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, 1999
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 (X) No ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of November 10, 1999, 19,934,495, all of which were owned by
Clark Refining Holdings Inc.
<PAGE>1
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of
Clark USA, Inc:
We have reviewed the accompanying consolidated balance sheet of Clark
USA, Inc. and Subsidiaries (the "Company") as of September 30, 1999,
and the related consolidated statements of operations for the three and
nine month periods ended September 30, 1998 and 1999, and the
consolidated statements of cash flows for the nine month periods then
ended. 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
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements 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 the Company as of
December 31, 1998, and the related consolidated statements of
operations, stockholder's equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 6, 1999 (except
Note 3 for which the date was July 8, 1999), we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as
of December 31, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
Deloitte & Touche LLP
St. Louis, Missouri
November 9, 1999
<PAGE>2
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
<TABLE>
Reference December 31, September 30,
Note 1998 1999
--------- ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 148.1 $ 261.7
Short-term investments 4.5 1.4
Accounts receivable 131.7 183.0
Inventories 3 267.7 326.7
Prepaid expenses and other 31.5 38.6
Net assets held for sale 7 142.0 --
------------ -------------
Total current assets 725.5 811.4
PROPERTY, PLANT, AND EQUIPMENT, NET 628.9 622.0
OTHER ASSETS 4 95.9 114.0
------------ -------------
$1,450.3 $1,547.4
============ =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 250.3 $ 322.3
Accrued expenses and other 5 66.8 72.9
Accrued taxes other than income 25.8 30.7
------------ -------------
Total current liabilities 342.9 425.9
LONG-TERM DEBT 980.2 977.9
OTHER LONG-TERM LIABILITIES 52.5 64.3
COMMITMENTS AND CONTINGENCIES 8 -- --
EXCHANGEABLE PREFERRED STOCK
($.01 par value per share;
5,000,000 shares authorized;
74,504 shares issued) 72.5 78.8
COMMON STOCKHOLDER'S EQUITY:
Common stock
Common, $.01 par value, 13,833,485 issued 0.1 0.1
Class F Common, $.01 par value,
6,101,010 issued 0.1 0.1
Paid-in capital 209.0 205.5
Retained deficit (207.0) (205.2)
------------ -------------
Total common stockholder's equity 2.2 0.5
------------ -------------
$1,450.3 $1,547.4
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>3
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
<TABLE>
For the Three Months
Ended September 30,
Reference --------------------
Note 1998 1999
------------ --------- ---------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 1,019.4 $ 1,136.3
EXPENSES:
Cost of sales (880.0) (1,014.7)
Operating expenses (89.2) (104.6)
General and administrative expenses (12.6) (12.6)
Depreciation (7.4) (9.1)
Amortization (6.9) (6.5)
Inventory recovery from market
adjustment 3 20.5 --
--------- ---------
(975.6) (1,147.5)
---------- ---------
GAIN ON SALE OF PIPELINE INTERESTS 69.3 --
---------- ---------
OPERATING INCOME (LOSS) 113.1 (11.2)
Interest and finance costs, net 4, 5 (18.3) (19.2)
---------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 94.8 (30.4)
Income tax benefit 6 3.7 9.5
--------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS 98.5 (20.9)
Discontinued operations, net of income tax benefit
of $5.7 (1998 - provision of $3.7) 7 5.7 (9.2)
Gain on disposal of discontinued operations, net of
taxes of $23.7 7 -- 36.9
---------- ---------
NET EARNINGS 104.2 6.8
Preferred stock dividends (2.0) (2.1)
---------- ---------
NET EARNINGS AVAILABLE TO COMMON STOCK $ 102.2 $ 4.7
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>4
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, dollars in millions)
<TABLE>
For the Nine Months
Reference Ended September 30,
Note 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES $2,600.9 $3,093.4
EXPENSES:
Cost of sales (2,226.9) (2,794.1)
Operating expenses (241.9) (297.5)
General and administrative expenses (37.4) (38.3)
Depreciation (20.3) (26.5)
Amortization (18.7) (18.5)
Inventory recovery (write-down)
to market 3 (10.4) 105.8
--------- ---------
(2,555.6) (3,069.1)
--------- ---------
GAIN ON SALE OF PIPELINE INTERESTS 69.3 --
--------- ---------
OPERATING INCOME 114.6 24.3
Interest and finance costs, net 4, 5 (50.1) (61.0)
--------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 64.5 (36.7)
Income tax benefit 6 3.6 12.1
--------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS 68.1 (24.6)
Discontinued operations, net of income
tax benefit of $2.7 (1998 - provision
of $3.8) 7 4.6 (4.3)
Gain on disposal of discontinued operations,
net of taxes of $23.7 7 -- 36.9
--------- ---------
NET EARNINGS 72.7 8.0
Preferred stock dividends (5.7) (6.3)
--------- ---------
NET EARNINGS AVAILABLE TO COMMON STOCK $ 67.0 $ 1.7
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>5
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
<TABLE>
For the Nine Months
Ended September 30,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 72.7 $ 8.0
Discontinued operations (4.6) 4.3
Adjustments:
Depreciation 20.3 26.5
Amortization 20.8 23.4
Deferred income taxes -- 8.2
Gain on sale of pipeline and retail interests (69.3) (60.6)
Inventory (recovery) write-down to market 10.4 (105.8)
Other, net 3.9 20.5
Cash provided by (reinvested in) working capital
Accounts receivable, prepaid expenses and other (142.7) (48.1)
Inventories (176.3) 48.1
Accounts payable, accrued expenses, taxes
other than income and other 132.2 73.3
--------- ---------
Net cash used in operating activities
of continuing operations (132.6) (2.2)
Net cash provided by (used in) operating
activities of discontinued operations 11.0 (1.5)
--------- ---------
Net cash used in operating activities (121.6) (3.7)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (38.0) (49.9)
Expenditures for turnaround (13.8) (66.3)
Refinery acquisition expenditures (177.7) --
Proceeds from sale of assets 76.4 214.9
Proceeds from transfer of assets to Port Arthur
Coker Company L.P., net (8.1) 26.6
Purchases of short-term investments -- (3.2)
Sales and maturities of short-term investments -- 2.9
Discontinued operations (0.7) (1.8)
--------- ---------
Net cash provided by (used in) investing
activities (161.9) 123.2
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (9.5) (2.4)
Proceeds from issuance of long-term debt 224.7 --
Repurchase of common stock -- (3.5)
Proceeds from sale of common stock 0.2 --
Deferred financing costs (8.0) --
--------- ---------
Net cash provided by (used in) financing
activities 207.4 (5.9)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (76.1) 113.6
CASH AND CASH EQUIVALENTS, beginning of period 234.3 148.1
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 158.2 $ 261.7
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>6
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark USA, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1999
(tabular dollar amounts in millions of U.S. dollars)
1. Basis of Preparation
The consolidated interim financial statements of Clark USA, Inc. and
Subsidiaries (the "Company") have been reviewed by independent
accountants. 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 financial statements are presented in accordance with the
disclosure requirements for Form 10-Q. These unaudited financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K.
In May 1999, all of the shares of Clark USA, Inc. were transferred by
their holders to Clark Refining Holdings Inc. ("Holdings") for equivalent
shares, making the Company a wholly-owned subsidiary of Holdings.
The Company has made certain reclassifications to the prior period to
conform to current period presentation.
2. Accounting Changes
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company is required to adopt
this statement effective January 1, 2001. SFAS No. 133 will require the
Company to record all derivatives on the balance sheet at fair value.
Changes in derivative fair value will either be recognized in earnings
as offsets to the changes in fair value of related hedged assets,
liabilities, and firm commitments or, for forecasted transactions,
deferred and recorded as a component of comprehensive income until the
hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will
be recognized in earnings immediately. The Company is currently
evaluating when it will adopt this standard and the impact of the
standard on the Company. The impact of SFAS No. 133 will depend on a
variety of factors, including future interpretive guidance, the future
level of hedging activity, the types of hedging instruments used, and
the effectiveness of such instruments.
3. Inventories
The carrying value of inventories consisted of the following:
<TABLE>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Crude oil.................... $ 165.3 $ 103.6
Refined and blendstocks...... 186.4 199.0
LIFO inventory cost excess
over market................. (105.8) --
Warehouse stock and other.... 21.8 24.1
------------ -------------
$ 267.7 $ 326.7
============ =============
</TABLE>
<PAGE> 7
The market value of the crude oil and refined product inventories at
September 30, 1999 was approximately $116.8 million above carrying
value.
4. Other Assets
Amortization of deferred financing costs for the three-month and
nine-month periods ended September 30, 1999 was $1.7 million (1998 -
$0.7 million) and $4.8 million (1998 - $1.9 million), respectively, and
was included in "Interest and finance costs, net."
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
<TABLE>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest expense....... $ 20.8 $ 23.1 $ 57.3 $ 69.7
Financing costs........ 0.6 1.8 1.8 5.1
Interest and finance
income................ (2.4) (3.4) (7.3) (6.3)
------ ------ ------ ------
19.0 21.5 51.8 68.5
Capitalized interest... (0.7) (2.3) (1.7) (7.5)
------ ------ ------ ------
$ 18.3 $ 19.2 $ 50.1 $ 61.0
====== ====== ====== ======
</TABLE>
Cash paid for interest expense for the three-month and nine-month
periods ended September 30, 1999 was $18.7 million (1998 - $12.0
million) and $65.4 million (1998 - $48.2 million), respectively.
Accrued interest payable as of September 30, 1999 of $19.3 million
(December 31, 1998 - $14.9 million) was included in "Accrued expenses
and other."
6. Income Taxes
The Company received net cash income tax refunds totaling $0.5
million for the three months ended September 30, 1999 (1998 - net cash
income tax payments of $0.1 million) and received net cash income tax
refunds totaling $0.1 million for the nine-month period ended September
30, 1999 (1998 - $4.3 million).
The income tax benefit on the Earnings (Loss) from Continuing
Operations of $9.5 million and $12.1 million for the three and nine-
month periods ended September 30, 1999 reflects the effects of
intraperiod tax allocations resulting from the utilization of net
operating losses to offset the income tax provision resulting from the
gain on the sale of the retail division ($23.7 million) and the income
tax benefit from Discontinued Operations, as well as the
write-down of a net deferred tax asset.
7. Disposition of Retail Division
In July 1999, Clark Refining & Marketing, Inc. ("Clark R&M"), the
Company's principal operating subsidiary, sold its retail marketing
operation in a recapitalization transaction to a company controlled by
Apollo Management L.P. for approximately $230 million. The retail
marketing operation sold included all Company and independently-operated
Clark-branded stores and the Clark trade name. After all transaction
costs, the sale generated cash proceeds of approximately $215 million.
See Exhibit 10.0 Asset Contribution and Recapitalization Agreement filed
with the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1999. In general, the buyer assumed unknown environmental
liabilities at the retail stores they acquired up to $50,000 per site,
as well as responsibility for any post closing contamination. Subject
<PAGE> 8
to certain risk sharing arrangements, Clark R&M retained responsibility
for all pre-existing known contamination. Holdings acquired a six
percent equity interest in the retail marketing operation. As part of
the sale agreement, Clark R&M also entered into a two-year market-based
supply agreement for refined products that will be provided to the
retail business through Clark R&M's Midwest refining and distribution
network. This network was not included in the sale. The buyer may
cancel the supply agreement with 90 days notice. The retail marketing
operation was sold in order to allow the Company to focus its human and
financial resources on the continued improvement and expansion of its
refining business, which it believes will generate higher future
returns.
The retail marketing operations were classified as a discontinued
operation and the results of operations were excluded from continuing
operations in the consolidated statements of operations beginning with
the periods ended March 31, 1998 and 1999. A pre-tax gain on the sale
of $60.6 million ($36.9 million, net of income taxes) was recognized in
the third quarter of 1999.
The net sales revenue from the retail marketing operation for the
three-month and nine-month periods ended September 30, 1999 was $20.2
million (1998 - $238.6 million) and $485.1 million (1998 - $719.7
million), respectively. "Net assets held for sale" included in the
Company's Consolidated Balance Sheet as of December 31, 1998 consisted
of the following:
<TABLE>
December 31,
1998
------------
<S> <C>
Current assets............... $ 42.6
Noncurrent assets............ 187.5
---------
Total assets................. $ 230.1
=========
Current liabilities.......... 63.4
Noncurrent liabilities....... 24.7
---------
Total liabilities............ $ 88.1
=========
Net assets held for sale..... $ 142.0
=========
</TABLE>
8. Commitments and Contingencies
Clark R&M 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. While it is not possible at this time to
establish the ultimate amount of liability with respect to such
contingent liabilities, Clark R&M 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.
In March 1998, Clark R&M announced that it had entered into a long-
term crude oil supply agreement with P.M.I. Comercio Internacional,
S.A. de C.V. ("PMI"), an affiliate of Petroleos Mexicanos, the
Mexican state oil company. The contract provided Clark R&M with the
foundation necessary to continue developing a project to upgrade its
Port Arthur, Texas refinery to process primarily lower-cost, heavy sour
crude oil. The project includes the construction of additional coking
and hydrocracking capability, and the expansion of crude unit capacity
to approximately 250,000 barrels per day. Financing for the new major
processing units in the project was arranged by Port Arthur Coker
Company L.P., a company that is an affiliate of, but not controlled by,
the Company and its subsidiaries in the third quarter of 1999. The oil
supply agreement with PMI and the construction work-in-progress related
to the new processing units were transferred for value to Port Arthur
Coker Company L.P. in the third quarter of 1999. In connection with
the project, Clark R&M will lease certain existing processing units to
<PAGE> 9
Port Arthur Coker Company L.P. on fair market terms and, pursuant to
this lease, will be obligated to make certain modifications,
infrastructure improvements and incur certain development costs during
1999 and 2000 at an estimated cost up to $120 million. To secure this
commitment, the Company posted a letter of credit in the amount of
$97.0 million at the closing, all of which was outstanding at September
30, 1999. As of September 30, 1999, Clark R&M had expended
approximately $35.8 million towards this commitment. In addition,
Clark R&M entered into agreements with Port Arthur Coker Company L.P.
pursuant to which Clark R&M will provide certain operating, maintenance
and other services and will purchase the output from the new coking and
hydrocracking equipment for further processing into finished products.
Clark R&M also entered into agreements under which Port Arthur Coker
Company L.P. will process certain hydrocarbon streams owned by Clark
R&M. Clark R&M will receive and pay compensation at fair market value
under these agreements, which in the aggregate are expected to be
favorable to Clark R&M.
<PAGE> 10
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Clark USA, Inc. (the "Company") is a wholly-owned subsidiary of Clark
Refining Holdings Inc. ("Holdings") and owns all of the outstanding
capital stock of Clark Refining & Marketing, Inc. ("Clark R&M"). The
Company also owns all of the outstanding capital stock of Clark Pipe
Line Company. Because Clark R&M is the principal subsidiary of the
Company, a discussion of the Company's results of operations consists
principally of a discussion of Clark R&M's results of operations.
Results of Operations
Financial Highlights
The following table reflects the Company's financial and operating
highlights for the three and nine-month periods ended September 30,
1998 and 1999. All amounts listed are dollars in millions, except per
barrel information. Certain information was restated to reflect current
period presentation. The table provides supplementary data and is not
intended to represent an income statement presented in accordance with
generally accepted accounting principles.
Operating Income:
<TABLE>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Port Arthur Refinery
Crude oil throughput
(thousand bbls per day) 223.6 189.8 226.3 205.2
Production (thousand bbls
per day) 219.9 208.6 226.7 217.3
Gross margin ($ per barrel
of production) $ 3.12 $ 2.43 $ 3.71 $ 2.14
Gulf Coast 3/2/1 crack
spread ($ per barrel) 1.99 2.54 2.63 1.73
Operating expenses (44.9) (44.9) (132.9) (124.0)
Net margin $ 18.2 $ 1.8 $ 96.7 $ 3.0
Midwest Refineries and Other
Crude oil throughput
(thousand bbls per day) 221.6 245.2 153.4 252.4
Production (thousand bbls
per day) 216.0 257.4 152.7 266.8
Gross margin ($ per barrel
of production) $ 2.74 $ 2.24 $ 3.44 $ 1.97
Chicago 3/2/1 crack spread
($ per barrel) 3.30 3.72 3.68 2.83
Operating expenses (44.0) (59.6) (108.2) (173.0)
Clark Pipe Line net margin 0.4 (0.3) 1.6 0.6
Net margin $ 10.9 $ (6.8) $ 36.8 $ (28.7)
General and administrative
expenses (12.6) (12.6) (37.4) (38.3)
-------- -------- -------- --------
Operating contribution (loss)$ 16.5 $ (17.6) $ 96.1 $ (64.0)
Inventory timing adjustment gain
(loss) (a) 21.1 22.0 (1.4) 27.5
Inventory recovery (write-down)
to market 20.5 - (10.4) 105.8
Gain on sale of assets 69.3 - 69.3 -
Depreciation and amortization (14.3) (15.6) (39.0) (45.0)
-------- -------- -------- --------
Operating income (loss) $ 113.1 $ (11.2) $ 114.6 $ 24.3
======== ======== ========= =========
</TABLE>
(a) Includes gains and losses caused by the timing differences between
when crude oil is actually purchased and refined products are
actually sold, and a daily "market in, market out" operations
measurement methodology.
The Company recorded net earnings of $4.7 million in the third
quarter of 1999 versus net earnings of $102.2 million in the same
period a year ago. For the first nine months of 1999, the Company
recorded net earnings of $1.7 million versus net earnings of $67.0
million in the same period a year ago. Net earnings in the third
<PAGE> 11
quarter of 1999 included a pre-tax gain on the sale of the company's
retail division of $60.6 million and net earnings in the third quarter
of 1998 included a pre-tax gain on the sale of certain pipeline
interests of $69.3 million. Earnings in the first nine months of 1999
also benefited from rising petroleum prices as demonstrated by an over
$12.00 per barrel increase in benchmark West Texas Intermediate
("WTI") crude oil prices. Associated inventory gains in the first
nine months of 1999 were a result of a recovery of previous non-cash
inventory writedowns of $105.8 million (1998 - loss of $10.4 million)
and the cash benefit of the price increases on the lag between crude
oil purchases and product sales of $27.5 million (1998 - loss of $1.4
million).
Net sales and operating revenues increased approximately 11% and 19%
in the three and nine months ended September 30, 1999, respectively, as
compared to the same periods of 1998. These increases were principally
due to additional sales volumes resulting from the acquisition of the
Lima refinery in August 1998.
Operating Contribution (earnings before interest, depreciation,
amortization, inventory-related items and taxes) from continuing
operations was a loss of $17.6 million in the third quarter of 1999
versus a contribution of $16.5 million for the same period a year ago.
Operating Contribution from continuing operations was a loss of $64.0
million in the first nine months of 1999 versus a contribution of $96.1
million in the same period of 1998. Operating Contribution in both the
third quarter and first nine months of 1999 trailed the prior year due
to weaker market conditions and significant planned and unplanned
downtime, particularly in the third quarter of 1999.
Three of the Company's four refineries had curtailed operations during the
third quarter of 1999. During September, a planned maintenance
turnaround was performed on the Company's Lima, Ohio refinery that
reduced production and resulted in a lost gross margin opportunity of
an estimated $15 million with similar activities resulting in an
estimated $5 million lost gross margin opportunity in the first quarter
of 1999. Operating Contribution was further reduced by an estimated
$18 million in the third quarter of 1999 due to unplanned downtime.
The Lima refinery ran at reduced rates in August due to an interruption
of crude oil deliveries caused by a fire in a Chevron crude oil
pipeline. In addition, a lightning-induced power outage and related
downtime at the Company's Port Arthur, Texas refinery and operating
problems with the Hartford, Illinois refinery's coker unit reduced
Operating Contribution.
Industry light product margins improved in the third quarter from
anemic first half levels on improving inventory fundamentals, but this
improvement was more than offset by lower margins on by-products whose
prices did not track third quarter crude price increases and by narrower
discounts for heavy and light sour crude oil. Gulf Coast 3/2/1 crack
spread refining margin indicators in the first nine months of 1999
decreased to $1.73 per barrel (1998 - $2.63 per barrel) as the third
consecutive warmer-than-normal winter heating season resulted in high
industry inventories on a historical basis. As of November 9, 1999,
light product inventories had improved to below 1998 levels and
approached five-year averages. The Company believes the narrower crude
oil differentials were due principally to Latin American oil exporters
disproportionately reducing supplies of heavy crude oil sales as part of
the accord reached among OPEC and non-OPEC producers to reduce the world
oil glut that existed earlier this year. Discounts for the benchmark
Maya/WTI differentials narrowed to $4.35 per barrel (1998 - $5.17) in
the third quarter and to $4.67 per barrel (1998 - $5.94) for the year to
date. Refining market conditions in the first nine months of 1999 were
the most unfavorable of the last 15 years.
Crude oil throughput and related production in the Company's Midwest
refineries was higher in the third quarter and first nine months of
1999 principally because of the addition of the Lima refinery in August
1998. However, the increase in production resulting from the Lima
refinery acquisition was partially offset by a reduction in throughput
due to the poor refining margins in the first nine months of 1999,
leaks in major interstate crude oil pipelines supplying the Midwest
refineries and other planned and unplanned downtime. Crude oil
throughput and production was also reduced at the Port Arthur refinery
in the third quarter and first nine months of 1999 due to weak market
conditions.
<PAGE> 12
Midwest refining operating expenses increased because of the
addition of the Lima refinery. Port Arthur operating expenses were
reduced in the first nine months of 1999 due to lower maintenance and
gain sharing expenses and the positive impact of lower natural gas
prices early in 1999 on fuel costs.
Other Financial Highlights
The Company has expended $5.2 million from inception of its year 2000
systems remediation program through September 30, 1999. The Company
believes that as of October 1999 its mission critical embedded
processors at refineries and mission critical systems, including
hardware and software, were ready for the year 2000. In addition, the
Company's mission critical business partners had represented that their
mission critical systems were remediated. In the event the Company
incurs year 2000-related problems with its mission critical systems or
processes, contingency plans have been developed to handle such
occurrences. More information on the Company's year 2000 program is
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
Depreciation and amortization expenses increased in the three and
nine months ended September 30, 1999 over the comparable periods in 1998
principally because of the acquisition of the Lima refinery. Interest
and finance costs, net for the three and nine months ended September 30,
1999 increased over the comparable periods in 1998 principally because
of increased debt associated with the acquisition of the Lima refinery.
The income tax benefit on the Earnings (Loss) from Continuing
Operations of $9.5 million and $12.1 million for the three and nine-
month periods ended September 30, 1999 reflects the effects of
intraperiod tax allocations resulting from the utilization of net
operating losses to offset the income tax provision resulting from the
gain on the sale of the retail division ($23.7 million) and the income
tax benefit from Discontinued Operations, as well as the write-down of a
net deferred tax asset.
Sale of Retail Division
In July 1999, Clark R&M sold its retail marketing operation in a
recapitalization transaction to a company controlled by Apollo
Management L.P. for approximately $230 million. The retail marketing
operation sold included all Company and independently-operated Clark-
branded stores and the Clark trade name. After all transaction costs,
the sale generated cash proceeds of approximately $215 million. See
Exhibit 10.0 Asset Contribution and Recapitalization Agreement filed
with the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1999. In general, the buyer assumed unknown environmental
liabilities at the retail stores they acquired up to $50,000 per site,
as well as responsibility for any post closing contamination. Subject
to certain risk sharing arrangements, Clark R&M retained responsibility
for all pre-existing known contamination. Holdings acquired a six
percent equity interest in the retail marketing operation. As part of
the sale agreement, Clark R&M also entered into a two-year market-based
supply agreement for refined products that will be provided to the
retail business through Clark R&M's Midwest refining and distribution
network. This network was not included in the sale. The buyer may
cancel the supply agreement with 90 days notice. The retail marketing
operation was sold in order to allow the Company to focus its human and
financial resources on the continued improvement and expansion of its
refining business, which it believes will generate higher future
returns.
The retail marketing operations were classified as a discontinued
operation and the results of operations were excluded from continuing
operations in the consolidated statements of operations beginning with
the periods ended March 31, 1998 and 1999. A pre-tax gain on the sale
of $60.6 million ($36.9 million, net of income taxes) was recognized in
the third quarter of 1999.
<PAGE> 13
Liquidity and Capital Resources
Net cash used in operating activities, excluding working capital
changes, for the nine months ended September 30, 1999 was $75.5 million
compared to cash provided of $54.2 million in the year-earlier period.
Working capital as of September 30, 1999 was $385.5 million, a 1.91-to-1
current ratio, versus $382.6 million as of December 31, 1998, a 2.12-to-
1 current ratio. Working capital at December 31, 1998 included the
retail division net assets held for sale. The benefit to working
capital from increased petroleum prices and the sale of the retail
division for a gain in the first nine months of 1999 was offset by cash
flow from operating activities and capital expenditures.
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil and refined
petroleum products. Clark R&M has in place a credit agreement (the
"Credit Agreement") which provides for borrowings and the issuance of
letters of credit up to the lesser of $700 million, or the amount of a
borrowing base calculated with respect to Clark R&M's cash, short-term
investments, eligible receivables and hydrocarbon inventories. Direct
borrowings under the Credit Agreement are limited to the principal
amount of $150 million. Borrowings under the Credit Agreement are
secured by a lien on substantially all of the Company's cash and cash
equivalents, receivables, crude oil and refined product inventories and
trademarks. The amount available under the borrowing base associated
with such facility at September 30, 1999 was $695 million and
approximately $426 million of the facility was utilized for letters of
credit. As of September 30, 1999, there were no direct borrowings under
the Credit Agreement. The Credit Agreement expires on December 31, 1999
and Clark R&M expects to amend or replace the agreement by the end of
November 1999.
Cash flows generated from investing activities in the first nine
months of 1999 were $123.2 million as compared to cash flows used in
investing activities of $161.9 million in the year-earlier period. The
variance between the first nine months of 1999 and 1998 was principally
due to proceeds from the sale of the Company's retail division and the
transfer of assets to Port Arthur Coker Company L.P. in 1999, while the
prior year included expenditures of $177.7 million related to the
acquisition the Lima refinery that were only partially offset by the
proceeds from the sale of minority pipeline interests. Scheduled
maintenance turnaround expenditures in the first nine months of 1999
exceeded that same period in the prior year due to increased turnaround
activity at the Lima and Port Arthur refineries. Expenditures for
property, plant and equipment totaled $49.9 million in the first nine
months of 1999 (1998 - $38.0 million) and included $18.6 million related
to Clark R&M's portion of a project being undertaken in conjunction with
Port Arthur Coker Company L.P. to upgrade the Port Arthur refinery to
allow it to process up to 80% heavy sour crude oil.
In March 1998, Clark R&M announced that it had entered into a long-
term crude oil supply agreement with P.M.I. Comercio Internacional,
S.A. de C.V. ("PMI"), an affiliate of Petroleos Mexicanos, the
Mexican state oil company. The contract provided Clark R&M with the
foundation necessary to continue developing a project to upgrade its
Port Arthur, Texas refinery to process primarily lower-cost, heavy sour
crude oil. The project includes the construction of additional coking
and hydrocracking capability, and the expansion of crude unit capacity
to approximately 250,000 barrels per day. Financing for the new major
processing units in the project was arranged by Port Arthur Coker
Company L.P., a company that is an affiliate of, but not controlled by,
the Company and its subsidiaries in the third quarter of 1999. The oil
supply agreement with PMI and the construction work-in-progress related
to the new processing units were transferred for value to Port Arthur
Coker Company L.P. in the third quarter of 1999. In connection with
the project, Clark R&M will lease certain existing processing units to
Port Arthur Coker Company L.P. on fair market terms and, pursuant to
this lease, will be obligated to make certain modifications,
infrastructure improvements and incur certain development costs during
1999 and 2000 at an estimated cost up to $120 million. To secure this
commitment, the Company posted a letter of credit in the amount of
$97.0 million at the closing, all of which was outstanding at September
30, 1999. As of September 30, 1999, Clark R&M had expended
approximately $35.8 million towards this commitment. In addition,
Clark R&M entered into agreements with Port Arthur Coker Company L.P.
<PAGE> 14
pursuant to which Clark R&M will provide certain operating, maintenance
and other services and will purchase the output from the new coking and
hydrocracking equipment for further processing into finished products.
Clark R&M also entered into agreements under which Port Arthur Coker
Company L.P. will process certain hydrocarbon streams owned by Clark
R&M. Clark R&M will receive and pay compensation at fair market value
under these agreements, which in the aggregate are expected to be
favorable to Clark R&M.
In June 1999, Clark R&M signed a non-binding letter of intent to
pursue the acquisition of Equilon Enterprises, L.L.C.'s ("Equilon")
295,000 barrel per day Wood River, Illinois refinery, which is adjacent
to Clark R&M's Hartford, Illinois refinery. Separately, Clark R&M
signed a non-binding letter of intent to sell 12 distribution terminals
to Equilon.
Cash flows from financing activities for first nine months of 1999
were reduced as compared to the same period in 1998 principally because
of the proceeds received in 1998 to partially finance the acquisition of
the Lima refinery.
Funds generated from Clark R&M's 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. Clark USA's ability to
access Clark R&M's cash flows from operating activities is subject to
limitation by covenants governing Clark R&M's outstanding debt and bank
facilities. Future working capital investments, discretionary and non-
discretionary capital expenditures, and acquisitions may require
additional debt or equity financing.
Forward-Looking Statements
Certain statements in this document are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements
are subject to the safe harbor provisions of this legislation. Words
such as "expects," "intends," "plans," "projects," "believes,"
"estimates" and similar expressions typically identify such
forward-looking statements.
Even though the Company believes its expectations regarding future
events are based on reasonable assumptions, forward-looking statements
are not guarantees of future performance. There are many reasons why
actual results could, and probably will, differ from those contemplated
in the Company's forward-looking statements. These include, among
others, changes in:
* Industry-wide refining margins
* Crude oil and other raw material costs, embargoes, industry
expenditures for the discovery and production of crude oil, and
military conflicts between, or internal instability in, one or more
oil-producing countries, and governmental actions
* Market volatility due to world and regional events
* Availability and cost of debt and equity financing
* Labor relations
* U.S. and world economic conditions
* Supply and demand for refined petroleum products
* Reliability and efficiency of the Company's operating facilities.
There are many hazards common to operating oil refining and
distribution facilities. Such hazards include equipment
malfunctions, plant construction/repair delays, explosions, fires,
oil spills and the impact of severe weather
* Actions taken by competitors which may include both pricing and
expansion or retirement of refinery capacity
* The enforceability of contracts
* Civil, criminal, regulatory or administrative actions, claims or
proceedings and regulations dealing with protection of the
environment, including refined petroleum product composition and
characteristics
* Other unpredictable or unknown factors not discussed
Because of all of these uncertainties, and others, you should not
place undue reliance on the Company's forward-looking statements.
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
On July 6, 1999, Clark Refining & Marketing, Inc. was served with a
civil administrative complaint by the United States Environmental
Protection Agency, Region 5, alleging certain violations of the
Emergency Planning and Community Right-to-Know Act, and regulations
promulgated thereunder, with respect to certain record-keeping and
reporting requirements relating to the Hartford refinery. The
administrative complaint seeks a civil penalty of $498,000. No estimate
can be made at this time of the Company's potential liability, if any,
as a result of this matter.
ITEM 5 - Other Information
Director Change
Richard C. Lappin, 54, was appointed director of the Company,
Holdings and Clark R&M effective October 12, 1999. Mr. Lappin has
served as a Senior Managing Director of The Blackstone Group L.P. since
February 1999. Prior to joining Blackstone, Mr. Lappin served as
President of Farley Industries which included West Point-Pepperell,
Inc., Acme Boot Company, Inc., Tool and Engineering, Inc., Magnus
Metals, Inc. and Fruit of the Loom, Inc. from 1989 to 1998. Mr. Lappin
replaced David A. Stockman on the board of directors. Mr. Stockman
resigned as a director of the Company, Holdings and Clark R&M effective
September 9, 1999.
Sale of Retail Division
In July 1999, Clark R&M sold its retail marketing operation in a
recapitalization transaction to a company controlled by Apollo
Management L.P. for approximately $230 million. The retail marketing
operation sold included all Company and independently-operated Clark-
branded stores and the Clark trade name. After all transaction costs,
the sale generated cash proceeds of approximately $215 million. See
Exhibit 10.0 Asset Contribution and Recapitalization Agreement filed
with the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1999. In general, the buyer assumed unknown environmental
liabilities at the retail stores they acquired up to $50,000 per site,
as well as responsibility for any post closing contamination. Subject
to certain risk sharing arrangements, Clark R&M retained responsibility
for all pre-existing known contamination. Holdings acquired a six
percent equity interest in the retail marketing operation. As part of
the sale agreement, Clark R&M also entered into a two-year market-based
supply agreement for refined products that will be provided to the
retail business through Clark R&M's Midwest refining and distribution
network. This network was not included in the sale. The buyer may
cancel the supply agreement with 90 days notice. The retail marketing
operation was sold in order to allow the Company to focus its human and
financial resources on the continued improvement and expansion of its
refining business, which it believes will generate higher future
returns.
The retail marketing operations were classified as a discontinued
operation and the results of operations were excluded from continuing
operations in the consolidated statements of operations beginning with
the periods ended March 31, 1998 and 1999. A pre-tax gain on the sale
of $60.6 million ($36.9 million, net of income taxes) was recognized in
the third quarter of 1999.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
<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, 1999
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