-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SbL6+68pVrK4feabrOqWfPCF8vG4+plod56vh//U74mOFMqAHenuvpER/hjdMe8b LAKcGvjEXPQJjDBsiELzfQ== 0000887207-01-500030.txt : 20020410 0000887207-01-500030.hdr.sgml : 20020410 ACCESSION NUMBER: 0000887207-01-500030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ULTRAMAR DIAMOND SHAMROCK CORP CENTRAL INDEX KEY: 0000887207 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 133663331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11154 FILM NUMBER: 1785396 BUSINESS ADDRESS: STREET 1: 6000 N. LOOP 1604 W. STREET 2: P O BOX 696000 CITY: SAN ANTONIO STATE: TX ZIP: 78249-1112 BUSINESS PHONE: 2105922000 MAIL ADDRESS: STREET 1: P O BOX 696000 STREET 2: THIRD FLOOR CITY: SAN ANTONIO STATE: TX ZIP: 78269-6000 FORMER COMPANY: FORMER CONFORMED NAME: ULTRAMAR CORP /DE DATE OF NAME CHANGE: 19930328 10-Q 1 f10qudsc0901.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2001 Commission File Number 1-11154 ULTRAMAR DIAMOND SHAMROCK CORPORATION Incorporated under the laws of the State of Delaware I.R.S. Employer Identification No. 13-3663331 6000 North Loop 1604 West San Antonio, Texas 78249-1112 Telephone number: (210) 592-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ As of October 31, 2001, 74,294,000 shares of Common Stock, $0.01 par value, were outstanding and the aggregate market value of such stock was $3,718,437,000. ================================================================================ ULTRAMAR DIAMOND SHAMROCK CORPORATION FORM 10-Q SEPTEMBER 30, 2001 TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.................................... ............... 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2001 and 2000....... 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000................. 5 Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2001 and 2000....... 6 Notes to Consolidated Financial Statements................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 26 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................... 30 Item 4. Submission of Matters to a Vote of Security Holders................. 30 Item 6. Exhibits and Reports on Form 8-K.................................... 30 SIGNATURE........................................................... 30 2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements ULTRAMAR DIAMOND SHAMROCK CORPORATION CONSOLIDATED BALANCE SHEETS (in millions, except share data) September 30, December 31, 2001 2000 ---- ---- (unaudited) Assets Current assets: Cash and cash equivalents............................ $ 121.5 $ 197.1 Accounts and notes receivable, net................... 474.7 700.5 Inventories.......................................... 850.9 808.8 Prepaid expenses and other current assets............ 80.0 29.3 Deferred income taxes................................ 114.5 117.6 ------- ------- Total current assets.............................. 1,641.6 1,853.3 ------- ------- Property, plant and equipment........................... 5,301.8 5,136.0 Less accumulated depreciation and amortization.......... (1,651.7) (1,501.7) ------- ------- Property, plant and equipment, net................... 3,650.1 3,634.3 Other assets, net....................................... 691.6 500.8 ------- ------- Total assets........................................$ 5,983.3 $ 5,988.4 ======= =======
Liabilities and Stockholders' Equity Current liabilities: Notes payable and current portion of long-term debt..................................... $ 449.3 $ 1.7 Accounts payable..................................... 729.3 825.5 Accrued liabilities.................................. 453.2 366.6 Taxes other than income taxes........................ 282.8 289.8 Income taxes payable................................. 36.4 59.3 ------- ------- Total current liabilities......................... 1,951.0 1,542.9 Long-term debt, less current portion.................... 977.1 1,659.8 Other long-term liabilities............................. 397.3 366.3 Deferred income taxes................................... 568.7 394.1 Minority interest in consolidated subsidiary............ 115.4 - Commitments and contingencies Company obligated preferred stock of subsidiary......... 200.0 200.0 Stockholders' equity: Common Stock, par value $0.01 per share: 250,000,000 shares authorized, 74,172,000 and 86,987,000 shares issued and outstanding as of September 30, 2001 and December 31, 2000..... 0.7 0.9 Additional paid-in capital........................... 944.1 1,516.9 Treasury stock....................................... (69.9) (1.2) Grantor trust stock ownership program................ - (95.8) Retained earnings.................................... 1,023.5 509.0 Accumulated other comprehensive loss ................ (124.6) (104.5) ------- ------- Total stockholders' equity......................... 1,773.8 1,825.3 ------- ------- Total liabilities and stockholders' equity.........$ 5,983.3 $ 5,988.4 ======= =======
See accompanying notes to consolidated financial statements. 3 ULTRAMAR DIAMOND SHAMROCK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited, in millions, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Sales and other revenues...................................... $ 4,019.9 $ 4,527.9 $ 13,339.6 $ 12,182.8 ------- ------- -------- -------- Operating costs and expenses: Cost of products sold...................................... 2,517.0 3,141.3 8,728.1 8,320.8 Operating expenses......................................... 306.4 276.3 966.3 747.8 Selling, general and administrative expenses............... 93.4 83.0 256.3 226.5 Taxes other than income taxes.............................. 777.8 724.1 2,223.4 2,086.1 Depreciation and amortization.............................. 72.2 63.3 202.2 185.8 Restructuring and other expenses, net....................... 1.0 (0.1) (7.9) - ------- ------- -------- -------- Total operating costs and expenses...................... 3,767.8 4,287.9 12,368.4 11,567.0 ------- ------- -------- -------- Operating income.............................................. 252.1 240.0 971.2 615.8 Interest income............................................. 2.5 5.0 7.0 11.2 Interest expense............................................ (26.6) (34.3) (95.7) (95.8) Equity income from joint ventures........................... 3.7 3.5 6.4 15.8 Minority interest in net income of consolidated subsidiary.. (3.7) - (6.1) - ------- ------- -------- -------- Income before income taxes and dividends of subsidiary........ 228.0 214.2 882.8 547.0 Provision for income taxes.................................. (76.5) (84.0) (323.0) (214.1) Dividends on preferred stock of subsidiary.................. (2.5) (2.6) (7.7) (7.7) ------- ------- --------- -------- Net income.................................................... $ 149.0 $ 127.6 $ 552.1 $ 325.2 ======= ======= ========= ======== Net income per share: Basic...................................................... $ 2.04 $ 1.47 $ 7.46 $ 3.75 Diluted.................................................... $ 2.00 $ 1.47 $ 7.31 $ 3.74 Weighted average number of shares (in thousands): Basic...................................................... 73,129 86,794 74,047 86,759 Diluted.................................................... 74,616 87,003 75,520 86,922 Dividends per Common Share.................................... $ 0.125 $ 0.275 $ 0.525 $ 0.825
See accompanying notes to consolidated financial statements. 4 ULTRAMAR DIAMOND SHAMROCK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in millions) Nine Months Ended September 30, ------------- 2001 2000 ---- ---- Cash Flows from Operating Activities: Net income..................................................... $ 552.1 $ 325.2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................... 202.2 185.8 Gain on derivative instruments.............................. (14.2) - Provision for losses on receivables......................... 9.8 16.6 Gain on sale of property, plant and equipment............... (2.8) (3.4) Write-down of property, plant and equipment and goodwill.... - 5.2 Equity income from joint ventures........................... (6.4) (15.8) Minority interest in net income of consolidated subsidiary.. 6.1 - Deferred income tax provision............................... 172.2 98.4 Other, net.................................................. 9.0 3.7 Changes in operating assets and liabilities: Decrease (increase) in accounts and notes receivable...... 199.7 (23.5) Increase in inventories................................... (20.9) (146.7) Increase in prepaid expenses and other current assets..... (10.0) (11.9) Increase (decrease) in accounts payable and other current liabilities.............................................. (194.0) 192.9 Decrease in other long-term assets............................. 9.5 23.1 Increase (decrease) in other long-term liabilities............. 32.2 (21.8) ------ ------ Net cash provided by operating activities............... 944.5 627.8 ----- ----- Cash Flows from Investing Activities: Capital expenditures.......................................... (241.0) (89.3) Acquisition of refining operations............................ (5.8) (806.8) Acquisition of retail operations.............................. (0.4) (14.5) Deferred refinery maintenance turnaround costs................ (29.4) (15.4) Proceeds from sales of property, plant and equipment.......... 25.3 21.0 ----- ----- Net cash used in investing activities....................... (251.3) (905.0) ----- ----- Cash Flows from Financing Activities: Net change in commercial paper and working capital borrowings.................................................. (175.9) 119.4 Proceeds from debt borrowings................................. - 350.0 Repayment of long-term debt................................... (81.6) (35.3) Purchase of common shares..................................... (682.7) - Payment of cash dividends..................................... (37.7) (71.7) Proceeds from sale of minority interest in consolidated subsidiary.................................................. 111.9 - Payment of cash distributions to minority interest in consolidated subsidiary..................................... (2.6) - Proceeds from exercise of stock options....................... 101.8 1.8 ----- ----- Net cash provided by (used in) financing activities......... (766.8) 364.2 ----- ----- Effect of exchange rate changes on cash........................ (2.0) (2.4) ----- ----- Net Increase (Decrease) in Cash and Cash Equivalents........... (75.6) 84.6 Cash and Cash Equivalents at Beginning of Period............... 197.1 92.8 ----- ----- Cash and Cash Equivalents at End of Period..................... $ 121.5 $ 177.4 ===== =====
See accompanying notes to consolidated financial statements. 5 ULTRAMAR DIAMOND SHAMROCK CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited, in millions) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income...................................................... $ 149.0 $ 127.6 $ 552.1 $ 325.2 Other comprehensive income (loss): Foreign currency translation adjustment........................ (26.6) (8.9) (31.7) (21.9) Derivative instruments adjustments, net of income tax expense: Cumulative effect of accounting change....................... - - 13.3 - Change in fair value of derivative instruments............... (5.3) - 4.5 - Reclassification adjustment for gains included in net income..................................... - - (6.2) - ---- ---- ---- ---- Derivative instruments adjustments, net.................. (5.3) - 11.6 - ---- ---- ---- ---- Comprehensive income............................................ $ 117.1 $ 118.7 $ 532.0 $ 303.3 ===== ===== ===== =====
See accompanying notes to consolidated financial statements. 6 ULTRAMAR DIAMOND SHAMROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (unaudited) NOTE 1: Basis of Presentation We prepared these unaudited consolidated financial statements in accordance with United States' generally accepted accounting principles for interim financial reporting and with Securities and Exchange Commission rules and regulations for Form 10-Q. We have included all normal and recurring adjustments considered necessary for a fair presentation. You should read these unaudited consolidated financial statements with the audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2000. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Our results of operations may be affected by seasonal factors, such as the demand for gasoline during the summer driving season and heating oil during the winter season; or industry factors, such as movements in and the general level of crude oil prices, the demand for and prices of refined products, industry supply capacity, refinery maintenance turnarounds and availability of refined product pipeline capacity. Certain previously reported amounts have been reclassified to conform to the 2001 presentation. NOTE 2: Accounting Change - Derivative Instruments and Hedging Activities Effective January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement established accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivative instruments be recognized as either assets or liabilities in the balance sheet and be measured at their fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of Statement No. 133, as amended, could increase volatility in our net income and other comprehensive income based on the level of derivative instruments utilized and the extent of our hedging activities which are subject to change from time to time based on our decision as to the appropriate strategies and our overall risk exposure levels. Interest rate swap agreements are used to manage our exposure to interest rate risk on fixed-rate debt obligations. Under Statement No. 133, as amended, these interest rate swap agreements are designated and documented as fair value hedges of the related fixed-rate debt obligations. Our operations utilize contracts that provide for the purchase of crude oil and other feedstocks and for the sale of refined products. Certain of these contracts meet the definition of a derivative instrument in accordance with Statement No. 133, as amended. We believe these contracts qualify for the normal purchases and normal sales exception under Statement No. 133, as amended, because they will be delivered in quantities expected to be used or sold over a reasonable period of time in the normal course of business. Accordingly, these contracts are designated as normal purchases and normal sales contracts and are not required to be recorded as derivative instruments under Statement No. 133, as amended. 7 ULTRAMAR DIAMOND SHAMROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Commodity futures contracts are used to procure a large portion of our crude oil requirements and to hedge our exposure to crude oil, refined product, and natural gas price volatility. Under Statement No. 133, as amended, these commodity futures contracts are not designated as hedging instruments. Commodity price swaps are used to manage our exposure to price volatility related to forecasted purchases of crude oil, refined products and natural gas. Under Statement No. 133, as amended, certain commodity price swaps are designated and documented as cash flow hedges of forecasted purchases. Other commodity price swaps are not designated as hedging instruments. Periodically, we enter into short-term foreign exchange and purchase contracts to manage our exposure to exchange rate fluctuations on the trade payables of our Canadian operations that are denominated in U.S. dollars. Under Statement No. 133, as amended, these contracts are not designated as hedging instruments. The impact of adopting Statement No. 133, as amended, on January 1, 2001 was to record derivative assets of $25.6 million, derivative liabilities of $16.1 million and a cumulative effect adjustment to other comprehensive income of $13.3 million, net of income taxes. As of September 30, 2001, we had fair value hedge derivative assets of $22.4 million with an offsetting change in carrying value of $22.4 million to the related hedged items and cash flow hedge derivative assets of $18.4 million. We also had derivative assets of $15.4 million and derivative liabilities of $3.1 million for derivative instruments that are not designated as hedging instruments. Included in other comprehensive income as of September 30, 2001 are $11.6 million of gains, which will be reclassified into income during June 2002 when the forecasted transactions impact income. The above transactions are non-cash items which were excluded from the statement of cash flows for the nine months ended September 30, 2001. NOTE 3: Inventories Inventories consisted of the following: September 30, December 31, 2001 2000 ---- ---- (in millions) Crude oil and other feedstocks............................................ $ 331.5 $ 279.1 Refined and other finished products and convenience store items........... 449.1 463.9 Materials and supplies.................................................... 70.3 65.8 ------ ------ Total inventories.................................................... $ 850.9 $ 808.8 ===== =====
NOTE 4: Accounts Receivable Securitization In March 1999, we arranged a $250.0 million revolving accounts receivable securitization facility. On March 1, 2001, the facility was increased $110.0 million to $360.0 million. On an ongoing basis, we sell eligible accounts receivable to Coyote Funding, L.L.C. (Coyote), a non-consolidated, wholly-owned subsidiary. Coyote sells a percentage ownership in these receivables, without recourse, to a third party cooperative corporation. Our retained interest in receivables sold to Coyote is included in notes receivable and is recorded at fair value. The fair value of our retained interest in these receivables approximates the eligible accounts receivable sold to Coyote less the outstanding balance of receivables sold to the third party cooperative corporation. As of September 30, 2001 and December 31, 2000, the balance of receivables sold was $273.0 million and $250.0 million, respectively. 8 The following table summarizes the cash flows related to this securitization facility: Nine Months Ended September 30, 2001 2000 ---- ---- (in millions) Proceeds from the sales of receivables......... $ 60.0 $ 300.0 Proceeds from collections under the facility... 7,023.8 5,414.4 NOTE 5: Acquisition of Golden Eagle Refinery On August 31, 2000, we acquired Tosco Corporation's 168,000 barrel per day Avon Refinery (renamed the Golden Eagle Refinery) located in the San Francisco bay area of California. The original purchase price of $806.8 million included the crude oil, feedstock and refined product inventories and the assumption of certain liabilities. In addition, the terms of the Purchase and Sale Agreement provided for additional consideration of up to $150.0 million over an eight-year period if average annual West Coast refinery margins exceeded historical averages. The acquisition was accounted for using the purchase method. The purchase price was allocated based on the estimated fair values of the individual assets and liabilities at the date of acquisition. During the subsequent year since the acquisition, it was determined that the estimated fair values of inventories, accrued liabilities and lease obligations were understated. In addition, West Coast refinery margins have exceeded historical averages resulting in the full $150.0 million of contingent consideration becoming due and payable to Tosco Corporation. Accordingly, revisions to the initial allocation of purchase price have been made as of August 31, 2001 as follows: Final Initial Allocation Allocation ---------- ---------- (in millions) Working capital............................... $ 168.5 $ 150.3 Property, plant and equipment................. 642.0 650.0 Excess of cost over fair value of net assets of purchased business...................... 205.3 28.6 Other long-term liabilities assumed........... (59.9) (22.1) ----- ----- Total purchase price................. $ 955.9 $ 806.8 ===== ===== The excess of purchase price over the fair value of the net assets acquired is being amortized as goodwill on a straight-line basis over 20 years. NOTE 6: Minority Interest in Consolidated Subsidiary On April 16, 2001, Shamrock Logistics, L.P., a previously wholly-owned subsidiary, issued 5.2 million limited partnership units in an initial public offering. As a result of the initial public offering, we now own approximately 74% of Shamrock Logistics' ownership equity. Shamrock Logistics is included as a subsidiary in our consolidated financial statements. The minority interest in consolidated subsidiary on the consolidated balance sheet represents the minority unitholders' investment in Shamrock Logistics plus their share of the net income of Shamrock Logistics since the initial public offering on April 16, 2001 less distributions paid. Minority interest in net income of consolidated subsidiary in the consolidated statement of income represents the minority unitholders' share of the net income of Shamrock Logistics. 9 On July 19, 2001, Shamrock Logistics declared a quarterly partnership distribution of $0.5011 per unit (a pro rata distribution for the period April 16, 2001 to June 30, 2001) which was paid on August 14, 2001 to unitholders of record on August 1, 2001. The total distribution was $9.8 million of which $2.6 million was paid to the minority unitholders. On October 19, 2001, Shamrock Logistics declared a quarterly partnership distribution of $0.60 per unit payable on November 14, 2001 to unitholders of record on November 1, 2001. The total distribution is expected to be approximately $11.7 million of which $3.1 million is payable to minority unitholders. NOTE 7: Computation of Net Income Per Share Basic net income per share is calculated as net income divided by the weighted average number of common shares outstanding. Diluted net income per share assumes, when dilutive, issuance of the net incremental shares from stock options and restricted shares. The following table reconciles the net income amounts and share numbers used in the computation of net income per share. Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (in millions, except share and per share data) Basic Net Income Per Share: Weighted average common shares outstanding (in thousands)............................................... 73,129 86,794 74,047 86,759 ====== ====== ====== ====== Net income applicable to Common Stock............................ $ 149.0 $ 127.6 $ 552.1 $ 325.2 ===== ===== ===== ===== Basic net income per share....................................... $ 2.04 $ 1.47 $ 7.46 $ 3.75 ==== ==== ==== ==== Diluted Net Income Per Share: Weighted average common shares outstanding (in thousands)............................................... 73,129 86,794 74,047 86,759 Net effect of dilutive stock options based on the treasury stock method using the average market price................... 1,487 209 1,473 163 ------ ----- ------ ------ Weighted average common equivalent shares........................ 74,616 87,003 75,520 86,922 ====== ====== ====== ====== Net income....................................................... $ 149.0 $ 127.6 $ 552.1 $ 325.2 ===== ===== ===== ===== Diluted net income per share..................................... $ 2.00 $ 1.47 $ 7.31 $ 3.74 ==== ==== ==== ====
10 NOTE 8: Restructuring and Other Expenses Restructuring and other expenses consisted of the following: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (in millions) Loss (gain) on sale of property, plant and equipment........ $ 1.0 $ 1.7 $ (2.8) $ (3.4) Write-down of property, plant and equipment and goodwill.............................................. - - - 5.2 Restructuring reserve reductions............................ - (1.8) (5.1) (1.8) ---- --- --- --- Restructuring and other expenses, net.................. $ 1.0 $ (0.1) $ (7.9) $ - === === === ===
In June 1998, we adopted a three-year restructuring plan to reduce our retail cost structure by eliminating employee positions to improve operating efficiencies and to close and sell 316 under-performing convenience stores. In addition, we restructured certain pipeline and terminal operations and support infrastructure resulting in the elimination of 62 positions. From June 1998 through June 2001, 286 convenience stores were sold or closed and 270 retail employees and 66 pipeline and terminal employees were terminated. Effective June 30, 2001, we completed our three-year restructuring program of our retail and pipeline and terminal operations; the balance of the various restructuring reserves was credited into income. NOTE 9: Commitments and Contingencies Our operations are subject to environmental laws and regulations adopted by various federal, state, and local governmental authorities in the jurisdictions in which we operate. Site restoration and environmental remediation and clean-up obligations are accrued either when known or when considered probable and reasonably estimable. Environmental exposures are difficult to assess and estimate due to unknown factors such as the magnitude of possible contamination, the timing and extent of remediation, the determination of our liability in proportion to other parties, improvements in cleanup technologies and the extent to which environmental laws and regulations may change in the future. Although environmental costs may have a significant impact on results of operations for any single year, we believe that such costs will not have a material adverse effect on our financial position. There are various legal proceedings and claims pending against us which arise in the ordinary course of business. It is our management's opinion, based upon advice of legal counsel, that these matters, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations. NOTE 10: Business Segments We have three reportable segments: Refining, Retail and Petrochemical/NGL. The Refining segment includes refinery, wholesale, product supply and distribution, and transportation operations. The Retail segment includes Company-operated convenience stores, dealers/jobbers and truckstop facilities, cardlock and home heating oil operations. The Petrochemical/NGL segment includes earnings from Nitromite fertilizer, NGL marketing and certain NGL pipeline operations. Equity income from joint ventures is not included in operating income. Operations that are not included in any of the three reportable segments are included in the Corporate category and consist primarily of corporate office expenditures. 11 Our reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires unique technology and marketing strategies. We evaluate performance based on operating income and EBITDA which is defined as operating income plus depreciation and amortization and equity income from joint ventures less gain (plus loss) on sale of property, plant and equipment. EBITDA is a measure used for internal analysis and in presentations to analysts, investors and lenders. The calculation of EBITDA is not based on United States' generally accepted accounting principles and should not be considered as an alternative to net income or cash flows from operating activities (which are determined in accordance with US GAAP). This measure may not be comparable to similarly titled measures used by other entities as other entities may not calculate EBITDA in the same manner as we do. Intersegment sales are generally derived from transactions made at prevailing market rates. Petrochemical/ Refining Retail NGL Corporate Total -------- ------ --- --------- ----- (in millions) Three months ended September 30, 2001: Sales and other revenues from external customers............... $ 2,481.2 $ 1,510.6 $ 28.1 $ - $ 4,019.9 Intersegment sales.................. 764.8 - - - 764.8 EBITDA.............................. 330.7 41.6 3.5 (46.8) 329.0 Depreciation and amortization....... 50.1 18.7 0.1 3.3 72.2 Operating income (loss)............. 281.1 21.4 (0.3) (50.1) 252.1 Total capital expenditures.......... 96.4 20.6 - 2.0 119.0 Three months ended September 30, 2000: Sales and other revenues from external customers............... 2,739.0 1,747.4 41.5 - 4,527.9 Intersegment sales.................. 890.3 - - - 890.3 EBITDA.............................. 306.2 32.5 3.6 (33.8) 308.5 Depreciation and amortization....... 42.5 17.2 0.5 3.1 63.3 Operating income (loss)............. 263.3 14.5 (0.4) (37.4) 240.0 Total capital expenditures.......... 821.6 29.6 - 7.6 858.8 Nine months ended September 30, 2001: Sales and other revenues from external customers............... 8,303.5 4,934.7 101.4 - 13,339.6 Intersegment sales.................. 2,437.9 - - - 2,437.9 EBITDA.............................. 1,148.3 138.0 7.3 (116.6) 1,177.0 Depreciation and amortization....... 137.2 55.5 0.1 9.4 202.2 Operating income (loss)............. 1,017.4 79.0 0.8 (126.0) 971.2 Total assets........................ 4,386.6 1,202.4 155.4 238.9 5,983.3 Total capital expenditures.......... 216.1 52.9 - 7.6 276.6 Nine months ended September 30, 2000: Sales and other revenues from external customers............... 7,116.9 4,944.6 121.3 - 12,182.8 Intersegment sales.................. 2,512.5 - 1.4 - 2,513.9 EBITDA.............................. 775.5 110.4 17.8 (84.5) 819.2 Depreciation and amortization....... 124.8 51.6 0.8 8.6 185.8 Operating income (loss)............. 644.5 63.9 1.1 (93.7) 615.8 Total assets........................ 4,246.8 1,208.7 118.2 317.6 5,891.3 Total capital expenditures.......... 862.9 46.5 - 16.6 926.0
12 The following summarizes the reconciliation of reportable segment operating income to consolidated operating income: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (in millions) Operating income: Total operating income for reportable segments... $ 302.2 $ 277.4 $ 1,097.2 $ 709.5 Corporate........................................ (50.1) (37.4) (126.0) (93.7) ----- ----- ------ ----- Consolidated operating income................. $ 252.1 $ 240.0 $ 971.2 $ 615.8 ===== ===== ===== =====
Sales and other revenues from external customers for our principal products were as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (in millions) Refining: Gasoline and blendstocks......................... $ 1,446.1 $ 1,472.4 $ 4,747.7 $ 3,566.7 Distillates (diesel, jet fuel, heating oil, etc.) 785.1 949.4 2,665.9 2,687.6 Petrochemicals................................... 108.2 100.6 354.5 377.9 Asphalt and lubes................................ 33.1 123.9 355.7 317.3 Other............................................ 108.7 92.7 179.7 167.4 Retail: Fuel sales (gasoline and diesel)................. 1,216.2 1,389.0 3,767.3 3,781.3 Merchandise sales................................ 213.1 329.5 953.1 955.4 Home heating oil................................. 81.3 28.9 214.3 207.9 Petrochemical...................................... 28.1 41.5 101.4 121.3 --------- --------- -------- --------- Total sales and other revenues from external customers......................... $ 4,019.9 $ 4,527.9 $ 13,339.6 $ 12,182.8 ======= ======= ======== ========
NOTE 11: Agreement and Plan of Merger On May 7, 2001, we announced that we had agreed to be acquired by Valero Energy Corporation for total consideration of approximately $4.0 billion plus the assumption of all outstanding debt of approximately $2.0 billion. Under the terms of the agreement and plan of merger, UDS shareholders will receive, for each share of UDS common stock they hold, at their election, cash, Valero common stock or a combination of cash and Valero common stock, having a value equal to the sum of $27.50 plus 0.614 shares of Valero common stock (based on the average Valero common stock price over a ten trading-day period ending three days prior to closing). The merger has been approved by the board of directors and shareholders of both companies; however, closing of the transaction is subject to the completion of regulatory reviews. The merger is expected to close in the fourth quarter of 2001. Valero Energy Corporation owns and operates seven refineries in Texas, Louisiana, New Jersey and California with a combined throughput capacity of more than 1.1 million barrels per day. Valero markets its gasoline, diesel and other refined products in 34 states through a bulk and rack marketing network and, in California, through approximately 350 retail locations. 13 NOTE 12: Subsequent Events On October 2, 2001, our Board of Directors declared a quarterly dividend of $0.125 per Common Share payable on December 5, 2001 to holders of record on November 21, 2001. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company Ultramar Diamond Shamrock Corporation (UDS) is a leading independent refiner and retailer of high-quality refined products and convenience store merchandise in the central, southwest, and northeast regions of the United States and eastern Canada. We own and operate seven refineries and we market our products through over 4,500 convenience stores. In the northeast region of the United States and in eastern Canada, we sell home heating oil to approximately 250,000 households. Our refineries are geographically aggregated as follows: o the Mid-Continent Refineries include the operations of the McKee, Three Rivers, Ardmore and Denver Refineries; o the West Coast Refineries include the operations of the Wilmington and Golden Eagle Refineries; and o the Quebec Refinery includes the operations of our refinery in Quebec, Canada. On November 9, 2001, the Quebec Refinery was renamed the Jean Gaulin Refinery in honor of our retiring president, chief executive officer and chairman of our board of directors, Jean R. Gaulin. Our operating results are affected by: o company-specific factors, primarily our refinery utilization rates and refinery maintenance turnarounds; o seasonal factors, such as the demand for gasoline during the summer driving season and heating oil during the winter season; and o industry factors, such as movements in and the level of crude oil prices, the demand for and prices of refined products, industry supply capacity, refinery maintenance turnarounds and availability of refined product pipeline capacity. The effect of crude oil price changes on our operating results is determined, in part, by the rate at which refined product prices adjust to reflect such changes. As a result, our earnings have been volatile in the past and may be volatile in the future. Agreement and Plan of Merger On May 7, 2001, we announced that we had agreed to be acquired by Valero Energy Corporation for total consideration of approximately $4.0 billion plus the assumption of all outstanding debt of approximately $2.0 billion. Under the terms of the agreement and plan of merger, UDS shareholders will receive, for each share of UDS common stock they hold, at their election, cash, Valero common stock or a combination of cash and Valero common stock, having a value equal to the sum of $27.50 plus 0.614 shares of Valero common stock (based on the average Valero common stock price over a ten trading-day period ending three days prior to closing). The merger has been approved by the board of directors and shareholders of both companies; however, closing of the transaction is subject to the completion of regulatory reviews. The merger is expected to close in the fourth quarter of 2001. Valero Energy Corporation owns and operates seven refineries in Texas, Louisiana, New Jersey and California with a combined throughput capacity of more than 1.1 million barrels per day. Valero markets its gasoline, diesel and other refined products in 34 states through a bulk and rack marketing network and, in California, through approximately 350 retail locations. 15 Results of Operations Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Summarized financial and operating data for the three months ended September 30, 2001 and 2000 are as follows: Summarized Financial Data: Three Months Ended September 30, 2001 2000 ---- ---- (in millions, except per share data) Statement of Operations Data: Sales and other revenues: Refining.................................$ 2,481.2 $ 2,739.0 Retail................................... 1,510.6 1,747.4 Petrochemical/NGL........................ 28.1 41.5 ------- ------- Total sales and other revenues........$ 4,019.9 $ 4,527.9 ======= ======= Operating income (loss): Refining.................................$ 281.1 $ 263.3 Retail................................... 21.4 14.5 Petrochemical/NGL........................ (0.3) (0.4) Corporate................................ (50.1) (37.4) ------- ------- Total operating income................ 252.1 240.0 Interest income............................ 2.5 5.0 Interest expense........................... (26.6) (34.3) Equity income from joint ventures.......... 3.7 3.5 Minority interest in net income of consolidated subsidiary............... (3.7) - ------- ------- Income before income taxes and dividends of subsidiary........................... 228.0 214.2 Provision for income taxes................. (76.5) (84.0) Dividends on preferred stock of subsidiary. (2.5) (2.6) ------ ------ Net income...............................$ 149.0 $ 127.6 ====== ====== Net income per share: Basic.................................... $ 2.04 $ 1.47 Diluted.................................. $ 2.00 $ 1.47 September 30, September 30, 2001 2000 ---- ---- (in millions) Balance Sheet Data: Cash and cash equivalents.................. $ 121.5 $ 177.4 Working capital, excluding current debt.... 139.9 355.3 Property, plant and equipment, net......... 3,650.1 3,596.5 Total assets............................... 5,983.3 5,891.3 Long-term debt, including current portion.. 1,426.4 1,781.1 Total stockholders' equity................. 1,773.8 1,727.3 16 Summarized Operating Data: - -------------------------- Three Months Ended September 30, 2001 2000 ---- ---- Refining: Mid-Continent Refineries: Throughput (barrels per day)............ 345,800 373,200 Refinery gross profit margin ($/barrel). $ 6.99 $ 5.74 Operating cost ($/barrel)............... $ 2.05 $ 2.27 West Coast Refineries: Throughput (barrels per day)............ 291,800 181,300 Refinery gross profit margin ($/barrel). $ 8.78 $ 8.90 Operating cost ($/barrel)............... $ 3.25 $ 2.41 Quebec Refinery: Throughput (barrels per day)............ 134,800 158,300 Refinery gross profit margin ($/barrel). $ 3.81 $ 4.13 Operating cost ($/barrel)............... $ 0.99 $ 0.93 Retail: US: Fuel volume (barrels per day)........... 166,200 165,300 Fuel margin (cents per gallon).......... 10.2 9.6 Merchandise sales ($1,000/day).......... $ 3,159 $ 3,157 Merchandise margin...................... 27.5% 26.9% Northeast: Fuel volume (barrels per day)........... 68,600 66,400 Fuel margin (cents per gallon).......... 19.7 20.1 Merchandise sales ($1,000/day).......... $ 256 $ 214 Merchandise margin...................... 22.0% 21.3% Overview Net income for the quarter ended September 30, 2001 was $149.0 million as compared to $127.6 million for the quarter ended September 30, 2000. Net income per diluted share was $2.00 per share and $1.47 per share for the quarter ended September 30, 2001 and 2000, respectively. Net income per share increased from the third quarter of 2000 to the third quarter of 2001 due to higher refining margins and the addition of the Golden Eagle Refinery combined with a decrease in the outstanding shares of our common stock as a result of shares we purchased under our share buyback program which began in February 2001. Interest expense for the third quarter of 2001 was lower than the third quarter of 2000 due to: o lower average outstanding long-term debt during 2001; o an increase in capitalized interest expense as a result of higher levels of construction in progress at various refineries during 2001; and o higher differentials received on our interest rate swap agreements and lower interest expense on our floating rate debt due to lower interest rates during 2001. The consolidated income tax provisions for the third quarter of 2001 and 2000 were based upon our estimated effective income tax rates for the years ending December 31, 2001 and 2000 of 37% and 39%, respectively. The consolidated effective income tax rate exceeds the U.S. Federal statutory income tax rate primarily due to state income taxes, the effects of foreign operations and the amortization of nondeductible goodwill. 17 Refining Throughput and operating income for the refining segment increased 8% and 7%, respectively from the third quarter of 2000 to the third quarter of 2001 despite planned and unplanned shutdowns at our refineries. These increases were mainly due to the addition of the Golden Eagle Refinery operations, which were acquired on August 31, 2000. In early March 2001, the No. 3 crude oil unit at the Golden Eagle Refinery was restarted which increased the refinery's capability to process more crude oil and increased the production of California Air Resource Board (CARB) gasoline and diesel. Throughput at the Golden Eagle Refinery increased from 131,100 barrels per day during the first quarter of 2001 to 161,800 barrels per day during the third quarter of 2001. The Golden Eagle Refinery's refinery gross profit margin for the quarter ended September 30, 2001 was $9.63 per barrel and operating costs were $4.44 per barrel. On July 9, 2001, the Three Rivers Refinery sustained a fire in the plant's alkylation unit. As a result of the fire, the refinery was shut down for repairs and turnaround maintenance through August 6, 2001, at which time the refinery began to ramp up production slowly. The alkylation unit did not resume production until mid-September 2001 at which time the refinery was back in full operation. This unplanned downtime at the Three Rivers Refinery resulted in the lower throughput at our Mid-Continent Refineries. Throughput at the Three Rivers Refinery for the quarter ended September 30, 2001 was 62,000 barrels per day as compared to 95,500 barrels per day in the third quarter of 2000 resulting in an operating loss of $21.3 million for the third quarter of 2001. In mid-September 2001, our Quebec Refinery was shut down for three weeks to tie-in the newly expanded fluid catalytic cracking unit (FCCU) and a new crude oil unit and for turnaround maintenance. This planned shutdown of the Quebec Refinery resulted in lower throughput and higher operating costs per barrel for the third quarter of 2001 as compared to the same period in 2000. The expanded FCCU and the new crude oil unit will increase the refinery capacity of the Quebec Refinery to 200,000 barrels per day. Retail Operating income for the retail segment increased 48% from the third quarter of 2000 to the third quarter of 2001 mainly from higher fuel volumes and merchandise sales combined with improved fuel margins and merchandise margins. The US retail re-imaging program is positively impacting per store sales as the new look is increasing customer activity at each of the 66 convenience stores remodeled to date. US Retail operations improved due to higher retail fuel margins, particularly in July 2001, when the mid-continent region of the United States experienced a supply imbalance due to refinery shutdowns. Retail operations in the Northeast continued to benefit from high retail fuel margins especially in the cardlock and convenience store businesses. Corporate Higher incentive compensation accruals as a result of improved profitability resulted in higher selling, general and administrative expenses and negatively impacted the corporate segment for the third quarter of 2001. 18 Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Summarized financial and operating data for the nine months ended September 30, 2001 and 2000 are as follows: Summarized Financial Data: Nine Months Ended September 30, 2001 2000 ---- ---- (in millions, except per share data) Statement of Operations Data: Sales and other revenues: Refining.......................................................... $ 8,303.5 $ 7,116.9 Retail............................................................ 4,934.7 4,944.6 Petrochemical/NGL................................................. 101.4 121.3 -------- -------- Total sales and other revenues................................. $ 13,339.6 $ 12,182.8 ======== ======== Operating income (loss): Refining.......................................................... $ 1,017.4 $ 644.5 Retail............................................................ 79.0 63.9 Petrochemical/NGL................................................. 0.8 1.1 Corporate......................................................... (126.0) (93.7) -------- ------- Total operating income......................................... 971.2 615.8 Interest income..................................................... 7.0 11.2 Interest expense.................................................... (95.7) (95.8) Equity income from joint ventures................................... 6.4 15.8 Minority interest in net income of consolidated subsidiary.......... (6.1) - -------- ------- Income before income taxes and dividends of subsidiary............ 882.8 547.0 Provision for income taxes.......................................... (323.0) (214.1) Dividends on preferred stock of subsidiary.......................... (7.7) (7.7) -------- ------- Net income........................................................ $ 552.1 $ 325.2 ======== ======= Net income per share: Basic............................................................. $ 7.46 $ 3.75 Diluted........................................................... $ 7.31 $ 3.74
19 Summarized Operating Data: - -------------------------- Nine Months Ended September 30, ------------------------------- 2001 2000 ---- ---- Refining: Mid-Continent Refineries: Throughput (barrels per day)............. 363,300 367,200 Refinery gross profit margin ($/barrel).. $ 7.43 $ 6.36 Operating cost ($/barrel)................ $ 2.39 $ 2.02 West Coast Refineries: Throughput (barrels per day)............. 284,400 155,700 Refinery gross profit margin ($/barrel).. $ 10.00 $ 6.02 Operating cost ($/barrel)................ $ 3.52 $ 1.94 Quebec Refinery: Throughput (barrels per day)............. 154,300 160,800 Refinery gross profit margin ($/barrel).. $ 3.91 $ 4.62 Operating cost ($/barrel)................ $ 0.86 $ 0.87 Retail: US: Fuel volume (barrels per day)............ 161,400 160,400 Fuel margin (cents per gallon)........... 9.6 9.9 Merchandise sales ($1,000/day)........... $ 2,997 $ 3,019 Merchandise margin....................... 27.3% 27.4% Northeast: Fuel volume (barrels per day)............ 72,400 70,700 Fuel margin (cents per gallon)........... 24.1 20.8 Merchandise sales ($1,000/day)........... $ 228 $ 196 Merchandise margin....................... 22.4% 21.0% Overview Net income for the nine months ended September 30, 2001 was $552.1 million as compared to $325.2 million for the nine months ended September 30, 2000. Net income per diluted share was $7.31 per share and $3.74 per share for the first nine months of 2001 and 2000, respectively. Net income per share increased from 2000 to 2001 due to higher operating income in the refining segment for the nine months ended September 30, 2001 coupled with a decrease in our outstanding shares of common stock as a result of shares we purchased under our share buyback program which began in February 2001. Interest expense for the nine months ended September 30, 2001 was comparable to the same period in 2000 due to: o an increase in capitalized interest expense as a result of higher levels of construction in progress at various refineries during 2001; o higher differentials received on our interest rate swap agreements; and o lower interest expense on our floating rate debt due to lower interest rates during 2001 despite higher average borrowings during the first nine months of 2001. Equity income from joint ventures continues to remain lower for the nine months ended September 30, 2001 as compared to the same period in 2000 due to high natural gas costs and the resulting lower petrochemical margins experienced industry wide. 20 On April 16, 2001, Shamrock Logistics, L.P. successfully completed its initial public offering. As a result of the offering, we now own approximately 74% of Shamrock Logistics' ownership equity. Minority interest in net income of consolidated subsidiary of $6.1 million represents the minority unitholders' share of Shamrock Logistics' net income for the period from April 16, 2001 to September 30, 2001. The consolidated income tax provisions for the nine months ended September 30, 2001 and 2000 were based upon our estimated effective income tax rates for the years ending December 31, 2001 and 2000 of 37% and 39%, respectively. The consolidated effective income tax rate exceeds the U.S. Federal statutory income tax rate primarily due to state income taxes, the effects of foreign operations and the amortization of nondeductible goodwill. Refining Throughput for the first nine months of 2001 for the refining segment increased 17% from the same period in 2000 mainly due to the addition of the Golden Eagle Refinery operations, which were acquired on August 31, 2000. In early March 2001, the No. 3 crude oil unit at the Golden Eagle Refinery was restarted which increased the refinery's capability to process more crude oil and increase the production of CARB gasoline and diesel. The Golden Eagle Refinery's operations for the nine months ended September 30, 2001 included throughput of 149,000 barrels per day and a refinery gross profit margin of $11.25 per barrel. Higher refinery gross profit margins at our Mid-Continent and West Coast Refineries for the first nine months of 2001 compared to the same period in 2000 contributed to the increased operating income for the refining segment. In particular, our West Coast Refineries continued to benefit from improved crack spreads where the refining gross profit margin was $10.00 per barrel in 2001 compared to $6.02 per barrel in 2000. The refinery gross profit margin at our Quebec Refinery has been negatively affected by lower crack spreads and higher freight costs during the year. Also, in mid-September 2001, the Quebec Refinery was shut down for three weeks to tie-in the newly expanded FCCU and a new crude oil unit and for turnaround maintenance. Refining operating costs per barrel increased for our Mid-Continent and West Coast Refineries due to higher fuel gas and electricity costs which increased as a result of higher crude oil and natural gas prices during the first half of 2001. Retail Operating income year to date for the retail segment increased 24% from 2000 to 2001 mainly from NE retail operations where lower wholesale prices on the East Coast have resulted in improved retail fuel margins for the home heating oil, motorist and cardlock businesses. Corporate Higher incentive compensation accruals as a result of improved profitability combined with increased legal fees and IT maintenance expenses resulted in higher selling, general and administrative expenses and negatively impacted the corporate segment for the nine months ended September 30, 2001. The corporate segment for the nine months ended September 30, 2000 included an $18.7 million recovery for environmental insurance claims which was partially offset by $14.0 million of one-time expense accruals for litigation, SAP system training, and other charges. 21 Outlook Our earnings depend largely on refining and retail margins. The petroleum refining and marketing industry has been and continues to be volatile and highly competitive. The cost of crude oil that we purchase and the price of refined products that we sell have fluctuated widely in the past. As a result of the historic volatility of refining and retail margins and the fact that they are affected by numerous diverse factors, it is impossible to predict future margin levels. The third quarter of 2001 was our second highest quarterly earnings for the company; continuing the record pace we have been on since the beginning of 1999. Our integrated operations and geographic diversity allowed us to achieve superior results compared to our peer group. Industry refining margins were below five-year averages due to high inventory levels and increased importation of refined products from overseas at the beginning of the third quarter. As the quarter unfolded, seasonally stronger demand coupled with planned and unplanned downtime at several domestic refineries caused a dramatic decrease in inventory levels and refining margins moved higher. Wholesale and retail margins, which are counter-cyclical to refining margins, started the third quarter with stronger than normal margins but as the quarter moved forward those margins came under pressure as the increase in spot prices moved faster than the wholesale and retail prices. Distillate margins held above the five-year average due to continued strong demand and relatively low inventories. The September 11th terrorist attacks and the slowdown in the economy roiled both the equity and commodity markets. Crude oil prices initially moved higher after the terrorist attacks, then dropped almost $7 per barrel to settle at approximately $21 per barrel. The decline in crude oil prices along with the marked drop in jet fuel demand caused the industry refining margin to come under pressure at the end of the third quarter of 2001. Looking ahead to the fourth quarter of 2001, we expect slightly higher inventory levels compared to a year ago, seasonally lower demand and uncertainty as to the direction of the U.S. economy to continue to affect both the crude oil and refined product markets. These markets are expected to remain volatile as suppliers respond to the weakness in the world crude oil demand. Despite the prospect of lower then average margins for both gasoline and distillate, we raised our full year 2001 earnings per share estimate to approximately $8.00 per diluted share up from the previously announced earnings per share estimate of $7.50 per diluted share. See "Certain Forward-Looking Statements." Capital Expenditures The refining and retail marketing industry is a capital-intensive business. Significant capital requirements include expenditures to upgrade or enhance refinery operations to meet environmental regulations and maintain our competitive position, as well as to acquire, build and maintain broad-based retail networks. The capital requirements of our operations consist primarily of: o maintenance expenditures, such as those required to maintain equipment reliability and safety and to address environmental regulations; and o growth opportunity expenditures, such as those planned to expand and upgrade our retail business and to increase the capacity of certain refinery processing units and pipelines. During the nine months ended September 30, 2001, capital expenditures totaled $247.2 million of which $76.7 million related to maintenance expenditures and $170.5 million related to growth opportunity expenditures. Approximately $47.9 million and $22.8 million of costs were incurred at the refineries and at the retail level, respectively, for various maintenance expenditures. During the nine months ended September 30, 2001, $29.4 million was also incurred for refinery maintenance turnarounds. 22 Growth opportunity expenditures during the nine months ended September 30, 2001 included: o $21.3 million to expand our Quebec Refinery from 167,000 barrels per day to 200,000 barrels per day; o $20.0 million to reestablish the delivery of crude oil shipments to the Amorco Wharf at the Golden Eagle Refinery; o $16.6 million for improvements for our CARB diesel unibon unit at the Wilmington Refinery to produce cleaner diesel fuel; o $13.2 million to re-image various convenience stores; o $11.7 million to restart the No. 2 reformer at the Golden Eagle Refinery in order to increase throughput; o $5.8 million to acquire pipeline gathering systems; and, o $5.5 million to restart the No. 3 crude oil unit at the Golden Eagle Refinery. We continue to investigate strategic acquisitions and other business opportunities that will complement our current business activities. We expect to fund our capital expenditures from cash provided by operations and, to the extent necessary, from the proceeds of borrowings under our bank credit facilities and our commercial paper program discussed below. In addition, depending upon our future needs and the cost and availability of various financing alternatives, we may seek additional debt or equity financing in the public or private markets. Liquidity and Capital Resources Financing As of September 30, 2001, our cash and cash equivalents totaled $121.5 million. We currently have two committed, unsecured bank facilities which provide a maximum of $700.0 million U.S. and $200.0 million Cdn. of available credit, and a $700.0 million commercial paper program supported by the committed, unsecured U.S. bank facility. The unsecured bank facilities and commercial paper program mature in July 2002 and, as a result of the pending merger with Valero Energy Corporation, which is expected to close in the fourth quarter of 2001, we do not intend to negotiate new bank facilities. However, Valero Energy Corporation expects to put in place new bank facilities at the time of the merger to finance the borrowing needs of the combined entity. Accordingly, $448.0 million of commercial paper and other borrowings maturing in the next 12 months have been classified as a current liability. As of September 30, 2001, we had borrowing capacity of approximately $648.9 million under our committed bank facilities and commercial paper program and approximately $156.1 million under uncommitted, unsecured short-term lines of credit with various financial institutions. In addition to our bank credit facilities, we have $1.0 billion available under universal shelf registrations previously filed with the Securities and Exchange Commission. The net proceeds from any debt or equity offering under the universal shelf registrations would add to our working capital and would be available for general corporate purposes. The bank facilities and other debt agreements require that we maintain certain financial ratios and other restrictive covenants. We are in compliance with those covenants and believe that those covenants will not have a significant impact on our liquidity or our ability to pay dividends. We believe our current sources of funds will be sufficient to satisfy our capital expenditure, working capital, debt service and dividend requirements for at least the next twelve months. On April 16, 2001, Shamrock Logistics, L.P., a previously wholly-owned subsidiary, issued 5.2 million limited partnership units in an initial public offering at a price of $24.50 per unit. Proceeds from the offering totaled $111.9 million, net of offering expenses of $14.9 million. We used the proceeds from the initial public offering to pay down debt. In December 2000, Shamrock Logistics Operations, L.P., a subsidiary of Shamrock Logistics, entered into a $120.0 million revolving credit facility with a financial institution. The revolving credit facility expires on January 15, 2006 and borrowings under the facility bear interest at either the alternative base rate or the LIBOR rate at the option of Shamrock Logistics Operations. In conjunction with the initial public offering of common units by Shamrock Logistics on April 16, 2001, Shamrock Logistics Operations borrowed $20.5 million under the revolving credit facility. As of September 30, 2001, $15.0 million was outstanding. 23 In March 1999, we established a revolving accounts receivable securitization facility which provides us with the ability to sell up to $250.0 million of accounts receivable on an ongoing basis. In connection with the securitization facility, we sell, on a revolving basis, an undivided interest in certain of our trade and credit card receivables. On March 1, 2001, the facility was increased $110.0 million to $360.0 million. At September 30, 2001 and December 31, 2000, the balance of receivables sold was $273.0 million and $250.0 million, respectively. Equity On February 7, 2001, our Board of Directors approved a share buyback program to repurchase $750.0 million of our common stock. As of September 30, 2001, we had purchased 17,050,109 shares of our common stock at a total cost of $682.7 million, including 7,050,109 shares at a price of $32.85 per share which were held by TotalFinaElf since our acquisition of Total Petroleum (North America) Ltd. in September 1997. In conjunction with the share buyback program, we entered into an agreement to repurchase 10,000,000 shares under an accelerated program with a financial institution at an initial cost of $323.3 million. In May 2001, we settled the accelerated stock buyback program with an additional payment of $126.3 million as a result of the increase in our common stock price. In order to fund the share buyback program, we entered into a short-term bridge loan agreement on February 7, 2001 with two banks that committed to lend us up to $750.0 million. Borrowings under the short-term bridge loan totaled $554.9 million. In May 2001, we paid off the outstanding balance of the bridge loan with proceeds received from commercial paper borrowings and available cash. On October 2, 2001, our Board of Directors declared a quarterly dividend of $0.125 per Common Share payable on December 5, 2001 to holders of record on November 21, 2001. Cash Flows for the Nine Months Ended September 30, 2001 During the nine months ended September 30, 2001, our cash position decreased $75.6 million to $121.5 million. Net cash provided by operating activities was $944.5 million due to increased profitability. Net cash used in investing activities during the nine months ended September 30, 2001, totaled $251.3 million including $241.0 million for capital expenditures, $5.8 million for the acquisition of pipeline gathering systems, $29.4 million for refinery maintenance turnaround costs, and $25.3 million of proceeds primarily from the sale of our Oklahoma crude oil gathering operations. Net cash used in financing activities during the nine months ended September 30, 2001, was $766.8 million including a reduction of our short-term borrowings of $175.9 million, repayment of long-term debt of $81.6 million, cash dividends totaling $37.7 million, and common shares purchased of $682.7 million. Cash Flows for the Nine Months Ended September 30, 2000 During the nine months ended September 30, 2000, our cash position increased $84.6 million to $177.4 million. Net cash provided by operating activities was $627.8 million due to improved profitability which was partially offset by an increase in inventories of $146.7 million due to the acquisitions of the Golden Eagle Refinery and Valley Shamrock. Net cash used in investing activities during the nine months ended September 30, 2000 totaled $905.0 million including acquisitions (primarily the Golden Eagle Refinery and Valley Shamrock) totaling $821.3 million, $89.3 million for capital expenditures and $15.4 million for refinery maintenance turnaround costs. We received $21.0 million of proceeds from the sales of various retail assets. Net cash provided by financing activities during the nine months ended September 30, 2000 totaled $364.2 million. During the nine months ended September 30, 2000, our commercial paper and short-term borrowings increased $119.4 million and we received proceeds of $350.0 million from a bridge loan to fund the acquisition of the Golden Eagle Refinery. We also paid cash dividends totaling $71.7 million during the nine months ended September 30, 2000. 24 Exchange Rates The value of the Canadian dollar relative to the U.S. dollar has weakened substantially since the acquisition of the Canadian operations in 1992. As our Canadian operations are in a net asset position, the weaker Canadian dollar has reduced, in U.S. dollars, our net equity as of September 30, 2001, by $107.8 million. Although the Company expects the exchange rate to fluctuate during 2001, it cannot reasonably predict its future movement. With the exception of our crude oil costs, which are U.S. dollar denominated, fluctuations in the Canadian dollar exchange rate will affect the U.S. dollar amount of revenues and related costs and expenses reported by the Canadian operations. The potential impact on the refining margin of fluctuating exchange rates together with U.S. dollar denominated crude oil costs is mitigated by our pricing policies, which generally pass on any change in the cost of crude oil. Retail margins, on the other hand, have been adversely affected by exchange rate fluctuations as competitive pressures have, from time to time, limited our ability to promptly pass on the increased costs to the ultimate consumer. We have considered various strategies to manage currency risk, and we hedge the Canadian currency risk when such hedging is considered economically appropriate. See "Certain Forward-Looking Statements." New Accounting Pronouncements In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Statement No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" but retains Statement No. 121's fundamental provisions for recognition and measurement of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. This Statement also supersedes APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for the disposal of a segment of a business. Statement No. 144 does not apply to goodwill or other intangible assets, the accounting and reporting of which is addressed in newly issued Statement No. 142, "Goodwill and Other Intangible Assets." The provisions of Statement No. 144 are effective for financial statements for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. We are currently evaluating the impact of adopting this new Statement. Certain Forward-Looking Statements This quarterly report on Form 10-Q contains certain "forward-looking" statements as that term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, and information relating to us and our subsidiaries that are based on the beliefs of management as well as assumptions made by and information currently available to management. When used in this report, the words "anticipate," "believe," "estimate," "expect," and "intend" and words or phrases of similar expressions, as they relate to us or our subsidiaries or management, identify forward-looking statements. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the operations and results of operations, including as a result of competitive factors and pricing pressures, shifts in market demand and general economic conditions and other factors. Should one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to various market risks, including changes in interest rates, foreign currency rates and commodity prices related to crude oil, refined products and natural gas. To manage or reduce these market risks, we use interest rate swaps, foreign exchange and purchase contracts, and commodity futures and price swap contracts. A discussion of our primary market risk exposures in derivative financial instruments is presented below. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, established accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivative instruments be recognized as either assets or liabilities in the balance sheet and be measured at their fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Effective January 1, 2001, we adopted Statement No. 133, as amended; the impact of adoption was not material to our consolidated financial position or results of operations. The adoption of Statement No. 133, as amended, could increase volatility in our net income and other comprehensive income as derivative instruments and the degree of hedge accounting is subject to change from time to time based on our decisions as to the appropriate strategies and our overall risk exposure levels. Interest Rate Risk We are subject to interest rate risk on our long-term fixed interest rate debt. Commercial paper borrowings and borrowings under revolving credit facilities do not give rise to significant interest rate risk because these borrowings have maturities of less than three months. The carrying amount of our floating interest rate debt approximates fair value. Generally, the fair market value of debt with a fixed interest rate will increase as interest rates fall and will decrease as interest rates rise. This exposure to interest rate risk is managed by obtaining debt that has a floating interest rate or using interest rate swaps to change fixed interest rate debt to floating interest rate debt. Generally, we maintain floating interest rate debt of between 40% and 50% of total debt. The Federal Reserve has cut interest rates ten times during 2001 for a total decrease of 4.50% in order to avert a recession of economic growth. As a result of the Federal Reserve's interest rate cuts, the fair value of our fixed rate debt has increased. The following table provides information about our long-term debt and interest rate swaps, both of which are sensitive to changes in interest rates. For long-term debt, principal cash flows and related weighted average interest rates by expected maturity dates, after consideration of refinancing (as of December 31, 2000 only), are presented. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average floating rates are based on implied forward rates in the yield curve at the reporting date. As of September 30, 2001, the carrying value and fair value of our interest rate swaps was $22.4 million and the carrying amount of our fixed interest rate debt hedged by those interest rate swaps increased by the same amount in accordance with Statement No. 133, as amended. As of December 31, 2000, the fair value of our interest rate swaps was $1.8 million and the carrying value of those interest rate swaps was $0, as we were not required at that time to record the fair value of the interest rate swaps. 26 September 30, 2001 ---------------------------------------------------------------------------------- Expected Maturity Dates ----------------------------------------------------------- There- Fair 2001 2002 2003 2004 2005 after Total Value ---- ---- ---- ---- ---- ----- ----- ----- (in millions, except interest rates) Long-term Debt: Fixed rate................... $ 0.2 $ 283.4 $ 28.8 $ 0.5 $ 209.2 $ 718.0 $ 1,240.1 $ 1,237.5 Average interest rate...... 7.0% 8.6% 8.2% 7.7% 7.9% 7.5% 7.8% N/A Floating rate................ $ - $ 171.3 $ - $ - $ - $ 15.0 $ 186.3 $ 186.3 Average interest rate...... -% 3.7% -% -% -% 4.2% 3.8% N/A Interest Rate Swaps: Notional amount.............. $ - $ 200.0 $ - $ - $ 150.0 $100.0 $ 450.0 $ 22.4 Average pay rate........... 2.5% 2.4% 4.0% 5.0% 5.3% 6.5% 5.1% Average receive rate....... 6.4% 6.4% 6.6% 6.6% 6.6% 6.9% 6.7%
December 31, 2000 ---------------------------------------------------------------------------------- Expected Maturity Dates ----------------------------------------------------------- There- Fair 2001 2002 2003 2004 2005 after Total Value ---- ---- ---- ---- ---- ----- ----- ----- (in millions, except interest rates) Long-term Debt: Fixed rate................... $ 1.7 $ 351.3 $ 28.8 $ 0.6 $ 196.5 $ 714.8 $ 1,293.7 $ 1,306.2 Average interest rate...... 7.4% 8.8% 8.2% 7.7% 7.9% 7.5% 7.9% N/A Floating rate................ $ - $ 367.8 $ - $ - $ - $ - $ 367.8 $ 367.8 Average interest rate...... - % 7.8% -% -% -% -% 7.8% N/A Interest Rate Swaps: Notional amount.............. $ - $ 200.0 $ - $ - $ 150.0 $ 100.0 $ 450.0 $ 1.8 Average pay rate........... 5.5% 5.1% 5.5% 5.7% 5.9% 6.5% 6.0% Average receive rate....... 6.4% 6.4% 6.6% 6.6% 6.6% 6.9% 6.7%
Foreign Currency Risk Periodically, we enter into short-term foreign exchange and purchase contracts to manage our exposure to exchange rate fluctuations on the trade payables of our Canadian operations that are denominated in U.S. dollars. These contracts involve the exchange of Canadian and U.S. currency at future dates. Gains and losses on these contracts generally offset losses and gains on the U.S. dollar denominated trade payables. As of September 30, 2001, we had outstanding commitments to purchase $2.5 million of U.S. dollars. We generally do not hedge for the effects of foreign exchange rate fluctuations on the translation of our foreign results of operations or financial position. Commodity Price Risk We are subject to the market risk associated with changes in market prices of our crude oil, refined products and natural gas; however, such changes in values are generally offset by changes in the sales price of our refined products. Our risk management policy allows us to use commodity futures contracts to procure a large portion of our crude oil requirements and to hedge our exposure to crude oil, refined product and natural gas price volatility. In addition, we use commodity swaps to manage our exposure to price volatility related to forecasted purchases of crude oil, refined products and natural gas. 27 The information below reflects our commodity futures contracts and swaps that are sensitive to changes in crude oil, refined product or natural gas commodity prices. The tables present the notional amounts in barrels for crude oil and refined product or MMBTU for natural gas, the weighted average contract prices and the total contract amount by expected maturity dates. Contract amounts are used to calculate the contractual payments and quantity of barrels of crude oil or refined products or MMBTU of natural gas to be exchanged under the contracts. The fair value of commodity futures contracts is based on quoted market prices. The fair value of commodity price swap contracts is determined by comparing the contract price with current broker quotes for futures contracts corresponding to the period that the anticipated transactions are expected to occur. As of September 30, 2001, the carrying amount is stated at fair value. September 30, 2001 ---------------------------------------------------------- Carrying Amount Weighted --------------- Contract Contract Average Asset Liability Amount Volumes Price ----- --------- ------ ------- ----- (in millions, except weighted average price) Procurement: Futures contracts - long: 2001 (crude oil and refined products)...... $ 0.2 $ (0.8) $ 12.8 0.5 $ 27.29 2002 (crude oil and refined products)...... 0.1 (1.4) 15.8 0.5 30.57 Futures contracts - short: 2001 (crude oil and refined products)...... 12.6 (0.5) 107.8 5.1 21.10 Price swaps - long: 2001 (natural gas)......................... 0.8 - 2.9 0.9 3.23 2002 (natural gas)......................... 0.7 - 2.8 0.9 3.23 2001 (crude oil and refined products)...... 0.0 - 1.8 0.1 17.92 2002 (crude oil and refined products)...... 18.6 - 144.3 6.6 21.86 Price swaps - short: 2001 (natural gas)......................... - - 3.6 0.9 4.04 2002 (natural gas)......................... - - 3.5 0.9 4.04 Spread swaps - long: 2001 (refined products).................... - (0.3) 0.7 0.4 1.95 2002 (refined products).................... - (0.1) 0.8 0.4 1.92 Options - long: 2001 (refined products).................... 0.1 - - 0.1 32.92 2002 (refined products).................... 0.6 - - 0.4 32.03 Options - short: 2001 (crude oil)........................... 0.1 - - 0.2 19.00
28 December 31, 2000 -------------------------------------------------------------------- Carrying Fair Value Weighted Amount Amount Contract Contract Average Gain (Loss) Gain (Loss) Amount Volumes Price ----------- ----------- ------ ------- ----- (in millions, except weighted average price) Procurement: Futures contracts - long: 2001 (crude oil and refined products)...... $ (8.3) $ (9.5) $ 321.7 11.6 $ 27.64 2001 (natural gas)......................... - 1.2 13.5 1.5 8.97 Futures contracts - short: 2001 (crude oil and refined products)...... 5.4 16.4 361.5 16.0 22.64 Price swaps - long: 2001 (crude oil and refined products).. - (0.6) 7.5 0.3 24.37 2002 (crude oil and refined products)...... - 11.6 140.0 6.4 22.00 Price swaps - short: 2001 (crude oil and refined products).. - (0.1) 10.9 0.4 23.68
29 PART II - OTHER INFORMATION Item 1. Legal Proceedings We are involved in various claims and lawsuits arising in the normal course of business. In the opinion of our management, based upon the advice of counsel, the ultimate resolution of these matters will not have a material adverse effect on our results of operations or financial position. Oklahoma Department of Environmental Quality vs. TPI Petroleum (Ardmore Refinery) We settled in principle prolonged negotiations with the Oklahoma Department of Environmental Quality concerning alleged Clean Air Act violations at our Ardmore Refinery. Under the proposed consent decree, we will pay a $1.5 million penalty and install pollution controls on the fluid catalytic cracking unit and other units at the refinery. The settlement amount was fully accrued as of September 30, 2001. Item 4. Submission of Matters to a Vote of Security Holders On September 27, 2001, we held a special meeting of our stockholders to vote upon a proposal to approve the Agreement and Plan of Merger, dated May 6, 2001, between Valero Energy Corporation and us. Our stockholders approved the proposed acquisition of UDS by Valero. There were 49,800,809 votes cast in favor of the proposal, 114,741 against, and 133,107 abstained. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ULTRAMAR DIAMOND SHAMROCK CORPORATION By: /s/ Robert S. Shapard - ----------------------------------------------------------------------- ROBERT S. SHAPARD EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER November 13, 2001 30 -----END PRIVACY-ENHANCED MESSAGE-----