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, 2000
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
THE PREMCOR REFINING GROUP 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)
CLARK REFINING & MARKETING, INC.
(Former name of registrant)
Registrant's telephone number, including area code (314) 854-9696
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Number of shares of registrant's common stock, $.01 par value, outstanding
as of November 10, 2000, 100, all of which were owned by Premcor USA Inc.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of The Premcor Refining Group Inc:
We have reviewed the accompanying consolidated balance sheet of The Premcor
Refining Group Inc. and Subsidiaries (the "Company") as of September 30, 2000
and the related consolidated statements of operations for the three-month and
nine-month periods ended September 30, 1999 and 2000, and consolidated
statements of cash flows for the nine-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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 1999, and the related consolidated statements of
operations, stockholder's equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 16, 2000, we expressed an
unqualified opinion on those consolidated financial statements.
Deloitte & Touche LLP
St. Louis, Missouri
November 7, 2000
1
<PAGE>
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
<TABLE>
Reference December 31, September 30,
Note 1999 2000
------------ ------------ -------------
ASSETS (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 284.9 $ 226.1
Short-term investments 1.4 1.4
Accounts receivable 197.1 283.6
Receivable from affiliates 8 7.4 5.8
Inventories 3 252.2 401.6
Prepaid expenses and other 37.1 35.0
------------ -------------
Total current assets 780.1 953.5
PROPERTY, PLANT, AND EQUIPMENT, NET 615.3 698.6
OTHER ASSETS 4 118.4 113.0
------------ ------------
$ 1,513.8 $ 1,765.1
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 331.1 $ 538.9
Payable to affiliates 8 26.9 27.9
Accrued expenses and other 5 73.4 60.8
Accrued taxes other than income 39.4 31.7
----------- ------------
Total current liabilities 470.8 659.3
LONG-TERM DEBT 794.9 795.1
OTHER LONG-TERM LIABILITIES 64.8 65.6
COMMITMENTS AND CONTINGENCIES 9 -- --
COMMON STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and 100 shares
issued and outstanding) -- --
Paid-in capital 194.7 168.7
Retained earnings (deficit) (11.4) 76.4
------------ -------------
Total stockholder's equity 183.3 245.1
------------ -------------
$ 1,513.8 $ 1,765.1
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
<TABLE>
For the Three Months
Reference Ended September 30,
Note -----------------------------------
----- 1999 2000
----------- -------------
<S> <C> <C>
NET SALES AND OPERATING REVENUES $ 1,137.5 $ 2,032.6
EXPENSES:
Cost of sales (1,015.8) (1,862.8)
Operating expenses (104.5) (115.0)
General and administrative expenses (12.5) (12.3)
Depreciation (9.1) (9.7)
Amortization 4 (6.5) (9.2)
------------ -----------
(1,148.4) (2,009.0)
------------ -----------
OPERATING INCOME (LOSS) (10.9) 23.6
Interest and finance costs, net 4, 5 (14.4) (15.8)
------------ -----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (25.3) 7.8
Income tax (provision) benefit 7 13.2 (0.2)
------------ -----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (12.1) 7.6
Discontinued operations, net of income tax provision
of $5.7 (9.2) --
Gain on disposal on discontinued operations, net of
taxes of $23.3 36.6 --
------------ ------------
NET EARNINGS $ 15.3 $ 7.6
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
<TABLE>
For the Nine Months
Ended September 30,
---------------------------------
Reference
Note 1999 2000
------------ ------------- ------------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 3,094.1 $ 5,312.4
EXPENSES:
Cost of sales (2,796.0) (4,762.7)
Operating expenses (297.0) (327.9)
General and administrative expenses (38.1) (34.9)
Depreciation (26.5) (26.6)
Amortization 4 (18.5) (25.6)
Inventory recovery to market 3 105.8 --
------------- ------------
(3,070.3) (5,177.7)
------------- ------------
OPERATING INCOME 23.8 134.7
Interest and finance costs, net 4, 5 (46.4) (46.3)
------------- ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (22.6) 88.4
Income tax (provision) benefit 7 15.8 (0.6)
------------- ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (6.8) 87.8
Discontinued operations, net of income tax provision
of $2.7 (4.3) -
Gain on disposal of discontinued operations, net of
taxes of $23.3 36.6 -
------------ ------------
NET EARNINGS $ 25.5 $ 87.8
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
<TABLE>
For the Nine Months
Ended September 30,
-------------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 25.5 $ 87.8
Discontinued operations 4.3 --
Adjustments:
Depreciation 26.5 26.6
Amortization 23.0 31.6
Deferred income taxes 8.2 --
Gain on sale of retail interests (36.3) --
Inventory recovery to market (105.8) --
Other, net 20.5 0.4
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other (54.6) (84.4)
Inventories 48.1 (149.5)
Accounts payable, accrued expenses, taxes other than
income and other 68.5 197.2
------------ ------------
Net cash provided by operating activities
of continuing operations 27.9 109.7
Net cash used in operating activities of
discontinued operations (25.3) --
------------ ------------
Net cash provided by operating activities 2.6 109.7
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (180.4) (110.3)
Expenditures for turnaround (66.3) (23.8)
Proceeds from sale of assets 214.9 0.5
Proceeds from sale of upgrade assets to Port Arthur Coker Company LP 157.1 --
Purchases of short-term investments (3.2) (1.5)
Sales and maturities of short-term investments 2.9 1.5
Discontinued operations (1.8) --
------------ ------------
Net cash provided by (used in) investing activities 123.2 (133.6)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments (2.5) (7.0)
Capital contribution returned (39.5) (26.0)
Deferred financing costs -- (1.9)
------------ ------------
Net cash used in financing activities (42.0) (34.9)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 83.8 (58.8)
CASH AND CASH EQUIVALENTS, beginning of period 147.5 284.9
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 231.3 $ 226.1
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
The Premcor Refining Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2000
(tabular dollar amounts in millions of U.S. dollars)
1. Basis of Preparation
The consolidated interim financial statements of The Premcor Refining Group
Inc. and Subsidiaries (formerly Clark Refining & Marketing, 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 1999 Annual
Report on Form 10-K/A.
The Company changed its name effective May 10, 2000 pursuant to the terms
of a 1999 transaction with Apollo Management L.C. in which the Company sold the
retail marketing division as well as the Clark trade name.
2. New Accounting Standard
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards 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, as
amended, will be adopted by the Company effective January 1, 2001. Management is
continuing to evaluate the impact the adoption of this standard will have on the
Company's financial position and results of operations. Based on an initial
analysis, management believes no material effect of adoption is currently
expected.
3. Inventories
The carrying value of inventories consisted of the following:
<TABLE>
December 31, September 30,
1999 2000
----------- -------------
<S> <C> <C>
Crude oil .................................................. $ 95.1 $ 184.5
Refined products and blendstocks............................ 134.6 193.6
Warehouse stock and other................................... 22.5 23.5
----------- -------------
$ 252.2 $ 401.6
=========== =============
</TABLE>
The market value of crude oil and refined product inventories at September
30, 2000 was approximately $131 million (December 31, 1999 - $78 million) above
carrying value. In the first nine months of 1999 there was a $105.8 million
recovery of a prior year write-down of inventory costs to market. Included in
inventory at September 30, 2000 were 0.4 million barrels of crude oil, valued at
$10.4 million, for which the Company did not hold title but was obligated to
repurchase at a fixed price on a future date.
6
<PAGE>
4. Other Assets
Amortization of deferred financing costs for the three- and nine-month
periods ended September 30, 2000 was $2.0 million (1999 - $1.5 million) and $5.9
million (1999 - $4.4 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, 2000 was $9.2 million (1999 - $6.5
million) and $25.6 million (1999 - $18.5 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,
------------------- -------------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
------ ------ ------ ------
Interest expense................. $ 18.3 $ 18.6 $ 55.4 $ 55.3
Financing costs.................. 1.7 2.1 4.7 6.1
Interest and finance income...... (3.3) (3.1) (6.2) (9.9)
------ ------ ------ ------
16.7 17.6 53.9 51.5
Capitalized interest............. (2.3) (1.8) (7.5) (5.2)
------ ------ ------ ------
$ 14.4 $ 15.8 $ 46.4 $ 46.3
======= ======== ======== ========
</TABLE>
Cash paid for interest expense for the three- and nine-month periods ended
September 30, 2000 was $19.1 million (1999 - $18.7 million) and $55.6 million
(1999 - $55.9 million), respectively. Accrued interest payable as of September
30, 2000 of $13.2 million (December 31, 1999 - $13.3 million) was included in
"Accrued expenses and other."
6. Working Capital Facility
In September 2000, the Company entered into a cash-collateralized working
capital facility of $75 million to be used for issuing letters of credit for
crude oil purchases. This facility is in addition to the Company's existing
credit facility and was necessary to address the higher crude oil price
environment. As crude oil prices have risen in 2000, the availability to issue
letters of credit under the existing $625 million working capital facility was
significantly reduced as it was sized for maximum $30 per barrel crude oil. As
of September 30, 2000, there were $56.7 million of letters of credit issued
against this facility. This new facility matures on June 30, 2001, concurrent
with the Company's existing facility.
7. Income Taxes
The Company made net cash income tax payments during the three- and
nine-month periods ended September 30, 2000 of $2.5 million (1999 - net cash
income tax refunds received of $0.5 million) and $3.3 million (1999 - net cash
income tax refunds received of $0.5 million), respectively.
The income tax benefit from Continuing Operations of $13.2 million and
$15.8 million for the three- and nine-month periods ended September 30, 1999,
respectively, reflect the effects of intraperiod tax allocations resulting from
the utilization of net operating losses to offset the income tax provision
resulting from the Gain on Disposal of Discontinued Operations ($23.3 million)
and the income tax benefit from Discontinued Operations, as well as the
write-down of a net deferred tax asset.
8. Related Party Transactions
At September 30, 2000, the Company had a net outstanding receivable balance
of $0.9 million (December 31, 1999 - $0.4 million) from Port Arthur Coker
Company L.P. ("PACC"), consisting of a receivable of $1.0 million for services
provided under a services and supply agreement and fees paid by the Company on
PACC's behalf and a $0.1 million payable for the overpayment of such services in
a prior period. These amounts may be offset.
7
<PAGE>
9. Commitments and 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 the Company's contingent liabilities, the Company is of the opinion that the
aggregate amount of any such liabilities, for which a provision has not been
made, will not have a material adverse effect on its 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.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Financial Highlights
The following table reflects The Premcor Refining Group Inc.'s (formerly
Clark Refining & Marketing, Inc., the "Company") financial and operating
highlights for the three- and nine-month periods ended September 30, 1999 and
2000. All amounts listed are dollars in millions, except barrel and 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.
<TABLE>
Operating Income:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Port Arthur Refinery
Crude oil throughput (000 barrels per day) 189.8 247.3 205.2 187.3
Production (000 barrels per day) 199.2 233.0 207.3 201.1
Gross margin (per barrel of production) $ 2.52 $ 4.72 $ 2.23 $ 4.55
Gulf Coast 3/2/1 crack spread (per barrel) 2.54 4.37 1.73 4.32
Operating expenses (44.9) (55.7) (124.0) (153.7)
Net margin $ 1.1 $ 45.4 $ 2.0 $ 97.3
Midwest Refineries and Other
Crude oil throughput (000 barrels per day) 245.2 284.5 252.4 267.1
Production (000 barrels per day) 242.5 279.3 251.3 266.5
Gross margin (per barrel of production) $ 2.32 $ 2.78 $ 2.07 $ 4.64
Chicago 3/2/1 crack spread (per barrel) 3.72 5.09 2.83 5.92
Operating expenses (59.6) (59.3) (173.0) (174.2)
Net margin $ (7.8) $ 12.2 $ (31.0) $ 164.9
General and administrative expenses (12.5) (12.3) (38.1) (34.9)
----------- ---------- ---------- -----------
Operating Contribution (loss) $ (19.2) $ 45.3 $ (67.1) $ 227.3
Inventory timing adjustment gain (loss) (a) 23.9 (2.8) 30.1 (40.4)
Inventory recovery to market -- -- 105.8 --
Depreciation and amortization (15.6) (18.9) (45.0) (52.2)
----------- ---------- ---------- -----------
Operating income (loss) $ (10.9) $ 23.6 $ 23.8 $ 134.7
=========== ========== ========== ===========
</TABLE>
(a) Includes adjustments to inventory costs caused by differences between
when and how crude oil is actually purchased, refined products are actually sold
and inventories managed, and a daily "market in, market out" operations
measurement methodology.
The Company had net earnings from continuing operations of $7.6 million in
the third quarter of 2000 as compared to a net loss from continuing operations
of $12.1 million in the same period a year ago. For the nine-month period ended
September 30, 2000, the Company had net earnings from continuing operations of
$87.8 million as compared to a net loss from continuing operations of $6.8
million for the same period last year. Net earnings from continuing operations
in the nine-month period ended September 30, 1999 included a $105.8 million
after-tax recovery of previous writedowns of inventory costs to market value.
Excluding this non-cash item, net earnings from continuing operations improved
$200.4 million in the first nine months of 2000 from the year-ago period. Net
sales and operating revenues increased approximately 79% and 72% in the third
quarter and first nine months of 2000 as compared to the same periods of 1999,
and cost of sales increased approximately 83% and 70% in the third quarter and
first nine months of 2000 as compared to the same period of 1999. The increase
in net sales and operating revenues and cost of sales was principally due to
higher petroleum prices.
8
<PAGE>
Operating Contribution (earnings before interest, depreciation,
amortization, inventory-related items and taxes) of $45.3 million in the third
quarter of 2000 was improved versus an Operating Contribution loss of $19.2
million in the same period of 1999. Operating Contribution of $227.3 million in
the first nine months of 2000 was also improved versus an Operating Contribution
loss of $67.1 million in the same period of 1999. Both the third quarter and
year-to-date 2000 results were impacted by dramatic improvements in margins for
light products (gasoline and distillates) versus 1999. Operating income was
reduced by $2.8 million and $40.4 million in the third quarter and first nine
months of 2000 due to the negative impact of inventory timing adjustments. These
inventory timing adjustment losses were mainly due to managing inventory in
volatile and backwardated market conditions. Backwardation occurs when the
future price of a product is less than the price in the current trading month.
Operating Contribution improved in the third quarter and first nine months
of 2000 as compared to the same periods last year due to the continued strong
refined product market conditions. The market conditions for the first nine
months of 2000 started improving over prior year levels during the first quarter
and remained above prior year levels on a year-to-date basis. These improved
market conditions were due mainly to low U.S. inventory levels, solid demand,
the mandated introduction of a new summer-grade reformulated gasoline, and
supply disruptions. The improvement in light product margins was reflected by
improvements in benchmark 3/2/1 crack spreads, which are indicators of refining
margins based on quoted market prices. The 3/2/1 crack spread is calculated by
subtracting the price for three barrels of WTI crude oil from the price of two
barrels of regular unleaded gasoline and one barrel of high sulfur diesel fuel,
and dividing the total by three. In the third quarter of 2000, the Gulf Coast
crack spread averaged $4.37 per barrel versus $2.54 per barrel in 1999, and the
average Chicago crack spread increased to $5.09 per barrel compared to $3.72 per
barrel last year. In the first nine months of 2000, 3/2/1 crack spreads in the
Gulf Coast market averaged $4.32 per barrel versus only $1.73 per barrel for the
same period in 1999, and the Chicago market averaged $5.92 per barrel versus
$2.83 per barrel for the same period in 1999. Midwest markets were weak early in
the third quarter of 2000 relative to the exceptional levels experienced in the
second quarter, and over-supplied relative to other areas in the U.S., but still
remained strong against the prior year. Crack spreads in both markets began the
fourth quarter of 2000 at higher levels than the same period in 1999 with
continued tight supply and demand balances, heavy turnaround activity in the
Midwest, and favorable market sentiment. The improved light product margins were
partially offset by poor heavy product margins as prices for such products as
petroleum coke and residual fuel did not track the high feedstock prices in the
period. This trend has continued in the fourth quarter.
Crude oil throughput rates at the Port Arthur refinery reached record
levels in the third quarter of 2000 after the modifications made to the crude
unit during the second quarter maintenance turnaround. In the first nine months
of 2000, the Port Arthur refinery experienced reduced rates principally due to
the maintenance turnaround and subsequent unplanned downtime in the second
quarter and reduced rates associated with weak margins early in the first
quarter. During the third quarter of 2000, the Midwest refineries also achieved
record crude oil throughput rates. The Lima refinery ran at essentially full
economic capacity as it continues to be restricted from achieving its full rated
capacity of 170,000 barrels per day by a limited market for high sulfur diesel
fuel in its sales area. During the first nine months of 2000, the Midwest
refineries were below full economic utilization due to reduced rates associated
with weak margins early in the first quarter and unplanned downtime.
Operating expenses at the Port Arthur refinery increased during the third
quarter and first nine months of 2000 due to higher energy and repair and
maintenance expenses. Natural gas prices increased in the third quarter and
first nine months of 2000, increasing operating expenses by $10 million and $22
million, respectively, versus 1999. General and administrative expenses in the
first nine months of 2000 were lower than 1999 due to costs eliminated by the
sale of the Company's refined product terminals and Y2K remediation costs
incurred in 1999 slightly offset by an increase in incentive compensation
accruals for 2000 due to improved financial results.
Other Financial Highlights
Depreciation and amortization expenses increased in the three- and
nine-month periods ended September 30, 2000 over the comparable periods in 1999
principally because of higher amortization of turnaround costs associated with
the Lima refinery maintenance turnaround performed in the third quarter of 1999.
Interest and finance costs, net for the quarter ended September 30, 2000 were
higher than 1999 principally due to higher interest rates on the Company's
floating interest rate loans. Interest and finance costs, net for the nine-month
period ended September 30, 2000 were lower than 1999 principally due to
increased interest income resulting from higher invested balances and interest
rates partially offset by the higher interest rates on the Company's floating
interest rate loans.
9
<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities, excluding working capital
changes, for the nine months ended September 30, 2000 was $146.4 million
compared to cash used of $34.1 million in the year-earlier period. Working
capital as of September 30, 2000 was $294.2 million, a 1.45-to-1 current ratio,
versus $309.3 million as of December 31, 1999, a 1.66-to-1 current ratio. The
improvement in net cash provided by operating activities, excluding working
capital changes, principally resulted from the improved industry market
conditions.
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 which provides for the issuance of
letters of credit up to the lesser of $625 million or the amount of a borrowing
base calculated with respect to the Company's cash and eligible cash
equivalents, eligible investments, eligible receivables, eligible petroleum
inventories, paid but unexpired letters of credit, and net obligations on swap
contracts. The credit agreement also provides for direct cash borrowings up to
$50 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 borrowing base
associated with such facility at September 30, 2000 was $797 million and
approximately $578 million of the facility was utilized for letters of credit.
As of September 30, 2000, there were no direct borrowings under the credit
agreement. In September 2000, the Company entered into an additional
cash-collateralized working capital facility of $75 million that is outside of
the existing credit facility and will be used for issuing letters of credit for
crude oil purchases. This facility was necessary to address the higher crude oil
price environment. As crude oil prices have risen in 2000, the availability to
issue letters of credit under the existing $625 million working capital facility
was significantly reduced as it was sized for maximum $30 per barrel crude oil.
As of September 30, 2000, there were approximately $57 million of letters of
credit issued against this new facility. Both of these credit facilities expire
on June 30, 2001.
In addition, the Company had cash-collateralized arrangements with certain
lenders to issue up to $70 million of letters of credit for the Company's
commitments associated with a heavy oil upgrade project at its Port Arthur
refinery and for non-hydrocarbon items. The total outstanding letters of credit
under these arrangements were $26 million for the heavy oil upgrade project and
$19 million for non-hydrocarbon items as of September 30, 2000.
In 1999, the Company sold crude oil linefill in the pipeline system
supplying the Lima refinery. The Company has an agreement in place that requires
it to repurchase approximately 2.6 million barrels of crude oil in this pipeline
system in March 2001 at market prices, unless extended by mutual consent.
In 1998, the Company began an upgrade project at its Port Arthur refinery
that included the construction of new coking, hydrocracking, sulfur removal
capability, and the expansion of the existing crude unit capacity to 250,000
barrels per day (the "Refinery Upgrade Project"). The Refinery Upgrade Project
will allow the refinery to process primarily lower-cost, heavy sour crude oil.
In the third quarter of 1999, the Company sold a portion of the work in progress
and certain other assets to Port Arthur Coker Company L.P. ("PACC"), a company
that is an affiliate of, but not controlled by, the Company. PACC financed and
is completing the construction of the new coking, hydrocracking, and sulfur
removal facilities. The Company has completed the expansion of its crude unit
capacity to 250,000 barrels per day from 232,000 barrels per day and is making
certain other improvements that are part of the Refinery Upgrade Project. As of
September 30, 2000, the Company 's portion of the Refinery Upgrade Project was
over 95% complete. PACC and the Company have entered into certain agreements
associated with the Refinery Upgrade Project and continuing operations.
The Refinery Upgrade Project is expected to begin operations and revenue
generation in the fourth quarter of 2000 with operations in the initial three to
six months at less than full capacity. The sulfur complex began operations in
early November, and the coker and hydrocracker units are expected to begin
operations later in the fourth quarter. In early November, a supplier-built
hydrogen plant that will provide steam, electricity and hydrogen to the Company
and PACC under a long-term agreement also began operations. Additional
information regarding the Refinery Upgrade Project is included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1999.
Cash flows used in investing activities in the first nine months of 2000
were $133.6 million as compared to cash flows provided from investing activities
of $123.2 million in the year-earlier period. Capital expenditures were $134.1
million in the first nine months of 2000 versus $246.7 million in the same
period of 1999. A significant portion of the 1998 and 1999 capital expenditures
totaling $157.1 million, related to the Refinery Upgrade Project discussed
above, were sold to PACC in the third quarter of 1999. Capital expenditures in
2000 included $79.4 million related to the Company's portion of the Refinery
Upgrade Project. The Company has invested $130.2 million, net, in the Refinery
Upgrade Project since its inception. In the first nine months of 1999, the Lima,
Port Arthur, and Blue Island refineries had maintenance turnaround activity
totaling $66.3 million, while most of the $23.8 million of maintenance
turnaround costs in 2000 was due to the Port Arthur refinery turnaround in the
second quarter. Funds from investing activities in the first nine months of 1999
also included proceeds from the sale of the Company's retail operations.
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Cash flows used in financing activities for the first nine months of 2000
were lower as compared to the same period in 1999 principally because of a
higher return of capital to Premcor USA Inc. in 1999 than in 2000. Cash flow
uses in the first nine months of 2000 included a balloon payment due upon
expiration of a capital lease and additional costs of expanding the Company's
credit agreement to $625 million from the $540 million originally put into place
in November 1999.
Premcor USA Inc., the 100% owner of the Company, relies on the Company for
substantially all of its liquidity in order to meet its interest and other
costs. Premcor USA Inc. is required to make interest payments on its 10 7/8%
Notes due 2005 of $9.5 million on June 1 and December 1 of each year and expects
its other costs to total less than $1 million per year. Premcor USA Inc.
currently pays dividends on its 11 1/2% Exchangeable Preferred Stock in kind. In
August 2000, the Company returned capital of $26 million to Premcor USA Inc. for
future costs. As of September 30, 2000, cash, cash equivalents, and
short-term investments owned by Premcor USA Inc. amounted to $38.5 million, and
the most restrictive covenant at the Company would have allowed an additional
$29 million to be returned to Premcor USA Inc. These amounts are restricted
primarily for financing costs.
In December 1999, the United States Environmental Protection Agency
("USEPA") published the Tier II Motor Vehicle Emission Standards Final Rule
for all passenger vehicles, establishing standards for sulfur content in
gasoline. The ruling mandates that the sulfur content of gasoline at any
refinery not exceed 30 parts per million after January 1, 2006. Starting in
2004, the USEPA will begin a program to phase in new low sulfur gasoline
requirements. Currently the sulfur content in the Company's gasoline pool
averages approximately 385 parts per million.
After preliminary analysis, the Company believes it will be required to
make material capital investments at each of its refineries to reduce the
sulfur levels in its gasoline in order to meet these regulations beginning
with some preliminary engineering in 2001. The Company is currently
evaluating strategic options for its current refining asset portfolio
relative to this potential investment to determine when, how and whether
investment is warranted. Until this analysis is completed, the Company is
unable to estimate its cost of meeting the new low sulfur gasoline
standards. The USEPA has also drafted a proposed regulation which, it is
believed, would require a significant reduction in the sulfur content of
diesel fuel by the year 2006 and require additional capital investment.
Funds generated from operating activities together with existing cash, cash
equivalents and short-term investments and proceeds from asset sales are
expected to be adequate to fund existing requirements for working capital and
capital expenditure programs for the Company for the next year. Due to the
commodity nature of its feedstocks and products, the Company's operating results
are subject to rapid and wide fluctuations. While the Company believes its
maintenance of large cash, cash equivalents and short-term investment balances
and its operating philosophies will be sufficient to provide the Company with
adequate liquidity through the next year, there can be no assurance that market
conditions will not be worse than anticipated. Future working capital,
discretionary capital expenditures, environmentally mandated spending and
acquisitions may require additional debt or equity capital.
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:
o Industry-wide refining margins
o 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
o Market volatility due to world and regional events
o Availability and cost of debt and equity financing
o Labor relations
o U.S. and world economic conditions
o Supply and demand for refined petroleum products
o 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
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o Actions taken by competitors which may include both pricing and
expansion or retirement of refinery capacity
o The enforceability of contracts
o Civil, criminal, regulatory or administrative actions, claims or
proceedings and regulations dealing with protection of the environment,
including refined petroleum product composition and characteristics
o Other unpredictable or unknown factors not discussed
Because of all of these uncertainties, and others, you should not place
undue reliance on the Company's forward-looking statements.
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
During the start up of the fluid catalytic cracking unit at the Blue
Island refinery in June 2000, following a power outage, a malfunction
resulted in the accidental release into the air of an estimated 22 tons of
non-toxic catalyst. The Company immediately commenced and is continuing an
effort to address and resolve the claims and concerns of the communities and
local residents impacted by the release. However, as a result of this release
two class actions (Madrigal et al. v. Clark and Mason et al. v. Clark) were
filed against the Company seeking unspecified recovery for alleged property
damage and personal injury. The Company plans to vigorously defend these
lawsuits.
As a result of a multimedia investigation by the Environmental Protection
Agency at the Blue Island refinery during March 1997, civil and criminal
proceedings were initiated by the federal government. The Company, federal
agencies, and state agencies have reached an agreement in principle on a
resolution of the civil issues arising from that investigation as well as all
outstanding state enforcement issues. The agreement requires the payment of
a fine by the Company of approximately $2.5 million, changes and enhancements
to certain operating practices and procedures, and installation of a wet gas
scrubber on the fluid catalytic cracker unit at the refinery. The parties
have begun the process of negotiating the language of a consent decree
incorporating these agreements in principle. The Company anticipates that an
agreement will be reached and the consent decree will be entered by the end
of the year. The Company does not believe that compliance with the proposed
consent decree will have a material adverse effect on the results of
operations or financial position of the Company.
The criminal proceeding arising out of the multimedia investigation was
commenced by issuance of a grand jury subpoena in March 1997 requesting
certain documents relating to wastewater discharges. The Company cooperated
fully in the grand jury investigation. The grand jury investigation resulted
in the indictment of the Company and two former employees in August 2000. The
Company resolved the allegations against itself by agreeing prior to the
announcement of the indictments to plead guilty to two felonies, pay a $2
million fine and be placed on probation for three years. The two former
Company employees are scheduled for trial in April 2001 regarding their
individual indictments.
A resolution has been reached in a civil administrative action initiated
by the federal government at the Hartford refinery in July 1999. This action
alleged violations of the Emergency Planning and Community Right-to-Know Act,
and regulations promulgated thereunder with respect to certain record keeping
and reporting requirements. The matter was resolved by agreement by the
Company to pay a civil penalty of $50,000 and undertake a supplemental
environmental project valued at $175,000.
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ITEM 5 - Other Information
Company Name Change
Effective May 10, 2000 the Company changed its name to The Premcor Refining
Group Inc. from Clark Refining & Marketing, Inc. In connection with this name
change, the following affiliated companies have also changed their names:
New Name Former Name
Ultimate Parent:
Premcor Inc. Clark Refining Holdings Inc.
Parent Company and Subsidiary:
Premcor USA Inc. Clark USA, Inc.
The Premcor Pipeline Co. Clark Pipe Line Company
Subsidiaries:
Premcor Investments Inc. Clark Investments, Inc.
Premcor P.A. Pipeline Company Clark Port Arthur Pipe Line Company
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.0 - Letter of Credit Reimbursement Agreement dated
as of September 28, 2000 between The Premcor Refining Group
Inc. and Bankers Trust Company
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PREMCOR REFINING GROUP INC.
(Registrant)
/s/ Dennis R. Eichholz
--------------------------------
Dennis R. Eichholz
Controller and Treasurer (Principal
Accounting Officer and Duly
Authorized Officer)
November 13, 2000
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