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 June 30, 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 July 31, 2001: 8,971,179 shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets June 30, 2001 (Unaudited)
and December 31, 2000
Condensed Consolidated Statements of Earnings for the Three and
Six Months Ended June 30, 2001 and 2000 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 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 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)
JUNE 30, DECEMBER 31,
- -------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 53,735 $ 26,618
Receivables, net 60,509 75,547
Inventories 58,592 56,607
Prepaid expenses and other 2,992 3,659
Deferred income taxes 2,753 2,753
- -------------------------------------------------------------------------
Total current assets 178,581 165,184
- -------------------------------------------------------------------------
Property, plant and equipment 504,966 508,384
Less accumulated depreciation and amortization (200,443) (192,234)
- -------------------------------------------------------------------------
304,523 316,150
- -------------------------------------------------------------------------
Goodwill, net 20,271 20,806
Other assets 30,954 26,425
- -------------------------------------------------------------------------
$ 534,329 $ 528,565
=========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 144 $ 213
Accounts payable 57,904 66,461
Accrued expenses 40,770 44,016
- -------------------------------------------------------------------------
Total current liabilities 98,818 110,690
- -------------------------------------------------------------------------
Long-term debt, net of current portion 257,985 258,009
Deferred income taxes 32,125 27,621
Other liabilities and deferred income 4,794 4,542
Commitments and contingencies (Notes 6 and 7)
Common stockholders' equity 140,607 127,703
- -------------------------------------------------------------------------
$ 534,329 $ 528,565
=========================================================================
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- --------------------------------------------------------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Net revenues $ 281,158 $ 266,066 $ 532,370 $ 491,200
Cost of products sold 209,856 210,501 410,265 388,423
- --------------------------------------------------------------------------------
Gross margin 71,302 55,565 122,105 102,777
Operating expenses 29,140 29,504 58,220 59,029
Depreciation and amortization 8,139 8,370 16,252 16,675
Selling, general and
administrative expenses 8,755 6,396 15,338 12,798
- --------------------------------------------------------------------------------
Operating income 25,268 11,295 32,295 14,275
Interest expense, net 5,553 5,805 11,033 11,516
- --------------------------------------------------------------------------------
Earnings before income taxes 19,715 5,490 21,262 2,759
Provision for income taxes 7,762 2,209 8,359 1,110
- --------------------------------------------------------------------------------
Net earnings $ 11,953 $ 3,281 $ 12,903 $ 1,649
================================================================================
Net earnings per common share:
Basic $ 1.33 $ 0.36 $ 1.44 $ 0.18
================================================================================
Assuming dilution $ 1.33 $ 0.36 $ 1.44 $ 0.18
================================================================================
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
- ----------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 12,903 $ 1,649
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 16,252 16,675
Deferred income taxes 4,504 399
Loss on disposal of assets 180 12
Other 530 408
Changes in operating assets and liabilities:
Decrease (increase) in receivables 15,011 (2,457)
Increase in inventories (1,953) (8,805)
Decrease (increase) in prepaid expenses and other 667 (1,932)
Decrease in accounts payable (8,557) (648)
Increase (decrease) in accrued expenses 2,230 (3,041)
- ----------------------------------------------------------------------------------
Net cash provided by operating activities 41,767 2,260
- ----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment and other assets (4,929) (13,000)
Refinery acquisition contingent payment (5,139) (5,442)
Purchase of other assets (5,010) -
Proceeds from sale of property, plant and equipment 521 3,098
- ----------------------------------------------------------------------------------
Net cash used by investing activities (14,557) (15,344)
- ----------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of long-term debt - 68,000
Payments of long-term debt (93) (68,152)
Purchase of treasury stock - (10,738)
Proceeds from exercise of stock options - 109
- ----------------------------------------------------------------------------------
Net cash used by financing activities (93) (10,781)
- ----------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 27,117 (23,865)
Cash and cash equivalents:
Beginning of period 26,618 32,945
- ----------------------------------------------------------------------------------
End of period $ 53,735 $ 9,080
==================================================================================
Non-cash Investing and Financing Activities. In the second quarter of
2001, the Company received 103,430 shares of its common stock valued at
approximately $1,107,000 from its Chairman and Chief Executive Officer as
payment for the exercise of 126,601 common stock options. These shares
were immediately cancelled.
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
(collectively, "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 area 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 in accordance 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 six months ended June 30, 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.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133." There was no effect on the
Company's financial position, results of operations or cash flows as a
result of adopting SFAS No. 133.
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.
At June 30, 2001 and December 31, 2000, the Company had no hedging
strategies in place as defined in SFAS No. 133, as amended.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations."
This Statement requires, among other things, that the purchase method of
accounting be used to account for all business combinations. The
provisions of the Statement apply to all business combinations initiated
after June 30, 2001, and to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or
later.
The FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets," in June 2001. This Statement requires, among other things, that
goodwill not be amortized, but will be tested for impairment. The
provisions of the Statement are required to be applied starting with
fiscal years beginning after December 15, 2001. Impairment losses for
goodwill and indefinite-lived intangible assets that arise due to the
initial application of this Statement (resulting from a transitional
impairment test) are to be reported as resulting from a change in
accounting principle.
The Company is in the process of evaluating the effect these two
statements will have on its financial position and results of operations.
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." These consist primarily of corporate
staff operations, including selling, general and administrative expenses
of $6,820,000 and $4,463,000 for the three months ended June 30, 2001 and
2000, respectively, and $11,359,000 and $8,794,000 for the six months
ended June 30, 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 for the three months ended June 30,
2001 and 2000, are presented below.
For the Three Months Ended June 30, 2001 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
Customer net revenues:
Finished products $ 81,720 $ 67,557 $ 80,571 $ - $ - $229,848
Merchandise and lubricants - 37,630 6,010 - - 43,640
Other 2,852 4,134 607 77 - 7,670
-------- -------- -------- ------- -------- --------
Total 84,572 109,321 87,188 77 - 281,158
-------- -------- -------- ------- -------- --------
Intersegment net revenues:
Finished products 52,687 - 25,577 - (78,264) -
Other 3,507 - - - (3,507) -
-------- -------- -------- ------- -------- --------
Total 56,194 - 25,577 - (81,771) -
-------- -------- -------- ------- -------- --------
Total net revenues $140,766 $109,321 $112,765 $ 77 $(81,771) $281,158
======== ======== ======== ======= ======== ========
Operating income (loss) $ 28,464 $ 2,285 $ 1,757 $(7,238) $ - $ 25,268
Interest expense (6,040)
Interest income 487
--------
Earnings before income taxes $ 19,715
========
Depreciation and amortization $ 4,011 $ 2,934 $ 669 $ 525 $ - $ 8,139
Capital expenditures $ 1,751 $ 513 $ 279 $ 164 $ - $ 2,707
For the Three Months Ended June 30, 2000 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
Customer net revenues:
Finished products $ 74,239 $ 73,577 $ 67,615 $ - $ - $215,431
Merchandise and lubricants - 36,509 6,986 - - 43,495
Other 2,409 3,852 808 71 - 7,140
-------- -------- -------- ------- -------- --------
Total 76,648 113,938 75,409 71 - 266,066
-------- -------- -------- ------- -------- --------
Intersegment net revenues:
Finished products 51,869 - 18,790 - (70,659) -
Other 3,920 - - - (3,920) -
-------- -------- -------- ------- -------- --------
Total 55,789 - 18,790 - (74,579) -
-------- -------- -------- ------- -------- --------
Total net revenues $132,437 $113,938 $ 94,199 $ 71 $(74,579) $266,066
======== ======== ======== ======= ======== ========
Operating income (loss) $ 14,116 $ 2,244 $ 634 $(5,699) $ - $ 11,295
Interest expense (6,143)
Interest income 338
--------
Earnings before income taxes $ 5,490
========
Depreciation and amortization $ 4,291 $ 2,882 $ 641 $ 556 $ - $ 8,370
Capital expenditures $ 1,180 $ 1,240 $ 246 $ 13 $ - $ 2,679
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals for the six months ended
June 30, 2001 and 2000, are presented below.
As of and for the Six Months Ended June 30, 2001 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
Customer net revenues:
Finished products $147,769 $124,178 $162,760 $ - $ - $434,707
Merchandise and lubricants - 70,456 11,668 - - 82,124
Other 5,805 8,230 1,355 149 - 15,539
-------- -------- -------- -------- --------- --------
Total 153,574 202,864 175,783 149 - 532,370
-------- -------- -------- -------- --------- --------
Intersegment net revenues:
Finished products 91,214 - 46,590 - (137,804) -
Other 7,168 - - - (7,168) -
-------- -------- -------- -------- --------- --------
Total 98,382 - 46,590 - (144,972) -
-------- -------- -------- -------- --------- --------
Total net revenues $251,956 $202,864 $222,373 $ 149 $(144,972) $532,370
======== ======== ======== ======== ========= ========
Operating income (loss) $ 39,549 $ 1,784 $ 3,225 $(12,263) $ - $ 32,295
Interest expense (12,083)
Interest income 1,050
--------
Earnings before income taxes $ 21,262
========
Depreciation and amortization $ 7,960 $ 5,920 $ 1,329 $ 1,043 $ - $ 16,252
Total assets $229,354 $150,238 $ 75,173 $ 79,564 $ - $534,329
Capital expenditures $ 3,147 $ 933 $ 578 $ 271 $ - $ 4,929
For the Six Months Ended June 30, 2000 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
Customer net revenues:
Finished products $112,288 $136,455 $148,737 $ - $ - $397,480
Merchandise and lubricants - 66,009 13,346 - - 79,355
Other 4,457 8,024 1,715 169 - 14,365
-------- -------- -------- -------- --------- --------
Total 116,745 210,488 163,798 169 - 491,200
-------- -------- -------- -------- --------- --------
Intersegment net revenues:
Finished products 118,225 - 31,788 - (150,013) -
Other 7,986 - - - (7,986) -
-------- -------- -------- -------- --------- --------
Total 126,211 - 31,788 - (157,999) -
-------- -------- -------- -------- --------- --------
Total net revenues $242,956 $210,488 $195,586 $ 169 $(157,999) $491,200
======== ======== ======== ======== ========= ========
Operating income (loss) $ 20,743 $ 1,086 $ 2,668 $(10,222) $ - $ 14,275
Interest expense (12,255)
Interest income 739
--------
Earnings before income taxes $ 2,759
========
Depreciation and amortization $ 8,519 $ 5,636 $ 1,254 $ 1,266 $ - $ 16,675
Capital expenditures $ 3,120 $ 8,631 $ 922 $ 22 $ - $ 12,695
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:
Three Months Ended June 30,
-------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- -------
Earnings per common
share - basic:
Net earnings $ 11,953,000 8,957,684 $ 1.33 $ 3,281,000 9,150,574 $ 0.36
Effect of dilutive
stock options - 21,992 - - 13,726 -
------------ --------- ------ ----------- --------- ------
Earnings per common
share - assuming dilution:
Net earnings $ 11,953,000 8,979,676 $ 1.33 $ 3,281,000 9,164,300 $ 0.36
============ ========= ====== =========== ========= ======
Six Months Ended June 30,
-------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- -------
Earnings per common
share - basic:
Net earnings $ 12,903,000 8,952,873 $ 1.44 $ 1,649,000 9,398,344 $ 0.18
Effect of dilutive
stock options - 13,859 - - 13,740 -
------------ --------- ------ ----------- --------- ------
Earnings per common
share - assuming dilution:
Net earnings $ 12,903,000 8,966,732 $ 1.44 $ 1,649,000 9,412,084 $ 0.18
============ ========= ====== =========== ========= ======
At June 30, 2001, there were 8,971,179 shares of the Company's common
stock outstanding. There were no transactions subsequent to June 30, 2001,
that if the transactions had occurred before June 30, 2001, would
materially change the number of common shares or potential common shares
outstanding as of June 30, 2001.
NOTE 4 - RELATED PARTY TRANSACTIONS:
On September 17, 1998, the Company loaned $4,000,000 to its Chairman
and Chief Executive Officer ("CCEO"). The loan was originally evidenced by
an unsecured promissory note bearing interest at the prime rate published
by the Wall Street Journal on September 17, 1998 (the "Prime Rate") plus
2%. Principal and accrued interest were due and payable in one lump sum on
February 28, 1999. On December 23, 1998, the Company and the CCEO entered
into a revised loan agreement. The amount of the loan was increased to
$5,000,000, the loan's interest rate was increased to the Prime Rate plus
3%, and the loan's maturity date was extended to February 28, 2001. An
initial interest payment was made on February 28, 1999 for interest due
through December 31, 1998. Subsequent interest was due and payable semi-
annually on June 30 and December 31 of each year.
The loan was modified again on March 10, 2000. The terms of the loan
were revised so that all principal and interest, including interest that
otherwise would have been payable on December 31, 1999, became due and
payable on February 28, 2001. As security for the modified loan, the
Company received a pledge by an entity owned by the CCEO (the "LLC") of a
49% equity interest in an entity that owns certain real property in north
Scottsdale, Arizona (the "Real Property"). The loan was further modified
on February 28, 2001 to extend the loan's maturity date to March 28, 2001.
This modification reflected the fact that the Company's purchase of a
parcel of land from a trust of which the CCEO is the beneficiary had not
closed. A portion of the proceeds of this sale was to be used to pay the
interest that became due and payable under the loan on February 28, 2001.
On March 21, 2001, the Company's Board of Directors (the "Board") approved
an additional two-year extension of the loan's maturity date, making all
principal and interest due and payable on March 28, 2003. This extension
was conditioned upon, among other things, the CCEO's payment of all
interest due and payable on March 28, 2001, which was paid. In return for
the extension of the loan, the CCEO provided additional security for the
loan by pledging all of his equity interest in the LLC.
The Company is aware of prior liens on the Real Property and on
certain of the collateral pledged to the Company (the "Prior Liens") that
relate to loans entered into by the LLC (the "LLC Loans"). On July 18,
2001, the Board was advised that the LLC was not able to make the monthly
payments due and owing to its lenders (the "Lenders") in the month of
July. The Board was asked to make such payments, in the approximate amount
of $250,000, on behalf of the CCEO for the benefit of the LLC. The Board
authorized the Company to make the July payments in order to avoid a
default under the LLC Loans. Should the LLC not continue to service the
first lien holder debt when due, or should other adverse circumstances
arise, the Company's ability to recover all of the described amounts could
be adversely affected. Additionally, the Indenture supporting the
Company's senior subordinated notes due 2003, the Indenture supporting the
Company's senior subordinated notes due 2007, and the Company's
$65,000,000 secured Credit Agreement contain restrictive covenants that
may constrain the Company's ability to take certain actions absent a
waiver or other approval obtained in accordance with the terms of such
documents. Accordingly, it is possible that the Company will not be able
to recover all or any of the amounts due and owing from the CCEO. Should
any such amounts be deemed uncollectible in the future, it could have a
material adverse impact on the reporting period in which such amount was
deemed uncollectible. As of June 30, 2001, accrued interest outstanding on
the $5,000,000 loan was approximately $138,500.
NOTE 5 - INVENTORIES:
JUNE 30, DECEMBER 31,
- ----------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
- ----------------------------------------------------------------------
First-in, first-out ("FIFO") method:
Crude oil $ 13,963 $ 17,420
Refined products 26,343 24,679
Refinery and shop supplies 10,980 10,829
Merchandise 4,316 3,882
Retail method:
Merchandise 8,358 8,737
- ----------------------------------------------------------------------
Subtotal 63,960 65,547
Allowance for last-in,
first-out ("LIFO") method (5,368) (8,940)
- ----------------------------------------------------------------------
Total $ 58,592 $ 56,607
======================================================================
The portion of inventories valued on a LIFO basis totaled $27,854,000
and $28,319,000 at June 30, 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 June 30,
2001 and 2000, net earnings and diluted earnings per share for the three
months ended June 30, 2001 and 2000, would have been (lower) higher by
$(342,000) and $(0.04), and $459,000 and $0.05, respectively, and net
earnings and diluted earnings per share for the six months ended June 30,
2001 and 2000 would have been (lower) higher by $(2,144,000) and $(0.24),
and $2,912,000 and $0.31, 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 June 30, 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
June 30, 2001, the availability of funds under the Credit Agreement was
$65,000,000. There were no direct borrowings outstanding under this
facility at June 30, 2001 or July 31, 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 June 30, 2001, this rate was approximately
5.75% 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 June 30, 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 with a new secured Credit Agreement.
The Company also had approximately $7,917,000 of capital lease
obligations outstanding at June 30, 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 June 30, 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.
On June 11, 2001, the Company filed claims against the United States
Defense Energy Support Center ("DESC") in connection with jet fuel that
the Company sold to DESC from 1983 through 1994. The Company asserted that
the DESC underpaid for the jet fuel, 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 $250,000 over a 30-
year period, which amount is included in the Company's environmental
reserve.
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. The Company understands that the allegations contained in the NOV
have been included in a Compliance Order for the Company's Bloomfield
Refinery, addressed below, which replaces the NOV.
On June 13, 2001, the Company received two Compliance Orders
("Orders") from the NMED in connection with alleged violations of air
regulations at the Company's Ciniza Refinery. The Orders allege violations
discovered during NMED inspections in 1999 and 2000. The civil penalties
assessed in connection with both Orders total approximately $200,000. The
NMED has represented that it is willing to settle both Orders for
$145,000. On July 13, 2001, the Company filed a Request for Hearing and
Answer with respect to each Order.
On June 14, 2001, the Company received two Orders from the NMED in
connection with alleged violations of air regulations at the Company's
Bloomfield Refinery. The Orders allege violations discovered during NMED
inspections in 1999 and 2000. The civil penalties assessed in connection
with both Orders total approximately $350,000. The NMED has represented
that it is willing to settle both Orders for $250,000. On July 13, 2001,
the Company filed a Request for Hearing and Answer with respect to each
Order.
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 complaint, 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 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 complaint has been removed to federal court and
consolidated with the CERCLA action.
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 law
actions in which it alleges what it contends are releases by the Company
during its ownership and operation of the Albuquerque Terminal. The
Company has denied that it has had any releases that have contributed to
soil and groundwater contamination at the South Valley Superfund Site.
During the second quarter of 2001, the Court advised the Company that it
will be dismissed from the state law complaint, and the Company is waiting
for a written order to that effect. 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 consolidated lawsuit.
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 originally were 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 for this matter 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 received approval to conduct a pilot
bioventing project to address remaining contamination at the site, which
was completed on June 26, 2001, at a cost of approximately $15,000. Based
on the results of the pilot project, the Company will be submitting a
remediation plan to OCD that will propose the use of bioventing to address
remaining contamination. The Company anticipates that it would incur
approximately $150,000 in remediation expenses in connection with this
plan over a period of one to two years. If the Company's plan is not
approved, the Company cannot reasonably estimate remaining remediation
costs because, among other reasons, it does not know what remediation
technology would be approved by OCD for use at the site. 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 $55,000 remains.
At June 30, 2001, the Company had an environmental liability accrual
of approximately $2,100,000. 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.
NOTE 8 - SUBSEQUENT EVENT:
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. In July 2001, the Company repurchased the
remaining 59 service station/convenience stores for approximately
$38,100,000, which was the original selling price, plus closing costs. The
repurchase of these service station/convenience stores will reduce the
Company's lease expense by approximately $4,500,000 annually, while
depreciation expense will increase approximately $2,800,000 annually
because of the transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- ---------------------------------------------------------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------
Net revenues $ 281,158 $ 266,066 $ 532,370 $ 491,200
Cost of products sold 209,856 210,501 410,265 388,423
- ---------------------------------------------------------------------------------
Gross margin 71,302 55,565 122,105 102,777
Operating expenses 29,140 29,504 58,220 59,029
Depreciation and amortization 8,139 8,370 16,252 16,675
Selling, general and
administrative expenses 8,755 6,396 15,338 12,798
- ---------------------------------------------------------------------------------
Operating income 25,268 11,295 32,295 14,275
Interest expense, net 5,553 5,805 11,033 11,516
- ---------------------------------------------------------------------------------
Earnings before income taxes 19,715 5,490 21,262 2,759
Provision for income taxes 7,762 2,209 8,359 1,110
- ---------------------------------------------------------------------------------
Net earnings $ 11,953 $ 3,281 $ 12,903 $ 1,649
=================================================================================
Net earnings per common share:
Basic $ 1.33 $ 0.36 $ 1.44 $ 0.18
=================================================================================
Assuming dilution $ 1.33 $ 0.36 $ 1.44 $ 0.18
=================================================================================
Net revenues:(1)
Refining Group $ 140,766 $ 132,437 $ 251,956 $ 242,956
Retail Group 109,321 113,938 202,864 210,488
Phoenix Fuel 112,765 94,199 222,373 195,586
Other 77 71 149 169
Intersegment (81,771) (74,579) (144,972) (157,999)
- ---------------------------------------------------------------------------------
Consolidated $ 281,158 $ 266,066 $ 532,370 $ 491,200
=================================================================================
Income (loss) from operations:(1)
Refining Group $ 28,464 $ 14,116 $ 39,549 $ 20,743
Retail Group 2,285 2,244 1,784 1,086
Phoenix Fuel 1,757 634 3,225 2,668
Other (7,238) (5,699) (12,263) (10,222)
- ---------------------------------------------------------------------------------
Consolidated $ 25,268 $ 11,295 $ 32,295 $ 14,275
=================================================================================
(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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- ----------------------------------------------------------------------------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------------
REFINING GROUP OPERATING DATA:
Crude Oil/NGL Throughput (BPD) 35,398 37,203 34,413 35,873
Refinery Sourced Sales Barrels (BPD) 35,709 36,798 33,194 34,293
Average Crude Oil Costs ($/Bbl) $ 26.28 $ 27.86 $ 27.06 $ 27.60
Refining Margins ($/Bbl) $ 12.27 $ 7.63 $ 10.41 $ 7.04
RETAIL GROUP OPERATING DATA:
Fuel Gallons Sold (000's) 55,374 60,247 106,732 120,646
Fuel Margins ($/gal) $ 0.168 $ 0.177 $ 0.160 $ 0.157
Merchandise Sales ($ in 000's) $ 37,630 $ 36,509 $ 70,456 $ 66,009
Merchandise Margins 29.4% 29.0% 29.8% 29.2%
Number of Units at End of Period 168 180 168 180
PHOENIX FUEL OPERATING DATA:
Fuel Gallons Sold (000's) 104,229 107,389 209,149 202,899
Fuel Margins ($/gal) $ 0.053 $ 0.041 $ 0.051 $ 0.049
Lubricant Sales ($ in 000's) $ 5,422 $ 6,392 $ 10,475 $ 12,101
Lubricant Margins 18.8% 16.6% 18.5% 16.3%
In the second quarter of 2000, 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 June 30, 2001, operating income was
$25,268,000, an increase of $13,973,000 from $11,295,000 for the three
months ended June 30, 2000. The increase was primarily due to a 61%
increase in refinery margins, mainly due to higher selling prices and
lower crude oil costs; a 30% increase in Phoenix Fuel finished product
margins; and a 3% increase in retail merchandise sales with nominally
higher margins quarter-to-quarter. These increases were offset in part by
higher selling, general and administrative expenses ("SG&A"); a 3% 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 5% decline in retail fuel margins.
For the six months ended June 30, 2001, operating income was
$32,295,000, an increase of $18,020,000 from $14,275,000 for the six
months ended June 30, 2000. The increase was primarily due to a 48%
increase in refinery margins, for the same reasons discussed above, and a
7% increase in retail merchandise sales with nominally higher margins
year-to-year. These increases were offset in part by higher SG&A expenses
and a 3% decline in refinery sourced finished product sales volumes.
The increase in operating income for the three and six months ended
June 30, 2001, was primarily due to record refining margins. These record
refining margins have not continued into the third quarter of 2001. The
Company's future results of operations are primarily dependent on
producing or purchasing, and selling, sufficient quantities of refined
products at margins sufficient to cover fixed and variable expenses.
REVENUES
- --------
Revenues for the three months ended June 30, 2001, increased
approximately $15,092,000 or 6% to $281,158,000 from $266,066,000 in the
comparable 2000 period. The increase was due to, among other things, a 10%
increase in refinery weighted average selling prices; an 8% increase in
Phoenix Fuel weighted average selling prices; a 3% increase in retail
merchandise sales; and a 6% increase in retail refined products selling
prices. These increases were partially offset by a 3% decline in refinery
sourced finished product sales volumes and a 6% decrease in wholesale fuel
volumes sold by Phoenix Fuel to third party customers.
The volumes of refined products sold through the Company's retail
units decreased approximately 8% 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 6%. These
declines were due in part to increased price competition in the Company's
Phoenix and Tucson markets. In addition, the Company has closed or sold 14
service station/convenience stores and opened one store since the end of
the first quarter of 2000. Volumes sold from the Company's travel center
declined approximately 1%.
Revenues for the six months ended June 30, 2001, increased
approximately $41,170,000 or 8% to $532,370,000 from $491,200,000 in the
comparable 2000 period. The increase was due to, among other things, an 8%
increase in refinery weighted average selling prices; a 7% increase in
Phoenix Fuel weighted average selling prices; a 7% increase in retail
merchandise sales; and a 6% increase in retail refined products selling
prices. These increases were partially offset by a 3% decline in refinery
sourced finished product sales volumes and 1% decline in wholesale fuel
volumes sold by Phoenix Fuel to third party customers.
The volumes of refined products sold through the Company's retail
units decreased approximately 12% 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 9%. These
declines were due in part to increased price competition in the Company's
Phoenix and Tucson markets. In addition, the Company has closed or sold 21
service station/convenience stores and opened two stores since the
beginning of 2000. Volumes sold from the Company's travel center declined
approximately 7%.
COST OF PRODUCTS SOLD
- ---------------------
For the three months ended June 30, 2001, cost of products sold
decreased approximately $645,000 to $209,856,000 from $210,501,000 in the
comparable 2000 period. The decrease is due in part to a 6% decline in
refinery average crude oil costs, a 3% decline in refinery sourced
finished product sales volumes, and a 6% decrease in wholesale fuel
volumes sold by Phoenix Fuel to third party customers. These decreases
were partially offset by an 8% increase in the cost of finished products
purchased by Phoenix Fuel and a 3% increase in retail merchandise sales.
For the six months ended June 30, 2001, cost of products sold
increased approximately $21,842,000 or 6% to $410,265,000 from
$388,423,000 in the comparable 2000 period. The increase is due in part to
a 7% increase in the cost of finished products purchased by Phoenix Fuel
and a 7% increase in retail merchandise sales. These increases were
partially offset by a 3% decline in refinery sourced finished product
sales volumes, a 2% decline in refinery average crude oil costs, and a 1%
decline in wholesale fuel volumes sold by Phoenix Fuel to third party
customers.
OPERATING EXPENSES
- ------------------
For the three months ended June 30, 2001, operating expenses
decreased approximately $364,000 or 1% to $29,140,000 from $29,504,000 in
the comparable 2000 period. For the six months ended June 30, 2001,
operating expenses decreased approximately $809,000 or 1% to $58,220,000
from $59,029,000 in the comparable 2000 period. The decrease in each
period is due to, among other things, reduced expenses for payroll and
related costs, including operating bonuses, for retail operations, due in
part to the closure of twelve retail units in the first half of 2001; and
decreased payroll and related costs and repair and maintenance expenses
for Phoenix Fuel. These decreases were offset in part by higher contract
labor and material expenditures for the Company's refining operations.
DEPRECIATION AND AMORTIZATION
- -----------------------------
For the three months ended June 30, 2001, depreciation and
amortization decreased approximately $231,000 or 3% to $8,139,000 from
$8,370,000 in the comparable 2000 period. For the six months ended June
30, 2001, depreciation and amortization decreased approximately $423,000
or 3% to $16,252,000 from $16,675,000 in the comparable 2000 period. The
decrease in each period 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 and 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
For the three months ended June 30, 2001, SG&A expenses increased
approximately $2,359,000 or 37% to $8,755,000 from $6,396,000 in the
comparable 2000 period. For the six months ended June 30, 2001, SG&A
expenses increased approximately $2,540,000 or 20% to $15,338,000 from
$12,798,000 in the comparable 2000 period. The increase in each period is
primarily due to expense accruals for bonuses to be paid under the
Company's management incentive bonus plan if certain year-end profit
objectives are met and higher workers' compensation costs. Expenditures
incurred in each 2000 period included certain strategic planning costs
and, in addition, for the six month period, severance pay costs incurred
in the first quarter of 2000 relating to a reorganization and staff
reduction program.
INTEREST EXPENSE, NET
- ---------------------
For the three months ended June 30, 2001, net interest expense
(interest expense less interest income) decreased approximately $252,000
or 4% to $5,553,000 from $5,805,000 in the comparable 2000 period. For the
six months ended June 30, 2001, net interest expense decreased
approximately $483,000 or 4% to $11,033,000 from $11,516,000 in the
comparable 2000 period. The decrease in each period 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 and six months ended June 30,
2001 was approximately 39.3% and for the three and six months ended June
30, 2000 was approximately 40.2%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
- -------------------------
Operating cash flows increased for the six months ended June 30,
2001, compared to the six months ended June 30, 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 $41,767,000 for
the six months ended June 30, 2001, compared to $2,260,000 in the
comparable 2000 period.
WORKING CAPITAL
- ---------------
Working capital at June 30, 2001 consisted of current assets of
$178,581,000 and current liabilities of $98,818,000, or a current ratio of
1.81:1. 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 increased since December 31, 2000, primarily due
to an increase in cash and cash equivalents. This increase was offset in
part by a decrease in accounts receivable. Accounts receivable have
decreased primarily due to a reduction in Phoenix Fuel and refinery trade
receivable balances outstanding, although sales prices have increased. In
addition, there was a reduction in certain excise tax refunds receivable.
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; a reduction in finished product purchases for the Refinery
Group; and a decrease in crude oil acquisition costs. These decreases were
partially offset by an increase in Phoenix Fuel's trade payables. 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, a decrease in certain excise taxes
payable, and reduced payroll accruals. These decreases were offset in part
by accruals for 2001 management incentive and operating bonuses, Company
401(k) matching contributions, and ESOP contributions.
CAPITAL EXPENDITURES AND RESOURCES
- ----------------------------------
Net cash used in investing activities for the purchase of property,
plant and equipment totaled approximately $4,929,000 for the six months
ended June 30, 2001. Expenditures were primarily for operational and
environmental projects for the refineries and retail operation upgrades.
The Company has budgeted approximately $24,000,000 for capital
expenditures in 2001, excluding any potential acquisitions and the
Bloomfield contingent payment discussed below.
The Company received proceeds of approximately $521,000 from the sale
of property, plant and equipment in the first half of 2001. In addition,
the Company recorded the disposition of approximately $4,300,000 of fully
depreciated assets.
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 were considered additional purchase price, were
allocated to the appropriate assets and are being 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 Company's Board of Directors 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 June 30,
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. In July 2001, the Company repurchased the
remaining 59 service station/convenience stores for approximately
$38,100,000, which was the original selling price, plus closing costs. The
repurchase of these service station/convenience stores will reduce the
Company's lease expense by approximately $4,500,000 annually, while
depreciation expense will increase approximately $2,800,000 annually
because of the transaction.
In the first half of 2001, the Company closed 12 non-strategic or
underperforming retail 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
reacquired from FFCA. In the second quarter of 2001, the Company initiated
a program to determine the level of interest in the marketplace for
potential sale of the assets. The Company has received a number of
inquiries regarding the sale of some of the units and is in the process of
negotiating with a number of parties. 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 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 other non-strategic or
underperforming assets, in addition to the retail assets discussed above.
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 June 30, 2001 and December 31, 2000, the Company's long-term debt
was 64.7% 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 59.2% 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 June 30, 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
June 30, 2001, the availability of funds under the Credit Agreement was
$65,000,000. There were no direct borrowings outstanding under this
facility at June 30, 2001 or July 31, 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 June 30, 2001, this rate was approximately
5.75% 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 June 30, 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 with a new secured 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 half 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 suspended the payment of cash
dividends on common stock in the fourth quarter of 1998 and has no plans
to reinstate such dividends. The payment of future dividends is subject to
declaration by the Company's Board of Directors and compliance with
certain debt covenants.
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 Company had no open commodity futures or options contracts at
June 30, 2001.
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 June 30, 2001,
however, there were no direct borrowings outstanding under this Credit
Agreement.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133." There was no effect on the
Company's financial position, results of operations or cash flows as a
result of adopting SFAS No. 133.
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.
At June 30, 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
- -----
As previously discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, on September 17, 1998, the Company
loaned $4,000,000 to its Chairman and Chief Executive Officer ("CCEO").
The loan was originally evidenced by an unsecured promissory note bearing
interest at the prime rate published by the Wall Street Journal on
September 17, 1998 (the "Prime Rate") plus 2%. Principal and accrued
interest were due and payable in one lump sum on February 28, 1999. On
December 23, 1998, the Company and the CCEO entered into a revised loan
agreement. The amount of the loan was increased to $5,000,000, the loan's
interest rate was increased to the Prime Rate plus 3%, and the loan's
maturity date was extended to February 28, 2001. An initial interest
payment was made on February 28, 1999 for interest due through December
31, 1998. Subsequent interest was due and payable semi-annually on June 30
and December 31 of each year.
The loan was modified again on March 10, 2000. The terms of the loan
were revised so that all principal and interest, including interest that
otherwise would have been payable on December 31, 1999, became due and
payable on February 28, 2001. As security for the modified loan, the
Company received a pledge by an entity owned by the CCEO (the "LLC") of a
49% equity interest in an entity that owns certain real property in north
Scottsdale, Arizona (the "Real Property"). The loan was further modified
on February 28, 2001 to extend the loan's maturity date to March 28, 2001.
This modification reflected the fact that the Company's purchase of a
parcel of land from a trust of which the CCEO is the beneficiary had not
closed. A portion of the proceeds of this sale was to be used to pay the
interest that became due and payable under the loan on February 28, 2001.
On March 21, 2001, the Company's Board of Directors (the "Board") approved
an additional two-year extension of the loan's maturity date, making all
principal and interest due and payable on March 28, 2003. This extension
was conditioned upon, among other things, the CCEO's payment of all
interest due and payable on March 28, 2001, which was paid. In return for
the extension of the loan, the CCEO provided additional security for the
loan by pledging all of his equity interest in the LLC.
The Company is aware of prior liens on the Real Property and on
certain of the collateral pledged to the Company (the "Prior Liens") that
relate to loans entered into by the LLC (the "LLC Loans"). On July 18,
2001, the Board was advised that the LLC was not able to make the monthly
payments due and owing to its lenders (the "Lenders") in the month of
July. The Board was asked to make such payments, in the approximate amount
of $250,000, on behalf of the CCEO for the benefit of the LLC. The Board
authorized the Company to make the July payments in order to avoid a
default under the LLC Loans. Should the LLC not continue to service the
first lien holder debt when due, or should other adverse circumstances
arise, the Company's ability to recover all of the described amounts could
be adversely affected. Additionally, the Indenture supporting the
Company's senior subordinated notes due 2003, the Indenture supporting the
Company's senior subordinated notes due 2007, and the Company's
$65,000,000 secured Credit Agreement contain restrictive covenants that
may constrain the Company's ability to take certain actions absent a
waiver or other approval obtained in accordance with the terms of such
documents. Accordingly, it is possible that the Company will not be able
to recover all or any of the amounts due and owing from the CCEO. Should
any such amounts be deemed uncollectible in the future, it could have a
material adverse impact on the reporting period in which such amount was
deemed uncollectible. As of June 30, 2001, accrued interest outstanding on
the $5,000,000 loan was approximately $138,500.
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.
As previously discussed in the Company's Quarterly Report on Form
10-Q for the first quarter of 2001, the Company is pursuing claims against
the United States Defense Energy Support Center ("DESC"). On June 11,
2001, the Company filed claims against DESC in connection with jet fuel
that the Company sold to DESC from 1983 through 1994. The Company asserted
that the DESC underpaid for the jet fuel, 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.
As previously discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, and in the Company's Quarterly
Report on Form 10-Q for the first quarter of 2001, the Company has
received a Notice of Violation ("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. The Company understands that the allegations contained in the NOV
have been included in a Compliance Order for the Company's Bloomfield
Refinery, addressed below, which replaces the NOV.
On June 13, 2001, the Company received two Compliance Orders
("Orders") from the NMED in connection with alleged violations of air
regulations at the Company's Ciniza Refinery. The Orders allege violations
discovered during NMED inspections in 1999 and 2000. The civil penalties
assessed in connection with both Orders total approximately $200,000. The
NMED has represented that it is willing to settle both Orders for
$145,000. On July 13, 2001, the Company filed a Request for Hearing and
Answer with respect to each Order.
On June 14, 2001, the Company received two Orders from the NMED in
connection with alleged violations of air regulations at the Company's
Bloomfield Refinery. The Orders allege violations discovered during NMED
inspections in 1999 and 2000. The civil penalties assessed in connection
with both Orders total approximately $350,000. The NMED has represented
that it is willing to settle both Orders for $250,000. On July 13, 2001,
the Company filed a Request for Hearing and Answer with respect to each
Order.
As previously discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, and in the Company's Quarterly
Report on Form 10-Q for the first quarter of 2001, 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 complaint, 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 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 complaint has been removed to federal court and
consolidated with the CERCLA action.
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 law
actions in which it alleges what it contends are releases by the Company
during its ownership and operation of the Albuquerque Terminal. The
Company has denied that it has had any releases that have contributed to
soil and groundwater contamination at the South Valley Superfund Site.
During the second quarter of 2001, the Court advised the Company that it
will be dismissed from the state law complaint, and the Company is waiting
for a written order to that effect. 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 consolidated lawsuit.
As previously discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, and in the Company's Quarterly
Report on Form 10-Q for the first quarter of 2001, 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 received
approval to conduct a pilot bioventing project to address remaining
contamination at the site, which was completed on June 26, 2001, at a cost
of approximately $15,000. Based on the results of the pilot project, the
Company will be submitting a remediation plan to OCD that will propose the
use of bioventing to address remaining contamination. The Company
anticipates that it would incur approximately $150,000 in remediation
expenses in connection with this plan over a period of one to two years.
If the Company's plan is not approved, the Company cannot reasonably
estimate remaining remediation costs because, among other reasons, it does
not know what remediation technology would be approved by OCD for use at
the site. 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 $55,000 remains.
At June 30, 2001, the Company had an environmental liability accrual
of approximately $2,100,000. 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, and in the Company's Quarterly
Report on Form 10-Q for the first quarter of 2001, 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 the
remainder of 2001. During 2001, the Company has experienced lower than
anticipated receipts, at least in part as a result of the decreased
production discussed above, along with production facilities maintenance.
The Company has decreased production runs at its refineries from levels it
would otherwise schedule as a result of shortfalls in Four Corners crude
oil production and at this time anticipates that it will do so through
most of the remainder of the year. 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. In addition, the Company's future
results of operations are primarily dependent on producing or purchasing,
and selling, sufficient quantities of refined products at margins
sufficient to cover fixed and variable expenses.
As previously discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 and in the Company's Quarterly Report
on Form 10-Q for the first quarter of 2001, an existing NGLs pipeline
originating in Southeastern New Mexico was converted to a refined products
pipeline in late 1999, and delivers refined products into the Albuquerque,
New Mexico and the Four Corners areas. In the third quarter of 2001, the
pumping capacity of the pipeline is expected to be increased. 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 third quarter 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.
As previously discussed in the Company's Quarterly Report on Form
10-Q for the first quarter of 2001, 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 June 30, 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 consolidated lawsuit 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 maintain refining margins sufficient to cover fixed
and variable expenses; the risk that the CCEO will not be able to pay
amounts that become due and payable to the Company under the terms of the
Company's outstanding $5,000,000 loan to the CCEO; the risk that the LLC
will not be able to service the first lien holder debt when due; the risk
that adverse circumstances may occur that prevent the Company from
recovering amounts that relate to the $5,000,000 loan; the risk that the
Company will not be able to obtain replacement natural gas supplies on
terms favorable to the Company; the Company's ability to recover some or
all of the amounts specified in its claims against DESC; the risk that OCD
will not approve the Company's remediation plan to address remaining
contamination adjacent to the Tank that was located in Bloomfield, New
Mexico; 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 Statements 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K. There were no reports filed on Form 8-K for the
quarter ended June 30, 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 June 30, 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
(Principal Accounting Officer)
Date: August 9, 2001