UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
Commission File Number 1-11154
------------------------------------
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification No. 13-3663331
6000 North Loop 1604 West
San Antonio, Texas 78249-1112
Telephone number: (210) 592-2000
--------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
As of April 30, 1999, 86,587,000 shares of Common Stock, $0.01 par value, were
outstanding and the aggregate market value of such stock as of April 30, 1999
was $1,996,919,000.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
FORM 10-Q
MARCH 31, 1999
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998.................................................. 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998...................................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998...................................... 5
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1999 and 1998......................... 6
Notes to Consolidated Financial Statements............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................. 22
Item 6. Exhibits and Reports on Form 8-K.................................... 22
SIGNATURE..................................................... 23
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
March 31, December 31,
1999 1998
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents........................................ $ 108.4 $ 176.1
Accounts and notes receivable, net............................... 307.0 562.7
Inventories...................................................... 581.8 635.6
Prepaid expenses and other current assets........................ 30.4 33.0
Deferred income taxes............................................ 98.4 98.4
--------- ---------
Total current assets.......................................... 1,126.0 1,505.8
--------- ---------
Property, plant and equipment....................................... 4,463.7 4,423.2
Less accumulated depreciation and amortization...................... (1,208.4) (1,162.0)
--------- ---------
Property, plant and equipment, net............................... 3,255.3 3,261.2
Other assets, net................................................... 582.1 548.0
--------- ---------
Total assets.................................................... $ 4,963.4 $ 5,315.0
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt.............. $ 4.8 $ 5.8
Accounts payable................................................. 301.7 366.0
Accrued liabilities.............................................. 343.2 402.4
Taxes other than income taxes.................................... 289.7 343.0
Income taxes payable............................................. 24.4 28.9
--------- ---------
Total current liabilities..................................... 963.8 1,146.1
--------- ---------
Long-term debt, less current portion................................ 1,762.2 1,926.2
Other long-term liabilities......................................... 443.3 453.7
Deferred income taxes............................................... 212.0 205.0
Commitments and contingencies
Company obligated preferred stock of subsidiary..................... 200.0 200.0
Stockholders' equity:
Common Stock, par value $0.01 per share:
250,000,000 shares authorized, 86,556,000 and
86,558,000 shares issued and outstanding as of
March 31, 1999 and December 31, 1998.......................... 0.9 0.9
Additional paid-in capital....................................... 1,513.1 1,512.7
Treasury stock................................................... (100.6) (100.1)
Retained earnings................................................ 74.6 82.5
Accumulated other comprehensive loss ............................ (105.9) (112.0)
--------- ---------
Total stockholders' equity..................................... 1,382.1 1,384.0
--------- ---------
Total liabilities and stockholders' equity..................... $ 4,963.4 $ 5,315.0
========= =========
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in millions, except share and per share data)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Sales and other revenues (including excise taxes).............. $2,725.7 $2,789.6
-------- --------
Operating costs and expenses:
Cost of products sold....................................... 1,547.2 1,621.3
Operating expenses.......................................... 255.7 287.9
Selling, general and administrative expenses................ 87.4 78.6
Taxes other than income taxes............................... 712.8 678.3
Depreciation and amortization............................... 57.1 65.4
-------- --------
Total operating costs and expenses....................... 2,660.2 2,731.5
-------- --------
Operating income............................................... 65.5 58.1
Interest income.............................................. 2.9 2.1
Interest expense............................................. (38.6) (36.1)
Equity income from Diamond-Koch.............................. 1.5 -
Gain on sale of property, plant and equipment................ - 7.0
-------- --------
Income before income taxes and dividends of
subsidiary................................................... 31.3 31.1
Provision for income taxes................................... 12.7 12.1
Dividends on preferred stock of subsidiary................... 2.6 2.6
-------- --------
Net income..................................................... $ 16.0 $ 16.4
======== ========
Net income per share:
Basic....................................................... $0.18 $0.18
Diluted..................................................... $0.18 $0.18
Weighted average number of shares (in thousands):
Basic....................................................... 86,557 87,284
Diluted..................................................... 86,643 90,882
Dividends per share:
Common Shares............................................... $0.275 $0.275
5% Cumulative Convertible Preferred Shares.................. - $0.625
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Cash Flows from Operating Activities:
Net income...................................................... $ 16.0 $ 16.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................ 57.1 65.4
Provision for losses on receivables.......................... 1.7 4.9
Equity income from Diamond-Koch.............................. (1.5) -
Loss (gain) on sale of property, plant and equipment......... 0.1 (7.5)
Deferred income tax provision................................ 6.0 2.9
Other, net................................................... 0.5 (4.2)
Changes in operating assets and liabilities:
Decrease in accounts and notes receivable.................. 249.3 154.6
Decrease in inventories.................................... 56.8 97.1
Decrease in prepaid expenses and other current assets...... 2.7 13.2
Increase in other assets................................... (8.8) (7.7)
Decrease in accounts payable and other current liabilities. (195.4) (324.6)
Decrease in other long-term liabilities.................... (13.0) 5.9
------- --------
Net cash provided by operating activities................ 171.5 16.4
------- --------
Cash Flows from Investing Activities:
Capital expenditures........................................... (35.3) (28.8)
Deferred refinery maintenance turnaround costs................. (18.3) (7.5)
Proceeds from sales of property, plant and equipment........... 2.2 27.8
------- --------
Net cash used in investing activities........................ (51.4) (8.5)
------- --------
Cash Flows from Financing Activities:
Net change in commercial paper and short-term borrowings....... (162.6) 25.6
Repayment of long-term debt.................................... (2.7) (2.2)
Payment of cash dividends...................................... (23.8) (24.9)
Other, net..................................................... 0.1 4.5
------- --------
Net cash provided by (used in) financing activities.......... (189.0) 3.0
------- --------
Effect of exchange rate changes on cash......................... 1.2 0.1
------- --------
Net Increase (Decrease) in Cash and Cash Equivalents............ (67.7) 11.0
Cash and Cash Equivalents at Beginning of Period................ 176.1 92.0
------- --------
Cash and Cash Equivalents at End of Period...................... $ 108.4 $ 103.0
======= ========
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in millions)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Net income...................................................... $16.0 $16.4
Other comprehensive income (loss):
Foreign currency translation adjustment...................... 7.2 3.7
Minimum pension liability adjustment, net of income taxes.... (1.1) -
----- -----
Comprehensive income............................................ $22.1 $20.1
===== =====
See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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, 1998.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. 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.
Certain previously reported amounts have been reclassified to conform to the
1999 presentation.
NOTE 2: Inventories
Inventories consisted of the following:
March 31, December 31,
1999 1998
---- ----
(in millions)
Crude oil and other feedstocks..........................................$189.5 $283.9
Refined and other finished products and convenience store items..........336.0 296.9
Materials and supplies................................................... 56.3 54.8
----- ------
Total inventories..................................................$581.8 $635.6
===== =====
NOTE 3: Computation of Net Income Per Share
Basic net income per share is calculated as net income less preferred stock
dividends divided by the weighted average number of Common Shares outstanding.
Diluted net income per share assumes, when dilutive, issuance of the net
incremental shares from stock options and restricted stock, and, in 1998, the
conversion of the 5% Cumulative Convertible Preferred Shares. The following
table reconciles the net income amounts and share numbers used in the
computation of net income per share (in millions, except per share data).
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Basic Net Income Per Share:
Weighted average number of Common Shares outstanding
(in thousands)............................................... 86,557 87,284
====== ======
Net income....................................................... $ 16.0 $ 16.4
Dividends on 5% Cumulative Convertible Preferred
Stock....................................................... - 1.1
------ ------
Net income applicable to Common Shares........................... $ 16.0 $ 15.3
====== ======
Basic net income per share....................................... $ 0.18 $ 0.18
====== ======
Diluted Net Income Per Share:
Weighted average number of Common Shares outstanding
(in thousands)............................................... 86,557 87,284
Net effect of dilutive stock options based on the treasury stock
method using the average market price............................ 86 804
Assumed conversion of 5% Cumulative Convertible Preferred
Shares (prior to conversion in March 1998)..................... - 2,794
------ ------
Weighted average common equivalent shares........................ 86,643 90,882
====== ======
Net income....................................................... $ 16.0 $ 16.4
====== ======
Diluted net income per share..................................... $ 0.18 $ 0.18
====== ======
NOTE 4: Restructuring and Other Charges
In June 1998, the Company adopted a three-year restructuring plan to reduce its
retail cost structure by eliminating 341 positions to improve operating
efficiencies and to close and sell 316 under-performing convenience stores. In
addition, the Company restructured certain pipeline and terminal operations and
support infrastructure resulting in the elimination of 125 positions. As of
March 31, 1999, 88 convenience stores were sold or closed and 276 employees were
terminated under the retail and pipeline and terminal restructuring plans.
In December 1998, the Company finalized plans to eliminate approximately 300
non-essential jobs, programs and expenses and to implement new initiatives
designed to further reduce capital employed and improve earnings. As of March
31, 1999, 95 employees were terminated under the profit improvement program.
Changes in accrued restructuring costs for the quarter ended March 31, 1999 were
as follows:
Balance at Balance at
December 31, 1998 Payments Reductions March 31, 1999
----------------- -------- ---------- --------------
Severance and related costs $19.0 $6.8 $0.3 $11.9
Lease buyout costs 14.0 0.1 0.8 13.1
Fuel system removal costs 16.1 0.9 2.8 12.4
----- ---- ---- -----
$49.1 $7.8 $3.9 $37.4
===== ==== ==== =====
NOTE 5: Commitments and Contingencies
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities. Site restoration and environmental
remediation and clean-up obligations are accrued either when known or when
considered probable and reasonably estimable. Total future environmental costs
are difficult to assess and estimate due to unknown factors such as the
magnitude of possible contamination, the timing and extent of remediation, the
determination of the Company's liability in proportion to other parties,
improvements in cleanup technologies and the extent to which environmental laws
and regulations may change in the future. Although environmental costs may have
a significant impact on results of operations for any single year, the Company
believes that such costs will not have a material adverse effect on the
Company's financial position.
There are various legal proceedings and claims pending against the Company that
arise in the ordinary course of business. It is management's opinion, based upon
advice of legal counsel, that these matters, individually or in the aggregate,
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE 6: Accounts Receivable Securitization
In March 1999, the Company arranged a $250.0 million revolving accounts
receivable securitization facility. On an ongoing basis, the Company sells
certain accounts receivable to Coyote Funding, L.L.C. (Coyote), a
non-consolidated, wholly-owned subsidiary, which then sells a percentage
ownership in such receivables, without recourse, to a third party cooperative
corporation. The gross proceeds resulting from the sale of the percentage
ownership interest in the receivables totaled $222.0 million as of March 31,
1999. The Company's retained interest in receivables sold to Coyote is included
in accounts and notes receivable, net in the accompanying consolidated balance
sheet. Discounts and net expenses associated with the sale of receivables
totaled $1.3 million and are included in interest expense in the consolidated
statement of income for the three months ended March 31, 1999.
NOTE 7: Business Segments
The Company has three reportable segments: Refining, Retail and
Petrochemical/NGL. The Refining segment includes refinery, wholesale, product
supply and distribution, and transportation operations. The Retail segment
includes Company-operated convenience stores, dealers/jobbers and truckstop
facilities, cardlock and home heating oil operations. The Petrochemical/NGL
segment includes the equity earnings from Diamond-Koch and earnings from
Nitromite fertilizer, NGL marketing and certain NGL pipeline operations.
Diamond-Koch is a 50-50 joint venture primarily related to the Mont Belvieu
petrochemical assets of the Company and Koch Industries, Inc.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each business
requires unique technology and marketing strategies. The Company evaluates
performance based on earnings before interest, taxes and depreciation and
amortization (EBITDA). Intersegment sales are generally derived from
transactions made at prevailing market rates.
Petrochemical/
Refining Retail NGL Corporate Total
-------- ------ --- --------- -----
(in millions)
Three months ended March 31, 1999:
Sales and other revenues from
external customers............... $1,435.2 $1,266.0 $ 24.5 $ - $2,725.7
Intersegment sales.................. 488.2 2.1 - - 490.3
EBITDA.............................. 110.3 52.9 1.0 (41.6) 122.6
Depreciation and amortization....... 39.8 16.2 0.3 0.8 57.1
Operating income (loss)............. 70.5 36.7 0.7 (42.4) 65.5
Total assets........................ 3,458.2 1,265.7 167.6 71.9 4,963.4
Three months ended March 31, 1998:
Sales and other revenues from
external customers............... 1,280.0 1,428.3 81.3 - 2,789.6
Intersegment sales.................. 521.1 1.0 6.1 - 528.2
EBITDA.............................. 70.1 67.3 15.5 (29.4) 123.5
Depreciation and amortization....... 37.7 23.1 2.4 2.2 65.4
Operating income (loss)............. 32.4 44.2 13.1 (31.6) 58.1
Total assets........................ 3,199.6 1,314.3 224.1 563.6 5,301.6
The following summarizes the reconciliation of reportable segment operating
income to consolidated operating income for the three months ended March 31,
1999 and 1998 (in millions):
1999 1998
---- ----
Operating income:
Total operating income for reportable segments... $107.9 $ 89.7
Other income (loss).............................. (42.4) (31.6)
----- -----
Consolidated operating income................. $ 65.5 $ 58.1
===== ====
NOTE 8: Diamond 66
On March 19, 1999, the Company and Phillips Petroleum Company terminated
discussions related to the formation of a proposed joint venture (Diamond 66)
between the two companies. During the first quarter of 1999, the Company
expensed $11.0 million of transaction costs incurred related to the formation of
Diamond 66, which costs are included in selling, general and administrative
expenses.
NOTE 9: Proposed Sale of the Michigan System
In December 1998, the Company announced plans to consider the sale of the
Michigan operations, which consist of the Alma Refinery, product and crude
pipelines, four terminals and 183 convenience stores. The Company has received
and is currently reviewing several proposals from interested parties; however,
no agreements or final decision has been made relating to a possible sale of
such assets.
NOTE 10: Subsequent Events
On May 4, 1999, the Board of Directors declared a quarterly dividend of $0.275
per Common Share payable on June 3, 1999 to holders of record on May 20, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company
Ultramar Diamond Shamrock Corporation (the Company) is a leading independent
refiner and retailer of high-quality refined products and convenience store
merchandise in the central and southwest regions of the United States (the US
System), and the northeast United States and eastern Canada (the Northeast
System). Its operations consist of seven refineries, over 5,900 convenience
stores, pipelines, a home heating oil business, and related petrochemical
operations.
The Company's operating results are affected by Company-specific factors,
primarily its refinery utilization rates and 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.
On March 19, 1999 the Company and Phillips Petroleum Company (Phillips)
terminated discussions related to the formation of a proposed joint venture
(Diamond 66) between the two companies. During the first quarter of 1999, the
Company expensed $11.0 million of transaction costs incurred related to the
formation of Diamond 66.
Seasonality
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. Both the US and Northeast Systems are impacted
by the increased demand for gasoline during the summer driving season.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Financial and operating data by geographic area for the three months ended March
31, 1999 and 1998 are as follows:
Financial Data:
Three Months Ended March 31,
--------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
US Northeast Total US Northeast Total
-- --------- ----- -- --------- -----
(in millions)
Sales and other revenues............... $2,146.6 $579.1 $2,725.7 $2,132.8 $656.8 $2,789.6
Cost of products sold (1).............. 1,241.8 305.4 1,547.2 1,256.0 365.3 1,621.3
Operating expenses..................... 227.5 28.2 255.7 257.0 30.9 287.9
Selling, general and
administrative expenses (2).......... 48.0 39.4 87.4 38.3 40.3 78.6
Taxes other than income taxes.......... 543.4 169.4 712.8 499.8 178.5 678.3
Depreciation and amortization.......... 47.9 9.2 57.1 56.5 8.9 65.4
------- ----- ------- ------- ----- -------
Operating income....................... $ 38.0 $ 27.5 65.5 $ 25.2 $ 32.9 58.1
======= ===== ======= =====
Interest income........................ 2.9 2.1
Interest expense....................... (38.6) (36.1)
Equity income from Diamond-Koch (3).... 1.5 -
Gain on sale of assets (4)............. - 7.0
--------- -------
Income before income taxes and
dividends of subsidiary.............. 31.3 31.1
Provision for income 12.7 12.1
taxes.............
Dividends on subsidiary stock.......... 2.6 2.6
--------- -------
Net income............................. $ 16.0 $ 16.4
========= =======
(1) In March 1998, the Company recorded a $13.6 million non-cash reduction in
the carrying value of inventories due to the significant market drop in crude
oil and refined product prices during the first quarter of 1998.
(2) In March 1999, the Company expensed $11.0 million of transaction costs
associated with the termination of the proposed Diamond 66 joint venture.
(3) In September 1998, the Company contributed certain of its petrochemical
assets to the Diamond-Koch joint venture, which is being accounted for using the
equity accounting method. Operating income in the first quarter of 1998 for the
petrochemical assets contributed was $4.9 million, excluding overhead.
(4) In March 1998, the Company recognized a $7.0 million gain on the sale of a
25% interest in a pipeline and terminal facility.
Operating Data:
- --------------
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
US System
Mid-Continent Refineries (1)
Throughput (bpd)............................. 390,600 402,300
Margin (dollars per barrel) (2).............. $ 3.27 $ 3.10
Operating cost (dollars per barrel).......... $ 1.87 $ 2.02
Wilmington Refinery
Throughput (bpd)............................. 131,800 124,000
Margin (dollars per barrel).................. $ 5.53 $ 4.82
Operating cost (dollars per barrel).......... $ 1.70 $ 2.28
Retail
Fuel volume (bpd)............................ 170,900 167,300
Fuel margin (cents per gallon)............... 10.9 13.9
Merchandise sales ($1,000/day)............... $ 3,188 $ 2,927
Merchandise margin (%)....................... 26.1% 30.7%
Northeast System
Quebec Refinery
Throughput (bpd)............................. 158,200 156,500
Margin (dollars per barrel)(2)............... $ 1.68 $ 2.23
Operating cost (dollars per barrel).......... $ 0.86 $ 1.03
Retail
Fuel volume (bpd)............................ 73,500 70,100
Overall margins (cents per gallon) (3)....... 25.8 29.1
(1) The Mid-Continent Refineries include the Alma, Ardmore, Denver, McKee and
Three Rivers Refineries.
(2) Refinery margins for 1998 exclude the impact of the non-cash charge for the
reduction in the carrying value of crude oil and refined product inventories due
to the drop in crude oil and refined product prices. Had the non-cash charge for
the reduction of inventories been included in the refinery margin computations,
the 1998 refinery margins would have been $2.91 per barrel for the Mid-Continent
Refineries and $1.75 per barrel for the Quebec Refinery.
(3) Retail marketing overall margin reported for the Northeast System represents
a blend of gross margin for Company and dealer-operated retail outlets and
convenience stores, home heating oil sales and cardlock operations.
General
Net income for the quarter ended March 31, 1999 totaled $16.0 million as
compared to $16.4 million for the quarter ended March 31, 1998. The first
quarter of 1999 included a $6.6 million after-tax charge to record expenses
associated with the termination of the proposed Diamond 66 joint venture. The
first quarter of 1998 included a $4.3 million after-tax gain on the sale of a
25% interest in a pipeline and terminal facility and an $8.3 million after-tax
non-cash charge to reduce inventories due to the continuing drop in crude oil
and refined product prices. Excluding these unusual items, net income would have
been $22.6 million in 1999 as compared to $20.4 million in 1998. On a per share
basis, basic and diluted net income per share for both the first quarter of 1999
and 1998 was $0.18 per share.
US System
The US System had operating income of $38.0 million for the first quarter of
1999, as compared to $25.2 million for the first quarter of 1998. The increase
in operating income was primarily due to improved refinery margins and lower
operating expenses.
Overall, US refining operations improved significantly over 1998 levels due to
higher refinery margins and lower operating costs. The lower industry refining
margins resulting from high inventories and declining crude oil prices in the
early part of the first quarter of 1999 negatively impacted the Mid-Continent
Refineries' margin. However, the Mid-Continent Refineries benefited $1.15 per
barrel from the positive effect of buying their crude oil 40 days in advance in
the latter part of the quarter when crude oil prices began to rise, which
resulted in a $3.27 per barrel refinery margin for the first quarter of 1999. In
addition, the operating costs were lower in 1999 by $0.15 per barrel as compared
to 1998 due to lower utility and maintenance expenses. The decrease in refining
throughput for the Mid-Continent Refineries, from 402,300 barrels per day in
1998 to 390,600 barrels per day in 1999, was due to planned production cuts in
January and February 1999 implemented to counter the effect of weak industry
margins.
The Wilmington Refinery margin improved 14.7% from $4.82 per barrel in 1998 to
$5.53 per barrel 1999 as the Company benefited from the supply imbalance in the
California market, which was caused by unplanned shutdowns at several West Coast
refineries. In addition, throughput at the Wilmington Refinery increased 6.3% to
131,800 barrels per day due to the debottlenecking of the fluid catalytic
cracking unit (FCCU) in December 1998.
The US retail operations were negatively impacted by the sharp increase in
wholesale gasoline prices, which increased faster than the retail pump prices.
The retail fuel margin declined from 13.9 cents per gallon in 1998 to 10.9 cents
per gallon in 1999. However, the Company realized a 2.2% increase in the retail
fuel volume in 1999 as compared to 1998 due to an aggressive pricing program
initiated to increase per store volumes. Partially offsetting the negative 1999
fuel margin was the 8.9% growth in merchandise sales in 1999 as compared to
1998. The merchandise margin, however, declined to 26.1% in 1999 due to the
increase in cigarette prices, which could not be fully passed on to customers.
Selling, general and administrative expenses for the first quarter of 1999 were
$9.7 million higher than in the first quarter of 1998 due to the $11.0 million
of transaction costs associated with the termination of the proposed Diamond 66
joint venture.
Northeast System
Sales and other revenues in the Northeast System decreased $77.7 million from
$656.8 million in the first quarter of 1998 to $579.1 million in the first
quarter of 1999. The decline in sales was due to reduced selling prices of
refined products as a result of lower crude oil prices compared to 1998.
Throughput for the first quarter of 1999 increased 1,700 barrels per day over
the first quarter of 1998. The lower throughput for the first quarter of 1998
was attributed to the shutdown of the crude unit for repairs. The refinery
margin decreased $0.55 per barrel from $2.23 per barrel in the first quarter of
1998 to $1.68 per barrel in the first quarter of 1999 reflecting high product
inventories and the resulting reduced refinery margins in the Atlantic Basin
since the beginning of 1999. Partially offsetting the reduced refinery margin
were lower operating costs which declined to $0.86 per barrel in 1999 from $1.03
per barrel in 1998 due to lower supply and distribution expenses related to the
wholesale operations.
Retail operations benefited from a 4.9% increase in fuel volumes despite the
warm temperatures in the Northeast which reduced home heating oil volumes. The
overall retail margin declined to 25.8 cents per gallon in 1999 as the increased
sales were generated from the motorist and cardlock businesses, which have lower
margins as compared to the home heating oil business.
Selling, general and administrative expenses for the first quarter of 1999 were
comparable to the first quarter of 1998 due to lower haulage and delivery
expenses in the home heating oil business, which were partially offset by higher
administrative expenses associated with severance costs for a departing
executive.
Corporate
Interest expense of $38.6 million in the first quarter of 1999 was $2.5 million
higher than in the corresponding quarter of 1998 due to higher average
borrowings in 1999 as compared to 1998.
The consolidated income tax provisions for the first quarter of 1999 and 1998
were based upon the Company's estimated effective income tax rates for the years
ending December 31, 1999 and 1998 of 40.0% and 39.0%, respectively. The
consolidated effective income tax rates exceed the U.S. Federal statutory income
tax rate primarily due to state income taxes, the effects of foreign operations
and the amortization of nondeductible goodwill.
Outlook
The Company's earnings depend largely on refining and retail margins. The
petroleum refining and marketing industry has been and continues to be volatile
and highly competitive. The cost of crude oil purchased by the Company as well
as the price of refined products sold by the Company have fluctuated widely in
the past. As a result of the historic volatility of refining and retail margins
and the fact that they are affected by numerous diverse factors, it is
impossible to predict future margin levels.
Industry refining margins during the first quarter of 1999 continued in
record-low territory until mid-February when margins finally bottomed-out. With
margins approaching zero, or in the case of the Chicago market dropping below
zero, and with storage for refined products filled to capacity, some refiners
made significant production cuts and margins started to improve. At the same
time, several West Coast refineries reduced run rates as a result of a series of
mishaps and unplanned outages. With margins already turning around throughout
the United States, the disruption in the tightly balanced West Coast market had
a ripple effect throughout the country and the quarter ended with improved
refining margins.
As the second quarter of 1999 begins, crude oil prices have risen as OPEC seems
to be making good on their promise to cut crude oil output. The immediate effect
has been a reduction in refining margins as the run-up in crude oil prices has
outpaced increases in wholesale gasoline prices. At the same time, the deep
discounts for crude oil purchased in the prompt month that led to full
utilization of refining capacity throughout 1998 and into early 1999 have now
been replaced with the more normal premium for prompt month barrels. The premium
to purchase current barrels acts as a disincentive for refiners to refine
barrels in excess of current requirements because next month's barrels are
available at a discount from today's prices. As a consequence, utilization rates
should retreat from last year's record highs, and with demand for refined
products still robust, inventory levels should decline. As crude oil prices
stabilize and refined product inventories decline, refining and retail margins
should improve.
See "Certain Forward-Looking Statements."
Capital Expenditures
The petroleum refining and marketing industry is a capital intensive business.
Significant capital requirements include expenditures to upgrade or enhance
refinery operations to meet environmental regulations and maintain the Company's
competitive position, as well as to acquire, build and maintain broad-based
retail networks. The capital requirements of the Company's operations consist
primarily of:
- maintenance expenditures, such as those required to maintain equipment
reliability and safety and to address environmental regulations; and
- growth opportunity expenditures, such as those planned to expand and upgrade
its retail business, to increase the capacity of certain refinery processing
units and pipelines and to construct additional petrochemical processing
units.
During the quarter ended March 31, 1999, capital expenditures totaled $35.3
million of which $17.2 million related to maintenance expenditures and $18.1
million related to growth opportunity expenditures. Approximately $12.4 million
and $4.2 million of costs have been incurred at the refineries and at the retail
level, respectively, for various maintenance expenditures. During the quarter
ended March 31, 1999, the Company also incurred $18.3 million in refinery
maintenance turnaround costs primarily at the Wilmington Refinery.
Growth opportunity expenditures for the quarter ended March 31, 1999 included:
- $9.5 million associated with the implementation of the Company's new infor-
mation technology system, and
- $5.5 million to revamp the McKee Refinery's FCCU power train.
The Company is continually investigating strategic acquisitions and other
business opportunities, some of which may be material, that will complement its
current business activities.
The Company expects to fund its capital expenditures from cash provided by
operations and, to the extent necessary, from the proceeds of borrowings under
its bank credit facilities and its commercial paper program discussed below. In
addition, depending upon its future needs and the cost and availability of
various financing alternatives, the Company may, from time to time, seek
additional debt or equity financing in the public or private markets.
Liquidity and Capital Resources
As of March 31, 1999, the Company had cash and cash equivalents of $108.4
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 March 31, 1999, the Company had borrowing capacity of approximately $614.4
million remaining under its committed bank facilities and commercial paper
program and had approximately $610.9 million under uncommitted, unsecured
short-term lines of credit with various financial institutions.
In addition to its bank credit facilities, the Company has $1.0 billion
available under universal shelf registrations previously filed with the
Securities and Exchange Commission. The net proceeds from any debt or equity
offering under the universal shelf registrations would add to the Company's
working capital and would be available for general corporate purposes.
The Company also has $69.1 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, as amended, require that the
Company maintain certain financial ratios and other restrictive covenants. The
Company is in compliance with such covenants and believes that such covenants
will not have a significant impact on the Company's liquidity or its ability to
pay dividends. The Company believes its current sources of funds will be
sufficient to satisfy its capital expenditure, working capital, debt service and
dividend requirements for at least the next twelve months.
Effective March 29, 1999, the Company established a revolving accounts
receivable securitization facility (Securitization Facility) which provides the
Company with the ability to sell up to $250.0 million of accounts receivable on
an ongoing basis. In connection with the Securitization Facility, the Company
sells, on a revolving basis, an undivided interest in certain of its trade and
credit card receivables. The proceeds from the sale of accounts receivable,
which totaled $222.0 million at March 31, 1999, were used to reduce the
Company's outstanding indebtedness under its commercial paper program. The
remaining availability under the Securitization Facility will be used, among
other purposes, to further reduce debt.
On May 4, 1999, the Board of Directors declared a quarterly dividend of $0.275
per Common Share payable on June 3, 1999, to holders of record on May 20 , 1999.
Cash Flows for the Three Months Ended March 31, 1999
During the first quarter ended March 31, 1999, the Company's cash position
decreased $67.7 million to $108.4 million. Net cash provided by operating
activities was $171.5 million including the receipt of $222.0 million from the
sale of trade and credit card receivables under the Company's Securitization
Facility.
Net cash used in investing activities during the quarter ended March 31, 1999
totaled $51.4 million including $35.3 million for capital expenditures and $18.3
million for refinery maintenance turnaround costs.
Net cash used in financing activities during the quarter ended March 31, 1999
totaled $189.0 million, including payments to reduce short-term borrowings of
$162.6 million and for cash dividends totaling $23.8 million.
Exchange Rates
The value of the Canadian dollar relative to the U.S. dollar has weakened
substantially since the acquisition of the Canadian operations in 1992. As the
Company's Canadian operations are in a net asset position, the weaker Canadian
dollar has reduced, in U.S. dollars, the Company's net equity at March 31, 1999
by $104.8 million. Although the Company expects the exchange rate to fluctuate
during 1999, it cannot reasonably predict its future movement.
With the exception of its crude oil costs, which are U.S. dollar denominated,
fluctuations in the Canadian dollar exchange rate will affect the U.S. dollar
amount of revenues and related costs and expenses reported by the Canadian
operations. The potential impact on the refining margin of fluctuating exchange
rates together with U.S. dollar denominated crude oil costs is mitigated by the
Company's pricing policies in the Northeast System, which generally pass on any
change in the cost of crude oil. Retail margins, on the other hand, have been
adversely affected by exchange rate fluctuations as competitive pressures have,
from time to time, limited the Company's ability to promptly pass on the
increased costs to the ultimate consumer. The Company has considered various
strategies to manage currency risk, and it hedges the Canadian currency risk
when such hedging is considered economically appropriate.
Year 2000 Issue
State of Readiness
In 1997, the Company commenced efforts to address Year 2000 issues and
subsequently formalized an enterprise-wide effort to assess and mitigate or
eliminate the business risk associated with Year 2000 issues, focusing on:
- information technology (IT) computer hardware and software systems,
- internal process control equipment outside of the IT area used in the
refining or retail operations, and
- interfaces and support services from key suppliers, vendors and customers.
A Company-wide process is in place to inventory, assess, test, remediate and
develop contingency plans for addressing the Year 2000 issues described above.
The process is ongoing and is periodically reassessed as new information becomes
known, and the process is revised accordingly. The Company has also engaged
outside consultants to assist in addressing its Year 2000 issues.
The Company's Northeast IT systems are not Year 2000 compliant. As a result, the
Company is implementing a new stand-alone enterprise-wide IT system which will
bring the Northeast into compliance by the third quarter of 1999. This new
enterprise-wide IT system will also be implemented in the US operations during
the fourth quarter of 1999 because it offers superior technological enhancements
and operating efficiencies not available in the existing US IT system. The cost
of the new enterprise-wide IT system for the Northeast and US is expected to be
approximately $48.0 million, with most of the costs being capitalized. As of
March 31, 1999, the Company has incurred $13.2 million of costs related to the
new IT system.
The Company believes it has identified most of the significant exposure items
associated with internal process control equipment used at the refineries and
throughout the retail operations, and has implemented a plan to bring such
equipment into Year 2000 compliance. The Company has also corresponded with its
key suppliers, vendors and customers and has developed a plan to mitigate
potential exposure areas. The estimated cost to be incurred for the verification
and testing of the systems implemented in 1995 and the non-IT and third-party
corrective action plans range from $28.2 million to $44.0 million, with most of
the costs being capitalized. The actual costs incurred will depend on the
alternative chosen for each corrective action. Management anticipates that all
corrective actions will be completed by December 31, 1999 to ensure minimal
disruption to operations as the new millennium begins.
Risks
Certain Year 2000 risk factors which could have a material adverse effect on the
Company's results of operations, liquidity, and financial condition include, but
are not limited to, failure to identify critical systems which could experience
failures, errors in efforts to correct problems, unexpected or extended failures
by key suppliers, vendors and customers, and failures in global banking systems
and commodity exchanges.
As a matter of operating policy, the Company routinely analyzes production and
automation systems for potential failures, such as interruptions in the supply
of raw materials or utilities. It is not anticipated that a problem in these
areas will have a significant impact on the Company's ability to continue normal
business activities. In addition, it is not expected that these failures would
impact safety or the environment nor have a material impact on production or
sales. Any problems in these systems can be dealt with using existing operating
procedures.
The worst case scenario would be that the Company's failure or the failure of
key suppliers, vendors and customers to correct material Year 2000 issues could
result in serious disruptions in normal business activities and operations. Such
disruptions could prevent the Company from refining crude oil and delivering
refined products to customers. While the Company does not expect a worst case
scenario, if it were to occur and could not be corrected on a timely basis or
otherwise mitigated by contingency plans, it could have a material adverse
impact on the Company's results of operations, liquidity and financial position.
Contingency Plans
Based on the current assessments and analysis of the Company's Year 2000
readiness and that of key suppliers, vendors and customers, Year 2000 specific
contingency plans are being developed for critical business operations. The
Company's US IT systems were initially assessed as being fundamentally Year 2000
compliant resulting from the 1995 implementation of a new IT system and the
migration in early 1998 of Total's operations to such new system at a cost of
$4.3 million. As a result of recent declarations by the vendor who developed the
system implemented in 1995, the Company has decided, as a part of its
contingency planning, to verify and test certain aspects of these systems during
1999 to mitigate as much as possible any material adverse impact which may arise
from possible Year 2000 issues. Those systems would only be used in the new
millenium as a contingency in the event the new enterprise-wide IT systems are
not yet operating.
For the remainder of 1999, the Year 2000 contingency plans will be adjusted or
new plans developed as circumstances warrant. The Company's current and planned
activities with respect to the Year 2000 issue are expected to significantly
reduce the Company's level of uncertainty about the magnitude of the risk posed
by the Year 2000 issue and, in particular, about the Year 2000 compliance and
readiness of its key suppliers, vendors, and customers. The Company believes
that, with the implementation of new IT systems and completion of the planned
activities as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
See "Certain Forward-Looking Statements."
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 expressions, as they relate to the Company or its subsidiaries or
management, identify forward-looking statements. Such statements reflect the
current views of management with respect to future events and are subject to
certain risks, uncertainties and assumptions relating to the operations and
results of operations, including as a result of competitive factors and pricing
pressures, shifts in market demand and general economic conditions and other
factors.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes in interest
rates, foreign currency rates and commodity prices related to crude oil, refined
products and natural gas. To manage or reduce these market risks, the Company
uses interest rate swaps, foreign exchange contracts, and commodity futures and
price swap contracts. The Company's policy governing the use of derivatives
requires that every derivative relate to an underlying, offsetting position,
anticipated transaction or firm commitment and prohibits the use of highly
complex or leveraged derivatives. Beginning in 1999, the Company revised its
feedstock procurement program to allow for limited discretionary hedging
activities based on expectations of future market conditions. A summary of the
Company's primary market risk exposures and its use of derivative financial
instruments is presented below.
Interest Rate Risk
The Company is subject to interest rate risk on its long-term fixed interest
rate debt. Commercial paper borrowings and borrowings under revolving credit
facilities do not give rise to significant interest rate risk because these
borrowings have maturities of less than three months. The carrying amount of the
Company's floating interest rate debt approximates fair value. Generally, the
fair market value of debt with a fixed interest rate will increase as interest
rates fall, and the fair market value will decrease as interest rates rise. This
exposure to interest rate risk is managed by obtaining debt that has a floating
interest rate or using interest rate swaps to change fixed interest rate debt to
floating interest rate debt. Generally, the Company maintains floating interest
rate debt of between 35% and 45% of total debt. Interest rates have remained
relatively stable over the past year and the Company anticipates such rates to
remain relatively stable over the next year.
The following table provides information about the Company's long-term debt and
interest rate swaps, both of which are sensitive to changes in interest rates.
For long-term debt, principal cash flows and related weighted average interest
rates by expected maturity dates, after consideration of refinancing, are
presented. For interest rate swaps, the table presents notional amounts and
weighted average interest rates by expected (contractual) maturity dates.
Notional amounts are used to calculate the contractual payments to be exchanged
under the contract. Weighted average floating rates are based on implied forward
rates in the yield curve at March 31, 1999.
Expected Maturity - Year Ending December 31,
-------------------------------------------------------------------
Fair Value
1999 2000 2001 2002 2003 Thereafter Total March 31,1999
---- ---- ---- ---- ---- ---------- ----- -------------
(in millions)
Long-term Debt:
Fixed rate.................. $ 3.6 $14.7 $86.5 $492.2 $35.0 $914.1 $1,546.1 $1,572.8
Average interest rate...... 8.6% 9.3% 9.6% 8.8% 8.9% 7.6% 8.1% N/A
Floating rate............... $ - $ - $ - $220.9 $ - $ - $ 220.9 $ 220.9
Average interest rate...... -% -% -% 5.1% -% -% 5.1% N/A
Interest Rate Swaps:
Fixed to floating........... $ - $ - $ - $200.0 $ - $250.0 $ 450.0 $ 450.0
Average pay rate........... 4.88% 5.23% 5.57% 5.79% 5.85% 6.32% 5.90% N/A
Average receive rate....... 6.43% 6.43% 6.43% 6.43% 6.59% 6.85% 6.66% N/A
Foreign Currency Risk
The Company periodically enters into short-term foreign exchange contracts to
manage its exposure to exchange rate fluctuations on the trade payables of its
Canadian operations that are denominated in U.S. dollars. These contracts
involve the exchange of Canadian and U.S. currency at future dates. Gains and
losses on these contracts generally offset losses and gains on the U.S. dollar
denominated trade payables. At March 31, 1999, the Company had short-term
foreign exchange contracts totaling $16.7 million. The Company's exposure to
market risk is minimal on these contracts as they matured on April 1, 1999.
The Company generally does not hedge for the effects of foreign exchange rate
fluctuations on the translation of its foreign results of operations or
financial position.
Commodity Price Risk
The Company is subject to the market risk associated with changes in market
prices of its underlying crude oil, refined products and natural gas; however,
such changes in values are generally offset by changes in the sales price of the
Company's refined products. Price swaps are price hedges for which gains and
losses are recognized when the hedged transactions occur; however, losses are
recognized when future prices are not expected to recover.
As of March 31, 1999, the Company had outstanding commodity futures and price
swap contracts to buy $586.0 million and sell $374.6 million of crude oil and
refined products or to settle differences between a fixed price and market price
on aggregate notional quantities of 6.4 million barrels of crude oil and refined
products which mature on various dates through June 2002. The fair value of
commodity futures contracts is based on quoted market prices. The fair value of
price swap contracts is determined by comparing the contract price with current
published quotes for futures contracts corresponding to the period that the
anticipated transactions are expected to occur.
The information below reflects the Company's price swaps and futures contracts
that are sensitive to changes in crude oil or refined product commodity prices.
The table presents the notional amounts in barrels for crude oil, the weighted
average contract prices and the total contract amount by expected maturity
dates. Contract amounts are used to calculate the contractual payments and
quantity of barrels of crude oil to be exchanged under the futures contract.
Weighted
Fair Contract Average
Carrying Value Contract Volumes Price
Year Ending December 31, Amount Amount Amount In Barrels Per Barrel
-------- ------ -------- ---------- ----------
(in millions, except weighted average price)
Crude Procurement:
Futures contracts - buy:
1999............................................ $11.5 $16.9 $189.5 12.0 $15.80
2000............................................ 4.0 4.0 54.7 3.4 15.85
Futures contracts - sell:
1999............................................ (18.4) (43.0) 296.9 18.1 16.42
Price swaps:
2002............................................ (9.1) (13.4) 140.0 6.4 22.00
Discretionary:
Futures contracts - buy:
1999............................................ 35.5 35.5 201.9 12.5 16.18
Futures contracts - sell:
1999............................................ (17.3) (17.3) 77.7 4.9 15.75
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 4. Submission Of Matters To A Vote Of Security Holders
The Company's 1999 Annual Meeting of Stockholders was held on May 4, 1999 in San
Antonio, Texas. At the meeting, the Company's stockholders elected four
directors to serve three-year terms expiring in 2002, and ratified the
appointment of Arthur Andersen LLP to serve as independent accountants for the
Company and its subsidiaries for 1999.
The following tables summarize the number of votes cast for, against or
withheld, and number of abstentions as to each matter:
Election of Directors
Name Total Votes For Total Votes Withheld
H. Frederick Christie 77,119,910 275,158
W.H. Clark 77,115,798 279,270
Jean R. Gaulin 77,115,014 280,054
Bob Marbut 77,124,873 270,195
Ratification of Arthur Andersen LLP as Independent Accountants
For Against Abstain
77,145,166 57,336 192,566
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Performance Support Agreement dated March 29, 1999 among the Company,
Asset Securitization Cooperative Corporation (ASCC), and Canadian
Imperial Bank of Commerce (CIBC).
10.2 Credit Card Receivables Purchase Agreement dated March 29, 1999 among
Coyote funding, L.L.C. (Coyote), Diamond Shamrock Refining and
Marketing Company (DSRMC), ASCC and CIBC.
10.3 Trade Receivables Purchase Agreement dated March 29, 1999 among
Coyote, DSRMC, ASCC and CIBC.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: /s/ H. Pete Smith
H. PETE SMITH
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
May 13, 1999