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 June 30, 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
(?) No ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of August 6, 1999, 20,362,778, all of which were owned by
Clark Refining Holdings Inc.
1
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
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 June 30, 1999, and the
related consolidated statements of operations for the three and six
month periods ended June 30, 1998 and 1999, and the consolidated
statements of cash flows for the six month periods 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.
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 (except
Note 3 for which the date was July 8, 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
August 5, 1999
2
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
Reference December 31, June 30,
Note 1998 1999
--------- ------------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 148.1 $ 106.6
Short-term investments 4.5 1.4
Accounts receivable 131.7 126.7
Inventories 3 267.7 288.6
Prepaid expenses and other 31.5 32.7
Net assets held for sale 7 142.0 145.5
------------- -----------
Total current assets $ 725.5 $ 701.5
PROPERTY, PLANT, AND EQUIPMENT, NET 628.9 720.8
OTHER ASSETS 4, 5 95.9 119.1
------------- -----------
$ 1,450.3 $ 1,541.4
============= ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 250.3 $ 336.0
Accrued expenses and other 5 66.8 69.2
Accrued taxes other than income 25.8 26.0
------------- -----------
Total current liabilities 342.9 431.2
LONG-TERM DEBT 980.2 978.7
OTHER LONG-TERM LIABILITIES 52.5 55.7
COMMITMENTS AND CONTINGENCIES 8 -- --
EXCHANGEABLE PREFERRED STOCK
($.01 par value per share;
5,000,000 shares authorized;
74,504 shares issued) 72.5 76.6
COMMON STOCKHOLDER'S 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) (210.0)
------------- -----------
Total common stockholder's
equity (deficit) 2.2 (0.8)
------------- -----------
$ 1,450.3 $ 1,541.4
============= ===========
The accompanying notes are an integral part of these statements.
3
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
For the Three Months
Ended June 30,
Reference ---------------------
Note 1998 1999
--------- ---------- ----------
NET SALES AND OPERATING REVENUES $ 864.4 $ 1,059.9
EXPENSES:
Cost of sales (722.5) (959.8)
Operating expenses (75.0) (95.8)
General and administrative expenses (12.8) (12.5)
Depreciation (6.5) (8.6)
Amortization (5.9) (6.9)
Inventory recovery (write-down) to
market 3 (8.2) 9.6
---------- ----------
(830.9) (1,074.0)
---------- ----------
OPERATING INCOME (LOSS) 33.5 (14.1)
Interest and finance costs, net 4, 5 (15.8) (20.7)
---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 17.7 (34.8)
Income tax benefit 6 -- 1.5
---------- ----------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 17.7 (33.3)
Discontinued operations, net of income
tax provision of $1.8
(1998 - benefit of $0.1) 7 (0.5) 3.0
---------- ----------
NET EARNINGS (LOSS) 17.2 (30.3)
Preferred stock dividends (1.9) (2.2)
---------- ----------
NET EARNINGS (LOSS) AVAILABLE TO COMMON STOCK $ 15.3 $ (32.5)
========== ==========
The accompanying notes are an integral part of these statements.
4
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
For the Six Months
Ended June 30,
Reference ---------------------
Note 1998 1999
--------- ---------- ----------
NET SALES AND OPERATING REVENUES $ 1,581.5 $ 1,957.1
EXPENSES:
Cost of sales (1,346.9) (1,779.4)
Operating expenses (152.7) (192.9)
General and administrative expenses (24.8) (25.7)
Depreciation (12.9) (17.4)
Amortization (11.8) (12.0)
Inventory recovery (write-down) to
market 3 (30.9) 105.8
----------- ----------
(1,580.0) (1,921.6)
----------- ----------
OPERATING INCOME 1.5 35.5
Interest and finance costs, net 4, 5 (31.8) (41.8)
----------- ----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (30.3) (6.3)
Income tax (provision) benefit 6 (0.1) 2.6
----------- ----------
LOSS FROM CONTINUING OPERATIONS (30.4) (3.7)
Discontinued operations, net of
income tax provision of $3.0
(1998 - benefit of $0.1) 7 (1.1) 4.9
----------- ----------
NET EARNINGS (LOSS) (31.5) 1.2
Preferred stock dividends (3.7) (4.2)
----------- ----------
NET LOSS AVAILABLE TO COMMON STOCK $ (35.2) $ (3.0)
=========== ==========
The accompanying notes are an integral part of these statements.
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
For the Six Months
Ended June 30,
-------------------
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (31.5) $ 1.2
Discontinued operations 1.1 (4.9)
Adjustments:
Depreciation 12.9 17.4
Amortization 13.2 15.2
Accretion of Zero Coupon Notes 0.1 --
Share of earnings of affiliates, net of
dividends 1.5 --
Inventory (recovery) write-down to market 30.9 (105.8)
Other, net (2.2) 4.4
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses
and other 3.8 11.2
Inventories (41.1) 86.5
Accounts payable, accrued expenses,
taxes other than income and other (15.6) 82.7
--------- ---------
Net cash provided by (used in)
operating activities of continuing
operations (26.9) 107.9
Net cash provided by operating
activities ofdiscontinued operations 12.0 3.2
--------- ---------
Net cash provided by (used in) operating
activities (14.9) 111.1
--------- ---------
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 (24.4) (112.9)
Expenditures for turnaround (11.1) (36.0)
Discontinued operations 3.4 (1.8)
--------- ---------
Net cash used in investing activities (32.1) (151.0)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (8.7) (1.6)
Proceeds from sale of common stock 0.1 --
--------- ---------
Net cash used in financing activities (8.6) (1.6)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (55.6) (41.5)
CASH AND CASH EQUIVALENTS, beginning of period 234.3 148.1
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 178.7 $ 106.6
========= =========
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)
June 30, 1999
(tabular dollar amounts in millions of U.S. 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 transferred by
their holders to Clark Refining Holdings Inc. ("Holdings") for
equivalent shares, making the Company a wholly-owned subsidiary of
Holdings.
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, 2001. 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, June 30,
1998 1999
------------ -----------
Crude oil ............................... $ 165.3 $ 88.1
Refined and blendstocks ................. 186.4 177.0
LIFO inventory value excess over market.. (105.8) --
Warehouse stock and other................ 21.8 23.5
------------ -----------
$ 267.7 $ 288.6
The market value of the crude oil and refined product inventories at
June 30, 1999 was approximately $24.2 million above carrying value.
7
4. Other Assets
Amortization of deferred financing costs for the three-month and six-
month periods ended June 30, 1999 was $1.8 million (1998 - $0.5 million)
and $3.2 million (1998 - $1.2 million), respectively, and was included
in "Interest and finance costs, net".
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
1998 1999 1998 1999
--------- --------- --------- -------
Interest expense ...... $ 18.1 $ 23.3 $ 36.5 $ 46.6
Financing costs........ 0.6 1.8 1.2 3.3
Interest and finance
income.............. (2.3) (1.2) (4.9) (2.9)
--------- --------- --------- --------
16.4 23.9 32.8 47.0
Capitalized interest... (0.6) (3.2) (1.0) (5.2)
--------- --------- --------- --------
$ 15.8 $ 20.7 $ 31.8 $ 41.8
========= ========= ========= ========
Cash paid for interest expense for the three-month and six-month
periods ended June 30, 1999 was $27.7 million (1998- $24.3 million) and
$46.7 million (1998 - $36.2 million), respectively. Accrued interest
payable as of June 30, 1999 of $14.9 million (December 31, 1998- $14.9
million) was included in "Accrued expenses and other".
6. Income Taxes
The Company made net cash income tax payments during the three-month
and six-month periods ended June 30, 1999 of $0.4 million (1998 - $0.6
million) and $0.4 million (1998 - refunds of $4.4 million),
respectively.
The income tax (provision) benefit on the Earnings (Loss) from Continuing
Operations reflects the intraperiod utilization of net operating losses.
7. Disposition of Retail Division
In July 1999, Clark R&M sold its retail marketing operation in a
recapitalization transaction to a company controlled by Apollo
Management L.P. for approximately $230 million. After all transaction
costs the sale is expected to generate cash proceeds of approximately
$213 million. See Exhibit 10.0 Asset Contribution and Recapitalization
Agreement filed with the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1999. In general, the buyer assumed unknown
environmental liabilities at the retail stores they acquired up to
$50,000 per site, as well as responsibility for any post closing
contamination. Subject to certain risk sharing arrangements, Clark R&M
retained responsibility for all pre-existing known contamination.
Holdings acquired a six percent equity interest in the retail marketing
operation. As part of the sale agreement, Clark R&M also entered into a
two-year market-based supply agreement for refined products that will be
provided to the retail business through Clark R&M's Midwest refining and
distribution network. This network was not included in the sale. The
buyer may cancel the supply agreement with 90 days notice. The retail
marketing operation was 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 beginning with
the periods ending March 31, 1998 and 1999. A substantial gain on the
sale is expected to be recognized in the third quarter of 1999 that will
be substantially sheltered from income taxes by the Company's favorable
8
tax attributes. The retail marketing operation sold included all
Company-operated retail stores, approximately 200 independently-
operated, Clark-branded stores and the Clark trade name.
The net sales revenue from the retail marketing operation for the
three-month and six-month periods ended June 30, 1999 was $262.1 million
(1998 - $247.1 million) and $464.9 million (1998 - $481.1 million),
respectively. "Net assets held for sale" as of December 31, 1998 and
June 30, 1999 consisted of the following:
December 31, June 30,
1998 1999
------------- -----------
Current assets ............... $ 42.6 $ 63.4
Noncurrent assets............. 187.5 177.4
------------- -----------
Total assets.................. $ 230.1 $ 240.8
============= ===========
Current liabilities........... $ 63.4 $ 73.1
Noncurrent liabilities........ 24.7 22.2
------------- -----------
Total liabilities............. $ 88.1 $ 95.3
============= ===========
Net assets held for sale...... $ 142.0 $ 145.5
============= ===========
8. Commitments and Contingencies
Clark Refining & Marketing ("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, Clark R&M 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 Clark R&M 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 approximately $700 million including
the construction of additional coking and hydrocracking capability, and
the expansion of crude unit capacity to approximately 250,000 barrels
per day. Financing for the new major processing units in the project
has been arranged by Port Arthur Coker Company L.P., a company that is
an affiliate of, but not controlled by, the Company and its
subsidiaries. Closing on the financing is expected on August 19, 1999.
The oil supply agreement with PMI and the construction work-in-progress
related to the new processing units are expected to be transferred for
value to Port Arthur Coker Company L.P. In connection with the
project, Clark R&M expects to lease certain existing processing units
to Port Arthur Coker Company L.P. on fair market terms and, pursuant to
this lease, will be obligated to make certain modifications,
infrastructure improvements and incur certain development costs during
1999 and 2000 at an estimated cost up to $120 million. In addition,
Clark R&M expects to enter into agreements with Port Arthur Coker
Company L.P. pursuant to which Clark R&M 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. Clark R&M also expects to enter into
agreements under which Port Arthur Coker Company L.P. would process
certain hydrocarbon streams owned by Clark R&M. Clark R&M expects to
receive and pay compensation at fair market value under these
agreements, which in the aggregate are expected to be favorable to
Clark R&M.
9
In the event the project financing cannot be completed on a non-
recourse basis to the Company and its subsidiaries as contemplated, the
restrictions in the Company's and its subsidiaries' 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, Clark R&M has entered into
purchase orders, some of which contain cancellation penalties and
similar provisions, for material, equipment and services related to this
project. As of June 30, 1999, non-cancelable amounts of approximately
$139 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 canceled, Clark
R&M would be required to pay a termination fee of $200,000 per month to
PMI from September 1, 1998 to the cancellation date. In addition, Clark
R&M would be subject to payment of the non-cancelable commitments and
required to record a charge to earnings for all expenditures to date.
Although the financing is expected to be completed by Port Arthur Coker
Company L.P., there can be no assurance that the financing for the
project will be successful or that the project can be completed as
contemplated.
10
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Clark USA, Inc. (the "Company") is a wholly-owned subsidiary of Clark
Refining Holdings Inc. ("Holdings") and owns all of the outstanding
capital stock of Clark Refining & Marketing, Inc. ("Clark R&M"). The
Company also owns all of the outstanding capital stock of Clark Pipe
Line Company. Because Clark R&M is the principal subsidiary of the
Company, a discussion of the Company's results of operations consists
principally of a discussion of Clark R&M's results of operations.
Results of Operations
Financial Highlights
The following table reflects the Company's financial and operating
highlights for the three and six month periods ended June 30, 1998 and
1999. All amounts listed are dollars in millions, except per barrel
information. Certain information was restated to reflect current period
presentation. The table provides supplementary data and is not intended
to represent an income statement presented in accordance with generally
accepted accounting principles.
Operating Income:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
1998 1999 1998 1999
-------- ---------- --------- -------
Port Arthur Refinery
Crude oil throughput
(thousand bbls per day) 233.2 213.0 227.7 213.0
Production (thousand bbls per day) 241.4 229.3 230.2 221.7
Gross margin ($ per barrel of
production) $ 4.09 $ 1.91 $ 4.00 $ 2.00
Gulf Coast 3/2/1 crack spread
($ per barrel) 3.42 1.44 2.96 1.33
Operating expenses (42.6) (38.9) (88.0) (79.1)
Net margin $ 47.2 $ 1.0 $ 78.5 $ 1.2
Midwest Refineries and Other
Crude oil throughput
(thousand bbls per day) 128.0 269.7 118.8 256.1
Production (thousand bbls per day) 124.9 281.7 120.5 271.6
Gross margin
($ per barrel of production) $ 5.31 $ 2.41 $ 4.08 $ 1.84
Chicago 3/2/1 crack spread
($ per barrel) 5.09 2.97 3.87 2.38
Operating expenses (32.1) (56.5) (64.2) (113.4)
Clark Pipe Line net margin 0.6 0.1 1.2 0.9
Net margin $ 28.8 $ 5.5 $ 25.9 $(21.9)
General and administrative expenses (12.8) (12.5) (24.8) (25.7)
-------- ---------- --------- -------
Operating Contribution $ 63.2 $ (6.0) $ 79.6 $(46.4)
Inventory timing adjustment gain
(loss) (a) (9.1) (2.2) (22.5) 5.5
Inventory recovery (write-down)
to market (8.2) 9.6 (30.9) 105.8
Depreciation and amortization (12.4) (15.5) (24.7) (29.4)
-------- ---------- --------- -------
Operating income (loss) $ 33.5 $ (14.1) $ 1.5 $ 35.5
======== ========== ========= =======
(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.
The Company recorded a net loss from continuing operations of $33.3
million in the second quarter of 1999 versus net earnings from
continuing operations of $17.7 million in the same period a year ago.
For the first six months of 1999, the Company recorded a net loss from
continuing operations of $3.7 million versus a net loss from continuing
operations of $30.4 million in the same period a year ago. Earnings in
1999 benefited from rising crude oil prices as demonstrated by an over
11
$7.00 per barrel increase in benchmark West Texas Intermediate crude
oil prices along with even larger increases in refined product prices.
Associated inventory gains in the first six months of 1999 were a
result of a recovery of previous non-cash inventory writedowns of
$105.8 million (1998 - loss of $30.9 million) and the cash benefit of
the price increases on the lag between crude oil purchases and product
sales of $5.5 million (1998 - loss of $22.5 million).
Net sales and operating revenues increased approximately 23% and 24%
in the first three and six months of 1999, respectively, as compared to
the same periods of 1998. These increases were principally due to
additional sales volumes 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) from continuing
operations was a loss of $6.0 million in the second quarter of 1999
versus a contribution of $63.2 million for the same period a year ago.
Operating Contribution from continuing operations was a loss of $46.4
million in the first six months of 1999 versus a contribution of $79.6
million in the same period of 1998. Operating Contribution in both the
second quarter and first half of 1999 trailed the prior year due to
lower refining margins. Gulf Coast 3/2/1 crack spread refining margin
indicators in the first six months of 1999 decreased $1.63 per barrel
(second quarter - $1.98 per barrel) and Midwest indicators decreased
$1.49 per barrel (second quarter - $2.12 per barrel) as the third
consecutive warmer-than-normal winter heating season resulted in high
industry inventories on a historical basis. Second quarter industry
conditions were modestly improved from the first quarter, but were still
well below 1998 and historical levels. In addition, discounts for heavy
and sour crude oil were compressed relative to year-ago levels. The
Company believes this margin compression was due to the low average
crude oil prices, reduced Canadian heavy sour crude oil production, and
OPEC production cuts disproportionately affecting heavy crude oil
barrels. Refining market conditions in the first six months of 1999
were the most unfavorable of the last 15 years.
Crude oil throughput and related production in the Company's Midwest
refineries was higher in the second quarter and first half of 1999
principally because of the addition of the Lima refinery in August
1998. However, the increase in production resulting from the Lima
refinery acquisition was partially offset by a reduction in throughput
due to the poor refining margins in the first six months of 1999 and a
leak in a major interstate crude oil pipeline supplying the Midwest
refineries in the first quarter. The lower production associated with
a maintenance turnaround at the Lima refinery resulted in a lost margin
opportunity of approximately $5 million in the first quarter of 1999.
Crude oil throughput and production was also reduced at the Port Arthur
refinery in the second quarter and first half of 1999 due to weak
market conditions.
Midwest refining operating expenses increased because of the
addition of the Lima refinery. Port Arthur operating expenses were
reduced in the second quarter and first half 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 six months
of 1999 over the comparable period of 1998 principally because of costs
related to the addition of the Lima refinery and costs associated with
year 2000-related remediation and upgrades. The Company has expended
$4.6 million from inception of its year 2000 program through June 30,
1999. The Company believes that as of June 30, 1999, 99% of mission
critical embedded processors at refineries, 84% of mission critical
systems, including hardware and software, and 84% of mission critical
business partners had represented that mission critical systems were
remediated. More information on the Company's year 2000 program is
discussed 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 and six months ended
June 30, 1999 increased over the comparable periods in 1998 principally
because of increased debt associated with the acquisition of the Lima
12
refinery. Depreciation and amortization expense also increased in the
three and six months ended June 30, 1999 over the comparable periods in
1998 principally because of the acquisition of the Lima refinery.
Sale of Retail Division
In July 1999, Clark R&M sold its retail marketing operation in a
recapitalization transaction to a company controlled by Apollo
Management L.P. for approximately $230 million. After all transaction
costs the sale is expected to generate cash proceeds of approximately
$213 million. See Exhibit 10.0 Asset Contribution and Recapitalization
Agreement filed with the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1999. In general, the buyer assumed unknown
environmental liabilities at the retail stores they acquired up to
$50,000 per site, as well as responsibility for any post closing
contamination. Subject to certain risk sharing arrangements, Clark R&M
retained responsibility for all pre-existing known contamination.
Holdings acquired a six percent equity interest in the retail marketing
operation. As part of the sale agreement, Clark R&M also entered into a
two-year market-based supply agreement for refined products that will be
provided to the retail business through Clark R&M's Midwest refining and
distribution network. This network was not included in the sale. The
buyer may cancel the supply agreement with 90 days notice. The retail
marketing operation was 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 beginning with
the periods ending March 31, 1998 and 1999. A substantial gain on the
sale is expected to be recognized in the third quarter of 1999 that will
be substantially sheltered from income taxes by the Company's favorable
tax attributes. The retail marketing operation sold included 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 six months ended June 30, 1999 was $72.5 million
compared to cash provided of $26.0 million in the year-earlier period.
Working capital as of June 30, 1999 was $270.3 million, a 1.63-to-1
current ratio, versus $382.6 million as of December 31, 1998, a 2.12-to-
1 current ratio. Working capital at December 31, 1998 and June 30, 1999
included the retail division net assets held for sale. Total working
capital decreased in the first half 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. Inventory management activities also reduced the
total volume of inventory during the first six months of 1999.
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 June 30, 1999 was $492 million and approximately
$421 million of the facility was utilized for letters of credit. As of
June 30, 1999, there were no direct borrowings under the Credit
Agreement. The Credit Agreement expires on December 31, 1999 and Clark
R&M expects to amend or replace the agreement by the end of 1999.
13
Cash flows used in investing activities in the first six months of
1999 were $151.0 million as compared to $32.1 million in the year-
earlier period. Cash flow used in investing activities in the first
half of 1999 was higher than the previous year's first half principally
due to increased scheduled maintenance turnaround expenditures at the
Lima and Port Arthur refineries ($36.0 million), and increased
expenditures for property, plant and equipment. Expenditures for
property, plant and equipment totaled $112.9 million in the first six
months of 1999 (1998 - $24.4 million) and principally related to a
project to upgrade the Port Arthur refinery to allow it to process up to
80% heavy sour crude oil ($96.9 million).
In March 1998, Clark R&M 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 Clark R&M 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 approximately $700 million including
the construction of additional coking and hydrocracking capability, and
the expansion of crude unit capacity to approximately 250,000 barrels
per day. Financing for the new major processing units in the project
has been arranged by Port Arthur Coker Company L.P., a company that is
an affiliate of, but not controlled by, the Company and its
subsidiaries. Closing on the financing is expected on August 19, 1999.
The oil supply agreement with PMI and the construction work-in-progress
related to the new processing units are expected to be transferred for
value to Port Arthur Coker Company L.P. In connection with the
project, Clark R&M expects to lease certain existing processing units
to Port Arthur Coker Company L.P. on fair market terms and, pursuant to
this lease, will be obligated to make certain modifications,
infrastructure improvements and incur certain development costs during
1999 and 2000 at an estimated cost up to $120 million. In addition,
Clark R&M expects to enter into agreements with Port Arthur Coker
Company L.P. pursuant to which Clark R&M 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. Clark R&M also expects to enter into
agreements under which Port Arthur Coker Company L.P. would process
certain hydrocarbon streams owned by Clark R&M. Clark R&M expects to
receive and pay compensation at fair market value under these
agreements, which in the aggregate are expected to be favorable to
Clark R&M.
In the event the project financing cannot be completed on a non-
recourse basis to the Company and its subsidiaries as contemplated, the
restrictions in the Company's and its subsidiaries' 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, Clark R&M has entered into
purchase orders, some of which contain cancellation penalties and
similar provisions, for material, equipment and services related to this
project. As of June 30, 1999, non-cancelable amounts of approximately
$139 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 canceled, Clark
R&M 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, Clark
R&M 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 Port Arthur Coker
Company L.P., there can be no assurance that the financing for the
project will be successful or that the project can be completed as
contemplated.
In June 1999, Clark R&M signed a non-binding letter of intent to
pursue the acquisition of Equilon Enterprises, L.L.C.'s ("Equilon")
295,000 barrel per day Wood River, Illinois refinery, which is adjacent
to Clark R&M's Hartford, Illinois refinery. Separately, Clark R&M
signed a non-binding letter of intent to sell 12 distribution terminals
to Equilon.
14
Cash flows used in financing activities for first half 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. 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, among
others, 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, and governmental actions
* Market volatility due to world and regional events
* Availability and cost of debt and equity financing
* Labor relations
* U.S. and world economic conditions
* 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. Such hazards include equipment
malfunctions, plant construction/repair delays, explosions, fires,
oil spills and the impact of severe weather
* Actions taken by competitors which may include both pricing and
expansion or retirement of refinery capacity
* The enforceability of contracts
* Civil, criminal, regulatory or administrative actions, claims or
proceedings 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.
15
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
On July 6, 1999, Clark Refining & Marketing, Inc. was served with a
civil administrative complaint by the United States Environmental
Protection Agency, Region 5, alleging certain violations of the
Emergency Planning and Community Right-to-Know Act, and regulations
promulgated thereunder, with respect to certain record-keeping and
reporting requirements relating to the Hartford refinery. The
administrative complaint seeks a civil penalty of $498,000. No estimate
can be made at this time of the Company's potential liability, if any,
as a result of this matter.
ITEM 5 - Other Information
Director Change
Robert L. Friedman was appointed director of the Company, Clark
Refining Holdings Inc. and Clark R&M effective July 15, 1999. Mr.
Friedman has served as a Senior Managing Director of The Blackstone
Group L.P. since March 1999. Prior to joining Blackstone, Mr. Friedman
was a partner with Simpson Thacher & Bartlett, a New York law firm,
since 1967. Mr. Friedman replaced Glenn H. Hutchins on the board of
directors. Mr. Hutchins resigned as a director of the Company and Clark
R&M effective May 4, 1999.
Sale of Retail Division
In July 1999, Clark R&M sold its retail marketing operation in a
recapitalization transaction to a company controlled by Apollo
Management L.P. for approximately $230 million. After all transaction
costs the sale is expected to generate cash proceeds of approximately
$213 million. See Exhibit 10.0 Asset Contribution and Recapitalization
Agreement filed with the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1999. In general, the buyer assumed unknown
environmental liabilities at the retail stores they acquired up to
$50,000 per site, as well as responsibility for any post closing
contamination. Subject to certain risk sharing arrangements, Clark R&M
retained responsibility for all pre-existing known contamination. Clark
Refining Holdings Inc. acquired a six percent equity interest in the
retail marketing operation. As part of the sale agreement, Clark R&M
also entered into a two-year market-based supply agreement for refined
products that will be provided to the retail business through Clark
R&M's Midwest refining and distribution network. This network was not
included in the sale. The buyer may cancel the supply agreement with 90
days notice. The retail marketing operation was 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 beginning with
the periods ending March 31, 1998 and 1999. A substantial gain on the
sale is expected to be recognized in the third quarter of 1999 that will
be substantially sheltered from income taxes by the Company's favorable
tax attributes. The retail marketing operation sold included 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
None
(b) Reports on Form 8-K
None
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)
August 12, 1999