FINANCIAL REVIEW
Wainoco's performance in 1994 was highlighted by continued growth
in refining operating income and the reserve replacement of 1994
Canadian production at a lower finding cost level than the previous
year. However, Wainoco incurred a net loss during 1994 of $12.6
million, the result of a $17.3 million charge. The charge is the
outcome of the Company ceasing exploration activities in the United
States and selling certain oil and gas properties as well as the
write-down of unsold United States properties.
In 1993, net income improved to $2.5 million over the $1.0
million loss in 1992. The improvement in 1993 included higher
refining operating margins, increased refined product sales and
improved natural gas prices.
Wainoco's operating income, excluding the restructuring charge
and associated write-downs, was $24.7 million in 1994 compared to
$22.2 million in 1993. Refining operations contributed $23.0 million
of operating income in 1994, an increase of 23%. Canadian oil and gas
operations contributed $6.1 million of operating income in both 1994
and the prior year.
Weak economic conditions in the energy sector led to a general
reduction in revenues and operating costs in both 1994 and 1993. The
declines impact underlying material costs, primarily crude oil, and
related refined product prices.
The 1992-1993 Frontier capital improvement program and the
Frontier Refinery acquisition in October 1991 added to the Company's
debt level. This increase in debt caused net interest costs to
increase during 1994 and 1993 compared to prior periods.
Canadian Oil & Gas Operations Information and Analysis
(In thousands) 1994 1993 1992
-------- -------- --------
Operating margin $ 18,461 $ 16,975 $ 15,605
Selling and general expenses 2,189 2,067 2,263
Depreciation, depletion and amortization 10,127 8,793 8,999
-------- -------- --------
Operating Income $ 6,145 $ 6,115 $ 4,343
======== ======== ========
The Canadian oil and gas operations' performance benefited from a
significant increase in the price of natural gas throughout the first nine
months of 1994, which provided higher levels of revenue and cash flow for the
year. With higher levels of cash flow, coupled with Wainoco's commitment to
increase its investment in finding Canadian reserves, capital expenditures
increased to $11.1 million, up 63% over 1993. This resulted in replacement of
1994 production at a finding cost of $.48 per mcfe and a developed cost of $.66
per mcfe. In 1994 on a gross volume before royalty basis, finding costs
decreased 42% in 1994 to C$.53 (U.S. $.38 per mcfe) and developed costs
decreased 43% in 1994 to C$.74 (U.S. $.53) per mcfe.
The Canadian oil and gas operations are conducted in Canadian currency. The
financial statements of the Canadian oil and gas operations activities are
translated and reported in United States dollars. This conversion lowered
reported results between years due to the decline in the Canadian dollar. The
average Canadian/United States dollar exchange rate dropped 6% in 1994 to U.S.
$.73 after dropping 6% in 1993.
The following table presents Canadian production information. Gross
volumes represent Wainoco's working interest plus associated freehold,
provincial and other royalties. This data is presented herein because it is
equivalent to the reporting used by other Canadian oil and gas companies.
(Dollars in thousands) 1994 1993 1992
-------- -------- --------
Gross Volume - Oil (Bbls) 266,079 281,583 322,187
Natural Gas (Mmcf) 18,120 18,504 18,763
Royalty (Mmcfe) (3,045) (2,863) (3,100)
Net Volume - Oil (Bbls) 224,450 232,115 266,928
Natural Gas (Mmcf) 15,325 15,938 15,995
Gross Revenue - Oil $ 3,381 $ 3,595 $ 4,531
Natural Gas 23,725 21,264 18,825
Royalty (4,205) (3,609) (3,648)
Net Revenue - Oil $ 2,873 $ 2,982 $ 3,773
Natural Gas 20,028 18,268 15,935
In 1994 and 1993 oil and gas gross revenues increased due to
rising natural gas prices. During the first nine months of 1994
natural gas prices rose 14% to $1.31. However, in late 1994, natural
gas prices declined to an average of $1.10 in December 1994 versus
$1.52 in December 1993, a decrease of 28%.
During 1994, natural gas production from new wells added
production on a gross volume basis of approximately 1.5 bcf helping
offset production declines at various locations. The decrease in
sales volumes from 1993 to 1994 was mainly attributable to
curtailments during the installation or modification of compression
facilities, unscheduled equipment repairs and productivity declines in
some areas.
Lower natural gas prices received during the fourth quarter in
1994 restrained operating income growth by increasing depreciation and
depletion expense in excess of the increase associated with higher
revenues. This results from lower period end natural gas prices being
used in computing the quarterly depreciation and depletion provision.
Additionally, increases in the estimated costs of future site
restoration added to the depletable base.
Operating costs increased $346,000 in 1994. The increase is
attributable to successful drilling of wells in new areas which
commenced production in 1994, costs associated with operating
additional compressors installed during 1994 to maintain production
levels at maturing areas and unscheduled well workovers and equipment
repairs.
Selling and general expenses increased 6% during 1994 after
decreasing 8% during 1993. Cost increases during 1994 were associated
with environmental administration implementation and professional
fees.
United States Oil & Gas Operations Information and Analysis
(In thousands) 1994 1993 1992
-------- -------- --------
Operating margin $ 9,184 $ 10,059 $ 12,639
Selling and general expenses 2,180 2,110 2,568
Depreciation, depletion and amortization 8,911 7,629 10,086
Restructuring charges, primarily
oil and gas operating write-downs 17,299 0 0
-------- -------- --------
Operating Income (Loss) $(19,206) $ 320 $ (15)
======== ======== ========
Natural gas production increased 20% in 1994 after a 15% decrease
in 1993. The 1994 increase was the result of the 1993 discovery on
High Island Block 93 which began production in February 1994, and 1993
fell as existing production declined without any significant new
production coming on-line. Average natural gas prices were relatively
flat in 1994 following a 17% increase in 1993.
Oil production declined 7% in 1994 and 11% in 1993 due to the
sales of marginal properties and natural reservoir declines. Average
oil prices continued their decline, from $16.85/bbl in 1993 to
$14.99/bbl in 1994.
Operating costs decreased 11% in 1994 and 6% in 1993. The
decreases were achieved through reduced production taxes reflecting
lower sales, cost controls being stressed in an atmosphere of weak
prices and the sale or abandonment of uneconomic wells.
Selling and general expenses in 1994 remained relatively flat
after declining 18% in 1993, primarily the result of staff reductions.
Restructuring of Operations In the third quarter of 1994,
Wainoco announced that it intended to cease all exploration in the
United States and sell its United States oil and gas assets. Wainoco
has sold or is in the process of selling all of its United States oil
and gas producing properties, except for its Conroe field interests
and some other minor properties. For those properties that are in the
process of being sold, the Company has recorded these properties at
net realizable value, which is the estimated sales price less cost to
sell. Wainoco has recorded an estimated loss of $10.9 million. The
cost of the remaining United States oil and gas producing properties
at December 31, 1994 has been revalued and recorded at the present
value of their estimated future net income discounted at 10%, which
resulted in an additional write-down of $5.4 million. Wainoco also
recorded costs, primarily from severance arrangements with certain of
its U.S. oil and gas operations' employees of $1.0 million.
United States oil and gas producing properties which Wainoco
intends to sell have recorded revenues of $12.6 million, lease
operating expense of $5.0 million, DD&A of $6.6 million and oil and
gas production volumes of 461 mbbls and of 2,973 mmcf, respectively,
for the twelve months ended December 31, 1994. The revenues, lease
operating expense and DD&A related to these properties will be
recorded until the sales are closed, which will occur at various times
in 1995.
Refining Operations Information and Analysis
(In thousands) 1994 1993 1992
-------- -------- --------
Operating margin $ 35,335 $ 29,823 $ 24,084
Selling and general expenses 4,614 4,785 5,702
Depreciation, depletion and amortization 7,702 6,262 4,038
-------- -------- --------
Operating Income $ 23,019 $ 18,776 $ 14,334
======== ======== ========
Refining operating income increased 23% in 1994 after a 31%
increase in 1993. The significant growth in operating income is due
to the improved operating reliability of the Refinery and the improved
utilization of all the Refinery processing units which has allowed
Frontier to significantly increase its gasoline and diesel yields.
This improvement has resulted in gasoline product yield increasing 6%
to 16,106 bpd in 1994 after increasing 15% in 1993, and diesel product
yields increasing 11% to 13,094 bpd in 1994 after increasing 8% in
1993. Additionally in 1994, the combined gasoline and diesel product
yields represented 82% of total yields compared to 79% in 1993 and 76%
in 1992.
The refined product spread increased 7% to $5.88 per barrel in
1994 reflecting the improved utilization of the refinery units. The
diesel product spread declined in 1994 as compared to 1993, but was
higher than 1992. This decline reflects the impact of the abnormally
high price received in the fourth quarter of 1993 associated with the
introduction of low sulfur diesel which allowed for higher spreads
than would normally be expected. The gasoline product spread was
higher in 1992 than 1994 or 1993 reflecting the strong market for
gasoline during the summer months of 1992. Frontier expects its
gasoline and diesel spreads for 1995 to remain similar to that
received in 1994. Although national market forces could change
Frontier's outlook, the demand for Frontier's gasoline and diesel
should continue to remain strong due to the growth of the Rocky
Mountain area.
The sweet/Wyoming sour spread declined to $3.94 per barrel in
1994 from the high of $5.90 per barrel in 1991. The downward movement
is attributable primarily to increased competition for Wyoming general
sour crude. During 1994, the sweet/sour spread also declined as more
higher priced Canadian and other types of sour crudes were utilized
rather than the lower priced Wyoming general sour crude. The portion
of sour crude oil processed increased to 81% in 1994 from 71% in 1992,
a result of the capital improvement program. Frontier expects that
competition for sour crude oil will continue throughout 1995, causing
a continued gradual deterioration in the sweet/sour spread.
Refining operating expenses in 1994 decreased by $.10 per sales
barrel, a 3% decrease from 1993. During 1993 refining operating
expenses increased 12%, reflecting higher transportation costs due to
increased asphalt sales and the higher cost of disposing of petroleum
coke.
Other income included insurance settlements of $1.0 million in
1993 and $700,000 in 1992 which are applicable to prior year claims.
The capital improvement program completed in 1993 enabled the
production of low sulfur diesel, increased sour crude run capacities
and improved the overall operating efficiency of the Refinery. In
addition, effective management of the Refinery operations has
significantly improved reliability. Management continues to identify
and correct maintenance problems and will dedicate a significant
portion of 1995 capital expenditures for reliability improvements.
Maintenance problems may arise in the future, resulting in
downtime of certain process units and reduced yields, which may
negatively impact profitability. During the spring of 1994, Frontier
performed maintenance turnaround work on two of its major operating
units. With the completion of the 1994 turnaround, all refinery
operating units have completed repair, maintenance and inspection work
since the Company's acquisition of Frontier. No major turnaround work
is scheduled for 1995.
LIQUIDITY AND CAPITAL COMMITMENTS
Internal and External Funding
Net cash provided by operating activities was $32.1 million,
$32.8 million and $23.3 million for 1994, 1993 and 1992, respectively.
The Company reduced debt by $6.1 million during 1994. No new
financing was undertaken in 1994 whereas the Company sold common stock
in July 1993 and Senior Notes in August 1992. The net proceeds from
the sale of common stock, $20.8 million in 1993, were used to retire
$5.0 million of Subordinated Debentures and pay down the Company's
bank lines, and the net proceeds from the sale of Senior Notes, $96.5
million in 1992, were used to refinance $44.8 million of the Refinery
indebtedness and to pay down Wainoco's bank lines.
Liquidity and Future Planning
The Company is highly leveraged at year-end as reflected by the
debt to total capitalization ratio of 78%. The Company's leverage
will result in the following: (i) a portion of the Company's cash flow
from operations and the United States oil and gas property sales
proceeds 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, 1994, the
Company had $5.8 million available in cash, $27.2 million available
under its oil and gas lines of credit and $15.0 million available
under the Frontier line of credit. The Company anticipates the
available borrowing capacity under its United States oil and gas line
of credit will be reduced as a result of the sale of United States oil
and gas properties. Proceeds from the sale of United States properties
will be used to repay this debt.
Capital expenditures of approximately $18.3 million are budgeted
for 1995. These expenditures are allocated $7.5 million for the
Refinery and $10.8 million for Canadian exploration and development
expenditures. The Refinery's projected capital expenditures for 1995
are in line with those of 1994 and down substantially from the $58.4
million incurred during 1993 and 1992 for the Refinery capital
improvement program. The Company believes sustaining capital
expenditure requirements at Frontier will be $5-10 million annually.
Additionally, to improve Refinery controls over emissions,
approximately $4 million, may be required over four years beginning in
1995. 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 1995
capital needs and the $4 million of additional future anticipated
costs for pollution control.
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$107 million at
December 31, 1994 are exposed to a certain level of economic risk
stemming from fluctuations in the Canadian/United States dollar
exchange rate. The translation adjustments, $4.1 million and $3.2
million during 1994 and 1993, respectively, 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 limit its current operating plans. Subsequent to
the Refinery upgrade program in 1993 and during 1994, Frontier paid
dividends of $9.9 million and $22.7 million to Wainoco.
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 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)
1994 1993
-------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second First
-------- -------- -------- -------- -------- -------- -------- --------
Revenues $ 91,421 $ 99,498 $ 90,590 $ 72,206 $ 97,006 $ 95,211 $ 90,704 $ 83,635
Restructuring Charges, primarily United
States Oil and Gas Property Write-downs 17,299 0 0 0 0 0 0 0
Operating Income (Loss) (13,517) 7,543 6,965 6,364 12,803 4,892 3,265 1,250
Net Income (Loss) (18,695) 2,612 2,001 1,475 7,898 134 (1,633) (3,895)
Earnings (Loss) Per Share (.68) .10 .07 .05 .29 .01 (.07) (.18)
Earnings before Interest, Taxes,
Depreciation, Depletion and Amortization
and Restructuring Charges, primarily
United States Oil and Gas Property
Write-downs (EBITDA)* 10,650 14,825 13,597 12,322 19,000 10,345 8,987 7,116
Net Cash Provided By Operating Activities 13,781 8,329 9,163 835 22,708 5,136 2,082 2,874
Oil and Gas Operations
Production - Oil (mbbls) 218 224 246 232 250 258 233 238
Gas (bcf) 4.7 4.7 4.5 4.3 4.4 4.7 4.4 4.9
Average sales price - Oil (per bbl) $ 15.09 $ 15.97 $ 14.86 $ 11.96 $ 13.93 $ 15.31 $ 17.56 $ 16.99
Gas (per mcf) 1.30 1.41 1.49 1.55 1.44 1.24 1.25 1.19
Refining Operations
Total charges (bpd) 39,581 36,993 36,133 36,442 37,546 35,636 33,378 35,201
Sour crude charge rate (%) 87 80 80 78 88 73 81 78
Gasoline yields (bpd) 16,806 15,859 15,723 16,029 17,800 14,359 13,871 14,458
Distillate yields (bpd) 14,906 11,282 13,325 12,860 13,068 11,187 10,582 12,268
Total product sales (bpd) 40,702 38,551 40,066 35,785 40,824 42,400 37,890 36,154
Five Year Financial Data
(In thousands except per share) 1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Revenues $353,715 $366,556 $376,842 $130,067 $ 48,224
Restructuring Charges and United States
Oil and Gas Property Write-downs 17,299 0 0 13,000 21,200
Operating Income (Loss) 7,355 22,210 16,079 (8,713) (11,821)
Income (Loss) Before Taxes (13,442) 1,989 (1,393) (18,909) (18,975)
Provision (Benefit) For Income Taxes (835) (515) (415) (618) (402)
Net Income (Loss) (12,607) 2,504 (978) (18,291) (18,573)
Earnings (Loss) Per Share (.46) .10 (.04) (.90) (.94)
EBITDA* 51,394 45,448 39,510 27,308 27,391
Net Cash Provided By Operating Activities 32,108 32,800 23,336 17,513 17,691
Working Capital (Deficit) 1,532 (1,905) 3,344 (9,156) (1,091)
Total Assets 277,536 296,811 291,417 286,604 167,510
Long-Term Debt 170,797 176,900 189,273 154,417 81,301
Shareholders' Equity 49,449 66,040 44,956 53,987 61,774
Capital Expenditures 23,822 40,651 41,761 47,561 48,563
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. EBITDA and operating income before
depreciation are the same as operating income before DD&A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share)
For the years ended December 31, 1994 1993 1992
-------- -------- --------
REVENUES
Refined products $312,376 $324,504 $333,203
Oil and gas sales 39,567 39,137 40,677
Other 1,772 2,915 2,962
-------- -------- --------
353,715 366,556 376,842
-------- -------- --------
COSTS AND EXPENSES
Refining operating costs 277,852 296,255 310,701
Oil and gas operating costs 12,883 13,444 13,771
Selling and general expenses 11,586 11,409 12,860
Depreciation, depletion and amortization 26,740 23,238 23,431
Restructuring charges, primarily United States
oil and gas property write-downs 17,299 0 0
-------- -------- --------
346,360 344,346 360,763
-------- -------- --------
OPERATING INCOME 7,355 22,210 16,079
Interest expense, net 20,797 20,221 17,472
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (13,442) 1,989 (1,393)
Provision (benefit) for income taxes (835) (515) (415)
-------- -------- --------
NET INCOME (LOSS) $(12,607) $ 2,504 $ (978)
======== ======== ========
INCOME (LOSS) PER SHARE $ (.46) $ .10 $ (.04)
======== ======== ========
The accompanying notes are an integral part of these financial
statements.
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
As of December 31, 1994 1993
-------- --------
ASSETS
Current Assets -
Cash, including cash equivalents of $467 and $2,078
at December 31, 1994 and 1993, respectively $ 5,831 $ 3,770
Trade receivables 17,990 16,281
Joint operator and other receivables 3,209 2,790
Inventory of crude oil, products and other 23,618 21,086
Other current assets 1,129 2,331
-------- --------
Total Current Assets 51,777 46,258
-------- --------
Property, Plant and Equipment - at cost, and oil
and gas properties on a full cost basis 592,936 579,174
Less - Accumulated depreciation, depletion and amortization 372,937 334,905
-------- --------
Net Property, Plant and Equipment 219,999 244,269
Other Assets 5,760 6,284
-------- --------
Total Assets $277,536 $296,811
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities -
Accounts payable $ 32,991 $ 30,514
Oil and gas proceeds payable 3,421 4,095
Accrued interest 5,602 5,681
Accrued turnaround cost 2,245 3,741
Other accrued liabilities 5,986 4,132
-------- --------
Total Current Liabilities 50,245 48,163
-------- --------
Long-Term Debt 170,797 176,900
Deferred Credits and Other 4,627 3,410
Deferred Income Taxes 2,418 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,
27,310,842 shares and 27,122,177 shares issued
in 1994 and 1993, respectively 57,172 57,153
Paid-in capital 81,758 80,855
Retained earnings (deficit) (78,904) (66,297)
Cumulative translation adjustment (10,307) (6,233)
Other, including 60,000 treasury shares (270) 562
-------- --------
Total Shareholders' Equity 49,449 66,040
-------- --------
Total Liabilities and Shareholders' Equity $277,536 $296,811
======== ========
The accompanying notes are an integral part of these financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended December 31, 1994 1993 1992
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $(12,607) $ 2,504 $ (978)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities -
Depreciation, depletion and amortization 26,740 23,238 23,431
Other deferred credits (498) (460) 1,306
Restructuring charges, primarily United States
oil and gas property write-downs 17,299 0 0
Other 882 598 826
-------- -------- --------
31,816 25,880 24,585
-------- -------- --------
Changes in components of working
capital from operations
(Increase) decrease in receivables (1,624) (668) 3,186
(Increase) decrease in inventory (2,722) 8,659 404
(Increase) decrease in other current assets 949 (1,137) (371)
Increase (decrease) in accounts payable 4,258 (684) (5,868)
Increase (decrease) in accrued liabilities (569) 750 1,400
-------- -------- --------
292 6,920 (1,249)
-------- -------- --------
Net cash provided by operating activities 32,108 32,800 23,336
-------- -------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment (23,802) (42,381) (42,365)
Sales of oil and gas properties 2,215 2,262 1,231
Other (2,045) 1,136 2,319
-------- -------- --------
Net cash used in investing activities (23,632) (38,983) (38,815)
-------- -------- --------
FINANCING ACTIVITIES
Long-term borrowings - Bank debt 11,964 27,400 11,900
Senior Notes 0 0 100,000
Payments of debt - Bank debt (15,664) (37,400) (52,200)
Subordinated Debentures (2,500) (4,999) 0
Mortgage notes and other debt 0 0 (41,845)
Common stock offering and commitments 0 21,725 0
Other (179) (209) (5,491)
-------- -------- --------
Net cash provided by (used in) financing activities (6,379) 6,517 12,364
Effect of exchange rate changes on cash (36) (274) (233)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 2,061 60 (3,348)
Cash and cash equivalents, beginning of period 3,770 3,710 7,058
-------- -------- --------
Cash and cash equivalents, end of period $ 5,831 $ 3,770 $ 3,710
======== ======== ========
The accompanying notes are an integral part of these financial
statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except shares)
Common Stock Other
------------------- ------------------------------------
Number of Retained Cumulative Commitment Deferred
Shares Paid-In Earnings Translation To Issue Treasury Employee
Issued Amount Capital (Deficit) Adjustment Common Stock Stock Compensation
---------- ------- ------- --------- ---------- ------------ -------- ------------
DECEMBER 31, 1991 22,122,177 $56,653 $60,513 $(67,823) $ 5,156 $ 0 $ (270) $ (242)
Deferred compensation amortization 0 0 0 0 0 0 0 96
Translation adjustment 0 0 0 0 (8,149) 0 0 0
Net loss 0 0 0 (978) 0 0 0 0
---------- ------- ------- -------- ---------- ------------ -------- -----------
DECEMBER 31, 1992 22,122,177 56,653 60,513 (68,801) (2,993) 0 (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 0 883 0 0
Deferred compensation amortization 0 0 0 0 0 0 0 95
Translation adjustment 0 0 0 0 (3,240) 0 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) (6,233) 883 (270) (51)
Shares issued under:
Common stock commitment 175,275 18 865 0 0 (883) 0 0
Stock option plan 13,390 1 38 0 0 0 0 0
Deferred compensation amortization 0 0 0 0 0 0 0 51
Translation adjustment 0 0 0 0 (4,074) 0 0 0
Net loss 0 0 0 (12,607) 0 0 0 0
---------- ------- ------- -------- ---------- ------------ -------- ----------
DECEMBER 31, 1994 27,310,842 $57,172 $81,758 $(78,904) $ (10,307) $ 0 $ (270) $ 0
========== ======= ======= ======== ========== ============ ======== ==========
The accompanying notes are an integral part of these financial
statements.
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 costs 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 is 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, by country, are limited
to the present value of future net income from estimated production of
proved oil and gas reserves discounted at 10%, plus the value of
unproved properties.
Largely as a result of price declines for gas at December 31,
1994, capitalized oil and gas property costs in the United States are
at, and in Canada are approaching, the limitation on such costs, as
described above. Further price deterioration during 1995 could result
in a downward revision in the present value of future net income from
estimated production of oil and gas reserves. A downward revision
might require Wainoco to provide additional provisions for
depreciation, depletion and amortization in future periods.
Schedule of Property, Plant and Equipment
(In thousands) 1994 1993
-------- --------
Oil and gas properties
Canada $151,184 $149,328
United States 303,375 299,321
Refinery and pipeline 132,872 124,705
Furniture, fixtures and others 5,505 5,820
-------- --------
$592,936 $579,174
======== ========
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 $216,000, $93,000 and $221,000 was
recorded in the years ended December 31, 1994, 1993 and 1992,
respectively. During 1993 and 1992 the Company capitalized interest
of $728,000 and $1.0 million, respectively. Wainoco capitalizes
interest on debt incurred to fund the construction or acquisition of a
significant asset as part of the historical cost of the asset.
To manage its interest cost and exposure to interest rate
movements, Wainoco entered into an interest rate swap with one of its
lending banks. 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.
Environmental Expenditures
Environmental expenditures are expensed or capitalized 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
Highly liquid debt instruments with a maturity, when purchased,
of three months or less are considered to be cash equivalents. Cash
payments for interest during 1994, 1993 and 1992 were $19.4 million,
$19.7 million and $12.6 million, respectively, and cash payments for
income taxes during 1994, 1993 and 1992 were $116,000, $124,000 and
$173,000, respectively.
2 INVENTORY
Schedule of Major Components of Inventory
(In thousands)
December 31, 1994 1993
-------- --------
Crude oil $ 6,135 $ 2,803
Unfinished products 3,489 4,487
Finished products 7,737 7,435
Chemicals and in-transit inventory 1,277 1,589
Repairs and maintenance supplies and other 4,980 4,772
-------- --------
$ 23,618 $ 21,086
======== ========
3 SHORT-TERM DEBT
In 1992, the maximum and average amounts of short-term borrowings
outstanding were $28.3 million and $12.2 million, respectively and the
average interest rate paid on these balances was 12.3%. 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, 1994 1993
-------- --------
Credit facilities
United States oil and gas $ 15,000 $ 18,700
Canadian oil and gas 0 0
Refining 0 0
Senior Notes 100,000 100,000
Convertible Subordinated Debentures 46,000 46,000
Subordinated Debentures 9,797 12,200
-------- --------
$170,797 $176,900
======== ========
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, at its prevailing rate, plus from one and one-half percent to
one and three-quarters percent. The agreements provide for commitment
fees of one-half of 1%.
The facilities convert to five-year term loans on December 31,
1995 with payments commencing on March 31, 1996. The credit
agreements can be extended annually at the option of the lenders. The
loan covenants include net worth, fixed charge coverage ratio and
interest coverage ratio requirements.
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.
The $18 million United States revolving line of credit is secured
by substantially all of the United States oil and gas properties.
The C$34 million (the United States dollar equivalent of
approximately $24.2 million at December 31, 1994) Canadian revolving
line of credit is secured by substantially all of the Canadian oil and
gas properties.
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,
1996, 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, 1994, there were $6.2 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
quarterly commitment fee of .425 of 1%. Interest rates are based, at
the Company's option, on the agent bank's prime rate plus one and
one-quarter percent or the reserve-adjusted LIBOR plus two and
one-quarter 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 103.875% 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 $9.8 million of 10 3/4% Subordinated Debentures (Subordinated
Debentures), which represent a discount to the $10 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 for 1996 and 1997 and $5.0
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, 1994. 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 $5.5
million in 1996 and 1997, $8.0 million in 1998 and $3.0 million in
1999. These amounts assume that the balance outstanding on the United
States credit facility at December 31, 1994 is converted to a term
loan on March 31, 1996, 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 in 1996 and
1997 and $5.0 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 following is the pretax income (loss) and the provision
(benefit) for income taxes for the three years ended December 31,
1994, 1993 and 1992.
Pretax Income (Loss)
(In thousands) 1994 1993 1992
-------- -------- --------
Canada $ 5,743 $ 5,552 $ 2,113
United States (19,185) (3,563) (3,506)
-------- -------- --------
$(13,442) $ 1,989 $ (1,393)
======== ======== ========
Provision (Benefit) for Income Taxes
(In thousands) 1994 1993 1992
-------- -------- --------
Canada - Current $ (955) $ (515) $ (415)
United States - Deferred 120 0 0
-------- -------- --------
$ (835) $ (515) $ (415)
======== ======== ========
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,
1994, 1993 and 1992.
Reconciliation of Tax Provision
(In thousands) 1994 1993 1992
-------- -------- --------
Provision (benefit) based on statutory rates $ (3,722) $ 1,241 $ (221)
-------- -------- --------
Increase (decrease) resulting from -
Unutilized net operating loss 3,722 (1,241) 221
Canada
Provincial tax credits and rebates (1,075) (621) (590)
Large corporation tax and other 120 106 175
-------- -------- --------
(955) (515) (415)
United States 120 0 0
-------- -------- --------
Provision (benefit) as reported $ (835) $ (515) $ (415)
======== ======== ========
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, 1994 and 1993.
Components of Deferred Taxes
December 31, 1994 December 31, 1993
-------------------- --------------------
United United
(In thousands) Canada States Canada States
-------------------- --------------------
DEFERRED TAX LIABILITIES
Property, plant and equipment,
due to differences in DD&A $ 6,989 $ 21,022 $ 9,975 $ 27,406
Installment sale 0 5,435 0 5,435
Other 0 1,509 0 1,657
-------- -------- -------- --------
DEFERRED TAX LIABILITIES 6,989 27,966 9,975 34,498
-------- -------- -------- --------
DEFERRED TAX ASSETS
Tax loss carryforwards 4,798 38,417 5,469 40,199
Depletion carryforwards 3,745 3,045 2,513 3,045
Tax credit carryforwards 0 2,509 0 2,389
Foreign exploration and
development expenditures 16,337 0 16,205 0
Other 0 2,005 0 1,609
-------- -------- -------- --------
24,880 45,976 24,187 47,242
LESS - VALUATION ALLOWANCE 17,891 20,428 14,212 15,042
-------- -------- -------- --------
NET DEFERRED TAX ASSETS 6,989 25,548 9,975 32,200
-------- -------- -------- --------
NET DEFERRED TAX LIABILITIES $ 0 $ 2,418 $ 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.
The Parent has net operating loss carryforwards for Canadian
income tax purposes of $10.7 million available to reduce future
Canadian federal taxable income which expire, if not otherwise
rescheduled, as follows: $748,000 in 1999, $5.7 million in 2000 and
$4.3 million in 2001. The Parent also has oil and gas deductions of
$88.9 million and earned depletion of $8.3 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 $109.7 million available to reduce
future federal taxable income. The net operating loss carryforwards
will expire as follows: $26.0 million in 1996, $22.7 million in 1997,
$4.7 million in 1998, $1.7 million in 2000, $7.6 million in 2001, $3.0
million in 2003, $15.5 million in 2004, $4.2 million in 2005, $12.0
million in 2006, $8.7 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.
6 COMMON STOCK
Earnings Per Share
In 1994 and 1992, 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. 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.
The primary and fully diluted weighted average shares outstanding were
27,335,360, 24,454,262 and 22,062,177 in 1994, 1993 and 1992,
respectively. The primary and fully diluted earnings per share for
the year 1993 are 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 three stock option plans which authorize the granting
of restricted stock and options to purchase shares. The plans as of
December 31, 1994 have a total of 4,019,000 shares of common stock of
which 1,564,228 shares were granted and exercised, 1,858,447 shares
were granted and are outstanding and 596,325 shares are available to
be granted. As of December 31, 1993, the plans had 572,795 shares
available to be granted. A summary of the plans' activity is set
forth in the Stock Option Activity table. Options under the 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, 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
Granted 457,400 4.62 to 5.00
Exercised (13,390) 3.50 to 4.21
Exchanged (394,400) 6.33 to 7.20
Lapsed (86,530) 3.50 to 8.50
--------- ------------
December 31, 1994 1,858,447 3.27 to 7.75
-------- ------------
EXERCISABLE
December 31, 1992 1,160,215 3.50 to 8.50
December 31, 1993 1,441,114 3.37 to 7.75
December 31, 1994 1,582,702 3.27 to 7.75
--------- ------------
Restricted Stock Grants
The Company issued 63,900 restricted shares of common stock. The
value of these shares and related deferred compensation was recorded
in equity. The deferred compensation, based on the market value of
the shares issued, was 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.
Common Stock Issuance
The Company's Canadian oil and gas division entered into a
drilling program in 1993 with a third party and received $883,000 in
exchange for 175,275 shares of its common stock and the distribution
of Canadian tax deductions attributable to certain of the Company's
exploration and development activities in Canada.
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 the three years ended December 31,
1994, and identifiable assets as of December 31, 1994, 1993 and 1992,
by segment by country.
Segment Information
(In thousands) 1994 1993 1992
-------- -------- --------
REVENUES
Refining $313,187 $326,078 $334,785
Oil and Gas - Canada 24,133 22,301 20,722
United States and Other 16,395 18,177 21,293
Unallocated 0 0 42
-------- -------- --------
353,715 366,556 376,842
-------- -------- --------
DEPRECIATION, DEPLETION AND AMORTIZATION*
Refining 7,702 6,262 4,038
Oil and gas - Canada 10,127 8,793 8,999
United States and Other 14,311 7,629 10,086
Unallocated 0 554 308
-------- -------- --------
32,140 23,238 23,431
-------- -------- --------
OPERATING INCOME (LOSS)
Refining 23,019 18,776 14,344
Oil and Gas - Canada 6,145 6,115 4,343
United States and Other (19,206) 320 (15)
Unallocated Expenses (2,603) (3,001) (2,593)
-------- -------- --------
7,355 22,210 16,079
-------- -------- --------
CAPITAL EXPENDITURES
Refining 8,245 26,932 31,493
Oil and Gas - Canada 11,171 6,828 5,045
United States and Other 4,406 6,891 5,223
-------- -------- --------
23,822 40,651 41,761
-------- -------- --------
IDENTIFIABLE ASSETS
Refining 158,654 156,265 140,574
Oil and Gas - Canada 74,037 76,294 83,270
United States and Other 40,351 60,207 61,798
Unallocated 4,494 4,045 5,775
-------- -------- --------
$277,536 $296,811 $291,417
======== ======== ========
*Includes the United States oil and gas property write-down in 1994.
8 COMMITMENTS AND CONTINGENCIES
Lease and Other Commitments
Wainoco has noncapitalized building, equipment and vehicle lease
agreements which expire from 1995 through 2000 having minimum annual
payments as of December 31, 1994 of $2.1 million for 1995, $1.7
million for 1996, $1.1 million for 1997, $1.0 million for 1998,
$458,000 for 1999 and $128,000 for 2000. Operating lease rental
expense (exclusive of oil and gas lease rentals) was $1.8 million,
$1.2 million and $1.2 million for the three years ended December 31,
1994, 1993 and 1992, respectively.
The Company has entered into firm pipeline capacity contracts in
Canada to meet contracted gas supply requirements. The Company's
commitment under these contracts is approximately $3.5 million in
1995, $1.2 million in 1996, $900,000 in 1997 and $600,000 a year from
1998 through 2001.
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 19% of its customers accounting for approximately 80% of total
refined product sales in the last three years. Canadian oil and gas
operations sell primarily to gas aggregators and marketers located in
Alberta and British Columbia, who in turn supply natural gas to a
diversified western United States and Canadian market. 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 1994, the Company made sales to
CITGO Petroleum Corporation of $55.6 million, which accounted for 16%
of consolidated revenues.
Pension Plan
The plan covered its United States employees not covered by a
collective bargaining agreement. Effective October 25, 1994, the
pension plan was curtailed, and it is anticipated that the pension
obligation will be settled during 1995. Beginning in 1993, Wainoco
began making retirement contribution to its defined contribution plan
in lieu of contribution to the pension plan, a defined benefit plan.
The following is the plan's funded status and net pension costs.
The actuarial present value of accumulated benefit obligations was
discounted at 6.5% at December 31, 1994, 1993 and 1992. Plan assets
consisted of stocks and bonds with an expected rate of return of 9%
for each period.
Pension Plan Information
(In thousands) 1994 1993 1992
------- ------- -------
FUNDED STATUS
Actuarial present value of accumulated
benefit obligations -
Vested $ 1,379 $ 1,298 $ 1,253
Nonvested 0 25 16
------- ------- -------
1,379 1,323 1,269
------- ------- -------
Projected benefit obligation 1,379 1,323 1,852
Plan assets at estimated fair value 1,067 1,290 1,179
------- ------- -------
Plan assets less than projected benefit obligation 312 33 673
Unrecognized net loss arising from the difference
in actual experience and that assumed (233) 0 (583)
Adjustment required to recognize minimum liability 233 0 0
------- ------- -------
Accrued retirement plan liability $ 312 $ 33 $ 90
------- ------- -------
NET PENSION COSTS
Service cost, benefits earned during period $ 0 $ 0 $ 147
Interest cost on projected benefit obligation 87 85 120
Actual return on plan assets 40 (154) (177)
Net amortization and deferral (150) 54 133
------- ------- -------
Net pension costs $ (23) $ (15) $ 223
======= ======= =======
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, 1994, 1993 and
1992 was $1.8 million, $1.7 million and $1.5 million, 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's
financial position or results of operations.
9 RESTRUCTURING OF OPERATIONS
In the third quarter of 1994, Wainoco announced that, in
connection with the restructuring of its operations, it had engaged an
investment banker to assist in the sale of its United States oil and
gas producing properties. As a result of the bids, Wainoco has sold
or is in the process of selling all of its United States oil and gas
producing properties, except for its Conroe field reserves and some
minor properties.
For the properties that are in the process of being sold, Wainoco
has recorded these properties at net realizable value, which is the
estimated sales price less cost to sell. The Company estimates that
it will receive aggregate net proceeds from the sale of $14 million.
This will result in an estimated loss of $10.9 million. The cost of
the remaining United States oil and gas producing properties at
December 31, 1994 have been recorded at the present value of their
estimated future net income discounted at 10%, which resulted in
additional write-downs of $5.4 million.
In connection with the restructure, Wainoco communicated
termination arrangements with certain of its United States oil and gas
operations' employees. Severance and related costs in the amount of
$1.0 million have been accrued, of which $104,000 has been paid as of
December 31, 1994.
The loss on the sale, the additional write-down of remaining
properties, and the severance and related costs have been recognized
in the fourth quarter and included in the 1994 income statement under
the caption "Restructuring charges, primarily additional write-downs
of United States oil and gas properties" in the amount of $17.3
million.
The following presents the revenues, lease operating expense,
DD&A and sales volumes recorded for the twelve months ended December
31, 1994 for United States oil and gas producing properties which the
Company intends to sell. The revenues, lease operating expense and
DD&A related to these properties will be recorded until the sales are
closed, which will occur at various times in 1995.
(In thousands) 1994
--------
Revenues $ 12,556
Lease operating expense 4,957
DD&A 6,618
--------
Production volumes
Oil (Mbbls) 461
Gas (Mmcf) 2,973
--------
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, 1994 and 1993, the carrying
amounts of long-term debt instruments were $170.8 million and $176.9
million, respectively, and the estimated fair values were $170.7
million and $178.9 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, 1994 and 1993, the carrying
amount was zero and the estimated net fair value of the liability was
$84,000 and $1.9 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, 1994 and 1993, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1994. 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, 1994 and
1993, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
February 21, 1995
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
The schedules presented in Supplemental Financial Information
include activities associated with the United States properties to be
sold. The oil and gas reserves for these properties at January 1,
1995 are estimated to be 2,130 mbbls and 9,453 mmcf, respectively, and
the standardized measure of discounted future net cash flows before
income taxes is estimated to be $15.7 million.
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.
At December 31, 1994, capitalized oil and gas property costs in
the United States are at, and in Canada are approaching, the
limitation on such costs, as described in Note 1 of the financial
statements. Price deterioration subsequent to December 31, 1994 could
result in a downward revision in the present value of future net
income from estimated production of oil and gas reserves. A downward
revision might require Wainoco to provide additional provisions for
depreciation, depletion and amortization in future periods.
Results of Operations from Oil and Gas Producing Activities
1994 1993 1992
---------------------------- ---------------------------- ----------------------------
United United United
(In thousands) Canada States Total Canada States Total Canada States Total
-------- -------- -------- -------- -------- -------- -------- -------- --------
Revenues from operations $ 24,133 $ 16,595 $ 40,728 $ 22,301 $ 18,177 $ 40,478 $ 20,722 $ 21,293 $ 42,015
Production costs 5,672 6,407 12,079 5,326 7,089 12,415 5,117 7,352 12,469
Production taxes 0 804 804 0 1,029 1,029 0 1,302 1,302
Technical support and other 2,238 2,306 4,544 2,111 2,276 4,387 2,302 2,857 5,159
Provision for DD&A 10,080 8,785 18,865 8,759 7,463 16,222 8,960 9,797 18,757
Restructuring charges, primarily oil
and gas property write-downs 0 17,299 17,299 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) 6,143 (19,006) (12,863) 6,105 320 6,425 4,343 (15) 4,328
Income tax expense (benefit) (835) 0 (835) (515) 0 (515) (415) 0 (415)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
producing activities 6,978 (19,006) (12,028) 6,620 320 6,940 4,758 (15) 4,743
Normal DD&A per dollar
of oil and gas sales $ .44 $ .53 $ .48 $ .41 $ .42 $ .41 $ .45 $ .47 $ .46
======== ======== ======== ======== ======== ======== ======== ======== ========
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, 1994, 1993,
1992 and 1991, Ryder Scott Company Petroleum Engineers prepared
reserve studies comprising 87%, 93%, 93% and 91%, respectively, of the
Company's total discounted property value. The Company prepared
reserve studies on the remaining properties. MBOE is defined as a
thousand barrels of oil equivalent and is based on British Thermal
Units at a ratio of six mcf of natural gas to one bbl of oil.
Changes in Proved Oil and Gas Reserve Quantities
Canada United States Total
---------------------------- ---------------------------- ----------------------------
Oil Gas MBOE Oil Gas MBOE Oil Gas MBOE
-------- -------- -------- -------- -------- -------- -------- -------- --------
DEVELOPED AND UNDEVELOPED
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
Revisions to previous estimates (124) 3,025 380 683 (7,319) (537) 559 (4,294) (157)
Extensions, discoveries
and other additions 135 15,857 2,777 226 371 288 361 16,228 3,065
Purchases of reserves-in-place 0 27 4 3 85 17 3 112 21
Production (224) (15,325) (2,777) (696) (2,993) (1,197) (920) (18,318) (3,974)
Sales of reserves-in-place (3) (1,407) (238) (71) (128) (92) (74) (1,535) (330)
-------- -------- -------- -------- -------- -------- -------- -------- --------
December 31, 1994 1,308 120,887 21,456 3,284 35,281 9,164 4,592 156,168 30,620
-------- -------- -------- -------- -------- -------- -------- -------- --------
DEVELOPED
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
December 31, 1994 1,301 119,195 21,167 3,014 35,173 8,876 4,315 154,368 30,043
-------- -------- -------- -------- -------- -------- -------- -------- --------
DEVELOPED AS A PERCENTAGE OF TOTAL
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
December 31, 1994 99 99 99 92 100 97 94 99 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
United States
Canada and Other Total
------------------ ------------------ ------------------
(In thousands) 1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- --------
CAPITALIZED COSTS
Unproved properties $ 5,940 $ 5,307 $ 1,264 $ 4,152 $ 7,204 $ 9,459
Proved properties 145,244 144,021 302,111 295,169 447,355 439,190
-------- -------- -------- -------- -------- --------
151,184 149,328 303,375 299,321 454,559 448,649
-------- -------- -------- -------- -------- --------
ACCUMULATED DD&A $ 82,884 $ 77,376 $269,169 $244,382 $352,053 $321,758
======== ======== ======== ======== ======== ========
Capitalized Costs Incurred for Oil and Gas Activities
Unproved Proved
(In thousands) Property Property Exploration Development Total
------------ ------------ ------------ ------------ ------------
1994
Canada $ 2,457 $ 146 $ 5,475 $ 3,020 $ 11,098
United States (38) 58 2,781 1,302 4,103
Other 201 0 0 0 201
------------ ------------ ------------ ------------ ------------
2,620 204 8,256 4,322 15,402
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
============ ============ ============ ============ ============
The following tables set forth standardized measure information
for 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
Canada United States Total
------------------ ------------------ ------------------
(In thousands) 1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- --------
Future cash inflows $156,529 $189,701 $101,061 $135,049 $257,590 $324,750
Future production costs 46,782 45,678 42,805 48,469 89,587 94,147
Future developments 3,420 4,111 5,849 6,699 9,269 10,810
-------- -------- -------- -------- -------- --------
Future net inflows before income taxes 106,327 139,912 52,407 79,881 158,734 219,793
Future income taxes 1,915 11,574 561 902 2,476 12,476
-------- -------- -------- -------- -------- --------
Future net cash flows 104,412 128,338 51,846 78,979 156,258 207,317
10% discount factor 36,606 45,524 16,189 23,187 52,795 68,711
-------- -------- -------- -------- -------- --------
Discounted future net cash flows 67,806 82,814 35,657 55,792 103,463 138,606
-------- -------- -------- -------- -------- --------
Discounted future net cash flows
before income taxes $ 68,865 $ 88,577 $ 36,020 $ 56,441 $104,885 $145,018
======== ======== ======== ======== ======== ========
Changes in Standardized Measure of Discounted Future Net Cash Flows
Canada United States Total
---------------------------- ---------------------------- ----------------------------
(In thousands) 1994 1993 1992 1994 1993 1992 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- -------- --------
Sales, net of production costs $(17,229) $(15,924) $(14,591) $ (9,455) $ (9,769) $(12,315) $(26,684) $(25,693) $(26,906)
Net change in sales price
and production costs (21,479) 22,807 (4,966) (11,302) (3,132) 6,504 (32,781) 19,675 1,538
Extension, discoveries and
other additions, net of future
production and development costs 11,417 5,329 2,781 2,331 9,760 6,253 13,748 15,089 9,034
Changes in estimated future
development costs 481 3,166 4,576 (1,079) (709) 1,391 (598) 2,457 5,967
Development costs incurred
during the period that reduced
future development costs 409 166 250 22 0 0 431 166 250
Revisions of quantity estimates 1,244 (12,473) (1,643) (2,421) (3,622) 1,763 (1,177) (16,095) 120
Accretion of discount 8,858 7,681 9,119 5,644 5,428 5,136 14,502 13,109 14,255
Net change in income taxes 4,704 (2,098) 2,243 286 (159) (161) 4,990 (2,257) 2,082
Purchases of reserves-in-place 12 403 176 92 267 0 104 670 176
Sales of reserves-in-place (356) (629) (37) (363) (451) (1,218) (719) (1,080) (1,255)
Changes in production rates
(timing) and other (3,069) 1,235 (10,036) (3,890) 4,391 (4,603) (6,959) 5,626 (14,639)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (decrease)
from beginning of year $(15,008) $ 9,663 $(12,128) $(20,135) $ 2,004 $ 2,750 $(35,143) $ 11,667 $ (9,378)
======== ======== ======== ======== ======== ======== ======== ======== ========
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 closing prices in dollars as reported on the New York
Stock Exchange, rounded to the nearest one-eighth, are shown in the
following table:
High Low
------ ------
1994
Fourth Quarter 5 3/8 4 3/8
Third Quarter 5 1/8 4 1/4
Second Quarter 5 3/4 4 1/4
First Quarter 5 7/8 3 7/8
------ ------
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
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, 1995 was 2,693.
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:
Mrs. Michal King
Corporate Communications
Wainoco Oil Corporation
1200 Smith Street
Suite 2100
Houston, Texas 77002-4367
AUDITORS
Arthur Andersen LLP
Houston, Texas
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