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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
---
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
Commission Exact Name of Registrant as Specified in State of I.R.S. Employer
File Number its Charter, Principal Office Address and Incorporation Identification No.
Telephone Number
- ------------ ---------------------------------------------- ------------------ ---------------------
1-16827 Premcor Inc. Delaware 43-1851087
1700 East Putnam Avenue Suite 500
Old Greenwich, Connecticut 06870
(203) 698-7500
1-13514 Premcor USA Inc. Delaware 43-1495734
1700 East Putnam Avenue Suite 500
Old Greenwich, Connecticut 06870
(203) 698-7500
1-11392 The Premcor Refining Group Inc. Delaware 43-1491230
1700 East Putnam Avenue Suite 500
Old Greenwich, Connecticut 06870
(203) 698-7500
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.
Premcor Inc. Yes (X) No ( )
Premcor USA Inc. Yes (X) No ( )
The Premcor Refining Group Inc. Yes (X) No ( )
Number of shares of the registrant's common stock (only one class for each
registrant) outstanding as of August 6, 2002:
Premcor Inc. 57,468,935 shares
Premcor USA Inc. 100 shares (100% owned by
Premcor Inc.)
The Premcor Refining Group Inc. 100 shares (100% owned by
Premcor USA Inc.)
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Form 10-Q
June 30, 2002
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Premcor Inc.:
Independent Accountants' Report.................................................................... 2
Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002.............................. 3
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2001 and 2002........................................................ 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2002.............. 5
Premcor USA Inc.:
Independent Accountants' Report ................................................................... 6
Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002.............................. 7
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2001 and 2002........................................................ 8
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2002.............. 9
The Premcor Refining Group Inc.:
Independent Accountants' Report ................................................................... 10
Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002 ............................. 11
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2001 and 2002........................................................ 12
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2002.............. 13
Notes to Consolidated Financial Statements (Premcor Inc., Premcor USA Inc., and
The Premcor Refining Group Inc. Combined)...................................................... 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................... 54
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 56
Item 2. Changes in Securities and Use of Proceeds ........................................................... 56
Item 6. Exhibits and Reports on Form 8-K..................................................................... 57
Signature
FORM 10-Q - PART I. FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q represents a combined report for three
registrants, Premcor Inc., Premcor USA Inc., or Premcor USA, and The Premcor
Refining Group Inc., or PRG. PRG is a wholly owned subsidiary of Premcor USA and
is the principal operating company. PRG, together with its wholly owned
subsidiary, Sabine River Holding Corp., or Sabine, own and operate three
refineries. Premcor USA is a wholly owned subsidiary of Premcor Inc.
The results of operations for Premcor Inc. and Premcor USA principally
reflect the results of operations of PRG. The consolidated financial statements
of PRG and Premcor USA differ primarily for the effects of some minor pipeline
operations of Premcor USA, that mainly serve PRG, and long-term debt of
stand-alone Premcor USA. The consolidated financial statements of Premcor USA
and Premcor Inc. differ primarily for the effects of Premcor Inc.'s stand-alone
general and administrative costs and interest income.
Included in this Quarterly Report on Form 10-Q are balance sheets,
statements of operations, and statements of cash flows for the applicable
periods for Premcor Inc., Premcor USA, and PRG. The information reflected in the
combined, consolidated footnotes is equally applicable to all three companies
except where indicated otherwise. The Management Discussion and Analysis of
Financial Condition and Results of Operations is presented at the Premcor Inc.
level and is also equally applicable to all three companies except where
otherwise noted.
1
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of Premcor Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Premcor Inc. (the "Company") as of June 30, 2002, the related condensed
consolidated statements of operations for the three-month and six-month periods
ended June 30, 2001 and 2002, and the related condensed consolidated statements
of cash flows for the six-month periods then ended. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 10 to the condensed consolidated financial statements, the
Company changed its method of accounting for stock based compensation issued to
employees.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2001, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 11, 2002 (March 29, 2002 as
to Note 15 and April 15, 2002 as to Notes 10 & 19), we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2001 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
St. Louis, Missouri
August 5, 2002
2
PREMCOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
December 31, June 30,
2001 2002
------------- -------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 510.1 $ 180.5
Short-term investments........................................................ 1.7 1.7
Cash and cash equivalents restricted for debt service......................... 30.8 65.4
Accounts receivable, net of allowance of $1.3 and $1.3........................ 148.3 280.4
Inventories................................................................... 318.3 329.8
Prepaid expenses and other.................................................... 52.3 36.8
Net assets held for sale...................................................... -- 61.2
----------- -----------
Total current assets....................................................... 1,061.5 955.8
PROPERTY, PLANT AND EQUIPMENT, NET.............................................. 1,299.6 1,194.7
DEFERRED INCOME TAXES........................................................... -- 68.6
OTHER ASSETS.................................................................... 148.7 146.1
----------- -----------
$ 2,509.8 $ 2,365.2
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 366.4 $ 481.2
Accrued expenses ............................................................. 95.4 97.5
Accrued taxes other than income............................................... 35.7 31.7
Current portion of long-term debt............................................. 81.4 9.9
----------- -----------
Total current liabilities.................................................. 578.9 620.3
LONG-TERM DEBT.................................................................. 1,391.4 923.5
DEFERRED INCOME TAXES........................................................... 16.7 --
OTHER LONG-TERM LIABILITIES..................................................... 109.1 142.5
COMMITMENTS AND CONTINGENCIES................................................... -- --
MINORITY INTEREST............................................................... 24.2 --
EXCHANGEABLE PREFERRED STOCK
($0.01 par value per share; 250,000 shares authorized;
92,284 shares issued and outstanding in 2001)................................. 94.8 --
COMMON STOCKHOLDERS' EQUITY:
Common, $0.01 par value per share, 53,000,000 authorized, 25,720,589 issued
and outstanding in 2001 and 150,000,000 authorized, 57,461,435 issued and
outstanding in 2002; Class F Common, $0.01 par value, 7,000,000 authorized,
6,101,010 issued and outstanding in 2001.................................... 0.3 0.6
Paid-in capital................................................................. 323.7 847.4
Retained deficit................................................................ (29.3) (169.1)
----------- -----------
Total common stockholders' equity.......................................... 294.7 678.9
----------- -----------
$ 2,509.8 $ 2,365.2
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
PREMCOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; amounts in millions, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
NET SALES AND OPERATING REVENUES ..................................... $ 1,818.3 $ 1,679.0 $ 3,504.7 $ 2,907.3
EXPENSES:
Cost of sales ..................................................... 1,337.3 1,523.4 2,742.9 2,585.0
Operating expenses ................................................ 118.1 114.1 250.9 228.6
General and administrative expenses ............................... 16.6 14.4 29.2 28.9
Stock option compensation expense ................................. -- 3.8 -- 5.7
Depreciation ...................................................... 12.9 11.8 25.9 24.2
Amortization ...................................................... 10.0 10.1 18.6 19.9
Refinery restructuring and other charges .......................... -- 16.6 150.0 158.6
----------- ----------- ----------- -----------
1,494.9 1,694.2 3,217.5 3,050.9
OPERATING INCOME (LOSS) ............................................... 323.4 (15.2) 287.2 (143.6)
Interest and finance expense ....................................... (40.4) (32.9) (82.3) (67.4)
Loss on extinguishment of long-term debt ........................... -- (19.3) -- (19.3)
Interest income .................................................... 5.1 2.9 9.8 6.4
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST .................................................. 288.1 (64.5) 214.7 (223.9)
Income tax (provision) benefit ..................................... (103.3) 23.5 (47.3) 84.9
Minority interest .................................................. (7.6) 0.9 (10.9) 1.7
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS .............................. 177.2 (40.1) 156.5 (137.3)
Loss from discontinued operations, net of tax benefit of $5.5 ...... -- -- (8.5) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) ..................................................... 177.2 (40.1) 148.0 (137.3)
Preferred stock dividends .......................................... (2.7) -- (5.2) (2.5)
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS .................... $ 174.5 $ (40.1) $ 142.8 $ (139.8)
=========== =========== =========== ===========
Basic net income (loss) per common share:
Income (loss) from continuing operations ............................ $ 5.49 $ (0.82) $ 4.76 $ (3.47)
Discontinued operations ............................................. -- -- (0.27) --
----------- ----------- ----------- -----------
Net income (loss) ................................................... $ 5.49 $ (0.82) $ 4.49 $ (3.47)
=========== =========== =========== ===========
Weighted average common shares outstanding ............................ 31.8 48.7 31.8 40.3
Diluted net income (loss) per common share:
Income (loss) from continuing operations ............................ $ 5.06 $ (0.82) $ 4.39 $ (3.47)
Discontinued operations ............................................. -- -- (0.25) --
----------- ----------- ----------- -----------
Net income (loss) ................................................... $ 5.06 $ (0.82) $ 4.14 $ (3.47)
=========== =========== =========== ===========
Weighted average common shares outstanding ............................ 34.5 48.7 34.5 40.3
Pro forma for adoption of SFAS No. 123:
Income (loss) from continuing operations ............................ $ 177.0 $ (40.3) $ 156.2 $ (137.6)
Net income (loss) available to common stockholders .................. $ 174.3 $ (40.3) $ 142.5 $ (140.1)
Net income (loss) per common share:
Basic ............................................................ $ 5.48 $ (0.83) $ 4.48 $ (3.48)
Diluted .......................................................... $ 5.05 $ (0.83) $ 4.13 $ (3.48)
The accompanying notes are an integral part of these financial statements.
4
PREMCOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
For the Six Months
Ended June 30,
-------------------------------------
2001 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ 148.0 $ (137.3)
Discontinued operations................................................................. 8.5 --
Adjustments
Depreciation......................................................................... 25.9 24.2
Amortization......................................................................... 24.2 24.9
Deferred income taxes................................................................ 43.5 (85.3)
Refinery restructuring and other charges............................................. 118.1 103.6
Write-off of deferred financing costs ............................................... -- 9.5
Minority interest.................................................................... 10.9 (1.7)
Other, net........................................................................... (0.7) 17.5
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other...................................... 52.5 (116.6)
Inventories.......................................................................... 31.1 (11.5)
Accounts payable, accrued expenses, and taxes other than income ..................... (75.1) 113.0
Cash and cash equivalents restricted for debt service................................ -- 8.3
---------- ----------
Net cash provided by (used in) operating activities of continuing operations....... 386.9 (51.4)
Net cash used in operating activities of discontinued operations................... (2.5) (3.4)
---------- ----------
Net cash provided by (used in) operating activities................................ 384.4 (54.8)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment.......................................... (40.2) (38.5)
Expenditures for turnaround............................................................. (38.3) (31.7)
Cash and cash equivalents restricted for investment in capital additions................ -- 4.3
Other................................................................................... 0.5 0.2
---------- ----------
Net cash used in investing activities.............................................. (78.0) (65.7)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments................................................................. (0.7) (637.1)
Proceeds from the issuance of common stock, net......................................... -- 482.0
Cash and cash equivalents restricted for debt repayment................................. -- (42.9)
Deferred financing costs................................................................ (1.8) (11.1)
---------- ----------
Net cash used in financing activities.............................................. (2.5) (209.1)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 303.9 (329.6)
CASH AND CASH EQUIVALENTS, beginning of period............................................ 290.1 510.1
---------- ----------
CASH AND CASH EQUIVALENTS, end of period.................................................. $ 594.0 $ 180.5
========== ==========
The accompanying notes are an integral part of these financial statements.
5
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of Premcor USA Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Premcor USA Inc. (the "Company") as of June 30, 2002, the related condensed
consolidated statements of operations for the three-month and six-month periods
ended June 30, 2001 and 2002, and the related condensed consolidated statements
of cash flows for the six-month periods then ended. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 10 to the condensed consolidated financial statements, the
Company changed its method of accounting for stock based compensation issued to
employees. Additionally, the condensed consolidated financial statements have
been restated to give retroactive effect to the contribution of Sabine River
Holding Corp. common stock owned by Premcor Inc. to The Premcor Refining Group
Inc. (the "Sabine Restructuring"), which has been accounted for in a manner
similar to a pooling of interests as described in Notes 1 and 3 to the condensed
consolidated financial statements.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2001, and the related consolidated statements of
operations, stockholder's equity, and cash flows for the year then ended (not
presented herein). In our reports dated February 11, 2002 (March 5, 2002 as to
Note 15 & 19), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2001 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived after giving effect to the restatement for
the Sabine Restructuring described in Notes 1 and 3 to the condensed
consolidated financial statements.
Deloitte & Touche LLP
St. Louis, Missouri
August 5, 2002
6
PREMCOR USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
December 31, June 30,
2001 2002
----------------- -----------------
ASSETS (as restated, (unaudited)
see Note 1)
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 508.0 $ 135.6
Short-term investments......................................................... 1.7 1.7
Cash and cash equivalents restricted for debt service.......................... 30.8 65.4
Accounts receivable, net of allowance of $1.3 and $1.3......................... 148.3 280.3
Receivable from affiliates..................................................... 40.7 64.4
Inventories.................................................................... 318.3 329.8
Prepaid expenses and other..................................................... 42.7 36.8
Net assets held for sale....................................................... -- 61.2
----------- -----------
Total current assets........................................................ 1,090.5 975.2
PROPERTY, PLANT AND EQUIPMENT, NET............................................... 1,299.6 1,186.7
DEFERRED INCOME TAXES............................................................ -- 68.7
OTHER ASSETS..................................................................... 144.5 141.8
----------- -----------
$ 2,534.6 $ 2,372.4
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................... $ 366.4 $ 481.0
Payable to affiliates.......................................................... 28.4 61.2
Accrued expenses .............................................................. 99.4 98.6
Accrued taxes other than income............................................... 35.7 31.7
Current portion of long-term debt.............................................. 81.4 9.9
----------- -----------
Total current liabilities................................................... 611.3 682.4
LONG-TERM DEBT................................................................... 1,391.4 923.5
DEFERRED INCOME TAXES............................................................ 16.7 --
OTHER LONG-TERM LIABILITIES...................................................... 109.1 142.5
COMMITMENTS AND CONTINGENCIES.................................................... -- --
MINORITY INTEREST................................................................ 24.2 --
EXCHANGEABLE PREFERRED STOCK
($0.01 par value per share; 250,000 shares authorized;
92,284 shares issued and outstanding in 2001).................................. 94.8 --
COMMON STOCKHOLDER'S EQUITY:
Common, $0.01 par value per share, 100 authorized, issued and outstanding...... 0.1 0.1
Paid-in capital................................................................ 315.9 792.8
Retained deficit............................................................... (28.9) (168.9)
----------- -----------
Total common stockholder's equity........................................... 287.1 624.0
----------- -----------
$ 2,534.6 $ 2,372.4
=========== ===========
The accompanying notes are an integral part of these financial statements.
7
PREMCOR USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; amounts in millions)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------- ------------------------------
2001 2002 2001 2002
-------------- -------------- -------------- --------------
(as (as
restated, restated,
see Note 1) see Note 1)
NET SALES AND OPERATING REVENUES............................... $ 1,818.3 $ 1,679.0 $ 3,504.7 $ 2,907.3
EXPENSES:
Cost of sales................................................ 1,337.3 1,523.4 2,742.9 2,585.0
Operating expenses........................................... 118.1 114.1 250.9 228.6
General and administrative expenses.......................... 16.5 14.4 29.1 28.8
Stock option compensation expense............................ -- 3.8 -- 5.7
Depreciation................................................. 12.9 11.8 25.9 24.2
Amortization................................................. 10.0 10.1 18.6 19.9
Refinery restructuring and other charges..................... -- 16.6 150.0 158.6
----------- ----------- ----------- -----------
1,494.8 1,694.2 3,217.4 3,050.8
OPERATING INCOME (LOSS)........................................ 323.5 (15.2) 287.3 (143.5)
Interest and finance expense................................. (40.5) (32.9) (82.3) (67.4)
Loss on extinguishment of long-term debt..................... -- (19.3) -- (19.3)
Interest income.............................................. 5.2 2.2 9.8 5.9
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST........................................ 288.2 (65.2) 214.8 (224.3)
Income tax (provision) benefit............................... (102.7) 23.8 (46.8) 85.1
Minority interest............................................ (7.6) 0.9 (10.9) 1.7
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS ...................... 177.9 (40.5) 157.1 (137.5)
Loss from discontinued operations, net of tax benefit of
$5.5....................................................... -- -- (8.5) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................. 177.9 (40.5) 148.6 (137.5)
Preferred stock dividends.................................... (2.7) -- (5.2) (2.5)
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER.............. $ 175.2 $ (40.5) $ 143.4 $ (140.0)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
8
PREMCOR USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
For the Six Months
Ended June 30,
------------------------------------
2001 2002
---------------- ---------------
(as restated,
see Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................... $ 148.6 $ (137.5)
Discontinued operations............................................................. 8.5 --
Adjustments
Depreciation..................................................................... 25.9 24.2
Amortization.................................................................... 24.2 24.9
Deferred income taxes............................................................ 43.4 (85.4)
Refinery restructuring and other charges......................................... 118.1 103.6
Write-off of deferred financing costs............................................ -- 9.5
Minority interest................................................................ 10.9 (1.7)
Other, net....................................................................... (0.7) 17.6
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other.................................. 52.6 (126.1)
Inventories...................................................................... 31.2 (11.5)
Accounts payable, accrued expenses, and taxes other than income ................. (77.4) 109.9
Affiliate receivables/payables................................................... 1.6 9.1
Cash and cash equivalents restricted for debt service............................ -- 8.3
---------- ---------
Net cash provided by (used in) operating activities of continuing operations... 386.9 (55.1)
Net cash used in operating activities of discontinued operations............... (2.5) (3.4)
---------- ---------
Net cash provided by (used in) operating activities............................ 384.4 (58.5)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment...................................... (40.2) (38.5)
Expenditures for turnaround......................................................... (38.3) (31.7)
Cash and cash equivalents restricted for investment in capital additions............ -- 4.3
Proceeds from disposal of assets.................................................... 0.5 0.2
---------- ---------
Net cash used in investing activities.......................................... (78.0) (65.7)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments............................................................. (0.7) (637.1)
Capital contributions, net.......................................................... -- 442.9
Cash and cash equivalents restricted for debt service............................... -- (42.9)
Deferred financing costs............................................................ (1.8) (11.1)
---------- ---------
Net cash used in financing activities.......................................... (2.5) (248.2)
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 303.9 (372.4)
CASH AND CASH EQUIVALENTS, beginning of period........................................ 290.1 508.0
---------- ---------
CASH AND CASH EQUIVALENTS, end of period.............................................. $ 594.0 $ 135.6
========== =========
The accompanying notes are an integral part of these financial statements.
9
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of The Premcor Refining Group Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of The
Premcor Refining Group Inc. (the "Company") as of June 30, 2002, the related
condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 2001 and 2002, and the related condensed
consolidated statements of cash flows for the six-month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 10 to the condensed consolidated financial statements, the
Company changed its method of accounting for stock based compensation issued to
employees. Additionally, the condensed consolidated financial statements have
been restated to give retroactive effect to the contribution of Sabine River
Holding Corp. common stock owned by Premcor Inc. to The Premcor Refining Group
Inc. (the "Sabine Restructuring"), which has been accounted for in a manner
similar to a pooling of interests as described in Notes 1 and 3 to the condensed
consolidated financial statements.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2001, and the related consolidated statements of
operations, stockholder's equity, and cash flows for the year then ended (not
presented herein). In our reports dated February 11, 2002 (March 5, 2002 as to
Note 18), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2001 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived after giving effect to the restatement for the Sabine
Restructuring described in Notes 1 and 3 to the condensed consolidated financial
statements.
Deloitte & Touche LLP
St. Louis, Missouri
August 5, 2002
10
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
December 31, June 30,
2001 2002
---------------- -----------------
ASSETS (as restated, (unaudited)
see Note 1)
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 482.5 $ 118.5
Short-term investments........................................................... 1.7 1.7
Cash and cash equivalents restricted for debt service............................ 30.8 65.4
Accounts receivable, net of allowance of $1.3 and $1.3........................... 148.3 280.3
Receivable from affiliates....................................................... 31.3 50.4
Inventories...................................................................... 318.3 329.8
Prepaid expenses and other....................................................... 42.7 36.6
Net assets held for sale......................................................... -- 61.2
----------- -----------
Total current assets.......................................................... 1,055.6 943.9
PROPERTY, PLANT AND EQUIPMENT, NET................................................. 1,298.7 1,185.8
DEFERRED INCOME TAXES.............................................................. -- 33.9
OTHER ASSETS....................................................................... 142.8 141.9
----------- -----------
$ 2,497.1 $ 2,305.5
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 366.4 $ 481.0
Payable to affiliates............................................................ 49.8 83.7
Accrued expenses................................................................. 93.1 92.0
Accrued taxes other than income.................................................. 35.7 31.7
Current portion of long-term debt................................................ 81.4 9.9
----------- -----------
Total current liabilities..................................................... 626.4 698.3
LONG-TERM DEBT..................................................................... 1,247.0 880.0
DEFERRED INCOME TAXES.............................................................. 46.6 --
OTHER LONG-TERM LIABILITIES........................................................ 109.1 142.5
COMMITMENTS AND CONTINGENCIES...................................................... -- --
MINORITY INTEREST.................................................................. 24.2 --
COMMON STOCKHOLDER'S EQUITY:
Common, $0.01 par value per share, 1000 authorized, 100 issued and
outstanding.................................................................... 0.1 0.1
Paid-in capital.................................................................. 242.9 511.5
Retained earnings................................................................ 200.8 73.1
----------- -----------
Total common stockholder's equity............................................. 443.8 584.7
----------- -----------
$ 2,497.1 $ 2,305.5
=========== ===========
The accompanying notes are an integral part of these financial statements.
11
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; amounts in millions)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- -------------------------
2001 2002 2001 2002
---- ---- ---- ----
(as restated, (as
see Note 1) restated,
see Note 1)
NET SALES AND OPERATING REVENUES.......................... $ 1,818.3 $ 1,679.0 $ 3,504.7 $ 2,907.3
EXPENSES:
Cost of sales........................................... 1,337.8 1,526.3 2,743.8 2,588.3
Operating expenses ..................................... 117.8 113.9 250.5 228.3
General and administrative expenses..................... 16.5 14.4 29.1 28.8
Stock option compensation expense....................... -- 3.8 -- 5.7
Depreciation............................................ 12.9 11.8 25.9 24.2
Amortization............................................ 10.0 10.1 18.6 19.9
Refinery restructuring and other charges................ -- 16.6 150.0 158.6
----------- ----------- ----------- ----------
1,495.0 1,696.9 3,217.9 3,053.8
OPERATING INCOME (LOSS)................................... 323.3 (17.9) 286.8 (146.5)
Interest and finance expense............................ (35.6) (27.5) (72.5) (58.0)
Loss on extinguishment of long-term debt................ -- (9.3) -- (9.3)
Interest income......................................... 4.8 2.2 8.8 4.4
----------- ----------- ----------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST................................... 292.5 (52.5) 223.1 (209.4)
Income tax (provision) benefit.......................... (104.2) 19.4 (67.3) 80.0
Minority interest....................................... (7.6) 0.9 (10.9) 1.7
------------ ----------- ----------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................. 180.7 (32.2) 144.9 (127.7)
Loss from discontinued operations, net of tax benefit of
$5.5................................................. -- -- (8.5) --
----------- ----------- ----------- ----------
NET INCOME (LOSS)......................................... $ 180.7 $ (32.2) $ 136.4 $ (127.7)
=========== =========== =========== ==========
The accompanying notes are an integral part of these financial statements.
12
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
For the Six Months
Ended June 30,
--------------------------------
2001 2002
------------ ------------
(as restated
see Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................................. $ 136.4 $ (127.7)
Discontinued operations............................................................ 8.5 --
Adjustments
Depreciation.................................................................... 25.9 24.2
Amortization.................................................................... 23.9 24.8
Deferred income taxes........................................................... 53.4 (80.5)
Refinery restructuring and other charges........................................ 118.1 103.6
Write-off of deferred financing costs........................................... -- 7.9
Minority interest............................................................... 10.9 (1.7)
Other, net...................................................................... (0.8) 17.2
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other................................. 52.5 (125.9)
Inventories..................................................................... 31.2 (11.5)
Accounts payable, accrued expenses, and taxes other than income ................ (79.8) 109.6
Affiliate receivables/payables.................................................. 13.0 14.8
Cash and cash equivalents restricted for debt service........................... -- 8.3
--------- ---------
Net cash provided by (used in) operating activities of continuing operations.. 393.2 (36.9)
Net cash used in operating activities of discontinued operations.............. (2.5) (3.4)
--------- ---------
Net cash provided by (used in) operating activities........................... 390.7 (40.3)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment..................................... (40.2) (38.5)
Expenditures for turnaround........................................................ (38.3) (31.7)
Cash and cash equivalents restricted for investment in capital additions........... -- 4.3
Other.............................................................................. 0.1 0.2
--------- ---------
Net cash used in investing activities......................................... (78.4) (65.7)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments............................................................ (0.7) (438.6)
Cash and cash equivalents restricted for debt repayment............................ -- (42.9)
Capital contributions, net ........................................................ -- 234.6
Deferred financing costs........................................................... (1.8) (11.1)
--------- ---------
Net cash used in financing activities......................................... (2.5) (258.0)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 309.8 (364.0)
CASH AND CASH EQUIVALENTS, beginning of period....................................... 251.2 482.5
---------- ---------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 561.0 $ 118.5
========== =========
The accompanying notes are an integral part of these financial statements.
13
FORM 10-Q - PART I
ITEM 1. FINANCIAL STATEMENTS (continued)
PREMCOR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
(tabular dollar amounts in millions of U.S. dollars)
1. Basis of Preparation and Recent Developments
Premcor Inc. (the "Company"), a Delaware corporation, was incorporated in
April 1999. Premcor Inc. owns all of the outstanding common stock of Premcor USA
Inc. ("Premcor USA"), and Premcor USA owns all of the outstanding common stock
of The Premcor Refining Group Inc., ("PRG"). Following the completion of the
restructuring described in Note 3, referred to as the Sabine restructuring, PRG
owns all of the outstanding common stock of Sabine River Holding Corp.
("Sabine"). Sabine is the 1% general partner of Port Arthur Coker Company L.P.,
a limited partnership ("PACC"), and the 100% owner of Neches River Holding Corp.
("Neches"), which is the 99% limited partner of PACC. PACC is the 100% owner of
Port Arthur Finance Corp. ("PAFC"). The restructuring of Sabine as a wholly
owned subsidiary of PRG was an exchange of ownership interest between entities
under common control, and therefore was accounted for at the book value of
Sabine, similar to a pooling of interests. Accordingly, Premcor USA's and PRG's
historical financial statements have been restated to include the consolidated
results of operations, financial position, and cash flows of Sabine, as if the
combination had occurred on January 1, 2001.
Premcor Inc.'s principal operating subsidiaries are PRG and PACC. The
Company is one of the largest independent petroleum refiners and suppliers of
unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum
coke and other petroleum products in the United States. The Company owns and
operates three refineries with a combined crude oil throughput capacity of
490,000 barrels per day ("bpd"). The refineries are located in Port Arthur,
Texas; Lima, Ohio; and Hartford, Illinois.
On February 28, 2002, the Company announced its intention to discontinue
operations of its 70,000 bpd Hartford refinery in October 2002. Subsequently,
the Company changed the closing date to November 2002. The Company has concluded
that there is no economically viable manner of reconfiguring the refinery to
produce fuels which meet the new gasoline and diesel fuel specifications
mandated by the federal government. During the period prior to closing the
refinery, the focus will continue to be on employee safety and environmental
performance. Additionally, the Company is pursuing all opportunities, including
a sale of the refinery, to mitigate loss of jobs and refining capacity in the
Midwest.
On May 3, 2002, Premcor Inc. completed an initial public offering of 20.7
million shares of common stock. The initial public offering, plus the concurrent
purchases of 850,000 shares in the aggregate by Thomas D. O'Malley, the
Company's chairman of the board, chief executive officer and president, and two
independent directors of the Company, netted proceeds to Premcor Inc. of
approximately $482 million. The proceeds from the offering were committed to
retire debt of Premcor Inc.'s subsidiaries. See Note 8 Long-term Debt for
details on the use of these proceeds. Prior to the initial public offering,
Premcor Inc.'s common equity was privately held and controlled by Blackstone
Capital Partners III Merchant Banking Fund L.P. and its affiliates
("Blackstone"). Premcor Inc.'s other principal shareholder was a subsidiary of
Occidental Petroleum Corporation ("Occidental"). As a result of these sales of
Premcor Inc.'s common stock and the Sabine restructuring described in Note 3,
Blackstone's ownership was reduced to approximately 48% and Occidental's
ownership was reduced to approximately 13%.
This Quarterly Report on Form 10-Q represents a combined report for three
registrants, Premcor Inc., Premcor USA and PRG. The accompanying unaudited
consolidated financial statements of Premcor Inc., Premcor USA, and PRG and
their respective subsidiaries are presented pursuant to the rules and
regulations of the United States Securities and Exchange Commission in
accordance with the disclosure requirements for Form 10-Q. In the opinion of the
management of the Company, the unaudited consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary to fairly state the results for the interim periods
14
presented. Operating results for the three-month and six-month periods ended
June 30, 2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002. These combined consolidated notes apply
equally to Premcor Inc., Premcor USA, and PRG, unless otherwise noted. These
unaudited financial statements should be read in conjunction with the audited
financial statements and notes for the years ended December 31, 2001 and 2000
included in Premcor Inc.'s Registration Statement on Form S-1/A dated April 29,
2002 and Premcor USA's and PRG's Annual Report on Form 10-K for the year ended
December 31, 2001.
2. New and Proposed Accounting Standards
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections.
SFAS 145 rescinds SFAS No. 4, Reporting Gains and Losses from the Extinguishment
of Debt; SFAS No. 44, Accounting for Intangible Assets of Motor Carriers; and
SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements.
SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, as it relates to
sale-leaseback transactions and other transactions structured similar to a
sale-leaseback as well as amends other pronouncements to make various technical
corrections. The provisions of SFAS No. 145 as they relate to the rescission of
SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The
provision of this statement related to the amendment to SFAS No. 13 shall be
effective for transactions occurring after May 15, 2002. All other provisions of
this statement shall be effective for financial statements on or after May 15,
2002. As permitted by the pronouncement, the Company has elected early adoption
of SFAS No. 145 and, accordingly, has included the loss on extinguishment of
long-term debt in "Income from continuing operations" as opposed to as an
extraordinary item, net of taxes, below "Income from continuing operations" in
its Statement of Operations.
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. The adoption of these standards did not have a material
impact on the Company's financial position and results of operations; however,
SFAS No. 144 was utilized in the accounting for the Company's announced
intention to discontinue refining operations at the Hartford, Illinois refinery
in November 2002. See Note 4, Refinery Restructuring and Other Charges for
details of the Hartford refinery shutdown.
In July 2001, the Financial Accounting Standards Board approved SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses when a
liability should be recorded for asset retirement obligations and how to measure
this liability. The initial recording of a liability for an asset retirement
obligation will require the recording of a corresponding asset that will be
required to be amortized. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The implementation of SFAS No. 143 is not expected to have
a material impact on the Company's financial position or results of operations.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has issued an exposure draft of a proposed
statement of position ("SOP") entitled Accounting for Certain Costs and
Activities Related to Property, Plant and Equipment. If adopted as proposed,
this SOP will require companies to expense as incurred turnaround costs, which
it terms as "the non-capital portion of major maintenance costs." Adoption of
the proposed SOP would require that any existing unamortized turnaround costs be
expensed immediately. If this proposed change were in effect at June 30, 2002,
the Company would have been required to write-off unamortized turnaround costs
of approximately $104 million. Unamortized turnaround costs will change in 2002
as maintenance turnarounds are performed and past maintenance turnarounds are
amortized. If adopted in its present form, charges related to this proposed
change would be taken in the first quarter of 2003 and would be reported as a
cumulative effect of an accounting change, net of income tax, in the
consolidated statements of operations.
3. Sabine Restructuring
On June 6, 2002, PRG and Sabine completed a series of transactions ("the
Sabine restructuring") that resulted in Sabine and its subsidiaries becoming
wholly owned subsidiaries of PRG. Sabine, through its principal operating
subsidiary, PACC, owns and operates a heavy oil processing facility, which is
operated in conjunction with PRG's Port Arthur, Texas refinery. Prior to the
Sabine restructuring, Sabine was 90% owned by Premcor Inc. and 10% owned by
Occidental Petroleum Corporation.
15
The Sabine restructuring was permitted by the successful consent
solicitation of the holders of PAFC's 12 1/2% Senior Notes due 2009. The Sabine
restructuring was accomplished according to the following steps, among others:
.. Premcor Inc. contributed $225.6 million in proceeds from its initial public
offering of common stock to Sabine. Sabine used the proceeds from the
equity contribution, plus cash on hand, to prepay $221.4 million of its
senior secured bank loan and to pay a dividend of $141.4 million to Premcor
Inc.;
.. Commitments under Sabine's senior secured bank loan, working capital
facility, and certain insurance policies were terminated and related
guarantees were released;
.. PRG's existing working capital facility was amended and restated to, among
other things, permit letters of credit to be issued on behalf of Sabine;
.. Occidental exchanged its 10% interest in Sabine for 1,363,636 newly issued
shares of Premcor Inc. common stock;
.. Premcor Inc. contributed its 100% ownership interest in Sabine to Premcor
USA and Premcor USA, in turn, contributed its 100% ownership interest to
PRG; and
.. PRG fully and unconditionally guaranteed, on a senior unsecured basis, the
payment obligations under the PAFC 12 1/2% Senior Notes due 2009. The
guarantee was issued in a private placement made in reliance on an
exemption from the registration requirements of the Securities Act. Due to
the PRG guarantee, Sabine is no longer required to file periodic reports
under the Securities Exchange Act of 1934, as amended. PRG and Sabine have
agreed to file a registration statement under the Securities Act to
register the notes and the PRG guarantee, not later than 120 days from June
6, 2002.
Premcor Inc.'s acquisition of the 10% ownership in Sabine was accounted for
under the purchase method. The purchase price was based on the exchange of
1,363,636 shares of Premcor Inc. common stock for the 10% interest in Sabine and
was valued at $30.5 million or approximately $22 per share. The purchase price
of the 10% minority interest in Sabine exceeded the book value by $8.0 million.
Based on an appraisal of the Sabine assets, the excess of the purchase price
over the book value of the minority interest was recorded by Premcor Inc. as an
investment in property, plant and equipment and will be depreciated over the
remaining lives of the assets. Because the purchase price did not exceed the
fair value of the underlying assets, no goodwill was recognized.
As discussed in Note 1, the contribution of Premcor Inc.'s 100% ownership
interest in Sabine to PRG was an exchange of ownership interest between entities
under common control, and therefore was accounted for at the book value of
Sabine, similar to a pooling of interests. Accordingly, Premcor USA's and PRG's
historical financial statements have been restated to include the consolidated
results of operations, financial position, and cash flows of Sabine as if the
combination had occurred on January 1, 2001.
16
4. Refinery Restructuring and Other Charges
In 2002, the Company recorded refinery restructuring and other charges of
$158.6 million, $142.0 million in the first quarter and $16.6 million in the
second quarter.
The year-to-date charge consisted of the following:
.. a $137.4 million charge related to the announced shutdown of refining
operations at the Hartford, Illinois refinery,
.. a $22.3 million charge related to the restructuring of the Company's
management team and administrative functions,
.. income of $5.0 million related to the unanticipated sale of a portion of
the Blue Island refinery assets previously written off,
.. a $2.5 million charge related to the termination of certain guarantees at
PACC as part of the Sabine restructuring, and
.. a $1.4 million loss related to idled assets held for sale.
The second quarter charge consisted of the following:
.. an additional $6.2 million charge related to the announced shutdown of
refining operations at the Hartford, Illinois refinery,
.. a $6.5 million charge related to the restructuring of the Company's
administrative functions,
.. a $2.5 million charge related to the termination of certain guarantees at
PACC as part of the Sabine restructuring, and
.. a $1.4 million loss related to idled assets held for sale.
Hartford Refinery
In February 2002, the Company announced that it would shutdown refining
operations at the Hartford, Illinois refinery in October 2002. Although the
Hartford refinery has marginally contributed to the Company's earnings in the
past, the Company has concluded that there is no economically viable manner of
reconfiguring the refinery to produce fuels which meet new gasoline and diesel
fuel standards mandated by the federal government. The Company is pursuing all
options, including the sale of the refinery, to mitigate the loss of jobs and
refinery capacity in the Midwest. The Company has extended the closing date of
the refinery by one month to November 2002 in order to provide additional time
for consideration of certain opportunities. The Company believes that it is more
likely to maximize value of the refinery if the refinery is operating when a
transaction is consummated.
Since the Hartford refinery operation had been only marginally profitable
over the last 10 years and since substantial investment would be required to
meet new required product specifications in the future, the Company's reduced
refining capacity resulting from the shutdown is not expected to have a
significant negative impact on net income or cash flow from operations. The only
anticipated effect on net income and cash flow in the future will result from
the actual shutdown process, including recovery of realizable asset value, and
subsequent environmental site remediation, which will occur over a number of
years. Unless there is a need to adjust the shutdown reserve in the future as
discussed below, there should be no significant effect on net income beyond
2002.
A pretax charge of $131.2 million was recorded in the first quarter of 2002
and an additional pretax charge of $6.2 million was recorded in the second
quarter of 2002. The total charge included $70.7 million of non-cash long-lived
asset write-offs to reduce the refinery assets to their estimated net realizable
value of $61.0 million. The net realizable value was determined by estimating
the value of the assets in a sale or operating lease transaction. The Company
has had preliminary discussions with third parties regarding such a transaction,
but there can be no assurance that one will be completed. In the event, that a
sale or lease transaction is not completed, the net realizable value may be less
than $61.0 million and a further write-down may be required. The net realizable
value was recorded as a current asset on the balance sheet. In the second
quarter of 2002, the Company completed an evaluation of its warehouse stock,
catalysts, chemicals, and additives inventories, and the Company determined that
a portion of these inventories would not be recoverable upon the closure of the
refinery. Accordingly, the Company wrote-down these assets by $3.2 million.
17
The total charge also included a reserve for future costs of $62.5 million
as itemized below. The Hartford restructuring reserve balance and net cash
activity as of June 30, 2002 is as follows:
Reserve as of
Initial Reserve Net Cash Outlay June 30, 2002
----------------- ---------------- -----------------
Employee severance.......................... $ 16.6 $ 0.1 $ 16.5
Plant closure/equipment remediation......... 12.9 4.4 8.5
Site clean-up/environmental matters......... 33.0 -- 33.0
--------- ----------- --------
$ 62.5 $ 4.5 $ 58.0
========= =========== ========
The initial reserve included an additional $1.9 million charge recorded in
the second quarter of 2002 that related primarily to the cancellation of various
capital projects that were underway prior to the announced closure. Management
adopted an exit plan that details the shutdown of the process units at the
refinery and the subsequent environmental remediation of the site. The Company
expects the majority of the shutdown of the process units will be completed in
the fourth quarter of 2002. The Company estimates that 315 employees, both
hourly (covered by collective bargaining agreements) and salaried, will be
terminated due to this shutdown, 98% of which are scheduled to be terminated in
November of 2002. The site clean-up and environmental reserve takes into account
costs that are reasonably foreseeable at this time. As the site remediation plan
is refined and work is performed, further adjustments of the reserve may be
necessary, and such adjustments may be material.
Finally, the total charge included a $1.1 million reserve, which was
recorded in the second quarter of 2002, related to post-retirement expenses that
were extended to certain employees who were nearing the retirement requirements.
This liability was recorded in "Other Long-term Liabilities" on the balance
sheet together with the Company's other post retirement liabilities.
Company Management Restructuring
In February 2002, the Company began the restructuring of its executive
management team and subsequently its administrative functions with the hiring of
Thomas D. O'Malley as chairman, chief executive officer, and president and
William E. Hantke as executive vice president and chief financial officer. In
the first quarter of 2002, the Company recognized severance expense of $5.0
million and non-cash compensation expense of $5.7 million resulting from
modifications of stock option terms related to the resignation of the officers
who previously held these positions. In addition, the Company incurred a charge
of $5.0 million for the cancellation of a monitoring agreement with an affiliate
of Blackstone. In the second quarter of 2002, the Company commenced a
restructuring of its St. Louis-based general and administrative operations and
recorded a charge of $6.5 million for severance, outplacement and other
employee-related restructuring expenses.
Blue Island Closure Reserve
As of June 30, 2001, the Company had recorded a $150 million restructuring
charge related to the January 2001 closure of the Blue Island, Illinois
refinery. The Blue Island restructuring reserve balance and net cash activity as
of June 30, 2002 is as follows:
Reserve as of Reserve as of
December 31, 2001 Net Cash Outlay June 30, 2002
--------------------- ----------------- -----------------
Employee severance.......................... $ 2.1 $ 1.5 $ 0.6
Plant closure/equipment remediation......... 13.9 2.5 11.4
Site clean-up/environmental matters......... 20.5 4.0 16.5
-------- ---------- ---------
$ 36.5 $ 8.0 $ 28.5
======== ========== =========
The Company expects to spend approximately $16 million in 2002 related to
the reserve for future costs, with the majority of the remainder to be spent
over the next several years. The site clean-up and environmental reserve takes
into account costs that are reasonably foreseeable at this time. As the site
remediation plan is finalized and work is performed, further adjustments of the
reserve may be necessary. In 2002, environmental risk insurance policies
covering the Blue Island refinery site have been procured and bound. Final
policies will be issued pending
18
the insurers' concurrence that the terms of the remediation contract, as
executed, are materially consistent with the proposed contract submitted as part
of the application process. The Company expects to finalize and execute the
remediation contract in the third quarter of 2002. This insurance program will
allow the Company to quantify and, within the limits of the policy, cap its cost
to remediate the site, and provide insurance coverage from future third party
claims arising from past or future environmental releases. The remediation cost
overrun policy has a term of ten years and, subject to certain exceptions and
exclusions, provides $25 million in coverage in excess of a self-insured
retention amount of $26 million. The pollution legal liability policy provides
for $25 million in aggregate coverage and per incident coverage in excess of a
self insured retention of $250,000 per incident. The Company believes this
program also provides governmental agencies financial assurance that, once
begun, remediation of the site will be completed in a timely and prudent manner.
5. Loss on Extinguishment of Long-Term Debt
In the second quarter of 2002, Premcor USA recorded a loss of $19.3 million
related to the early redemption and repurchase of portions of its long-term debt
as described in Note 8 Long-term Debt. This loss included premiums associated
with the early repayment of long-term debt of $9.2 million, a write-off of
unamortized deferred financing costs related to the prepaid debt of $9.5
million, and the write-off of a prepaid premium for an insurance policy
guaranteeing the interest and principal payments on Sabine's long-term debt of
$0.6 million. PRG recorded a loss of $9.3 million related to this early
redemption of long-term debt, of which $0.9 million related to premiums, $7.8
million related to the write-off of deferred financing costs, and $0.6 million
related to the write-off of debt guarantee fees at Sabine.
6. Inventories
The carrying value of inventories consisted of the following:
December 31, June 30,
2001 2002
----------- ---------
Crude oil...................................... $ 77.0 $ 97.3
Refined products and blendstocks............... 218.7 211.9
Warehouse stock and other...................... 22.6 20.6
------------ ----------
$ 318.3 $ 329.8
============ ==========
The market value of crude oil, refined products and blendstocks inventories
at June 30, 2002 was approximately $127.1 million (December 31, 2001 - $5
million) above carrying value.
As of January 1, 2002, PACC changed its method of inventory valuation from
first-in first-out ("FIFO") to last-in first-out ("LIFO") for crude oil and
blendstock inventories. Management believes this change is preferable in that it
achieves a more appropriate matching of revenues and expenses. The adoption of
this inventory accounting method on January 1, 2002 did not have an impact on
pretax earnings. The adoption of the LIFO method resulted in $0.4 million ($0.01
per basic share) and $12.5 million ($0.31 per basic share) less net income for
the three-month and six-month periods ended June 30, 2002 than if the FIFO
method had been used for the same period. Cost for warehouse stock continues to
be determined under the FIFO method.
19
7. Other Assets
Other assets consisted of the following:
December 31, June 30,
2001 2002
------------ ----------
Deferred turnaround costs................................ $ 97.9 $ 103.9
Deferred financing costs................................. 32.6 29.2
Cash restricted for investment in capital additions...... 9.9 5.6
Investment in affiliates................................. 4.7 4.7
Other.................................................... 3.6 2.7
--------- ---------
$ 148.7 $ 146.1
========= =========
Amortization of deferred financing costs for the three and six-month
periods ended June 30, 2002 was $2.5 million (2001 - $2.9 million) and $5.0
million (2001 - $5.9 million) and was included in "Interest and finance
expense". In the first quarter of 2002, the Company incurred $1.1 million of
deferred financing costs for fees to obtain a waiver related to insurance
coverage required under PACC's common security agreement with certain bond
holders ("CSA"). In the second quarter of 2002, the Company incurred $10.0
million of deferred financing costs related to the consent solicitation process
of the Sabine restructuring and wrote-off $9.5 million related to the early
repayment of long-term debt. Included in the $9.5 million write-off of deferred
financing costs was $1.6 million related to Premcor USA stand alone long-term
debt.
PRG and Premcor USA "Other Assets" of $141.8 million and $141.9 million,
respectively exclude $4.2 million of investments in affiliates held by Premcor
Inc. stand-alone.
20
8. Long-term Debt and Exchangeable Preferred Stock
Long-term debt and exchangeable preferred stock consisted of the following:
December 31, June 30,
2001 2002
------------ ----------
8 5/8% Senior Notes due August 15, 2008
("8 5/8% Senior Notes")/(1)/ ................................... $ 109.8 $ 109.8
8 3/8% Senior Notes due November 15, 2007
("8 3/8% Senior Notes")/(1)/ ................................... 99.6 99.6
8 7/8% Senior Subordinated Notes due November 15, 2007
("8 7/8% Senior Subordinated Notes")/(1)/ ...................... 174.2 174.3
Floating Rate Term Loan due November 15, 2003 and 2004
("Floating Rate Loan")/(1)/ .................................... 240.0 240.0
9 1/2% Senior Notes due September 15, 2004
("9 1/2% Senior Notes")/(1)/ ................................... 150.4 -
12 1/2% Senior Notes due January 15, 2009............................
("12 1/2% Senior Notes")/(2)/ .................................. 255.0 255.0
Bank Senior Loan Agreement/(2)/ ..................................... 287.6 -
Ohio Water Development Authority Environmental Facilities Revenue
Bonds due December 01, 2031
("Series 2001 Ohio Bonds")/(1)/ ................................ 10.0 10.0
Obligations under capital leases/(1)/ ............................... 1.8 1.2
------------ ----------
1,328.4 889.9
Less current portion of debt ....................................... 81.4 9.9
------------ ----------
Total long-term debt at PRG 1,247.0 880.0
10 7/8% Senior Notes due December 1, 2005
("10 7/8% Senior Notes")/(3)/ .................................. 144.4 -
11 1/2% Subordinated Debentures due October 1, 2009 ("11 1/2%
Subordinated Debentures")/(3)/ ................................ - 43.5
------------ ----------
Total long-term debt at Premcor Inc. and Premcor USA $ 1,391.4 $ 923.5
============ ==========
Exchangeable Preferred Stock/(3)/ ................................... $ 94.8 $ --
============ ==========
(1) Issued or borrowed by PRG
(2) Issued or borrowed by PAFC
(3) Issued or borrowed by Premcor USA
During the second quarter of 2002, Premcor Inc. contributed $442.9 million
of its initial public offering proceeds to its subsidiaries for the early
redemption and repurchase of a portion of their outstanding long-term debt. In
June 2002, PRG redeemed the remaining $150.4 million of its 9 1/2% Senior
Secured Notes due September 15, 2004 at par, and Premcor USA redeemed the
remaining $144.4 million of its 10 7/8% Senior Secured Notes, including a $5.2
million premium, mainly from capital contributions received from Premcor Inc.
On April 1, 2002, Premcor USA exchanged all of its 11 1/2% Exchangeable
Preferred Stock for 11 1/2% Subordinated Debentures due October 2009. During the
second quarter of 2002, Premcor USA purchased, in the open market, $54.1 million
in aggregate principal amount of its 11 1/2% Subordinated Debentures at 105.75%
of their principal amount, which amounted to a $3.1 million premium, mainly from
capital contributions received from Premcor Inc. Premcor USA may pay the
interest on the remaining balance of these debentures in-kind until the April 1,
2003 interest payment, after which time it is required to make interest payments
in cash.
In January 2002, PACC made a $66.2 million principal payment on its Bank
Senior Loan Agreement, of which $59.7 million represented a mandatory prepayment
pursuant to the CSA and related secured account
21
structure. In June 2002, as part of the Sabine restructuring, PACC prepaid the
remaining balance of $221.4 million on the Bank Senior Loan Agreement at a $0.9
million premium, with cash on hand and an $84.2 million net capital contribution
from Premcor Inc.
Prior to the Sabine restructuring, the CSA required that PACC carry
insurance coverage with specified terms. Due to the effects of the events of
September 11, 2001 on the insurance market, coverage meeting such terms was not
available on commercially reasonable terms, and as a result, PACC's insurance
program was not in full compliance with the required insurance coverage at
December 31, 2001. PACC received a waiver from the requisite parties.
Subsequently, the CSA has been amended as part of the Sabine restructuring and
the new provisions regarding insurance coverage take into consideration a
changing economic environment and its effects on the insurance markets in
general. Under the amended CSA PACC has some specific insurance requirements,
but principally must ensure that coverage is consistent with customary standards
in its industry. There is also a provision that allows for thirty days notice to
requisite parties of any inability to comply with the specific terms without any
event of a default. As of June 30, 2002, PACC was in compliance with the
insurance coverage requirements of the amended CSA.
9. Working Capital Facility
In March 2002, PRG received a waiver regarding the maintenance of the
tangible net worth covenant related to its $650 million working capital credit
agreement, which allows for the exclusion of $120 million of the pretax
restructuring charge related to the closure of the Hartford refinery.
As part of the Sabine restructuring, Sabine terminated its insurance policy
that guaranteed its Maya crude oil purchase obligations and its $35 million
bank working capital facility that guaranteed Sabine's non-Maya crude oil
purchase obligations. In May 2002, PRG amended its $650 million working capital
facility principally to allow for the inclusion of Sabine crude oil purchase
obligations. As amended, the $650 million limit can be extended by $50 million
at the request of PRG in integral multiples of $5 million, the borrowing base
calculation was amended to include PACC inventory, and the tangible net worth
covenant was changed to $400 million from $150 million.
10. Stock Option Plans
In conjunction with the management change discussed in Note 4 above,
Premcor Inc. adopted two new stock incentive plans. The 2002 Special Stock
Incentive Plan was adopted in connection with the employment of Thomas D.
O'Malley and allows for the issuance of options for the purchase of Premcor Inc.
common stock. Under this plan, options on 3,400,000 shares of Premcor Inc.
common stock may be awarded. As of June 30, 2002, options for 2,950,000 shares
of Premcor Inc. common stock had been granted, options for 2,200,000 shares at
an exercise price of $10 per share and options for 750,000 shares at an exercise
price of $22.50 per share. Options granted under this plan vest 1/3 on each of
the first three anniversaries of the date of grant. The options for 750,000
shares referenced above were granted to Mr. O'Malley pursuant to his employment
agreement.
The 2002 Equity Incentive Plan was adopted to award key employees,
directors, and consultants with various stock options, stock appreciation
rights, restricted stock, performance-based awards and other common stock based
awards of Premcor Inc. common stock. Under the 2002 Equity Incentive Plan,
options for 1,500,000 shares of Premcor Inc. common stock may be awarded. As of
June 30, 2002, options for 1,023,500 shares of Premcor Inc. common stock were
granted as follows: options for 435,000 shares at an exercise price of $10 per
share, options for 240,000 shares at an exercise price of $22.50 per share, and
options for 348,500 shares at an exercise price of $24 per share. Options
granted under this plan vest 1/3 on each of the first three anniversaries of the
date of grant. These options included options for 100,000 shares granted to two
directors pursuant to agreements with the Company.
During the second quarter of 2002, the Company elected to adopt the fair
value based expense recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS
22
No. 123"). The Company previously applied the intrinsic value based expense
recognition provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). SFAS No. 123 provides that the adoption of the fair
value based method is a change to a preferable method of accounting. As provided
by SFAS No. 123, the stock option compensation expense is calculated based only
on stock options granted in the year of election and thereafter. The fair value
of these options was estimated on the grant date using the Black-Sholes
option-pricing model with the following weighted average assumptions as of June
30, 2002: a) assumed risk-free rate of 5.06%, b) expected life of 3.7 years, c)
expected volatility of 38.9%, and d) no expected dividends. All stock options
granted prior to January 1, 2002 continue to be accounted for under APB No. 25.
In relation to the two new 2002 stock incentive programs, the Company had
recognized stock option compensation expense of $1.6 million in the quarter
ended March 31, 2002, and would have recognized $2.8 million and $4.4 million
for the three-month and six-month periods ended June 30, 2002, respectively,
under APB No. 25. The adoption of SFAS No. 123 increased stock option
compensation expense by $1.0 million and $1.3 million for the three-month and
six-month periods ended June 30, 2002, respectively. The adoption of SFAS No.
123 increased the Company's net loss by $0.6 million (less than $0.01 per basic
share) and $0.8 million (less than $0.01 per basic share) for the three-month
and six-month periods ended June 30, 2002, respectively.
Since nonvested awards issued to employees prior to January 1, 2002 were
and continue to be accounted for using the intrinsic value based provisions of
APB No. 25, the prospective application of employee stock-based compensation
expense determined using the fair value based method is not necessarily
indicative of future expense amounts when the fair value based method will apply
to all outstanding, nonvested awards.
The effects of the adoption of SFAS No. 123 on loss from continuing
operations, net loss available to common stockholders, and net loss per share
for the three-month period ended March 31, 2002 are as follows:
Loss from continuing operations and net loss available to common
stockholders:
As reported $ (99.5)
Revised for adoption of SFAS No. 123 $ (99.7)
Net loss per common share (in whole dollars):
As reported $ (3.13)
Revised for adoption of SFAS No. 123 $ (3.14)
In March 2002, the Company recorded $5.7 million of non-cash, stock option
compensation expense related to the modification of option terms for two former
executives and this amount is included in "refinery restructuring and other
charges". With respect to all stock option grants outstanding at June 30, 2002,
the Company will record future non-cash stock option compensation expense and
additional paid-in capital of $44.6 million over the applicable vesting periods
of the grants.
11. Interest and Finance Expense
Interest and finance expense included in Premcor Inc.'s and Premcor USA's
statements of operations consisted of the following:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ------------------
2001 2002 2001 2002
-------- --------- -------- --------
Interest expense................. $ 37.2 $ 30.7 $ 77.0 $ 62.8
Financing costs.................. 4.3 3.5 7.8 7.7
Capitalized interest............. (1.1) (1.3) (2.5) (3.1)
-------- --------- -------- --------
$ 40.4 $ 32.9 $ 82.3 $ 67.4
======== ========= ======== ========
23
Interest and finance expense included in PRG's statements of operations
consisted of the following:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ------------------
2001 2002 2001 2002
-------- -------- -------- --------
Interest expense................. $ 32.5 $ 25.2 $ 67.5 $ 53.5
Financing costs.................. 4.2 3.5 7.6 7.6
Capitalized interest............. (1.1) (1.2) (2.6) (3.1)
-------- -------- -------- --------
$ 35.6 $ 27.5 $ 72.5 $ 58.0
======== ======== ======== =======
Cash paid for interest for the three-month and six-month periods ended June
30, 2002 was $33.3 million (2001 - $35.2 million) and $71.2 million (2001 -
$78.8 million), respectively, for Premcor USA. Cash paid for interest for the
three-month and six-month periods ended June 30, 2002 was $25.2 million (2001 -
$25.7 million) and $63.0 million (2001 - $69.3 million), respectively, for PRG.
12. Income Taxes
Premcor USA received net cash income tax refunds during the three-month and
six-month periods ended June 30, 2002 of $0.7 million (2001 - $2.4 million net
cash income tax payments) and $12.4 million (2001 - $0.3 million net cash income
tax payments), respectively. PRG received net cash income tax refunds during the
three-month and six-month periods ended June 30, 2002 of $0.7 million (2001 -
$2.4 million net cash income tax payments) and $12.4 million (2001 - $2.8
million net cash income tax payments), respectively.
The income tax provision on the income from continuing operations before
income taxes for the six-month period ended June 30, 2001 of $47.3 million for
the Company and $46.8 million for Premcor USA included the effect of a reversal
during the first quarter of 2001 of the remaining deferred tax valuation
allowance of $30.0 million. The reversal of the remaining deferred tax valuation
allowance resulted from the analysis of the likelihood of realizing the future
tax benefit of federal and state tax loss carryforwards, alternative minimum tax
credits and federal and state business tax credits. The income tax provision on
the income from continuing operations before income taxes for the six-month
period ended June 30, 2001 of $67.3 million for PRG included the effect of the
reversal during the first quarter of 2001 of the remaining deferred tax
valuation allowance as described above of $12.4 million.
13. Discontinued Operations
In 2001, the Company recorded a pretax charge of $14.0 million, $8.5
million net of income taxes, related to environmental liabilities of
discontinued retail operations. This charge represented an increase in estimates
regarding the Company's environmental clean up obligation and was prompted by
the availability of new information concerning site by site clean up plans and
changing postures of state regulatory agencies.
14. Earnings per share
The diluted share base for the three-month and six-month periods ended June
30, 2002 excluded incremental common stock equivalents of 1,923,951 and
2,704,930, respectively, related to employee stock options and shareholder
warrants. These common stock equivalents were excluded due to their antidilutive
effect as a result of the Company's net loss available to common stockholders.
The diluted weighted average shares outstanding for the three-month and
six-month periods ended June 30, 2001 reflected the potential dilution that
could have occurred if all outstanding warrants were exercised. In the earnings
per share calculation, net income (loss) available to common stockholders
includes the deduction of preferred stock dividends when applicable.
15. Consolidating Financial Statements of PRG as Co-guarantor of PAFC's Senior
Notes
Presented below are the PRG consolidating balance sheets, statement of
operations, and cash flows as required by Rule 3-10 of the Exchange Act. As part
of the Sabine restructuring, PRG became a full and unconditional guarantor of
PAFC's 12 1/2% Senior Notes, along with PACC, Sabine, and Neches. Under Rule
3-10, the condensed consolidating balance sheets, statement of operations, and
cash flows presented below meet the requirements for
24
financial statements of the issuer and each guarantor of the notes since the
issuer and guarantors are all direct or indirect subsidiaries of PRG as well as
full and unconditional guarantors. PAFC issued and then loaned to PACC the
proceeds from the 12 1/2% Senior Notes, in order to finance PACC's heavy oil
processing facility. PACC owns and operates the heavy oil processing facility,
which is fully integrated with PRG's Port Arthur refinery. Both Sabine and
Neches have no material assets or operations.
25
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
Eliminations
Other Guarantor and Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
--------- ---------- --------------- ------------ ------------
ASSETS (in millions)
CURRENT ASSETS:
Cash and cash equivalents................ $ 110.3 $ -- $ 8.2 $ -- $ 118.5
Short-term investments................... 1.7 -- -- -- 1.7
Cash and cash equivalents
restricted for debt service........... -- -- 65.4 -- 65.4
Accounts receivable...................... 280.3 -- -- -- 280.3
Receivable from affiliates............... 79.6 23.4 -- (52.6) 50.4
Inventories.............................. 293.9 -- 35.9 -- 329.8
Prepaid expenses and other............... 33.0 -- 3.6 -- 36.6
Net assets held for sale................. 61.2 -- -- -- 61.2
--------- ---------- --------------- ------------ ------------
Total current assets.......... ....... 860.0 23.4 113.1 (52.6) 943.9
PROPERTY, PLANT AND EQUIPMENT, NET......... 565.8 -- 620.0 -- 1,185.8
Deferred income taxes...................... 59.2 -- -- (25.3) 33.9
Investment in affiliate.................... 298.2 -- -- (298.2) --
Other assets............................... 124.5 -- 17.4 -- 141.9
Note receivable from affiliate............. 2.4 246.3 -- (248.7) --
--------- ---------- --------------- ------------ ------------
$ 1,910.1 $ 269.7 $ 750.5 $ (624.8) $ 2,305.5
========= ========== =============== ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable......................... $ 384.8 $ -- $ 96.2 -- $ 481.0
Payable to affiliates.................... 59.5 -- 74.0 (49.8) 83.7
Accrued expenses and other............... 76.0 14.7 1.3 -- 92.0
Accrued taxes other than income.......... 28.1 -- 3.6 -- 31.7
Current portion of long-term debt........ 1.2 8.7 -- -- 9.9
Current portion of notes payable.........
to affiliate.......................... -- -- 2.8 (2.8) --
--------- ---------- --------------- ------------ ------------
Total current liabilities............. 549.6 23.4 177.9 (52.6) 698.3
LONG-TERM DEBT............................. 633.7 246.3 -- -- 880.0
DEFERRED INCOME TAXES...................... -- -- 25.3 (25.3) --
OTHER LONG-TERM LIABILITIES................ 142.3 -- 0.2 -- 142.5
NOTE PAYABLE TO AFFILIATE.................. -- -- 248.7 (248.7) --
COMMON STOCKHOLDER'S EQUITY:
Common stock............................. 0.1 -- 0.1 (0.1) 0.1
Paid-in capital.......................... 501.0 -- 206.0 (195.5) 511.5
Retained earnings (deficit).............. 83.4 -- 92.3 (102.6) 73.1
--------- ---------- --------------- ------------ ------------
Total common stockholder's
equity................................ 584.5 -- 298.4 (298.2) 584.7
--------- ---------- --------------- ------------ ------------
$ 1,910.1 $ 269.7 $ 750.5 $ (624.8) $ 2,305.5
========= ========== =============== ============ ============
26
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Eliminations
Other and
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- -------------- --------------- ------------- -------------
(in millions)
NET SALES AND OPERATING REVENUES ......... $ 1,793.4 $ -- $ 468.2 $ (582.6) $ 1,679.0
Equity in net earnings of affiliate ...... (18.1) -- -- 18.1 --
EXPENSES:
Cost of sales .......................... 1,660.2 -- 440.8 $ (574.7) 1,526.3
Operating expenses ..................... 92.8 -- 29.0 (7.9) 113.9
General and administrative expenses..... 13.1 -- 1.3 -- 14.4
Stock option compensation expense ...... 3.8 -- -- -- 3.8
Depreciation ........................... 6.5 -- 5.3 -- 11.8
Amortization ........................... 10.1 -- -- -- 10.1
Refinery restructuring and other
charges .............................. 14.1 -- 2.5 -- 16.6
--------- --------- --------- ---------- ---------
1,800.6 -- 478.9 (582.6) 1,696.9
OPERATING INCOME (LOSS) .................. (25.3) -- (10.7) 18.1 (17.9)
Interest and finance expense ........... (15.0) (10.8) (12.6) 10.9 (27.5)
Loss on extinguishment of long-term
debt ................................. (1.0) -- (8.3) -- (9.3)
Interest income ........................ 1.4 10.8 0.9 (10.9) 2.2
--------- --------- --------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST ...................... (39.9) -- (30.7) 18.1 (52.5)
Tax benefit ............................ 8.8 -- 10.6 -- 19.4
Minority interest ...................... -- -- -- 0.9 0.9
--------- --------- --------- ---------- ---------
NET INCOME (LOSS) ........................ $ (31.1) $ -- $ (20.1) $ 19.0 $ (32.2)
========= ========= ========= ========== =========
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Eliminations
Other and
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- -------------- --------------- ------------- -------------
(in millions)
NET SALES AND OPERATING REVENUES .......... $ 3,049.3 $ -- $ 888.9 $ (1,030.9) $ 2,907.3
Equity in net earnings of affiliate ....... (25.4) -- -- 25.4 --
EXPENSES:
Cost of sales ........................... 2,783.3 -- 820.4 $ (1,015.4) 2,588.3
Operating expenses ...................... 181.1 -- 62.7 (15.5) 228.3
General and administrative expenses ..... 26.4 -- 2.4 -- 28.8
Stock option compensation expense ....... 5.7 -- -- -- 5.7
Depreciation ............................ 13.7 -- 10.5 -- 24.2
Amortization ............................ 19.9 -- -- -- 19.9
Refinery restructuring and other
charges ............................... 156.1 -- 2.5 -- 158.6
--------- --------- --------- ---------- ---------
3,186.2 -- 898.5 (1,030.9) 3,053.8
OPERATING INCOME (LOSS) ................... (162.3) -- (9.6) 25.4 (146.5)
Interest and finance expense............. (31.0) (22.8) (27.2) 23.0 (58.0)
Loss on extinguishment of long-term
debt .................................. (1.0) -- (8.3) -- (9.3)
Interest income ......................... 2.8 22.8 1.8 (23.0) 4.4
--------- --------- --------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST ....................... (191.5) -- (43.3) 25.4 (209.4)
Tax benefit ............................. 64.9 -- 15.1 -- 80.0
Minority interest ....................... -- -- -- 1.7 1.7
--------- --------- --------- ---------- ---------
NET INCOME (LOSS) ......................... $ (126.6) $ -- $ (28.2) $ 27.1 $ (127.7)
========= ========= ========= ========== =========
27
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Eliminations
Other and
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- ------------- ---------------- ------------- -------------
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................... $ (126.6) $ -- $ (28.2) $ 27.1 $ (127.7)
Adjustments:
Depreciation......................... 13.7 -- 10.5 -- 24.2
Amortization......................... 23.1 -- 1.7 -- 24.8
Deferred income taxes................ (65.2) -- (15.3) -- (80.5)
Refinery restructuring and other
charges.............................. 103.6 -- -- -- 103.6
Write-off of deferred financing costs 1.1 -- 6.8 -- 7.9
Minority interest.................... -- -- -- (1.7) (1.7)
Equity in earnings of affiliate...... 25.4 -- -- (25.4) --
Other, net........................... 16.8 -- 0.4 -- 17.2
Cash provided by (reinvested in)
working capital:
Accounts receivable, prepaid
expenses and other................... (133.8) -- 7.9 -- (125.9)
Inventories.......................... (15.7) -- 4.2 -- (11.5)
Accounts payable, accrued expenses,
and taxes other than income, and
other............................. 101.5 (4.7) 12.8 -- 109.6
Affiliate receivable and payable..... (20.2) 292.3 (257.3) -- 14.8
Cash and cash equivalents restricted
for debt service.................. -- -- 8.3 -- 8.3
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities of
continued operations............ (76.3) 287.6 (248.2) -- (36.9)
Net cash used in operating
activities of discontinued
operations...................... (3.4) -- -- -- (3.4)
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities............ (79.7) 287.6 (248.2) -- (40.3)
--------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment ........................... (40.4) -- 1.9 -- (38.5)
Expenditures for turnaround.......... (31.7) -- -- -- (31.7)
Cash and cash equivalents restricted
for investment in capital
additions......................... 4.3 -- -- -- 4.3
Other................................ 0.2 -- -- -- 0.2
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities.............. (67.6) -- 1.9 -- (65.7)
--------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments.............. (151.0) (287.6) -- -- (438.6)
Cash and cash equivalents restricted
for debt repayment................ -- -- (42.9) -- (42.9)
Capital contribution from Premcor
Inc............................... 150.4 -- 225.6 -- 376.0
Dividend distribution to Premcor Inc. -- -- (141.4) -- (141.4)
Deferred financing costs............. (1.5) -- (9.6) -- (11.1)
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities............ (2.1) (287.6) 31.7 -- (258.0)
--------- ---------- ---------- ---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS....................... (149.4) -- (214.6) -- (364.0)
CASH AND CASH EQUIVALENTS,
beginning of period............... 259.7 -- 222.8 -- 482.5
--------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of period..................... $ 110.3 $ -- $ 8.2 $ -- $ 118.5
========= ========== ========== ========== ==========
28
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
Other Eliminations
Guarantor and Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
--------- ---------- ------------- ------------ ------------
ASSETS (in millions)
CURRENT ASSETS:
Cash and cash equivalents.......... $ 259.7 $ -- $ 222.8 $ -- $ 482.5
Short-term investments............. 1.7 -- -- -- 1.7
Cash and cash equivalents
restricted for debt service..... -- -- 30.8 -- 30.8
Accounts receivable................ 148.3 -- -- -- 148.3
Receivable from affiliates......... 60.8 99.0 25.1 (153.6) 31.3
Inventories........................ 278.2 -- 40.1 -- 318.3
Prepaid expenses and other......... 31.2 -- 11.5 -- 42.7
--------- ---------- ------------ ------------ ------------
Total current assets............ 779.9 99.0 330.3 (153.6) 1,055.6
PROPERTY, PLANT AND EQUIPMENT,
NET............................. 666.3 -- 632.4 -- 1,298.7
INVESTMENT IN AFFILIATE.............. 242.2 -- -- (242.2) --
OTHER ASSETS......................... 126.4 -- 16.4 -- 142.8
NOTE RECEIVABLE FROM AFFILIATE ...... 4.9 463.0 -- (467.9) --
--------- ---------- ------------ ------------ ------------
$ 1,819.7 $ 562.0 $ 979.1 $ (863.7) $ 2,497.1
========= ========== ============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 284.1 $ -- $ 82.3 $ -- $ 366.4
Payable to affiliates............. 63.4 -- 137.2 (150.8) 49.8
Accrued expenses and other......... 72.6 19.4 1.1 -- 93.1
Accrued taxes other than income.... 30.8 -- 4.9 -- 35.7
Current portion of long-term debt.. 1.8 79.6 -- -- 81.4
Current portion of notes payable
to affiliate.................... -- -- 2.8 (2.8) --
--------- ---------- ------------ ------------ ------------
Total current liabilities....... 452.7 99.0 228.3 (153.6) 626.4
LONG-TERM DEBT....................... 784.0 463.0 -- -- 1,247.0
DEFERRED INCOME TAXES................ 6.0 -- 40.6 -- 46.6
OTHER LONG-TERM LIABILITIES.......... 109.1 -- -- -- 109.1
NOTE PAYABLE TO AFFILIATE............ -- -- 467.9 (467.9) --
MINORITY INTEREST.................... -- -- -- 24.2 24.2
COMMON STOCKHOLDER'S EQUITY:
Common stock....................... 0.1 -- 0.1 (0.1) 0.1
Paid-in capital.................... 255.0 -- 121.7 (133.8) 242.9
Retained earnings (deficit)........ 212.8 -- 120.5 (132.5) 200.8
--------- ---------- ------------ ------------ ------------
Total common stockholder's
equity........................ 467.9 -- 242.3 (266.4) 443.8
--------- ---------- ------------ ------------ ------------
$ 1,819.7 $ 562.0 $ 979.1 $ (863.7) $ 2,497.1
========= ========== ============ ============ ============
29
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Eliminations
Other and
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- -------------- --------------- ------------- -------------
(in millions)
NET SALES AND OPERATING REVENUES.......... $ 1,846.1 $ -- $ 537.1 $ (564.9) $ 1,818.3
Equity in net earnings of affiliate....... 67.9 -- -- (67.9) --
EXPENSES:
Cost of sales........................... 1,534.4 -- 361.3 $ (557.9) 1,337.8
Operating expenses...................... 88.6 -- 37.8 (8.6) 117.8
General and administrative expenses..... 15.5 -- 1.0 -- 16.5
Depreciation............................ 7.7 -- 5.2 -- 12.9
Amortization............................ 10.0 -- -- -- 10.0
--------- --------- --------- --------- ---------
1,656.2 -- 405.3 (566.5) 1,495.0
OPERATING INCOME (LOSS)................... 257.8 -- 131.8 (66.3) 323.3
Interest and finance expense............ (18.3) (15.3) (17.4) 15.4 (35.6)
Interest income......................... 3.3 15.3 1.6 (15.4) 4.8
--------- --------- --------- ---------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST ...................... 242.8 -- 116.0 (66.3) 292.5
Tax provision........................... (63.6) -- (40.6) -- (104.2)
Minority interest....................... -- -- -- (7.6) (7.6)
--------- --------- -------- ---------- ---------
NET INCOME (LOSS)......................... $ 179.2 $ -- $ 75.4 $ (73.9) $ 180.7
========= ========= ========= ========== =========
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Eliminations
Other And
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- -------------- --------------- ------------- -------------
(in millions)
NET SALES AND OPERATING REVENUES.......... $ 3,563.8 $ -- $ 1,044.7 $ (1,103.8) $ 3,504.7
Equity in net earnings of affiliate....... 97.8 -- -- (97.8) --
EXPENSES:
Cost of sales........................... 3,085.3 -- 747.3 $ (1,088.8) 2,743.8
Operating expenses...................... 180.2 -- 86.9 (16.6) 250.5
General and administrative expenses..... 27.1 -- 2.0 -- 29.1
Depreciation............................ 16.0 -- 9.9 -- 25.9
Amortization............................ 18.6 -- -- -- 18.6
Refinery restructuring and other
charges................................. 150.0 -- -- -- 150.0
--------- -------- -------- ---------- ---------
3,477.2 -- 846.1 (1,105.4) 3,217.9
OPERATING INCOME (LOSS)................... 184.4 -- 198.6 (96.2) 286.8
Interest and finance expense............ (38.6) (31.3) (34.2) 31.6 (72.5)
Interest income......................... 6.2 31.3 2.9 (31.6) 8.8
--------- --------- --------- ---------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST....................... 152.0 -- 167.3 (96.2) 223.1
Tax provision........................... (8.7) -- (58.6) -- (67.3)
Minority interest....................... -- -- -- (10.9) (10.9)
-------- --------- --------- ---------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS.............................. 143.3 -- 108.7 (107.1) 144.9
DISCONTINUED OPERATIONS:
Loss from operations, net of tax
benefit of $5.5......................... (8.5) -- -- -- (8.5)
--------- --------- --------- ---------- ---------
NET INCOME (LOSS)......................... $ 134.8 $ -- $ 108.7 $ (107.1) $ 136.4
========= ========= ========= ========== =========
30
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Eliminations
Other And
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
------------- ------------- ---------------- ------------- -------------
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................... $ 134.8 $ -- $ 108.7 $ (107.1) $ 136.4
Discontinued operations................ 8.5 -- -- -- 8.5
Adjustments:
Depreciation......................... 16.0 -- 9.9 -- 25.9
Amortization......................... 22.4 -- 1.5 -- 23.9
Deferred income taxes................ 34.7 -- 18.7 -- 53.4
Refinery restructuring and other
charges......................... 118.1 -- -- -- 118.1
Equity in earnings of affiliate...... (97.8) -- -- 97.8 --
Minority interest.................... -- -- -- 10.9 10.9
Other, net........................... (0.5) -- (0.3) -- (0.8)
Cash provided by (reinvested in) working capital:
Accounts receivable, prepaid
expenses and other.............. 55.6 -- (3.1) -- 52.5
Inventories.......................... 40.9 -- (8.1) (1.6) 31.2
Accounts payable, accrued expenses,
and taxes other than income, and
other............................. (101.8) (0.8) 22.8 -- (79.8)
Affiliate receivable and payable..... 8.6 0.8 3.6 -- 13.0
--------- ---------- ---------- ---------- ----------
Net cash provided by operating
activities of continued
operations...................... 239.5 -- 153.7 -- 393.2
Net cash used in operating
activities of discontinued
operations...................... (2.5) -- -- -- (2.5)
--------- ---------- ---------- ---------- ----------
Net cash provided by operating
activities...................... 237.0 -- 153.7 -- 390.7
--------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment ...................... (34.8) -- (5.4) -- (40.2)
Expenditures for turnaround.......... (38.3) -- -- -- (38.3)
Other................................ 0.1 -- -- -- 0.1
--------- ---------- ---------- ---------- ----------
Net cash used in investing
activities...................... (73.0) -- (5.4) -- (78.4)
--------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments............... (0.7) -- -- -- (0.7)
Deferred financing costs (1.8) -- -- -- (1.8)
--------- ---------- ---------- ---------- -----------
Net cash used in financing
activities...................... (2.5) -- -- -- (2.5)
--------- ---------- ---------- ---------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS..................... 161.5 -- 148.3 -- 309.8
CASH AND CASH EQUIVALENTS, beginning
of period......................... 214.8 -- 36.4 -- 251.2
--------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of
period.......................... $ 376.3 $ -- $ 184.7 $ -- $ 561.0
========= ========== ========== ========== ==========
31
16. Commitments and Contingencies
Legal and Environmental
As a result of its activities, the Company is the subject of a number of
material pending legal proceedings, including proceedings related to
environmental matters. Set forth below is an update of developments during the
six months ended June 30, 2002 with respect to any such proceedings and with
respect to any environmental proceedings that involve monetary sanctions of
$100,000 or more and to which a governmental authority is a party.
Blue Island: Federal and State Enforcement. In September 1998, the federal
government filed a complaint, United States v. Clark Refining & Marketing, Inc.,
alleging that the Blue Island refinery violated federal environmental laws
relating to air, water and solid waste. The Illinois Attorney General intervened
in the case. The State of Illinois and Cook County had also brought an action,
several years earlier, People ex rel. Ryan v. Clark Refining & Marketing, Inc.,
also alleging violations under environmental laws. In 2002, the Company reached
an agreement to settle both cases. The consent order in the state case was
formally approved and entered by the state court judge on April 8, 2002, and the
federal court approved the settlement on June 12, 2002. The consent order in the
federal case required payments totaling $6.25 million as civil penalties (plus
$0.1 million in interest), which the Company paid on July 12, 2002, and requires
limited ongoing monitoring at the now-idled refinery. The Company had previously
accrued for this obligation in its legal and environmental reserves. The consent
order in the state case requires an ongoing tank inspection program along with
enhanced reporting obligations and requires that the parties enter a process to
complete an appropriate site remediation program at the Blue Island refinery.
The consent orders dispose of both the federal and state cases.
Legal and Environmental Reserves. As a result of its normal course of
business, the Company is a party to a number of legal and environmental
proceedings. As of June 30, 2002, the Company had accrued a total of
approximately $100 million (December 31, 2001 - $77 million), on an undiscounted
basis, for legal and environmental-related obligations that may result from the
matters noted above and other legal and environmental matters. This accrual
includes approximately $78 million (December 31, 2001 - $53 million) for site
clean-up and environmental matters associated with the Hartford and Blue Island
refinery closures and retail sites. The Company is of the opinion that the
ultimate resolution of these claims, to the extent not previously provided for,
will not have a material adverse effect on the consolidated financial condition,
results of operations or liquidity of the Company. However, an adverse outcome
of any one or more of these matters could have a material effect on quarterly or
annual operating results or cash flows when resolved in a future period.
Environmental Standards for Products
Tier 2 Motor Vehicle Emission Standards. In February 2000, the
Environmental Protection Agency ("EPA") promulgated the Tier 2 Motor Vehicle
Emission Standards Final Rule for all passenger vehicles, establishing standards
for sulfur content in gasoline. These regulations mandate that the average
sulfur content of gasoline at any refinery not exceed 30 ppm during any calendar
year by January 1, 2006, phasing in beginning on January 1, 2004. The Company
currently expects to produce gasoline under the new sulfur standards at the Port
Arthur refinery prior to January 1, 2004 and, as a result of the corporate pool
averaging provisions of the regulations, will not be required to meet the new
sulfur standards at the Lima refinery until July 1, 2004, a six month deferral.
A further delay in the requirement to meet the new sulfur standards at the Lima
refinery through 2005 may be possible through the purchase of sulfur allotments
and credits which arise from a refiner producing gasoline with a sulfur content
below specified levels prior to the end of 2005, the end of the phase-in period.
There is no assurance that sufficient allotments or credits to defer investment
at the Lima refinery will be available, or if available, at what cost. The
Company believes, based on current estimates and on a January 1, 2004 compliance
date for both the Port Arthur and Lima refineries, that compliance with the new
Tier 2 gasoline specifications will require capital expenditures for the Lima
and Port Arthur refineries in the aggregate through 2005 of approximately $235
million. More than 95% of the total investment to meet the Tier 2 gasoline
specifications is expected to be incurred during 2002 through 2004 with the
greatest concentration of spending occurring in 2003 and early 2004.
Low Sulfur Diesel Standards. In January 2001, the EPA promulgated its
on-road diesel regulations, which will require a 97% reduction in the sulfur
content of diesel fuel sold for highway use by June 1, 2006, with full
compliance by January 1, 2010. Regulations for off-road diesel requirements are
pending. The Company estimates capital expenditures in the aggregate through
2006 required to comply with the diesel standards at its Port Arthur and Lima
refineries, utilizing existing technologies, of approximately $245 million. More
than 95% of the projected investment is expected to be incurred during 2004
through 2006 with the greatest concentration of spending occurring in 2005.
Since the Lima refinery does not currently produce diesel fuel to on-road
specifications, the Company is considering an acceleration of the low-sulfur
diesel investment at the Lima refinery in order to capture this incremental
product value. If the investment is accelerated, production of the low-sulfur
fuel is possible by the first quarter of 2005.
Maximum Available Control Technology. On April 11, 2002, the EPA
promulgated regulations to implement Phase II of the petroleum refinery Maximum
Achievable Control Technology rule under the federal Clean Air Act, referred to
as MACT II, which regulates emissions of hazardous air pollutants from certain
refinery units. The
32
Company expects to spend approximately $45 million over the next three years
related to these new regulations with most of the expenditures occurring in 2003
and 2004.
Other Commitments
Crude Oil Purchase Commitment. In 1999, the Company sold crude oil linefill
in the pipeline system supplying the Lima refinery. An agreement is in place
that requires the Company to repurchase approximately 2.7 million barrels of
crude oil in this pipeline system on September 30, 2002 at then current market
prices. The price for West Texas Intermediate crude oil averaged $26.28 per
barrel for the quarter ended June 30, 2002. The Company has hedged the economic
price risk related to the repurchase obligations through the purchase of
exchange-traded futures contracts. As of June 30, 2002, the Company had given
notice that it will not extend the terms of this contract beyond September 2002.
Long-Term Crude Oil Contract
Port Arthur Coker Company is party to a long-term crude oil supply
agreement with PMI Comercio Internacional, S.A. de C.V. ("PEMEX"), an affiliate
of Petroleos Mexicanos, the Mexican state oil company, which supplies
approximately 167,000 barrels per day of Maya crude oil. Under the terms of this
agreement, Port Arthur Coker Company is obligated to buy Maya crude oil from
PEMEX, and PEMEX is obligated to sell to Port Arthur Coker Company Maya crude
oil. An important feature of this agreement is a price adjustment mechanism
designed to minimize the effect of adverse refining margin cycles and to
moderate the fluctuations of the coker gross margin, a benchmark measure of the
value of coker production over the cost of coker feedstocks. This price
adjustment mechanism contains a formula that represents an approximation of the
coker gross margin and provides for a minimum average coker margin of $15 per
barrel over the first eight years of the agreement, which began on April 1,
2001. The agreement expires in 2011.
On a monthly basis, the coker gross margin, as defined under this
agreement, is calculated and compared to the minimum. Coker gross margins
exceeding the minimum are considered a "surplus" while coker gross margins that
fall short of the minimum are considered a "shortfall." On a quarterly basis,
the surplus and shortfall determinations since the beginning of the contract are
aggregated. Pricing adjustments to the crude oil the Company purchases are only
made when there exists a cumulative shortfall. When this quarterly aggregation
first reveals that a cumulative shortfall exists, the Company receives a
discount on its crude oil purchases in the next quarter in the amount of the
cumulative shortfall. If thereafter, the cumulative shortfall incrementally
increases, the Company receives additional discounts on its crude oil purchases
in the succeeding quarter equal to the incremental increase. Conversely, if
thereafter, the cumulative shortfall incrementally decreases, the Company repays
discounts previously received, or a premium, on its crude oil purchases in the
succeeding quarter equal to the incremental decrease. Cash crude oil discounts
received by the Company in any one quarter are limited to $30 million, while the
Company's repayment of previous crude oil discounts, or premiums, are limited to
$20 million in any one quarter. Any amounts subject to the quarterly payment
limitations are carried forward and applied in subsequent quarters.
As of June 30, 2002, a cumulative quarterly surplus of $77.5 million
existed under the contract. As a result, to the extent the Company experiences
quarterly shortfalls in coker gross margins going forward, the price it pays for
Maya crude oil in succeeding quarters will not be discounted until this
cumulative surplus is offset by future shortfalls.
Insurance Expenses
The Company purchases insurance intending to protect against risk of loss
from a variety of exposures common to the refining industry, including property
damage, business interruptions, third party liabilities, workers compensation,
marine activities, and directors and officers legal liability, among others. The
Company employs internal risk management measurements, actuarial analysis, and
peer benchmarking to assist in determining the appropriate limits, deductibles,
and coverage terms for the Company. The Company believes the insurance coverages
it currently purchases are consistent with customary insurance standards in the
industry. The Company's major insurance policies expire on October 1, 2002, at
which time it expects to renew or replace all of its current lines of coverage.
Due to the effects of the events of September 11, 2001 on the insurance market,
the Company may experience significant changes to its current insurance program
at renewal, including restriction or elimination of certain coverage terms
(e.g., terrorism coverage), higher required deductibles, unavailability of high
coverage
33
limits on commercially reasonable terms, and increased premium expenses. While
the Company intends to continue purchasing insurance coverages consistent with
customary insurance standards in the industry, future losses could exceed
insurance policy limits or under adverse interpretations, be excluded from
coverage.
34
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements in this document are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are subject to the safe harbor
provisions of this legislation. Words such as "expects," "intends," "plans,"
"projects," "believes," "estimates," "will" and similar expressions typically
identify such forward-looking statements.
Even though we believe our expectations regarding future events are based
on reasonable assumptions, forward-looking statements are not guarantees of
future performance. Important factors that could cause actual results to differ
materially from those contained in our forward-looking statements include, among
others, changes in:
. Industry-wide refining margins;
. Crude oil and other raw material costs, the cost of transportation of
crude oil, embargoes, industry expenditures for the discovery and
production of crude oil, military conflicts between, or internal
instability in, one or more oil-producing countries, governmental
actions, and other disruptions of our ability to obtain crude oil;
. Market volatility due to world and regional events;
. Availability and cost of debt and equity financing;
. Labor relations;
. U.S. and world economic conditions;
. Supply and demand for refined petroleum products;
. Reliability and efficiency of our operating facilities which are
effected by such potential hazards as equipment malfunctions, plant
construction/repair delays, explosions, fires, oil spills and the
impact of severe weather and other factors which could result in
significant planned and unplanned downtime;
. Actions taken by competitors which may include both pricing and
expansion or retirement of refinery capacity;
. Civil, criminal, regulatory or administrative actions, claims or
proceedings and regulations dealing with protection of the
environment, including refined petroleum product composition and
characteristics;
. Acts of war or terrorism;
. Other unpredictable or unknown factors not discussed.
Because of all of these uncertainties, and others, you should not place
undue reliance on our forward-looking statements.
35
Results of Operations
This Management Discussion and Analysis of Financial Condition and Results
of Operations reflects the results of operations and financial condition of
Premcor Inc. and subsidiaries, which is materially the same as the results of
operations and financial condition of PRG and Premcor USA. Results of
operations, transactions, financial positions, and cash flows that are unique to
PRG and Premcor USA are clearly identified.
Premcor Inc. owns all of the outstanding common stock of Premcor USA, and
Premcor USA owns all the outstanding common stock of PRG. After the June 6, 2002
Sabine restructuring described below, PRG owns all of the outstanding common
stock of Sabine River Holding Corp., or Sabine. PRG together with Sabine's
principal operating subsidiary Port Arthur Coker Company L.P., or PACC, own and
operate three refineries with a combined crude oil throughput capacity of
490,000 barrels per day, or bpd. These refineries are located in Port Arthur,
Texas; Lima, Ohio; and Hartford, Illinois.
On June 6, 2002, PRG and Sabine completed a series of transactions,
referred to as the Sabine restructuring, that resulted in Sabine and its
subsidiaries becoming wholly owned subsidiaries of PRG. Sabine, through PACC,
owns and operates a heavy oil processing facility, which is operated in
conjunction with PRG's Port Arthur, Texas refinery. Prior to the Sabine
restructuring, Sabine was 90% owned by Premcor Inc. and 10% owned by Occidental
Petroleum Corporation. The transfer of ownership in which Sabine became a wholly
owned subsidiary of PRG was an exchange of ownership interest between entities
under common control, and therefore was accounted for at the book value of
Sabine, similar to a pooling of interests. Accordingly, Premcor USA's and PRG's
historical financial statements have been restated to include the consolidated
results of operations, financial position, and cash flows of Sabine as if the
combination had occurred on January 1, 2001.
The Sabine restructuring was permitted by the successful consent
solicitation of the holders of Sabine's Port Arthur Finance Corp. 12 1/2% senior
notes due 2009. The Sabine restructuring was accomplished according to the
following steps, among others:
.. Premcor Inc. contributed $225.6 million in proceeds from its initial public
offering of common stock to Sabine. Sabine used the proceeds from the
equity contribution, plus cash on hand, to prepay $221.4 million of its
senior secured bank loan and to pay a dividend of $141.4 million to Premcor
Inc.;
.. Commitments under Sabine's senior secured bank loan, working capital
facility, and certain insurance policies were terminated and related
guarantees were released;
.. PRG's existing working capital facility was amended and restated to, among
other things, permit letters of credit to be issued on behalf of Sabine;
.. Occidental exchanged its 10% interest in Sabine for 1,363,636 newly issued
shares of Premcor Inc. common stock;
.. Premcor Inc. contributed its 100% ownership interest in Sabine to Premcor
USA, and Premcor USA, in turn, contributed its 100% ownership interest to
PRG; and
.. PRG fully and unconditionally guaranteed, on a senior unsecured basis, the
payment obligations under the PAFC 12 1/2% senior notes due 2009. The
guarantee was issued in a private placement made in reliance on an
exemption from the registration requirements of the Securities Act. Due to
the PRG guarantee, Sabine is no longer required to file periodic reports
under the Securities Exchange Act of 1934, as amended. PRG and Sabine have
agreed to file a registration statement under the Securities Act to
register the notes and the PRG guarantee, not later than 120 days from
June 6, 2002.
Premcor Inc.'s acquisition of the 10% ownership in Sabine was accounted for
under the purchase method. The purchase price was based on the exchange of
1,363,636 shares of Premcor Inc. common stock for the 10% interest in Sabine and
was valued at $30.5 million or approximately $22 per share. The purchase price
of the 10% minority interest in Sabine exceeded the book value by $8.0 million.
Based on an appraisal of the Sabine assets, the excess of the purchase price
over the book value of the minority interest was recorded by Premcor Inc. as an
investment in property, plant and equipment and will be depreciated over the
remaining lives of the assets. Because the purchase price did not exceed the
fair value of the underlying assets, no goodwill was recognized.
The following tables reflect Premcor Inc.'s financial and operating
highlights for the three- and six-month periods ended June 30, 2001 and 2002.
36
Financial Results For the Three Months For the Six Months
(in millions, except as noted) Ended June 30, Ended June 30,
---------------------------- -------------------------
2001 2002 2001 2002
---------- ----------- ----------- ------------
Net sales and operating revenues................ $1,818.3 $ 1,679.0 $ 3,504.7 $ 2,907.3
Cost of sales................................... 1,337.3 1,523.4 2,742.9 2,585.0
---------- ----------- ----------- ------------
Gross margin................................. 481.0 155.6 761.8 322.3
Operating expenses.............................. 118.1 114.1 250.9 228.6
General and administrative expenses............. 16.6 14.4 29.2 28.9
Stock option compensation expense............... -- 3.8 -- 5.7
---------- ----------- ----------- ------------
Adjusted EBITDA ............................. 346.3 23.3 481.7 59.1
Depreciation and amortization................... 22.9 21.9 44.5 44.1
Refinery restructuring and other charges........ -- 16.6 150.0 158.6
---------- ----------- ----------- ------------
Operating income (loss)...................... 323.4 (15.2) 287.2 (143.6)
Interest expense and finance income, net........ (35.3) (30.0) (72.5) (61.0)
Loss on extinguishment of long-term debt........ -- (19.3) -- (19.3)
Income tax benefit (provision).................. (103.3) 23.5 (47.3) 84.9
Minority interest .............................. (7.6) 0.9 (10.9) 1.7
---------- ----------- ----------- ------------
Income (loss) from continuing operations..... 177.2 (40.1) 156.5 (137.3)
Loss on discontinued operations................. -- -- (8.5) --
---------- ----------- ----------- ------------
Net income (loss) ........................... 177.2 (40.1) 148.0 (137.3)
Preferred stock dividends ...................... (2.7) -- (5.2) (2.5)
---------- ----------- ----------- ------------
Net income (loss) available to common
stockholders .............................. $ 174.5 $ (40.1) $ 142.8 $ (139.8)
========== =========== =========== ============
Income (loss) from continuing operations per
common share:
Basic ....................................... $ 5.49 $ (0.82) $ 4.76 $ (3.47)
Diluted ..................................... $ 5.06 $ (0.82) $ 4.39 $ (3.47)
Weighted average common shares outstanding:
Basic ....................................... 31.8 48.7 31.8 40.3
Diluted ..................................... 34.5 48.7 34.5 40.3
Market Indicators For the Three Months For the Six Months
(dollars per barrel, except as noted) Ended June 30, Ended June 30,
---------------------------- --------------------------
2001 2002 2001 2002
---------- ----------- ----------- -------------
West Texas Intermediate (WTI) crude oil (sweet) ... $ 27.89 $ 26.28 $ 28.35 $ 23.94
Crack Spreads: *
Gulf Coast 3/2/1 ............................. $ 6.52 $ 3.36 $ 5.76 $ 3.08
Gulf Coast 2/1/1.............................. $ 5.71 $ 2.61 $ 5.15 $ 2.52
Chicago 3/2/1 ................................ $ 11.97 $ 5.29 $ 8.95 $ 4.48
Chicago 5/3/2 ................................ $ 11.50 $ 4.96 $ 8.69 $ 4.25
Crude Oil Differentials:
WTI less WTS (sour)........................... $ 3.23 $ 1.15 $ 3.66 $ 1.24
WTI less Maya (heavy sour).................... $ 10.46 $ 4.34 $ 10.54 $ 4.89
WTI less Dated Brent (foreign) ............... $ 0.72 $ 1.23 $ 1.81 $ 0.82
Natural gas (per mmbtu) ........................... $ 4.68 $ 3.38 $ 5.84 $ 2.79
* Crack spreads represent the per barrel margin achieved by converting
crude oil into refined products in a specific geographical market area. The
first number represents the number of barrels of West Texas Intermediate crude
oil, priced at Cushing, Oklahoma as input. The second and third numbers
represent the number of barrels of conventional gasoline and the number of
barrels of high sulfur diesel fuel, respectively, that result from the refining
process.
37
For the Three Months For the Six Months
Selected Volumetric and Per Barrel Data Ended June 30, Ended June 30,
---------------------------- --------------------------
(in thousands of barrels per day, except 2001 2002 2001 2002
----------- ---------- ---------- ---------
as noted)
Crude oil throughput by refinery:
Port Arthur .............................. 230.7 239.9 230.2 235.9
Lima ..................................... 145.9 142.8 139.5 141.2
Hartford ................................. 67.4 65.2 66.0 64.0
Blue Island .............................. -- -- 8.0 --
----------- ---------- ---------- ---------
Total throughput ....................... 444.0 447.9 443.7 441.1
Per barrel of throughput (in dollars):
Gross margin ............................. $ 11.90 $ 3.82 $ 9.49 $ 4.04
Operating expenses ....................... $ 2.92 $ 2.80 $ 3.12 $ 2.86
38
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2002
----------------------------------------- ---------------------------------------------
Selected Volumetric Data Port Total Port Total
(in thousands of barrels per day) Arthur Midwest Total Percent Arthur Midwest Total Percent
--------- --------- ---------- ---------- ----------- ----------- ---------- ----------
Feedstocks:
Crude oil throughput:
Sweet -- 143.5 143.5 32% -- 142.6 142.6 32%
Light/medium sour 39.7 61.8 101.5 22% 33.3 63.4 96.7 21%
Heavy sour 191.0 8.0 199.0 45% 206.6 2.0 208.6 46%
--------- --------- ---------- ---------- ----------- ----------- ---------- ----------
Total crude oil 230.7 213.3 444.0 99% 239.9 208.0 447.9 99%
Unfinished and blendstocks 9.5 (6.6) 2.9 1% 10.3 (8.0) 2.3 1%
--------- --------- ---------- ---------- ----------- ----------- ---------- ----------
Total feedstocks 240.2 206.7 446.9 100% 250.2 200.0 450.2 100%
========= ========= ========== ========== =========== =========== ========== ==========
Production:
Light products:
Conventional gasoline 85.3 98.1 183.4 40% 85.3 100.1 185.4 40%
Premium and reformulated gasoline 28.4 22.5 50.9 11% 29.7 17.4 47.1 10%
Diesel fuel 69.0 42.8 111.8 24% 66.8 41.0 107.8 23%
Jet fuel 23.5 24.8 48.3 11% 30.2 20.7 50.9 11%
Petrochemical feedstocks 18.4 10.7 29.1 6% 18.4 10.5 28.9 6%
--------- --------- ---------- ---------- ----------- ----------- ---------- ----------
Total light products 224.6 198.9 423.5 92% 230.4 189.7 420.1 90%
Petroleum coke and sulfur 25.3 7.4 32.7 7% 29.4 6.6 36.0 8%
Residual oil 2.9 1.1 4.0 1% 5.6 3.8 9.4 2%
--------- --------- ---------- ---------- ----------- ----------- ---------- ----------
Total production 252.8 207.4 460.2 100% 265.4 200.1 465.5 100%
========= ========= ========== ========== =========== =========== ========== ==========
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2002
----------------------------------------- ---------------------------------------------
Selected Volumetric Data Port Total Port Total
(in thousands of barrels per day) Arthur Midwest* Total Percent Arthur Midwest Total Percent
--------- --------- ---------- --------- ----------- ----------- ---------- ----------
Feedstocks:
Crude oil throughput:
Sweet -- 141.7 141.7 31% -- 138.5 138.5 32%
Light/medium sour 52.7 66.3 119.0 27% 41.1 61.8 102.9 23%
Heavy sour 177.5 5.5 183.0 41% 194.8 4.9 199.7 46%
--------- --------- ---------- --------- ----------- ----------- ---------- ----------
Total crude oil 230.2 213.5 443.7 99% 235.9 205.2 441.1 101%
Unfinished and blendstocks 7.2 (2.7) 4.5 1% (3.2) (2.2) (5.4) (1)%
--------- --------- ---------- --------- ----------- ----------- ---------- ----------
Total feedstocks 237.4 210.8 448.2 100% 232.7 203.0 435.7 100%
========= ========= ========== ========= =========== =========== ========== ==========
Production:
Light products:
Conventional gasoline 81.8 99.3 181.1 39% 79.0 105.4 184.4 41%
Premium and reformulated gasoline 24.9 23.6 48.5 10% 21.9 16.1 38.0 8%
Diesel fuel 73.6 46.2 119.8 26% 65.6 39.0 104.6 23%
Jet fuel 18.9 21.8 40.7 9% 28.6 21.7 50.3 11%
Petrochemical feedstocks 19.9 10.4 30.3 7% 17.2 10.9 28.1 6%
--------- --------- ---------- --------- ----------- ----------- ---------- ----------
Total light products 219.1 201.3 420.4 91% 212.3 193.1 405.4 89%
Petroleum coke and sulfur 28.6 7.7 36.3 8% 31.3 7.2 38.5 9%
Residual oil 4.6 2.2 6.8 1% 7.4 3.3 10.7 2%
--------- --------- ---------- --------- ----------- ----------- ---------- ----------
Total production 252.3 211.2 463.5 100% 251.0 203.6 454.6 100%
========= ========= ========== ========= =========== =========== ========== ==========
* Includes 8.8 of feedstocks and 8.6 of production for the Blue Island refinery
which was closed in January 2001
39
Factors Affecting Comparability
Blue Island Closure. In January of 2001, we shutdown our refining
operations at our Blue Island, Illinois refinery. Our operating results in the
first half of 2001 included one month of operating results of our Blue Island
refinery.
Inventory Price Risk Management. The nature of our business leads us to
maintain a substantial investment in petroleum inventories. Since petroleum
feedstocks and products are essentially commodities, we have no control over the
changing market value of our investment. We manage the impact of commodity price
volatility on our hydrocarbon inventory position by, among other methods,
determining a volumetric exposure level that we consider appropriate and
consistent with normal business operations. This target inventory position
includes both titled inventory and fixed price purchase and sale commitments.
Our current target inventory position, consisting of sales commitments netted
against fixed price purchase commitments, amounts to a long inventory position
of approximately 6 million barrels.
Prior to the second quarter of 2002, we did not generally price protect any
portion of our target inventory position. However, although we continue to
generally leave the titled portion of our inventory position target fully
exposed to price flucuations, beginning in the second quarter of 2002, we began
to actively mitigate some or all of the price risk related to our target level
of fixed price purchase and sale commitments. These risk management decisions
are based on the relative level of absolute hydrocarbon prices. The economic
effect of our risk management strategy in the second quarter of 2002 was
modestly positive as measured against a fully exposed fixed price commitment
target. In the first quarter of 2002, we benefited by approximately $30 million
from leaving our fixed price commitment target fully exposed in a rising
absolute price environment.
We generally conduct our risk mitigation activities through the purchase or
sale of futures contracts on the New York Mercantile Exchange, or NYMEX. Our
price risk mitigation activities carry all of the usual time, location and
product grade basis risks generally associated with these activities. Because
out titled inventory is valued under the last-in, first-out costing method,
price fluctuations on our target level of titled inventory have very little
effect on our financial results unless the market value of our target inventory
is reduced below cost. However, since the current cost of our inventory
purchases and sales are generally charged to our statement of operations, our
financial results are affected by price movements on the portion of our target
level of fixed price purchase and sale commitments that are not price protected.
2002 Compared to 2001
Overview. Net loss available to common stockholders was $40.1 million in
the second quarter of 2002 as compared to net income available to common
stockholders of $174.5 million in the corresponding period in 2001. Our
operating loss was $15.2 million in the second quarter of 2002 as compared to
operating income of $323.4 million in the corresponding period in 2001. The
operating loss included pretax refinery restructuring and other charges of $16.6
million in the second quarter of 2002. Excluding the refinery restructuring and
other charges, operating income was $1.4 million in the second quarter of 2002.
Net loss available to common stockholders was $139.8 million in the first
half of 2002, compared to net income available to common stockholders of $142.8
million in the corresponding period in 2001. Our operating loss was $143.6
million in the first half of 2002 as compared to operating income of $287.2
million in the corresponding period in 2001. The operating loss included pretax
refinery restructuring and other charges of $158.6 million and $150.0 million
for the first quarter of 2002 and 2001, respectively. Excluding the refinery
restructuring and other charges, we earned operating income of $15.0 million and
$437.2 million in the first half of 2002 and 2001, respectively. Operating
income, excluding the refinery restructuring and other charges, decreased in the
second quarter and first half of 2002 compared to the same periods in 2001
principally due to significantly weaker market conditions in 2002 than in 2001.
Net Sales and Operating Revenue. Net sales and operating revenues decreased
$139.3 million, or 8%, to $1,679.0 million in the second quarter of 2002 from
$1,818.3 million in the corresponding period in 2001. Net
40
sales and operating revenues decreased $597.4 million, or 17%, to $2,907.3
million in the first half of 2002 from $3,504.7 million in the corresponding
period in 2001. This decrease was mainly attributable to lower product prices in
the second quarter and first half of 2002 as compared to the same periods of
2001.
Gross Margin. Gross margin decreased $325.4 million to $155.6 million in
the second quarter of 2002 from $481.0 million in the corresponding period in
2001. Gross margin decreased $439.5 million to $322.3 million in the first half
of 2002 from $761.8 million in the corresponding period in 2001. The decrease in
gross margin in the second quarter and first half of 2002 as compared to the
corresponding periods in 2001 was principally driven by significantly weaker
market conditions in 2002 than in 2001. The events of September 11, 2001, a
sluggish world economy and an extremely mild winter contributed to high
distillate and gasoline inventories, which depressed industry refining margins
in the first quarter. Industry refining margins improved in the second quarter
as demand increased for the spring and summer driving season; however, crack
spreads in our market areas remained significantly below their prior year
levels. The average Gulf Coast and Chicago crack spreads were approximately 50%
lower in the second quarter and first half of 2002 than for the same periods of
2001.
OPEC production cutbacks during 2002 were concentrated in heavy and sour
crude oils which led to a significant narrowing of the price spreads between
West Texas Intermediate sweet crude oils (or WTI) and Maya heavy sour and medium
sour crude oils. This had a significant negative impact on our gross margin
because a large proportion of our crude oil throughput is heavy sour and
light/medium sour crude oils, which are typically purchased at a discount from
WTI, the benchmark crude oil used in industry crack spread calculations. As
shown on the table of Market Indicators above, the price spread, or
differential, between WTI and Maya heavy sour crude oil was approximately 60%
lower in this year's second quarter than in last year's second quarter, and was
approximately 54% lower for the first six months of 2002 than for the same
period last year. This type of crude oil accounts for between 41% and 46% of our
crude oil throughput. Light and medium sour crude oils account for between 21%
and 27% of our crude oil throughput. The price differential between WTI and West
Texas Sour is indicative of the discounts typically received on this type of
crude oil. This differential was approximately 65% lower in both the second
quarter and first six months of 2002, than in the corresponding 2001 periods.
Our gross margin in the first half of 2002 was also affected by planned and
unplanned downtime at our refineries.
Refinery Operations
In May 2002, we had a three-day unplanned shutdown of the reformer unit at
the Lima refinery. The result of the shutdown was the production of non-saleable
inventory that was rerun in the later part of the second quarter and into the
third quarter resulting in lost economics. Our Port Arthur and Hartford
refineries reduced crude oil throughput rates slightly during the second quarter
due to the narrow price differentials for sour and heavy sour crude oil as
discussed above.
In February 2002, we shutdown our coker unit at our Port Arthur refinery
for ten days for unplanned maintenance. We took advantage of the coker outage to
make repairs to the distillate and naphtha hydrotreaters, including turnaround
maintenance that was originally planned for later in the year. Crude oil
throughput rates were restricted by approximately 18,000 bpd during this time,
but returned to near capacity of 250,000 bpd following the maintenance. In
January 2002, we shut down the fluid catalytic cracking (FCC) unit, gas oil
hydrotreating unit and sulfur plant for approximately 39 days at our Port Arthur
refinery for planned turnaround maintenance. This turnaround maintenance did not
affect crude oil throughput rates but did lower gasoline production. We sold
more unfinished products during the first quarter of 2002 due to this shutdown.
All three refineries operated below economic crude oil throughput capacity
during the first half of 2002 due to poor refining market conditions.
In 2001, crude oil throughput rates at the Port Arthur refinery were
restricted due to a lightning strike in early May, which limited the crude unit
rate through the balance of the second quarter. The crude unit was shutdown in
early July for 10 days to repair the damage caused by the lightning strike.
Crude oil throughput rates in the first half of 2001 at Port Arthur were
restricted due to the lightning strike plus restrictions on the crude unit as
downstream process units were in start-up operations during the first quarter.
In January of 2001, our new hydrocracker was brought on-line and our new coker
unit and sulfur plant were still in start-up operations, having begun operations
in December 2000. In the first half of 2001, crude oil throughput rates were
below capacity at our Lima refinery due to crude oil delivery delays caused by
bad weather in the Gulf Coast and a month-long maintenance turnaround on its
coker and isocracker units in the first quarter. Crude oil throughput rates were
also below capacity for the first half of 2001 at our Hartford
41
refinery due to coker unit repairs in the first quarter. Both Lima and Hartford
operated near their economic crude oil throughput capacity in the second quarter
of 2001.
Safety
We continuously aim to achieve excellent safety and health performance. We
believe that a superior safety record is inherently tied to achieving our
productivity and financial goals. We measure our success in this area primarily
through the use of accident frequency rates administered by the Occupational
Safety and Health Administration, or OSHA. The accident frequency rates, or
recordable injury rates, reflect the number of recordable incidents per 200,000
hours worked. For the six months ended June 30, 2002, our refineries had the
following recordable injury rates: Port Arthur: 1.41; Lima: 1.41; and Hartford:
0.0. The United States refining industry average recordable injury rate for 2001
was 1.35. Despite our best efforts to achieve excellence in our safety and
health performance, there can be no assurance that our employees will not be
injured, even fatally injured.
Operating Expenses. Operating expenses decreased $4.0 million to $114.1
million in the second quarter of 2002 from $118.1 million in the corresponding
period in 2001. Operating expenses decreased $22.3 million to $228.6 million in
the first half of 2002 from $250.9 million in the corresponding period in 2001.
The decrease in the second quarter of 2002 was principally due to lower natural
gas prices partially offset by higher repair and maintenance costs at the
Hartford refinery and higher employee expenses. The decrease in the first half
of 2002 was principally due to significantly lower natural gas prices partially
offset by higher repair and maintenance costs and higher employee expenses. The
higher employee expenses related primarily to new benefit plans and higher
medical benefit costs for both current and post retirement plans.
General and Administrative Expenses. General and administrative expenses
decreased $2.2 million to $14.4 million in the second quarter of 2002 from $16.6
million in the corresponding period in 2001. General and administrative expenses
decreased $0.3 million to $28.9 million in the first half of 2002 from $29.2
million in the corresponding period in 2001. The decrease in the second quarter
was principally due to lower wages and benefits following a restructuring which
resulted in a decrease by approximately one third of the administrative
positions in the St. Louis based general office. Partially offsetting this
decrease were higher employee benefit costs particularly related to new pension
and retirement plans and both current and post retirement employee medical
benefit costs.
Stock Option Expense. Stock option expense was $3.8 million and $5.7
million for the second quarter and first half of 2002, respectively. During the
second quarter of 2002, we elected to adopt the fair value based expense
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"). We previously applied the intrinsic value based expense
recognition provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). SFAS No. 123 provides that the adoption of the fair
value based method is a change to a preferable method of accounting. As provided
by SFAS No. 123, the stock option compensation expense is calculated based only
on stock options granted in the year of election and thereafter. All stock
options granted prior to January 1, 2002 continue to be accounted for under APB
No. 25.
In relation to two new 2002 stock incentive programs, we had recognized
stock option compensation expense of $1.6 million in the quarter ended March 31,
2002, and would have recognized $2.8 million and $4.4 million for the
three-month and six-month periods ended June 30, 2002, respectively, under APB
No. 25. The adoption of SFAS No. 123 increased stock option compensation expense
by $1.0 million and $1.3 million for the three-month and six-month periods ended
June 30, 2002, respectively. The adoption of SFAS No. 123 increased our net loss
by $0.6 million (less than $0.01 per basic share) and $0.8 million (less than
$0.01 per basic share) for the three-month and six-month periods ended June 30,
2002, respectively.
Since nonvested awards issued to employees prior to January 1, 2002 were
and continue to be accounted for using the intrinsic value based provisions of
APB No. 25, the prospective application of employee stock-based compensation
expense determined using the fair value based method is not necessarily
indicative of future expense amounts when the fair value based method will apply
to all outstanding, nonvested awards.
42
The effects of the adoption of SFAS No. 123 on loss from continuing
operations, net loss available to common stockholders, and net loss per share
for the three-month period ended March 31, 2002 are as follows:
Loss from continuing operations and net loss available to
common stockholders:
As reported $ (99.5)
Revised for adoption of SFAS No. 123 $ (99.7)
Net loss per common share (in whole dollars):
As reported $ (3.13)
Revised for adoption of SFAS No. 123 $ (3.14)
With respect to all stock option grants outstanding at June 30, 2002, the
Company will record future non-cash stock option compensation expense and
additional paid-in capital of $44.6 million over the applicable vesting periods
of the grants.
Depreciation and Amortization. Depreciation and amortization expenses were
relatively the same in the second quarter and first half of 2002 as compared to
the same periods in 2001. In the first half of 2002 depreciation expense
decreased as compared to the first half of 2001 as depreciation ceased for the
Hartford refinery assets beginning in March 2002. This decrease was offset by an
increase in amortization due to the completion of the turnaround at the Port
Arthur refinery in early 2002.
Refinery Restructuring and Other Charges. In 2002, we recorded refinery
restructuring and other charges of $158.6 million, $142.0 million in the first
quarter and $16.6 million in the second quarter.
The year-to-date charge consisted of the following:
.. a $137.4 million charge related to the announced shutdown of refining
operations at the Hartford, Illinois refinery,
.. a $22.3 million charge related to the restructuring of our management team
and administrative functions,
.. income of $5.0 million related to the unanticipated sale of a portion of
the Blue Island refinery assets previously written off,
.. a $2.5 million charge related to the termination of certain guarantees at
PACC as part of the Sabine restructuring, and
.. a $1.4 million loss related to the sale of idled assets.
The second quarter charge consisted of the following:
.. an additional $6.2 million charge related to the announced shutdown of
refining operations at the Hartford, Illinois refinery,
.. a $6.5 million charge related to the restructuring of our administrative
functions,
.. a $2.5 million charge related to the termination of certain guarantees at
PACC as part of the Sabine restructuring, and
.. a $1.4 million loss related to the sale of idled assets.
In 2001, refinery restructuring and other charges consisted of a $150.0 million
charge related to the January 2001 closure of the Blue Island, Illinois
refinery.
Hartford Refinery
In February 2002, we announced that we would shutdown refining operations
at the Hartford, Illinois refinery in October 2002. Although the Hartford
refinery has marginally contributed to our earnings in the past, we have
concluded that there is no economically viable manner of reconfiguring the
refinery to produce fuels which meet new gasoline and diesel fuel standards
mandated by the federal government. We are pursuing all options, including the
sale of the refinery, to mitigate the loss of jobs and refinery capacity in the
Midwest. We have extended the closing date of the refinery by one month to
November 2002 in order to provide additional time for consideration of certain
43
opportunities. We believe that we are more likely to maximize value of the
refinery if the refinery is operating when a transaction is consummated.
Since the Hartford refinery operation had been only marginally profitable
over the last 10 years and since substantial investment would be required to
meet new required product specifications in the future, our reduced refining
capacity resulting from the shutdown is not expected to have a significant
negative impact on net income or cash flow from operations. The only anticipated
effect on net income and cash flow in the future will result from the actual
shutdown process, including recovery of realizable asset value, and subsequent
environmental site remediation, which will occur over a number of years. Unless
there is a need to adjust the shutdown reserve in the future as discussed below,
there should be no significant effect on net income beyond 2002.
A pretax charge of $131.2 million was recorded in the first quarter of 2002
and an additional pretax charge of $6.2 million was recorded in the second
quarter of 2002. The total charge included $70.7 million of non-cash long-lived
asset write-offs to reduce the refinery assets to their estimated net realizable
value of $61.0 million. The net realizable value was determined by estimating
the value of the assets in a sale or operating lease transaction. We have had
preliminary discussions with third parties regarding such a transaction, but
there can be no assurance that one will be completed. In the event, that a sale
or lease transaction is not completed, the net realizable value may be less than
$61.0 million and a further write-down may be required. The net realizable value
was recorded as a current asset on the balance sheet. In the second quarter of
2002, we completed an evaluation of Hartford's warehouse stock, catalysts,
chemicals, and additives inventories, and we determined that a portion of these
inventories would not be recoverable upon the closure of the refinery.
Accordingly, we wrote-down these assets by $3.2 million.
The total charge also included a reserve for future costs of $62.5 million
as itemized below. The Hartford restructuring reserve balance and net cash
activity as of June 30, 2002 is as follows:
Initial Net Cash Reserve as of
Reserve Outlay June 30, 2002
--------- ---------- -------------
Employee severance.......................... $ 16.6 $ 0.1 $ 16.5
Plant closure/equipment remediation......... 12.9 4.4 8.5
Site clean-up/environmental matters......... 33.0 -- 33.0
--------- --------- --------
$ 62.5 $ 4.5 $ 58.0
========= ========= ========
The initial reserve included an additional $1.9 million charge recorded in
the second quarter of 2002 that related primarily to the cancellation of various
capital projects that were underway prior to the announced closure. Management
adopted an exit plan that details the shutdown of the process units at the
refinery and the subsequent environmental remediation of the site. We expect the
majority of the shutdown of the process units will be completed in the fourth
quarter of 2002. We estimate that 315 employees, both hourly (covered by
collective bargaining agreements) and salaried, will be terminated due to this
shutdown, 98% of which are scheduled to be terminated in November of 2002. The
site clean-up and environmental reserve takes into account costs that are
reasonably foreseeable at this time. As the site remediation plan is refined and
work is performed, further adjustments of the reserve may be necessary, and such
adjustments may be material.
Finally, the total charge included a $1.1 million reserve, which was
recorded in the second quarter of 2002, related to post-retirement expenses that
were extended to certain employees who were nearing the retirement requirements.
This liability was recorded in "Other Long-term Liabilities" on the balance
sheet together with our other post retirement liabilities.
Hartford, Illinois Vapor Extraction System. The Hartford refinery is
located in an area in which two other refineries have historically operated, one
of which is still in operation today. Since the late 1980's it has been widely
recognized in the Hartford community that a plume of gasoline is present under
certain portions of the town of Hartford. All three of the refineries, including
our Hartford refinery, may have historically contributed to this plume. Since
the mid-1990's we have operated, on a voluntary basis, a vapor recovery system
designed to prevent gasoline odors from rising into the homes in that area of
Hartford overlying the plume. In the second quarter of 2002, a combination of
high groundwater levels and high rainfall caused gasoline odors to rise into
four homes in an area adjacent to the area which the vapor extraction system is
designed to cover. Since this occurrence, we have been in
44
discussions with regulatory authorities, state and local community leaders, and
residents regarding a potential upgrade of the vapor recovery system to cover
the area of town in which those homes are located. No civil litigation or
regulatory enforcement action has resulted from this occurrence. If such
litigation or action were initiated, we do not believe that such litigation or
action would have a material adverse effect on our financial condition or
results of operation.
Alleged Asbestos Exposure. We have recently been named, along with numerous
other defendants, in approximately twenty claims alleging personal injury
resulting from exposure to asbestos. All of the claims have been filed by
employees of third-party independent contractors who purportedly were exposed to
asbestos while performing services at our Hartford refinery. A majority of the
lawsuits have only recently been served and all of them are in the very early
stages of litigation. Substantive discovery has not yet been conducted. It is
impossible at this time for us to quantify our exposure from these claims, but
we do not believe that any liability resulting from the resolution of these
matters will have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Company Management and Administrative Restructuring
In February 2002, we began the restructuring of our executive management
team and subsequently our administrative functions with the hiring of Thomas D.
O'Malley as chairman, chief executive officer, and president and William E.
Hantke as executive vice president and chief financial officer. In the first
quarter of 2002, we recognized severance expense of $5.0 million and non-cash
compensation expense of $5.7 million resulting from modifications of stock
option terms related to the resignation of the officers who previously held
these positions. In addition, we incurred a charge of $5.0 million for the
cancellation of a monitoring agreement with an affiliate of our majority owner,
Blackstone Management Associates III L.L.C. In the second quarter of 2002, we
commenced a restructuring of our St. Louis-based general and administrative
operations and recorded a charge of $6.5 million for severance, outplacement and
other employee-related restructuring expenses.
Interest Expense and Finance Income, net. Interest expense and finance
income, net decreased $5.3 million to $30.0 million in the second quarter of
2002 from $35.3 million in the corresponding period in 2001. Interest expense
and finance income, net decreased $11.5 million to $61.0 million in the first
half of 2002 from $72.5 million in the corresponding period in 2001. These
decreases related primarily to lower interest rates on our floating rate debt
and lower interest expense due to the repurchase of certain debt securities in
the third quarter of 2001 and in the second quarter of 2002.
Loss on Extinguishment of Long-term Debt. In the second quarter of 2002, we
recorded a loss of $19.3 million related to the early redemption and repurchase
of portions of our long-term debt. This loss included $9.2 million of premiums
associated with the early repayment of long-term debt, a $9.5 million write-off
of unamortized deferred financing costs related to the prepaid debt, and a $0.6
million write-off of a prepaid premium for an insurance policy guaranteeing the
interest and principal payments on Sabine's long-term debt. PRG recorded a loss
of $9.3 million related to this early redemption of long-term debt, of which
$0.9 million related to premiums, $7.8 million related to the write-off of
deferred financing costs, and $0.6 million related to the write-off of debt
guarantee fees at Sabine.
Income Tax (Provision) Benefit. We recorded a $23.5 million income tax
benefit in the second quarter of 2002 versus an income tax provision of $103.3
million in the corresponding period in 2001. We recorded an $84.9 million income
tax benefit in the first half of 2002 versus an income tax provision of $47.3
million in the corresponding period in 2001. The income tax provision of $47.3
million for 2001 included the effect of a $30.0 million decrease in the deferred
tax valuation allowance. During the first quarter of 2001, we reversed our
remaining deferred tax valuation allowance as a result of the analysis of the
likelihood of realizing the future tax benefit of our federal and state tax loss
carryforwards, alternative minimum tax credits and federal and state business
tax credits.
We currently have a net deferred tax asset of $68.6 million (Premcor USA -
$68.7 million; PRG - $33.9 million) recorded on our balance sheet. SFAS No. 109,
Accounting for Income Taxes, requires that deferred tax assets be reduced by a
valuation allowance if, based on the weight of available evidence, it is more
likely than not (a likelihood of more than 50 percent) that some portion or all
of the deferred tax assets will not be realized. The valuation allowance should
be sufficient to reduce the deferred tax asset to the amount that is more likely
than not to be realized. As a result of the analysis of the likelihood of
realizing the future tax benefit of our federal and state tax loss
carryforwards, alternative minimum tax credits and federal and state business
tax credits, we have not provided a valuation allowance related to the net
deferred tax asset. The likelihood of realizing the net deferred tax asset is
analyzed on a regular basis and should it be determined that it is more likely
than not that some portion or all of the net deferred tax asset will not be
realized, a tax valuation allowance and a corresponding income tax provision
would be required at that time.
Discontinued Operations. In 2001, we recorded a pretax charge of $14.0
million, $8.5 million net of income taxes, related to environmental liabilities
of discontinued retail operations. This charge represented an increase in
45
estimates regarding our environmental clean up obligation and was prompted by
the availability of new information concerning site by site clean up plans and
changing postures of state regulatory agencies.
Outlook
Market. We expect industry refining margins for the third quarter of 2002
to be significantly lower than 2001 levels due to continued high inventory and
import levels and lagging demand. Crude oil differentials for sour and heavy
sour crude oils are expected to be particularly constrained due to the effects
of OPEC cutbacks, which have been concentrated on heavy crude oil. Because we
run a significant amount of sour and heavy sour crude oils, we expect the narrow
heavy/light differentials to have a significant negative impact on our results,
such that if they do not improve, may make it difficult for us to achieve a
profit in the third quarter.
Gross Margin. It is common practice in our industry to look to benchmark
market indicators as a predictor of actual refining margins. For example, the
3/2/1 benchmark crack spread models a refinery that consumes WTI sweet crude oil
and produces roughly 66% regular gasoline and 33% high sulfur distillate. To
improve the reliability of this benchmark as a predictor of actual refining
margins, it must first be adjusted for a crude oil slate that is not 100% light
and sweet. Secondly, it must be adjusted to reflect variances from the benchmark
product slate to the actual, or anticipated, product slate. Lastly, it must be
adjusted for any other factors not anticipated in the benchmark, including
ancillary crude and product costs such as transportation, storage and credit
fees, inventory fluctuations and price risk management activities.
Our Port Arthur refinery has historically produced roughly equal parts
gasoline and distillate. For this reason, we believe the Gulf Coast 2/1/1 crack
spread more closely reflects our product slate than the Gulf Coast 3/2/1 crack
spread. However, approximately 15% of Port Arthur's product slate is lower value
petroleum coke and residual oils which will negatively impact the refinery's
performance against the benchmark crack spread.
Port Arthur's crude oil slate is approximately 80% Maya heavy sour crude
oil and 20% medium sour crude oil. Accordingly, the WTI/Maya and WTI/WTS crude
oil differentials can be used as an adjustment to the benchmark crack spread. As
discussed elsewhere is this Form 10-Q, under current market conditions we do not
anticipate any discounts on our purchases of Maya crude oil under our crude oil
supply agreement through the balance of 2002. Ancillary crude costs, primarily
transportation, at Port Arthur averaged $.60 per barrel of crude oil throughput
in the second quarter of 2002 and $.66 per barrel of crude oil throughput for
the first six months of 2002. No significant downtime is planned for Port Arthur
for the balance of 2002 and we expect crude oil throughput rates to continue at,
or near, their 2002 year-to-date rates.
Our Lima refinery has a product slate of approximately 60% gasoline and 30%
distillate and we believe the Chicago 5/3/2 is an appropriate benchmark. This
refinery consumes approximately 95% light sweet crude oil with the balance being
light sour crudes. We opportunistically buy a mix of domestic and foreign sweet
crude oils. The foreign crude oils consumed at Lima are priced relative to Brent
and the WTI/Brent differential can be used to adjust the benchmark. Ancillary
crude costs for Lima averaged $1.28 per barrel of crude throughput for the
second quarter of 2002 and $1.26 per barrel for the first six months of 2002. No
significant downtime is planned for Lima for the rest of 2002 and crude oil
throughput rates are expected to continue at, or near, their 2002 year-to-date
rates.
The Hartford refinery is scheduled for closure on November 1, 2002. Until
that date, we expect the refinery will continue, at or near, its 2002
year-to-date crude oil throughput rate. We believe the Chicago 3/2/1 crack
spread is an appropriate benchmark for Hartford. Although capable of running a
heavier crude slate, the refinery currently runs primarily light and medium sour
crude oils. Accordingly, the WTI/WTS crude oil differential can be used as an
adjustment to the benchmark crack spread. Nearly 10% of Hartford's product slate
is lower value petroleum coke and residual oils, which will negatively impact
its results compared to the benchmark. Ancillary crude costs for Hartford
averaged $1.24 and $1.25 per barrel of crude throughput for the second quarter
and six months ended June 30, 2002, respectively.
Operating Expenses. Natural gas is the most variable component of our
operating expenses. On an annual basis, our refineries consume approximately
26.7 mmbtu of natural gas. We anticipate this usage will be 25.9 mmbtu after the
planned closure of the Hartford refinery on November 1, 2002. In a normalized
natural gas pricing environment and assuming average crude oil throughput
levels, our annual operating expenses should range between
46
$450 million and $475 million. The closure of the Hartford refinery is expected
to reduce this amount to $380 million to $400 million.
General and Administrative Expenses. During the second quarter of 2002, we
restructured our general and administrative operations to reduce our overhead
costs. When the restructuring plan is fully implemented, we expect our general
and administrative expenses to total approximately $40 million annually. In
addition, we recognize non-cash stock option compensation expense computed under
SFAS 123. Through June 30, 2002, $5.7 million in stock option compensation
expense has been incurred to cover all 2002 stock options issued to date,
representing 73% of all stock options currently outstanding. We expect to charge
$4.2 million per quarter for the approximately ten quarters remaining in the
2002 option grants vesting period. Future option grants will be treated in the
same manner.
Insurance Expense. We carry insurance policies on insurable risks, which we
believe to be appropriate at commercially reasonable rates. While we believe
that we are adequately insured, future losses could exceed insurance policy
limits or under adverse interpretations, be excluded from coverage. Future
costs, if any, incurred under such circumstances would have to be paid out of
general corporate funds.
We are in the process of renewing our comprehensive insurance program.
Current indications are that we may have to change the nature and scope of some
of our coverages and that premiums may increase substantially. These changes are
expected to be effective October 1, 2002 and may result in a significant
increase in our operating expenses and general and administrative expenses.
Depreciation and amortization. Depreciation and amortization expense for
the second quarter of 2002 was $21.9 million and excludes the Hartford refinery,
which has been accounted for as an asset held for sale. This amount will
increase in future periods based upon capital expenditure activity. Included in
this amount is the amortization of our turnaround costs, generally over four
years. As described below, a proposed accounting pronouncement, if adopted,
would require that we expense these costs as incurred. If the proposed
accounting pronouncement is adopted, we would be required to write-off our
unamortized turnaround costs of approximately $104 million in the first quarter
of 2003. This charge would be shown as a cumulative effect of an accounting
change, net of taxes.
Interest Expense. Based on our outstanding long-term debt at June 30, 2002,
our annual interest expense is approximately $85 million. All of our debt is at
fixed rates with the exception of $240 million in floating rate notes tied to
LIBOR.
Income Taxes. Our effective tax rate for the six months ended June 30, 2002
was 38.0% and approximates the rate we expect for all of 2002.
Capital Expenditures and Turnarounds. Capital expenditures and turnarounds
for the first six months of 2002 totaled $70.2 million. We plan to expend a
similar amount for the second half of 2002 and approximately $200 million in
2003. We have stated that we plan to fund capital expenditures with internally
generated funds. If the current market environment continues, this plan may not
be practicable and we are reevaluating the scope and timing of our capital
expenditures plan and potential financing alternatives.
47
Liquidity and Capital Resources
Cash Balances
As of June 30, 2002, we had a cash and short term investment balance of
$182.2 million of which $120.2 million was held by PRG, $17.1 million by Premcor
USA, and $44.9 million by Premcor Inc. In addition, under an amended common
security agreement related to PACC's senior debt, PACC is required to maintain
$45.0 million of restricted cash for debt service plus an amount equal to the
next principal and interest payment, prorated based on the number of months
remaining until that payment is due. As of June 30, 2002, cash of $65.4 million
was restricted under these requirements.
Cash Flows from Operating Activities
Net cash used in operating activities for the six months ended June 30,
2002 was $54.8 million compared to net cash provided from operations of $384.4
million in the corresponding period of 2001. The use of cash for operating
activities in 2002 as compared to the provision of cash from operations in 2001
is mainly attributable to weak market conditions which resulted in poor
operating results. Working capital as of June 30, 2002 was $335.5 million, a
1.54-to-1 current ratio, versus $482.6 million as of December 31, 2001, a
1.83-to-1 current ratio. The decrease in working capital included the use of
approximately $203 million of available cash, excluding initial public offering
proceeds, to repay long-term debt. Our cash investment in hydrocarbon working
capital at June 30, 2002 was approximately $50 million above our normalized
operating level due primarily to timing of crude oil purchases and product
receipts. This incremental investment is believed to be temporary.
Blue Island Refinery Closure
In January 2001, we shutdown the refining operations at our Blue Island,
Illinois refinery. The Blue Island restructuring reserve balance and net cash
activity as of June 30, 2002 is as follows:
Reserve as of
December 31, Net Cash Reserve as of
2001 Outlay June 30, 2002
------------------ --------------- -----------------
Employee severance................................ $ 2.1 $ 1.5 $ 0.6
Plant closure/equipment remediation............... 13.9 2.5 11.4
Site clean-up/environmental matters............... 20.5 4.0 16.5
------- -------- -------
$ 36.5 $ 8.0 $ 28.5
======= ======== =======
We expect to spend approximately $16 million in 2002 related to the
reserve for future costs, with the majority of the remainder to be spent over
the next several years. The site clean-up and environmental reserve takes into
account costs that are reasonably foreseeable at this time. As the site
remediation plan is finalized and work is performed, further adjustments of the
reserve may be necessary. In 2002, environmental risk insurance policies
covering the Blue Island refinery site have been procured and bound. Final
policies will be issued pending the insurers' concurrence that the terms of the
remediation contract, as executed, are materially consistent with the proposed
contract submitted as part of the application process. We expect to finalize and
execute the remediation contract in the third quarter of 2002. This insurance
program will allow us to quantify and, within the limits of the policy, cap our
cost to remediate the site, and provide insurance coverage from future third
party claims arising from past or future environmental releases. The remediation
cost overrun policy has a term of ten years and, subject to certain exceptions
and exclusions, provides $25 million in coverage in excess of a self-insured
retention amount of $26 million. The pollution legal liability policy provides
for $25 million in aggregate coverage and per incident coverage in excess of a
self insured retention of $250,000 per incident. We believe this program also
provides governmental agencies financial assurance that, once begun, remediation
of the site will be completed in a timely and prudent manner.
Long-Term Crude Oil Contract
PACC is party to a long-term crude oil supply agreement with PMI Comercio
Internacional, S.A. de C.V ("PEMEX"), an affiliate of Petroleos Mexicanos, the
Mexican state oil company, which supplies approximately 167,000 barrels per day
of Maya crude oil to our Port Arthur refinery. Under the terms of this
agreement, PACC is obligated to buy Maya crude oil from PEMEX, and PEMEX is
obligated to sell to PACC Maya crude oil. An
48
important feature of this agreement is a price adjustment mechanism designed to
minimize the effect of adverse refining margin cycles and to moderate the
fluctuations of the coker gross margin, a benchmark measure of the value of
coker production over the cost of coker feedstocks. This price adjustment
mechanism contains a formula that represents an approximation of the coker gross
margin and provides for a minimum average coker margin of $15 per barrel over
the first eight years of the agreement, which began on April 1, 2001. The
agreement expires in 2011.
On a monthly basis, the coker gross margin, as defined under this
agreement, is calculated and compared to the minimum. Coker gross margins
exceeding the minimum are considered a "surplus" while coker gross margins that
fall short of the minimum are considered a "shortfall." On a quarterly basis,
the surplus and shortfall determinations since the beginning of the contract are
aggregated. Pricing adjustments to the crude oil we purchase is only made when
there exists a cumulative shortfall. When this quarterly aggregation first
reveals that a cumulative shortfall exists, we receive a discount on our crude
oil purchases in the next quarter in the amount of the cumulative shortfall. If
thereafter, the cumulative shortfall incrementally increases, we receive
additional discounts on our crude oil purchases in the succeeding quarter equal
to the incremental increase. Conversely, if thereafter, the cumulative shortfall
incrementally decreases, we repay discounts previously received, or a premium,
on our crude oil purchases in the succeeding quarter equal to the incremental
decrease. Cash crude oil discounts received by us in any one quarter are limited
to $30 million, while our repayment of previous crude oil discounts, or
premiums, is limited to $20 million in any one quarter. Any amounts subject to
the quarterly payment limitations are carried forward and applied in subsequent
quarters.
As of June 30, 2002, a cumulative quarterly surplus of $77.5 million
existed under the contract. As a result, to the extent that we experience
quarterly shortfalls in coker gross margins going forward, the price we pay for
Maya crude oil in succeeding quarters will not be discounted until this
cumulative surplus is offset by future shortfalls. Assuming the WTI less Maya
crude oil differential continues at its second quarter 2002 average of $4.34 per
barrel, and assuming a similar Gulf Coast crack spread, we estimate the current
$77.5 million cumulative surplus would be fully reversed after the second
quarter of 2003. At that time, assuming a continuation of weak market
conditions, we would be eligible to receive discounts on our crude oil purchases
under the PEMEX contract as described above.
Other Commitments
In 1999, we sold crude oil linefill in the pipeline system supplying the
Lima refinery. An agreement is in place that requires us to repurchase
approximately 2.7 million barrels of crude oil in this pipeline system in
September 2002 at then current market prices. The price for WTI crude oil
averaged $26.28 per barrel for the quarter ended June 30, 2002. We have hedged
the economic price risk related to the repurchase obligation through the
purchase of exchange-traded futures contracts. As of June 30, 2002, we had given
notice that we will not extend the terms of this contract beyond September 2002.
We are pursuing the sale of this linefill to another third party, but there is
no assurance that any acceptable arrangement will be entered into prior to the
end of September.
Credit Agreements
As part of the Sabine restructuring, PACC terminated its Winterthur
International Insurance Company Limited oil payment guaranty insurance policy,
which had guaranteed Maya crude oil purchase obligations made under a long-term
agreement with PMI Comercio Internacional, S.A. de C.V., or PMI. PACC also
terminated its $35 million bank working capital facility, which primarily
supported non-Maya crude oil purchase obligations. As such, all PACC crude oil
purchases are supported under the amended PRG working capital facility.
PRG has a credit agreement, which was amended in May 2002 to allow for the
Sabine crude oil purchase obligations, which provides for the issuance of
letters of credit, primarily for the purchases of crude oil, up to the lesser of
$650 million or the amount of a borrowing base calculation. The borrowing base
is calculated with respect to our eligible cash and cash equivalents,
investments, receivables, petroleum inventories, paid but unexpired letters of
credit, and net obligations on swap contracts. As amended, the $650 million
limit can be increased by $50 million at the request of PRG in integral
multiples of $5 million. The credit agreement provides for direct cash
borrowings up to $50 million. Borrowings under the credit agreement are secured
by a lien on substantially all of our cash and cash equivalents, receivables,
crude oil and refined product inventories and trademarks. The borrowing base
associated with such facility at June 30, 2002 was $704.5 million with $457.6
million of the facility utilized for letters of credit. As of June 30, 2002,
there were no direct cash borrowings under the credit agreement.
49
The credit agreement contains covenants and conditions that, among other
things, limit PRG's dividends, indebtedness, liens, investments and contingent
obligations. PRG is also required to comply with certain financial covenants,
including the maintenance of working capital of at least $150 million, the
maintenance of tangible net worth of at least $400 million, as amended, and the
maintenance of minimum levels of balance sheet cash (as defined therein) of $75
million at all times. The covenants also provide for a cumulative cash flow test
that from July 1, 2001 must not be less than zero. In March 2002, PRG received a
waiver regarding the maintenance of the tangible net worth covenant, which
allows for the exclusion of $120 million for the pretax restructuring charge
related to the closure of the Hartford refinery.
Cash Flows from Investing Activities
Cash flows used in investing activities in the six months ended June 30,
2002 were $65.7 million as compared to $78.0 million in the year-earlier period.
Both the six months ended June 30, 2002 and 2001 primarily reflect capital
expenditures. We classify our capital expenditures into two main categories,
mandatory and discretionary. Mandatory capital expenditures, such as for
turnarounds and maintenance, are required to maintain safe and reliable
operations or to comply with regulations pertaining to soil, water and air
contamination or pollution and occupational, safety and health issues. Our total
mandatory capital and refinery maintenance turnaround expenditure budget,
excluding Tier 2 gasoline standards, on-road diesel regulations and the MACT II
regulations described below, is approximately $75 million in 2002, of which
$44.7 million has been spent as of June 30, 2002. Discretionary capital
expenditures are undertaken by us on a voluntary basis after thorough analytical
review and screening of projects based on the expected return on incremental
capital employed. Discretionary capital projects generally involve an expansion
of existing capacity, improvement in product yields and/or a reduction in
operating costs. Accordingly, total discretionary capital expenditures may be
less than budget if cash flow is lower than expected and higher than budget if
cash flow is better than expected. Our discretionary capital expenditure budget
is approximately $30 million in 2002, of which $9.6 million has been spent as of
June 30, 2002. We plan to fund both mandatory and discretionary capital
expenditures for 2002 with available cash and cash flows from operations.
In addition to mandatory capital expenditures, we expect to incur
approximately $525 million over the next five years in order to comply with
environmental regulations discussed below. The Environmental Protection Agency,
or EPA, has promulgated new regulations under the Clean Air Act that establish
stringent sulfur content specifications for gasoline and on-road diesel fuel
designed to reduce air emissions from the use of these products.
Tier 2 Motor Vehicle Emission Standards. In February 2000, the EPA
promulgated the Tier 2 Motor Vehicle Emission Standards Final Rule for all
passenger vehicles, establishing standards for sulfur content in gasoline. These
regulations mandate that the average sulfur content of gasoline at any refinery
not exceed 30 ppm during any calendar year by January 1, 2006, phasing in
beginning on January 1, 2004. We currently expect to produce gasoline under the
new sulfur standards at the Port Arthur refinery prior to January 1, 2004 and,
as a result of the corporate pool averaging provisions of the regulations, will
not be required to meet the new sulfur standards at the Lima refinery until July
1, 2004, a six month deferral. A further delay in the requirement to meet the
new sulfur standards at the Lima refinery through 2005 may be possible through
the purchase of sulfur allotments and credits which arise from a refiner
producing gasoline with a sulfur content below specified levels prior to the end
of 2005, the end of the phase-in period. There is no assurance that sufficient
allotments or credits to defer investment at our Lima refinery will be
available, or if available, at what cost. We believe, based on current estimates
and on a January 1, 2004 compliance date for both the Port Arthur and Lima
refineries, that compliance with the new Tier 2 gasoline specifications will
require capital expenditures in the aggregate through 2005 of approximately $235
million, an increase of $59 million from previous estimates. We have completed
detailed engineering studies that have resulted in revised cost estimates based
on refined implementation plans. Future revisions to these cost estimates may be
necessary. More than 95% of the total investment to meet the Tier 2 gasoline
specifications is expected to be incurred during 2002 through 2004 with the
greatest concentration of spending occurring in 2003 and early 2004.
Low Sulfur Diesel Standards. In January 2001, the EPA promulgated its
on-road diesel regulations, which will require a 97% reduction in the sulfur
content of diesel fuel sold for highway use by June 1, 2006, with full
compliance by January 1, 2010. Regulations for off-road diesel requirements are
pending. We estimate that capital expenditures required to comply with the
diesel standards at our Port Arthur and Lima refineries in the aggregate through
2006 is approximately $245 million, an increase of $20 million from previous
estimates. The revised estimate is based on additional engineering studies and
may be
50
revised further as we move towards finalization of our implementation strategy.
More than 95% of the projected investment is expected to be incurred during 2004
through 2006 with the greatest concentration of spending occurring in 2005.
Since the Lima refinery does not currently produce diesel fuel to on-road
specifications, we are considering an acceleration of the low-sulfur diesel
investment at the Lima refinery in order to capture this incremental product
value. If the investment is accelerated, production of the low-sulfur fuel is
possible by the first quarter of 2005.
Maximum Available Control Technology. On April 11, 2002, the EPA
promulgated regulations to implement Phase II of the petroleum refinery Maximum
Achievable Control Technology rule under the federal Clean Air Act, referred to
as MACT II, which regulates emissions of hazardous air pollutants from certain
refinery units. We expect to spend approximately $45 million in the next three
years related to these new regulations with a majority of the spending evenly
spread out over 2003 and 2004.
Our budget for complying with Tier 2 gasoline standards, on-road diesel
regulations and the MACT II regulations is approximately $45 million in 2002, of
which $15.9 million has been spent as of June 30, 2002. It is our intention to
fund expenditures necessary to comply with these new environmental standards
with cash flow from operations. However, if current weak market conditions
continue, it may not be possible for us to generate sufficient cash flow from
operations to meet these obligations. Accordingly, we are evaluating our
implementation plans and financing alternatives.
In conjunction with the work being performed to comply with the above
regulations, we have initiated a project to expand the Port Arthur refinery to
300,000 - 400,000 barrels per day of crude oil throughput capacity. A
feasibility study is underway and the ultimate scope and outcome of this project
has yet to be determined. We are also evaluating projects to reconfigure the
Lima refinery to process a more sour and heavier crude slate. This initiative is
in a very preliminary stage.
The cash and cash equivalents restricted for investment in capital addition
for the six months ended June 30, 2002 of $4.3 million reflected the portion of
an original $10.0 million in Ohio state revenue bonds that were utilized for
solid waste and wastewater capital projects at the Lima refinery.
Cash Flows from Financing Activities
Cash flows used in financing activities were $209.1 million for the six
months ended June 30, 2002 compared to $2.5 million in the prior year for the
same period. In 2002, Premcor Inc. received net proceeds of $482.0 million from
the sale of its common stock. Premcor Inc. received a net $462.6 million from an
initial public offering of 20.7 million shares of its common stock, $19.1
million from the concurrent sales of 850,000 shares of common stock in the
aggregate to Thomas D. O'Malley, its chairman of the board, chief executive
officer and president, and two of its directors, and $0.3 million from the
exercise of stock options under its stock option plans. The proceeds from the
initial public offering and concurrent sales are committed to reducing the
long-term debt of Premcor Inc.'s subsidiaries, and as of June 30, 2002, Premcor
Inc. had contributed $442.9 million to its subsidiaries for the early repayment
of debt.
In 2002, Premcor Inc.'s subsidiaries redeemed and repurchased portions of
their long-term debt totaling $637.1 million in principal, of which $438.6
million related to PRG long-term debt. In June 2002, PRG redeemed the remaining
$150.4 million of its 9 1/2% Senior Secured Notes due September 15, 2004 at par
and Premcor USA redeemed the remaining $144.4 million of its 10 7/8% Senior
Secured Notes with a $5.2 million premium, mainly from capital contributions
received from Premcor Inc. PRG also made principal payments of $0.6 million on
its outstanding capital lease.
On April 1, 2002, Premcor USA exchanged all of its 11 1/2% Exchangeable
Preferred Stock for 11 1/2% Subordinated Debentures due October 2009. During the
second quarter of 2002, Premcor USA purchased, in the open market, $54.1 million
in aggregate principal amount of its 11 1/2% Subordinated Debentures with a $3.1
million premium, mainly from capital contributions received from Premcor Inc.
Premcor USA may pay the interest on the remaining debentures in-kind until the
April 1, 2003 interest payment, at which time it is required to make interest
payments in cash.
In January 2002, PACC made a $66.2 million principal payment on its bank
senior loan agreement with $59.7 million representing a mandatory prepayment
pursuant to the common security agreement and secured account
51
structure. In June 2002, PACC prepaid the remaining balance of $221.4 million on
the bank senior loan agreement at a $0.9 million premium, with an $84.2 million
net capital contribution from Premcor Inc and available cash.
Cash and cash equivalents restricted for debt service increased by $34.6
million, of which an increase of $42.9 million related to future principal
payments and is included in cash flows from financing activity and a decrease of
$8.3 million related to future interest payments and is included in cash flows
from operating activities. The increase in the amount restricted for principal
payments mainly reflected the new requirement under the amended common security
agreement to maintain a $45.0 million debt service reserve at all times.
We incurred deferred financing costs of $11.1 million related to the
consent process that permitted the Sabine restructuring and the waiver related
to insurance coverage required under the common security agreement.
PRG continues to review alternatives to extend the maturities of its
long-term indebtedness. Although these alternatives may include the issuance of
additional long-term debt, no transaction involving a sale of additional
indebtedness is being pursued at this time. Additionally, we continue to
evaluate the most efficient use of capital and, from time to time, depending
upon market conditions, may seek to purchase certain of our outstanding debt
securities in the open market or by other means, in each case to the extent
permitted by existing covenant restrictions.
Funds generated from operating activities together with existing cash, cash
equivalents and short-term investments and proceeds from asset sales are
expected to be adequate to fund existing requirements for working capital and
capital expenditure programs for the next year. Due to the commodity nature of
our products, our operating results are subject to rapid and wide fluctuations.
While we believe that our maintenance of large cash, cash equivalents and
short-term investment balances and our operating philosophies will be sufficient
to provide us with adequate liquidity through the next year, there can be no
assurance that market conditions will not be worse than anticipated. As
discussed above, future working capital, discretionary capital expenditures,
environmentally mandated spending and acquisitions may require additional debt
or equity capital.
New and Proposed Accounting Standards
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections.
SFAS 145 rescinds SFAS No. 4, Reporting Gains and Losses from the Extinguishment
of Debt; SFAS No. 44, Accounting for Intangible Assets of Motor Carriers; and
SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements.
SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, as it relates to
sale-leaseback transactions and other transactions structured similar to a
sale-leaseback as well as amends other pronouncements to make various technical
corrections. The provisions of SFAS No. 145 as they relate to the rescission of
SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The
provision of this statement related to the amendment to SFAS No. 13 shall be
effective for transactions occurring after May 15, 2002. All other provisions of
this statement shall be effective for financial statements on or after May 15,
2002. As permitted by the statement, we have elected early adoption of SFAS 145
and, accordingly, have included the loss on extinguishment of debt in "Income
from continuing operations" as opposed to as an extraordinary item, net of
taxes, below "Income from continuing operations" in our Statement of Operations.
On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible
Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The adoption of these standards did not have a material
impact on our financial position and results of operations; however, SFAS No.
144 was utilized in the accounting for our announced intention to discontinue
refining operations at the Hartford, Illinois refinery in November 2002.
In July 2001, the Financial Accounting Standards Board approved SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses when a
liability should be recorded for asset retirement obligations and how to measure
this liability. The initial recording of a liability for an asset retirement
obligation will require the recording of a corresponding asset that will be
required to be amortized. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The implementation of SFAS No. 143 is not expected to have
a material impact on our financial position or results of operations.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has issued an exposure draft of a proposed
statement of position ("SOP") entitled Accounting for Certain Costs and
52
Activities Related to Property, Plant and Equipment. If adopted as proposed,
this SOP will require companies to expense as incurred turnaround costs, which
it terms as "the non-capital portion of major maintenance costs." Adoption of
the proposed SOP would require that any existing unamortized turnaround costs be
expensed immediately. If this proposed change were in effect at June 30, 2002,
we would have been required to write-off unamortized turnaround costs of
approximately $104 million. Unamortized turnaround costs will change in 2002 as
maintenance turnarounds are performed and past maintenance turnarounds are
amortized. If adopted in its present form, charges related to this proposed
change would be taken in the first quarter of 2003 and would be reported as a
cumulative effect of an accounting change, net of income tax, in the
consolidated statements of operations.
53
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in our market risk sensitive instruments and positions is
the potential loss from adverse changes in commodity prices and interest rates.
None of our market risk sensitive instruments are held for trading.
Commodity Risk
Our earnings, cash flow and liquidity are significantly affected by a
variety of factors beyond our control, including the supply of, and demand for,
commodities such as crude oil, other feedstocks, gasoline and other refined
products. The demand for these refined products depends on, among other factors,
changes in domestic and foreign economies, weather conditions, domestic and
foreign political affairs, planned and unplanned downtime in refineries,
pipelines and production facilities, production levels, the availability of
imports, the marketing of competitive fuels and the extent of government
regulation. As a result, crude oil and refined product prices fluctuate
significantly, which directly impacts our net sales and operating revenues and
costs of goods sold.
The movement in petroleum prices does not necessarily have a direct
long-term relationship to operating income. The effect of changes in crude oil
prices on our operating results is determined more by the rate at which the
prices of refined products adjust to reflect such changes. We are required to
fix the price on our crude oil purchases approximately two to three weeks prior
to the time when the crude oil can be processed and sold. As a result, we are
exposed to crude oil price movements relative to refined product price movements
during this period. In addition, earnings may be impacted by the write-down of
our LIFO based inventory cost to market value when market prices drop
dramatically compared to our LIFO inventory cost. These potential write-downs
may be recovered in subsequent periods as our inventories turn and market prices
rise.
The nature of our business leads us to maintain a substantial investment in
petroleum inventories. Since petroleum feedstocks and products are essentially
commodities, we have no control over the changing market value of our
investment. We manage the impact of commodity price volatility on our
hydrocarbon inventory position by, among other methods, determining a volumetric
exposure level that we consider appropriate and consistent with normal business
operations. This target inventory position includes both titled inventory and
fixed price purchase and sale commitments. Our current target inventory
position, consisting of sales commitments netted against fixed price purchase
commitments, amounts to a long inventory position of approximately 6 million
barrels.
Prior to the second quarter of 2002, we did not generally price protect any
portion of our target inventory position. However, although we continue to
generally leave the titled portion of our inventory position target fully
exposed to price flucuations, beginning in the second quarter of 2002, we began
to actively mitigate some or all of the price risk related to our target level
of fixed price purchase and sale commitments. These risk management decisions
are based on the relative level of absolute hydrocarbon prices. The economic
effect of our risk management strategy in the second quarter of 2002 was
modestly positive as measured against a fully exposed fixed price commitment
target. In the first quarter of 2002, we benefited by approximately $30 million
from leaving our fixed price commitment target fully exposed in a rising
absolute price environment.
We use several strategies to minimize the impact on profitability of
volatility in feedstock costs and refined product prices. These strategies
generally involve the purchase and sale of exchange-traded, energy-related
futures and options with a duration of six months or less. To a lesser extent we
use energy swap agreements similar to those traded on the exchanges, such as
crack spreads and crude oil options, to better match the specific price
movements in our markets as opposed to the delivery point of the exchange-traded
contract. These strategies are designed to minimize, on a short-term basis, our
exposure to the risk of fluctuations in crude oil prices and refined product
margins. The number of barrels of crude oil and refined products covered by such
contracts varies from time to time. Such purchases and sales are closely managed
and subject to internally established risk standards. The results of these price
risk mitigation activities affect refining cost of sales and inventory costs. We
do not engage in speculative futures or derivative transactions.
We prepared a sensitivity analysis to estimate our exposure to market risk
associated with derivative commodity positions. This analysis may differ from
actual results. The fair value of each derivative commodity
54
position was based on quoted futures prices. As of June 30, 2002, a 10% change
in quoted futures prices would result in a $11.6 million change to the fair
market value of the derivative commodity position and correspondingly the same
change in operating income. As of December 31, 2001, a 10% change in quoted
futures prices would result in a $8.1 million change to the fair market value of
the derivative commodity position and correspondingly the same change in
operating income.
Interest Rate Risk
In the first half of 2002, we repaid $637.1 million of our long-term debt,
leaving an outstanding balance, including current maturities, of $933.4 million
at Premcor USA and Premcor Inc. (of which $889.9 million is at PRG) at June 30,
2002. Our primary interest rate risk is associated with our long-term debt. We
manage this interest rate risk by maintaining a high percentage of our long-term
debt with fixed rates. The weighted average interest rate on our fixed rate
long-term debt is slightly over 10%. We are subject to interest rate risk on our
floating rate loans and any direct borrowings under our credit facility. As of
June 30, 2002, a 1% change in interest rates on our floating rate loans, which
totaled $250 million, would result in a $2.5 million change in pretax income. As
of December 31, 2001, a 1% change in interest rate on the floating rate loans,
which totaled $538 million, would result in a $5.4 million change in pretax
income. As of June 30, 2002 and December 31, 2001, there were no borrowings
under our credit agreement.
55
PART II. - OTHER INFORMATION
ITEM 1. -- Legal Proceedings
The following is an update of developments during the quarter of material
pending legal proceedings to which we or any of our subsidiaries are a party or
to which any of our or their property is subject, including environmental
proceedings that involve potential monetary sanctions of $100,000 or more and to
which a governmental authority is a party.
Blue Island: Federal and State Enforcement. In September 1998, the federal
government filed a complaint, United States v. Clark Refining & Marketing, Inc.,
alleging that the Blue Island refinery violated federal environmental laws
relating to air, water and solid waste. The Illinois Attorney General intervened
in the case. The State of Illinois and Cook County had also brought an action
several years earlier, People ex rel. Ryan v. Clark Refining & Marketing, Inc.,
also alleging violations under environmental laws. In 2002, we reached an
agreement to settle both cases. The consent order in the state case was formally
approved and entered by the state court judge on April 8, 2002, and the federal
court approved the settlement on June 12, 2002. The consent order in the federal
case required payments totaling $6.25 million as civil penalties (plus $0.1
million in interest), which we paid on July 12, 2002, and requires limited
ongoing monitoring at the now-idled refinery. The consent order in the state
case requires an ongoing tank inspection program along with enhanced reporting
obligations and requires that the parties enter a process to complete an
appropriate site remediation program at the Blue Island refinery. The consent
orders dispose of both the federal and state cases.
Legal and Environmental Reserves. As a result of its normal course of
business, we are a party to a number of legal and environmental proceedings. As
of June 30, 2002, we had accrued a total of approximately $100 million, on an
undiscounted basis, for legal and environmental-related obligations that may
result from the matters noted above and other legal and environmental matters.
This accrual includes approximately $78 million (December 31, 2001 - $53
million) for site clean-up and environmental matters associated with the
Hartford and Blue Island refinery closures and retail sites. We are of the
opinion that the ultimate resolution of these claims, to the extent not
previously provided for, will not have a material adverse effect on our
consolidated financial condition, results of operations or liquidity. However,
an adverse outcome of any one or more of these matters could have a material
effect on quarterly or annual operating results or cash flows when resolved in a
future period.
ITEM 2. - Changes in Securities and Use of Proceeds
On April 29, 2002, Premcor Inc.'s Registration Statement on Form S-1 (File
No. 333-70314) was declared effective by the Securities and Exchange Commission
allowing for an initial public offering of its common stock. A total of 20.7
million shares of Premcor Inc.'s common stock were registered and sold in this
offering at an offering price of $24.00 per share, for an aggregate offering
price of $496.8 million, including 2.7 million shares sold pursuant to the
underwriters over-allotment option. Premcor Inc. incurred $31.0 million in
underwriters' fees and $3.2 million in other fees and expenses in connection
with the offering, yielding net proceeds of $462.6 million. Morgan Stanley and
Credit Suisse First Boston served as managing underwriters for the offering.
On April 30, 2002, Premcor Inc. filed a Registration Statement on Form S-8
to register 850,000 shares of its common stock. Of those shares, 750,000 shares
were sold to Thomas D. O'Malley, Premcor Inc.'s chairman of the board, chief
executive officer and president, and 50,000 shares each were sold to two
directors of Premcor Inc. The shares were sold at a price per share of $22.50,
which was the initial public offering price per share less the underwritten
commission per share. Premcor Inc. received proceeds of approximately $19.1
million from these sales. The net proceeds from the initial public offering and
the other sales described above were committed to retire long-term debt of
Premcor Inc.'s subsidiaries. As of June 30, 2002, $442.9 million of the net
proceeds had been contributed to Premcor Inc.'s subsidiaries and used to redeem
and repurchase outstanding long-term debt securities.
Premcor Inc. registered an additional 7.1 million shares of its common
stock via the Registration Statement on Form S-8 filed on April 30, 2002. These
shares are reserved for issuance under the company's three stock incentive
plans. As of June 30, 2002, options to purchase 5.4 million shares of Premcor
Inc. common stock were outstanding.
56
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation of Premcor Inc.
(Incorporated by reference to Exhibit 3.1 filed with Premcor Inc.'s
Registration Statement on Form S-1/A (Registration No. 333-70314)).
3.2 Amended and Restated By-Laws of Premcor Inc. (Incorporated by
reference to Exhibit 3.2 filed with Premcor Inc.'s Registration
Statement on Form S-1/A (Registration No. 333-70314)).
3.3 Restated Certificate of Incorporation of The Premcor Refining Group
Inc. ("PRG") (f/k/a Clark Refining & Marketing, Inc. and Clark Oil &
Refining Corporation) effective as of February 1, 1993 (Incorporated
by reference to Exhibit 3.1 filed with PRG's Annual Report on Form
10-K, for the year ended December 31, 2000 (Commission File No.
1-11392)).
3.4 Certificate of Amendment to Certificate of Incorporation of PRG (f/k/a
Clark Refining & Marketing, Inc. and Clark Oil & Refining Corporation)
effective as of September 30, 1993 (Incorporated by reference to
Exhibit 3.2 filed with PRG's Annual Report on Form 10-K, for the year
ended December 31, 2000 (Commission File No. 1-11392)).
3.5 Certificate of Amendment of Restated Certificate of Incorporation of
PRG (f/k/a Clark Refining & Marketing, Inc. and Clark Oil & Refining
Corporation) effective as of May 9, 2000 (Incorporated by reference to
Exhibit 3.3 filed with PRG's Annual Report on Form 10-K, for the year
ended December 31, 2000 (Commission File No. 1-11392)).
3.6 By-laws of PRG (f/k/a Clark Refining & Marketing, Inc. and Clark Oil &
Refining Corporation) (Incorporated by reference to Exhibit 3.2 filed
with PRG's Registration Statement on Form S-1 (Registration No.
33-28146)).
3.7 Restated Certificate of Incorporation of Premcor USA Inc. ("Premcor
USA") (formerly known as Clark USA, Inc.) effective as of December 28,
1994 (Incorporated by reference to Exhibit 3.1 filed with Premcor
USA's Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
3.8 Certificate of Amendment of Certificate of Incorporation of Premcor
USA (formerly known as Clark USA, Inc.) effective as of February 23,
1995 (Incorporated by reference to Exhibit 3.2 filed with Premcor
USA's Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
3.9 Certificate of Amendment of Certificate of Incorporation of Premcor
USA (formerly known as Clark USA, Inc.) effective as of November 3,
1995 (Incorporated by reference to Exhibit 3.3 filed with Premcor
USA's Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
3.10 Certificate of Amendment of Certificate of Incorporation of Premcor
USA (formerly known as Clark USA, Inc.) effective as of October 1,
1997 (Incorporated by reference to Exhibit 3.4 filed with Premcor
USA's Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
3.11 Certificate of Amendment of Certificate of Incorporation of Premcor
USA (formerly known as Clark USA, Inc.) effective as of October 1,
1997 (Incorporated by reference to Exhibit 3.5 filed with Premcor
USA's Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
3.12 Certificate of Amendment of Certificate of Incorporation of Premcor
USA (formerly known as Clark USA, Inc.) effective as of October 1,
1997 (Incorporated by reference to Exhibit 3.6 filed with Premcor
USA's Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
57
Exhibit
Number Description
------- -----------
3.13 Certificate of Amendment of Certificate of Incorporation of Premcor
USA (formerly known as Clark USA, Inc.) effective as of January 15,
1998 (Incorporated by reference to Exhibit 3.7 filed with Premcor
USA's Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
3.14 Certificate of Amendment of Certificate of Incorporation of Premcor
USA (formerly known as Clark USA, Inc.) effective as of December 28,
1999 (Incorporated by reference to Exhibit 3.8 filed with Premcor
USA's Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
3.15 Certificate of Amendment of Certificate of Incorporation of Premcor
USA (formerly known as Clark USA, Inc.) effective as of May 10, 2000
(Incorporated by reference to Exhibit 3.9 filed with Premcor USA's
Annual Report on Form 10-K, for the year ended December 31, 2000
(Commission File No. 1-13514)).
3.16 By-laws of Premcor USA (formerly known as Clark USA, Inc.)
(Incorporated by reference to Exhibit 3.2 filed with Premcor USA's
(formerly known as Clark USA, Inc.) Current Report on Form 8-K, dated
February 27, 1995 (Registration No. 33-59144)).
4.1 Common Stock Certificate of Premcor Inc. (Incorporated by reference to
Exhibit 4.1 filed with Premcor Inc.'s Registration Statement on Form
S-1/A (Registration No. 333-70314)).
4.2 Indenture, dated as of August 10, 1998, between PRG (f/k/a Clark
Refining & Marketing, Inc.) and Bankers Trust Company, as Trustee,
including the form of the 8 5/8% Senior Notes due 2008 (Incorporated
by reference to Exhibit 4.1 filed with PRG's Registration Statement on
Form S-4 (Registration No. 333-64387)).
4.3 Indenture dated as of November 21, 1997, between PRG (f/k/a Clark
Refining & Marketing, Inc.) and Bankers Trust Company, as Trustee,
including the form of 8 3/8% Senior Notes due 2007 (Incorporated by
reference to Exhibit 4.5 filed with PRG's Registration Statement on
Form S-4 (Registration No. 333-42431)).
4.4 Indenture dated as of November 21, 1997, between PRG (f/k/a Clark
Refining & Marketing, Inc.) and Marine Midland Bank, including the
form of 8 7/8% Senior Subordinated Notes due 2007 (Incorporated by
reference to Exhibit 4.6 filed with PRG's Registration Statement on
Form S-4 (Registration No. 333-42431)).
4.5 Supplemental Indenture dated as of November 21, 1997, between PRG
(f/k/a Clark Refining & Marketing, Inc.) and Marine Midland Bank
(Incorporated by reference to Exhibit 6.1 filed with PRG's
Registration Statement on Form S-4 (Registration No. 333-42431)).
4.6 Indenture, dated as of October 1, 1997, between Premcor USA (f/k/a
Clark USA, Inc.) and Bankers Trust Company, as Trustee, including form
of 11 1/2% Subordinated Exchange Debentures due 2009 (Incorporated by
reference to Exhibit 4.2 filed with Premcor USA's (f/k/a Clark USA,
Inc.) Registration Statement on Form S-4 (Registration No.
333-42457)).
4.7 Supplemental Indenture, dated as of August 10, 1998, to Indenture,
dated as of October 1, 1997, between Premcor USA (f/k/a Clark USA,
Inc.) and Bankers Trust Company, as Trustee (Incorporated by reference
to Exhibit 4.4 filed with Premcor USA's Annual Report on Form 10-K for
the year ended December 31, 1998 (Commission File No. 1-13514)).
4.8 Indenture, dated as of August 19, 1999, among Sabine River Holding
Corp. ("Sabine"), Neches River Holding Corp. ( "Neches "), Port Arthur
Finance Corp. ( "PAFC "), Port Arthur Coker Company L.P. ( "PACC "),
HSBC Bank USA, the Capital Markets Trustee, and Bankers Trust Company,
as Collateral Trustee (Incorporated by reference to Exhibit 4.01 filed
with PAFC's Registration Statement on Form S-4 (Registration No.
333-92871)).
58
Exhibit
Number Description
------- -----------
4.9 First Supplemental Indenture, dated as of June 6, 2002, among PRG,
Sabine, Neches, PACC, PAFC, Deutsche Bank Trust Company Americas, as
Collateral Trustee, and HSBC Bank USA, as Capital Markets Trustee
(Incorporated by reference to Exhibit 4.1 filed with PRG's Current
Report on Form 8-K dated June 6, 2002 (Registration No 1-11392)).
4.10 Form of 12 1/2% Senior Secured Notes due 2009 (Incorporated by
reference to Exhibit 4.02 filed with PAFC's Registration Statement on
Form S-4 (Registration No. 333-92871)).
4.11 Amended and Restated Common Security Agreement, dated as of June 6,
2002, among Sabine, PRG, PAFC, PACC, Neches, Deutsche Bank Trust
Company Americas, as Collateral Trustee and Depositary Bank, and HSBC
Bank USA, as Capital Markets Trustee (Incorporated by reference to
Exhibit 4.2 filed with PRG's Current Report on Form 8-K dated June 6,
2002 (Registration No 1-11392)).
4.12 Amended and Restated Transfer Restrictions Agreement, dated as of June
6, 2002, among PAFC, PACC, Premcor Inc., Sabine, Neches, Deutsche Bank
Trust Company Americas, as Collateral Trustee, and HSBC Bank USA, as
Capital Markets Trustee (Incorporated by reference to Exhibit 4.4
filed with PRG's Current Report on Form 8-K dated June 6, 2002
(Registration No 1-11392)).
4.13 Second Amended and Restated Stockholders' Agreement, dated as of
November 3, 1997, between Premcor USA (f/k/a Clark USA, Inc.) and
Occidental C.O.B. Partners (Incorporated by reference to Exhibit 4.19
filed with Premcor Inc.'s Registration Statement on Form S-1
(Registration No. 333-70314)).
4.14 Stockholder Agreement, dated as of March 9, 1999, among Premcor Inc.
(f/k/a Clark Refining Holdings Inc.), Blackstone Capital Partners III
Merchant Banking Fund L.P and Marshall A. Cohen (Incorporated by
reference to Exhibit 4.20 filed with Premcor Inc.'s Registration
Statement on Form S-1 (Registration No. 333-70314)).
4.15 Registration Rights Agreement, dated as of April 16, 2002, between
Blackstone Capital Partners III Merchant Banking Fund L.P., Blackstone
Offshore Capital Partners III L.P., Blackstone Family Investment
Partnership III, and Premcor Inc. (Incorporated by reference to
Exhibit 4.21 filed with Premcor Inc.'s Registration Statement on Form
S-1/A (Registration No. 333-70314)).
4.16 Registration Rights Agreement, dated as of June 6, 2002, among PAFC,
Sabine, PRG, PACC, and Neches (Incorporated by reference to Exhibit
4.3 filed with PRG's Current Report on Form 8-K dated June 6, 2002
(Registration No 1-11392)).
10.1 Employment Agreement, dated as of January 30, 2002, of Thomas D.
O'Malley (Incorporated by reference to Exhibit 10.13 filed with PRG's
Annual Report on Form 10-K for the year ended December 31, 2001 (File
No. 001-11392)).
10.2 First Amendment to Employment Agreement, dated March 18, 2002, of
Thomas D. O'Malley (Incorporated by reference to Exhibit 10.14 filed
with PRG's Annual Report on Form 10-K for the year ended December 31,
2001 (File No. 001-11392)).
10.3 Amended and Restated Employment Agreement, dated as of June 1, 2002,
of William E. Hantke (filed herewith).
10.4 Amended and Restated Employment Agreement, dated as of June 1, 2002,
of Henry M. Kuchta (filed herewith).
10.5 Amended and Restated Employment Agreement, dated as of June 1, 2002,
of Jeffry N. Quinn (filed herewith).
59
Exhibit
Number Description
------- -----------
10.6 Amended and Restated Employment Agreement, dated as of June 1, 2002,
of Joseph D. Watson (filed herewith).
10.7 Premcor Inc. 2002 Equity Incentive Plan (Incorporated by reference to
Exhibit 10.19 filed with PRG's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 001-11392)).
10.8 Premcor Inc. 2002 Special Stock Incentive Plan (Incorporated by
reference to Exhibit 10.20 filed with PRG's Annual Report on Form 10-K
for the year ended December 31, 2001 (File No. 001-11392)).
10.9 Letter Agreement, dated as of February 1, 2002, between Premcor Inc.
and Wilkes McClave III (Incorporated by reference to Exhibit 10.21
filed with PRG's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 001-11392)).
10.10 Letter Agreement, dated as of February 1, 2002, between Premcor Inc.
and Jefferson F. Allen (Incorporated by reference to Exhibit 10.22
filed with PRG's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 001-11392)).
10.11 Termination Agreement, dated as of January 31, 2002, between Premcor
Inc. and William C. Rusnack (Incorporated by reference to Exhibit
10.39 filed with Premcor Inc.'s Registration Statement on Form S-1/A
(Registration No. 333-70314)).
10.12 Termination Agreement, dated as of January 31, 2002, between Premcor
Inc. and Ezra C. Hunt (Incorporated by reference to Exhibit 10.40
filed with Premcor Inc.'s Registration Statement on Form S-1/A
(Registration No. 333-70314)).
10.13 Second Amended and Restated Credit Agreement, dated as of May 29,
2002, among PRG, Deutsche Bank Trust Company Americas, as
Administrative Agent and Collateral Agent, TD Securities (USA) Inc.,
as Syndication Agent, Fleet National Bank, as Documentation Agent, and
other financial institutions party hereto (Incorporated by reference
to Exhibit 10.1 filed with PRG's Current Report on Form 8-K dated June
6, 2002 (Registration No 1-11392)).
10.14 Premcor Pension Plan (filed herewith).
10.15 Premcor Inc. Senior Executive Retirement Plan (filed herewith).
10.16 Premcor Retirement Savings Plan (filed herewith).
10.17 First Amendment to the Premcor Retirement Savings Plan (filed
herewith).
10.18 Premcor Pension Restoration Plan (filed herewith).
15.01 Awareness letter dated August 13, 2002, from Deloitte & Touche LLP
concerning the unaudited interim financial information for June 30,
2002 and 2001 (filed herewith).
18.01 Preferability letter, dated May 8, 2002, from Deloitte & Touche LLP
concerning the Port Arthur Coker Company's change in method of
accounting for crude oil and blendstock inventories from first-in
first-out ("FIFO") to last-in first-out ("LIFO") (Incorporated by
reference to Exhibit 18.01 filed with Sabine's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 (File No. 333-92871)).
99.1 Section 906 Chief Executive Officer certificate (filed herewith).
99.2 Section 906 Chief Financial Officer certificate (filed herewith).
60
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the period covered by
this report and up to and including the date of filing of this report:
(1) PRG filed a report dated May 20, 2002 (announcing the commencement
of a consent solicitation process initiated by Sabine that would
result in PRG owning 100% of the outstanding common stock of
Sabine.),
(2) PRG filed a report dated June 20, 2002 (announcing the
restructuring allowed under a consent solicitation process, which
resulted in PRG owning 100% of the outstanding common stock of
Sabine. This report included the required pro forma financial
statements of the combined PRG and Sabine.),
(3) Premcor USA filed a report dated June 20, 2002 (announcing the
restructuring allowed under a consent solicitation process, which
resulted in Premcor USA indirectly owning 100% of the outstanding
common stock of Sabine. This report included the required pro forma
financial statements of the combined Premcor USA and Sabine.), and
(4) Premcor Inc. furnished a report dated August 7, 2002 (announcing
the operating results of the second quarter and first half of
2002).
61
(5) SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMCOR INC.
PREMCOR USA INC.
THE PREMCOR REFINING GROUP INC.
(Co-Registrants)
/s/ Dennis R. Eichholz
-----------------------------------
Dennis R. Eichholz
Controller (principal
accounting officer and
duly authorized officer)
August 13, 2002
62