery increased by 38.0% to $5.01
per barrel in the first quarter of 1997 due to an improvement in the heavy,
sour crude oil price differential, lower overall crude oil costs, and a
strong market rebound during March 1997. Throughput at the Wilmington
refinery during the first quarter of 1997 increased by 25.5% over the same
period in 1996 to 104,900 barrels per day, principally due to the
processing of additional feed and blendstocks through the refinery's gas
oil hydrotreater which came on stream in the second quarter of 1996.
Retail marketing fuel volume increased by 2.7%, to 104,500 barrels per day,
principally as a result of increased demand; however, fuel margins
decreased by 20.2% to 9.1 cents per gallon in the first quarter of 1997,
due to intense competitive pressures.
Merchandise sales at the Company's convenience stores averaged $2.1 million
per day during the first quarter of 1997 as compared to $2.3 million per
day during the corresponding quarter of 1996, as a result of disposing of a
number of stations during recent months. Merchandise margins for the first
quarters of 1997 and 1996 remained relatively constant at 30.2% and 30.1%,
respectively.
Refining system operating expenses, before depreciation, of $74.3 million
were $7.8 million lower than in the first quarter of 1996, reflecting
merger related expense savings in 1997. Marketing and other operating
expenses of $94.4 million were $7.9 million higher than in the first
quarter of 1996, principally due to a $5.0 million environmental credit
received in 1996. Selling, general and administrative expenses of $29.7
million were $2.5 million lower than in the first quarter of 1996,
reflecting cost reductions and synergies from the Ultramar-Diamond Shamrock
merger in December 1996.
The petrochemicals and natural gas liquids businesses also contributed to
operating profit in the first quarter of 1997 with continued strong demand
for Nitromite fertilizer and propylene.
Northeast Operations
Sales and other revenues in the Northeast in the first quarter of 1997
totaled $818.1 million and were $80.0 million, or 10.8%, higher than in the
corresponding quarter of 1996 as average product prices increased by 17.4%.
Higher volume in retail activities, mainly associated with expansion into
New England which occurred in mid-1996, was principally responsible for the
improvement in revenue.
Refining margins decreased 36.2% to $2.47 per barrel in the first quarter
of 1997 as compared to $3.87 per barrel in the first quarter of 1996, due
to high crude oil costs and low import parity prices. Throughput at the
Quebec Refinery averaged 148,600 BPD or 2.9% higher than in the first
quarter of 1996, as throughput was adversely affected in the first quarter
of 1996 by delays in crude shipping due to bad weather conditions. Overall
retail margins increased 5.1 cents per gallon, or 21.2%, to 29.2 cents per
gallon in the first quarter of 1997 as compared to the corresponding
quarter of 1996, reflecting the Home Heat and Cardlock segments' ability to
maintain prices as costs declined. Retail marketing volumes increased
11.2% as compared with the first quarter of 1996, to 70,600 barrels per
day, as a result of the Company's expanding home heating oil operations and
the implementation of the "value plus" pricing program in the Company's
Canadian retail gasoline operations late in the second quarter of 1996.
Refinery operating expenses, before depreciation, totaled $11.9 million or
89 cents per barrel in the first quarter of 1997 as compared to $11.3
million or 86 cents per barrel in the first quarter of 1996. Refinery
operating expenses in the first quarter of 1997 reflect increased
throughput and higher maintenance costs. Selling, general and
administrative expenses of $42.3 million were $3.6 million higher than in
the first quarter of 1996 principally due to the previously mentioned
acquisition of home heating oil and distribution operations in the
northeast United States.
Combined Interest and Income Taxes
Net interest expense of $30.1 million in the first quarter of 1997 was $5.3
million higher than in the corresponding quarter of 1996. Borrowing levels
increased in the first quarter of 1997, compared to the same period in
1996, and the Company capitalized interest in the first quarter of 1996,
for the Gas Oil Hydrotreater and other major capital expenditure projects
in California.
The consolidated income tax provisions for the first quarter of 1997 and
1996 were based upon the Company's estimated effective income tax rates for
the years ending December 31, 1997 and 1996 of 39.7% and 40.2%,
respectively. The consolidated effective income tax rates exceed the U.S.
Federal statutory income tax rate primarily due to state income taxes and
the effects of foreign operations.
Outlook
The Company's earnings depend largely on refining and retail marketing
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 marketing margins and the fact that
they are affected by numerous diverse factors, it is impossible to predict
future margin levels.
In general, industry gasoline inventories are lower than they were a year
ago. This should bode well for better margins, as the industry enters the
spring and summer driving season. In addition, backwardation has moderated
in the crude oil market and crude oil prices have been declining and are
relatively stable at present.
California refining margins are reduced somewhat from the first quarter;
however, retail margins have improved significantly. As product prices
stabilized and the Company was able to run lower cost crude oil, Texas
refining margins have also improved. Southwest retail margins, which
includes California, have improved early in the second quarter of 1997 from
a very weak first quarter but are still lower than recent historical
levels.
In eastern Canada, refining spreads have improved from the first quarter
while retail margins have weakened slightly as the heating oil season came
to an end.
Certain Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation
Reform Act of 1995 and information relating to the Company and its
subsidiaries that are based on the beliefs of the Company's management as
well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," and "intend" and words or phrases of
similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements.
Such statements reflect the current risks, uncertainties and assumptions
related to certain factors including, without limitations, competitive
factors, general economic conditions, customer relations, relationships
with vendors, the interest rate environment, governmental regulation and
supervision, seasonality, distribution networks, product introductions and
acceptance, technological change, changes in industry practices, one-time
events and other factors described herein and in other filings made by the
Company with the Securities and Exchange Commission. Based upon changing
conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to
update these forward-looking statements.
Capital Expenditures
The refining and marketing of petroleum products is a capital intensive
business. Significant capital requirements include expenditures to upgrade
or enhance operating facilities 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 (i) reliability, environmental
and regulatory expenditures, such as those required to maintain equipment
reliability and safety and to address environmental regulations (including
reformulated fuel specifications, stationary source emission standards and
underground storage tank regulations); and (ii) growth opportunity
expenditures, such as those planned to expand and upgrade its retail
marketing business, to increase the capacity of certain refinery processing
units and pipelines and to construct additional petrochemical processing
units.
During the first quarter of 1997, capital expenditures and acquisition of
marketing operations totaled $60.0 million, of which $29.9 million related
to growth opportunity expenditures. Growth capital spending included $11.9
million for the continued construction of the benzene, toluene, and xylene
("BTX") extraction unit at the Three Rivers refinery, which has started up
in the second quarter of 1997. Other growth capital spending, during the
first quarter of 1997 included $5.4 million to increase conversion
capability at the Quebec refinery and $5.4 million to increase pipeline and
terminal capacity at Denver, El Paso and Albuquerque.
In conjunction with its plans to expand and upgrade its retail marketing
operations, the Company also spent $16.8 million related to retail
marketing growth projects. Retail capital spending included the acquisition
of two retail home heating operations in the northeast United States and
the completion of six new stores in Arizona, California and Colorado.
The Company believes that the Quebec provincial government may issue new
refinery liquid effluent regulations during 1998 which may require
modifications and additions to the Quebec Refinery's waste water treatment
facilities. The Company has completed a detailed process design and
estimates the cost of potential capital expenditures required to comply
with the expected regulations to be approximately $11.6 million. It is
expected that any required construction for the modifications and new
equipment would begin in 1998 and be completed to meet the anticipated new
regulations.
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 over the next several
years from cash provided by operations and, to the extent necessary, from
the proceeds of borrowings under its bank credit facilities and its
commercial paper and medium-term note programs 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.
Liquidity and Capital Resources
At March 31, 1997, the Company had cash and cash equivalents of $99.4
million. The Company has committed, unsecured bank facilities which
provide a maximum of $500.0 million and Cdn. $200.0 million of available
credit, and a $200.0 million commercial paper program supported by the
unsecured, committed U. S. dollar bank facility. The Company's bank
facilities require the maintenance of certain financial ratios and contain
covenants with which the Company must comply. The Company believes these
covenants will not have a significant impact on the Company's liquidity or
its ability to pay dividends. At March 31, 1997, the Company had
approximately $489.5 million of remaining borrowing capacity under its
committed bank facilities and commercial paper program. In addition to its
committed bank facilities, on March 31, 1997, the Company had approximately
$232.0 million of borrowing capacity under uncommitted, unsecured short-term
lines of credit with various financial institutions.
In addition to its bank credit facilities, the Company has $50.0 million
available under a debt shelf registration previously filed with the
Securities and Exchange Commission. The net proceeds from any offering
under the existing shelf registration would add to the Company's working
capital and could be available for general corporate purposes.
The Company also has $107.0 million available pursuant to lease agreements
aggregating $290.0 million, under which the lessors will construct or
acquire and lease to the Company primarily retail marketing sites.
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.
In connection with the proposed acquisition of Total Petroleum (North
America) Ltd., the Company has begun to negotiate new credit, lease and
other financing arrangements.
On May 6, 1997, the Board of Directors declared a quarterly dividend of
$.275 per common share payable on June 6, 1997, to holders of record on May
20, 1997. In addition, the Board of Directors declared a quarterly
dividend of $.625 per share on the Company's 5% Cumulative Convertible
Preferred Stock payable on June 13, 1997, to holders of record on May 20,
1997.
Cash Flows for the Three Months Ended March 31, 1997
During the three months ended March 31, 1997, the Company's cash position
decreased $98.5 million to $99.4 million. Net cash provided by operating
activities, before changes in non-cash operating assets and liabilities,
was $87.9 million. Net cash provided by operating activities (after
changes in non-cash operating assets and liabilities) totaled $5.9 million.
Net cash used in investing activities during the three-month period ended
March 31, 1997 totaled $19.0 million, representing scheduled capital
expenditures, the acquisition of a marketing operations in the Northeast
and expenditures for investments, net of the proceeds from asset disposals.
Net cash used in financing activities during the three-month period ended
March 31, 1997, totaled $85.1 million, including the repayment of
borrowings under the Company's commercial paper program of $72.2 million
and the payment of dividends of $21.6 million. These uses of cash were
partially offset by increases in other long-term debt of $7.9 million and
the issuance of Common Stock upon the exercise of employee stock options of
$0.8 million.
Recent Developments
On April 15, 1997, the Company entered into a definitive agreement to
acquire Total Petroleum (North America) Ltd. ("Total"), a Denver, Colorado
based petroleum refining and marketing company. The agreement provides for
the issuance of .322 shares of Common Stock for each outstanding share of
Total Common Stock. The Company expects to issue approximately 13.0
million shares of Common Stock and will assume approximately $414.0 million
of Total debt. The transaction is subject to the approval of Total
shareholders, completion of due diligence and customary approvals. The
transaction is expected to be completed near the end of the second quarter
of 1997. Total has approximately 6,000 employees, and operates refineries
in Ardmore, Oklahoma, Alma, Michigan, and Denver, Colorado. The three
refineries have a combined throughput capacity of approximately 150,000
barrels of crude oil per day. Total distributes gasoline and merchandise
through approximately 2,100 branded outlets, of which approximately 560 are
company-operated.
Seasonality
In the Northeast, demand for petroleum 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 heating oils during the
winter months results in the Company's Canadian operations having
significantly higher accounts receivable and inventory levels during the
first and last quarters of each year. The Company's Southwest operations
are less affected by seasonal fluctuations in demand than its operations in
the Northeast. The working capital requirements of the Southwest
operations are limited due to lower inventory requirements and show little
fluctuation throughout the year.
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
March 31, 1997, by $62.2 million. Although the Company expects the
exchange rate to fluctuate during 1997, 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 operation. The potential impact on 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,
which generally pass on any change in the cost of crude oil. Marketing
margin, on the other hand, has 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Arrangement Agreement
10.2 Stockholder Agreement
11.0 Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 4, 1997 (File No. 11154) relating to
change in Registrants' certifying accountant.
Current Report on Form 8-K/A dated March 4, 1997 (File No. 11154) relating
to change in Registrants' certifying accountant.
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.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
(REGISTRANT)
By: /s/ H. PETE SMITH
H. PETE SMITH
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER,
MAY 14, 1997
Exhibit 11 - Statement re: Computation of Earnings Per Share
Three Months Ended
March 31,
1997 1996
(dollars in millions,
except per share data
and shares in thousands)
Primary:
Average common shares outstanding 74,724 74,135
Net effect of dilutive stock options -
based on the treasury stock method using
average market price 837 726
Total 75,561 74,861
Net income $27.6 $22.0
Dividend requirement on preferred stock 1.1 1.1
Net income applicable to common shares $26.5 $20.9
Net income per common share: $.35 $.28
Fully Diluted:
Average common shares outstanding 74,724 74,135
Net effect of dilutive stock options -
based on the treasury stock method
using the period-end market price, if
higher than average market price 1,005 893
Assumed conversion of 5% cumulative
preferred stock 3,320 3,320
Total 79,049 78,348
Net income $27.6 $22.0
Net income per common share $.35 $.28