UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 (x) No ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of May 14, 1999, 19,934,495, all of which were owned by
Clark Refining Holdings, Inc.
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 March 31, 1999, and the
related consolidated statements of operations and cash flows for the
three month periods ended March 31, 1998 and 1999. 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.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of the Company as of
December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 6, 1999, 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, 1998 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
May 14, 1999
2
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
Reference December 31, March 31,
Note 1998 1999
---------- ------------ ----------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 148.2 $ 104.3
Short-term investments 4.5 4.8
Accounts receivable 131.3 142.8
Inventories 3 267.7 277.3
Prepaid expenses and other 28.7 27.6
Net assets held for sale 7 140.3 140.6
------------ ----------
Total current assets 720.7 697.4
PROPERTY, PLANT AND EQUIPMENT, NET 628.8 660.7
OTHER ASSETS 4,5 97.6 116.8
------------ ----------
$ 1,447.1 $ 1,474.9
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 250.3 $ 237.1
Accrued expenses and other 5 66.8 75.7
Accrued taxes other than income 25.9 26.9
------------ ----------
Total current liabilities 343.0 339.7
LONG-TERM DEBT 980.2 979.4
OTHER LONG-TERM LIABILITIES 49.2 49.6
COMMITMENTS AND CONTINGENCIES 8 -- --
EXCHANGEABLE PREFERRED STOCK
($.01 par value per share;
5,000,000 shares authorized;
74,504 shares issued) 72.5 74.5
COMMON STOCKHOLDERS' EQUITY:
Common stock
Common, $.01 par value, 13,767,829 issued 0.1 0.1
Class F Common, $.01 par value,
6,101,010 issued 0.1 0.1
Paid in capital 209.0 209.0
Retained deficit (207.0) (177.5)
------------ -----------
Total common stockholders' equity 2.2 31.7
------------ -----------
$ 1,447.1 $ 1,474.9
============ ===========
The accompanying notes are an integral part of these statements.
3
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions)
For the three months
ended March 31,
----------------------------
Reference
Note 1998 1999
----------- ------------- -------------
(unaudited) (unaudited)
NET SALES AND OPERATING REVENUES $ 590.1 $ 803.2
EXPENSES:
Cost of sales (497.5) (725.6)
Operating expenses (77.6) (97.1)
General and administrative expenses (12.0) (13.2)
Depreciation (6.4) (8.8)
Amortization 4 (5.9) (5.1)
Inventory recovery (write-down)
to market 3 (22.7) 96.2
------------- -------------
(622.1) (753.6)
------------- -------------
OPERATING INCOME (LOSS) (32.0) 49.6
Interest expense and finance
costs, net 4,5 (16.0) (21.1)
------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (48.0) 28.5
Income tax (provision) benefit 6 (0.3) 1.1
------------- -------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (48.3) 29.6
Discontinued operations, net of
income taxes of $1.1 (1998 - $0.2
benefit 7 (0.4) 1.9
------------- -------------
NET EARNINGS (LOSS) $ (48.7) $ 31.5
Preferred stock dividends (1.8) (2.0)
------------- -------------
NET EARNINGS (LOSS) AVAILABLE TO
COMMON STOCK $ (50.5) $ 29.5
============= =============
The accompanying notes are an integral part of these statements.
4
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
For the three months
ended March 31,
----------------------------
1998 1999
------------- -------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (48.7) $ 31.5
Discontinued operations 0.4 (1.9)
Adjustments:
Depreciation 6.4 8.8
Amortization 6.6 6.6
Inventory (recovery) write-down to market 22.7 (96.2)
Other (4.4) (1.1)
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other 13.6 (10.4)
Inventories (44.5) 86.6
Accounts payable, accrued expenses, taxes
other than income and other (47.7) (3.3)
------------- -------------
Net cash provided by (used in)
operating activities (95.6) 20.6
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments -- (3.2)
Sales and maturities of short-term investments -- 2.9
Expenditures for property, plant and equipment (5.9) (40.7)
Expenditures for turnaround (3.5) (24.3)
Discontinued operations 10.1 1.6
------------- -------------
Net cash provided by (used in)
investing activities 0.7 (63.7)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (7.7) (0.8)
------------- -------------
Net cash used in financing activities (7.7) (0.8)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (102.6) (43.9)
CASH AND CASH EQUIVALENTS, beginning of period 234.3 148.2
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 131.7 $ 104.3
============= =============
The accompanying notes are an integral part of these statements.
5
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark USA, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1999
(tabular dollar amounts in millions of US dollars)
1. Basis of Preparation
The consolidated interim financial statements of Clark USA, Inc. and
Subsidiaries (the "Company") have been reviewed by independent
accountants. 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 financial statements are presented in accordance with the
disclosure requirements for Form 10-Q. These unaudited financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K.
In May 1999, all of the shares of Clark USA, Inc. were exchanged for
equivalent shares of Clark Refining Holdings, Inc. which
was newly formed to serve as a holding company.
The Company has made certain reclassifications to the prior period to
conform to current period presentation.
2. Accounting Changes
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" was issued. This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. The Company is required to adopt this statement
effective January 1, 2000. SFAS No. 133 will require the Company to
record all derivatives on the balance sheet at fair value. Changes in
derivative fair value will either be recognized in earnings as offsets
to the changes in fair value of related hedged assets, liabilities, and
firm commitments or, for forecasted transactions, deferred and recorded
as a component of comprehensive income until the hedged transactions
occur and are recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value will be recognized in earnings
immediately. The Company is currently evaluating when it will adopt
this standard and the impact of the standard on the Company. The impact
of SFAS No. 133 will depend on a variety of factors, including future
interpretive guidance, the future level of hedging activity, the types
of hedging instruments used, and the effectiveness of such instruments.
3. Inventories
The carrying value of inventories consisted of the following:
December 31, March 31,
1998 1999
------------- ------------
Crude oil $ 165.3 $ 89.7
Refined and blendstocks 186.4 176.1
LIFO inventory value excess over market (105.8) (9.6)
Warehouse stock and other 21.8 21.1
------------- ------------
$ 267.7 $ 277.3
============= ============
6
4. Other Assets
Amortization of deferred financing costs for the three-month period
ended March 31, 1999 was $1.4 million (1998- $0.7 million) and was
included in "Interest and finance costs, net."
Amortization of refinery maintenance turnaround costs for the three-
month period ended March 31, 1999 was $5.1 million (1998- $5.9 million).
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
For the three months
ended March 31,
-----------------------
1998 1999
--------- -----------
Interest expense $ 18.4 $ 23.3
Financing costs 0.6 1.5
Interest and finance income (2.6) (1.7)
--------- -----------
16.4 23.1
Capitalized interest (0.4) (2.0)
--------- -----------
Interest and finance costs, net $ 16.0 $ 21.1
========= ===========
Cash paid for interest expense for the three-month period ended March
31, 1999 was $19.0 million (1998- $11.9 million). Accrued interest
payable as of March 31, 1999 of $19.2 million (December 31, 1998- $14.9
million) was included in "Accrued expenses and other."
6. Income Taxes
The Company made no net cash income tax payments during the first
quarter of 1999 (1998 - net cash income tax refunds of $5.0 million).
The income tax provision (benefit) related to Discontinued Operations
for the three-month period ended March 31, 1999 was $1.1 million (1998 -
$(0.2) million). The income tax provision (benefit) for Continuing
Operations for the same periods was $(1.1) million and $0.3 million,
respectively, which reflects the intraperiod utilization of net
operating losses.
7. Disposition of Retail Division
In May, 1999, the Company signed a definitive agreement to sell its
retail marketing operation in a recapitalization transaction to a
company controlled by Apollo Management L.P. for cash proceeds of
approximately $230 million. An affiliate of the Company's principal
shareholder will hold a six percent equity interest in the retail
marketing operation. As part of the sale agreement, the Company also
entered into a two-year, market-based supply agreement for refined
products that will be provided to the retail business through the
Company's Midwest refining and distribution network. This network was not
included in the sale. The supply agreement may be cancelled with 90
days notice by the buyer
The sale of the business is expected to close in the third quarter of
1999. The retail marketing operation sold includes all Company-operated retail
stores, approximately 200 independently-operated, Clark-branded stores
and the Clark trade name. Accordingly, the operating results of the
retail marketing operations, including the provision for income taxes,
have been segregated from the Company's continuing operations and
reported as a separate line item as Discontinued Operations in the
Consolidated Statements of Operations for all periods presented.
7
The retail operations' net sales revenue for the three-month period
ended March 31, 1999 was $202.8 million (1998 - $234.0 million). The
components of "Net assets held for sale" included in the Company's
Consolidated Balance Sheets for March 31, 1999 and December 31, 1998 are
as follows:
December 31, March 31,
1998 1999
------------ -----------
Current Assets $ 43.0 $ 48.2
Noncurrent Assets 187.5 182.2
------------ -----------
Total Assets 230.5 230.4
------------ -----------
Current Liabilities 63.4 62.3
Noncurrent Liabilities 26.8 27.5
------------ -----------
Total Liabilities 90.2 89.8
------------ -----------
Net Assets Held For Sale $ 140.3 $ 140.6
============ ===========
8. Commitments and Contingencies
Clark Refining & Marketing, Inc. ("Clark R&M") 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 R&M 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.
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. ("PMI"), 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 includes the construction of additional coking and
hydrocracking capability, and the expansion of crude unit capacity to
approximately 250,000 barrels per day. Although the Company and its
shareholders are currently evaluating alternatives for financing the
project, it is expected that the financing will be on a non-recourse
basis to the Company. The oil supply agreement with PMI and the
construction work-in-progress are expected to be transferred for value
to a non-recourse entity that will likely be an affiliate of, but not
be controlled by, the Company and its subsidiaries. The Company
expects to enter into agreements with this affiliate pursuant to which
the Company would provide certain operating, maintenance and other
services and would purchase the output from the new coking and
hydrocracking equipment for further processing into finished products.
The Company expects to receive compensation under these agreements at
fair market value that is expected to be favorable to the Company.
In the event the project financing cannot be completed on a non-
recourse basis to the Company as contemplated, the restrictions in the
Company's existing debt instruments would likely prohibit the Company
and its subsidiaries from raising the financing themselves and thus
completing the project. Notwithstanding the foregoing, however, 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 March 31, 1999, non-cancelable
amounts of approximately $65 million had accumulated under these
purchase orders. Additional purchase orders and commitments have been
made and are expected to continue to be made during 1999. If the
project were cancelled, the Company would be required to pay a
termination fee of $200,000 per month to PMI from September 1, 1998 to
the cancellation date. In addition, the Company would be subject to
payment of the non-cancelable commitments and required to record a
charge to earnings for all expenditures to date. Although the financing
is expected to be completed by mid-1999, there can be no assurance that
the financing for the project will be successful or that the project can
be completed as contemplated.
8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Clark USA, Inc. (the "Company") owns all of the outstanding capital
stock of Clark Refining & Marketing, Inc. ("Clark R&M"). The Company
also owns all of the outstanding capital stock of Clark Pipe Line
Company. Because Clark R&M is the principal subsidiary of the Company,
a discussion of the Company's results of operations consists principally
of a discussion of Clark R&M's results of operations.
Results of Operations
Financial Highlights
The following table reflects the Company's financial and operating
highlights for the three month periods ended March 31, 1998 and 1999.
All amounts listed are dollars in millions, except per barrel
information. The table provides supplementary data and is not intended
to represent an income statement presented in accordance with generally
accepted accounting principles.
Operating Income:
For the three months
ended March 31,
-----------------------
1998 1999
----------- ----------
Port Arthur Refinery
Crude oil throughput (m bbls/day) 222.2 213.0
Production (m bbls/day) 218.9 214.0
Gross margin ($/barrel of production) $ 3.89 $ 2.10
Gulf Coast 3/2/1 crack spread ($/barrel) 2.50 1.21
Operating expenses (45.4) (40.2)
Net margin $ 31.3 $ 0.2
Midwest Refineries and Other
Crude oil throughput (m bbls/day) 109.5 242.4
Production (m bbls/day) 116.1 261.4
Gross margin ($/barrel of production) $ 2.74 $ 1.22
Chicago 3/2/1 crack spread ($/barrel) 2.65 1.79
Operating expenses (32.1) (56.9)
Clark Pipe Line net margin 0.6 0.8
Net margin $ (2.9) $ (27.4)
General and administrative expenses (12.0) (13.2)
----------- ----------
Operating Contribution 16.4 (40.4)
Inventory timing adjustment gain (loss) (a) (13.4) 7.7
Inventory recovery (write-down) to market (22.7) 96.2
Depreciation and amortization (12.3) (13.9)
----------- ----------
Operating income (loss) $ (32.0) $ 49.6
=========== ==========
(a) Includes gains and losses caused by the 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.
In the first quarter of 1999, the Company recorded net earnings from
continuing operations of $29.6 million versus a loss of $48.3 million
in the same period a year ago. Net earnings in 1999 benefited from an
increase in crude oil prices during the quarter as demonstrated by the
over $4.60 per barrel in WTI crude oil prices along with a larger
increase in refined product prices. This increase resulted in
inventory gains of $103.9 million as compared to inventory losses of
$36.1 million in 1998. In 1999, these inventory gains were made up of
a recovery of previous non-cash inventory writedowns of $96.2 million
9
(1998 - loss of $22.7 million) and the cash benefit of the price
increases on the lag between crude oil purchases and product sales of
$7.7 million (1998 - loss of $13.4 million).
Net sales and operating revenues increased approximately 36% in the
first three months of 1999 as compared to the same period of 1998. This
increase was due to additional sales volumes principally resulting from
the acquisition of the Lima refinery in August 1998 that were only
partially offset in the period by lower average petroleum prices.
Operating Contribution (earnings before interest, depreciation,
amortization, inventory-related items and taxes) was a loss of $40.4
million in the first quarter of 1999, which was below the Operating
Contribution of $16.4 million in the same period a year ago principally
due to lower refining margins. Gulf Coast refining margin indicators
decreased $1.29 per barrel and Midwest indicators decreased $0.86 per
barrel in the first quarter of 1999 as the third consecutive warmer-
than-normal winter heating season bloated industry inventories. In
addition, discounts for heavy and sour crude oil were compressed
relative to year-ago levels. This compression was due to the low
absolute crude oil prices, reduced Canadian heavy sour crude oil
production, and OPEC production cuts disproportionately affecting heavy
crude oil barrels.
Crude oil throughput and related production in the Company's Midwest
refineries was higher in the first quarter of 1999 principally because
of the addition of the Lima refinery in August 1998. However, the
increase in production resulting from the Lima refinery was partially
offset by a reduction in throughput due to the poor refining margins, a
leak in a major interstate crude oil pipeline supplying the Midwest
refineries and lower throughput associated with a maintenance
turnaround at the Lima refinery. The lower production associated with
the maintenance turnaround resulted in a lost margin opportunity of
approximately $5 million for the quarter. Crude oil throughput and
production was also reduced at the Port Arthur refinery due to the poor
first quarter 1999 refining margins.
Midwest refining operating expenses increased because of the
addition of the Lima refinery. Port Arthur operating expenses were
reduced in the first quarter of 1999 due to lower maintenance and gain
sharing expenses and the positive impact of lower natural gas prices on
fuel costs.
Other Financial Highlights
General and administrative expenses increased in the first quarter of
1999 over the comparable periods of 1998 principally because of costs
related to the addition of the Lima refinery and costs associated with
year 2000 remediation and upgrades. The Company has expended $3.1
million from inception of its year 2000 program through March 31, 1999.
The Company is on target with its year 2000 program that is discussed
in more detail in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
Interest and finance costs, net for the three months ended March 31,
1999 increased over the comparable period in 1998 principally because of
increased debt associated with the acquisition of the Lima refinery.
Depreciation and amortization expense also increased in the three months
ended March 31, 1999 over the comparable period in 1998 principally
because of the acquisition of the Lima refinery.
Sale of Retail Division
In May 1999, the Company signed a definitive agreement to sell its
retail marketing operation in a recapitalization transaction to a
company controlled by Apollo Management L.P. for cash proceeds of
approximately $230 million. See Exhibit 10.0 Asset Contribution and
Recapitalization Agreement. An affiliate of the Company's principal
shareholder will hold a six percent equity interest in the retail
marketing operation. As part of the sale agreement, the Company also
entered into a two-year market-based supply agreement for refined
products that will be provided to the retail business through the
10
Company's Midwest refining and distribution network. This network was not
included in the sale. The supply agreement may be cancelled with 90
days notice by the buyer. The retail marketing operation is being sold
in order to allow the Company to focus its human and financial resources
on the continued improvement and expansion of its refining business,
which it believes will generate higher future returns.
The retail marketing operations were classified as a discontinued
operation and the results of operations were excluded from continuing
operations in the consolidated statements of operations for the periods
ending March 31, 1998 and 1999. A gain on the sale is expected to be
recognized and the transaction is expected to close in the third
quarter of 1999. The retail marketing operation sold includes all
Company-operated retail stores, approximately 200 independently-
operated, Clark-branded stores and the Clark trade name.
Liquidity and Capital Resources
Net cash used in operating activities, excluding working capital
changes, for the three months ended March 31, 1999 was $52.3 million
compared to cash used of $17.0 million in the year-earlier period.
Working capital as of March 31, 1999 was $357.7 million, a 2.05-to-1
current ratio, versus $377.7 million as of December 31, 1998, a 2.10-to-
1 current ratio. Working capital at December 31, 1998 and March 31,
1999 included the retail division net assets held for sale. Total
working capital decreased in the first quarter of 1999 principally due
to the cash used in operating activities and significant capital
expenditures, which were only partially offset by the positive impact of
increased petroleum prices on inventory.
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 R&M has in place a credit agreement (the
"Credit Agreement") which provides for borrowings and the issuance of
letters of credit up to the lesser of $700 million, or the amount of a
borrowing base calculated with respect to Clark R&M's cash, short-term
investments, eligible receivables and hydrocarbon inventories. Direct
borrowings under the Credit Agreement 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 March 31, 1999 was $450 million and approximately
$292 million of the facility was utilized for letters of credit. As of
March 31, 1999, there were no direct borrowings under the Credit
Agreement. The Credit Agreement expires on December 31, 1999 and the
Company expects to amend or replace the agreement by the end of 1999.
Cash flows used in investing activities in the first three months of
1999 were $63.7 million as compared to $0.7 million in the year-earlier
period. Cash flow used in investing activities in 1999 was higher than
the previous year's first quarter principally due to increased scheduled
maintenance turnaround expenditures at the Lima and Port Arthur
refineries ($24.3 million), and increased capital expenditures.
Expenditures for property, plant and equipment totaled $40.7 million
(1998 - $5.9 million) in the first three months of 1999 principally
related to a project to upgrade the Port Arthur refinery to allow it to
process up to 80% heavy sour crude oil ($33.3 million).
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. ("PMI"), 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 includes the construction of additional coking and
hydrocracking capability, and the expansion of crude unit capacity to
approximately 250,000 barrels per day. Although the Company and its
shareholders are currently evaluating alternatives for financing the
project, it is expected that the financing will be on a non-recourse
basis to the Company. The oil supply agreement with PMI and the
11
construction work-in-progress are expected to be transferred for value
to a non-recourse entity that will likely be an affiliate of, but not
be controlled by, the Company and its subsidiaries. The Company
expects to enter into agreements with this affiliate pursuant to which
the Company would provide certain operating, maintenance and other
services and would purchase the output from the new coking and
hydrocracking equipment for further processing into finished products.
The Company expects to receive compensation under these agreements at
fair market value that is expected to be favorable to the Company.
In the event the project financing cannot be completed on a non-
recourse basis to the Company as contemplated, the restrictions in the
Company's existing debt instruments would likely prohibit the Company
and its subsidiaries from raising the financing themselves and thus
completing the project. Notwithstanding the foregoing, however, the
Company has begun entering into purchase orders, some of which contain
cancellation penalties and similar provisions, for material, equipment
and services related to this project. As of March 31, 1999, non-
cancelable amounts of approximately $65 million had accumulated under
these purchase orders. Additional purchase orders and commitments have
been made and are expected to continue to be made during 1999. If the
project were cancelled, the Company would be required to pay a
termination fee of $200,000 per month to PMI from September 1, 1998 to
the cancellation date. In addition, the Company would be subject to
payment of the non-cancelable commitments and required to record a
charge to earnings for all expenditures to date. Although the financing
is expected to be completed by mid-1999, there can be no assurance that
the financing for the project will be successful or that the project can
be completed as contemplated.
Cash flows used in financing activities for first quarter of 1999
decreased as compared to the same period in 1998 principally because of
the partial redemption in 1998 of the Company's Senior Secured Zero
Coupon Notes, due 2000 ($3.6 million), and the repurchase in 1998 of
Clark R&M's 9 1/2% Senior Unsecured Notes, due 2004 tendered under its
required Change of Control offer ($3.3 million).
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 by
mid-1999. Future working capital investments, discretionary or non-
discretionary capital expenditures, or acquisitions may require
additional debt or equity financing.
Forward-Looking Statements
Certain statements in this document are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements
are subject to the safe harbor provisions of this legislation. Words
such as "expects," "intends," "plans," "projects,"
"believes," "estimates" and similar expressions typically identify
such forward-looking statements.
Even though the Company believes its expectations regarding future
events are based on reasonable assumptions, forward-looking statements
are not guarantees of future performance. There are many reasons why
actual results could, and probably will, differ from those contemplated
in the Company's forward-looking statements. These include changes in:
* Industry-wide refining margins
* Crude oil and other raw material costs, embargoes, industry
expenditures for the discovery and production of crude oil, and
military conflicts between (or internal instability in) one or more
oil-producing countries
* Market volatility due to world and regional events
* Availability and cost of debt and equity financing
* Labor relations
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* U.S. and world economic conditions (including recessionary trends,
inflation and interest rates)
* Supply and demand for refined petroleum products
* Reliability and efficiency of the Company's operating facilities.
There are many hazards common to operating oil refining and
distribution facilities (including equipment malfunctions, plant
construction/repair delays, explosions, fires, oil spills and the
impact of severe weather)
* Actions taken by competitors (including both pricing and expansion or
retirement of refinery capacity)
* Civil, criminal, regulatory or administrative actions, claims or
proceedings (both domestic and international), and regulations
dealing with protection of the environment (including refined
petroleum product composition and characteristics)
* Other unpredictable or unknown factors not discussed
Because of all of these uncertainties, and others, you should not
place undue reliance on the Company's forward-looking statements.
PART II - OTHER INFORMATION
ITEM 5 - Other Information
Resignation of Director
Effective May 4, 1998, Glenn H. Hutchins resigned as a director of
the Company and Clark R&M. No replacement was immediately named to
replace Mr. Hutchins.
Sale of Retail Division
In May 1999, the Company signed a definitive agreement to sell its
retail marketing operation in a recapitalization transaction to a
company controlled by Apollo Management L.P. for cash proceeds of
approximately $230 million. See Exhibit 10.0 Asset Contribution and
Recapitalization Agreement. An affiliate of the Company's principal
shareholder will hold a six percent equity interest in the retail
marketing operation. As part of the sale agreement, the Company also
entered into a two-year market-based supply agreement for refined
products that will be provided to the retail business through the
Company's Midwest refining and distribution network. This network was not
included in the sale. The supply agreement may be cancelled with 90
days notice by the buyer. The retail marketing operation is being sold
in order to allow the Company to focus its human and financial resources
on the continued improvement and expansion of its refining business,
which it believes will generate higher future returns.
The retail marketing operations were classified as a discontinued
operation and the results of operations were excluded from continuing
operations in the consolidated statements of operations for the periods
ending March 31, 1998 and 1999. A gain on the sale is expected to be
recognized and the transaction is expected to close in the third
quarter of 1999. The retail marketing operation sold includes all
Company-operated retail stores, approximately 200 independently-
operated, Clark-branded stores and the Clark trade name.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.0 - Asset Contribution and Recapitalization
Agreement
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
None
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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)
May 14, 1999