1


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-Q



(Mark One)
 X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---     EXCHANGE ACT OF 1934

For the quarterly period ended      OctoberJanuary 31, 20002001
                               --------------------------

                                       OR

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---     EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number 1-3876
                       ------

                                HOLLY CORPORATION
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             (Exact name of registrant as specified in its charter)

           Delaware                                            75-1056913
- ---------------------------------                         -------------------------------------
 (State or other jurisdiction of                           (I.R.S. Employer
  incorporation or organization)                          Identification No.)

  100 Crescent Court, Suite 1600
           Dallas, Texas                                      75201-6927
- ----------------------------------------                    ------------------------
(Address of principal executive offices)                      (Zip Code)


Registrant's telephone number, including area code     (214) 871-3555
                                                    -----------------------------------

- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X  No
                                      ---   ---

7,550,814 shares of Common Stock, par value $.01 per share, were outstanding on
December 11, 2000.March 5, 2001.


   2




                                HOLLY CORPORATION
                                      INDEX


Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet - (Unaudited) OctoberJanuary 31, 20002001 and July 31, 2000 3 Consolidated Statement of Income (Unaudited) - Three Months and Six Months Ended OctoberJanuary 31, 20002001 and 19992000 4 Consolidated Statement of Cash Flows (Unaudited) - ThreeSix Months Ended OctoberJanuary 31, 20002001 and 19992000 5 Consolidated Statement of Comprehensive Income (Unaudited) - Three Months and Six Months Ended OctoberJanuary 31, 20002001 and 19992000 6 Notes to Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1011 Item 3. Quantitative and Qualitative Disclosures About Market Risk 2021 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 23
This Quarterly Report on Form 10-Q (including documents incorporated by reference herein) contains statements with respect to the Company's expectations or beliefs as to future events. These types of statements are "forward-looking" and are subject to uncertainties. See "Factors Affecting Forward-Looking Statements" on page 10.11. 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HOLLY CORPORATION CONSOLIDATED BALANCE SHEET Unaudited
OCTOBERJANUARY 31, JULY 31, 2001 2000 2000 ----------- -------------------- ------------ ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents...................................................equivalents .................................................................. $ 33,59528,531 $ 3,628 Accounts receivable: Product........................................... 69,532Product .............................................................. 55,337 65,988 Crude oil resales................................. 134,449resales .................................................... 93,742 123,978 --------- --------- 203,981------------ ------------ 149,079 189,966 Inventories: Crude oil and refined products.................... 49,330products ....................................... 55,670 49,340 Materials and supplies............................ 10,008supplies ............................................... 10,109 10,193 Reserve for lower of cost or market...............market .................................. (2,934) (2,934) --------- --------- 56,404------------ ------------ 62,845 56,599 Income taxes receivable .................................................................... 2,629 -- Prepayments and other....................................................... 14,850other ...................................................................... 13,221 16,911 --------- --------------------- ------------ TOTAL CURRENT ASSETS 308,830.................................................................. 256,305 267,104 Properties, plants and equipment, at cost...................................... 364,887cost ..................................................... 373,664 359,937 Less accumulated depreciation, depletion and amortization...................... (188,860)amortization ..................................... (192,668) (184,628) --------- --------- 176,027------------ ------------ 180,996 175,309 Investments in and advances to joint ventures.................................. 13,865ventures ................................................. 11,407 11,749 Other assets................................................................... 8,012assets .................................................................................. 7,910 10,200 --------- --------------------- ------------ TOTAL ASSETS...........................................................ASSETS .......................................................................... $ 506,734456,618 $ 464,362 ========= ===================== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................................................payable ........................................................................... $ 237,326198,686 $ 223,870 Accrued liabilities......................................................... 26,325liabilities ........................................................................ 24,901 22,956 Income taxes payable........................................................ 14,124payable ....................................................................... 1,085 6,177 Current maturities of long-term debt........................................debt ....................................................... 13,738 13,738 --------- --------------------- ------------ TOTAL CURRENT LIABILITIES.............................................. 291,513LIABILITIES ............................................................. 238,410 266,741 Deferred income taxes.......................................................... 24,846taxes ......................................................................... 25,291 25,183 Long-term debt, less current maturities........................................ 42,857maturities ....................................................... 34,286 42,857 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value - 1,000,000 shares authorized; none issued.............................................................issued ................ -- -- Common stock, $.01 par value - 20,000,000 shares authorized; 8,650,282 shares issued.................................................issued ....... 87 87 Additional capital..........................................................capital ......................................................................... 6,132 6,132 Retained earnings........................................................... 149,346earnings .......................................................................... 160,529 130,293 --------- --------- 155,565------------ ------------ 166,748 136,512 Common stock held in treasury, at cost - 1,099,468 shares...................shares .................................. (7,793) (7,793) Other comprehensive income (loss)........................................... (254) .......................................................... (324) 862 --------- --------------------- ------------ TOTAL STOCKHOLDERS' EQUITY............................................. 147,518EQUITY ............................................................ 158,631 129,581 --------- --------------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................EQUITY ............................................ $ 506,734456,618 $ 464,362 ========= ===================== ============
See accompanying notes. 3 4 HOLLY CORPORATION CONSOLIDATED STATEMENT OF INCOME Unaudited
THREE MONTHS ENDED OCTOBERSIX MONTHS ENDED JANUARY 31, -------------------------------------JANUARY 31, ---------------------------- ---------------------------- 2001 2000 1999 ---------------- -----------------2001 2000 ------------ ------------ ------------ ------------ (In thousands, except per share data) SALES AND OTHER REVENUES .................................................................... $ 325,963283,140 $ 200,631218,424 $ 609,103 $ 419,055 OPERATING COSTS AND EXPENSES Cost of products sold ................................. 254,235 159,830................................... 224,761 190,692 478,996 350,522 Operating expenses .................................... 24,382 23,239...................................... 25,807 21,885 50,189 45,124 Selling, general and administrative expenses .......... 6,973 4,868............ 5,190 5,287 12,163 10,155 Depreciation, depletion and amortization .............. 6,552 6,416................ 6,407 6,957 12,959 13,373 Exploration expenses, including dry holes ............. 234 303 --------------- ---------------............... 599 299 833 602 ------------ ------------ ------------ ------------ TOTAL OPERATING COSTS AND EXPENSES ............... 292,376 194,656 --------------- ---------------expenses ................. 262,764 225,120 555,140 419,776 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS ................................... 33,587 5,975.............................. 20,376 (6,696) 53,963 (721) OTHER INCOME (EXPENSE) Equity in earnings of joint ventures .................. 1,067 631.................... 908 (73) 1,975 558 Interest income ....................................... 576 264......................................... 823 159 1,399 423 Interest expense ...................................... (1,436) (1,561) --------------- --------------- 207 (666) --------------- ---------------........................................ (1,342) (1,458) (2,778) (3,019) ------------ ------------ ------------ ------------ 389 (1,372) 596 (2,038) ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES ............................... 33,794 5,309.......................... 20,765 (8,068) 54,559 (2,759) Income tax provision (benefit) Current ............................................... 13,013 2,332................................................. 7,765 (2,917) 20,778 (585) Deferred .............................................. 369 (249) --------------- --------------- 13,382 2,083 --------------- ---------------................................................ 458 (248) 827 (497) ------------ ------------ ------------ ------------ 8,223 (3,165) 21,605 (1,082) ------------ ------------ ------------ ------------ NET INCOME ...............................................(LOSS) .......................................... $ 20,41212,542 $ 3,226 =============== ===============(4,903) $ 32,954 $ (1,677) ============ ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE (basic and diluted) ............... $ 2.701.66 $ 0.39 =============== ===============(0.59) $ 4.36 $ (0.20) ============ ============ ============ ============ CASH DIVIDENDS PAID PER COMMON SHARE ............................................ $ 0.18 $ 0.17 =============== ===============$ 0.36 $ 0.34 ============ ============ ============ ============ AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING .....outstanding ....... 7,551 8,254 =============== ===============7,551 8,254 ============ ============ ============ ============
See accompanying notes. 4 5 HOLLY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited
THREESIX MONTHS ENDED OCTOBERJANUARY 31, ------------------------------------------------------ 2001 2000 1999 ---------- ---------------------- ------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income ..............................................(loss) ............................................ $ 20,41232,954 $ 3,226(1,677) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization ............ 6,552 6,416................. 12,959 13,373 Deferred income taxes ............................... 369 (249).................................... 827 (497) Dry hole costs and leasehold impairment .................. 328 -- Equity in earnings of joint ventures ................ (1,067) (631)..................... (1,975) (558) (Increase) decrease in current assets Accounts receivable ............................... (14,015) (20,823).................................... 42,186 (28,255) Inventories ....................................... 195 4,945............................................ (6,246) 1,429 Income taxes receivable ................................ (2,629) (5,447) Prepayments and other ............................. 667 (129).................................. 714 51 Increase (decrease) in current liabilities Accounts payable .................................. 13,456 23,787....................................... (25,184) 50,154 Accrued liabilities ............................... 3,369 1,745.................................... 1,945 (584) Income taxes payable .............................. 7,947 (4,897)................................... (5,092) (7,641) Turnaround expenditures ............................. (471) --.................................. (977) (125) Other, net .......................................... 164 (181) ---------- ----------............................................... 306 (308) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES .......... 37,578 13,209............... 50,116 19,915 CASH FLOWS FROM FINANCING ACTIVITIES Increase in borrowings under credit agreement ................ -- 4,300 Payment of long-term debt .................................... (8,571) (8,579) Debt issuance costs ..................................... (50).......................................... (100) -- Cash dividends .......................................... (1,359) (1,403) ---------- ----------............................................... (2,718) (2,806) ------------ ------------ NET CASH USED FOR FINANCING ACTIVITIES ............. (1,409) (1,403).................. (11,389) (7,085) CASH FLOWS FROM INVESTING ACTIVITIES Additions to properties, plants and equipment ........... (5,153) (5,994)................ (14,875) (10,882) Investments and advances to joint ventures ................................. (1,049) -- Distributions from joint venture ........................ --ventures ............................ 2,100 750 ---------- ---------------------- ------------ NET CASH USED FOR INVESTING ACTIVITIES ............. (6,202) (5,244) ---------- ----------.................. (13,824) (10,132) ------------ ------------ CASH AND CASH EQUIVALENTS INCREASE FOR THE PERIOD ................................. 29,967 6,562...................................... 24,903 2,698 Beginning of year ................................................................................... 3,628 4,194 ---------- ---------------------- ------------ END OF PERIOD ........................................................................................... $ 33,59528,531 $ 10,756 ========== ==========6,892 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during period for Interest ........................................................................................... $ 3632,970 $ 2673,307 Income taxes ................................................................................... $ 5,02328,404 $ 7,20512,456
See accompanying notes. 5 6 HOLLY CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Unaudited
THREE MONTHS ENDED OCTOBERSIX MONTHS ENDED JANUARY 31, --------------------------JANUARY 31, ------------------------ ------------------------ 2001 2000 19992001 2000 ---------- ---------- ---------- ---------- (In thousands) NET INCOME ......................................................(LOSS) ............................................... $ 20,41212,542 $ 3,226(4,903) $ 32,954 $ (1,677) Other comprehensive income Unrealized income (loss) on securities available for sale .... (1,856) 525(116) 787 (1,972) 1,312 Income tax provision (benefit) ............................... (740) 217(46) 309 (786) 526 ---------- ---------- (1,116) 308---------- ---------- (70) 478 (1,186) 786 ---------- ---------- ---------- ---------- TOTAL COMPREHENSIVE INCOME ......................................(LOSS) ............................... $ 19,29612,472 $ 3,534(4,425) $ 31,768 $ (891) ========== ========== ========== ==========
See accompanying notes. 6 7 HOLLY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A - Presentation of Financial Statements In the opinion of the Company, the accompanying consolidated financial statements, which have not been audited by independent accountants, reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's consolidated financial position as of OctoberJanuary 31, 2000,2001, the consolidated results of operations and comprehensive income for the three months and six months ended OctoberJanuary 31, 20002001 and 1999,2000, and consolidated cash flows for the threesix months ended OctoberJanuary 31, 20002001 and 1999.2000. Certain notes and other information have been condensed or omitted. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2000. References herein to the "Company" are for convenience of presentation and may include obligations, commitments or contingencies that pertain solely to one or more affiliates of the Company. Results of operations for the first threesix months of fiscal 2001 are not necessarily indicative of the results to be expected for the full year. Note B - New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and that those instruments be measured at fair value. SFAS No. 133 also prescribes the accounting treatment for changes in the fair value of derivatives which depends on the intended use of the derivative and the resulting designation. Designations include hedges of the exposure to changes in the fair value of a recognized asset, liability or liability,firm commitment, hedges of the exposure to variable cash flows of a forecasted transaction, hedges of the exposure to foreign currency translations, and derivatives not designated as hedging instruments,instruments. SFAS No. 133 requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge criteria are met. Specific accounting for qualifying hedges allows a derivative instrument's gains and losses to offset related results on the hedged item in the statement of income, to the extent effective, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 with early adoption permitted. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133," which amended certain accounting and reporting standards of FASB 133. Effective as of August 1, 2000, the Company adopted SFAS No. 133. During the three months ended October 31, 2000, the Company did not hold any derivative instruments that would be covered under SFAS No. 133. 7 8 HOLLY CORPORATIONIn January 2001, the Company entered into energy commodity futures contracts to hedge certain firm commitments to purchase crude oil and deliver gasoline. The purpose of the hedge is to help protect the Company from the risk that the refining margin with respect to the hedged gasoline sales will decline. Due to the strict requirements of SFAS 133 in measuring effectiveness of hedges, this particular hedge transaction did not qualify for hedge accounting. The energy commodity futures contracts entered into were marked to the current fair market value at January 31, 2001, and as a result a gain of $20,000 was included in revenue for the quarter ended January 31, 2001. Note C - Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for net income.
THREE MONTHS ENDED SIX MONTHS ENDED JANUARY 31, JANUARY 31, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (In thousands, except share data) Net income (loss) ........................................ $ 12,542 $ (4,903) $ 32,954 $ (1,677) Average number of shares of common stock outstanding ..... 7,551 8,254 7,551 8,254 Effect of dilutive stock options ......................... 19 -- 2 -- ---------- ---------- ---------- ---------- Average number of shares of common stock outstanding assuming dilution .................... 7,570 8,254 7,553 8,254 ========== ========== ========== ========== Income (loss) per share - basic .......................... $ 1.66 $ (0.59) $ 4.36 $ (0.20) ========== ========== ========== ========== Income (loss) per share - diluted ........................ $ 1.66 $ (0.59) $ 4.36 $ (0.20) ========== ========== ========== ==========
Note D - Segment Information The Company has two major business segments: Refining and Pipeline Transportation. The Refining segment is engaged in the refining of crude oil and wholesale marketing of refined products, such as gasoline, diesel fuel and jet fuel, and includes the Company's Navajo Refinery and Montana Refinery. The petroleum products produced by the Refining segment are marketed in the southwestern United States, Montana and northern Mexico. Certain pipelines and terminals operate in conjunction with the Refining segment as part of the supply and distribution networks of the refineries. The Refining segment also includes the equity earnings from the Company's 50% interest in NK Asphalt Partners, which manufactures and markets asphalt and asphalt products in Arizona 8 9 and New Mexico. The Pipeline Transportation segment includes approximately 1,300 miles of the Company's pipeline assets in Texas and New Mexico. Revenues from the Pipeline Transportation segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations. The Pipeline Transportation segment also includes the equity earnings from the Company's 25% interest in Rio Grande Pipeline Company, which provides petroleum products transportation. Operations of the Company that are not included in the two reportable segments are included in Corporate and Other, which includes costs of Holly Corporation, the parent company, consisting primarily of general and administrative expenses and interest charges, as well as a small-scale oil and gas exploration and production program, and a small equity investment in retail gasoline stations and convenience stores. The accounting policies for the segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K for the year ended July 31, 2000. The Company's reportable segments are strategic business units that offer different products and services.
TOTAL FOR PIPELINE REPORTABLE CORPORATE CONSOLIDATED REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL -------- -------------- -------------- -------------- -------------- ------------------------ --------- ------------ (In thousands) THREE MONTHS ENDED OCTOBERJANUARY 31, 2001 Sales and other revenues ............. $277,394 $ 4,902 $ 282,296 $ 844 $ 283,140 EBITDA(1) ............................ $ 25,582 $ 3,958 $ 29,540 $ (1,849) $ 27,691 Income (loss) from operations ........ $ 19,531 $ 2,834 $ 22,365 $ (1,989) $ 20,376 Income (loss) before income taxes .... $ 19,473 $ 3,576 $ 23,049 $ (2,284) $ 20,765 THREE MONTHS ENDED JANUARY 31, 2000 Sales and other revenues ........................ $213,686 $ 320,3533,683 $ 4,647217,369 $ 325,0001,055 $ 963218,424 EBITDA(1) ............................ $ 325,963 EBITDA(1) ..........................(1,249) $ 40,0052,296 $ 3,4001,047 $ 43,405(859) $ (2,199) $ 41,206188 Income (loss) from operations .............. $ 33,154(7,510) $ 2,8202,022 $ 35,974(5,488) $ (2,387)(1,208) $ 33,587(6,696) Income (loss) before income taxes ...... $ 33,766(7,584) $ 3,0292,007 $ 36,795(5,577) $ (3,001)(2,491) $ 33,794 THREE(8,068) SIX MONTHS ENDED OCTOBERJANUARY 31, 19992001 Sales and other revenues ........................ $597,747 $ 195,8499,549 $ 3,651607,296 $ 199,5001,807 $ 1,131609,103 EBITDA(1) ............................ $ 200,631 EBITDA(1) ..........................65,587 $ 10,7007,358 $ 2,94772,945 $ 13,647(4,048) $ (625) $ 13,02268,897 Income (loss) from operations .............. $ 5,12252,685 $ 1,9865,654 $ 7,10858,339 $ (1,133)(4,376) $ 5,97553,963 Income (loss) before income taxes ...... $ 5,05653,239 $ 2,6546,605 $ 7,71059,844 $ (2,401)(5,285) $ 5,30954,559 SIX MONTHS ENDED JANUARY 31, 2000 Sales and other revenues ............. $409,535 $ 7,334 $ 416,869 $ 2,186 $ 419,055 EBITDA(1) ............................ $ 9,451 $ 5,243 $ 14,694 $ (1,484) $ 13,210 Income (loss) from operations ........ $ (2,388) $ 4,008 $ 1,620 $ (2,341) $ (721) Income (loss) before income taxes .... $ (2,528) $ 4,661 $ 2,133 $ (4,892) $ (2,759)
(1) Earnings Before Interest, Taxes, Depreciation and Amortization. 89 910 HOLLY CORPORATION Note DE - Contingencies In August 1998, a lawsuit (the "Longhorn Suit") was filed in state district court in El Paso, Texas against the Company and two of its subsidiaries (along with an Austin, Texas law firm which was subsequently dropped from the case). The suit was filed by Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), a Delaware limited partnership composed of Longhorn Partners GP, L.L.C. as general partner and affiliates of Exxon Pipeline Company, BP/Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. and Chisholm Holdings as limited partners. The suit, as most recently amended by Longhorn Partners in September 2000, seeks damages alleged to total up to $1,050,000,000 (after trebling) based on claims of violations of the Texas Free Enterprise and Antitrust Act, unlawful interference with existing and prospective contractual relations, and conspiracy to abuse process. The specific actions of the Company complained of in the Longhorn Suit, as currently amended, are alleged solicitation of and support for allegedly baseless lawsuits brought by Texas ranchers in federal and state courts to challenge the proposed Longhorn Pipeline project, support of allegedly fraudulent public relations activities against the proposed Longhorn Pipeline project, entry into a contractual "alliance" with Fina Oil and Chemical Company, threatening litigation against certain partners in Longhorn Partners, and alleged interference with the federal court settlement agreement that provided for an Environmental Assessment of the Longhorn Pipeline. In early October 2000, the Company filed an amended motion for summary judgment, amending a motion for summary judgment originally filed in February 2000, seeking a court ruling that would terminate this litigation. A hearing on the Company's amended motion for summary judgment, is currently scheduled for earlywhich seeks a court ruling that would terminate this litigation, was held January 2001.3, 2001; as of the date of this report, the court has not issued a ruling with respect to this motion. The Company believes that the Longhorn Suit is wholly without merit and plans to continue to defend itself vigorously. The Company also plans to pursue at the appropriate time any affirmative remedies that may be available to it relating to the Longhorn Suit. 910 1011 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FACTORS AFFECTING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts included in this Form 10-Q, including without limitation those under "Results of Operations," "Liquidity and Capital Resources" and "Additional Factors that May Affect Future Results" (including "Risk Management") under this Item 2 regarding the Company's financial position and results of operations, are forward-looking statements. Such statements are subject to risks and uncertainties, including but not limited to risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in the Company's markets, the demand for and supply of crude oil and refined products, the spread between market prices for refined products and crude oil, the possibility of constraints on the transportation of refined products, the possibility of inefficiencies or shutdowns in refinery operations or pipelines, governmental regulations and policies, the availability and cost of financing to the Company, the effectiveness of the Company's capital investments and marketing strategies, and the costs of defense and the risk of an adverse outcome in the Longhorn Pipeline litigation. Because of these and other risks and uncertainties, actual results may vary materially from those estimated, anticipated or projected. Although the Company believes that the expectations reflected by the forward-looking statements contained in this Quarterly Report are reasonable based on information currently available to the Company, no assurances can be given that such expectations will prove to be correct. This summary discussion of risks and uncertainties that may cause actual results to differ from those indicated in forward-looking statements should be read in conjunction with the discussion under the heading "Additional Factors That May Affect Future Results" included in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2000 and in conjunction with the discussion below under the headings "Liquidity and Capital Resources" and "Additional Factors That May Affect Future Results." All forward-looking statements included in this Quarterly Report on Form 10-Q and all subsequent oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth above. 1011 1112 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) RESULTS OF OPERATIONS FINANCIAL DATA (Unaudited)
THREE MONTHS ENDED OCTOBERSIX MONTHS ENDED JANUARY 31, --------------------------------JANUARY 31, ---------------------------- ---------------------------- 2001 2000 1999 -------------- --------------2001 2000 ------------ ------------ ------------ ------------ (In thousands, except share data) Sales and other revenues .................................................................. $ 325,963283,140 $ 200,631218,424 $ 609,103 $ 419,055 Operating costs and expenses Cost of products sold ............................... 254,235 159,830................................... 224,761 190,692 478,996 350,522 Operating expenses .................................. 24,382 23,239...................................... 25,807 21,885 50,189 45,124 Selling, general and administrative expenses ........ 6,973 4,868............ 5,190 5,287 12,163 10,155 Depreciation, depletion and amortization ............ 6,552 6,416................ 6,407 6,957 12,959 13,373 Exploration expenses, including dry holes ........... 234 303 -------------- --------------............... 599 299 833 602 ------------ ------------ ------------ ------------ Total operating costs and expenses ............. 292,376 194,656 -------------- --------------................. 262,764 225,120 555,140 419,776 ------------ ------------ ------------ ------------ Income (loss) from operations ................................. 33,587 5,975.............................. 20,376 (6,696) 53,963 (721) Other income (expense) Equity in earnings of joint ventures ................ 1,067 631.................... 908 (73) 1,975 558 Interest expense, net ............................... (860) (1,297) -------------- -------------- 207 (666) -------------- --------------................................... (519) (1,299) (1,379) (2,596) ------------ ------------ ------------ ------------ 389 (1,372) 596 (2,038) ------------ ------------ ------------ ------------ Income (loss) before income taxes ............................. 33,794 5,309.......................... 20,765 (8,068) 54,559 (2,759) Income tax provision ................................... 13,382 2,083 -------------- --------------....................................... 8,223 (3,165) 21,605 (1,082) ------------ ------------ ------------ ------------ Net income .............................................(loss) .......................................... $ 20,41212,542 $ 3,226 ============== ==============(4,903) $ 32,954 $ (1,677) ============ ============ ============ ============ Net income (loss) per common share (basic and diluted) ............. $ 2.701.66 $ 0.39 ============== ==============(0.59) $ 4.36 $ (0.20) ============ ============ ============ ============ Average number of shares of common stock outstanding .......... 7,551 8,254 ============== ==============7,551 8,254 ============ ============ ============ ============ Sales and other revenues(1) Refining ............................................................................................ $ 320,353277,394 $ 195,849213,686 $ 597,747 $ 409,535 Pipeline Transportation ............................. 4,647 3,651................................. 4,902 3,683 9,549 7,334 Corporate and Other ................................. 963 1,131 -------------- --------------..................................... 844 1,055 1,807 2,186 ------------ ------------ ------------ ------------ Consolidated .................................................................................... $ 325,963283,140 $ 200,631 ============== ==============218,424 $ 609,103 $ 419,055 ============ ============ ============ ============ Income (loss) from operations(1) Refining ............................................................................................ $ 33,15419,531 $ 5,122(7,510) $ 52,685 $ (2,388) Pipeline Transportation ............................. 2,820 1,986................................. 2,834 2,022 5,654 4,008 Corporate and Other ................................. (2,387) (1,133) -------------- --------------..................................... (1,989) (1,208) (4,376) (2,341) ------------ ------------ ------------ ------------ Consolidated .................................................................................... $ 33,58720,376 $ 5,975 ============== ==============(6,696) $ 53,963 $ (721) ============ ============ ============ ============
1112 1213 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 1)(1) The Refining segment includes the Company's principal refinery in Artesia, New Mexico, which is operated in conjunction with refining facilities in Lovington, New Mexico (collectively, the Navajo Refinery) and the Company's refinery near Great Falls, Montana. Included in the Refining Segment are costs relating to pipelines and terminals that operate in conjunction with the Refining segment as part of the supply and distribution networks of the refineries. The Pipeline Transportation segment includes approximately 1,300 miles of the Company's pipeline assets in Texas and New Mexico. Revenues from the Pipeline Transportation segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations. REFINING SEGMENT OPERATING DATA (Unaudited)
THREE MONTHS ENDED OCTOBERSIX MONTHS ENDED JANUARY 31, ---------------------------------JANUARY 31, ------------------------ ------------------------ 2001 2000 1999 --------------- ---------------2001 2000 ---------- ---------- ---------- ---------- Crude charge (BPD)(1) .................. 68,100 61,400.................... 66,900 66,300 67,500 63,900 Average per barrel(2) Refinery margin .............................................. $ 9.737.90 $ 5.713.44 $ 8.83 $ 4.55 Cash operating costs(3) .............. 3.92 4.03 --------------- ---------------................ 4.17 3.77 4.04 3.90 ---------- ---------- ---------- ---------- Net cash operating margin ............(deficit) .... $ 5.813.73 $ 1.68 =============== ===============(0.33) $ 4.79 $ 0.65 ========== ========== ========== ========== Sales of produced refined products Gasolines ............................ 53.3% 56.5%.............................. 58.6% 60.2% 55.9% 58.4% Diesel fuels .................................................... 22.8 21.1 22.9 20.320.7 Jet fuels ............................ 10.7 9.8.............................. 10.1 10.0 10.4 9.9 Asphalt .............................. 9.8 9.5................................ 5.2 5.4 7.5 7.4 LPG and other .................................................. 3.3 3.9 --------------- ---------------3.3 3.3 3.6 ---------- ---------- ---------- ---------- Total ........................................................ 100.0% 100.0% =============== ===============100.0% 100.0% ========== ========== ========== ==========
- ---------- (1) Barrels per day of crude oil processed. (2) Represents average per barrel amounts for produced refined products sold. (3) Includes operating costs and selling, general and administrative expenses of refineries, as well as pipeline expenses that are part of refinery operations. 1213 1314 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) FIRSTSECOND QUARTER OF FISCAL 2001 COMPARED TO FIRSTSECOND QUARTER OF FISCAL 2000 Net income for the firstsecond quarter ended Octoberending January 31, 20002001 was $20.4$12.5 million ($2.701.66 per share), a record quarterly level for the second quarter, as compared to $3.2a net loss of $4.9 million ($.39.59 per share)share loss) for the firstsecond quarter of the prior year. The increasefavorable change in income for the firstsecond quarter of fiscal 2001 as compared to the same quarter of the prior year was principally due to significantly higher refinery margins, which were 70%130% above margins in the prior year's second quarter. Continuing from the first quarter of fiscal 2001, refinery margins stayed very strong through most of the second quarter in the refined product markets served by the Company's Navajo Refinery. Both revenues and cost of products sold were higher in the second quarter of 2001, as compared to the second quarter of fiscal 2000, due to the increased cost of purchased crude oil and, with respect to revenues, higher margins. Income from the pipeline transportation segment also improved in the second quarter, as compared to the prior year, as the Company realized additional revenues from refined product and crude oil transportation activities. Operating expenses increased in the second quarter of fiscal 2001, as compared to the prior year's second quarter, resulting principally from increased utility costs. Favorably impacting earnings in the second quarter of the current year was the beginning of realization of significant benefits from the cost reduction and production efficiency program announced in May 2000, which is currently being implemented. Since the end of the second fiscal quarter, margins for the Company's refining operations have continued to be relatively strong. However, the favorable effect of such margins was reduced in February 2001 due to a decrease in production resulting from planned scheduled maintenance at the Navajo Refinery. Net income for the six months ending January 31, 2001 was $33.0 million ($4.36 per share), a record level for two consecutive quarters, as compared to a net loss of $1.7 million ($.20 per share loss) for the first six months of the prior year. The favorable change in income for the first six months of fiscal 2001 as compared to the same period of the prior year was principally due to significantly higher refinery margins, which were 94% above margins in the prior year's first six months. Beginning in July 2000 and continuing throughout most of the firstsecond quarter of fiscal 2001, refinery margins were very strong in the refined product markets served by the Company's Navajo Refinery. The Company's increased production capabilities for cleaner-burning gasolines required in its Phoenix market enabled the Company to participate more fully participate in the particularly strong margins for this product duringin the quarter.current fiscal year. In addition, refining income was favorably affected by an 8.4%a 4.5% increase in sales volume in the threesix months ended OctoberJanuary 31, 2000,2001, as compared to the prior year's first quarter.comparable period. Both revenues and cost of products sold were higher in the first quartersix months of fiscal 2001 due principally to the increased cost of purchased crude oil. Current refinery margins, while not as high as for the quarter just ended, are running substantially above historic levels for this time period. The Company experienced an increase in operating expenses in the first quartersix months of fiscal 2001, as compared to the prior year's first quarter;six months; this increase in expenses was principally attributable to increased utility costs, offset by lower maintenance and consulting service costs. 14 15 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General and administrative expenses increased in the threesix months ended OctoberJanuary 31, 20002001, due primarily to increased accrued compensation and costs associated with legal proceedings. AdditionallyContributing to income in the first quartersix months of the current fiscal year, over the Company began to realize partprior period, was the Company's share of the benefits from the cost reductionearnings in an asphalt joint venture with a subsidiary of Koch Industries, Inc., which was formed in July 2000, and production efficiency program announcedan increase in May 2000, which is currently being implemented.pipeline transportation income. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $30.0$24.9 million to $33.6$28.5 million during the threesix months ended OctoberJanuary 31, 20002001 as cash flows generated from operations were significantly greater than cash flows required for investing activities, scheduled debt repayments and dividends paid. Working capital increased during the quartersix months ended OctoberJanuary 31, 20002001 by $17.0$17.5 million to $17.3$17.9 million. In April 2000, the Company entered into an agreement with a group of banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit Agreement until October 10, 2001. The Company is currently in discussions with its banks on an extension of this agreement. Under the extensioncurrent agreement, as subsequently amended, the Company will havehas access to $90 million of commitments for both revolving credit loans and letters of credit. Up to $45 million of this facility may be used for revolving credit loans. At OctoberJanuary 31, 20002001 the Company had letters of credit outstanding under the facility of $36.5$35.8 million and had no borrowings outstanding. The Company believes its internally generated cash flow, along with its Credit Agreement, provides sufficient resources through October 2001 to fund capital projects, scheduled repayments of the Senior Notes, continued payment of dividends (although dividend payments must be approved by the Board of Directors and cannot be guaranteed) and the Company's liquidity needs. 13 14 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) In May 2000, the Company announced a cost reduction and production efficiency program that is expected to yield annual pre-tax improvements totaling approximately $20 million. The program is currently being implemented and should be completed by July 2002. The cost reduction and production efficiency program includes productivity enhancements and a reduction in workforce. As part of the implementation of cost reductions, the Company offered a voluntary early retirement program to eligible employees, under which 55 employees are scheduled to retire in fiscal 2001, most of whom will retireretired by December 31, 2000. The pre-tax cost of the voluntary early retirement program was $6.8 million and was reflected in the Company's earnings for the quarter ended July 31, 2000. It is estimated that capital expenditures of approximately $9 million will be required to effectuate some of the production improvements included in the program, of which expenditures totaling approximately $5 million are included in the fiscal 2001 capital budget. Net cash provided by operating activities amounted to $37.6$50.1 million for the first threesix months of fiscal 2001, as compared to $13.2$19.9 million for the same period of the prior year. The increase was primarily due to strong cash flows from the refining operations of the Company in the first quartersix months of the current fiscal year, and was also favorably affected by the deferral of payment of related current income taxes due.year. Cash flows used for financing activities amounted to $1.4$11.4 million in the first threesix months of fiscal 2001, as compared to $1.4$7.1 million in the same period of the prior year. Cash flows used for 15 16 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) financing activities in the first quartersix months of both fiscal years consisted solelyprincipally of repayments of $8.6 million of fixed term debt and dividends paid to shareholders. Currently,The Company has not made any bank borrowings during the current fiscal year. During the first six months of the prior fiscal year, the Company has no outstandingmade net bank borrowings. During the 2001 fiscal year,borrowings of $4.3 million. The next principal payment of $5.2 million on the Company's Senior Notes require principal payments of $8.6 million in December 2000 and $5.2 millionis due in June 2001 respectively.2001. Cash flows used for investing activities were $6.2$13.8 million for the first threesix months of fiscal 2001, as compared to $5.2$10.1 million for the same period of the 2000 fiscal year. AllSubstantially all amounts expended were on capital projects except for $1.0 million invested in a joint venture created in July 2000 to manufacture and market asphalt products. The Company's net cash flow used for investing activities inwas reduced during the first quartersix months of the 2000 fiscal year was reduced2001 by a $2.1 million distribution in that quarter to the Company from the asphalt joint venture and during the first six months of fiscal 2000 by a $0.8 million distribution from the Rio Grande Pipeline Company joint venture of $0.8 million. 14 15 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)venture. The Company has adopted a capital budget of $20 million for fiscal 2001. The components of this budget are $12 million for refinery improvements, $1 million for engineering costs relating to a purchased hydrotreater, as described below, $6 million for pipeline and transportation projects and less than $1 million for oil and gas exploration and production activities. In addition to these projects, the Company plans to expend in the 2001 fiscal year approximately $10 million on capital projects that were approved in previous capital budgets, including a sulfur recovery unit at the Navajo Refinery and a product terminal to be used in conjunction with the leased pipeline to northwest New Mexico described below. In November 1997, the Company purchased a hydrotreater unit for $5 million from a closed refinery. This purchase should give the Company the ability to reconstruct the unit at the Navajo Refinery at a substantial savings relative to the purchase cost of a new unit. The hydrotreater would enhance higher value, light product yields and expand the Company's ability to meet the present California Air Resources Board ("CARB") standards, which have been adopted in the Company's Phoenix market for winter months beginning in the latter part of 2000, and to meet the recently proposed EPA nationwide Low-Sulfur Gasoline requirements scheduled to begin in 2004. During fiscal 2000, the Company relocated the purchased hydrotreater equipment to the Navajo Refinery and purchased certain long-lead-time pieces of equipment for the hydrotreater. Included in the fiscal 2001 capital budget are commitments of approximately $1 million for engineering costs related to the hydrotreater project. Additionally, the Company is infinalizing the processconstruction of constructing a sulfur recovery unit, scheduled for completion early in calendar 2001, which will be immediately utilized to enhance sour crude processing capabilities and would recover additional extracted sulfur when the hydrotreater is completed. The sulfur recovery unit was approved as part of the fiscal 2000 capital budget and remaining costs of the unit are expected to be approximately $5 million. The Company, subject to obtaining necessary permitting in a timely manner, currently expects that the hydrotreater project could be completed by the endlatter half of the 2002 fiscal year.calendar 2002. Remaining costs to complete the hydrotreater project are estimated to be approximately $20 million, in addition to the engineering.engineering costs budgeted for fiscal 2001. Based on the current configuration of the Navajo Refinery, the Company is able to supply current sales volumes into the Phoenix market under the CARB standards prior to completion of the hydrotreater. 16 17 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company has leased from Mid-America Pipeline Company more than 300 miles of 8" pipeline running from Chavez County to San Juan County, New Mexico (the "Leased Pipeline"). The Company has completed a 12" pipeline from the Navajo Refinery to the Leased Pipeline as well as terminalling facilities in Bloomfield and a diesel fuel terminal 40 miles east of Albuquerque in Moriarty. Transportation of petroleum products to markets in northwest New Mexico and diesel fuels to Moriarty began in the latter part of calendar 1999.2000. The Company is expanding its terminal in Moriarty to include gasoline and jet fuel, and the expanded terminal is expected to be operational by the springsummer of 2001. When the Moriarty terminal expansion is completed, the Company will be 15 16 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) positioned to expand the transport of petroleum products from the Navajo Refinery to the Albuquerque area. In July 2000, Navajo Western Asphalt Company ("Navajo Western"), a wholly-owned subsidiary of the Company, and a subsidiary of Koch Materials Company ("Koch") formed a joint venture, NK Asphalt Partners, to manufacture and market asphalt and asphalt products in Arizona and New Mexico under the name "Koch Asphalt Solutions - Southwest." Navajo Western contributed all of its assets to NK Asphalt Partners and Koch contributed its New Mexico and Arizona asphalt and manufacturing assets to NK Asphalt Partners. Each Company owns a 50% interest in the joint venture. All asphalt produced at the Navajo Refinery will be sold to the joint venture under a supply agreement. The Company is required to make additional contributions to the joint venture for each of the next ten years of up to $3,250,000 per year, contingent on the earnings level of the joint venture. The Company expects to finance such contributions from its share of cash flows of the joint venture. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS This discussion should be read in conjunction with the discussion under the heading "Additional Factors That May Affect Future Results" included in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2000. The proposed Longhorn Pipeline is an additional potential source of pipeline transportation of refined products from Gulf Coast refineries to El Paso. This pipeline is proposed to run approximately 700 miles from the Houston area of the Gulf Coast to El Paso, utilizing a direct route. The owner of the Longhorn Pipeline, Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), is a Delaware limited partnership that includes affiliates of Exxon Pipeline Company, BP/Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. and Chisholm Holdings as limited partners. Longhorn Partners has proposed to use the pipeline initially to transport approximately 72,000 BPD of refined products from the Gulf Coast to El Paso and markets served from El Paso, with an ultimate maximum capacity of 225,000 BPD. A critical feature of this proposed petroleum products pipeline is that it would utilize, for approximately 450 miles (including areas overlying the environmentally sensitive Edwards Aquifer and Edwards-Trinity Aquifer and heavily populated areas in the southern part of Austin, Texas) an existing pipeline (previously owned by Exxon Pipeline Company) that was constructed in about 1950 for the shipment of crude oil from West Texas to the Houston area. 1617 1718 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Longhorn Pipeline is not currently operating because of a federal court injunction in August 1998 and a settlement agreement in March 1999 entered into by Longhorn Partners, the United States Environmental Protection Agency ("EPA") and Department of Transportation ("DOT"), and the other parties to the federal lawsuit that had resulted in the injunction and settlement. Additionally, the Longhorn Pipeline is not operating because it lacks valid easements from the Texas General Land Office for crossing certain state-owned stream and river beds; the Texas Land Commissioner has indicated that these easements will not be granted until he is satisfied that the pipeline meets federal safety and other standards. The March 1999 settlement agreement in the federal lawsuit that resulted in the injunction against operation of the Longhorn Pipeline required the preparation of an Environmental Assessment under the authority of the EPA and the DOT while the federal court retained jurisdiction. A final Environmental Assessment (the "Final EA") on the Longhorn Pipeline was released in November 2000. The Final EA is accompanied by a Finding of No Significant Impact that is conditioned on the implementation by Longhorn Partners of a proposed mitigation plan developed by Longhorn Partners which contains 40 mitigation measures, including the replacement of approximately 19 miles of pipe in the Austin area with new thick-walled pipe protected by a concrete barrier. Some elements of the proposed mitigation plan are required to be completed before the Longhorn Pipeline is allowed to operate, with the remainder required to be completed later or to be implemented for as long as operations continue. The plaintiffs in the federal court lawsuit that resulted in the Environmental Assessment of the Longhorn Pipeline have indicated that they will challengechallenged the Final EA in further federal court proceedings that are expected to beginbegan in January 2001. Longhorn Partners has recently indicated that construction relating to certain mitigation measures included in the Final EA may not begin until conclusion of legal challenges to the Final EA. At the date of this report, it is not possible to predict the outcome of legal challenges to the Longhorn Pipeline. 17 18 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) If the Longhorn Pipeline is allowed to operate as currently proposed, the substantially lower requirement for capital investment permitted by the direct route through Austin, Texas and over the Edwards Aquifers would permit Longhorn Partners to give its shippers a cost advantage through lower tariffs that could, at least for a period, result in significant downward pressure on wholesale refined products prices and refined products margins in El Paso and related markets. Although some current suppliers in the market might not compete in such a climate, the Company's analyses indicate that, because of location, recent capital improvements, and on-going enhancements to operational efficiency, the Company's position in El Paso and markets served from El Paso could withstand such a period of lower prices and margins. However, the Company's results of operations could be adversely impacted if the Longhorn Pipeline were allowed to operate as currently proposed. It is not possible to predict whether and, if so, under what conditions, the Longhorn Pipeline ultimately will be allowed to operate, nor is it possible to predict the consequences for the Company of Longhorn Pipeline's operations if they occur. In August 1998, a lawsuit (the "Longhorn Suit") was filed by Longhorn Partners in state district court in El Paso, Texas against the Company and two of its subsidiaries (along with an Austin, Texas 18 19 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) law firm which was subsequently dropped from the case). The suit, as most recently amended by Longhorn Partners in September 2000, seeks damages alleged to total up to $1,050,000,000 (after trebling) based on claims of violations of the Texas Free Enterprise and Antitrust Act, unlawful interference with existing and prospective contractual relations, and conspiracy to abuse process. The specific actions of the Company complained of in the Longhorn Suit, as currently amended, are alleged solicitation of and support for allegedly baseless lawsuits brought by Texas ranchers in federal and state courts to challenge the proposed Longhorn Pipeline project, support of allegedly fraudulent public relations activities against the proposed Longhorn Pipeline project, entry into a contractual "alliance" with Fina Oil and Chemical Company, threatening litigation against certain partners in Longhorn Partners, and alleged interference with the federal court settlement agreement that provided for the Environmental Assessment of the Longhorn Pipeline. The Company believes that the Longhorn Suit is wholly without merit and plans to continue to defend itself vigorously. However, because of the size of the damages claimed and in spite of the apparent lack of merit in the claims asserted, the Longhorn Suit has created increasing problems for the Company, including the exclusion of the Company from the possibility of certain types of major corporate transactions, an adverse impact on the cost of debt financing for Company operations, and what appears to be a continuing adverse effect on the market price of the Company's common stock. The Company plans to pursue at the appropriate time any affirmative remedies that may be available to it relating to the Longhorn Suit. For additional information on the Longhorn Suit, see Part II "Other Information," Item 1, "Legal Proceedings." 18 19 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) RISK MANAGEMENT The Company uses certain strategies to reduce some commodity price and operational risks. The Company does not attempt to eliminate all market risk exposures when the Company believes that the exposure relating to such risk would not be significant to the Company's future earnings, financial position, capital resources or liquidity or that the cost of reducing or eliminating the exposure would outweigh the benefit. The Company's profitability depends largely on the spread between market prices for refined products and crude oil. A substantial or prolonged decrease in this spread could have a significant negative effect on the Company's earnings, financial condition and cash flows. At times, the Company utilizes petroleum commodity futures contracts to minimize a portion of its exposure to price fluctuations associated with crude oil and refined products. SuchIn January 2001, the Company entered into energy commodity futures contracts are used solelyto hedge certain firm commitments to purchase crude oil and deliver gasoline. The hedge is to help manage the price risk inherent in purchasing crude oil in advance of the delivery date and as a hedge for fixed-price sales contracts of refined products and do not increase the market risks to whichprotect the Company is exposed. No such contracts were outstanding duringfrom the three months ended Octoberrisk that the refining margin with respect to the hedged gasoline sales will decline. At January 31, 2000. At October 31, 2000,2001, the Company had outstanding unsecured debt of $56.6$48.0 million and had no borrowings outstanding under its Credit Agreement. The Company does not have significant exposure to changing interest rates on its unsecured debt because the interest rates are fixed, the average maturity is less than three years and such debt represents less than 30%25% of the Company's 19 20 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) total capitalization. As the interest rates on the Company's bank borrowings, if any, under its Credit Agreement are reset frequently based on either the bank's daily effective prime rate or the LIBOR rate, interest rate market risk is very low. Additionally, the Company invests any available cash only in investment grade, highly liquid investments with maturities of three months or less. As a result, the interest rate market risk implicit in these cash investments is low, as the investments mature within three months. A ten percent change in the market interest rate over the next year would also not materially impact the Company's earnings or cash flow, as the interest rates on the Company's long-term debt are fixed, and the Company's borrowings under the Credit Agreement and cash investments are at short-term market rates and such interest has historically not been significant as compared to the total operations of the Company. A ten percent change in the market interest rate over the next year would also not materially impact the Company's financial condition, since the average maturity of the Company's long-term debt is less than three years and such debt represents less than 30%25% of the Company's total capitalization, and since the Company's borrowings, if any, under the Credit Agreement and cash investments are at short-term market rates. 19 20 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company's operations are subject to normal hazards of operations, including fire, explosion and weather-related perils. The Company maintains various insurance coverages, including business interruption insurance, subject to certain deductibles. The Company is not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable or premium costs, in the judgment of the Company, do not justify such expenditures. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and that those instruments be measured at fair value. SFAS No. 133 also prescribes the accounting treatment for changes in the fair value of derivatives which depends on the intended use of the derivative and the resulting designation. Designations include hedges of the exposure to changes in the fair value of a recognized asset, liability or liability,firm commitment, hedges of the exposure to variable cash flows of a forecasted transaction, hedges of the exposure to foreign currency translations, and derivatives not designated as hedging instruments,instruments. SFAS No. 133 requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge criteria are met. Specific accounting for qualifying hedges allows a derivative instrument's gains and losses to offset related results on the hedged item in the statement of income, to the extent effective, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 with early adoption permitted. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133," which amended certain accounting and reporting standards of FASB 133. Effective as of August 1, 2000, the Company adopted SFAS No. 133. During the three months ended October 31, 2000,In January 2001, the Company entered into energy commodity futures contracts to hedge certain firm commitments to purchase crude oil and deliver gasoline. The purpose of the hedge is to help protect 20 21 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) the Company from the risk that the refining margin with respect to the hedged gasoline sales will decline. Due to the strict requirements of SFAS 133 in measuring effectiveness of hedges, this particular hedge transaction did not hold any derivative instruments that would be covered under SFAS No. 133.qualify for hedge accounting. The energy commodity futures contracts entered into were marked to the current fair market value at January 31, 2001, and as a result a gain of $20,000 was included in revenue for the quarter ended January 31, 2001. Item 3. Quantitative and Qualitative Disclosures About Market Risk See "Risk Management" under "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2021 2122 HOLLY CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings In August 1998, a lawsuit (the "Longhorn Suit") was filed in state district court in El Paso, Texas against the Company and two of its subsidiaries (along with an Austin, Texas law firm which was subsequently dropped from the case). The suit was filed by Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), a Delaware limited partnership composed of Longhorn Partners GP, L.L.C. as general partner and affiliates of Exxon Pipeline Company, BP/Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. and Chisholm Holdings as limited partners. The suit, as most recently amended by Longhorn Partners in September 2000, seeks damages alleged to total up to $1,050,000,000 (after trebling) based on claims of violations of the Texas Free Enterprise and Antitrust Act, unlawful interference with existing and prospective contractual relations, and conspiracy to abuse process. The specific actions of the Company complained of in the Longhorn Suit, as currently amended, are alleged solicitation of and support for allegedly baseless lawsuits brought by Texas ranchers in federal and state courts to challenge the proposed Longhorn Pipeline project, support of allegedly fraudulent public relations activities against the proposed Longhorn Pipeline project, entry into a contractual "alliance" with Fina Oil and Chemical Company, threatening litigation against certain partners in Longhorn Partners, and alleged interference with the federal court settlement agreement that provided for an Environmental Assessment of the Longhorn Pipeline. In early October 2000, the Company filed an amended motion for summary judgment, amending a motion for summary judgment originally filed in February 2000, seeking a court ruling that would terminate this litigation. A hearing on the Company's amended motion for summary judgment, is currently scheduled for earlywhich was filed in October 2000 and seeks a court ruling that would terminate this litigation, was held January 2001.3, 2001; as of the date of this report, the court has not issued a ruling with respect to this motion. A motion filed by the Company to transfer the venue for trial of the case from the El Paso court to another Texas court has been pending since May 2000, and no hearing on this motion is currently scheduled. The Company believes that the Longhorn Suit is wholly without merit and plans to continue to defend itself vigorously. The Company also plans to pursue at the appropriate time any affirmative remedies that may be available to it relating to the Longhorn Suit. 21 22 HOLLY CORPORATION Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders on December 14, 2000, all nine of the management's nominees for directors as listed in the proxy statement were elected. ELECTION OF DIRECTORS
Total Votes Total Votes "For" "Withheld" ----------- ----------- Matthew P. Clifton 6,642,247 94,987 W. John Glancy 6,642,141 95,093 William J. Gray 6,648,764 88,470 Marcus R. Hickerson 6,647,010 90,224 A.J. Losee 6,654,502 82,732 Thomas K. Matthews, II 6,650,502 86,732 Robert G. McKenzie 6,657,576 79,658 Lamar Norsworthy 6,656,471 80,763 Jack P. Reid 6,653,666 83,568
Additionally, at the annual meeting of stockholders on December 14, 2000, the following matters were voted upon. The Board of Directors recommended, subject to stockholders' approval, adoption of the 2000 Stock Option Plan to take the place of the current Stock Option Plan, which was adopted in 1990 and under which no options may be granted after December 31, 2000. Adoption of the 2000 Stock Option Plan was approved.
ADOPTION OF 2000 STOCK OPTION PLAN ---------------------------------- Votes For 3,441,354 Votes Against 1,343,502 Abstentions 33,345 Broker Non-Votes 1,919,033
22 23 HOLLY CORPORATION A stockholder submitted a proposal regarding the sale of the Company. The purpose of the proposal was to give all Holly Corporation shareholders the opportunity to send a message to the Holly Corporation Board that they support the prompt sale of Holly Corporation to the highest bidder. The proposal was defeated.
STOCKHOLDER PROPOSAL REGARDING THE SALE OF THE COMPANY ------------------------------------------------------ Votes For 1,026,250 Votes Against 3,759,349 Abstentions 38,902 Broker Non-Votes 1,912,733
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: See Index to Exhibits on page 25. (b) Reports on Form 8-K: None. 23 24 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOLLY CORPORATION ----------------------------------------------------------------------------------- (Registrant) Date: December 15, 2000March 9, 2001 By /s/ Kathryn H. Walker ------------------------------------------------- ------------------------------------------- Kathryn H. Walker Vice President, Accounting (Principal Accounting Officer) By /s/ Scott C. Surplus ---------------------------------------------------------------------------- Scott C. Surplus Vice President, Treasury and Tax 24 25 HOLLY CORPORATION INDEX TO EXHIBITS (Exhibits are numbered to correspond to the exhibit table in Item 601 of Regulation S-K)
EXHIBIT NUMBER DESCRIPTION ------Exhibit Number Description ------- ----------- 10 Holly Corporation 2000 Stock Option Plan3 - As adopted at the Annual Meeting of StockholdersBy-Laws of Holly Corporation on December 14, 2000.as amended and restated March 9, 2001 27 - Financial Data Schedule