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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 September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Specified in its
Commission File Charter, Principal Office Address and State of I.R.S. Employer
Number Telephone Number Incorporation Identification No.
- --------------- -------------------------------------------- ------------- ------------------
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 November 1, 2002:
Premcor Inc. 57,926,435 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
September 30, 2002
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Premcor Inc.:
Independent Accountants' Report ................................................................. 2
Condensed Consolidated Balance Sheets as of December 31, 2001 and September 30, 2002 ............ 3
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2001 and 2002 ............................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001
and 2002 .................................................................................... 5
Premcor USA Inc.:
Independent Accountants' Report ................................................................. 6
Condensed Consolidated Balance Sheets as of December 31, 2001 (as restated) and
September 30, 2002 .......................................................................... 7
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2001 (as restated) and 2002 ................................. 8
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001
(as restated) and 2002 ..................................................................... 9
The Premcor Refining Group Inc.:
Independent Accountants' Report ................................................................. 10
Condensed Consolidated Balance Sheets as of December 31, 2001 (as restated) and
September 30, 2002 .......................................................................... 11
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2001 (as restated) and 2002 ................................. 12
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001
(as restated) 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 ............. 34
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................................ 54
Item 4. Controls and Procedures ........................................................................... 55
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
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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 two
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 due to 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 due to 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 September 30, 2002, the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 2001 and 2002, and the related condensed consolidated
statements of cash flows for the nine-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with 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
November 6, 2002
2
PREMCOR INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions, except share data)
December 31, September 30,
2001 2002
------------ -------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 510.1 $ 156.3
Short-term investments .......................................................... 1.7 1.7
Cash and cash equivalents restricted for debt service ........................... 30.8 51.9
Accounts receivable, net of allowance of $1.3 and $3.2 .......................... 148.3 200.0
Inventories ..................................................................... 318.3 367.3
Prepaid expenses and other ...................................................... 52.3 30.7
Assets held for sale ............................................................ -- 61.2
-------- --------
Total current assets ......................................................... 1,061.5 869.1
PROPERTY, PLANT AND EQUIPMENT, NET ................................................ 1,299.6 1,213.7
DEFERRED INCOME TAXES ............................................................. -- 78.8
OTHER ASSETS ...................................................................... 148.7 130.9
-------- --------
$ 2,509.8 $ 2,292.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................ $ 366.4 $ 441.4
Accrued expenses ................................................................ 95.4 92.2
Accrued taxes other than income ................................................. 35.7 28.2
Current portion of long-term debt ............................................... 81.4 15.6
-------- --------
Total current liabilities .................................................... 578.9 577.4
LONG-TERM DEBT .................................................................... 1,391.4 909.7
DEFERRED INCOME TAXES ............................................................. 16.7 --
OTHER LONG-TERM LIABILITIES ....................................................... 109.1 146.8
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, 57,473,935 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 ................................................................... 323.7 851.6
Accumulated deficit ............................................................... (29.3) (193.6)
-------- --------
Total common stockholders' equity ............................................ 294.7 658.6
-------- --------
$ 2,509.8 $ 2,292.5
========= =========
The accompanying notes are an integral part of these financial statements.
3
PREMCOR INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; amounts in millions, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- --------------------------------
2001 2002 2001 2002
--------------- ------------ -------------- --------------
NET SALES AND OPERATING REVENUES ...................... $ 1,666.2 $ 1,899.8 $ 5,170.9 $ 4,807.1
EXPENSES:
Cost of sales ...................................... 1,390.8 1,757.8 4,133.7 4,342.8
Operating expenses ................................. 104.9 109.6 355.8 338.2
General and administrative expenses ................ 16.1 11.9 45.3 40.8
Stock option compensation expense .................. -- 4.2 -- 9.9
Depreciation ....................................... 13.7 11.5 39.6 35.7
Amortization ....................................... 9.5 9.3 28.1 29.2
Refinery restructuring and other charges ........... 26.2 14.3 176.2 172.9
---------- --------- --------- ---------
1,561.2 1,918.6 4,778.7 4,969.5
OPERATING INCOME (LOSS) ............................... 105.0 (18.8) 392.2 (162.4)
Interest and finance expense ....................... (39.3) (22.0) (121.6) (89.4)
Gain (loss) on extinguishment of long-term debt .... 8.7 (0.2) 8.7 (19.5)
Interest income .................................... 5.5 1.5 15.3 7.9
---------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTEREST ......................... 79.9 (39.5) 294.6 (263.4)
Income tax (provision) benefit ..................... (31.4) 15.0 (78.7) 99.9
Minority interest .................................. (1.5) -- (12.4) 1.7
---------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS .............. 47.0 (24.5) 203.5 (161.8)
Loss from discontinued operations, net of income tax
benefit of $5.5 .................................. -- -- (8.5) --
---------- --------- --------- ---------
NET INCOME (LOSS) ..................................... 47.0 (24.5) 195.0 (161.8)
Preferred stock dividends .......................... (2.7) -- (7.9) (2.5)
---------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS .... $ 44.3 $ (24.5) $ 187.1 $ (164.3)
========== ========= ========= =========
Basic net income (loss) per common share:
Income (loss) from continuing operations ............ $ 1.39 $ (0.43) $ 6.15 $ (3.57)
Discontinued operations ............................. -- -- (0.27) --
---------- --------- --------- ---------
Net income (loss) ................................... $ 1.39 $ (0.43) $ 5.88 $ (3.57)
========== ========= ========= =========
Weighted average common shares outstanding .......... 31.8 57.5 31.8 46.0
Diluted net income (loss) per common share:
Income (loss) from continuing operations ............ $ 1.28 $ (0.43) $ 5.67 $ (3.57)
Discontinued operations ............................. -- -- (0.25) --
---------- --------- --------- ---------
Net income (loss) ................................... $ 1.28 $ (0.43) $ 5.42 $ (3.57)
========== ========= ========= =========
Weighted average common shares outstanding .......... 34.5 57.5 34.5 46.0
Pro forma for adoption of SFAS No. 123:
Income (loss) from continuing operations ............ $ 46.9 $ (24.3) $ 203.1 $ (161.9)
Net income (loss) available to common stockholders .. $ 44.2 $ (24.3) $ 186.7 $ (164.4)
Net income (loss) per common share:
Basic ............................................ $ 1.39 $ (0.43) $ 5.87 $ (3.57)
Diluted .......................................... $ 1.28 $ (0.43) $ 5.41 $ (3.57)
The accompanying notes are an integral part of these financial statements.
4
PREMCOR INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, amounts in millions)
For the Nine Months
Ended September 30,
-------------------------------------
2001 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................. $ 195.0 $ (161.8)
Discontinued operations ........................................................... 8.5 --
Adjustments:
Depreciation ................................................................... 39.6 35.7
Amortization ................................................................... 37.1 36.9
Deferred income taxes .......................................................... 71.2 (100.5)
Inventory write-down to market ................................................. 8.7 --
Stock option compensation expense .............................................. -- 9.9
Minority interest .............................................................. 12.4 (1.7)
Refinery restructuring and other charges ....................................... 125.3 103.6
Write-off of deferred financing costs .......................................... 0.6 9.5
Write-off of equity investment ................................................. -- 4.2
Other, net ..................................................................... 0.4 15.8
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other ................................ 41.9 (30.1)
Inventories .................................................................... (12.0) (49.0)
Accounts payable, accrued expenses, and taxes other than income ................ (105.4) 64.5
Cash and cash equivalents restricted for debt service .......................... (30.6) 24.1
------- --------
Net cash provided by (used in) operating activities of continuing operations . 392.7 (38.9)
Net cash used in operating activities of discontinued operations ............. (2.5) (3.3)
------- --------
Net cash provided by (used in) operating activities .......................... 390.2 (42.2)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment .................................... (57.8) (64.1)
Expenditures for turnaround ....................................................... (41.3) (33.4)
Cash and cash equivalents restricted for investment in capital additions .......... -- 5.5
Other ............................................................................. 0.6 0.2
------- --------
Net cash used in investing activities ........................................ (98.5) (91.8)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and capital lease payments ......................................... (58.9) (645.2)
Proceeds from the issuance of common stock, net ................................... -- 482.0
Cash and cash equivalents restricted for debt repayment ........................... -- (45.2)
Deferred financing costs .......................................................... (9.6) (11.4)
Preferred stock dividend .......................................................... (0.3) --
------- --------
Net cash used in financing activities ........................................ (68.8) (219.8)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 222.9 (353.8)
CASH AND CASH EQUIVALENTS, beginning of period ...................................... 290.1 510.1
------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................ $ 513.0 $ 156.3
======= ========
The accompanying notes are an integral part of these financial statements.
5
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 September 30, 2002, the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 2001 and 2002, and the related condensed consolidated
statements of cash flows for the nine-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with 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 report 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
November 6, 2002
6
PREMCOR USA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions, except share data)
December 31, September 30,
2001 2002
------------- -------------
ASSETS (as restated, (unaudited)
see Note 1)
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 508.0 $ 109.3
Short-term investments .................................................... 1.7 1.7
Cash and cash equivalents restricted for debt service ..................... 30.8 51.9
Accounts receivable, net of allowance of $1.3 and $3.2 .................... 148.3 199.9
Receivable from affiliates ................................................ 40.7 67.9
Inventories ............................................................... 318.3 367.3
Prepaid expenses and other ................................................ 42.7 30.7
Assets held for sale ...................................................... -- 61.2
----------- -----------
Total current assets ................................................... 1,090.5 889.9
PROPERTY, PLANT AND EQUIPMENT, NET .......................................... 1,299.6 1,213.7
DEFERRED INCOME TAXES ....................................................... -- 77.4
OTHER ASSETS ................................................................ 144.5 131.0
----------- -----------
$ 2,534.6 $ 2,312.0
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 366.4 $ 441.3
Payable to affiliates ..................................................... 28.4 62.7
Accrued expenses .......................................................... 99.4 93.2
Accrued taxes other than income ........................................... 35.7 28.2
Current portion of long-term debt ......................................... 81.4 15.6
----------- -----------
Total current liabilities .............................................. 611.3 641.0
LONG-TERM DEBT .............................................................. 1,391.4 909.7
DEFERRED INCOME TAXES ....................................................... 16.7 --
OTHER LONG-TERM LIABILITIES ................................................. 109.1 146.8
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 . -- --
Paid-in capital ........................................................... 316.0 805.1
Accumulated deficit ....................................................... (28.9) (190.6)
----------- -----------
Total common stockholder's equity ...................................... 287.1 614.5
----------- -----------
$ 2,534.6 $ 2,312.0
=========== ===========
The accompanying notes are an integral part of these financial statements.
7
PREMCOR USA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, amounts in millions)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------------- -------------------------------
2001 2002 2001 2002
--------------- -------------- ------------- --------------
(as restated, (as restated,
see Note 1) see Note 1)
NET SALES AND OPERATING REVENUES ........................ $ 1,666.2 $ 1,899.8 $ 5,170.9 $ 4,807.1
EXPENSES:
Cost of sales ......................................... 1,390.8 1,757.8 4,133.7 4,342.8
Operating expenses .................................... 104.9 109.6 355.8 338.2
General and administrative expenses ................... 16.1 11.7 45.2 40.5
Stock option compensation expense ..................... -- 4.2 -- 9.9
Depreciation .......................................... 13.7 11.5 39.6 35.7
Amortization .......................................... 9.5 9.3 28.1 29.2
Refinery restructuring and other charges .............. 26.2 10.1 176.2 168.7
--------- --------- --------- ---------
1,561.2 1,914.2 4,778.6 4,965.0
OPERATING INCOME (LOSS) ................................. 105.0 (14.4) 392.3 (157.9)
Interest and finance expense .......................... (39.3) (22.0) (121.6) (89.4)
Gain (loss) on extinguishment of long-term debt ....... 8.7 (0.2) 8.7 (19.5)
Interest income ....................................... 5.5 1.5 15.3 7.4
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTEREST .......................... 79.9 (35.1) 294.7 (259.4)
Income tax (provision) benefit ....................... (31.4) 13.4 (78.2) 98.5
Minority interest .................................... (1.5) -- (12.4) 1.7
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............... 47.0 (21.7) 204.1 (159.2)
Loss from discontinued operations, net of income
tax benefit of $5.5 ................................ -- -- (8.5) --
--------- --------- --------- ---------
NET INCOME (LOSS) ...................................... 47.0 (21.7) 195.6 (159.2)
Preferred stock dividends ............................ (2.7) -- (7.9) (2.5)
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDER ................................... $ 44.3 $ (21.7) $ 187.7 $ (161.7)
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
8
PREMCOR USA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, amounts in millions)
For the Nine Months
Ended September 30,
---------------------------------------
2001 2002
----------------- -----------------
(as restated,
see Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ 195.6 $ (159.2)
Discontinued operations .............................................................. 8.5 --
Adjustments:
Depreciation ...................................................................... 39.6 35.7
Amortization ...................................................................... 37.1 36.9
Deferred income taxes ............................................................. 71.2 (99.1)
Inventory write-down to market .................................................... 8.7 --
Stock option compensation expense ................................................. -- 9.9
Minority interest ................................................................. 12.4 (1.7)
Refinery restructuring and other charges .......................................... 125.3 103.6
Write-off of deferred financing costs ............................................. 0.6 9.5
Other, net ........................................................................ 0.5 15.8
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other ................................... 44.7 (39.6)
Inventories ....................................................................... (12.0) (49.0)
Accounts payable, accrued expenses, and taxes other than income ................... (99.3) 61.3
Affiliate receivables and payables ................................................ (11.7) 7.1
Cash and cash equivalents restricted for debt service ............................. (30.6) 24.1
------- --------
Net cash provided by (used in) operating activities of continuing operations .... 390.6 (44.7)
Net cash used in operating activities of discontinued operations ................ (2.5) (3.3)
------- --------
Net cash provided by (used in) operating activities ............................. 388.1 (48.0)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment ....................................... (57.8) (64.1)
Expenditures for turnaround .......................................................... (41.3) (33.4)
Cash and cash equivalents restricted for investment in capital additions ............. -- 5.5
Other ................................................................................ 0.6 0.2
------- --------
Net cash used in investing activities ........................................... (98.5) (91.8)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and capital lease payments ............................................ (58.9) (645.2)
Capital contributions, net ........................................................... -- 442.9
Cash and cash equivalents restricted for debt repayment .............................. -- (45.2)
Deferred financing costs ............................................................. (9.6) (11.4)
Preferred stock dividend ............................................................. (0.3) --
------- --------
Net cash used in financing activities ........................................... (68.8) (258.9)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... 220.8 (398.7)
CASH AND CASH EQUIVALENTS, beginning of period ......................................... 290.1 508.0
------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................... $ 510.9 $ 109.3
======= ========
The accompanying notes are an integral part of these financial statements.
9
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. and subsidiaries (the "Company") as of September 30,
2002, the related condensed consolidated statements of operations for the
three-month and nine-month periods ended September 30, 2001 and 2002, and the
related condensed consolidated statements of cash flows for the nine-month
periods then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with 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 report dated February 11, 2002 (March 5, 2002 as to
Note 18 and August 5, 2002 as to Notes 1 and 2), 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
November 6, 2002
10
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions, except share data)
December 31, September 30,
2001 2002
------------- -------------
ASSETS (as restated, (unaudited)
see Note 1)
CURRENT ASSETS:
Cash and cash equivalents .................................................................... $ 482.5 $ 107.8
Short-term investments ....................................................................... 1.7 1.7
Cash and cash equivalents restricted for debt service ........................................ 30.8 51.9
Accounts receivable, net of allowance of $1.3 and $3.2 ....................................... 148.3 199.9
Receivable from affiliates ................................................................... 31.3 54.0
Inventories .................................................................................. 318.3 367.3
Prepaid expenses and other ................................................................... 42.7 30.6
Assets held for sale ......................................................................... -- 61.2
--------- ---------
Total current assets ...................................................................... 1,055.6 874.4
PROPERTY, PLANT AND EQUIPMENT, NET ............................................................. 1,298.7 1,212.8
DEFERRED INCOME TAXES .......................................................................... -- 42.0
OTHER ASSETS ................................................................................... 142.8 131.0
--------- ---------
$ 2,497.1 $ 2,260.2
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................................. $ 366.4 $ 441.3
Payable to affiliates ........................................................................ 49.8 84.3
Accrued expenses ............................................................................. 93.1 85.4
Accrued taxes other than income .............................................................. 35.7 28.2
Current portion of long-term debt ............................................................ 81.4 15.6
--------- ---------
Total current liabilities ................................................................. 626.4 654.8
LONG-TERM DEBT ................................................................................. 1,247.0 869.6
DEFERRED INCOME TAXES .......................................................................... 46.6 --
OTHER LONG-TERM LIABILITIES .................................................................... 109.1 146.8
COMMITMENTS AND CONTINGENCIES .................................................................. -- --
MINORITY INTEREST .............................................................................. 24.2 --
COMMON STOCKHOLDER'S EQUITY:
Common, $0.01 par value per share, 1000 authorized, 100 issued and outstanding................ -- --
Paid-in capital .............................................................................. 243.0 537.0
Retained earnings ............................................................................ 200.8 52.0
--------- ---------
Total common stockholder's equity ......................................................... 443.8 589.0
--------- ---------
$ 2,497.1 $ 2,260.2
========= =========
The accompanying notes are an integral part of these financial statements.
11
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, amounts in millions)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
2001 2002 2001 2002
---- ---- ---- ----
(as restated, (as restated,
see Note 1) see Note 1)
NET SALES AND OPERATING REVENUES ......................................... $ 1,666.2 $ 1,899.8 $ 5,170.9 $ 4,807.1
EXPENSES:
Cost of sales .......................................................... 1,391.2 1,758.2 4,135.0 4,346.5
Operating expenses ..................................................... 104.8 109.3 355.3 337.6
General and administrative expenses .................................... 16.0 11.7 45.1 40.5
Stock option compensation expense ...................................... -- 4.2 -- 9.9
Depreciation ........................................................... 13.7 11.5 39.6 35.7
Amortization ........................................................... 9.5 9.3 28.1 29.2
Refinery restructuring and other charges ............................... 26.2 10.1 176.2 168.7
--------- --------- --------- ---------
1,561.4 1,914.3 4,779.3 4,968.1
OPERATING INCOME (LOSS) .................................................. 104.8 (14.5) 391.6 (161.0)
Interest and finance expense ........................................... (34.5) (20.8) (107.0) (78.8)
Gain (loss) on extinguishment of long-term debt ........................ 0.8 -- 0.8 (9.3)
Interest income ........................................................ 5.1 1.5 13.9 5.9
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST .................................................. 76.2 (33.8) 299.3 (243.2)
Income tax (provision) benefit ......................................... (30.1) 12.7 (97.4) 92.7
Minority interest ...................................................... (1.5) -- (12.4) 1.7
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................................. 44.6 (21.1) 189.5 (148.8)
Loss from discontinued operations, net of income tax
benefit of $5.5 ..................................................... -- -- (8.5) --
--------- --------- --------- ---------
NET INCOME (LOSS) ........................................................ $ 44.6 $ (21.1) $ 181.0 $ (148.8)
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
12
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, amounts in millions)
For the Nine Months
Ended September 30,
--------------------------
2001 2002
------------ --------
(as restated
see Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................................................... $ 181.0 $ (148.8)
Discontinued operations ................................................................................ 8.5 --
Adjustments:
Depreciation ........................................................................................ 39.6 35.7
Amortization ........................................................................................ 36.7 36.8
Deferred income taxes ............................................................................... 74.8 (93.5)
Inventory write-down to market ...................................................................... 8.7 --
Stock option compensation expense ................................................................... -- 9.9
Minority interest ................................................................................... 12.4 (1.7)
Refinery restructuring and other charges ............................................................ 125.3 103.6
Write-off of deferred financing costs ............................................................... 0.2 7.9
Other, net .......................................................................................... 0.4 15.1
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other ..................................................... 44.7 (39.5)
Inventories ......................................................................................... (12.0) (49.0)
Accounts payable, accrued expenses, and taxes other than income ..................................... (105.5) 59.8
Affiliate receivables and payables .................................................................. 1.4 11.8
Cash and cash equivalents restricted for debt service ............................................... (30.6) 24.1
------- --------
Net cash provided by (used in) operating activities of continuing operations ...................... 385.6 (27.8)
Net cash used in operating activities of discontinued operations .................................. (2.5) (3.3)
------- --------
Net cash provided by (used in) operating activities ............................................... 383.1 (31.1)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment ......................................................... (57.8) (64.1)
Expenditures for turnaround ............................................................................ (41.3) (33.4)
Cash and cash equivalents restricted for investment in capital additions ............................... -- 5.5
Other .................................................................................................. 0.1 0.2
------- --------
Net cash used in investing activities ............................................................. (99.0) (91.8)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and capital lease payments .............................................................. (22.4) (443.3)
Capital contributions, net ............................................................................. (25.8) 248.1
Cash and cash equivalents restricted for debt repayment ................................................ -- (45.2)
Deferred financing costs ............................................................................... (9.6) (11.4)
------- --------
Net cash used in financing activities ............................................................. (57.8) (251.8)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................................... 226.3 (374.7)
CASH AND CASH EQUIVALENTS, beginning of period ........................................................... 251.2 482.5
------- --------
CASH AND CASH EQUIVALENTS, end of period ................................................................. $ 477.5 $ 107.8
======= ========
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
PREMCOR USA INC. AND SUBSIDIARIES
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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"). 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.
("PACC"), a limited partnership, 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 constituted an exchange of ownership interest
between entities under common control, and therefore was accounted for similar
to a pooling of interests. Accordingly, Premcor USA's and PRG's historical
financial statements have been restated to include the consolidated financial
position, results of operations, and cash flows of Sabine for all periods
presented.
The Company is an independent petroleum refiner and supplier of unbranded
transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and
other petroleum products in the United States. The Company owns and operates two
refineries with a combined crude oil throughput capacity of 420,000 barrels per
day ("bpd"). The refineries are located in Port Arthur, Texas and Lima, Ohio.
The Company ceased operations at its 70,000 bpd Hartford, Illinois refinery in
late September consistent with the Company's plan which was announced in
February 2002.
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
condensed 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 condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary to fairly state the results for the interim periods
presented. Operating results for the three-month and nine-month periods ended
September 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, PRG's, and Sabine's Annual Reports on Form
10-K for the year ended December 31, 2001. PAFC has filed a Registration
Statement on Form S-4 which includes audited financial statements and notes
14
for the year ended December 31, 2001 for PRG that were restated for
the Sabine restructuring. Certain reclassifications have been made to prior
periods in order to conform to the current period presentation.
2. New and Proposed Accounting Standards
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("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 closure of the Hartford, Illinois refinery.
See Note 4, Refinery Restructuring and Other Charges for details of the Hartford
refinery shutdown.
In July 2001, the Financial Accounting Standards Board ("FASB") issued 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 Company is in the process of evaluating the
impact of the adoption of this standard on its financial position and results of
operations and believes that implementation will not have a material impact.
In April 2002, the FASB issued 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 SFAS No. 145, the Company has elected early adoption of
the rescission of SFAS No. 4. Accordingly, the Company has included the gain or
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.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires the
recognition of liabilities at fair value that are associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Such liabilities include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing or other exit or disposal
activities. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company will adopt SFAS No.
146 for all restructuring, discontinued operations, plant closings or other exit
or disposal activities initiated after December 31, 2002.
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 September 30,
2002, the Company would have been required to write-off unamortized turnaround
costs of approximately $97 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
15
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.
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 in
Sabine 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 Exchange Act
of 1933, as amended. In September 2002, PAFC filed a registration statement
under the Securities Act to register the notes and the PRG guarantee and
has 120 additional days to finalize the registration process. Due to the
PRG guarantee, Sabine is no longer required to file periodic reports under
the Securities Exchange Act of 1934, as amended.
Premcor Inc.'s acquisition of Occidental's 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, along with a $5.0
million deferred income tax adjustment, was recorded as an investment in
property, plant and equipment and will be depreciated over the remaining useful
lives of the related Sabine assets. The income tax adjustment reflected the
temporary difference between the book and tax basis of property, plant and
equipment related to the excess of the purchase price over book value. 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 for all
prior periods presented.
4. Refinery Restructuring and Other Charges
In 2002, the Company recorded refinery restructuring and other charges of
$172.9 million, of which $14.3 million was recorded in the third quarter. The
third quarter charge included $10.1 million related to the further restructuring
of the Company's management team, refinery operations and administrative
functions and $4.2 million related to the write-down of Premcor Inc.'s minority
interest in Clark Retail Group, Inc., the sole stockholder of Clark Retail
Enterprises, Inc. ("CRE"). Premcor Inc. acquired an interest in Clark Retail
Group, Inc. when PRG sold its retail business to CRE in 1999. Clark Retail
Group, Inc. and CRE filed a petition to reorganize under Chapter 11 of the U.S.
bankruptcy laws in October 2002.
The year-to-date charge consisted of the following:
.. a $137.4 million charge related to the shutdown of refining operations at
the Hartford, Illinois refinery,
16
.. a $32.4 million charge related to the restructuring of the Company's
management team, refinery operations 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,
.. a $1.4 million loss related to idled assets held for sale, and
.. a $4.2 million write-down of Premcor Inc.'s 5% interest in Clark Retail
Group, Inc.
In 2001, refinery restructuring and other charges of $176.2 million
consisted of a $167.2 million charge related to the January 2001 closure of the
Blue Island, Illinois refinery and a $9.0 million charge related to the
write-off of idled coker units at the Port Arthur refinery. The write-off of the
Port Arthur coker units and a $17.2 million charge related to the Blue Island
refinery closure were recorded in the third quarter of 2001. The write-off of
the Port Arthur coker units included a charge of $5.8 million related to the net
asset value of the idled cokers and a charge of $3.2 million for future
environmental clean-up costs related to the coker unit site.
Hartford Refinery Closure
In late September 2002, the Company ceased operations at its Hartford
refinery after concluding there was no economically viable method of
reconfiguring the refinery to produce fuels meeting new gasoline and diesel fuel
specifications mandated by the federal government. Despite ceasing operations,
the Company continues to pursue all options, including the sale of the refinery,
to mitigate the loss of jobs and refinery capacity in the Midwest.
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 $137.4 million was recorded in 2002, which 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 or sale of the refinery. Accordingly,
the Company 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 September 30, 2002 is as follows:
Reserve as of
September 30,
Initial Reserve Net Cash Outlay 2002
--------------- --------------- -------------
Employee severance ........................... $ 16.6 $ 0.2 $ 16.4
Plant closure/equipment remediation .......... 12.9 5.6 7.3
Site clean-up/environmental matters .......... 33.0 -- 33.0
------ ----- ------
$ 62.5 $ 5.8 $ 56.7
====== ===== ======
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 process unit shutdown and hydrocarbon
purging to be finalized in the fourth quarter of 2002. The Company terminated
approximately 300
17
of 315 employees, both hourly (covered by collective bargaining agreements) and
salaried, in October 2002. The site clean-up and environmental reserve takes
into account costs that are reasonably foreseeable at this time. As the final
disposition of the refinery is determined and a site remediation plan refined,
further adjustments of the reserve may be necessary, and such adjustments may be
material. The Company expects to spend approximately $20 million to $30 million
in 2002 related to employee severance and the process unit shutdown and
hydrocarbon purge.
Finally, the total charge included a $1.0 million reserve related to
post-retirement benefits 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.
Management, Refinery Operations and Administrative 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, as a result of the resignation of the officers who
previously held these positions, the Company recognized severance expense of
$5.0 million and non-cash compensation expense of $5.8 million resulting from
modifications of stock option terms. 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 restructuring expenses
relating to the elimination of 107 hourly and salaried positions. In the third
quarter of 2002, the Company announced plans to reduce its non-represented
workforce at its Port Arthur, Texas and Lima, Ohio refineries and make
additional staff reductions at its St. Louis administrative office. The Company
recorded a charge of $10.1 million for severance, outplacement, and other
restructuring expenses relating to the elimination of 140 hourly and salaried
positions. Included in this charge is $1.3 million related to post-retirement
benefits 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.
Reductions at the refineries occurred in October 2002 and those at the St. Louis
office will take place by the end of the first quarter of 2003. The reserve
relating to the refineries and St. Louis restructuring is as follows:
Reserve as of
Initial Additional Net Cash September 30,
Reserve Reserve Outlay 2002
---------------- ------------- -------------- ---------------
Refineries and St. Louis restructuring ........ $ 6.5 $ 8.8 $ 4.6 $ 10.7
The Company expects to spend approximately $11 million to $13 million in 2002
related to these refinery and St. Louis restructuring activities.
Blue Island Refinery Closure Reserve
In 2001, the Company recorded a first quarter pretax charge of $150.0
million and an additional third quarter pretax charge of $17.2 million related
to the January 2001 closure of the Blue Island, Illinois refinery. The Blue
Island restructuring reserve balance and net cash activity as of September 30,
2002 is as follows:
Reserve as of Reserve as of
December 31, 2001 Net Cash Outlay September 30, 2002
----------------- --------------- ------------------
Employee severance ............................ $ 2.1 $ 2.1 $ --
Plant closure/equipment remediation ........... 13.9 8.1 5.8
Site clean-up/environmental matters ........... 20.5 3.9 16.6
-------- ---------- ---------
$ 36.5 $ 14.1 $ 22.4
======== ========== =========
The Company expects to spend approximately $15 million to $16 million in
2002 related to the reserve for future costs, with the remainder to be spent
over the next several years. The Company is currently in discussions with
governmental agencies concerning a remediation program, which it believes will
likely lead to a final consent order
18
and remediation plan. The Company does not expect these discussions to be
concluded until 2003 at the earliest. The Company's site clean-up and
environmental reserve takes into account costs that are reasonably foreseeable
at this time, based on studies performed in conjunction with obtaining the
insurance policy mentioned below. 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 were procured and bound, with final policies expected to be issued
within the first quarter of 2003. 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 $100,000 deductible
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. Gain or Loss on Extinguishment of Long-Term Debt
In the quarter and nine months ended September 30, 2002, Premcor USA
recorded a loss on extinguishment of long-term debt of $0.2 million and $19.5
million, respectively, related to the repurchase of certain long-term debt as
described in Note 8 Long-term Debt. The third quarter loss related to a premium
paid for the repurchase of a portion of the 11 1/2% Subordinated Debentures. The
loss recorded for the nine months ended September 30, 2002 included premiums
associated with the early repayment of long-term debt of $9.4 million, a
write-off of unamortized deferred financing costs related to this 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. In the nine months ended September 30, 2002, 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.
In the third quarter of 2001, Premcor USA repurchased in the open market
$21.3 million in face value of its 9 1/2% Senior Notes due September 15, 2004,
$30.6 million in face value of its 10 7/8% Senior Notes due December 1, 2005,
and $5.9 million in face value of its 11 1/2% Exchangeable Preferred Stock. As a
result of these transactions, Premcor USA recorded a gain of $8.7 million, which
included discounts of $9.3 million offset by the write-off of deferred financing
costs related to the notes. Related to the repurchase of a portion of its 9 1/2%
Senior Notes due September 15, 2004, PRG recorded a gain of $0.8 million, which
included a discount of $1.0 million offset by the write-off of deferred
financing costs.
6. Inventories
The carrying value of inventories consisted of the following:
December 31, September 30,
2001 2002
------------ ------------
Crude oil ........................................ $ 77.0 $ 93.1
Refined products and blendstocks ................. 218.7 253.4
Warehouse stock and other ........................ 22.6 20.8
------------ ----------
$ 318.3 $ 367.3
============ ==========
The market value of crude oil, refined products and blendstock inventories
at September 30, 2002 was approximately $150 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 no impact for the
three-month period and approximately $12 million less net income ($0.26 per
basic and diluted share) for the
19
nine-month period ended September 30, 2002 than if the FIFO method had been used
for the same periods. Cost for warehouse stock continues to be determined under
the FIFO method.
7. Other Assets
Other assets consisted of the following:
December 31, September 30,
2001 2002
------------ -------------
Deferred turnaround costs ................................... $ 97.9 $ 96.5
Deferred financing costs .................................... 32.6 27.0
Cash restricted for investment in capital additions ......... 9.9 4.4
Investment in affiliates .................................... 4.7 0.5
Other ....................................................... 3.6 2.5
--------- ---------
$ 148.7 $ 130.9
========= =========
Amortization of deferred financing costs for the three and nine-month
periods ended September 30, 2002 was $2.5 million (2001 - $2.9 million) and $7.5
million (2001 - $8.8 million), respectively, and was included in "Interest and
finance expense". In 2002, the Company incurred deferred financing costs of $1.1
million for fees to obtain a waiver related to insurance coverage required under
PACC's common security agreement with certain bondholders and $10.3 million
related to the consent solicitation process of the Sabine restructuring and
subsequent registration of the PACC senior notes with the Securities & Exchange
Commission. In the second quarter of 2002, the Company wrote-off $9.5 million of
deferred financing costs, including $1.6 million related to Premcor USA stand
alone long-term debt, as a result of the early repayment of long-term debt.
20
8. Long-term Debt and Exchangeable Preferred Stock
Long-term debt and exchangeable preferred stock consisted of the following:
December 31, September 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)................ 174.2 174.4
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)............................ 255.0 250.7
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 0.7
--------- -------
1,328.4 885.2
Less current portion of debt................................. 81.4 15.6
--------- -------
Total long-term debt at PRG.................................. 1,247.0 869.6
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)................. - 40.1
--------- -------
Total long-term debt at Premcor Inc. and Premcor USA......... $ 1,391.4 $ 909.7
========= =======
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
In 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 Notes at par, and Premcor USA
redeemed the remaining $144.4 million of its 10 7/8% Senior Notes, including a
$5.2 million premium, 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 a $3.1
million premium from capital contributions received from Premcor Inc. In the
third quarter of 2002, Premcor USA purchased an additional $3.4 million of its
11 1/2% Subordinated Debentures due 2009 at a premium of $0.2 million from
capital contributions received from Premcor Inc.
In the third quarter of 2002, PACC made a $4.3 million principal payment on
its 12 1/2% Senior Notes. 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 common security agreement and related
secured account structure. In June 2002, as part of the Sabine restructuring,
PACC prepaid the remaining balance of $221.4 million
21
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 common security agreement 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 common security agreement has been amended and
restated 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 and restated
common security agreement, 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 September 30, 2002, PACC was in compliance with the
insurance coverage requirements of the amended and restated common security
agreement.
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 supported 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 of the facility can be increased by $50
million, up to the borrowing base limitation, at the request of PRG and upon
securing additional commitments. Also under the amendment, the borrowing base
calculation was amended to include PACC inventory and the tangible net worth
covenant was increased 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 September 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
September 30, 2002, options for 1,036,000 shares of Premcor Inc. common stock
were granted as follows: options for 435,000 shares at an exercise price of $10
per share and options for 601,000 shares at an exercise price ranging from
$18.50 per share to $26 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 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
22
following weighted average assumptions as of September 30, 2002: a) assumed
risk-free rate of 5.06% per annum, 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 the period of adoption of SFAS No. 123, the adoption of this fair value
based method 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. 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)
Since nonvested awards issued to employees prior to January 1, 2002
continue to be accounted for using the intrinsic value based provisions of APB
No. 25, employee stock-based compensation expense determined using the fair
value based method applied prospectively is not necessarily indicative of future
expense amounts when the fair value based method will apply to all outstanding
nonvested awards. With respect to all stock option grants outstanding at
September 30, 2002, the Company will record future non-cash stock option
compensation expense and additional paid-in capital of $40.4 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 Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
2001 2002 2001 2002
----- ----- ------ -----
Interest expense ....... $ 36.5 $ 20.6 $ 113.5 $ 83.4
Financing costs ........ 4.1 2.9 11.9 10.6
Capitalized interest ... (1.3) (1.5) (3.8) (4.6)
------ ------ ------- ------
$ 39.3 $ 22.0 $ 121.6 $ 89.4
====== ====== ======= ======
Interest and finance expense included in PRG's statements of operations
consisted of the following:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2001 2002 2001 2002
----- ----- ------ -----
Interest expense ....... $ 31.8 $ 19.5 $ 99.3 $ 73.0
Financing costs ........ 3.9 2.8 11.5 10.4
Capitalized interest ... (1.2) (1.5) (3.8) (4.6)
------ ------ ------- ------
$ 34.5 $ 20.8 $ 107.0 $ 78.8
====== ====== ======= ======
Premcor USA's cash paid for interest for the three-month and nine-month
periods ended September 30, 2002 was $24.4 million (2001 - $42.1 million) and
$95.6 million (2001 - $120.9 million), respectively. PRG's cash paid for
interest for the three-month and nine-month periods ended September 30, 2002 was
$24.4 million (2001 - $41.0 million) and $87.5 million (2001 - $110.2 million),
respectively.
23
12. Income Taxes
Premcor USA made net cash income tax payments during the three-month period
ended September 30, 2002 of $0.1 million (2001 - $13.3 million) and received net
cash income tax refunds during the nine-month period ended September 30, 2002 of
$12.4 million (2001 - $13.6 million net cash income tax payments). PRG made net
cash income tax payments during the three-month period ended September 30, 2002
of $0.1 million (2001 - $13.3 million) and received net cash income tax refunds
during the nine-month period ended September 30, 2002 of $12.4 million (2001 -
$16.1 million net cash income tax payments).
The income tax provision on the income from continuing operations before
income taxes for the nine-month period ended September 30, 2001 of $78.7 million
for the Company and $78.2 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
nine-month period ended September 30, 2001 of $97.4 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 nine-month periods ended
September 30, 2002 excluded incremental common stock equivalents of 598,310 and
2,027,715, respectively. 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 dilutive shares for the quarter related to employee
stock options and the dilutive shares for year to date related to employee stock
options and shareholder warrants. The diluted weighted average shares
outstanding for the three-month and nine-month periods ended September 30, 2001
reflected the potential dilution that could have occurred if all outstanding
warrants were exercised. In the second quarter of 2002, all outstanding
shareholder 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 Securities Exchange
Act of 1934. 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 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.
Under the amended and restated common security agreement related to PACC's
12 1/2% Senior Notes, PACC is required to restrict $45.0 million of cash for
debt service at all times plus restrict an amount equal to the next scheduled
principal and interest payment, prorated based on the number of months remaining
until that payment is due. Otherwise, there are no restrictions limiting
dividends from PACC to PRG and, under the amended working capital facility, PACC
is required to dividend to PRG all excess cash over $20 million, excluding the
restricted debt service amounts. Also, pursuant to the amended working capital
facility, if an aggregate intercompany payable from
24
PRG to PACC exceeds $40 million at any time, PACC shall forgive PRG such excess
amount, which would take the form of a non-cash dividend. No such dividends have
been made as of September 30, 2002.
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
(unaudited, amounts in millions)
Other
Guarantor Consolidated
PRG PAFC Subsidiaries Eliminations PRG
--------- ------- ------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......... $ 107.8 $ -- $ -- $ -- $ 107.8
Short-term investments ............ 1.7 -- -- -- 1.7
Cash and cash equivalents
restricted for debt service .... -- -- 51.9 -- 51.9
Accounts receivable ............... 198.8 -- 1.1 -- 199.9
Receivable from affiliates ........ 54.2 21.4 0.7 (22.3) 54.0
Inventories ....................... 342.3 -- 27.1 (2.1) 367.3
Prepaid expenses and other ........ 28.3 -- 2.3 -- 30.6
Assets held for sale .............. 61.2 -- -- -- 61.2
--------- ------- ------- -------- ---------
Total current assets ........... 794.3 21.4 83.1 (24.4) 874.4
PROPERTY, PLANT AND EQUIPMENT, NET .. 598.7 -- 614.1 -- 1,212.8
DEFERRED INCOME TAXES ............... 64.6 -- -- (22.6) 42.0
INVESTMENT IN AFFILIATE ............. 294.8 -- -- (294.8) --
OTHER ASSETS ........................ 114.2 -- 16.8 -- 131.0
NOTE RECEIVABLE FROM AFFILIATE ...... 2.4 235.9 -- (238.3) --
--------- ------- ------- -------- ---------
$ 1,869.0 $ 257.3 $ 714.0 $ (580.1) $ 2,260.2
========= ======= ======= ======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable .................. $ 336.5 $ -- $ 104.8 $ -- $ 441.3
Payable to affiliates ............. 60.6 -- 43.1 (19.4) 84.3
Accrued expenses .................. 77.4 6.6 1.4 -- 85.4
Accrued taxes other than income ... 23.0 -- 5.2 -- 28.2
Current portion of long-term debt . 0.8 14.8 -- -- 15.6
Current portion of notes payable
to affiliate ................... -- -- 2.9 (2.9) --
--------- ------- ------- -------- ---------
Total current liabilities ...... 498.3 21.4 157.4 (22.3) 654.8
LONG-TERM DEBT ...................... 633.7 235.9 -- -- 869.6
DEFERRED INCOME TAXES ............... -- -- 23.3 (23.3) --
OTHER LONG-TERM LIABILITIES ......... 146.6 -- 0.2 -- 146.8
NOTE PAYABLE TO AFFILIATE ........... -- -- 238.3 (238.3) --
COMMON STOCKHOLDER'S EQUITY:
Common stock ...................... -- -- 0.1 (0.1) --
Paid-in capital ................... 537.0 -- 206.0 (206.0) 537.0
Retained earnings ................. 53.4 -- 88.7 (90.1) 52.0
--------- ------- ------- -------- ---------
Total common stockholder's
equity ........................ 590.4 -- 294.8 (296.2) 589.0
--------- ------- ------- -------- ---------
$ 1,869.0 $ 257.3 $ 714.0 $ (580.1) $ 2,260.2
========= ======= ======= ======== =========
25
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited, amounts in millions)
Other
Guarantor Consolidated
PRG PAFC Subsidiaries Eliminations PRG
-------------- -------------- --------------- ------------- -------------
NET SALES AND OPERATING REVENUES ....... $ 2,042.5 $ -- $ 540.4 $ (683.1) $ 1,899.8
EQUITY IN EARNINGS OF AFFILIATE ........ (3.6) -- -- 3.6 --
EXPENSES:
Cost of sales ........................ 1,936.5 -- 494.7 (673.0) 1,758.2
Operating expenses ................... 80.7 -- 36.7 (8.1) 109.3
General and administrative expenses .. 10.8 -- 0.9 -- 11.7
Stock option compensation expense .... 4.2 -- -- -- 4.2
Depreciation ......................... 6.2 -- 5.3 -- 11.5
Amortization ......................... 9.3 -- -- -- 9.3
Refinery restructuring and other
charges ........................... 10.1 -- -- -- 10.1
--------- --------- --------- ---------- ---------
2,057.8 -- 537.6 (681.1) 1,914.3
OPERATING INCOME (LOSS) ................ (18.9) -- 2.8 1.6 (14.5)
Interest and finance expense ......... (12.1) (8.3) (8.8) 8.4 (20.8)
Interest income ...................... 1.2 8.3 0.4 (8.4) 1.5
--------- --------- --------- ---------- ---------
LOSS BEFORE INCOME TAXES ............... (29.8) -- (5.6) 1.6 (33.8)
Income tax benefit ................... 10.0 -- 2.0 0.7 12.7
--------- --------- --------- ---------- ---------
NET LOSS ............................... $ (19.8) $ -- $ (3.6) $ 2.3 $ (21.1)
========= ========= ========== ========== =========
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited, amounts in millions)
Eliminations
Other and
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- -------------- --------------- ------------- -------------
NET SALES AND OPERATING REVENUES ....... $ 5,091.8 $ -- $ 1,429.3 $ (1,714.0) $ 4,807.1
EQUITY IN EARNINGS OF AFFILIATE ........ (30.1) -- -- 30.1 --
EXPENSES:
Cost of sales ........................ 4,719.8 -- 1,315.1 (1,688.4) 4,346.5
Operating expenses ................... 261.8 -- 99.4 (23.6) 337.6
General and administrative expenses .. 37.2 -- 3.3 -- 40.5
Stock option compensation expense .... 9.9 -- -- -- 9.9
Depreciation ......................... 19.9 -- 15.8 -- 35.7
Amortization ......................... 29.2 -- -- -- 29.2
Refinery restructuring and other
charges ........................... 166.2 -- 2.5 -- 168.7
--------- --------- --------- ---------- ---------
5,244.0 -- 1,436.1 (1,712.0) 4,968.1
OPERATING LOSS ......................... (182.3) -- (6.8) 28.1 (161.0)
Interest and finance expense ......... (43.1) (31.1) (36.0) 31.4 (78.8)
Loss on extinguishment of long-term
debt .............................. (1.0) -- (8.3) -- (9.3)
Interest income ...................... 4.0 31.1 2.2 (31.4) 5.9
--------- --------- --------- ---------- ---------
LOSS BEFORE INCOME TAXES AND MINORITY
INTEREST ............................. (222.4) -- (48.9) 28.1 (243.2)
Income tax benefit ................... 74.9 -- 17.1 0.7 92.7
Minority interest .................... -- -- -- 1.7 1.7
--------- --------- --------- ---------- ---------
NET LOSS ............................... $ (147.5) $ -- $ (31.8) $ 30.5 $ (148.8)
========= ========= ========= ========== =========
26
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited, amounts in millions)
Other Eliminations
Guarantor and Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
--------- ---------- ------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $ (147.5) $ -- $ (31.8) $ 30.5 $ (148.8)
Adjustments:
Depreciation .................................. 19.9 -- 15.8 -- 35.7
Amortization .................................. 34.2 -- 2.6 -- 36.8
Deferred income taxes ......................... (75.5) -- (17.3) (0.7) (93.5)
Stock option compensation expense ............. 9.9 -- -- -- 9.9
Equity in earnings of affiliate ............... 30.1 -- -- (30.1) --
Minority interest ............................. -- -- -- (1.7) (1.7)
Refinery restructuring and other charges ...... 103.6 -- -- -- 103.6
Write-off of deferred financing costs ......... 1.1 -- 6.8 -- 7.9
Other, net .................................... 15.0 -- 0.1 -- 15.1
Cash provided by (reinvested in) working capital:
Accounts receivable, prepaid expenses
and other ................................... (47.8) -- 8.3 -- (39.5)
Inventories ................................... (64.0) -- 13.0 2.0 (49.0)
Accounts payable, accrued expenses,
and taxes other than income ................. 49.5 (12.8) 23.1 -- 59.8
Affiliate receivables and payables ............ 6.3 304.7 (299.2) -- 11.8
Cash and cash equivalents restricted
for debt service ............................ -- -- 24.1 -- 24.1
-------- --------- -------- ------- ----------
Net cash provided by (used in) operating
activities of continuing operations ....... (65.2) 291.9 (254.5) -- (27.8)
Net cash used in operating activities of
discontinued operations ................... (3.3) -- -- -- (3.3)
-------- --------- -------- ------- ----------
Net cash provided by (used in) operating
activities ................................ (68.5) 291.9 (254.5) -- (31.1)
-------- --------- -------- ------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment .. (66.6) -- 2.5 -- (64.1)
Expenditures for turnaround ..................... (33.4) -- -- -- (33.4)
Cash and cash equivalents restricted for
investment in capital additions ............... 5.5 -- -- -- 5.5
Other ........................................... 0.2 -- -- -- 0.2
-------- --------- -------- ------- ----------
Net cash provided by (used in) investing
activities ................................ (94.3) -- 2.5 -- (91.8)
-------- --------- -------- ------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and capital lease payments ....... (151.4) (291.9) -- -- (443.3)
Capital contributions, net . .................... 163.9 -- 84.2 -- 248.1
Cash and cash equivalents restricted for debt
repayment ..................................... -- -- (45.2) -- (45.2)
Deferred financing costs ........................ (1.6) -- (9.8) -- (11.4)
-------- --------- -------- ------- ----------
Net cash provided by (used in) financing
activities ................................ 10.9 (291.9) 29.2 -- (251.8)
-------- --------- -------- ------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......... (151.9) -- (222.8) -- (374.7)
CASH AND CASH EQUIVALENTS, beginning of period .... 259.7 -- 222.8 -- 482.5
-------- --------- -------- ------- ----------
CASH AND CASH EQUIVALENTS, end of period .......... $ 107.8 $ -- $ -- $ -- $ 107.8
======== ========= ======== ======= ==========
27
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(amounts in millions)
Other Eliminations
Guarantor and Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- ------------- --------------- -------------- ------------
ASSETS
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 ............. 218.1 -- -- (218.1) --
OTHER ASSETS ........................ 126.4 -- 16.4 -- 142.8
NOTE RECEIVABLE FROM AFFILIATE ...... 4.9 463.0 -- (467.9) --
--------- ---------- ---------- ---------- ----------
$ 1,795.6 $ 562.0 $ 979.1 $ (839.6) $ 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 .................. 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) --
Paid-in capital ................... 243.0 -- 121.7 (121.7) 243.0
Retained earnings ................. 200.8 -- 120.5 (120.5) 200.8
--------- ---------- ---------- ---------- ----------
Total common stockholder's
equity ...................... 443.8 -- 242.3 (242.3) 443.8
--------- ---------- ---------- ---------- ----------
$ 1,795.6 $ 562.0 $ 979.1 $ (839.6) $ 2,497.1
========= ========== ========== ========== ==========
28
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(unaudited, amounts in millions)
Eliminations
Other and
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- -------------- --------------- ------------- -------------
NET SALES AND OPERATING REVENUES ....... $ 1,701.2 $ -- $ 461.3 $ (496.3) $ 1,666.2
EQUITY IN EARNINGS OF AFFILIATE ........ 13.3 -- -- (13.3) --
EXPENSES:
Cost of sales ........................ 1,489.3 -- 390.3 (488.4) 1,391.2
Operating expenses ................... 85.5 -- 27.3 (8.0) 104.8
General and administrative expenses .. 14.9 -- 1.0 0.1 16.0
Depreciation ......................... 8.4 -- 5.3 -- 13.7
Amortization ......................... 9.5 -- -- -- 9.5
Refinery restructuring and other
charges ........................... 26.2 -- -- -- 26.2
--------- -------- --------- ---------- ---------
1,633.8 -- 423.9 (496.3) 1,561.4
OPERATING INCOME ....................... 80.7 -- 37.4 (13.3) 104.8
Interest and finance expense ......... (18.1) (14.6) (16.6) 14.8 (34.5)
Gain on extinguishment of long-term
debt .............................. 0.8 -- -- -- 0.8
Interest income ...................... 3.2 14.6 2.1 (14.8) 5.1
--------- -------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST .................... 66.6 -- 22.9 (13.3) 76.2
Income tax provision ................. (22.0) -- (8.1) -- (30.1)
Minority interest .................... -- -- -- (1.5) (1.5)
--------- -------- --------- ---------- ---------
NET INCOME ............................. $ 44.6 $ -- $ 14.8 $ (14.8) $ 44.6
========= ======== ========= ========== =========
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(unaudited, amounts in millions)
Eliminations
Other And
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- -------------- --------------- ------------- -------------
(in millions)
NET SALES AND OPERATING REVENUES ....... $ 5,265.0 $ -- $ 1,506.0 $ (1,600.1) $ 5,170.9
EQUITY IN EARNINGS OF AFFILIATE ........ 111.1 -- -- (111.1) --
EXPENSES:
Cost of sales ........................ 4,574.6 -- 1,137.6 (1,577.2) 4,135.0
Operating expenses ................... 265.7 -- 114.2 (24.6) 355.3
General and administrative expenses .. 42.0 -- 3.0 0.1 45.1
Depreciation ......................... 24.4 -- 15.2 -- 39.6
Amortization ......................... 28.1 -- -- -- 28.1
Refinery restructuring and other
charges ........................... 176.2 -- -- -- 176.2
--------- --------- --------- ---------- ---------
5,111.0 -- 1,270.0 (1,601.7) 4,779.3
OPERATING INCOME (LOSS) ................ 265.1 -- 236.0 (109.5) 391.6
Interest and finance expense ......... (56.7) (45.9) (50.8) 46.4 (107.0)
Gain on extinguishment of long-term
debt .............................. 0.8 -- -- -- 0.8
Interest income ...................... 9.4 45.9 5.0 (46.4) 13.9
--------- --------- --------- ---------- ---------
ME FROM CONTINUING
FORE INCOME TAXES AN
INTEREST ............................. 218.6 -- 190.2 (109.5) 299.3
Tax provision ........................ (30.7) -- (66.7) -- (97.4)
Minority interest .................... -- -- -- (12.4) (12.4)
-------- --------- --------- ---------- ---------
INCOME FROM CONTINUING OPERATIONS ..... 187.9 -- 123.5 (121.9) 189.5
Loss from operations, net of
income tax benefit of $5.5 ........ (8.5) -- -- -- (8.5)
--------- --------- --------- ---------- ---------
NET INCOME ............................. $ 179.4 $ -- $ 123.5 $ (121.9) $ 181.0
========= ========= ========= ========== =========
29
THE PREMCOR REFINING GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(unaudited, amounts in millions)
Eliminations
Other And
Guarantor Minority Consolidated
PRG PAFC Subsidiaries Interest PRG
-------------- ------------- ---------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................... $ 179.4 $ -- $ 123.5 $ (121.9) $ 181.0
Discontinued operations ................. 8.5 -- -- -- 8.5
Adjustments:
Depreciation .......................... 24.4 -- 15.2 -- 39.6
Amortization .......................... 34.4 -- 2.3 -- 36.7
Deferred income taxes ................. 43.0 -- 31.8 -- 74.8
Inventory write-down to market ........ -- -- 8.7 -- 8.7
Equity in earnings of affiliate ....... (111.1) -- -- 111.1 --
Minority interest ..................... -- -- -- 12.4 12.4
Refinery restructuring and other
charges ............................ 125.3 -- -- -- 125.3
Write-off of deferred financing
costs .............................. 0.2 -- -- -- 0.2
Other, net ............................ (0.4) -- 0.7 0.1 0.4
Cash provided by (reinvested in) working
capital:
Accounts receivable, prepaid
expenses and other ................. 48.6 -- (3.9) -- 44.7
Inventories ........................... 13.4 -- (23.7) (1.7) (12.0)
Accounts payable, accrued expenses,
and taxes other than income, and
other .............................. (158.2) (9.3) 62.0 -- (105.5)
Affiliate receivables and payables .... 8.2 9.3 (16.1) -- 1.4
Cash and cash equivalents restricted
for debt service ................... -- -- (30.6) -- (30.6)
--------- ----------- ---------- ----------- ----------
Net cash provided by operating
activities of continuing
operations ....................... 215.7 -- 169.9 -- 385.6
Net cash used in operating
activities of discontinued
operations ....................... (2.5) -- -- -- (2.5)
--------- ----------- ---------- ----------- ----------
Net cash provided by operating
activities ....................... 213.2 -- 169.9 -- 383.1
--------- ----------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment ............................. (49.1) -- (8.7) -- (57.8)
Expenditures for turnaround ........... (41.3) -- -- -- (41.3)
Other ................................. 0.1 -- -- -- 0.1
--------- ----------- ---------- ----------- ----------
Net cash used in investing
activities ....................... (90.3) -- (8.7) -- (99.0)
--------- ----------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments ............... (22.4) -- -- -- (22.4)
Capital contributions, net ............ (25.8) -- -- -- (25.8)
Deferred financing costs .............. (9.6) -- -- -- (9.6)
--------- ----------- ---------- ----------- ----------
Net cash used in financing
activities ....................... (57.8) -- -- -- (57.8)
--------- ----------- ---------- ----------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS .......................... 65.1 -- 161.2 -- 226.3
CASH AND CASH EQUIVALENTS, beginning
of period ............................ 214.8 -- 36.4 -- 251.2
--------- ----------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of
period ............................... $ 279.9 $ -- $ 197.6 $ -- $ 477.5
========= =========== ========== =========== ==========
30
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
nine months ended September 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, 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. 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 September 30, 2002, the Company had accrued a total of
approximately $99 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. As of September
30, 2002, this accrual included 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 for highway use produced 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 $255 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
31
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 Achievable 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 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 to Koch Supply and Trading
L.P. or Koch. As part of the agreement with Koch, the Company was required to
repurchase approximately 2.7 million barrels of crude oil in this pipeline
system in September 2002. On October 1, 2002, Morgan Stanley Capital Group Inc.
("MSCG'), purchased the 2.7 million barrels of crude oil from Koch in lieu of
the Company's purchase obligation. The Company has agreed to purchase those
barrels of crude oil from MSCG upon termination of the agreement with them, at
then current market prices as adjusted by certain predetermined contract
provisions. The initial term of the contract continues until October 1, 2003,
and thereafter, automatically renews for additional 30-day periods unless
terminated by either party. The Company has hedged the economic price risk
related to the repurchase obligation through the purchase of exchange-traded
futures contracts.
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. ("PMI"), 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,
PACC is obligated to buy Maya crude oil from PMI, and PMI is obligated to sell
Maya crude oil to PACC. 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 September 30, 2002, a cumulative quarterly surplus of $61.7 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.
32
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 renewed on October 1, 2002 with a one-year term. Due
primarily to the continuing effects of the events of September 11, 2001 on the
insurance market, certain coverage terms, including terrorism coverage, were
restricted or eliminated at renewal, certain deductibles were raised, certain
coverage limits were lowered, and overall premium rates increased by 23%. Higher
insurance premium expenses will be reflected in the Company's results beginning
in the fourth quarter. 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.
33
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
affected 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 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.
34
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 two refineries with a combined crude oil throughput capacity of 420,000
barrels per day, or bpd. These refineries are located in Port Arthur, Texas and
Lima, Ohio. In late September 2002, PRG ceased operations at its Hartford,
Illinois refinery.
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. PACC owns all of the
outstanding common stock of Port Arthur Finance Corp., or PAFC. 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 for all prior periods presented.
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 Exchange Act of 1933, as amended. In September 2002, PAFC
filed a registration statement under the Securities Act to register
the notes and the PRG guarantee and has 120 additional days to
finalize the registration process. Due to the PRG guarantee, Sabine
is no longer required to file periodic reports under the Securities
Exchange Act of 1934, as amended.
Premcor Inc.'s acquisition of Occidental's 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, along with a $5.0
million deferred income tax adjustment, was recorded as an investment in
property, plant and equipment and will be depreciated by us over the remaining
useful lives of the related Sabine assets. The income tax adjustment reflected
the temporary difference between the book and tax basis of property, plant and
equipment related to the excess of the purchase price over book value. Because
the purchase price did not exceed the fair value of the underlying assets, no
goodwill was recognized.
35
The following tables reflect Premcor Inc.'s financial and operating
highlights for the three- and nine-month periods ended September 30, 2001 and
2002.
Financial Results For the Three Months For the Nine Months
(in millions, except as noted) Ended September 30, Ended September 30,
---------------------- ----------------------
2001 2002 2001 2002
--------- --------- --------- ---------
Net sales and operating revenues ............................... $ 1,666.2 $ 1,899.8 $ 5,170.9 $ 4,807.1
Cost of sales .................................................. 1,390.8 1,757.8 4,133.7 4,342.8
---------- ---------- --------- ----------
Gross margin ................................................ 275.4 142.0 1,037.2 464.3
Operating expenses ............................................. 104.9 109.6 355.8 338.2
General and administrative expenses ............................ 16.1 11.9 45.3 40.8
Stock option compensation expense .............................. -- 4.2 -- 9.9
---------- ---------- --------- ----------
Adjusted EBITDA ............................................. 154.4 16.3 636.1 75.4
Depreciation and amortization .................................. 23.2 20.8 67.7 64.9
Refinery restructuring and other charges ....................... 26.2 14.3 176.2 172.9
---------- ---------- --------- ----------
Operating income (loss) ..................................... 105.0 (18.8) 392.2 (162.4)
Interest expense and finance income, net ....................... (33.8) (20.5) (106.3) (81.5)
Gain (loss) on extinguishment of long-term debt ................ 8.7 (0.2) 8.7 (19.5)
Income tax benefit (provision) ................................. (31.4) 15.0 (78.7) 99.9
Minority interest .............................................. (1.5) -- (12.4) 1.7
---------- ---------- --------- ----------
Income (loss) from continuing operations .................... 47.0 (24.5) 203.5 (161.8)
Loss on discontinued operations ................................ -- -- (8.5) --
---------- ---------- --------- ----------
Net income (loss) ........................................... 47.0 (24.5) 195.0 (161.8)
Preferred stock dividends ...................................... (2.7) -- (7.9) (2.5)
---------- ---------- --------- ----------
Net income (loss) available to common
stockholders .............................................. $ 44.3 $ (24.5) $ 187.1 $ (164.3)
========== ========== ========= ==========
Income (loss) from continuing operations per common share:
Basic ....................................................... $ 1.39 $ (0.43) $ 6.15 $ (3.57)
Diluted ..................................................... $ 1.28 $ (0.43) $ 5.67 $ (3.57)
Weighted average common shares outstanding:
Basic ....................................................... 31.8 57.5 31.8 46.0
Diluted ..................................................... 34.5 57.5 34.5 46.0
36
Market Indicators For the Three Months For the Nine Months
(dollars per barrel, except as noted) Ended September 30, Ended September 30,
-------------------- --------------------
2001 2002 2001 2002
------ ------ ------ ------
West Texas Intermediate (WTI) crude oil (sweet) ............... $26.81 $28.34 $27.84 $25.41
Crack Spreads: *
Gulf Coast 3/2/1 ........................................... $ 3.41 $ 2.64 $ 4.98 $ 2.93
Gulf Coast 2/1/1 ........................................... $ 3.27 $ 2.22 $ 4.54 $ 2.42
Chicago 3/2/1 .............................................. $ 9.21 $ 4.80 $ 9.04 $ 4.59
Chicago 5/3/2 .............................................. $ 9.13 $ 4.63 $ 8.83 $ 4.38
Crude Oil Differentials:
WTI less WTS (sour) ........................................ $ 2.02 $ 1.31 $ 3.11 $ 1.26
WTI less Maya (heavy sour) ................................. $ 7.63 $ 4.92 $ 9.57 $ 4.90
WTI less Dated Brent (foreign) ............................. $ 1.43 $ 1.37 $ 1.68 $ 1.01
Natural gas (per mmbtu) ....................................... $ 3.01 $ 3.19 $ 4.90 $ 2.92
* 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.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
Selected Volumetric and Per Barrel Data -------------------- -------------------
(in thousands of barrels per day, except 2001 2002 2001 2002
as noted) ------ ------ ------ ------
Crude oil throughput by refinery:
Port Arthur ................................................ 215.6 215.9 225.2 229.1
Lima ....................................................... 150.0 140.6 143.0 141.0
Hartford ................................................... 63.9 58.9 65.3 62.3
Blue Island ................................................ -- -- 5.3 --
------ ------ ------ -----
Total throughput ......................................... 429.5 415.4 438.8 432.4
Per barrel of throughput (in dollars):
Gross margin ............................................... $ 6.97 $ 3.72 $ 8.66 $ 3.93
Operating expenses ......................................... $ 2.65 $ 2.87 $ 2.97 $ 2.87
37
Three Months Ended Three Months Ended
September 30, 2001 September 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 -- 157.8 157.8 36% -- 136.2 136.2 31%
Light/medium sour 41.2 49.4 90.6 20% 36.5 63.3 99.8 23%
Heavy sour 174.4 6.7 181.1 41% 179.4 -- 179.4 41%
----- ----- ----- --- ----- ----- ----- ---
Total crude oil 215.6 213.9 429.5 97% 215.9 199.5 415.4 95%
Unfinished and blendstocks 17.9 (5.0) 12.9 3% 23.0 (1.1) 21.9 5%
----- ----- ----- --- ----- ----- ----- ---
Total feedstocks 233.5 208.9 442.4 100% 238.9 198.4 437.3 100%
===== ===== ===== === ===== ===== ===== ===
Production:
Light products:
Conventional gasoline 82.2 103.3 185.5 41% 92.4 98.1 190.5 42%
Premium and reformulated gasoline 24.0 20.2 44.2 10% 21.0 20.7 41.7 9%
Diesel fuel 76.1 40.5 116.6 26% 63.0 36.5 99.5 22%
Jet fuel 17.9 25.8 43.7 10% 26.0 22.9 48.9 11%
Petrochemical feedstocks 17.2 9.7 26.9 6% 20.6 9.5 30.1 7%
----- ----- ----- --- ----- ----- ----- ---
Total light products 217.4 199.5 416.9 93% 223.0 187.7 410.7 91%
Petroleum coke and sulfur 22.5 6.8 29.3 6% 27.0 6.2 33.2 7%
Residual oil 4.3 1.7 6.0 1% 6.8 3.2 10.0 2%
----- ----- ----- --- ----- ----- ----- ---
Total production 244.2 208.0 452.2 100% 256.8 197.1 453.9 100%
===== ===== ===== === ===== ===== ===== ===
Nine Months Ended Nine Months Ended
September 30, 2001 September 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 -- 147.0 147.0 32% -- 137.7 137.7 32%
Light/medium sour 48.8 60.7 109.5 25% 39.5 62.4 101.9 23%
Heavy sour 176.4 5.9 182.3 41% 189.6 3.2 192.8 44%
----- ----- ----- --- ----- ----- ----- ---
Total crude oil 225.2 213.6 438.8 98% 229.1 203.3 432.4 99%
Unfinished and blendstocks 10.8 (3.5) 7.3 2% 5.7 (1.8) 3.9 1%
----- ----- ----- --- ----- ----- ----- ---
Total feedstocks 236.0 210.1 446.1 100% 234.8 201.5 436.3 100%
===== ===== ===== === ===== ===== ===== ===
Production:
Light products:
Conventional gasoline 81.9 100.6 182.5 40% 83.5 103.0 186.5 41%
Premium and reformulated gasoline 24.6 22.5 47.1 10% 21.6 17.7 39.3 9%
Diesel fuel 74.4 44.2 118.6 26% 64.7 38.2 102.9 23%
Jet fuel 18.6 23.2 41.8 9% 27.7 22.1 49.8 11%
Petrochemical feedstocks 18.9 10.1 29.0 6% 18.3 10.5 28.8 6%
----- ----- ----- --- ----- ----- ----- ---
Total light products 218.4 200.6 419.0 91% 215.8 191.5 407.3 90%
Petroleum coke and sulfur 26.5 6.9 33.4 7% 29.9 6.9 36.8 8%
Residual oil 4.6 2.6 7.2 2% 7.3 3.4 10.7 2%
----- ----- ----- --- ----- ----- ----- ---
Total production 249.5 210.1 459.6 100% 253.0 201.8 454.8 100%
===== ===== ===== === ===== ===== ===== ===
* Includes 5.8 of feedstocks and 5.7 of production for the Blue Island refinery
which was closed in January 2001.
38
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.
The portion of our current target inventory position consisting of sales
commitments netted against fixed price purchase commitments amounts to a net
long inventory position of approximately 4 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 fluctuations, 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 cumulative
economic effect of our risk management strategy in the second and third quarter
of 2002 resulted in an approximate $11 million loss as measured against a fully
exposed fixed price commitment target. In the first quarter of 2002, we
benefited by approximately $30 million from having 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
our 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 $24.5 million
($0.43 per diluted share) in the third quarter of 2002 as compared to net income
available to common stockholders of $44.3 million ($1.28 per diluted share) in
the corresponding period in 2001. Our operating loss was $18.8 million in the
third quarter of 2002 as compared to operating income of $105.0 million in the
corresponding period in 2001. Operating income (loss) included pretax refinery
restructuring and other charges of $14.3 million and $26.2 in the third quarter
of 2002 and 2001, respectively. Excluding the refinery restructuring and other
charges, our operating loss was $4.5 million in the third quarter of 2002 as
compared to operating income of $131.2 million in the third quarter of 2001.
Net loss available to common stockholders was $164.3 million ($3.57 per
diluted share) for the first nine months of 2002 as compared to net income
available to common stockholders of $187.1 million ($5.42 per diluted share) in
the corresponding period in 2001. Our operating loss was $162.4 million for the
first nine months of 2002 as compared to operating income of $392.2 million in
the corresponding period in 2001. Operating income (loss) included pretax
refinery restructuring and other charges of $172.9 million and $176.2 million
for the first nine months of 2002 and 2001, respectively. Excluding the refinery
restructuring and other charges, our operating income was $10.5 million and
$568.4 million for the first nine months of 2002 and 2001, respectively.
Operating income, excluding the refinery restructuring and other charges,
decreased in the third quarter and first nine months of 2002 compared to the
same periods in 2001 principally due to significantly weaker market conditions
in 2002 than in 2001.
39
Net Sales and Operating Revenues. Net sales and operating revenues
increased $233.6 million, or 14%, to $1,899.8 million in the third quarter of
2002 from $1,666.2 million in the corresponding period in 2001. This increase
was mainly due to higher product prices in the third quarter of 2002 which we
believe were influenced by uncertainties about war with Iraq and associated
concerns about future crude oil supply. Net sales and operating revenues
decreased $363.8 million, or 7%, to $4,807.1 million for the first nine months
of 2002 from $5,170.9 million in the corresponding period in 2001. This decrease
was mainly attributable to lower average product prices in the first nine months
of 2002 as compared to the same periods of 2001. The overall price decline in
2002 reflects the weaker market conditions in 2002 versus the higher product
prices mainly observed in the first six months of 2001, partially offset by the
third quarter 2002 war premium discussed above.
Gross Margin. Gross margin decreased $133.4 million to $142.0 million in
the third quarter of 2002 from $275.4 million in the corresponding period in
2001. Gross margin decreased $572.9 million to $464.3 million for the first nine
months of 2002 from $1,037.2 million in the corresponding period in 2001. The
decrease in gross margin in the third quarter and first nine months of 2002 as
compared to the corresponding periods in 2001 was principally driven by
significantly weaker market conditions in 2002 than in 2001.
Market
These weak market conditions consisted of significantly weaker crack
spreads and crude oil differentials. Beginning in late 2001 and continuing into
the third quarter of 2002, on an overall basis, crack spreads have been poor due
to weak demand and high levels of distillate and gasoline inventories. This
margin environment has been principally driven by a sluggish world economy,
significant declines in air travel following the events of September 11, 2001,
and an extremely mild 2001/2002 winter. The normal increase in demand for the
spring and summer driving season contributed slight improvements to the crack
spreads in the second quarter; however, the third quarter again reflected
depressed conditions. The Gulf Coast and Chicago crack spreads were
approximately 20-30% and 50% lower, respectively, in the third quarter of 2002
than in the corresponding period of 2001. The third quarter of 2001 reflected a
decrease from historic highs reached earlier in that year in the Gulf Coast
crack spreads as supply shortages from early in the year were addressed with
high refinery utilization rates and increased import levels. The Chicago crack
spreads did not weaken in proportion to the Gulf Coast crack spreads in the
third quarter of 2001 due primarily to supply shortages caused by an unplanned,
extended outage at a Chicago refinery, as well as other factors.
The crude oil differentials were also significantly lower in the third
quarter and first nine months of 2002 as compared to the same periods in 2001.
The crude oil differential between WTI and Maya heavy sour crude oil was
approximately 36% lower in the third quarter of 2002 than in the corresponding
quarter of last year, and was approximately 50% lower for the first nine months
of 2002 than for the same period last year. The crude oil differential between
WTI and WTS sour crude oil was approximately 35% lower in the third quarter of
2002 than in the corresponding quarter of last year, and was approximately 60%
lower for the first nine months of 2002 than for the same period last year. We
believe these narrowed differentials were attributed to OPEC production cutbacks
during 2002, which were concentrated in heavy sour and light/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. The heavy sour 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. Our
gross margin for the first nine months of 2002 was also affected by planned and
unplanned downtime at our refineries.
Refinery Operations
In the third quarter of 2002, our Port Arthur refinery experienced reduced
crude oil throughput rates due to planned delays in crude oil supply resulting
from anticipated repairs at the coker unit, which proved to be minimal, and due
to unplanned delays in crude oil supply resulting from the impact of production
and transportation interruptions caused by hurricanes Isidore and Lili. Our Lima
refinery had a slightly reduced crude oil throughput rate in the third quarter
of 2002 also due to delays in crude oil delivery caused by the hurricanes. Our
Hartford refinery operated below capacity as it reduced inventories as it
approached its closure date. The Hartford refinery ceased all crude oil
processing operations in late September. All three refineries ran below crude
oil capacity in the third quarter due to the poor refining market conditions.
40
In the first nine months of 2002, the Port Arthur refinery operations were
also affected by the February shutdown of our coker unit 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.
In the first nine months of 2002, our Lima refinery operations were also
affected by an unplanned shutdown of the reformer unit in May. 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. All three refineries operated below economic crude oil throughput
capacity during the first nine months of 2002 due to poor refining market
conditions.
In the first nine months of 2001, crude oil throughput rates at our Port
Arthur refinery were restricted due to a lightning strike in early May plus
restrictions on the crude unit as downstream process units were in start-up
operations during the first quarter. The damage from the lightning strike
limited the crude unit rate until the crude unit was shutdown in early July for
ten days to repair the damage. Following these repairs, the Port Arthur
refinery's crude oil throughput rate was close to capacity for the remainder of
the quarter. In the first nine months 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 the
coker and isocracker units in the first quarter. Crude oil throughput rates were
also below capacity for the first nine months of 2001 at our Hartford refinery
due to coker unit repairs in the first and third quarters.
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 injury frequency rates administered by the Occupational
Safety and Health Administration, or OSHA. The recordable injury rate reflects
the number of recordable incidents per 200,000 hours worked, and for the nine
months ended September 30, 2002, our refineries had the following recordable
injury rates: Port Arthur: 1.39; Lima: 1.59; 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 there will not be accidents
resulting in injuries or even fatalities.
Operating Expenses. Operating expenses increased $4.7 million to $109.6
million in the third quarter of 2002 from $104.9 million in the corresponding
period in 2001. This increase was mainly attributable to higher insurance costs
at both the Port Arthur and Lima refineries and higher property taxes at our
Port Arthur refinery. This increase was partially offset by lower repair and
maintenance costs at our Port Arthur refinery and a one-time settlement of a
dispute with the local water authorities with respect to our Lima refinery.
Operating expenses decreased $17.6 million to $338.2 million for the first nine
months of 2002 from $355.8 million in the corresponding period in 2001. The
decrease in the first nine months of 2002 was principally due to significantly
lower natural gas prices partially offset by higher insurance and employee
expenses. The higher insurance expenses related to the overall insurance
environment after the events of September 11, 2001, and 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 $4.2 million to $11.9 million in the third quarter of 2002 from $16.1
million in the corresponding period in 2001. General and administrative expenses
decreased $4.5 million to $40.8 million for the first nine months of 2002 from
$45.3 million in the corresponding period in 2001. The decrease in the third
quarter was principally due to lower wages and benefits. The lower wages related
to a restructuring which resulted in a decrease by approximately one third of
the administrative positions in the St. Louis based office. The lower benefits
principally related to lower incentive compensation under our annual incentive
program partially offset by higher costs associated with new pension and
retirement plans and both current and post retirement employee medical benefit
plans. The decrease in the first nine months of 2002 included lower wages and
benefits partially offset by relocation costs associated with the new
Connecticut office.
41
Stock Option Compensation Expense. Stock option compensation expense was
$4.2 million and $9.9 million for the third quarter and first nine months 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 the period of adoption of SFAS No. 123, the adoption of this fair value
based method 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. As provided by SFAS No.
123, the first quarter of 2002 was restated to reflect the adoption of SFAS No.
123. For the three months ended March 31, 2002, the effect of the adoption of
SFAS No. 123 on loss from continuing operations and net loss available to common
stockholders was an additional loss of $0.2 million and $0.01 per common share.
Since nonvested awards issued to employees prior to January 1, 2002
continue to be accounted for using the intrinsic value based provisions of APB
No. 25, employee stock-based compensation expense determined using the fair
value based method applied prospectively is not necessarily indicative of future
expense amounts when the fair value based method will apply to all outstanding
nonvested awards. With respect to all stock option grants outstanding at
September 30, 2002, the Company will record future non-cash stock option
compensation expense and additional paid-in capital of $40.4 million over the
applicable vesting periods of the grants.
Depreciation and Amortization. Depreciation and amortization expenses
decreased $2.4 million to $20.8 million in the third quarter of 2002 from $23.2
million in the corresponding period in 2001. Depreciation and amortization
expenses decreased $2.8 million to $64.9 million for the first nine months of
2002 from $67.7 million in the corresponding period in 2001. Depreciation and
amortization expenses decreased in the third quarter and first nine months
principally due to ceasing the recording of depreciation and amortization
expense for the Hartford refinery assets beginning in March 2002. This decrease
was partially offset by higher amortization expenses for the first nine months
of 2002 at our Lima refinery due to the completion of turnarounds performed in
2001, and higher amortization for the third quarter and first nine months of
2002 at our Port Arthur refinery due to the completion of turnaround activity in
early 2002.
Refinery Restructuring and Other Charges. In 2002, we recorded refinery
restructuring and other charges of $172.9 million, of which $14.3 million was
recorded in the third quarter. The third quarter charge included $10.1 million
related to further restructuring of our management team, refinery operations and
administrative functions and $4.2 million related to the write-down of Premcor
Inc.'s minority interest in Clark Retail Group, Inc., the sole stockholder of
Clark Retail Enterprises, Inc., or CRE. Premcor Inc. acquired an interest in
Clark Retail Group, Inc. when PRG sold its retail business to CRE in 1999. Clark
Retail Group, Inc. and CRE filed a petition to reorganize under Chapter 11 of
the U.S. bankruptcy laws in October 2002.
The year-to-date charge consisted of the following:
.. a $137.4 million charge related to the shutdown of refining operations at
the Hartford, Illinois refinery,
.. a $32.4 million charge related to the restructuring of our management team,
refinery operations 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,
.. a $1.4 million loss related to the sale of idled assets, and
.. a $4.2 million write-down of Premcor Inc.'s 5% interest in Clark Retail
Group, Inc.
In 2001, refinery restructuring and other charges of $176.2 million
consisted of a $167.2 million charge related to the January 2001 closure of the
Blue Island, Illinois refinery and a $9.0 million charge related to the
write-off of idled coker units at our Port Arthur refinery. The write-off of the
Port Arthur coker units and a $17.2 million charge related to the Blue Island
refinery closure were recorded in the third quarter of 2001. The write-off of
the Port
42
Arthur coker units included a charge of $5.8 million related to the net asset
value of the idled cokers and a charge of $3.2 million for future environmental
clean-up costs related to the coker unit site.
See further details about the Hartford and Blue Island refinery closures
and the management and administrative restructuring below.
Hartford Refinery Closure
In late September 2002, we ceased operations at our Hartford refinery after
concluding there was no economically viable method of reconfiguring the refinery
to produce fuels meeting new gasoline and diesel fuel specifications mandated by
the federal government. Despite ceasing operations, we continue to pursue all
options, including the sale of the refinery, to mitigate the loss of jobs and
refinery capacity in the Midwest.
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 $137.4 million was recorded in 2002, which 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 our warehouse stock, catalysts, chemicals, and additives
inventories, and we determined that a portion of these inventories would not be
recoverable upon the closure or sale 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 September 30, 2002 is as follows:
Reserve as of
Initial Net Cash September 30,
Reserve Outlay 2002
----------------- ---------------- -----------------
Employee severance ........................... $ 16.6 $ 0.2 $ 16.4
Plant closure/equipment remediation .......... 12.9 5.6 7.3
Site clean-up/environmental matters .......... 33.0 -- 33.0
--------- ----------- ---------
$ 62.5 $ 5.8 $ 56.7
========= =========== =========
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 process unit shutdown and hydrocarbon purging to
be finalized in the fourth quarter of 2002. We terminated approximately 300 of
315 employees, both hourly (covered by collective bargaining agreements) and
salaried, in October 2002. The remainder of the employees are expected to be
terminated within a year. The site clean-up and environmental reserve takes into
account costs that are reasonably foreseeable at this time. As the final
disposition of the refinery is determined and a site remediation plan refined,
further adjustments of the reserve may be necessary, and such adjustments may be
material. We expect to spend approximately $20 million to $30 million in 2002
related to employee severance and the process unit shutdown and hydrocarbon
purge.
Finally, the total charge included a $1.0 million reserve related to
post-retirement benefits 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.
43
Management, Refinery Operations 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, as a result of the resignation of the officers who previously
held these positions, we recognized severance expense of $5.0 million and
non-cash compensation expense of $5.8 million resulting from modifications of
stock option terms. 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 restructuring expenses relating to
the elimination of 107 hourly and salaried positions. In the third quarter of
2002, we announced plans to reduce our non-represented workforce at our Port
Arthur, Texas and Lima, Ohio refineries and make additional staff reductions at
our St. Louis administrative office. We recorded a charge of $10.1 million for
severance, outplacement, and other restructuring expenses relating to the
elimination of 140 hourly and salaried positions. Included in this charge is
$1.3 million related to post-retirement benefits 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. Reductions at the refineries occurred in
October 2002 and those at the St. Louis office will take place by the end of the
first quarter of 2003. The reserve related to the refineries and St. Louis
restructuring is as follows:
Reserve as of
Initial Additional Net Cash September 30,
Reserve Reserve Outlay 2002
---------------- ------------- -------------- ---------------
Refineries and St. Louis restructuring ............ $ 6.5 $ 8.8 $ 4.6 $ 10.7
We expect to spend approximately $11 million to $13 million in 2002 related to
these refinery and St. Louis restructuring activities.
Blue Island Refinery Closure Reserve
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 September 30, 2002 is as follows:
Reserve as of Reserve as of
December 31, 2001 Net Cash Outlay September 30, 2002
------------------ --------------- ------------------
Employee severance............................... $ 2.1 $ 2.1 $ --
Plant closure/equipment remediation.............. 13.9 8.1 5.8
Site clean-up/environmental matters.............. 20.5 3.9 16.6
-------- ---------- ---------
$ 36.5 $ 14.1 $ 22.4
======== ========== =========
We expect to spend approximately $15 million to $16 million in 2002 related
to the reserve for future costs, with the remainder to be spent over the next
several years. We are currently in discussions with governmental agencies
concerning a remediation program, which we believe will likely lead to a final
consent order and remediation plan. We do not expect these discussions to be
concluded until 2003 at the earliest. Our site clean-up and environmental
reserve takes into account costs that are reasonably foreseeable at this time,
based on studies performed in conjunction with obtaining the insurance policy
mentioned below. 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 were procured and bound, with final policies expected to be issued
within the first quarter of 2003. 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
44
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 $100,000 deductible 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.
Interest Expense and Finance Income, net. Interest expense and finance
income, net decreased $13.3 million to $20.5 million in the third quarter of
2002 from $33.8 million in the corresponding period in 2001. Interest expense
and finance income, net decreased $24.8 million to $81.5 million in the first
nine months of 2002 from $106.3 million in the corresponding period in 2001.
These decreases related primarily to lower interest expense due to the
repurchase of certain debt securities in the third quarter of 2001 and in the
second quarter of 2002 and lower interest rates on our floating rate debt. The
decrease was partially offset by lower interest income as cash balances
declined.
Gain or Loss on Extinguishment of Long-term Debt. In the third quarter and
first nine months of 2002, we recorded a loss on extinguishment of long-term
debt of $0.2 million and $19.5 million, respectively, related to the repurchase
of certain long-term debt. The third quarter loss related to a premium paid for
the repurchase of a portion of our 11 1/2% Subordinated Debentures. The loss
recorded for the first nine months of 2002 included premiums associated with the
early repayment of long-term debt of $9.4 million, a write-off of unamortized
deferred financing costs related to this 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. In the nine
months ended September 30, 2002, 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.
In the third quarter of 2001, we repurchased in the open market $21.3
million in face value of our 9 1/2% Senior Notes due September 15, 2004, $30.6
million in face value of our 10 7/8% Senior Notes due December 1, 2005, and $5.9
million in face value of our 11 1/2% Exchangeable Preferred Stock. As a result
of these transactions, we recorded a gain of $8.7 million, which included
discounts of $9.3 million offset by the write-off of deferred financing costs
related to the notes. Related to the repurchase of a portion of the 9 1/2%
Senior Notes due September 15, 2004, PRG recorded a gain of $0.8 million, which
included a discount of $1.0 million offset by the write-off of deferred
financing costs.
Income Tax (Provision) Benefit. We recorded a $15.0 million income tax
benefit in the third quarter of 2002 versus an income tax provision of $31.4
million in the corresponding period in 2001. We recorded a $99.9 million income
tax benefit in the first nine months of 2002 versus an income tax provision of
$78.7 million in the corresponding period in 2001. The income tax provision of
$78.7 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 $78.8 million (Premcor USA -
$77.4 million; PRG - $42.0 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
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.
45
Outlook
The forward-looking statements made in this Outlook section, as well as any
forward-looking statements within other sections of this Form 10-Q, reflect our
expections regarding future events as of the date of the filing of this Form
10-Q. 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. For example, set forth in the Refinery
Operations section below, we discuss our expectations regarding the performance
of our Port Arthur and Lima refineries for the fourth quarter of 2002. Despite
our expectations, factors beyond our control such as the reliability and
efficiency of our operating facilities, the impact of severe weather, crude oil
supply interruptions, and acts of war or terrorism could result in restricted
operations, unplanned downtime, and other unanticipated results. See the
Forward-Looking Statements section of this Management's Discussion and Analysis
of Financial Condition and Results of Operations for an expanded list of the
factors that could cause actual results to differ materially from our current
expectations.
Market. Crack spreads for the fourth quarter of 2002 through the date of
this filing have improved, with the average Gulf Coast and Chicago crack spreads
60% to 90% higher for the month of October 2002 than the average for the first
nine months of 2002. We believe these margins have been driven by the decline in
refined product inventories principally caused by production cuts due to poor
margins earlier this year and major maintenance activities as well as production
and transportation interruptions due to hurricanes Isidore and Lili. Crude oil
differentials have shown a slight improvement from the low levels reached
earlier this year.
Refinery Operations. 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 in this Form 10-Q, we will not receive any discounts on our
purchases of Maya crude oil under our long-term crude oil supply agreement
through the balance of 2002. Ancillary crude costs, primarily transportation, at
Port Arthur averaged $0.95 per barrel of crude oil throughput for the first nine
months of 2002. Our reformer unit is expected to be down for repairs for
approximately two weeks during late October and early November and crude oil
throughput rates will be restricted during this period. No significant downtime
is planned for our Port Arthur refinery for the balance of 2002, and we expect
crude oil throughput rates in the fourth quarter of 2002 to continue at, or
near, their year-to-date rate in 2002.
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 crack
spread. This refinery consumes approximately 95% light sweet crude oil with the
balance being light sour crude oils. 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 $1.49 per barrel of crude
throughput for the first nine months of 2002. In the fourth quarter of 2002, the
Lima refinery plans to shutdown its reformer unit for an estimated 7-10 days for
repairs, which will restrict crude oil throughput rates as well as other unit
operations. However, crude oil throughput in the fourth quarter of 2002 is
expected to remain at or above year-to-date levels.
Operating Expenses. Natural gas is the most variable component of our
operating expenses. On an annual basis, our refineries consume approximately
26.7 million mmbtu of natural gas. Excluding the Hartford refinery, we
anticipate this usage will be 25.9 million mmbtu. In a normalized natural gas
pricing environment and assuming average crude oil throughput levels, our annual
operating expenses should range between $450 million and $475 million. The
closure of the Hartford refinery is expected to reduce this amount to $360
million to $380 million.
General and Administrative Expenses. During 2002, we restructured our
general and administrative operations to reduce our overhead costs. As part of
these cost reductions, we have indefinitely suspended our Senior Executive
Retirement Plan, or SERP, and the plan participants have consented to the
suspension. In addition, Mr. O'Malley, our chairman, chief executive officer,
and president, has voluntarily agreed to reduce his annual salary by 40% from
$500,000 to $300,000. Mr O'Malley may reinstate his previous annual salary by
giving 30 days notice to us. The SERP may be reinstated with approval of the
board of directors. We expect the restructuring
46
to be completed by the end of the first quarter of 2003, and we expect our
general and administrative expenses to total approximately $38 million for 2003.
We recognize non-cash, stock option compensation expense computed under
SFAS No. 123. As of September 30, 2002, we had incurred $9.9 million in stock
option compensation expense for all stock options granted to date in 2002,
representing 77% of all stock options currently outstanding. We expect to record
$4.2 million per quarter for approximately nine more quarters, reflecting the
remaining vesting period for the outstanding 2002 options granted to date.
Future stock option grants will be expensed pursuant to the recognition
provisions of SFAS No. 123.
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.
The Company's major insurance policies renewed on October 1, 2002 with a
one-year term. Due primarily to the continuing effects of the events of
September 11, 2001 on the insurance market, certain coverage terms, including
terrorism coverage, were restricted or eliminated at renewal, certain
deductibles were raised, certain coverage limits were lowered, and overall
premium rates increased by 23%. Higher insurance premium expenses will be
reflected in our results beginning in the fourth quarter.
Depreciation and Amortization. Depreciation and amortization expense for
the third quarter of 2002 was $20.8 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 $90 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 September 30,
2002, our annual gross 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. Reported interest expense is reduced by capitalized interest.
Income Taxes. Our effective tax rate for the nine months ended September
30, 2002 was 37.9% and approximates the rate we expect for all of 2002.
Capital Expenditures and Turnarounds. Capital expenditures and turnarounds
for the first nine months of 2002 totaled $97.5 million. We plan to expend
approximately $30 million to $50 million in the fourth quarter of 2002 and
approximately $175 million in 2003. We plan to fund capital expenditures with
internally generated funds. However, if the average market environment
experienced in the first nine months of 2002 continues, this plan may not be
practicable and we are reevaluating the scope and timing of our capital
expenditures plan.
Liquidity and Capital Resources
Cash Balances
As of September 30, 2002, we had a cash and short-term investment balance
of $158.0 million of which $109.5 million was held by PRG, $1.5 million by
Premcor USA, $3.1 million by Opus Energy, a wholly-owned captive insurance
subsidiary of Premcor Inc., and $43.9 million by Premcor Inc. In addition, under
an amended and restated common security agreement related to PACC's senior debt,
PACC is required to restrict $45.0 million of cash for debt service at all times
plus restrict an amount equal to the next scheduled principal and interest
payment, prorated based on the number of months remaining until that payment is
due. As of September 30, 2002, cash of $51.9 million was restricted under these
requirements.
Premcor Inc. maintains a directors' and officers' insurance policy, which
insures our directors and officers from any claim arising out of an alleged
wrongful act by such persons in their respective capacities as directors and
officers. Pursuant to indemnity agreements between Premcor Inc. and each of our
directors and officers, Premcor
47
Inc. has formed a captive insurance subsidiary, Opus Energy, to provide
additional financial coverage for such claims. Premcor Inc. has funded an
initial $3.0 million and has committed to funding $1 million annually until a
loss fund of $10 million is established.
The common security agreement related to PACC's senior debt, prior to the
restatement mentioned above, reserved all of PACC's cash under a secured account
structure. The amended and restated common security agreement was a result of
the Sabine restructuring and eliminated the requirements of the secured cash
account structure. Except for the PACC cash restrictions mentioned above, there
are no restrictions limiting dividends from PACC to PRG and, under the amended
working capital facility, PACC is required to dividend to PRG all excess cash
over $20 million, excluding the restricted debt service amounts. Also, pursuant
to the amended working capital facility, if an aggregate intercompany payable
from PRG to PACC exceeds $40 million at any time, PACC shall forgive PRG such
excess amount, which would take the form of a non-cash dividend. No such
dividends have been made as of September 30, 2002.
Cash Flows from Operating Activities
Net cash used in operating activities for the nine months ended September
30, 2002 was $42.2 million compared to net cash provided from operations of
$390.2 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 September 30, 2002 was
$291.7 million, a 1.51-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 September 30, 2002 remained 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 recoverable in the ordinary course of business.
We have increased our reserve for uncollectible accounts receivable to $3.2
million primarily in response to increased risk with respect to our wholesale
customers caused by the continued downturn of the U.S. economy.
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. ("PMI"), 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 PMI, and PMI is
obligated to sell Maya crude oil to PACC. 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 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 September 30, 2002, a cumulative quarterly surplus of $61.7 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
48
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 third quarter 2002 average of $4.92 per
barrel, and assuming a similar Gulf Coast crack spread, we estimate the current
$61.7 million cumulative surplus would be fully reversed after the third 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 PMI
contract as described above.
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 upon securing
additional commitments. 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 September 30, 2002 was $797.1 million with $520.2 million
of the facility utilized for letters of credit. As of September 30, 2002, there
were no direct cash borrowings under the credit agreement.
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.
Other Commitments
In 1999, we sold crude oil linefill in the pipeline system supplying the
Lima refinery to Koch Supply and Trading L.P. or Koch. As part of the agreement
with Koch, we were required to repurchase approximately 2.7 million barrels of
crude oil in this pipeline system in September 2002. On October 1, 2002, Morgan
Stanley Capital Group Inc., or MSCG, purchased the 2.7 million barrels of crude
oil from Koch in lieu of our purchase obligation. We have agreed to purchase
those barrels of crude oil from MSCG upon termination of our agreement with
them, at then current market prices as adjusted by certain predetermined
contract provisions. The initial term of the contract continues until October 1,
2003, and thereafter, automatically renews for additional 30-day periods unless
terminated by either party. We have hedged the economic price risk related to
the repurchase obligation through the purchase of exchange-traded futures
contracts.
Clark Retail Group, Inc. and its wholly owned subsidiary, CRE, filed a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code on October 15, 2002. As part of PRG's sale of its retail business to CRE in
July 1999, PRG assigned approximately 170 leases and subleases of retail stores
to CRE. PRG remains jointly and severally liable for CRE's obligations under
these leases, including payment of rent and environmental cleanup
responsibilities for releases of petroleum occurring during the term of the
leases. Should CRE reject some or all of these leases, PRG may become
responsible for these obligations. We are currently evaluating what the
financial impact on us will be if PRG is forced to assume liability for the rent
and cleanup obligations under a significant number of these leases. Should any
of these leases revert to PRG, we will attempt to reduce the potential liability
by subletting or reassigning the leases.
49
Cash Flows from Investing Activities
Cash flows used in investing activities for the nine months ended September
30, 2002 were $91.8 million as compared to $98.5 million in the year-earlier
period. Activity in both the nine months ended September 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 $65
million in 2002, of which $56.8 million has been spent as of September 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 $15.2
million has been spent as of September 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 $545 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 for highway use
produced 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 $255 million, an increase of $79 million from 2001 year-end
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.
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 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 Achievable 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,
50
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. We are performing some tests at
our Lima refinery that will determine if we currently meet the MACT II
standards. If the tests confirm this compliance then our MACT II spending can be
reduced to $25 million. We should know the results of these tests for our
year-end 2002 reporting.
Our budget for complying with Tier 2 gasoline standards, on-road diesel
regulations and the MACT II regulations is approximately $64 million in 2002, of
which $25.5 million has been spent as of September 30, 2002. It is our intention
to fund expenditures necessary to comply with these new environmental standards
with cash flow from operations. However, if the average market environment
experienced in the first nine months of 2002 continues, 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.
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 nine months ended September 30, 2002 of $5.5 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 $219.8 million for the nine
months ended September 30, 2002 compared to $68.8 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 September 30, 2002,
Premcor Inc. had contributed a net $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 $645.2 million in principal, of which $443.3
million related to PRG long-term debt. In June 2002, PRG redeemed the remaining
$150.4 million of its 9 1/2% Senior Notes due September 15, 2004 at par and
Premcor USA redeemed the remaining $144.4 million of its 10 7/8% Senior Notes
with a $5.2 million premium, mainly from capital contributions received from
Premcor Inc. PRG also made principal payments of $1.0 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. In 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 a $3.1
million premium from capital contributions received from Premcor Inc. In the
third quarter of 2002, Premcor USA purchased an additional $3.4 million in
aggregate principal amount of its 11 1/2% Subordinated Debentures at a premium
of $0.2 million from capital contributions received from Premcor Inc.
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 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. In the third quarter of 2002,
PACC made a mandatory $4.3 million principal payment on its 12 1/2% Senior Notes
due 2009.
Cash and cash equivalents restricted for debt service increased by $21.1
million, of which an increase of $45.2 million related to future principal
payments and is included in cash flows from financing activity and a decrease of
$24.1 million related to future interest payments and is included in cash flows
from operating activities. The
51
increase in the amount restricted for principal payments mainly reflected the
new requirement under the amended and restated common security agreement to
maintain a $45.0 million debt service reserve at all times.
In September 2001, Premcor USA repurchased in the open market $21.3 million
in face value of its 9 1/2% Senior Notes, $30.6 million in face value of its
10 7/8% Senior Notes, and $5.9 million in face value of its 11 1/2% Exchangeable
Preferred Stock, which on April 1, 2002 was converted into 11 1/2% Subordinated
Debentures due 2009, for an aggregate purchase price of $48.5 million. Premcor
USA recorded a gain of $8.7 million related to the repurchase of this debt,
which included a discount of $9.3 million and a write-off of associated deferred
financing costs of $0.6 million. In relation to these repurchases of long-term
debt, PRG recorded a gain of $0.8 million which included a discount of $1.0
million and the write-off of deferred financing costs of $0.2 million related to
the repurchase of its debt.
In September 2001, PRG made a capital contribution of $25.8 million to
Premcor USA of which $25.0 million was utilized by Premcor USA to repurchase a
portion of its long-term debt and exchangeable preferred stock in the open
market and $0.8 million was for interest payments on Premcor USA's long-term
debt. In 2002, PRG received capital contributions from Premcor USA of $13.5
million.
In 2002, we incurred deferred financing costs of $11.4 million related to
the consent process that permitted the Sabine restructuring, the registration of
the PACC 12 1/2% Senior Notes with the Securities and Exchange Commission
following the 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 for the purpose of extending maturities 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 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. Future working capital,
discretionary capital expenditures, environmentally mandated spending and
acquisitions may require additional debt or equity capital.
New and Proposed Accounting Standards
On January 1, 2002, we adopted Statement of Financial Accounting Standard
("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 July 2001, the Financial Accounting Standards Board, or FASB, 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. We are in the process of evaluating the
impact of the adoption of this standard on our financial position and results of
operations and believe implementation will not have a material impact.
In April 2002, the FASB issued 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.
52
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires the
recognition of liabilities at fair value that are associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Such liabilities include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing or other exit or disposal
activities. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. We will adopt SFAS No. 146 for all
restructuring, discontinued operations, plant closings or other exit or disposal
activities initiated after December 31, 2002.
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 September 30,
2002, we would have been required to write-off unamortized turnaround costs of
approximately $97 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. The portion of our current target
inventory position consisting of sales commitments netted against fixed price
purchase commitments amounts to a net long inventory position of approximately 4
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 fluctuations, 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 cumulative
economic effect of our risk management strategy in the second and third quarter
of 2002 resulted in an approximate $11 million loss as measured against a fully
exposed fixed price commitment target. In the first quarter of 2002, we
benefited by approximately $30 million from having 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.
54
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 position was based
on quoted futures prices. As of September 30, 2002, a 10% change in quoted
futures prices would result in a $8.8 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
During 2002, as of September 30, we repaid $645.2 million of our long-term
debt, leaving an outstanding balance, including current maturities, of $925.3
million at Premcor USA and Premcor Inc. (of which $885.2 million is at PRG) at
September 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 September 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 on an annual basis. As of December 31, 2001, a
1% change in interest rate on our floating rate loans, which totaled $538
million, would result in a $5.4 million change in pretax income on an annual
basis. As of September 30, 2002 and December 31, 2001, there were no borrowings
under our credit agreement.
ITEM 4. - Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operations of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-14 and 15d-14. Based upon that
evaluation, the chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
not been any significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of
evaluation.
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. For additional discussion of our
material pending legal proceedings, see Premcor Inc.'s Registration Statement on
Form S-1 (File 333-70314) dated April 29, 2002 and Premcor USA's and PRG's Forms
10-K for the period ending December 31, 2001.
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. The consent orders dispose of both the federal and state cases.
Legal and Environmental Reserves. As a result of our normal course of
business, we are a party to a number of legal and environmental proceedings. As
of September 30, 2002, we had accrued a total of approximately $99 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 aggregate offering
proceeds 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 a total of 8.0 million 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
underwriting 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 September 30, 2002, $446.5
million of the net proceeds had been used to redeem and repurchase outstanding
long-term debt securities of Premcor Inc.'s subsidiaries. The remaining 7.1
million shares registered under this statement are reserved for issuance under
our three stock incentive plans.
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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 (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 (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 (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 (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 (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 (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 (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 (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 (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 (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 (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 (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 (File 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 (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 (File 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 (File 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 (File 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 (File No.
1-11392)).
10.1 Amendment to the Premcor 2002 Equity Incentive Plan dated October 24, 2002
(filed herewith).
10.2 First Amendment to the Premcor Pension Plan dated August 29, 2002 (filed
herewith).
10.3 Second Amendment to the Premcor Retirement Savings Plan dated August 29,
2002 (filed herewith).
10.4 Crude Oil Sale and Supply Agreement effective as of September 13, 2002 by
and between PRG and Morgan Stanley Capital Group Inc. (filed herewith).
10.5 Amendment to Crude Oil Sale and Supply Agreement, dated September 13, 2002
by and between PRG and Morgan Stanley Capital Group Inc. (filed herewith).
15.1 Awareness letter dated November 6, 2002, from Deloitte & Touche LLP
concerning the unaudited interim financial information for September 30,
2002 and 2001 (filed herewith).
99.1 Section 906 Chief Executive Officer certificate (filed herewith).
99.2 Section 906 Chief Financial Officer certificate (filed herewith).
59
(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) Premcor Inc. furnished a report dated August 6, 2002 pursuant to
Item 9 (announcing the operating results of the second quarter
and first half of 2002),
(2) Premcor Inc. furnished a report dated August 14, 2002 pursuant to
Item 9 (attaching as exhibits the certifications Premcor Inc.'s
Chief Executive Officer and Chief Financial Officer each
submitted to the SEC under oath in accordance with SEC Order No.
4-460), and
(3) Premcor Inc., Premcor USA Inc., and The Premcor Refining Group
Inc. filed a report dated September 16, 2002 pursuant to Item 5
(announcing plans to further reduce costs by restructuring and
reducing the non-represented workforce at its Port Arthur, Texas
and Lima, Ohio refineries and its St. Louis based administrative
office).
60
(3) 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)
By: /s/ Dennis R. Eichholz
----------------------------------------
Dennis R. Eichholz
Controller (principal
accounting officer and
duly authorized officer)
November 7, 2002
61
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Thomas D. O'Malley, certify that:
1. I have reviewed this quarterly report on Form 10-Q for each of Premcor Inc.,
Premcor USA Inc. and The Premcor Refining Group Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2002 /s/ Thomas D. O'Malley
----------------- --------------------------------
Chairman of the Board, Chief
Executive Officer and President
62
CERTIFICATION
I, William E. Hantke, certify that:
1. I have reviewed this quarterly report on Form 10-Q for each of Premcor Inc.,
Premcor USA Inc. and The Premcor Refining Group Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2002 /s/ William E. Hantke
----------------- -----------------------------
Executive Vice President and
Chief Financial Officer
63