UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11392
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 November 6, 1998: 100, all of which were owned by
Clark USA, Inc.
<PAGE> 2
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 September 30, 1998,
and the related consolidated statements of earnings for the three and nine
month periods then ended, and the consolidated statement of cash flows for the
nine month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
The consolidated financial statements of the Company for the three and nine
months ended September 30, 1997 were reviewed by other accountants whose
report dated October 17, 1997, except for Note 8 which was as of November 3,
1997, expressed that they were not aware of any material modifications that
should be made to those financial statements in order for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1997, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated February 6, 1998, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1997
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Deloitte & Touche LLP
St. Louis, Missouri
November 3, 1998
<PAGE> 3
CLARK REFINING & MARKETING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
<TABLE>
September 30,
Reference December 31, 1998
Note 1997 (unaudited)
--------- ------------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 229.7 $ 154.7
Short-term investments 14.9 14.9
Accounts receivable 92.9 231.5
Receivable from affiliates 2.2 4.9
Inventories 3 261.4 422.8
Prepaid expenses and other 18.2 18.6
------------ ------------
619.3 847.4
PROPERTY, PLANT AND EQUIPMENT 2 $ 575.6 $ 764.6
OTHER ASSETS 4, 7 66.0 60.6
------------ ------------
$1,260.9 $1,672.6
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 219.0 $ 342.9
Payable to affiliates 14.8 16.0
Accrued expenses and other 5 69.7 67.2
Accrued taxes other than income 52.1 40.4
------------ ------------
Total current liabilities 355.6 466.5
LONG-TERM DEBT 587.4 806.4
OTHER LONG-TERM LIABILITIES 57.0 59.5
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) 11.7 100.5
------------ ------------
Total stockholder's equity 260.9 340.2
------------ ------------
$1,260.9 $1,672.6
============ ============
</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 September 30,
------------------------
Reference 1997 1998
Note (unaudited) (unaudited)
---------- ------------ -----------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 1,123.7 $1,141.3
EXPENSES:
Cost of sales (916.7) (951.6)
Operating expenses (107.5) (120.8)
General and administrative expenses (18.4) (18.2)
Depreciation (11.0) (10.7)
Amortization 4 (5.5) (6.9)
Recovery of inventory write-down to market 3 -- 20.5
---------- ---------
(1,059.1) (1,087.7)
GAIN ON SALE OF PIPELINE INTERESTS 7 -- 69.3
---------- ---------
OPERATING INCOME 64.6 122.9
Interest expense and finance income, net 4, 5 (8.8) (13.6)
---------- ---------
EARNINGS BEFORE INCOME TAXES 55.8 109.3
Income tax provision 6 (4.7) --
---------- ---------
NET EARNINGS $ 51.1 $ 109.3
========== =========
</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 nine months
ended September 30,
-----------------------
Reference 1997 1998
Note (unaudited) (unaudited)
--------- ----------- -----------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $3,296.4 $2,942.4
EXPENSES:
Cost of sales (2,791.4) (2,435.4)
Operating expenses (319.0) (339.0)
General and administrative expenses (47.4) (53.3)
Depreciation (30.2) (30.4)
Amortization 4 (14.1) (18.7)
Inventory write-down to market 3 -- (10.4)
----------- -----------
(3,202.1) (2,887.2)
GAIN ON SALE OF PIPELINE INTERESTS 7 -- 69.3
----------- -----------
OPERATING INCOME 94.3 124.5
Interest expense and finance income, net 4, 5 (26.3) (35.6)
----------- -----------
EARNINGS BEFORE INCOME TAXES 68.0 88.9
Income tax provision 6 (11.7) (0.2)
----------- -----------
NET EARNINGS $ 56.3 $ 88.7
=========== ===========
</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 nine months
ended September 30,
-----------------------
1997 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 56.3 $ 88.7
Adjustments:
Depreciation 30.2 30.4
Amortization 19.4 20.3
Share of earnings of affiliates, net of dividends -- 0.4
Deferred income taxes (0.7) --
Gain on sale of pipeline interests -- (69.3)
Inventory write-down to market -- 10.4
Other 0.7 3.1
Cash reinvested in working capital -
Accounts receivable, prepaid expenses and other 70.4 (140.9)
Inventories (57.8) (171.0)
Accounts payable, accrued expenses, taxes other than
income and other (79.3) 112.7
----------- ----------
Net cash provided by (used in)
operating activities 39.2 (115.2)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments 0.1 --
Expenditures for property, plant and equipment (54.0) (62.3)
Expenditures for turnaround (31.2) (13.8)
Refinery acquisition expenditures -- (177.7)
Proceeds from disposals of property, plant and equipment 3.7 16.2
Proceeds from sale of pipeline interests -- 76.4
----------- ----------
Net cash used in investing activities (81.4) (161.2)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (2.3) (5.9)
Proceeds from issuance of long-term debt -- 224.7
Capital contribution returned -- (9.5)
Deferred financing costs (3.8) (7.9)
----------- ----------
Net cash provided by (used in)
financing activities (6.1) 201.4
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (48.3) (75.0)
CASH AND CASH EQUIVALENTS, beginning of period 319.4 229.7
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 271.1 $154.7
=========== ==========
</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)
September 30, 1998
(tabular dollar amounts in millions of US dollars)
1. Basis of Preparation
The unaudited consolidated balance sheet of Clark Refining & Marketing,
Inc. and Subsidiaries (the "Company") as of September 30, 1998, and the
related consolidated statements of earnings and of cash flows for the three
and nine month periods ended September 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 nine month
periods ending September 30, 1997 and 1998.
2. Lima Refinery Acquisition
On August 10, 1998 the Company acquired British Petroleum's ("BP") 170,000
barrel per day refinery and related terminal facilities located in Lima, Ohio
(the "Lima Acquisition") for $175 million plus inventory of approximately $60
million. Clark funded the Lima Acquisition and related costs with cash on
hand and the proceeds of a private placement to institutional investors of
$110 million 8 5/8% Senior Notes due 2008 and a $115 million floating rate
term loan due 2004 issued at LIBOR plus 275 basis points.
In connection with the financing of the Lima Acquisition, the Company'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
working capital and letter of credit facility facility on August 10, 1998 to
increase the facility to the lesser of $700 million or the amount of the
borrowing base calculated with respect to the Company's cash, short-term
investments, eligible receivables and hydrocarbon inventories, provided that
direct borrowings are limited to the principal amount of $150 million.
Borrowings under the credit agreement are secured by a lien on substantially
all of the Company's cash and cash
<PAGE> 7
equivalents, receivables, crude oil and refined product inventories and
trademarks. The amount available under the borrowing base associated with
such facility at September 30, 1998 was $565 million and approximately $252
million of the facility was utilized for letters of credit. As of
September 30, 1998, there were no direct borrowings under the Credit Agreement.
3. Inventories
The carrying value of inventories consisted of the following:
<TABLE>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Crude oil $ 86.2 $ 190.9
Refined and blendstocks 156.6 218.4
LIFO inventory value excess over market (19.2) (29.6)
Convenience products 22.4 18.9
Warehouse stock and other 15.4 24.2
------------ -------------
$261.4 $ 422.8
============ =============
</TABLE>
The Company recorded a $20.5 million (1997-nil) recovery of a previous
write-down of inventory carrying value to market for the three month period
ended September 30, 1998. For the nine months ended September 30, 1998, the
Company recorded a net write-down of inventory carrying value to market of
$10.4 million (1997 - nil).
4. Other Assets
Amortization of deferred financing costs for the three and nine month
periods ended September 30, 1998 was $0.5 million (1997 - $1.8 million) and
$1.3 million (1997 - $5.3 million), respectively, and was included in
"Interest and finance costs, net ".
Amortization of refinery maintenance turnaround costs for the three and
nine month periods ended September 30, 1998 was $6.9 million (1997 - $5.5
million) and $18.7 million (1997 - $14.1 million), respectively.
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
--------------------- -------------------
1997 1998 1997 1998
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Interest expense $ 11.0 $ 16.1 $ 32.3 $ 43.0
Financing costs 1.8 0.5 5.3 1.4
Interest and finance income (3.6) (2.3) (10.3) (7.1)
---------- --------- --------- --------
9.2 14.3 27.3 37.3
Capitalized interest (0.4) (0.7) (1.0) (1.7)
---------- --------- --------- --------
Interest and finance
costs, net $ 8.8 $ 13.6 $ 26.3 $ 35.6
========== ========= ========= ========
</TABLE>
Cash paid for interest expense for the three and nine month periods ended
September 30, 1998 was $12.0 million (1997 - $9.2 million) and $38.7 million
(1997 - $30.6 million). Accrued interest payable at September 30, 1998 of
$13.0 million (December 31, 1997 - $8.7 million) was included in "Accrued
expenses and other".
<PAGE> 8
6. Income Taxes
The Company made net cash tax payments for the three and nine month periods
ended September 30, 1998 of $0.1 million (1997 - $0.5 million) and $1.0
million (1997 -$1.3 million), respectively.
7. Sale of Pipeline Interests
During the three month period ended September 30, 1998, the Company sold
its minority interests in Chicap Pipeline Company, Southcap Pipeline Company,
Westshore Pipeline Company and Wolverine Pipeline Company for net proceeds of
$76.4 million that resulted in an after-tax book gain of $69.3 million.
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.
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 nine month periods ended September 30, 1997 and
1998. All dollar amounts listed are in millions. The tables provide
supplementary data and are not intended to represent an income statement
presented in accordance with generally accepted accounting principles.
Financial Results:
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- ---------------------
1997 1998 1997 1998
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Income:
Refining contribution to
operating income $ 71.8 $ 21.0 $ 157.7 $ 110.5
Retail contribution to
operating income 8.0 12.2 18.1 21.1
Corporate general and
administrative expenses (5.1) (4.9) (12.5) (14.8)
---------- --------- ----------- ---------
Operating Contribution 74.7 28.3 163.3 116.8
Inventory timing adjustment gain
(loss) (a) 6.4 22.4 (24.7) (2.1)
Inventory recovery (write-down)
to market -- 20.5 -- (10.4)
Gain on sale of pipeline interests -- 69.3 -- 69.3
Depreciation and amortization (16.5) (17.6) (44.3) (49.1)
---------- --------- ----------- ---------
Operating income $ 64.6 $ 122.9 $ 94.3 $ 124.5
========== ========= =========== =========
</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 net earnings of $109.3 million for the three months
ended September 30, 1998 which compared to net earnings of $51.1 million in the
third quarter of 1997. Net earnings this quarter included a $69.3 million
after-tax gain on the sale of minority pipeline interests and $42.9 million of
inventory-related gains. Operating Contribution (earnings before interest,
depreciation, amortization, inventory-related items, and the gain on the sale
of the minority pipeline interests) of $28.3 million for the third quarter of
1998 was below the record $74.7 million achieved in the third quarter of 1997
principally due to industry refining margins being much weaker this year. For
the nine months ended September 30, 1998, net earnings were $88.7 million
compared to $56.3 million in the first nine months of 1997. Operating
Contribution for the nine months ended September 30, 1998 was $116.8 million
compared to $163.3 million for the same period of 1997.
An increase in petroleum prices of approximately $2 per barrel in the third
quarter of 1998 resulted in inventory-related gains of $42.9 million in
operating income, of which $20.5 million was a non-realized recovery of a
previous write-down of inventory carrying costs to current market value.
Petroleum prices as of September 30, 1998 were still over $1 per barrel below
1997 year-end prices and as a result inventory-related losses in operating
income for the first nine months of 1998 were $12.5 million, of which $10.4
million was a non-realized inventory-accounting charge. If future petroleum
prices decrease, the Company believes it may result in further inventory-
related charges, while if they increase, the Company may record further
inventory-related gains.
<PAGE> 10
Net sales and operating revenues increased approximately 2% in the three
months ended September 30, 1998 as compared to the same period of 1997. This
was due to increased sales volumes resulting from the acquisition of the Lima
refinery on August 10, 1998. The increased volume offset the impact of lower
worldwide petroleum prices in the current year which reduced both sales and
cost of goods sold and resulted in sales and operating revenues for the nine
months ended September 30, 1998 that were approximately 12% below 1997 levels.
Refining
Refining Division Operating Statistics:
(dollars in millions, except per barrel data)
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
1997 1998 1997 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Port Arthur Refinery
Crude oil throughput (m bbls/day) 218.3 223.6 201.3 226.3
Production (m bbls/day) 228.2 219.9 208.5 226.7
Gross margin ($/barrel of production)$ 4.40 $ 3.12 $ 4.14 $ 3.71
Gulf Coast 3/2/1 crack spread
($/barrel) 4.19 1.99 3.53 2.63
Operating expenses (43.4) (44.9) (127.1) (132.9)
Net margin $ 49.0 $ 18.2 $ 108.7 $ 96.7
Midwest Refining and Other
Crude oil throughput (m bbls/day) 136.0 221.6 135.6 153.4
Production (m bbls/day) 141.6 216.0 141.4 152.7
Gross margin ($/barrel of production)$ 4.54 $ 2.74 $ 4.13 $ 3.44
Chicago 3/2/1 crack spread ($/barrel) 4.96 3.30 4.53 3.68
Operating expenses (29.3) (44.0) (92.6) (108.2)
Net margin $ 29.8 $ 10.5 $ 66.6 $ 35.2
Divisional G & A expenses (7.0) (7.7) (17.6) (21.4)
---------- --------- ---------- --------
Refining contribution to
operating income $ 71.8 $ 21.0 $ 157.7 $110.5
========== ========= ========== ========
</TABLE>
Refining division contribution to operating income of $21.0 million in the
third quarter of 1998 was below year-ago levels of $71.8 million principally
due to lower industry refining margins. Similarly, contribution to operating
income of $110.5 million for the nine months ended September 30, 1998 was also
lower than the $157.7 million recorded in the first nine months of 1997.
Industry margin indicators for the Gulf Coast and Chicago markets were down
over 50% and 30%, respectively, in the third quarter, and approximately 25%
and 20%, respectively, for the nine month period, as compared to the same
periods of 1997. A warmer-than-normal 1997-1998 winter and the Asian
financial crisis reduced world-wide demand, and when combined with high
industry inventory levels, resulted in ample supply and a squeeze on light
products margins. Prior year results benefited from unplanned downtime in the
U.S. and Europe.
Crude oil throughput, production and operating expenses in the Company's
Midwest refineries were higher in the third quarter and first nine months of
1998 principally because of the addition of the Lima refinery in mid-August.
However, because of the weak margin environment and the short period of
operation, the Lima refinery only provided a nominal contribution to net
margin. Net margin at the Company's Midwest refineries was reduced by
approximately $10 million in the first nine months of 1998 relative to 1997
principally due to increased scheduled downtime. Conversely, the Port Arthur
refinery benefited in 1998 from less scheduled downtime than 1997 which
improved its net margin by approximately $14 million. This was principally
due to a large maintenance turnaround at the Port Arthur refinery in 1997 and
maintenance turnarounds at the Blue Island refinery in 1998. During the
spring Blue Island refinery turnaround, improvements were made to the
refinery's vacuum unit that are designed to upgrade approximately 2,000
barrels per day of asphalt-type material to diesel fuel. Divisional general
and administrative expenses increased principally because of increased
employee placement costs and the timing of incentive compensation accruals.
<PAGE> 11
Retail
Retail Division Operating Statistics:
(dollars in millions, except per gallon and per store data)
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
1997 1998 1997 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Core Market Stores
Gasoline volume (mm gals.) 238.9 225.7 673.6 676.8
Gasoline gross margin (cents/gal) 10.5 13.2 10.3 11.3
Gasoline gross margin $ 25.1 $ 29.9 $ 69.5 $ 76.8
Convenience product sales 67.8 75.9 183.3 205.7
Convenience product margin and
other income 17.7 19.3 48.1 53.7
Operating expenses (30.3) (31.2) (85.4) (92.1)
Divisional G & A expenses (6.3) (5.6) (17.3) (17.1)
---------- --------- ---------- ---------
Core market store contribution $ 6.2 $ 12.4 $ 14.9 $ 21.3
Non-core stores and other 1.8 (0.2) 3.2 (0.2)
---------- --------- ---------- ---------
Retail contribution to
operating income $ 8.0 $ 12.2 $ 18.1 $ 21.1
========== ========= ========== =========
Core Market Stores - Per Month Per Store
Company operated stores (average) (a) 670 673 665 670
Gasoline volume (m gals.) 120.7 113.2 113.9 113.8
Convenience product sales
(thousands) $ 33.7 $ 37.7 $ 30.6 $ 34.1
Convenience product gross margin
(thousands) 8.8 9.6 8.0 8.9
</TABLE>
(a) Nine stores were operated as convenience stores only.
Retail contribution to operating income from core market stores of $12.2
million in the third quarter of 1998 was nearly double that of the same
period in 1997 as earnings benefited from declining wholesale prices early in
the quarter and continued strong contribution from convenience product sales.
Total retail contribution was also improved and resulted in the best
quarterly retail contribution since 1995. During the third quarter of 1998
the Company focused its fuel pricing strategy on generating gross margins,
albeit with some sacrifice of volume. Non-core stores and other contribution
has decreased versus 1997 since the Company has sold over 120 non-core stores
principally to Clark branded marketers in 1998. As of June 30, 1998, the
Company's program to reposition its assets in non-core markets was
substantially complete.
Other Financial Highlights
Corporate general and administrative expenses increased in the first nine
months of 1998 over the comparable period in 1997 principally because of
increased consulting services and increased information services costs related
to year 2000 remediation and upgrades.
The Company operates many computer programs that use only two digits to
identify a year. If these programs are not modified or replaced by the year
2000, such applications and embedded systems could fail or create erroneous
results. Some applications and embedded systems have already been replaced or
modified. The Company has hired outside consultants to assist it in
evaluating the scope of the remaining required program conversions or
replacements. The Company has expended $0.8 million through September 30,
1998 and estimates the cost of such remaining program conversions or
replacements to be approximately $5 million to $10 million, and estimates
completion by June 30, 1999. Such costs will be expensed as incurred and
funded from operations. The Company reviews the progress of its year 2000
program weekly and if it is determined that any item is falling behind
schedule the Company has, or will, identify an alternative remediation or
replacement approach.
In addition, the Company is communicating, and evaluating the systems of
its customers, suppliers, financial institutions and other with which it does
business to identify any year 2000 issues. Presently, the Company does not
anticipate that the year 2000 problem will have a material adverse effect on
the operations or financial performance of the Company. There can be no
assurance, however, that the year 2000 problem will not adversely affect the
Company and its business. Likewise, there can be no assurance that the
Company's customers, suppliers, financial institutions, and others will be
year 2000 compliant.
<PAGE> 12
Interest and finance costs, net for the three and nine months ended
September 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. On August 10, 1998, the Company
issued $110 million of 8 5/8% Senior Notes and increased borrowings by $115
million under a floating rate term loan at LIBOR plus 275 basis points to fund
the acquisition of the Lima refinery.
Depreciation and amortization expense increased in the three and nine
months ended September 30, 1998 over the comparable periods in 1997
principally because of higher amortization related to maintenance turnarounds
performed in 1997 and 1998.
Liquidity and Capital Resources
Net cash provided by operating activities, excluding working capital
changes, for the nine months ended September 30, 1998 was $84.0 million
compared to $105.9 million in the year-earlier period. Working capital as of
September 30, 1998 was $380.9 million, a 1.82-to-1 current ratio, versus
$263.7 million as of December 31, 1997, a 1.74-to-1 current ratio. Total
working capital increased in the first nine months of 1998 principally due to
cash generated from the sale of the minority pipeline interests and the
acquisition of the Lima refinery's working capital, which was financed
principally with long-term debt. However, the Company believes its cash
balance was below what it considered a normalized level at quarter-end. This
was due to a investment of over $50 million in non-cash working capital due to
temporary operational changes, and transitional issues related to the Lima
refinery acquisition.
In general, the Company's short-term working capital requirements fluctuate
with the price and payment terms of crude oil and refined petroleum products.
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 acquisition of the Lima refinery, the Credit Agreement was amended on
August 10, 1998 to increase the facility to the lesser of $700 million or the
amount of the borrowing base calculated with respect to the Company's cash,
short-term investments, eligible receivables and hydrocarbon inventories,
provided that direct borrowings are limited to the principal amount of $150
million. Borrowings under the Credit Agreement are secured by a lien on
substantially all of the Company's cash and cash equivalents, receivables,
crude oil and refined product inventories and trademarks. The amount
available under the borrowing base associated with such facility at September
30, 1998 was $565 million and approximately $252 million of the facility was
utilized for letters of credit. As of September 30, 1998, there were no
direct borrowings under the Credit Agreement.
On August 10, 1998, the Company acquired British Petroleum's ("BP") 170,000
barrel per day refinery and related terminals located in Lima, Ohio for $175
million plus inventory of approximately $60 million. From 1991 to 1997 the
Company believes BP invested an aggregate of approximately $212 million in the
Lima refinery. Based on the Company's due diligence, it expects mandatory
capital expenditures for the Lima refinery to average approximately $20
million per year for the period from 1999 to 2002 and turnaround expenditures
to cost approximately $30 million once every five years. The Lima Refinery is
scheduled to have the first such major maintenance turnaround in 1999. The
Company expects cash flows from the Lima Refinery to be adequate to cover
incremental financing and mandatory capital and turnaround costs.
In 1997, the Company determined that its minority interests in Westshore
Pipeline Company, Wolverine Pipeline Company, Chicap Pipeline Company and
Southcap Pipeline Company were not strategic since the Company's shipping
rights were assured due to the pipelines' operation as common carrier
pipelines and the Company's historical throughput on such pipelines. During
the third quarter of 1998, the Company sold its interests in these pipelines
for net proceeds of $76.4 million. The above referenced pipelines contributed
approximately $8 million of dividends to the Company for the year ended
December 31, 1997.
<PAGE> 13
Cash flows used in investing activities in the first nine months of 1998
were $161.2 million as compared to $81.4 million in the year-earlier period.
Cash flows used in investing activities in 1998 were reduced by proceeds of
$76.4 million from the sale of the minority pipeline interests and $16.2
million from the sale of certain non-core retail stores. The higher net
investing activities in 1998 resulted principally from the acquisition of the
Lima refinery. Refinery expenditures for property, plant and equipment
totaled $42.6 million in the first nine months of 1998 (1997 - $17.6 million)
principally related to (i) a project to upgrade the Port Arthur refinery to
allow it to process up to 80% heavy, sour crude, (ii) a project to increase
the throughput of Canadian heavy, sour crude oil at the Hartford refinery,
(iii) a project to upgrade vacuum tower bottoms at the Blue Island refinery
and (iv) various mandatory expenditures at the Port Arthur refinery. Retail
expenditures for property, plant and equipment for the first nine months of
1997 included $21.0 million for the acquisition and subsequent image
conversion of 48 retail stores in Michigan. In 1998, retail expenditures
totaled $16.2 million versus $13.9 million, excluding the Michigan
acquisition, in 1997 and were principally for underground storage tank-related
work. As of September 30, 1998, the Company was substantially complete with
its program, which will still require some on-going expenditures, to comply
with the EPA's pending December 1998 underground storage tank regulations.
Turnaround expenditures in the first nine months of 1998 related to Blue
Island refinery turnarounds and to a Port Arthur refinery turnaround scheduled
for early 1999, while 1997 turnaround expenditures were principally related to
the Port Arthur refinery.
In March 1998, the Company announced that it had entered into a long-term
crude oil supply agreement with P.M.I. Comercio Internacional, S.A. de C.V.,
an affiliate of Petroleos Mexicanos, the Mexican state oil company. The
contract provided the Company with the foundation necessary to continue
developing a project to upgrade its Port Arthur, Texas refinery to process
primarily lower-cost, heavy sour crude oil. The project is expected to cost
$600-$700 million and include the construction of additional coking and
hydrocracking capability, and the expansion of crude unit capacity to
approximately 250,000 barrels per day. The Company has begun entering into
purchase orders, some of which contain cancellation penalties and provisions,
for material, equipment and services related to this project. As of
September 30, 1998, non-cancelable amounts of approximately $30 million had
accumulated under these purchase orders. Additional purchase orders and
commitments are expected to be made during the rest of 1998 and into 1999.
The Company plans to initially fund expenditures related to this project with
existing liquidity, but expects to seek additional debt or equity financing
in 1999.
Cash flows provided by financing activities for first nine months of 1998
increased as compared to the same period in 1997 principally because of the
financing of the acquisition of the Lima refinery. The Company funded the
acquisition of the Lima refinery and related costs with cash on hand and the
proceeds of a private placement to institutional investors of $110 million 8
5/8% Senior Notes due 2008 and a $115 million floating rate term loan due
2004.
Funds generated from operating activities together with the Company's
existing cash, cash equivalents and short-term investments are expected to be
adequate to fund requirements for working capital and capital expenditure
programs for the next year, excluding the Port Arthur heavy sour crude oil
upgrade project which the Company expects to finance in the first half of
1999. Future working capital investments, discretionary or non-discretionary
capital expenditures, or acquisitions may require additional debt or equity
financing.
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
August 24, 1998, Item 2 Acquisition of Assets and Item 7 Financial
Statements, Pro Forma Information and Exhibits - Acquisition and
financing of British Petroleum's Lima, Ohio refinery and related
agreements.
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)
November 13, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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