UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number 1-11154
ULTRAMAR DIAMOND SHAMROCK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3663331
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
6000 N. Loop 1604 W 78249-1112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (210) 592-2000
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 ____
Common Stock, $.01 Par Value -- 87,628,023 shares outstanding as of October
31, 1997
ULTRAMAR DIAMOND SHAMROCK CORPORATION
FORM 10-Q
September 30, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 ............................... 3
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1997 and 1996 ....... 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996 ............ 5
Notes to Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................. 21
Item 2. Changes in Securities and Use of Proceeds......... 21
Item 6. Exhibits and Reports on Form 8-K.................. 22
SIGNATURE...................................................... 23
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(Unaudited)
(in millions)
Assets
Current assets:
Cash and cash equivalents $ 112.8 $ 197.9
Accounts and notes receivable, net 706.1 503.1
Inventories 690.2 633.3
Prepaid expenses and other current assets 61.0 35.0
Deferred income taxes 53.3 30.0
Total current assets 1,623.4 1,399.3
Property, plant and equipment 4,605.4 3,685.2
Less accumulated depreciation and
amortization (1,048.8) (954.4)
3,556.6 2,730.8
Other assets, net 436.7 289.9
Total assets $ 5,616.7 $4,420.0
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of
long-term debt $ 6.5 $ 3.2
Accounts payable 609.3 540.7
Accrued liabilities 354.5 328.9
Taxes other than income taxes 241.5 191.3
Income taxes payable 19.9 32.1
Total current liabilities 1,231.7 1,096.2
Long-term debt, less current portion 1,920.6 1,646.3
Other long-term liabilities 425.0 349.6
Deferred income taxes 136.2 87.0
Commitments and contingencies
Company obligated Preferred Stock of subsidiary 200.0 -
Stockholders' equity:
Convertible Preferred Stock, par value $.01
per share:
25,000,000 shares authorized, 1,724,000 and
1,725,000 shares issued and outstanding at
September 30, 1997 and December 31, 1996 0.0 0.0
Common Stock, par value $.01 per share:
250,000,000 shares authorized, 87,626,000
and 74,710,000 shares issued and
outstanding at September 30, 1997 and
December 31, 1996 0.9 0.7
Additional paid-in capital 1,533.9 1,137.0
ESOP, treasury stock and other (30.3) (32.2)
Retained earnings 259.6 193.7
Foreign currency translation adjustment (60.9) (58.3)
Total stockholders' equity 1,703.2 1,240.9
Total liabilities and stockholders'
equity $ 5,616.7 $4,420.0
The accompanying notes are an integral part of these consolidated financial
statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(in millions, except per share data)
Sales and other revenues
(including excise taxes) $2,613.2 $2,552.8 $7,577.8 $7,488.2
Operating costs and expenses
Cost of products sold 1,617.2 1,541.0 4,752.7 4,695.3
Operating expenses 201.7 233.0 604.1 665.2
Selling, general
and administrative
expenses 75.0 74.6 216.7 217.1
Taxes other than income
taxes 547.2 609.4 1,577.0 1,560.3
Depreciation and amorti-
zation 46.2 44.5 135.9 130.8
Total operating costs
and expenses 2,487.3 2,502.5 7,286.4 7,268.7
Operating income 125.9 50.3 291.4 219.5
Interest income 2.3 4.8 10.2 12.9
Interest expense (30.3) (33.4) (92.4) (94.6)
Gain on sale of office
building - - 11.0 -
Income before income taxes 97.9 21.7 220.2 137.8
Provision for income taxes 38.6 7.8 87.0 54.8
Dividends on preferred
stock of subsidiary 2.7 - 2.7 -
Net income 56.6 13.9 130.5 83.0
Dividends on convertible
preferred stock 1.1 1.0 3.3 3.2
Net income applicable to
common shares $ 55.5 $ 12.9 $ 127.2 $ 79.8
Net income per common share:
Primary $ 0.72 $ 0.17 $ 1.67 $ 1.06
Fully diluted $ 0.71 $ 0.17 $ 1.64 $ 1.06
Weighted average number of
common shares used in com-
putation (in thousands):
Primary 76,845 75,089 76,070 75,102
Fully diluted 80,164 78,611 79,493 78,545
Dividends per share:
Common shares $ 0.275 $ 0.275 $ 0.825 $ 0.825
Cumulative convertible
preferred stock $ 0.625 $ 0.625 $ 1.875 $ 1.875
The accompanying notes are an integral part of these consolidated
financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1997 1996
(in millions)
Cash Flows from Operating Activities:
Net income $ 130.5 $ 83.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 135.9 130.9
Gain on sale of fixed assets (14.5) (1.0)
Provision for deferred income taxes 80.7 34.8
Other, net 4.1 3.0
Changes in operating assets and
liabilities, net of acquisition:
Decrease (increase) in accounts and
notes receivable 7.9 (40.9)
Decrease in inventories 103.3 77.7
Decrease in prepaid expenses and
other current assets 5.9 24.9
Increase in other assets (19.4) (1.2)
Decrease in accounts payable and
other current liabilities (259.2) (109.1)
Decrease in other long-term
liabilities (56.4) (16.6)
Other, net (35.8) 10.1
Net cash provided by operating
activities 83.0 195.6
Cash Flows from Investing Activities:
Capital expenditures (149.8) (216.4)
Acquisition of Total, net of cash
acquired (402.4) -
Acquisition of marketing operations (20.3) (14.0)
Deferred turnaround costs (15.5) (10.4)
Expenditures for investments (10.1) (4.3)
Proceeds from sales of property, plant
and equipment 77.0 27.4
Net cash used in investing activities (521.1) (217.7)
Cash Flows from Financing Activities:
Net change in commercial paper and
other borrowings 194.6 (168.2)
Increase in long-term debt 15.3 294.0
Issuance of company obligated preferred
stock of subsidiary 200.0 -
Payment of dividends (64.9) (52.2)
Other, net 6.7 11.0
Net cash provided by financing
activities 351.7 84.6
Effect of exchange rate changes on cash 1.3 0.4
Net (Decrease) Increase in Cash and
Cash Equivalents (85.1) 62.9
Cash and Cash Equivalents at Beginning
of Period 197.9 175.5
Cash and Cash Equivalents at End of
Period $ 112.8 $ 238.4
The accompanying notes are an integral part of these consolidated
financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by Ultramar Diamond Shamrock Corporation (the "Company"), in
accordance with generally accepted accounting principles for interim
financial reporting and with Securities and Exchange Commission rules
and regulations for Form 10-Q. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These unaudited
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in
the Company's annual report on Form 10-K for the year ended December 31,
1996.
Prior period amounts have been reclassified to reflect the merger of
Diamond Shamrock, Inc., with and into the Company effective December 3,
1996, in a transaction accounted for as a pooling-of-interests. Certain
reclassifications of historical financial data have been made to conform
the accounting policies of the two companies as further described in the
Company's annual report on Form 10-K for the year ended December 31,
1996.
Operating results for the three and nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. The results of operations may be
affected by seasonal factors, such as the demand for petroleum products
and working capital requirements in the Northeast, which vary
significantly during the year; or industry factors that may be specific
to a particular period, such as movements in and the general level of
crude oil prices, the demand for and prices of refined products,
industry supply capacity and maintenance turnarounds.
NOTE 2: Inventories
Inventories consisted of the following:
September 30, December 31,
1997 1996
(in millions)
Crude oil and other feedstocks $ 217.3 $ 309.2
Refined and other finished products 411.2 264.7
Materials, supplies and convenience
store items 61.7 59.4
$ 690.2 $ 633.3
NOTE 3: Gain on Sale of Office Building
Earnings for the first nine months of 1997 include a pre-tax gain of
$11.0 million, resulting from the sale of an office building in San
Antonio, Texas which was originally purchased to serve as the Company's
corporate headquarters.
NOTE 4: Commitments and Contingencies
The Company's operations are subject to environmental laws and
regulations adopted by various governmental authorities. Site
restoration and environmental remediation and clean-up obligations are
accrued either when known or when considered probable and reasonably
estimable. Total future environmental costs cannot be reasonably
estimated due to unknown factors such as the magnitude of possible
contamination, the timing and extent of remediation, the determination
of the Company's liability in proportion to other parties and the extent
to which environmental laws and regulations may change in the future.
Although environmental costs may have a significant impact on results of
operations for any single year, the Company believes that such costs
will not have a material adverse effect on the Company's financial
position.
There are various legal proceedings and claims pending against the
Company that arise in the ordinary course of business. It is
management's opinion, based upon advice of legal counsel, that these
matters, individually or in the aggregate, will not have a material
adverse effect on the Company's financial position or results of
operations.
NOTE 5: Accounting Pronouncement
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which establishes new standards for computing and presenting earnings
per share ("EPS") for entities with publicly held common stock. SFAS
No. 128 simplifies the standards for computing EPS previously found in
Accounting Principles Board Opinion No. 15, "Earnings Per Share," and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS, and
requires dual presentation of basic and diluted EPS on the face of the
statement of income. SFAS No. 128 is effective for periods ending after
December 15, 1997, and early adoption is not permitted. The Company has
not completed its calculations of EPS data under SFAS No. 128; however,
management of the Company does not anticipate that the adoption of SFAS
No. 128 will have a material impact on the Company's earnings per share.
NOTE 6: Company Obligated Preferred Stock of Subsidiary
On June 25, 1997, UDS Capital I (the "Trust") issued $200.0 million of
8.32% Trust Originated Preferred Securities in an underwritten public
offering. The Company has guaranteed, on a subordinated basis, the
dividend payments due on the Trust Originated Preferred Securities if
and when declared. The proceeds from the issuance of the Trust
Originated Preferred Securities were used to reduce long-term debt.
NOTE 7: Acquisition of Total Petroleum (North America) Ltd.
On September 25, 1997, the Company completed its acquisition of Total
Petroleum (North America) Ltd. ("Total"). The purchase price included
the issuance of 12,672,213 shares of Company common stock, valued at
$30.875 per share, and the assumption of approximately $445.2 million of
debt. To finance the immediate pay-off of the debt assumed from Total,
the Company obtained a $150.0 million bridge loan from a group of banks,
borrowed funds under uncommitted bank credit lines and issued commercial
paper. The $150.0 million bridge loan had an interest rate equal to
5.92% and was refinanced on October 14, 1997 (see Note 8).
The acquisition has been accounted for using the purchase accounting
method. The purchase price has been allocated based on a preliminary
estimate of the fair values of the individual assets and liabilities at
the date of acquisition. The excess of purchase price over the
preliminary estimate of the fair value of the net assets acquired was
approximately $88.0 million and is being amortized as goodwill on a
straight-line basis over 25 years. A summary of the preliminary
estimate of the purchase price allocation is as follows (in millions):
Working capital $ 39.2
Property, plant and equipment 835.3
Excess of cost over fair value of net assets of
purchased business 88.0
Other, net (126.0)
Total purchase price 836.5
Less: Company common stock issued (391.3)
Debt assumed $ 445.2
The following unaudited pro forma information presents summary
consolidated statements of income of the Company and Total as if the
acquisition had occurred as of January 1, 1997 and 1996. The proforma
amounts include certain adjustments such as amortization of goodwill,
additional operating costs to account for refinery maintenance
turnaround costs under the deferral method versus accrual method, and
certain other adjustments, together with related income tax effects.
Nine Months Nine Months
Ended Ended
September 30, September 30,
1997 1996
(in millions, except per share data)
Sales and other revenues $9,877.1 $9,986.7
Net income 137.5 87.3
Net income applicable to common shares 134.2 84.1
Net income per common share:
Primary 1.51 0.96
Fully diluted 1.49 0.96
These pro forma results have been prepared for comparative purposes
only. They do not include the cost reductions or operating synergies
expected to result from the acquisition and therefore are not indicative
of the operating results that would have occurred had the acquisition
been consummated as of the above date, nor are they indicative of future
operating results.
NOTE 8: Subsequent Events
On October 14, 1997, the Company completed a public offering of $400.0
million of senior notes (the "Notes") to refinance most of the debt
incurred to finance the acquisition of Total. The Notes were issued in
three separate series. The 7.20% Notes due October 15, 2017 (the "2017
Notes") totaling $200.0 million, the 6.75% Notes due October 15, 2037
(the "2037 Notes") totaling $100.0 million, and the 7.45% Notes due
October 15, 2097 (the "2097 Notes") totaling $100.0 million. Interest
on the Notes is payable semi-annually in arrears on April 15 and October
15 of each year.
On November 5, 1997, the Board of Directors declared a quarterly
dividend of $.275 per common share payable on December 5, 1997 to
holders of record on November 20, 1997. In addition, the Board of
Directors declared a quarterly dividend of $.625 per share on the
Company's 5% Cumulative Convertible Preferred Stock payable on December
15, 1997, to holders of record on November 20, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company's operating results are affected by Company-specific
factors, primarily its refinery utilization rates and refinery
maintenance turnarounds; seasonal factors, such as the demand for
petroleum products and working capital requirements in the Northeast,
both of which vary significantly during the year; and industry factors,
such as movements in and the level of crude oil prices, the demand for
and prices of refined products and industry supply capacity. The effect
of crude oil price changes on the Company's operating results is
determined, in part, by the rate at which refined product prices adjust
to reflect such changes. As a result, the Company's earnings have been
volatile in the past and may be volatile in the future.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Financial and operating data by geographic area for the three month
periods ended September 30, 1997 and 1996 are as follows:
Financial Data:
<TABLE>
Three Months Ended September 30,
1997 1996
Southwest Northeast Total Southwest Northeast Total
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and
other
revenues $1,873.0 $ 740.2 $2,613.2 $1,827.3 $ 725.5 $2,552.8
Cost of pro-
ducts sold 1,191.6 425.6 1,617.2 1,143.0 398.0 1,541.0
Operating ex-
penses 173.9 27.8 201.7 202.9 30.1 233.0
Selling,
general and
administra-
tive expenses 32.4 42.6 75.0 24.9 47.3 72.2
Taxes other
than income
taxes 338.6 208.6 547.2 347.1 262.3 609.4
Depreciation
and amortiza-
tion 37.7 8.5 46.2 38.0 6.5 44.5
Operating in-
come (loss) $ 98.8 $ 27.1 125.9 $ 71.4 $ (18.7) 52.7
Merger and in-
tegration
costs - (2.4)
Interest in-
come 2.3 4.8
Interest expense (30.3) (33.4)
Income before
income taxes 97.9 21.7
Provision for
income taxes (38.6) (7.8)
Dividend on
subsidiary
stock (2.7) -
Net income $ 56.6 $ 13.9
</TABLE>
Operating Data:
Three Months Ended
September 30,
1997 1996
Southwest
McKee and Three Rivers Refineries
Throughput (BPD) 244,955 235,546
Margin (dollars per barrel) $5.50 $4.04
Wilmington Refinery
Throughput (BPD) 122,470 109,369
Margin (dollars per barrel) $5.93 $5.20
Retail Marketing
Fuel volume (BPD) 112,821 108,119
Fuel margin (cents per gallon) 11.8 14.8
Merchandise sales ($1,000/day) 2,565 2,562
Merchandise margin (%) 29.6 31.3
Northeast
Quebec Refinery
Throughput (BPD) 148,300 126,800
Margin (dollars per barrel) $2.49 $1.53
Retail Marketing
Fuel volume (BPD) 58,300 59,600
Overall margins (cents per gallon)(1) 26.0 17.4
(1) Retail marketing overall margins reported for the Northeast
represent a blend of gross margin from Company and dealer operated
service stations, heating oil sales and the cardlock business
segment.
General
Net income for the quarter ended September 30, 1997 totaled $56.6
million as compared to $13.9 million for the quarter ended September 30,
1996. In the Southwest, the Company had operating income of $98.8
million for the third quarter of 1997, as compared to $71.4 million for
the third quarter of 1996. The increase in operating profit was
primarily due to increased refining margins at the McKee and Three
Rivers refineries, increased throughput at the Wilmington refinery, and
a decrease of $29.0 million in operating expenses due primarily to
efficiencies gained from the Ultramar - Diamond Shamrock merger in
December 1996. These increases were somewhat offset by a decrease in
the average retail marketing fuel margin of 3 cents per gallon. In the
Northeast, operating income was $27.1 million for the third quarter of
1997 as compared to an operating loss of ($18.7) in the third quarter of
1996, as a result of improved refining margins and higher throughput at
the Quebec refinery, and a 7.6% decrease in operating expenses due to
efficiencies gained from the merger in 1996. The average Northeast
retail marketing margin of 26.0 cents per gallon in the third quarter of
1997 improved by 8.6 cents per gallon compared to the third quarter of
1996.
Southwest Operations
Sales and other revenues in the Southwest in the third quarter of 1997
totaled $1.9 billion and were 2.5% higher than for the third quarter of
1996 primarily due to a 4.3% increase in retail marketing fuel volumes.
The refining margin for the McKee and Three Rivers refineries of $5.50
per barrel in the third quarter of 1997 increased by 36.1% as compared
to $4.04 per barrel in the third quarter of 1996, reflecting declining
crude oil costs and increased demand during the third quarter of 1997.
The refining margin for the Wilmington refinery increased by 14.0% to
$5.93 per barrel in the third quarter of 1997 due to a 15.8% increase in
refined product sales prices compared to the third quarter of 1996.
Throughput at the Wilmington refinery during the third quarter of 1997
increased by 12.0% over the same period in 1996 to 122,470 barrels per
day, principally due to the processing of additional feedstocks through
the refinery's gas oil hydrotreater which came on stream in the second
quarter of 1996. Retail marketing fuel volume increased by 4.3% to
112,821 barrels per day, principally as a result of the successful
rebranding of the National Convenience Stores, which were acquired in
December 1995. Retail fuel margins decreased by 20.3% to 11.8 cents per
gallon for the third quarter of 1997, due primarily to a very
competitive pricing environment at the station level in the California
and Texas markets.
Merchandise sales at the Company's convenience stores remained steady at
an average of $2.6 million per day during the third quarters of 1997 and
1996. However the average per store sales increased as a result of the
disposition of a number of stores during the past year. Merchandise
margins for the third quarter of 1997 were down slightly to 29.6%
compared to 31.3% for the third quarter of 1996, reflecting continued
competitive pressures on the pricing of beer, soda and tobacco products.
The petrochemicals and natural gas liquids businesses also contributed
to operating income in the third quarter of 1997 with continued strong
demand for Nitromite fertilizer and propylene.
Selling, general and administrative expenses of $32.4 million were $7.5
million higher than in the third quarter of 1996, reflecting higher
selling costs incurred to support the increased sales partially offset
by lower general and administrative expenses associated with synergies
resulting from the Ultramar-Diamond Shamrock merger in December 1996.
Northeast Operations
Sales and other revenues in the Northeast in the third quarter of 1997
totaled $740.2 million and were $14.7 million, or 2.0%, higher than in
the corresponding quarter of 1996, as a result of record throughput at
the Quebec refinery.
Refining margins increased by 62.7% to $2.49 per barrel in the third
quarter of 1997 as compared to $1.53 per barrel in the third quarter of
1996, due to lower crude oil costs and the 1996 quarter being impacted
by a scheduled refinery turnaround. Throughput at the Quebec Refinery
averaged 148,300 barrels per day or 17.0% higher than in the third
quarter of 1996. Overall retail margins increased 8.6 cents per gallon
to 26.0 cents per gallon in the third quarter of 1997 as compared to the
corresponding quarter of 1996, reflecting more stable market conditions
as a result of the Company's "value plus" pricing program initiated in
the second half of 1996 and the Home Heat and Cardlock segments' ability
to maintain prices as costs declined. Retail marketing volumes
decreased 2.2% as compared with the third quarter of 1996, to 58,300
barrels per day, as a result of increased competition in the Canadian
market.
Selling, general and administrative expenses of $42.6 million were $4.7
million lower than in the third quarter of 1996, principally due to the
previously mentioned cost reductions and synergies from the merger in
1996.
Combined Interest and Income Taxes
Net interest expense of $28.0 million in the third quarter of 1997 was
$0.6 million lower than in the corresponding quarter of 1996 due to
lower average interest rates obtained on new debt financing.
The consolidated income tax provisions for the third quarter of 1997 and
1996 were based upon the Company's estimated effective income tax rates
for the years ending December 31, 1997 and 1996 of 39.4% and 40.5%,
respectively. The consolidated effective income tax rates exceed the
U.S. Federal statutory income tax rate primarily due to state income
taxes and the effects of foreign operations.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Financial and operating data by geographic area for the nine month
periods ended September 30, 1997 and 1996 are as follows:
<TABLE>
Financial Data:
Nine Months Ended September 30,
1997 1996
Southwest Northeast Total Southwest Northeast Total
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and
other revenues $5,321.4 $2,256.4 $7,577.8 $5,308.8 $2,179.4 $7,488.2
Cost of pro-
ducts sold 3,418.1 1,334.6 4,752.7 3,416.4 1,278.9 4,695.3
Operating ex-
penses 515.0 89.1 604.1 574.2 91.0 665.2
Selling, general
and administra-
tive expenses 93.0 123.7 216.7 92.4 122.3 214.7
Taxes other than
income taxes 980.3 596.7 1,577.0 950.8 609.5 1,560.3
Depreciation
and amortiza-
tion 112.2 23.7 135.9 111.4 19.4 130.8
Operating income $ 202.8 $ 88.6 291.4 $ 163.6 $ 58.3 221.9
Interest income 10.2 12.9
Interest expense (92.4) (94.6)
Merger and in-
tegration costs - (2.4)
Gain on sale of
office building 11.0 -
Income before
income taxes 220.2 137.8
Provision for
income taxes (87.0) (54.8)
Dividend on
stock of sub-
sidiary (2.7) -
Net income $ 130.5 $ 83.0
</TABLE>
Operating Data:
Nine Months Ended
September 30,
1997 1996
Southwest
McKee and Three Rivers Refineries
Throughput (BPD) 234,754 235,179
Margin (dollars per barrel) $5.19 $4.10
Wilmington Refinery
Throughput (BPD) 116,793 101,743
Margin (dollars per barrel) $4.76 $5.15
Retail Marketing
Fuel volume (BPD) 110,572 107,307
Fuel margin (cents per gallon) 11.4 13.5
Merchandise sales ($1,000/day) 2,397 2,469
Merchandise margin (%) 29.9 30.8
Northeast
Quebec Refinery
Throughput (BPD) 134,400 139,500
Margin (dollars per barrel) $2.33 $3.08
Retail Marketing
Fuel volume (BPD) 63,000 59,000
Overall margins (cents per gallon)(1) 27.7 22.1
(1) Retail marketing overall margins reported for the Northeast
represent a blend of gross margin from Company and dealer
operated service stations, heating oil sales and the cardlock
business segment.
General
Net income for the nine months ended September 30, 1997 totaled $130.5
million as compared to $83.0 million for the nine months ended September
30, 1996. In the Southwest, the Company had operating income of $202.8
million for the nine months of 1997, as compared to $163.6 million for
the comparable period of 1996. A major factor contributing to the
increased operating income was that operating expenses decreased 10.3%
or $59.2 million due primarily to efficiencies obtained from the
Ultramar - Diamond Shamrock merger in December 1996. In addition, the
low refining margins on the West Coast were offset by increased
throughput at the Wilmington refinery and increased refining margins at
the McKee and Three Rivers refineries. In the Northeast, operating
income of $88.6 million was $30.3 million higher than that of the first
nine months of 1996, resulting from retail marketing volumes increasing
by 4,000 barrels per day in the nine months of 1997, and the overall
retail marketing margin improving by 5.6 cents per gallon compared to
the nine months of 1996. These increases were offset by lower refining
margins resulting from higher crude oil costs and scheduled turnarounds
in 1997.
Southwest Operations
Sales and other revenues in the Southwest in the first nine months of
1997 totaled $5.3 billion and were 0.2% higher than for the first nine
months of 1996, primarily due to a 4.3% increase in refinery throughput,
partially offset by a 2.9% decrease in merchandise sales.
The combined refining margin for the McKee and Three Rivers refineries
of $5.19 per barrel in the nine months of 1997 increased by 26.6% as
compared to $4.10 per barrel in the nine months of 1996, reflecting
strong margin improvement throughout 1997, as a result of declining
crude oil costs. The refining margin for the Wilmington refinery
decreased by 7.6% to $4.76 per barrel in the nine months of 1997.
Throughput at the Wilmington refinery during the nine months of 1997
increased by 14.8% over the same period in 1996 to 116,793 barrels per
day, principally due to the processing of additional feedstocks through
the refinery's gas oil hydrotreater which came on stream in the second
quarter of 1996. Retail marketing fuel volume increased by 3.0%, to
110,572 barrels per day, principally as a result of increased demand.
Retail fuel margins decreased by 15.6% to 11.4 cents per gallon in the
nine months of 1997, primarily in the mid-continent area, due to intense
competitive pressures. This decrease was partially offset by improved
retail margins in the West Coast.
Merchandise sales at the Company's convenience stores averaged $2.4
million per day during the nine months of 1997 as compared to $2.5
million per day during the corresponding nine months of 1996, as a
result of disposing of a number of stations during recent months.
Merchandise margins for the nine months of 1997 decreased to 29.9%
compared to 30.8% in the nine months of 1996 due to competitive pricing
on beer, soda and tobacco products.
Selling, general and administrative expenses of $93.0 million were $0.6
million higher than in the nine months of 1996, reflecting higher
selling costs to support the increased sales, offset by cost reductions
and synergies resulting from the acquisition of National Convenience
Stores in December 1995 and the Ultramar-Diamond Shamrock merger in
December 1996.
The petrochemical and natural gas liquids businesses also contributed to
operating income in the nine months of 1997 with continued strong demand
for Nitromite fertilizer and propylene.
Northeast Operations
Sales and other revenues in the Northeast in the nine months of 1997
totaled $2.3 billion and were $77.0 million, or 3.5%, higher than in the
corresponding nine months of 1996 as the overall retail margin increased
by 25.3%. Higher volume in retail activities, mainly associated with
expansion into New England which occurred in mid-1996, was principally
responsible for the improvement in revenue. This increase was partially
offset by reduced throughput at the Quebec refinery, reflecting a 39 day
scheduled turnaround in the second quarter of 1997.
Refining margins decreased 24.4% to $2.33 barrel in the nine months of
1997 as compared to $3.08 per barrel in the nine months of 1996, due to
high crude oil costs, low import parity prices and a scheduled
turnaround in the second quarter of 1997. Throughput at the Quebec
Refinery averaged 134,400 barrels per day or 3.7% lower than in the nine
months of 1996, as throughput was adversely affected in the nine months
of 1997 due to the previously mentioned refinery turnaround. Overall
retail margins increased 5.6 cents per gallon, or 25.3%, to 27.7 cents
per gallon in the nine months of 1997 as compared to the corresponding
nine months of 1996, reflecting more stable market conditions as a
result of the Company's "value plus" pricing program initiated in the
second half of 1996 and the Home Heat and Cardlock segments' ability to
maintain prices as costs declined. Retail marketing volumes increased
6.8% as compared with the nine months of 1996, to 63,000 barrels per
day, as a result of the Company's expanding home heating oil operations
and the implementation of the "value plus" pricing program.
Selling, general and administrative expenses of $123.7 million were $1.4
million higher than in the nine months of 1996 principally due to the
previously mentioned acquisition of home heating oil and distribution
operations in the northeast United States.
Combined Interest and Income Taxes
Net interest expense of $82.2 million in the nine months of 1997 was
$0.5 million higher than in the corresponding nine months of 1996 due to
increased borrowings.
The consolidated income tax provisions for the nine months of 1997 and
1996 were based upon the Company's estimated effective income tax rates
for the years ending December 31, 1997 and 1996 of 39.4% and 40.5%,
respectively. The consolidated effective income tax rates exceeded the
U.S. Federal statutory income tax rate primarily due to state income
taxes and the effects of foreign operations.
Outlook
The Company's earnings depend largely on refining and retail marketing
margins. The petroleum refining and marketing industry has been and
continues to be volatile and highly competitive. The cost of crude oil
purchased by the Company as well as the price of refined products sold
by the Company have fluctuated widely in the past. As a result of the
historic volatility of refining and marketing margins and the fact that
they are affected by numerous diverse factors, it is impossible to
predict future margin levels.
Continued unrest in the Middle East resulted in an increase in crude oil
prices early in the third quarter of 1997. In general, the decrease in
gasoline demand due to the end of the summer driving season, the build
up of heating oil inventories, accompanied by the increase in crude oil
costs have resulted in the recent pressure on refinery margins. If
crude oil prices fall off, which is expected, and North America
experiences typical winter conditions, there should be some relief to
the margin pressure that has been experienced early in the fourth
quarter.
West Coast refining margins have held up better than most of the other
regions of the country as the fourth quarter begins, while retail
margins continue to be very volatile. Mid-continent refining margins
have declined from the strength of the third quarter and retail margins
continue to experience market pressure. Merchandise margins are
expected to remain constant with averages obtained in the first nine
months of 1997.
In eastern Canada, refining margins have also declined early in the
fourth quarter while retail margins continue to be strong. See "Certain
Forward Looking Statements."
Capital Expenditures
The refining and marketing of petroleum products is a capital intensive
business. Recent capital spending has included expenditures to upgrade
or enhance operating facilities to meet environmental regulations and
maintain the Company's competitive position, as well as expenditures to
acquire, build and maintain broad-based retail networks. The capital
requirements of the Company's operations consist primarily of (i)
reliability, environmental and regulatory expenditures, such as those
required to maintain equipment reliability and safety and to address
environmental regulations (including reformulated fuel specifications,
stationary source emission standards and underground storage tank
regulations); and (ii) growth opportunity expenditures, such as those
planned to expand and upgrade its retail marketing business, to increase
the capacity of certain refinery processing units and pipelines and to
construct additional petrochemical processing units.
During the nine months ended September 30, 1997, capital expenditures
and acquisition of marketing operations totaled $196.7 million, of which
$121.3 million related to growth opportunity expenditures. Growth
opportunity spending included $26.0 million for the benzene, toluene and
xylene ("BTX") extraction unit at the Three Rivers refinery, which
started up in May 1997. Other growth opportunity spending, during the
first nine months of 1997 included $24.6 million to upgrade the fluid
catalytic cracking unit ("FCCU") to increase the conversion capability
at the Quebec refinery and $34.3 million to increase pipeline and
terminal capacity in Denver, El Paso and Albuquerque.
In conjunction with its plans to expand and upgrade its retail marketing
operations, the Company also spent $43.4 million related to retail
marketing growth projects, including the acquisition of two retail home
heating operations in the northeast United States and the completion of
sixteen new stores in Arizona, California and Colorado.
The Company is continually investigating strategic acquisitions and
other business opportunities, some of which may be material, that will
complement its current business activities.
The Company expects to fund its capital expenditures over the next
several years from cash provided by operations and, to the extent
necessary, from the proceeds of borrowings under its bank credit
facilities and its commercial paper and medium-term note programs
discussed below. In addition, depending upon its future needs and the
cost and availability of various financing alternatives, the Company
may, from time to time, seek additional debt or equity financing in the
public or private markets.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash and cash equivalents of
$112.8 million. The Company currently has two committed, unsecured bank
facilities which provide a maximum of $700.0 million and Cdn. $200.0
million of available credit, and a $700.0 million commercial paper
program supported by the committed, unsecured U.S. dollar bank facility.
The Company's bank facilities require the maintenance of certain
financial ratios and contain covenants with which the Company must
comply. The Company believes these covenants will not have a
significant impact on the Company's liquidity or its ability to pay
dividends.
On September 25, 1997, the Company completed the acquisition of 100% of
the common stock of Total Petroleum (North America) Ltd. ("Total"), a
Denver, Colorado based petroleum refining and marketing company. Total
has approximately 6,000 employees and operates refineries in Ardmore,
Oklahoma, Alma, Michigan and Denver, Colorado. The three refineries
have a combined capacity of approximately 150,000 barrels of crude oil
per day. Total distributes gasoline and merchandise through
approximately 2,100 branded outlets, of which approximately 560 are
company-operated. The purchase price included the issuance of
12,672,213 shares of Company common stock and the assumption of
approximately $445.2 million of debt outstanding. On September 25,
1997, the Company repaid most of the debt of Total with the proceeds of
a $150.0 million short-term bridge loan, provided by three banks and
with the proceeds from the issuance of commercial paper and borrowings
under uncommitted bank credit lines. The Company repaid the entire
bridge loan and most of the rest of the debt assumed in the acquisition
with the proceeds of the issuance of senior notes on October 14, 1997.
As of September 30, 1997, the Company had approximately $451.8 million
remaining borrowing capacity under its committed bank facilities and
commercial paper program. In addition to its committed bank facilities,
on September 30, 1997, the Company had approximately $391.8 million of
borrowing capacity under uncommitted, unsecured short-term lines of
credit with various financial institutions.
In addition to its bank credit facilities, the Company had $700.0
million (prior to the $400.0 million debt issuance in October 1997,
described below) available during the quarter under universal shelf
registrations previously filed with the Securities and Exchange
Commission. The net proceeds from any debt or equity offering under the
existing shelf registration would add to the Company's working capital
and could be available for general corporate purposes.
The Company also has $101.3 million available pursuant to committed
lease facilities aggregating $355.0 million, under which the lessors
will construct or acquire and lease to the Company primarily retail
marketing sites.
On October 14, 1997, the Company completed a public offering of $400.0
million of senior notes (the "Notes") to refinance most of the debt
incurred to finance the acquisition of Total. The Notes were issued in
three separate series. The 7.20% Notes due October 15, 2017 (the "2017
Notes") totaling $200.0 million, the 6.75% Notes due October 15, 2037
(the "2037 Notes") totaling $100.0 million, and the 7.45% Notes due
October 15, 2097 (the "2097 Notes") totaling $100.0 million. Interest
on the Notes is payable semi-annually in arrears on April 15 and October
15 of each year.
The Company believes its current sources of funds will be sufficient to
satisfy its capital expenditure, working capital, debt service and
dividend requirements for at least the next twelve months.
On November 5, 1997, the Board of Directors declared a quarterly
dividend of $.275 per common share payable on December 5, 1997, to
holders of record on November 20, 1997. In addition, the Board of
Directors declared a quarterly dividend of $.625 per share on the
Company's 5% Cumulative Convertible Preferred Stock payable on December
15, 1997, to holders of record on November 20, 1997.
Cash Flows for the Nine Months Ended September 30, 1997
During the nine months ended September 30, 1997, the Company's cash
position decreased $85.1 million to $112.8 million. Net cash provided
by operating activities, excluding the impact of the Total acquisition,
was $83.0 million due to increased net income and management's efforts
to reduce inventory levels, which were partially offset by increases in
other current assets and decreases in current liabilities.
Net cash used in investing activities during the nine month period ended
September 30, 1997 totaled $521.1 million, including $402.4 million for
the purchase of Total. Other cash outflows were for scheduled capital
expenditures of $149.8 million and the acquisition of marketing
operations for $20.3 million, and cash inflows of $77.0 million related
to proceeds from the sales of property, plant and equipment.
Net cash provided by financing activities during the nine months ended
September 30, 1997, totaled $351.7 million, primarily due to the
issuance of preferred stock of a subsidiary of $200.0 million and
increased borrowings of $194.6 million associated primarily with the
Total acquisition. For the first nine months of 1997, the Company has
declared and paid cash dividends totaling $64.9 million on its
outstanding common stock ($0.825 per share) and convertible preferred
stock ($1.875 per share), an increase of $12.7 million over dividend
payments made in the comparable period of 1996 which totaled $52.2
million.
Seasonality
In the Northeast, demand for petroleum products varies significantly
during the year. Distillate demand during the first and fourth quarters
can range from 30% to 40% above the average demand during the second and
third quarters. The substantial increase in demand for heating oil
during the winter months results in the Company's Northeast operations
having significantly higher accounts receivable and inventory levels
during the first and fourth quarters of each year. The Company's
Southwest operations are less affected by seasonal fluctuations in
demand than its operations in the Northeast. The working capital
requirements of the Southwest operations, though substantial, show
little fluctuation throughout the year.
Exchange Rates
The value of the Canadian dollar relative to the U.S. dollar has
weakened substantially since the acquisition of the Canadian operations
in 1992. As the Company's Canadian operations are in a net asset
position, the weaker Canadian dollar has reduced, in U.S. dollars, the
Company's net equity at September 30, 1997 by $60.9 million. Although
the Company expects the exchange rate to fluctuate during 1997, it
cannot reasonably predict its future movement.
With the exception of its crude oil costs, which are U.S. dollar
denominated, fluctuations in the Canadian dollar exchange rate will
affect the U.S. dollar amount of revenues and related costs and expenses
reported by the Canadian operation. The potential impact on refining
margin of fluctuating exchange rates together with U.S. dollar
denominated crude oil costs is mitigated by the Company's pricing
policies in the Northeast, which generally pass on any change in the
cost of crude oil. Marketing margins, on the other hand, have been
adversely affected by exchange rate fluctuations as competitive
pressures have, from time to time, limited the Company's ability to
promptly pass on the increased costs to the ultimate consumer. The
Company has considered various strategies to manage currency risk, and
it hedges the Canadian currency risk when such hedging is considered
economically appropriate.
Certain Forward Looking Statements
This quarterly report on Form 10-Q contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation
Reform Act of 1995 and information relating to the Company and its
subsidiaries that are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to
the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect," and "intend" and words or
phrases of similar import, as they relate to the Company or its
subsidiaries or Company management, are intended to identify forward-looking
statements. Such statements reflect the current general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision,
seasonality, distribution networks, product introductions and
acceptance, technological change, changes in industry practices, one-time
events and other factors described herein and in other filings made
by the Company with the Securities and Exchange Commission.
Based upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described
herein as anticipated, believed, estimated, expected or intended. The
Company does not intend to update these forward-looking statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
United States of America v. Total Petroleum, Inc. (CA No. CIV-97-182-S,
U.S. District Court, Eastern District of Oklahoma) filed March 21, 1997,
seeking penalties and injunctive relief for alleged violations of the
Clean Air Act at Total's Ardmore refinery. The parties have reached a
settlement whereby Total will pay $75,000 in penalties and will
implement and complete a Supplemental Environmental Project with an
expenditure of approximately $315,000.
In the Matter of Total Petroleum, Inc. (Combined Docket No. RCRA V-W-003-94
filed December 13, 1993 and RCRA V-96-002 filed April 5, 1996 as
an administrative action), the United States Environmental Protection
Agency filed complaints seeking penalties and injunctive relief for
alleged violations of the Resource Conservation and Recovery Act at
Total's Alma refinery. The parties have entered into a Consent
Agreement and Final Order (CAFO) whereby Total will pay $35,000 in
penalties and will implement and complete a Supplemental Environmental
Project with an expenditure of approximately $300,000.
In the Matter of Total Petroleum, Inc. (Combined Notice of Violation No.
EPA-5-97-MI-33 and Finding of Violation No. EPA-5-97-MI-34 filed August
5, 1997), the United States Environmental Protection Agency is
administratively seeking penalties and injunctive relief for alleged
violations of the Clean Air Act at Total's Alma refinery. Total is
responding to the EPA's requests for additional information. Total
believes a CAFO can be negotiated with the EPA to settle any ongoing
compliance issues, but Total is not in a position to determine what
actions, if any, may be instituted and is uncertain what additional
remedial actions may be required or penalties or costs incurred.
However, this action is not expected to have a material adverse effect
on the Company's financial position.
In December, 1996, the United States Environmental Protection Agency
filed administrative Requests for Information (RFIs) for the Company's
McKee and Three Rivers refineries. The RFIs, relating to hazardous
waste and Clean Air compliance issues, tracked the Company's disclosures
to the Texas Natural Resource Conservation Commission upon the
completion of audits at these facilities conducted pursuant to the Texas
self audit privilege and immunity law. In August, 1997, the United
States Environmental Protection Agency filed supplemental RFIs which
indicate the agency may seek the value of economic benefit of
noncompliance from the Company as penalties. The Company is not in a
position to determine what actions, if any, may be instituted and is
uncertain what additional remedial actions may be required or penalties
or costs incurred. However, no such action is expected to have a
material adverse effect on the Company's financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As of September 25, 1997, the Company completed the acquisition of 100%
of the outstanding shares of common stock of Total. The purchase price
included the issuance of 12,672,213 shares of Company common stock,
valued at $30.875 per share, to the holders of outstanding shares of
Total. The Company issued 0.322 shares of the Company's common stock
for each outstanding share of Total common stock. The common stock of
the Company so issued was unregistered, insofar as it was exempt from
registration under the provisions of Section 3(a)(10) of the Securities
Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.0 Statement Regarding Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 25, 1997 (File No. 11154)
relating to the acquisition of 100% of the outstanding common stock
of Total Petroleum (North America) Ltd.
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.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
(REGISTRANT)
By: /s/ H. Pete Smith
H. PETE SMITH
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
November 11, 1997
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(dollars in millions, except per share data
and shares in thousands)
Primary:
Average common shares
outstanding 75,724 74,495 75,086 74,345
Net effect of dilutive
stock options - based
on the treasury stock
method using average
market price 1,121 594 984 757
Total 76,845 75,089 76,070 75,102
Net Income $ 56.6 $ 13.9 $130.5 $ 83.0
Dividends on convertible
preferred stock 1.1 1.0 3.3 3.2
Net income applicable to
common shares $ 55.5 $ 12.9 $127.2 $ 79.8
Net income per common share $ 0.72 $ 0.17 $ 1.67 $ 1.06
Fully Diluted:
Average common shares
outstanding 75,724 74,495 75,086 74,345
Net effect of dilutive
stock options - based
on the treasury stock
method using the
period-end market price,
if higher than average
market price 1,121 796 1,088 880
Assumed conversion of 5%
cumulative preferred
stock 3,319 3,320 3,319 3,320
Total 80,164 78,611 79,493 78,545
Net income $ 56.6 13.9 $130.5 $ 83.0
Net income per common share $ 0.71 $ 0.17 $ 1.64 $ 1.06
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 112,800
<SECURITIES> 0
<RECEIVABLES> 724,100
<ALLOWANCES> 18,000
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<COMMON> 877
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