UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-13514
CLARK USA, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1495734
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8182 Maryland Avenue 63105-3721
St. Louis, Missouri (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (314) 854-9696
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
(*) No ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of November 6, 1998.
Class Shares Outstanding
Common Stock 13,767,829
Class F Common Stock 6,101,010
1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Clark USA, Inc.:
We have reviewed the accompanying consolidated balance sheet of Clark
USA, Inc. and Subsidiaries (the "Company") as of September 30, 1998, and
the related consolidated statements of earnings for the three and nine
month periods then ended, and the consolidated statement of cash flows
for the nine month period then ended. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be
in conformity with generally accepted accounting principles.
The consolidated financial statements of the Company for the three and
nine months ended September 30, 1997 were reviewed by other accountants
whose report dated October 17, 1997, except for Note 8 which was as of
November 3, 1997, expressed that they were not aware of any material
modifications that should be made to those financial statements in order
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of the Company as of
December 31, 1997, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 6, 1998, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Deloitte & Touche LLP
St. Louis, Missouri
November 3, 1998
2
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
September 30,
Reference December 31, 1998
Note 1997 (unaudited)
--------- ------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 236.1 $ 159.5
Short-term investments 14.9 14.9
Accounts receivable 93.8 232.0
Inventories 3 261.5 422.9
Prepaid expenses and other 21.1 18.7
------------ -------------
Total current assets 627.4 848.0
PROPERTY, PLANT AND EQUIPMENT 2 578.0 767.7
OTHER ASSETS 4, 8 70.2 64.5
------------ -------------
$1,275.6 $1,680.2
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 219.1 $ 343.0
Accrued expenses and other 5 72.9 77.3
Accrued taxes other than income 52.1 40.5
Total current liabilities 344.1 460.8
LONG-TERM DEBT 765.9 981.4
OTHER LONG-TERM LIABILITIES 62.4 60.9
CONTINGENCIES 9 -- --
EXCHANGEABLE PREFERRED STOCK
($.01 par value per share; 5,000,000 shares
authorized; 70,454 shares issued) 64.8 70.5
COMMON STOCKHOLDERS' EQUITY:
Common stock 7
Common, $.01 par value, 14,759,782
issued at 12/31/97, 13,767,829
issued at 9/30/98 0.1 0.1
Class F Common, $.01 par value,
6,000,000 issued at 12/31/97,
6,101,010 issued at 9/30/98 0.1 0.1
Paid-in capital 230.0 209.0
Advance crude oil purchase receivable from
stockholder 7 (26.5) --
Retained earnings (deficit) (165.3) (102.6)
------------ -------------
Total common stockholders' equity 38.4 106.6
------------ -------------
$1,275.6 $1,680.2
============ =============
The accompanying notes are an integral part of these statements.
3
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions)
For the three months
ended September 30,
-----------------------
Reference 1997 1998
Note (unaudited) (unaudited)
--------- ----------- -----------
NET SALES AND OPERATING REVENUES $ 1,124.1 $ 1,141.5
EXPENSES:
Cost of sales (916.1) (951.1)
Operating expenses (108.0) (121.2)
General and administrative expenses (18.8) (18.7)
Depreciation (11.0) (10.8)
Amortization 4 (5.5) (6.9)
Recovery of inventory write-down to market 3 -- 20.5
----------- -----------
(1,059.4) (1,088.2)
GAIN ON SALE OF PIPELINE INTERESTS 8 -- 69.3
----------- -----------
OPERATING INCOME 64.7 122.6
Interest and finance costs, net 4, 5 (19.7) (18.4)
----------- -----------
EARNINGS BEFORE INCOME TAXES 45.0 104.2
Income tax provision 6 (0.5) --
----------- -----------
NET EARNINGS BEFORE DIVIDENDS 44.5 104.2
Preferred stock dividends -- (2.0)
----------- -----------
NET EARNINGS AVAILABLE TO COMMON STOCK $ 44.5 $ 102.2
=========== ===========
The accompanying notes are an integral part of these statements.
4
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions)
For the nine months
ended September 30,
-----------------------
Reference 1997 1998
Note (unaudited) (unaudited)
--------- ----------- -----------
NET SALES AND OPERATING REVENUES $ 3,297.2 $ 2,943.7
EXPENSES:
Cost of sales (2,789.4) (2,434.2)
Operating expenses (320.1) (340.2)
General and administrative expenses (48.0) (55.9)
Depreciation (30.3) (30.5)
Amortization 4 (14.1) (18.7)
Inventory write-down to market 3 -- (10.4)
----------- -----------
(3,201.9) (2,889.9)
GAIN ON SALE OF PIPELINE INTERESTS 8 -- 69.3
----------- -----------
OPERATING INCOME 95.3 123.1
Interest and finance costs, net 4, 5 (58.4) (50.2)
----------- -----------
EARNINGS BEFORE INCOME TAXES 36.9 72.9
Income tax provision 6 (7.5) (0.2)
----------- -----------
NET EARNINGS BEFORE DIVIDENDS 29.4 72.7
Preferred stock dividends -- (5.7)
----------- -----------
NET EARNINGS AVAILABLE TO COMMON STOCK $ 29.4 $ 67.0
=========== ===========
The accompanying notes are an integral part of these statements.
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
For the nine months
ended September 30,
-----------------------
1997 1998
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 29.4 $ 72.7
Adjustments:
Depreciation 30.3 30.5
Amortization 22.1 20.7
Accretion of Zero Coupon Notes 15.8 0.1
Share of earnings of affiliates, net of dividends (0.1) 0.4
Gain on sale of pipeline interests -- (69.3)
Inventory write-down to market -- 10.4
Other 0.7 0.1
Cash reinvested in working capital -
Accounts receivable, prepaid expenses and other 60.3 (136.4)
Inventories (57.8) (170.9)
Accounts payable, accrued expenses,
taxes other than income and other (68.5) 119.6
----------- -----------
Net cash provided by (used in)
operating activities 32.2 (122.1)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments 0.1 --
Expenditures for property, plant and equipment (55.7) (63.0)
Expenditures for turnaround (31.2) (13.8)
Refinery acquisition expenditures -- (177.7)
Proceeds from disposals of property, plant and equipment 3.7 16.2
Proceeds from sale of pipeline interests -- 76.4
----------- -----------
Net cash used in investing activities (83.1) (161.9)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (2.3) (9.5)
Proceeds from issuance of long-term debt -- 224.7
Proceeds from sale of common stock -- 0.2
Deferred financing costs (3.7) (8.0)
----------- -----------
Net cash provided by (used in)
financing activities (6.0) 207.4
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (56.9) (76.6)
CASH AND CASH EQUIVALENTS, beginning of period 339.9 236.1
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 283.0 $ 159.5
=========== ===========
The accompanying notes are an integral part of these statements.
6
FORM 10-Q - PART I
ITEM 1 - Financial Statements (continued)
Clark USA, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1998
(tabular dollar amounts in millions of US dollars)
1. Basis of Preparation
The unaudited consolidated balance sheet of Clark USA, Inc. and
Subsidiaries (the "Company") as of September 30, 1998, and the related
consolidated statements of earnings and of cash flows for the three
month and nine month periods ended September 30, 1997 and 1998, have
been reviewed by independent accountants. Clark Refining & Marketing,
Inc. ("Clark"), a subsidiary of the Company, makes up the majority of
the consolidated financial information. In the opinion of the
management of the Company, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the
financial statements have been included therein. The results of this
interim period are not necessarily indicative of results for the entire
year.
The financial statements have been prepared in accordance with the
instructions to Form 10-Q. Accordingly, certain information and
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. These unaudited financial statements should be
read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1997.
The Company's earnings and cash flow from operations are primarily
dependent upon processing crude oil and selling quantities of refined
petroleum products at margins sufficient to cover operating expenses.
Crude oil and refined petroleum products are commodities, and factors
largely out of the Company's control can cause prices to vary, in a wide
range, over a short period of time. This potential margin volatility
can have a material effect on financial position, current period
earnings and cash flow.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, effective January 1,
1998, with no effect on the Company's financial statements for the three
month and nine month periods ended September 30, 1997 and 1998.
2. Lima Refinery Acquisition
On August 10, 1998 the Company's principal subsidiary, Clark
Refining & Marketing, Inc. ("Clark") acquired British Petroleum's
("BP") 170,000 barrel per day refinery and related terminal facilities
located in Lima, Ohio (the "Lima Acquisition") for $175 million plus
inventory of approximately $60 million. Clark funded the Lima
Acquisition and related costs with cash on hand and the proceeds of a
private placement to institutional investors of $110 million 8 5/8%
Senior Notes due 2008 and a $115 million floating rate term loan due
2004 issued at LIBOR plus 275 basis points.
In connection with the financing of the Lima Acquisition, the
Company received consents from the holders of its 10 7/8% Senior Notes
and its 11 1/2% Cumulative Exchangeable Preferred Stock to permit Clark
to increase the amount of its authorized working capital and letter of
credit facility to the greater of $700 million or the amount available
under a defined borrowing base, and to allow the incurrence of up to
$250 million of additional indebtedness to fund the Lima Acquisition.
7
Also in connection with the Lima Acquisition, the Company amended
its working capital and letter of credit facility facility on August 10,
1998 to increase the facility to the lesser of $700 million or the
amount of the borrowing base calculated with respect to the Company's
cash, short-term investments, eligible receivables and hydrocarbon
inventories, provided that direct borrowings are limited to the
principal amount of $150 million. Borrowings under the credit agreement
are secured by a lien on substantially all of the Company's cash and
cash equivalents, receivables, crude oil and refined product inventories
and trademarks. The amount available under the borrowing base
associated with such facility at September 30, 1998 was $565 million and
approximately $252 million of the facility was utilized for letters of
credit. As of September 30, 1998, there were no direct borrowings under
the Credit Agreement.
3. Inventories
The carrying value of inventories consisted of the following:
December 31, September 30,
1997 1998
------------ -------------
Crude oil $ 86.2 $ 190.9
Refined and blendstocks 156.6 218.4
LIFO inventory value excess over market (19.2) (29.6)
Convenience products 22.4 18.9
Warehouse stock and other 15.5 24.3
------------ -------------
$ 261.5 $ 422.9
============ =============
The Company recorded a $20.5 million (1997-nil) recovery of a
previous write-down of inventory carrying value to market for the three
month period ended September 30, 1998. For the nine months ended
September 30, 1998, the Company recorded a net write-down of inventory
carrying value to market of $10.4 million (1997 - nil).
4. Other Assets
Amortization of deferred financing costs for the three and nine month
periods ended September 30, 1998 was $0.5 million (1997 - $2.7 million)
and $1.6 million (1997 - $8.0 million), respectively, and was included
in "Interest and finance costs, net".
Amortization of refinery maintenance turnaround costs for the three
and nine month periods ended September 30, 1998 was $6.9 million (1997 -
$5.5 million) and $18.7 million (1997 - $14.1 million), respectively.
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
For the three months For the nine months
ended September 30, ended September 30,
--------------------- --------------------
1997 1998 1997 1998
---------- ---------- --------- ----------
Interest expense $ 21.0 $ 20.8 $ 62.3 $ 57.4
Financing costs 2.8 0.7 8.1 1.8
Interest and finance income (3.7) (2.4) (11.0) (7.3)
---------- ---------- --------- ----------
20.1 19.1 59.4 51.9
Capitalized interest (0.4) (0.7) (1.0) (1.7)
---------- ---------- --------- ----------
Interest and finance costs, net $ 19.7 $ 18.4 $ 58.4 $ 50.2
========== ========== ========= ==========
8
Cash paid for interest expense for the three and nine month periods
ended September 30, 1998 was $12.0 million (1997 - $9.2 million) and was
$48.2 million (1997 - $40.1 million), respectively. Accrued interest
payable as of September 30, 1998 of $19.3 million (December 31, 1997 -
$10.3 million) was included in "Accrued expenses and other".
6. Income Taxes
The Company made net cash tax payments for the three months ended
September 30, 1998 of $0.1 million (1997 - $0.5 million) and received
net cash tax refunds totaling $4.3 million for the nine month period
ended September 30, 1998 (1997 - net cash tax payments of $1.4 million).
7. Gulf Settlement
In March 1998, the Company settled the obligations outstanding
between the Company and Gulf Resources Corporation ("Gulf"). The
Company paid Gulf $4.0 million, released 213,654 escrowed shares of
Common Stock to Gulf, and released Gulf from its obligation to deliver
certain amounts of crude oil through 2001. In exchange, Gulf agreed to
release the Company from obligations to pay further commissions related
to the crude deliveries and agreed to allow the Company to cancel the
remaining 1,008,619 shares of its escrowed Common Stock.
8. Sale of Pipeline Interests
During the three month period ended September 30, 1998, the Company
sold its minority interests in Chicap Pipeline Company, Southcap
Pipeline Company, Westshore Pipeline Company and Wolverine Pipeline
Company for net proceeds of $76.4 million that resulted in an after-tax
book gain of $69.3 million.
9. Contingencies
Clark and the Company are subject to various legal proceedings
related to governmental regulations and other actions arising out of the
normal course of business, including legal proceedings related to
environmental matters. While it is not possible at this time to
establish the ultimate amount of liability with respect to such
contingent liabilities, Clark and the Company are of the opinion that
the aggregate amount of any such liabilities, for which provision has
not been made, will not have a material adverse effect on their
financial position, however, an adverse outcome of any one or more of
these matters could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future period.
10. Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
This statement establishes new standards for reporting information about
operating segments in annual financial statements and requires selected
operating segment information to be reported in interim financial
reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and
major customers. This statement becomes effective for the Company's
financial statements beginning with the year ending December 31, 1998 at
which time restatement of prior period segment information presented for
comparative purposes is required. Interim period information is not
required until the second year of application, at which time comparative
information is required.
9
In June 1998, the FASB adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement becomes effective
for all fiscal quarters of all fiscal years beginning after June 15,
1999. The Company is currently evaluating this new standard, the impact
it may have on the Company's accounting and reporting, and planning for
when to adopt the standard.
10
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Clark USA, Inc. (the "Company") owns all of the outstanding capital
stock of Clark Refining & Marketing, Inc. ("Clark"). The Company also
owns all of the outstanding capital stock of Clark Pipe Line Company.
Because Clark is the principal subsidiary of the Company, a discussion
of the Company's results of operations consists principally of a
discussion of Clark's results of operations.
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three and nine month periods ended September 30, 1997
and 1998. All dollar amounts listed are in millions. The tables
provide supplementary data and are not intended to represent an income
statement presented in accordance with generally accepted accounting
principles.
Financial Results:
For the three months For the nine months
ended September 30, ended September 30,
--------------------- --------------------
1997 1998 1997 1998
---------- ---------- --------- ----------
Operating Income:
Refining contribution to operating
income $ 72.4 $ 21.4 $ 159.4 $ 112.1
Retail contribution to operating
income 7.5 11.6 17.6 19.4
Corporate general and administrative
expenses (5.1) (4.9) (12.6) (16.0)
---------- ---------- --------- ----------
Operating Contribution 74.8 28.1 164.4 115.5
Inventory timing adjustment gain
(loss) (a) 6.4 22.4 (24.7) (2.1)
Inventory recovery (write-down) to
market -- 20.5 -- (10.4)
Gain on sale of pipeline interests -- 69.3 -- 69.3
Depreciation and amortization (16.5) (17.7) (44.4) (49.2)
---------- ---------- --------- ----------
Operating income $ 64.7 $ 122.6 $ 95.3 $ 123.1
========== ========== ========= ==========
(a) Includes adjustments to inventory costs caused by timing
differences between when crude oil is actually purchased and refined
products are actually sold, and a daily "market in, market out"
operations measurement methodology for the refining division.
The Company recorded net earnings of $102.2 million for the three
months ended September 30, 1998 which compared to net earnings of $44.5
million in the third quarter of 1997. Net earnings this quarter
included a $69.3 million after-tax gain on the sale of minority pipeline
interests and $42.9 million of inventory-related gains. Operating
Contribution (earnings before interest, depreciation, amortization,
inventory-related items, and the gain on the sale of the minority
pipeline interests) of $28.1 million for the third quarter of 1998 was
below the record $74.8 million achieved in the third quarter of 1997
principally due to industry refining margins being much weaker this
year. For the nine months ended September 30, 1998, net earnings were
$67.0 million compared to $29.4 million in the first nine months of
1997. Operating Contribution for the nine months ended September 30,
1998 was $115.5 million compared to $164.4 million for the same period
of 1997.
An increase in petroleum prices of approximately $2 per barrel in the
third quarter of 1998 resulted in inventory-related gains of $42.9
million in operating income, of which $20.5 million was a non-realized
recovery of a previous write-down of inventory carrying costs to current
market value. Petroleum prices as of September 30, 1998 were still over
$1 per barrel below 1997 year-end prices and as a result inventory-
related losses in operating income for the first nine months of 1998
were $12.5 million, of which $10.4 million was a non-realized inventory-
accounting charge. If future petroleum prices decrease, the Company
believes it may result in further inventory-related charges, while if
they increase, the Company may record further inventory-related gains.
11
Net sales and operating revenues increased approximately 2% in the
three months ended September 30, 1998 as compared to the same period of
1997. This was due to increased sales volumes resulting from the
acquisition of the Lima refinery on August 10, 1998. The increased
volume offset the impact of lower worldwide petroleum prices in the
current year which reduced both sales and cost of goods sold and
resulted in sales and operating revenues for the nine months ended
September 30, 1998 that were approximately 12% below 1997 levels.
Refining
Refining Division Operating Statistics:
(dollars in millions, except per barrel data)
For the three months For the nine months
ended September 30, ended September 30,
--------------------- --------------------
1997 1998 1997 1998
---------- ---------- --------- ----------
Port Arthur Refinery
Crude oil throughput (m bbls/day) 218.3 223.6 201.3 226.3
Production (m bbls/day) 228.2 219.9 208.3 226.7
Gross margin ($/barrel of production) $ 4.40 $ 3.12 $ 4.14 $ 3.71
Gulf Coast 3/2/1 crack spread ($/barrel)4.19 1.99 3.53 2.63
Operating expenses (43.4) (44.9) (127.1) (132.9)
Net margin $ 49.0 $ 18.2 $ 108.7 $ 96.7
Midwest Refining and Other
Crude oil throughput (m bbls/day) 136.0 221.6 135.6 153.4
Production (m bbls/day) 141.6 216.0 141.4 152.7
Gross margin ($/barrel of production) $ 4.54 $ 2.74 $ 4.13 $ 3.44
Chicago 3/2/1 crack spread ($/barrel) 4.96 3.30 4.53 3.68
Operating expenses (29.3) (44.0) (92.6) (108.2)
Clark Pipe Line net margin 0.6 0.4 1.7 1.6
Net margin $ 30.4 $ 10.9 $ 68.3 $ 36.8
Divisional G & A expenses (7.0) (7.7) (17.6) (21.4)
---------- ---------- ---------- ----------
Refining contribution to operating
income $ 72.4 $ 21.4 $ 159.4 $ 112.1
========== ========== ========== ==========
Refining division contribution to operating income of $21.4 million
in the third quarter of 1998 was below year-ago levels of $72.4 million
principally due to lower industry refining margins. Similarly,
contribution to operating income of $112.1 million for the nine months
ended September 30, 1998 was also lower than the $159.4 million recorded
in the first nine months of 1997. Industry margin indicators for the
Gulf Coast and Chicago markets were down over 50% and 30%, respectively,
in the third quarter, and approximately 25% and 20%, respectively, for
the nine month period, as compared to the same periods of 1997. A
warmer-than-normal 1997-1998 winter and the Asian financial crisis
reduced world-wide demand, and when combined with high industry
inventory levels, resulted in ample supply and a squeeze on light
products margins. Prior year results benefited from unplanned downtime
in the U.S. and Europe.
Crude oil throughput, production and operating expenses in the
Company's Midwest refineries were higher in the third quarter and first
nine months of 1998 principally because of the addition of the Lima
refinery in mid-August. However, because of the weak margin
environment and the short period of operation, the Lima refinery only
provided a nominal contribution to net margin. Net margin at the
Company's Midwest refineries was reduced by approximately $10 million
in the first nine months of 1998 relative to 1997 principally due to
increased scheduled downtime. Conversely, the Port Arthur refinery
benefited in 1998 from less scheduled downtime than 1997 which improved
its net margin by approximately $14 million. This was principally due
to a large maintenance turnaround at the Port Arthur refinery in 1997
and maintenance turnarounds at the Blue Island refinery in 1998.
During the spring Blue Island refinery turnaround, improvements were
made to the refinery's vacuum unit that are designed to upgrade
approximately 2,000 barrels per day of asphalt-type material to diesel
fuel. Divisional general and administrative expenses increased
principally because of increased employee placement costs and the
timing of incentive compensation accruals.
12
Retail
Retail Division Operating Statistics:
(dollars in millions, except per gallon and per store data)
For the three months For the nine months
ended September 30, ended September 30,
--------------------- --------------------
1997 1998 1997 1998
---------- ---------- --------- ----------
Core Market Stores
Gasoline volume (mm gals.) 238.9 225.7 673.6 676.8
Gasoline gross margin (cents/gal) 10.5 13.2 10.3 11.3
Gasoline gross margin $ 25.1 $ 29.9 $ 69.5 $ 76.8
Convenience product sales 67.8 75.9 183.3 205.7
Convenience product margin and
other income 17.7 19.3 48.1 53.7
Operating expenses (30.3) (31.2) (85.4) (92.1)
Divisional G & A expenses (6.3) (5.6) (17.3) (17.1)
---------- ---------- --------- ----------
Core market store contribution $ 6.2 $ 12.4 $ 14.9 $ 21.3
Non-core stores, business
development and other 1.3 (0.8) 2.7 (1.9)
---------- ---------- --------- ----------
Retail contribution to operating
income $ 7.5 $ 11.6 $ 17.6 $ 19.4
========== ========== ========= ==========
Core Market Stores - Per Month Per Store
Company operated stores
(average) (a) 670 673 665 670
Gasoline volume (m gals.) 120.7 113.2 113.9 113.8
Convenience product sales
(thousands) $ 33.7 $ 37.7 $ 30.6 $ 34.1
Convenience product gross margin
(thousands) 8.8 9.6 8.0 8.9
(a) Nine stores were operated as convenience stores only.
Retail contribution to operating income from core market stores of
$12.4 million in the third quarter of 1998 was double that of the same
period in 1997 as earnings benefited from declining wholesale prices
early in the quarter and continued strong contribution from convenience
product sales. Total retail contribution was also improved and
resulted in the best quarterly retail contribution since 1995. During
the third quarter of 1998 the Company focused its fuel pricing strategy
on generating gross margins, albeit with some sacrifice of volume.
Non-core stores, business development and other contribution has
decreased versus 1997 since the Company has sold over 120 non-core
stores principally to Clark branded marketers in 1998. As of June 30,
1998, the Company's program to reposition its assets in non-core
markets was substantially complete.
Other Financial Highlights
Corporate general and administrative expenses increased in the third
quarter and first nine months of 1998 over the comparable periods in
1997 principally because of increased consulting services and increased
information services costs related to year 2000 remediation and
upgrades.
The Company operates many computer programs that use only two digits
to identify a year. If these programs are not modified or replaced by
the year 2000, such applications and embedded systems could fail or
create erroneous results. Some applications and embedded systems have
already been replaced or modified. The Company has hired outside
consultants to assist it in evaluating the scope of the remaining
required program conversions or replacements. The Company has expended
$0.8 million through September 30, 1998 and estimates the cost of such
remaining program conversions or replacements to be approximately $5
million to $10 million, and estimates completion by June 30, 1999. Such
costs will be expensed as incurred and funded from operations. The
Company reviews the progress of its year 2000 program weekly and if it
is determined that any item is falling behind schedule the Company has,
or will, identify an alternative remediation or replacement approach.
13
In addition, the Company is communicating, and evaluating the systems
of its customers, suppliers, financial institutions and other with which
it does business to identify any year 2000 issues. Presently, the
Company does not anticipate that the year 2000 problem will have a
material adverse effect on the operations or financial performance of
the Company. There can be no assurance, however, that the year 2000
problem will not adversely affect the Company and its business.
Likewise, there can be no assurance that the Company's customers,
suppliers, financial institutions, and others will be year 2000
compliant.
Interest and finance costs, net for the three and nine months ended
September 30, 1998 decreased over the comparable periods in 1997
principally because of reduced borrowing rates and reduced deferred
financing cost amortization resulting from the Company's financing
activities in late 1997. On August 10, 1998, the Company issued $110
million of 8 5/8% Senior Notes and increased borrowings by $115 million
under a floating rate term loan at LIBOR plus 275 basis points to fund
the acquisition of the Lima refinery.
Depreciation and amortization expense increased in the three and nine
months ended September 30, 1998 over the comparable periods in 1997
principally because of higher amortization related to maintenance
turnarounds performed in 1997 and 1998.
Liquidity and Capital Resources
Net cash provided by operating activities, excluding working capital
changes, for the nine months ended September 30, 1998 was $65.6 million
compared to $98.2 million in the year-earlier period. Working capital
as of September 30, 1998 was $387.2 million, a 1.84-to-1 current ratio,
versus $283.3 million as of December 31, 1997, a 1.82-to-1 current
ratio. Total working capital increased in the first nine months of 1998
principally due to cash generated from the sale of the minority pipeline
interests and the acquisition of the Lima refinery's working capital,
which was financed principally with long-term debt. However, the
Company believes its cash balance was below what it considered a
normalized level at quarter-end. This was due to a investment of over
$50 million in non-cash working capital due to temporary operational
changes, and transitional issues related to the Lima refinery
acquisition.
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil and refined
petroleum products. Clark has in place a credit agreement (the "Credit
Agreement") which provides for borrowings and the issuance of letters of
credit. In connection with the acquisition of the Lima refinery, the
Credit Agreement was amended on August 10, 1998 to increase the facility
to the lesser of $700 million or the amount of the borrowing base
calculated with respect to Clark's cash, short-term investments,
eligible receivables and hydrocarbon inventories, provided that direct
borrowings are limited to the principal amount of $150 million.
Borrowings under the Credit Agreement are secured by a lien on
substantially all of the Company's cash and cash equivalents,
receivables, crude oil and refined product inventories and trademarks.
The amount available under the borrowing base associated with such
facility at September 30, 1998 was $565 million and approximately $252
million of the facility was utilized for letters of credit. As of
September 30, 1998, there were no direct borrowings under the Credit
Agreement.
On August 10, 1998, the Company acquired British Petroleum's ("BP")
170,000 barrel per day refinery and related terminals located in Lima,
Ohio for $175 million plus inventory of approximately $60 million. From
1991 to 1997 the Company believes BP invested an aggregate of
approximately $212 million in the Lima refinery. Based on the Company's
due diligence, it expects mandatory capital expenditures for the Lima
refinery to average approximately $20 million per year for the period
from 1999 to 2002 and turnaround expenditures to cost approximately $30
million once every five years. The Lima Refinery is scheduled to have
the first such major maintenance turnaround in 1999. The Company
expects cash flows from the Lima Refinery to be adequate to cover
incremental financing and mandatory capital and turnaround costs.
14
In 1997, the Company determined that its minority interests in
Westshore Pipeline Company, Wolverine Pipeline Company, Chicap Pipeline
Company and Southcap Pipeline Company were not strategic since the
Company's shipping rights were assured due to the pipelines' operation
as common carrier pipelines and the Company's historical throughput on
such pipelines. During the third quarter of 1998, the Company sold its
interests in these pipelines for net proceeds of $76.4 million. The
above referenced pipelines contributed approximately $8 million of
dividends to Clark for the year ended December 31, 1997.
Cash flows used in investing activities in the first nine months of
1998 were $161.9 million as compared to $83.1 million in the year-
earlier period. Cash flows used in investing activities in 1998 were
reduced by proceeds of $76.4 million from the sale of the minority
pipeline interests and $16.2 million from the sale of certain non-core
retail stores. The higher net investing activities in 1998 resulted
principally from the acquisition of the Lima refinery. Refinery
expenditures for property, plant and equipment totaled $42.6 million in
the first nine months of 1998 (1997 - $17.6 million) principally related
to (i) a project to upgrade the Port Arthur refinery to allow it to
process up to 80% heavy, sour crude, (ii) a project to increase the
throughput of Canadian heavy, sour crude oil at the Hartford refinery,
(iii) a project to upgrade vacuum tower bottoms at the Blue Island
refinery and (iv) various mandatory expenditures at the Port Arthur
refinery. Retail expenditures for property, plant and equipment for the
first nine months of 1997 included $21.0 million for the acquisition and
subsequent image conversion of 48 retail stores in Michigan. In 1998,
retail expenditures totaled $16.9 million versus $15.4 million,
excluding the Michigan acquisition, in 1997 and were principally for
underground storage tank-related work. As of September 30, 1998, the
Company's was substantially complete with its program, which will still
require some on-going expenditures, to comply with the EPA's pending
December 1998 underground storage tank regulations. Turnaround
expenditures in the first nine months of 1998 related to Blue Island
refinery turnarounds and to a Port Arthur refinery turnaround scheduled
for early 1999, while 1997 turnaround expenditures were principally
related to the Port Arthur refinery.
In March 1998, the Company announced that it had entered into a
long-term crude oil supply agreement with P.M.I. Comercio
Internacional, S.A. de C.V., an affiliate of Petroleos Mexicanos, the
Mexican state oil company. The contract provided the Company with the
foundation necessary to continue developing a project to upgrade its
Port Arthur, Texas refinery to process primarily lower-cost, heavy sour
crude oil. The project is expected to cost $600-$700 million and
include the construction of additional coking and hydrocracking
capability, and the expansion of crude unit capacity to approximately
250,000 barrels per day. The Company has begun entering into purchase
orders, some of which contain cancellation penalties and provisions,
for material, equipment and services related to this project. As of
September 30, 1998, non-cancelable amounts of approximately $30 million
had accumulated under these purchase orders. Additional purchase
orders and commitments are expected to be made during the rest of 1998
and into 1999. The Company plans to initially fund expenditures
related to this project with existing liquidity, but expects to seek
additional debt or equity financing in 1999.
Cash flows provided by financing activities for first nine months of
1998 increased as compared to the same period in 1997 principally
because of the financing of the acquisition of the Lima refinery. The
Company funded the acquisition of the Lima refinery and related costs
with cash on hand and the proceeds of a private placement to
institutional investors of $110 million 8 5/8% Senior Notes due 2008 and
a $115 million floating rate term loan due 2004.
Funds generated from operating activities together with the Company's
existing cash, cash equivalents and short-term investments are expected
to be adequate to fund requirements for working capital and capital
expenditure programs for the next year, excluding the Port Arthur heavy
sour crude oil upgrade project which the Company expects to finance in
the first half of 1999. Future working capital investments,
discretionary or non-discretionary capital expenditures, or acquisitions
may require additional debt or equity financing.
15
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
August 24, 1998, Item 2 Acquisition of Assets and Item 7
Financial Statements, Pro Forma Information and Exhibits -
Acquisition and financing of British Petroleum's Lima, Ohio
refinery and related agreements.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CLARK USA, INC.
(Registrant)
/s/ Dennis R. Eichholz
------------------------
Dennis R. Eichholz
Controller and Treasurer (Authorized
Officer and Chief Accounting Officer)
November 13, 1998