UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
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 North Loop 1604 West
San Antonio, Texas 78249-1112
Telephone number: (210) 592-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
As of October 29, 1999, 86,658,000 shares of Common Stock, $0.01 par value, were
outstanding and the aggregate market value of such stock as of October 29, 1999
was $2,123,113,000.
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
FORM 10-Q
SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998............................................. 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998................. 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998................................. 5
Consolidated Statements of Comprehensive Income (Loss)
for the Three and Nine Months Ended September 30, 1999
and 1998.......................................................... 6
Notes to Consolidated Financial Statements........................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 27
Item 6. Exhibits and Reports on Form 8-K.............................. 27
SIGNATURE..................................................... 28
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
September 30, December 31,
1999 1998
---- ----
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 136.7 $ 176.1
Accounts and notes receivable, net................................... 418.5 562.7
Inventories.......................................................... 627.5 635.6
Prepaid expenses and other current assets............................ 23.2 33.0
Deferred income taxes................................................ 98.4 98.4
--------- ---------
Total current assets.............................................. 1,304.3 1,505.8
--------- ---------
Property, plant and equipment........................................... 4,529.4 4,423.2
Less accumulated depreciation and amortization.......................... (1,291.4) (1,162.0)
--------- ---------
Property, plant and equipment, net................................... 3,238.0 3,261.2
Other assets, net....................................................... 566.8 548.0
--------- ---------
Total assets........................................................ $ 5,109.1 $ 5,315.0
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt.................. $ 6.2 $ 5.8
Accounts payable..................................................... 481.6 366.0
Accrued liabilities.................................................. 410.4 402.4
Taxes other than income taxes........................................ 289.0 343.0
Income taxes payable................................................. 30.7 28.9
--------- ---------
Total current liabilities......................................... 1,217.9 1,146.1
--------- ---------
Long-term debt, less current portion.................................... 1,491.8 1,926.2
Other long-term liabilities............................................. 424.1 453.7
Deferred income taxes................................................... 292.0 205.0
Commitments and contingencies
Company obligated preferred stock of subsidiary......................... 200.0 200.0
Stockholders' equity:
Common Stock, par value $0.01 per share:
250,000,000 shares authorized, 86,648,000 and
86,558,000 shares issued and outstanding as of
September 30, 1999 and December 31, 1998.......................... 0.9 0.9
Additional paid-in capital........................................... 1,515.1 1,512.7
Treasury stock....................................................... (100.7) (100.1)
Retained earnings.................................................... 159.6 82.5
Accumulated other comprehensive loss ................................ (91.6) (112.0)
--------- ---------
Total stockholders' equity......................................... 1,483.3 1,384.0
--------- ---------
Total liabilities and stockholders' equity......................... $ 5,109.1 $ 5,315.0
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except share and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and other revenues (including excise taxes)............. $ 3,842.1 $ 2,740.9 $ 9,953.6 $ 8,571.5
--------- --------- --------- ---------
Operating costs and expenses:
Cost of products sold...................................... 2,503.5 1,504.1 6,162.8 4,851.8
Operating expenses......................................... 248.2 275.2 761.9 851.1
Selling, general and administrative expenses............... 75.6 80.9 225.5 242.7
Taxes other than income taxes.............................. 784.9 742.3 2,265.9 2,178.6
Depreciation and amortization.............................. 60.9 57.3 177.4 180.8
Restructuring and other charges............................ - - 11.0 142.8
--------- --------- --------- ---------
Total operating costs and expenses...................... 3,673.1 2,659.8 9,604.5 8,447.8
--------- --------- --------- ---------
Operating income.............................................. 169.0 81.1 349.1 123.7
Interest income............................................. 3.0 2.3 8.8 6.6
Interest expense............................................ (33.4) (35.2) (109.4) (107.3)
Equity income from Diamond-Koch............................. 5.2 - 12.4 -
Gain on sale of property, plant and equipment............... 2.2 - 2.2 7.0
--------- --------- --------- ---------
Income before income taxes and dividends of subsidiary........ 146.0 48.2 263.1 30.0
Provision for income taxes.................................. (59.2) (19.9) (106.8) (32.7)
Dividends on preferred stock of subsidiary.................. (2.6) (2.5) (7.7) (7.7)
--------- --------- --------- ---------
Net income (loss)............................................. $ 84.2 $ 25.8 $ 148.6 $ (10.4)
========= ========= ========= =========
Net income (loss) per share:
Basic...................................................... $ 0.97 $ 0.29 $ 1.71 $ (0.13)
Diluted.................................................... $ 0.97 $ 0.29 $ 1.71 $ (0.13)
Weighted average number of shares (in thousands):
Basic...................................................... 86,631 89,526 86,594 89,018
Diluted.................................................... 86,807 89,760 86,711 89,018
Dividends per share:
Common Shares.............................................. $ 0.275 $ 0.275 $ 0.825 $ 0.825
5% Cumulative Convertible Preferred Shares................. $ - $ - $ - $ 0.625
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)....................................................... $ 148.6 $ (10.4)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization........................................ 177.4 180.8
Provision for losses on receivables.................................. 6.4 9.2
Restructuring charges - write-down of property, plant
and equipment and goodwill......................................... - 82.1
Equity income from Diamond-Koch...................................... (12.4) (1.2)
Loss (gain) on sale of property, plant and equipment................. (2.2) (7.0)
Deferred income tax provision........................................ 84.1 16.1
Other, net........................................................... 5.5 6.0
Changes in operating assets and liabilities:
Decrease in accounts and notes receivable.......................... 133.5 18.8
Decrease in inventories............................................ 16.4 98.5
Decrease in prepaid expenses and other current assets.............. 10.0 23.3
Decrease in other assets........................................... 4.3 5.6
Increase (decrease) in accounts payable and other current liabilities 44.6 (240.0)
Increase (decrease) in other long-term liabilities................. (32.6) 7.4
------- -------
Net cash provided by operating activities........................ 583.6 189.2
------- -------
Cash Flows from Investing Activities:
Capital expenditures................................................... (125.1) (93.1)
Deferred refinery maintenance turnaround costs......................... (28.0) (29.3)
Proceeds from sales of property, plant and equipment................... 30.4 77.4
------- -------
Net cash used in investing activities................................ (122.7) (45.0)
------- -------
Cash Flows from Financing Activities:
Net change in commercial paper and short-term borrowings............... (222.8) 39.6
Repayment of long-term debt............................................ (211.9) (36.3)
Purchase of common stock............................................... - (64.3)
Payment of cash dividends.............................................. (71.5) (74.2)
Other, net............................................................. 2.2 6.7
------- -------
Net cash used in financing activities................................ (504.0) (128.5)
------- -------
Effect of exchange rate changes on cash................................. 3.7 (2.3)
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents.................... (39.4) 13.4
Cash and Cash Equivalents at Beginning of Period........................ 176.1 92.0
------- -------
Cash and Cash Equivalents at End of Period.............................. $ 136.7 $ 105.4
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)............................................... $ 84.2 $ 25.8 $ 148.6 $ (10.4)
Other comprehensive income (loss):
Foreign currency translation adjustment...................... 1.7 (21.1) 21.5 (34.2)
Minimum pension liability adjustment,
net of income taxes........................................ - - (1.1) -
------ ------ ------- ------
Comprehensive income (loss)..................................... $ 85.9 $ 4.7 $ 169.0 $ (44.6)
====== ====== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by Ultramar Diamond Shamrock Corporation (the Company), in accordance with
generally accepted accounting principles for interim financial reporting and
with Securities and Exchange Commission rules and regulations for Form 10-Q. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
Operating results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. The results of operations may be affected by seasonal
factors, such as the demand for petroleum products and working capital
requirements in the Northeast System, which vary during the year; or industry
factors that may be specific to a particular period, such as movements in and
the general level of crude oil prices, the demand for and prices of refined
products, industry supply capacity and maintenance turnarounds.
NOTE 2: Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(In millions)
<S> <C> <C>
Crude oil and other feedstocks............................................$ 216.9 $ 283.9
Refined and other finished products and convenience store items........... 356.3 296.9
Materials and supplies.................................................... 54.3 54.8
------- -------
Total inventories....................................................$ 627.5 $ 635.6
======= =======
</TABLE>
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3: Computation of Net Income (Loss) Per Share
Basic net income (loss) per share is calculated as net income (loss) less
preferred stock dividends divided by the weighted average number of Common
Shares outstanding. Diluted net income (loss) per share assumes, when dilutive,
issuance of the net incremental shares from stock options and restricted stock,
and, in 1998, the conversion of the 5% Cumulative Convertible Preferred Shares.
The following table reconciles the net income (loss) amounts and share numbers
used in the computation of net income (loss) per share (in millions, except
share and per share data).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic Net Income (Loss) Per Share:
Weighted average number of Common Shares outstanding
(in thousands)............................................... 86,631 89,526 86,594 89,018
====== ====== ======= =======
Net income (loss)................................................ $ 84.2 $ 25.8 $ 148.6 $ (10.4)
Dividends on 5% Cumulative Convertible Preferred Stock........... - - - 1.1
------ ------ ------- -------
Net income (loss) applicable to Common Shares.................... $ 84.2 $ 25.8 $ 148.6 $ (11.5)
====== ====== ======= =======
Basic net income (loss) per share................................ $ 0.97 $ 0.29 $ 1.71 $ (0.13)
====== ====== ======= =======
Diluted Net Income (Loss) Per Share:
Weighted average number of Common Shares outstanding
(in thousands)............................................... 86,631 89,526 86,594 89,018
Net effect of dilutive stock options based on the treasury
stock method using the average market price.................... 176 234 117 -
------ ------ ------- -------
Weighted average common equivalent shares........................ 86,807 89,760 86,711 89,018
====== ====== ======= =======
Net income (loss)................................................ $ 84.2 $ 25.8 $ 148.6 $(11.5) (1)
====== ====== ======= =======
Diluted net income (loss) per share.............................. $ 0.97 $ 0.29 $ 1.71 $(0.13)
====== ====== ======= ======
(1) Includes dividends on 5% Cumulative Convertible Preferred Shares.
</TABLE>
NOTE 4: Restructuring and Other Charges
In June 1998, the Company adopted a three-year restructuring plan to reduce its
retail cost structure by eliminating 341 positions to improve operating
efficiencies and to close and sell 316 under-performing convenience stores. In
addition, the Company restructured certain pipeline and terminal operations and
support infrastructure resulting in the elimination of 125 positions. As of
September 30, 1999, 136 convenience stores were sold or closed and 286 employees
were terminated under the retail and pipeline and terminal restructuring plans.
In December 1998, the Company finalized plans to eliminate approximately 300
non-essential jobs, programs and expenses and to implement new initiatives
designed to further reduce capital employed and improve earnings. As of
September 30, 1999, 134 employees were terminated under the profit improvement
program.
Changes in accrued restructuring costs for the nine months ended September 30,
1999 were as follows (in millions):
<TABLE>
<CAPTION>
Balance at Balance at
December 31, 1998 Payments Reductions September 30, 1999
----------------- -------- ---------- ------------------
<S> <C> <C> <C> <C>
Severance and related costs $ 19.0 $ 13.8 $ 0.3 $ 4.9
Lease buyout costs 14.0 0.6 0.8 12.6
Fuel system removal costs 16.1 2.2 2.8 11.1
------ ------ ----- -------
$ 49.1 $ 16.6 $ 3.9 $ 28.6
====== ====== ===== =======
</TABLE>
NOTE 5: Commitments and Contingencies
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities. Site restoration and environmental
remediation and clean-up obligations are accrued either when known or when
considered probable and reasonably estimable. Total future environmental costs
are difficult to assess and estimate 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 year, the Company
believes that such costs will not have a material adverse effect on the
Company's financial position.
There are various legal proceedings and claims pending against the Company that
arise in the ordinary course of business. It is management's opinion, based upon
advice of legal counsel, that these matters, individually or in the aggregate,
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE 6: Accounts Receivable Securitization
In March 1999, the Company arranged a $250.0 million revolving accounts
receivable securitization facility. On an ongoing basis, the Company sells
certain accounts receivable to Coyote Funding, L.L.C. (Coyote), a
non-consolidated, wholly-owned subsidiary, which then sells a percentage
ownership in such receivables, without recourse, to a third party cooperative
corporation. The gross proceeds resulting from the sales of the percentage
ownership interest in the receivables totaled $237.6 million through September
30, 1999. The Company's retained interest in receivables sold to Coyote is
included in accounts and notes receivable, net in the accompanying consolidated
balance sheet. Discounts and net expenses associated with the sales of
receivables totaled $7.8 million and are included in interest expense in the
consolidated statement of operations for the nine months ended September 30,
1999.
NOTE 7: Business Segments
The Company has three reportable segments: Refining, Retail and
Petrochemical/NGL. The Refining segment includes refinery, wholesale, product
supply and distribution, and transportation operations. The Retail segment
includes Company-operated convenience stores, dealers/jobbers and truckstop
facilities, cardlock and home heating oil operations. The Petrochemical/NGL
segment includes earnings from Nitromite fertilizer, NGL marketing and certain
NGL pipeline operations. Equity income from Diamond-Koch, a 50-50 joint venture
primarily related to the Mont Belvieu petrochemical assets of the Company and
Koch Industries, Inc., is not included in operating income. Operations that are
not included in any of the three reportable segments are included in the
Corporate category and consist primarily of corporate office operations.
<PAGE>
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each business
requires unique technology and marketing strategies. The Company evaluates
performance based on earnings before interest, taxes and depreciation and
amortization (EBITDA). Intersegment sales are generally derived from
transactions made at prevailing market rates.
<TABLE>
<CAPTION>
Petrochemical/
Refining Retail NGL Corporate Total
-------- ------ --- --------- -----
(In millions)
<S> <C> <C> <C> <C>
Nine months ended September 30, 1999:
Sales and other revenues from
external customers............... $ 5,526.5 $ 4,325.8 $ 101.3 $ - $ 9,953.6
Intersegment sales.................. 1,905.5 6.4 - - 1,911.9
EBITDA.............................. 468.3 146.8 5.8 (94.4) 526.5
Depreciation and amortization....... 123.9 49.9 1.0 2.6 177.4
Operating income (loss)............. 344.4 96.9 4.8 (97.0) 349.1
Total assets........................ 3,270.5 1,252.1 163.5 423.0 5,109.1
Nine months ended September 30, 1998:
Sales and other revenues from
external customers............... $ 4,125.7 $ 4,208.7 $ 237.1 $ - $ 8,571.5
Intersegment sales.................. 1,611.4 3.6 15.9 - 1,630.9
EBITDA.............................. 304.1 74.3 32.9 (106.8) 304.5
Depreciation and amortization....... 114.6 56.4 7.0 2.8 180.8
Operating income (loss)............. 189.5 17.9 25.9 (109.6) 123.7
Total assets........................ 3,441.0 1,374.5 195.7 200.5 5,211.7
Three months ended September 30, 1999:
Sales and other revenues from
external customers............... $ 2,207.5 $ 1,592.1 $ 42.5 $ - $ 3,842.1
Intersegment sales.................. 768.5 2.0 - - 770.5
EBITDA.............................. 220.0 35.6 2.8 (28.5) 229.9
Depreciation and amortization....... 42.7 17.0 0.3 0.9 60.9
Operating income (loss)............. 177.3 18.6 2.5 (29.4) 169.0
Three months ended September 30, 1998:
Sales and other revenues from
external customers............... $ 1,349.7 $ 1,318.1 $ 73.1 $ - $ 2,740.9
Intersegment sales.................. 505.5 1.4 5.9 - 512.8
EBITDA.............................. 95.7 68.2 7.3 (32.8) 138.4
Depreciation and amortization....... 38.4 16.7 2.1 0.1 57.3
Operating income (loss)............. 57.3 51.5 5.2 (32.9) 81.1
</TABLE>
<PAGE>
The following summarizes the reconciliation of reportable segment operating
income to consolidated operating income (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating income:
Total operating income for reportable segments... $ 198.4 $ 114.0 $ 446.1 $ 233.3
Other operating income (loss).................... (29.4) (32.9) (97.0) (109.6)
------- ------- ------- -------
Consolidated operating income................. $ 169.0 $ 81.1 $ 349.1 $ 123.7
======= ======= ======= =======
</TABLE>
NOTE 8: Diamond 66
On March 19, 1999, the Company and Phillips Petroleum Company terminated
discussions related to the formation of a proposed joint venture (Diamond 66)
between the two companies. During the first quarter of 1999, the Company
expensed $11.0 million of transaction costs incurred related to the formation of
Diamond 66, which costs are included in restructuring and other charges.
NOTE 9: Proposed Sale of the Michigan System
In December 1998, the Company announced plans to consider the sale of the
Michigan operations, which consists of the Alma Refinery, product and crude
pipelines, four terminals and 183 convenience stores. In May 1999, the Company
signed an agreement with Marathon Ashland Petroleum LLC to sell its Michigan
retail stores, terminals and pipelines. The Company expects to complete the sale
in the fourth quarter of 1999, subject to regulatory approvals and closing
conditions.
Upon completion of the sale of the Michigan retail stores, terminals and
pipelines, the Company plans to close the Alma Refinery. The Company suspended
operations at the refinery during the first week of October 1999.
NOTE 10: Subsequent Events
During 1998, the Company purchased 3,740,400 shares of its Common Stock under a
$100.0 million buyback program. The purchased stock will be used to fund future
employee benefit obligations of the Company. The purchased shares were
transferred to a Grantor Trust Stock Ownership Program on November 9, 1999 and
will be released therefrom over a ten-year period.
On October 5, 1999, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on December 2, 1999 to holders of record on
November 18, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company
Ultramar Diamond Shamrock Corporation (the Company) is a leading independent
refiner and retailer of high-quality refined products and convenience store
merchandise in the central and southwest regions of the United States (the US
System), and the northeast United States and eastern Canada (the Northeast
System). Its operations consist of seven refineries, over 5,900 convenience
stores, pipelines, a home heating oil business, and related petrochemical
operations.
The Company's operating results are affected by Company-specific factors,
primarily its refinery utilization rates and maintenance turnarounds; seasonal
factors, such as the demand for petroleum products and working capital
requirements; 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 System, demand for petroleum products varies 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 home heating oil during the winter months results in the
Company's Northeast System having higher accounts receivable and inventory
levels during the first and fourth quarters of each year. The Company's US
System is less affected by seasonal fluctuations in demand than its operations
in the Northeast System. The working capital requirements of the US System,
though substantial, show little fluctuation throughout the year. Both the US and
Northeast Systems are impacted by the increased demand for gasoline during the
summer driving season.
<PAGE>
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Financial and operating data by geographic area for the three months ended
September 30, 1999 and 1998 are as follows:
Financial Data:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------- ------------------------------------
US Northeast Total US Northeast Total
-- --------- ----- -- --------- -----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and other revenues............... $ 3,053.8 $ 788.3 $ 3,842.1 $ 2,157.7 $ 583.2 $ 2,740.9
Cost of products sold (1).............. 1,986.0 517.5 2,503.5 1,200.6 303.5 1,504.1
Operating expenses..................... 229.7 18.5 248.2 248.9 26.3 275.2
Selling, general and
administrative expenses.............. 32.8 42.8 75.6 42.9 38.0 80.9
Taxes other than income taxes.......... 585.5 199.4 784.9 558.0 184.3 742.3
Depreciation and amortization.......... 51.3 9.6 60.9 48.4 8.9 57.3
--------- ------- --------- --------- ------- ---------
Operating income....................... $ 168.5 $ 0.5 169.0 $ 58.9 $ 22.2 81.1
========= ======= ========= ======
Interest income........................ 3.0 2.3
Interest expense....................... (33.4) (35.2)
Equity income from Diamond-Koch (2).... 5.2
-
Gain on sale of assets (3)............. 2.2
---------
-
Income before income taxes
and dividends of subsidiary.......... 146.0 48.2
Provision for income (59.2) (19.9)
taxes.............
Dividends on subsidiary stock.......... (2.6) (2.5)
--------- ---------
Net income............................. $ 84.2 $ 25.8
========= =========
</TABLE>
(1) For the quarter ended September 30, 1998, the Company recorded a $16.1
million non-cash reduction in the carrying value of inventories due to the
continuing drop in crude oil and refined product prices during the third quarter
of 1998.
(2) In September 1998, the Company contributed certain of its petrochemical
assets to the Diamond-Koch joint venture, which is accounted for using the
equity accounting method. Operating income in the third quarter of 1998 for the
petrochemical assets contributed was $3.1 million, excluding overhead.
(3) In August 1999, the Company recognized a $2.2 million gain on the sale of an
8.33% interest in a pipeline and terminal facility.
<PAGE>
Operating Data:
- --------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
---- ----
US System
<S> <C> <C>
Mid-Continent Refineries (1)
Throughput (barrels per day)............................... 400,700 367,000
Margin (dollars per barrel) (2)............................ $ 4.86 $ 4.08
Operating cost (dollars per barrel)........................ $ 1.74 $ 2.17
Wilmington Refinery
Throughput (barrels per day)............................... 131,500 116,200
Margin (dollars per barrel) (2)............................ $ 6.60 $ 4.44
Operating cost (dollars per barrel)........................ $ 1.73 $ 2.41
Retail
Fuel volume (barrels per day).............................. 180,400 168,000
Fuel margin (cents per gallon)............................. 10.1 15.7
Merchandise sales ($1,000/day) (3)......................... $ 3,794 $ 3,399
Merchandise margin (%)3.................................... 25.1% 31.1%
Northeast System
Quebec Refinery
Throughput (barrels per day)............................... 128,600 150,300
Margin (dollars per barrel)(2)............................... $ 2.30 $ 2.87
Operating cost (dollars per barrel)........................ $ 1.06 $ 0.90
Retail
Fuel volume (barrels per day).............................. 63,300 59,100
Overall margins (cents per gallon)4........................ 20.9 21.4
</TABLE>
(1) The Mid-Continent Refineries include the Alma, Ardmore, Denver, McKee and
Three Rivers Refineries.
(2) Refinery margins for 1998 exclude the non-cash charge for the reduction in
the carrying value of inventories. In addition, the 1998 Mid-Continent
Refineries' margin has been restated ($0.31 per barrel) to reflect a change in
the policy for pricing refined products transferred from its McKee and Three
Rivers Refineries to its Mid-Continent marketing operations. Had the non-cash
charge for the reduction of inventories been included in the refinery margin
computation, the 1998 refinery margins would have been $3.99 for the
Mid-Continent Refineries, $3.56 for the Wilmington Refinery, and $2.61 for the
Quebec Refinery.
(3) The merchandise sales per day and merchandise margin for 1998 have been
restated to include certain deli and food service operations previously included
in other retail income. The merchandise sales per day and merchandise margin
originally reported for the quarter ended September 30, 1998 was $3,259 and
30.5%, respectively.
(4) Retail marketing overall margin reported for the Northeast System represents
a blend of gross margin for Company and dealer-operated retail outlets and
convenience stores, home heating oil sales and cardlock operations.
<PAGE>
General
Net income for the quarter ended September 30, 1999 totaled $84.2 million as
compared to net income of $25.8 million for the quarter ended September 30,
1998. On a per share basis, the 1999 third quarter earnings represent $0.97 per
basic and diluted share as compared to $0.29 per basic and diluted share for the
third quarter of 1998. The earnings for the third quarter of 1999 are the
highest quarterly results since the merger of Ultramar and Diamond Shamrock in
1996.
During the third quarter of 1999, the Company recognized a $2.2 million pre-tax
gain on the sale of an 8.33% interest in a pipeline and terminal facility.
During the third quarter of 1998, the Company recognized a $16.1 million
non-cash charge to reduce inventories due to a drop in crude oil and refined
product prices.
US System
The US System had operating income of $168.5 million for the third quarter of
1999 as compared to operating income of $58.9 million for the third quarter of
1998, an increase of 186.1%. Increased throughput and sales volumes combined
with strong refining margins and lower operating costs contributed to the US
System's strong performance.
Throughput at the Mid-Continent Refineries improved 33,700 barrels per day for
the third quarter of 1999 over the third quarter of 1998. In mid-July 1998, the
Ardmore Refinery sustained a power failure and fire in the main fractionation
column in the plant's fluid catalytic cracking unit (FCCU) which curtailed
production by approximately 47,000 barrels per day during the third quarter of
1998. The Mid-Continent refinery margin improved 19.1% from $4.08 per barrel in
1998 to $4.86 per barrel in 1999 as a result of higher wholesale prices
generated from increased product demand and better crude oil costs which
resulted from managing the lag effect on crude oil purchases. Operating costs
were $0.43 per barrel lower in the third quarter of 1999 as compared to 1998 due
to lower utility and maintenance expenses combined with higher throughput
volumes.
Throughput at the Wilmington Refinery increased 13.2% over the third quarter
1998 level to 131,500 barrels per day for the third quarter of 1999. The
Wilmington Refinery operated at full capacity during most of the third quarter
of 1999 when the refining margin increased 48.6% to $6.60 per barrel, resulting
in record income in California. However, the high refining margins disappeared
in September 1999 when several West Coast refineries, which had experienced
significant operating problems earlier in the year, were restarted and
utilization rates and inventory levels returned to more normal levels.
The US retail operations were negatively impacted by a 35.7% decline in the fuel
margin caused by wholesale gasoline prices continuing to increase faster than
retail pump prices. At the same time, the merchandise margin dropped six
percentage points from the same quarter in 1998 due to the significant increase
in cigarette prices which could not be fully passed on to customers. However,
retail fuel volumes improved 7.4% in 1999 as compared to 1998 despite closing or
selling 136 convenience stores since the retail restructuring program was
initiated in 1998. On a per store basis, fuel volumes increased 13.3% and
merchandise sales increased 18.7% for the third quarter of 1999 as compared to
1998 due to continued aggressive promotion programs initiated to increase store
volumes.
Selling, general and administrative expenses for the third quarter of 1999
continue to be lower than 1998 levels due to the cost-reduction programs
initiated in 1998 and early 1999.
Northeast System
Sales and other revenues in the Northeast System increased $205.1 million from
the third quarter of 1998 to $788.3 million in the third quarter of 1999 as
selling prices returned to more normal levels in 1999. During 1998, selling
prices were depressed due to high industry inventories and lower crude oil
prices.
Throughput at the Quebec Refinery for the third quarter of 1999 decreased 21,700
barrels per day as compared to the third quarter of 1998 due to a two-week
turnaround on the refinery's crude unit, which occurred in late August and early
September 1999. The refinery margin decreased $0.57 per barrel from the third
quarter of 1998 to $2.30 per barrel in the third quarter of 1999, reflecting
continued industry refinery margin weakness in the Atlantic Basin since the
beginning of 1999. Partially offsetting the reduced refinery margin were lower
operating costs due to the continued cost-reduction programs started at the
beginning of 1999. The increase in operating cost per barrel is a result of the
lower throughput volumes during the third quarter of 1999 caused by the
turnaround at the refinery.
The overall retail margin declined slightly to 20.9 cents per gallon in the
third quarter of 1999 as retail pump prices did not follow the rapid increase in
import prices. However, retail fuel volumes increased 7.1% over last year which
resulted in higher overall retail profits. Retail fuel volumes continue to
remain strong due to the successful implementation of promotions programs.
The increase in selling, general and administrative expenses for the third
quarter of 1999 is due mainly to the additional selling expenses associated with
increased sales volumes for the quarter.
Corporate
Interest expense of $33.4 million in the third quarter of 1999 was $1.8 million
lower than in the corresponding quarter of 1998 due to lower average borrowings
in 1999 as compared to 1998. In July 1999, the Company paid off $175.0 million
of debt which matured. In addition, $30.0 million of debt, which bore interest
at 10.75%, was repaid in the first half of 1999.
The consolidated income tax provisions for the third quarter of 1999 and 1998
were based upon the Company's estimated effective income tax rates for the years
ending December 31, 1999 and 1998 of 40.5% and 40.0% (exclusive of the 1998
restructuring charges), respectively. The consolidated effective income tax
rates exceed the U.S. Federal statutory income tax rate primarily due to state
income taxes, the effects of foreign operations and the amortization of
nondeductible goodwill.
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Financial and operating data by geographic area for the nine months ended
September 30, 1999 and 1998 are as follows:
Financial Data:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------------------
1999 1998
------------------------------------- -----------------------------------
US Northeast Total US Northeast Total
-- --------- ----- -- --------- -----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and other revenues............... $ 7,925.6 $ 2,028.0 $ 9,953.6 $ 6,732.9 $ 1,838.6 $ 8,571.5
Cost of products sold (1).............. 4,956.2 1,206.6 6,162.8 3,861.8 990.0 4,851.8
Operating expenses..................... 688.5 73.4 761.9 765.4 85.7 851.1
Selling, general and
administrative expenses.............. 103.4 122.1 225.5 125.8 116.9 242.7
Taxes other than income taxes.......... 1,710.3 555.6 2,265.9 1,632.6 546.0 2,178.6
Depreciation and amortization.......... 148.7 28.7 177.4 153.8 27.0 180.8
Restructuring and other charges (2).... 11.0 - 11.0 133.2 9.6 142.8
--------- --------- --------- --------- --------- ---------
Operating income....................... $ 307.5 $ 41.6 349.1 $ 60.3 $ 63.4 123.7
========= ========= ========= =========
Interest income........................ 8.8 6.6
Interest expense....................... (109.4) (107.3)
Equity income from Diamond-Koch (3).... 12.4 -
Gain on sale of assets (4)............. 2.2 7.0
--------- ---------
Income before income taxes
and dividends of subsidiary.......... 263.1 30.0
Provision for income taxes............. (106.8) (32.7)
Dividends on subsidiary stock.......... (7.7) (7.7)
--------- ---------
Net income (loss)...................... $ 148.6 $ (10.4)
========= =========
</TABLE>
(1) During the nine months ended September 30, 1998, the Company recorded a
$42.2 million non-cash reduction in the carrying value of inventories due to the
significant market drop in crude oil and refined product prices during the first
nine months of 1998.
(2) In March 1999, the Company expensed $11.0 million of transaction costs
associated with the termination of the proposed Diamond 66 joint venture. In
June 1998, the Company recorded a $131.6 million restructuring charge related to
the retail, refining and pipeline operations and support services, which
included asset write-downs of $82.1 million, severance and relocation costs of
$15.5 million, and lease buyout, fuel system removal and other costs totaling
$34.0 million. Also, during the second quarter of 1998, the Company incurred
$11.2 million of costs associated with the canceled Petro-Canada joint venture,
including $2.5 million to write-off costs for a coker development project that
will not be pursued.
(3) In September 1998, the Company contributed certain of its petrochemical
assets to the Diamond-Koch joint venture, which is being accounted for using the
equity accounting method. Operating income during the nine months ended
September 30, 1998 for the petrochemical assets contributed was $12.9 million,
excluding overhead.
(4) In August 1999, the Company recognized a $2.2 million gain on the sale of an
8.33% interest in a pipeline and terminal facility. Also, in March 1998, the
Company recognized a $7.0 million gain on the sale of a 25% interest in the same
pipeline and terminal facility.
<PAGE>
Operating Data:
- --------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---- ----
US System
<S> <C> <C>
Mid-Continent Refineries (1)
Throughput (barrels per day)............................... 402,600 393,400
Margin (dollars per barrel) (2)............................ $ 3.72 $ 3.85
Operating cost (dollars per barrel)........................ $ 1.76 $ 2.06
Wilmington Refinery
Throughput (barrels per day)............................... 130,300 120,500
Margin (dollars per barrel) (2)............................ $ 5.98 $ 4.87
Operating cost (dollars per barrel)........................ $ 1.74 $ 2.29
Retail
Fuel volume (barrels per day) (3).......................... 177,400 170,500
Fuel margin (cents per gallon)(3).......................... 11.1 14.0
Merchandise sales ($1,000/day)(4).......................... $ 3,594 $ 3,261
Merchandise margin (%)4.................................... 26.1% 31.1%
Northeast System
Quebec Refinery
Throughput (barrels per day)............................... 146,600 152,300
Margin (dollars per barrel)(2)............................. $ 1.87 $ 2.55
Operating cost (dollars per barrel)........................ $ 0.94 $ 0.97
Retail
Fuel volume (barrels per day).............................. 66,600 63,100
Overall margins (cents per gallon) (5)..................... 23.9 24.9
</TABLE>
(1) The Mid-Continent Refineries include the Alma, Ardmore, Denver, McKee and
Three Rivers Refineries.
(2) Refinery margins for 1998 exclude the non-cash charge for the reduction in
the carrying value of inventories. In addition, the 1998 Mid-Continent
Refineries' margin has been restated ($0.47 per barrel) to reflect a change in
the policy for pricing refined products transferred from its McKee and Three
Rivers Refineries to its Mid-Continent marketing operations. Had the non-cash
charge for the reduction of inventories been included in the refinery margin
computation, the 1998 refinery margins would have been $3.75 for the
Mid-Continent Refineries, $4.35 for the Wilmington Refinery, and $2.21 for the
Quebec Refinery.
(3) The retail fuel volume and fuel margin for 1998 have been restated to
conform to the 1999 presentation. The retail fuel volume and fuel margin
originally reported for the nine months ended September 30, 1998 was 170,300
barrels per day and 13.9 cents per gallon.
(4) The merchandise sales per day and merchandise margin for 1998 have been
restated to include certain deli and food service operations previously included
in other retail income. The merchandise sales per day and merchandise margin
originally reported for the nine months ended September 30, 1998 was $3,149 and
30.6%, respectively.
(5) Retail marketing overall margin reported for the Northeast System represents
a blend of gross margin for Company and dealer-operated retail outlets and
convenience stores, home heating oil sales and cardlock operations.
<PAGE>
General
Net income for the nine months ended September 30, 1999 totaled $148.6 million
as compared to a net loss of $10.4 million for the nine months ended September
30, 1998. The first nine months of 1999 included an $11.0 million charge to
record expenses associated with the termination of the proposed Diamond 66 joint
venture and a $2.2 million pre-tax gain on the sale of an 8.33% interest in a
pipeline and terminal facility. The first nine months of 1998 included the
following unusual items:
o $131.6 million charge related to the restructuring of the retail,
refining and pipeline operations and support services;
o $42.2 million non-cash charge to reduce inventories due to a drop in
crude oil and refined product prices;
o $11.2 million of costs associated with the canceled joint venture
with Petro-Canada; and
o $7.0 million gain on the sale of a 25% interest in a pipeline and
terminal facility.
Basic and diluted net income per share was $1.71 for the nine months ended
September 30, 1999 as compared to a net loss of $0.13 per basic and diluted
share for the nine months ended September 30, 1998.
US System
The US System had operating income of $307.5 million for the first nine months
of 1999 as compared to $60.3 million for the first nine months of 1998. The
unusual items discussed above negatively impacted the US System's operating
income by $11.0 million in 1999 and $161.2 million in 1998. Excluding the impact
of these unusual items, the 1999 operating results increased 43.8% over 1998.
US refining operations continued to improve over 1998 levels due primarily to
strong refinery margins at the Wilmington and McKee Refineries. The Wilmington
Refinery operated at full capacity during the second and third quarters when
refining margins hit an all-time high on the West Coast. In September 1999, the
West Coast refining margins returned to more normal levels after other West
Coast refineries, which had been shut down, were restarted and taken to full
capacity. In addition to the higher refinery margin, throughput at the
Wilmington Refinery increased 8.1% to 130,300 barrels per day due to the
debottlenecking of the FCCU in December 1998.
The Mid-Continent Refineries' throughput increased 9,200 barrels per day and
sales volumes increased 31,700 barrels per day over 1998 levels. In 1998,
throughput and sales volumes were adversely affected due to the downtime at the
Ardmore Refinery after it sustained a power failure and fire in the FCCU in July
1998. Operating costs for the Mid-Continent Refineries' were lower in 1999 by
$0.30 per barrel as compared to 1998 as a result of lower utility expenses and
higher throughput volumes. During part of the summer driving season, asphalt
margins were lower at the Ardmore Refinery due to lower quality asphalt being
produced.
The US retail operations continue to be negatively impacted by the increase in
wholesale gasoline prices, which increased faster than retail pump prices. The
retail fuel margin declined 20.7% from 1998 to 11.1 cents per gallon in 1999.
However, the Company realized a 4.0% increase in the retail fuel volume and
10.2% growth in merchandise sales per day in 1999 as compared to 1998 despite
closing or selling 136 stores since the retail restructuring program was
initiated in 1998. The merchandise margin, however, declined to 26.1% in 1999
due to the increase in cigarette prices which could not be fully passed on to
customers. On a per store basis, fuel volumes increased 9.8% and merchandise
sales increased 17.2% due to the Company's marketing efforts to increase store
traffic and sales per customer.
Selling, general and administrative expenses for the nine months ended September
30, 1999 were lower compared to 1998 due to the cost-reduction programs
initiated in 1998 and early 1999.
<PAGE>
Northeast System
Sales and other revenues in the Northeast System increased to $2,028.0 million
for the nine months ended September 30, 1999 as compared to $1,838.6 million for
1998. This increase is due mainly to the recovery of 1999 selling prices to more
normal levels. During 1998, selling prices were depressed due to high industry
inventories and lower crude oil prices.
The refinery margin decreased $0.68 per barrel from $2.55 per barrel during the
first nine months of 1998 to $1.87 per barrel in 1999 as a result of high
inventory levels, warm winter weather during the first quarter of 1999, and
rapidly increasing crude oil costs during 1999. Partially offsetting the reduced
refinery margin were lower operating costs due to the cost-reduction programs
implemented at the beginning of 1999 resulting in lower operating costs per
barrel in 1999 as compared to 1998.
Retail operations benefited from a 5.5% increase in fuel volumes due to
continued successful promotions programs. The overall retail margin declined
slightly to 23.9 cents per gallon in 1999 from 24.9 cents per gallon in 1998 as
a result of slightly lower margins in the home heating oil business which was
caused by the warm winter and high inventory levels.
Selling, general and administrative expenses for the nine months ended September
30, 1999 are slightly higher than comparable amounts for 1998 due to additional
selling expenses associated with higher sales volumes.
Corporate
Interest expense increased $2.1 million to $109.4 million for the nine months
ended September 30, 1999. The increase is due to $7.8 million of costs
associated with a newly implemented accounts receivable securitization facility
offset by $5.1 million of interest reduction after the payoff of $205.0 million
of debt.
The consolidated income tax provisions for the first nine months of 1999 and
1998 were based upon the Company's estimated effective income tax rates for the
years ending December 31, 1999 and 1998 of 40.5% and 40.0% (exclusive of the
1998 restructuring charges), respectively. The consolidated effective income tax
rates exceed the U.S. Federal statutory income tax rate primarily due to state
income taxes, the effects of foreign operations and the amortization of
nondeductible goodwill.
Outlook
The Company's earnings depend largely on refining and retail margins. The
petroleum refining and marketing industry has been and continues to be volatile
and highly competitive. The cost of crude oil purchased by the Company as well
as the price of refined products sold by the Company have fluctuated widely in
the past. As a result of the historic volatility of refining and retail margins
and the fact that they are affected by numerous diverse factors, it is
impossible to predict future margin levels.
Refining margins during the third quarter of 1999 continued to increase as a
result of wholesale prices rising faster than increasing crude oil prices and
lower refinery utilizations, particularly in California, as compared to year-ago
levels. OPEC and other major producing countries have maintained crude oil
production cuts resulting in an $8 per barrel average increase in the price of
crude oil during 1999. Refinery utilizations have been negatively impacted by
severe weather on the East Coast and by unplanned outages at several refineries
on the West Coast. The reduced utilizations have in turn tightened refined
product supplies while demand increased throughout the summer driving season.
Towards the end of the third quarter, refinery margins begin to weaken as the
summer driving season concluded and West Coast refineries resumed operations.
As the fourth quarter of 1999 begins, refining margins are comparable to 1998
fourth quarter levels as fall and winter demand for refined products has
decreased. The winter demand for home heating oil and other distillates,
especially in the northeastern part of the United States and eastern Canada
where the Company operates its home heating oil business, should strengthen
throughout the fourth quarter assuming this winter is colder than last year. In
addition, numerous refineries throughout the U.S. are planning fourth quarter
turnarounds during the typical winter slow down for the refining industry. A
normal winter on the East Coast and lower refinery utilizations would hold
industry margins at average winter levels, which should increase overall
industry profits in the fourth quarter of 1999 as compared to 1998.
Retail fuel margins in the second and third quarters of 1999 were negatively
impacted as retail pump prices did not keep pace with rising crude oil costs and
wholesale gasoline prices. As the fourth quarter of 1999 begins, crude oil
prices appear to be stabilizing which may allow retail pump prices to catch up
to the higher wholesale gasoline prices and result in improved retail fuel
margins. Merchandise margins in the fourth quarter of 1999 are expected to
remain level with 1999 year to date margins, which are lower than 1998 due to
the cigarette price increases implemented by the tobacco industry in December
1998.
The continued convergence and consolidation in the refining and marketing
industry and the entrance of new supermarket stores in the retail sector is
changing the competitive level in markets the Company serves, requiring
innovative ways to stay ahead of the field. New technology and larger store
formats are just some of the ways the Company is responding to the new
challenges.
See "Certain Forward-Looking Statements."
Capital Expenditures
The petroleum refining and marketing industry 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:
o maintenance expenditures, such as those required to maintain equipment
reliability and safety and to address environmental regulations; and
o growth opportunity expenditures, such as those planned to expand and
upgrade its retail business, to increase the capacity of certain
refinery processing units and pipelines and to construct additional
petrochemical processing units.
A recent Environmental Protection Agency proposal and a similar standard in
Canada calls for a reduction in the sulfur content in gasoline beginning in
2004. If these requirements along with the proposed ban in California on the use
of methyl tertiary butyl ether (MTBE) in gasoline become law, they are expected
to increase the Company's capital expenditure requirements over the next several
years.
Capital expenditures in 1999 have been reduced to $195.0 million from an
original budget of $295.0 million as several projects have been canceled or
delayed. During the nine months ended September 30, 1999, capital expenditures
totaled $125.1 million of which $65.1 million related to maintenance
expenditures and $60.0 million related to growth opportunity projects.
Approximately $31.1 million and $16.0 million of costs have been incurred at the
refineries and at the retail level, respectively, for various maintenance
expenditures. During the nine months ended September 30, 1999, the Company also
incurred $28.0 million in refinery maintenance turnaround costs primarily at the
Wilmington Refinery.
Growth opportunity expenditures for the nine months ended September 30, 1999
included:
o $29.8 million associated with the implementation of the Company's new
information technology system, and
o $8.3 million to revamp the McKee Refinery's FCCU power train.
The Company is continually investigating strategic acquisitions and other
business opportunities, some of which may be material, which will complement its
current business activities. The Company has not completed its budgeting process
for 2000, but expects to target capital expenditures of approximately $260.0
million, which will include $160.0 million for growth projects and $100.0
million for maintenance, reliability and regulatory projects.
The Company expects to fund its capital expenditures from cash provided by
operations and, to the extent necessary, from the proceeds of borrowings under
its bank credit facilities and its commercial paper program 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 under its
universal shelf registration.
Liquidity and Capital Resources
As of September 30, 1999, the Company had cash and cash equivalents of $136.7
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.
As of September 30, 1999, the Company had borrowing capacity of approximately
$678.8 million remaining under its committed bank facilities and commercial
paper program and had approximately $618.2 million under uncommitted, unsecured
short-term lines of credit with various financial institutions.
In addition to its bank credit facilities, the Company has $1.0 billion
available under universal shelf registrations previously filed with the
Securities and Exchange Commission. 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 Company also has $53.4 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 convenience stores.
The bank facilities and other debt agreements, as amended, 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.
Effective March 29, 1999, the Company established a revolving accounts
receivable securitization facility (Securitization Facility) which provides the
Company with the ability to sell up to $250.0 million of accounts receivable on
an ongoing basis. In connection with the Securitization Facility, the Company
sells, on a revolving basis, an undivided interest in certain of its trade and
credit card receivables. The proceeds from the sale of accounts receivable,
which totaled $237.6 million at September 30, 1999, were used to reduce the
Company's outstanding indebtedness, including indebtedness under its commercial
paper program. The remaining availability under the Securitization Facility will
be used, among other purposes, to further reduce debt.
On October 6, 1999, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on December 2, 1999 to
holders of record on November 18, 1999.
As an alternative financing vehicle, the Company is considering the formation of
a master limited partnership (MLP), which would operate most of the Company's
pipeline and terminal assets. The Company would be the general partner of the
MLP and operate the assets on its behalf. It is contemplated that the MLP,
through an initial public offering, would sell limited partnership units
representing 49% of the ownership interests to the public. Management expects to
form the MLP and complete the initial public offering during the first quarter
of 2000, subject to approval by the Board of Directors and evaluation of market
conditions and other considerations.
Cash Flows for the Nine Months Ended September 30, 1999
During the nine months ended September 30, 1999, the Company's cash position
decreased $39.4 million to $136.7 million. Net cash provided by operating
activities was $583.4 million including the receipt of $237.6 million from the
sale of trade and credit card receivables under the Company's Securitization
Facility.
Net cash used in investing activities during the nine months ended September 30,
1999 totaled $122.7 million including $125.1 million for capital expenditures,
$28.0 million for deferred refinery maintenance turnaround costs and $30.4
million from proceeds from asset sales.
Net cash used in financing activities during the nine months ended September 30,
1999 totaled $503.8 million, including payments to reduce short-term borrowings
and long-term debt of $434.8 million and for cash dividends totaling $71.5
million. In April and July 1999, the Company paid off $30.0 million of 10.75%
Senior Notes and $175.0 million of 8.25% Notes, respectively.
Exchange Rates
The value of the Canadian dollar relative to the U.S. dollar has weakened
substantially since the acquisition of the Canadian operations in 1992. As the
Company's Canadian operations are in a net asset position, the weaker Canadian
dollar has reduced, in U.S. dollars, the Company's net equity at September 30,
1999 by $90.5 million. Although the Company expects the exchange rate to
fluctuate during 1999, 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
operations. The potential impact on the 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 System, which generally pass on any
change in the cost of crude oil. Retail 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.
Year 2000 Issue
State of Readiness
In 1997, the Company commenced efforts to address Year 2000 issues and
subsequently formalized an enterprise-wide effort to assess and mitigate or
eliminate the business risk associated with Year 2000 issues, focusing on:
o information technology (IT) computer hardware and software systems,
o internal process control equipment outside of the IT area used in the
refining or retail operations, and
o interfaces and support services from key suppliers, vendors and
customers.
A Company-wide process is in place to inventory, assess, test, remediate and
develop contingency plans for addressing the Year 2000 issues described above.
The process is ongoing and is periodically reassessed as new information becomes
known, and the process is revised accordingly. The Company has also engaged
outside consultants to assist in addressing its Year 2000 issues and to provide
quality assurance reviews.
The Company's Northeast IT systems are now expected to be Year 2000 compliant.
In August 1999, the Company implemented a new stand-alone enterprise-wide IT
system. This new enterprise-wide IT system is also being implemented, effective
January 1, 2000, in the US because it offers superior technological enhancements
and operating efficiencies not available in the existing US IT system. The cost
of the new enterprise-wide IT system for the Northeast and US is expected to be
approximately $53.0 million, with most of the costs being capitalized. As of
September 30, 1999, the Company has incurred $40.8 million of costs related to
the new IT system.
The Company believes it has identified the significant exposure items associated
with internal process control equipment used at the refineries and throughout
the retail operations, and has implemented plans to bring such equipment into
Year 2000 compliance. The Company has also corresponded with its key suppliers,
vendors and customers and has developed contingency plans. The estimated cost to
be incurred on the remediation and testing of the IT systems and the third-party
contingency plans range from $25.0 million to $35.0 million, with most of the
costs being capitalized. The actual costs incurred will depend on whether the
contingency plans must be implemented. All remediation and contingency planning
and testing will be completed by December 31, 1999 to ensure minimal disruption
to operations as the new millennium begins. As of September 30, 1999, the
Company has incurred approximately $23.1 million of costs related to the
remediation and testing of the IT systems and contingency plans of which $19.2
million has been capitalized.
Risks
Certain Year 2000 risk factors which could have a material adverse effect on the
Company's results of operations, liquidity, and financial condition include, but
are not limited to, failure to identify critical systems which could experience
failures, errors in efforts to correct problems, unexpected or extended failures
by key suppliers, vendors and customers, and failures in global banking systems
and commodity exchanges.
As a matter of operating policy, the Company routinely analyzes production and
automation systems for potential failures, such as interruptions in the supply
of raw materials or utilities. It is not anticipated that a problem in these
areas will have a significant impact on the Company's ability to continue normal
business activities. In addition, it is not expected that these failures would
impact safety or the environment nor have a material impact on production or
sales. Any problems in these systems can be dealt with using existing operating
procedures.
The worst case scenario would be that the Company's failure or the failure of
key suppliers, vendors and customers to correct material Year 2000 issues could
result in serious disruptions in normal business activities and operations. Such
disruptions could prevent the Company from refining crude oil and delivering
refined products to customers. While the Company does not expect a worst case
scenario, if it were to occur and could not be corrected on a timely basis or
otherwise mitigated by contingency plans, it could have a material adverse
impact on the Company's results of operations, liquidity and financial position.
Conclusion
The Company's current and planned activities with respect to the Year 2000 issue
are expected to significantly reduce the Company's level of uncertainty about
the magnitude of the risk posed by the Year 2000 issue and, in particular, about
the Year 2000 compliance and readiness of its key suppliers, vendors, and
customers. The Company believes that, with the implementation of new IT systems
and completion of activities as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
See "Certain Forward-Looking Statements."
Certain Forward-Looking Statements
This quarterly report on Form 10-Q contains certain "forward-looking" 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 report, the words
"anticipate," "believe," "estimate," "expect," and "intend" and words or phrases
of 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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes in interest
rates, foreign currency rates and commodity prices related to crude oil, refined
products and natural gas. To manage or reduce these market risks, the Company
uses interest rate swaps, foreign exchange contracts, and commodity futures and
price swap contracts. The Company's policy governing the use of derivatives
requires that every derivative relate to an underlying, offsetting position,
anticipated transaction or firm commitment and prohibits the use of highly
complex or leveraged derivatives. Beginning in 1999, the Company revised its
feedstock procurement program to allow for limited discretionary hedging
activities based on expectations of future market conditions. A summary of the
Company's primary market risk exposures and its use of derivative financial
instruments is presented below.
See "Certain Forward-Looking Statements."
Interest Rate Risk
The Company is subject to interest rate risk on its long-term fixed interest
rate debt. Commercial paper borrowings and borrowings under revolving credit
facilities do not give rise to significant interest rate risk because these
borrowings have maturities of less than three months. The carrying amount of the
Company's floating interest rate debt approximates fair value. Generally, the
fair market value of debt with a fixed interest rate will increase as interest
rates fall, and the fair market value will decrease as interest rates rise. This
exposure to interest rate risk is managed by obtaining debt that has a floating
interest rate or using interest rate swaps to change fixed interest rate debt to
floating interest rate debt. Generally, the Company maintains floating interest
rate debt of between 40% and 50% of total debt. Interest rates have remained
relatively stable over the past year and the Company anticipates such rates to
remain relatively stable over the next year.
The following table provides information about the Company's long-term debt and
interest rate swaps, both of which are sensitive to changes in interest rates.
Principal payments and related weighted average interest rates by expected
maturity dates, after consideration of refinancing, are presented for long-term
debt. For interest rate swaps, the table presents notional amounts and weighted
average interest rates by expected (contractual) maturity dates. Notional
amounts are used to calculate the contractual payments to be exchanged under the
contract. Weighted average floating rates are based on implied forward rates in
the yield curve at September 30, 1999.
<TABLE>
<CAPTION>
Expected Maturity - Year Ending December 31,
There- Fair Value
1999 2000 2001 2002 2003 after Total September 30, 1999
---- ---- ---- ---- ---- ----- ----- ------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate.................. $1.2 $14.6 $86.0 $286.6 $34.6 $913.9 $1,336.9 $1,311.8
Average interest rate....... 9.1% 9.0% 9.6% 8.7% 8.9% 7.6% 8.0% N/A
Floating rate............... $ - $ - $ - $161.1 $ - $ - $ 161.1 $ 161.1
Average interest rate....... -% -% -% 5.8% -% -% 5.8% N/A
Interest Rate Swaps:
Fixed to floating........... $ - $ - $ - $200.0 $ - $250.0 $ 450.0 $ 450.0
Average pay rate........... 5.71% 5.93% 6.50% 6.64% 6.78% 7.25% 6.79% N/A
Average receive rate....... 6.43% 6.43% 6.43% 6.43% 6.59% 6.85% 6.66% N/A
</TABLE>
Foreign Currency Risk
The Company 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. At September 30, 1999, the Company did not have any
short-term foreign exchange contracts.
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.
Commodity Price Risk
The Company is subject to the market risk associated with changes in market
prices of its underlying crude oil, refined products and natural gas; however,
such changes in values are generally offset by changes in the sales price of the
Company's refined products. Price swaps are price hedges for which gains and
losses are recognized when the hedged transactions occur; however, losses are
recognized when future prices are not expected to recover.
As of September 30, 1999, the Company had outstanding commodity futures and
price swap contracts to buy $512.2 million and sell $268.7 million of crude oil
and refined products or to settle differences between a fixed price and market
price on aggregate notional quantities of 6.4 million barrels of crude oil and
refined products which mature on various dates through June 2002. The fair value
of commodity futures contracts is based on quoted market prices. The fair value
of price swap contracts is determined by comparing the contract price with
current published quotes for futures contracts corresponding to the period that
the anticipated transactions are expected to occur.
The information below reflects the Company's price swaps and futures contracts
that are sensitive to changes in crude oil or refined product commodity prices.
The table presents the notional amounts in barrels for crude oil, the weighted
average contract prices and the total contract amount by expected maturity
dates. Contract amounts are used to calculate the contractual payments and
quantity of barrels of crude oil to be exchanged under the futures contract.
<TABLE>
<CAPTION>
Weighted
Carrying Fair Value Contract Average
Amount Amount Contract Volumes Price
Year Ending December 31, Gain (Loss) Gain (Loss) Amount In Barrels Per Barrel
- ------------------------ ----------- ----------- -------- ---------- ----------
(In millions, except weighted average price)
<S> <C> <C> <C> <C> <C>
Crude Procurement:
Futures contracts - long:
1999....................................... $ - $ 15.6 $ 241.7 10.1 $ 23.93
2000....................................... - 25.4 130.5 6.1 21.39
Futures contracts - short:
1999....................................... - (3.4) 213.0 8.8 24.14
2000....................................... - (0.5) 55.7 2.4 22.93
Price swaps:
2002....................................... (9.1) (21.1) 140.0 6.4 22.00
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: /s/ H. Pete Smith
H. PETE SMITH
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
November 12, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 136,700
<SECURITIES> 0
<RECEIVABLES> 423,400
<ALLOWANCES> (4,900)
<INVENTORY> 627,500
<CURRENT-ASSETS> 1,304,300
<PP&E> 4,529,400
<DEPRECIATION> (1,291,400)
<TOTAL-ASSETS> 5,109,100
<CURRENT-LIABILITIES> 1,217,900
<BONDS> 1,491,800
200,000
0
<COMMON> 900
<OTHER-SE> 1,482,400
<TOTAL-LIABILITY-AND-EQUITY> 5,109,100
<SALES> 9,953,600
<TOTAL-REVENUES> 9,953,600
<CGS> 6,162,800
<TOTAL-COSTS> 6,162,800
<OTHER-EXPENSES> 3,435,300
<LOSS-PROVISION> 6,400
<INTEREST-EXPENSE> 109,400
<INCOME-PRETAX> 263,100
<INCOME-TAX> 106,800
<INCOME-CONTINUING> 156,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,600
<EPS-BASIC> 1.71
<EPS-DILUTED> 1.71
</TABLE>
