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 quarterly period ended June 30, 1998
Commission File Number 1-11154
ULTRAMAR DIAMOND SHAMROCK CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification No. 13-3663331
6000 N Loop 1604 W
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, 1998, 90,284,816 shares of Common Stock, $0.01 par value, were
outstanding, and the aggregate market value of such shares as of July 31, 1998
was $2,364,334,000.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
FORM 10-Q
JUNE 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997.............................................. 3
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1997........................ 4
Consolidated Statements of Cash Flows for the Three and
Six Months Ended June 30, 1998 and 1997........................ 5
Consolidated Statements of Comprehensive Income (Loss)
for the Three and Six Months Ended June 30, 1998 and 1997...... 6
Notes to Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 26
Item 6. Exhibits and Reports on Form 8-K........................... 26
SIGNATURE............................................................ 27
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Assets (in millions)
Current assets:
Cash and cash equivalents....................................................$ 112.5 $ 92.0
Accounts and notes receivable, net........................................... 583.9 673.9
Inventories.................................................................. 622.1 741.0
Prepaid expenses and other current assets.................................... 42.3 53.1
Deferred income taxes........................................................ 44.9 50.8
--------- ---------
Total current assets...................................................... 1,405.7 1,610.8
--------- ---------
Property, plant and equipment................................................... 4,618.2 4,654.3
Less accumulated depreciation and amortization.................................. (1,190.9) (1,093.3)
--------- ---------
Property, plant and equipment, net........................................... 3,427.3 3,561.0
Other assets, net.............................................................. 388.2 422.9
--------- ---------
Total assets................................................................$ 5,221.2 $ 5,594.7
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt........................ $ 6.9 $ 6.5
Accounts payable............................................................. 295.2 661.7
Accrued liabilities.......................................................... 379.5 331.9
Taxes other than income taxes................................................ 278.1 237.2
Income taxes payable......................................................... 16.1 13.4
--------- ---------
Total current liabilities................................................. 975.8 1,250.7
--------- ---------
Long-term debt, less current portion............................................ 1,869.0 1,866.4
Other long-term liabilities..................................................... 389.9 403.5
Deferred income taxes........................................................... 172.5 187.5
Commitments and contingencies
Company obligated preferred stock of subsidiary................................. 200.0 200.0
Stockholders' equity:
5% Cumulative Convertible Preferred Stock, par value $0.01 per share:
25,000,000 shares authorized, no shares and 1,724,400 shares issued and
outstanding as of June 30, 1998 and December 31, 1997...................... - 0.0
Common Stock, par value $0.01 per share:
250,000,000 shares authorized, 90,283,000 and 86,663,000 shares issued
and outstanding as of June 30, 1998 and December 31, 1997................. 0.9 0.9
Additional paid-in capital................................................... 1,511.2 1,534.9
Treasury stock............................................................... - (30.1)
Retained earnings............................................................ 193.2 259.1
Accumulated other comprehensive loss......................................... (91.3) (78.2)
--------- ---------
Total stockholders' equity................................................. 1,614.0 1,686.6
--------- ---------
Total liabilities and stockholders' equity.................................$ 5,221.2 $ 5,594.7
========= =========
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in millions, except share and per share data)
Sales and other revenues (including excise taxes) ...................... $3,041.0 $2,414.4 $5,830.6 $4,964.6
------- ------- ------- -------
Operating costs and expenses:
Cost of products sold ............................................... 1,726.4 1,485.8 3,347.7 3,135.5
Operating expenses .................................................. 288.0 192.2 575.9 402.4
Selling, general and administrative expenses ........................ 94.4 69.7 173.0 141.7
Taxes other than income taxes ....................................... 758.0 520.6 1,436.3 1,029.8
Depreciation and amortization ....................................... 58.1 45.5 123.5 89.7
Restructuring charges ............................................... 131.6 -- 131.6 --
------- ------- ------- -------
Total operating costs and expenses ............................... 3,056.5 2,313.8 5,788.0 4,799.1
------- ------- ------- -------
Operating (loss) income ................................................ (15.5) 100.6 42.6 165.5
Interest income ...................................................... 2.2 5.5 4.3 7.9
Interest expense ..................................................... (36.0) (29.6) (72.1) (62.1)
Gain on sale of property, plant and equipment ........................ -- -- 7.0 11.0
------- ------- ------- -------
(Loss) income before income taxes and dividends of
subsidiary ........................................................... (49.3) 76.5 (18.2) 122.3
Benefit (provision) for income taxes ................................. 19.3 (30.2) 7.2 (48.4)
Dividends on preferred stock of subsidiary ........................... (2.6) -- (5.2) --
------- -------- -------- -------
Net (loss) income ...................................................... $ (32.6) $ 46.3 $ (16.2) $ 73.9
======= ======== ======== =======
Net (loss) income per share:
Basic ............................................................... $ (0.36) $ 0.60 $ (0.19) $ 0.96
Diluted ............................................................. $ (0.36) $ 0.59 $ (0.19) $ 0.94
Weighted average number of shares (in thousands):
Basic ............................................................... 90,220 74,799 88,760 74,762
Diluted ............................................................. 90,220 79,113 88,760 78,997
Dividends per share:
Common Shares ....................................................... $ 0.275 $ 0.275 $ 0.550 $ 0.550
5% Cumulative Convertible Preferred Shares .......................... $ -- $ 0.625 $ 0.625 $ 1.250
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
1998 1997
(in millions)
Cash Flows from Operating Activities:
Net (loss) income ............................................. $(16.2) $ 73.9
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Depreciation and amortization .............................. 123.5 89.7
Provision for losses on receivables ........................ 6.9 5.6
Restructuring charges - write-down of property, plant
and equipment and goodwill ............................... 82.1 --
Gain on sale of property, plant and equipment .............. (8.4) (14.5)
Deferred income tax (benefit) provision .................... (15.5) 42.8
Other, net ................................................. 1.6 1.8
Changes in operating assets and liabilities:
Decrease in accounts and notes receivable ................ 80.5 47.7
Decrease in inventories .................................. 114.7 69.5
Decrease (increase) in prepaid expenses and other
current assets ......................................... 10.7 (6.6)
(Increase) decrease in other assets ...................... (3.4) 5.7
Decrease in accounts payable and other current liabilities (274.1) (334.4)
Decrease in other long-term liabilities .................. (3.9) (42.9)
Other, net ............................................... -- (10.1)
------ ------
Net cash provided by (used in) operating activities .... 98.5 (71.8)
------ ------
Cash Flows from Investing Activities:
Capital expenditures ......................................... (64.9) (115.7)
Acquisition of marketing operations .......................... -- (9.9)
Deferred maintenance turnaround costs ........................ (21.1) (10.4)
Expenditures for investments ................................. -- (7.8)
Proceeds from sales of property, plant and equipment ......... 48.2 72.7
------ ------
Net cash used in investing activities ...................... (37.8) (71.1)
------ ------
Cash Flows from Financing Activities:
Net change in commercial paper and short-term
borrowings .................................................. 37.2 (37.9)
Proceeds from long-term debt ................................. -- 10.6
Repayment of long-term debt .................................. (34.0) (88.7)
Issuance of Company obligated preferred stock of subsidiary .. -- 200.0
Payment of cash dividends .................................... (49.7) (43.6)
Other, net ................................................... 6.6 (1.7)
------ ------
Net cash (used in) provided by financing activities ........ (39.9) 38.7
Effect of exchange rate changes on cash ....................... (0.3) (0.7)
------ ------
Net Increase (Decrease) in Cash and Cash Equivalents ....... 20.5 (104.9)
Cash and Cash Equivalents at Beginning of Period .............. 92.0 197.9
------ ------
Cash and Cash Equivalents at End of Period .................... $112.5 $ 93.0
====== ======
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,
--------- --------
1998 1997 1998 1997
---- ---- ---- ----
Net (loss) income........................................ $ (32.6) $ 46.3 $ (16.2) $ 73.9
Other comprehensive (loss) income, net of tax -
Foreign currency translation adjustment.............. (16.8) 1.3 (13.1) (2.6)
---- ----- ---- -----
Comprehensive (loss) income.............................. $ (49.4) $ 47.6 $ (29.3) $ 71.3
==== ==== ==== ====
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(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
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, 1997.
Operating results for the three and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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 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.
NOTE 2: Adoption of Accounting Pronouncements
Effective March 31, 1998, the Company adopted the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," which established standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The Company
added separate statements of comprehensive income (loss) and certain amounts
from prior periods have been reclassified to conform with the new requirements
of SFAS No. 130.
NOTE 3: Inventories
Inventories consisted of the following:
June 30, December 31,
1998 1997
-------- ------------
(in millions)
Crude oil and other feedstocks.......... $280.2 $342.7
Refined and other finished products
and convenience store items........... 281.5 340.5
Materials and supplies.................. 60.4 57.8
------ ------
Total inventories.................. $622.1 $741.0
===== =====
During the quarter ended June 30, 1998, the Company recorded a $12.5 million
($7.6 million net of income tax benefit) non-cash reduction in the carrying
value of crude oil inventories to reduce such inventories to market resulting in
a $26.1 million ($15.9 million net of income tax benefit) inventory reduction
for the six months ended June 30, 1998.
NOTE 4: Computation of Net Income (Loss) Per Share
Basic net income (loss) per share is calculated as net income (loss) less
preferred stock dividends divided by the average number of Common Shares
outstanding. Diluted net income (loss) per share assumes, when dilutive,
issuance of the net incremental shares from stock options and restricted stock,
and conversion of the 5% Cumulative Convertible Preferred Shares. The following
table reconciles the net income (loss) amounts and share numbers used in the
computation of net income (loss) per share (in millions, except per share data
and number of shares, which are in thousands).
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
Basic:
Average number of Common Shares outstanding 90,220 74,799 88,760 74,762
====== ====== ====== ======
Net (loss) income $(32.6) $ 46.3 $ 16.2) $ 73.9
Dividends on 5% Cumulative Convertible Preferred
Shares - 1.1 1.1 2.2
------ ------ ------ ------
Net (loss) income applicable to Common Shares $(32.6) $ 45.2 $(17.3) $ 71.7
====== ====== ====== ======
Basic net (loss) income per share $(0.36) $ 0.60 $(0.19) $ 0.96
====== ====== ====== ======
Diluted:
Average number of Common Shares outstanding 90,220 74,799 88,760 74,762
Net effect of dilutive stock options and restricted
stock
based on the treasury stock method using the average - 995 - 916
market price for the periods presented
Assumed conversion of 5% Cumulative Convertible
Preferred Shares (prior to conversion in March 1998) - 3,319 - 3,319
------ ------ ------ ------
Total 90,220 79,113 88,760 78,997
====== ====== ====== ======
Net (loss) income $(32.6) $ 46.3 $(17.3) (1) $ 73.9
====== ====== ====== ======
Diluted net (loss) income per share $ (0.36) $ 0.59 $(0.19) $ 0.94
====== ====== ====== ======
1 Includes dividends on 5% Cumulative Convertible Preferred Shares.
NOTE 5: Redemption of 5% Cumulative Convertible Preferred Shares
The Company's 5% Cumulative Convertible Preferred Shares (the Preferred Stock)
included a redemption feature effective through June 2000, such that if the
Company's Common Stock traded above $33.77 per share for any 20 days within a 30
day period, the Company could elect to redeem the Preferred Stock by issuance of
Common Stock of the Company. On February 27, 1998, the trading threshold was
reached and on March 18, 1998 the Company redeemed all 1,724,400 outstanding
shares of Preferred Stock. The Preferred Shares were redeemed for Common Stock
at a conversion rate of 1.9246 shares of Common Stock for each share of
Preferred Stock, resulting in a total of 3,318,698 shares of the Company's
Common Stock being issued. The Common Shares were issued from treasury to the
extent available and the balance were newly issued shares.
NOTE 6: 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 or
results of operations.
NOTE 7: Gain on Sale of Assets
In March 1998, the Company recognized a pre-tax gain of $7.0 million ($4.2
million net of income taxes) resulting from the sale of a 25% interest in the
McKee to El Paso pipeline and El Paso terminal to Phillips Petroleum Company.
NOTE 8: Joint Venture with Petro-Canada
In June 1998, the Company and Petro-Canada terminated discussions relating to
the formation of a refining and marketing joint venture involving the Company's
Canadian and northern United States operations. The Competition Bureau of Canada
advised management of both companies that the joint venture raised serious
concerns under the competition laws of Canada. In light of these concerns and
the potentially lengthy review process, the project was terminated. Included in
selling, general and administrative expenses for the three and six months ended
June 30, 1998 is $11.2 million ($6.8 million net of income tax benefit) of costs
associated with the joint venture project including $2.5 million to write-off
costs for a coker development project that will not be pursued.
NOTE 9: Joint Venture with Koch Industries, Inc.
In August 1998, the Company and Koch Hydrocarbon Co., a division of Koch
Industries, Inc. and Koch Pipeline Co., an affiliate of Koch Industries, Inc.,
expect to finalize the formation of a 50-50 joint venture related to each
entity's Mont Belvieu petrochemical assets. The joint venture and related
operating agreements will require that the Company contribute its interests in
its propane/propylene splitters and related distribution pipeline and terminal
and its interest in its Mont Belvieu hydrocarbon storage facilities and Koch
will contribute its interest in its Mont Belvieu natural gas fractionator
facility and certain of its pipeline and supply systems.
NOTE 10: Restructuring Charges
In light of increased competitive conditions, in June 1998, the Company approved
a restructuring plan designed to reduce its cost structure to reflect current
values and improve operating efficiencies in its retail marketing, refining and
pipeline operations and support services.. As a result, the Company recorded a
one-time charge to earnings of $131.6 million ($79.1 million net of income tax
benefit) for the quarter ended June 30, 1998 to cover the cost of eliminating
466 positions, the closure or sale of 316 convenience stores and the sale of
certain non-strategic terminals and pipelines.
The components of the $131.6 million charge are as follows (in millions):
Write-down of property, plant and
equipment and goodwill (non-cash) $ 82.1
Severance and related costs 15.5
Lease buy-out costs 14.1
Fuel system removal costs 16.7
Other costs 3.2
-------
$ 131.6
The restructuring plan is expected to be completed by the year 2000.
NOTE 11: Subsequent Events
On July 13, 1998, the Ardmore Refinery sustained a power failure and fire in the
main fractionation column in the plant's fluid catalytic cracking unit. The unit
is estimated to be down until the last half of September 1998. Repair costs will
be limited to a $1.0 million insurance deductible and business interruption
insurance is expected to cover all but fifteen days of lost operations. The
Refinery, which normally operates at about 80,000 barrels per day, has been
curtailed to about 37,000 barrels per day.
On July 28, 1998, the Board of Directors approved a $100.0 million stock buyback
plan allowing the Company to purchase shares of its Common Stock in the open
market. The purchased shares will be acquired through a newly formed grantor
trust to fund future employee benefit obligations of the Company.
On August 5, 1998, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on September 7, 1998 to holders of record on
August 20, 1998.
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 marketer of petroleum products and convenience store merchandise in
the Southwest and central regions of the United States (the US System, formerly
referred to as the Southwest), and the Northeast United States and eastern
Canada (the Northeast System). The Company owns and operates seven refineries
located in Texas, California, Michigan, Oklahoma, Colorado and Quebec and
markets its products through Company-operated convenience stores and wholesale
outlets. In the US System, the Company also stores and markets natural gas
liquids and polymer-grade propylene at its facilities at Mont Belvieu, Texas
and, in the Northeast System, the Company sells, on a retail basis, home heating
oil.
On September 25, 1997, the Company completed its acquisition of Total Petroleum
(North America) Ltd. (Total). The purchase price included the issuance of shares
of Company Common Stock and the assumption of Total's outstanding debt. The
acquisition has been accounted for using the purchase method and, accordingly,
operating results of Total subsequent to the date of acquisition have been
included in the consolidated statements of operations, including for the three
and six months ended June 30, 1998. Total was an independent refiner and
marketer, operating three refineries in Michigan, Oklahoma and Colorado, and
marketing its products in the central region of the United States through
company-owned convenience stores and wholesale outlets.
In the Northeast System, 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 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.
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.
Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Financial and operating data by geographic area for the three months ended June
30, 1998 and 1997 are as follows:
Financial Data:
Three Months Ended June 30,
-----------------------------------------------------------------------------
1998 1997
------------------------------------ ----------------------------------
U S Northeast Total U S Northeast Total
--- --------- ----- --- --------- -----
(in millions)
Sales and other $2,442.4 $ 598.6 $3,041.0 $1,716.3 $ 698.1 $2,414.4
revenues........
Cost of products sold (1)....... 1,405.2 321.2 1,726.4 1,081.1 404.7 1,485.8
Operating expenses.............. 259.5 28.5 288.0 163.7 28.5 192.2
Selling, general and
administrative expenses (2). 46.2 48.2 94.4 30.9 38.8 69.7
Taxes other than income taxes... 574.8 183.2 758.0 321.9 198.7 520.6
Depreciation and amortization... 48.9 9.2 58.1 37.6 7.9 45.5
Restructuring charges (3)....... 131.6 - 131.6 - - -
-------- -------- -------- --------- -------- --------
Operating (loss) income......... $ (23.8) $ 8.3 (15.5) $ 81.1 $ 19.5 100.6
======== ======== ======== ========
Interest income................. 2.2 5.5
Interest expense................ (36.0) (29.6)
------ --------
(Loss) income before income
tax benefit (provision)..... (49.3) 76.5
Benefit (provision) for
income 19.3 (30.2)
taxes................
Dividend on subsidiary (2.6) -
-------- --------
stock......
Net (loss) income............... $ (32.6) $ 46.3
======== ========
(1) For the quarter ended June 30, 1998, the Company recorded a $12.5 million
non-cash reduction in the carrying value of crude oil inventories due to the
continuing drop in crude oil prices.
(2) During the second quarter of 1998, the Company incurred $11.2 million in
costs associated with the aborted Petro-Canada joint venture including $2.5
million to write-off costs for a coker development project that will not be
pursued.
(3) On June 9, 1998, the Company recorded a one-time charge of $131.6 million to
restructure its retail marketing, refining and pipeline operations and support
services. The restructuring charges include a property, plant and equipment and
goodwill write-down totaling $82.1 million, severance and relocation costs of
$15.5 million, and lease buyout, fuel system removal and other costs totaling
$34.0 million.
Operating Data:
Three Months Ended
June 30,
-------
1998 1997
---- ----
US System (formerly the Southwest)
Mid-Continent Refineries (1)
Throughput (bpd) 411,400 236,400
Margin (dollars per barrel) (2), (4) $5.03 $5.35
Wilmington Refinery
Throughput (bpd) 121,500 122,800
Margin (dollars per barrel)(4) $5.30 $3.60
Retail Marketing
Fuel volume (bpd) 176,400 108,700
Fuel margin (cents per gallon) (2) 12.5 15.4
Merchandise sales ($1,000/day) $3,258 $2,438
Merchandise margin (%) 30.7% 29.9%
Northeast System
Quebec Refinery
Throughput (bpd) 150,100 106,400
Margin (dollars per barrel) (4) $2.56 $1.92
Retail Marketing
Fuel volume (bpd) 60,300 60,200
Overall margins (cents per gallon) (3) 23.7 27.8
(1) The Mid-Continent Refineries include the McKee and Three Rivers Refineries
and, since their acquisition on September 25, 1997, the Alma, Ardmore and Denver
Refineries.
(2) Effective January 1, 1998, the Company modified its policy for pricing
refined products transferred from its McKee and Three Rivers Refineries to its
Mid-Continent marketing operations to more closely reflect spot market prices
for such refined products. Accordingly, the 1997 amounts have been restated to
reflect the pricing policy change as if it had occurred on January 1, 1997. The
refining margin and retail marketing fuel margin originally reported for the
quarter ended June 30, 1997 were $5.62 and 13.5 cents, respectively.
(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 the cardlock operations.
(4) Refinery margins for 1998 exclude the impact of the non-cash charge for the
reduction in the carrying value of crude oil inventories due to the drop in
crude oil prices. Had the non-cash charge for the reduction of inventories been
included in the refinery margin computation, the 1998 refinery margins would
have been $5.00 for the Mid-Continent Refineries, $4.61 for the Wilmington
Refinery, and $2.28 for the Quebec Refinery.
General
Net loss for the quarter ended June 30, 1998 totaled $32.6 million as compared
to net income of $46.3 million for the quarter ended June 30, 1997. The second
quarter of 1998 included a one-time charge of $131.6 million ($79.1 million net
of income tax benefit) related to the restructuring of the retail marketing,
refining and pipeline operations and support services; $11.2 million of costs
($6.8 million net of income tax benefit) associated with the aborted joint
venture with Petro-Canada; and a $12.5 million ($7.6 million net of income tax
benefit) non-cash reduction in the carrying value of inventories due to the drop
in crude oil prices. Excluding these unusual items, net income would have been
$60.9 million for the quarter ended June 30, 1998 as compared to $46.3 million
for the quarter ended June 30, 1997.
On a per share basis, the Company recognized a net loss per diluted share of
$0.36 for the quarter ended June 30, 1998 as compared to net income per diluted
share of $0.59 in 1997.
In the US System, the Company had an operating loss of $23.8 million for the
second quarter of 1998 as compared to operating income of $81.1 million for the
second quarter of 1997. The decrease in operating income from 1997 to 1998 is
due to the unusual items discussed above. In addition, the Mid-Continent
Refineries' margin declined $0.32 per barrel coupled with declining retail
marketing fuel margins. These decreases were partially offset by increased
throughput from the Mid-Continent Refineries and increased retail marketing fuel
volume, merchandise sales and merchandise margins.
In the Northeast System, operating income was $8.3 million for the second
quarter of 1998 as compared to $19.5 million in the second quarter of 1997. The
decrease in operating income from 1997 to 1998 is due to the unusual items
discussed above which include a $3.8 million non-cash reduction in the carrying
value of inventories and $9.6 million of costs associated with the aborted
Petro-Canada joint venture.
US System
Sales and other revenues in the US System in the second quarter of 1998 totaled
$2.4 billion and were 42.3% higher than for the second quarter of 1997 primarily
due to the increased sales generated from the Total operations acquired in
September 1997. Sales and other revenues for the Total operations for the three
months ended June 30, 1998 were $658.2 million.
The increase in throughput for the Mid-Continent Refineries from 236,400 for the
second quarter of 1997 to 411,400 in the second quarter of 1998 is due mainly to
the increased volume associated with the acquisition of the Alma, Ardmore, and
Denver Refineries from Total. The refining margin for the Mid-Continent
Refineries of $5.03 per barrel in the second quarter of 1998 decreased by 6.0%
as compared to $5.35 per barrel in the second quarter of 1997 mainly because the
decrease in product selling prices was greater than the decrease in crude oil
costs.
Throughput at the Wilmington Refinery remained relatively unchanged for the
second quarter of 1998 as compared to the second quarter of 1997. However, the
increase in the refinery margin by 47.2% was a result of improved spreads
between crude oil/feedstocks and refined products.
Retail marketing fuel volume in the US System increased by 62.3% to 176,400
barrels per day as a result of the addition of approximately 500 high volume
Total convenience stores, which were acquired in September 1997, and the
addition of several new convenience stores in Colorado and Arizona in the last
quarter of 1997. Retail fuel margins decreased to 12.5 cents per gallon for the
second quarter of 1998 due to competitive pricing pressures at the pump,
primarily in Texas and California.
Merchandise sales at the Company's convenience stores increased from $2.4
million per day during the second quarter of 1997 to $3.3 million per day during
the second quarter of 1998 due to the increased sales generated from the Total
stores. The merchandise margin for the second quarter of 1998 increased slightly
to 30.7% as compared to 29.9% for the second quarter of 1997 as a result of beer
price wars in Texas which affected margins negatively in 1997.
The petrochemicals and natural gas liquids business contributed to operating
income, however at lower levels in 1998 as compared to 1997 due to the negative
impact on prices of propylene and other petrochemicals caused by very weak
economic conditions in Asia and the Far East. Consequently, the Company has
canceled plans to construct a cyclohexane plant at the Three Rivers Refinery in
South Texas.
Selling, general and administrative expenses of $46.2 million in the second
quarter of 1998 were $15.3 million higher than in the second quarter of 1997,
reflecting primarily higher selling costs incurred to support the increased
sales resulting from the Total operations and $1.6 million of costs incurred
related to the formation of the aborted Petro-Canada joint venture.
Northeast System
Sales and other revenues in the Northeast System in the second quarter of 1998
totaled $598.6 million and were $99.5 million, or 14.3%, lower than in the
corresponding quarter of 1997, as a result of lower sales in the retail and
wholesale segments following the relatively mild winter in Eastern Canada and
the Northeast United States. The lower sales were also directly affected by the
reduced 1998 selling prices of refined products in comparison to 1997 as a
result of lower crude oil prices.
Throughput at the Quebec Refinery increased 41.1% to 150,100 barrels per day for
the second quarter of 1998 compared to 106,400 barrels per day for the second
quarter of 1997. The low throughput in 1997 was caused by a planned maintenance
turnaround on the fluid catalytic cracking unit in May and June 1997. Refining
margins increased by 33.3% to $2.56 per barrel in the second quarter of 1998 as
compared to $1.92 per barrel in the second quarter of 1997 due mainly to the
scheduled refinery maintenance turnaround which occurred in the second quarter
of 1997.
Retail marketing fuel volumes remained level as compared with the second quarter
of 1997 at approximately 60,300 barrels per day. Retail margins, however,
dropped to 23.7 cents per gallon in 1998 as compared to 27.8 cents per gallon in
1997 due to the decreased demand for high-margin home heating oil resulting from
a mild winter in 1998 which was partially offset by increased demand in the
lower-margin motorist and cardlock markets.
Selling, general and administrative expenses of $48.2 million were $9.4 million
higher than in the second quarter of 1997 principally due to $9.6 million of
costs incurred related to the formation of the aborted Petro-Canada joint
venture.
Corporate
Interest expense of $36.0 million in the second quarter of 1998 was $6.4 million
higher than in the corresponding quarter of 1997 due to higher average
borrowings in 1998 as compared to 1997 resulting from the debt incurred to
finance the Total acquisition in September 1997.
The consolidated income tax provisions for the second quarter of 1998 and 1997
were based upon the Company's estimated effective income tax rates for the years
ending December 31, 1998 and 1997 of 39.5%. 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.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Financial and operating data by geographic area for the six months ended June
30, 1998 and 1997 are as follows:
Financial Data:
Six Months Ended June 30,
------------------------------------------------------------------------------
1998 1997
-------------------------------------- ----------------------------------
U S Northeast Total U S Northeast Total
--- --------- ----- --- --------- ------
(in millions)
Sales and other $ 4,575.2 $ 1,255.4 $ 5,830.6 $ 3,448.4 $ 1,516.2 $ 4,964.6
revenues........
Cost of products sold (1)....... 2,661.2 686.5 3,347.7 2,226.5 909.0 3,135.5
Operating expenses.............. 516.5 59.4 575.9 341.1 61.3 402.4
Selling, general and
administrative expenses (2). 84.5 88.5 173.0 60.6 81.1 141.7
Taxes other than income taxes... 1,074.6 361.7 1,436.3 641.7 388.1 1,029.8
Depreciation and amortization... 105.4 18.1 123.5 74.5 15.2 89.7
Restructuring charges (3)....... 131.6 - 131.6 - - -
-------- -------- -------- -------- --------- --------
Operating income................ $ 1.4 $ 41.2 42.6 $ 104.0 $ 61.5 165.5
======== ======== ======== =========
Interest income................. 4.3 7.9
Interest expense................ (72.1) (62.1)
Gain on sale of assets (4)...... 7.0 11.0
-------- --------
(Loss) income before income
tax benefit (provision)..... (18.2) 122.3
Benefit (provision) for
income 7.2 (48.4)
taxes................
Dividend on subsidiary stock.... (5.2) -
-------- --------
Net (loss) income............... $ (16.2) $ 73.9
======== ========
(1) During the six months ended June 30, 1998, the Company recorded a $26.1
million non-cash reduction in the carrying value of crude oil inventories due to
the significant drop in crude oil prices in 1998.
(2) During the second quarter of 1998, the Company incurred $11.2 million in
costs associated with the aborted Petro-Canada joint venture including $2.5
million to write-off costs for a coker development project that will not be
pursued.
(3) On June 9, 1998, the Company recorded a one-time charge of $131.6 million to
restructure its retail marketing, refining and pipeline operations and support
services. The restructuring charges include a property, plant and equipment and
goodwill write-down totaling $82.1 million, severance and relocation costs of
$15.5 million, and lease buyout, fuel system removal and other costs totaling
$34.0 million.
(4) In March 1998, the Company recognized a $7.0 million gain on the sale of a
25% interest in its McKee to El Paso pipeline and El Paso terminal to Phillips
Petroleum Company. In March 1997, the Company recognized an $11.0 million gain
on the sale of an office building in San Antonio, Texas.
Operating Data:
Six Months Ended
June 30,
--------
1998 1997
---- ----
US System (formerly the Southwest)
Mid-Continent Refineries (1)
Throughput (bpd) 406,800 229,600
Margin (dollars per barrel) (2), (4) $4.30 $4.93
Wilmington Refinery
Throughput (bpd) 122,700 113,900
Margin (dollars per barrel) (4) $5.06 $4.25
Retail Marketing
Fuel volume (bpd) 171,800 105,000
Fuel margin (cents per gallon) (2) 13.1 13.0
Merchandise sales ($1,000/day) $3,090 $2,255
Merchandise margin (%) 30.7% 30.0%
Northeast System
Quebec Refinery
Throughput (bpd) 153,300 127,400
Margin (dollars per barrel) (4) $2.39 $2.24
Retail Marketing
Fuel volume (bpd) 65,100 65,400
Overall margins (cents per gallon)(3) 26.6 28.5
(1) The Mid-Continent Refineries include the McKee and Three Rivers Refineries
and, since their acquisition on September 25, 1997, the Alma, Ardmore and Denver
Refineries.
(2) Effective January 1, 1998, the Company modified its policy for pricing
refined products transferred from its McKee and Three Rivers Refineries to its
Mid-Continent marketing operations to more closely reflect spot market prices
for such refined products. Accordingly, the 1997 amounts have been restated to
reflect the pricing policy change as if it had occurred on January 1, 1997. The
refining margin and retail marketing fuel margin originally reported for the six
months ended June 30, 1997, were $5.23 and 11.4 cents, respectively.
(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 the cardlock operations.
(4) Refinery margins for 1998 exclude the impact of the non-cash charge for the
reduction in the carrying value of crude oil inventories due to the drop in
crude oil prices. Had the non-cash charge for the reduction of inventories been
included in the refinery margin computation, the 1998 refinery margins would
have been $4.19 for the Mid-Continent Refineries, $4.72 for the Wilmington
Refinery, and $2.01 for the Quebec Refinery.
General
Net loss for the six months ended June 30, 1998 totaled $16.2 million as
compared to net income of $73.9 million for the six months ended June 30, 1997.
The first six months of 1998 included a $7.0 million ($4.2 million net of income
taxes) gain on the sale of a 25% interest in the McKee to El Paso pipeline and
El Paso terminal; a $26.1 million ($15.9 million net of income tax benefit)
non-cash charge to reduce crude oil inventories due to the continuing drop in
crude oil prices; a one-time charge of $131.6 million ($79.1 million net of
income tax benefit) related to the restructuring of the retail marketing,
refining and pipeline operations and support services; and $11.2 million of
costs ($6.8 million net of income tax benefit) associated with the aborted joint
venture with Petro-Canada. In the first six months of 1997, the Company
recognized an $11.0 million ($6.6 million net of income taxes) gain on the sale
of an office building. Excluding these unusual items, net income would have been
$81.4 million for the six months ended June 30, 1998 as compared to $67.3
million for the six months ended June 30, 1997.
As a result of these unusual items, for the six months ended June 30, 1998, the
Company recognized a net loss of $0.19 per basic share as compared to net income
of $0.96 per basic share in 1997. The net loss per diluted share for the six
months ended June 30, 1998 was also $0.19 as compared to net income of $0.94 per
diluted share in 1997.
In the US System, the Company had operating income of $1.4 million for the first
six months of 1998 as compared to operating income of $104.0 million for the
same period of 1997. In the Northeast System, operating income was $41.2 million
for the first six months of 1998 as compared to $61.5 million in 1997. The
decrease in operating income from 1997 to 1998 for both the US System and the
Northeast System is due primarily to the unusual items discussed above.
US System
Sales and other revenues in the US System for the six months ended June 30, 1998
totaled $4.6 billion and were 32.7% higher than for the six months ended June
30, 1997 primarily due to the increased sales generated from the Total
operations acquired in September 1997. Sales and other revenues for the Total
operations for the six months ended June 30, 1998 were $1.3 billion. Sales and
other revenues were adversely impacted by lower sales prices of products in 1998
as compared to 1997 as a result of the overall market decline in crude oil and
refined product prices.
The increase in throughput for the Mid-Continent Refineries from 229,600 in the
first half of 1997 to 406,800 in the first half of 1998 is due mainly to the
increased volume associated with the acquisition of the Total refineries. The
refining margin for the Mid-Continent Refineries of $4.30 per barrel in the
first six months of 1998 decreased by 12.8% as compared to $4.93 per barrel in
the first six months of 1997 due to a 21-day scheduled maintenance turnaround at
the Three Rivers Refinery, lower throughput at the Ardmore Refinery in order to
de-bottleneck the crude unit, and an unplanned repair of the fluid catalytic
cracking unit at the McKee Refinery. In addition, product selling prices
decreased by more than the decrease in crude oil costs.
Throughput at the Wilmington Refinery increased 7.7% for the six months ended
June 30, 1998 to 122,700 barrels per day because of increased purchases of high
sulfur distillate to produce finished diesel during 1998 which did not occur
during the first half of 1997 coupled with a scheduled maintenance turnaround on
the gas oil hydrotreater in February 1997 which impacted throughput in 1997. In
addition, the increase in the refining margin by 19.1% was a result of improved
spreads between crude oil/feedstocks and refined products.
Retail marketing fuel volume in the US System increased by 63.6% to 171,800
barrels per day, as a result of the addition of approximately 500 high volume
Total convenience stores, which were acquired in September 1997, and the
addition of several new convenience stores in Colorado and Arizona in the last
quarter of 1997. Retail fuel margins remained steady for the six months ended
June 30, 1998 as compared to 1997 at 13.1 cents per gallon.
Merchandise sales at the Company's convenience stores increased from $2.3
million per day during the first six months of 1997 to $3.1 million per day
during the first six months of 1998 due to the increased sales generated from
the Total stores. The merchandise margin for the six months ended June 30, 1998
was up slightly at 30.7% as compared to 30.0% for the six months ended June 30,
1997.
For the first six months of 1998, the petrochemicals and natural gas liquids
businesses contributed to operating income, however at lower levels due to the
declining prices of propylene and other petrochemicals which have been
negatively impacted by very weak economic conditions in Asia and the Far East.
Selling, general and administrative expenses of $84.5 million for the six months
ended June 30, 1998 were $23.9 million higher than the six months ended June 30,
1997, primarily due to higher selling costs incurred to support the increased
sales resulting from the Total operations, $1.6 million of costs incurred
related to the formation of the aborted Petro-Canada joint venture and
approximately $3.5 million of non-recurring costs associated with Total's Denver
office which was closed in May 1998.
Northeast System
Sales and other revenues in the Northeast System in the first six months of 1998
totaled $1.3 billion and were $260.8 million, or 17.2%, lower than in the
corresponding six months of 1997, as a result of lower sales in the retail and
wholesale segments following the relatively mild winter in Eastern Canada and
the Northeast United States. The lower sales were also directly affected by the
reduced 1998 selling prices of refined products in comparison to 1997 as a
result of the lower crude oil prices.
Throughput at the Quebec Refinery increased 20.3% to 153,300 barrels per day in
the first six months of 1998 compared to 127,400 barrels per day in the first
six months of 1997. The low throughput in 1997 was caused by a planned
maintenance turnaround on the fluid catalytic cracking unit in May and June
1997. Refining margins increased by 6.7% to $2.39 per barrel in the first six
months of 1998 as compared to $2.24 per barrel in the first six months of 1997
due mainly to the scheduled refinery maintenance turnaround which occurred in
the second quarter of 1997.
Retail marketing fuel volumes remained level as compared with the first six
months of 1997 at approximately 65,000 barrels per day. Retail margins, however,
dropped to 26.6 cents per gallon in 1998 as compared to 28.5 cents per gallon in
1997 due to the decreased demand for high-margin home heating oil resulting from
a mild winter in 1998 which was offset partially by increased demand in the
lower-margin motorist and cardlock markets.
Selling, general and administrative expenses of $88.5 million were higher than
in the first six months of 1997, principally due to $9.6 million of costs
incurred related to the formation of the aborted Petro-Canada joint venture.
Corporate
Interest expense of $72.1 million in the first six months of 1998 was $10.0
million higher than in the corresponding six months of 1997 due to higher
average borrowings in 1998 as compared to 1997 resulting from the debt incurred
to finance the acquisition of Total in September 1997.
The consolidated income tax provisions for the six months ended June 30, 1998
and 1997 were based upon the Company's estimated effective income tax rates for
the years ending December 31, 1998 and 1997 of 39.5%. 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.
Crude oil prices held relatively low throughout the first part of the second
quarter of 1998 then dropped significantly in early June. A meeting among OPEC
members in late June 1998, in which they resolved to cut production, worked to
temporarily halt the skid in prices until mid-August when actual production
cutbacks were not as large as promised. Until all major oil-producing countries
(OPEC and non-OPEC) cut production, it is expected that prices will remain low
in the short-term. Any significant rise in crude oil prices will put pressure on
margins and may impact profitability in the third quarter of 1998. However, the
significant time lag between crude oil purchases and deliveries to the
Mid-Continent Refineries (about 40 days) should result in higher refining
margins for these refineries if crude oil prices rise sharply.
The Company enjoyed strong margins in the second quarter throughout its
operations. These margins have carried over into the third quarter; however,
refining margins have declined in early August 1998 as a result of pressure from
high inventories and softened demand as a result of the end of the summer
driving season.
As the Company begins the third quarter, all facilities are operating extremely
well, with the exception of the Ardmore Refinery which experienced a power
failure and fire in the main fractionation column of the fluid catalytic
cracking unit on July 13, 1998. The unit is expected to be down until the last
half of September; however, repair costs will be limited to a $1.0 million
insurance deductible and business interruption insurance is expected to cover
all but fifteen days of lost operations. The remainder of the refinery is
operating at 37,000 barrels per day.
See "Certain 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 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 (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 six months ended June 30, 1998, capital expenditures totaled $64.9
million, of which $32.5 million related to growth opportunity expenditures, and
$32.4 million related to reliability, environmental and regulatory expenditures.
Approximately $16.3 million and $8.8 million have been incurred at the
refineries and the retail level, respectively, for various reliability,
environmental and regulatory expenditures.
Growth opportunity spending during the first six months of 1998 included $12.7
million for the construction of a third propane/propylene splitter at the
Company's Mont Belvieu facility to be completed in August 1998, and $2.9 million
for the McKee to El Paso pipeline expansion to increase capacity to 60,000
barrels per day. Upon completion of the expansion, this cost will be shared with
Phillips Petroleum Company, a partner whose interest in the pipeline will
increase from 25% to 33% as a result. In May 1998, three additional water
cooling tower bays were completed at the McKee Refinery for a total cost of $1.8
million to alleviate the shortage of cooling water to the fluid catalytic
cracking unit and other units and to increase operating efficiency. At the Three
Rivers Refinery, the fluid catalytic cracker unit's reactor and regenerator were
replaced with new state-of-the-art designs, and new exchangers, pumps and towers
were installed in the gas concentration and Merox treating units. This revamp
work cost approximately $2.1 million and has increased throughput capacity of
the Three Rivers Refinery by approximately 2,000 barrels per day. Through June
1998, approximately $1.3 million has been incurred to modify the main column and
gas concentration sections of the fluid catalytic cracking unit at the
Wilmington Refinery to expand throughput capacity by 5,000 barrels per day. The
project is expected to be completed in December 1998 at a total estimated cost
of $13.0 million.
During the six months ended June 30, 1998, the Company also incurred $21.1
million in maintenance turnaround costs primarily at the Ardmore, Three Rivers
and McKee Refineries.
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
As of June 30, 1998, the Company had cash and cash equivalents of $112.5
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, 1998, the Company had approximately $518.2 million remaining
borrowing capacity under its committed bank facilities and commercial paper
program. In addition to its committed bank facilities, on June 30, 1998, the
Company had approximately $514.8 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 $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 $73.8 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.
In March 1998, the Company exercised its right to redeem the 1,724,400
outstanding shares of its 5% Cumulative Convertible Preferred Stock into Common
Stock at a conversion rate of 1.9246 shares of Common Stock for each share of
Preferred Stock. The redemption resulted in 3,318,698 shares of Common Stock
being issued, a portion of which came from treasury shares and the balance of
shares were newly issued. As a result of the redemption, the cash dividend
requirements for the Company will be lower by $0.7 million on an annualized
basis.
The continued consolidation in the refining and marketing industry has changed
the retail product pricing environment resulting in lower retail marketing
margins over the past several years. In order to stay competitive and increase
profitability, the Company initiated a restructuring program in June 1998 to
reorganize its retail support infrastructure (eliminating 341 positions), to
close or sell 316 under-performing convenience stores, and to sell certain
excess terminal and pipeline assets, including the elimination of an additional
125 positions. Accordingly, the Company recognized a one-time charge of $131.6
million in the quarter ended June 30, 1998 consisting of $82.1 million to
write-down property, plant and equipment and goodwill, $34.0 million for costs
associated with closing the 316 convenience stores, and of $15.5 million of
severance costs to eliminate 466 positions.
The restructuring initiatives are expected to increase annual earnings before
interest and income taxes by $99.6 million in 1999, $124.0 million in 2000, and
$128.9 million in 2001 due to lower operating costs. The increase in annual
earnings will more than offset the one-time cash outlays related to the
restructuring program estimated at $49.5 million over the next three years. In
addition, as part of the restructuring plan, the Company has decreased its
retail marketing capital expenditures budget by $32.6 million for the second
half of 1998.
On July 28, 1998, the Board of Directors approved a $100.0 million stock buyback
plan allowing the Company to purchase shares of its Common Stock in the open
market. The Company will fund the purchase of Common Stock using available cash
flow and existing debt facilities. The purchased stock will be used to fund
future employee benefit obligations of the Company.
On August 5, 1998, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on September 7, 1998 to holders of record on
August 20, 1998.
Cash Flows for the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Company's cash position increased
$20.5 million to $112.5 million. Net cash provided by operating activities
during the first half of 1998 was $98.5 million due to increased depreciation
and amortization, the $82.1 million restructuring charges write-down, and
management's efforts to reduce accounts and notes receivable and inventory
levels, which were offset by reductions in accounts payable and other current
liabilities.
Net cash used in investing activities during the six months ended June 30, 1998,
totaled $37.8 million, including cash outflows of $64.9 million for capital
expenditures and $21.1 million for maintenance turnaround costs, and cash
inflows of $27.8 million related to proceeds from the sale of the McKee to El
Paso pipeline and El Paso terminal to Phillips Petroleum Company and $17.2
million for proceeds from the sale of 29 convenience stores to Griffin L.L.C.
Net cash used in financing activities during the six months ended June 30, 1998,
totaled $39.9 million, primarily due to the cash dividends declared and paid
totaling $49.7 million on outstanding Common Stock ($0.55 per share) and 5%
Cumulative Convertible Preferred Stock ($0.625 per share) prior to redemption in
March 1998.
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, and
reached an historic low against the U.S. dollar in the second quarter of 1998.
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, 1998, by $91.3 million. Although the Company expects the exchange rate to
fluctuate during 1998, 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 System, which generally pass on any
change in the cost of crude oil. Marketing 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.
Update on Impact of Year 2000 Issues
In June 1998, the Company terminated its efforts to form a joint venture between
its Northeast operations and Petro-Canada's refining and marketing operations
and, accordingly, has revised the plans by which it will bring its Northeast IT
systems into compliance for the year 2000. The revised plan calls for
implementing new stand-alone IT systems in the Northeast operations, which will
provide enhanced business benefits in addition to providing year 2000
compliance. The Company has not yet determined the cost of the new stand-alone
IT systems, however it is expected to be higher than previously planned for the
Petro-Canada joint venture. The Company's revised plan anticipates having new IT
systems implemented during the third quarter of 1999.
New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 revises existing standards, requiring that all start-up
activity costs be expensed as incurred. The term "start-up" is broadly defined
and includes pre-operating, pre-opening and organizational activities. SOP 98-5
is effective for financial statements for periods beginning after December 15,
1998; however early adoption is permitted. The Company expects to adopt SOP 98-5
as of January 1, 1999 and is currently evaluating the impact of the change which
is not expected to be material to the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes new and revises several existing standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. If certain conditions are met, a derivative may
be designated as a cashflow hedge, as a fair value hedge or as a foreign
currency hedge. An entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedge and the measurement method to be used. Changes in the
fair value of derivatives are either recognized in earnings in the period of
change or as a component of other comprehensive income in the case of certain
hedges. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company expects to adopt SFAS No. 133 as of
January 1, 2000 and is currently evaluating the impact of the change, but has
not quantified the effect at this time.
Certain Forward Looking Statements
This quarterly report on Form 10-Q contains certain "forward-looking" statements
as such term is defined in the U. S. Private Securities Litigation Reform Act of
1995 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 import, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None..............
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 section 13 or 15(d) 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
(Registrant)
By: /s/ H. PETE SMITH
H. PETE SMITH
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
August 13, 1998