UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-13514
CLARK USA, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1495734
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8182 Maryland Avenue 63105-3721
St. Louis, Missouri (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (314) 854-9696
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (*) No ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of November 8, 1996:
Class Shares Outstanding
Common Stock 19,051,818
Class A Common Stock 10,162,509
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Clark USA, Inc.:
We have reviewed the accompanying consolidated balance sheet of Clark
USA, Inc. (a Delaware corporation) and subsidiaries as of September 30,
1996, and the related consolidated statements of earnings for the three and
nine month periods ended September 30, 1995 and 1996 and cash flows for the
nine month periods ended September 30, 1995 and 1996. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to the financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less
in scope than an audit in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Clark USA, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for the year
then ended (not presented herein); and in our report dated February 2,
1996, we expressed an unqualified opinion on those statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1995 is fairly stated, in all material respects,
in relation to the financial statements from which it has been derived.
COOPERS & LYBRAND L.L.P.
St. Louis, Missouri,
October 29, 1996
<PAGE> 3
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
<TABLE>
Reference December 31, September 30,
ASSETS Note 1995 1996
--------- ------------ -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 103,729 $ 83,836
Short-term investments 2 46,116 26,731
Accounts receivable 179,763 163,455
Inventories 3 290,444 285,109
Prepaid expenses and other 22,228 24,381
Advance crude oil purchase receivable 6 6,565 224,131
------------ -----------
Total current assets 648,845 807,643
PROPERTY, PLANT AND EQUIPMENT 7 550,872 545,010
ADVANCE CRUDE OIL PURCHASE RECEIVABLE 6 99,345 --
DEFERRED INCOME TAXES -- 10,803
OTHER ASSETS 4 65,860 54,465
------------ -----------
$ 1,364,922 $1,417,921
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 307,528 $ 255,225
Accrued expenses and other 5 46,301 52,913
Accrued taxes other than income 45,242 47,719
------------ ---------
Total current liabilities 399,071 355,857
LONG-TERM DEBT 765,030 775,959
DEFERRED INCOME TAXES 7,677 --
OTHER LONG-TERM LIABILITIES 38,937 44,500
CONTINGENCIES 8 -- --
STOCKHOLDERS' EQUITY:
Common stock
Common, $.01 par value, 19,051,818 issued 190 190
Class A Common, $.01 par value, 10,162,509 issued 90 102
Class B Common 6 --
Class C Common 6 --
Paid-in capital 300,057 296,094
Advance crude oil purchase receivable
from stockholders 6 (146,890) (26,149)
Retained earnings (deficit) 2 748 (28,632)
------------ -------------
Total stockholders' equity 154,207 241,605
------------ -------------
$ 1,364,922 $ 1,417,921
=========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
<TABLE>
For the three months
ended September 30,
Reference --------------------------
Note 1995 1996
------------ ------------- -----------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 1,211,874 $ 1,249,608
EXPENSES:
Cost of sales (1,062,283) (1,120,496)
Operating expenses (100,853) (104,663)
General and administrative expenses (14,634) (15,876)
Depreciation (8,018) (9,883)
Amortization 4 (3,021) (2,509)
------------ -----------
(1,188,809) (1,253,427)
------------ -----------
OPERATING INCOME (LOSS) 23,065 (3,819)
Interest and financing costs, net 2, 4, 5, 6 (14,436) (14,322)
------------ -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 8,629 (18,141)
Income tax (provision) benefit (3,464) 6,784
------------ -----------
NET EARNINGS (LOSS) $ 5,165 $ (11,357)
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE> 5
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
<TABLE>
For the nine months
ended September 30,
Reference --------------------------
Note 1995 1996
------------ ------------- -----------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 3,377,473 $ 3,724,723
EXPENSES:
Cost of sales (3,025,310) (3,344,179)
Operating expenses (271,516) (303,977)
General and administrative expenses (42,404) (45,565)
Depreciation (22,654) (28,175)
Amortization 4 (8,848) (8,835)
------------- -----------
(3,370,732) (3,730,731)
------------- -----------
OPERATING INCOME (LOSS) 6,741 (6,008)
Interest and financing costs, net 2, 4, 5, 6 (41,547) (40,608)
------------- -----------
LOSS BEFORE INCOME TAXES (34,806) (46,616)
Income tax benefit 12,891 17,422
------------- -----------
NET LOSS $ (21,915) $ (29,194)
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE> 6
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
For the nine months
ended September 30,
------------------------
1995 1996
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(21,915) $(29,194)
Adjustments:
Depreciation 22,654 28,175
Amortization 13,356 16,600
Accretion of Zero Coupon Notes 12,569 14,182
Share of earnings of affiliates, net of dividends (741) (139)
Deferred income taxes (13,133) (18,366)
Other 1,008 (617)
Cash provided by (reinvested in) working capital
Accounts receivable, prepaid expenses and other (75,127) 15,266
Inventories (149,884) 5,252
Accounts payable, accrued expenses, taxes
other than income, and other 133,739 (45,736)
--------- ---------
Net cash used in operating activities (77,474) (14,577)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (25,701) 85
Sales of short-term investments 25,942 19,000
Expenditures for property, plant and equipment (24,244) (23,368)
Expenditures for turnaround (2,764) (7,174)
Refinery acquisition expenditures (69,746) --
Proceeds from disposals of property, plant
and equipment 15,934 3,890
Advance crude oil purchase receivable -- 449
-------- ---------
Net cash used in investing activities (80,579) (7,118)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (119) (3,253)
Proceeds from sale of stock 135,500 6,438
Stock issuance costs (2,995) --
Deferred financing costs (14,399) (1,383)
-------- ---------
Net cash provided by financing activities 117,987 1,802
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (40,066) (19,893)
CASH AND CASH EQUIVALENTS, beginning of period 126,384 103,729
-------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 86,318 $ 83,836
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 7
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark USA, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1996
(tabular dollar amounts in thousands of US dollars)
1. Basis of Preparation
The unaudited consolidated balance sheet of Clark USA, Inc. (a
Delaware corporation) and Subsidiaries (the "Company"), as of September
30, 1996, and the related consolidated statements of earnings for the
three month and nine month periods ended September 30, 1995 and 1996, and
statements of cash flows for the nine month periods ended September 30,
1995 and 1996, have been reviewed by independent accountants as noted in
their report included herein. Clark Refining & Marketing, Inc. ("Clark"),
a subsidiary of the Company, makes up the majority of the consolidated
financial information. In the opinion of the management of the Company,
all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial statements have been
included therein. The results of this interim period are not necessarily
indicative of results for the entire year.
Certain reclassifications have been made to the operating and
general administrative expenses in the 1995 financial statements to
conform to current year presentation.
The financial statements have been prepared in accordance with the
instructions to Form 10-Q. Accordingly, certain information and
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. These unaudited financial statements should be read
in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 1995.
The Company's earnings and cash flow from operations are primarily
dependent upon processing crude oil and selling quantities of refined
petroleum products at margins sufficient to cover operating expenses.
Crude oil and refined petroleum products are commodities, and factors
largely out of the Company's control can cause prices to vary, in a wide
range, over a short period of time. This potential margin volatility can
have a material effect on financial position, current period earnings and
cash flow.
2. Short-term Investments
The Company's short-term investments are all considered "Available-
for-Sale" and are carried at fair value with the resulting unrealized gain
or loss (net of applicable taxes) shown as a component of retained
earnings.
Short-term investments consisted of the following:
The net unrealized position at September 30, 1996 included gains of
$0.0 million and losses of $0.3 million (December 31, 1995 -- gains of
$0.1 million and losses of $0.1 million).
<PAGE> 8
The contractual maturities of the short-term investments at
September 30, 1996 were:
<TABLE>
Amortized Aggregate
Cost Fair Value
---------- -----------
<S> <C> <C>
Due in one year or less $ 15,063 $ 14,966
Due after one year through five years 11,968 11,765
---------- -----------
27,031 $ 26,731
========== ==========
</TABLE>
Although some of the contractual maturities of these short-term
investments are over one year, management's intent is to use the funds for
current operations and not hold the investments to maturity.
For the three month and nine month periods ended September 30, 1996,
proceeds from the sale of Available-for-Sale securities were $0.0 million
and $19.0 million, respectively, with no realized gains or losses recorded
for the periods. For the same three and nine month periods in 1995,
proceeds from the sale of Available-for-Sale securities were $18.0 million
and $25.9 million, respectively, with no realized gains or losses recorded
for the periods. Realized gains and losses are presented in "Interest and
financing costs, net" and are computed using the specific identification
method.
The change in the net unrealized holding gains or losses on
Available-for-Sale securities for the three month and nine month periods
ended September 30, 1996, was $0.0 million and a loss of $0.3 million
($0.2 million after taxes), respectively. For the same three and nine
month periods in 1995, the change in the net unrealized holding gains or
losses was a gain of $0.1 million ($0.1 million after taxes) and a gain of
$1.5 million ($0.9 million after taxes), respectively.
3. Inventories
The carrying value of inventories consisted of the following:
<TABLE>
December 31, September 30,
1995 1996
----------- ------------
<S> <C> <C>
Crude oil $ 90,635 $ 80,618
Refined and blendstocks 163,915 170,803
Convenience products 20,532 19,698
Warehouse stock and other 15,362 13,990
----------- ------------
$290,444 $285,109
=========== ============
</TABLE>
The market value of these inventories at September 30, 1996 was
approximately $69.3 million above the carrying value (December 31, 1995 -
$5.4 million).
4. Other Assets
Amortization of deferred financing costs for the three month and
nine month periods ended September 30, 1996, was $2.6 million (1995 - $1.7
million) and $7.6 million (1995 - $4.5 million), respectively, and is
included in "Interest and financing costs, net."
Amortization of turnaround costs for the three month and nine month
periods ended September 30, 1996, was $2.5 million (1995 - $3.0 million)
and $8.8 million (1995 - $8.8 million), respectively.
<PAGE> 9
5. Interest and Financing Costs, Net
Interest and financing costs, net, consisted of the following:
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense $ 14,532 $ 20,409 $ 43,500 $ 60,662
Financing costs 1,705 2,568 4,511 7,626
Interest and finance income (1,677) (8,369) (5,189) (26,926)
--------- --------- --------- ---------
14,560 14,608 42,822 41,362
Capitalized interest (124) (286) (1,275) (754)
--------- --------- --------- ---------
$14,436 $ 14,322 $ 41,547 $ 40,608
========= ========= ========= =========
</TABLE>
Accrued interest payable at September 30, 1996, of $15.0 million (December
31, 1995 - $8.4 million) is included in "Accrued Expenses and Other".
6. Advance Crude Oil Purchase Receivable
The Company has advance crude oil purchase receivables from
Occidental Petroleum Corporation ("Occidental") and Gulf Resources
Corporation ("Gulf"). These advance crude oil purchase receivables are
being accounted for as financial instruments and are recorded at cost
at September 30, 1996. To the extent the advance crude oil purchase
receivables were acquired by the issuance of stock, they were recorded as a
reduction to Stockholders' Equity. The issuance of stock is recognized as
the principal portion of the receivable is amortized. Finance income and
the reduction of principal related to the receivables is recognized
according to the interest method of amortization with gross proceeds from the
sale of crude oil delivered allocated between principal recovery (for both the
receivable recorded as an asset and the receivable recorded as a reduction to
Stockholders' Equity) and finance income. This allocation is based on the
implicit yield of the transactions, which yield is a function of the expected
future cash flow stream relative to the value of the advance crude oil
purchase receivable assets on the date of acquisition. The projected cash
flow stream is determined by reference to the applicable forward oil
markets. At September 30, 1996, the implicit yield for the Occidental and
Gulf transactions was 9.3% and 18.3%, respectively.
The Company recognized proceeds, net of hedging activity, totaling
$11.7 million and $31.2 million from these transactions for the respective
three month and nine month periods ended September 30, 1996. Proceeds
were from the scheduled payments on the receivable. For the three month
and nine month periods ended September 30, 1996, the Company recorded
finance income of $6.8 million and $20.9 million, respectively, which is
included in "Interest and financing costs, net".
On October 4, 1996, Clark sold one of the Company's advance crude
oil purchase receivables and certain associated hedge contracts. The
advance crude oil purchase receivable was sold along with the associated
hedge contracts for net cash proceeds of $235.4 million. The advance
crude oil purchase receivable was valued based on its defined future
delivery schedule, associated forward crude oil price quotes and
discounted for certain assumed credit risk factors. As a result of the
subsequent sale, that portion of the advance crude oil purchase receivable
subject to the sales transaction was classified as a current asset at
September 30, 1996 and such classification had the effect of increasing
net Stockholders' Equity by approximately $110.6 million. The Company
will realize a gain on the transaction of $10.9 million in the fourth
quarter. The advance crude oil purchase receivable from Gulf was not sold
in this transaction and continues to be held by the Company.
7. New Accounting Standard Adopted
<PAGE> 10
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The
standard requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable with future cash flows. Implementation of this SFAS did not
result in an impairment loss.
The Company has expended approximately $25 million on a project to
produce low sulfur diesel fuel at the Hartford refinery ("DHDS Project")
which was delayed in 1992. Should the Company determine in the future to
permanently discontinue this project, the carrying value of the DHDS
Project would likely not be fully recoverable.
8. Contingencies
Clark and the Company are subject to various legal proceedings
related to governmental regulations and other actions arising out of the
normal course of business, including legal proceedings related to
environmental matters.
In early April, 1996, Clark learned that its Hartford, Illinois
refinery is the subject of a Clean Air Act enforcement referral by the
United States Environmental Protection Agency to the United States
Department of Justice. The referral pertains to alleged violations of the
Clean Air Act and regulations promulgated thereunder in the operation and
permitting of the Hartford refinery fluid catalytic cracking unit ("FCCU")
and alleged modification of the FCCU. Although a complaint has not yet
been filed, the government requested additional information from Clark
pursuant to Section 114 of the Clean Air Act for the stated purpose of
completing its pre-enforcement evaluation. Clark is gathering the
requested information and is otherwise cooperating with the government in
its investigation. No estimate can be made at this time of Clark's
potential liability, if any, as a result of this enforcement referral.
While it is not possible at this time to establish the ultimate
amount of liability with respect to such contingent liabilities, Clark and
the Company are of the opinion that the aggregate amount of any such
liabilities, for which provision has not been made, will not have a
material adverse effect on their financial position, however, an adverse
outcome of any one or more of these matters could have a material effect
on quarterly or annual operating results or cash flows when resolved in a
future period.
<PAGE> 11
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Clark USA, Inc. (the "Company") owns all of the outstanding capital
stock of Clark Refining & Marketing, Inc. ("Clark"). The Company also
owns all of the outstanding capital stock of Clark Pipe Line Company.
Because Clark is the principal subsidiary of the Company, a discussion of
the Company's results of operations consists principally of a discussion
of Clark's results of operations.
Certain reclassifications were made to 1995 operating expenses and
general and administrative expenses to conform to current period
presentation. In addition, certain reclassifications were made to 1995
refining division results for the Port Arthur refinery and Blue Island,
Hartford and Other Refining to allocate certain crude oil acquisition and
inventory management results and conform to current period presentation.
Such reclassifications did not change the Company's total results of
operations.
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three and nine month periods ended September 30, 1995
and 1996. All dollars listed are in millions except per barrel, per
gallon and other statistical data.
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
------------------- ------------------
Financial Results: 1995 1996 1995 1996
----------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales and operating revenues $1,211.9 $1,249.6 $3,377.4 $3,724.7
Cost of sales 1,062.3 1,120.5 3,025.3 3,344.2
Operating expenses 100.9 104.6 271.5 304.0
General and administrative expenses 14.6 15.9 42.4 45.5
Depreciation and amortization 11.0 12.4 31.5 37.0
Interest and financing costs 16.1 22.7 46.7 67.5
Interest and finance income 1.7 8.4 5.2 26.9
----------- -------- --------- --------
Earnings (loss) before income taxes 8.7 (18.1) (34.8) (46.6)
Income tax (provision) benefit (3.5) 6.7 12.9 17.4
----------- -------- --------- --------
Net earnings (loss) $ 5.2 $ (11.4) $ (21.9) $ (29.2)
=========== ======== ======== ========
Operating Income:
Refining contribution to
operating income $ 21.7 $ 7.3 $ 14.3 $ 17.7
Retail contribution to
operating income 16.0 5.3 35.5 24.4
Corporate general and administrative 3.6 4.0 11.6 11.1
Depreciation and amortization 11.0 12.4 31.5 37.0
----------- ------- ------- --------
Operating income (loss) $ 23.1 $ (3.8) $ 6.7 $ (6.0)
=========== ======= ======= ========
</TABLE>
The Company reported a net loss of $11.4 million for the third quarter
of 1996 versus net earnings of $5.2 million in the third quarter of 1995.
Refining and retail market conditions were weak in the quarter as rising
and volatile crude oil prices squeezed margins and more than offset the
positive impact of improved operations versus the prior year. For the
first nine months of 1996, Clark reported a net loss of $29.2 million as
compared to a $21.9 million net loss in the same period of 1995. Despite a
first quarter rebound in refining margins reflecting more normal winter
demand for distillates, nine month results were reduced versus the prior
year because of rising crude oil prices and extreme crude oil market
volatility. These factors effectively raised the cost of the Company's
feedstocks. The majority of the Company's products are commodities that
are subject to seasonal and market volatility. Net sales and operating
revenues increased approximately 3% in the third quarter of 1996 as
compared to the prior year because of higher crude oil prices, and the
first nine months of 1996 increased approximately 10% over 1995 because of
the higher crude oil prices and the inclusion in 1996 of a full nine
months of incremental sales from production at the Port Arthur refinery,
which was acquired on February 27, 1995.
<PAGE> 12
Refining
Refining Division Operating Statistics:
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- ------------------
1995 1996 1995 1996
------------ -------- --------- --------
<S> <C> <C> <C> <C>
Port Arthur Refinery (acquired February 27, 1995)
Crude oil throughput (m bbls/day) 210.2 196.4 203.8 201.7
Production (m bbls/day) 222.5 210.7 210.6 212.0
Gross margin ($/barrel of production) $2.37 $ 2.72 $ 2.41 $ 2.49
Operating expenses ($/barrel of production) 1.81 2.19 1.90 2.06
Net margin (millions) $11.6 $ 10.4 $ 23.2 $ 25.0
Blue Island, Hartford and other refining
Crude oil throughput (m bbls/day) 141.1 140.1 133.3 135.1
Production (m bbls/day) 139.1 144.3 133.1 136.2
Gross margin ($/barrel of production) $3.72 $2.43 $ 2.80 $ 2.66
Operating expenses ($/barrel of production) 2.52 2.24 2.62 2.44
Net margin (millions) $15.4 $ 2.5 $ 6.5 $ 8.2
Clark Pipe Line net margin (millions) 0.6 0.5 1.2 1.7
Divisional G & A expenses (millions) 5.9 6.1 16.6 17.2
Contribution to earnings (millions) $21.7 $ 7.3 $ 14.3 $ 17.7
</TABLE>
The refining division contribution to operating income in the third
quarter of 1996 was $7.3 million (1995 - $21.7 million). Refining results
in the third quarter continued to be hampered by weak market conditions.
Rising crude oil prices combined with weaker than expected summer gasoline
demand squeezed margins. Clark's Midwest and Gulf Coast markets were both
negatively impacted, as reflected by $1.80 and $0.80 per barrel respective
declines in industry refining margin indicators from the second quarter.
In addition, high absolute crude oil prices weakened margins on by-
products that do not immediately track crude oil price changes, and higher
refinery fuel gas prices increased operating expenses at the Port Arthur
refinery by approximately 30 cents per barrel. For the first nine months
of 1996, the refining division improved its contribution to $17.7 million
(1995 - $14.3 million). Nine month refining division results reflected
year over year operational improvements, including improved yields, but
these improvements were tempered by the volatile crude oil markets,
increased refinery fuel gas costs and lower chemical and by-product
margins. Industry margins in early 1995 were particularly weak due to the
transition to reformulated gasoline in certain markets and an unseasonably
warm winter, which reduced demand for heating oil.
Port Arthur crude oil throughput and production in the third quarter
was below 1995 levels due to maintenance on the FCC unit. Midwest
refining production during the first nine months was below capacity as
routine maintenance was successfully completed on several units. Refinery
production was reduced by an average of approximately 9,000 barrels per
day in the first nine months of 1995 due to the poor industry refining
margins and a fire in an operating unit at the Blue Island refinery.
Production in the fourth quarter of 1996 is expected to be five to ten
percent less than capacity at Clark's Blue Island refinery due to two
units being out of service for approximately three weeks.
In 1996, the commodity markets for crude oil and refined products have
been characterized by rising crude oil prices, daily price volatility and
steep premiums for prompt crude oil and product deliveries. These type of
commodity market conditions disrupt many normal options and futures
relationships making it difficult for the Company to effectively hedge
short-term price risk.
<PAGE> 13
Retail
Retail Division Operating Statistics:
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- ------------------
1995 1996 1995 1996
------------ -------- --------- --------
<S> <C> <C> <C> <C>
Gasoline volume (mm gals.) 278.4 270.1 807.2 777.7
Gasoline gross margin (cents/gal) 12.9 9.4 11.1 10.6
Gasoline gross margin (millions) $ 35.8 $ 25.4 $ 89.9 $ 82.3
Convenience product sales (millions) $ 72.5 $ 68.3 $190.0 $193.7
Convenience product and
other income (millions) 16.8 17.9 47.7 52.1
Operating expenses (millions) $ 31.4 $ 32.2 $ 87.8 $ 92.7
Divisional G & A expenses (millions) 5.2 5.8 14.3 17.3
Contribution to operating
income (millions) $ 16.0 $ 5.3 $ 35.5 $ 24.4
Per Month Per Store
Company operated stores (average) 863 827 852 828
Gasoline volume (m gals.) 107.5 108.9 105.3 104.4
Convenience product sales (m) $ 28.0 $ 27.5 $ 24.7 $ 26.0
Convenience product gross margin (m) $ 6.5 $ 7.2 $ 6.2 $ 6.7
</TABLE>
The retail division contributed $5.3 million to operating income in
the third quarter of 1996 (1995 - $16.0 million). The third quarter
retail division contribution was below 1995 levels due almost entirely to
a sharp drop in retail gasoline margins. This resulted from an increase
in wholesale gasoline costs associated with higher crude oil prices that
was not fully captured in retail selling prices due to an extremely
competitive Midwest retail market environment. This was particularly the
case in the last half of the third quarter. Convenience product sales
were below year ago levels, but overall margin contribution was higher
due to improved pricing and product mix. Nine month results were also
below year ago levels because of the squeeze in overall fuel margin
contribution. Retail margins generally are compressed in periods of
rapid oil price increases and widen as prices stabilize or fall.
Operating and general and administrative expenses increased over the
prior year principally due to operating leases and other costs related to
new store properties and increased costs related to the expansion of
Clark's credit card programs.
The Company continued to implement its targeted retail growth strategy
in 1996 by adding 10 high volume stores in its core Chicago market which
raised its Chicago market share to approximately 10%. Early in 1996, the
Company completed its withdrawal from the Minnesota market, recognizing a
modest gain. As part of its overall growth strategy, the Company expects
to continue to consider retail store growth in both existing and new
markets while also evaluating current markets for possible divestiture.
Other Financial Highlights
Depreciation and amortization expenses for the third quarter and first
nine months of 1996 exceeded the comparable periods of 1995 principally
because of the acquisition of Port Arthur refinery in early 1995.
Increases over 1995 in both interest expense and financing income in
the third quarter and first nine months of 1996 were principally related
to the acquisition of advance crude oil purchase receivables and related
financing completed in the fourth quarter of 1995. In addition, interest
expense increased due to the amortization of bondholder consent fees
incurred in 1995 and costs related to an expanded working capital
facility.
<PAGE> 14
Liquidity and Capital Resources
Net cash generated from operating activities, excluding working capital
changes, for the first nine months of 1996 was $10.6 million compared to
$13.8 million in the year-earlier period. Working capital at September
30, 1996 was $451.8 million, a 2.27 to 1 current ratio, versus $249.8
million at December 31, 1995, a 1.63 to 1 current ratio. Working capital
at September 30, 1996 increased since one of the Company's advance crude
oil purchase receivables was sold on October 4, 1996, resulting in its
classification as current (see below).
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil. Clark has in
place a $400 million committed revolving line of credit expiring December
31, 1997 for the issuance of letters of credit primarily to support
purchases of crude oil, other feedstocks and refined products. The amount
available under the borrowing base associated with such facility at
September 30, 1996 was $393 million and approximately $286 million of the
facility was utilized for letters of credit. There were no direct
borrowings under Clark's line of credit at September 30, 1996.
Cash flows used in investing activities in the first nine months of
1996, excluding short-term investment activities which management treats
similar to cash and cash equivalents, decreased to $26.2 million from
$80.8 million in the year-earlier period. The higher investing activities
in 1995 resulted principally from the Port Arthur refinery acquisition
which closed on February 27, 1995. Capital expenditures for property,
plant and equipment during the first nine months of 1996 totaled $23.4
million (1995 - $24.2 million) with an additional $7.2 million (1995 -
$2.8 million) for refinery maintenance turnaround expenditures. Refinery
capital expenditures totaled $12.6 million in the first nine months of
1996 (1995 - $4.8 million), most of which was for discretionary projects
at the Port Arthur and Hartford refineries. Retail capital expenditures
for the first nine months of 1996 totaled $10.5 million (1995 - $18.5
million) principally for the purchase of equipment related to new stores
and underground storage tank-related work.
In early October, Clark sold for net cash proceeds of $235.4 million
one of the Company's advance crude oil purchase receivables acquired in
December, 1995 and certain associated hedge contracts. The receivable
together with the associated hedge contracts was assigned to Clark by the
Company in early October at fair market value and recorded as an equity
contribution. The Company will realize a gain on the transaction in the
fourth quarter of 1996. The Company continues to own the advance crude
oil purchase receivable from Gulf Resources Corporation. The Company has
historically maintained substantial cash reserves to mitigate the
cyclical nature of its business. Such cash reserves may also be used to
enhance existing assets, for acquisitions or to reduce debt.
Cash flows from financing activities declined in the first nine months
of 1996 as compared to the prior year. Financing activities in 1995 related to
the financing of the Port Arthur refinery acquisition.
Funds generated from operating activities together with the Company's
existing cash, cash equivalents and short-term investments are expected to
be adequate to fund requirements for working capital and capital
expenditure programs for the next year. Future working capital,
discretionary or non-discretionary capital expenditures, or acquisitions
may require additional debt or equity financing.
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
In early April, 1996, Clark learned that its Hartford, Illinois refinery
is the subject of a Clean Air Act enforcement referral by the United States
Environmental Protection Agency ("USEPA") to the United States Department
of Justice. The referral pertains to alleged violations of the Clean Air
Act and regulations promulgated thereunder in the operation and permitting
of the Hartford refinery fluid catalytic cracking unit ("FCCU") and alleged
modification of the FCCU. Although a complaint has not yet been filed, the
government requested additional information from Clark pursuant to Section
114 of the Clean Air Act for the stated purpose of completing its pre-
enforcement evaluation. Clark is gathering the requested information and
is otherwise cooperating with the government in its investigation. No
estimate can be made at this time of Clark's potential liability, if any,
as a result of this enforcement referral.
On January 5, 1995, Clark received a Unilateral Administrative Order
from the USEPA pursuant to CERCLA alleging that "Clark Oil & Refining
Corp." is a potential responsible party ("PRP") with respect to shipments
of hazardous substances to a solid waste disposal site known as the Ninth
Avenue Site, Gary, Indiana. The alleged shipments all occurred prior to
1987. The Order instructs Clark and the other approximately ninety PRPs
to design and implement certain remedial work at the site. Clark has
informed the USEPA that it is not a proper party to this matter, because
its purchase of certain assets of a company previously operating under the
"Clark" name ("Old Clark") was "free and clear" of all Old Clark
liabilities. Information provided with the Order estimates that the
remedial work may cost approximately $25 million. No estimate of
liability can be made with respect to this proceeding at this time. In
addition, on December 28, 1994, Clark was served with a summons and
complaint brought by certain private parties seeking to recover all past
and future response costs with respect to that site on the basis of
shipments of hazardous substances allegedly made prior to 1987. Clark
moved to dismiss this action on the basis that the action is barred by the
"free and clear" Order pursuant to which Clark purchased certain assets of
Old Clark. The plaintiffs and one co-defendant opposed Clark's motion to
dismiss. On April 19, 1996, the District Court denied Clark's Motion to
Dismiss holding that at this early procedural stage of the case and prior
to gathering facts regarding the plaintiffs opportunity to participate in
the bankruptcy case which issued the "free and clear" order, the Court
would not dismiss the case. No estimate of any liability with respect to
this case can be made at this time.
On September 30, 1996, the USEPA sent a combined Finding of Violation
alleging that fugitive emissions had been released from Clark's Blue
Island refinery and a Notice of Violation alleging that the total annual
benzene calculation pursuant to the National Emissions Standards for
Hazardous Air Pollutants was incorrectly determined. Clark has scheduled
an administrative conference to discuss this matter with the USEPA. No
estimate of liability, if any, with respect to any of these matters can be
made at this time.
Following an explosion on October 19, 1996 in a propane gas line at
the Blue Island refinery, the State of Illinois brought an action seeking a
temporary restraining order requiring the refinery to cease operations,
temporarily, pending a safety review. On November 8, 1996, the court
denied the requested order. The State's time for appeal has not yet run
out.
<PAGE> 16
ITEM 5 - Other Information
Clark signed a new three year collective bargaining agreement, expiring
August 31, 1999, for certain Blue Island refinery employees. The previous
agreement would have expired August 31, 1996.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Fifth Amendment to Amended and Restated Credit
Agreement, dated as of October 4, 1996 (Incorporated by reference
to Exhibit 10.1 filed with Clark Refining & Marketing, Inc.
Form 10-Q for the period ending September 30, 1996
(File No. 1-11392)
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
October 4, 1996 - Announcement of the sale of an advance
crude oil purchase receivable
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CLARK USA, INC.
(Registrant)
/s/ Dennis R. Eichholz
Dennis R. Eichholz
Controller and Treasurer (Authorized
Officer and Chief Accounting Officer)
November 12, 1996
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