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, 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 1-11392
CLARK REFINING & MARKETING, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1491230
(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 12, 1998: 100, all of which were owned by
Clark USA, Inc.
<PAGE> 1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Clark Refining & Marketing, Inc.:
We have reviewed the accompanying consolidated balance sheet of Clark Refining
& Marketing, Inc. and Subsidiaries (the "Company") as of June 30, 1998, and
the related consolidated statements of earnings for the three and six month
periods then ended, and the statement of cash flows for the six 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 six
months ended June 30, 1997 were reviewed by other accountants whose report
dated July 29, 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, stockholder's
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
July 31, 1998
(except for Note 6
as to which the date
is August 10, 1998)
<PAGE> 2
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
<TABLE>
June 30,
Reference December 31, 1998
Note 1997 (unaudited)
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 229.7 $ 175.4
Short-term investments 14.9 14.9
Accounts receivable 92.9 88.5
Receivable from affiliates 2.2 5.2
Inventories 2 261.4 267.5
Prepaid expenses and other 18.2 16.1
----------- -------------
Total current assets 619.3 567.6
PROPERTY, PLANT AND EQUIPMENT 575.6 574.4
OTHER ASSETS 3 66.0 63.1
----------- -------------
$ 1,260.9 $ 1,205.1
=========== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 219.0 $ 213.4
Payable to affiliates 4 14.8 15.5
Accrued expenses and other 69.7 56.9
Accrued taxes other than income 52.1 48.0
----------- -------------
Total current liabilities 355.6 333.8
LONG-TERM DEBT 587.4 582.4
OTHER LONG-TERM LIABILITIES 57.0 58.1
CONTINGENCIES 8 -- --
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value
per share; 1,000 shares
authorized and 100 shares
issued and outstanding) -- --
Paid-in capital 249.2 239.7
Retained earnings (deficit) 11.7 (8.9)
----------- -------------
Total stockholder's equity 260.9 230.8
----------- -------------
$ 1,260.9 $ 1,205.1
=========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in millions)
<TABLE>
For the three months
ended June 30,
------------------------
Reference 1997 1998
Note (unaudited) (unaudited)
---------- ------------ -----------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 1,171.3 $ 975.4
EXPENSES:
Cost of sales (981.1) (794.8)
Operating expenses (104.1) (107.4)
General and administrative expenses (14.1) (18.6)
Depreciation (9.7) (9.6)
Amortization 3 (5.7) (5.9)
Inventory write-down to market 2 -- (8.2)
Equity Pipeline 2.4 2.2
------------ -----------
(1,112.3) (942.3)
------------ -----------
OPERATING INCOME 59.0 33.1
Interest expense and finance
income, net 3, 4 (9.4) (11.0)
------------ -----------
INCOME BEFORE INCOME TAXES 49.6 22.1
Income tax provision 5 (7.0) --
------------ -----------
NET EARNINGS $ 42.6 $ 22.1
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions)
<TABLE>
For the six months
ended June 30,
------------------------
Reference 1997 1998
Note (unaudited) (unaudited)
----------- ---------- ------------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 2,168.6 $ 1,797.8
EXPENSES:
Cost of sales (1,874.7) (1,483.8)
Operating expenses (211.5) (218.2)
General and administrative expenses (29.0) (35.1)
Depreciation (19.2) (19.7)
Amortization 3 (8.6) (11.8)
Inventory write-down to market 2 -- (30.9)
Equity pipelines 4.1 3.3
---------- ----------
(2,138.9) (1,796.2)
---------- ----------
OPERATING INCOME 29.7 1.6
Interest expense and finance
income, net 3, 4 (17.5) (22.0)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 12.2 (20.4)
Income tax provision 5 (7.0) (0.2)
---------- ----------
NET EARNINGS (LOSS) $ 5.2 $ (20.6)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
For the six months
ended June 30,
-----------------------
1997 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 5.2 $ (20.6)
Adjustments:
Depreciation 19.2 19.7
Amortization 12.1 12.9
Share of earnings of affiliates,
net of dividends (0.1) 1.5
Inventory write-down to market -- 30.9
Other 0.3 1.0
Cash reinvested in working capital -
Accounts receivable, prepaid expenses and
other 50.8 4.1
Inventories (12.2) (36.4)
Accounts payable, accrued expenses, taxes
other than income and other (68.4) (21.1)
----------- -----------
Net cash provided by (used in)
operating activities 6.9 (8.0)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment (39.9) (34.5)
Expenditures for turnaround (30.0) (11.1)
Proceeds from disposals of property, plant
and equipment 2.2 13.9
----------- -----------
Net cash used in investing activities (67.7) (31.7)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (1.5) (5.1)
Capital contribution received (returned) -- (9.5)
----------- -----------
Net cash used in financing activities (1.5) (14.6)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (62.3) (54.3)
CASH AND CASH EQUIVALENTS, beginning of period 319.4 229.7
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 257.1 $ 175.4
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark Refining & Marketing, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1998
(tabular dollar amounts in thousands of US dollars)
1. Basis of Preparation
The unaudited consolidated balance sheet of Clark Refining & Marketing,
Inc. and Subsidiaries (the "Company") as of June 30, 1998, and the related
consolidated statements of earnings for the three and six month periods ended
June 30, 1997 and 1998, and the related statements of cash flows for the six
month periods ended June 30, 1997 and 1998, have been reviewed by independent
accountants. Clark Port Arthur Pipeline Company and Clark Investments, Inc.
are included in the consolidated results of the Company. 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 and six month
periods ending June 30, 1997 and 1998.
2. Inventories
The carrying value of inventories consisted of the following:
<TABLE>
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
Crude oil $ 86.2 $ 122.9
Refined and blendstocks 156.6 158.2
LIFO inventory value excess over market (19.2) (50.1)
Convenience products 22.4 19.9
Warehouse stock and other 15.4 16.6
------------ ----------
$ 261.4 $ 267.5
============ ==========
</TABLE>
The write-down of inventory carrying value to market for the three and
six month periods ended June 30, 1998, was $8.2 million (1997 - nil) and $30.9
million (1997 - nil), respectively.
<PAGE> 7
3. Other Assets
Amortization of deferred financing costs for the three and six month
periods ended June 30, 1998, was $0.5 million (1997 - $1.7 million) and $1.0
million (1997 - $3.5 million), respectively, and was included in "Interest and
finance costs, net."
Amortization of refinery maintenance turnaround costs for the three and six
month periods ended June 30, 1998, was $5.9 million (1997 - $5.7 million) and
$11.8 million (1997 - $8.6 million), respectively.
4. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
--------------------- ------------------
1997 1998 1997 1998
--------- ---------- --------- --------
<C> <C> <C> <C>
Interest expense $ 10.7 $ 13.4 $ 21.3 $ 27.0
Financing costs 1.7 0.4 3.5 0.8
Interest and finance income (2.8) (2.2) (6.7) (4.8)
--------- ---------- --------- --------
9.6 11.6 18.1 23.0
Capitalized interest (0.2) (0.6) (0.6) (1.0)
--------- ---------- --------- --------
Interest and finance costs,
net $ 9.4 $ 11.0 $ 17.5 $ 22.0
========= ========== ========= ========
</TABLE>
Cash paid for interest expense for the three and six month periods ended
June 30, 1998 was $14.8 million (1997 - $12.5 million) and $26.7 million (1997
- - $21.4 million). Accrued interest payable at June 30, 1998, of $8.9 million
(December 31, 1997 - $8.7 million) was included in "Accrued expenses and
other."
5. Income Taxes
The Company made net cash tax payments for the three and six month periods
ended June 30, 1998 of $0.6 million (1997 - $0.5 million) and $0.9 million
(1997 -$0.9 million).
6. Lima Refinery Acquisition
On August 10, 1998, the Company acquired British Petroleum's ("BP")
170,000 barrel per day refinery and related terminals located in Lima, Ohio
(the "Lima Acquisition") for $175 million plus inventory currently estimated
at approximately $40 million. The Company funded the Lima Acquisition and
related costs with $5 million of cash on hand and the proceeds of a private
placement to institutional investors of $110 million 8 5/8% Senior Notes due
2008 and $115 million floating rate note term loan due 2004.
In connection with the financing of the Lima Acquisition, the Company's
parent, Clark USA, Inc., received consents from the holders of its 10 7/8%
Senior Notes and its 11 1/2% Cumulative Exchangeable Preferred Stock to permit
the Company 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.
Also in connection with the Lima Acquisition, the Company amended its
revolving credit facility, to increase its size to the lesser of $700 million
or the amount available under a borrowing base, as defined, representing
specified percentages of cash, investments, accounts receivable, inventory and
other working capital items.
<PAGE> 8
7. Equity Pipelines
During July 1998, the Company sold its interests in Westshore Pipeline
Company and Wolverine Pipeline Company for net proceeds of approximately $17
million, resulting in an after-tax book gain of approximately $12 million.
The Company has signed definitive agreements to sell its interests in Chicap
Pipeline Company and Southcap Pipeline Company, subject to regulatory
approval, for net proceeds of approximately $57 million which would result in
an after-tax book gain of approximately $56 million. Although the Company
expects to close the remaining two transactions by September 1998, there can
be no assurance that it will be able to do so by such time or at all.
8. Contingencies
The Company is 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, the Company is 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.
9. 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 ended 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. The adoption of this statement is
not expected to impact the Company's consolidated financial statement
disclosures.
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.
<PAGE> 9
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three and six month periods ended June 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:
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
1997 1998 1997 1998
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Operating Income:
Refining contribution to
operating income $ 74.8 $ 68.1 $ 85.9 $ 89.5
Retail contribution to
operating income 5.9 4.7 10.1 8.9
Corporate general and administrative
expenses (3.5) (5.5) (7.4) (9.9)
--------- --------- --------- ---------
Operating Contribution 77.2 67.3 88.6 88.5
Inventory timing adjustments loss (a) (2.8) (10.5) (31.1) (24.5)
Inventory write-down to market -- (8.2) -- (30.9)
Depreciation and amortization (15.4) (15.5) (27.8) (31.5)
--------- --------- --------- ---------
Operating income $ 59.0 $ 33.1 $ 29.7 $ 1.6
========= ========= ========= =========
</TABLE>
(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 an Operating Contribution (earnings before interest,
taxes, depreciation, amortization and inventory-related charges) of $67.3
million for the quarter ended June 30, 1998 which compared to a record
Operating Contribution of $77.2 million in the same period of 1997. For the
six months ended June 30, 1998, Operating Contribution was $88.5 million
compared to $88.6 million in the first six months of 1997. Net earnings for
the quarter ended June 30, 1998 were $22.1 million compared to $42.6 million
for the same period of 1997. For the first six months of 1998, the Company
reported a net loss of $20.6 million compared to net earnings of $5.2 million
in the first six months of 1997.
A decrease in crude oil prices of over $1.50 per barrel in the second
quarter of 1998 and approximately $3.50 per barrel for the year to date
resulted in a negative impact on net earnings of $18.7 million for the second
quarter and $55.4 million for the first half of 1998 as compared to a negative
impact of $2.8 million and $31.1 million in the same periods a year ago.
These inventory-related charges in 1998 included non-cash accounting charges
of $22.7 million and $8.2 million in the first and second quarters of 1998,
respectively, to write down inventory carrying costs to current market value.
The Company believes it may recover these charges if hydrocarbon prices
increase.
Net sales and operating revenues decreased approximately 17% in the
three and six months ended June 30, 1998 as compared to the same periods
of 1997, principally as a result of lower worldwide crude oil and product
prices in the current year which reduced both sales and cost of goods sold.
<PAGE> 10
Refining
Refining Division Operating Statistics:
(dollars in millions, except per barrel data)
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
1997 1998 1997 1998
---------- -------- --------- -------
<S> <C> <C> <C> <C>
Port Arthur Refinery
Crude oil throughput (m bbls/day) 218.4 233.2 192.6 227.7
Production (m bbls/day) 230.5 241.4 198.5 230.2
Gross margin
($/barrel of production) $ 4.17 $ 4.09 $ 3.99 $ 4.00
Operating expenses (40.6) (42.6) (83.7) (88.0)
Net margin $ 46.8 $ 47.2 $ 59.7 $ 78.5
Blue Island, Hartford
and other refining
Crude oil throughput
(m bbls/day) 137.2 128.0 135.3 118.8
Production (m bbls/day) 145.7 124.9 141.2 120.5
Gross margin ($/barrel of
production) $ 4.87 $ 5.31 $ 3.92 $ 4.08
Operating expenses (31.3) (32.1) (63.3) (64.2)
Net margin $ 33.3 $ 28.2 $ 36.8 $ 24.7
Divisional G & A expenses (5.3) (7.3) (10.6) (13.7)
---------- -------- --------- -------
Refining contribution to
operating income $ 74.8 $ 68.1 $ 85.9 $ 89.5
========== ========= ========= ========
</TABLE>
Refining division contribution to operating income of $68.1 million in
the second quarter of 1998 was below year-ago levels of $74.8 million
principally due to the nearly $5 million estimated impact of a scheduled
maintenance turnaround at the Blue Island refinery that reduced throughput
during the first few weeks of the quarter. For the six months ended
June 30, 1998, contribution to operating income of $89.5 million exceeded
the $85.9 million recorded in the first half of 1997 principally because
there was less total scheduled downtime in 1998. In the first six months
of 1997 a maintenance turnaround at the Port Arthur refinery reduced
refining contribution by an estimated $16 million versus a total impact of
scheduled downtime of approximately $9 million during 1998. During the
Blue Island refinery turnaround, improvements were made to the Blue Island
refinery's vacuum unit that are designed to upgrade approximately 2,000
barrels per day of asphalt-type material to diesel fuel. During the second
quarter and first half of 1998, the Port Arthur refinery continued its
significant productivity improvements under Clark's ownership with record
throughput rates achieved on the crude and FCC units.
Weaker margins for gasoline and distillates in the second quarter
and first half of 1998 versus the same period of 1997 were largely
offset by favorable discounts for heavy and medium sour crude oil.
Industry margin indicators for the Gulf Coast and Chicago markets were each
down approximately 10 cents per barrel in the second quarter and were down
approximately 40 cents per barrel in the first half of 1998 as compared to
the same periods of 1997. Warmer-than-normal weather 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.
<PAGE> 11
Retail
Retail Division Operating Statistics:
(dollars in millions, except per gallon and per store data)
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
1997 1998 1997 1998
---------- -------- --------- -------
<S> <C> <C> <C> <C>
Core Market Stores
Gasoline volume (mm gals.) 228.8 225.7 434.7 451.1
Gasoline gross margin (cents/gal) 9.5 10.3 10.2 10.4
Gasoline gross margin $ 21.8 $ 23.2 $ 44.4 $ 46.9
Convenience product sales $ 64.9 $ 70.9 $115.5 $129.8
Convenience product margin and
other income 16.5 18.5 30.4 34.4
Operating expenses (28.0) (31.1) (55.1) (60.9)
Divisional G & A expenses (5.3) (5.8) (11.0) (11.5)
---------- -------- --------- -------
Core market store contribution $ 5.0 $ 4.8 $ 8.7 $ 8.9
Non-core stores and other 0.9 (0.1) 1.4 --
---------- -------- --------- -------
Retail contribution to
operating income $ 5.9 $ 4.7 $ 10.1 $ 8.9
========== ======== ========= =======
Core Market Stores - Per Month Per Store
Company operated stores
(average) (a) 669 670 663 670
Gasoline volume (m gals.) 115.6 113.8 110.6 113.7
Convenience product sales
(thousands) $ 32.3 $ 35.3 $ 29.0 $ 32.3
Convenience product gross
margin (thousands) 8.3 9.2 7.7 8.6
</TABLE>
(a) Ten stores were operated as convenience stores only.
Retail contribution to operating income from core market stores of $4.8
million in the second quarter of 1998 and $8.9 million for the first six
months of 1998 were relatively flat with year-ago contributions.
Improvements in retail fuel and convenience product gross margins were offset
by higher operating expenses associated with increased advertising and labor
costs. Total retail contribution was reduced in the current quarter
principally due to non-core store results. The Company has sold 110 non-core
stores principally to Clark branded marketers in the first half of 1998
generating approximately $13.9 million of proceeds. 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 second
quarter and first half of 1998 over the comparable periods in 1997 principally
because of increased consulting services and increased information services
costs related to year 2000 upgrades.
Interest and finance costs, net for the three and six months ended June 30,
1998 increased over the comparable periods in 1997 principally because of the
addition of the 8 7/8% Senior Subordinated Notes, due 2007 in late 1997. This
increase was only partially offset by reduced borrowing rates and reduced
deferred financing cost amortization resulting from the Company's other
financing activities in late 1997.
Depreciation and amortization expense increased in the first six months of
1998 over the comparable period in 1997 principally because of amortization
related to the Port Arthur maintenance turnaround performed in the first
quarter of 1997.
<PAGE> 12
Liquidity and Capital Resources
Net cash provided by operating activities, excluding working capital
changes, for the six months ended June 30, 1998 was $45.4 million compared to
$36.7 million in the year-earlier period. Working capital as of June 30, 1998
was $233.8 million, a 1.70-to-1 current ratio, versus $263.7 million as of
December 31, 1997, a 1.74-to-1 current ratio. Total working capital decreased
in the first half of 1998 principally due to the non-cash inventory write-down
of $30.9 million and debt reduction.
In general, the Company's short-term working capital requirements fluctuate
with the price and payment terms of crude oil and refined petroleum products.
The Company has in place a credit agreement (the "Credit Agreement") which
provides for borrowings and the issuance of letters of credit. In connection
with the Lima Acquisition (as defined below), 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 the Company's
cash, 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 June 30, 1998, and prior to
the Lima Acquisition, was $372 million and approximately $197 million of the
facility was utilized for letters of credit. As of June 30, 1998, there were
no direct borrowings under the Credit Agreement.
Cash flows used in investing activities in the first six months of 1998,
excluding short-term investment activities which management treats similar to
cash and cash equivalents, were $31.7 million as compared to $67.7 million in
the year-earlier period. Cash flows used in investing activities in 1998 were
reduced by proceeds of $13.9 million from the sale of certain non-core retail
stores. The higher investing activities in 1997 resulted principally from the
Port Arthur refinery turnaround ($30.0 million) and the acquisition and
subsequent image conversion of 48 retail stores in Michigan ($20.1 million).
Refinery capital expenditures totaled $22.6 million in the first half of 1998
(1997 - $12.5 million) principally related to a project to increase the
throughput of Canadian heavy, sour crude oil at the Hartford refinery, a
project to upgrade vacuum tower bottoms at the Blue Island refinery and
various mandatory expenditures at the Port Arthur refinery. Turnaround
expenditures in the first half of 1998 related to the previously-mentioned
Blue Island refinery turnaround and to a Port Arthur refinery turnaround
scheduled for early 1999. Retail capital expenditures for the first six
months of 1998 totaled $10.1 million (1997 - $6.3 million, excluding the
Michigan acquisition and subsequent image conversion) and were principally for
underground storage tank-related work.
Cash flows used in financing activities for first half of 1998
increased as compared to the same period in 1997 principally because of
the return of capital to the Company's parent, Clark USA, Inc., for its
debt service requirements and the repurchase of a portion of the Company's
9 1/2% Senior Unsecured Notes, due 2004 tendered under its required change
of control offer ($3.3 million).
On August 10, 1998, the Company acquired British Petroleum's
170,000 barrel per day refinery and related terminals located in Lima,
Ohio (the "Lima Acquisition") for $175 million plus inventory currently
estimated at approximately $40 million. The Company funded the Lima Acquisition
and related costs with $5 million of cash on hand and the proceeds of
a private placement to institutional investors of $110 million 8 5/8%
Senior Notes due 2008 and $115 million floating rate note term loan due
2004. From 1991 to 1997 BP invested an aggregate of approximately $212
million in the Lima Refinery. Based on the Company's due diligence, it
expects mandatory capital expenditures 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.
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 are assured due to the pipelines' operation as common carrier
pipelines and the Company's historical throughput on such pipelines.
During July 1998, the Company sold its interests in Westshore Pipeline Company
and Wolverine Pipeline Company for net proceeds of approximately $17 million,
resulting in an after-tax book gain of approximately $12 million. The
Company has signed definitive agreements to sell the remaining two pipeline
interests, subject to regulatory approval, for net proceeds of approximately
$57 million, which would result in an after-tax book gain of approximately
$56 million. Although the Company expects to close the remaining two
transactions by September 1998, there can be no assurance that it will be
able to do so by such time or at all. The above referenced pipelines
contributed approximately $8 million of earnings before interest, taxes,
depreciation and amortization for the year ended December 31, 1997.
<PAGE> 13
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. Future working capital, discretionary or non-
discretionary capital expenditures, or acquisitions may require additional
debt or equity financing.
PART II - OTHER INFORMATION
ITEM 5 - Other Information
On May 18, 1998, Glenn H. Hutchins, 42, was appointed as a director of
the Company filling an existing vacancy. Mr. Hutchins is a Senior Managing
Director of The Blackstone Group L.P., which he joined in 1994. Mr. Hutchins
was a Managing Director of Thomas H. Lee Co. ("THL") from 1987 until 1994
and, while on leave from THL during parts of 1993 and 1994, was a Special
Advisor in the White House. Mr. Hutchins is a member of the boards of
directors of American Axle Manufacturing Inc., CommNet Cellular Inc., Corp.
Banca (Argentina) S.A., Corp. Group. C.V., and Haynes International Inc. In
1994, Mr. Hutchins was also appointed Chairman of the board of directors of
the Western N.I.S. Enterprise Fund by President Clinton.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
Clark USA, Inc., July 7, 1998, Item 5. Other Events - Acquisition
of BP's Lima, Ohio refinery and related Consent Solicitation Statement
including financing plan, update on recent results and sale of minority
pipeline interests.
<PAGE> 15
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 REFINING & MARKETING, INC.
(Registrant)
/s/ Dennis R. Eichholz
------------------------------------
Dennis R. Eichholz
Controller and Treasurer (Authorized
Officer and Chief Accounting Officer)
August 13, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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