-----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, HvK/xR8iJ8FbePa8bQk+uB0GHxbkvAKz+FKxD3hGsAHrkWXwq+PfcGFblq4fxH4U 1InQikHVAwOk2uCKhInDmw== 0000887207-99-000021.txt : 19991115 0000887207-99-000021.hdr.sgml : 19991115 ACCESSION NUMBER: 0000887207-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: SEC FILE NUMBER: 001-11154 FILM NUMBER: 99747878 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 THIRD QUARTER 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1999 Commission File Number 1-11154 ULTRAMAR DIAMOND SHAMROCK CORPORATION Incorporated under the laws of the State of Delaware I.R.S. Employer Identification No. 13-3663331 6000 North Loop 1604 West San Antonio, Texas 78249-1112 Telephone number: (210) 592-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ As of October 29, 1999, 86,658,000 shares of Common Stock, $0.01 par value, were outstanding and the aggregate market value of such stock as of October 29, 1999 was $2,123,113,000. ULTRAMAR DIAMOND SHAMROCK CORPORATION FORM 10-Q SEPTEMBER 30, 1999 TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998............................................. 3 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998................. 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998................................. 5 Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 1999 and 1998.......................................................... 6 Notes to Consolidated Financial Statements........................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................. 27 Item 6. Exhibits and Reports on Form 8-K.............................. 27 SIGNATURE..................................................... 28 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
ULTRAMAR DIAMOND SHAMROCK CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except share data) September 30, December 31, 1999 1998 ---- ---- (Unaudited) Assets Current assets: Cash and cash equivalents............................................ $ 136.7 $ 176.1 Accounts and notes receivable, net................................... 418.5 562.7 Inventories.......................................................... 627.5 635.6 Prepaid expenses and other current assets............................ 23.2 33.0 Deferred income taxes................................................ 98.4 98.4 --------- --------- Total current assets.............................................. 1,304.3 1,505.8 --------- --------- Property, plant and equipment........................................... 4,529.4 4,423.2 Less accumulated depreciation and amortization.......................... (1,291.4) (1,162.0) --------- --------- Property, plant and equipment, net................................... 3,238.0 3,261.2 Other assets, net....................................................... 566.8 548.0 --------- --------- Total assets........................................................ $ 5,109.1 $ 5,315.0 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Notes payable and current portion of long-term debt.................. $ 6.2 $ 5.8 Accounts payable..................................................... 481.6 366.0 Accrued liabilities.................................................. 410.4 402.4 Taxes other than income taxes........................................ 289.0 343.0 Income taxes payable................................................. 30.7 28.9 --------- --------- Total current liabilities......................................... 1,217.9 1,146.1 --------- --------- Long-term debt, less current portion.................................... 1,491.8 1,926.2 Other long-term liabilities............................................. 424.1 453.7 Deferred income taxes................................................... 292.0 205.0 Commitments and contingencies Company obligated preferred stock of subsidiary......................... 200.0 200.0 Stockholders' equity: Common Stock, par value $0.01 per share: 250,000,000 shares authorized, 86,648,000 and 86,558,000 shares issued and outstanding as of September 30, 1999 and December 31, 1998.......................... 0.9 0.9 Additional paid-in capital........................................... 1,515.1 1,512.7 Treasury stock....................................................... (100.7) (100.1) Retained earnings.................................................... 159.6 82.5 Accumulated other comprehensive loss ................................ (91.6) (112.0) --------- --------- Total stockholders' equity......................................... 1,483.3 1,384.0 --------- --------- Total liabilities and stockholders' equity......................... $ 5,109.1 $ 5,315.0 ========= ========= See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in millions, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Sales and other revenues (including excise taxes)............. $ 3,842.1 $ 2,740.9 $ 9,953.6 $ 8,571.5 --------- --------- --------- --------- Operating costs and expenses: Cost of products sold...................................... 2,503.5 1,504.1 6,162.8 4,851.8 Operating expenses......................................... 248.2 275.2 761.9 851.1 Selling, general and administrative expenses............... 75.6 80.9 225.5 242.7 Taxes other than income taxes.............................. 784.9 742.3 2,265.9 2,178.6 Depreciation and amortization.............................. 60.9 57.3 177.4 180.8 Restructuring and other charges............................ - - 11.0 142.8 --------- --------- --------- --------- Total operating costs and expenses...................... 3,673.1 2,659.8 9,604.5 8,447.8 --------- --------- --------- --------- Operating income.............................................. 169.0 81.1 349.1 123.7 Interest income............................................. 3.0 2.3 8.8 6.6 Interest expense............................................ (33.4) (35.2) (109.4) (107.3) Equity income from Diamond-Koch............................. 5.2 - 12.4 - Gain on sale of property, plant and equipment............... 2.2 - 2.2 7.0 --------- --------- --------- --------- Income before income taxes and dividends of subsidiary........ 146.0 48.2 263.1 30.0 Provision for income taxes.................................. (59.2) (19.9) (106.8) (32.7) Dividends on preferred stock of subsidiary.................. (2.6) (2.5) (7.7) (7.7) --------- --------- --------- --------- Net income (loss)............................................. $ 84.2 $ 25.8 $ 148.6 $ (10.4) ========= ========= ========= ========= Net income (loss) per share: Basic...................................................... $ 0.97 $ 0.29 $ 1.71 $ (0.13) Diluted.................................................... $ 0.97 $ 0.29 $ 1.71 $ (0.13) Weighted average number of shares (in thousands): Basic...................................................... 86,631 89,526 86,594 89,018 Diluted.................................................... 86,807 89,760 86,711 89,018 Dividends per share: Common Shares.............................................. $ 0.275 $ 0.275 $ 0.825 $ 0.825 5% Cumulative Convertible Preferred Shares................. $ - $ - $ - $ 0.625 See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in millions) Nine Months Ended September 30, ------------- 1999 1998 ---- ---- Cash Flows from Operating Activities: Net income (loss)....................................................... $ 148.6 $ (10.4) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................................ 177.4 180.8 Provision for losses on receivables.................................. 6.4 9.2 Restructuring charges - write-down of property, plant and equipment and goodwill......................................... - 82.1 Equity income from Diamond-Koch...................................... (12.4) (1.2) Loss (gain) on sale of property, plant and equipment................. (2.2) (7.0) Deferred income tax provision........................................ 84.1 16.1 Other, net........................................................... 5.5 6.0 Changes in operating assets and liabilities: Decrease in accounts and notes receivable.......................... 133.5 18.8 Decrease in inventories............................................ 16.4 98.5 Decrease in prepaid expenses and other current assets.............. 10.0 23.3 Decrease in other assets........................................... 4.3 5.6 Increase (decrease) in accounts payable and other current liabilities 44.6 (240.0) Increase (decrease) in other long-term liabilities................. (32.6) 7.4 ------- ------- Net cash provided by operating activities........................ 583.6 189.2 ------- ------- Cash Flows from Investing Activities: Capital expenditures................................................... (125.1) (93.1) Deferred refinery maintenance turnaround costs......................... (28.0) (29.3) Proceeds from sales of property, plant and equipment................... 30.4 77.4 ------- ------- Net cash used in investing activities................................ (122.7) (45.0) ------- ------- Cash Flows from Financing Activities: Net change in commercial paper and short-term borrowings............... (222.8) 39.6 Repayment of long-term debt............................................ (211.9) (36.3) Purchase of common stock............................................... - (64.3) Payment of cash dividends.............................................. (71.5) (74.2) Other, net............................................................. 2.2 6.7 ------- ------- Net cash used in financing activities................................ (504.0) (128.5) ------- ------- Effect of exchange rate changes on cash................................. 3.7 (2.3) ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents.................... (39.4) 13.4 Cash and Cash Equivalents at Beginning of Period........................ 176.1 92.0 ------- ------- Cash and Cash Equivalents at End of Period.............................. $ 136.7 $ 105.4 ======= ======= See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited, in millions) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income (loss)............................................... $ 84.2 $ 25.8 $ 148.6 $ (10.4) Other comprehensive income (loss): Foreign currency translation adjustment...................... 1.7 (21.1) 21.5 (34.2) Minimum pension liability adjustment, net of income taxes........................................ - - (1.1) - ------ ------ ------- ------ Comprehensive income (loss)..................................... $ 85.9 $ 4.7 $ 169.0 $ (44.6) ====== ====== ======= ======= See accompanying notes to consolidated financial statements.
ULTRAMAR DIAMOND SHAMROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) NOTE 1: Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared by Ultramar Diamond Shamrock Corporation (the Company), in accordance with generally accepted accounting principles for interim financial reporting and with Securities and Exchange Commission rules and regulations for Form 10-Q. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. Operating results for the three and nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The results of operations may be affected by seasonal factors, such as the demand for petroleum products and working capital requirements in the Northeast System, which vary during the year; or industry factors that may be specific to a particular period, such as movements in and the general level of crude oil prices, the demand for and prices of refined products, industry supply capacity and maintenance turnarounds. NOTE 2: Inventories Inventories consisted of the following:
September 30, December 31, 1999 1998 ---- ---- (In millions) Crude oil and other feedstocks............................................$ 216.9 $ 283.9 Refined and other finished products and convenience store items........... 356.3 296.9 Materials and supplies.................................................... 54.3 54.8 ------- ------- Total inventories....................................................$ 627.5 $ 635.6 ======= =======
ULTRAMAR DIAMOND SHAMROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 3: Computation of Net Income (Loss) Per Share Basic net income (loss) per share is calculated as net income (loss) less preferred stock dividends divided by the weighted average number of Common Shares outstanding. Diluted net income (loss) per share assumes, when dilutive, issuance of the net incremental shares from stock options and restricted stock, and, in 1998, the conversion of the 5% Cumulative Convertible Preferred Shares. The following table reconciles the net income (loss) amounts and share numbers used in the computation of net income (loss) per share (in millions, except share and per share data).
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 Basic Net Income (Loss) Per Share: Weighted average number of Common Shares outstanding (in thousands)............................................... 86,631 89,526 86,594 89,018 ====== ====== ======= ======= Net income (loss)................................................ $ 84.2 $ 25.8 $ 148.6 $ (10.4) Dividends on 5% Cumulative Convertible Preferred Stock........... - - - 1.1 ------ ------ ------- ------- Net income (loss) applicable to Common Shares.................... $ 84.2 $ 25.8 $ 148.6 $ (11.5) ====== ====== ======= ======= Basic net income (loss) per share................................ $ 0.97 $ 0.29 $ 1.71 $ (0.13) ====== ====== ======= ======= Diluted Net Income (Loss) Per Share: Weighted average number of Common Shares outstanding (in thousands)............................................... 86,631 89,526 86,594 89,018 Net effect of dilutive stock options based on the treasury stock method using the average market price.................... 176 234 117 - ------ ------ ------- ------- Weighted average common equivalent shares........................ 86,807 89,760 86,711 89,018 ====== ====== ======= ======= Net income (loss)................................................ $ 84.2 $ 25.8 $ 148.6 $(11.5) (1) ====== ====== ======= ======= Diluted net income (loss) per share.............................. $ 0.97 $ 0.29 $ 1.71 $(0.13) ====== ====== ======= ====== (1) Includes dividends on 5% Cumulative Convertible Preferred Shares.
NOTE 4: Restructuring and Other Charges In June 1998, the Company adopted a three-year restructuring plan to reduce its retail cost structure by eliminating 341 positions to improve operating efficiencies and to close and sell 316 under-performing convenience stores. In addition, the Company restructured certain pipeline and terminal operations and support infrastructure resulting in the elimination of 125 positions. As of September 30, 1999, 136 convenience stores were sold or closed and 286 employees were terminated under the retail and pipeline and terminal restructuring plans. In December 1998, the Company finalized plans to eliminate approximately 300 non-essential jobs, programs and expenses and to implement new initiatives designed to further reduce capital employed and improve earnings. As of September 30, 1999, 134 employees were terminated under the profit improvement program. Changes in accrued restructuring costs for the nine months ended September 30, 1999 were as follows (in millions):
Balance at Balance at December 31, 1998 Payments Reductions September 30, 1999 ----------------- -------- ---------- ------------------ Severance and related costs $ 19.0 $ 13.8 $ 0.3 $ 4.9 Lease buyout costs 14.0 0.6 0.8 12.6 Fuel system removal costs 16.1 2.2 2.8 11.1 ------ ------ ----- ------- $ 49.1 $ 16.6 $ 3.9 $ 28.6 ====== ====== ===== =======
NOTE 5: Commitments and Contingencies The Company's operations are subject to environmental laws and regulations adopted by various governmental authorities. Site restoration and environmental remediation and clean-up obligations are accrued either when known or when considered probable and reasonably estimable. Total future environmental costs are difficult to assess and estimate due to unknown factors such as the magnitude of possible contamination, the timing and extent of remediation, the determination of the Company's liability in proportion to other parties, improvements in cleanup technologies and the extent to which environmental laws and regulations may change in the future. Although environmental costs may have a significant impact on results of operations for any single year, the Company believes that such costs will not have a material adverse effect on the Company's financial position. There are various legal proceedings and claims pending against the Company that arise in the ordinary course of business. It is management's opinion, based upon advice of legal counsel, that these matters, individually or in the aggregate, will not have a material adverse effect on the Company's financial position or results of operations. NOTE 6: Accounts Receivable Securitization In March 1999, the Company arranged a $250.0 million revolving accounts receivable securitization facility. On an ongoing basis, the Company sells certain accounts receivable to Coyote Funding, L.L.C. (Coyote), a non-consolidated, wholly-owned subsidiary, which then sells a percentage ownership in such receivables, without recourse, to a third party cooperative corporation. The gross proceeds resulting from the sales of the percentage ownership interest in the receivables totaled $237.6 million through September 30, 1999. The Company's retained interest in receivables sold to Coyote is included in accounts and notes receivable, net in the accompanying consolidated balance sheet. Discounts and net expenses associated with the sales of receivables totaled $7.8 million and are included in interest expense in the consolidated statement of operations for the nine months ended September 30, 1999. NOTE 7: Business Segments The Company has three reportable segments: Refining, Retail and Petrochemical/NGL. The Refining segment includes refinery, wholesale, product supply and distribution, and transportation operations. The Retail segment includes Company-operated convenience stores, dealers/jobbers and truckstop facilities, cardlock and home heating oil operations. The Petrochemical/NGL segment includes earnings from Nitromite fertilizer, NGL marketing and certain NGL pipeline operations. Equity income from Diamond-Koch, a 50-50 joint venture primarily related to the Mont Belvieu petrochemical assets of the Company and Koch Industries, Inc., is not included in operating income. Operations that are not included in any of the three reportable segments are included in the Corporate category and consist primarily of corporate office operations. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires unique technology and marketing strategies. The Company evaluates performance based on earnings before interest, taxes and depreciation and amortization (EBITDA). Intersegment sales are generally derived from transactions made at prevailing market rates.
Petrochemical/ Refining Retail NGL Corporate Total -------- ------ --- --------- ----- (In millions) Nine months ended September 30, 1999: Sales and other revenues from external customers............... $ 5,526.5 $ 4,325.8 $ 101.3 $ - $ 9,953.6 Intersegment sales.................. 1,905.5 6.4 - - 1,911.9 EBITDA.............................. 468.3 146.8 5.8 (94.4) 526.5 Depreciation and amortization....... 123.9 49.9 1.0 2.6 177.4 Operating income (loss)............. 344.4 96.9 4.8 (97.0) 349.1 Total assets........................ 3,270.5 1,252.1 163.5 423.0 5,109.1 Nine months ended September 30, 1998: Sales and other revenues from external customers............... $ 4,125.7 $ 4,208.7 $ 237.1 $ - $ 8,571.5 Intersegment sales.................. 1,611.4 3.6 15.9 - 1,630.9 EBITDA.............................. 304.1 74.3 32.9 (106.8) 304.5 Depreciation and amortization....... 114.6 56.4 7.0 2.8 180.8 Operating income (loss)............. 189.5 17.9 25.9 (109.6) 123.7 Total assets........................ 3,441.0 1,374.5 195.7 200.5 5,211.7 Three months ended September 30, 1999: Sales and other revenues from external customers............... $ 2,207.5 $ 1,592.1 $ 42.5 $ - $ 3,842.1 Intersegment sales.................. 768.5 2.0 - - 770.5 EBITDA.............................. 220.0 35.6 2.8 (28.5) 229.9 Depreciation and amortization....... 42.7 17.0 0.3 0.9 60.9 Operating income (loss)............. 177.3 18.6 2.5 (29.4) 169.0 Three months ended September 30, 1998: Sales and other revenues from external customers............... $ 1,349.7 $ 1,318.1 $ 73.1 $ - $ 2,740.9 Intersegment sales.................. 505.5 1.4 5.9 - 512.8 EBITDA.............................. 95.7 68.2 7.3 (32.8) 138.4 Depreciation and amortization....... 38.4 16.7 2.1 0.1 57.3 Operating income (loss)............. 57.3 51.5 5.2 (32.9) 81.1
The following summarizes the reconciliation of reportable segment operating income to consolidated operating income (in millions):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Operating income: Total operating income for reportable segments... $ 198.4 $ 114.0 $ 446.1 $ 233.3 Other operating income (loss).................... (29.4) (32.9) (97.0) (109.6) ------- ------- ------- ------- Consolidated operating income................. $ 169.0 $ 81.1 $ 349.1 $ 123.7 ======= ======= ======= =======
NOTE 8: Diamond 66 On March 19, 1999, the Company and Phillips Petroleum Company terminated discussions related to the formation of a proposed joint venture (Diamond 66) between the two companies. During the first quarter of 1999, the Company expensed $11.0 million of transaction costs incurred related to the formation of Diamond 66, which costs are included in restructuring and other charges. NOTE 9: Proposed Sale of the Michigan System In December 1998, the Company announced plans to consider the sale of the Michigan operations, which consists of the Alma Refinery, product and crude pipelines, four terminals and 183 convenience stores. In May 1999, the Company signed an agreement with Marathon Ashland Petroleum LLC to sell its Michigan retail stores, terminals and pipelines. The Company expects to complete the sale in the fourth quarter of 1999, subject to regulatory approvals and closing conditions. Upon completion of the sale of the Michigan retail stores, terminals and pipelines, the Company plans to close the Alma Refinery. The Company suspended operations at the refinery during the first week of October 1999. NOTE 10: Subsequent Events During 1998, the Company purchased 3,740,400 shares of its Common Stock under a $100.0 million buyback program. The purchased stock will be used to fund future employee benefit obligations of the Company. The purchased shares were transferred to a Grantor Trust Stock Ownership Program on November 9, 1999 and will be released therefrom over a ten-year period. On October 5, 1999, the Board of Directors declared a quarterly dividend of $0.275 per Common Share payable on December 2, 1999 to holders of record on November 18, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company Ultramar Diamond Shamrock Corporation (the Company) is a leading independent refiner and retailer of high-quality refined products and convenience store merchandise in the central and southwest regions of the United States (the US System), and the northeast United States and eastern Canada (the Northeast System). Its operations consist of seven refineries, over 5,900 convenience stores, pipelines, a home heating oil business, and related petrochemical operations. The Company's operating results are affected by Company-specific factors, primarily its refinery utilization rates and maintenance turnarounds; seasonal factors, such as the demand for petroleum products and working capital requirements; and industry factors, such as movements in and the level of crude oil prices, the demand for and prices of refined products and industry supply capacity. The effect of crude oil price changes on the Company's operating results is determined, in part, by the rate at which refined product prices adjust to reflect such changes. As a result, the Company's earnings have been volatile in the past and may be volatile in the future. Seasonality In the Northeast System, demand for petroleum products varies during the year. Distillate demand during the first and fourth quarters can range from 30% to 40% above the average demand during the second and third quarters. The substantial increase in demand for home heating oil during the winter months results in the Company's Northeast System having higher accounts receivable and inventory levels during the first and fourth quarters of each year. The Company's US System is less affected by seasonal fluctuations in demand than its operations in the Northeast System. The working capital requirements of the US System, though substantial, show little fluctuation throughout the year. Both the US and Northeast Systems are impacted by the increased demand for gasoline during the summer driving season. Results of Operations Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Financial and operating data by geographic area for the three months ended September 30, 1999 and 1998 are as follows: Financial Data:
Three Months Ended September 30, ---------------------------------------------------------------------------- 1999 1998 ----------------------------------- ------------------------------------ US Northeast Total US Northeast Total -- --------- ----- -- --------- ----- (In millions) Sales and other revenues............... $ 3,053.8 $ 788.3 $ 3,842.1 $ 2,157.7 $ 583.2 $ 2,740.9 Cost of products sold (1).............. 1,986.0 517.5 2,503.5 1,200.6 303.5 1,504.1 Operating expenses..................... 229.7 18.5 248.2 248.9 26.3 275.2 Selling, general and administrative expenses.............. 32.8 42.8 75.6 42.9 38.0 80.9 Taxes other than income taxes.......... 585.5 199.4 784.9 558.0 184.3 742.3 Depreciation and amortization.......... 51.3 9.6 60.9 48.4 8.9 57.3 --------- ------- --------- --------- ------- --------- Operating income....................... $ 168.5 $ 0.5 169.0 $ 58.9 $ 22.2 81.1 ========= ======= ========= ====== Interest income........................ 3.0 2.3 Interest expense....................... (33.4) (35.2) Equity income from Diamond-Koch (2).... 5.2 - Gain on sale of assets (3)............. 2.2 --------- - Income before income taxes and dividends of subsidiary.......... 146.0 48.2 Provision for income (59.2) (19.9) taxes............. Dividends on subsidiary stock.......... (2.6) (2.5) --------- --------- Net income............................. $ 84.2 $ 25.8 ========= =========
(1) For the quarter ended September 30, 1998, the Company recorded a $16.1 million non-cash reduction in the carrying value of inventories due to the continuing drop in crude oil and refined product prices during the third quarter of 1998. (2) In September 1998, the Company contributed certain of its petrochemical assets to the Diamond-Koch joint venture, which is accounted for using the equity accounting method. Operating income in the third quarter of 1998 for the petrochemical assets contributed was $3.1 million, excluding overhead. (3) In August 1999, the Company recognized a $2.2 million gain on the sale of an 8.33% interest in a pipeline and terminal facility. Operating Data: - --------------
Three Months Ended September 30, 1999 1998 ---- ---- US System Mid-Continent Refineries (1) Throughput (barrels per day)............................... 400,700 367,000 Margin (dollars per barrel) (2)............................ $ 4.86 $ 4.08 Operating cost (dollars per barrel)........................ $ 1.74 $ 2.17 Wilmington Refinery Throughput (barrels per day)............................... 131,500 116,200 Margin (dollars per barrel) (2)............................ $ 6.60 $ 4.44 Operating cost (dollars per barrel)........................ $ 1.73 $ 2.41 Retail Fuel volume (barrels per day).............................. 180,400 168,000 Fuel margin (cents per gallon)............................. 10.1 15.7 Merchandise sales ($1,000/day) (3)......................... $ 3,794 $ 3,399 Merchandise margin (%)3.................................... 25.1% 31.1% Northeast System Quebec Refinery Throughput (barrels per day)............................... 128,600 150,300 Margin (dollars per barrel)(2)............................... $ 2.30 $ 2.87 Operating cost (dollars per barrel)........................ $ 1.06 $ 0.90 Retail Fuel volume (barrels per day).............................. 63,300 59,100 Overall margins (cents per gallon)4........................ 20.9 21.4
(1) The Mid-Continent Refineries include the Alma, Ardmore, Denver, McKee and Three Rivers Refineries. (2) Refinery margins for 1998 exclude the non-cash charge for the reduction in the carrying value of inventories. In addition, the 1998 Mid-Continent Refineries' margin has been restated ($0.31 per barrel) to reflect a change in the policy for pricing refined products transferred from its McKee and Three Rivers Refineries to its Mid-Continent marketing operations. Had the non-cash charge for the reduction of inventories been included in the refinery margin computation, the 1998 refinery margins would have been $3.99 for the Mid-Continent Refineries, $3.56 for the Wilmington Refinery, and $2.61 for the Quebec Refinery. (3) The merchandise sales per day and merchandise margin for 1998 have been restated to include certain deli and food service operations previously included in other retail income. The merchandise sales per day and merchandise margin originally reported for the quarter ended September 30, 1998 was $3,259 and 30.5%, respectively. (4) Retail marketing overall margin reported for the Northeast System represents a blend of gross margin for Company and dealer-operated retail outlets and convenience stores, home heating oil sales and cardlock operations. General Net income for the quarter ended September 30, 1999 totaled $84.2 million as compared to net income of $25.8 million for the quarter ended September 30, 1998. On a per share basis, the 1999 third quarter earnings represent $0.97 per basic and diluted share as compared to $0.29 per basic and diluted share for the third quarter of 1998. The earnings for the third quarter of 1999 are the highest quarterly results since the merger of Ultramar and Diamond Shamrock in 1996. During the third quarter of 1999, the Company recognized a $2.2 million pre-tax gain on the sale of an 8.33% interest in a pipeline and terminal facility. During the third quarter of 1998, the Company recognized a $16.1 million non-cash charge to reduce inventories due to a drop in crude oil and refined product prices. US System The US System had operating income of $168.5 million for the third quarter of 1999 as compared to operating income of $58.9 million for the third quarter of 1998, an increase of 186.1%. Increased throughput and sales volumes combined with strong refining margins and lower operating costs contributed to the US System's strong performance. Throughput at the Mid-Continent Refineries improved 33,700 barrels per day for the third quarter of 1999 over the third quarter of 1998. In mid-July 1998, the Ardmore Refinery sustained a power failure and fire in the main fractionation column in the plant's fluid catalytic cracking unit (FCCU) which curtailed production by approximately 47,000 barrels per day during the third quarter of 1998. The Mid-Continent refinery margin improved 19.1% from $4.08 per barrel in 1998 to $4.86 per barrel in 1999 as a result of higher wholesale prices generated from increased product demand and better crude oil costs which resulted from managing the lag effect on crude oil purchases. Operating costs were $0.43 per barrel lower in the third quarter of 1999 as compared to 1998 due to lower utility and maintenance expenses combined with higher throughput volumes. Throughput at the Wilmington Refinery increased 13.2% over the third quarter 1998 level to 131,500 barrels per day for the third quarter of 1999. The Wilmington Refinery operated at full capacity during most of the third quarter of 1999 when the refining margin increased 48.6% to $6.60 per barrel, resulting in record income in California. However, the high refining margins disappeared in September 1999 when several West Coast refineries, which had experienced significant operating problems earlier in the year, were restarted and utilization rates and inventory levels returned to more normal levels. The US retail operations were negatively impacted by a 35.7% decline in the fuel margin caused by wholesale gasoline prices continuing to increase faster than retail pump prices. At the same time, the merchandise margin dropped six percentage points from the same quarter in 1998 due to the significant increase in cigarette prices which could not be fully passed on to customers. However, retail fuel volumes improved 7.4% in 1999 as compared to 1998 despite closing or selling 136 convenience stores since the retail restructuring program was initiated in 1998. On a per store basis, fuel volumes increased 13.3% and merchandise sales increased 18.7% for the third quarter of 1999 as compared to 1998 due to continued aggressive promotion programs initiated to increase store volumes. Selling, general and administrative expenses for the third quarter of 1999 continue to be lower than 1998 levels due to the cost-reduction programs initiated in 1998 and early 1999. Northeast System Sales and other revenues in the Northeast System increased $205.1 million from the third quarter of 1998 to $788.3 million in the third quarter of 1999 as selling prices returned to more normal levels in 1999. During 1998, selling prices were depressed due to high industry inventories and lower crude oil prices. Throughput at the Quebec Refinery for the third quarter of 1999 decreased 21,700 barrels per day as compared to the third quarter of 1998 due to a two-week turnaround on the refinery's crude unit, which occurred in late August and early September 1999. The refinery margin decreased $0.57 per barrel from the third quarter of 1998 to $2.30 per barrel in the third quarter of 1999, reflecting continued industry refinery margin weakness in the Atlantic Basin since the beginning of 1999. Partially offsetting the reduced refinery margin were lower operating costs due to the continued cost-reduction programs started at the beginning of 1999. The increase in operating cost per barrel is a result of the lower throughput volumes during the third quarter of 1999 caused by the turnaround at the refinery. The overall retail margin declined slightly to 20.9 cents per gallon in the third quarter of 1999 as retail pump prices did not follow the rapid increase in import prices. However, retail fuel volumes increased 7.1% over last year which resulted in higher overall retail profits. Retail fuel volumes continue to remain strong due to the successful implementation of promotions programs. The increase in selling, general and administrative expenses for the third quarter of 1999 is due mainly to the additional selling expenses associated with increased sales volumes for the quarter. Corporate Interest expense of $33.4 million in the third quarter of 1999 was $1.8 million lower than in the corresponding quarter of 1998 due to lower average borrowings in 1999 as compared to 1998. In July 1999, the Company paid off $175.0 million of debt which matured. In addition, $30.0 million of debt, which bore interest at 10.75%, was repaid in the first half of 1999. The consolidated income tax provisions for the third quarter of 1999 and 1998 were based upon the Company's estimated effective income tax rates for the years ending December 31, 1999 and 1998 of 40.5% and 40.0% (exclusive of the 1998 restructuring charges), respectively. The consolidated effective income tax rates exceed the U.S. Federal statutory income tax rate primarily due to state income taxes, the effects of foreign operations and the amortization of nondeductible goodwill. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Financial and operating data by geographic area for the nine months ended September 30, 1999 and 1998 are as follows: Financial Data:
Nine Months Ended September 30, --------------------------------------------------------------------------- 1999 1998 ------------------------------------- ----------------------------------- US Northeast Total US Northeast Total -- --------- ----- -- --------- ----- (In millions) Sales and other revenues............... $ 7,925.6 $ 2,028.0 $ 9,953.6 $ 6,732.9 $ 1,838.6 $ 8,571.5 Cost of products sold (1).............. 4,956.2 1,206.6 6,162.8 3,861.8 990.0 4,851.8 Operating expenses..................... 688.5 73.4 761.9 765.4 85.7 851.1 Selling, general and administrative expenses.............. 103.4 122.1 225.5 125.8 116.9 242.7 Taxes other than income taxes.......... 1,710.3 555.6 2,265.9 1,632.6 546.0 2,178.6 Depreciation and amortization.......... 148.7 28.7 177.4 153.8 27.0 180.8 Restructuring and other charges (2).... 11.0 - 11.0 133.2 9.6 142.8 --------- --------- --------- --------- --------- --------- Operating income....................... $ 307.5 $ 41.6 349.1 $ 60.3 $ 63.4 123.7 ========= ========= ========= ========= Interest income........................ 8.8 6.6 Interest expense....................... (109.4) (107.3) Equity income from Diamond-Koch (3).... 12.4 - Gain on sale of assets (4)............. 2.2 7.0 --------- --------- Income before income taxes and dividends of subsidiary.......... 263.1 30.0 Provision for income taxes............. (106.8) (32.7) Dividends on subsidiary stock.......... (7.7) (7.7) --------- --------- Net income (loss)...................... $ 148.6 $ (10.4) ========= =========
(1) During the nine months ended September 30, 1998, the Company recorded a $42.2 million non-cash reduction in the carrying value of inventories due to the significant market drop in crude oil and refined product prices during the first nine months of 1998. (2) In March 1999, the Company expensed $11.0 million of transaction costs associated with the termination of the proposed Diamond 66 joint venture. In June 1998, the Company recorded a $131.6 million restructuring charge related to the retail, refining and pipeline operations and support services, which included asset write-downs of $82.1 million, severance and relocation costs of $15.5 million, and lease buyout, fuel system removal and other costs totaling $34.0 million. Also, during the second quarter of 1998, the Company incurred $11.2 million of costs associated with the canceled Petro-Canada joint venture, including $2.5 million to write-off costs for a coker development project that will not be pursued. (3) In September 1998, the Company contributed certain of its petrochemical assets to the Diamond-Koch joint venture, which is being accounted for using the equity accounting method. Operating income during the nine months ended September 30, 1998 for the petrochemical assets contributed was $12.9 million, excluding overhead. (4) In August 1999, the Company recognized a $2.2 million gain on the sale of an 8.33% interest in a pipeline and terminal facility. Also, in March 1998, the Company recognized a $7.0 million gain on the sale of a 25% interest in the same pipeline and terminal facility. Operating Data: - --------------
Nine Months Ended September 30, 1999 1998 ---- ---- US System Mid-Continent Refineries (1) Throughput (barrels per day)............................... 402,600 393,400 Margin (dollars per barrel) (2)............................ $ 3.72 $ 3.85 Operating cost (dollars per barrel)........................ $ 1.76 $ 2.06 Wilmington Refinery Throughput (barrels per day)............................... 130,300 120,500 Margin (dollars per barrel) (2)............................ $ 5.98 $ 4.87 Operating cost (dollars per barrel)........................ $ 1.74 $ 2.29 Retail Fuel volume (barrels per day) (3).......................... 177,400 170,500 Fuel margin (cents per gallon)(3).......................... 11.1 14.0 Merchandise sales ($1,000/day)(4).......................... $ 3,594 $ 3,261 Merchandise margin (%)4.................................... 26.1% 31.1% Northeast System Quebec Refinery Throughput (barrels per day)............................... 146,600 152,300 Margin (dollars per barrel)(2)............................. $ 1.87 $ 2.55 Operating cost (dollars per barrel)........................ $ 0.94 $ 0.97 Retail Fuel volume (barrels per day).............................. 66,600 63,100 Overall margins (cents per gallon) (5)..................... 23.9 24.9
(1) The Mid-Continent Refineries include the Alma, Ardmore, Denver, McKee and Three Rivers Refineries. (2) Refinery margins for 1998 exclude the non-cash charge for the reduction in the carrying value of inventories. In addition, the 1998 Mid-Continent Refineries' margin has been restated ($0.47 per barrel) to reflect a change in the policy for pricing refined products transferred from its McKee and Three Rivers Refineries to its Mid-Continent marketing operations. Had the non-cash charge for the reduction of inventories been included in the refinery margin computation, the 1998 refinery margins would have been $3.75 for the Mid-Continent Refineries, $4.35 for the Wilmington Refinery, and $2.21 for the Quebec Refinery. (3) The retail fuel volume and fuel margin for 1998 have been restated to conform to the 1999 presentation. The retail fuel volume and fuel margin originally reported for the nine months ended September 30, 1998 was 170,300 barrels per day and 13.9 cents per gallon. (4) The merchandise sales per day and merchandise margin for 1998 have been restated to include certain deli and food service operations previously included in other retail income. The merchandise sales per day and merchandise margin originally reported for the nine months ended September 30, 1998 was $3,149 and 30.6%, respectively. (5) Retail marketing overall margin reported for the Northeast System represents a blend of gross margin for Company and dealer-operated retail outlets and convenience stores, home heating oil sales and cardlock operations. General Net income for the nine months ended September 30, 1999 totaled $148.6 million as compared to a net loss of $10.4 million for the nine months ended September 30, 1998. The first nine months of 1999 included an $11.0 million charge to record expenses associated with the termination of the proposed Diamond 66 joint venture and a $2.2 million pre-tax gain on the sale of an 8.33% interest in a pipeline and terminal facility. The first nine months of 1998 included the following unusual items: o $131.6 million charge related to the restructuring of the retail, refining and pipeline operations and support services; o $42.2 million non-cash charge to reduce inventories due to a drop in crude oil and refined product prices; o $11.2 million of costs associated with the canceled joint venture with Petro-Canada; and o $7.0 million gain on the sale of a 25% interest in a pipeline and terminal facility. Basic and diluted net income per share was $1.71 for the nine months ended September 30, 1999 as compared to a net loss of $0.13 per basic and diluted share for the nine months ended September 30, 1998. US System The US System had operating income of $307.5 million for the first nine months of 1999 as compared to $60.3 million for the first nine months of 1998. The unusual items discussed above negatively impacted the US System's operating income by $11.0 million in 1999 and $161.2 million in 1998. Excluding the impact of these unusual items, the 1999 operating results increased 43.8% over 1998. US refining operations continued to improve over 1998 levels due primarily to strong refinery margins at the Wilmington and McKee Refineries. The Wilmington Refinery operated at full capacity during the second and third quarters when refining margins hit an all-time high on the West Coast. In September 1999, the West Coast refining margins returned to more normal levels after other West Coast refineries, which had been shut down, were restarted and taken to full capacity. In addition to the higher refinery margin, throughput at the Wilmington Refinery increased 8.1% to 130,300 barrels per day due to the debottlenecking of the FCCU in December 1998. The Mid-Continent Refineries' throughput increased 9,200 barrels per day and sales volumes increased 31,700 barrels per day over 1998 levels. In 1998, throughput and sales volumes were adversely affected due to the downtime at the Ardmore Refinery after it sustained a power failure and fire in the FCCU in July 1998. Operating costs for the Mid-Continent Refineries' were lower in 1999 by $0.30 per barrel as compared to 1998 as a result of lower utility expenses and higher throughput volumes. During part of the summer driving season, asphalt margins were lower at the Ardmore Refinery due to lower quality asphalt being produced. The US retail operations continue to be negatively impacted by the increase in wholesale gasoline prices, which increased faster than retail pump prices. The retail fuel margin declined 20.7% from 1998 to 11.1 cents per gallon in 1999. However, the Company realized a 4.0% increase in the retail fuel volume and 10.2% growth in merchandise sales per day in 1999 as compared to 1998 despite closing or selling 136 stores since the retail restructuring program was initiated in 1998. The merchandise margin, however, declined to 26.1% in 1999 due to the increase in cigarette prices which could not be fully passed on to customers. On a per store basis, fuel volumes increased 9.8% and merchandise sales increased 17.2% due to the Company's marketing efforts to increase store traffic and sales per customer. Selling, general and administrative expenses for the nine months ended September 30, 1999 were lower compared to 1998 due to the cost-reduction programs initiated in 1998 and early 1999. Northeast System Sales and other revenues in the Northeast System increased to $2,028.0 million for the nine months ended September 30, 1999 as compared to $1,838.6 million for 1998. This increase is due mainly to the recovery of 1999 selling prices to more normal levels. During 1998, selling prices were depressed due to high industry inventories and lower crude oil prices. The refinery margin decreased $0.68 per barrel from $2.55 per barrel during the first nine months of 1998 to $1.87 per barrel in 1999 as a result of high inventory levels, warm winter weather during the first quarter of 1999, and rapidly increasing crude oil costs during 1999. Partially offsetting the reduced refinery margin were lower operating costs due to the cost-reduction programs implemented at the beginning of 1999 resulting in lower operating costs per barrel in 1999 as compared to 1998. Retail operations benefited from a 5.5% increase in fuel volumes due to continued successful promotions programs. The overall retail margin declined slightly to 23.9 cents per gallon in 1999 from 24.9 cents per gallon in 1998 as a result of slightly lower margins in the home heating oil business which was caused by the warm winter and high inventory levels. Selling, general and administrative expenses for the nine months ended September 30, 1999 are slightly higher than comparable amounts for 1998 due to additional selling expenses associated with higher sales volumes. Corporate Interest expense increased $2.1 million to $109.4 million for the nine months ended September 30, 1999. The increase is due to $7.8 million of costs associated with a newly implemented accounts receivable securitization facility offset by $5.1 million of interest reduction after the payoff of $205.0 million of debt. The consolidated income tax provisions for the first nine months of 1999 and 1998 were based upon the Company's estimated effective income tax rates for the years ending December 31, 1999 and 1998 of 40.5% and 40.0% (exclusive of the 1998 restructuring charges), respectively. The consolidated effective income tax rates exceed the U.S. Federal statutory income tax rate primarily due to state income taxes, the effects of foreign operations and the amortization of nondeductible goodwill. Outlook The Company's earnings depend largely on refining and retail margins. The petroleum refining and marketing industry has been and continues to be volatile and highly competitive. The cost of crude oil purchased by the Company as well as the price of refined products sold by the Company have fluctuated widely in the past. As a result of the historic volatility of refining and retail margins and the fact that they are affected by numerous diverse factors, it is impossible to predict future margin levels. Refining margins during the third quarter of 1999 continued to increase as a result of wholesale prices rising faster than increasing crude oil prices and lower refinery utilizations, particularly in California, as compared to year-ago levels. OPEC and other major producing countries have maintained crude oil production cuts resulting in an $8 per barrel average increase in the price of crude oil during 1999. Refinery utilizations have been negatively impacted by severe weather on the East Coast and by unplanned outages at several refineries on the West Coast. The reduced utilizations have in turn tightened refined product supplies while demand increased throughout the summer driving season. Towards the end of the third quarter, refinery margins begin to weaken as the summer driving season concluded and West Coast refineries resumed operations. As the fourth quarter of 1999 begins, refining margins are comparable to 1998 fourth quarter levels as fall and winter demand for refined products has decreased. The winter demand for home heating oil and other distillates, especially in the northeastern part of the United States and eastern Canada where the Company operates its home heating oil business, should strengthen throughout the fourth quarter assuming this winter is colder than last year. In addition, numerous refineries throughout the U.S. are planning fourth quarter turnarounds during the typical winter slow down for the refining industry. A normal winter on the East Coast and lower refinery utilizations would hold industry margins at average winter levels, which should increase overall industry profits in the fourth quarter of 1999 as compared to 1998. Retail fuel margins in the second and third quarters of 1999 were negatively impacted as retail pump prices did not keep pace with rising crude oil costs and wholesale gasoline prices. As the fourth quarter of 1999 begins, crude oil prices appear to be stabilizing which may allow retail pump prices to catch up to the higher wholesale gasoline prices and result in improved retail fuel margins. Merchandise margins in the fourth quarter of 1999 are expected to remain level with 1999 year to date margins, which are lower than 1998 due to the cigarette price increases implemented by the tobacco industry in December 1998. The continued convergence and consolidation in the refining and marketing industry and the entrance of new supermarket stores in the retail sector is changing the competitive level in markets the Company serves, requiring innovative ways to stay ahead of the field. New technology and larger store formats are just some of the ways the Company is responding to the new challenges. See "Certain Forward-Looking Statements." Capital Expenditures The petroleum refining and marketing industry is a capital-intensive business. Significant capital requirements include expenditures to upgrade or enhance refinery operations to meet environmental regulations and maintain the Company's competitive position, as well as to acquire, build and maintain broad-based retail networks. The capital requirements of the Company's operations consist primarily of: o maintenance expenditures, such as those required to maintain equipment reliability and safety and to address environmental regulations; and o growth opportunity expenditures, such as those planned to expand and upgrade its retail business, to increase the capacity of certain refinery processing units and pipelines and to construct additional petrochemical processing units. A recent Environmental Protection Agency proposal and a similar standard in Canada calls for a reduction in the sulfur content in gasoline beginning in 2004. If these requirements along with the proposed ban in California on the use of methyl tertiary butyl ether (MTBE) in gasoline become law, they are expected to increase the Company's capital expenditure requirements over the next several years. Capital expenditures in 1999 have been reduced to $195.0 million from an original budget of $295.0 million as several projects have been canceled or delayed. During the nine months ended September 30, 1999, capital expenditures totaled $125.1 million of which $65.1 million related to maintenance expenditures and $60.0 million related to growth opportunity projects. Approximately $31.1 million and $16.0 million of costs have been incurred at the refineries and at the retail level, respectively, for various maintenance expenditures. During the nine months ended September 30, 1999, the Company also incurred $28.0 million in refinery maintenance turnaround costs primarily at the Wilmington Refinery. Growth opportunity expenditures for the nine months ended September 30, 1999 included: o $29.8 million associated with the implementation of the Company's new information technology system, and o $8.3 million to revamp the McKee Refinery's FCCU power train. The Company is continually investigating strategic acquisitions and other business opportunities, some of which may be material, which will complement its current business activities. The Company has not completed its budgeting process for 2000, but expects to target capital expenditures of approximately $260.0 million, which will include $160.0 million for growth projects and $100.0 million for maintenance, reliability and regulatory projects. The Company expects to fund its capital expenditures from cash provided by operations and, to the extent necessary, from the proceeds of borrowings under its bank credit facilities and its commercial paper program discussed below. In addition, depending upon its future needs and the cost and availability of various financing alternatives, the Company may, from time to time, seek additional debt or equity financing in the public or private markets under its universal shelf registration. Liquidity and Capital Resources As of September 30, 1999, the Company had cash and cash equivalents of $136.7 million. The Company currently has two committed, unsecured bank facilities which provide a maximum of $700.0 million U.S. and $200.0 million Cdn. of available credit, and a $700.0 million commercial paper program supported by the committed, unsecured U.S. bank facility. As of September 30, 1999, the Company had borrowing capacity of approximately $678.8 million remaining under its committed bank facilities and commercial paper program and had approximately $618.2 million under uncommitted, unsecured short-term lines of credit with various financial institutions. In addition to its bank credit facilities, the Company has $1.0 billion available under universal shelf registrations previously filed with the Securities and Exchange Commission. The net proceeds from any debt or equity offering under the universal shelf registrations would add to the Company's working capital and would be available for general corporate purposes. The Company also has $53.4 million available pursuant to committed lease facilities aggregating $355.0 million under which the lessors will construct or acquire and lease to the Company primarily convenience stores. The bank facilities and other debt agreements, as amended, require that the Company maintain certain financial ratios and other restrictive covenants. The Company is in compliance with such covenants and believes that such covenants will not have a significant impact on the Company's liquidity or its ability to pay dividends. The Company believes its current sources of funds will be sufficient to satisfy its capital expenditure, working capital, debt service and dividend requirements for at least the next twelve months. Effective March 29, 1999, the Company established a revolving accounts receivable securitization facility (Securitization Facility) which provides the Company with the ability to sell up to $250.0 million of accounts receivable on an ongoing basis. In connection with the Securitization Facility, the Company sells, on a revolving basis, an undivided interest in certain of its trade and credit card receivables. The proceeds from the sale of accounts receivable, which totaled $237.6 million at September 30, 1999, were used to reduce the Company's outstanding indebtedness, including indebtedness under its commercial paper program. The remaining availability under the Securitization Facility will be used, among other purposes, to further reduce debt. On October 6, 1999, the Board of Directors declared a quarterly dividend of $0.275 per Common Share payable on December 2, 1999 to holders of record on November 18, 1999. As an alternative financing vehicle, the Company is considering the formation of a master limited partnership (MLP), which would operate most of the Company's pipeline and terminal assets. The Company would be the general partner of the MLP and operate the assets on its behalf. It is contemplated that the MLP, through an initial public offering, would sell limited partnership units representing 49% of the ownership interests to the public. Management expects to form the MLP and complete the initial public offering during the first quarter of 2000, subject to approval by the Board of Directors and evaluation of market conditions and other considerations. Cash Flows for the Nine Months Ended September 30, 1999 During the nine months ended September 30, 1999, the Company's cash position decreased $39.4 million to $136.7 million. Net cash provided by operating activities was $583.4 million including the receipt of $237.6 million from the sale of trade and credit card receivables under the Company's Securitization Facility. Net cash used in investing activities during the nine months ended September 30, 1999 totaled $122.7 million including $125.1 million for capital expenditures, $28.0 million for deferred refinery maintenance turnaround costs and $30.4 million from proceeds from asset sales. Net cash used in financing activities during the nine months ended September 30, 1999 totaled $503.8 million, including payments to reduce short-term borrowings and long-term debt of $434.8 million and for cash dividends totaling $71.5 million. In April and July 1999, the Company paid off $30.0 million of 10.75% Senior Notes and $175.0 million of 8.25% Notes, respectively. Exchange Rates The value of the Canadian dollar relative to the U.S. dollar has weakened substantially since the acquisition of the Canadian operations in 1992. As the Company's Canadian operations are in a net asset position, the weaker Canadian dollar has reduced, in U.S. dollars, the Company's net equity at September 30, 1999 by $90.5 million. Although the Company expects the exchange rate to fluctuate during 1999, it cannot reasonably predict its future movement. With the exception of its crude oil costs, which are U.S. dollar denominated, fluctuations in the Canadian dollar exchange rate will affect the U.S. dollar amount of revenues and related costs and expenses reported by the Canadian operations. The potential impact on the refining margin of fluctuating exchange rates together with U.S. dollar denominated crude oil costs is mitigated by the Company's pricing policies in the Northeast System, which generally pass on any change in the cost of crude oil. Retail margins, on the other hand, have been adversely affected by exchange rate fluctuations as competitive pressures have, from time to time, limited the Company's ability to promptly pass on the increased costs to the ultimate consumer. The Company has considered various strategies to manage currency risk, and it hedges the Canadian currency risk when such hedging is considered economically appropriate. Year 2000 Issue State of Readiness In 1997, the Company commenced efforts to address Year 2000 issues and subsequently formalized an enterprise-wide effort to assess and mitigate or eliminate the business risk associated with Year 2000 issues, focusing on: o information technology (IT) computer hardware and software systems, o internal process control equipment outside of the IT area used in the refining or retail operations, and o interfaces and support services from key suppliers, vendors and customers. A Company-wide process is in place to inventory, assess, test, remediate and develop contingency plans for addressing the Year 2000 issues described above. The process is ongoing and is periodically reassessed as new information becomes known, and the process is revised accordingly. The Company has also engaged outside consultants to assist in addressing its Year 2000 issues and to provide quality assurance reviews. The Company's Northeast IT systems are now expected to be Year 2000 compliant. In August 1999, the Company implemented a new stand-alone enterprise-wide IT system. This new enterprise-wide IT system is also being implemented, effective January 1, 2000, in the US because it offers superior technological enhancements and operating efficiencies not available in the existing US IT system. The cost of the new enterprise-wide IT system for the Northeast and US is expected to be approximately $53.0 million, with most of the costs being capitalized. As of September 30, 1999, the Company has incurred $40.8 million of costs related to the new IT system. The Company believes it has identified the significant exposure items associated with internal process control equipment used at the refineries and throughout the retail operations, and has implemented plans to bring such equipment into Year 2000 compliance. The Company has also corresponded with its key suppliers, vendors and customers and has developed contingency plans. The estimated cost to be incurred on the remediation and testing of the IT systems and the third-party contingency plans range from $25.0 million to $35.0 million, with most of the costs being capitalized. The actual costs incurred will depend on whether the contingency plans must be implemented. All remediation and contingency planning and testing will be completed by December 31, 1999 to ensure minimal disruption to operations as the new millennium begins. As of September 30, 1999, the Company has incurred approximately $23.1 million of costs related to the remediation and testing of the IT systems and contingency plans of which $19.2 million has been capitalized. Risks Certain Year 2000 risk factors which could have a material adverse effect on the Company's results of operations, liquidity, and financial condition include, but are not limited to, failure to identify critical systems which could experience failures, errors in efforts to correct problems, unexpected or extended failures by key suppliers, vendors and customers, and failures in global banking systems and commodity exchanges. As a matter of operating policy, the Company routinely analyzes production and automation systems for potential failures, such as interruptions in the supply of raw materials or utilities. It is not anticipated that a problem in these areas will have a significant impact on the Company's ability to continue normal business activities. In addition, it is not expected that these failures would impact safety or the environment nor have a material impact on production or sales. Any problems in these systems can be dealt with using existing operating procedures. The worst case scenario would be that the Company's failure or the failure of key suppliers, vendors and customers to correct material Year 2000 issues could result in serious disruptions in normal business activities and operations. Such disruptions could prevent the Company from refining crude oil and delivering refined products to customers. While the Company does not expect a worst case scenario, if it were to occur and could not be corrected on a timely basis or otherwise mitigated by contingency plans, it could have a material adverse impact on the Company's results of operations, liquidity and financial position. Conclusion The Company's current and planned activities with respect to the Year 2000 issue are expected to significantly reduce the Company's level of uncertainty about the magnitude of the risk posed by the Year 2000 issue and, in particular, about the Year 2000 compliance and readiness of its key suppliers, vendors, and customers. The Company believes that, with the implementation of new IT systems and completion of activities as scheduled, the possibility of significant interruptions of normal operations should be reduced. See "Certain Forward-Looking Statements." Certain Forward-Looking Statements This quarterly report on Form 10-Q contains certain "forward-looking" statements as such term is defined in the U. S. Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of management as well as assumptions made by and information currently available to management. When used in this report, the words "anticipate," "believe," "estimate," "expect," and "intend" and words or phrases of similar expressions, as they relate to the Company or its subsidiaries or management, identify forward-looking statements. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the operations and results of operations, including as a result of competitive factors and pricing pressures, shifts in market demand and general economic conditions and other factors. Should one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to various market risks, including changes in interest rates, foreign currency rates and commodity prices related to crude oil, refined products and natural gas. To manage or reduce these market risks, the Company uses interest rate swaps, foreign exchange contracts, and commodity futures and price swap contracts. The Company's policy governing the use of derivatives requires that every derivative relate to an underlying, offsetting position, anticipated transaction or firm commitment and prohibits the use of highly complex or leveraged derivatives. Beginning in 1999, the Company revised its feedstock procurement program to allow for limited discretionary hedging activities based on expectations of future market conditions. A summary of the Company's primary market risk exposures and its use of derivative financial instruments is presented below. See "Certain Forward-Looking Statements." Interest Rate Risk The Company is subject to interest rate risk on its long-term fixed interest rate debt. Commercial paper borrowings and borrowings under revolving credit facilities do not give rise to significant interest rate risk because these borrowings have maturities of less than three months. The carrying amount of the Company's floating interest rate debt approximates fair value. Generally, the fair market value of debt with a fixed interest rate will increase as interest rates fall, and the fair market value will decrease as interest rates rise. This exposure to interest rate risk is managed by obtaining debt that has a floating interest rate or using interest rate swaps to change fixed interest rate debt to floating interest rate debt. Generally, the Company maintains floating interest rate debt of between 40% and 50% of total debt. Interest rates have remained relatively stable over the past year and the Company anticipates such rates to remain relatively stable over the next year. The following table provides information about the Company's long-term debt and interest rate swaps, both of which are sensitive to changes in interest rates. Principal payments and related weighted average interest rates by expected maturity dates, after consideration of refinancing, are presented for long-term debt. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average floating rates are based on implied forward rates in the yield curve at September 30, 1999.
Expected Maturity - Year Ending December 31, There- Fair Value 1999 2000 2001 2002 2003 after Total September 30, 1999 ---- ---- ---- ---- ---- ----- ----- ------------------ (In millions) Long-term Debt: Fixed rate.................. $1.2 $14.6 $86.0 $286.6 $34.6 $913.9 $1,336.9 $1,311.8 Average interest rate....... 9.1% 9.0% 9.6% 8.7% 8.9% 7.6% 8.0% N/A Floating rate............... $ - $ - $ - $161.1 $ - $ - $ 161.1 $ 161.1 Average interest rate....... -% -% -% 5.8% -% -% 5.8% N/A Interest Rate Swaps: Fixed to floating........... $ - $ - $ - $200.0 $ - $250.0 $ 450.0 $ 450.0 Average pay rate........... 5.71% 5.93% 6.50% 6.64% 6.78% 7.25% 6.79% N/A Average receive rate....... 6.43% 6.43% 6.43% 6.43% 6.59% 6.85% 6.66% N/A
Foreign Currency Risk The Company periodically enters into short-term foreign exchange contracts to manage its exposure to exchange rate fluctuations on the trade payables of its Canadian operations that are denominated in U.S. dollars. These contracts involve the exchange of Canadian and U.S. currency at future dates. Gains and losses on these contracts generally offset losses and gains on the U.S. dollar denominated trade payables. At September 30, 1999, the Company did not have any short-term foreign exchange contracts. The Company generally does not hedge for the effects of foreign exchange rate fluctuations on the translation of its foreign results of operations or financial position. Commodity Price Risk The Company is subject to the market risk associated with changes in market prices of its underlying crude oil, refined products and natural gas; however, such changes in values are generally offset by changes in the sales price of the Company's refined products. Price swaps are price hedges for which gains and losses are recognized when the hedged transactions occur; however, losses are recognized when future prices are not expected to recover. As of September 30, 1999, the Company had outstanding commodity futures and price swap contracts to buy $512.2 million and sell $268.7 million of crude oil and refined products or to settle differences between a fixed price and market price on aggregate notional quantities of 6.4 million barrels of crude oil and refined products which mature on various dates through June 2002. The fair value of commodity futures contracts is based on quoted market prices. The fair value of price swap contracts is determined by comparing the contract price with current published quotes for futures contracts corresponding to the period that the anticipated transactions are expected to occur. The information below reflects the Company's price swaps and futures contracts that are sensitive to changes in crude oil or refined product commodity prices. The table presents the notional amounts in barrels for crude oil, the weighted average contract prices and the total contract amount by expected maturity dates. Contract amounts are used to calculate the contractual payments and quantity of barrels of crude oil to be exchanged under the futures contract.
Weighted Carrying Fair Value Contract Average Amount Amount Contract Volumes Price Year Ending December 31, Gain (Loss) Gain (Loss) Amount In Barrels Per Barrel - ------------------------ ----------- ----------- -------- ---------- ---------- (In millions, except weighted average price) Crude Procurement: Futures contracts - long: 1999....................................... $ - $ 15.6 $ 241.7 10.1 $ 23.93 2000....................................... - 25.4 130.5 6.1 21.39 Futures contracts - short: 1999....................................... - (3.4) 213.0 8.8 24.14 2000....................................... - (0.5) 55.7 2.4 22.93 Price swaps: 2002....................................... (9.1) (21.1) 140.0 6.4 22.00
PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ULTRAMAR DIAMOND SHAMROCK CORPORATION By: /s/ H. Pete Smith H. PETE SMITH EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER November 12, 1999 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS SEP-30-1999 DEC-31-1999 136,700 0 423,400 (4,900) 627,500 1,304,300 4,529,400 (1,291,400) 5,109,100 1,217,900 1,491,800 200,000 0 900 1,482,400 5,109,100 9,953,600 9,953,600 6,162,800 6,162,800 3,435,300 6,400 109,400 263,100 106,800 156,300 0 0 0 148,600 1.71 1.71
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