Exhibit 13.1
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Consolidated Results 1994 vs 1993
Sales and operating revenues for 1994 were $2,606.3 million compared to
$2,555.3 million in 1993. Sales and operating revenues increased primarily due
to a 6.4% increase in refined product sales volumes, a 6.4% increase in retail
merchandise sales and an improvement in revenues in the Allied Businesses
segment.
During 1994, the Company had net income of $75.8 million compared with income
before cumulative effect of accounting changes of $32.6 million and net income
of $18.4 million in 1993. The Company's integrated business approach
contributed significantly to the Company's profitability during 1994. The
Refining and Wholesale segment was supported by strong refining margins in the
first half of 1994. Then, as refining margins narrowed, the Company had
excellent results from the Retail segment, reflecting improved retail margins in
the second half of 1994. The Allied Businesses segment provided significant
operating profit improvements throughout 1994, reflecting a general improvement
in the petrochemical business and strong demand for anhydrous ammonia
fertilizer.
A major portion of the Company's inventory is valued at the lower of last-in,
first-out (LIFO) cost or market. At December 31, 1994, inventories of crude
oil and refined products of the Refining and Wholesale segment and propylene
products in the Allied Businesses segment were valued at market (lower than
LIFO cost). Motor fuel products of the Retail segment were recorded at their
LIFO costs. Estimating the financial impact of changes in the valuation of
refinery inventories due to such inventories being valued at market is
difficult because of the number of variables that must be considered. For
operating purposes, management attempts to estimate the impact of changes in
valuation of refinery inventories on net income. The estimated after tax
change in inventory values was a positive $7.3 million and a negative $16.5
million, in 1994 and 1993, respectively.
Consolidated Results 1993 vs 1992
Sales and operating revenues for 1993 were $2,555.3 million compared to
$2,602.6 million in 1992. Sales and operating revenues decreased primarily due
to a decrease in natural gas liquids sales volumes, attributable to the
cancellation of a contract to process natural gas during the second quarter of
1993, and a decrease in Retail segment sales, primarily due to a 3.9% decrease
in retail gasoline sales prices.
During 1993, the Company had income before cumulative effect of accounting
changes of $32.6 million and net income of $18.4 million compared with income
before cumulative effect of accounting changes of $26.4 million and net income
of $8.7 million in 1992.
The Company's 1993 results were positively affected by strong refining margins,
as motor fuel demand increased and pipeline and refinery expansion projects were
completed. High retail gasoline ad merchandise sales volumes, and strong
margins, primarily in the third and fourth quarters of 1993, contributed to
record earnings in the Retail segment.
Falling crude oil and refined product prices resulted in inventory devaluation
that negatively affected net income by approximately $16.5 million during 1993.
The Company's 1993 results were also affected by two noncash charges totaling
$15.9 million after tax. The first noncash charge arose because the Company
changed the accounting method for recording the liability under an agreement
with Maxus Energy Corporation (see Note 3 of the Notes to the Consolidated
Financial Statements on page 35 of this Annual Report). The second arose
because the Company took a charge of $1.7 million to restate deferred taxes as
a result of increased corporate income tax rates.
Segment Results 1994 vs 1993
Sales and operating revenues from the Refining and Wholesale segment increased
$26.0 million from $1,294.8 million in 1993 to $1,320.8 million in 1994,
primarily due to a 6.4% increase in refined product sales volumes as the
Company's expansion of its Three Rivers Refinery came on-line. This increase
was partially offset by a 5.1% decrease in refined product sales prices.
Refining and Wholesale operating profit increased by 98.6% to $146.8 million
compared to $73.9 million in 1993. This increase in operating profit was
primarily due to a 17.0% increase in refinery margins compared to 1993. The 1994
operating profit was positively impacted by an increase in the value of crude
oil and refined product inventories. The Company also benefited from a full
year of the projects brought on in 1993, namely the Three Rivers expansion and
the diesel desulfurizer at McKee.
Sales and operating revenues in the Retail segment increased 1.7% in 1994,
primarily due to a 6.4% increase in retail merchandise sales, a 2.0% increase in
gasoline fuel sales volumes, and a 6.4% increase in lottery sales, partially
offset by a 2.9% decrease in retail gasoline sales prices. Per-store
merchandise sales increased by 5.1%. Retail operating profit decreased by 6.1%
to $58.9 million in 1994 from $62.7 million in 1993, primarily due to increased
operating costs, reflecting the costs associated with the installation of the
Company's computerized retail information inventory management and customer
service system ("IRIS"). IRIS has the capability of tracking merchandise sales
by item and interfaces with computerized controls for underground storage tank
monitoring that allows the Company increased environmental protection. Also
contributing to the decrease in operating profit was a 0.6% decrease in retail
merchandise margins. Gross profit from lottery sales in 1994 was $8.2 million
compared to $7.3 million in 1993.
Allied Businesses sales and operating revenues increased 2.9% to $311.2 million
in 1994, primarily due to an increase in revenues from the Company's Nitromite
fertilizer and propane/propylene businesses. The propane/propylene increases
reflected a general improvement in the petrochemical business and strong demand
for polymer grade propylene during the last half of the year. The Nitromite
fertilizer business benefited from strong demand for anhydrous ammonia and
depressed natural gas prices. These revenue increases were partially offset by
a 9.1% decrease in natural gas liquids sales volumes and a 6.9% decrease in
natural gas liquids sales prices. Allied Businesses operating profits
increased by 73.3% in 1994 to $26.0 million, primarily due to an $8.2 million
and $6.7 million increase in operating profits from the Company's
propane/propylene and Nitromite fertilizer businesses, respectively. Also
contributing to the increase in operating profits was a $3.0 million
improvement from Trans Texas Pipeline, reflecting a full year of higher
operating rates and tariffs. Partially offsetting the increase in operating
profits was a $5.7 million increase in operating expense from international
operations, and a $2.9 million decrease in natural gas processing operating
profit, reflecting the cancellation during the second quarter of 1993 of the
Company's contract to process natural gas.
Segment Results 1993 vs 1992
Sales and operating revenues from the Refining and Wholesale segment were
$1,294.8 million in 1993, compared with $1,290.4 million for 1992. Refined
product sales volumes increased by 6.5%, primarily due to increased product
demand and completed pipeline and refinery expansion projects. This increase
was partially offset by an 8.0% decrease in refined product sales prices.
Refining and Wholesale operating profit increased by 8.5% to $73.9 million
compared to $68.1 million in 1992. This increase in operating profit was
primarily due to a 17.1% increase in refinery margins. Refinery margins were
positively impacted by projects brought on in late 1992 and during 1993, namely
the crude oil pipeline from Wichita Falls, Texas to the McKee refinery, the
Three Rivers expansion, and the diesel desulfurizer at McKee. The 1993
operating profit was negatively impacted due to a fall in the value of crude
oil and refined product inventories.
The Retail segment showed a $12.6 million decrease in sales and operating
revenues in 1993 from $970.7 million in 1992, primarily due to a 3.9% decrease
in retail gasoline sales prices, partially offset by a 1.6% increase in retail
merchandise sales and a 1.1% increase in retail gasoline sales volumes. Per-
store gasoline sales volumes and merchandise sales increased by 1.7% and 2.1%,
respectively. Retail operating profit increased by 34.5% to $62.7 million in
1993, due to a 13.0% increase in retail gasoline margins and a 4.2% increase in
merchandise margins. Gross profit from lottery sales in 1993 was $7.3 million
compared to $3.9 million in 1992. Increased customer traffic from lottery
sales, improved product mix, and the closing of unproductive units contributed
to the increase in operating profit in 1993.
Sales and operating revenues from the Allied Businesses segment decreased
11.4% to $302.4 million in 1993, due primarily to an 18.5% decrease in natural
gas liquids sales volumes, reflecting the cancellation of the Company's
contract to process natural gas during the second quarter. Also contributing
to the decrease in sales and operating revenues was the full year effect of the
sale in the first quarter of 1992 of Industrial Lubricants Company, a
wholesaler of automotive aftermarket products. Allied Businesses operating
profits decreased by 34.3% in 1993 to $15.0 million, primarily due to a $6.3
million and $5.8 million decrease in operating profits from the
propane/propylene and natural gas liquids marketing businesses, respectively.
Lower operating profit from the propane/propylene business was caused by lower
margins as a weak economy, particularly outside the U.S., kept petrochemical
feedstocks plentiful. This decrease was partially offset by a $3.0 million
improvement in 1993 in operating profit from the Company's telephone service
business.
Outlook
Approximately 800,000 barrels per day of U.S. crude distillation capacity has
been shut down since 1989. While an estimated 300,000 barrels per day of U.S.
crude distillation capacity is said to be vulnerable to closure or for sale, it
remains to be seen what portion of this capacity will be bought, shut down, or
operated as some other refinery-related facility. The reduction in crude
capacity since 1989 has been partially offset by increased gasoline capacity
brought on by "capacity creep," which includes investments to increase
conversion capability, handle heavier crude oils, improve product slates, and
perform routine refinery debottlenecking projects.
The strong economy in 1994 resulted in gasoline demand growth of 2.3% over 1993,
and demand in 1995 is expected to grow another 1.0% to 1.5%. However, high
capacity utilization rates throughout 1994, high product inventories in Europe,
and the uncertainty surrounding reformulated gasoline supplies, combined with
the announcement that certain areas were "opting out" of the reformulated
gasoline program, worked to depress industry refining margins beginning in
the second half of 1994. The weakness in refining margins was partially
offset by the strength in retail marketing margins.
The outlook for the refining and marketing industry in 1995 is positive. Based
on the expectations of continued strong demand for gasoline, spurred by a
growing economy and industry-wide low gasoline inventory levels, refining
margins are expected to improve as the summer driving season approaches.
Additionally, the Company's recently completed Corpus Christi crude oil
terminal and related pipeline to Three Rivers, as well as product pipelines and
refinery projects planned for completion in 1995, should continue to improve
the Company's refining margins relative to the industry.
Liquidity and Capital Resources
Cash Flow and Working Capital
For the year ended December 31, 1994, cash provided by operations was $176.2
million, compared with $109.3 million provided in 1993. The increase in cash
provided by operations during 1994 was primarily due to a $57.4 million
increase in net income and a $31.9 million increase in deferred taxes. Deferred
taxes increased primarily because of the difference between book and tax
inventory valuation at the Company's two refineries and because of the increase
in the difference between the book and tax basis for properties and equipment,
offset in part by an increase in the alternative minimum tax credit
carryforward. The Company was in an alternative minimum tax position for the
1994 taxable year. Increased working capital negatively impacted cash provided
by operations during 1994. Working capital at December 31, 1994 consisted of
current assets of $540.4 million and current liabilities of $374.1 million, or a
current ratio of 1.4. At December 31, 1993, the current ratio was 1.6, with
current as sets of $356.2 million and current liabilities of $220.4 million.
The increase in working capital in 1994 was primarily due to a 56.5% increase
in inventories, attributable to high crude oil inventory at year end. The
increase in current liabilities was primarily due to a 125.2% increase in
accounts payable. The increase in inventories and accounts payable was
affected by the Company's decision to purchase additional crude oil in December
1994 in order to overcome potential supply disruptions caused by the
implementation of Oil Pollution Act 1990 ("OPA 90"). Under OPA 90, all vessels
trading in U.S. waters must have had a Certificate of Financial Responsibility,
approved by the Coast Guard, in place by December 28, 1994. Vessel owners
were slow to comply, setting the stage for a possible shortage of foreign
shipments to the U.S.
Cash provided by operations for the year ended December 31, 1993 was positively
impacted by decreased working capital, primarily due to a 16.8% increase in
accrued taxes, attributable to the increase in operating income. The decrease
in current assets was primarily due to a 3.7% decrease in inventories,
attributable to a 23.0% decrease in inventory prices, partially offset by a
20.4% increase in inventory volumes during the period. This decrease in
inventories was partially offset by a 5.1% increase in receivables during the
period.
The Company acquires a major portion of its crude oil requirements through the
purchase of futures contracts on the New York Mercantile Exchange. The Company
also uses the futures market to manage the price risk inherent in purchasing the
crude oil in advance of the delivery date, and in maintaining the inventories
contained within its refinery and pipeline systems. The Company defers the
impact of changes in the market value of these contracts until such time as
the hedged transaction is completed.
The Company has not entered into any form of interest rate caps or on any of
its fixed or variable rate debt in recent periods.
Capital Expenditures
In recent years capital expenditures have represented a variety of projects
designed to expand and maintain up-to-date refinery facilities, improve
terminal and distribution systems, modernize and expand retail outlets, comply
with environmental regulatory requirements, and pursue new ventures in related
businesses. The Company's capital expenditures during 1994 were $162.1 million
compared with $131.8 million in 1993, and $170.5 million in 1992.
Included in 1994 capital expenditures were the acquisition of 26 retail outlets
in Texas and Colorado, the 32,000 barrels per day refined products pipeline from
the McKee refinery to Colorado Springs, and the Colorado Springs products
terminal. The crude oil storage terminal at Corpus Christi and the related
pipeline to Three Rivers were completed by the end of January 1995.
The Company's capital expenditures budget for 1995 is approximately $225.0
million, including approximately $110.9 million to complete various pipeline
projects. Also included in the 1995 capital expenditures budget are various
refinery projects and approximately 38.0 million associated with the Company's
decision to own outright rather than lease more of the retail outlets to be
built or acquired in 1995.
On February 13, 1995, the Company, anticipating that its capital expenditures
for debt service, lease obligations, working capital, and dividend
requirements would exceed cash generated by operations, issued $75.0 million in
non-callable 8.75% debentures due June 15, 2015. To the extent required to meet
its cash needs, the Company also has access to commercial paper and bank money
market facilities and may consider other financing alternatives depending
upon various factors, including changes in its capital requirements, results
of operations, and developments in the capital markets.
The Company continued to increase its retail marketing business in 1994 with
the acquisition of eight outlets in El Paso, Texas in September and 18 outlets
in Colorado in November. In addition, the Company opened 17 outlets and closed
10 marginal outlets in 1994. The Company opened nine and 12 new outlets, in
1993 and 1992, respectively. The newly opened outlets are leased by the Company
under a pre-existing long-term lease arrangement (the "Brazos Lease"). The
Brazos Lease had an initial lease term which expired in April 1997. After the
initial non-cancelable lease term, the Brazos Lease may be extended by
agreement of the parties, or the Company may purchase or arrange for the sale
of the retail outlets. In April 1994, the Company expanded the capacity of the
lease by $25.0 million and extended the primary term applicable to the
properties under the lease by two years, to April, 1999. Rent payable under
the Brazos Lease is based on the amounts spent to acquire or construct the
outlets and the lessor's cost of funds from time to time. At December 31, 1994,
approximately $161.7 million of the $190.0 million commitment had been utilized
to construct and/or acquire retail outlets.
Environmental Matters
Environmental laws and regulations affect the Company in many areas. Starting
on January 1, 1995, reformulated gasoline was mandated by the 1990 Clean Air
Act amendments for the nine worst ozone polluting cities in the United States.
Houston, which is in the Company's market area, is included among these nine
cities. Other cities, including Dallas, which is also in the Company's market
area, have chosen to "opt in" to the program. The Company currently supplies
its Houston market through third party purchases and exchange agreements and
anticipates it will continue such supply arrangements for its reformulated
gasoline requirements in Houston. The Company currently makes reformulated
gasoline for its Dallas market, which historically has absorbed approximately
25 percent of the McKee refinery's total gasoline pool.
The 1990 Clean Air Act amendments also affect the Company by requiring more
stringent refinery and petrochemical permitting requirements and Stage II vapor
recovery nozzles on gas pumps in ozone nonattainment areas, including Beaumont,
Dallas, El Paso, Fort Worth, and Houston, which are located within the
Company's market area.
Most of the capital spent by the Company for environmental compliance is
integrally related to projects that increase refinery capacity or improve
product mix, and the Company does not specifically identify capital
expenditures related to such economic projects as being environmental.
However, with respect to capital expenditures budgeted primarily to produce
federally-mandated fuels to comply with regulations related to air and water
toxic emission levels, for remediation and compliance costs related to
underground storage tanks, and to meet Stage II Vapor Recovery requirements,
it is estimated that approximately $11.6 million was spent in 1994, $21.4
million was spent in 1993, and $9.6 million was spent in 1992. For 1995, the
Company has budgeted approximately $7.7 million in environmental capital
expenditures, primarily for the Retail segment and the Refining and Wholesale
segment.
Federal, state, and local laws and regulations relating to health and
environmental quality affect nearly all of the operations of the Company.
While the Company cannot predict what legislation, rules, or regulations will
be developed or how they will be administered, management believes that
compliance with the more stringent laws or regulations could require
substantial additional expenditures by the Company for installation and
operation of systems and equipment related to health and environmental quality.
Capital Structure
Financing Activities During 1995
On February 13, 1995, the Company issued $75.0 million in non-callable 8.75%
debentures due June 15, 2015. The proceeds from the issuance of the debentures
will be used for general corporate purposes, including payment of a scheduled
$30.0 million principal installment on the 10.75% Senior Notes (as defined
below), and to fund anticipated capital expenditures in 1995.
Financing Activities During 1994
On January 6, 1994, the Company prepaid the $35.0 million balance on its $65.0
million Term Loan Agreement.
At December 31, 1994, the Company had outstanding $66.9 million of borrowings
under bank money market facilities provided by major money center banks at a
rate of 6.50%.
The Revolving Credit Loan Agreement (the Revolving Credit Agreement) consists
of two separate agreements, (Agreement I and Agreement II) under which the
total amount available is $300.0 million. Agreement I has face value of $200.0
million with a maturity date of September 30, 1996. Agreement II matures on
April 13, 1995, and it has a value of $100.0 million. Interest under Agreement
I and Agreement II varies depending on specified lending options available to
the Company. Generally, the variable conditions relate to the prime rate,
certificate of deposit rates, and London Interbank Offered ("LIBO") rates, all
as adjusted upward by specified percentages. On December 31, 1994, the Company
had no borrowings outstanding under Agreement I or Agreement II.
The Revolving Credit Agreement is unsecured. Certain subsidiaries of the Company
have unconditionally guaranteed the repayment of all indebtedness and the
performance of all obligations incurred by the Company under the Revolving
Credit Agreement.
The Revolving Credit Agreement and Senior Notes all contain various restrictive
covenants relating to the Company and its financial condition, operations, and
properties. Under these covenants, the Company is required to maintain a
minimum current ratio and net worth. These covenants also include restrictions
on the payment of dividends. However, it is not anticipated that such
limitations will affect the Company's present ability to pay dividends. At
December 31, 1994, under the most restrictive of these covenants, $250.3
million was available for the payment of dividends.
Financing Activities During 1993
During February 1993, the Company issued $46.0 million in medium-term notes
with an average rate of 7.44% and average maturities of 12 years.
On April 1, 1993, the Company issued $100.0 million of 8% debentures due April
1, 2023.
In June 1993, the Company issued 1.725 million shares of 5% Cumulative
Convertible Preferred Stock (the "Preferred Stock") in a private placement. On
September 8, 1993, the Preferred Stock became convertible into the Company's
Common Stock at an initial conversion price of $26.50 per share. After June
15, 1996, the Preferred Stock is redeemable at the Company's option, subject to
certain conditions, for Common Stock, and, after June 15, 2000, it is
redeemable at the Company's option at par for cash.
Financing Activities Prior to 1993
At December 31, 1994, the Company's long-term debt included the following
amounts incurred prior to 1993:
$150.0 million of 10.75% Senior Notes payable in equal annual installments of
$30.0 million beginning April 30, 1995.
$8.4 million of 9% Senior Notes payable in semi-annual installments ending May
15, 1997.
$30.0 million of 8.77% Senior Notes payable in quarterly installments
including interest only until the May, 1997 payment and then both interest and
principal for the remaining 48 quarterly payments.
$1.9 million of 8.35% Senior Notes payable in semi-annual installments ending
May 15, 1997.
$75.0 million of medium-term notes with an interest rate of 9-3/8% due March 1,
2001.
$24.0 million of medium-term notes with an average interest rate of 8.45%
maturing in the year 2003.
Accounting Matters
Effective January 1, 1993, the Company changed the accounting method for
recording the liability under an agreement with Maxus (see Note 3 of the Notes
to the Consolidated Financial Statements on page 35 of this Annual Report).
Effective January 1, 1993, the Company adopted Financial Accounting Standard
No. 112 ("FAS 112"), "Employers' Accounting for Postemployment Benefits, an
Amendment of FASB Statements No. 5 and 43" (see Note 3 of the Notes to the
Consolidated Financial Statements on page 35 of this Annual Report).
Effective January 1, 1992, the Company adopted Financial Accounting Standard
No. 106 ("FAS 106"), "Employers' Accounting for Postretirement Benefits Other
Than Pensions" and Financial Accounting Standard No. 109 ("FAS 109"),
"Accounting for Income Taxes," (see Note 3 of the Notes to the Consolidated
Financial Statements on page 35 of this Annual Report).