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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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: 1-11392
CLARK REFINING & MARKETING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1491230
(State or Other Jurisdiction of (I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of shares of registrant's common stock, $.01 par value, outstanding
as of March 27, 1996: 100 all of which are owned by Clark USA, Inc.
CLARK USA, INC.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
PART I
Items 1 and 2. Business; Properties................................. 1
Item 3. Legal Proceedings.................................... 20
Item 4. Submission of Matters to a Vote of Security Holders.. 21
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters................................ 21
Item 6. Selected Financial Data.............................. 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 24
Item 8. Financial Statements and Supplementary Data.......... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 33
PART III
Item 10. Directors and Executive Officers of the Registrant... 33
Item 11. Executive Compensation............................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 39
Item 13. Certain Relationships and Related Transactions....... 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 44
Glossary of Terms...................................................... 46
Signatures............................................................. 70
Certain industry terms are defined in the Glossary of Terms
PART I
ITEM 1 AND 2. BUSINESS; PROPERTIES
COMPANY OVERVIEW
Clark Refining & Marketing, Inc. (the "Company" or "Clark") is a leading
independent refiner and marketer of refined petroleum products in the Central
United States with over 340,000 barrels per day of rated crude oil throughput
capacity. Clark operates through two divisions. The refining division consists
of one Texas refinery, two Illinois refineries, 16 product distribution
terminals, a crude oil terminal, a LPG terminal and pipeline interests. As of
January 31, 1996, the marketing division consisted of approximately 821 gasoline
and convenience product stores in ten Midwestern states and the wholesale
marketing of gasoline, diesel fuel and other petroleum products on a branded and
unbranded basis. Clark's retail network has conducted operations under the Clark
name for over 60 years.
COMPANY HISTORY
All of the outstanding common stock of Clark is owned by Clark USA, Inc.
("Clark USA"). In November 1988, Clark USA was formed by The Horsham Corporation
("Horsham") and AOC Limited Partnership ("AOC L.P.") to hold all of the
capital stock of Clark and certain other assets. Pursuant to a stockholder
agreement (the "Stockholder Agreement") among AOC L.P., Horsham, Clark USA and
Clark, Horsham purchased 60% of the equity capital of Clark USA and AOC L.P.
purchased the remaining 40% interest. On December 30, 1992, Horsham and Clark
USA entered into a Stock Purchase and Redemption Agreement (the "AOC Stock
Purchase Agreement") with AOC L.P. to purchase and redeem all of the shares and
options to purchase shares of Clark USA owned by AOC L.P., resulting in Horsham
owning 100% of the outstanding equity of Clark USA at that time.
On February 27, 1995, Clark USA sold $135 million of stock to a wholly
owned subsidiary of Horsham. The Horsham subsidiary immediately resold $120
million of the stock to Tiger Management Corporation ("Tiger"), representing an
equity ownership interest of 40% of Clark USA at that time. As a result, Clark
received an equity contribution of $150 million from Clark USA and used these
proceeds along with existing cash to acquire from Chevron USA, Inc. ("Chevron")
the Port Arthur, Texas refinery and related assets (the "Port Arthur Refinery")
for approximately $70 million, plus approximately $122 million for inventory and
spare parts and the assumption of certain liabilities for the remediation of
environmental contamination under the active process units (estimated at $7.5
million) and employee postretirement benefits (estimated at $11.9 million). The
Company is also obligated under certain circumstances to pay to Chevron
contingent payments (the "Chevron Contingent Payments") pursuant to a formula
based on refining industry margin indicators and the volume of crude oil
processed at the Port Arthur refinery over a five-year period. Such contingent
payments were not payable for the first measurement period which ended September
30, 1995 and would not be payable for the next annual period based on these
industry margin indicators through December 31, 1995. The maximum total amount
of the Chevron Contingent Payments is $125 million. The Port Arthur refinery
acquisition positions the Company as one of the four largest independent
refiners in the United States.
In December 1995, subsidiaries of Occidental Petroleum Corporation
("Occidental") and Gulf Resources Corporation ("Gulf") acquired approximately
23% of the equity in Clark USA in exchange for the delivery of certain amounts
of crude oil over a six year period ending in 2001. See "--The Advance Crude Oil
Purchase Transactions."
The Company's primary business assets other than the Port Arthur Refinery
were acquired on November 22, 1988 out of bankruptcy proceedings. The assets
acquired consisted of (i) substantially all of the assets of Apex Oil Company,
Inc., a Wisconsin corporation (formerly OC Oil & Refining Corporation and prior
thereto Clark Oil & Refining Corporation, a Wisconsin corporation ("Old
Clark")) and its subsidiaries and (ii) certain other assets and liabilities of
the Novelly/Goldstein Partnership (formerly Apex Oil Company), a Missouri
general partnership ("Apex"), the indirect owner of Old Clark and an affiliate
of AOC L.P.
1
BUSINESS STRATEGY
The Company operates in a commodity-based industry in which market prices
for crude oil and refined products are largely beyond its control. Accordingly,
the Company's business strategy focuses on maximizing productivity, minimizing
operating costs, optimizing capital expenditures and growing both its refining
and marketing operations to strengthen the Company's business and financial
profile.
. IMPROVING PRODUCTIVITY. The Company implements relatively low cost
projects in its refining and marketing operations designed to increase
production, sales volumes and production yields and to improve sales mix
while reducing input costs and operating expenses. Improvements at the
newly acquired Port Arthur refinery, sour crude oil and deep cut projects
at its Illinois refineries and a retail reimaging program are examples of
these types of projects.
. OPTIMIZING CAPITAL INVESTMENT. The Company optimizes capital investments by
linking discretionary capital spending to cash flow generated, focusing its
efforts first on those productivity initiatives that require no capital
investment and then those which have relatively short payback periods. In
response to weak 1995 industry refining margin conditions, capital
expenditures were scaled back significantly from budget and prior year
levels. The Company has also implemented an upgraded image program within
its retail store network to incorporate its new On The Go(R) theme at a
cost per store that the Company believes is less than that incurred by
competitors for upgrades of retail facilities.
. PROMOTING ENTREPRENEURIAL CULTURE. The Company emphasizes an
entrepreneurial management approach which uses employee incentives to
enhance financial performance and safety. All of the Company's employees
participate in either its performance management, profit sharing or other
incentive plans. In addition, Clark USA has adopted a stock incentive plan
for Clark's key employees.
. GROWING THROUGH OPPORTUNISTIC ACQUISITIONS. The Company intends to
continue to expand its refining and marketing operations through
opportunistic acquisitions which can benefit from its business strategy,
create critical mass, increase market share or access new markets. Since
1994, the Company more than doubled its refining capacity by acquiring the
Port Arthur Refinery and strengthened its Northern Illinois presence by
adding 73 retail stores in this core market.
. STRENGTHENING THE BALANCE SHEET. The Company will continue to seek to
improve its capital structure. The financing of the Port Arthur refinery
acquisition principally with equity lowered the Company's leverage in early
1995 and provided an opportunity for improved results of operations.
REFINING
Overview
The refining division currently operates one refinery in Texas and two
refineries in Illinois with a combined throughput capacity of approximately
340,000 barrels per day. The Company also owns 16 product terminals located
throughout the Company's market area, a crude oil and LPG terminal associated
with the Port Arthur refinery, crude and product pipeline interests and
integrated supply, distribution, planning and support operations/services. The
Company's refining capacity of approximately 340,000 barrels per day, ranks the
Company as one of the four largest independent refiners in the United States.
2
Port Arthur Refinery
The Port Arthur refinery acquisition more than doubled the Company's
refining capacity. The refinery has the ability to process 100% sour crude oil,
including up to 20% heavy sour crude oil, and has coking capabilities. The
configuration of the Port Arthur refinery complements the Company's existing
refineries with its ability to produce jet fuel, 100% low sulfur diesel fuel,
55% summer reformulated gasoline ("RFG") and 75% winter RFG. The refinery's
Texas Gulf Coast location provides access to numerous cost effective domestic
and international crude oil sources, and its products can be sold in the mid-
continent and eastern U.S. as well as in export markets. The Company believes
that the Port Arthur Refinery has the potential for significant productivity
gains with modest capital investment, and that it will offer an opportunity for
improved results of operations and cash flow.
The feedstocks and production of the Port Arthur refinery for the ten
months it was owned in 1995 were as follows:
PORT ARTHUR REFINERY FEEDSTOCKS AND PRODUCTION
(BARRELS IN THOUSANDS)
TEN MONTHS ENDED
DECEMBER 31, 1995
------------------
BBLS %
-------- --------
FEEDSTOCKS
Light Sweet Crude Oil................................ 22,269 35.0%
Light Sour Crude Oil................................. 31,518 49.5
Heavy Sour Crude Oil................................. 7,488 11.8
Unfinished & Blendstocks............................. 2,349 3.7
------ -----
Total.................................................. 63,623 100.0
====== =====
PRODUCTION
Gasoline
Unleaded............................................. 13,966 21.8
Premium Unleaded..................................... 13,060 20.4
------ -----
26,996 42.2
------ -----
Other Products
Low Sulfur Diesel Fuel............................... 14,330 22.4
High Sulfur Diesel Fuel.............................. 409 0.7
Jet Fuel............................................. 9,047 14.1
Petrochemical Products............................... 5,382 8.4
Others............................................... 7,794 12.2
------ -----
36,962 57.8
------ -----
Total.................................................. 63,958 100.0
====== =====
Output/day............................................. 207.7
Illinois Refineries
The Company's Illinois refineries, Blue Island near Chicago and Hartford
near St. Louis, Missouri, are supplied by common carrier crude oil pipelines and
are also located on inland waterways with barge access. The refineries not only
have access to multiple sources of foreign and domestic crude oil supply, but
also benefit from crude oil input flexibility. The Company believes that the
Midwest location of these refineries provides relatively high refining margins
and less volatility than comparable operations located in other regions of the
United States on a historical basis principally because, in the past, demand for
refined products has exceeded supply in the region. This excess demand has
historically been satisfied by imports from other regions, providing these
Midwest refineries with a transportation advantage.
The Hartford refinery is capable of processing a variety of grades of crude
oil, including heavy sour crude, at a rated capacity of 65,000 barrels per day.
The Hartford refinery has the capability to process approximately 50% heavy sour
crude oil such as Maya crude oil and 25% medium sour crude oil although current
crude oil differentials and transportation costs do not justify processing heavy
sour crude oil at the Hartford refinery. Heavy sour crude oil has historically
been available at substantially lower cost compared to light sweet crude oil
such as WTI. The Blue Island refinery also can process various grades of crude
oil, including light sour crude oil at a rated capacity of 75,000 barrels per
day. The two refineries are connected by product pipelines, increasing
flexibility relative to stand-alone operations. The Company's product terminals
allow efficient distribution of refinery production through pipeline systems.
3
Blue Island Refinery
The Blue Island refinery is located in Blue Island, Illinois, approximately
17 miles south of Chicago. The refinery is situated on a 170 acre site, bounded
by the town of Blue Island and the Calumet-Sag Canal. The facility was initially
constructed in 1945 and, through a series of improvements and expansions, has
reached a crude oil capacity of 75,000 barrels per day, although the actual
throughput rates have been sustained at levels in excess of rated capacity. Blue
Island has among the highest capabilities to produce gasoline relative to the
other refineries in its market area and through productivity initiatives has
achieved the flexibility to produce RFG and low sulfur diesel fuel when the
market warrants. During most of the year, gasoline is the most profitable
refinery product.
The feedstocks and production of the Blue Island refinery for the years
ended December 31, 1993, 1994 and 1995 were as follows:
BLUE ISLAND REFINERY FEEDSTOCKS AND PRODUCTION
(BARRELS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 (A) 1994 1995 (B)
-------------- -------------- --------------
BBLS % BBLS % BBLS %
------ ------ ------ ------ ------ ------
FEEDSTOCKS
Light Sweet Crude Oil........ 22,016 85.9% 20,780 71.3% 18,975 74.0%
Light Sour Crude Oil......... 1,404 5.5 7,120 24.5 6,318 24.6
Unfinished & Blendstocks..... 2,211 8.6 1,233 4.2 347 1.4
------ ----- ------ ----- ------ -----
Total.......................... 25,631 100.0 29,133 100.0 25,640 100.0
====== ===== ====== ===== ====== =====
PRODUCTION
Gasoline
Unleaded..................... 9,701 38.3 12,571 43.7 12,737 50.1
Premium Unleaded............. 5,232 20.6 5,558 19.3 3,540 13.9
------ ----- ------ ----- ------ -----
14,933 58.9 18,129 63.0 16,277 64.0
------ ----- ------ ----- ------ -----
Other Products
Diesel Fuel.................. 5,329 21.0 6,376 22.2 5,133 20.2
Others....................... 5,091 20.1 4,293 14.8 4,016 15.8
------ ----- ------ ----- ------ -----
10,420 41.1 10,669 37.0 9,149 36.0
------ ----- ------ ----- ------ -----
Total.......................... 25,353 100.0 28,798 100.0 25,426 100.0
====== ===== ====== ===== ====== =====
Output/Day..................... 69.5 78.9 69.7
(a) The 1993 refinery production yield reflects maintenance turnaround downtime
of approximately two months on selected units. During a turnaround, refinery
production is reduced significantly.
(b) Output during 1995 was reduced due to poor first quarter market conditions
and a fire in a processing unit.
Hartford Refinery
The Hartford refinery is located in Hartford, Illinois, approximately 17
miles northeast of St. Louis. The refinery is situated on a 400 acre site. The
facility was initially constructed in 1941 and, through a series of improvements
and expansions, has reached a crude oil refining capacity of approximately
65,000 barrels per day. The Hartford refinery includes a coker unit and
consequently has the ability to process lower cost, heavy sour crude oil into
higher value products such as gasoline and diesel fuel. This upgrading
capability allows the refinery to benefit from higher margins if heavy sour
crude oil, such as Maya crude oil, is at a significant discount to light sweet
crude oil.
4
The feedstocks and production of the Hartford refinery for the years ended
December 31, 1993, 1994 and 1995 were as follows:
HARTFORD REFINERY FEEDSTOCKS AND PRODUCTION
(BARRELS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 (A) 1995 (B)
-------------- -------------- --------------
BBLS % BBLS % BBLS %
------ ------ ------ ------ ------ ------
FEEDSTOCKS
Light Sweet Crude Oil........ 4,817 19.6% 6,037 26.2% 5,008 20.8%
Light Sour Crude Oil......... 3,814 15.5 7,696 33.4 13,520 56.0
Heavy Sour Crude Oil......... 13,119 53.4 8,800 38.2 4,960 20.6
Unfinished & Blendstocks..... 2,807 11.5 506 2.2 637 2.6
------ ----- ------ ----- ------ -----
Total.......................... 24,557 100.0 23,039 100.0 24,125 100.0
====== ===== ====== ===== ====== =====
PRODUCTION
Gasoline
Unleaded..................... 10,394 43.6 9,777 43.6 11,497 47.2
Premium Unleaded............. 1,892 8.0 1,732 7.7 1,723 7.1
------ ----- ------ ----- ------ -----
12,286 51.6 11,509 51.3 13,220 54.3
------ ----- ------ ----- ------ -----
Other Products
High Sulfur Diesel Fuel...... 7,979 33.5 7,801 34.8 8,090 33.2
Others....................... 3,557 14.9 3,106 13.9 3,060 12.5
------ ----- ------ ----- ------ -----
11,536 48.4 10,907 48.7 11,150 45.7
------ ----- ------ ----- ------ -----
Total.......................... 23,822 100.0 22,416 100.0 24,370 100.0
====== ===== ====== ===== ====== =====
Output/Day..................... 65.3 61.4 66.8
(a) The 1994 results reflect maintenance turnaround downtime of approximately
one month on selected units.
(b) The 1995 results reflect the reduction of heavy sour crude oil throughput
due to weak crude oil differentials.
Terminals and Pipelines
Refined products are distributed primarily through the Company's terminals,
company-owned and common carrier product pipelines and by leased barges over the
Mississippi, Illinois and Ohio rivers. The Company owns 16 product terminals in
its market area. In addition to cost efficiencies in supplying its retail
network, the terminal distribution system allows efficient distribution of
refinery production. The Company also owns a crude oil terminal and an LPG
terminal associated with the Port Arthur refinery.
The Company enters into refined product exchange agreements with
unaffiliated companies to broaden its geographical distribution capabilities,
and products are also received through exchange terminals and distribution
points throughout the Central U.S.
5
The Company's terminals and respective capacities, as of December 31, 1995,
were as follows:
TERMINAL CAPACITY
-------- --------
(M BBLS)
Midwest
Blue Island, IL.................................. 86.6
Brecksville, OH.................................. 252.4
Clermont, IN..................................... 272.0
Columbus, OH..................................... 132.2
Taylor, MI....................................... 287.9
Granville, WI.................................... 323.6
Green Bay, WI.................................... 269.0
Hammond, IN...................................... 816.9
Hartford, IL..................................... 567.0
Marshall, MI..................................... 248.3
Peoria, IL....................................... 163.2
Rockford, IL..................................... 143.2
St. Louis, MO.................................... 471.3
Toledo, OH....................................... 195.4
Texas
Beaumont, TX (crude oil and refined products).... 3,220.0
Fannett, TX (LPG)................................ 2,500.0
Port Arthur Products Station..................... 1,831.5
--------
Total capacity.............................. 11,780.5
========
The Company's pipeline interests, as of December 31, 1995, were as follows:
PIPELINE TYPE INTEREST ROUTE
-------- ---- -------- -----
Southcap Crude 36.0% St. James, LA to Patoka, IL
Chicap Crude 22.7 Patoka, IL to Mokena, IL
Clark Port Arthur Crude and products 100.0 Port Arthur and Beaumont, TX
Wolverine Products 9.5 Chicago, IL to Toledo, OH
West Shore Products 11.1 Chicago, IL to Green Bay, WI
These pipelines operate as common carriers pursuant to published pipeline
tariffs, which also apply to use by the Company. The Company also owns a
dedicated products pipeline from the Blue Island refinery to its terminal in
Hammond, Indiana and from the Port Arthur refinery to its LPG terminal in
Fannett, Texas.
Supply
The Company's integrated refining and marketing assets are strategically
located in the Central U.S. in close proximity to a variety of supply and
distribution channels. As a result, the Company has the flexibility to acquire
the most economic domestic or foreign crude oil and the ability to distribute
its products to its own system and to most domestic wholesale markets. The Port
Arthur refinery's Texas Gulf Coast location provides access to numerous cost-
effective domestic and international crude oil sources, and its products can be
sold in the mid-continent and eastern United States as well as export markets.
The Company has agreements to sell to Chevron, at a spot pipeline low plus one-
half cent price, 24,000 barrels per day of gasoline and 3,000 barrels per day of
low-sulfur diesel and jet fuel through February 27, 1997. Remaining production
is used to supply the Company's current wholesale and retail needs with the
balance initially sold in the spot markets, while the Company further develops
its wholesale and retail networks.
The Company's Illinois refineries are located on major inland water
transportation routes and are connected to various local, interstate and
Canadian common carrier pipelines. The Company has a minority interest in
several of these pipelines. The Blue Island refinery can receive Canadian crude
oil through the Lakehead Pipeline from Canada, foreign and domestic crude oil
through the Capline Pipeline system originating in the Louisiana Gulf Coast
region, and domestic crude oil originating in West Texas, Oklahoma and the Rocky
Mountains through the
6
Arco Pipeline system. The Hartford refinery has access to foreign and domestic
crude oil supplies through the Capline/Capwood Pipeline systems and access to
West Texas, Oklahoma and Rocky Mountain crude oil through the Platte Pipeline
system. Both refineries are situated on major water transportation routes which
provide flexibility to receive crude oil or intermediate feedstocks by barge
when economical.
The Company has a sour crude oil supply contract with P.M.I. Comercio
Internacional, S.A. de C.V. ("PMI"), an affiliate of Petroleos Mexicanos, S.A.
de C.V. This contract is cancelable upon three months' notice by either party,
but it is intended to remain in place for the foreseeable future. The volume is
currently 50,000 barrels per day of Maya or Olmeca crude oil, with price
determination based on a market-related formula applicable to all PMI U.S.
customers. Other term crude oil supply agreements primarily relate to Canadian
crude oil delivered to Blue Island. Approximately 42,000 barrels per day are
currently under contract with three Canadian suppliers, cancelable with one or
two months' notice by either party. See "--The Advance Crude Oil Purchase
Transactions."
In addition to gasoline, the Company's refineries produce other types of
refined products. No. 2 diesel fuel is used mainly as a fuel for diesel burning
engines. No. 2 diesel fuel production is moved via pipeline or barge to the
Company's 16 product terminals and is sold over the Company's terminal truck
racks or through refinery pipeline or barge movement. The Port Arthur refinery
produces jet fuel which is generally sold through pipelines. Other production
includes residual oils (slurry oil and vacuum tower bottoms) which are used
mainly for heavy industrial fuel (e.g., power generation) and in the
manufacturing of roofing flux or for asphalt used in highway paving.
The Company supplies gasoline and diesel fuel to its retail system first,
then distributes products to its wholesale operations based on the highest
average market returns before being sold into the spot market.
Planning and Economics
The Company employs sophisticated linear programming models to optimize
refinery operations. These models enable the Company to predict the yield
structure of given crude oils and feedstocks, facilitating optimal feedstock
combinations and production of the most advantageous refined product mix for a
given set of market conditions. In this manner, the Company is able to take
advantage of lower cost crude oils and adjust the output mix in response to
changing market prices at any given time.
Inventory Management
The Company employs several strategies to minimize the impact on
profitability due to the volatility in feedstock costs and refined product
prices. These strategies generally involve the purchase and sale of exchange-
traded, energy-related futures and options with a duration of six months or
less. In addition, the Company to a lesser extent uses energy swap agreements
similar to those traded on the exchanges, such as crack spreads and crude oil
options, to better match the price movements in the Company's markets as opposed
to the delivery point of the exchange-traded contract. These strategies are
designed to minimize, on a short-term basis, the Company's exposure to the risk
of fluctuations in crude oil prices and refined product margins. The number of
barrels of crude oil and refined products covered by such contracts varies from
time to time. Such purchases and sales are closely managed and subject to
internally established risk standards and covenants contained in Clark's working
capital agreement. The results of these existing hedging activities affect
refining costs of sales and inventory costs.
With the Port Arthur refinery acquisition, the Company has the opportunity
to limit its exposure to price fluctuations on crude oil and finished product
production through the use of U.S. Gulf Coast based energy derivatives, such as
forward futures and option contracts relating to Gulf Coast crack spreads. There
exists a market for Gulf Coast refinery crack spreads based on published spot
market product prices and exchange-traded crude oil. Since the Company will
initially be selling the majority of the Port Arthur refinery's production into
the Gulf Coast spot market, the Company believes that forward future and option
contracts related to crack spreads may be used effectively to hedge refining
margins. Consequently, the Company is considering the feasibility and
implementation of such a program, particularly in the initial phase of the
Company's operation of the Port Arthur refinery. While the Company's hedging
program, if implemented, would be intended to provide an acceptable profit
margin on a portion of the Port Arthur refinery production, the use of such a
program could limit the Company's ability to participate in an improvement in
Gulf Coast crack spreads.
7
The Company manages its total inventory position in a manner consistent
with a risk management policy which states that a normal operating inventory
level (base load) will not be offset using risk management techniques, while
material builds or draws from this level may be offset by appropriate risk
management strategies to protect against an adverse impact due to unfavorable
price moves. The Company's retail network also reduces risk by providing market
sales which represented approximately 39% of the refineries' gasoline
production. In addition, the retail network benefits from a reliable and cost-
effective source of supply.
Capital Investment
The Company continually strives to increase its refineries' efficiency and
competitive position to meet changing market and regulatory demands. The Company
believes that its current strategic capital expenditure plan to comply with
mandatory environmental and other regulatory requirements should continue to
position the Company to compete effectively. The business strategy evaluates the
costs and benefits of complying with discretionary environmental regulations,
especially those related to reformulated and low sulfur fuels . The Company
evaluates these primarily discretionary environmental compliance expenditures
with the goal of incurring such expenditures only when satisfactory returns are
expected. The Company optimizes capital investments by linking capital spending
to cash flow generated.
Clean Air Act/Reformulated Fuels
Under the Clean Air Act, the U.S. Environmental Protection Agency ("EPA")
promulgated regulations mandating maximum sulfur content for diesel fuel offered
for sale for on-road consumption, which became effective in October 1993.
Additional EPA regulations include guidelines for RFG which became effective in
January 1995 for nine regions in the U.S., including Chicago and Milwaukee, the
only two currently affected metropolitan areas in the Company's existing
markets. Another 87 areas which have failed to attain ozone air quality
standards may elect to use RFG throughout the year. The Company, and virtually
all other domestic refineries producing gasoline, may be required to make
significant capital expenditures to comply with these requirements.
Company expenditures required to comply with reformulated fuels regulations
are primarily discretionary, subject to market conditions and economic
justification. The reformulated fuels programs impose restrictions on
properties of fuels to be refined and marketed, including those pertaining to
gasoline volatility, oxygenated content, detergent addition and sulfur content.
The regulations regarding these fuel properties vary in markets in which the
Company operates, based on attainment of air quality standards and the time of
the year. The Company's Port Arthur, Blue Island and Hartford refineries have
the capability to produce 60%, 40%, and 25%, respectively, of their gasoline
production in reformulated gasoline. The Port Arthur refinery has the capability
to produce 100% low sulfur diesel fuel.
Market Environment
Over the past two years the Company believes that refining margins have
been adversely impacted by uncertainties related to the transition to
reformulated gasoline and an unseasonably warm 1994-1995 Northern Hemisphere
winter that reduced demand for distillates. Several geographic areas
unexpectedly opted not to switch to RFG which caused confusion and concern in
the marketplace, which in turn caused gasoline prices to fall relative to the
price of crude oil. A narrowing price benefit from using heavy and sour crude
oil has also been experienced since the early 1990s. The Company believes that
this is principally because of the Iraqi oil embargo, new light sweet crude oil
fields coming onstream while export producers were maximizing light sweet crude
oil production. This has occurred while demand for heavy crude oil has increased
following industry construction of upgrading capability associated with the
favorable heavy and sour crude oil differentials of the early 1990s. The Company
believes that the increased supply of light sweet crude oils is a near term
phenomenon and that current heavy and sour crude oil differentials would not
justify further significant upgrading construction and that long-term crude oil
reserves favor more heavy and sour crude oils. The Company believes that these
trends may lead to a gradual improvement in heavy and sour crude oil
differentials. Since the Hartford and Port Arthur refineries
8
have coking capability which enables the processing of heavy crude oil when this
differential becomes attractive, the Company believes this development could
have a favorable impact on the Company's cash flow and earnings over the long
term.
The Company believes that it is well positioned to benefit from anticipated
long-term improvements in refining industry profitability. These improvements
are expected to result from increased demand for refined products at a time when
domestic refinery utilization is nearing its maximum crude oil processing limits
and industry capital expenditures are expected to decrease. Industry studies
indicate that a more favorable balance in supply and demand for refined light
petroleum products has developed in the United States since 1983. Capacity
utilization for the industry equaled an estimated 92% in 1995 (compared to 72%
in 1983). The Company believes that the maximum sustainable refining industry
capacity utilization is approximately 93% due to the requirements for regular
maintenance.
Industry studies attribute the prospect for improving refining industry
profitability to, among other things: (i) the high utilization rates of U.S.
refineries; (ii) continued economic-related growth in the demand for gasoline in
the United States; (iii) the decreasing level of planned capital expenditures
for additional refining capacity capable of producing higher-value light
petroleum products, such as gasoline and diesel fuel; and (iv) the objective of
those refiners that have invested significant capital in environmental-related
projects to obtain returns on these investments through higher product prices.
Based on its experience and several industry studies, the Company believes that
the U.S. refining industry may evidence gradual margin improvement through the
end of the decade.
The Company believes that significant additional domestic grass roots
construction is unlikely because of high capital costs and stringent
environmental regulations. The last grass roots refinery in the United States
was built in the mid-1970s. The only significant increase in crude oil
processing capacity that the Company anticipates in the next few years is the
restart of up to 200,000 barrels per day of capacity at the Good Hope refinery
in Louisiana in 1996 or 1997, which the Company understands still requires
additional financing.
Since 1991, several United States refiners have announced plans to sell or
close refineries as a result of the high capital expenditures required to
produce RFG and to comply with the Clean Air Act and other environmental
regulations. While much of this capacity has been closed, industry sources
estimate that an incremental 200,000 barrels per day of capacity could be closed
by 2000. These reductions in capacity may partially offset the addition of
oxygenates (ethanol, MTBE and ETBE) which were added to the gasoline pool to
meet the RFG specifications that went into effect in non-attainment areas on
January 1, 1995.
United States gasoline demand has increased by an average of 1% to 2%
annually over the last decade. Industry studies anticipate this demand to
continue to track economic growth as measured by statistics such as gross
domestic product. In addition, the demand for gasoline in Europe and Asia is
expected to increase as these areas emerge from recession, reducing the
incentive for foreign refiners to export gasoline to the U.S. The more
restrictive RFG specifications and conventional gasoline regulations may also
reduce the ability of foreign refiners to supply imported product.
Refining industry capital expenditures in the United States in the early
1990s have been high relative to historic levels and have primarily focused on
compliance with current and proposed environmental regulations, such as those
mandated by the Clean Air Act. Although some refineries increased light
production capabilities in conjunction with recent environmental project capital
spending, a reduction in capital spending related to poor industry earnings and
increased environmental regulations should limit the addition of incremental
light petroleum product production capacity at refineries in the United States.
Strategy
The refining division has developed a strategy consistent with the
Company's overall business strategy that focuses on improving productivity,
fully involving the workforce in the improvement of operations, linking capital
investments to cash flows generated and growth.
The refining division operates in a commodity-based market environment in
which market prices for crude oil and refined products fluctuate significantly
and are largely beyond its control. Accordingly, the refining division
9
focuses on improving productivity by increasing production, enhancing yields and
minimizing operating costs. The refining business is capital intensive. The
refining division's strategy is to focus its efforts first on those productivity
initiatives that require no capital investment and then those which have
relatively short payback periods of generally less than 4 years. All capital
decisions are made while ensuring compliance with regulatory and safety
standards. Since 1993, the refining division has identified and implemented, and
is continuing to implement, numerous productivity improvement initiatives. The
Company anticipates that additional productivity improvements will be identified
and implemented in future periods. Examples of some of the previous productivity
improvements include:
Port Arthur
. Increased crude oil throughput by over 20,000 barrels per day
. Lower operating expenses by over 50c per barrel by reducing staff and
contractor levels and reduced environmental remediation requirements
Blue Island
. Increased crude oil throughput capability by approximately 10,000 barrels
per day
. Began processing of up to 25% sour crude oil
. Increased processing capability by 25% for the FCC unit
. Added capability to produce up to 40% RFG
Hartford
. Increased crude oil throughput capability by approximately 10,000 barrels
per day
. Improved cut on the crude vacuum unit yielding more valuable gasoil
. Improved the operation of the FCC unit fractionation tower in 1994 to
enable the recovery of a greater amount of higher valued light cycle gas
oil from the slurry bottoms
. Improved catalyst effectiveness in the reformer using an existing spare
tower to eliminate undesirable feed constituents prior to processing
through the primary catalyst beds
. Improved the recovery of hydrocarbon products that were previously flared
by using cool well water to improve condensation of the coker
The refining division emphasizes an entrepreneurial approach which uses
employee incentives to enhance financial performance through productivity,
regulatory compliance and safety. All refining division employees participate in
a variety of incentive programs. The Company believes that these incentive
programs encourage employees to operate in a safe and productive manner and
promote innovation.
THE ADVANCE CRUDE OIL PURCHASE TRANSACTIONS
On December 1, 1995 (the "Effective Time"), Clark USA completed a merger
agreement (the "Occidental Merger Agreement") with subsidiaries of Occidental.
Pursuant to the merger agreement and a series of related agreements (the
"Occidental Transaction"), Clark USA acquired the right to receive the
equivalent of 17.661 million barrels of West Texas Intermediate crude oil
("WTI") to be delivered over the next six years according to a defined schedule
of (in millions of barrels) 2.17, 3.24, 3.48, 3.24, 2.90 and 2.63 in 1996, 1997,
1998, 1999, 2000 and 2001, respectively. In connection with the Occidental
Transaction, Clark USA issued common stock valued at approximately $120 million,
or $22 per share (3,954,545 shares of Common Stock and 1,500,000 shares of non-
voting Class D Common Stock which have been converted into an equal number of
shares of Common Stock), and paid $100 million in cash to Occidental. Clark
USA's right to receive oil in accordance with the contract schedule is
unconditional until $220 million (plus interest of 10% per year on any
unrecovered portion of the first $100 million) is received by Clark USA from the
sale of such oil. Subsequent to that time, this right will be subject to the
condition that certain sovereign acts (including the imposition of taxes by the
Government of the Congo) have not occurred with respect to the delivery of
certain unrelated royalty oil pursuant to an agreement between an Occidental
subsidiary and the Government of the Congo. Clark USA contracted to resell the
Occidental oil to a marketing subsidiary of Occidental immediately after
delivery at then current market prices. Occidental has guaranteed the
obligations of its subsidiaries as described above.
10
On December 1, 1995, Clark USA completed a merger agreement (the ''Gulf
Merger Agreement'') with subsidiaries of Gulf. Pursuant to the Gulf Merger
Agreement and a series of related agreements (the "Gulf Transaction"), Clark USA
acquired the right to receive 3.164 million barrels of certain royalty oil to be
received by Gulf pursuant to agreements among Gulf, an Occidental subsidiary and
the Government of the Congo. The crude oil is to be delivered over the next six
years according to a minimum schedule of (in millions of barrels) 0.72, 0.62,
0.56, 0.48, 0.42 and 0.36 in 1996, 1997, 1998, 1999, 2000 and 2001, respectively
or until all barrels are received. Provided certain underlying sales
arrangements remain in effect, Clark USA will resell the Gulf oil to Gulf
immediately after delivery at the then current Congo Government selling price
for Djeno crude oil (less an agreed transportation fee). In connection with the
Gulf Transaction, Clark USA issued common stock valued at approximately $26.9
million, or $22 per share (1,222,273 shares of non-voting Class D Common Stock
which have been converted into an equal number of shares of Common Stock). The
shares issued to Gulf are pledged to Clark USA and will be released to Gulf at
the rate of one share for each $22 of net receipts received by Clark USA from
the sale of the Gulf oil. Clark USA is entitled to foreclose on pledged shares
under certain circumstances where the Gulf oil is not received as and when
currently anticipated. Clark USA's recourse under such circumstances is limited
to the value of the shares.
The Occidental Transaction and the Gulf Transaction (the "Transactions")
assist Clark USA in realizing its objectives of increasing cash flow. The
Transactions provide a significant new source of cash flow directly to Clark USA
which is not dependent upon upstreaming of funds from Clark or other
subsidiaries. Cash flows from the Transactions will enable Clark USA to
accelerate capital projects, pursue growth and increase its strategic cash
reserve. The Transactions will also increase Clark USA's equity base.
Clark USA has entered into hedging transactions with respect to certain
anticipated cash flows associated with the Occidental Transaction, with the goal
of fixing cash flows that are dependent on future oil prices on the basis of
current market prices. To date, Clark USA has entered into such hedging
transactions with respect to approximately one-half of the barrels of oil to be
received from Occidental at average monthly prices ranging from $16.95 to
$18.00.
MARKETING
The Company markets gasoline and convenience products in ten Midwestern states
through a retail network of 821 company-operated stores at January 31, 1996.
The Company also markets refined petroleum products through a wholesale program
to distributors, chain retailers and industrial consumers.
Retail Overview
The Company's retail system began operations during the 1930s with the opening
of Old Clark's first store in Milwaukee, Wisconsin. Old Clark then expanded
throughout the Midwest. At its peak in the early 1970s, Old Clark operated more
than 1,800 retail stores and had established a strong market reputation for high
octane gasoline at discount prices. In subsequent years, Old Clark, in line
with the general industry trends, rationalized its operating stores by closing
down marginal locations. During the 1970s, the majority of Old Clark's stores
were dealer-operated. To ensure more direct control of its marketing and
distribution network, Old Clark assumed operation of most of its stores from
1973 through 1983.
As of January 31, 1996, the Company had 823 retail stores, all of which
operated under the Clark brand name. Of these 823 stores (686 owned and 137
leased), the Company directly operated 821 and the remainder were dealer-
operated. The Company believes that the high proportion of company-operated
stores enables the Company to respond more quickly and uniformly to changing
market conditions than many of its competitors, including major oil companies
which generally have most of their stores operated by dealers or jobbers. All
stores are self-service and all sell convenience products utilizing the
Company's On The Go(R) theme.
More than half of the Company's stores are in major metropolitan areas. The
Company's five highest volume core metropolitan markets are Chicago, Detroit,
Cleveland, Milwaukee and Toledo. The Company's core markets are markets in
which the Company believes it can maintain or develop market share of 8% to 15%
in order to leverage brand recognition, promotions and other marketing and
operating activities. In March 1996, the
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Company signed an agreement to acquire, through operating leases, 10 high volume
stores in its core Chicago market. The Company took immediate possession of the
sites with formal closing expected in April 1996. The geographic distribution of
retail stores by state, as of January 31, 1996 was as follows:
GEOGRAPHICAL DISTRIBUTION OF RETAIL STORES
COMPANY DEALER TOTAL
OPERATED OPERATED STORES
-------- -------- ------
Illinois.......................... 267 -- 267
Ohio.............................. 178 1 179
Michigan.......................... 166 -- 166
Indiana........................... 89 -- 89
Wisconsin......................... 75 -- 75
Missouri.......................... 31 1 32
Other states (a).................. 15 -- 15
--- -- ---
Total......................... 821 2 823
=== == ===
(a) Iowa, Kentucky, Pennsylvania and West Virginia
To improve gasoline sales volumes and margins, in 1989 the Company began
introducing special blending dispenser pumps to market three grades of gasoline
and began installing canopies at its stores. The Company believes the blending
pumps improve volumes and margins by enabling the Company to market a more
profitable mid-grade gasoline without the installation of costly additional
underground storage tanks. In addition, the Company believes that the
installation of canopies improves gasoline sales volumes due to better lighting
and shelter from adverse weather conditions. At January 31, 1996, approximately
60% of the Company's stores had blending pumps and approximately 80% had
canopies.
The Company has implemented a number of environmental projects at its retail
stores. These projects include the ongoing Company response to the September
1988 regulations that provided for a 10 year transition period through 1998, and
are related to the design, construction, installation, repair and testing of
underground storage tanks and the requirement of the Clean Air Act to install
Stage II vapor recovery systems at certain retail stores. The Company has
underground storage tank leak detection devices installed at nearly all retail
locations and has underground storage tanks and lines at approximately one-half
of all locations that meet the December 1998 federal underground storage tank
compliance deadline. The Company estimates that mandatory retail capital
expenditures for environmental and regulatory compliance from 1996 through 1998
will be approximately $50 million. Costs to comply with future regulations
cannot be estimated.
Market Environment
The retail markets have historically been highly competitive with a number of
well capitalized major oil companies and both large and small independent
competitors. Industry studies indicate that over the last several years the
retail markets have been characterized by several significant trends including
(i) increased store rationalization to fewer geographic regions and (ii)
increased consumer emphasis on convenience.
. Rationalization. During the past several years, the retail market has
experienced increasing concentration of market share in fewer geographic
regions as major oil companies have divested non-strategic locations and have
focused efforts on targeted areas, many of which are near strategic supply
sources. Additionally, smaller operators have closed marginal and
unprofitable locations as a result of increasing environmental regulations
requiring replacement of underground storage tanks. The lack of additional
favorable sites in existing markets and the high cost of construction of new
facilities are also believed to be barriers to new competition.
. Consumer Emphasis on Convenience. Industry studies indicate that consumer
buying behavior continues to reflect the effect of increasing demands on
consumer time. Convenience and the time required to make a purchase are
increasingly important considerations in the buying decision.
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The Company believes these two trends may result in decreased competition and
a corresponding increase in market share in the Company's core markets.
Since 1982, United States gasoline demand has grown by an average of 1% to 2%
annually and industry studies anticipate this demand will continue to track
economic growth. Other factors which contribute to the modest growth outlook
for gasoline include: (i) the lower energy content of oxygenated gasoline
compared with conventional gasoline and the resultant lower miles per gallon of
this fuel when used in the existing automobile fleet, (ii) the declining
differential between the fuel efficiency of the existing and retiring automobile
fleet and (iii) the anticipation of relatively small increases in fuel economy
of new car models.
Strategy
The Company's retail network is over 99% company-operated. The Company
believes that its control over its retail operations combined with its
established brand name in its market are competitive advantages. In addition,
the Company believes it can add to these advantages by implementing programs to
optimize capital expenditures, strengthen brand reputation, grow through
acquisitions and maximize customer satisfaction. The Company has developed
plans to achieve its strategic goals by focusing on a market segment philosophy
designed to increase sales volumes, profits and return on investment by
positioning the Company as the premier value-oriented marketer of gasoline and
On The Go(R) items in the Central United States.
. Marketing focus. The Company believes its retail market focus--high quality
products and fast delivery of services at competitive prices--has not been
fully captured in the retail gasoline industry. The Company also believes it
can exploit this opportunity by consistently providing fast service and
selected convenience products that satisfy immediate consumption demand (the
Company's On The Go(R) theme). The Company has developed the On The Go(R)
theme to capture this opportunity, strengthen the brand image and
differentiate the Company from (i) the major oil companies, which typically
invest more in their locations and price gasoline at a higher level, (ii) the
convenience store companies, which offer a full range of grocery items in
addition to gasoline and have a large investment in inventory and square
footage and (iii) the unbranded independents, whose gasoline quality may be
perceived to be inferior. The Company has recently introduced a proprietary
credit card to further strengthen the brand by improving customer loyalty.
. Core markets focus. Market business planning is a management tool that was
adopted by the Company in 1992 as the principal method to define preferred
gasoline markets. This method utilizes economic, demographic and market data
to develop market-specific plans for both asset and operational strategies.
The Company focuses on core markets where it has, or can develop, a
competitive advantage with targeted market share of between 8% and 15%. In
those markets where the Company already has a competitive strength on which to
build or where opportunities have been identified, the Company will consider
expanding through development and acquisition of stores and a branded jobber
program. For example, the Company has acquired through operating leases 73
stores in the Chicago and Peoria markets since late 1994. In those market
areas where the Clark brand name is not strong and the Company has a lower
market ranking, the Company will divest retail locations if favorable sale
opportunities arise. Since 1992, the Company has exited the Louisville,
Kentucky; Evansville, Indiana; Minnesota; Kansas and Western Missouri markets.
The retail division also has developed a strategy consistent with the
Company's overall business strategy. Key elements of this strategy include:
. Improving productivity. The retail division's goal is to achieve significant
productivity gains exclusive of market impacts. Planning and key initiatives
are based on this constant margin philosophy to focus the organization on
earnings separate from those which reflect only a market impact. For example,
monthly gasoline volumes per store increased approximately 16% from 1992 to
1995, and monthly convenience product gross margins per store increased
approximately 36% from 1992 to 1995. Additionally, through an emphasis on
improved and more responsive retail gasoline pricing and increased sales of
higher margin premium grades, the Company has improved overall gasoline gross
margins.
13
. Optimizing capital investments. Capital investments are linked to retail
division earnings. Capital is primarily budgeted for projects relating to the
retail division's environmental compliance plans, discretionary productivity
improvements and acquisitions. The Company began implementing in 1993 a four-
phase approach as part of its discretionary facilities upgrade strategy. This
approach is designed to improve productivity and profitability while creating
a sustainable competitive position in the marketplace. Phase I was designed
to change the convenience product offering to an On The Go(R) mix while
decreasing the reliance on tobacco products. Phase II involves a reimaging
plan for its retail network to modernize stores and convert to Clark's new
logo and vibrant color scheme. The Company began implementing this program in
March 1994 and reimaged 651 stores by the end of 1995. In Phase III, the
Company developed optimization projects which resulted from the Company's
market business planning process. This phase involves adding canopies,
enlarging selected stores, and installing new gasoline multiblend dispensers.
In Phase IV, the Company is adding new stores and product offerings such as
car washes, branded fast food, dispenser credit card readers and private label
products in concert with the financial objectives of the Company. Phases II,
III and IV are currently being implemented to varying degrees.
. Promoting entrepreneurial culture. The retail division employs a
decentralized team-oriented culture with training programs and employee
incentives designed to deliver service that exceeds customer expectations.
The Company's store managers have the flexibility to price gasoline and to
select and price convenience products, but also have the responsibility to
achieve acceptable gross margin results. The Company believes that customer
satisfaction is linked to employee satisfaction, and that its incentive
systems and feedback processes will contribute to the performance and
motivation of its focused workforce.
. Growing through acquisitions. The Company has a target of 8% to 15% market
share in core markets. In addition to improving volumes at existing
facilities, plans have been established to attain the market share target by
building new facilities and acquiring competitors' stores. Besides growth in
core markets, the Company will also consider other strategic alternatives to
improve integration with the Company's refining supply.
Wholesale Overview
The Company's wholesale marketing program consists of direct petroleum product
sales to profitable truck rack customers as an alternative to spot market sales.
In 1992, the Company began to more fully develop this channel and broaden its
wholesale customer base by increasing the number of sales representatives and
becoming a more consistent supplier. In addition, in anticipation of the
October 1993 deadline for low sulfur on-road diesel fuel, the Company focused
efforts on building market presence and customer relationships with off-road
diesel fuel users. In the second and third quarters of 1995 the Company's sales
of gasoline and diesel fuel to wholesale markets represented approximately 15%
and 25%, respectively, of its gasoline and diesel fuel refining production.
The Company currently sells its gasoline and diesel fuel on an unbranded basis
to approximately 500 distributors and chain retailers. The Company believes
these sales offer higher profitability than spot market alternatives. Wholesale
sales are also made in the transportation sector, including railroads, barge
lines, other industrial end-users and, in 1995, the Company began selling jet
fuel refined at the Port Arthur refinery through contracts with several major
airlines. In order to leverage the supply from the Port Arthur refinery, the
Company started a branded jobber program in 1995 with the signing of nine
initial outlets in Southeast Texas and Louisiana . The Company believes that a
branded distributor program and further focus on the transportation industry
offers significant opportunity for incremental sales volumes and earnings in the
future.
COMPETITION
The refining and marketing segment of the oil industry is highly competitive.
Many of the Company's principal competitors are integrated multinational oil
companies that are substantially larger and better known than the Company.
Because of the diversity, integration of operations, larger capitalization and
greater resources, these major oil companies may be better able to withstand
volatile market conditions, compete on the basis of price and more readily
obtain crude oil in times of shortages.
14
The principal competitive factors affecting the Company's refining division
are crude oil and other feedstock costs, refinery efficiency, refinery product
mix and product distribution and transportation costs. Certain of the Company's
larger competitors have refineries which are larger and, as a result, could have
lower per barrel costs or high margins per barrel of throughput. The Company
has no crude oil reserves and is not engaged in exploration. The Company
obtains most of its crude oil requirements from unaffiliated sources. The
Company believes that it will be able to obtain adequate crude oil and other
feedstocks at generally competitive prices for the foreseeable future.
The principal competitive factors affecting the Company's retail marketing
division are locations of stores, product price and quality, appearance and
cleanliness of stores and brand identification. Competition from large,
integrated oil and gas companies, as well as convenience stores which sell motor
fuel, is expected to continue. The principal competitive factors affecting the
Company's wholesale marketing business are product price and quality,
reliability and availability of supply and location of distribution points.
ENVIRONMENTAL MATTERS
Compliance Matters
Operators of refineries and gasoline stores are subject to comprehensive and
frequently changing federal, state and local environmental laws and regulations,
including those governing emissions of air pollutants, discharges of wastewater
and stormwater, and the handling and disposal of non-hazardous and hazardous
waste. Many of these laws authorize the imposition of civil and criminal
sanctions upon companies that fail to comply with applicable statutory or
regulatory requirements. The Company believes that, in all material respects,
its existing operations are in compliance with such laws and regulations.
The Company's existing operations are large and complex. The numerous
environmental regulations to which the Company is subject are complicated,
sometimes ambiguous, and often changing. In addition, the Company may not have
detected certain violations of environmental laws and regulations because the
conditions that constitute such violations may not be apparent. It is therefore
possible that certain of the Company's operations are not currently in
compliance with state or Federal environmental laws and regulations, and that
such non-compliance could result in fines and payments that could have a
material adverse effect on the Company's financial condition, results of
operations, cash flows or liquidity. Accordingly, the Company may be required
to make additional expenditures to comply with existing environmental
requirements.
The Company anticipates that, in addition to expenditures to comply with
existing environmental requirements, it will incur additional costs in the
future to comply with new regulatory requirements arising from recently enacted
statutes (such as the Clean Air Act requirements for operating permits and
control of hazardous air pollutants) and possibly with new statutory
requirements.
Federal, state and local laws and regulations establishing various health and
environmental quality standards and providing penalties for violations thereof
affect nearly all of the operations of the Company. Included among such
statutes are the Clean Air Act, Resource Conservation and Recovery Act ("RCRA")
and the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"). Also significantly affecting the Company are the
rules and regulations of Occupational Safety and Health Administration ("OSHA").
The Clean Air Act requires the Company to meet certain air emission standards
and to obtain and comply with the terms of emission permits. The RCRA empowers
the EPA to regulate the treatment and disposal of industrial wastes and to
regulate the use and operation of underground storage tanks. CERCLA requires
notification to the National Response Center of releases of hazardous materials
and provides a program to remediate hazardous releases at uncontrolled or
abandoned hazardous waste sites. CERCLA was amended and reauthorized by the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"). Title III of
SARA, the Emergency Planning and Community Right to Know Act of 1986, relates to
planning for hazardous material emergencies and provides for a community's right
to know about the hazards of chemicals used or manufactured at industrial
facilities. The OSHA rules and regulations call for the protection of workers
and provide for a worker's right to know about the hazards of chemicals used or
produced at facilities.
15
Regulations issued by the EPA in 1988 with respect to underground storage
tanks require the Company, over a period of up to ten years, to install, where
not already in place, detection devices and corrosion protection on all
underground tanks and piping at its retail gasoline outlets. The regulations
also require periodic tightness testing of underground tanks and piping .
Commencing in 1998, operators will be required under these regulations to
install continuous monitoring systems for underground tanks.
In March 1989, the EPA issued Phase 1 of regulations under authority of the
Clean Air Act requiring a reduction for summer months beginning in 1989 in the
volatility of gasoline ("RVP") (the measure of the amount of light hydrocarbons
contained in gasoline, such as normal butane, an octane booster). In June 1990,
Phase II regulations were issued by the EPA which required further reduction in
RVP beginning in May 1992. The Clean Air Act also established nationwide RVP
standards effective May 1992, but these do not exceed the EPA's Phase II
standards.
The Clean Air Act will impact the Company primarily in the following areas:
(i) beginning in late 1994, all gasoline produced and sold in the United States
must contain additives designed to reduce the formation of engine deposits; (ii)
beginning in 1995, a "reformulated" gasoline (which would include content
standards for oxygen, benzenes and aromatics) was mandated for gasoline sold in
the nine worst ozone polluting cities, including Chicago and Milwaukee in the
Company's market area; (iii) Stage II hose and nozzle controls were required on
gas pumps to capture fuel vapors in nonattainment areas, which affected 400
company stores; and (iv) more stringent refinery permitting requirements take
effect. EPA regulations required that after October 1, 1993 sulfur contained in
on-road diesel fuel produced in the U.S. must be reduced. In addition, stricter
refinery waste disposal requirements now apply as a broader group of wastes are
classified as hazardous.
The Company cannot predict what environmental legislation or regulations will
be enacted in the future or how existing or future laws or regulations will be
administered or interpreted with respect to products or activities to which they
have not previously been applied. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws which may develop in the
future, could have an adverse effect on the financial position of operations of
the Company and could require substantial additional expenditures by the Company
for the installation and operation of pollution control systems and equipment.
See "--Legal Proceedings."
REMEDIATION MATTERS
In addition to environmental laws that regulate the Company's on-going
operations, the Company's various operations also are subject to liability for
the remediation of contaminated soil and groundwater. Under CERCLA and
analogous state laws, certain persons may be liable as a result of the release
or threatened release of hazardous substances into the environment. Such
persons include the current owner or operator of property where such releases or
threatened releases have occurred, any persons who owned or operated such
property during the time that hazardous substances were released at such
property, and persons who arranged for the disposal of hazardous substances at
such property. Liability under CERCLA is strict. Courts have also determined
that liability under CERCLA is, in most cases, joint and several, meaning that
any responsible party could be held liable for all costs necessary for
investigating and remediating a release or threatened release of hazardous
substances. As a practical matter, liability at most CERCLA (and similar) sites
is shared among all the solvent "potentially responsible parties" ("PRPs").
The most relevant factors in determining the probable liability of a party at a
CERCLA site usually are the cost of investigation and remediation, the relative
amount of hazardous substances contributed by the party of the site and the
number of solvent PRPs. While the Company maintains property and casualty
insurance in the normal course of its business, such insurance does not
typically cover remediation and certain other environmental expenses.
The release or discharge of petroleum and hazardous materials can occur at
refineries, terminals and stores. The Company has identified a variety of
potential environmental issues at its refineries, terminals and stores. In
addition, each refinery has a areas on-site which may contain hazardous waste or
hazardous substance contamination and which may have to be addressed in the
future at substantial cost. Many of the terminals may also require remediation
due to the age of tanks and facilities and as a result of current or past
activities at the terminal properties including several significant spills and
past on-site waste disposal practices.
16
17
LEGAL AND GOVERNMENTAL PROCEEDINGS
As a result of its activities, Clark is the subject of a number of legal and
administrative proceedings relating to environmental matters. While it is not
possible at this time to estimate the ultimate amount of liability with respect
to the environmental matters described below, the Company is of the opinion that
the aggregate amount of any such liability will not have a material adverse
effect on its 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.
Hartford Groundwater Contamination. Clark and other area oil companies have
been contacted by the Illinois Environmental Protection Agency ("IEPA") and the
Illinois Attorney General regarding the presence of gasoline contamination in
the groundwater beneath the northern portion of the Village of Hartford,
Illinois. Clark has cooperated with the Illinois authorities in attempting to
identify the source and the extent of the contamination. On December 21, 1990,
the IEPA issued a draft report identifying contamination and identifying Clark
as a potential source. The IEPA also asked Clark to submit comments and
proposals for remediation by January 15, 1991. While it does not admit
liability, Clark submitted a response proposing to conduct a pilot project aimed
at expanding certain gasoline recovery efforts it had been conducting in the
Hartford area. Clark went forward with that expanded program and installed a
gasoline vapor recovery system in Hartford. No claim has been filed by the
state authorities. Based upon the estimates of an independent environmental
engineering firm, in 1991 Clark established a $10 million provision for the
estimated costs of its mitigation and recovery efforts, of which approximately
$2.5 million remained for future remediation at December 31, 1995. No estimate
can be made at this time of Clark's potential loss, if any, with respect to such
contamination. Clark is also the defendant in a private civil action relating
to Hartford groundwater contamination. See "--Legal Proceedings."
Hartford Pollution Control Board Litigation. On June 7, 1995, Clark was
served with a complaint entitled People of the State of Illinois vs. Clark
Refining & Marketing, Inc. PCB No. 95-163, which is currently pending before the
Illinois Pollution Control Board. Eight counts of the complaint allege
violations relating to the operation of certain process units at the Hartford
refinery and a number of permit, recordkeeping and reporting violations. One
count concerns an impoundment area at the Hartford refinery that contains
wastes, alleged to be hazardous, that were produced as a result of past
operations. Clark's discussions with the IEPA regarding remedial options with
respect to that waste predate the enforcement proceeding by more than two years.
In April 1993, an employee of IEPA told Clark that the presence of those
allegedly hazardous wastes may require a permit under the RCRA and that in turn
may require corrective action with respect to the entire refinery. Clark has
begun an investigation with respect to the need for a permit and consequent
corrective action. Based on the estimates of an independent engineering firm,
Clark established a $9.0 million provision for the estimated cost of site clean-
up in 1992, of which $7.6 million had been spent through December 31, 1995 under
remedial activities performed after notice to and comments from the IEPA.
Finally, four counts of the complaint allege violations relating to thirteen
(13) "release incidents" at the Hartford refinery between December, 1991 and
May, 1995, some of which had been the subject of "Pre-Enforcement Conference
Letters" sent to Clark by the IEPA in October, 1994. Clark has filed an answer
with the Illinois Pollution Control Board denying the material allegations. On
Clark's motion the Board dismissed certain of the claims because of the State's
failure to give advance notice of filing of the suit. Clark expects the hearing
on this matter to occur in the first quarter of 1996. No estimate of any
liability with respect to this complaint can be made at this time.
Hartford Clean Air Act Complaint. On January 5, 1993, Clark received a
complaint from the EPA alleging recordkeeping and related violations of the
Clean Air Act at the Hartford refinery, and seeking civil penalties of
$100,000. On July 11, 1994, the EPA filed an amended complaint alleging
additional violations and increasing the amount of the total penalty sought to
$200,000. The case was tried before an administrative law judge on August
23-24, 1994. On March 21, 1995, Clark received the initial decision of the
administrative law judge finding liability against Clark and assessing a
civil penalty of $140,000. Clark paid this penalty in May, 1995.
IEPA Pre-Enforcement Conference/Notice Letters. On August 25, 1995, the IEPA
sent a Pre-Enforcement Conference Letter to Clark in which it alleged that
certain wastewater flows at the Hartford refinery constituted a listed hazardous
waste within the meaning of the RCRA. Clark disputes the characterization of
the wastewater as hazardous waste. On September 22, 1995, the IEPA issued a
Pre-Enforcement Conference Letter to Clark alleging five release incidents at
the Hartford refinery in 1994 and 1995 which were not included in the June 1995
18
complaint in case number 95-163. On November 30, 1995 , Clark was served with a
Pre-Enforcement Notice Letter from the Illinois Attorney General alleging that
for certain periods of time a data recorder or certain air emissions at the Blue
Island refinery had failed to function properly. On December 4, 1995, the IEPA
issued an Enforcement Notice Letter to Clark alleging exceedences, over the
period 1992 through 1995, of the effluent standards in the National Pollutant
Discharge Elimination System Permit for the wastewater treatment plant at the
Hartford refinery. No estimate of liability, if any, with respect to any of
these matters can be made at this time.
Blue Island, Illinois Refinery. People ex rel Ryan v. Clark Refining &
Marketing, Inc., Cir. Ct. Cook County, Ill., Case No. 95-CH-2311, is currently
pending in the Circuit Court of Cook County, Illinois. The first count of this
lawsuit concerns a fire in the isomax unit at the Blue Island refinery on March
13, 1995 in which two employees were killed and three other employees were
injured. OSHA also investigated the incident, and on September 13, 1995 Clark
and OSHA entered into a settlement agreement, independent of the pending
lawsuit, pursuant to which Clark agreed to pay a $1.257 million penalty, make
certain safety improvements and perform a safety audit. The second count of the
lawsuit concerns a release of hydrogen fluoride ("HF") on May 16, 1995 from a
catalyst regeneration portion of the HF alkylation unit at the Blue Island
refinery. At the request of the Illinois Attorney General, and with Clark's
consent, the Circuit Court of Cook County, Illinois entered an order prohibiting
the restart of the regeneration unit of the HF alkylation unit pending an
investigation of the cause of the release. On August 8, 1995, an order was
entered by the Court allowing Clark to resume operation of the HF regeneration
unit. The order also requires Clark, pursuant to an agreement between Clark and
the Illinois Attorney General, to implement certain HF release mitigation and
detection measures. While Clark has not yet identified the actual cost of these
measures, it is initially estimated that these measures may cost at least $1.8
million. The next three counts of the lawsuit concern releases into the air that
occurred in the past three years at the Blue Island refinery. One of those air
emissions, which occurred on October 7, 1994, is also the basis for Rosolowski,
et al v. Clark Refining & Marketing, Inc., Cir. Ct. Cook County, Ill., Case No
95-L-014703. See "--Legal Proceedings." The remaining five counts of the lawsuit
concern several alleged releases of process waste water and contaminated storm
water to the Cal Sag Channel from the Blue Island refinery. Clark has filed an
answer denying the material allegations in the lawsuit. No estimate of any
liability with respect to this matter can be made at this time.
EPA Notice Letters. On October 25, 1994, Clark received correspondence from
the EPA submitting a proposed Agreed Administrative Order concerning an alleged
violation in 1990 of Section 114 of the Clean Air Act for failure to
continuously monitor opacity from the stack serving the FCC unit at the Blue
Island refinery. The Order does not seek a monetary fine or penalty from Clark.
Clark has met with the EPA to discuss the proposed Order. In addition, Clark
has received and is complying with a Request For Information pursuant to the
Clean Air Act from EPA concerning the October 7, 1994 Blue Island refinery
catalyst release. No estimate of liability, if any, with respect to any of
these matters can be made at this time.
RCRA Recordkeeping Claims. Clark received an administrative complaint from
the EPA on June 12, 1992 alleging record-keeping violations of RCRA concerning
22 stores in Michigan, Indiana and Wisconsin and seeking civil penalties of
$600,000. On March 18, 1993, Clark received an amended complaint from the EPA
involving similar allegations but reducing the amount of civil penalties sought
to $140,000. Clark settled this matter for $70,000 in January, 1995.
Ninth Avenue Site. On January 5, 1995, Clark received a Unilateral
Administrative Order from the EPA pursuant to CERCLA alleging that "Clark Oil &
Refining Corp." is a 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 EPA 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 has 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 have opposed Clark's
motion to dismiss. No estimate of any liability with respect to this case can
be made at this time.
19
Huth Oil Service Site. On August 8, 1994, Clark was served with a summons and
complaint in Ashland Oil, Inc. v. Acme Scrap Iron and Metal Corp., et al, Case
No. 1: 94-CV-1592, and Centerior Service Company, et al v. Acme, et al, Case No.
1:94-VC-1588, both pending in the Northern District of Ohio, in which Clark is
named, along with many other defendants, as one of the entities which allegedly
sent waste oil to the Huth Oil Services site in Cleveland, Ohio. The plaintiffs
agreed to dismiss the complaint against Clark with prejudice as to all pre-
November, 1988 shipments of waste, and without prejudice as to any post-
November, 1988 shipments. The Court entered an order dismissing the matter
without prejudice. Clark has moved the Court to reconsider the dismissal in
accordance with the agreement of the parties.
St. Louis Terminal. On April 13, 1995, Clark was served with two Grand Jury
Records Subpoenas issued by the Office of the United States Attorney,
Environmental Crimes Section, in St. Louis. The Subpoenas seek documentary
information primarily about the gasoline spill at the St. Louis terminal which
occurred in January, 1994. Clark is cooperating fully with the United States
Attorney Office's investigation, and on June 26, 1995 Clark produced documents
responsive to the Subpoena. At this time it is not possible to estimate any
potential exposure to Clark from this inquiry.
Sashabaw Road. On May 5, 1993 Clark received correspondence from the Michigan
Department of Natural Resources ("MDNR") indicating that the MDNR believes that
Clark may be a PRP in connection with groundwater contamination in the vicinity
of one of its retail stores in the Sashabaw Road area north of Woodhull Lake and
Lake Oakland, Oakland County, Michigan. On July 22, 1994, MDNR commenced suit
against Clark and Chevron U.S.A. Products Co, seeking $450,000 for past response
activity costs incurred by MDNR in connection with this site.
Port Arthur Refinery. The original refinery on the site of the Port Arthur
Refinery began operating in 1904, prior to modern environmental laws and methods
of operation. While the Company believes, as a result, that there is extensive
contamination at the site, the Company is unable to estimate the cost of
remediating such contamination. Chevron will be obligated to perform the
required remediation of most pre-closing contamination, while the Company
assumed responsibility for environmental contamination beneath and within 25 to
100 feet of the facility's active processing units (the "Excluded Area"). Based
on the estimates of independent environmental consultants, the Company accrued
approximately $7.5 million as part of the Port Arthur refinery acquisition for
its cost of remediation in the Excluded Area. In addition, as a result of the
acquisition, Clark may become jointly and severally liable under CERCLA for the
costs of investigation and remediation at the site. In the unlikely event that
Chevron is unable (as a result of bankruptcy or otherwise) or unwilling to
perform the required remediation at the site, Clark may be required to do so.
The cost of any such remediation could be substantial and could be beyond the
Company's financial ability.
EMPLOYEES
As of February 29, 1996, the Company employed approximately 7,000 people,
approximately 1,000 of whom were covered by collective bargaining agreements at
the Blue Island, Hartford and Port Arthur refineries. The Hartford and Port
Arthur refinery contracts expire in February 1999 and the Blue Island refinery
contract expires in August 1996. In addition, the Company has union contracts
for certain employees at its Hammond, Indiana and St. Louis, Missouri terminals
which expire March 31, 1998 and March 5, 1998, respectively. Historically,
relationships with the unions have been good and neither Old Clark nor the
Company has ever experienced a work stoppage as a result of labor disagreements.
20
ITEM 3. LEGAL PROCEEDINGS
Clark has been named as a defendant in thirty-four suits filed in December,
1991 in the Circuit Court of the Third Judicial District, Madison County,
Illinois, by plaintiff residents and property owners in the Village of Hartford,
Illinois. Also, both Clark and Shell Oil Company have been named as defendants
in six similar suits. These suits seek unquantified damages for the presence of
gasoline in the soil and groundwater beneath plaintiff's properties. See
"--Environmental Matters." On October 12, 1995 the thirty-four lawsuits pending
solely against Clark were voluntarily dismissed without prejudice. The
plaintiffs have one year from such dismissal in which to refile their lawsuits.
In the six remaining cases, Clark and Shell have filed motions to dismiss that
are still pending. No estimate can be made of Clark's potential loss, if any, at
this time.
Rosolowski, et al v. Clark Refining & Marketing, Inc., Cir. Ct. Cook
County, Ill., Case No. 95-L-014703. This purported class action lawsuit, filed
on October 11, 1995, relates to an on-site electrical malfunction at Clark's
Blue Island refinery on October 7, 1994, which resulted in the release to the
atmosphere of used catalyst containing low levels of heavy metals, including
antimony, nickel and vanadium. This release resulted in the temporary evacuation
of certain areas near the refinery, including a high school, and approximately
fifty people were taken to area hospitals. Clark has offered to reimburse the
medical expenses incurred by persons receiving treatment. Clark was previously
sued by one individual who claimed medical costs as a result of the incident;
that case was settled. The purported class action lawsuit was filed on behalf of
various named individuals and purported plaintiff classes, including residents
of Blue Island, Illinois and students at Eisenhower High School, alleging claims
based on common law nuisance, negligence, willful and wanton negligence and the
Illinois Family Expense Act as a result of this incident. Plaintiffs seek to
recover damages in an unspecified amount for alleged medical expenses,
diminished property values, pain and suffering and other damages. Plaintiffs
also seek punitive damages in an unspecified amount. On November 22, 1995 an
amended complaint was filed in this action which adds several additional
plaintiffs and two supplemental counts. Otherwise, the amended complaint is
substantially identical to the original complaint. At this time no estimate can
be made as to Clark's potential loss, if any, with respect to this matter.
EEOC v. Clark Refining & Marketing, Inc., Case No. 94 C 2779, is currently
pending in the United States District Court for the Northern District of
Illinois. In this action, the Equal Employment Opportunity Commission ("EEOC")
has alleged that Clark engaged in age discrimination in violation of the Age
Discrimination in Employment Act through a "pattern and practice" of
discrimination against a class of former retail managers over the age of forty.
The EEOC has identified 40 former managers it believes have been affected by the
alleged pattern and practice. The relief sought by the EEOC includes
reinstatement or reassignment of the individuals allegedly affected, payment of
back wages and benefits, an injunction prohibiting employment practices which
discriminate on the basis of age and institution of practices to eradicate the
effects of any past discriminatory practices. Discovery is ongoing. A scheduling
order has been entered indicating that a trial will not be held before 1997,
unless earlier dismissed. At this point, no estimate can be made as to Clark's
potential loss, if any, with respect to this litigation.
On May 23, 1995 Clark was served with a Petition entitled Anderson, et al
vs. Chevron and Clark, filed in Jefferson County, Texas by twenty-four
individual plaintiffs who were Chevron employees who did not receive offers of
employment from Clark at the time of the purchase of the Port Arthur refinery.
Chevron and the outplacement service retained by Chevron are also named as
defendants. An Amended Petition has now been filed increasing the number of
plaintiffs to forty. Clark filed an Answer denying all material allegations of
the Amended Petition. Subsequent to the filing of the lawsuit, the plaintiffs
have each filed individual charges with the EEOC and the Texas Commission of
Human Rights. At this point, no estimate can be made as to Clark's potential
liability, if any, with respect to this litigation or the individual charges
filed.
While it is not possible at this time to estimate the amount of liability
with respect to the legal proceedings described above, the Company is of the
opinion that the aggregate amount of any such liability will not have a material
adverse effect on its 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.
The Company is also the subject of various environmental and other
governmental proceedings. See "--Environmental Matters."
21
In addition to the specific matters discussed above or under
"--Environmental Matters", Clark has also been named in various other suits and
claims. While it is not possible to estimate with certainty the ultimate legal
and financial liability with respect to these other legal proceedings, the
Company believes the outcome of these other suits and claims will not have a
material adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Inapplicable.
22
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and dates indicated,
selected financial data derived from the Consolidated Financial Statements of
the Company for each of the years in the five-year period ended December 31,
1995. The Consolidated Financial Statements of the Company for each of the years
in the five-year period ended December 31, 1995 were audited by Coopers &
Lybrand L.L.P. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1991 1992 1993 1994 1995
---------------------------------------------------
(IN MILLIONS, EXCEPT RATIOS AND OPERATING DATA)
INCOME STATEMENT DATA:
Net sales and operating revenues............................ $2,426.1 $2,253.0 $2,263.4 $2,440.0 $4,486.1
Cost of sales............................................... 2,092.7 1,952.4 1,936.6 2,092.5 4,018.3
Operating expenses.......................................... 199.7 224.4 218.1 237.3 395.0
General and administrative expenses......................... 20.8 31.2 27.5 34.0 30.6
Inventory (recovery of) write-down to market value.......... -- -- 26.5 (26.5) --
Depreciation and amortization (a)........................... 26.4 30.4 35.3 37.3 43.5
-------- -------- -------- -------- --------
Operating income............................................ $ 86.5 $ 14.6 $ 19.4 $ 65.4 $ (1.3)
Interest and financing costs, net (b)....................... 27.2 26.4 29.9 37.6 39.9
Other income (expense) (c).................................. -- 14.7 11.4 -- --
-------- -------- -------- -------- --------
Earnings (loss) before taxes, extraordinary items and
cumulative effect of change in accounting principles...... $ 59.3 $ 2.9 $ 0.9 $ 27.8 $ (41.2)
Income tax provision (benefit).............................. 22.0 (0.4) (0.5) 9.7 (15.7)
-------- -------- -------- -------- --------
Earnings before extraordinary items and cumulative effect
of changes in accounting principles....................... $ 37.3 $ 3.3 $ 1.4 $ 18.1 $ (25.5)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 277.9 $ 218.3 $ 212.1 $ 134.1 $ 106.6
Total assets................................................ 820.4 800.0 829.1 859.5 1,188.3
Long-term debt.............................................. 426.6 401.5 401.0 400.7 420.4
Stockholder's equity........................................ 172.6 154.2 146.0 162.9 304.1
SELECTED FINANCIAL DATA:
Cash flows from operating activities........................ $ 46.0 $ 37.1 $ 68.4 $ 53.7 $ (85.6)
Cash flows from financing activities........................ 119.1 (38.7) (1.1) (5.4) 174.7
Ratio of earnings to fixed charges (d)...................... 2.37x (e) (e) 1.56x (e)
Turnaround expenditures..................................... 17.2 2.7 20.6 11.2 6.5
Capital expenditures........................................ 58.0 59.5 67.9 100.3 42.1
Refinery acquisition expenditures........................... -- -- -- 13.5 71.8
-------- -------- -------- -------- --------
Total expenditures.......................................... $ 75.2 $ 62.2 $ 88.5 $ 125.0 $ 120.4
======== ======== ======== ======== ========
OPERATING DATA:
Refining Division:
Port Arthur Refinery (acquired February 27, 1995)
Production (m bbls/day)................................ -- -- -- -- 207.7
Gross margin (per bbl)................................. -- -- -- -- $ 2.40
Operating expenses (per bbl)........................... -- -- -- -- 1.96
Blue Island, Hartford and other refining
Production (m bbls/day)................................ 129.4 142.4 134.7 140.3 136.5
Gross margin (per bbl) (f)............................. $ 3.88 $ 3.03 $ 3.24 $ 3.48 $ 2.61
Operating expenses (per bbl)........................... 2.38 2.22 2.20 2.34 2.72
Refining contribution to operating income (mm) (f).......... N/A N/A 42.5 46.5 11.1
Retail Division:
Number of stores (at period end)............................ 889 873 846 839 833
Gasoline volume (mm gals)................................... 966.2 956.7 1,014.8 1,028.5 1,063.8
Gasoline volume (m gals pmps)............................... 86.9 90.1 98.6 102.8 104.1
Gasoline gross margin (c/gal) (f)........................... 10.9c 10.0c 11.1c 10.9c 11.4c
Convenience product sales (mm).............................. $ 186.9 $ 203.4 $ 218.0 $ 231.6 $ 252.6
Convenience product sales (pmps)............................ 16.8 19.2 21.2 23.1 24.7
Convenience product gross margin (mm)....................... 45.1 47.7 54.8 57.2 62.9
Convenience product gross margin (pmps)..................... 4.0 4.5 5.3 5.7 6.1
Operating expenses (mm)..................................... 94.3 106.3 109.9 117.2 134.1
Retail contribution to operating income (mm) (f)............ N/A N/A 52.9 45.9 45.4
23
(a) Amortization includes amortization of turnaround costs and organizational
costs.
(b) Interest and financing costs, net, includes amortization of debt issuance
costs of $6.0 million, $2.9 million, $1.2 million, $1.2 million, and $5.2
million for the years ended December 31, 1991, 1992, 1993, 1994 and 1995,
respectively. Interest and financing costs, net, also includes interest on
all indebtedness, net of capitalized interest and interest income.
(c) Other expense in 1994 includes financing costs associated with a withdrawn
debt offering. Other income in 1993 includes the final settlement of
litigation with Drexel Burnham Lambert Incorporated ("Drexel") of $8.5
million and a gain from the sale of non-core stores of $2.9 million. Other
income in 1992 includes the settlement of litigation with Apex and Drexel of
$9.2 million and $5.5 million, respectively.
(d) The ratio of earnings to fixed charges is computed by dividing (i) earnings
before income taxes (adjusted to recognize only distributed earnings from
less than 50% owned persons accounted for under the equity method) plus
fixed charges by (ii) fixed charges. Fixed charges consist of interest on
indebtedness, including amortization of discount and debt issuance costs and
the estimated interest components (one-third) of rental and lease expense.
(e) As a result of the losses for the years ended December 31, 1992, 1993 and
1995, earnings were insufficient to cover fixed charges by $2.0 million,
$1.7 million and $44.0 million, respectively.
(f) In 1995, the Company changed its pricing methodology to better reflect
external market prices for valuing product transferred between its retail
and refining divisions. Divisional results for 1993 and 1994 have been
restated to be consistent with this new methodology although there is no
annual effect on 1993. Divisional results for 1992 and prior years have not
been restated because appropriate external pricing was not available; the
Company believes that the transfer pricing change, if effected, would not
have had a material effect on such years.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Report.
RESULTS OF OPERATIONS
Overview
The Company's results are significantly affected by a variety of factors
beyond its control, including the supply of, and demand for, crude oil, gasoline
and other refined products which in turn depend on, among other factors, changes
in domestic and foreign economies, weather conditions, domestic and foreign
political affairs and production levels, the availability of imports, the
marketing of competitive fuels and the extent of government regulation. Although
margins are significantly affected by industry and regional factors, the Company
can influence its margins through the efficiency of its operations. While the
Company's net sales and operating revenues fluctuate significantly with
movements in industry crude oil prices, such prices do not have a direct
relationship to net earnings. The effect of changes in crude oil prices on the
Company's operating results is determined more by the rate at which the prices
of refined products adjust to reflect such changes. The Company believes that,
in general, low crude oil prices indirectly benefit operating results over the
longer term due to increased demand and decreased working capital requirements.
Conversely, the Company believes that high crude oil prices generally result in
decreased demand and increased working capital requirements over the long term.
Increased refinery production is typically associated with improved results of
operations, while reduced production, which generally occurs during scheduled
refinery maintenance turnarounds, negatively affects results of operations.
The following table illustrates the potential pre-tax earnings impact based
on historical operating rates estimated by the Company resulting from changes
in: (i) sweet crude oil cracking margins--the spread between gasoline and diesel
fuel prices and input (e.g., a benchmark sweet crude oil) costs; (ii) sweet/sour
differentials--the spread between a benchmark sour crude oil and a benchmark
sweet crude oil; (iii) heavy/light differentials--the spread between a benchmark
light crude oil and a benchmark heavy crude oil and (iv) retail margins--the
spread between product prices at the retail level and wholesale product costs.
PRE-TAX EARNINGS IMPACT ON
THE COMPANY
------------------------------
BEFORE PORT AFTER PORT
ARTHUR ARTHUR
EARNINGS SENSITIVITY CHANGE ACQUISITION ACQUISITION (A)
-------------------- ---------------- ----------- ---------------
Refining margins
Sweet crude cracking margin $0.10 per barrel $ 5 million $12 million
Sweet/sour differentials 0.10 per barrel 3 million 9 million
Heavy/light differentials 0.10 per barrel 1 million 2 million
Retail margin $0.01 per gallon $10 million $10 million
(a) Based on an assumed production of approximately 200,000 barrels per day for
the Port Arthur refinery.
25
1995 COMPARED WITH 1994 AND 1993:
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
--------- -------- ---------
(IN MILLIONS)
FINANCIAL RESULTS: (A)
Net sales and operating revenues............... $2,263.4 $2,440.0 $4,486.1
Cost of sales.................................. 1,936.6 2,092.5 4,018.3
Operating expenses............................. 218.1 237.3 395.0
General and administrative expenses............ 27.5 32.9 30.6
Depreciation and amortization.................. 35.3 37.3 43.5
Interest and financing costs, net.............. 29.9 32.1 39.9
-------- -------- --------
Earnings (loss) before income taxes (b)........ 16.0 7.9 (41.2)
Income tax provision (benefit) (b)............. 5.4 2.2 (15.7)
-------- -------- --------
Earnings (loss) before unusual items (b)....... 10.6 5.7 (25.5)
Unusual items, after taxes (b)................. (18.8) 12.4 --
-------- -------- --------
Net earnings (loss)............................ $ (8.2) $ 18.1 $ (25.5)
======== ======== ========
OPERATING INCOME:
Refining contribution to operating income (c).. $ 42.5 $ 46.5 $ 11.1
Retail contribution to operating income (c).... 52.9 45.9 45.4
Corporate general and administrative expenses.. 14.2 15.1 14.3
Depreciation and amortization.................. 35.3 37.3 43.5
Unusual items (b).............................. (26.5) 25.4 --
-------- -------- --------
Operating income (loss)........................ $ 19.4 $ 65.4 $ (1.3)
======== ======== ========
(a) This table provides supplementary data and is not intended to represent an
income statement presented in accordance with generally accepted accounting
principles.
(b) The Company considers certain items in 1993 and 1994 to be "unusual."
Detail on these items is presented below.
(c) In 1995, the Company changed its pricing methodology to better reflect
external market prices for valuing product transferred between its retail
and refining divisions. Divisional results for 1993 and 1994 have been
restated to be consistent with this new methodology although there is no
annual effect on 1993.
The Company reported a net loss of $25.5 million in 1995 compared with net
earnings of $18.1 million in 1994 and a loss of $8.2 million in 1993. Earnings
in 1995 were reduced by extremely poor refining market conditions resulting
principally from narrower crude oil differentials, an extremely warm 1994-1995
winter and the resulting oversupply of distillates and market uncertainty
related to the introduction of reformulated gasoline. Partially offsetting these
factors was the Company's acquisition on February 27, 1995 of a 200,000 barrel
per day refinery in Port Arthur, Texas which more than doubled the Company's
refining capacity. Significant unusual items, discussed below, increased 1994
net earnings while decreasing 1993 earnings. Net earnings, excluding "unusual"
items, declined in 1995 as compared to 1994 and 1993 principally due to the
declining industry refining margins over the period. In addition, finance
charges associated with the Port Arthur Refinery acquisition in early 1995
increased interest expense from 1993 to 1995.
Net sales and operating revenues reached record levels in 1995 because of
the inclusion of incremental sales of production from the Port Arthur refinery.
Operating revenues in 1994 were higher than 1993 due to an increase in crude oil
and product prices that resulted in both increased selling prices and costs of
sales. Refining production was reduced in the first half of 1993 when the Blue
Island refinery underwent a scheduled maintenance turnaround which reduced the
volume of refined product production by approximately three million barrels and
reduced revenues by approximately $69 million. A 1994 maintenance turnaround on
the FCC and alkylation units at the Hartford refinery reduced revenues by
approximately $17 million, reduced production of refined product at the Hartford
refinery by approximately 30,000 barrels per day and increased the production of
lower value intermediate feedstocks by approximately 25,000 barrels per day for
approximately one month. A turnaround on the crude unit at the Hartford refinery
is planned for 1996. This turnaround is expected to reduce revenues by
approximately $15
26
million and to reduce the refined product output by approximately 770,000
barrels in 1996. Retail gasoline volumes increased approximately 5% from 1993 to
1995, and wholesale volumes increased 7% in 1995 from 1994 and 9% in 1994 from
1993.
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
------ ----- -----
(IN MILLIONS)
UNUSUAL ITEMS:
Inventory recovery of (write-down to) market value.... $(26.5) $26.5 $ --
Other................................................. -- (1.1) --
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Impact on operating income.................. (26.5) 25.4 --
Change in accounting principle........................ (15.6) -- --
Litigation settlements................................ 8.5 -- --
Sale of non-core stores............................... 2.9 -- --
Short-term investment losses.......................... -- (5.4) --
------ ----- -----
Total....................................... $(30.7) $20.0 $ --
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Net of income taxes......................... $(18.8) $12.4 $ --
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Several items which are considered by management as "unusual" are excluded
throughout this discussion of the Company's results of operations. A non-cash
accounting charge of $26.5 million was taken in the fourth quarter of 1993 to
reflect the decline in the value of petroleum inventories below carrying value
caused by a substantial drop in petroleum prices. Crude oil and related refined
product prices rose in 1994 allowing the Company to recover the original charge.
Accordingly, a reversal of the inventory write-down to market was recorded in
1994. A return to lower prices could result in future charges. In 1994, the
Company realized losses on the sale of short-term investments due to an increase
in market interest rates. . Effective January 1, 1993, the Company adopted the
provisions of SFAS No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" and SFAS No. 109 "Accounting for Income Taxes", which was
accounted for by restating prior periods. See Note 12 "Postretirement Benefits
Other Than Pensions" and Note 13 "Income Taxes" to the Consolidated Financial
Statements. Unusual credits included a 1993 gain related to the sale of 21
retail stores located in non-core markets and the favorable settlement of
litigation. See Note 11 "Other Income" to the Consolidated Financial Statements.
27
Refining
YEAR ENDED DECEMBER 31,
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