EXHIBIT 13.1 TO 10K - PORTIONS OF 1993 ANNUAL REPORT
FINANCIAL REVIEW
Wainoco returned to profitability during 1993 with net income of $2.5
million. Operating income was $22.2 million for the current year, $6.1 million
greater than in 1992. Operating income for 1993 was the highest in the Company's
history. Refining contributed $18.8 million and oil and gas operations
contributed $6.4 million to 1993 operating income. Refining operating income
increased $4.4 million over 1992 and oil and gas operating income increased $2.1
million over 1992.
Net income in 1993 improved over the $1.0 million and $18.3 million loss
levels of 1992 and 1991. This improvement in 1993 included higher refining
operating margins, increased refined product sales and improved Canadian gas
prices. The 1992 improvement included strong first full year refining results
and the elimination of oil and gas property writedowns of $13.0 million in 1991.
Additionally, selling and general expenses were reduced by $1.5 million or 11%
in 1993.
Net interest costs increased from $10.2 million in 1991 to $17.5 million in
1992 to $20.2 million in 1993. The increases reflect the impact of increased
interest expense from additional debt incurred relating to the 1992-1993
Refinery capital improvement program and the Frontier Refinery acquisition in
October 1991.
Oil and Gas Operations
The overall environment for oil and gas operations was mixed in 1993 as the
average gas price increased from $1.12 to $1.28 and the average oil price
declined from $17.46 to $15.90. The Company's drilling expenditures remained low
during 1993 and 1992 in order to redeploy capital to the Refinery's capital
improvement program.
Oil and gas revenues declined 4% in 1993 and 8% in 1992. Gas revenues
increased 11% in 1993 following an 8% drop in 1992 as the average 1993 price
received increased 14%. However, this was more than offset by falling oil
revenues of 20% in 1993 and 7% in 1992 in response to declines in both prices
received and volumes produced.
Natural gas production remained level in Canada in 1993 after a small
increase in 1992. United States natural gas production declined 16% in 1992 and
15% in 1993 primarily as a result of reservoir declines and the sale or
abandonment of uneconomic wells. As a result of strong demand, the average price
for natural gas in Canada rose 21%, to C$1.48 per mcf from C$1.22 per mcf, but
the Canadian/United States dollar exchange rate fell from an average of $.8281
in 1992 to $.7755 in 1993, resulting in only a 15% price increase in United
States dollars. The average price of natural gas in the United States improved
17%. The increase in the average Canadian gas price associated with Canada's
larger gas production enhanced the Canadian operating results more than the
United States results.
Oil production declined 12% in 1993 and marginally in 1992 due to the sales
of marginal properties and natural reservoir declines and additionally, in 1993,
delays in bringing on newly developed production from reworked wells. Average
oil prices have continued to decline in response to the worldwide overproduction
and the weak economic condition of the industrial nations.
Other income included proceeds of $5.2 million in 1991 from the settlement
of all previously contested excise tax issues.
Oil and gas operating costs decreased marginally in 1993 after a 12%
decrease in 1992. The 1992 decrease was achieved through cost controls being
stressed in an atmosphere of weak prices, and remained relatively flat in 1993
as a result of the sale or abandonment of uneconomic wells and continued
emphasis on cost control.
Oil and gas selling and general expenses decreased $646,000 in 1993 or 13%
after declining $1.4 million or 22% in 1992. This was a result of reductions in
staffing in the United States and a decrease in legal and professional fees.
Refining Operations
Refining operating income was $18.8 million and $14.3 million during 1993
and 1992. Average crude charge increased by 9% to 32,490 bpd during 1993
following a 3% decrease in 1992. The percentage of sour crude oil processed
increased to 80% in 1993 from 71% in 1992. The higher crude charge and increased
sour crude capacities are a result of the capital improvement program which
commenced in 1992 and was completed in 1993.
The refined product spread increased 14% to $5.51 per barrel in 1993 due to
improved profitability from diesel and asphalt products. The diesel product
spread was substantially higher in 1993 than in 1992 and 1991. This increase
includes the impact of the high price received in the fourth quarter of 1993 for
low sulfur diesel. Supply disruptions with the introduction of low sulfur diesel
allowed for higher spreads than are normally expected to occur in the future.
Asphalt and other product spreads were higher in 1993 reflecting the lower cost
of crude oil and higher demand for asphalt. The gasoline product spread was
higher in 1992 than in 1993 or 1991, reflecting the strong market for gasoline
during the summer months of 1992. However, the general decline in the price of
crude oil depressed the average selling prices of products during 1993 and 1992.
Reducing the increase in the refined product spread was the decrease in the
sweet/sour spread to $4.48 per barrel in 1993 from $5.53 per barrel in 1992 and
$5.90 per barrel in 1991. The decrease is attributable to increased competition
for Wyoming general sour crude. During 1994, the Company expects that the
sweet/sour spread may continue to decline as Canadian and other types of sour
crudes will be processed which have a higher price than Wyoming general sour
crude.
Refining operating expenses increased to $3.55 per sales barrel, a 12%
increase from 1992, reflecting higher transportation costs due to increased
asphalt sales and the higher cost of disposing of petroleum coke.
Refining selling and general expenses decreased $917,000 in 1993, primarily
the result of the partial collection of an accounts receivable previously
reserved.
Other income included proceeds from insurance settlements of $1 million in
1993 and $700,000 in 1992 which are nonrecurring.
The capital improvement program completed in 1993 enabled the production of
low sulfur diesel, increased sour crude run capacities and improved the overall
operating reliability of the refinery. Although significant progress was made to
improve reliability, management continues to identify and correct reliability
maintenance problems.
Maintenance problems may arise in the future, resulting in downtime of
certain process units and reduced yields and may negatively impact
profitability. Turnaround work, which enhances reliability, was performed in the
spring of 1993. During the spring of 1994, Frontier has scheduled maintenance
turnaround work on two of its major operating units. After completion of the
1994 turnaround, all refinery operating units will have completed repair,
maintenance and inspection work since the Company's acquisition of Frontier.
Liquidity and Capital Commitments
Internal and External Funding
Net cash provided by operating activities was $32.8 million, $23.3 million
and $17.5 million for 1993, 1992 and 1991, respectively. Cash from financing
activities in 1993, 1992 and 1991 was provided by borrowings from the Company's
bank lines of credit of $27.4 million, $11.9 million and $65.1 million,
respectively. Additionally, net proceeds of $20.8 million from the sale of
common stock in July, 1993 and net proceeds of $96.5 million from the sale of
Senior Notes in August 1992 were received. The net proceeds from the sale of
common stock in 1993 were used to retire $5 million of Subordinated Debentures
and pay down the Company's bank lines, and the net proceeds from the sale of
Senior Notes in 1992 were used to refinance $44.8 million of refinery
indebtedness and to pay down Wainoco's bank line.
Net cash used in investing activities during 1993, 1992 and 1991 was used
primarily for additions to property and equipment, and in 1991 included the
purchase of the Frontier Refinery for $20.1 million net of cash acquired.
Liquidity and Future Planning
The Company is highly leveraged at year-end as reflected by the debt to total
capitalization ratio of 73%, down from 81% in 1992. The Company's leverage will
result in the following: (i) a portion of the Company's cash flow from
operations will be dedicated to the repayment of the Company's debt; (ii) the
Company will be more vulnerable to downward swings in the oil and gas prices and
the refining industry or to interruptions at the Refinery; and (iii) if, and to
the extent, the Company requires additional financing for working capital,
capital expenditures, debt refinancing or other purposes, the Company's leverage
may impair its ability to obtain additional financing. At December 31, 1993, the
Company had $31.6 million available under its oil and gas lines of credit and
$15.0 million available under the Frontier line of credit.
Capital expenditures of approximately $23.2 million are budgeted for 1994.
These expenditures are allocated $8.4 million for Refining and $14.8 million for
exploration and development expenditures. Refining's projected capital
expenditures for 1994 of $8.4 million are down substantially from the $58.4
million incurred during the prior two years. This is the result of a program
completed in 1993 to upgrade the refinery for compliance primarily with new
diesel fuel specifications of the Clean Air Act Amendments of 1990 (Act)
(approximately $34.9 million) and other modernization and upgrade projects. The
Company believes sustaining capital expenditure requirements at Frontier will be
$5-10 million annually. In addition to Refinery expenditures budgeted in 1994,
capital expenditures of up to $1 million are anticipated over the next two years
associated with conventional gasoline formulation requirements of the Act. To
improve refinery controls on emissions designated as hazardous by the Act,
approximately $4 million, after 1994, may be required over the next four years.
Because other refineries will be required to make similar expenditures, the
Company does not expect such expenditures to materially adversely impact its
competitive position.
It is anticipated that existing working capital and cash generated by
operating activities will be sufficient to meet 1994 capital needs and the $5
million of additional future anticipated costs for compliance with the Act.
The functional currency for the Company's Canadian operations is the Canadian
dollar which has declined over the last two years. Accordingly, the Company's
Canadian net assets of C$101.2 million at December 31, 1993 are exposed to a
certain level of economic risk stemming from fluctuations in the Canadian/U.S.
dollar exchange rate. The translation adjustments, $3.2 million and $8.1 million
during 1993 and 1992, arising from consolidating its Canadian operations are
included in the Company's consolidated statements of shareholders' equity.
Wainoco's credit agreements and Senior Notes currently restrict it from the
payment of dividends. Additionally, under certain conditions, Frontier is
restricted from the transfer of cash in the form of loans or advances to the
parent. Wainoco does not believe these restrictions will limit its current
operating plans.
Impact of Changing Prices
The Company's revenues and cash flows, as well as estimates of future cash
flows from oil and gas reserves, are very sensitive to changes in energy prices.
Major shifts in the cost of crude and the price of refined products can result
in large changes in operating margin from refining operations. Energy prices
also determine the carrying value of the Refinery's inventory. Since energy
prices are also a determining factor in the carrying value of oil and gas
assets, any reductions in the prices of crude oil and natural gas could require
noncash write-downs of those assets.
Environmental
Numerous local, state and federal laws, rules and regulations relating to the
environment are applicable to the Company's operations and activities. As a
result, the Company falls under the jurisdiction of numerous state and federal
agencies for administration and is exposed to the possibility of judicial or
administrative actions for remediation and/or penalties brought by those
agencies. Frontier is party to two consent decrees requiring the investigation
and, in certain instances, mitigation of environmental impacts resulting from
past operational activities. The Company has been and will be responsible for
costs related to compliance with or remediations resulting from environmental
regulations. There are currently no identified environmental remediation
projects of which the costs can be reasonably estimated. However, the
continuation of the present investigative process, other more extensive
investigations over time or changes in regulatory requirements could result in
future liabilities.
Selected Quarterly Financial and Operating Data
(Unaudited, dollars in thousands except per share and average prices)
1993
-----------------------------------------------
Fourth Third Second First
---------- ---------- ---------- ----------
Revenues $ 97,006 $ 95,211 $ 90,704 $ 83,635
Operating Income (Loss) 12,803 4,892 3,265 1,250
Net Income (Loss) 7,898 134 (1,633) (3,895)
Earnings (Loss) Per Share .29 .01 (.07) (.18)
Earnings before Interest, Taxes and Depreciation,
Depletion and Amortization (EBITDA)* 19,000 10,345 8,987 7,116
Net Cash Provided By Operating Activities 22,708 5,136 2,082 2,874
Oil and Gas Operations
Production - Oil (mbbls) 250 258 233 238
- Gas (bcf) 4.4 4.7 4.4 4.9
Average sales price - Oil (per bbl) $ 13.93 $ 15.31 $ 17.56 $ 16.99
- Gas (per mcf) 1.44 1.24 1.25 1.19
Refining Operations
Total charges (bpd) 37,546 35,636 33,378 35,201
Sour crude charge rate (%) 88 73 81 78
Gasoline sales (bpd) 20,780 21,255 19,012 18,256
Distillate sales (bpd) 12,809 11,061 11,249 12,159
Total product sales (bpd) 40,824 42,400 37,890 36,154
1992
-----------------------------------------------
Fourth Third Second First
--------- --------- ---------- ---------
Revenues $ 93,469 $ 98,623 $ 104,308 $ 80,442
Operating Income (Loss) 2,302 5,618 9,746 (1,587)
Net Income (Loss) (2,418) 1,365 5,574 (5,499)
Earnings (Loss) Per Share (.11) .07 .25 (.25)
Earnings before Interest, Taxes and Depreciation,
Depletion and Amortization (EBITDA)* 8,482 11,228 15,276 4,524
Net Cash Provided By Operating Activities 9,090 4,849 6,214 3,183
Oil and Gas Operations
Production - Oil (mbbls) 260 273 289 289
- Gas (bcf) 5.3 4.8 4.0 4.8
Average sales price - Oil (per bbl) $ 18.18 $ 18.86 $ 17.49 $ 15.45
- Gas (per mcf) 1.21 1.02 1.17 1.09
Refining Operations
Total charges (bpd) 33,000 30,884 35,357 32,219
Sour crude charge rate (%) 73 77 68 64
Gasoline sales (bpd) 19,316 19,355 20,282 19,046
Distillate sales (bpd) 10,673 10,068 12,391 12,210
Total product sales (bpd) 36,156 37,344 40,433 35,394
Five Year Financial Data (In thousands except per share)
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
Revenues $ 366,556 $ 376,842 $ 130,067 $ 48,224 $ 38,920
Operating Income (Loss) 22,210 16,079 (8,713) (11,821) 5,051
Income (Loss) Before Taxes 1,989 (1,393) (18,909) (18,975) 410
Provision (Benefit) For Income Taxes (515) (415) (618) (402) (1,390)
Net Income (Loss) 2,504 (978) (18,291) (18,573) 1,800
Earnings (Loss) Per Share .10 (.04) (.90) (.94) .09
EBITDA* 45,448 39,510 27,308 27,391 20,897
Net Cash Provided By Operating Activities 32,800 23,336 17,513 17,691 14,728
Working Capital (Deficit) (1,905) 3,344 (9,156) (1,091) 13,968
Total Assets 296,811 291,417 286,604 167,510 169,796
Long-term Debt 176,900 189,273 154,417 81,301 69,253
Shareholders' Equity 66,040 44,956 53,987 61,774 80,136
Capital Expenditures 40,651 41,761 47,561 48,563 28,656
Dividends Declared 0 0 0 0 0
*EBITDA is provided supplementally because it is a commonly used measure of
performance in the energy industry. EBITDA is not presented in accordance with
generally accepted accounting principles (GAAP) and should not be used in lieu
of GAAP presentations of results of operations and cash flows.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1993, 1992, 1991
(In thousands except per share)
1993 1992 1991
---------- ---------- ----------
Revenues
Refined products $ 324,504 $ 333,203 $ 78,019
Oil and gas sales 39,137 40,677 44,045
Other 2,915 2,962 8,003
---------- ---------- ----------
366,556 376,842 130,067
Costs and Expenses
Refining operating costs 296,255 310,701 76,822
Oil and gas operating costs 13,444 13,771 15,656
Selling and general expenses 11,409 12,860 10,281
Depreciation, depletion and amortization -
Normal 23,238 23,431 23,021
Additional 0 0 13,000
---------- ---------- ----------
344,346 360,763 138,780
Operating Income (Loss) 22,210 16,079 (8,713)
Interest expense, net 20,221 17,472 10,196
Income (Loss) Before Income Taxes 1,989 (1,393) (18,909)
Provision (benefit) for income taxes (515) (415) (618)
---------- ---------- ----------
Net Income (Loss) $ 2,504 $ (978) $ (18,291)
========== ========== ==========
Income (Loss) Per Share $ .10 $ (.04) $ (.90)
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1993 and 1992
(In thousands except shares)
1993 1992
---------- ----------
ASSETS
Current Assets -
Cash, including cash equivalents of $2,078 and $1,853
at December 31, 1993 and 1992 $ 3,770 $ 3,710
Trade receivables 16,281 16,040
Joint operator and other receivables 2,790 2,523
Inventory of crude oil, products and other 21,086 29,698
Other current assets 2,331 1,178
---------- ----------
Total Current Assets 46,258 53,149
---------- ----------
Property, Plant and Equipment, at cost -
Oil and gas properties, on a full-cost basis 448,649 443,430
Refinery and pipeline 124,705 98,139
Furniture, fixtures and other 5,820 5,384
---------- ----------
579,174 546,953
Less - Accumulated depreciation,
depletion and amortization 334,905 315,539
---------- ----------
244,269 231,414
Other Assets 6,284 6,854
---------- ----------
Total Assets $ 296,811 $ 291,417
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities -
Accounts payable $ 30,514 $ 31,701
Oil and gas proceeds payable 4,095 4,075
Current maturities of long-term debt 0 2,499
Accrued interest 5,681 5,406
Accrued turnaround cost 3,741 2,688
Other accrued liabilities 4,132 3,436
---------- ----------
Total Current Liabilities 48,163 49,805
---------- ----------
Long-Term Debt 176,900 189,273
Deferred Revenue and Other 3,410 5,085
Deferred Income Taxes 2,298 2,298
Commitments and Contingencies
Shareholders' Equity -
Preferred stock, $100 par value, 500,000 shares authorized,
no shares issued 0 0
Common stock, no par, 50,000,000 shares authorized,
22,122,177 shares and 22,122,177 shares issued
in 1993 and 1992, respectively 57,153 56,653
Paid-in capital 80,855 60,513
Retained earnings (deficit) (66,297) (68,801)
Commitments to issue common stock, 175,275 shares 883 0
Cumulative translation adjustment (6,233) (2,993)
Treasury stock, 60,000 shares (270) (270)
Deferred employee compensation (51) (146)
---------- ----------
Total Shareholders' Equity 66,040 44,956
Total Liabilities and Shareholders' Equity $ 296,811 $ 291,417
========== ==========
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1993, 1992 and 1991
(In thousands)
1993 1992 1991
---------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 2,504 $ (978) $ (18,291)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation, depletion and amortization 23,238 23,431 36,021
Deferred income tax provision 0 0 (119)
Deferred revenue and other (460) 1,306 (4,635)
Other 598 826 352
---------- ---------- ----------
25,880 24,585 13,328
Changes in components of working capital from
operations, net of the acquisition of Frontier -
(Increase) decrease in receivables (668) 3,186 2,428
(Increase) decrease in inventory 8,659 404 (2,835)
(Increase) decrease in other current assets (1,137) (371) (322)
Increase (decrease) in accounts payable (684) (5,868) 2,827
Increase (decrease) in accrued liabilities 750 1,400 2,087
---------- ---------- ----------
Net cash provided by operating activities 32,800 23,336 17,513
INVESTING ACTIVITIES
Additions to property, plant and equipment (42,381) (42,365) (48,976)
Acquisition of Frontier, net of cash acquired 0 0 (20,145)
Sales of oil and gas properties 2,262 1,231 5,710
Other 1,136 2,319 331
---------- ---------- ----------
Net cash used in investing activities (38,983) (38,815) (63,080)
FINANCING ACTIVITIES
Long-term borrowings -
Senior Notes 0 100,000 0
Bank debt 27,400 11,900 65,058
Payments of debt -
Bank debt (37,400) (52,200) (9,058)
Debentures (4,999) 0 (282)
Mortgage notes and other debt 75 (41,845) (5,526)
Common stock offering and commitments 21,725 0 0
Other (284) (5,491) 172
---------- ---------- ----------
Net cash provided by financing activities 6,517 12,364 50,364
Effect of exchange rate changes on cash (274) (233) (9)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 60 (3,348) 4,788
Cash and cash equivalents, beginning of period 3,710 7,058 2,270
---------- ---------- ----------
Cash and cash equivalents, end of period $ 3,770 $ 3,710 $ 7,058
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except shares)
Common Stock
Number of Retained Commitment Cumulative Deferred
Shares Paid-In Earnings To Issue Translation Treasury Employee
Issued Amount Capital (Deficit) Common Stock Adjustment Stock Compensation
----------- -------- --------- --------- ------------ ------------ -------- ------------
DECEMBER 31, 1990 19,911,950 $ 56,431 $ 50,743 $ (49,532) $ 0 $ 4,824 $(270) $(422)
Shares issued -
Stock option plan 14,990 2 46 0 0 0 0 84
Acquisition 2,195,237 220 9,724 0 0 0 0 0
Deferred compensation
amortization 0 0 0 0 0 0 0 96
Translation adjustment 0 0 0 0 0 332 0 0
Net loss 0 0 0 (18,291) 0 0 0 0
---------- ------- ------- -------- ----- ------- ----- ------
DECEMBER 31, 1991 22,122,177 56,653 60,513 (67,823) 0 5,156 (270) (242)
Deferred compensation
amortization 0 0 0 0 0 0 0 96
Translation adjustment 0 0 0 0 0 (8,149) 0 0
Net loss 0 0 0 (978) 0 0 0 0
---------- ------- ------- -------- ----- ------- ----- ------
DECEMBER 31, 1992 22,122,177 56,653 60,513 (68,801) 0 (2,993) (270) (146)
Shares issued in
equity offering 5,000,000 500 20,342 0 0 0 0 0
Commitment to issue shares 0 0 0 0 883 0 0 0
Deferred compensation
amortization 0 0 0 0 0 0 0 95
Translation adjustment 0 0 0 0 0 (3,240) 0 0
Net income 0 0 0 2,504 0 0 0 0
---------- ------- ------- -------- ----- -------- ----- ------
DECEMBER 31, 1993 27,122,177 $ 57,153 $ 80,855 $ (66,297) $ 883 $ (6,233) $(270) $ (51)
========== ======= ======= ======== ===== ======== ===== ======
The accompanying notes are an integral part of these financial statements.
[TEXT]
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Wainoco Oil
Corporation (the Parent), a Wyoming corporation, and its wholly-owned
subsidiaries, including Wainoco Oil & Gas Company and Frontier Holdings Inc.
(Frontier), collectively referred to as Wainoco or the Company. Significant
intercompany transactions are eliminated in consolidation.
Currency Translation
The Canadian dollar financial statements of the Parent's Canadian division
have been translated to United States dollars. Gains and losses on currency
transactions are included in the consolidated statements of operations
currently, and translation adjustments are included in the consolidated
statements of shareholders' equity.
Inventories
Inventories of crude oil, other unfinished oils and all finished products are
recorded at the lower of cost on a first-in, first-out (FIFO) basis or market.
Refined product exchange transactions are considered asset exchanges with
deliveries offset against receipts. The net exchange balance is included in
inventory. Inventories of materials and supplies are recorded at cost.
Property, Plant and Equipment
Refining Operations. Refinery plant and equipment is depreciated based on
the straight-line method over estimated useful lives of three to twenty years.
Maintenance and repairs are expensed as incurred except for major scheduled
repair and maintenance (turnaround) of the refinery operating units. The costs
for planned turnarounds are ratably accrued over the period from the prior
turnaround to the next scheduled turnaround. Major improvements are capitalized,
and the assets replaced are retired.
Oil and Gas Operations. Wainoco follows the accounting policy (commonly
referred to as full-cost accounting) of capitalizing costs incurred in the
acquisition, exploration and development of oil and gas reserves. The estimated
cost of dismantlement, restoration and abandonment, net of salvage value, along
with other future development costs are added to the costs being amortized and,
when subsequently incurred, are capitalized as part of the full-cost pool.
Proceeds from sales of oil and gas properties are credited to the full-cost
pool unless the sale is significant, in which case a gain or loss on the sale
would be recognized.
Wainoco computes the provision for depreciation, depletion and amortization
(DD&A) of oil and gas properties on a quarterly basis using the composite
unit-of-production method based on future gross revenue attributable to proved
reserves.
Capitalized oil and gas property costs in the United States exceeded the
limitation on such costs and additional provisions for depreciation, depletion
and amortization were made in the second and fourth quarters of 1991. The
limitation is based, after consideration of income tax effects, on the present
value of future net income from estimated production of proved oil and gas
reserves discounted at 10% and the net book value of investments in unproved and
unevaluated properties.
Hedging
The Company, at times, engages in futures transactions in its refining
operations and oil and gas operations for the purpose of hedging its inventory
position and product prices. Changes in the market value of futures contracts
for the purpose of hedging are included in the measurement of the related
transaction.
Interest
Interest is reported net of interest capitalized and interest income.
Interest income of $93,000, $221,000 and $355,000 was recorded in the years
ended December 31, 1993, 1992 and 1991, respectively.
Wainoco follows the policy of capitalizing interest on debt incurred to fund
the construction or acquisition of an asset as part of the historical cost of
the asset. During 1993 and 1992 the Company capitalized interest of $728,000 and
$1.0 million, respectively.
Wainoco has an interest rate swap with one of its lending banks for the
purpose of managing its interest cost and exposure to interest rate movements.
The agreement effectively changes the Company's interest rate exposure on $15
million of its floating rate debt to a fixed 8.2% over a five-year period
expiring in August, 1996.
Nonrecurring Transactions
During 1991 the Company obtained a final settlement of all previously
contested excise tax issues, resulting in nonrecurring income of $5.2 million.
During 1993 and 1992, the Company received payments of insurance proceeds, as
reimbursement for losses incurred, which resulted in nonrecurring income of $1.0
million and $700,000, respectively. All such amounts have been classified as
other income in the consolidated statements of operations.
Environmental Expenditures
Wainoco expenses or capitalizes environmental expenditures based upon their
future economic benefit. Costs which improve a property as compared with the
condition of the property when originally constructed or acquired and costs
which prevent future environmental contamination are capitalized. Costs related
to environmental damage resulting from operating activities subsequent to
acquisition are expensed. Liabilities for these expenditures are recorded when
it is probable that obligations have been incurred and the amounts can be
reasonably estimated.
Cash Flow Reporting
Wainoco considers highly liquid debt instruments with a maturity, when
purchased, of three months or less to be cash equivalents. Cash payments for
interest during 1993, 1992 and 1991 were $19.7 million, $12.6 million and $9.5
million, respectively, and cash payments for income taxes during 1993, 1992 and
1991 were $124,000, $173,000 and $195,000, respectively. Reference is made to
Property Acquisitions in Note 9 for discussion of the Frontier purchase in
October 1991, which included noncash financing activities.
2 Inventory
SCHEDULE OF MAJOR COMPONENTS OF INVENTORY (In thousands)
December 31, 1993 1992
---------- ----------
Crude oil $ 2,803 $ 3,858
Unfinished products 4,487 6,647
Finished products 7,435 14,340
Chemicals and in-transit inventory 1,589 1,001
Repairs and maintenance supplies and other 4,772 3,852
---------- ----------
$ 21,086 $ 29,698
========== ==========
3 Short-Term Debt
The maximum and average amounts of short-term borrowings outstanding were
$28.3 million and $12.2 million in 1992 and $21.1 million and $3.9 million in
1991, respectively. The average interest rate paid on these balances was 12.3%
in 1992 and 10.9% in 1991. All short-term debt was paid off in August 1992 with
proceeds from the issuance of the Senior Notes.
4 Long-Term Debt
SCHEDULE OF LONG-TERM DEBT (In thousands)
December 31, 1993 1992
---------- ----------
Credit facilities
Canadian oil and gas $ 0 $ 4,000
United States oil and gas 18,700 19,000
Refining 0 5,700
Senior Notes 100,000 100,000
Convertible Subordinated Debentures 46,000 46,000
Subordinated Debentures 12,200 17,072
---------- ----------
176,900 191,772
Less - Current maturities 0 2,499
---------- ----------
$ 176,900 $ 189,273
========== ==========
Oil and Gas Credit Facilities
Wainoco has two long-term credit facilities; one each for its Canadian and
United States oil and gas operations. Interest rates are based, at the Company's
option, on 1) the bank's prime rate, or 2) LIBOR or banker s acceptances, at
their prevailing rates, plus from three-quarters of 1% to one and three-quarters
percent for the Canadian facility and one and one-half percent for the United
States facility.
The banks review the oil and gas properties at least annually (generally in
April based on the beginning of the year reserves) and make a determination of
the credit to be made available (the borrowing base). If the banks determine
that the unpaid balance on the line is in excess of the borrowing base, then the
Company must either 1) provide additional security to increase the borrowing
base by an amount at least equal to such excess, 2) repay any such excess, or 3)
convert the outstanding balance to a term loan.
Canadian. The revolving line of credit of C$37.5 million (the United
States dollar equivalent of approximately $28.3 million at December 31, 1993) is
secured by substantially all of the Canadian oil and gas properties. The
agreement provides for a commitment fee of one-half of 1%.
The facility converts to a five-year term loan on April 29, 1995 with
payments commencing on May 1, 1995. The credit agreement can be extended
annually at the option of the lenders. The loan covenants include net worth and
current ratio requirements.
United States. The revolving line of credit of $22 million is secured by
substantially all of the United States oil and gas properties. The agreement
provides for commitment and facility fees aggregating five-eighths of 1%.
The facility converts to a five-year term loan on December 31, 1994 with
payments commencing on March 31, 1995. The loan covenants require a minimum cash
flow coverage of interest.
Refining Credit Facility
Frontier has a capital facility entered into in August 1992 with a group of
three banks. This credit facility, which expires April 2, 1995, is a
collateral-based facility with total capacity of up to $50 million, of which
maximum cash borrowings are $15 million. Any unutilized capacity after cash
borrowings is available for letters-of-credit. At December 31, 1993, there were
$7.6 million in standby letters-of-credit outstanding.
The facility provides working capital financing for operations, generally
the financing of crude and product supply. It is generally secured by Frontier's
current assets. The agreement provides for a commitment fee of one-half of 1%.
Interest rates are based, at the Company's option, on the agent bank s prime
rate plus one and three-quarters percent or the reserve-adjusted LIBOR, plus
three percent. Standby letters-of-credit issued bear a fee of one and one-half
percent annually, plus standard issuance and renewal fees. The facility
agreement includes certain financial covenant requirements relating to
Frontier's working capital, tangible net worth and fixed charge coverage.
Senior Notes
On August 18, 1992, Wainoco sold $100 million of unsecured 12% Senior Notes
(Senior Notes) due 2002 through a public offering. Proceeds from the sale of the
Senior Notes were used to refinance Frontier debt, including mortgage notes and
short-term borrowings, and pay down the Company's borrowings under its credit
facilities. The notes are redeemable, at the option of the Company, at a premium
of 103.43% after July 31, 1997, declining to 100% in 1999. Interest is payable
semiannually.
Convertible Subordinated Debentures
The $46 million of 7 3/4% Convertible Subordinated Debentures (Convertible
Subordinated Debentures) are due in 2014. The debentures are convertible into
the Company's common stock at $8.75 per share. Interest is payable semiannually.
The debentures are redeemable at a premium of 104.65% declining to 100% in 1999.
Sinking fund payments of 5% of the principal amount commence in 2000, and are
calculated to retire 70% of the principal amount prior to maturity. Based on the
effective yield at the time of issuance, the debentures are not considered
common stock equivalents.
Subordinated Debentures
The $12.2 million of 10 3/4% Subordinated Debentures (Subordinated
Debentures), which represent a discount to the $12.5 million face value, are due
in 1998, and are redeemable at 100% of their principal amount at the option of
the Company. Interest is payable semiannually, and sinking fund payments of $2.5
million from 1995 through 1997 and $5 million in 1998 are due annually.
Restrictions on Loans, Transfer of Funds and Payment of Dividends
Under its credit agreements, Wainoco is required to maintain a minimum
consolidated shareholders' equity (as defined) equal to $40 million at December
31, 1993. Additionally, the Frontier credit facility restricts Frontier as to
the distribution of capital assets and the transfer of cash in the form of loans
or advances when there are any outstanding borrowings under the facility or when
a default exists or would occur.
Five-Year Maturities
The estimated five-year maturities of long-term debt are $2.2 million in
1995, 1996 and 1997 and $8.7 million in 1998. These amounts assume that the
balance outstanding on the United States credit facility at December 31, 1993 is
converted to a term loan on March 31, 1995, and is amortized at its minimum
level. Without the inclusion of the revolving facility, the estimated five-year
maturities of long-term debt are $2.5 million for 1995 through 1997 and $5
million in 1998.
5 Income Taxes
The Parent and its subsidiaries file a consolidated United States federal
income tax return. The Parent also files a separate Canadian income tax return.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Taxes". The cumulative effect of
adopting SFAS No. 109 had no impact on the provision (benefit) for income taxes.
The Parent has net operating loss carryforwards for Canadian income tax
purposes of $6.8 million available to reduce future Canadian federal taxable
income which expire, if not otherwise rescheduled, by 1995 and $5.4 million
which expire as follows: $800,000 in 1999 and $4.6 million in 2000. The Parent
also has exploration and development deductions of $85.6 million and earned
depletion of $5.6 million which are available indefinitely to reduce future
Canadian taxable income.
The Company has net operating loss carryforwards for United States tax
reporting purposes of $114.8 million available to reduce future federal taxable
income. The net operating loss carryforwards will expire as follows: $2.5
million in 1995, $28.6 million in 1996, $22.7 million in 1997, $4.7 million in
1998, $1.7 million in 2000, $7.5 million in 2001, $3.0 million in 2003, $15.5
million in 2004, $3.8 million in 2005, $11.9 million in 2006, $9.3 million in
2007 and $3.6 million in 2008. The Company also has tax depletion carryforwards
of $8.7 million which are indefinitely available to reduce future United States
income taxes payable and $1.3 million in investment tax credit carryforwards
available to reduce future United States income taxes payable. The investment
tax credit carryforwards expire in various amounts through 2000.
The following is the pretax income (loss) and the provision (benefit) for
income taxes for the three years ended December 31, 1993, 1992 and 1991.
Pretax Income (Loss) (In thousands)
1993 1992 1991
---------- ---------- ----------
Canada $ 5,552 $ 2,113 $ 2,178
United States (3,563) (3,506) (21,087)
---------- ---------- ----------
$ 1,989 $ (1,393) $ (18,909)
========== ========== ==========
Provision (Benefit) for Income Taxes (In thousands)
1993 1992 1991
---------- ---------- ----------
Canada - Current $ (515) $ (415) $ (499)
United States - Deferred 0 0 (119)
---------- ---------- ----------
$ (515) $ (415) $ (618)
========== ========== ==========
The following is a reconciliation of the provision (benefit) for income
taxes computed at the statutory Canadian and United States income tax rates on
pretax income (loss) and the provision (benefit) for income taxes as reported
for the three years ended December 31, 1993, 1992 and 1991.
Reconciliation of Tax Provision (In thousands)
1993 1992 1991
---------- ---------- ----------
Provision (benefit) based on statutory rates $ 1,241 $ (221) $ (6,199)
Increase (decrease) resulting from -
Unutilized net operating loss (1,241) 221 6,199
Canada
Provincial tax credits and rebates (621) (590) (558)
Large corporation tax and other 106 175 59
---------- ---------- ----------
(515) (415) (499)
United States 0 0 (119)
---------- ---------- ----------
Provision (benefit) as reported $ (515) $ (415) $ (618)
========== ========== ==========
The following are the significant components, by type of temporary
differences or carryforwards, of deferred tax liabilities and tax assets,
computed at the federal statutory rates, as of December 31, 1993 and January 1,
1993, date of adoption of SFAS No. 109.
Components of Deferred Taxes (In thousands)
December 31, 1993 January 1, 1993
----------------------- -----------------------
United United
Canada States Canada States
---------- ---------- ---------- ----------
Deferred tax liabilities
Property, plant and equipment,
due to differences in DD&A $ 9,975 $ 27,406 $ 13,080 $ 24,771
Installment sale 0 5,435 0 5,280
Other 0 1,657 0 1,610
---------- ---------- ---------- ----------
Deferred tax liabilities 9,975 34,498 13,080 31,661
Deferred tax assets
Tax loss carryforwards 5,469 40,199 3,461 37,808
Depletion carryforwards 2,513 3,045 2,872 2,958
Tax credit carryforwards 0 2,389 0 2,389
Foreign exploration and development expenditures 16,205 0 16,808 0
Other 0 1,609 0 2,033
---------- ---------- ---------- ----------
24,187 47,242 23,141 45,188
Less - valuation allowance 14,212 15,042 10,061 15,825
---------- ---------- ---------- ----------
Net deferred tax assets 9,975 32,200 13,080 29,363
---------- ---------- ---------- ----------
Net deferred tax liabilities $ 0 $ 2,298 $ 0 $ 2,298
========== ========== ========== ==========
Realization of deferred tax assets is dependent on the Company's ability to
generate taxable income within the tax loss carryforward periods. As a result of
the Company's history of operating losses, a valuation allowance has been
provided for deferred tax assets that are not offset by scheduled future
reversals of deferred tax liabilities.
6 Common Stock
Earnings Per Share
In 1993, the primary and fully diluted earnings per share were computed
based on the average number of shares outstanding and assumed the exercise of
stock option and other equivalent shares. In 1992 and 1991, the primary and
fully diluted earnings per share were computed based on the average number of
shares outstanding and did not assume the exercise of stock option shares, as
losses were incurred. The primary and fully diluted weighted average shares
outstanding were 24,454,262, 22,062,177 and 20,365,800 in 1993, 1992 and 1991,
respectively. The primary and fully diluted earnings per share for the year 1993
is five cents more than the sum of the 1993 quarters due to the issuance of five
million shares of common stock in July, which had a more significant impact on
the higher earnings of the third and fourth quarters than on the year taken as a
whole.
Stock Option Plans
Wainoco has two stock option plans which authorize the granting of
restricted stock and options to purchase shares. The plans as of December 31,
1993 have a total of 3,474,000 shares of common stock of which 1,550,838 shares
were granted and exercised, 1,895,367 shares were granted and are outstanding
and 27,795 shares are available to be granted. As of December 31, 1992, the
plans had 315,095 shares available to be granted. A summary of the plans'
activity is set forth in the Stock Option Activity table. Options under both
plans are granted at not less than fair market value on the date of grant. No
entries are made in the accounts until the options are exercised, at which time
the proceeds are credited to common stock and paid-in capital.
STOCK OPTION ACTIVITY
Option Shares Price Range
--------------- ---------------
OUTSTANDING
December 31, 1990 1,291,297 4.75 to 8.53
Granted 432,700 5.00 to 6.25
Exercised (32,500) 4.75 to 5.75
Lapsed (134,050) 5.00 to 8.40
-------------- --------------
December 31, 1991 1,557,447 4.75 to 8.56
Granted 330,243 3.50 to 3.88
Lapsed (279,623) 5.00 to 7.75
-------------- --------------
December 31, 1992 1,608,067 3.50 to 8.50
Granted 428,600 4.13 to 5.00
Exchanged (118,000) 6.88 to 6.88
Lapsed (23,300) 3.50 to 6.71
-------------- --------------
December 31, 1993 1,895,367 3.37 to 7.75
-------------- --------------
EXERCISABLE
December 31, 1991 976,633 4.75 to 8.56
December 31, 1992 1,160,215 3.50 to 8.50
December 31, 1993 1,441,114 3.37 to 7.75
-------------- --------------
Restricted Stock Grants
The Company has outstanding 63,900 restricted shares of common stock. The
value of these shares and related deferred compensation are recorded in equity.
The deferred compensation, based on the market value of the shares issued, is
amortized ratably over a five-year vesting period.
Common Stock Offering
The Company sold five million shares of common stock in July 1993 through a
public offering. The net proceeds of $20.8 million were used to pay down
borrowings under its revolving credit facilities and to retire $5 million
principal amount of its Subordinated Debentures which were applied to its 1993
and 1994 sinking fund requirements.
Commitment to Issue Common Stock
The Company's Canadian oil and gas division entered into a drilling program
with a third party and received $883,000 in exchange for a commitment to issue
175,275 shares of its common stock and distribute Canadian tax deductions
attributable to certain of the Company's exploration and development activities
in Canada. The shares were issued in the first quarter of 1994.
7 Segment Information
Wainoco is engaged in two business segments, the exploration, development
and production of oil and gas reserves (oil and gas operations), and crude oil
refining and wholesale marketing of refined petroleum products (refining
operation). Geographically, the oil and gas operations are located in the United
States and Canada, and the refining operation is located in the United States.
Income taxes, interest and certain amounts included in other revenues, selling
and general expenses, and depreciation, depletion and amortization are not
allocated to the operating segments.
The following schedule presents certain operating income (loss) items and
capital expenditures for each of the three years ended December 31, 1993, and
identifiable assets as of December 31, 1993, 1992 and 1991, by segment by
country.
SEGMENT INFORMATION (In thousands)
1993 1992 1991
---------- ---------- ----------
Revenues
Refining (since acquisition, October 1991) $ 326,078 $ 334,785 $ 78,432
Oil and Gas
Canada 22,301 20,722 23,982
United States 18,177 21,293 27,630
Unallocated 0 42 23
---------- ---------- ----------
$ 366,556 $ 376,842 $ 130,067
========== ========== ==========
Depreciation, Depletion and Amortization
Refining (since acquisition, October 1991) $ 6,262 $ 4,038 $ 898
Oil and Gas
Canada 8,793 8,999 9,506
United States 7,629 10,086 25,480
Unallocated 554 308 137
---------- ---------- ----------
$ 23,238 $ 23,431 $ 36,021
========== ========== ==========
Operating Income (Loss)
Refining (since acquisition, October 1991) $ 18,776 $ 14,344 $ (624)
Oil and Gas
Canada 6,115 4,343 5,134
United States 320 (15) (10,376)
Unallocated Expenses (3,001) (2,593) (2,847)
---------- ---------- ----------
$ 22,210 $ 16,079 $ (8,713)
========== ========== ==========
Capital Expenditures
Refining (since acquisition, October 1991) $ 26,932 $ 31,493 $ 3,479
Oil and Gas
Canada 6,828 5,045 9,967
United States and Other 6,891 5,223 34,115
---------- ---------- ----------
$ 40,651 $ 41,761 $ 47,561
========== ========== ==========
Identifiable Assets
Refining $ 156,265 $ 140,574 $ 116,283
Oil and Gas
Canada 76,294 83,270 97,241
United States and Other 60,207 61,798 71,066
Unallocated 4,045 5,775 2,014
---------- ---------- ----------
$ 296,811 $ 291,417 $ 286,604
========== ========== ==========
8 Commitments and Contingencies
Lease Commitments
Wainoco has noncapitalized building, equipment and vehicle lease agreements
which expire from 1994 through 2000 having minimum annual payments as of
December 31, 1993 of $1.9 million for 1994, $2.0 million for 1995, $1.6 million
for 1996, $1.1 million for 1997, $955,000 for 1998, $370,000 for 1999 and
$128,000 for 2000. Operating lease rental expense (exclusive of oil and gas
lease rentals) was $1.2 million, $1.2 million and $719,000 for the three years
ended December 31, 1993, 1992 and 1991, respectively.
Environmental
Wainoco accrues for environmental costs as indicated in Note 1. Numerous
local, state and federal laws, rules and regulations relating to the environment
are applicable to the Company's operations and activities. As a result, the
Company falls under the jurisdiction of numerous state and federal agencies for
administration and is exposed to the possibility of judicial or administrative
actions for remediation and/or penalties brought by those agencies. Frontier is
party to two consent decrees requiring the investigation and, in certain
instances, mitigation of environmental impacts resulting from past operational
activities. The Company has been and will be responsible for costs related to
compliance with or remediations resulting from environmental regulations. There
are currently no identified environmental remediation projects of which the
costs can be reasonably estimated. However, the continuation of the present
investigative process, other more extensive investigations over time or changes
in regulatory requirements could result in future liabilities.
Litigation
The Company is involved in various lawsuits incident to its business. In
management's opinion, the adverse determination of such lawsuits would not have
a material adverse effect on the Company taken as a whole.
Contribution Plans
Wainoco sponsors defined contribution plans for Canadian division
employees, United States employees covered by a collective bargaining agreement
and United States employees not covered by such an agreement. All employees may
participate by contributing a portion of their annual earnings to the plans. The
Company makes basic and/or matching contributions on behalf of participating
employees. The cost of the plans for the three years ended December 31, 1993,
1992 and 1991 was $1.7 million, $1.5 million and $671,000, respectively.
Pension Plan
The following is the plan's funded status and net pension costs. The
actuarial present value of accumulated benefit obligations at December 31, 1993,
1992 and 1991 was discounted at 6.5%, 6.5% and 7.25%, respectively. Plan assets
consisted of stocks and bonds with an expected rate of return of 9% for each
period.
Effective January 1, 1993, Wainoco's pension plan is non-contributory, open
to all its United States employees not covered by a collective bargaining
agreement and over 25 years of age with six months of service. The plan has a
retirement age of 65. Benefits from the plan for service on and after January 1,
1993 will only be paid to the extent these benefits exceed the benefits from the
Wainoco contribution plan.
Pension Plan Information (In thousands)
1993 1992 1991
---------- ---------- ----------
Funded Status
Actuarial present value of accumulated
benefit obligations -
Vested $ 1,298 $ 1,253 $ 1,127
Nonvested 25 16 17
---------- ---------- ----------
$ 1,323 $ 1,269 $ 1,144
---------- ---------- ----------
Projected benefit obligation $ 1,323 $ 1,852 $ 1,672
Plan assets at estimated fair value 1,290 1,179 1,048
---------- ---------- ----------
Plan assets less than projected benefit obligation 33 673 624
Unrecognized net gain (loss) arising from the
difference in actual experience and that assumed 0 (583) (528)
---------- ---------- ----------
Accrued retirement plan liability $ 33 $ 90 $ 96
========== ========== ==========
Net Pension Costs
Service cost, benefits earned during the period $ 0 $ 147 $ 118
Interest cost on projected benefit obligation 85 120 100
Actual return on plan assets (154) (177) (79)
Net amortization and deferral 54 133 36
---------- ---------- ----------
Net pension costs $ (15) $ 223 $ 175
========== ========== ==========
Concentration of Credit Risk
The Company has three operations, each of which has concentrations of
credit risk with respect to sales within the same or related industry and within
limited geographic areas. The Refining operation sells its products exclusively
at wholesale, principally to independent retailers, jobbers and major oil
companies located primarily in the Denver, western Nebraska and eastern Wyoming
regions, with 13% of its customers accounting for approximately 80% of total
refined product sales in the last three years. Canadian oil and gas operations
sell primarily under long-term contracts to gas aggregators located in Alberta
and British Columbia, accounting for 82%, 75% and 79% of total Canadian sales in
1993, 1992 and 1991, respectively. United States oil and gas operations sell
primarily to oil marketers and gas pipelines in the midcontinent, Los Angeles
Basin and Gulf Coast regions. Wainoco extends credit to its customers based on
ongoing credit evaluations. An allowance for doubtful accounts is provided based
on the current evaluation of each customer's credit risk, past experience and
other factors. During 1993, the Company made sales to CITGO Petroleum
Corporation of $47.6 million, which accounted for 13% of consolidated revenues.
9 Property Acquisitions and Disposition
In August, 1991, Wainoco Oil & Gas Company completed its acquisition of the
majority of Texaco Exploration and Production, Inc.'s interests in the Conroe
field, located near Conroe, Texas, for $16.8 million. The purchase was funded by
bank borrowings.
In October, 1991, Wainoco completed the acquisition of Frontier for a
purchase price consisting of $25 million in cash and $9.9 million in Company
common stock (2,195,237 shares). Additionally, Frontier delivered promissory
notes aggregating $16.5 million to the sellers. The cash portion of the purchase
price was funded by bank borrowings.
The unaudited pro forma revenues, net loss and net loss per share giving
effect to the Frontier and Conroe acquisitions for the year ended December 31,
1991 were $388.9 million, $12.1 million and $.55, respectively.
In September, 1991, Wainoco Oil & Gas Company finalized the sale of its
remaining natural gas interests in the Appalachian Basin Athens field to an
unaffiliated party for $4 million.
10 Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to do so.
Long-Term Debt
The Company's Senior Notes and debentures are estimated based on quotations
obtained from broker-dealers who make markets in these and similar securities.
The bank credit facilities are based on floating interest rates and, as such,
the carrying amount is a reasonable estimate of fair value. At December 31, 1993
and 1992, the carrying amounts of long-term debt instruments were $176.9 million
and $191.8 million, respectively, and the estimated fair values were $178.9
million and $180.1 million.
Interest Rate Swap Agreement
The fair value of the Company's interest rate swap (used for hedging
purposes) is the estimated amount that the bank would receive or pay to settle
the swap agreement at the reporting date, taking into account current interest
rates and the current credit-worthiness of the swap counterparty. At December
31, 1993 and 1992, the carrying amount was zero and the estimated net fair value
of the liability was $1.9 million and $1.2 million, respectively.
Report of Independent Public Accountants
To the Shareholders of Wainoco Oil Corporation:
We have audited the accompanying consolidated balance sheets of Wainoco Oil
Corporation (a Wyoming corporation) and subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wainoco Oil Corporation and
subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
Arthur Andersen & Co.
/s/ Arthur Andersen & Co.
Houston, Texas
February 11, 1994
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
Oil and Gas Producing Activities
The results of operations from oil and gas producing activities are similar
to the segment information disclosure in Note 7 to the financial statements, but
differ as to the level of detail, classification of depreciation on furniture
and fixtures and the inclusion of income taxes. The following schedule excludes
interest expense, net. The income tax expenses were determined by applying
statutory rates to pretax income with adjustments for tax credits (including
carryforwards and Alberta Royalty Tax Credits) and permanent differences.
Results of Operations from Oil and Gas Producing Activities (In thousands)
United
Canada States Total
---------- ---------- ----------
1993 Revenues from operations $ 22,301 $ 18,177 $ 40,478
Production costs 5,326 7,089 12,415
Production taxes 0 1,029 1,029
Technical support and other 2,111 2,276 4,387
Provision for DD&A
Normal 8,759 7,463 16,222
Additional 0 0 0
---------- ---------- ----------
Operating income (loss) 6,105 320 6,425
Income tax expense (benefit) (515) 0 (515)
---------- ---------- ----------
Income (loss) from producing activities $ 6,620 $ 320 $ 6,940
========== ========== ==========
Normal DD&A per dollar of oil and gas sales $ .41 $ .42 $ .41
========== ========== ==========
1992 Revenues from operations $ 20,722 $ 21,293 $ 42,015
Production costs 5,117 7,352 12,469
Production taxes 0 1,302 1,302
Technical support and other 2,302 2,857 5,159
Provision for DD&A
Normal 8,960 9,797 18,757
Additional 0 0 0
---------- ---------- ----------
Operating income (loss) 4,343 (15) 4,328
Income tax expense (benefit) (415) 0 (415)
---------- ---------- ----------
Income (loss) from producing activities $ 4,758 $ (15) $ 4,743
========== ========== ==========
Normal DD&A per dollar of oil and gas sales $ .45 $ .47 $ .46
========== ========== ==========
1991 Revenues from operations $ 23,982 $ 27,630 $ 51,612
Production costs 6,254 8,024 14,278
Production taxes 0 1,378 1,378
Technical support and other 3,131 3,394 6,525
Provision for DD&A
Normal 9,463 12,210 21,673
Additional 0 13,000 13,000
---------- ---------- ----------
Operating income (loss) 5,134 (10,376) (5,242)
Income tax expense (benefit) (655) 0 (655)
---------- ---------- ----------
Income (loss) from producing activities $ 5,789 $ (10,376) $ (4,587)
========== ========== ==========
Normal DD&A per dollar of oil and gas sales $ .43 $ .56 $ .49
========== ========== ==========
The table on the following page summarizes Wainoco's proved oil and gas
reserves. Oil includes condensate and natural gas liquids, and is stated in
thousands of barrels. Natural gas is stated in millions of cubic feet. For the
years ended December 31, 1993, 1992, 1991 and 1990, Ryder Scott Company
Petroleum Engineers prepared reserve studies comprising 93%, 93%, 91% and 89%,
respectively, of the Company's total discounted property value. The Company
prepared reserve studies on the remaining properties. BOE is defined as barrels
of oil equivalent and is based on British Thermal Units at a ratio of six mmcf
of natural gas to one bbl of oil.
Changes in Proved Oil and Gas Reserve Quantities
United
Canada States Total
---------------------------- ---------------------------- ----------------------------
Oil Gas BOE Oil Gas BOE Oil Gas BOE
-------- -------- -------- -------- -------- -------- -------- -------- --------
DEVELOPED AND UNDEVELOPED
December 31, 1990 2,042 183,808 32,677 5,221 36,376 11,284 7,263 220,184 43,961
Revision to previous estimates (74) (9,765) (1,702) (1,841) (4,189) (2,539) (1,915) (13,954) (4,241)
Extensions, discoveries and
other additions 67 6,993 1,233 293 1,273 505 360 8,266 1,738
Purchases of reserves-in-place 15 4,303 732 1,522 23,787 5,487 1,537 28,090 6,219
Production (285) (15,486) (2,866) (835) (3,515) (1,421) (1,120) (19,001) (4,287)
Sales of reserves-in-place (58) (1,244) (265) (35) (7,869) (1,347) (93) (9,113) (1,612)
-------- -------- -------- -------- -------- -------- -------- -------- --------
December 31, 1991 1,707 168,609 29,809 4,325 45,863 11,969 6,032 214,472 41,778
Revisions to previous estimates 336 (5,163) (525) 351 (121) 331 687 (5,284) (194)
Extensions, discoveries and
other additions 24 2,207 392 691 2,056 1,034 715 4,263 1,426
Purchases of reserves-in-place 8 1,311 227 0 0 0 8 1,311 227
Production (267) (15,995) (2,933) (844) (2,954) (1,336) (1,111) (18,949) (4,269)
Sales of reserves-in-place (16) 0 (16) (23) (1,333) (245) (39) (1,333) (261)
-------- -------- -------- -------- -------- -------- -------- -------- --------
December 31, 1992 1,792 150,969 26,954 4,500 43,511 11,753 6,292 194,480 38,707
Revisions to previous estimates (172) (18,026) (3,176) (974) 1,332 (752) (1,146) (16,694) (3,928)
Extensions, discoveries and
other additions 171 4,262 881 545 3,622 1,149 716 7,884 2,030
Purchases of reserves-in-place 1 607 102 8 218 44 9 825 146
Production (232) (15,938) (2,888) (747) (2,504) (1,164) (979) (18,442) (4,052)
Sales of reserves-in-place (36) (3,164) (563) (193) (914) (345) (229) (4,078) (908)
-------- -------- -------- -------- -------- -------- -------- -------- --------
December 31, 1993 1,524 118,710 21,310 3,139 45,265 10,685 4,663 163,975 31,995
======== ======== ======== ======== ======== ======== ======== ======== ========
DEVELOPED
December 31, 1990 1,869 165,986 29,533 3,872 33,175 9,401 5,741 199,161 38,934
December 31, 1991 1,527 151,326 26,748 4,188 42,896 11,337 5,715 194,222 38,085
December 31, 1992 1,726 137,163 24,587 4,486 42,083 11,500 6,212 179,246 36,087
December 31, 1993 1,524 115,628 20,795 3,124 43,837 10,430 4,648 159,465 31,225
Developed as a Percentage
of Total
December 31, 1990 92% 90% 90% 74% 91% 83% 79% 90% 89 %
December 31, 1991 89 90 90 97 94 95 95 91 91
December 31, 1992 96 91 91 100 97 98 99 92 93
December 31, 1993 100 97 98 100 97 98 100 97 98
The following tables set forth the capitalized costs and related
accumulated depreciation, depletion and amortization and capitalized costs
incurred for oil and gas activities.
Capitalized Costs and Related Accumulated DD&A (In thousands)
United States
Canada and Other Total
-------------------- -------------------- --------------------
1993 1992 1993 1992 1993 1992
--------- --------- --------- --------- --------- ---------
Capitalized Costs
Unproved properties $ 5,307 $ 4,681 $ 4,152 $ 6,922 $ 9,459 $ 11,603
Proved properties 144,028 144,693 295,169 287,134 439,189 431,827
--------- --------- --------- --------- --------- ---------
$ 149,327 $ 149,374 $ 299,321 $ 294,056 $ 448,648 $ 443,430
Accumulated DD&A $ 77,376 $ 71,663 $ 244,382 $ 236,919 $ 321,758 $ 308,582
========= ========= ========= ========= ========= =========
Capitalized Costs Incurred for Oil and Gas Activities (In Thousands)
Unproved Proved
Property Property Exploration Development Total
---------- ---------- ---------- ---------- ----------
1993 Canada $ 1,399 $ 429 $ 3,138 $ 1,841 $ 6,807
United States 555 69 4,294 1,221 6,139
Other 425 0 0 0 425
---------- ---------- ---------- ---------- ----------
$ 2,379 $ 498 $ 7,432 $ 3,062 $ 13,371
========== ========== ========== ========== ==========
1992 Canada $ 692 $ 38 $ 3,104 $ 1,176 $ 5,010
United States 1,031 0 3,308 841 5,180
---------- ---------- ---------- ---------- ----------
$ 1,723 $ 38 $ 6,412 $ 2,017 $ 10,190
========== ========== ========== ========== ==========
1991 Canada $ 880 $ 2,331 $ 4,458 $ 2,239 $ 9,908
United States 4,614 16,463 11,020 1,318 33,415
---------- ---------- ---------- ---------- ----------
$ 5,494 $ 18,794 $ 15,478 $ 3,557 $ 43,323
========== ========== ========== ========== ==========
The following tables set forth the standardized measure of discounted
future net cash flows relating to proved oil and gas reserves and the changes in
standardized measure of discounted future net cash flows from proved reserve
quantities. This information is based on the respective prices in effect as of
year-end. Future income taxes are estimated by applying statutory rates to the
excess of future pretax cash flows over the tax basis (including carryforwards)
in the properties involved. Future changes in tax rates are considered only if
legislated by year-end. Tax credits (including carryforwards) and statutory
depletion in excess of cost basis are considered in determining future income
taxes.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (In
Thousands)
United
Canada States Total
-------------------- -------------------- --------------------
1993 1992 1993 1992 1993 1992
--------- --------- --------- --------- --------- ---------
Future cash inflows $ 189,701 $ 193,309 $ 135,049 $ 161,597 $ 324,750 $ 354,906
Future production costs 45,678 54,377 48,469 67,440 94,147 121,817
Future development costs 4,111 8,262 6,699 7,167 10,810 15,429
--------- --------- --------- --------- --------- ---------
Future net inflows before
income taxes 139,912 130,670 79,881 86,990 219,793 217,660
Future income taxes 11,574 8,168 902 747 12,476 8,915
--------- --------- --------- --------- --------- ---------
Future net cash flows 128,338 122,502 78,979 86,243 207,317 208,745
10% discount factor 45,524 49,351 23,187 32,455 68,711 81,806
--------- --------- --------- --------- --------- ---------
Discounted future net cash flows $ 82,814 $ 73,151 $ 55,792 $ 53,788 $ 138,606 $ 126,939
========= ========= ========= ========= ========= =========
Discounted future net cash
flows before income taxes $ 88,577 $ 76,816 $ 56,441 $ 54,278 $ 145,018 $ 131,094
========= ========= ========= ========= ========= =========
Changes in Standardized Measure of Discounted Future Net Cash Flows (In Thousands)
1993 1992 1991
--------- --------- ---------
Sales, net of production costs $ (25,693) $ (26,906) $ (28,389)
Net change in sales price and production costs 19,675 1,538 (37,626)
Extensions, discoveries and other additions,
net of future production and development costs 15,089 9,034 7,137
Changes in estimated future development costs 2,457 5,967 5,854
Development costs incurred during the period that
reduced future development costs 166 250 661
Revisions of quantity estimates (16,095) 120 (19,296)
Accretion of discount 13,109 14,255 18,957
Net change in income taxes (2,257) 2,082 10,244
Purchases of reserves-in-place 670 176 21,835
Sales of reserves-in-place (1,080) (1,255) (8,666)
Changes in production rates (timing) and other 5,626 (14,639) (7,478)
--------- --------- ---------
Net increase (decrease) from beginning of year $ 11,667 $ (9,378) $ (36,767)
========= ========= =========
CORPORATE INFORMATION
Common Stock
Wainoco's common stock is listed on the New York Stock Exchange and the
Alberta Stock Exchange under the symbol WOL. The quarterly high and low sales
prices as reported on the New York Stock Exchange, rounded to the nearest one-
eighth, are shown in the following table:
High Low
----- -----
1993
Fourth Quarter 5 1/2 3 1/2
Third Quarter 5 1/2 3 7/8
Second Quarter 5 7/8 4 1/4
First Quarter 5 1/4 3 5/8
1992
Fourth Quarter 4 3 1/8
Third Quarter 4 3/8 3 1/4
Second Quarter 4 1/4 3 1/8
First Quarter 5 1/4 3 1/8
Wainoco has not paid dividends since 1982 and intends to continue following
a policy of retaining funds to provide for the expansion of its oil and gas
reserves. The number of holders of record for Wainoco Oil Corporation common
stock as of February 1, 1993 was 2,942.
Availability of Form 10-K
The Company's annual report on Form 10-K, which is filed with the
Securities and Exchange Commission is available upon request and may be obtained
by writing:
Michal King
Corporate Communications
Wainoco Oil Corporation
1200 Smith Street
Suite 2100
Houston, Texas 77002-4367
Auditors
Arthur Andersen & Co.
Houston, Texas
Counsel
Gardere & Wynne, L.L.P.
Houston, Texas
Burnet, Duckworth & Palmer
Calgary, Alberta
Registrars and Transfer Agents
Common Stock
Harris Trust and Savings Bank
Chicago, Illinois
12% Senior Notes
Bank One, Texas, N.A.
Houston, Texas
10 3/4% Subordinated Debentures
7 3/4% Convertible Subordinated Debentures
Texas Commerce Bank
Houston, Texas