UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended June 30, 1996
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: 1-9409
DIAMOND SHAMROCK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2456753
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9830 Colonnade Boulevard, San Antonio, Texas 78230
(Address of principal executive offices) (Zip Code)
210-641-6800
(Registrant's telephone number, including area code)
_____________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
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. (X)YES ( )NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
( )YES ( )NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares of Common Stock outstanding at July 31, 1996: 29,296,085
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DIAMOND SHAMROCK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(dollars in millions, except per share data)
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 (a) 1996 1995 (a)
REVENUES
Sales and operating revenues $1,231.4 $ 982.0 $2,402.5 $1,827.6
Other revenues, net 7.5 4.2 14.6 8.4
1,238.9 986.2 2,417.1 1,836.0
COSTS AND EXPENSES
Cost of products sold 808.4 584.7 1,547.5 1,101.9
Operating expenses 144.4 102.4 295.8 198.3
Depreciation and amortization 25.8 19.5 51.7 38.1
Selling and administrative 23.2 21.4 48.0 39.7
Taxes other than income taxes 187.4 202.6 393.4 381.9
Interest 17.8 11.4 36.4 22.8
1,207.0 942.0 2,372.8 1,782.7
Income Before Tax Provision 31.9 44.2 44.3 53.3
Provision for Income Taxes 13.2 16.2 18.4 19.9
Net Income 18.7 28.0 25.9 33.4
Dividend Requirement
on Preferred Stock 1.1 1.1 2.2 2.2
Earnings Applicable to
Common Shares $ 17.6 $ 26.9 $ 23.7 $ 31.2
Primary Earnings
Per Share $ 0.60 $ 0.93 $ 0.81 $ 1.08
Fully Diluted Earnings
Per Share $ 0.57 $ 0.87 $ 0.79 $ 1.03
Cash Dividends Per Share
Common $ 0.14 $ 0.14 $ 0.28 $ 0.28
Preferred $ 0.625 $ 0.625 $ 1.25 $ 1.25
Weighted Average Common Shares
Outstanding (thousands of shares)
Primary 29,491 29,153 29,380 29,089
Fully Diluted 32,746 32,409 32,688 32,372
(a) Reclassified to conform to 1996 presentation, to include excise
taxes as a component of sales: Excise taxes for the three months
ended June 30, 1996-$174.9 million; 1995-$192.2 million, and for
the six months ended June 30, 1996-$371.5 million; 1995-$361.2
million. (See Note 2)
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
CONSOLIDATED BALANCE SHEET
(dollars in millions, except per share data)
June 30, December 31,
1996 1995
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 63.1 $ 48.6
Receivables, less doubtful receivables
of $6.3; $7.1 in 1995 238.4 213.0
Inventories
Finished products 201.0 204.1
Raw materials 80.5 137.4
Supplies 35.2 34.5
316.7 376.0
Prepaid expenses and other current assets 16.1 17.3
Total Current Assets 634.3 654.9
Properties and Equipment, less accumulated
depreciation of $729.5; $684.2 in 1995 1,393.5 1,357.1
Excess of Cost over Acquired Net Assets,
less accumulated amortization
of $4.0; $0.3 in 1995 156.1 160.1
Deferred Charges and Other Assets 67.2 73.3
$2,251.1 $ 2,245.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term debt payable within one year $ 6.3 $ 7.2
Accounts payable 221.6 274.3
Accrued taxes 72.5 71.0
Accrued royalties 12.3 6.6
Current portion of Long-term Liability 5.5 8.0
Other accrued liabilities 91.9 122.4
Total Current Liabilities 410.1 489.5
Long-term Debt 1,011.0 957.5
Deferred Income Taxes 64.9 58.6
Other Liabilities and Deferred Credits 115.3 115.1
Stockholders' Equity
Preferred Stock, $.01 par value
Authorized shares - 25,000,000
Issued and Outstanding shares - 1,725,000;
1,725,000 in 1995 0.0 0.0
Common Stock, $.01 par value
Authorized shares - 75,000,000
Issued shares - 29,295,406; 29,035,853
in 1995
Outstanding shares - 29,293,570; 28,994,715
in 1995 0.3 0.3
Paid-in Capital 457.2 447.8
ESOP Stock and Stock Held in Treasury (34.4) (37.4)
Retained Earnings 226.7 214.0
Total Stockholders' Equity 649.8 624.7
$2,251.1 $ 2,245.4
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(dollars in millions)
Six Months Ended
June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25.9 $ 33.4
Adjustments to arrive at net cash provided
by operating activities:
Depreciation and amortization 51.7 38.1
Deferred income taxes 9.2 8.0
Loss on sale of properties and equipment 0.3 0.5
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (25.4) (24.4)
Decrease (increase) in inventories 59.3 50.0
Decrease (increase) in prepaid expenses 1.2 (8.9)
Increase (decrease) in accounts payable (53.6) (54.7)
Increase (decrease) in taxes payable 3.1 6.1
Increase (decrease) in accrued liabilities (27.3) (17.1)
Other, net 3.3 10.5
NET CASH PROVIDED BY OPERATING ACTIVITIES 47.7 41.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties and equipment 7.7 0.1
Purchase of properties and equipment (86.2) (111.0)
Expenditures for investments (2.9) (1.1)
NET CASH (USED IN) INVESTING ACTIVITIES (81.4) (112.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increases in long-term debt 229.4 233.7
Repayments of long-term debt (175.8) (161.5)
Payments of long-term liability (2.1) (5.3)
Funds received from ESOP 2.1 2.8
Sale of Common Stock 6.0 0.2
Sale of Common Stock held in treasury 0.9 0.2
Dividends paid (10.3) (10.3)
Other, net (2.0) -
NET CASH PROVIDED BY FINANCING ACTIVITIES 48.2 59.8
Net increase (decrease) in cash and cash equivalents 14.5 (10.7)
Cash and cash equivalents at beginning of period 48.6 27.4
Cash and cash equivalents at end of period $ 63.1 $ 16.7
In January 1995, the Company acquired a portion of a crude oil import and
storage terminal in a non-cash transaction under an installment purchase
arrangement. The purchase price was $12.0 million.
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The consolidated financial statements as of June 30, 1996 and for the three
months and six months ended June 30, 1996 and 1995 are unaudited, but in the
opinion of Diamond Shamrock, Inc. (the "Company"), all adjustments (consisting
only of normal accruals) necessary for a fair presentation of consolidated
results of operations, consolidated financial position, and consolidated cash
flows at the date and for the periods indicated have been included.
The consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included
in the 1995 Annual Report to Stockholders and incorporated by reference into
the Company's Annual Report on Form 10-K for the year ended December 31, 1995
(the "1995 Form 10-K").
With respect to the unaudited consolidated financial information of the Company
as of June 30, 1996, and for the three months and six months ended June 30,
1996 and 1995, Price Waterhouse LLP has made a review (based on procedures
adopted by the American Institute of Certified Public Accountants) and not an
audit, as set forth in their separate report appearing herein. Such a report
is not a "report" or "part of a Registration Statement" within the meaning
of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions
of Section 11 of such Act do not apply.
2. Classification of Excise Taxes
Beginning in 1996, the Company includes federal excise taxes and state motor
fuel taxes in Sales and operating revenues and in Costs and expenses for
financial reporting purposes. The results of operations for the three months
and six months ended June 30, 1995 have been reclassified to conform to the
1996 presentation. The amount of such taxes for the three months ended June 30
is $174.9 million and $192.2 in 1996 and 1995, respectively. The amount of
such taxes for the six months ended June 30 is $371.5 million and $361.2 in
1996 and 1995, respectively. Neither operating profits nor net income are
affected by including such taxes in both sales and expenses.
3. Acquisition
On December 14, 1995, the Company completed the acquisition of National
Convenience Stores Incorporated ("NCS") (See footnote 4 of the 1995 Form 10-K).
The acquisition was accounted for under the purchase method. Consequently, the
operating results of NCS are included in the second quarter and first six
months Consolidated Statement of Income and the Consolidated Statement of Cash
Flows for 1996, but not for 1995. The amount of NCS sales included in
the 1996 second quarter and first six months Consolidated Statement of
Operations is $222.3 million and $422.6 million, respectively.
4. Inventories
Inventories are valued at the lower of cost or market with cost determined
primarily under the Last-in, First-out (LIFO) method. At June 30, 1996,
inventories of crude oil and refined products of the Refining and Wholesale
segment were valued at market values (lower than LIFO cost). Motor fuel
products of the Retail segment, and propylene products in the Allied Businesses
segment were recorded at their LIFO costs. Costs of all other inventories are
determined on an average cost method.
5. Long-term Debt
The Company currently has outstanding $90.0 million of debt designated as the
10.75% Senior Notes. As of May 1, 1996, $30.0 million of the long-term debt
became payable within one year. Since the Company intends to refinance the
$30.0 million repayment by the use of commercial paper or other credit
facilities which would be classified as long-term, and the Company has the
ability to do so, the current portion of the long-term debt payable on
April 30, 1997 has been classified as long-term debt.
6. Commitments and Contingencies
In connection with the 1987 Spin-off from Maxus Energy Corporation ("Maxus"),
the Company agreed to assume a share of certain liabilities of Maxus'
businesses discontinued or disposed of prior to the Spin-off date (see Note 17
of the 1995 Form 10-K). The Company's total liability for such shared costs is
limited to $85.0 million. The Company has reimbursed Maxus for a total of
$79.5 million as of June 30, 1996, including $4.5 million paid during the
six months ended June 30, 1996. See Note 3 of the 1995 Form 10-K for a
discussion of the change in the method of accounting for the liability.
<PAGE>
REVIEW BY INDEPENDENT ACCOUNTANTS
With respect to the unaudited consolidated financial information of the Company
as of June 30, 1996 and the three months and six months ended June 30, 1996 and
1995, Price Waterhouse LLP reported that they have applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate report dated August 13, 1996, appearing below, states
that they did not audit and they do not express an opinion on that unaudited
consolidated financial information. Price Waterhouse LLP has not carried out
any significant or additional audit tests beyond those which would have been
necessary if their report had not been included. Accordingly, the degree of
reliance on their report on such information should be restricted in light
of the limited nature of the review procedures applied. Price Waterhouse LLP
is not subject to the liability provisions of Section 11 of the Securities Act
of 1933 for their report on the unaudited consolidated financial information
because that report is not a "report" or "part of a Registration Statement"
prepared or certified by Price Waterhouse LLP within the meaning of Sections 7
and 11 of the Act.
<PAGE>
REPORT ON REVIEW BY INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Diamond Shamrock, Inc.
We have reviewed the consolidated interim financial information included in the
Report on Form 10-Q of Diamond Shamrock, Inc. (the "Company") and its
subsidiaries as of June 30, 1996 and for the three months and six months ended
June 30, 1996 and 1995. This financial information is the responsibility of
the management of Diamond Shamrock, Inc.
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 the accompanying financial information for it to be in conformity
with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1995, and the related consolidated statements of operations and of cash flows
for the year then ended (not presented herein), and in our report dated
February 23, 1996 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of December 31, 1995, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Antonio, Texas
August 13, 1996
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following are the Company's sales and operating revenues and operating
profit for the three months and six months ended June 30, 1996 and 1995.
Business segment operating profit is sales and operating revenues less
applicable segment operating expense. In determining the operating profit of
the three business segments, neither interest expense nor administrative
expenses are included.
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
Sales and Operating Revenues:
Refining and Wholesale $ 488.9 $ 487.5(1) $ 1,008.2 $ 891.3(1)
Retail 647.3 387.9(1) 1,209.4 725.2(1)
Allied Businesses 95.2 106.6 184.9 211.1
Total Sales and
Operating Revenues $1,231.4 $ 982.0 $ 2,402.5 $1,827.6
Operating Profit:
Refining and Wholesale $ 37.1 $ 46.1 $ 71.1 $ 54.6
Retail 24.5 12.0 32.0 27.0
Allied Businesses 8.1 15.3 18.4 28.4
Total Operating Profit $ 69.7 $ 73.4 $ 121.5 $ 110.0
(1) Reclassified to conform to 1996 presentation, including excise taxes as a
component of sales.
Consolidated Results Second Quarter 1996 vs Second Quarter 1995
Sales and operating revenues of $1,231.4 million for the second quarter of 1996
were 25.4% higher than in the same period of 1995, primarily due to the
acquisition of National Convenience Stores Incorporated ("NCS") in mid-December
1995 which contributed $222.3 million in sales and operating revenues.
Excluding the impact of the NCS acquisition, sales and operating revenues for
the second quarter of 1996 increased 2.8% primarily due to a 6.4% and a 3.9%
increase in retail gasoline sales prices and volumes, respectively. Partially
offsetting these increases was a 10.7% decrease in sales and operating revenues
in the Allied Businesses segment, primarily due to a decrease in prices and
volumes in the Company's propane/propylene business, reflecting a decrease in
demand for polymer grade propylene.
During the second quarter of 1996, the Company had net income of $18.7 million
compared to net income of $28.0 million in the 1995 second quarter. The
decrease in net income is primarily due to an increase in interest and
administrative costs associated with the NCS acquisition, which was partially
offset by operating profit contributions from the NCS stores of $7.5 million.
In addition, a decrease in demand for polymer grade propylene resulted in lower
operating profits in the Company's propane/propylene business. Also
contributing to the decrease in operating profit were lower refining margins in
the inland markets where the Company sells most of its products. Although
positive, the increase in the market value of refinery inventories in the
second quarter of 1996 was less than that of the second quarter of 1995, due
primarily to crude oil purchase price increases which contributed to the
decrease in net income in the second quarter of 1996 compared to 1995.
Partially offsetting these decreases was an increase in retail fuel margins,
reflecting increased demand in the summer driving season.
Inventories are valued at the lower of cost or market with cost determined
primarily under the Last-in, First-out (LIFO) method. At June 30, 1996,
inventories of crude oil and refined products of the Refining and Wholesale
segment were valued at market values (lower than LIFO cost). Motor fuel
products of the Retail segment, and propylene products in the Allied Businesses
segment were recorded at their LIFO costs. All other inventories are
determined on an average cost method. Estimating the financial impact of
changes in the valuation of refinery inventories due to such inventories being
valued at market is difficult because of the number of variables that must be
considered. For operating purposes, management attempts to estimate the impact
of changes in valuation of refinery inventories on net income. The estimated
after tax change in inventory values was a positive $0.6 million and $7.8
million in the second quarters of 1996 and 1995, respectively.
Consolidated Results First Six Months 1996 vs First Six Months 1995
Sales and operating revenues of $2,402.5 million for the first six months of
1996 were $574.9 million higher than for the same period of 1995, primarily due
to the acquisition of NCS in mid-December 1995 which contributed $422.6 million
in sales and operating revenues. Excluding the impact of the NCS acquisition,
sales and operating revenues for the first six months of 1996 increased 8.3%,
primarily due to an 11.6% and an 11.0% increase in wholesale refined product
sales volumes and prices, respectively. Also contributing to the increase in
sales and operating revenues was a 4.6% and a 4.1% increase in retail gasoline
sales volumes and prices, respectively, from the Corner Store retail outlets.
Partially offsetting these increases was a 12.4% decrease in sales in the
Allied Businesses segment, primarily due to a decrease in polymer grade
propylene sales prices and volumes.
During the first six months of 1996, the Company had net income of $25.9
million compared to net income of $33.4 million in the first six months of
1995. The decrease in net income was primarily due to an increase in interest
and administrative expenses associated with the NCS acquisition, partially
offset by operating profit contributions from the NCS stores of $10.5 million
during the first six months of 1996. Also contributing to the decrease in net
income was a decrease in operating profit from the Company's propane/propylene
and Nitromite fertilizer businesses, reflecting decreased demand for polymer
grade propylene and ammonia fertilizer. Although positive, the increase in
the market value of refinery inventories during the first six months of 1996
was less than that of the first six months of 1995, due primarily to crude
oil purchase price increases during the first half of 1995. This also
contributed to the decrease in net income in the first six months of 1996
compared to 1995. For operating purposes, management attempts to estimate
the impact of changes in valuation of refinery inventories on net income.
The estimated after tax impact of the change in inventory values was a
positive $1.8 million and $9.7 million in the first six months of 1996 and
1995, respectively. Partially offsetting these decreases was an increase in
refining margins, reflecting low inventories as the high demand summer
driving season approached, and volatile crude prices.
Segment Results Second Quarter 1996 vs Second Quarter 1995
During the second quarter of 1996, the Refining and Wholesale segment had sales
and operating revenues of $488.9 million compared to $487.5 million during the
second quarter of 1995. Operating profit in the second quarter of 1996
decreased $9.0 million from the second quarter of 1995, primarily due to the
fact that the increase in the value of refinery inventories in the second
quarter of 1996 was less than that of the second quarter of 1995, due
primarily to crude oil purchase price increases during the first half of
1995. Also contributing to the decrease in operating profit were a 4.0%
decrease in refinery margins from the same period a year ago, as refining
margins declined early in the second quarter and recovered somewhat late in
the quarter. Volatile crude oil prices have had a significant impact on
refining margins during the second quarter of 1996.
The Retail segment in the second quarter of 1996 reflected a 66.8% increase in
sales and operating revenues over the second quarter of 1995, primarily due to
the acquisition of NCS and its 661 retail outlets in mid-December 1995.
Excluding the impact of the NCS acquisition, sales and operating revenues for
the second quarter of 1996 increased 9.6%, primarily due to a 6.4% and a 3.9%
increase in retail gasoline sales prices and volumes, respectively. Operating
profit in the second quarter of 1996 was $24.5 million compared to $12.0
million in the second quarter of 1995. The increase in operating profit was
primarily due to a $7.5 million contribution from the NCS stores and an 8.3%
increase in retail fuel margins reflecting increase demand.
During the second quarter of 1996, the Allied Businesses segment reflected a
decrease in sales and operating revenues of 10.7% as compared to the second
quarter of 1995, primarily due to a decrease in the Company's propane/propylene
business. Partially offsetting this decrease in sales and operating revenues
was a 13.2% increase from the Company's natural gas liquids marketing business,
reflecting a 10.8% increase and a 2.1% decrease in natural gas liquids sales
prices and volumes, respectively. Operating profits were $8.1 million for the
second quarter of 1996 compared to $15.3 million in the second quarter of 1995.
The decrease in operating profit was primarily due to a decrease in demand for
polymer grade propylene in the Company's propane/propylene business.
Segment Results First Six Months 1996 vs First Six Months 1995
Sales and operating revenues from the Refining and Wholesale segment were
$1,008.2 million in the first six months of 1996 compared to $891.3 million
during the first six months of 1995. The increase in sales and operating
revenues was primarily due to an 11.6% and an 11.0% increase in wholesale
refined product sales volumes and prices, respectively. Operating profit in
the first six months of 1996 was $71.1 million compared to $54.6 million in
the first six months of 1995. The increase in operating profit was primarily
due to a 17.7% increase in refinery margins from the same period a year ago.
Refinery margins increased significantly late in the first quarter of 1996 but
decreased somewhat in the second quarter, as volatile and rising crude oil
prices have had a significant impact on refining margins during the first six
months of 1996. Impacting this increase was the fact that refinery
inventories in the first six months of 1996 increased in value by an amount
less than the amount of increase experienced in the first six months of 1995.
The Retail segment results for the first six months of 1996 reflected a 66.8%
increase in sales and operating revenues, primarily due to the acquisition of
NCS in mid-December 1995 which contributed $422.6 million in sales and
operating revenues. Excluding the impact of the NCS acquisition, sales and
operating revenues for the first six months of 1996 increased 8.5%, primarily
due to a 4.6% and a 4.1% increase in retail gasoline sales volumes and prices,
respectively. Also contributing to the increase in sales and operating
revenues was a 7.6% increase in Corner Store merchandise sales. Operating
profit in the first six months of 1996 was $32.0 million compared to $27.0
million in the first six months of 1995. Operating profit increased primarily
due to increased retail gasoline sales volumes and prices, and a 146.1%
increase in merchandise sales, reflecting the contributions from the NCS
acquisition. Partially offsetting these increases was an 8.0% decrease in
retail fuel margins compared to the first six months of 1995 as the retail
segment was unable to completely recoup the rising wholesale fuel costs
resulting from higher crude prices compared to the same period a year ago.
The Allied Businesses segment results reflected a decrease in sales and
operating revenues of 12.4% to $184.9 million in the first six months of 1996
as compared to the same period in 1995. This decrease was primarily due to a
decrease in sales in the Company's propane/propylene business, reflecting
decreased sales volumes and prices attributable to reduced demand for polymer
grade propylene. Partially offsetting this decrease in sales and operating
revenues was a 6.7% increase from the Company's natural gas liquids marketing
business, reflecting a 13.9% increase and a 6.4% decrease in natural gas
liquids sales prices and volumes, respectively. Operating profits were $18.4
million for the first six months of 1996 compared to $28.4 million in 1995.
Operating profits decreased primarily due to a $7.2 million and a $1.8
million decrease in operating profit from the Company's propane/propylene and
Nitromite ammonia fertilizer businesses, respectively, reflecting decreased
demand for polymer grade propylene and ammonia fertilizer.
Outlook
Although refining margins were under pressure in the second quarter, industry
fundamentals remain strong. U.S. gasoline inventories continue to trend
downward and gasoline demand is expected to rise because of the increase
speed limit and the continued demand for sport/utility vehicles and a growing
economy.
U.S. distillate demand for 1996 is at historically high levels due to both the
cold winter and the increase in the use of on-highway diesel. Distillate
inventories usually build significantly during the summer months but this has
not been the case in 1996. In fact, distillate inventories are at historically
low levels. Assuming the US experiences normal weather patterns this winter,
distillate margins should be good.
Refinery utilization rates remain high. Conversion capacity is expected to
grow but at a more moderate rate than the last several years due to the decline
in capital expenditures for the industry.
There is still concern about volatile crude prices. The impact of Iraqi crude
on the market and the effect it will have on the price is unclear at this time.
Liquidity and Capital Resources
Cash Flow and Working Capital
For the six months ended June 30, 1996, cash provided by operations was $47.7
million, compared with $41.5 million in the same period of 1995.
Working capital at June 30, 1996 was up $58.8 million from December 31, 1995,
and consisted of current assets of $634.3 million and current liabilities of
$410.1 million, or a current ratio of 1.5. At December 31, 1995, current assets
were $654.9 million and current liabilities were $489.5 million, or a current
ratio of 1.3. The increase in working capital was primarily due to a 19.2% and
a 24.9% decrease in accounts payable and accrued liabilities, respectively.
The decrease in current liabilities was partially offset by a 15.8% decrease in
inventories. The decrease in accounts payable reflected the payment in the
first quarter of 1996 for the additional crude oil purchased in December 1995
and the return to lower crude oil inventory levels. In addition, receivables
increased during the first six months of 1996, primarily due to increased
refined product sales prices and volumes.
Capital Expenditures
In recent years, capital expenditures have related to a variety of projects
designed to expand and maintain up-to-date refinery facilities, improve
terminal and distribution systems, modernize and expand retail outlets, comply
with environmental regulatory requirements, acquisitions, and pursue new
ventures in related businesses.
Although the Company intends to continue to pursue acquisition and other
capital investment opportunities when those opportunities become available, the
Company's near-term objective is to reduce its total debt by approximately
$200.0 million over the next two years primarily through cash flow generated
from operations and the sale of non-strategic assets. In addition, the
Company has reduced its capital expenditure budget compared to recent years
so that revised capital spending plans are approximately $160.0 million in
1996 and, while the Company's 1997 capital budget has not been finalized,
approximately $140.0 million in 1997. Capital spending plans allow for the
rebranding and integration of the NCS stores into the Company's systems
as well as the construction of additional retail stores principally in Arizona.
The Company expects to rebrand the NCS gasoline retail outlets at a rate of
about 100 outlets per month with completion in September 1996. This rebranding
and integration program includes signage on the street and at the pump,
and upgraded security, computerization, and store interiors.
Expansion and upgrading projects begun in 1995 at the Company's Three Rivers
refinery will be completed in 1996. These projects are expected to increase
the capacity of the refinery from 75,000 to 85,000 barrels per day and will
allow heavy oils to be upgraded to higher value refined products. The projects
are scheduled for completion in the third quarter of 1996.
In addition, expenditures continue at Three Rivers on the previously announced
benzene, toluene, and xylene ("BTX") extraction unit, which will produce high
value petrochemical feedstocks. Once completed in 1997, the BTX unit will give
the Company the flexibility to shift certain components out of the gasoline
pool into more attractively priced petrochemical feedstocks. Finally, the 1996
capital budget also includes construction of a second 730 million pound per
year propylene splitter at Mont Belvieu with completion scheduled for the third
quarter of 1996.
The Company's capital and investment expenditures during the first six months
of 1996 were $90.0 million. The Company's capital expenditures were $123.0
million during the first six months of 1995, including a non-cash investment of
$12.0 million for the Corpus Christi crude oil terminal acquired under an
installment purchase arrangement.
The Company anticipates to continue consolidation in the businesses in which it
operates. The Company expects from time to time to consider acquisition and
other investment opportunities in the Company's core refining and marketing
businesses and in the downstream petrochemicals area as opportunities may arise.
Although it is presently the Company's goal to reduce debt in 1996, if its
assumptions regarding operating results or capital requirements change, the
Company believes that it has adequate financial flexibility through its bank
credit, bank money market, commercial paper facilities, and access to the
capital markets to refinance existing debt or otherwise meet its financial
requirements.
In June 1996, the Company issued $100.0 million in 7.65% debentures due July 1,
2026. The proceeds from the issuance of the debentures were used to re-pay
outstanding short term debt.
In June 1996, the Company completed the sale of seven non-strategic outlets and
is in the process of completing the sale of an additional 72 non-strategic
retail outlets. In addition, the Company opened 10 retail outlets and closed
12 marginal retail outlets during the first six months of 1996. Two of the
newly opened outlets were leased by the Company under a pre-existing
long-term lease arrangement.
Regulatory Matters
It is expected that rules and regulations implementing the federal, state, and
local laws relating to health and environmental quality will continue to affect
the operations of the Company. The Company cannot predict what health or
environmental legislation, rules or regulations will be enacted in the future
or how existing or future laws, rules or regulations will be administered or
enforced with respect to products or activities of the Company. However, while
the Company does not have any major capital programs underway designed to
satisfy these requirements compliance with more stringent laws or regulations,
as well as more expansive interpretation of existing laws and their more
vigorous enforcement by the regulatory agencies could have an adverse effect on
the operations of the Company and could require substantial additional
expenditures by the Company, such as for the installation and operation of
pollution control systems and equipment.
PART II. OTHER INFORMATION
Item 3. Legal Proceedings
Three Rivers Refinery
In the fourth quarter of 1994, the Texas Natural Resource Conservation
Commission ("TNRCC") conducted an inspection of the Company's Three Rivers
Refinery, as a result of which the Company received a Notice of Violation
("NOV"). The Company and the TNRCC have negotiated an agreed enforcement order
pertaining to the NOV which includes a fine of $74,160 with $22,248 being
deferred. The Three Rivers agreed order became effective May 17, 1996.
Item 4. Submission of Matters to Vote of Security Holders
The Company's 1996 Annual Meeting of Stockholders was held on May 7, 1996
in San Antonio, Texas. At that meeting, the Company's Stockholders elected
three directors to serve three year terms expiring in 1999 and ratified the
appointment of Price Waterhouse LLP to serve as independent accountants for the
Company and its subsidiaries for 1996.
The number of votes cast for, against, or withheld, as the number of
abstentions as to each matter, is set forth below:
Election of Directors
Name Total Votes For Total Votes Withheld
B. Charles Ames 26,669,561 253,062
Lauro F. Cavazos, Ph.D. 26,683,464 239,164
Roger R. Hemminghaus 26,682,452 240,176
Ratification of Appointment of Independent Accountants
For Against Abstain
26,650,083 75,519 197,026
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Fourth Amendment to Agreement for Ground Lease between Brazos
River Leasing, L.P. and Diamond Shamrock Refining and Marketing
Company, dated as of April 23, 1996.
10.2 Fourth Amendment to Agreement for Facilities Lease between
Brazos River Leasing, L.P. and Diamond Shamrock Refining and
Marketing Company dated as of April 23, 1996.
15.1 Independent Accountants' Awareness Letter
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company in the second
quarter of 1996 on June 20.
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.
DIAMOND SHAMROCK, INC.
By: /s/ GARY E. JOHNSON
Gary E. Johnson
Vice President and Controller
(Principal Accounting Officer)
August 13, 1996
w3188.tw
FOURTH AMENDMENT
TO
AGREEMENT FOR GROUND LEASE
between
BRAZOS RIVER LEASING L.P.
and
DIAMOND SHAMROCK REFINING AND MARKETING COMPANY
Dated as of April 23, 1996
This Fourth Amendment to Agreement for Ground Lease has been manually
executed in 8 counterparts, numbered consecutively from 1 through 8,
of which this is No. ____. To the extent, if any, that this Fourth
Amendment to Agreement for Ground Lease constitutes chattel paper (as
such term is defined in the Uniform Commercial Code as in effect in
any jurisdiction), no security interest in this Fourth Amendment to
Agreement for Ground Lease may be created or perfected through the
transfer or possession of any counterpart other than the original
counterpart which shall be the counterpart identified as counterpart
No. 1.
<PAGE>
FOURTH AMENDMENT TO AGREEMENT FOR GROUND LEASE
This Fourth Amendment to Agreement for Ground Lease is made and
entered into as of April 23, 1996, by and between BRAZOS RIVER
LEASING L.P. ("Brazos") and DIAMOND SHAMROCK REFINING AND MARKETING
COMPANY ("Diamond Shamrock R & M").
W I T N E S S E T H:
WHEREAS, Brazos and Diamond Shamrock R & M have heretofore
entered into an Agreement for Ground Lease, dated as of April 23,
1992 (as amended by the First Amendment to Agreement for Ground
Lease, the "Agreement for Ground Lease"); and
WHEREAS, Brazos and Diamond Shamrock R & M desire to further
amend the Agreement for Ground Lease to extend the acquisition period
and to otherwise set forth their mutual agreement; and
WHEREAS, Brazos and Diamond Shamrock R & M agree that the
provisions of this amendment shall apply, to the extent provided by
law, to each Property acquired by Brazos under the Agreement for
Ground Lease.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Brazos and Diamond
Shamrock R & M agree that the Agreement for Ground Lease is hereby
amended as follows:
1. Section 3.06 of the Agreement for Ground Lease is hereby
amended by deleting in subsection (i) in Section 3.06, the reference
to "four years" and inserting in lieu thereof "five years".
2. Brazos and Diamond Shamrock R & M agree that this Fourth
Amendment to Agreement for Ground Lease shall not be effective until
the approvals required by Section 9.01 of the Credit Agreement have
been obtained as evidenced by the execution of Amendment No. 5 by the
necessary parties under the Credit Agreement.
3. Defined terms used in this Fourth Amendment to Agreement
for Ground Lease and not otherwise defined herein have the meanings
ascribed to those terms in the Agreement for Ground Lease.
IN WITNESS WHEREOF, Brazos and Diamond Shamrock R & M have
caused this Fourth Amendment to Agreement for Ground Lease to be
executed and delivered by their duly authorized officers as of the
day and year first above written.
BRAZOS RIVER LEASING L.P.
By: Headwater Investments L.P.,
its General Partner
By: Headwater Holdings, Inc.,
its General Partner
By: /s/ GREGORY C. GREENE
Gregory C. Greene,
President
DIAMOND SHAMROCK REFINING
AND MARKETING COMPANY
By: /s/ R. C. Becker
Name: R. C. Becker
Title: Vice President and
Treasurer
W3996.TW
FOURTH AMENDMENT
TO
AGREEMENT FOR FACILITIES LEASE
between
BRAZOS RIVER LEASING L.P.
and
DIAMOND SHAMROCK REFINING AND MARKETING COMPANY
Dated as of April 23, 1996
This Fourth Amendment to Agreement for Facilities Lease has been
manually executed in 8 counterparts, numbered consecutively from 1
through 8, of which this is No. ____. To the extent, if any, that
this Fourth Amendment to Agreement for Facilities Lease constitutes
chattel paper (as such term is defined in the Uniform Commercial Code
as in effect in any jurisdiction), no security interest in this
Fourth Amendment to Agreement for Facilities Lease may be created or
perfected through the transfer or possession of any counterpart other
than the original counterpart which shall be the counterpart
identified as counterpart No. 1.
FOURTH AMENDMENT TO AGREEMENT FOR FACILITIES LEASE
This Fourth Amendment to Agreement for Facilities Lease is made
and entered into as of April 23, 1996, by and between BRAZOS RIVER
LEASING L.P. ("Brazos") and DIAMOND SHAMROCK REFINING AND MARKETING
COMPANY ("Diamond Shamrock R & M").
W I T N E S S E T H:
WHEREAS, Brazos and Diamond Shamrock R & M have heretofore
entered into an Agreement for Facilities Lease, dated as of April 23,
1992 (as amended by the First Amendment to Agreement for Facilities
Lease, the "Agreement for Facilities Lease"); and
WHEREAS, Brazos and Diamond Shamrock R & M desire to further
amend the Agreement for Facilities Lease to extend the acquisition
period and to otherwise set forth their mutual agreement; and
WHEREAS, Brazos and Diamond Shamrock R & M agree that the
provisions of this amendment shall apply, to the extent provided by
law, to each Facility acquired by Brazos under the Agreement for
Facilities Lease.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Brazos and Diamond
Shamrock R & M agree that the Agreement for Facilities Lease is
hereby amended as follows:
1. Section 3.06 of the Agreement for Facilities Lease is
hereby amended by deleting in subsection (i) in Section 3.06, the
reference to "four years" and inserting in lieu thereof "five years".
2. Brazos and Diamond Shamrock R & M agree that this Fourth
Amendment to Agreement for Facilities Lease shall not be effective
until the approvals required by Section 9.01 of the Credit Agreement
have been obtained as evidenced by the execution of Amendment No. 5
by the necessary parties under the Credit Agreement.
3. Defined terms used in this Fourth Amendment to Agreement
for Facilities Lease and not otherwise defined herein have the
meanings ascribed to those terms in the Agreement for Facilities
Lease.
IN WITNESS WHEREOF, Brazos and Diamond Shamrock R & M have
caused this Fourth Amendment to Agreement for Facilities Lease to be
executed and delivered by their duly authorized officers as of the
day and year first above written.
BRAZOS RIVER LEASING L.P.
By: Headwater Investments L.P.,
its General Partner
By: Headwater Holdings, Inc.,
its General Partner
By: /s/ GREGORY C. GREENE
Gregory C. Greene,
President
DIAMOND SHAMROCK REFINING
AND MARKETING COMPANY
By: /s/ R. C. Becker
Name: R. C. Becker
Title: Vice President and
Treasurer
W3997.TW
EXHIBIT 15.1
INDEPENDENT ACCOUNTANTS' AWARENESS LETTER
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We are aware that Diamond Shamrock, Inc. has included our report dated
August 13, 1996 (issued pursuant to the provisions of Statement on
Auditing Standards No. 71) in the Prospectuses constituting part of its
Registration Statements on Form S-3 (Nos. 33-67166, 33-59451, and 333-4157)
filed on August 9, 1993, May 19, 1995, and May 20, 1996 respectively, and on
Form S-8 (Nos. 33-15268, 33-34306, 33-47761, 33-50573, 33-59025 and 33-64645)
filed on June 22, 1987, April 13, 1990, May 6, 1992, October 6, 1993, May 2,
1995 and November 30, 1995, respectively. We are also aware of our
responsibilities under the Securities Act of 1933.
Yours very truly,
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Antonio, Texas
August 13, 1996
W3998.TW
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<RECEIVABLES> 244,700
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