FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______.
Commission File Number: 1-10398
GIANT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0642718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23733 North Scottsdale Road, Scottsdale, Arizona 85255
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(480) 585-8888
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of Common Shares outstanding at April 30, 2001: 8,948,008 shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets March 31, 2001 (Unaudited)
and December 31, 2000
Condensed Consolidated Statements of Earnings (Loss) Three
Months Ended March 31, 2001 and 2000 (Unaudited)
Condensed Consolidated Statements of Cash Flows Three Months
Ended March 31, 2001 and 2000 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURE
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
- -------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 22,210 $ 26,618
Receivables, net 60,339 75,547
Inventories 64,916 56,607
Prepaid expenses and other 2,902 3,659
Deferred income taxes 2,753 2,753
- -------------------------------------------------------------------------
Total current assets 153,120 165,184
- -------------------------------------------------------------------------
Property, plant and equipment 507,253 508,384
Less accumulated depreciation and amortization (197,365) (192,234)
- -------------------------------------------------------------------------
309,888 316,150
- -------------------------------------------------------------------------
Goodwill, net 20,539 20,806
Other assets 31,247 26,425
- -------------------------------------------------------------------------
$ 514,794 $ 528,565
=========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 214 $ 213
Accounts payable 59,890 66,461
Accrued expenses 35,432 44,016
- -------------------------------------------------------------------------
Total current liabilities 95,536 110,690
- -------------------------------------------------------------------------
Long-term debt, net of current portion 257,997 258,009
Deferred income taxes 27,939 27,621
Other liabilities and deferred income 4,669 4,542
Commitments and contingencies (Notes 6 and 7)
Common stockholders' equity 128,653 127,703
- -------------------------------------------------------------------------
$ 514,794 $ 528,565
=========================================================================
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------
Net revenues $ 251,212 $ 225,134
Cost of products sold 200,409 177,922
- -------------------------------------------------------------------------
Gross margin 50,803 47,212
Operating expenses 29,080 29,525
Depreciation and amortization 8,113 8,305
Selling, general and administrative expenses 6,583 6,402
- -------------------------------------------------------------------------
Operating income 7,027 2,980
Interest expense, net 5,480 5,711
- -------------------------------------------------------------------------
Earnings (loss) before income taxes 1,547 (2,731)
Provision (benefit) for income taxes 597 (1,099)
- -------------------------------------------------------------------------
Net earnings (loss) $ 950 $ (1,632)
=========================================================================
Net earnings (loss) per common share:
Basic $ 0.11 $ (0.17)
=========================================================================
Assuming dilution $ 0.11 $ (0.17)
=========================================================================
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
- ----------------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ 950 $ (1,632)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 8,113 8,305
Deferred income taxes 318 (592)
Other 414 493
Changes in operating assets and liabilities:
Decrease (increase) in receivables 15,181 (7,779)
Increase in inventories (8,277) (21,844)
Decrease (increase) in prepaid expenses and other 757 (3,722)
(Decrease) increase in accounts payable (6,571) 7,044
Decrease in accrued expenses (3,108) (2,286)
- -----------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 7,777 (22,013)
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,222) (10,016)
Refinery acquisition contingent payment (5,139) -
Purchase of other assets (5,014) -
Proceeds from sale of property, plant and equipment 201 2,727
- -----------------------------------------------------------------------------------------
Net cash used by investing activities (12,174) (7,289)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of long-term debt - 29,000
Payments of long-term debt (11) (13,164)
Purchase of treasury stock - (10,725)
Proceeds from exercise of stock options - 109
- -----------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (11) 5,220
- -----------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,408) (24,082)
Cash and cash equivalents:
Beginning of period 26,618 32,945
- -----------------------------------------------------------------------------------------
End of period $ 22,210 $ 8,863
=========================================================================================
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Giant Industries, Inc., a Delaware corporation (together with its
subsidiaries, "Giant" or the "Company"), through its wholly-owned
subsidiary Giant Industries Arizona, Inc. and its subsidiaries ("Giant
Arizona"), is engaged in the refining and marketing of petroleum products
in New Mexico, Arizona, Colorado and Utah, with a concentration in the
Four Corners where these states adjoin. In addition, Phoenix Fuel Co.,
Inc. ("Phoenix Fuel"), a wholly-owned subsidiary of Giant Arizona,
operates an industrial/commercial petroleum fuels and lubricants
distribution operation. (See Note 2 for further discussion of Company
operations.)
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, hereafter referred to
as generally accepted accounting principles, for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. Operating results for the three months ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. The enclosed financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
originally to be effective for the Company's financial statements as of
January 1, 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective
Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date
of SFAS No. 133 by one year in order to give companies more time to study,
understand and implement the provisions of SFAS No. 133 and to complete
information system modifications. In June 2000, the FASB issued SFAS No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133." SFAS No. 138 expands and
clarifies certain provisions of SFAS No. 133 and was adopted by the
Company concurrently with SFAS No. 133 on January 1, 2001.
SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that entities record all derivatives as either assets or
liabilities, measured at fair value, with any change in fair value
recognized in earnings or in other comprehensive income, depending on the
use of the derivative and whether it qualifies for hedge accounting. If
certain conditions are met, a derivative may be specifically designated as
a (i) hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (ii) hedge of the
exposure to variable cash flows of a forecasted transaction, or (iii)
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction.
Under SFAS No. 133, as amended, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective
aspect of the hedge. Those methods must be consistent with the entity's
approach to managing risk.
The Company has performed a contract review and, except as described
below, believes these contracts do not qualify as derivatives or contain
embedded derivatives as defined in SFAS No. 133, as amended. Accordingly,
there was no earnings effect upon adoption January 1, 2001.
The Company from time to time speculates in the purchasing and
selling of crude oil and finished products and may enter into futures,
options and wet barrel contracts to speculate on price fluctuations in
these commodities. These activities are transacted in accordance with
policies established by the Company, which set limits on quantities,
require various levels of approval and require certain review and
reporting procedures. Gains and losses on all speculative transactions are
reflected in earnings in the period that they occur.
At March 31, 2001, the Company had open put option and futures
contracts for the purchase or sale of 50,000 barrels of crude oil and a
net loss of approximately $28,000 had been recorded relating to these
contracts. At December 31, 2000, the Company had open put option and
futures contracts for the purchase or sale of 285,000 barrels of heating
oil or crude oil and a net loss of approximately $275,000 had been
recorded relating to these contracts. These open put option and futures
contracts relate to specific speculative strategies entered into with the
expectation of profiting from favorable price movements. These contracts
are marked-to-market monthly and any gains or losses recorded in cost of
sales.
In addition, at December 31, 2000, the Company had entered into a
contract for the purchase of 25,000 barrels of CARB Phase II unleaded
regular gasoline for delivery in January 2001 in Los Angeles. This
contract is part of the Company's speculative wet barrel trading
activities, and would be considered a derivative instrument under SFAS No.
133, as amended. This contract was marked-to-market at December 31, 2000
and a gain of approximately $73,500 was recorded in cost of sales.
At March 31, 2001 and December 31, 2000, the Company had no hedging
strategies in place as defined in SFAS No. 133, as amended.
Certain reclassifications have been made to the 2000 financial
statements and notes to conform to the statement classifications used in
2001.
NOTE 2 - BUSINESS SEGMENTS:
The Company is organized into three operating segments based on
manufacturing and marketing criteria. These segments are the Refining
Group, the Retail Group and Phoenix Fuel. A description of each segment
and its principal products and operations are as follows:
- Refining Group: The Refining Group consists of the Company's two
refineries, its fleet of crude oil and finished product truck transports,
its crude oil pipeline gathering operations, and its finished product
terminaling operations. The Company's two refineries manufacture various
grades of gasoline, diesel fuel, jet fuel and other products from crude
oil, other feedstocks and blending components. In addition, finished
products are acquired through exchange agreements, from third party
suppliers and from Phoenix Fuel. These products are sold through Company-
operated retail facilities, independent wholesalers and retailers,
industrial/commercial accounts, and sales and exchanges with major oil
companies. Crude oil, other feedstocks and blending components are
purchased from third party suppliers.
- Retail Group: The Retail Group consists of service
station/convenience stores and one travel center. These operations sell
various grades of gasoline, diesel fuel, general merchandise and food
products to the general public through retail locations. The petroleum
fuels sold by the Retail Group are supplied by the Refining Group or
Phoenix Fuel. General merchandise and food products are obtained from
third party suppliers.
- Phoenix Fuel: Phoenix Fuel is an industrial/commercial petroleum
fuels and lubricants distribution operation, which includes a number of
bulk distribution plants, an unattended fleet fueling ("cardlock")
operation and a fleet of finished product truck transports. The petroleum
fuels and lubricants sold are primarily obtained from third party
suppliers and to a lesser extent from the Refining Group.
Operations that are not included in any of the three segments are
included in the category "Other" and consist primarily of corporate staff
operations, including selling, general and administrative expenses of
$4,539,000 and $4,331,000 for the three months ended March 31, 2001 and
2000, respectively.
Operating income for each segment consists of net revenues less cost
of products sold, operating expenses, depreciation and amortization, and
the segment's selling, general and administrative expenses. The sales
between segments are made at market prices. Cost of products sold reflects
current costs adjusted, where appropriate, for LIFO and lower of cost or
market inventory adjustments.
The total assets of each segment consist primarily of net property,
plant and equipment, inventories, accounts receivable and other assets
directly associated with the segment's operations. Included in the total
assets of the corporate staff operations are a majority of the Company's
cash and cash equivalents, various accounts receivable, net property,
plant and equipment and other long-term assets.
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals are presented below.
As of and for the Three Months Ended March 31, 2001 (In thousands)
-----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
Customer net revenues:
Finished products $ 66,049 $ 56,621 $ 82,189 $ - $ - $204,859
Merchandise and lubricants - 32,826 5,658 - - 38,484
Other 2,953 4,096 748 72 - 7,869
-------- -------- -------- ------- -------- --------
Total 69,002 93,543 88,595 72 - 251,212
-------- -------- -------- ------- -------- --------
Intersegment net revenues:
Finished products 38,527 - 21,013 - (59,540) -
Other 3,661 - - - (3,661) -
-------- -------- -------- ------- -------- --------
Total 42,188 - 21,013 - (63,201) -
-------- -------- -------- ------- -------- --------
Total net revenues $111,190 $ 93,543 $109,608 $ 72 $(63,201) $251,212
-------- -------- -------- ------- -------- --------
Operating income (loss) $ 11,085 $ (501) $ 1,468 $(5,025) $ 7,027
Interest expense (6,043)
Interest income 563
--------
Earnings before income taxes $ 1,547
--------
Depreciation and amortization $ 3,949 $ 2,986 $ 660 $ 518 $ 8,113
Total assets $238,540 $146,233 $ 76,707 $53,314 $514,794
Capital expenditures $ 1,396 $ 420 $ 299 $ 107 $ 2,222
For the Three Months Ended March 31, 2000 (In thousands)
-----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
Customer net revenues:
Finished products $ 38,049 $ 62,878 $ 81,122 $ - $ - $182,049
Merchandise and lubricants - 29,500 6,360 - - 35,860
Other 2,048 4,172 907 98 - 7,225
-------- -------- -------- ------- -------- --------
Total 40,097 96,550 88,389 98 - 225,134
-------- -------- -------- ------- -------- --------
Intersegment net revenues:
Finished products 66,356 - 12,998 - (79,354) -
Other 4,066 - - - (4,066) -
-------- -------- -------- ------- -------- --------
Total 70,422 - 12,998 - (83,420) -
-------- -------- -------- ------- -------- --------
Total net revenues $110,519 $ 96,550 $101,387 $ 98 $(83,420) $225,134
-------- -------- -------- ------- -------- --------
Operating income (loss) $ 6,627 $ (1,158) $ 2,034 $(4,523) $ 2,980
Interest expense (6,112)
Interest income 401
--------
Loss before income taxes $ (2,731)
--------
Depreciation and amortization $ 4,228 $ 2,754 $ 613 $ 710 $ 8,305
Capital expenditures $ 1,940 $ 7,391 $ 676 $ 9 $ 10,016
NOTE 3 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for net earnings (loss):
Three Months Ended March 31,
-------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Earnings (loss) per common
share - basic:
Net earnings (loss) $950,000 8,948,008 $0.11 $(1,632,000) 9,646,114 $(0.17)
Effect of dilutive
stock options 5,727 *
-------- --------- ----- ----------- --------- ------
Earnings (loss) per common
share - assuming dilution:
Net earnings (loss) $950,000 8,953,735 $0.11 $(1,632,000) 9,646,114 $(0.17)
======== ========= ===== =========== ========= ======
*The additional shares would be antidilutive due to the net loss.
At March 31, 2001, there were 8,948,008 shares of the Company's
common stock outstanding. There were no transactions subsequent to March
31, 2001, that if the transactions had occurred before March 31, 2001,
would materially change the number of common shares or potential common
shares outstanding as of March 31, 2001.
NOTE 4 - RELATED PARTY TRANSACTIONS:
The following transactions between the Company and its Chairman and
Chief Executive Officer ("CCEO"), that are more fully described in the
Company's Annual Report on Form 10-K for the year ended December 31,
2000, were completed in the first quarter of 2001: (i) the terms of a
$5,000,000 loan from the Company to the CCEO were modified to extend the
maturity date from February 28, 2001 to March 28, 2003, at which time all
outstanding principal and interest is due, (ii) the Company received
additional security for the loan, (iii) the CCEO paid all interest due
and payable on the loan through March 28, 2001, and (iv) the Company
purchased a parcel of land from the CCEO for $5,000,000.
NOTE 5 - INVENTORIES:
MARCH 31, DECEMBER 31,
- ----------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
- ----------------------------------------------------------------------
First-in, first-out ("FIFO") method:
Crude oil $ 16,408 $ 17,420
Refined products 30,372 24,679
Refinery and shop supplies 11,160 10,829
Merchandise 4,004 3,882
Retail method:
Merchandise 8,910 8,737
- ----------------------------------------------------------------------
Subtotal 70,854 65,547
Allowance for last-in,
first-out ("LIFO") method (5,938) (8,940)
- ----------------------------------------------------------------------
Total $ 64,916 $ 56,607
======================================================================
The portion of inventories valued on a LIFO basis totaled $30,104,000
and $28,319,000 at March 31, 2001 and December 31, 2000, respectively. The
following data will facilitate comparison with the operating results of
companies using the FIFO method of inventory valuation.
If inventories had been determined using the FIFO method at March 31,
2001 and 2000, net earnings and diluted earnings per share for the three
months ended March 31, 2001, would have been lower by $1,801,000 and
$0.20, respectively, and the net loss and diluted loss per share for the
three months ended March 31, 2000 would have been reduced by $2,453,000
and $0.25, respectively.
For interim reporting purposes, inventory increments expected to be
liquidated by year end are valued at the most recent acquisition costs,
and inventory liquidations that are expected to be reinstated by year end
are ignored for LIFO inventory valuation calculations. The LIFO effects of
inventory increments not expected to be liquidated by year end, and the
LIFO effects of inventory liquidations not expected to be reinstated by
year end, are recorded in the period such increments and liquidations
occur.
NOTE 6 - LONG-TERM DEBT:
The Company has issued $150,000,000 of 9% senior subordinated notes
due 2007 (the "9% Notes") and $100,000,000 of 9 3/4% senior subordinated
notes due 2003 (the "9 3/4% Notes", and collectively with the 9% Notes,
the "Notes"). The Indentures supporting the Notes contain restrictive
covenants that, among other things, restrict the ability of the Company
and its subsidiaries to create liens, to incur or guarantee debt, to pay
dividends, to repurchase shares of the Company's common stock, to sell
certain assets or subsidiary stock, to engage in certain mergers, to
engage in certain transactions with affiliates or to alter the Company's
current line of business. In addition, subject to certain conditions, the
Company is obligated to offer to purchase a portion of the Notes at a
price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase, with the net cash
proceeds of certain sales or other dispositions of assets. Upon a change
of control, the Company would be required to offer to purchase all of the
Notes at 101% of the principal amount thereof, plus accrued interest, if
any, to the date of purchase. At March 31, 2001, the Company was in
compliance with the restrictive covenants relating to the Notes.
Repayment of the Notes is jointly and severally guaranteed on an
unconditional basis by the Company's direct and indirect wholly-owned
subsidiaries, subject to a limitation designed to ensure that such
guarantees do not constitute a fraudulent conveyance. Except as otherwise
specified in the Indentures pursuant to which the Notes were issued, there
are no restrictions on the ability of such subsidiaries to transfer funds
to the Company in the form of cash dividends, loans or advances. General
provisions of applicable state law, however, may limit the ability of any
subsidiary to pay dividends or make distributions to the Company in
certain circumstances.
Separate financial statements of the Company's subsidiaries are not
included herein because the aggregate assets, liabilities, earnings, and
equity of the subsidiaries are substantially equivalent to the assets,
liabilities, earnings, and equity of the Company on a consolidated basis;
the subsidiaries are jointly and severally liable for the repayment of the
Notes; and the separate financial statements and other disclosures
concerning the subsidiaries are not deemed by the Company to be material
to investors.
The Company has a $65,000,000 secured Credit Agreement (the "Credit
Agreement") with a group of banks that expires December 23, 2001. This
Credit Agreement, a revolving loan agreement, is primarily a working
capital and letter of credit facility and is secured by eligible accounts
receivable and inventories as defined in the Credit Agreement. In
addition, the Company is able to borrow up to $9,000,000 to exercise its
purchase rights in connection with certain service station/convenience
stores that are currently subject to capital lease obligations, and up to
$10,000,000 for other acquisitions as defined in the Credit Agreement. The
availability of funds under this facility is the lesser of (i)
$65,000,000, or (ii) the amount determined under a borrowing base
calculation tied to the eligible accounts receivable and inventories. At
March 31, 2001, the availability of funds under the Credit Agreement was
$65,000,000. There were no direct borrowings outstanding under this
facility at March 31, 2001 or April 30, 2001, and there were approximately
$3,747,000 of irrevocable letters of credit outstanding on each date. At
December 31, 2000, there were no direct borrowings outstanding under this
facility.
The interest rate applicable to the Credit Agreement is tied to
various short-term indices. At March 31, 2001, this rate was approximately
6.5% per annum. The Company is required to pay a quarterly commitment fee
ranging from 0.325% to 0.500% per annum of the unused amount of the
facility. The exact rate depends on meeting certain conditions in the
Credit Agreement.
The Credit Agreement contains certain restrictive covenants that
require the Company to, among other things, maintain a minimum
consolidated net worth, a minimum interest coverage ratio and a maximum
capitalization ratio. It also places limits on investments, dispositions
of assets, prepayments of senior subordinated debt, guarantees, liens and
restricted payments. At March 31, 2001, the Company was in compliance with
the Credit Agreement's restrictive covenants. The Credit Agreement is
guaranteed by certain of the Company's direct and indirect wholly-owned
subsidiaries.
The Company is currently in discussions with a group of banks to
replace the Credit Agreement.
The Company also had approximately $7,917,000 of capital lease
obligations outstanding at March 31, 2001, which require annual lease
payments of approximately $895,000, all of which are recorded as interest
expense. The Company intends to purchase the assets associated with these
lease obligations pursuant to options to purchase during the remaining
lease period of approximately six years for $7,917,000, of which
$2,000,000 has been paid in advance and is recorded in "Other Assets" in
the Company's Consolidated Balance Sheets.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
Various legal actions, claims, assessments and other contingencies
arising in the normal course of the Company's business, including those
matters described below, are pending against the Company and certain of
its subsidiaries. Certain of these matters involve or may involve
significant claims for compensatory, punitive or other damages. These
matters are subject to many uncertainties, and it is possible that some of
these matters could be ultimately decided, resolved or settled adversely.
The Company has recorded accruals for losses related to those matters that
it considers to be probable and that can be reasonably estimated. Although
the ultimate amount of liability at March 31, 2001, that may result from
those matters for which the Company has recorded accruals is not
ascertainable, the Company believes that any amounts exceeding the
Company's recorded accruals should not materially affect the Company's
financial condition. It is possible, however, that the ultimate resolution
of these matters could result in a material adverse effect on the
Company's results of operations for a particular reporting period.
Federal, state and local laws and regulations relating to health and
the environment affect nearly all of the operations of the Company. As is
the case with all companies engaged in similar industries, the Company
faces significant exposure from actual or potential claims and lawsuits
involving environmental matters. These matters include soil and water
contamination, air pollution and personal injuries or property damage
allegedly caused by substances manufactured, handled, used, released or
disposed of by the Company. Future expenditures related to health and
environmental matters cannot be reasonably quantified in many
circumstances for various reasons, including the speculative nature of
remediation and clean-up cost estimates and methods, imprecise and
conflicting data regarding the hazardous nature of various types of
substances, the number of other potentially responsible parties involved,
various defenses which may be available to the Company and changing
environmental laws and interpretations of environmental laws.
The Company is in the process of filing claims against the United
States Defense Energy Support Center ("DESC") in connection with jet fuel
that the Company sold to DESC during the period 1983 through 1994. The
Company intends to assert that the DESC underpaid for the jet fuel that it
purchased, in the approximate amount of $17,000,000. The Company believes
that its claims are supported by recent federal court decisions, including
decisions from the United States Claims Court, dealing with contract
provisions similar to those contained in the contracts that are the
subject of the Company's claims. Due to the preliminary nature of this
matter, however, there can be no assurance that the Company will
ultimately prevail in this matter or, if successful, when any payment
would be received. Accordingly, the Company has not recorded any amounts
on its books relating to this matter.
The Company received a Notice of Violation ("NOV") in 1993 from the
New Mexico Environment Department ("NMED"), alleging that the Company
failed to comply with certain notification requirements contained in one
of the permits applicable to the Ciniza refinery's land treatment
facility. The Company subsequently reached agreement with NMED for the
closure of the land treatment facility, and NMED has issued a post-closure
care permit for the facility. The Company anticipates incurring closure
and post-closure expenses in the approximate amount of $265,000 over a 30-
year period.
The Company has received a NOV from NMED, dated July 18, 2000, in
connection with its Bloomfield refinery. The NOV alleges that the Company
violated air quality regulations at the refinery, as well as a condition
of an air quality permit. The NOV represents that the NMED is willing to
settle this matter for approximately $146,000. The Company has contested
the NOV.
On October 1, 1999, the State of New Mexico (the "State") filed a
lawsuit in the United States District Court for the District of New
Mexico, and a separate lawsuit in the Second Judicial District Court,
County of Bernalillo, State of New Mexico, against numerous entities,
including General Electric Company, ACF Industries, Inc., Chevron
Corporation, Texaco Refining and Marketing, Inc., Phillips Petroleum
Company, Ultramar Diamond Shamrock Corporation, the United States
Department of Energy, the United States Department of Defense, the United
States Air Force and the Company. The lawsuits relate to alleged releases
of pollutants at the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") South Valley Superfund Site in Albuquerque,
New Mexico (the "South Valley Superfund Site"). The South Valley Superfund
Site includes contamination that allegedly originated from a number of
facilities, including a GE Aircraft Engines/U.S. Air Force facility and a
petroleum products terminal (the "Albuquerque Terminal") that was acquired
by the Company in 1995 from Texaco Refining and Marketing, Inc.
("Texaco"). The lawsuits allege that the defendants released or threatened
to release hazardous substances into the environment, causing injury to
surface water, groundwater and soil at the South Valley Superfund Site,
which are natural resources of the State.
In the federal court lawsuit, the State seeks monetary damages under
CERCLA for all past, present and future damages to natural resources, plus
interest, costs and attorneys' fees. The state court complaint contains
state law claims for trespass, public nuisance, interference with natural
resources held in trust by the State, negligence, strict liability, unjust
enrichment and punitive damages. The State seeks various monetary damages
in connection with these claims, including natural resources damages, loss
of use of property and natural resources, loss of tax revenues, lost
profits, punitive damages and attorneys' fees and costs. Since its
original filing, the state court complaint has been removed to federal
court.
Although neither complaint states the amount of damages being sought
by the State, a preliminary assessment report on alleged damages to
natural resources, dated December 1998, issued by the New Mexico Office of
the Natural Resources Trustee estimated these damages at $260,000,000.
Liability for natural resource damages under CERCLA is joint and several
such that a responsible party may be liable for all natural resource
damages at a site even though it was responsible for only a small part of
such damages.
Texaco agreed to defend, indemnify, reimburse and hold the Company
harmless from and against all claims and damages arising from, or caused
by, pre-closing contamination at the Albuquerque Terminal. Texaco has
acknowledged this obligation, subject to any evidence that alleged
releases resulted from the Company's operations. In the first quarter of
2001, the State filed an amended complaint in the CERCLA and state court
actions in which it alleges what it contends are releases by the Company
during its ownership and operation of the Albuquerque Terminal. The
Company intends to deny that it has had any releases that have contributed
to soil and groundwater contamination at the South Valley Superfund Site.
The Company believes that any environmental damages associated with the
South Valley Superfund Site relate to releases that predate the Company's
acquisition of the Albuquerque Terminal and, accordingly, does not believe
that it needs to record a liability in connection with the two lawsuits.
In 1973, the Company constructed the Farmington refinery that was
operated until 1982. The Company became aware of soil and shallow
groundwater contamination at this facility in 1985. The Company hired
environmental consulting firms to investigate the contamination and
undertake remedial action. The consultants identified several areas of
contamination in the soils and shallow groundwater underlying the
Farmington property. A consultant to the Company has indicated that
contamination attributable to past operations at the Farmington property
has migrated off the refinery property, including a hydrocarbon plume that
appears to extend no more than 1,800 feet south of the refinery property.
Remediation activities are ongoing by the Company under the supervision of
the New Mexico Oil Conservation Division ("OCD"), although no cleanup
order has been received. The Company had reserved approximately $1,000,000
for possible environmental expenditures relating to its Farmington
property, of which approximately $570,000 still remains.
The Farmington property is located adjacent to the Lee Acres Landfill
(the "Landfill"), a closed landfill formerly operated by San Juan County,
which is situated on lands owned by the United States Bureau of Land
Management (the "BLM"). Industrial and municipal wastes were disposed of
in the Landfill by numerous sources. During the period that it was
operational, the Company disposed of office trash, maintenance shop trash,
used tires and water from the Farmington refinery's evaporation pond at
the Landfill.
The Landfill was added to the National Priorities List as a CERCLA
Superfund site in 1990. In connection with this listing, EPA defined the
site as the Landfill and the Landfill's associated groundwater plume. EPA
excluded any releases from the Farmington refinery itself from the
definition of the site. In May 1991, EPA notified the Company that it may
be a potentially responsible party under CERCLA for the release or
threatened release of hazardous substances, pollutants or contaminants at
the Landfill.
BLM made a proposed plan of action for the Landfill available to the
public in 1996. Remediation alternatives examined by BLM in connection
with the development of its proposed plan ranged in projected cost from no
cost to approximately $14,500,000. BLM proposed the adoption of a remedial
action alternative that it believes would cost approximately $3,900,000 to
implement. BLM's $3,900,000 cost estimate is based on certain assumptions
that may or may not prove to be correct and is contingent on confirmation
that the remedial actions, once implemented, are adequately addressing
Landfill contamination. For example, if assumptions regarding groundwater
mobility and contamination levels are incorrect, BLM is proposing to take
additional remedial actions with an estimated cost of approximately
$1,800,000.
BLM has received public comment on its proposed plan. The final
remedy for the site, however, has not yet been selected. Although the
Company was given reason to believe that a final remedy would be selected
in 2000, that selection did not occur. The Company has had no further
indication regarding when the final remedy selection will be made. In
1989, a consultant to the Company estimated, based on various assumptions,
that the Company's share of potential liability could be approximately
$1,200,000. This figure was based upon estimated Landfill remediation
costs significantly higher than those being proposed by BLM. The figure
also was based on the consultant's evaluation of such factors as available
clean-up technology, BLM's involvement at the site and the number of other
entities that may have had involvement at the site, but did not include an
analysis of all of the Company's potential legal defenses and arguments,
including possible setoff rights.
Potentially responsible party liability is joint and several, such
that a responsible party may be liable for all of the clean-up costs at a
site even though the party was responsible for only a small part of such
costs. Although it is possible that the Company may ultimately incur
liability for clean-up costs associated with the Landfill, a reasonable
estimate of the amount of this liability, if any, cannot be made at this
time because, among other reasons, the final site remedy has not been
selected, a number of entities had involvement at the site, allocation of
responsibility among potentially responsible parties has not yet been
made, and potentially applicable factual and legal issues have not been
resolved. Based on current information, the Company does not believe that
it needs to record a liability in relation to BLM's proposed plan.
BLM may assert claims against the Company and others for
reimbursement of investigative, cleanup and other costs incurred by BLM in
connection with the Landfill and surrounding areas. It also is possible
that the Company will assert claims against BLM in connection with
contamination that may be originating from the Landfill. Private parties
and other governmental entities also may assert claims against BLM, the
Company and others for property damage, personal injury and other damages
allegedly arising out of any contamination originating from the Landfill
and the Farmington property. Parties also may request judicial
determination of their rights and responsibilities, and the rights and
responsibilities of others, in connection with the Landfill and the
Farmington property. Currently, however, there is no outstanding
litigation against the Company by BLM or any other party.
In connection with the acquisition of the Bloomfield refinery, the
Company assumed certain environmental obligations, including Bloomfield
Refining Company's ("BRC") obligations under an administrative order
issued by EPA in 1992 pursuant to the Resource Conservation and Recovery
Act (the "Order"). The Order required BRC to investigate and propose
measures for correcting any releases of hazardous waste or hazardous
constituents at or from the Bloomfield refinery. The Company established
an environmental reserve of approximately $2,250,000 in connection with
this matter. In 2000, OCD approved the groundwater discharge permit for
the refinery, which included an abatement plan that addressed the
Company's environmental obligations under the Order. The abatement plan
reflects new information relating to the site as well as remediation
methods that were originally not contemplated in connection with the
Order. The Company has asked EPA to accept the measures specified in the
abatement plan as the appropriate corrective action remedy under the Order
and has further requested that EPA delegate its corrective action
oversight authority to the State. Adoption of the abatement plan as the
appropriate corrective action remedy would significantly reduce the
Company's corrective action costs. The Company estimates that remediation
expenses associated with the abatement plan will be in the range of
approximately $50,000 to $100,000, and will be incurred over a period of
approximately 30 years. If the Company's requests are not granted, the
Company estimates that remaining remediation expenses could range as high
as $1,000,000 and the Company's environmental reserve now reflects that
amount. If the requests are granted, the Company anticipates that the
reserve will be reduced.
The Company has discovered hydrocarbon contamination adjacent to a
55,000 barrel crude oil storage tank (the "Tank") that was located in
Bloomfield, New Mexico. The Company believes that all or a portion of the
Tank and the 5.5 acres owned by the Company on which the Tank was located
may have been a part of a refinery, owned by various other parties, that,
to the Company's knowledge, ceased operations in the early 1960s. The
Company submitted a work plan to define the extent of petroleum
contamination in the soil and groundwater, which was approved by OCD
subject to certain conditions. One of the conditions required the Company
to submit a comprehensive report on all site investigations to OCD by
January 14, 2000. The Company filed the required report on January 13,
2000. Based upon the report, it appears possible that contaminated
groundwater is contained within the property boundaries and does not
extend offsite. The Company anticipates that OCD will not require
remediation of offsite soil based upon the low contaminant levels found
there. On May 19, 2000, OCD approved the Company's work plan with certain
conditions. In the course of conducting the cleanup approved by OCD, it
was discovered that the extent of the contamination was greater than had
been anticipated. The Company has received approval to conduct a pilot
bioventing project to address remaining contamination at the site. The
pilot project is expected to cost approximately $15,000, and the Company
intends to commence work in the near future. The Company previously
estimated that cleanup expenses associated with the site would cost
$250,000 and an environmental reserve in that amount was created, of which
approximately $60,000 remains. Until the pilot project is completed and
its effectiveness as a means of site remediation can be evaluated, the
Company cannot reasonably estimate remaining remediation costs. Therefore,
no change has been made to the amount of the reserve.
At March 31, 2001, the Company had an environmental liability accrual
of approximately $2,200,000. This accrual is for the following projects:
(i) closure of the Ciniza refinery land treatment facility, including
post-closure expenses, (ii) the remediation of the hydrocarbon plume that
appears to extend no more than 1,800 feet south of the Company's inactive
Farmington refinery, (iii) environmental obligations assumed in connection
with the acquisition of the Bloomfield refinery, (iv) hydrocarbon
contamination on and adjacent to the 5.5 acres that the Company owns in
Bloomfield, New Mexico and (v) the closure of certain solid waste
management units at the Ciniza refinery, which is being conducted in
accordance with the refinery's Resource Conservation and Recovery Act
permit. The environmental accrual is recorded in the current and long-term
sections of the Company's Consolidated Balance Sheets.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------
Net revenues $ 251,212 $ 225,134
Cost of products sold 200,409 177,922
- ---------------------------------------------------------------------------
Gross margin 50,803 47,212
Operating expenses 29,080 29,525
Depreciation and amortization 8,113 8,305
Selling, general and administrative expenses 6,583 6,402
- ---------------------------------------------------------------------------
Operating income 7,027 2,980
Interest expense, net 5,480 5,711
- ---------------------------------------------------------------------------
Earnings (loss) before income taxes 1,547 (2,731)
Provision (benefit) for income taxes 597 (1,099)
- ---------------------------------------------------------------------------
Net earnings (loss) $ 950 $ (1,632)
===========================================================================
Net earnings (loss) per common share:
Basic $ 0.11 $ (0.17)
Assuming dilution $ 0.11 $ (0.17)
===========================================================================
Net revenues:(1)
Refining Group $ 111,190 $ 110,519
Retail Group 93,543 96,550
Phoenix Fuel 109,608 101,387
Other 72 98
Intersegment (63,201) (83,420)
- ---------------------------------------------------------------------------
Consolidated $ 251,212 $ 225,134
===========================================================================
Income (loss) from operations:(1)
Refining Group $ 11,085 $ 6,627
Retail Group (501) (1,158)
Phoenix Fuel 1,468 2,034
Other (5,025) (4,523)
- ---------------------------------------------------------------------------
Consolidated $ 7,027 $ 2,980
===========================================================================
(1) The Refining Group consists of the Company's two refineries, its fleet
of crude oil and finished product truck transports, its crude oil
pipeline gathering operations, and its finished product terminaling
operations. The Retail Group consists of service station/convenience
stores and one travel center. Phoenix Fuel is an industrial/commercial
petroleum fuels and lubricants distribution operation, which includes
a number of bulk distribution plants, an unattended fleet fueling
("cardlock") operation and a fleet of finished product truck
transports. The Other category is primarily Corporate staff operations.
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------
REFINING GROUP OPERATING DATA:
Crude Oil/NGL Throughput (BPD) 33,417 34,543
Refinery Sourced Sales Barrels (BPD) 30,651 31,789
Average Crude Oil Costs ($/Bbl) $ 27.90 $ 27.33
Refining Margins ($/Bbl) $ 8.23 $ 6.35
RETAIL GROUP OPERATING DATA:
Fuel Gallons Sold (000's) 51,358 60,399
Fuel Margins ($/gal) $ 0.151 $ 0.137
Merchandise Sales ($ in 000's) $ 32,826 $ 29,500
Merchandise Margins 30.2% 29.5%
Number of Units at End of Period 171 181
PHOENIX FUEL OPERATING DATA:
Fuel Gallons Sold (000's) 104,920 95,510
Fuel Margins ($/gal) $ 0.049 $ 0.059
Lubricant Sales ($ in 000's) $ 5,053 $ 5,709
Lubricant Margins 18.3% 16.0%
For 2001 the Company changed its methodology for treating product
purchased to supply Company retail operations and as a result certain
segment information for the Refining Group is not comparable with that
reported for 2000. This change in methodology had no effect on gross
margin or net income.
OPERATING INCOME
- ----------------
For the three months ended March 31, 2001, operating income was
$7,027,000, an increase of $4,047,000 from $2,980,000 for the three months
ended March 31, 2000. The increase was primarily due to a 30% increase in
refinery margins, due in part to a reduction in crude oil costs resulting
from contract negotiations with suppliers; an 11% increase in retail
merchandise sales with nominally higher margins quarter-to-quarter; an 11%
increase in retail fuel margins; and a 3% increase in wholesale fuel
volumes sold by Phoenix Fuel to third party customers. These increases
were offset in part by a 5% decline in refinery sourced finished product
sales volumes, due in part to reduced crude oil production and competitive
conditions in the Four Corners area and a 17% decline in Phoenix Fuel
finished product margins.
REVENUES
- --------
Revenues for the three months ended March 31, 2001, increased
approximately $26,078,000 or 12% to $251,212,000 from $225,134,000 in the
comparable 2000 period. The increase was due to, among other things, a 3%
increase in Phoenix Fuel weighted average selling prices and wholesale
fuel volumes sold to third party customers; a 5% increase in refinery
weighted average selling prices; an 11% increase in retail merchandise
sales; and a 6% increase in retail refined products selling prices. These
increases were partially offset by a 5% decline in refinery sourced
finished product sales volumes.
The volumes of refined products sold through the Company's retail
units decreased approximately 15% from period to period. The volume of
finished product sold from service station/convenience stores that were in
operation for a full year in each period decreased approximately 12%.
These declines were due in part to increased price competition in the
Company's Phoenix and Tucson markets. Volumes sold from the Company's
travel center also declined approximately 12%.
COST OF PRODUCTS SOLD
- ---------------------
For the three months ended March 31, 2001, cost of products sold
increased $22,487,000 or 13% to $200,409,000 from $177,922,000 in the
comparable 2000 period. The increase is due in part to a 6% increase in
the cost of finished products purchased by Phoenix Fuel, along with a 3%
increase in wholesale fuel volumes sold to third party customers, and an
11% increase in retail merchandise sales. This increase was partially
offset by a 5% decline in refinery sourced finished product sales volumes.
OPERATING EXPENSES
- ------------------
For the three months ended March 31, 2001, operating expenses
decreased approximately $445,000 or 2% to $29,080,000 from $29,525,000 in
the comparable 2000 period. The decrease is due to, among other things,
reduced expenses for repairs and maintenance, rent and operating bonuses
for retail operations due in part to the closure of nine retail units in
the first quarter of 2001; lower contract labor costs for the refineries;
and decreased repair and maintenance expenses for Phoenix Fuel. These
decreases were offset in part by higher utility costs for retail and
refining operations, along with increased purchased fuel costs for the
refineries.
DEPRECIATION AND AMORTIZATION
- -----------------------------
For the three months ended March 31, 2001, depreciation and
amortization decreased approximately $192,000 or 2% to $8,113,000 from
$8,305,000 in the comparable 2000 period. The decrease is primarily
related to higher refinery turnaround amortization costs in 2000, offset
in part by increased depreciation related to newly acquired service
station/convenience stores, and construction, remodeling and upgrades in
retail and refining operations, during 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
For the three months ended March 31, 2001, selling, general and
administrative expenses increased approximately $181,000 or 3% to
$6,583,000 from $6,402,000 in the comparable 2000 period. The increase is
primarily due to higher claims experience for self-insured health
insurance, higher incentive bonus accruals and higher workers compensation
costs. These increases were offset in part by severance pay costs incurred
in 2000 relating to a reorganization and staff reduction program and
certain strategic planning costs incurred in 2000.
INTEREST EXPENSE, NET
- -------------------------
For the three months ended March 31, 2001, net interest expense
(interest expense less interest income) decreased approximately $231,000
or 4% to $5,480,000 from $5,711,000 in the comparable 2000 period. The
decrease is due in part to an increase in interest and investment income
from the investment of funds in short-term instruments and additional
interest expense in 2000 related to borrowings from the Company's
revolving credit facility.
INCOME TAXES
- ------------
The effective tax rate for the three months ended March 31, 2001 was
approximately 39% and the effective benefit rate for the three months
ended March 31, 2000 was approximately 40%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
- -------------------------
Operating cash flows increased for the three months ended March 31,
2001 compared to the three months ended March 31, 2000, primarily as a
result of an increase in cash flows related to changes in operating assets
and liabilities in each period, along with an increase in net earnings in
2001. Net cash provided by operating activities totaled $7,777,000 for the
three months ended March 31, 2001, compared to net cash used by operating
activities of $22,013,000 in the comparable 2000 period.
WORKING CAPITAL
- ---------------
Working capital at March 31, 2001 consisted of current assets of
$153,120,000 and current liabilities of $95,536,000, or a current ratio of
1.60:1. At December 31, 2000, the current ratio was 1.49:1 with current
assets of $165,184,000 and current liabilities of $110,690,000.
Current assets have decreased since December 31, 2000, primarily due
to a decrease in cash and cash equivalents and accounts receivable. These
decreases were offset in part by an increase in inventories. Accounts
receivable have decreased primarily due to a reduction in Phoenix Fuel
balances outstanding. Inventories have increased primarily due to an
increase in Phoenix Fuel, exchange and refinery onsite refined product
inventory volumes. These increases are offset in part by a decrease in
terminal and retail refined product volumes, along with a decline in
refined product prices.
Current liabilities have decreased due to a decrease in accounts
payable and accrued expenses. Accounts payable have decreased primarily as
a result of two months of natural gas liquids purchases being included in
accounts payable at December 31, 2000, due to the timing of year end
payments, along with a reduction in product supply finished product
purchases. Accrued expenses have decreased primarily as a result of the
payment of the final accrued contingent payment related to the 1995
acquisition of the Company's Bloomfield refinery, the payment of 2000
accrued bonuses and 401(k) Company matching contributions and the payment
of certain accrued interest balances. These decreases were offset in part
by increased accruals for property taxes, self-insured health obligations
and 2001 incentive and operating bonuses.
CAPITAL EXPENDITURES AND RESOURCES
- ----------------------------------
Net cash used in investing activities for the purchase of property,
plant and equipment totaled approximately $2,222,000 for the three months
ended March 31, 2001. Expenditures were primarily for operational and
environmental projects for the refineries and retail operation upgrades.
The Company received proceeds of approximately $201,000 from the sale
of property, plant and equipment in the first quarter.
In October 1995, the Company completed the purchase of the
Bloomfield refinery. The purchase agreement provided for potential
contingent payments of approximately $35,000,000 to be made over
approximately six years from the acquisition date, not to exceed a net
present value of $25,000,000 as of October 1995, should certain criteria
be met. The contingent payments are considered additional purchase price,
are allocated to the appropriate assets and are amortized over their
remaining useful lives. In the first quarter of 2001, the Company made the
final payment of approximately $5,139,000 required under the purchase
agreement.
On January 25, 2001, the Board accepted an offer from its Chairman
and Chief Executive Officer ("CCEO"), on behalf of a trust of which the
CCEO is the beneficiary, to sell a parcel of land (the "Jomax Property")
to the Company, or to a company affiliated with the Company, for the
lesser of $5,000,000 or the Jomax Property's appraised value. The Jomax
Property was subsequently sold to the Company for $5,000,000 plus closing
costs. A portion of the proceeds from the sale were used by the CCEO to
pay all interest due and payable on March 28, 2001 under the terms of the
Company's outstanding loan to the CCEO. The trust has an option,
exercisable for a period of two years, to repurchase the property at the
greater of the amount paid by the Company to purchase the property and the
property's appraised value. The trust also has a right of first refusal,
exercisable for a period of two years, to repurchase the property on the
same terms as contained in a bona fide offer from a bona fide purchaser.
This right must be exercised by the trust within three business days after
receipt of written notice of the offer from the Company. The property is
recorded as "Assets Held for Sale" in "Other Assets" in the Company's
Consolidated Balance Sheet at March 31, 2001.
In December 1998, the Company and FFCA Capital Holding Corporation
("FFCA") completed a sale-leaseback transaction in which the Company sold
83 service station/convenience stores to FFCA and leased them back. In the
second half of 1999, the Company repurchased 24 of the service
station/convenience stores. The Company and FFCA are currently in
negotiations in connection with the possible repurchase of the remaining
59 stations by the Company.
In the first quarter of 2001, the Company closed nine retail units as
non-strategic or underperforming units. In March 2001, the Company
completed an evaluation of its retail assets. The Company has identified
approximately 60 retail units that are non-strategic or are
underperforming for possible sale, although the units had positive cash
flow in 2000. These 60 retail units include approximately 30 Company-
operated units that the Company may reacquire from FFCA. During the second
quarter of 2001, the Company will initiate an evaluation to determine the
level of interest in the marketplace for potential sale of the assets. In
the interim, the Company will continue to operate these units. There is no
assurance that any of these units will be sold, as their sale is
contingent upon, among other things, the receipt of acceptable offers.
The Company has budgeted approximately $24,000,000 for capital
expenditures in 2001, excluding any potential acquisitions and the
Bloomfield contingent payment.
The Company continues to investigate other strategic acquisitions as
well as capital improvements to its existing facilities. The amount of
capital projects that are actually undertaken in 2001 will depend on,
among other things, identifying and consummating acceptable acquisitions,
general business conditions and results of operations. The Company is also
evaluating the possible sale or exchange of non-strategic or
underperforming assets.
The Company anticipates that working capital, including that
necessary for capital expenditures and debt service, will be funded
through existing cash balances, cash generated from operating activities,
and, if necessary, future borrowings. Future liquidity, both short and
long-term, will continue to be primarily dependent on producing or
purchasing, and selling, sufficient quantities of refined products at
margins sufficient to cover fixed and variable expenses.
CAPITAL STRUCTURE
- -----------------
At March 31, 2001 and December 31, 2000, the Company's long-term debt
was 66.7% and 66.9% of total capital, respectively, and the Company's net
debt (long-term debt less cash and cash equivalents) to total
capitalization percentages were 64.7% and 64.4%, respectively.
The Company's capital structure includes $150,000,000 of 9% senior
subordinated notes due 2007 (the "9% Notes") and $100,000,000 of 9 3/4%
senior subordinated notes due 2003 (the "9 3/4% Notes", and collectively
with the 9% Notes, the "Notes"). The Indentures supporting the Notes
contain restrictive covenants that, among other things, restrict the
ability of the Company and its subsidiaries to create liens, to incur or
guarantee debt, to pay dividends, to repurchase shares of the Company's
common stock, to sell certain assets or subsidiary stock, to engage in
certain mergers, to engage in certain transactions with affiliates or to
alter the Company's current line of business. At March 31, 2001, the
Company was in compliance with the restrictive covenants relating to these
Notes.
Subject to certain conditions, the Company is obligated to offer to
purchase a portion of the Notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
purchase, with the net cash proceeds of certain sales or other
dispositions of assets. Upon a change of control, the Company would be
required to offer to purchase all of the Notes at 101% of the principal
amount thereof, plus accrued interest, if any, to the date of purchase.
Repayment of the Notes is jointly and severally guaranteed on an
unconditional basis by the Company's direct and indirect wholly-owned
subsidiaries, subject to a limitation designed to ensure that such
guarantees do not constitute a fraudulent conveyance. Except as otherwise
specified in the Indentures pursuant to which the Notes were issued, there
are no restrictions on the ability of such subsidiaries to transfer funds
to the Company in the form of cash dividends, loans or advances. General
provisions of applicable state law, however, may limit the ability of any
subsidiary to pay dividends or make distributions to the Company in
certain circumstances.
Separate financial statements of the Company's subsidiaries are not
included herein because the aggregate assets, liabilities, earnings, and
equity of the subsidiaries are substantially equivalent to the assets,
liabilities, earnings, and equity of the Company on a consolidated basis;
the subsidiaries are jointly and severally liable for the repayment of the
Notes; and the separate financial statements and other disclosures
concerning the subsidiaries are not deemed by the Company to be material
to investors.
The Company has a $65,000,000 secured Credit Agreement (the "Credit
Agreement") that expires December 23, 2001, with a group of banks. This
Credit Agreement, a revolving loan agreement, is primarily a working
capital and letter of credit facility and is secured by eligible accounts
receivable and inventories as defined in the Credit Agreement. The Credit
Agreement allows the Company to borrow up to $9,000,000 to exercise its
purchase rights in connection with certain service station/convenience
stores that are currently subject to capital lease obligations, and up to
$10,000,000 for other acquisitions as defined in the Credit Agreement. The
availability of funds under this facility is the lesser of (i)
$65,000,000, or (ii) the amount determined under a borrowing base
calculation tied to the eligible accounts receivable and inventories. At
March 31, 2001, the availability of funds under the Credit Agreement was
$65,000,000. There were no direct borrowings outstanding under this
facility at March 31, 2001 or April 30, 2001 and there were approximately
$3,747,000 of irrevocable letters of credit outstanding on each date.
The interest rate applicable to the Credit Agreement is tied to
various short-term indices. At March 31, 2001, this rate was approximately
6.5% per annum. The Company is required to pay a quarterly commitment fee
ranging from 0.325% to 0.500% per annum of the unused amount of the
facility. The exact rate depends on meeting certain conditions in the
Credit Agreement.
The Credit Agreement contains certain restrictive covenants which
require the Company to, among other things, maintain a minimum
consolidated net worth, a minimum interest coverage ratio and a maximum
capitalization ratio. It also places limits on investments, dispositions
of assets, prepayments of senior subordinated debt, guarantees, liens and
restricted payments. At March 31, 2001, the Company was in compliance with
the Credit Agreement's restrictive covenants. The Credit Agreement is
guaranteed by certain of the Company's direct and indirect wholly-owned
subsidiaries.
The Company is currently in discussions with a group of banks to
replace the Credit Agreement.
The Company's Board of Directors has authorized the repurchase of up
to 2,500,000 shares of the Company's common stock. These purchases may be
made from time to time as conditions permit. Shares may be repurchased
through privately-negotiated transactions, block share purchases and open
market transactions. The Company did not repurchase any shares of its
common stock under this program in the first quarter of 2001. From the
inception of the stock repurchase program, the Company has repurchased
2,165,266 shares for approximately $22,042,000, resulting in a weighted
average cost of $10.18 per share. The repurchased shares are treated as
treasury shares.
Shares repurchased under the Company's program are available for a
number of corporate purposes. The number of shares actually repurchased
will be dependent upon market conditions and existing debt covenants, and
there is no guarantee as to the exact number of shares to be repurchased
by the Company. The Company may discontinue the program at any time
without notice.
The Company's Board of Directors did not declare any cash dividends
on common stock for the three months ended March 31, 2001. The payment of
dividends is subject to the results of the Company's operations, existing
debt covenants and declaration by the Company's Board of Directors. The
Board of Directors will periodically review the Company's policy regarding
the payment of dividends.
RISK MANAGEMENT
- ---------------
The Company is exposed to various market risks, including changes in
certain commodity prices and interest rates. To manage the volatility
relating to these normal business exposures, the Company periodically uses
commodity futures and options contracts to reduce price volatility, to fix
margins in its refining and marketing operations and to protect against
price declines associated with its crude oil and finished products
inventories.
The potential loss from a hypothetical 10% adverse change in
commodity prices on open commodity futures and options contracts held by
the Company at March 31, 2001, was approximately $69,000.
Additionally, the Company's Credit Agreement is floating-rate debt
tied to various short-term indices. As a result, the Company's annual
interest costs associated with this debt may fluctuate. At March 31, 2001,
however, there were no direct borrowings outstanding under this Credit
Agreement.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
originally to be effective for the Company's financial statements as of
January 1, 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective
Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date
of SFAS No. 133 by one year to give companies more time to study,
understand and implement the provisions of SFAS No. 133 and to complete
information system modifications. In June 2000, the FASB issued SFAS No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133." SFAS No. 138 expands and
clarifies certain provisions of SFAS No. 133 and was adopted by the
Company concurrently with SFAS No. 133 on January 1, 2001.
SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that entities record all derivatives as either assets or
liabilities, measured at fair value, with any change in fair value
recognized in earnings or in other comprehensive income, depending on the
use of the derivative and whether it qualifies for hedge accounting. If
certain conditions are met, a derivative may be specifically designated as
a (i) hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (ii) hedge of the
exposure to variable cash flows of a forecasted transaction, or (iii)
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction.
Under SFAS No. 133, as amended, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective
aspect of the hedge. Those methods must be consistent with the entity's
approach to managing risk.
The Company has performed a contract review and, except as described
below, believes these contracts do not qualify as derivatives or contain
embedded derivatives as defined in SFAS No. 133, as amended. Accordingly,
there was no earnings effect upon adoption January 1, 2001.
The Company from time to time speculates in the purchasing and
selling of crude oil and finished products and may enter into futures,
options and wet barrel contracts to speculate on price fluctuations in
these commodities. These activities are transacted in accordance with
policies established by the Company, which set limits on quantities,
require various levels of approval and require certain review and
reporting procedures. Gains and losses on all speculative transactions are
reflected in earnings in the period that they occur.
At March 31, 2001 the Company had open put option and futures
contracts for the purchase or sale of 50,000 barrels of crude oil and a
net loss of approximately $28,000 had been recorded relating to these
contracts. At December 31, 2000, the Company had open put option and
futures contracts for the purchase or sale of 285,000 barrels of heating
oil or crude oil and a net loss of approximately $275,000 had been
recorded relating to these contracts. These open put option and futures
contracts relate to specific speculative strategies entered into with the
expectation of profiting from favorable price movements. These contracts
are marked-to-market monthly and any gains or losses recorded in cost of
sales.
In addition, at December 31, 2000, the Company had entered into a
contract for the purchase of 25,000 barrels of CARB Phase II unleaded
regular gasoline for delivery in January 2001 in Los Angeles. This
contract is part of the Company's speculative wet barrel trading
activities, and would be considered a derivative instrument under SFAS No.
133, as amended. This contract was marked-to-market at December 31, 2000
and a gain of approximately $73,500 was recorded in cost of sales.
At March 31, 2001 and December 31, 2000, the Company had no hedging
strategies in place as defined in SFAS No. 133, as amended.
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company
maintains various insurance coverages, including business interruption
insurance, subject to certain deductibles. The Company is not fully
insured against certain risks because such risks are not fully insurable,
coverage is unavailable or premium costs, in the judgment of the Company,
do not justify such expenditures.
Credit risk with respect to customer receivables is concentrated in
the geographic area in which the Company operates and relates primarily to
customers in the oil and gas industry. To minimize this risk, the Company
performs ongoing credit evaluations of its customers' financial position
and requires collateral, such as letters of credit, in certain
circumstances.
OTHER
- -----
Federal, state and local laws and regulations relating to health and
the environment affect nearly all of the operations of the Company. As is
the case with other companies engaged in similar industries, the Company
faces significant exposure from actual or potential claims and lawsuits
involving environmental matters. These matters include soil and water
contamination, air pollution and personal injuries or property damage
allegedly caused by substances manufactured, handled, used, released or
disposed of by the Company. Future expenditures related to health and
environmental matters cannot be reasonably quantified in many
circumstances for various reasons, including the speculative nature of
remediation and cleanup cost estimates and methods, imprecise and
conflicting data regarding the hazardous nature of various types of
substances, the number of other potentially responsible parties involved,
various defenses that may be available to the Company and changing
environmental laws and interpretations of environmental laws.
Rules and regulations implementing federal, state and local laws
relating to health and the environment will continue to affect the
operations of the Company. The Company cannot predict what health or
environmental legislation or regulations will be enacted or become
effective in the future or how existing or future laws or regulations will
be administered or enforced with respect to products or activities of the
Company. Compliance with more stringent laws or regulations, as well as
more vigorous enforcement policies of the regulatory agencies, could have
an adverse effect on the financial position and the results of operations
of the Company and could require substantial expenditures by the Company
for: (i) the installation and operation of refinery equipment, pollution
control systems and other equipment not currently possessed by the
Company, (ii) the acquisition or modification of permits applicable to
Company activities, and (iii) the initiation or modification of cleanup
activities.
The Company is in the process of filing claims against the United
States Defense Energy Support Center ("DESC") in connection with jet fuel
that the Company sold to DESC during the period 1983 through 1994. The
Company intends to assert that the DESC underpaid for the jet fuel that it
purchased, in the approximate amount of $17,000,000. The Company believes
that its claims are supported by recent federal court decisions, including
decisions from the United States Claims Court, dealing with contract
provisions similar to those contained in the contracts that are the
subject of the Company's claims. Due to the preliminary nature of this
matter, however, there can be no assurance that the Company will
ultimately prevail in this matter or, if successful, when any payment
would be received. Accordingly, the Company has not recorded any amounts
on its books relating to this matter.
At March 31, 2001, the Company had an environmental liability accrual
of approximately $2,200,000. This accrual is for the following projects:
(i) closure of the Ciniza refinery land treatment facility, including
post-closure expenses, (ii) the remediation of the hydrocarbon plume that
appears to extend no more than 1,800 feet south of the Company's inactive
Farmington refinery, (iii) environmental obligations assumed in connection
with the acquisition of the Bloomfield refinery, (iv) hydrocarbon
contamination on and adjacent to the 5.5 acres that the Company owns in
Bloomfield, New Mexico, and (v) the closure of certain solid waste
management units at the Ciniza refinery, which is being conducted in
accordance with the refinery's Resource Conservation and Recovery Act
permit. The environmental accrual is recorded in the current and long-term
sections of the Company's Consolidated Balance Sheets.
As previously discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, the Company's refineries primarily
process a mixture of high gravity, low sulfur crude oil, condensate and
natural gas liquids ("NGLs"). The locally produced, high quality crude oil
known as Four Corners Sweet is the primary feedstock for the refineries.
The Four Corners basin is a mature production area and accordingly is
subject to natural decline in production over time. In the past, this
natural decline has been offset to some extent by new drilling, field
workovers, and secondary recovery projects, which resulted in additional
production from existing reserves. Many of these projects were cut back,
however, when crude oil prices declined dramatically in 1998. Although
crude oil prices have recovered from 1998 levels, a lower than anticipated
allocation of capital to Four Corners basin production activities has
resulted in greater than anticipated net declines in production.
The Company's current receipts and projections of Four Corners crude
oil production indicate that the Company's crude oil demand will exceed
the crude oil supply that is available from local sources for 2001. During
the first quarter of 2001, the Company has experienced lower than
anticipated receipts, at least in part as a result of the decreased
production discussed above and production facilities maintenance in one
major field. The Company has decreased, and may from time to time in the
future decrease, production runs at its refineries from levels it would
otherwise schedule as a result of shortfalls in Four Corners crude oil
production. The Company may increase its production runs in the future if
additional crude oil or other refinery feedstocks become available
depending on demand for finished products and refining margins attainable.
The Company supplements the Four Corners crude oil used at its
refineries with other feedstocks. These feedstocks currently include
locally produced NGLs and other feedstocks produced outside of the Four
Corners area. The Company continues to evaluate supplemental feedstock
alternatives for its refineries on both a short-term and long-term basis.
These alternatives include, among other possibilities, encouraging new
exploration and production opportunities on tribal reservation lands. No
significant, cost effective crude oil feedstock alternatives have been
identified to date. Whether or not supplemental feedstocks are used at the
Company's refineries depends on a number of factors. These factors
include, but are not limited to, the availability of supplemental
feedstocks, the cost involved, the quantities required, the quality of the
feedstocks, the demand for finished products, and the selling prices of
finished products.
There is no assurance that current or projected levels of Four
Corners crude oil supply for the Company's refineries will be maintained.
Any significant, long-term interruption or decline in Four Corners crude
oil supply, due to prices or other factors, or any significant long-term
interruption of crude oil transportation systems, would have an adverse
effect on the Company's operations.
As previously discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, an existing NGLs pipeline
originating in Southeastern New Mexico was converted to a refined products
pipeline in late 1999, and delivers refined products into Albuquerque, New
Mexico and the Four Corners area. A diesel fuel terminal near Albuquerque
associated with this project has been completed and a terminal expansion
to include gasoline and jet fuel is expected to be completed in the summer
of 2001. In addition, the Company is aware of a number of actions,
proposals or industry discussions regarding product pipeline projects that
could impact portions of its marketing areas. The completion of some or
all of these projects would result in increased competition by increasing
the amount of refined products potentially available in these markets, as
well as improving competitor access to these areas. It also could result
in new opportunities for the Company, as the Company is a net purchaser of
refined products in some of these areas.
The Company has certain natural gas contracts for the purchase of
fuel used in operating the Company's refineries that expire at the end of
October 2001. The volume of natural gas purchased under these contracts is
4,500 MMBTU's per day, which represents about 90% of the Company's current
natural gas needs. During the quarter ended March 31, 2001, the contracted
price paid per MMBTU was substantially below what the Company would have
paid in the open market. The renewal or replacement of these contracts
could be at much higher rates than the current contracts and may result in
significantly higher purchased fuel costs starting in the fourth quarter
of 2001. The Company is exploring other alternatives that could
potentially reduce its demand for natural gas.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995: This report contains forward-looking statements that
involve known and unknown risks and uncertainties. Forward-looking
statements are identified by words or phrases such as "believes,"
"expects," "anticipates," "estimates," "could," "plans," "intends,"
variations of such words and phrases and other similar expressions. While
these forward-looking statements are made in good faith and reflect the
Company's current judgment regarding such matters, actual results could
vary materially from the forward-looking statements. Important factors
that could cause actual results to differ from forward-looking statements
include, but are not limited to: economic, competitive and governmental
factors affecting the Company's operations, markets, products, services
and prices; declines in production of Four Corners sweet crude oil; risks
associated with non-compliance with certain debt covenants or the
satisfaction of financial ratios contained in such covenants; the risk
that the Company may not be able to replace its current Credit Agreement
on terms favorable to the Company; the adequacy of the Company's reserves,
including its reserves for environmental and tax matters; the ultimate
outcome of the two lawsuits filed against the Company by the State of New
Mexico and the Company's ultimate liability related thereto; the
availability of indemnification from third parties in connection with
various legal proceedings; the Company's ability to resolve alleged legal
violations without the assessment of additional fines or penalties; the
expansion of the Company's refining, retail and Phoenix Fuel operations
through acquisition and construction; the adequacy and cost of raw
material supplies; the potential effects of various pipeline projects as
they relate to the Company's market area and future profitability; the
risk that the Company will not be able to sell non-strategic and
underperforming assets on terms favorable to the Company; the risk that
the Company will not be able to obtain replacement natural gas supplies on
terms favorable to the Company; the risk the Company will not be able to
repurchase various service station/convenience stores from FFCA on terms
satisfactory to the Company; the Company's ability to recover some or all
of the amounts specified in its claims against DESC; and other risks
detailed from time to time in the Company's filings with the Securities
and Exchange Commission. All subsequent written and oral forward-looking
statements attributable to the Company, or persons acting on behalf of the
Company, are expressly qualified in their entirety by the foregoing.
Forward-looking statements made by the Company represent its judgment on
the dates such statements are made. The Company assumes no obligation to
update any forward-looking statements to reflect new or changed events or
circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is incorporated herein by reference
to the section entitled "Risk Management" in the Company's Management's
Discussion and Analysis of Financial Condition and Results of Operations
in Part I, Item 2.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation incidental to
its business. There is also hereby incorporated by reference the
information regarding contingencies in Note 7 to the Unaudited Condensed
Consolidated Financial Statement set forth in Item 1, Part I hereof and
the discussion of certain contingencies contained in Item 2, Part 1
hereof, under the heading "Liquidity and Capital Resources - Other."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 1, 2001. Proxies
for the meeting were solicited under Regulation 14A. There were no matters
submitted to a vote of security holders other than the election of two
directors and approval of auditors as specified in the Company's Proxy
Statement. There was no solicitation in opposition to management's
nominees to the Board of Directors.
James E. Acridge was elected as a director of the Company. The vote
was as follows:
SHARES VOTED "FOR" SHARES VOTED "WITHHOLDING"
------------------ --------------------------
6,696,583 446,298
Richard T. Kalen, Jr. was elected as a director of the Company. The
vote was as follows:
SHARES VOTED "FOR" SHARES VOTED "WITHHOLDING"
------------------ --------------------------
6,819,506 323,375
Deloitte & Touche LLP were ratified as independent auditors for the
Company for the year ending December 31, 2001. The vote was as follows:
SHARES VOTED "FOR" SHARES VOTED "AGAINST" SHARES VOTED "ABSTAINING"
------------------ ---------------------- -------------------------
5,459,970 1,682,111 800
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Modification Agreement dated February 28, 2001 between James E.
Acridge ("Borrower") and Giant Industries, Inc.
10.2 Amended and Restated Promissory Note dated February 28, 2001.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K for the
quarter ended March 31, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q for the quarter
ended March 31, 2001 to be signed on its behalf by the undersigned
thereunto duly authorized.
GIANT INDUSTRIES, INC.
/s/ GARY R. DALKE
------------------------------------------
Gary R. Dalke, Vice President,
Controller, Accounting Officer
and Assistant Secretary
Date: May 14, 2001
10