UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 1997
Commission File Number 1-11154
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification No. 13-3663331
6000 N Loop 1604 W
San Antonio, Texas 78249-1112
Telephone number: (210) 592-2000
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01
par value registered on the New York Stock Exchange.
Securities registered pursuant to 12(g) of the Act: 5% Cumulative Convertible
Preferred Stock, $0.01 par
value.
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 [root] No
- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. ( [root] )
As of February 27, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the last sales price of the Common
Stock of the Registrant as quoted on the NYSE was $3,077,942,465.
The number of shares of Common Stock, $0.01 par value, of the Registrant
outstanding as of February 27, 1998 was 86,810,282.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement for its annual meeting of
shareholders are incorporated by reference into Items 10, 11, 12, and 13 of Part
III. The Registrant intends to file such Proxy Statement no later than 120 days
after the end of the fiscal year covered by this Form 10-K.
TABLE OF CONTENTS
Item Page
PART I
1. Business....................................................... 3
2. Properties..................................................... 12
3. Legal proceedings.............................................. 12
4. Submission of matters to a vote of security stockholders....... 13
PART II
5. Market for Registrant's common equity and related stockholder
matters.................................................. 14
6. Selected financial data........................................ 15
7. Management's discussion and analysis of financial condition and
results of operations.................................... 16
8. Financial statements and supplementary data.................... 30
9. Changes in and disagreements with accountants on accounting and
financial disclosure..................................... 62
PART III
10. Directors and executive officers of the Registrant............. 62
11. Executive compensation......................................... 62
12. Security ownership of certain beneficial owners and management. 62
13. Certain relationships and related transactions................. 62
PART IV
14. Exhibits, financial statement schedules and reports on Form 8-K 63
Signatures........................................................... 72
This Annual Report on Form 10-K (including documents incorporated by reference
herein) contains statements with respect to the Company's expectations or
beliefs as to future events. These type of statements are "forward-looking" and
are subject to uncertainties. See "Forward-Looking Statements" on page 29 .
PART I
ITEM 1. BUSINESS
Summary
Ultramar Diamond Shamrock Corporation (the Company) is a leading independent
refiner and marketer of high-quality petroleum products in the central and
southwest United States (the Southwest), and the northeast United States and
eastern Canada (the Northeast). These operations consist of refineries,
convenience stores, pipelines, a home heating oil business, and related
petrochemical and natural gas liquids operations. The Company currently employs
approximately 23,000 people.
The Company's Southwest operations include six modern refineries strategically
located near its key markets. Two refineries, the McKee Refinery located near
Amarillo, Texas and the Three Rivers Refinery located near San Antonio, Texas,
service Texas and the surrounding states. The Wilmington Refinery, located near
Los Angeles, California, services the California, Nevada and Arizona markets.
Upon the acquisition of Total Petroleum (North America) Ltd. (Total) in
September 1997, the Company acquired three refineries: the Ardmore Refinery
located in Oklahoma, the Alma Refinery located in Michigan and the Denver
Refinery located in Colorado. The Total refineries service twelve central states
from Texas to Michigan. The Company markets petroleum products and a broad range
of convenience store merchandise in the Southwest under the Diamond Shamrock(R),
Beacon(R), Ultramar(R), and Total(R) brand names through a network of
approximately 5,000 outlets across 21 central and southwest states. The
Southwest operations also include the storing and marketing of natural gas
liquids, and the manufacturing and marketing of anhydrous ammonia and
polymer-grade propylene at its facilities at Mont Belvieu, near Houston, Texas.
In the Northeast, the Company owns and operates a refinery in St. Romuald,
Quebec Canada and markets petroleum products through approximately 1,300 retail
outlets and 84 cardlocks. In addition, the Northeast operations include one of
the largest retail home heating oil businesses in the northeastern region of
North America, selling heating oil to approximately 236,000 households.
Merger and Acquisitions
Ultramar Diamond Shamrock Corporation (the Company or UDS) is the surviving
corporation in the December 1996 merger (the Merger) of Ultramar Corporation
(Ultramar) and Diamond Shamrock, Inc. (Diamond Shamrock). In connection with the
Merger, the Company issued 29,876,507 shares of Company common stock and
1,725,000 shares of newly created 5% cumulative convertible preferred stock in
exchange for all the outstanding common stock and 5% cumulative convertible
preferred stock of Diamond Shamrock. The shareholders of Diamond Shamrock
received 1.02 shares of Company common stock for each share of Diamond Shamrock
common stock and one share of Company 5% cumulative convertible preferred stock
for each share of Diamond Shamrock 5% cumulative convertible preferred stock.
The Company's common stock is listed on the New York and Montreal stock
exchanges under the symbols "UDS" and "ULR," respectively. UDS's principal
executive offices are located at 6000 N Loop 1604 W, San Antonio, Texas
78249-1112.
On September 25, 1997, the Company completed the acquisition of Total Petroleum
(North America) Ltd. (Total), a Denver, Colorado based petroleum refining and
marketing company (the Acquisition). In connection with the Acquisition, the
Company issued 0.322 shares of Company common stock for each outstanding share
of Total common stock, or 12,672,213 shares of Company common stock. The Company
also assumed approximately $460.5 million of Total's debt in connection with the
Acquisition. At acquisition, Total had approximately 6,000 employees and owned
and operated refineries in Ardmore, Oklahoma, Alma, Michigan and Denver,
Colorado with a combined throughput capacity of 147,000 bpd. In addition, Total
distributed gasoline and convenience store merchandise through 2,100 branded
retail stores located in the central United States, of which approximately 560
are Company-owned.
In December 1995, Diamond Shamrock completed the acquisition of National
Convenience Stores, Inc. (NCS). At the time of the NCS acquisition, NCS operated
661 Stop N Go convenience stores located primarily in four cities in Texas. The
Company has integrated the NCS stores with the rest of the Southwest retail
operations and sells Diamond Shamrock branded gasoline through most of its Stop
N Go stores.
Ultramar Corporation was originally formed in April 1992, to acquire the United
States and Canadian refining and marketing operations of Ultramar plc from LASMO
plc, a U. K. oil and gas exploration and production company.
The Company's Operations
Southwest Refining Business
The Company's Southwest operations include six modern refineries with a combined
throughput capacity of 487,000 bpd.
Refinery / State Capacity in BPD
McKee / Texas 150,000
Three Rivers / Texas 90,000
Wilmington / California 100,000
Ardmore / Oklahoma 68,000
Alma / Michigan 51,000
Denver / Colorado 28,000
-------
487,000
=======
These refineries produce primarily gasoline, diesel, jet fuels and liquefied
petroleum gases. Other by-products of the refining process include petroleum
coke, asphalt, sulfur, ammonium thiosulfate and refinery-grade propylene, to
name a few.
The McKee Refinery has a throughput capacity of 150,000 bpd and relies primarily
on a varying blend of domestically produced crude oil for feedstock. The
refinery produces conventional gasoline, Federal specification reformulated
gasoline (RFG), other oxygenated gasolines, and low-sulfur diesel meeting
governmental specifications for on-road use. A portion of the oxygenates used in
manufacturing RFG and other oxygenated gasolines is manufactured at the McKee
Refinery and the balance is obtained from other manufacturers.
The Three Rivers Refinery has a throughput capacity of 90,000 bpd and relies
primarily on foreign crude oil for feedstock. During the three years ended
December 31, 1997, the Company completed several expansion projects at the Three
Rivers Refinery, including a benzene/toluene/xylene extraction and fractionation
unit (BTX), a heavy gas oil hydrotreater, a demetalized oil hydrotreater, a
hydrogen plant and a sulfur recovery plant to allow the refinery flexibility in
selecting its crude oil feedstock and to expand the throughput capacity. In
addition, the refinery processes natural gas liquids (NGL's) from local gas
processing plants.
The Wilmington Refinery is the newest refinery in California and one of the most
modern, technologically-advanced and energy efficient refineries in North
America. The Wilmington Refinery is capable of processing over 100,000 bpd of
total throughput, including 70,000 bpd of crude oil, and because of additional
capacity in its downstream units, up to 50,000 bpd of partially refined
feedstocks and blendstocks. The Wilmington Refinery operates primarily on a
blend of California and imported foreign crude oils. Given its coking and
desulfurizing capabilities, it is particularly well suited to process heavy,
high-sulfur crude oils, which historically have cost less than other crude oils.
In 1996, the Company completed several construction projects which enabled the
refinery to produce 100% California Air Resource Board specification
reformulated gasoline (CARB), and increased the capacity of the refinery. In
1997, the Wilmington Refinery's processing stream was comprised of approximately
32% heavy sour crude oil, 40% heavy sweet crude oil and 28% more expensive
lighter crude oils.
The Ardmore Refinery has a throughput capacity of 68,000 bpd and relies on a
varying blend of domestically produced crude oil for feedstock. The refinery
produces conventional gasoline, and low-sulfur diesel meeting government
specifications for on-road use.
The Alma Refinery has a throughput capacity of 51,000 bpd and relies primarily
on a varying blend of Michigan and Canadian produced crude oil for feedstock.
The refinery produces conventional gasoline and low-sulfur diesel meeting
government specifications for on-road use.
The Denver Refinery has a throughput capacity of 28,000 bpd and relies primarily
on a varying blend of domestically produced and Canadian crude oil for
feedstock. The refinery produces conventional gasoline, oxygenated gasoline, and
low-sulfur diesel meeting government specifications for on-road use.
Southwest Supply and Distribution
The ability to supply the Company's refineries from a variety of feedstock
sources is essential to remain competitive. The Company's network of crude oil
pipelines provides the ability to acquire crude oil from producing leases, major
domestic oil trading centers and Gulf and West Coast ports, and to transport
crude to the Company's Southwest refineries at a competitive cost. The Company
acquires a portion of its crude oil requirements through the purchase of futures
contracts on the New York Mercantile Exchange. The Company also uses the futures
market to manage the price risk inherent in purchasing crude oil in advance of
the delivery date and in maintaining its inventories.
The Company does not maintain crude oil reserves; however, it has access to a
large supply of crude oil from both domestic and foreign sources, most of which
is obtained under short-term supply agreements. Although its operations could be
adversely impacted by fluctuations in availability of crude oil and other
supplies, the Company believes that it is currently advantageous to maintain
short-term supply agreements to purchase crude oil at attractive prices. The
Company believes that the current sources of crude oil and feedstocks will be
sufficient to meet the Company's requirements in the foreseeable future.
The McKee Refinery has access to crude oil from the Texas Panhandle, Oklahoma,
southwestern Kansas and eastern Colorado through approximately 1,223 miles of
crude oil pipelines owned or leased by the Company. This refinery is also
connected by common carrier pipelines to major crude oil centers in Cushing,
Oklahoma and Midland, Texas. The McKee Refinery also has access at Wichita
Falls, Texas to major pipelines which transport crude oil from the Texas Gulf
Coast and major West Texas oil fields into the mid-continent region. The crude
oil can be stored in tanks with a capacity totaling 520,000 barrels at the McKee
Refinery and an additional 928,000 barrels of storage capacity is available
throughout the supply system.
The Three Rivers Refinery has access to crude oil from foreign sources delivered
to the Texas Gulf Coast at Corpus Christi, Texas, as well as crude oil from
domestic sources. The crude oil terminal in Corpus Christi has a total storage
capacity of 1.6 million barrels, and allows the Company to accept delivery of
larger crude oil cargos at the terminal, thereby decreasing the number of
deliveries and the demurrage expense, the charge assessed by a ship for the time
it is delayed in port to unload cargo. The Corpus Christi crude oil terminal is
connected to the Three Rivers Refinery by a 92-mile pipeline which has the
capacity to deliver 120,000 bpd to the refinery. The Three Rivers Refinery also
has access to West Texas Intermediate and South Texas crude oils through common
carrier pipelines.
The Wilmington Refinery has 2.8 million barrels of storage capacity and is
connected by pipeline to marine terminals and associated dock facilities, which
can be utilized for movement and storage of crude oil and feedstocks. The
Company operates a product marine terminal and a dock facility which are leased
from the Port of Los Angeles and the Company owns tanks at the marine terminal
with a storage capacity of 980,000 barrels.
The Ardmore and Alma Refineries are supplied by 280 miles of Company-owned and
operated crude oil pipelines with connections to common carrier lines. The Alma
Refinery is connected to the Lakehead/Interprovincial Pipeline, which transports
both Canadian and domestic crude oil. The Denver Refinery is supplied by third
party pipelines, a 120-mile Company-owned pipeline purchased in 1996, and by
truck.
Refined products produced at the McKee and Three Rivers Refineries are
distributed primarily through approximately 3,357 miles of refined product
pipelines connected to 14 terminals. The Company's refined products terminal
near Dallas, Texas also receives products from the Explorer Pipeline, a major
common carrier pipeline from the Houston, Texas area. Refined products are
distributed from the Wilmington Refinery by pipeline to a network of product
terminals owned by third parties in Southern California, Nevada and Arizona, and
then on to the Company's retail stores and wholesale customers. The Ardmore,
Alma and Denver Refineries distribute refined products through a network of
third party pipelines, 135 miles of Company-owned pipelines, trucking operations
and 11 terminals.
Over the past several years, the Company has added significantly to its
distribution system, in part by the construction of new refined product
pipelines to connect the Company's refineries to expanding markets and by adding
to or purchasing additional capacity in existing refined product pipelines.
Additions to pipeline and terminal operations over the past three years include
the construction of the McKee to El Paso, Texas pipeline and terminal, expansion
of the Amarillo-Tucumcari-Albuquerque pipeline, and the expansion of the
Colorado pipeline to Denver. Total storage capacity of refined products within
the McKee and Three Rivers pipeline and terminal system is approximately 1.0
million barrels. Storage capacity of refined products in the Wilmington system
is 500,000 barrels.
In addition to Company pipelines and terminals, the Company has historically
entered into product exchange and purchase agreements which enable it to
minimize transportation costs, balance product availability, broaden geographic
distribution and supply markets not connected to its refined product pipeline
system. Exchange agreements provide for the delivery of refined products to
unaffiliated companies at the Company's and third party terminals in exchange
for delivery of a similar amount of refined products to the Company by such
unaffiliated companies at agreed locations. Purchase agreements involve the
purchase by the Company of refined products from unaffiliated companies with
delivery occurring at agreed locations. Products are currently received on
exchange or by purchase through 68 terminals and distribution points throughout
the Company's marketing areas. Most of the Company's agreements are
long-standing arrangements; however, they can be terminated with 30 to 90 days
notice. The Company believes it is unlikely that there will be an interruption
in its ability to exchange or purchase refined product in the foreseeable
future.
In November 1997, the Company entered into an agreement to sell to Phillips
Petroleum Company (Phillips) an interest in the El Paso pipeline system, which
includes the 408-mile pipeline from McKee to El Paso and the terminal in El
Paso. The agreement provides that Phillips will initially purchase a 25%
interest in the system and, once the planned expansion of the pipeline is
completed in 1998, Phillips will be able to purchase an additional 8.33%
interest. The Company will continue to operate the system.
Southwest Marketing
The Company is one of the largest independent retail marketers of petroleum
products in the southwest United States. The Company has a strong brand
identification in much of its 21 state marketing area, including Texas,
California, Colorado, Louisiana, New Mexico, Oklahoma and Michigan. Gasoline and
diesel fuel are sold under the Diamond Shamrock(R), Beacon(R), Ultramar(R), and
Total(R) brand names through a network of 2,114 Company-operated and 2,811
dealer operated retail stores. In 1997, the Company's total sales of refined
products (retail and wholesale) in its Southwest market averaged 485,500 bpd.
The Company has one of the highest average sales volume per store in the
Southwest, with sales per Company-operated store averaging 97,100 gallons per
month during 1997.
The Company operated retail stores are generally modern, attractive, high-volume
gasoline outlets. In addition, these outlets are convenience stores, selling a
wide variety of products such as groceries, health and beauty aids, fast foods
and beverages.
The total number of retail stores as of December 31 for the past three years
were as follows:
1997 1996 1995
---- ---- ----
Company owned and operated....... 1,127 783 857
Company leased and operated...... 987 817 802
----- ----- -----
Total Company operated........ 2,114 1,600 1,659
Dealer and jobber operated........ 2,811 1,372 1,403
----- ----- -----
Total retail stores............. 4,925 2,972 3,062
===== ===== =====
As of December 31, 1997, Company-operated retail stores in the Southwest were
located primarily in Texas (1,226), Colorado (229), Michigan (183), California
(160) and Oklahoma (48). The dealer and jobber operated stores are located
primarily in Texas (821), Oklahoma (519), Michigan (240), Missouri (225), Kansas
(205) and California (204).
The Company has an ongoing program to modernize and upgrade the retail stores it
operates. These efforts include the construction of new stores or improving the
uniformity and appearance of existing stores. Improvements generally include new
exterior signage, lighting and canopies, as well as the installation of
computer-controlled pumping equipment. During the three-year period ended
December 31, 1997, the Company acquired or constructed 957 retail stores in the
Southwest. The majority of the retail stores constructed in 1997 were in Arizona
(18). In addition, the Company continually reviews its retail store locations
and has closed or sold marginally profitable stores. During the three-year
period ended December 31, 1997, the Company closed or sold 163 stores.
The Company's competitive position is supported by its own proprietary credit
card program, which had approximately 1.1 million active accounts as of December
31, 1997. The Company currently utilizes electronic point-of-sale credit card
processing (POS) at substantially all its Company and dealer operated stores.
POS reduces transaction time at the sales counter and lowers the Company's
credit card program costs. Over the past several years, the Company has
installed dispenser-mounted credit card readers at high volume Company operated
stores.
Southwest Petrochemicals and NGL's
In addition to its core refining and marketing businesses, the Company is
engaged in several related operations, the most significant of which are
discussed below:
The Company owns and operates large underground natural gas liquids and
petrochemical storage and distribution facilities located at the Mont Belvieu
salt dome, near Houston, Texas. The facilities have total permitted storage
capacity of 77.0 million barrels and consist of 30 wells. The facilities are
used for storing and distributing ethane, ethane/propane mix, ethylene, propane,
natural gasoline, butane and isobutane, as well as refinery-, chemical-, and
polymer-grade propylenes. The facilities receive products from the McKee
Refinery through the Skelly-Belvieu pipeline as well as from local fractionators
and through major pipelines coming from the mid-continent region, West Texas and
New Mexico. The Company earns various storage and distribution fees when NGL's
and petrochemicals are moved through and stored at the facilities and when
distributed via an extensive network of pipeline connections to various
refineries and petrochemical complexes along the Texas and Louisiana Gulf Coast.
A major component of the Mont Belvieu facility is the two propane/propylene
splitters which are capable of producing 1.6 billion pounds of polymer-grade
propylene per year. In 1997, the Company started construction on a third
propane/propylene splitter to increase the total production capacity to 3.0
billion pounds per year. The expansion cost of approximately $55.0 million will
be shared with the Company's partner and the third splitter is expected to be
completed in August 1998. Polymer-grade propylene is a feedstock used in the
manufacture of plastics. The splitters utilize refinery-grade propylene produced
at the McKee and Three Rivers Refineries and other refineries for feedstock. The
polymer-grade propylene is distributed to purchasers in the Houston Ship Channel
area via a pipeline from Mont Belvieu to an export terminal.
Portions of the Mont Belvieu facilities are only partially-owned by the Company.
The Company operates the SkellyBelvieu pipeline; however, it only owns a 50%
interest in the pipeline. American PetroFina, Inc. (Fina) owns a 33% interest in
the two propane/propylene splitters located at the hydrocarbon storage facility
and the third splitter under construction. The Company and Fina pay their
proportionate share of costs and receive their proportionate share of the
products produced. A petrochemical export terminal located in the Houston Ship
Channel is operated by the Company; however, the Company only owns a 50%
interest in the terminal.
In November 1997, the Company signed a memorandum of understanding with Koch
Hydrocarbon Co., a division of Koch Industries, Inc. and Koch Pipeline Co., an
affiliate of Koch Industries, Inc. for a 50-50 joint venture related to each
entity's Mont Belvieu assets. The venture requires that the Company contribute
its majority interest in the propylene splitters and related distribution
pipeline and terminal, its operating interest in the hydrocarbon storage
facility and certain of its pipeline and supply systems, and that Koch will
contribute its majority interest in its Mont Belvieu natural gas fractionator
facility and certain of its pipeline and supply systems. In the first quarter of
1998, the Company expects to finalize the joint venture and other operating
agreements and to contribute the agreed-upon assets to the joint venture for a
50% ownership interest therein.
Northeast Refining
The Quebec Refinery has a throughput capacity of 160,000 bpd and relies on
foreign crude oil for feedstock. During the three years ended December 31, 1997,
the Company completed several capital projects at the Quebec Refinery, including
expanding the fluid catalytic cracking unit and debottlenecking and
reconfiguring crude cracking units, all of which have resulted in expanded
throughput.
Northeast Supply and Distribution
The Quebec Refinery receives crude oil by ship at its deep-water dock on the St.
Lawrence River. The location of the refinery and dock allow the refinery to
receive year-around shipments of crude oil from large crude oil tankers. The
Quebec Refinery has storage capacity for more than 8.0 million barrels of crude
oil, intermediate and refined products as well as pressurized storage for
liquefied petroleum gas. The Company's ability to receive large, single cargos
up to 1.0 million barrels offers a significant advantage over other refineries
in the region, which must rely on pipelines and small cargos. Additionally, the
Company has time charters on three large crude oil tankers which are
double-bottomed and double-hulled and are capable of navigating the St. Lawrence
River in the winter.
The Company has short-term supply contracts with major international oil
companies to supply the Quebec Refinery with light, sweet crude oils from the
North Sea and North Africa, principally at spot market prices. While the Company
has no crude oil reserves, it believes that given the wide availability of North
Sea and North Africa crude oils in the international market, its operations
would not be materially adversely affected if its existing supply contracts were
canceled.
Refined product is transported from the Quebec Refinery by coastal ship, truck
and railroad tank car. The Company operates a distribution network of
approximately 71 bulk storage facilities throughout the Northeast, including 23
terminals. Reciprocal product exchange agreements with other refineries are used
to minimize transportation costs, optimize refinery utilization and balance
product availability in particular locations with marketing demand.
Northeast Marketing
The Company is a major supplier of refined petroleum products in eastern Canada,
serving Quebec, Ontario and the Atlantic Provinces of Newfoundland, Nova Scotia,
New Brunswick and Prince Edward Island. In 1997, the Company's total sales of
refined products (retail and wholesale) in its Northeast market averaged 215,000
bpd. The gasoline and diesel fuel is sold under the Ultramar(R) brand through a
network of approximately 1,274 stores located throughout eastern Canada. As of
December 31, 1997, the Company owned or controlled, under long-term leases, 629
stores and it distributed gasoline to 645 branded dealers and independent
jobbers on an unbranded basis. In addition, the Company has 84 cardlocks, which
are card- or key- activated, self-service, unattended stations that allow
commercial, trucking and governmental fleets to buy gasoline and diesel fuels 24
hours a day.
Over the past several years, the Company has converted 193 stores of its retail
network from lessee- and agent-operated stores to Company-operated stores and
plans to add approximately 200 convenience stores to its network over the next
three years.
The Northeast operations include one of the largest home heating oil businesses
in North America. In 1997, the Company sold, under the Ultramar(R) brand, home
heating oil to approximately 236,000 households in eastern Canada and the
northeastern United States. Under a development plan initiated in 1995, the
Company has acquired six retail home heating oil operations, adding
approximately 80,000 households.
In January 1998, the Company signed a memorandum of understanding with
Petro-Canada to form a joint venture related to each entity's refining and
marketing assets located in Canada and the northern United States. The venture
requires that the Company contribute all of the assets in its Northeast segment
as well as assets located in Michigan. Petro-Canada will contribute all of its
refining and marketing assets in Canada, including three refineries, a lubricant
oil manufacturing facility and approximately 1,800 retail outlets. Control of
the venture will be shared, with major decisions requiring approval of both
parties. Petro-Canada will own 51% and the Company 49% of the voting units of
the joint venture. Profits and losses will be divided between Petro-Canada and
the Company in a ratio of 64% to 36%, respectively. The Company expects to
complete the joint venture in the summer of 1998.
Competitive Considerations
The refining and marketing business continues to be highly competitive.
Competitors include a number of well capitalized and fully-integrated major oil
companies and other independent refining and marketing concerns which operate in
all of the Company's market areas. The recent consolidation and convergence
experienced in the refining and marketing industry has reduced the number of
competitors; however, it has not reduced overall competition. The Company itself
is the result of a Merger, and in 1997, the Company acquired Total, a
mid-continent refiner and marketer.
The Company's refineries and supply and distribution networks are strategically
located in markets it serves. The Company consistently sells more refined
product than its refineries produce, purchasing its additional requirements in
the spot market. This strategy has enabled the Company's refineries to operate
at high throughput rates, while efficiently expanding capacity as deemed prudent
and necessary. Quality products and strong brand identification have positioned
the Company as the largest marketer of motor fuels in Texas, Colorado and New
Mexico, with market shares of approximately 16%, 19% and 12%, respectively, and
the second largest independent marketer in California, with a market share of
approximately 7%. In Quebec, Canada, the Company is the largest independent
marketer of motor fuels with a market share of approximately 24%, and in the
adjacent Canadian Atlantic provinces, the Company has a market share of
approximately 18%. In addition to motor fuel sales, the Company's merchandise
sales at Company-owned stores have steadily increased over the the passed three
years and reached an average of $3,028,000 per day in the fourth quarter of
1997.
Financial returns in the refining and marketing industry depend largely on
refining margins and retail marketing margins, both of which have fluctuated
significantly in recent years. Refining margins are frequently impacted by sharp
changes in crude oil costs which are not immediately reflected in retail product
prices. Crude oil and refined products are commodities, thus their prices depend
on numerous factors beyond the Company's control, including the supply and
demand for crude oil and gasoline. A large, rapid increase in crude oil prices
would adversely affect the Company's operating margins if the increased costs
could not be passed on to customers. The industry also tends to be seasonal with
increased demand for gasoline during the summer vacation season and, in the
northeast regions, for home heating oil during the winter months.
Regulatory Matters
Environmental
The Company's refining and marketing operations are subject to a variety of laws
and regulations in the United States and Canada governing the discharge of
contaminants into, or otherwise relating to, the environment. The Company
believes that its operations are in substantial compliance with all applicable
environmental laws.
The principal environmental risks associated with the Company's operations are
emissions into the air and releases into soil or groundwater. The unintended
release of emissions, at refineries, terminals and convenience stores and from
ships, trains, pipelines and trucks, may occur despite stringent operational
controls and the best management practices. Such releases may give rise to
liability under environmental laws and regulations in the United States and
Canada relating to contamination of air, soil, groundwater, and surface waters.
The Company employs personnel specifically trained to prevent occurrences and to
address and remediate these problems in the event they arise. In addition, the
Company has adopted policies, practices and procedures in the areas of pollution
control, product safety and occupational health; the production, handling,
storage, use and transportation of refined petroleum products; and the storage,
use and disposal of hazardous materials, designed to prevent material
environmental or other damage and limit the financial liability which could
result from such events.
The total cost for environmental assessment and remediation depends on a variety
of regulatory standards, some of which cannot be anticipated. The Company
establishes environmental accruals when site restoration and environmental
remediation and cleanup obligations are either known or considered probable and
can be reasonably estimated. Accruals for environmental matters amounted to
approximately $213.9 million as of December 31, 1997, including $79.7 million
related to Total acquired in September 1997.
The Company believes that its environmental risks will not, individually or in
the aggregate, have a material adverse effect on its financial or competitive
position. See "Legal Proceedings -- Environmental" for a discussion of legal
proceedings involving the Company relative to environmental matters.
Employees
As of December 31, 1997, the Company and its subsidiaries had approximately
23,000 employees, including salaried and hourly employees, approximately 20,000
of whom were employed in the United States and approximately 3,000 of whom were
employed in Canada. Approximately 4 % of the Company's employees are affiliated
with a union under contract or covered by collective bargaining agreements. The
Company believes that it maintains good relations with all its employees.
Executive Officers of the Registrant
The following is a list of the Company's executive officers as of February 28,
1998:
Name Age Position
Roger R. Hemminghaus 61 Chairman of the Board and Chief Executive
Officer
Jean R. Gaulin 55 Vice Chairman of the Board, President and Chief
Operating Officer
Timothy J. Fretthold 48 Executive Vice President, Chief Administrative
and Legal Officer
William R. Klesse 51 Executive Vice President, Refining, Product
Supply and Logistics
H. Pete Smith 56 Executive Vice President and Chief Financial
Officer
Robert S. Beadle 48 Senior Vice President, Corporate Development
W. Paul Eisman 42 Senior Vice President, Refining
Alain Ferland 44 Senior Vice President, Development
Christopher Havens 43 Senior Vice President, Retail Marketing and
Operations
All executive officers were appointed to the positions above on December 3,
1996, following stockholder approval of the Ultramar and Diamond Shamrock
Merger, except as described below.
Roger R. Hemminghaus is Chairman of the Board and Chief Executive Officer of the
Company, and has served in those capacities since the Merger. Previously, he was
Chairman of the Board, President and Chief Executive Officer of Diamond
Shamrock.
Jean R. Gaulin is Vice Chairman of the Board, President and Chief Operating
Officer of the Company, and has served in those capacities since the Merger.
Previously, he was Chairman of the Board and Chief Executive Officer of
Ultramar.
Timothy J. Fretthold is Executive Vice President and Chief Administrative
Officer of the Company, and has served in those capacities since the Merger, and
was appointed Chief Legal Officer in August 1997. Previously, he was Senior Vice
President / Group Executive and General Counsel of Diamond Shamrock.
William R. Klesse is Executive Vice President, Refining, Product Supply and
Logistics of the Company, and has served in that capacity since the Merger.
Previously, he was Executive Vice President and prior thereto he was Senior Vice
President of Diamond Shamrock.
H. Pete Smith is Executive Vice President and Chief Financial Officer of the
Company, and has served in those capacities since the Merger. From April 1996 to
the Merger, he was Senior Vice President and Chief Financial Officer of
Ultramar. Prior to April 1996, he was Vice President and Chief Financial Officer
of Ultramar.
Robert S. Beadle is Senior Vice President, Corporate Development of the Company
effective January 1998, and previously was Senior Vice President, Retail
Marketing, Southwest, since the Merger. Prior to the Merger, he was Vice
President, Retail Marketing and Vice President Wholesale Marketing of Diamond
Shamrock.
W. Paul Eisman is Senior Vice President, Refining of the Company, and has served
in that capacity since the Merger. Previously, he was Vice President, Refining,
and Group Executive of Diamond Shamrock. Prior to his promotion to Vice
President, he served in various senior positions within Diamond Shamrock.
Alain Ferland is Senior Vice President, Development of the Company effective
January 1998, and previously was Senior Vice President, Refining, Product Supply
and Logistics, Northeast since the Merger. From June 1996 to the Merger, he was
President of Ultramar Canada, Inc. and prior thereto, he served as Executive
Vice President and Senior Vice President of Ultramar Canada, Inc.
Christopher Havens is Senior Vice President, Retail Marketing and Operations, of
the Company effective January 1998, and previously was Senior Vice President,
Marketing, Northeast and Wholesale since the Merger. From March 1996 to the
Merger, he was President of Ultramar Energy, Inc. and prior thereto, he served
as Senior Vice President Marketing and in a variety of senior marketing
positions within Ultramar.
ITEM 2. PROPERTIES
The Company owns the McKee, Three Rivers, Quebec, Wilmington, Ardmore, Alma and
Denver refineries and related facilities in fee. The Company also owns
approximately 1,223 miles of crude oil pipelines and 3,357 miles of refined
product pipelines as of December 31, 1997. The Company jointly owns with one or
more other companies, 41 miles of crude oil pipelines and 1,246 miles of refined
product pipelines, and the Company's interest in such pipelines is 30% and 54%,
respectively. As of December 31, 1997, the Company owned 71 bulk storage
facilities in the Northeast and 14 product terminals in the Southwest (one of
which is only 60% owned by the Company). The Company leases, under a long-term
operating lease, the property on which its Corpus Christi crude oil terminal is
situated.
The principal properties used in the Company's marketing operations as of
December 31, 1997 were 2,743 Companyoperated retail stores, 1,317 of which were
owned in fee and 1,426 of which were leased under long-term operating leases. Of
the leased retail stores, 193 were leased to the Company pursuant to a $190.0
million lease facility expiring in December 2003 (the Brazos Lease). At the end
of the lease term, the Company may purchase the properties or renew the lease or
arrange for a sale of the retail stores. In 1996, the Company entered into a
similar $100.0 million lease facility expiring in July 2003 (the Jamestown
Lease). As of December 31, 1997, six sites and the new corporate headquarters
building were leased under this facility. As a result of the Acquisition, the
Company assumed a $65.0 million lease facility with similar terms to the above
lease facilities expiring in August 2002 (the Total Lease). As of December 31,
1997, 36 retail stores were leased under this facility. For a description of the
Company-operated retail stores, see "Southwest Marketing" and " Northeast
Marketing" in Item 1. Business above.
The principal plants and properties used in the Company's Petrochemicals and
NGL's segment are the hydrocarbon storage facility at Mont Belvieu, which the
Company owns, and the jointly-owned propane splitters at Mont Belvieu. See
"Southwest Petrochemical and NGL's" in Item 1. Business above.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in a number of hydrocarbon remediation projects. While
cleanup projects are typically conducted under the supervision of a governmental
authority, they do not involve proceedings seeking material monetary damages
from the Company and are not expected to be material to the Company's operations
or financial position.
State of Iowa Storage Tank Fund Board Claim. The State of Iowa has taken the
position that Total Petroleum, Inc. (TPI) is liable for certain costs incurred
by the state in connection with the assessment and remediation of hydrocarbon
contamination at sites which formerly sold gasoline under TPI's brand. The state
has identified 66 "known" sites, and has identified another 52 sites as
"anticipated" sites, meaning that the state anticipates making claims relating
to those sites in the future. Most of the 66 sites identified as "known" sites
are former branded distributor sites. The state has offered to settle its claims
with respect to all sites for $2,300,000.
Denver Refinery. The United States Environmental Protection Agency (EPA) and the
Colorado Department of Health and Environment (CDHE) have entered into a letter
of intent with Colorado Refining Company (CRC), a wholly-owned subsidiary of the
Company, relating to CRC's alleged liability arising from an underground
hydrocarbon plume on property adjoining CRC's Denver Refinery. Under the letter
of intent, which is to be incorporated into an agreed consent order within 90
days, CRC is to pay a penalty of $72,500, and fund "supplemental environmental
projects" costing at least $290,000. Supplemental environmental projects are
environmentally desirable projects which are not required by existing law or
regulation.
In the Matter of TPI (Combined Notice of Violation No. EPA-5-97-MI-33 and
Finding of Violation No. EPA-5-97-MI- 34 filed August 5, 1997). In January,
1998, the EPA and the U.S. Department of Justice (DOJ) notified TPI of its
intention to seek a multimedia enforcement action alleging additional potential
violations under the Federal Clean Water Act, Clean Air Act, Resource
Conservation and Recovery Act, and Underground Wastewater Injection regulations
as well as violations of Michigan law and regulations. To date, the EPA and the
DOJ have proposed a settlement of certain Clean Air Act violations for fines
exceeding $3,500,000.
Michigan Department of Environmental Claims. The Surface Water Quality Division
of the Michigan Department of Environmental Claims ("MDEC") has notified TPI of
its intention to seek fines and penalties in connection with a seepage of
hydrocarbons into the Chippewa River from the Roosevelt Refinery site in Mt.
Pleasant, Michigan. TPI has agreed to pay $250,000 to MDEC in settlement of all
past surface water violations in connection with the discharge.
Purity Oil Superfund Site. The Company has settled this matter with a cash
payment of $250,000.
The Company is involved in various claims and lawsuits arising in the normal
course of business. In the opinion of the Company's management, based upon the
advice of counsel, the ultimate resolution of these matters and the above
described environmental actions will not have a material adverse effect on the
Company's operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York and Montreal stock
exchanges under the symbols "UDS" and "ULR," respectively. The table below sets
forth, for the periods indicated, the high and low sales prices on the New York
Stock Exchange of the Company's Common Stock, and dividends per share thereon.
Price Range of Cash
Common Stock Dividends
High Low Declared
Year 1997
1st Quarter $33 1/4 $28 $0.275
2nd Quarter 33 5/8 30 1/8 0.275
3rd Quarter 34 3/4 31 1/2 0.275
4th Quarter 34 3/16 27 5/8 0.275
Year 1996
1st Quarter 29 1/2 26 1/8 0.275
2nd Quarter 32 7/8 28 3/4 0.275
3rd Quarter 30 1/2 25 7/8 0.275
4th Quarter 32 3/4 27 3/4 0.275
In each quarter of 1997, the Company declared and paid dividends of $0.625 per
share on its 5% Cumulative Convertible Preferred Stock. During 1997, the Company
also declared and paid dividends totaling $1.07 per share on the 8.32% Company
obligated preferred stock of a subsidiary.
The Company expects to continue its policy of paying regular cash dividends. The
timing, amount and form of future dividends will be determined by the Company's
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, financial condition and the availability of dividends and
other payments from subsidiaries which are subject to the limitation described
in Note 10 to the consolidated financial statements and discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." As of December 31, 1997, under the most restrictive debt covenants,
$169.6 million is available for the payment of dividends.
As of February 27, 1998, there were 86,810,282 shares of Common Stock
outstanding which were held by 12,549 holders of record.
The 5% Cumulative Convertible Preferred Stock is convertible into Common Stock
when the market price of the Common Stock exceeds $33.77 per share for 20 of any
30 consecutive trading days. As of February 27, 1998, the market price of the
Company's Common Stock exceeded the required threshold allowing the Company to
convert all of the Preferred Shares into 3,318,707 Common Shares. The conversion
is expected to occur in the first quarter of 1998.
ITEM 6. SELECTED FINANCIAL DATA
The consolidated selected financial data for the five-year period ended December
31, 1997, has been derived from the audited consolidated financial statements of
the Company. The consolidated selected financial data for the four- year period
ended December 31, 1996, has been restated to include the balances and results
of Diamond Shamrock due to the Merger, which was accounted for as a pooling of
interests, on December 3, 1996.
The consolidated selected financial data as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997, should be
read in conjunction with the audited consolidated financial statements and
related notes thereto included elsewhere herein, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
1997 (2) 1996 1995 (3) 1994 1993 (5)
---- ---- ---- ---- ----
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales and other revenues .......................$10,882.4 $10,208.4 $8,083.5 $7,418.3 $7,056.3
Operating income ............................... 384.4 69.9 226.8 299.2 279.2
Income (loss) before extraordinary loss
and cumulative effect ........................ 159.6 (35.9) 95.0 136.8 119.1
Extraordinary loss on debt extinguishment(1) ... (4.8) -- -- -- --
Cumulative effect of accounting change(4) ...... -- -- 22.0 -- (14.2)
Net income (loss) .............................. 154.8 (35.9) 117.0 136.8 104.9
Basic income (loss) per share:
Income (loss) before extraordinary loss and
cumulative effect ............................ 1.99 (0.54) 1.31 1.95 1.73
Extraordinary loss on debt extinguishment(1) ... (0.06) -- -- -- --
Cumulative effect of accounting change(4) ........ -- -- 0.31 -- (0.21)
Net income (loss) .............................. 1.93 (0.54) 1.62 1.95 1.52
Diluted income (loss) per share:
Income (loss) before extraordinary loss and
cumulative effect ............................ 1.94 (0.54) 1.30 1.90 1.67
Extraordinary loss on debt extinguishment(1) ... (0.06) -- -- -- --
Cumulative effect of accounting change(4) ...... -- -- 0.30 -- (0.20)
Net income (loss) .............................. 1.88 (0.54) 1.60 1.90 1.47
Cash dividends per share:
Common ......................................... 1.10 1.10 1.10 1.10 1.10
Preferred ...................................... 2.50 2.50 2.50 2.50 1.28
Preferred of subsidiary ........................ 1.07 -- -- -- --
Weighted average number of shares (in thousands):
Basic .......................................... 78,120 74,427 69,467 68,064 67,605
Diluted ........................................ 82,424 74,427 73,333 71,994 71,497
As of December 31,
1997 (2) 1996 1995 (3) 1994 1993 (5)
---- ---- ---- ---- ----
(in millions)
Balance Sheet Data:
Cash and cash equivalents ......................$ 92.0 $ 197.9 $ 175.5 $ 82.5 $ 110.2
Working capital ................................ 360.1 303.1 385.7 361.3 395.3
Total assets ................................... 5,594.7 4,420.0 4,216.7 3,384.4 3,073.9
Long-term debt, less current portion ........... 1,866.4 1,646.3 1,557.8 1,042.5 980.5
Preferred stock of subsidiary .................. 200.0 -- -- -- --
Stockholders' equity ........................... 1,686.6 1,240.9 1,328.0 1,122.3 1,069.3
</TABLE>
(1) In November 1997, the Company terminated its ESOPs in conjunction with
restructuring the employee benefit plans pursuant to the Merger, and recognized
an extraordinary loss of $4.8 million (net of income tax benefit of $3.2
million), or $0.06 per share on a diluted basis, as a result of prepaying the
underlying 8.77% Senior Notes related thereto.
(2) On September 25, 1997, the Company acquired Total for $851.8 million,
consisting of $460.5 million of debt assumed and $391.3 million of Company
common stock issued for the outstanding stock of Total. The acquisition was
accounted for using the purchase method and, accordingly, the results of
operations of Total are included from the date of acquisition.
(3) On December 14, 1995, Diamond Shamrock acquired NCS for approximately $280.0
million. The acquisition was accounted for using the purchase method and,
accordingly, the results of operations of NCS are included from the date of
acquisition.
(4) During the second quarter of 1995, the Company changed its method of
accounting for refinery maintenance turnaround costs from an accrual method to a
deferral method. The change resulted in a cumulative adjustment through December
31, 1994, of $22.0 million (net of income taxes of $13.4 million), or $0.30 per
share on a diluted basis, which is included in net income for the year ended
December 31, 1995. The effect of the change on the year ended December 31, 1995,
was to increase income before cumulative effect of accounting change by
approximately $3.5 million ($0.05 per share on a diluted basis) and net income
by $25.5 million ($0.35 per share on a diluted basis). Had the change in
accounting policy been in effect since the beginning of 1993, net income for the
years ended December 31, 1994 and 1993, would have been $143.4 million ($1.99
per share on a diluted basis) and $115.0 million ($1.61 per share on a diluted
basis), respectively.
(5) In 1993, Diamond Shamrock changed its method of accounting for certain
liabilities resulting from an agreement with Diamond Shamrock's former parent.
The change resulted in a cumulative adjustment through December 31, 1992, of
$14.2 million (net of income tax benefit of $9.4 million), or $0.20 per share on
a diluted basis, which is reflected in net income for the year ended December
31, 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company
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.
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. Additionally, the Company is impacted by the increased demand for gasoline
during the summer vacation season. The Company's Southwest operations are less
affected by seasonal fluctuations in demand than its operations in the
Northeast.
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Financial and operating data by geographic area for the years ended December 31,
1997 and 1996, are as follows:
Financial Data:
- ---------------
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996
-------- --------
Southwest(1) Northeast Total Southwest Northeast Total
--------- --------- ----- --------- --------- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and other revenues ............. $7,866.8 $3,015.6 $10,882.4 $7,161.6 $3,046.8 $10,208.4
Cost of products sold(3) ............. 5,031.8 1,785.7 6,817.5 4,728.9 1,821.1 6,550.0
Operating expenses ................... 762.8 124.4 887.2 802.4 125.7 928.1
Selling, general and
administrative expenses ........... 149.9 167.4 317.3 128.8 173.2 302.0
Taxes other than income taxes ........ 1,489.7 786.2 2,275.9 1,278.4 822.7 2,101.1
Depreciation and amortization ........ 167.7 32.4 200.1 153.5 26.4 179.9
Merger and integration costs(5) ...... -- -- -- -- -- 77.4
-------- -------- --------- -------- -------- ---------
Operating income ..................... $ 264.9 $ 119.5 384.4 $ 69.6 $ 77.7 69.9
Gain on sale of office building(2) ... ======== ======== 11.0 ======== ======== --
Interest income ...................... 11.5 18.4
Interest expense ..................... (131.7) (128.5)
--------- ---------
Income (loss) before income taxes,
extraordinary loss and dividends of
subsidiary............................ 275.2 (40.2)
Provision (benefit) for income taxes 110.2 (4.3)
Extraordinary loss(4)................. 4.8 -
Dividends on subsidiary stock......... 5.4 -
--------- ---------
Net income (loss)..................... $ 154.8 $ (35.9)
========= =========
</TABLE>
(1) On September 25, 1997, the Company acquired Total for $851.8 million,
consisting of $460.5 million of debt assumed and $391.3 million of Company
Common Stock issued for the outstanding stock of Total. The acquisition was
accounted for using the purchase method and, accordingly, the results of
operations of Total are included from the date of acquisition.
(2) In March 1997, the Company recognized an $11.0 million gain on the sale of
an office building in San Antonio, Texas which was originally purchased to serve
as the Company's corporate headquarters.
(3) In December 1997, the Company recorded an $11.1 million non-cash reduction
in the carrying value of crude oil inventories due to the significant drop in
crude oil prices late in 1997.
(4) In November 1997, the Company terminated its ESOPs in conjunction with
restructuring the employee benefit plans pursuant to the Merger, and recognized
an extraordinary loss of $4.8 million (net of income tax benefit of $3.2
million), as a result of prepaying the underlying 8.77% Senior Notes related
thereto.
(5) In connection with the Merger, the Company recorded merger and integration
costs of $77.4 million ($53.0 million net of income tax benefit) during the
fourth quarter of 1996. Such costs consisted of $13.1 million of financial,
legal and registration fees and $64.3 million related to workforce reductions,
writedowns of facilities and equipment, and other costs.
Operating Data:
Years Ended
December 31,
1997 1996
---- ----
Southwest
Mid-Continent Refineries (1):
Throughput (bpd)........................ 272,300 235,500
Margin (dollars per barrel)............. 4.89 3.61
Wilmington Refinery:
Throughput (bpd)........................ 120,300 102,700
Margin (dollars per barrel)............. 4.61 4.66
Retail Marketing:
Fuel volume (bpd)....................... 127,200 107,400
Fuel margin (cents per gallon).......... 11.9 12.7
Merchandise sales ($1,000/day).......... 2,551 2,416
Merchandise margin (%).................. 30.2 30.6
Northeast
Quebec Refinery:
Throughput (bpd)........................ 139,800 143,900
Margin (dollars per barrel)............. 2.35 3.15
Retail Marketing:
Fuel volume (bpd)....................... 64,000 60,900
Overall margin (cents per gallon) (2)... 26.8 22.2
(1) Effective September 25, 1997, the Mid-Continent Refineries, formerly
referred to as McKee and Three Rivers Refineries, include the Alma, Ardmore and
Denver Refineries acquired from Total. Excluding the operations of the Total
Refineries for the fourth quarter of 1997, the 1997 throughput would have been
231,000 bpd and the margin would have been $5.39 per barrel.
(2) Retail marketing overall margin reported for the Northeast represents a
blend of gross margin from Company and dealer operated retail stores, heating
oil sales and the cardlock business segment.
a)
Summary
Net income for the year ended December 31, 1997, totaled $154.8 million as
compared to a net loss in 1996 of ($35.9) million. In the Southwest, the Company
had operating income of $264.9 million in 1997, as compared to $69.6 million for
1996. The increase in operating profit was primarily due to increased refining
margins at the Mid-Continent Refineries, increased throughput at the Wilmington
Refinery, increased retail fuel volumes, and decreased operating expenses due
primarily to efficiencies gained from the Merger. These increases were somewhat
offset by a decrease in the average retail marketing fuel margin and a decrease
in the retail marketing merchandise margin. In the Northeast, operating income
was $119.5 million for 1997 as compared to $77.7 million for 1996, as a result
of improved retail marketing fuel volumes and a 21% increase in the retail
marketing margin. These increases were partially offset by a decline in the
Quebec Refinery throughput and a 25% decline in the refining margin.
Southwest Operations
Sales and other revenues in the Southwest for the year ended December 31, 1997
totaled $7.9 billion and were 9.8% higher than 1996 primarily due to an 18.4%
increase in retail marketing fuel volumes and the additional sales of $755.6
million from Total, acquired in September 1997.
The refining margin for the Mid-Continent Refineries of $4.89 per barrel for
1997 increased by 35.5% as compared to $3.61 per barrel for 1996, reflecting
declining crude oil costs and increased demand during 1997. As a result of a
partial shutdown of the McKee Refinery in the fourth quarter of 1997,
throughput, excluding the Total Refineries, declined by 1.9% from 1996 to 1997;
however, this shutdown of McKee allowed the Total Refineries to operate at much
higher levels to supply the needed demand. During the shutdown at the McKee
Refinery, the Company performed additional maintenance in order to defer a
scheduled 1998 turnaround until 1999. The refining margin for the Wilmington
Refinery remained steady at $4.61 per barrel in 1997 as compared to $4.66 in
1996. Throughput at the Wilmington Refinery during 1997 increased by 17.1% over
the same period in 1996 to 120,300 bpd, 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 18.4% to 127,200 bpd, principally as a
result of the addition of 27 new convenience stores during 1997 and increased
volumes sold through Total branded convenience stores acquired in September
1997. Retail fuel margins decreased by 6.3% to 11.9 cents per gallon for 1997,
due primarily to a very competitive pricing environment at the station level in
the Texas market, partially offset by increased fuel margins in California and
Colorado in 1997.
Merchandise sales at the Company's convenience stores increased 5.6% to $2.6
million per day during 1997 from $2.4 million per day in 1996. This increase is
a direct result of the Company's plan to expand and upgrade its marketing
operations, which included the construction of 27 new stores and the acquisition
of 560 Total convenience stores. On a per store basis, merchandise sales
increased 4.3% due to the Company closing or selling approximately 84
underperforming convenience stores. The retail marketing merchandise margin
remained steady at 30.2% in 1997 as compared to 30.6% in 1996, as competitive
pressures on the pricing of beer, soda and tobacco products continued.
The petrochemicals and NGL's businesses contributed $23.3 million to 1997
operating income versus $9.5 million in 1996 as a result of increased sales of
polymer-grade propylene from the second splitter completed in 1996, and
continued strong demand for Nitromite fertilizer. In the fourth quarter of 1997,
the Company started an expansion project for the existing two propane/propylene
splitters, and will complete construction of a third splitter in 1998 to take
advantage of the increasing demand for polymer-grade propylene, used in the
manufacture of plastics.
Operating expenses declined $39.6 million or 4.9%, to $762.8 million as a result
of merger synergies experienced in both refining and marketing. Excluding the
operating expenses related to Total of $66.5 million, the decline in operating
expenses would have been $106.1 million or 13.2 %.
Selling, general and administrative expenses for 1997 of $149.9 million were
$21.1 million higher than in 1996, and included $19.0 million of selling,
general and administrative expenses incurred by Total for the three months ended
December 31, 1997. Overall, selling, general and administrative expense remained
level with 1996 reflecting higher selling costs incurred to support the
increased sales which were offset by lower general and administrative expenses
associated with synergies resulting from the Merger.
Northeast Operations
Sales and other revenues in the Northeast in 1997 totaled $3.0 billion and were
$31.2 million, or 1.0%, lower than 1996, as a result of lower throughput and
lower product prices during the year.
Refining margins decreased by 25.4% to $2.35 per barrel in 1997 as compared to
$3.15 per barrel in 1996, due to lower average Atlantic Basin crack spreads.
Throughput at the Quebec Refinery averaged 139,800 bpd or 2.8% lower than in
1996 as throughput was adversely affected by a scheduled major turnaround in the
second quarter of 1997. During the recent ice storms in the Northeast, the
Quebec Refinery, which is located north of the affected area, continued to
operate, while competitors' refineries were shut down due to power failures,
thus allowing for improved margins in early 1998.
Overall retail margins increased 4.6 cents per gallon to 26.8 cents per gallon
in 1997 as compared to 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 crude oil prices declined. Retail marketing volumes increased 5.1% in
1997 as compared to 1996, to 64,000 bpd, as a result of acquiring three home
heating oil businesses in 1997, and converting 55 agent-operated stores to
Company-owned convenience stores.
Selling, general and administrative expenses for 1997 of $167.4 million were
$5.8 million lower than in 1996, principally due to the previously mentioned
cost reductions and synergies from the Merger.
Corporate Expenses
Despite significantly lower average working capital borrowings, net interest
expense of $120.2 million in 1997 was $10.1 million higher than in 1996 due
primarily to the assumption of approximately $400.0 million of debt at the time
of the Total Acquisition and a reduction in the amount of interest capitalized
on property, plant and equipment additions.
The consolidated income tax provisions for 1997 totaled $110.2 million,
representing an effective tax rate of 40.0% as compared to the 1996 effective
income tax benefit of ($4.3) million or 10.7%. The 1996 effective tax rate was
low due to non-deductible Merger and other costs recorded in 1996. 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.
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Financial and operating data by geographic area for the years ended December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Financial Data:
Years Ended December 31,
1996 1995
----------------------------- -------------------------------------
Southwest Northeast Total Southwest(3) Northeast Total
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and other revenues............. $7,161.6 $3,046.8 $10,208.4 $5,432.2 $2,651.3 $8,083.5
Cost of products sold................ 4,728.9 1,821.1 6,550.0 3,324.3 1,538.8 4,863.1
Operating expenses................... 802.4 125.7 928.1 553.4 118.9 672.3
Selling, general and
administrative expenses........... 128.8 173.2 302.0 89.6 165.1 254.7
Taxes other than income taxes........ 1,278.4 822.7 2,101.1 1,215.7 714.6 1,930.3
Depreciation and amortization........ 153.5 26.4 179.9 111.4 24.9 136.3
Merger and integration costs(1)...... - - 77.4 - - -
-------- -------- -------- -------- --------
Operating income..................... $ 69.6 $ 77.7 69.9 $ 137.8 $ 89.0 226.8
Interest income...................... ======== ======== 18.4 ======== ======== 13.4
Interest expense..................... (128.5) (93.1)
--------- --------
(Loss) income before income taxes
and cumulative effect of accounting
change............................... (40.2) 147.1
Provision (benefit) for income taxes (4.3) 52.1
Cumulative effect of accounting
change(2)............................ - 22.0
---------- -------
Net (loss) income.................... $ (35.9) $ 117.0
========== =======
</TABLE>
(1) In connection with the Merger, the Company recorded merger and integration
costs of $77.4 million ($53.0 million net of income tax benefit) during the
fourth quarter of 1996. Such costs consisted of $13.1 million of financial,
legal and registration fees and $64.3 million related to workforce reductions,
writedowns of facilities and equipment, and other costs.
(2) In the second quarter of 1995, the Company changed its method of accounting
for refinery maintenance turnaround costs from an accrual method to a deferral
method to better match revenues and expenses. The change resulted in a
cumulative adjustment through December 31, 1994, of $22.0 million (net of income
taxes of $13.4 million).
(3) On December 14, 1995, Diamond Shamrock acquired NCS for approximately $280.0
million. The acquisition was accounted for using the purchase method and,
accordingly, the results of operations of NCS are included from the date of
acquisition.
Operating Data:
Years Ended
December 31,
1996 1995
---- ----
Southwest
McKee and Three Rivers Refineries:
Throughput (bpd)............................ 235,500 210,900
Margin (dollars per barrel)................. 3.61 3.49
Wilmington Refinery:
Throughput (bpd)............................ 102,700 75,100
Margin (dollars per barrel)................. 4.66 4.38
Retail Marketing:
Fuel volume (bpd)........................... 107,400 79,800
Fuel margin (cents per gallon).............. 12.7 13.8
Merchandise sales ($1,000/day).............. 2,416 1,114
Merchandise margin (%)...................... 30.6 30.0
Northeast
Quebec Refinery:
Throughput (bpd)............................ 143,900 135,000
Margin (dollars per barrel) (1)............. 3.15 2.33
Retail Marketing:
Fuel volume (bpd)........................... 60,900 56,400
Overall margin (cents per gallon) (1) (2)... 22.2 26.3
(1) Effective January 1, 1996, the Company modified its policy for pricing
refined products transferred from its Quebec Refinery to its Northeast marketing
operations to more closely reflect the spot market prices for such refined
products. To facilitate the comparison to the operating data for the year ended
December 31, 1996, the amounts reported for the year ended December 31, 1995,
have been adjusted to reflect the pricing policy change as if it had occurred on
January 1, 1995. The refining margin and retail marketing fuel margin originally
reported for the year ended December 31, 1995, were $3.42 and 22.9(cent),
respectively.
(2) Retail marketing overall margin reported for the Northeast represents a
blend of gross margin from Company and dealer operated retail stores, heating
oil sales and the cardlock business segment.
Summary
The net loss for the year ended December 31, 1996, was $35.9 million, which
included a pre-tax charge of $77.4 million ($53.0 million after income tax
benefit) for transaction and integration costs associated with the Merger on
December 3, 1996. In the Southwest, operating income was $69.6 million for the
year ended December 31, 1996, a decrease of $68.2 million from the 1995 level,
due primarily to increased operating expenses and depreciation expense related
to the acquisition of NCS in December 1995. Also included in operating expenses
is a $50.4 million one-time non-cash charge recorded in the fourth quarter of
1996 to conform accounting practices between Diamond Shamrock and Ultramar. In
the Northeast, operating income was $77.7 million for the year ended December
31, 1996, a decrease of $11.3 million from the 1995 level.
Southwest Operations
Sales and other revenues in the Southwest for 1996 totaled $7.2 billion, $1.7
billion or 31.8% higher than in 1995, as average product prices increased by
21.7% and product sales volume increased by 13.6% to 416,600 bpd. Product and
merchandise sales volumes increased substantially over 1995, primarily as a
result of the December 1995 acquisition of NCS.
The refining margin at the McKee and Three Rivers Refineries increased by 3.4%
to $3.61 per barrel in 1996, reflecting crude oil price volatility during the
year. Refining margin at the Wilmington Refinery increased by 6.4% to $4.66 per
barrel in 1996 due to an improvement in the heavy sour crude oil price
differential. Refinery throughput at the McKee and Three Rivers Refineries
during 1996 increased by 11.7% to 235,500 bpd as several upgrade and expansion
projects were completed during the year. Throughput at the Wilmington Refinery
in 1996 increased by 36.8% to 102,700 bpd, principally due to the operation of
the Refinery's new gas oil hydrotreater. In addition, refinery throughput at the
Wilmington Refinery in 1995 was adversely affected as refinery units were down
on several occasions to tie in units required to make CARB specification
gasoline and to replace the crude oil heater destroyed by a 1995 explosion and
fire. Retail marketing fuel volume increased by 34.6% to 107,400 bpd,
principally as a result of the December 1995 NCS acquisition, which included 661
Stop N Go convenience stores; however, not all Stop N Go stores sold gasoline.
The retail marketing fuel margin decreased by 8.0% to 12.7 cents per gallon in
1996, due to intense competitive pressures in the California and Texas markets.
Merchandise sales at the Company's convenience stores more than doubled from
$1.1 million per day in 1995 to $2.4 million per day in 1996 as a result of the
NCS acquisition. Merchandise margins for the years 1996 and 1995 remained
relatively constant at 30.6% and 30.0%, respectively.
Operating expenses increased $249.0 million in 1996 to $802.4 million, primarily
as a result of increased marketing expenses associated with the NCS operations
acquired in December 1995. In addition, the Company recorded a one-time non-cash
charge of $50.4 million to conform the accounting practices between Diamond
Shamrock and Ultramar.
Selling, general and administrative expenses during 1996 of $128.8 million
increased by $39.2 million or 43.8% from 1995, as a result of the NCS operations
and the Merger, effective December 3, 1996.
Northeast Operations
Sales and other revenues in the Northeast for 1996 totaled $3.0 billion, $395.5
million or 14.9% higher than in 1995, as average product prices increased by
11.6% and product sales volume increased by 6.0% to 159,000 bpd. Cost of
products sold, as a percentage of sales, increased by 1.7% compared to 1995.
Refining margin increased 35.2% to $3.15 per barrel in 1996, from $2.33 per
barrel in 1995, as a result of higher average Atlantic Basin crack spreads and
the ability to process low cost Heidrun crude oil for all of 1996 as compared to
only one month in 1995. Throughput at the Quebec Refinery averaged 143,900 bpd
in 1996, or 6.6% higher than in 1995, as 1995 throughput was adversely affected
by refinery downtime while work was performed to configure the refinery to run
lower cost acidic crude oils such as Heidrun. Retail fuel margin decreased by
4.1 cents per gallon, or 15.6%, to 22.2 cents per gallon from 1995 to 1996,
reflecting continued competitive pressures on motorist margins and the impact of
higher distillate wholesale prices on both heating oil and cardlock sales
through the first ten months of 1996. Retail marketing fuel volume for 1996
increased 8.0% from 1995, to 60,900 bpd, as a result of the Company expanding
home heating oil operations and the implementation of the "Value Plus" program
in the Canadian retail gasoline operations late in the second quarter of 1996.
Refining operating expenses, before depreciation, totaled $50.7 million, or
$0.96 per barrel in 1996, compared to $46.1 million, or $0.94 per barrel in
1995. Refinery operating expenses in 1996 reflect increased throughput as well
as the incremental additive and chemical costs associated with running Heidrun
crude oil. Selling, general and administrative expenses of $173.2 million during
1996 were $8.1 million higher than in 1995, principally due to the previously
mentioned acquisition of home heating oil and distribution operations in the
Northeast United States during 1996 and the one-time cost related to the rollout
of the "Value Plus" program.
Corporate Expenses
Net interest expense totaled $110.1 million for 1996, an increase of $30.4
million or 38.1% over the 1995 level, as average borrowings increased from $1.2
billion in 1995 to $1.6 billion in 1996 as a result of additional borrowings
used to finance the NCS acquisition in December 1995. The average interest rate
on the Company's borrowings was 8.2% for 1996 as compared to 8.7% for 1995.
As a result of recognizing $77.4 million in merger and integration costs, the
Company incurred a net loss for 1996; however, certain of the merger costs were
non-deductible for income tax purposes, thus the effective income tax benefit
rate for 1996 was (10.7%). This compares to an effective tax rate of 35.4% in
1995.
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
significantly 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.
During the latter part of the fourth quarter of 1997 and continuing into 1998,
crude oil prices have declined significantly from the same period a year ago.
The decline in crude oil prices is the result of Saudi Arabia indicating in
November 1997 that it would increase production, the milder winter weather
brought about by the phenomenon known as El Nino, and the likelihood that
economic turmoil in southeast Asia will trim demand. Continued unrest in the
Middle East has added a great deal of uncertainty to what will happen to crude
oil prices for the rest of the first quarter and throughout the balance of 1998.
Should any military action occur, the impact on production and deliveries of
Middle East crude oil will more than likely spike crude oil prices industry
wide. In general, low distillate demand has put downward pressure on product
prices, which has not been entirely offset by the lower crude oil prices, thus
squeezing refinery margins. Should crude oil prices remain at levels materially
lower than December 31, 1997 prices, the Company will be required to reduce the
carrying value of its crude oil inventories.
West Coast refining margins have remained stronger than most of the other
regions of the country as the first quarter of 1998 begins, and the retail
margins continue to be strong; however, retail volumes have been affected in
some areas due to heavy California rains. Mid-Continent refining margins have
declined as we enter the first quarter of 1998 and retail margins have remained
steady with levels of the fourth quarter of 1997. Merchandise margins for the
first quarter of 1998 are expected to remain constant with levels obtained in
the fourth quarter of 1997.
In eastern Canada, refining margins have declined in the first quarter of 1998,
while retail margins continued to be strong. The Quebec Refinery, which is
located north of the area affected by the recent ice storms, was able to operate
while other refineries were forced to shut down. Demand for heating oil has
strengthened, helping maintain retail heating oil prices; however, not at normal
winter volume levels. See "Certain Forward Looking Statements."
Environmental Matters
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities in the jurisdictions in which the
Company operates. The Company has accrued liabilities for estimated site
restoration costs to be incurred in the future at certain facilities and
properties. In addition, the Company has accrued liabilities for environmental
remediation obligations at various sites, including the multiparty sites in the
Southwest where the Company has been identified as a potentially responsible
party. Under the Company's accounting policy, liabilities are recorded when site
restoration and environmental remediation and cleanup obligations are either
known or considered probable and can be reasonably estimated. As of December 31,
1997 and 1996, accruals for environmental matters amounted to $213.9 million
(including $79.7 million related to Total) and $151.4 million, respectively.
Charges to income for environmental matters during the years ended December 31,
1997 and 1996, were $1.3 million and $41.7 million, respectively. Charges in
1995 were not significant.
Capital Expenditures
The refining and marketing of petroleum products is a capital intensive
business. Significant capital requirements include expenditures to upgrade or
enhance refinery operations to meet environmental regulations and maintain the
Company's competitive position, as well as 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 year ended December 31, 1997, capital expenditures and acquisitions
of marketing operations totaled $267.9 million, of which $166.9 million related
to growth opportunity expenditures. Growth opportunity spending included $26.7
million for the benzene/toluene/xylene (BTX) extraction unit at the Three Rivers
Refinery, which started up in May 1997. Other growth opportunity spending during
1997 included $13.9 million to upgrade the fluid catalytic cracking unit (FCCU)
to increase production yields at the Quebec Refinery, $15.7 million for
expansion of the two existing propane/propylene splitters at Mont Belvieu and
$4.7 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 $75.1 million related to retail marketing
growth projects ($2.4 million of which was lease financed), including the
acquisition of three retail home heating oil operations in the northeast United
States and the completion of 27 new convenience 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. For fiscal year 1998, the Company has established a
capital projects budget of approximately $320.7 million, which includes $168.0
million of growth opportunity projects and $142.7 million of reliability and
regulatory projects. These budgeted amounts are reviewed throughout the year by
management and are subject to change based on other opportunities that arise.
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
As of December 31, 1997, the Company had cash and cash equivalents of $92.0
million. The Company currently has two committed, unsecured bank facilities
which provide a maximum of $700.0 million U.S. and $200.0 million Cdn. of
available credit, and a $700.0 million commercial paper program supported by the
committed, unsecured U.S. bank facility.
On June 25, 1997, UDS Capital I (the Trust), a wholly-owned subsidiary of the
Company, issued $200.0 million of 8.32% Trust Originated Preferred Securities
(TOPrS) in an underwritten public offering. The TOPrS represent preferred
undivided interests in the Trust's assets, with a liquidation preference of
$25.00 per security. Distributions on the TOPrS are cumulative and payable
quarterly in arrears, at the annual rate of 8.32% of the liquidation amount. The
Company has fully and unconditionally guaranteed, on a subordinated basis, the
dividend payments due on the TOPrS. The proceeds from the issuance of the TOPrS
were used to reduce long-term debt of the Company.
On September 25, 1997, the Company completed the acquisition of 100% of the
common stock of Total, a Denver, Colorado based petroleum refining and marketing
company. Total had 6,000 employees and operated the Ardmore, Alma and Denver
Refineries. The three refineries have a combined capacity of 147,000 barrels of
crude oil per day. Total distributed gasoline and merchandise through
approximately 2,100 branded outlets, of which approximately 560 were
company-operated. The purchase price included the issuance of 12,672,213 shares
of Company Common Stock and the assumption of $460.5 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.
On October 14, 1997, the Company completed a public offering of $400.0 million
of senior notes (the Total Senior Notes) to refinance most of the debt incurred
to finance the acquisition of Total. The Total Senior 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 Total Senior Notes is payable
semi-annually in arrears on April 15 and October 15 of each year. The 2017 Notes
and the 2097 Notes may be redeemed at any time at the option of the Company, in
whole or in part, at a redemption price equal to the greater of (a) 100% of the
principal amount, or (b) the sum of the present value of outstanding principal
and interest thereon discounted, at the U.S. Treasury Yield plus 20 basis
points, together with accrued interest, if any, to the date of redemption. The
2037 Notes may be redeemed, in whole or in part, by the holders on October 15,
2009, at a redemption price equal to 100% of the principal plus accrued and
unpaid interest. After October 15, 2009, the 2037 Notes are redeemable at the
option of the Company in the same manner as the 2017 Notes and 2097 Notes.
As of December 31, 1997, the Company had approximately $592.3 million remaining
borrowing capacity under its committed bank facilities and commercial paper
program. In addition to its committed bank facilities, on December 31, 1997, the
Company had approximately $479.4 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 $300.0 million
available under universal shelf registrations previously filed with the
Securities and Exchange Commission. Subsequent to December 31, 1997, the Company
filed an amendment to the universal shelf registration, increasing the amount
available to $1.0 billion. The net proceeds from any debt or equity offering
under the existing universal shelf registrations would add to the Company's
working capital and would be available for general corporate purposes.
The Company also has $77.8 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 stores.
The Bank facilities and other debt agreements require that the Company maintain
certain financial ratios and other restrictive covenants. The Company is in
compliance with such covenants and believes that such covenants will not have a
significant impact on the Company's liquidity or its ability to pay dividends.
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 February 4, 1998, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on March 5, 1998, to holders of record on
February 20, 1998. In addition, the Board of Directors declared a quarterly
dividend of $0.625 per share on the Company's 5% Cumulative Convertible
Preferred Stock payable on March 13, 1998, to holders of record on February 20,
1998.
Cash Flows For The Year Ended December 31, 1997
During the year ended December 31, 1997, the Company's cash position decreased
$105.9 million to $92.0 million. Net cash provided by operating activities was
$235.2 million due to increased net income and management's efforts to reduce
receivable and inventory levels, which were partially offset by decreases in
current payables and other long-term liabilities.
Net cash used in investing activities during the year ended December 31, 1997,
totaled $614.0 million, including $402.4 million for the purchase of Total.
Other cash outflows were for scheduled capital expenditures of $247.1 million
and the acquisition of marketing operations for $20.8 million, and cash received
of $93.8 million was related to proceeds from the sales of property, plant and
equipment.
Net cash provided by financing activities during the year ended December 31,
1997, totaled $271.9 million, primarily due to the issuance of preferred stock
of a subsidiary of $200.0 million and increased long-term borrowings of $415.9
million associated primarily with the Total acquisition. During 1997, the
Company repaid $189.2 million of commercial paper and other short-term
borrowings. For 1997, the Company declared and paid cash dividends totaling
$89.8 million on its outstanding Common Stock ($1.10 per share) and 5%
Cumulative Convertible Preferred Stock ($2.50 per share), an increase of $20.0
million over dividend payments made in 1996 which totaled $69.8 million.
Derivative Financial Instruments
The Company uses interest rate swaps, foreign exchange contracts and commodity
futures, option and price swap contracts to manage its exposure to interest
rates, foreign currency exchange rates and commodity price volatility. The
Company controls its derivative positions based on their underlying principal
values and does not use such agreements with the intent of producing speculative
gains. The Company does not use complex leveraged derivative transactions. See
Notes to Consolidated Financial Statements - Note 17 Financial Instruments.
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.
Subsequent to December 31, 1997, the Canadian dollar set an historical low
against the U.S. dollar. 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 as of December 31, 1997, by $78.2 million. Although the Company
expects the exchange rate to fluctuate during 1998, 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.
Impact of Year 2000 Issue
The Year 2000 issue is the result of using two digits rather than four digits to
define a year within older computer software and hardware configurations. Older
programs and equipment, which are date-sensitive, may recognize a "00" as the
year 1900 instead of the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company's U.S. information technology (IT) systems are substantially all
year 2000 compliant as a result of implementing a new IT system in 1995, with
the exception of the Total IT system recently acquired. The Company is in the
process of migrating Total's operation into the new IT system, which is expected
to be completed by June 1998 at a cost of approximately $4.3 million. The
Company's Canadian IT system is currently not year 2000 compliant. However, the
joint venture, into which the Canadian operations are being contributed, is
currently implementing a new IT system, which will be year 2000 compliant when
implemented in October 1998. The Company's share of the cost of the joint
venture system is estimated to be $5.4 million.
Beyond the IT systems, the Company is in the process of reviewing all other
critical operating functions and significant suppliers/vendors to determine the
extent to which the Company is vulnerable to year 2000 situations. Based on a
preliminary assessment, the Company believes that it will be able to make all
necessary conversions to be year 2000 compliant by December 31, 1998, and the
impact of such compliance is not expected to have a material effect on financial
position or the results of operations.
Impact of Inflation
Although inflation has slowed in recent years, it is still a factor in the U.S.
and Canadian economies, increasing the cost to acquire or replace property,
plant and equipment and increasing the costs of supplies and labor. As
previously noted, to the extent permitted by competition, the Company passes
along increased costs to its customers.
In addition, the Company is affected by volatility in the cost of crude oils and
refined petroleum products as market conditions continue to be the primary
factor in determining the costs of the Company's products. The Company uses the
LIFO method of accounting for its inventories. Under this method, the cost of
products sold reported in the financial statements approximates current costs.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in June 1997. This statement establishes
new standards for the way business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial statements issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement need
not be applied for interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. The Company plans to adopt SFAS No. 131 in the
fourth quarter of 1998.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," in June 1997.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that an
enterprise classify items of other comprehensive income by their nature and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet. SFAS No. 130 does not require a specific format for the financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassifications
of financial statements for earlier periods provided is required for comparative
purposes. The Company plans to adopt SFAS No. 130 in the first quarter of 1998,
which will require the reclassification of certain previously reported amounts.
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 income statement. SFAS No. 128 is effective for periods ending after
December 15, 1997, and early adoption is not permitted. The Company adopted SFAS
No. 128 effective December 31, 1997, and accordingly, all prior period EPS
amounts and weighted average number of share amounts have been restated to
conform with the new requirements.
Certain Forward Looking Statements
This Annual Report on Form 10-K and the Proxy Statement, incorporated herein by
reference, contain certain "forwardlooking" statements as such term is defined
in the U.S. Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. When used in this Annual Report or the Proxy Statement, the words
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or its subsidiaries or management, identify
forward-looking statements. Such statements reflect the current views of
management with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the operations and results of
operations, including as a result of competitive factors and pricing pressures,
shifts in market demand and general economic conditions and other factors.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants
To Ultramar Diamond Shamrock Corporation:
We have audited the accompanying consolidated balance sheet of Ultramar Diamond
Shamrock Corporation (a Delaware corporation) and subsidiaries (the Company) as
of December 31, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ultramar Diamond Shamrock
Corporation and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule included under Part IV, Item 14(d) is
presented for purposes of complying with the Securities and Exchange Commissions
rules and are not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 27, 1998
Report of Independent Auditors
Board of Directors and Stockholders
Ultramar Diamond Shamrock Corporation:
We have audited the accompanying consolidated balance sheet of Ultramar Diamond
Shamrock Corporation (formerly Ultramar Corporation) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1996. Our
audits also included the 1996 and 1995 financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We did
not audit the consolidated balance sheet of the Diamond Shamrock operations as
of December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1996, which financial statements reflect total assets
constituting 50% in 1996 and total revenues constituting 49% in 1996 and 46% in
1995 of the related consolidated totals, and the 1996 and 1995 financial
statement schedule of the Diamond Shamrock operations listed in the Index at
Item 14(a). Those financial statements and schedule were audited by Price
Waterhouse LLP whose report has been furnished to us, and our opinion, in sofar
as it relates to data included for the Diamond Shamrock operations, is based
solely on the report of Price Waterhouse LLP.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits and the report of Price Waterhouse LLP provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of Price Waterhouse LLP, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Ultramar Diamond
Shamrock Corporation as of December 31, 1996, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audits and the report of Price Waterhouse
LLP, the related 1996 and 1995 financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects the information set forth therein.
As discussed in Note 5 to the consolidated financial statements, in 1995, the
Company changed its method of accounting for refinery maintenance turnaround
costs.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
February 7, 1997
Report of Independent Accountants
To the Board of Directors and Stockholders of
Ultramar Diamond Shamrock Corporation:
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of the Diamond Shamrock
operations of Ultramar Diamond Shamrock Corporation as of December 31, 1996 and
the results of their operations and their cash flows for each of the years in
the two year period ended December 31, 1996, in conformity with generally
accepted accounting principles. These consolidated financial statements are the
responsibility of the Ultramar Diamond Shamrock Corporation's management; our
responsibility is to express an opinion on the consolidated financial statements
based on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for the
opinion expressed above.
/s/ PRICE WATERHOUSE LLP
San Antonio, Texas
February 7, 1997
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
---------------- ------------
(in millions, except share data)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................................... $ 92.0 $ 197.9
Accounts and notes receivable, less allowances for uncollectible
accounts of $16.2 million in 1997 and $15.4 million in 1996............... 673.9 503.1
Inventories................................................................. 741.0 633.3
Prepaid expenses and other current assets................................... 53.1 35.0
Deferred income taxes....................................................... 50.8 30.0
-------- ---------
Total current assets..................................................... 1,610.8 1,399.3
-------- ---------
Property, plant and equipment.................................................. 4,654.3 3,685.2
Less accumulated depreciation and amortization................................. (1,093.3) (954.4)
-------- ---------
3,561.0 2,730.8
Other assets, net.............................................................. 422.9 289.9
-------- ---------
Total assets............................................................... $5,594.7 $4,420.0
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt......................... $ 6.5 $ 3.2
Accounts payable............................................................ 661.7 540.7
Accrued liabilities......................................................... 331.9 328.9
Taxes other than income taxes............................................... 237.2 191.3
Income taxes payable........................................................ 13.4 32.1
-------- ---------
Total current liabilities................................................ 1,250.7 1,096.2
Long-term debt, less current portion........................................... 1,866.4 1,646.3
Other long-term liabilities.................................................... 403.5 349.6
Deferred income taxes.......................................................... 187.5 87.0
Commitments and contingencies
Company obligated preferred stock of subsidiary................................ 200.0 -
Stockholders' equity:
5% Cumulative Convertible Preferred Stock, par value $0.01 per share:
25,000,000 shares authorized, 1,724,400 and 1,725,000 shares
issued and outstanding as of December 31, 1997 and 1996................... - -
Common Stock, par value $0.01 per share:
250,000,000 shares authorized, 86,663,000 and 74,710,000 shares
issued and outstanding as of December 31, 1997 and 1996................... 0.9 0.7
Additional paid-in capital.................................................. 1,534.9 1,137.0
Treasury stock, ESOP and other.............................................. (30.1) (32.2)
Retained earnings........................................................... 259.1 193.7
Cumulative foreign currency translation adjustment.......................... (78.2) (58.3)
-------- ---------
Total stockholders' equity................................................ 1,686.6 1,240.9
-------- ---------
Total liabilities and stockholders' equity................................ $5,594.7 $4,420.0
======== =========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in millions, except per share data)
<S> <C> <C> <C>
Sales and other revenues (including excise taxes) $10,882.4 $10,208.4 $8,083.5
--------- --------- --------
Operating costs and expenses:
Cost of products sold............................... 6,817.5 6,550.0 4,863.1
Operating expenses.................................. 887.2 928.1 672.3
Selling, general and administrative expenses........ 317.3 302.0 254.7
Taxes other than income taxes....................... 2,275.9 2,101.1 1,930.3
Depreciation and amortization....................... 200.1 179.9 136.3
Merger and integration costs........................ - 77.4 -
---------- ---------- ---------
Total operating costs and expenses............... 10,498.0 10,138.5 7,856.7
---------- ---------- ---------
Operating income....................................... 384.4 69.9 226.8
Interest income...................................... 11.5 18.4 13.4
Interest expense..................................... (131.7) (128.5) (93.1)
Gain on sale of office building...................... 11.0 - -
---------- ---------- ---------
Income (loss) before income taxes, extraordinary
loss, cumulative effect and dividends of subsidiary... 275.2 (40.2) 147.1
Provision (benefit) for income taxes................. 110.2 (4.3) 52.1
Dividends on preferred stock of subsidiary........... 5.4 - -
---------- ---------- ---------
Income (loss) before extraordinary loss and
cumulative effect..................................... 159.6 (35.9) 95.0
Extraordinary loss on debt extinguishment............ (4.8) - -
Cumulative effect of accounting change............... - - 22.0
---------- ---------- ---------
Net income (loss)...................................... 154.8 (35.9) 117.0
Dividends on Cumulative Convertible Preferred Stock 4.3 4.3 4.3
---------- ---------- ---------
Net income (loss) applicable to Common Shares.......... $ 150.5 $ (40.2) $ 112.7
========== ========== =========
Basic income (loss) per share:
Income (loss) before extraordinary loss and $ 1.99 $(0.54) $1.31
cumulative effect.................................
Extraordinary loss on debt extinguishment........... (0.06) - -
Cumulative effect of accounting change.............. - - 0.31
---------- ---------- ---------
Net income (loss)................................... $ 1.93 $(0.54) $1.62
========== ========== =========
Diluted income (loss) per share:
Income (loss) before extraordinary loss and
cumulative effect................................. $ 1.94 $(0.54) $1.30
Extraordinary loss on debt extinguishment........... (0.06) - -
Cumulative effect of accounting change.............. - - 0.30
---------- ---------- ---------
Net income (loss)................................... $ 1.88 $(0.54) $1.60
========== ========== =========
Weighted average number of shares:
Basic............................................... 78.120 74.427 69.467
Diluted............................................. 82.424 74.427 73.333
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
(in millions)
Cumulative
Treasury Foreign
Additional Stock, Currency Total
Common Paid-in ESOP and Retained Translation Stockholders'
Stock Capital Other Earnings Adjustment Equity
------ ---------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995.......... $0.7 $ 988.6 $(45.6) $249.9 $(70.7) $1,122.9
Issuance of Common Stock.......... - 128.6 2.7 (0.6) - 130.7
Payment of ESOP note.............. - - 5.8 - - 5.8
Net income........................ - - - 117.0 - 117.0
Cash dividends.................... - - - (64.6) - (64.6)
Other, net........................ - 0.6 (0.4) 1.0 15.0 16.2
----- ---------- --------- --------- ------ --------
Balance at December 31, 1995........ 0.7 1,117.8 (37.5) 302.7 (55.7) 1,328.0
Issuance of Common Stock.......... - 16.4 1.2 (3.1) - 14.5
Payment of ESOP note.............. - - 4.2 - - 4.2
Net loss.......................... - - - (35.9) - (35.9)
Cash dividends.................... - - - (69.8) - (69.8)
Other, net........................ - 2.8 (0.1) (0.2) (2.6) (0.1)
----- -------- --------- ------ ------ --------
Balance at December 31, 1996........ 0.7 1,137.0 (32.2) 193.7 (58.3) 1,240.9
Issuance of Common Stock.......... 0.1 6.7 (0.7) - - 6.1
Termination of ESOP............... - - 2.8 - - 2.8
Net income........................ - - - 154.8 - 154.8
Cash dividends.................... - - - (89.8) - (89.8)
Acquisition of Total.............. 0.1 391.2 - - - 391.3
Other, net........................ - - - 0.4 (19.9) (19.5)
----- -------- ---------- --------- ------- ---------
Balance at December 31, 1997........ $0.9 $1,534.9 $(30.1) $259.1 $(78.2) $1,686.6
===== ======== ========== ========= ======= =========
As of December 31, 1997, 1996 and 1995, the Company had issued and outstanding
1,724,400 shares, 1,725,000 shares and 1,725,000 shares, respectively, of 5%
Cumulative Convertible Preferred Stock with a par value of less than $100,000.
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................. $ 154.8 $(35.9) $ 117.0
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............................. 200.1 179.9 136.3
Provision for losses on receivables........................ 14.9 13.6 13.8
(Gain) loss on sale of property, plant and equipment....... (11.4) 0.2 (1.2)
Deferred income tax provision (benefit).................... 104.8 (45.7) 39.3
Other, net................................................. 3.4 1.0 (19.6)
Changes in operating assets and liabilities, net of acquisition:
Decrease (increase) in accounts and notes receivable 25.6 (119.9) 3.1
Decrease (increase) in inventories....................... 46.5 31.7 (32.1)
(Decrease) increase in accounts payable and other current
liabilities.............................................. (221.5) 213.9 31.2
(Decrease) increase in other long-term liabilities....... (57.0) 20.0 (46.5)
Other, net............................................... (25.0) 34.8 4.2
------- ------ -------
Net cash provided by operating activities.............. 235.2 293.6 245.5
------- ------ -------
Cash Flows from Investing Activities:
Capital expenditures........................................ (247.1) (315.2) (474.6)
Acquisition of Total, net of cash acquired.................. (402.4) - -
Acquisition of marketing operations......................... (20.8) (27.9) (163.5)
Deferred refinery maintenance turnaround costs.............. (25.6) (11.5) (12.4)
Expenditures for investments................................ (11.9) (5.2) (2.7)
Proceeds from sales of property, plant and equipment........ 93.8 51.6 16.6
------- ------ -------
Net cash used in investing activities..................... (614.0) (308.2) (636.6)
------- ------ -------
Cash Flows from Financing Activities:
Proceeds from issuance of Common Stock...................... 5.5 14.0 128.0
Net change in commercial paper and short-term borrowings.. (189.2) - -
Proceeds from long-term debt borrowings..................... 415.9 578.9 790.0
Repayment of long-term debt................................. (68.3) (490.5) (375.9)
Issuance of Company obligated preferred stock of 200.0 - -
subsidiary...
Payment of cash dividends................................... (89.8) (69.8) (64.6)
Other, net.................................................. (2.2) 5.2 6.1
------- ------- -------
Net cash provided by financing activities................. 271.9 37.8 483.6
Effect of exchange rate changes on cash....................... 1.0 (0.8) 0.5
------- ------- -------
Net (Decrease) Increase in Cash and Cash Equivalents (105.9) 22.4 93.0
Cash and Cash Equivalents at Beginning of Year................ 197.9 175.5 82.5
------- ------ -------
Cash and Cash Equivalents at End of Year...................... $ 92.0 $ 197.9 $ 175.5
======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1: Summary of Significant Accounting Policies
Basis of Presentation: Ultramar Diamond Shamrock Corporation (the Company or
UDS, formerly Ultramar Corporation or Ultramar) was incorporated in the state of
Delaware in 1992 and is a leading independent refiner and marketer of petroleum
products (principally transportation fuels and heating oil) and convenience
store merchandise in the southwest and central regions of the United States (the
Southwest), and the northeast United States and eastern Canada (the Northeast).
The Company owns and operates seven refineries located in Texas, California,
Michigan, Oklahoma, Colorado and Quebec, Canada and, markets its products
through 2,743 Company-operated convenience stores and 3,456 wholesale outlets.
In the Southwest, the Company also stores and markets natural gas liquids,
anhydrous ammonia and polymer-grade propylene at its facilities at Mont Belvieu,
Texas and, in the Northeast, the Company sells, on a retail basis, home heating
oil to approximately 236,000 households.
Effective December 3, 1996, under the terms of an Agreement and Plan of Merger
dated September 22, 1996, between Ultramar and Diamond Shamrock, Inc. (Diamond
Shamrock), Diamond Shamrock was merged with and into Ultramar, in a transaction
accounted for as a pooling-of-interests (the Merger, see note 3). In connection
with the Merger, Ultramar changed its name to Ultramar Diamond Shamrock
Corporation.
On September 25, 1997, the Company completed its acquisition of Total Petroleum
(North America) Ltd. (Total). The purchase price included the issuance of shares
of Company Common Stock and the assumption of Total's outstanding debt. The
acquisition has been accounted for using the purchase method and, accordingly,
operating results of Total subsequent to the date of acquisition have been
included in the 1997 consolidated statement of operations. Total was an
independent refiner and marketer, operating three refineries in Michigan,
Oklahoma and Colorado, and marketing its products in the central region of the
United States through company-owned convenience stores and wholesale outlets.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, and joint ventures and partnerships in which a
controlling interest is held. Investments in 50% or less owned companies and
joint ventures are accounted for using the equity method of accounting. All
intercompany balances and transactions are eliminated in consolidation.
Use of Estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates, including
those related to litigation, environmental liabilities, and pensions, based on
currently available information. Changes in facts and circumstances may result
in revised estimates.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash
equivalents.
Inventories: Crude oil and refined and other finished product inventories are
valued at the lower of cost or market (net realizable value). Cost is determined
primarily on the last-in, first-out (LIFO) basis. Materials, supplies and
convenience store merchandise are valued at average cost, not in excess of
market value.
Property, Plant and Equipment: Additions to property, plant and equipment
including capitalized interest are recorded at cost. Depreciation is provided
principally by the straight-line method over the estimated useful lives of the
related assets. Assets recorded under capital leases and leasehold improvements
are amortized by the straight-line method over the shorter of the lease term or
the useful life of the related asset.
Goodwill: The excess of cost (purchase price) over the fair value of net assets
of businesses acquired (goodwill) is being amortized by the straight-line method
over periods ranging from 10 to 30 years.
Refinery Maintenance Turnaround Costs: Refinery maintenance turnaround costs are
deferred when incurred and amortized over the period of time estimated to lapse
until the next turnaround occurs.
Environmental Remediation Costs: Environmental remediation costs are expensed if
they relate to an existing condition caused by past operations and do not
contribute to future revenue generation. Liabilities are accrued when site
restoration and environmental remediation and cleanup obligations are either
known or considered probable and can be reasonably estimated. Estimated
liabilities are not discounted to present value.
Excise Taxes: Federal excise and state motor fuel taxes collected on the sale of
products and remitted to governmental agencies are included in sales and other
revenues and, in taxes other than income taxes.
Income Taxes: The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred amounts are measured
using enacted tax rates expected to apply to taxable income in the year those
temporary differences are expected to be recovered or settled.
Foreign Currency Translation: The functional currency of the Company's Canadian
operations is the Canadian dollar. The translation into U.S. dollars is
performed for balance sheet accounts using exchange rates in effect at the
balance sheet date and for revenue and expense accounts using the weighted
average exchange rate during the year. Adjustments resulting from such
translation are recorded as a separate component of stockholders' equity.
Stock-Based Compensation: The Company accounts for stock-based compensation
using the intrinsic value method, in accordance with Accounting Principles Board
Opinion (APB) No. 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
Common Stock at the date of grant over the amount an employee must pay to
acquire the stock.
Income Per Share: In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (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 APB No. 15, "Earnings Per Share," and makes them more 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 operations. The Company adopted SFAS No. 128
as of December 31, 1997, and has restated all prior-period income (loss) per
share data.
The computation of basic income (loss) per share is based on the weighted
average number of common shares outstanding during the year. Diluted income per
share is based on the weighted average number of common shares outstanding
during the year and, to the extent dilutive, common stock equivalents consisting
of stock options, stock awards subject to restrictions, stock appreciation
rights and convertible preferred stock. Basic income (loss) per share is
adjusted for dividend requirements on preferred stock.
New Accounting Pronouncement: In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements and display of the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods is required. The
Company plans to adopt SFAS No. 130 in the first quarter of 1998.
Reclassifications: Certain previously reported amounts have been reclassified to
conform to the 1997 presentation.
NOTE 2: Acquisition of Total
On September 25, 1997, the Company completed its acquisition of 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 $460.5
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 10).
The acquisition has been accounted for using the purchase method. The purchase
price has been allocated based on an estimate of the fair values of the
individual assets and liabilities at the date of acquisition. The excess of
purchase price over the estimate of the fair values of the net assets acquired
was approximately $76.5 million and is being amortized as goodwill on a
straight-line basis over 25 years. A summary of the purchase price allocation is
as follows (in millions):
Working capital...................................... $ 36.1
Property, plant and equipment........................ 842.6
Excess of cost over fair value of net assets of
purchased business................................. 76.5
Other, net (includes $18.0 million of severence (103.4)
-------
liabilities).........................................
Total purchase price................................. 851.8
Less Company Common Stock issued................ (391.3)
-------
Debt assumed......................................... $460.5
=======
The following unaudited pro forma information presents summary consolidated
statements of operations of the Company and Total as if the acquisition had
occurred as of January 1, 1997 and 1996. The pro forma 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.
Years Ended December 31,
1997 1996
---- ----
(in millions, except per share data)
Sales and other revenues........................ $ 13,179.7 $ 13,541.8
Income (loss) before extraordinary loss 165.6 (34.8)
Net income (loss)............................... 160.8 (34.8)
Net income (loss) applicable to Common Shares... 156.5 (39.1)
Net income (loss) per share:
Basic........................................ $1.79 $(0.45)
Diluted....................................... 1.75 (0.45)
These unaudited 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 dates, nor are they indicative of future operating results.
NOTE 3: Merger of Ultramar and Diamond Shamrock
On December 3, 1996, Diamond Shamrock merged with and into Ultramar. In
connection with the Merger, the Company issued 29,876,507 shares of its Common
Stock and 1,725,000 shares of its newly created 5% Cumulative Convertible
Preferred Stock in exchange for all the outstanding common stock and 5%
cumulative convertible preferred stock of Diamond Shamrock. The shareholders of
Diamond Shamrock received 1.02 shares of UDS Common Stock for each share of
Diamond Shamrock common stock and one share of UDS 5% Cumulative Convertible
Preferred Stock for each share of Diamond Shamrock 5% cumulative convertible
preferred stock. The Merger qualified as a tax-free reorganization and was
accounted for as a pooling-of-interests. Accordingly, the Company's consolidated
financial statements have been restated for all periods prior to the Merger to
include the results of operations, financial position and cash flows of Ultramar
and Diamond Shamrock. In addition, all share amounts, stock option data and per
share amounts were adjusted to give effect to the above exchange of UDS stock
for Diamond Shamrock stock.
The following table presents the separate Ultramar and Diamond Shamrock amounts
for the years ended December 31, 1996 and 1995.
Years Ended December 31,
1996 1995
---- ----
(in millions, except per share data)
Sales and other revenues:
Ultramar....................................... $ 3,421.8 $ 2,714.4
Diamond Shamrock............................... 4,993.7 3,703.0
Reclassifications.............................. 1,792.9 1,666.1
---------- ---------
Total....................................... $10,208.4 $ 8,083.5
========== =========
Net (loss) income:
Ultramar....................................... $ 48.2 $ 69.7
Diamond Shamrock............................... (31.1) 47.3
Merger and transaction costs, net of income
tax benefit.................................. (53.0) -
---------- ----------
Total....................................... $ (35.9) $ 117.0
========== ==========
Dividends per share:
Ultramar Common Stock.......................... $ 1.10 $ 1.10
Diamond Shamrock common stock.................. 0.56 0.56
Diamond Shamrock preferred stock............... 2.50 2.50
In combining the financial information, certain reclassifications of historical
financial data have been made to conform the accounting policies of the two
companies.
In connection with the Merger, the Company recorded merger and integration
expenses of $77.4 million ($53.0 million net of income tax benefit) during the
fourth quarter of 1996. Merger expenses of $13.1 million consist principally of
financial and legal fees and registration costs. Integration expenses of $64.3
million include costs to combine the two operations, including expenses
associated with a workforce reduction of approximately 200 employees, the
termination of certain agreements, the writedown of certain facilities and
equipment and other expenses. Integration expenses accrued at December 31, 1997
and 1996, totaled $13.5 million and $61.3 million, respectively.
NOTE 4: Acquisition of National Convenience Stores
On December 14, 1995, Diamond Shamrock completed the acquisition of National
Convenience Stores, Inc. (NCS). NCS operated 661 Stop N Go convenience stores
located in Texas. The total purchase price was approximately $280.0 million. The
acquisition was accounted for using the purchase method and, accordingly, the
operating results of NCS have been included in the consolidated statements of
operations since the date of acquisition. The excess of purchase price over the
fair value of the net assets acquired was approximately $160.5 million and is
being amortized on a straight-line basis over 20 years.
The pro forma financial data below for the year ended December 31, 1995, which
combines the results of operations of the Company and NCS prior to the
acquisition, are unaudited and reflect purchase price adjustments assuming the
acquisition had occurred on January 1, 1995 (in millions, except per share
data).
Sales and other revenues............................. $ 8,946.6
Net income........................................... 110.3
Net income applicable to Common Shares............... 106.0
Net income per share:
Basic.............................................. $ 1.53
Diluted............................................ 1.50
NOTE 5: Change in Accounting for Refinery Maintenance Turnaround Costs
During the second quarter of 1995, Ultramar changed its method of accounting for
refinery maintenance turnaround costs from an accrual method to a deferral and
amortization method to better match revenues and expenses. The change resulted
in a cumulative adjustment through December 31, 1994, of $22.0 million (net of
income taxes of $13.4 million) or $0.30 per share on a diluted basis, which is
included in net income for the year ended December 31, 1995. The effect of the
change on the year ended December 31, 1995, was to increase income before
cumulative effect of accounting change by approximately $3.5 million, net of
income taxes ($0.05 per share on a diluted basis) and net income by $25.5
million ($0.35 per share on a diluted basis).
NOTE 6: Accounts and Notes Receivable
Accounts and notes receivable consisted of the following:
December 31,
1997 1996
---- ----
(in millions)
Accounts receivable.............................. $ 654.2 $ 482.5
Notes receivable................................. 9.7 15.5
-------
Total.......................................... 663.9 498.0
Allowance for uncollectible accounts............. (16.2) (15.4)
Other............................................ 26.2 20.5
-------
Net accounts and notes receivable.............. $ 673.9 $ 503.1
======= =======
NOTE 7: Inventories
Inventories consisted of the following:
December 31,
1997 1996
---- ----
(in millions)
Crude oil and other feedstocks................... $ 184.2 $ 309.2
Refined and other finished products.............. 496.8 264.7
Materials, supplies and convenience store items 60.0 59.4
------- -------
Total inventories.............................. $ 741.0 $ 633.3
======= =======
In December 1997, the Company recorded an $11.1 million non-cash reduction in
the carrying value of crude oil inventories to reduce such inventories to
replacement cost which was lower than LIFO cost. As of December 31, 1996,
replacement cost exceeded the LIFO cost of inventories by $148.5 million.
NOTE 8: Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following:
Estimated December 31,
Useful Lives 1997 1996
------------ ---- ----
(in millions)
Refining......................... 15 - 30 years $ 3,155.0 $ 2,507.2
Marketing........................ 5 - 30 years 1,235.4 896.2
Petrochemicals and NGL's......... 5 - 25 years 208.5 224.9
Other............................ 3 - 10 years 55.4 56.9
--------- ---------
Total.......................... 4,654.3 3,685.2
Accumulated depreciation and
amortization................... (1,093.3) (954.4)
-------- ---------
Net property, plant and equipment $ 3,561.0 $ 2,730.8
========== =========
Net income for the year ended December 31, 1997 includes 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.
In November 1997, the Company entered into an agreement to sell 33.33% of its
McKee to El Paso pipeline and El Paso terminal; however, the Company will
continue to operate the pipeline.
Capitalized interest costs included in property, plant and equipment were $2.8
million, $8.8 million and $11.0 million for the years ended December 31, 1997,
1996 and 1995, respectively.
NOTE 9: Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
(in millions)
<S> <C> <C>
Goodwill and other intangibles, net of accumulated amortization
of $24.5 million in 1997 and $12.5 million in 1996............... $256.1 $176.2
Non-current notes receivable, net of allowances of $1.0 million
in 1997 and $3.4 million in 1996................................. 31.9 33.2
Refinery maintenace turnaround costs, net of accumulated
amortization of $36.5 million in 1997 and $19.6 million in 1996.. 31.5 18.0
Other non-current assets........................................... 103.4 62.5
------ ------
Net other assets................................................ $422.9 289.9
====== ======
</TABLE>
NOTE 10: Notes Payable and Long-Term Debt
Notes payable and long-term debt consisted of the following:
December 31,
1997 1996
---- ----
in millions)
8.25% Notes................................ $175.0 $174.9
8.625% Guaranteed Notes.................... 274.4 274.3
Medium-term Notes.......................... 294.8 294.8
Debentures................................. 300.0 300.0
Total Senior Notes......................... 400.0 -
Commercial Paper........................... 246.8 146.0
Money Market Lines of Credit............... 40.0 280.0
Senior Notes............................... 60.0 122.2
Mortgages.................................. 41.5 44.6
Other...................................... 40.4 12.7
-------- ---------
Total debt............................... 1,872.9 1,649.5
Less current portion....................... (6.5) (3.2)
--------- ---------
Long-term debt, less current portion..... $1,866.4 $1,646.3
========= =========
On October 14, 1997, the Company completed a public offering of $400.0 million
of senior notes (the Total Senior Notes) to refinance most of the debt incurred
to finance the acquisition of Total. The Total Senior 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. The Total Senior Notes are unsecured and interest is
payable semi-annually in arrears on April 15 and October 15 of each year. The
2017 Notes and the 2097 Notes may be redeemed at any time at the option of the
Company, in whole or in part, at a redemption price equal to the greater of (a)
100% of the principal amount, or (b) the sum of the present value of outstanding
principal and interest thereon, discounted at the U.S. Treasury Yield plus 20
basis points, together with accrued interest, if any, to the date of redemption.
The 2037 Notes may be redeemed, in whole or in part, by the holders on October
15, 2009, at a redemption price equal to 100% of the principal plus accrued
interest. After October 15, 2009, the 2037 Notes are redeemable at the option of
the Company in the same manner as the 2017 Notes and 2097 Notes.
In 1992, the Company issued the 8.25% Notes due in 1999 and Ultramar Credit
Corporation (UCC), a financing subsidiary, issued the 8.625% Guaranteed Notes
due in 2002, in public offerings. The 8.625% Guaranteed Notes issued by UCC are
guaranteed by the Company and both of these Notes are unsecured and interest is
payable semi-annually.
Medium-term Notes as of December 31, 1997 and 1996, consisted of $150.0 million
of 8.0% notes due in 2005, $75.0 million of 9.375% notes due in 2001 and $70.0
million of notes with an average interest rate of 7.8% and an average maturity
of 12 years. The Medium-term Notes are unsecured and interest is payable
semi-annually.
Debentures, originally issued by Diamond Shamrock, as of December 31, 1997 and
1996, consisted of $100.0 million of 7.65% Debentures due in 2026, $25.0 million
of non-callable 7.25% Debentures due in 2010, $75.0 million of non-callable
8.75% Debentures due in 2015 and $100.0 million of 8.0% Debentures due in 2023.
The Debentures are unsecured and interest is payable semi-annually.
As of December 31, 1997, the Company had available money market lines of credit
with numerous financial institutions which provide the Company with additional
uncommitted capacity of $360.0 million and Cdn. $235.0 million. Borrowings under
the money market lines are typically short-term and bear interest at prevailing
market rates as established by the financial institutions. As of December 31,
1997 and 1996, outstanding borrowings were $40.0 million at a weighted average
interest rate of 6.12% and $280.0 million at a weighted average interest rate of
6.23%, respectively.
Borrowings under the commercial paper program, money market lines of credit and
the Senior Notes were classified as long-term based on the Company's ability and
intent to refinance these amounts on a long-term basis, using its Bank
Facilities.
As of December 31, 1997, the Company's committed bank facilities consisted of
(a) a U.S. facility under which the Company may borrow and obtain letters of
credit in an aggregate amount of $700.0 million (the U.S. Bank Facility), and
(b) a Canadian facility under which the Company's Canadian subsidiary, Canadian
Ultramar Company (CUC), may borrow, issue bankers' acceptances and obtain
letters of credit in an aggregate amount of Cdn. $200.0 million (the Canadian
Bank Facility and together with the U.S. Bank Facility, the Bank Facilities).
The Company must pay annual fees of 11 basis points on the total used and unused
portion of the Bank Facilities. The interest rate under the Bank Facilities are
floating based upon the prime rate, the London interbank offered rate or other
floating interest rates, at the option of the Company. As of December 31, 1997
and 1996, there were no borrowings drawn against the Company's Bank Facilities.
Amounts outstanding under the Bank Facilities are due in 2002, upon expiration.
The Company has a $700.0 million commercial paper program supported by the U.S.
Bank Facility and as of December 31, 1997 and 1996, borrowings under the
commercial paper program totaled $246.8 million and $146.0 million,
respectively.
The Senior Notes, originally issued by Diamond Shamrock, as of December 31,
1997, include 10.75% notes which require annual installment payments of $30.0
million through April 1999. Mortgages, originally assumed by Diamond Shamrock as
part of the NCS acquisition, currently carry an annual interest rate of 9.5%,
mature in 2003 and are recorded at their net present value of $41.5 million and
$44.6 million as of December 31, 1997 and 1996, respectively. The Mortgages are
secured by retail properties owned by the Company.
In addition to the Bank Facilities, the Company has $300.0 million available
under universal shelf registrations previously filed with the Securities and
Exchange Commission. Subsequent to December 31, 1997, the Company filed an
amendment to the universal shelf registration, increasing the amount available
to $1.0 billion. The net proceeds from any debt or equity offering under the
universal shelf registrations would add to the Company's working capital and
would be available for general corporate purposes.
The aggregate maturities, after consideration of refinancing, of notes payable
and long-term debt as of December 31, 1997 were as follows (in millions):
1998............................................. $ 6.5
1999............................................. 211.0
2000............................................. 15.1
2001............................................. 86.8
2002............................................. 564.0
Thereafter....................................... 989.5
--------
Total notes payable and long-term debt........ $1,872.9
========
Outstanding letters of credit totaled $116.7 million and $79.4 million as of
December 31, 1997 and 1996, respectively.
The Bank Facilities and the indentures governing the various Notes contain
restrictive covenants relating to the Company and its financial condition,
operations and properties. Under these covenants, the Company and certain of its
subsidiaries are required to, among other things, maintain consolidated interest
coverage and debt-to-total capital ratios. Although these covenants have the
effect of limiting the Company's ability to pay dividends, it is not anticipated
that such limitations will affect the Company's present ability to pay
dividends. As of December 31, 1997, under the most restrictive of these
covenants, $169.6 million was available for the payment of dividends.
In order to manage interest costs on its outstanding debt, the Company has
entered into various types of interest rate swap agreements. In 1997 and 1996,
the Company entered into interest rate swap agreements the effect of which is to
modify the interest rate characteristics of a portion of its debt, from fixed to
floating rate. The differentials paid or received on interest rate swap
agreements are recognized as an adjustment to interest expense. As of December
31, 1997 and 1996, the Company had the following interest rate swap agreements
outstanding (in millions):
Year of Maturity
Fixed to Floating 2002 2005 2023
---- ---- ----
Notional amount as of December 31, 1997.... $ 200.0 $ 150.0 $ 100.0
Weighted average rate received............. 6.24% 6.36% 6.93%
Notional amount as of December 31, 1996.... $ 100.0 $ 100.0 -
Weighted average rate received............. 6.19% 6.39% -
Interest payments totaled $125.7 million, $122.8 million and $96.8 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 11: Company Obligated Preferred Stock of Subsidiary
On June 25, 1997, UDS Capital I (the Trust), a Delaware business trust, issued
$200.0 million of 8.32% perpetual Trust Originated Preferred Securities (TOPrS)
in an underwritten public offering. Distributions on the TOPrS are cumulative
and payable quarterly in arrears, at the annual rate of 8.32% of the liquidation
amount of $25.00 per TOPrS.
The TOPrS were issued by the Trust using a partnership, UDS Funding I, L.P., and
both entities are wholly-owned by the Company. The Company has fully and
unconditionally guaranteed, on a subordinated basis, the dividend payments due
on the TOPrS if and when declared. The proceeds from the issuance of the TOPrS
were used to reduce long-term debt of the Company.
NOTE 12: Stockholders' Equity
As of December 31, 1997 and 1996, the Company had issued and outstanding
1,724,400 shares and 1,725,000 shares, respectively, of 5% Cumulative
Convertible Preferred Stock (the Preferred Stock). The Preferred Stock is
non-voting and holders are entitled to receive a quarterly dividend of $0.625
per share which must be paid before a dividend can be paid on the Company's
Common Stock. The Preferred Stock has a liquidation value of $50.00 per share
(aggregate liquidation value of $86.2 million as of December 31, 1997), and each
share of Preferred Stock can be converted into the number of shares of the
Company's Common Stock obtained by dividing $50.00 by the conversion price then
in effect ($25.98 as of December 31, 1997), at any time up to and including the
redemption date. Until June 14, 2000, the Preferred Stock is redeemable at the
option of the Company for Common Stock, subject to certain conditions relating
to the market price of the Common Stock. After June 15, 2000, it is redeemable
for cash at the option of the Company, at a redemption price of $50.00 per share
plus any accrued and unpaid dividends. As of February 27, 1998, the market price
of the Company's Common Stock exceeded the required threshold allowing the
Company to convert all outstanding shares of Preferred Stock into 3,318,707
Common Shares. The conversion of the Preferred Stock will occur in March of
1998. The conversion has no impact on diluted income per share, as such shares
are already included in the weighted average number of diluted shares.
In October 1995, the Company issued 5,750,000 shares of Common Stock in a public
offering at a price of $22.875 per share. Net proceeds to the Company were
approximately $125.5 million, net of offering expenses.
The Company has adopted several Long-Term Incentive Plans (the LTIPs), which are
administered by the Compensation Committee of the Board of Directors (the
Committee). Under the terms of the LTIPs, the Committee may grant restricted
stock, stock options, stock appreciation rights, performance units and
securities awards to officers and key employees of the Company. The vesting
period for awards under the LTIPs are established by the Committee at the time
of grant. Restricted shares awarded under the Company's 1992 and 1996 LTIPs
generally vest on the third anniversary of the date of grant. Restricted shares
granted under the Company's 1987 and 1990 LTIPs vest over a three-year period.
Stock options may not be granted at less than the fair market value of the
Company's Common Stock at the date of grant and may not expire more than ten
years from the date of grant. Options granted by Diamond Shamrock prior to the
Merger become exercisable 40%, 30% and 30% on the first, second and third
anniversaries of the date of grant. Under the terms of Ultramar's 1992 LTIP,
upon the occurrence of a change in control, all rights and options become
immediately vested and exercisable, and all restricted shares immediately vest.
As a result, upon consummation of the Merger, 1,152,920 stock options became
exercisable and 24,898 restricted shares vested.
Grants of restricted shares and performance units under the LTIPs for 1997, 1996
and 1995 are summarized as follows:
Years Ended December 31,
1997 1996 1995
---- ---- ----
Restricted shares............... - 48,106 45,609
Performance units............... - 2,374,356 1,727,880
The Company did not recognize compensation expense related to performance units
during 1997; however, during 1996 and 1995 the Company recognized compensation
expense related to the performance units of $2.9 million and $1.6 million,
respectively.
During 1997, 1996 and 1995, the Committee granted 203,360, 3,902,675 and 975,050
stock options, respectively, under the LTIPs. Under these grants, 2,475,360
options vest 30%, 30% and 40% on the first, second and third anniversaries of
the date of grant, 626,725 options vest 40%, 30% and 30% on the first, second
and third anniversaries of the date of grant, and 1,979,000 options vest 100%
after 4 1/2 years, except that accelerated vesting will occur if the market
price of the Company's Common Stock reaches prescribed levels prior to such
time. These stock options have terms ranging from 5 to 10 years. As of December
31, 1997, there were 7,453,349 options available for future issuance under the
LTIPs.
Stock option transactions under the various LTIPs are summarized as follows:
Weighted Average
Options Exercise Price
------- ----------------
Outstanding January 1, 1995........ 2,686,937 $20.57
Granted.......................... 975,050 24.27
Canceled......................... (13,914) 18.73
Exercised........................ (204,834) 16.55
----------
Outstanding December 31, 1995...... 3,443,239 21.86
Granted.......................... 3,902,675 29.82
Canceled......................... (275,255) 26.25
Exercised........................ (707,526) 19.98
----------
Outstanding December 31, 1996...... 6,363,133 26.76
Granted.......................... 203,360 31.33
Canceled......................... (41,074) 28.57
Exercised........................ (295,288) 21.44
----------
Outstanding December 31, 1997...... 6,230,131 27.15
==========
As of December 31, 1997, 1996 and 1995, exercisable stock options totaled 3.1
million, 2.9 million and 1.7 million options, respectively, and had weighted
average exercise prices of $24.29, $23.04 and $20.33 per option, respectively.
Stock options outstanding and exercisable as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- --------------------
Weighted Average
Range of Number Remaining Life Weighted Average Number Weighted Average
Exercise Price Outstanding In Years Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$11.10 - $19.49 716,847 4.6 $16.68 716,847 $16.68
$20.40 - $23.53 380,928 5.0 22.35 333,418 22.18
$23.66 - $28.43 1,430,350 6.4 26.12 1,409,012 26.12
$28.56 - $33.88 3,702,006 5.4 30.08 667,889 29.63
--------- ----------
$11.10 - $33.88 6,230,131 5.5 27.15 3,127,166 24.29
========= ==========
</TABLE>
The Company accounts for its stock option plans using the intrinsic value method
and, accordingly, has not recognized compensation expense for its stock options
granted. Had the Company accounted for stock options granted in 1997, 1996 and
1995, using the fair value method at the date of grant, additional compensation
expense would have been recorded and the pro forma effect would have been as
follows:
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in millions, except per share data)
Pro forma net income (loss).............. $145.3 $(44.2) $110.8
Pro forma net income (loss) per share:
Basic.................................. $1.86 $(0.59) $1.60
Diluted................................ 1.76 (0.59) 1.51
The weighted average fair value of options granted during the years ended
December 31, 1997, 1996 and 1995 was $5.23, $5.83 and $6.54 per option,
respectively.
For purposes of the pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting periods. The fair value for
these options was estimated at the respective grant dates using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Years Ended December 31,
1997 1996 1995
---- ---- ----
Expected volatility........ 19% - 22% 22% - 23% 25% - 27%
Expected dividend yield.... 3.96% - 4.08% 3.34% - 3.48% 2.07%- 3.48%
Expected life.............. 4 years 4 - 6 years 4-6 years
Risk free interest rate.... 5.83% - 6.40% 5.45% - 6.07% 6.71% - 7.72%
In January 1993, the Committee adopted the Ultramar Corporation Annual Incentive
Plan (AIP) which provides for cash and restricted common stock awards to
officers and certain key employees of the Company. Annual awards under the AIP
are generally based on attainment of various performance measures established by
the Committee. Restricted shares awarded under the terms of the AIP generally
vest on the second anniversary of the date of grant. A total of 446,363 shares
remain available for issuance under the AIP.
A Performance Incentive Plan had been adopted by Diamond Shamrock under which
the Committee may grant cash awards to eligible employees. For the years ended
1997, 1996 and 1995, the Company expensed $13.8 million, $4.3 million and $2.4
million, respectively, under this Plan.
Prior to the Merger, Diamond Shamrock had established two Employee Stock
Ownership Plans (ESOPs). ESOP I was formed in June 1987, and ESOP II was formed
in April 1989. All employees of Diamond Shamrock who had attained a minimum
length of service and satisfied other plan requirements were eligible to
participate in the ESOPs, except that ESOP II excluded employees covered by any
collective bargaining agreements.
Prior to 1993, Diamond Shamrock loaned the ESOPs $65.8 million to purchase
shares of the Company's Common Stock and contributed 82,400 treasury shares of
its Common Stock to ESOP I as part of special award and success sharing
programs. In accordance with the success sharing program, the Company accrued
and expensed $1.5 million in 1995 for the purchase of 55,523 shares. There were
no purchases of shares in 1996, and the success sharing program was terminated
prior to the effective date of the Merger.
The Company made contributions to the ESOPs in sufficient amounts, when combined
with dividends on the Common Stock, to retire the principal and to pay interest
on the loans used to fund the ESOPs. Common Shares were allocated to
participants and included in the computation of income per share as the payments
of principal and interest were made on the loans. Contributions to the ESOPs
that were charged to expense for 1997, 1996 and 1995 were $3.5 million, $5.6
million and $7.5 million, respectively. Dividend and interest income reduced the
amounts charged to expense in 1997, 1996 and 1995, by $1.4 million, $1.7 million
and $1.5 million, respectively.
On November 14, 1997, the Company prepaid $29.6 million of the 8.77% Senior
Notes which had been issued to acquire Company Common Shares for the ESOPs. As a
result of the termination of the ESOPs, prepayment of the 8.77% Senior Notes was
necessary and the Company purchased, as treasury stock, the Common Stock of the
Company held by the ESOPs which had not been allocated to participants by
November 14, 1997. The ESOPs were terminated as a part of restructuring the
benefit plans of the Company pursuant to the Merger. The Company incurred an
extraordinary loss of $4.8 million, net of income tax benefit of $3.2 million,
as a result of terminating the ESOPs and prepaying the 8.77% Senior Notes.
Under the terms of the Company's Restricted Share Plan for Directors, directors
who were not officers of the Company received an award of 400 shares of
restricted Common Stock of the Company for each year of their term as director.
In 1996 and 1997, the annual award level under the plan was increased to 600
shares and 1,000 shares, respectively. The directors' restricted shares vest on
the last day of the term for which such shares were awarded or upon the
occurrence of a change in control. As of December 31, 1996, 19,000 restricted
shares that had been awarded, became fully vested as a result of the Merger. As
of December 31, 1997, a total of 81,000 shares are available for future issuance
under the plan.
In December 1993, the Committee adopted the Ultramar Corporation Stock Purchase
Plan and Dividend Reinvestment Plan which allows eligible holders of the
Company's Common Stock to use dividends to purchase Company Common Stock and to
make optional cash payments to buy additional shares of Common Stock. The
Company has reserved a total of 2,000,000 shares of Common Stock for issuance
under this plan. As of December 31, 1997, a total of 6,722 shares had been
issued under the plan and 1,993,278 shares remain available for future issuance.
NOTE 13: Employee Benefit Plans
The Company has several qualified, non-contributory defined benefit plans (the
Qualified Plans) covering substantially all of its salaried employees in the
United States, other than those subject to collective bargaining agreements.
These plans generally provide retirement benefits based on years of service and
compensation during specific periods. Senior executives and certain key
employees covered by these plans are also entitled to participate in various
unfunded supplemental executive retirement plans which provide retirement
benefits based on years of service and compensation, including compensation not
permitted to be taken into account under the Qualified Plans (the Supplemental
Plans and together with the Qualified Plans, the Pension Plans).
Under the Qualified Plans, the Company's policy is to fund normal cost plus the
amortization of the unfunded actuarial liability for costs arising from
qualifying service determined under the projected unit credit method. The
underlying pension plan assets include cash equivalents, fixed income securities
(primarily obligations of the U.S. government) and equity securities.
The Company also maintains a retirement plan for Diamond Shamrock's and Total's
collective bargaining groups (the Bargaining Unit Plans). The Bargaining Unit
Plans generally provide benefits that are based on the union member's monthly
base pay during the five years prior to retirement.
As a result of the Merger, the Company assumed obligations with respect to a
retirement plan for the former non-employee Directors of Diamond Shamrock (the
Directors Plan). The Directors Plan provides an annual retirement benefit for a
period of time equal to the shorter of (a) length of service as a non-employee
director, or (b) life of director. Following the Merger, the Company
discontinued future contributions to the Directors Plan.
Benefit plan expense related to the Company's Pension Plans consisted of the
following:
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in millions)
Cost of benefits earned......... $ 10.0 $ 8.9 $ 6.7
Accrued interest on projected
benefit obligation............ 10.2 7.1 5.9
Return on plan assets........... (16.7) (8.4) (9.1)
Net amortization and deferral... 7.2 2.9 4.5
------ ------ ------
Net benefit plan expense...... $ 10.7 $ 10.5 $ 8.0
====== ====== ======
A summary of the funded status of the Company's Pension Plans consisted of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
Plans Where Plans Where Plans Where Plans Where
Assets Exceeded Accumulated Assets Exceeded Accumulated
Accumulated Benefits Exceeded Accumulated Benefits Exceeded
Benefits Assets Benefits Assets
--------------- ----------------- --------------- -----------------
(in millions)
<S> <C> <C> <C> <C>
Fair market value of plan assets $ 204.3 $ 22.7 $ 85.2 $ 2.0
======= ====== ====== =====
Actuarial present value of accumulated
benefit obligation:
Vested $ 162.2 $ 25.6 $ 67.2 $ 2.4
Non-vested 7.9 0.3 5.1 -
------- ------ ------ -----
Total 170.1 25.9 72.3 2.4
Effect of projected future salary increases 59.1 5.7 27.6 0.3
------- ------ ------ -----
Projected benefit obligation $ 229.2 $ 31.6 $ 99.9 $ 2.7
======= ====== ======= =====
Components of projected benefit obligation
in excess of plan assets:
Unrecognized prior service costs $ 20.6 $ (0.2) $ 0.1 $ -
Unrecognized net experience (gains) losses 10.8 4.8 3.5 (0.5)
Unrecognized net obligation 0.3 0.1 0.4 -
Adjustment required to recognize
minimum liability - (2.3) (0.4) (0.1)
(Prepaid) accrued pension cost (6.8) 6.5 11.1 1.3
------- ------ ------ -----
$ 24.9 $ 8.9 $ 14.7 $ 0.7
======= ====== ====== =====
</TABLE>
The assumptions used to measure the projected benefit obligations under the
Company's Pension Plans as of December 31, 1997 and 1996, were as follows:
assumed discount rate of 7.25% to 7.50% for 1997, and 7.50% for 1996, and
assumed rate for compensation increases of 4.0% to 4.75% for 1997 and 1996. A
weighted average expected long-term rate of return on plan assets of 9.0% was
used to determine net periodic pension cost for each of the years in the three
years ended December 31, 1997.
The Company also maintains several defined contribution retirement plans for
substantially all its eligible employees in the United States and Canada.
Contributions to the plans are generally determined as a percentage of each
eligible employee's salary. The aggregate costs of these plans amounted to $8.0
million, $8.0 million and $5.6 million during the years ended December 31, 1997,
1996 and 1995, respectively.
The Company sponsors unfunded defined benefit postretirement plans which provide
health care and life insurance benefits to retirees who satisfy certain age and
service requirements. In addition, pursuant to the terms of a distribution
agreement between Diamond Shamrock and Maxus, Diamond Shamrock's parent company
prior to its 1987 spin-off, the Company also shares in the cost of providing
similar benefits to former employees of Maxus (see note 16).
Generally, the health care plans pay a stated percentage of most medical
expenses reduced for any deductibles, payments made by government programs and
other group coverage. The cost of providing these benefits is shared with
retirees.
Net periodic postretirement benefit costs included the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Health Life Health Life Health Life
Care Insurance Care Insurance Care Insurance
------ --------- ------ --------- ------ --------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost.................... $1.6 $0.3 $1.7 $0.2 $1.5 $0.1
Interest cost................... 4.6 0.7 3.9 0.6 4.0 0.4
Net amortization and deferral... (1.2) - (0.7) - (0.7) -
----- ---- ----- ---- ----- ----
$5.0 $1.0 $4.9 $0.8 $4.8 $0.5
===== ===== ===== ===== ===== =====
</TABLE>
The following table presents the plans' status reconciled with amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
Health Life Health Life
Care Insurance Care Insurance
------ --------- ------ -----------
(in millions)
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 54.7 $2.9 $32.8 $ 3.5
Fully eligible active plan participants 6.1 0.1 2.8 0.1
Other active plan participants 20.5 5.4 19.5 4.2
------ ------ ------ -----
Total $ 81.3 $8.4 $ 55.1 $ 7.8
====== ====== ======= ======
Components of accumulated benefit obligation:
Unrecognized prior service costs $(19.0) $2.1 $ (2.8) $(0.5)
Unrecognized net experience (gains) losses (9.9) (3.3) (4.0) 0.2
Accrued postretirement benefit cost 110.2 9.6 61.9 8.1
------- ----- ------- ------
Total $ 81.3 $8.4 $ 55.1 $ 7.8
======= ===== ======= ======
</TABLE>
The principal assumptions used in the computation of net periodic postretirement
benefit cost and the accumulated benefit obligation were as follows: weighted
average assumed discount rate of 7.25% for 1997, and 7.5% for 1996; rate of
increase in future compensation levels of 4.0% to 4.5% for 1997, and 4.0% to
4.75% for 1996. The health care cost trend rate for the U.S. ranged from 6.9% to
9.0% in 1997, and was assumed to decrease gradually to 5.0% to 6.0% by the year
2000, and remain at that level thereafter. The rate in 1996 ranged from 7.8% to
11.5%. In Canada, the rate was 8.0% in 1997 and 1996. The 8.0% rate was assumed
to decrease gradually to 5.25% by the year 2002 and to remain at that level
thereafter. Increasing the assumed weighted average health care cost trend rate
by 1% in each year would increase the accumulated postretirement benefit
obligation under the U.S. and Canadian plans as of December 31, 1997 by $4.9
million and $2.2 million, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
years then ended by $0.4 million and $0.2 million, respectively.
NOTE 14: Income Taxes
Income (loss) before income taxes, extraordinary loss and cumulative effect of
accounting change consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
United States.................................... $ 187.2 $ (110.7) $ 78.6
Canada........................................... 88.0 70.5 68.5
-------- --------- --------
Total.......................................... $ 275.2 $ (40.2) $ 147.1
======== ========= ========
Income tax expense (benefit) consisted of the following:
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in millions)
Current:
U.S. Federal................................... $ (1.0) $ 20.2 $ 9.4
U.S. State..................................... 1.8 1.5 1.4
Canada......................................... 4.6 19.7 2.0
------- -------- --------
Total current................................ 5.4 41.4 12.8
------- -------- --------
Deferred:
U.S. Federal................................... 68.1 (43.4) 15.1
U.S. State..................................... 6.9 (10.2) (1.9)
Canada......................................... 29.8 7.9 26.1
------- -------- --------
Total deferred............................... 104.8 (45.7) 39.3
------- -------- --------
Net income tax expense (benefit)................. $ 110.2 $ (4.3) $ 52.1
======== ======== ========
</TABLE>
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial
statements. The components of the Company's deferred income tax liabilities and
assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
(in millions)
<S> <C> <C>
Deferred tax liabilities:
Excess of book basis over tax basis of property, plant and
equipment..................................................... $ (510.9) $ (327.5)
LIFO inventory and market valuation allowance................... (36.9) (12.6)
Deferred refinery maintenance turnaround costs.................. (26.3) (20.7)
-------- --------
Total deferred tax liabilities................................ (574.1) (360.8)
-------- --------
Deferred tax assets:
Accrued liabilities and payables................................ 193.0 159.0
U.S. Federal and State income tax credit carryforwards.......... 95.9 62.2
Canadian tax benefit on unrealized foreign exchange adjustment 5.8 6.1
Net operating loss carryforwards................................ 138.3 70.9
Other........................................................... 12.8 10.6
-------- ---------
Total deferred tax assets..................................... 445.8 308.8
Less valuation allowance.......................................... (8.4) (5.0)
-------- ---------
Net deferred tax liability.................................... $ (136.7) $ (57.0)
======== =========
</TABLE>
As of December 31, 1997, the Company had U.S. Federal and State income tax
credit carryforwards totaling $36.3 million which will expire in the years 1998
through 2011, alternative minimum tax (AMT) credits totaling $59.6 million which
can be carried forward indefinitely, and income tax net operating loss (NOL)
carryforwards totaling $349.5 million which will expire in the years 2004
through 2012. Included in the above are $180.5 million of NOL carryforwards,
$18.7 million of income tax credit carryforwards, and $57.4 million of AMT
credits acquired from Total, NCS and Diamond Shamrock, which are subject to
annual U.S. Federal tax limitations.
The Company has established a valuation allowance for certain deferred tax
assets, primarily NOL carryforwards, which may not be realized in future
periods. The realization of net deferred tax assets recorded as of December 31,
1997, is dependent upon the Company's ability to generate future taxable income
in both the U.S. and Canada. Although realization is not assured, the Company
believes it is more likely than not that the net deferred tax assets will be
realized.
The differences between the Company's effective income tax rate and the U.S.
Federal statutory rate is reconciled as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
U.S. Federal statutory rate............................ 35.0% (35.0)% 35.0%
Effect of foreign operations........................... 1.3 7.3 3.0
U.S. State income taxes, net of U.S. Federal taxes 2.1 (14.2) (0.2)
Non-deductible reserves................................ - 11.2 (2.4)
Non-deductible merger costs............................ - 11.2 -
Goodwill amortization.................................. 1.2 7.0 -
General business credits............................... - - (2.5)
Other.................................................. 0.4 1.8 2.5
------ ------ -----
Effective income tax rate............................ 40.0% (10.7)% 35.4%
====== ======= =====
</TABLE>
Income taxes paid in the years ended December 31, 1997, 1996 and 1995, amounted
to $16.8 million, $9.6 million and $19.0 million, respectively.
NOTE 15: Environmental Matters
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities in the jurisdictions in which the
Company operates. Accordingly, the Company has adopted policies, practices and
procedures in the areas of pollution control, product safety, occupational
health and the production, handling, storage, use and disposal of hazardous
materials to prevent material environmental or other damage, and to limit the
financial liability which could result from such events. However, some risk of
environmental or other damage is inherent in the business of the Company, as it
is with other companies engaged in similar businesses.
The Company has been designated as a potentially responsible party by the U.S.
Environmental Protection Agency (the EPA) under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, and by certain states under
applicable state laws, with respect to the cleanup of hazardous substances at
several sites. In each instance, other potentially responsible parties also have
been so designated. In addition, the Quebec Ministry of Environment and Montreal
Urban Community are investigating possible instances of contamination at two of
the Company's Canadian facilities. The Company has agreed to remediate certain
of these sites and is currently assessing other sites. The Company has accrued
liabilities for environmental remediation obligations at these sites, as well as
estimated site restoration costs to be incurred in the future.
As of December 31, 1997 and 1996, accruals for environmental matters amounted to
$213.9 million (including $79.7 million related to Total upon acquisition) and
$151.4 million, respectively (included principally in other long-term
liabilities). Charges to the statements of operations during 1997 and 1996,
totaled $1.3 million and $41.7 million, respectively. The 1996 charges include
$37.0 million to conform the accounting policies of Diamond Shamrock and
Ultramar due to the Merger. Charges in 1995 were not significant.
The accruals noted above represent the Company's best estimate of the costs
which will be incurred over an extended period for restoration and environmental
remediation at various sites. These liabilities have not been reduced by
possible recoveries from third parties and projected cash expenditures have not
been discounted. 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, improvements in cleanup technologies 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 period, the Company believes that such costs will not
have a material adverse effect on the Company's financial position.
NOTE 16: Commitments and Contingencies
The Company leases convenience stores, office space and other assets under
operating leases with terms expiring at various dates through 2017. Certain
leases contain renewal options and escalation clauses and require the Company to
pay property taxes, insurance and maintenance costs. These provisions vary by
lease. Certain convenience store leases provide for the payment of rentals based
solely on sales volume while others provide for payments, in addition to any
established minimums, contingent upon the achievement of specified levels of
sales volumes.
Future minimum rental payments applicable to non-cancelable operating leases as
of December 31, 1997, are as follows (in millions):
1998............................................. $ 78.1
1999............................................. 61.9
2000............................................. 53.9
2001............................................. 48.3
2002............................................. 46.0
Thereafter....................................... 149.5
-------
Gross lease payments......................... 437.7
Less future minimum sublease rental income....... (34.2)
-------
Net future minimum lease payments............ $ 403.5
=======
Rental expense, net of sublease rental income, for all operating leases was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(in millions)
<S> <C> <C> <C>
Minimum rental expense........................... $ 76.7 $ 76.7 $ 59.3
Contingent rental expense........................ 7.8 6.8 6.7
------ ------ ------
Gross rental expense........................... 84.5 83.5 66.0
Less sublease rental income...................... (10.9) (10.4) (8.9)
------ ------- ------
Net rental expense............................. $ 73.6 $ 73.1 $ 57.1
====== ======= ======
</TABLE>
The Company has three long-term operating lease arrangements (the Brazos Lease,
the Jamestown Lease and the Total Lease) to accommodate its convenience store
construction program. The Brazos, Jamestown and Total Leases have lease terms
which will expire in December 2003, July 2003, and August 2002, respectively. As
of December 31, 1997, substantially all of the $190.0 million Brazos Lease
commitment has been used to construct or purchase convenience stores and over
half of the Jamestown and the Total Lease commitments, which totaled $165.0
million, have been used to construct or purchase convenience stores and to
construct the new corporate headquarters of the Company in San Antonio, Texas.
After their respective non-cancelable lease terms, the Brazos, the Jamestown and
the Total Leases may be extended by agreement of the parties, or the Company may
purchase or arrange for the sale of the convenience stores or corporate
headquarters. If the Company were unable to extend the lease or arrange for the
sale of the properties to a third party at the respective expiration dates of
the Leases, the amount necessary to purchase the properties under the Leases as
of December 31, 1997, would be approximately $277.2 million.
As of December 31, 1997, the Company had several ocean-going tankers and coastal
vessels under various non-cancelable time charters which expire on various dates
through 1998. Certain charters include renewal options and escalation clauses,
which vary by charter, and provide for the payment of chartering fees which vary
based on usage. Aggregate future minimum payments required under the time
charters total $12.9 million for 1998. Charges to operations for marine freight
time charters amounted to $22.1 million, $54.4 million and $54.7 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
In conjunction with the construction of a high-pressure gas oil hydrotreater at
the Company's Wilmington Refinery, the Company entered into a long-term contract
for the supply of hydrogen. The contract commenced in 1996 and will run for 15
years. The purchase price for the hydrogen is fixed, based on the quantity and
flow rate of product supplied. The contract has a take-or-pay provision of $1.2
million per month. In November 1996, the Company also entered into a contract
for the supply of hydrogen to its Three Rivers Refinery, containing a
take-or-pay provision of $0.7 million per month, with an initial term of 15
years.
Pursuant to the terms of various agreements, the Company has agreed to indemnify
the former owners of Ultramar, Inc. (UI) and CUC and certain of their affiliates
for any claims or liabilities arising out of, among other things, refining and
marketing activities and litigation related to the operations of UI and CUC
prior to their acquisition. The Company has also agreed to indemnify two
affiliates of the former owner against liability for substantially all U.S.
Federal, State and local income or franchise taxes in respect of periods in
which any UI company was a member of a consolidated, combined or unitary return
with any other member of the affiliated group.
In connection with the 1987 spin-off of Diamond Shamrock from Maxus, Diamond
Shamrock entered into a distribution agreement which, among other things,
provided for the sharing by the Company and Maxus of certain liabilities
relating to businesses Maxus discontinued or disposed of prior to the spin-off
date. The Company's total liability for such shared costs was limited to $85.0
million. The Company has fully performed all of its obligations to Maxus under
the agreement as of December 31, 1996, including $8.3 million paid during 1996.
There are various legal proceedings and claims pending against the Company which
arise in the ordinary course of business. It is management's opinion, based upon
advice of counsel, that these matters, individually or in the aggregate, will
not have a material adverse effect on the Company's results of operations or
financial condition.
NOTE 17: Financial Instruments
Financial instruments consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(in millions)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 92.0 $ 92.0 $ 197.9 $ 197.9
Notes receivable 31.9 31.9 33.2 33.2
Long-term debt, including current portion (1,872.9) (1,999.2) 1,649.5) (1,717.9)
Interest rate swap agreements (0.4) 5.9 0.2 2.7
Commodity futures, option and price swap
contracts (0.9) (12.0) (1.1) (1.1)
Foreign exchange contracts - - - -
</TABLE>
Cash and cash equivalents as of December 31, 1997 and 1996 include $14.4 million
and $84.0 million of investments in marketable securities with maturities of
less than three months, respectively. The investments are available for sale and
are stated at cost, which approximates fair market value.
The aggregate carrying amount of notes receivable approximated fair value as
determined based on the discounted cash flow method.
The fair value of the Company's fixed rate debt as of December 31, 1997 and
1996, was $1,712.4 million and $1,288.3 million, respectively (carrying amounts
of $1,586.1 million and $1,219.9 million, respectively) and was estimated based
on the quoted market price of similar debt instruments. The carrying amounts of
the Company's borrowings under its revolving credit agreements and money market
facilities approximate fair value because such obligations generally bear
interest at floating rates.
The interest rate swap agreements subject the Company to market risk as interest
rates fluctuate and impact the interest payments due on the notional amounts of
the agreements. The fair value of interest rate swap agreements is determined
based on the differences between the contract rate of interest and the rates
currently quoted for agreements of similar terms and maturities.
The Company uses commodity futures and option contracts to manage its exposure
to crude oil and petroleum product price volatility and does not use such
contracts with the intent of producing speculative gains. These contracts are
marked to market value and gains and losses are recognized currently in cost of
products sold, as a component of the related crude oil and petroleum product
purchases. In addition, the Company has entered into various price swaps as
price hedges for which gains or losses will be recognized when the hedged
transactions occur.
As of December 31, 1997, the Company had outstanding commodity futures, option
and price swap contracts to purchase $213.2 million and sell $62.7 million of
crude oil and petroleum products or to settle differences between a fixed price
and market prices on aggregate notional quantities of 8.6 million barrels of
crude oil and petroleum products which mature on various dates through June
2002. As of December 31, 1996, the Company had outstanding commodity futures and
option contracts to purchase $51.4 million and sell $22.9 million of crude oil
and petroleum products which matured on various dates through May 1997. The fair
value of commodity futures and option contracts is based on quoted market
prices. The fair value of price swap contracts is determined by comparing the
contract price with current broker quotes for futures contracts corresponding to
the period that the anticipated transactions are expected to occur.
The Company also periodically enters into short-term foreign exchange contracts
to manage its exposure to exchange rate fluctuations on the trade payables of
its Canadian operations that are denominated in U.S. dollars. These contracts
involve the exchange of Canadian and U.S. currency at future dates. Gains and
losses on these contracts generally offset losses and gains on the U.S. dollar
denominated trade payables. As of December 31, 1997, the Company had short-term
foreign exchange contracts totaling $35.3 million. As of December 31, 1996, the
Company had short-term foreign exchange contracts totaling $10.8 million. The
notional amount of the contracts represents the extent of the Company's
involvement in these transactions but does not represent its exposure to market
risk. The fair value of short-term foreign exchange contracts is determined
based on year-end exchange rates. The Company generally does not hedge for the
effects of foreign exchange rate fluctuations on the translation of its foreign
results of operations or financial position.
The Company is subject to the market risk associated with changes in market
price of the underlying crude oil and petroleum products; however, except in the
case of the price swaps, such changes in values are generally offset by changes
in the sales price of the Company's petroleum products. The Company is exposed
to credit risk in the event of nonperformance by the counterparties in all
interest rate swap agreements, price swap contracts and foreign exchange
contracts. However, the Company does not anticipate nonperformance by any of the
counterparties. The amount of such exposure is generally the unrealized gains or
losses on such contracts.
Other financial instruments which potentially subject the Company to credit risk
consist principally of trade receivables. Concentration of credit risk with
respect to trade receivables is limited due to the large number of customers
comprising the Company's customer base and their dispersion across different
geographic areas. As of December 31, 1997, the Company had no significant
concentrations of credit risk.
NOTE 18: Business Segments and Geographic Information
The Company's revenues are principally derived from two business segments: (1)
Refining and Marketing and (2) Petrochemicals and NGL's. Refining and Marketing
is engaged in the refining of crude oil and marketing of refined petroleum
products and other merchandise in the Southwest region of the U.S., with
particular emphasis in Texas, California, Colorado, Louisiana, New Mexico and
Oklahoma, as well as in the Northeast region of the U.S. and eastern Canada.
Petrochemicals and NGL's consist of transporting, storing and marketing of
natural gas liquids; upgrading refinery-grade propylene and selling
polymer-grade propylene and other chemicals primarily in the Texas Gulf Coast
region.
<TABLE>
<CAPTION>
Refining Petrochemicals
and and
Marketing NGL's Total
--------- -------------- -----
(in millions)
<S> <C> <C> <C>
Year ended December 31, 1997
Sales and other revenues........................... $10,410.1 $472.3 $10,882.4
Operating income................................... 361.1 23.3 384.4
Depreciation and amortization...................... 190.2 9.9 200.1
Interest expense, net.............................. 112.1 8.1 120.2
Income before income taxes, extraordinary loss and
dividends of subsidiary.......................... 252.8 22.4 275.2
Year ended December 31, 1996
Sales and other revenues........................... $ 9,747.3 $461.1 $10,208.4
Operating income................................... 137.8 9.5 147.3
Depreciation and amortization...................... 166.4 13.5 179.9
Interest expense, net.............................. 101.7 8.4 110.1
(Loss) income before income taxes.................. (49.1) 8.9 (40.2)
Year ended December 31, 1995
Sales and other revenues........................... $ 7,706.1 $377.4 $ 8,083.5
Operating income................................... 195.1 31.7 226.8
Depreciation and amortization...................... 124.9 11.4 136.3
Interest expense, net.............................. 73.7 6.0 79.7
Income before income taxes and cumulative effect 113.2 33.9 147.1
</TABLE>
Intersegment sales and other revenues are generally derived from transactions
made at prevailing market rates. Sales of natural gas liquids from the
Petrochemicals and NGL's segment to the Refining and Marketing segment amounted
to $8.6 million in 1997, $10.7 million in 1996 and $21.5 million in 1995.
Identifiable assets were as follows:
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
Refining and Marketing........................... $ 5,230.8 $ 3,922.3 $3,839.6
Petrochemicals and NGL's......................... 226.8 240.0 188.0
Corporate........................................ 137.1 257.7 189.1
-------- --------- --------
Consolidated Total............................. $ 5,594.7 $ 4,420.0 $4,216.7
======== ========= ========
Capital expenditures were as follows:
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(in millions)
Refining and Marketing........................... $ 241.4 $ 314.8 $ 771.5
Petrochemicals and NGL's......................... 20.5 25.4 21.2
Corporate........................................ 6.0 1.8 1.5
-------- --------- --------
Consolidated Total............................. $ 267.9 $ 342.0 $ 794.2
======== ========= ========
Identifiable assets are those assets that are utilized by the respective
business segment. Corporate assets are principally cash, investments and other
assets that cannot be directly associated with the operations or activities of a
business segment.
Geographic information is as follows:
As of or for the Years Ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Sales and other revenues:
Southwest...................................... $ 7,866.8 $ 7,161.6 $5,432.2
Northeast...................................... 3,015.6 3,046.8 2,651.3
--------- --------- --------
$10,882.4 $10,208.4 $8,083.5
========= ========= ========
Operating income:
Southwest...................................... $ 264.9 $ 69.6 $ 137.8
Northeast...................................... 119.5 77.7 89.0
---------- --------- --------
$ 384.4 $ 147.3 $ 226.8
========== ========= ========
Net income (loss):
Southwest...................................... $ 94.8 $ (68.5) $ 59.0
Northeast...................................... 60.0 32.6 58.0
---------- --------- --------
$ 154.8 $ (35.9) $ 117.0
========== ========= ========
Identifiable assets:
Southwest...................................... $ 4,666.5 $ 3,377.4 $3,304.6
Northeast...................................... 928.2 1,042.6 912.1
---------- --------- --------
$ 5,594.7 $ 4,420.0 $4,216.7
========== ========== ========
Capital expenditures:
Southwest...................................... $ 178.5 $ 259.1 $ 770.8
Northeast...................................... 89.4 82.9 23.4
---------- --------- --------
$ 267.9 $ 342.0 $ 794.2
========== ========= ========
Depreciation and amortization:
Southwest...................................... $ 167.7 $ 153.5 $ 111.4
Northeast...................................... 32.4 26.4 24.9
---------- --------- --------
$ 200.1 $ 179.9 $ 136.3
========== ========= ========
</TABLE>
The 1996 net loss in the Southwest includes an after tax charge of $53.0 million
for transaction and integration costs associated with the Merger.
NOTE 19: Subsequent Events
On February 4, 1998, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on March 5, 1998, to holders of record on
February 20, 1998. In addition, the Board of Directors declared a quarterly
dividend of $0.625 per share on the Company's 5% Cumulative Convertible
Preferred Stock payable on March 13, 1998, to holders of record on February 20,
1998.
In the first quarter of 1998, the Company and Koch Hydrocarbon Co., a division
of Koch Industries, Inc. and Koch Pipeline Co., an affiliate of Koch Industries,
Inc. expect to finalize the formation of a 50-50 joint venture related to each
entity's Mont Belvieu petrochemical assets. The joint venture agreement and
operating agreements will require that the Company contribute its majority
interest in the propane/propylene splitters and related distribution pipeline
and terminal, its operating interest in the hydrocarbon storage facility and
certain of its pipeline and supply systems, and Koch will contribute its
majority interest in its Mont Belvieu natural gas fractionator facility and
certain of its pipeline and supply systems.
In January 1998, the Company entered into a memorandum of understanding with
Petro-Canada to form a refining and marketing joint venture to serve customers
in Canada and the northern United States more efficiently. The venture requires
that the Company contribute all of the assets in its Northeast segment as well
as assets located in Michigan. Petro-Canada will contribute all of its refining
and marketing assets in Canada, including three refineries, a lubricant oil
manufacturing facility and approximately 1,800 retail outlets. Control of the
venture will be shared, with major decisions requiring approval of both parties.
Petro-Canada will own 51% and the Company 49% of the voting units of the joint
venture. Profits and losses will be divided between Petro-Canada and the Company
in a ratio of 64% to 36%, respectively. The Company expects to complete the
joint venture in the summer of 1998.
NOTE 20: Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1997 Quarters
-------------
First Second Third Fourth
----- ------ ----- ------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Sales and other revenues.................... $2,550.2 $2,414.4 $2,613.2 $3,304.6
Cost of products sold and operating expenses 1,859.9 1,678.0 1,818.9 2,347.9
Operating income............................ 64.9 100.6 125.9 93.0
Extraordinary loss.......................... - - - (4.8)
Net income.................................. 27.6 46.3 56.6 24.3
Net income per share:
Basic..................................... $ 0.35 $ 0.60 $ 0.73 $ 0.27
Diluted................................... 0.35 0.59 0.71 0.27
Weighted average number of shares (in
thousands):
Basic..................................... 74,725 74,799 75,724 87,122
Diluted................................... 78,881 79,113 80,164 91,334
1996 Quarters
-------------
First Second Third Fourth
----- ------ ----- ------
(in millions, except per share data)
Sales and other revenues.................... $2,369.6 $2,565.8 $2,552.8 $2,720.2
Cost of products sold and operating expenses 1,706.6 1,879.8 1,774.0 2,117.7
Operating income (loss)..................... 61.6 107.6 50.3 (149.6)
Net income (loss)........................... 22.0 47.1 13.9 (118.9)
Net income (loss) per share:
Basic..................................... $ 0.28 $ 0.62 $ 0.17 $ (1.61)
Diluted................................... 0.28 0.60 0.17 (1.61)
Weighted average number of shares (in thousands):
Basic..................................... 74,136 74,402 74,495 74,674
Diluted................................... 78,181 78,673 78,409 74,674
</TABLE>
The fourth quarter of 1997 includes Total's results since acquisition on
September 25, 1997. Excluding Total's results, sales and other revenues,
operating income and net income would have been $2,560.2 million, $95.5 million
and $26.5 million, respectively.
The results for the fourth quarter of 1997 also include a $4.8 million
extraordinary loss (net of income tax benefit of $3.2 million) related to the
termination of the ESOPs and the related prepayment of the ESOPs' debt. In
December 1997, the Company recorded an $11.1 million non-cash reduction in the
carrying value of crude oil inventories due to the significant drop in crude oil
prices late in 1997.
The results for the fourth quarter of 1996 include $77.4 million of merger and
integration costs and $50.4 million of charges principally to conform the
accounting practices of Diamond Shamrock and Ultramar, including the accrual of
estimated future environmental and other obligations. In addition, as a result
of a decision to increase certain inventory levels during the fourth quarter of
1996, the Company recorded an additional LIFO inventory reserve of $60.7 million
as a result of higher than expected crude oil prices.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The information appearing under the caption "Ratification of Appointment of
Independent Accountants" in the Registrant's Proxy Statement is hereby
incorporated by reference. On March 4, 1997, the Company changed its independent
accountants from Ernst & Young LLP to Arthur Andersen LLP as reported on Form
8-K dated March 4, 1997. There were no disagreements on accounting principles or
financial disclosures prior to the change.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act" in the Registrant's Proxy
Statement relating to its 1998 Annual Meeting of Stockholders as filed with the
Securities and Exchange Commission (the Proxy Statement) is hereby incorporated
by reference. See also the information appearing under the caption Executive
Officers of the Registrant appearing in Part I.
The Registrant is not aware of any family relationship between any director or
executive officer. Each officer is generally elected to hold office until his or
her successor is elected or until such officer's earlier removal or resignation.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Compensation of Executive Officers"
in the Registrant's Proxy Statement is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information appearing under the caption "Beneficial Ownership of Securities"
in the Registrant's Proxy Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Employment Agreements and
Change-in-Control Arrangements" and "Indebtedness of Management" in the
Registrant's Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(A)(1) and (2) -- List of financial statements and financial statement schedules
The following consolidated financial statements of Ultramar Diamond Shamrock
Corporation are included under Part II, Item 8:
Accountants Reports
Balance Sheets -- December 31, 1997 and 1996
Statements of Operations -- Years Ended December 31, 1997, 1996 and 1995
Statements of Stockholders' Equity -- Years Ended December 31, 1997, 1996
and 1995 Statements of Cash Flows -- Years Ended December 31, 1997, 1996
and 1995 Notes to Consolidated Financial Statements -- Years Ended December
31, 1997, 1996 and 1995
The following consolidated schedule of Ultramar Diamond Shamrock Corporation is
included under Part IV, Item 14(d):
Schedule II -- Valuation and qualifying accounts
All other schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
(B) Reports on Form 8-K
Current Report on Form 8-K dated October 8, 1997, relating to the underwriting
agreement for the issuance of the $400.0 million of Total Senior Notes.
Current Report on Form 8-K dated December 15, 1997, relating to the notification
of expiration of outstanding warrants.
Current Report on Form 8-K dated March 3, 1998, relating to the notification to
the 5% Cumulative Convertible Preferred Stock holders of the Company's intention
to redeem all such outstanding Preferred Stock on March 18, 1998.
(C) Exhibits:
Unless otherwise indicated, each of the following exhibits has been previously
filed with the Securities and Exchange Commission under File No. 1-11154. Where
indicated as being filed by Diamond Shamrock, Inc., such filings were filed
under File No. 1-9409 unless otherwise indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit Incorporated by Reference
Number Description to the Following Documents
3.1 Certificate of Incorporation dated April 27, 1992, Registration Statement on Form S-1 (File No.33-
as amended on April 28, 1992 47586), Exhibit 3.1
3.2 Certificate of Merger of Diamond Shamrock, Inc. Registration Statement on Form S-8 (File No.333-
with and into the Company, amending the 19131), Exhibit 4.2
Company's Articles of Incorporation
3.3 Certificate of Designations of the Company's 5% Registration Statement on Form S-8 (File No.333-
Cumulative Convertible Preferred Stock 19131), Exhibit 4.3
3.4 By-laws dated April 28, 1992 Registration Statement on Form S-1 (File No.33-
47586), Exhibit 3.2
3.5 Amendment dated July 22, 1993 to By-laws Annual Report on Form 10-K for the year ended
December 31, 1995, Exhibit 3.3
3.6 Amendment dated December 3, 1996 to By-laws Registration Statement on Form S-8 (File No.333-
19131), Exhibit 4.6
4.1 Form of Common Stock Certificate Registration Statement on Form S-8 (File No.333-
19131), Exhibit 4.8
4.2 Form of 5% Cumulative Convertible Preferred +
Stock Certificate
4.3 See Exhibit 3.1
4.4 See Exhibit 3.2
4.5 See Exhibit 3.3
4.6 See Exhibit 3.4
4.7 See Exhibit 3.5
4.8 See Exhibit 3.6
4.9 Form of Indenture between Diamond Shamrock, Registration Statement on Form S-1 of Diamond
Inc. and the First National Bank of Chicago Shamrock, Inc. (File No.33-32024), Exhibit 4.1
4.10 Form of 9 3/8% Note Due March 1, 2001 Current Report on Form 8-K of Diamond
Shamrock, Inc. dated February 20, 1991, Exhibit
4.1
4.11 Forms of Medium Term Notes, Series A Registration Statement on Form S-3 of Diamond
Shamrock, Inc. (File No.33-58744), Exhibit 4.2
4.12 Form of 8% Debenture due April 1, 2003 Current Report on Form 8-K of Diamond
Shamrock, Inc. dated March 22, 1993, Exhibit 4.1
4.13 Form of 8 3/4% Debenture due June 15, 2015 Current Report on Form 8-K of Diamond
Shamrock, Inc. dated February 6, 1995, Exhibit 4.1
4.14 Form of 7 1/4% Debenture due June 15, 2010 Current Report on Form 8-K of Diamond
Shamrock, Inc. dated June 1, 1995, Exhibit 4.1
4.15 Form of 7.65% Debenture due July 1, 2026 Current Report on Fom 8-K of Diamond
Shamrock, Inc. dated June 20, 1996, Exhibit 4.1
4.16 Rights Agreement dated June 25, 1992, between Registration Statement on Form S-1 (File No.33-
Ultramar Diamond Shamrock Corporation and 47586), Exhibit 4.2; Quarterly Report on Form 10-
Registrar and Transfer Company (as successor Q for the quarter ended September 30, 1992,
rights agent to First City Texas-Houston, NA), as Exhibit 4.2; Annual Report on Form 10-K for the
amended by the First Amendment dated October year ended December 31, 1994, Exhibit 4.3
26, 1992 and the Amendment dated May 10, 1994
4.17 Indenture dated July 6, 1992 between Ultramar Quarterly Report on Form 10-Q for the quarter
Diamond Shamrock Corporation, as issuer, and ended June 30, 1992, Exhibit 10.5
First City Texas-Houston NA, as trustee, relating
to the 8 1/4% Notes due July 1, 1999
4.18 Indenture dated July 6, 1992 among Ultramar Quarterly Report on Form 10-Q for the quarter
Credit Corporation, as issuer, Ultramar Diamond ended June 30, 1992, Exhibit 10.6
Shamrock Corporation, as guarantor, and First
City Texas-Houston NA, as trustee, relating to
the 8 5/8% Guaranteed Notes due July 1, 2002
4.19 Indenture dated March 15, 1994 between Ultramar Current Report on Form 8-K for the quarter ended
Diamond Shamrock Corporation, as issuer, and June 30, 1997, Exhibit 4.3
The Bank of New York, as trustee; Subordinated
Debt Indenture dated June 25, 1997 between
Ultramar Diamond Shamrock Corporation and the
Bank of New York, as trustee
4.20 Form of 7.20% Senior Note due October 15, 2017 Current Report on Form 8-K dated October 8,
1997, Exhibit 4.1
4.21 Form of 6.75% Senior Note due October 15, 2037 Current Report on Form 8-K dated October 8,
1997, Exhibit 4.2
4.22 Form of 7.45% Senior Note due October 15, 1997 Current Report on Form 8-K dated October 8,
1997, Exhibit 4.3
10.1 Lease dated April 30, 1970 between Ultramar. Registration Statement on Form S-1 (File No.33-
Inc. by assignment, and the City of Long Beach 47586), Exhibit 10.20
10.2 Lease dated November 27, 1992 between Ultramar Registration Statement on Form S-1 (File No.33-
Canada, Inc. and the National Harbours Board 47586), Exhibit 10.27
10.3 Permit No. 306 dated October 1, 1975 issued by Registration Statement on Form S-1 (File No.33-
the City of Los Angeles to Ultramar, Inc. by 47586), Exhibit 10.19
assignment
10.4 Agreement dated April 6, 1977 between Atlantic Registration Statement on Form S-1 (File No.33-
Richfield Company and Ultramar, Inc. by 47586), Exhibit 10.22
assignment
10.5 Agreement for Use of Marine Terminal and Registration Statement on Form S-1 (File No.33-
Pipeline dated August 30, 1978 between Ultramar, 47586), Exhibit 10.21
Inc. by assignment, Arco Transporation Company
and Shell Oil Company
10.6 Warehousing Agreement dated July 1, 1984 Registration Statement on Form S-1 (File No.33-
between Ultramar, Inc., by assignment and 47586), Exhibit 10.25
GATX Tank Storage Terminals
10.7 Contract re Charlottetown Terminal dated October Registration Statement on Form S-1 (File No.33-
1, 1990 between Ultramar Canada, Inc. and 47586), Exhibit 10.30
Imperial Oil (1)
10.8 Tax Allocation Agreement dated April 30, 1992 Registration Statement on Form S-1 (File No.33-
between Ultramar Diamond Shamrock 47586), Exhibit 10.2
Corporation, LASMO plc and Ultramar America
Limited and Guarantee of Performance and
Indemnity to Ultramar Diamond Shamrock
Corporation by LASMO plc, as amended by
Amendment No. 1 dated May 22, 1992
10.9 Reorganization Agreement dated as of July 6, 1992 Quarterly Report on Form 10-Q for the quarter
between LASMO plc and Ultramar Diamond ended June 30, 1992, Exhibit 10,1
Shamrock Corporation
10.10 Ultramar Diamond Shamrock Corporation 1992 Registration Statement on Form S-8 (File No.33-
Long Term Incentive Plan dated July 21, 1992, as 52148), Exhibit 28; Annual Report on Form 10-K
amended by the First Amendment dated January for the year ended December 31, 1992, Exhibit
23, 1993, the Second Amendment dated July 21, 10.34; Annual Report on Form 10-K for the year
1993, the Third Amendment dated March 21, 1994 ended December 31, 1993, Exhibit 10.46;
and the Fourth Amendment dated February 10, Quarterly Report on Form 10-Q for the quarter
1995 ended March 31, 1994, Exhibit 10.47; Quarterly
Report on Form 10-Q for the quarter eneded March
31, 1995, Exhibit 10.50
10.11 Ultramar Diamond Shamrock Corporation Annual +
Incentive Plan for 1997
10.12 Ultramar Diamond Shamrock Corporation Annual Report on Form 10-K for the year ended
Restricted Share Plan for Directors dated January December 31, 1992, Exhibit 10.36
26, 1993
10.13 Ultramar Diamond Shamrock Corporation Annual Report on Form 10-K for the year ended
Supplemental Executive Retirement Plan dated December 31, 1995, Exhibit 10.13
July 27, 1994
10.14 Ultramar Diamond Shamrock Corporation U.S. Annual Report on Form 10-K for the year ended
Employees Retirement Restoration Plan dated July December 31, 1995, Exhibit 10.14
27, 1994
10.15 Ultramar Diamond Shamrock Corporation U.S. Annual Report on Form 10-K for the year ended
Savings Incentive Restoration Plan dated July 27, December 31, 1995, Exhibit 10.15
1994
10.16 Trust Agreement dated April 1985 between Registration Statement on Form S-1 (File No.33-
Ultramar Canada, Inc. and Montreal Trust 47586), Exhibit 10.1
Company of Canada
10.17 Employment Agreement dated as of September 22, Registration Statement on Form S-4 (File No.333-
1996 between Ultramar Diamond Shamrock 14807), Exhibit 10.1
Corporation and Jean Gaulin
10.18 Employment Agreement dated September 22, 1996 Current Report on Form 8-K of Diamond
between Ultramar Diamond Shamrock Corporation Shamrock, Inc. dated September 30,, 1996, Exhibit
and Roger Hemminghaus 10(c)
10.20 Form of Employment Agreement dated as of Annual Report on Form 10-K for the year ended
September 22, 1996 between Diamond Shamrock, December 31, 1997, Exhibit
Inc. and W. R. Klesse
10.21 Hydrogen and Steam Supply Agreement dated Annual Report on Form 10-K for the year ended
December 22, 1993 between Ultramar, Inc. and Air December 31, 1993, Exhibit 10.43
Products and Chemicals, Inc. (1)
10.22 MTBE Terminaling Agreement dated March 3, Annual Report on Form 10-K for the year ended
1995 between Petro-Diamond Incorporated and December 31, 1995
Ultramar, Inc. (1)
10.23 Confidential Transportation Contract dated May Quarterly Report on Form 10-Q for the quarter
25, 1995 between Canadian National Railway ended June 30, 1995, Exhibit 10.52
Company and Ultramar Canada, Inc. (1)
10.24 Senior Subordinated Note Purchase Agreement Registration Statement on Form 10 of Diamond
dated as of April 17, 1987 between Diamond Shamrock, Inc. (DS Form 10), Exhibit 10.22
Shamrock, Inc. and certain purchasers (the Senior
Subordinated Note Agreement)
10.25 Amendment No.1 to the Senior Subordinated Note Quarterly Report on Form 10-Q of Diamond
Agreement dated as of March 31, 1988 Shamrock, Inc. for the quarter ended March 31,
1988, Exhibit 19.5
10.26 Amendment No.2 to the Senior Subordinated Note Quarterly Report on Form 10-Q of Diamond
Agreement dated as of July 12, 1989 Shamrock, Inc. for the quarter ended June 30,
1989, Exhibit 19.2
10.27 Amendment No.3 to the Senior Subordinated Note Annual Report on Form 10-K of Diamond
Agreement dated as of December 6, 1993 Shamrock, Inc. for the year ended December 31,
1993, Exhibit 10.8
10.28 Deferred Compensation Plan for executives and Annual Report on Form 10-K of Diamond
directors of Diamond Shamrock, Inc. amended and Shamrock, Inc. for the year ended December 31,
restated as of January 1, 1989 1988, Exhibit 10.13
10.29 Supplemental Executive Retirement Plan of DS Form 10, Exhibit 10.16
Diamond Shamrock, Inc. (the DS SERP)
10.30 First Amendment to the DS SERP Registration Statement on Form S-1 of Diamond
Shamrock, Inc. (File No.33-21991) (DS S-1),
Exhibit 10.21
10.31 Second Amendment to the DS SERP Annual Report on Form 10-K of Diamond
Shamrock, Inc. for the year ended December 31,
1989, Exhibit 10.21
10.32 Excess Benefits Plan of Diamond Shamrock, Inc. Quarterly Report on Form 10-Q of Diamond
Shamrock, Inc. for the quarter ended June 30,
1987, Exhibit 19.5
10.33 1987 Long-Term Incentive Plan of Diamond Registration Statement on Form S-8 of Diamond
Shamrock, Inc. Shamrock, Inc. (File No.33-15268), Annex A-1
10.34 Form of Disability Benefit Agreement between DS S-1, Exhibit 10.21
Diamond Shamrock, Inc. and certain of its
executive officers
10.35 Form of Supplemental Death Benefit Agreement Quarterly Report on Form 10-Q of Diamond
between Diamond Shamrock, Inc. and certain of its Shamrock, Inc. for the quarter ended June 30,
executive officers 1987, Exhibit 19.9
10.36 Diamond Shamrock, Inc. Long-Term Incentive Quarterly Report on Form 10-Q of Diamond
Plan as amended and restated as of August 15, Shamrock, Inc. for the quarter ended September
1996 30, 1996 (DS Form 10-Q), Exhibit 10.9
10.37 Diamond Shamrock, Inc. Long-Term Incentive Quarterly Report on Form 10-Q of Diamond
Plan as amended and restated as of May 5, 1992 Shamrock, Inc. for the quarter ended June 30,
1992, Exhibit 19.1
10.38 Form of Employee Stock Purchase Loan Quarterly Report on Form 10-Q of Diamond
Agreement between Diamond Shamrock, Inc. and Shamrock, Inc. for the quarter ended June 30,
certain of its executive officers and employees 1992, Exhibit 19.2
amended and restated as of May 26, 1992
10.39 Form of Excess benefit plan between Diamond Annual Report on Form 10-K of Diamond
Shamrock, Inc. and certain officers amended and Shamrock, Inc. for the year ended December 31,
restated as of December 1, 1992 1992 (DS 1992 10-K), Exhibit 10.49
10.40 Form of Disability Benefit Agreement between DS 1992 10-K, Exhibit 10.50
Diamond Shamrock, Inc. and certain officers
amended and restated as of January 1, 1993
10.41 Form of Deferred Compensation Plan between DS 1992 10-K, Exhibit 10.51
Diamond Shamrock, Inc. and certain directors,
officers and other employees amended and restated
as of January 1, 1993
10.42 Diamond Shamrock, Inc. Nonqualified 401(k) Plan Registration Statement on Form S-8 of Diamond
Shamrock, Inc. (File No.33-64645), Exhibit 4.1
10.43 Amendment to Diamond Shamrock, Inc. DS Form 10-Q
Supplemental Executive Retirement Plan, July 22,
1996
10.44 Amendment to Diamond Shamrock, Inc. Disability DS Form 10-Q
Benefit Agreement July 22, 1996
10.45 Amendment to Diamond Shamrock, Inc. DS Form 10-Q
Supplemental Death Benefit Agreement July 22,
1996
10.46 Amendment to Diamond Shamrock, Inc. Excess DS Form 10-Q
Benefits Plan July 22, 1996
10.47 Amendment to Diamond Shamrock, Inc. Long- DS Form 10-Q
Term Incentive Plan July 22, 1996
10.48 Credit Agreement dated July 23, 1997 in the Quarterly Report on Form 10-Q for the quarter
amount of $700,000,000 between the Company, ended June 30, 1997, Exhibit 10.1
Morgan Guaranty Trust Company of New York
and certain other banks
10.50 Credit Agreement dated December 19, 1996 in Annual Report on Form 10-K for the year ended
the amount of CND $200,000,000 between the December 31, 1996, Exhibit 10.50
Company, Canadian Ultramar Company,
Canadian Imperial Bank of Commerce and
certain other banks
10.51 Amendment No. 1 to Credit Agreement described Annual Report on Form 10-K for the year ended
in Exhibit 10.50 December 31, 1996, Exhibit 10.51
10.52 Amended and Restated Lease Agreement dated Annual Report on Form 10-K for the year ended
December 19, 1996 among Jamestown Funding December 31, 1996, Exhibit 10.52
L.P., Ultramar, Inc., Ultramar Engergy, Inc.,
Diamond Shamrock Leasing, Inc., Diamond
Shamrock Arizona, Inc. and Diamond Shamrock
Refining and Marketing Company.
10.53 Amended and Restated Ground Lease Agreement Annual Report on Form 10-K for the year ended
dated December 19, 1996 between Brazos River December 31, 1996, Exhibit 10.53
Leasing L.P. and Diamond Shamrock Refining and
Marketing Company
10.54 Amended and Restated Facilities Lease Agreement Annual Report on Form 10-K for the year ended
dated December 19, 1996 between Brazos River December 31, 1996, Exhibit 10.54
Leasing, L.P. and Diamond Shamrock Refining
and Marketing Company
10.55 Stockholder Agreement between the Company and Quarterly Report on Form 10-Q for the quarter
Total ended March 31, 1997, Exhibit 10.2
10.56 Ultramar Diamond Shamrock Corporation 1996 Registration Statement on Form S-4 (File No. 333-
Long-Term Incentive Plan 14807), Exhibit 10.2
10.57 Relocation Agreement between the Company and +
H. Pete Smith dated as of December 2, 1996
10.58 Form First Amendment to Employment Agreement +
between H. Pete Smith and the Company effective
December 3, 1996
10.59 Agreement between the Company and H. Pete +
Smith dated effective March 3, 1998, amending
Mr. Smith's Employment Agreement dated as of
November 25, 1996, and Mr. Smith's Relocation
Agreement dated as of December 2, 1996
10.60 Ultramar Diamond Shamrock Corporation Non- Registration Statement on Form S-8 (No. 333-
Employee Director Plan 27697), Exhibit 4.1
11 Statement regarding Computation of Per Share +
Earnings
16.1 Letter of Ernst & Young LLP to the Securities and Current Report on Form 8-K dated March 4, 1997,
Exchange Commission regarding its concurrence Exhibit 16.1
with the Company's statements contained in the
Company's Current Report on Form 8-K
16.2 Letter of Price Waterhouse LLP to the Securities Current Report on Form 8-K dated March 4, 1997,
and Exchange Commission regarding its Exhibit 16.2
concurrence with the Company's statements
contained in the Company's Current Report on
Form 8-K
18 Letter from Ernst & Young LLP dated August 7, Quarterly Report on Form 10-Q for the quarter
1995 regarding change in accounting ended June 30, 1995, Exhibit 18
method
21 Subsidiaries +
23.1 Consent of Ernst & Young LLP +
23.2 Consent of Price Waterhouse LLP +
23.3 Consent of Arthur Andersen LLP +
24.1 Power of Attorney of Officers and Directors +
24.2 Power of Attorney of the Company +
27 Financial Data Schedule +
</TABLE>
+ Filed herewith.
(1) Contains material for which confidential treatement has been granted
pursuant to Rule 406 under the Securities Exchange Act of 1933, as amended, or
Rule 24b-2 under the Securities Exchange Act of 1934, as amended. This material
has been filed separately with the Securities and Exchange Commssion pursuant to
the application for confidential treatment.
SCHEDULE II
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Deductions Balance
Beginning Charged to from at End
Description of Period Expense Accounts(1) of Period
----------- ---------- ---------- ----------- ---------
(in millions)
Year Ended December 31, 1997
<S> <C> <C> <C> <C>
Allowance for doubtful accounts and notes receivable:
Current allowance.............................. $15.4 $17.3 $(16.5) $16.2
Non-current allowance.......................... 3.4 (2.4) - 1.0
----- ------ ------- -----
Total....................................... $18.8 $14.9 $(16.5) $17.2
===== ====== ======= =====
Year Ended December 31, 1996
Allowance for doubtful accounts and notes receivable:
Current allowance.............................. $13.7 $13.5 $(11.8) $15.4
Non-current allowance.......................... 3.3 0.1 - 3.4
----- ----- ------- -----
Total....................................... $17.0 $13.6 $(11.8) $18.8
===== ===== ======= =====
Year Ended December 31, 1995
Allowance for doubtful accounts and notes receivable:
Current allowance.............................. $11.3 $12.3 $ (9.9) $13.7
Non-current allowance.......................... 6.0 1.5 (4.2) 3.3
----- ----- -------- -----
Total....................................... $17.3 $13.8 $(14.1) $17.0
===== ===== ======== =====
(1) Deductions represent uncollectible accounts written off, net of recoveries.
</TABLE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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 as of March 16, 1998.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: /s/ H. PETE SMITH
H. Pete Smith
Attorney-In-Fact
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed as of March 16, 1998 by the following persons in the capacities
indicated.
Signature Title
- --------- -----
/s/ Roger R. Hemminghaus * Chief Executive Officer and Chairman of the
Roger R. Hemminghaus Board of Directors (Principal Executive
Officer)
/s/ Jean Gaulin * President, Chief Operating Officer and Vice
Jean Gaulin Chairman of the Board of Directors (Principal
Operating Officer)
/s/ H. Pete Smith Executive Vice President and Chief Financial
H. Pete Smith Officer (Principal Financial and Accounting
Officer)
*
Byron Allumbaugh Director
*
E. Glenn Biggs Director
*
W. E. Bradford Director
*
H. Fredrick Christie Director
*
W. H. Clark Director
*
Bob Marbut Director
*
Katherine D. Ortega Director
*
Madeleine Saint Jacques Director
*
C. Barry Schaefer Director
* /s/ H. Pete Smith Attorney-in-Fact
H. Pete Smith
42
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
EXHIBIT 10.11
1997 ANNUAL INCENTIVE PLAN
Ultramar Diamond Shamrock Corporation's Annual Incentive Plan ("AIP") is
designed to incentivize participants to enhance shareholder value.
In making decisions under the AIP regarding participation and awards, it is
appropriate to consider the following:
1. providing substantial compensation incentive for AIP
participants to ensure their focus in carrying out the
Company's annual operating plans;
2. maintaining the competitiveness of the Company's program in
attracting, rewarding, and retaining executives and other key
employees;
3. the program's sensitivity to corporate financial and
stock market performance; and
4. the extent to which participants are building a significant
ownership stake in the Company and thus more closely
identifying with the interests of shareholders.
Incentive targets will vary according to a participant's position and the
relative impact a participant can have on total shareholder return ("TSR") and
earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The
payment of any awards is conditioned on the earnings and financial condition of
the Company.
Awards are determined by reference to TSR, EBITDA, and the participant's
attainment of certain individual objectives. These performance measures are used
with an individual's target bonus to determine a participant's total bonus, all
as described in more detail below.
I. Criteria for Participation
Officers of the Company will automatically participate in the AIP. High-level
and select middle-level professionals who have been nominated by the Company's
management, based upon their potential to impact the Company's performance, may
also participate in the AIP.
The Compensation Committee may designate individuals or positions as eligible
for participation in the AIP automatically from year-to-year, or may designate
participation annually.
II. Target Bonus
Target bonuses are expressed as a percentage of a participant's base salary.
Performance above or below target performance produces an award which is
respectively greater or smaller than the target bonus.
The Compensation Committee, in its sole discretion determines a participant's
target bonus. Target bonus percentages may be set at different levels, depending
on the participant's scope of responsibility. Generally, the higher the level of
responsibility, the greater the target bonus percentage. The Compensation
Committee may also consider such factors as the participant's dedication,
ingenuity, initiative, and other contributions the participant makes toward the
Company's success. In no event may any participant's total annual award exceed
200% of his target bonus.
For the Chief Executive Officer ("CEO") and Chief Operating Officer ("COO"), 60%
of their bonus is determined by the TSR performance measure, and 40% by the
EBITDA (Consolidated) performance measure.
In the case of corporate executives and other corporate participants (other than
the CEO and COO), 40% of their bonus is determined by the TSR performance
measure, 40% by the EBITDA (Consolidated) performance measure, and 20% by the
individual performance measure.
For unit managers and other unit participants, their bonus is determined by the
TSR performance measure for 40%, the EBITDA (Unit) performance measure for 40%,
and the individual performance measure for 20%.
The TSR, EBITDA, and individual performance measures are calculated in terms of
percent of target awards, and reflect the Compensation Committee's assessment of
the appropriate award levels for attaining different levels of relative
performance. The Compensation Committee, in its sole discretion, may change the
minimum and maximum measure levels during an AIP year.
TSR Performance Measure. The TSR performance measure is UDS' share price
appreciation plus dividends measured against the Company's peer group of
refining and marketing companies ("Peer Group"). Members of the Peer Group are
listed in Chart V.
For each calendar quarter UDS' TSR is calculated and compared to the UDS' "Peer
Group Average TSR" for the same period (see Chart I). The quarterly Peer Group
TSR is first determined by calculating each Peer Group member's TSR; the Peer
Group Average TSR is the simple, equally weighted average of the individual TSR
results.
The "point spread" is the difference between the quarterly UDS TSR and the Peer
Group Average TSR. The "point spread" is annualized and applied against the TSR
Incentive Scale (Chart II).
The TSR performance measure percentage of target award is determined by
averaging the quarterly target award percentages achieved during the AIP year.
There is no award where the annualized quarterly point spread is less than -10
percentage points. There is no limitation on the quarterly percentage of target
award which can be achieved.
EBITDA Performance Measure. The EBITDA performance measure is composed of two
internal EBITDA measurements. The first component is the actual EBITDA for the
year compared to the target EBITDA. The second measurement compares EBITDA
recalculated at budget margins to the target EBITDA. This second measurement
adjusts EBITDA to reflect how efficiently the business is managed independent of
industry margin variability, thereby providing an incentive to perform at a high
level regardless of where industry margins might go during the year. The EBITDA
performance measure is determined on a full-year basis.
These target EBITDA components will be established for the Company
("Consolidated") and one or more operating units ("Unit"). Early in the first
quarter each year, the Compensation Committee establishes the target EBITDA
performance measures for the year.
The two EBITDA performance measure components are weighted equally to determine
the total EBITDA performance measure and are compared against the EBITDA
Performance Measure Incentive Scale (Chart III). Each EBITDA component has a
separate scale for its portion of the percentage of target award. The scale for
EBITDA at actual margins reaches a maximum 200% of target award. The scale for
EBITDA at budget margins has no limit.
The calculation of the percentage of target award achieved for the EBITDA
performance measure for any of the Company's Canadian operations will be
calculated in Canadian dollars, so as to neutralize currency exchange rate
shifts during the year.
Individual Performance Measure. A participant's individual performance is
compared to the achievement of pre-determined objectives which may include, but
are not limited to, attainment of significant objective or quantifiable goals,
and developmental goals in such areas as leadership, communication, and
affirmative action. The percentage of target award achieved may range from 0%
(failed to achieve objectives) to 200% (exceeded all expectations in achieving
the objectives). Individual performance objectives are established by the
employee and his manager, and progress and priorities are reviewed periodically
during the year. Establishment of three to five individual objectives is
suggested.
An example of the calculation of a participant's award is set out in Chart IV.
III. Annual Incentive Threshold
Payment of any award is within the Compensation Committee's discretion. Before
any funds become available for the AIP, the Committee will generally require
that there be sufficient EBITDA to cover the AIP "Annual Incentive Threshold."
The Annual Incentive Threshold is the total of budgeted expenses for dividends,
debt service, current taxation, corporate administration, and the total
potential payout (calculated at target award level) for the AIP and all variable
pay programs for employees not participating in the AIP. The Annual Incentive
Threshold is reviewed annually by the Compensation Committee.
If sufficient funds are not available to pay the bonuses as calculated, all
awards may be pro- rated by the ratio of the actual funds available for the AIP
to the total calculated. In its sole discretion, the Compensation Committee may
cause the balance of such prorated awards to be paid in stock or restricted
stock.
IV. Bonus Adjustments
At its discretion, the Compensation Committee may adjust actual performance
measure results for extraordinary events or accounting adjustments resulting
from significant asset purchases or dispositions or other events not
contemplated or otherwise considered by the Compensation Committee when the
performance measure targets were set.
V. Bonus Payout
Awards typically are determined in January or February for performance in the
preceding year. Awards are paid in cash, unless the participant has elected, or
is required to receive, a portion of his award in restricted stock.
After a three-year transition period, if (at the time of the award payout) a
participant does not hold shares of Company stock sufficient to meet any
applicable stock ownership guidelines that have been approved by the
Compensation Committee, the participant will receive a restricted stock award in
lieu of cash. The applicable stock ownership guidelines are set out in Chart VI.
The number of restricted shares is determined by dividing the dollar amount of
25% of the bonus by the closing share price on the award date (the Canadian
dollar exchange rate on the date of the award will be used for Canadian
participants). All stock awards are granted pursuant to the Company's Long-Term
Incentive Plan.
Participants may increase the percentage of bonus payment taken in restricted
shares. They may also request that the Compensation Committee extend the
restriction period beyond the minimum two years up to a maximum of five years.
In both cases elections and requests must be made prior to October 1st of the
AIP year to secure tax deferral treatment on the share grant.
CHART I
COMPUTATION OF TOTAL SHAREHOLDER RETURN ("TSR")
1. For each calendar quarter:
TSR is calculated at the end of each calendar quarter, using the last trading
day's closing price for the preceding quarter (the beginning price) and the
current quarter (the ending price) plus the dividend for the period.
Ending Price + Dividends - 1
------------------------
Beginning Price
For example, UDS' TSR is calculated as follows, assuming a beginning price of
$32, an ending price of $33, and $.275 in dividends:
$33.00 + $.275 - 1 = 3.98%
--------------
$32.00
This calculation is performed for UDS and each company in its Peer Group.
UDS' TSR is compared to its Peer Group's average TSR to determine the "point
spread." The Peer Group's average is determined by a simple (not weighted)
average of the TSR results for the Peer Group.
The point spread is annualized by multiplying it by 4, and is then compared to
the Total Shareholder Return Incentive Scale (Chart II) to determine the
annualized percentage of target award achieved. The quarterly percentage of
target award is then determined by dividing by 4 the annualized percentage of
target award indicated on Chart II.
For example, the "point spread" is calculated as follows, assuming UDS' TSR was
3.5% and its Peer Group average TSR was -1.5%:
3.5% -(-1.5%) = 5% percentage points
4 x 5% = 20% (the annualized point spread)
Applying the 20% point spread to Chart II reflects that 160% of target
award was achieved for the quarter. Since 160% is the annualized
percentage of target award, in this example 40% (one-fourth of 160%) is
the quarterly percentage of target award achieved.
2. At the end of the AIP year:
The quarterly percentages of target award achieved during the AIP year are
averaged (totaled and divided by 4) to yield the total TSR performance measure's
percentage of target award achieved for the AIP year.
CHART II
TOTAL SHAREHOLDER RETURN INCENTIVE SCALE
TSR Percentage Point Spread % of Target Award
(annualized)
55 to 60 300%
50 to 55 280%
45 to 50 260%
40 to 45 240%
35 to 40 220%
30 to 35 200%
25 to 30 180%
20 to 25 160%
15 to 20 140%
10 to 15 120%
5 to 10 100%
-5 to 5 90%
-10 to -5 75%
Note: The scale is continued on a linear basis above 60%, with each 5
percentage point increment equaling a 20% increment for the annualized
percentage of target award achieved.
CHART III
EBITDA PERFORMANCE MEASURE INCENTIVE SCALE
(EBITDA As % of Budget)
Actual Margin % of Target Award At Budget Margins
270(1) 115
120 200 110
100 130 100
90 60 90
80 25 85
<80 0 <85
Results between points on the scale will be interpolated.
(1) Scale to be continued above 270% for EBITDA at Budget Margins, with
each percentage point increment equaling a 14% increment for the
percentage of target award.
The EBITDA at budget margins scale is narrower because only expenses and volumes
can affect the outcome, and these parameters are very limited with aggressive
targets, especially on the upside.
CHART IV
EXAMPLE OF AIP AWARD CALCULATION
Assume the following for this example:
o the target EBITDA is $100 million
o the actual EBITDA is $80 million
o EBITDA at budget margins is $110 million
Actual EBITDA performance is 80% ($80 million/$100 million).
EBITDA at budget margins is 110% ($110 million/$100 million).
This suggests that performance was above target but lower actual margins were
responsible for failure to meet target.
For an AIP participant earning $130,000 per year and a 25% target bonus, the
award is determined as follows:
1. The EBITDA performance measure (40% of total award for this
participant) portion of the bonus payout:
By referring to the EBITDA Performance Measure Incentive
Scale (Chart III):
o Actual margin EBITDA results at 80% of target = 25%
of target award
o EBITDA results at budget margins at 110% of target
= 200% of target award
EBITDA Performance Measure Percentage of Salary = [(25%
percentage of target award + 200% percentage of
target award) / 2] X 25% target bonus X 40% EBITDA
performance measure weight = 11.25%
EBITDA Performance Measure Bonus Payout = 11.25% X
$130,000 = $14,625
2. The TSR performance measure (40% of total award for this participant)
portion of the bonus payout:
The Company's TSR point spread (by calendar quarter):
Quarter Actual Point Spread % Target
Award(1)
1st +7.5% 180%
2nd -3.0% 0%
3rd + 4.0% 140%
4th + 6.0% 160%
Total 480%
(1) Annualized by multiplying the point spread by 4 and applying each
quarter's result against Chart II to determine the Incentive % Target
achieved for each quarter; these values are totaled (480%) and divided
by 4 to determine the Incentive Target % achieved for the AIP year
(120%).
TSR Performance Measure Percentage of Salary =
40% TSR performance measure weight x 25% of target
bonus x 120% percentage of target award = 12%
TSR Performance Measure Bonus Payout = 12% of $130,000 = $15,600
3. The Individual performance measure (20% of total award for this
participant) portion of the bonus payout:
Individual Performance Measure Percentage of Salary =
20% individual performance measure weight x 25% of
target bonus x 110% percentage of target award = 5.5%
Individual Performance Measure Bonus Payout = 5.5% of
$130,000 = $7,150
In this example this participant's total bonus would be $14,625 + $15,600 +
$7,150 = $37,375.
CHART V
PEER GROUP
ASHLAND, INC.
COASTAL CORP.
CROWN CENTRAL PETROLEUM
GIANT INDUSTRIES INC.
HOLLY CORP.
SUN COMPANY INC.
TOSCO CORP.
TOTAL PETROLEUM OF NORTH AMERICA
USX-MARATHON GROUP
VALERO ENERGY CORP.
CHART VI
EMPLOYEE STOCK OWNERSHIP GUIDELINES
EMPLOYEE GROUP GUIDELINE
CEO & COO 3 X ANNUAL BASE PAY
EXECUTIVE TEAM MEMBERS 2 X ANNUAL BASE PAY
VICE PRESIDENTS* 1 X ANNUAL BASE PAY
SENIOR MANAGERS 1 X ANNUAL BASE PAY*
*Vice Presidents of UDS or any of its subsidiaries
o SHARES TO BE COUNTED TOWARD OWNERSHIP:
o PERSONAL OR BENEFICIALLY OWNED SHARES
o COMPANY-SPONSORED PROGRAM SHARES (e.g. ESOP)
o RESTRICTED SHARES
o FOR SENIOR MANAGERS ONLY - THE VALUE OF VESTED STOCK
OPTIONS WHICH EXCEED THE EXERCISE PRICE
o 3-YEAR TRANSITION PERIOD
o CERTIFICATION REQUIRED BEFORE ANNUAL INCENTIVE PLAN BONUS PAYOUT
o IF AFTER THE THREE-YEAR TRANSITION PERIOD BEGINNING JANUARY 1, 1997, A
PARTICIPANT DOES NOT OWN SUFFICIENT COMPANY STOCK TO MEET THE APPLICABLE
OWNERSHIP GUIDELINE, 25% OF THE PARTICIPANT'S BONUS AWARD WILL BE PAID IN
RESTRICTED SHARES.
EXHIBIT 10.57
RELOCATION AGREEMENT
THIS AGREEMENT dated as of this 2nd day of December, 1996 is entered by and
between H. Pete Smith (the "Employee") and Ultramar Corporation (the "Company").
1. The Employee has entered into an employment agreement dated as of November
25, 1996 ("Employment Agreement") wherein he has agreed to accept the
position of Executive Vice President and Chief Financial Officer and
relocate to the Corporate Headquarters located in San Antonio, Texas.
This Agreement shall supplement the Employment Agreement with the
following: the Employee shall be entitled to a one time Relocation Bonus of
$150,000 less required withholdings and the provisions and allowances
provided by the Company Relocation Program Guidelines For Key Executives
dated October 1996 ("Guidelines"), a copy of which is attached and has been
provided to the Employee. The Relocation Bonus will be due upon relocation
but may be deferred for payment at a later date at the request of the
Employee.
2. The Employee may, at his election, voluntarily terminate his employment
after 18 months from December 3, 1996 (June 3, 1998) by giving at least 90
days' advance written notice to the Company no later than March 3, 1998
(the "Walk Right"). If such election is not made prior to March 4, 1998 the
Walk Right shall thereafter terminate. In the event Employee exercises such
"Walk Right" the Employee shall receive the following payments in lieu of
the payments specified in paragraph 5 of the Employment Agreement. A
termination during any period other than as specifically described herein
shall be treated strictly in accordance with the provisions of the
Employment Agreement in effect at the time of termination and all payments
due shall be only in accordance with the Employee
Agreement.
(a) The amount of severance to be paid in a single lump sum within 30 days
of the termination date shall be amount payable under the Employment
Agreement plus the present value of the benefit accrued through to the
termination date in the supplemental Executive Retirement Plan ("SERP")
as applied for a termination for Good Reason, reduced by the Relocation
bonus in paragraph 1.
(b) Employee will be relocated at his request anywhere in the contiguous 48
states in accordance with the reimbursements, allowances and tax
protection as described in the Guidelines. However, the Relocation
Allowance under item 12 of the Guidelines shall not be applicable.
3. In the event of the Employee's Involuntary Termination as defined in the
Employment Agreement for a reason other than cause during the five year
period commencing December 3, 1996, including death or permanent
disability, in addition to all other rights of the Employee the following
provisions will apply:
(a) At the Employee's election in writing or the spouse's in the event of
death, if made within one year of the event, the Company will relocate
the Employee and his family to their original location or other
location of Employee's choosing within the contiguous 48 states in
accordance with the reimbursements, allowances and tax protection as
describe in the Guidelines.
(b) For this purpose, however, the Relocation Allowance described in item
12 of the Guidelines shall not be applicable.
4. The Employee currently has a home loan dated August 1992 (the "Loan") with
a current balance due and owing of $247,500. The Employee shall be entitled
to carry forward the Loan with repayment on the original Loan schedule
(copy attached) provided that the new mortgage on the San Antonio house
plus the Company Loan amount does not exceed 90% of the new house purchase
price.
5. This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be
performed in that State.
6. This Agreement shall supersede any and all existing agreements written and
oral between the Employee and the Employer or any of its affiliates
relating to the Employee's reimbursement and allowance for relocation. It
may not be amended except by a written agreement signed by and both
parties.
7. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, representatives, successors and
assigns. The Agreement shall not be assignable by the Employee, and shall
be assignable by the Company only to any corporation or other entity
resulting from the reorganization, merger or consolidation of the Company
with any other corporation or entity or any corporation or entity to or
with which the Company's business or substantially all of its business or
assets may be sold, exchanged or transferred, and it must be so assigned by
the Company to, and accepted as binding upon it by, such other corporation
or entity in connection with any such reorganization, merger,
consolidation, sale, exchange or transfer (the provisions of this sentence
also being applicable to any successive such transaction).
AGREED:
/s/ H. PETE SMITH /S/ JEAN GAULIN
- ----------------- ---------------------
Employee Employer
14
EXHIBIT 10.58
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
H. Pete Smith (the "Executive") and Ultramar Diamond Shamrock Corporation, a
Delaware corporation (the "Company") hereby enter into this First Amendment to
the Employment Agreement between the Executive and the Company, dated as of
November 25, 1996 and effective as of December 3, 1996 (the "Employment
Agreement").
WHEREAS, the Executive serves as Chief Financial Officer of the Company; and
WHEREAS, the Executive and the Company entered into the Employment Agreement as
of the date stated above; and
WHEREAS, Section 12.8 of the Employment Agreement provides that it may be
amended only by an instrument in writing approved by the Company and signed by
the Executive and the Company; and
WHEREAS, to encourage the Executive to relocate from Connecticut to Texas, the
Executive and the Company desire to amend the Employment Agreement as described
below, and the Company has obtained all necessary approvals of such amendment.
NOW, THEREFORE, in consideration of the promises and mutual covenants contained
herein and in the Employment Agreement, it is agreed that, effective as of
December 3, 1996 (being the "Effective Date," as defined in the Employment
Agreement), a new paragraph is added to the end of Section 5.5 (I) of the
Employment Agreement, to read as follows:
"In addition, if the Executive is involuntarily terminated by the Company
without Cause (including for this purpose the termination by the Executive
of his employment with Good Reason other than pursuant to clause (g) or (h)
of Section 5.4 (I)), or there occurs a change in control entitling the
Executive to an immediate payout of his entire benefit under the Ultramar
Corporation Supplemental Executive Retirement Plan (the "Ultramar SERP"),
the Company will pay to the Executive, within thirty days after such event,
the excess, if any, of:
(a) the lump sum payment to which the Executive would be entitled upon the
occurrence of such event under the Diamond Shamrock R&M Supplemental
Executive Retirement Plan (as in effect on the Effective Date, but taking
into account any subsequent amendments thereto which do not decrease the
amount of benefits or the right to receive benefits) (the "Diamond Shamrock
SERP") if the Executive had participated therein immediately prior to and
at all times following the Effective Date, but after substituting "fifty
percent (50%)" for "sixty percent (60%)" in Section 6 (a) (I) of the
Diamond Shamrock SERP; over
(b) the lump sum payment actually made to the Executive under the Ultramar
SERP;
provided that if, at the time a lump sum payment becomes due to the
Executive under the Ultramar SERP under the circumstances described in this
paragraph, a lump sum payment would not otherwise be due the Executive
under the Diamond Shamrock SERP if he participated therein. In that event
an actuarial firm which generally performs services for the Company shall
translate the accrued Diamond Shamrock SERP benefit at such time (as if the
Executive participated therein) into an actuarially equivalent lump sum
benefit, using actuarial assumptions then applicable to the Executive's
benefit under the Ultramar SERP."
IN WITNESS WHEREOF, the parties have executed this First Amendment on the date
indicated below, but effective as of the date described above.
AGREED:
/s/ H. PETE SMITH
H. Pete Smith
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: /S/ ROGER R. HEMMINGHAUS
Roger R. Hemminghaus
Chief Executive Officer
16
EXHIBIT 10.59
AGREEMENT
This Agreement is entered into and effective as of March 3, 1998, between H.
Pete Smith ("Executive") and Ultramar Diamond Shamrock Corporation (the
"Company").
Executive and the Company are parties to an Employment Agreement dated November
25, 1996, as amended (the "Employment Agreement"), and to a Relocation Agreement
dated December 2, 1996 (the "Relocation Agreement").
In consideration of the promises and mutual benefits contained in this
Agreement, Executive and the Company amend said agreements as follows:
1. The first and second sentences of paragraph 2 of the Relocation Agreement
are amended and restated as follows:
"The Employee may, at his election, voluntarily terminate his employment on
June 1, 2000 (the "Walk Right") by giving written notice to the Company on
or before March 1, 2000. If such election is not received by the Company on
or before March 1, 2000, the Walk Right shall terminate and be of no
further force and effect."
2. The fourth sentence of paragraph 2 of the Relocation Agreement is amended
and restated as follows:
"A termination from employment on any date other than June 1, 2000 and by
means other than the written notice as specified in this agreement shall be
covered by the Employment Agreement, and any payments due shall be
determined in accordance with the Employment Agreement."
3. The first sentence of subparagraph (a) of paragraph 2 of the Relocation
Agreement is amended and restated as follows:
"(a) Regardless of anything to the contrary in the Employment Agreement,
the amount of severance to be paid in a single lump sum on or before June
30, 2000 shall be $1,498,200.00. Executive will also be paid the present
value of the benefit accrued through said termination date under the
Ultramar Corporation Supplemental Retirement Benefit Plan (the "SERP")
applied in accordance with Sections 5.4 (I) and 5.5 (I) of the Employment
Agreement for a termination with Good Reason."
4. Subparagraph (a) to the last paragraph of Section 5.5 (I) of the Employment
Agreement, as amended, is amended and restated as follows.
"(a) the lump sum payment to which the Executive would be entitled upon the
occurrence of such event under the Diamond Shamrock R & M Supplemental
Retirement Plan (as in effect on the Effective Date), but taking into
account any subsequent amendments thereto which do not decrease the amount
of benefits or the right to receive benefits) (the "Diamond Shamrock SERP")
if the Executive had participated therein immediately prior to and at all
times following the Effective Date; over".
Said amendments are effective as of March 3, 1998.
/s/ H. PETE SMITH
H. PETE SMITH
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: /s/ ROGER R. HEMMINGHAUS
ROGER R. HEMMINGHAUS
CHIEF EXECUTIVE OFFICER
<TABLE>
<CAPTION>
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(in millions, except per share data)
Basic Income (Loss) Per Share:
<S> <C> <C> <C>
Weighted average common shares outstanding (in thousands) 78,120 74,427 69,467
====== ====== ======
Income (loss) before extraordinary loss and cumulative effect $ 159.6 $(35.9) $ 95.0
Dividends on 5% Cumulative Convertible Preferred Stock............ (4.3) (4.3) (4.3)
------- ------- ------
Income (loss) applicable to Common Shares......................... 155.3 (40.2) 90.7
Extraordinary loss on debt extinguishment......................... (4.8) - -
Cumulative effect of accounting change............................ - - 22.0
------- -------- ------
Net income (loss) applicable to Common Shares.................. $ 150.5 $(40.2) $112.7
======= ======= ======
Per Share Amounts
Income (loss) before extraordinary loss and cumulative effect $ 1.99 $(0.54) $ 1.31
Extraordinary loss on debt extinguishment......................... (0.06) - -
Cumulative effect of accounting change............................ - - 0.31
------- ------- ------
Net income (loss).............................................. $ 1.93 $(0.54) $ 1.62
====== ======= ======
Diluted Income (Loss) Per Share:
Weighted average common shares outstanding (in thousands) 78,120 74,427 69,467
Net effect of dilutive stock options - based on the
treasury stock method using the average market price........... 985 - 546
Assumed conversion of 5% Cumulative Convertible Preferred
Stock........................................................... 3,319 - 3,320
------ ------- ------
Weighted average common equivalent shares...................... 82,424 74,427 73,333
====== ====== ======
Income (loss) before extraordinary loss and cumulative effect $ 159.6 $(35.9) $ 95.0
Dividends on cumulative convertible preferred stock............... - (4.3) -
------- ------- ------
Income (loss) applicable to Common Shares......................... 159.6 (40.2) 95.0
Extraordinary loss on debt extinguishment......................... (4.8) - -
Cumulative effect of accounting change............................ - - 22.0
------- ------- ------
Net income (loss) applicable to common equivalent shares....... $ 154.8 $(40.2) $117.0
======= ======= ======
Per Share Amounts
Income (loss) before extraordinary loss and cumulative effect $ 1.94 $(0.54) $ 1.30
Extraordinary loss on debt extinguishment......................... (0.06) - -
Cumulative effect of accounting change............................ - - 0.30
------- ------- ------
Net income (loss).............................................. $ 1.88 $(0.54) $ 1.60
====== ======= ======
</TABLE>
19
EXHIBIT 21
ULTRAMAR DIAMOND SHAMROCK CORPORATION
SUBSIDIARIES
SUBSIDIARY STATE OF INCORPORATION
3007152 Nova Scotia Company Canada
3070336 Canada Inc. Canada
585043 Ontario Limited Canada
Arkansas Central, Inc. Arkansas
Arkansas LR, Inc. Arkansas
Arkansas NE, Inc. Arkansas
Arkansas NW, Inc. Arkansas
Arkansas SE, Inc. Arkansas
Arkansas SW, Inc. Arkansas
Autotronic Systems, Inc. Delaware
Barinco Insurance Ltd. Bermuda
Belvex, Inc. Texas
Big Diamond Number 1, Inc. Texas
Big Diamond, Inc. Texas
Bioremetec Inc. Canada
Canadian Marine Response Management Canada
Corporation Ltd.
Canadian Ultramar Company Canada
Canadian Ultramar Holding Corp. Delaware
Colonnade Assurance Limited Bermuda
Colonnade Vermont Insurance Company Vermont
Colorado Refining Company Colorado
Corporate Claims Management, Inc. Texas
Cush-Po, Inc. Oklahoma
D-S Mont Belvieu, Inc. Texas
D-S Splitter, Inc. Delaware
D-S Systems, Inc. Delaware
D-S United, Inc. Delaware
D-S Venture Company, L.l.c. Delaware
D-S World Energy, Inc. Delaware
D. S. E. Pipeline Company Delaware
Diamond Reforming, Inc. Delaware
Diamond Security Systems, Inc. Delaware
Diamond Shamrock Arizona, Inc. Delaware
Diamond Shamrock Boliviana, Ltd. California
Diamond Shamrock Leasing, Inc. Delaware
Diamond Shamrock of Bolivia, Inc. Delaware
Diamond Shamrock Pipeline Company Delaware
Diamond Shamrock Refining and Delaware
Marketing Company
Diamond Shamrock Refining Company, Delaware
L.P.
Diamond Shamrock Stations, Inc. Delaware
Dsrm National Bank N/A
Eastern Canada Response Corporation Canada
Ltd.
Emerald Corporation Delaware
Emerald Marketing, Inc. Texas
Emerald Pipe Line Corporation Delaware
Geo Williamson Fuels Ltd. Canada
Hanover Petroleum Corporation Delaware
Integrated Product Systems, Inc. Delaware
Kempco Petroleum Company Texas
Laurelglen Holdings, Inc. Delaware
Les Carburants Ultra-GNV ENR. Canada
Les Petroles D. Kirouac Inc. Canada
Metro Oil Co. Michigan
National Convenience Stores Delaware
Incorporated
National Money Orders Incorporated Texas
Navajo Sales Company, Inc. Arizona
Oceanic Tankers Agency Limited Canada
Petro/chem Environmental Services, Delaware
Inc.
Phoebus Energy Ltd. Bermuda
Robinson Oil Company (1987) Limited Canada
Sallans Fuels Limited Canada
Schepps Food Stores, Inc. Texas
Sea Eagle Insurance Company Hawaii
Shamrock Ventures, Ltd. Bermuda
Sigmor Beverage, Inc. Texas
Sigmor Corporation Delaware
Sigmor Pipeline Company Texas
Skelly-Belvieu Pipeline Company, Delaware
L.L.C.
Skipper Beverage Company, Inc. Texas
Stop'n Go Markets of Georgia, Inc. Georgia
Stop'n Go Markets of Texas, Inc. Texas
Sunshine Beverage Co. Texas
Texas Super Duper Markets, Inc. Texas
The Shamrock Pipe Line Corporation Delaware
TOC-DS Company Delaware
Total Engineering & Research Company Colorado
Total Petroleum, Inc. Michigan
Total Pipeline Corporation Michigan
UDS Capital I Delaware
UDS Capital II Delaware
UDS Corporation Delaware
UDS Funding I, L.P. Delaware
UDS Funding II, L.P. Delaware
Ultramar Acceptance Inc. Canada
Ultramar Credit Corporation Canada
Ultramar D.S., Inc. Texas
Ultramar Energy Inc. Delaware
Ultramar Inc. Nevada
Ultramar Ltee / Ultramar Ltd. Canada
Ultramar Services Inc. Canada
West Emerald Pipe Line Corporation Delaware
Xcel Products Company, Inc. Texas
Xral Storage and Terminaling Company Texas
21
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements: (i) Form S-8 (No.33-52148) pertaining to the Ultramar Diamond
Shamrock Corporation 1992 Long-Term Incentive Plan, (ii) Form S-8 (No. 33-
62894) pertaining to the Ultramar Diamond Shamrock Corporation Restricted Share
Plan for Directors, (iii) Form S-8 (No. 333-19131) pertaining to the Diamond
Shamrock, Inc. 1987 Long-Term Incentive Plan and the Diamond Shamrock, Inc.
Long-Term Incentive Plan, (iv) Form S-3 (Nos. 333-28737 and 333-46775)
pertaining to the universal shelf registration of Ultramar Diamond Shamrock
Corporation, (v) Form S-8 (No. 333-27697) pertaining to the Ultramar Diamond
Shamrock Corporation Non-Employee Director Equity Plan, (vi) Form S-8 (No.
333-27699) pertaining to the Ultramar Diamond Shamrock Corporation 1996
Long-Term Incentive Plan, (vii) Form S-8 (No. 333-27701) pertaining to the
Ultramar Diamond Shamrock Corporation 401(k) Retirement Savings Plan, and (viii)
Form S-8 (No. 333-27703) pertaining to the Ultramar Diamond Shamrock Corporation
Non-Qualified 401(k) Plan of our report dated February 7, 1997 with respect to
the consolidated financial statements and schedule of Ultramar Diamond Shamrock
Corporation (formerly Ultramar Corporation) for the years ended December 31,
1996 and 1995 included in the Annual Report (Form 10-K) for the year ended
December 31, 1997 filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
March 16, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each of the Prospectuses
constituting part of the Registration Statements of Ultramar Diamond Shamrock
Corporation on Form S-3 (Nos. 333-28737 and 333-46775) and on Form S-8 (Nos.
33-52148, 33-62894, 333-19131, 333-27697, 333-27699, 333-27701, and 333-27703)
of our report dated February 7, 1997 with respect to the consolidated financial
statements and financial statement schedule of the Diamond Shamrock operations
of Ultramar Diamond Shamrock Corporation, appearing in Item 8 of this Annual
Report on Form 10-K.
/s/ PRICE WATERHOUSE LLP
San Antonio, Texas
March 16, 1998
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-3 (Nos. 333-28737 and 333-46775) and on Form
S-8 (Nos. 33-52148, 33-62894, 333-19131, 333-27697, 333-27699, 333-27701 and
333-27703).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
March 16, 1998
24
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned directors and/or officers of Ultramar Diamond Shamrock
Corporation, hereby constitute and appoint Timothy J. Fretthold, H. Pete Smith,
Curtis V. Anastasio, Todd Walker, or any of them, their true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, to do any and all acts and things in their name and behalf in
their capacity as a director and/or officer of Ultramar Diamond Shamrock
Corporation and to execute any and all instruments for them and in their name in
such capacity, which said attorneys-in-fact and agents, or any of them, may deem
necessary or advisable to enable Ultramar Diamond Shamrock Corporation to comply
with the Securities Exchange Act of 1934, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission, in connection with
the Annual Report on Form 10-K of Ultramar Diamond Shamrock Corporation for the
fiscal year ended December 31, 1997, including without limitation, power and
authority to sign for them, in their name in the capacity indicated above, such
Form 10-K and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
said attorneys-in-fact and agents, or their substitute or substitutes, or any
one of them, shall do or cause to be done by virtue hereof.
/s/ R. R. HEMMINGHAUS /s/ JEAN GAULIN
R. R. HEMMINGHAUS JEAN GAULIN
/s/ E. GLENN BIGGS /s/ BYRON ALLUMBAUGH
E. GLENN BIGGS BYRON ALLUMBAUGH
/s/ W. E. BRADFORD /s/ H. FREDERICK CHRISTIE
W. E. BRADFORD H. FREDERICK CHRISTIE
/s/ W. H. CLARK /s/ RUSSELL H. HERMAN
W. H. CLARK RUSSELL H. HERMAN
/s/ BOB MARBUT /s/ MADELEINE SAINT-JACQUES
BOB MARBUT MADELEINE SAINT-JACQUES
/s/ KATHERINE D. ORTEGA /s/ C. BARRY SCHAEFER
KATHERINE D. ORTEGA C. BARRY SCHAEFER
/s/ H. PETE SMITH
H. PETE SMITH
Dated: February 4, 1998
25
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of Ultramar
Diamond Shamrock Corporation, a Delaware corporation (the "Corporation"), hereby
constitutes and appoints Timothy J. Fretthold, H. Pete Smith, Curtis V.
Anastasio, and Todd Walker, attorneys-in-fact and agents of the Corporation,
with full power of substitution and resubstitution, to do any and all acts and
things in its name and on its behalf and to execute any and all instruments in
its name in such capacity which they may deem appropriate or advisable to enable
the Corporation to comply with the Securities Exchange Act of 1934, as amended,
and any rules and regulations of the Securities and Exchange Commission, in
connection with the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, including without limitation, the power to sign such
report on the Corporation's behalf and to sign any amendments thereto, and to
file the same, with all exhibits thereto, and other documents required in
connection therewith, with the Securities and Exchange Commission, granting to
each and all of said attorneys-in-fact, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection with the filing of such report as herein described.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
/s/ R. R. HEMMINGHAUS
R. R. Hemminghaus
Chairman of the Board and
Chief Executive Officer
Dated: February 4, 1998
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