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 September 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 October 31, 2001: 8,553,879 shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2001
(Unaudited) and December 31, 2000
Condensed Consolidated Statements of Earnings for the Three and
Nine Months Ended September 30, 2001 and 2000 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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)
SEPTEMBER 30, DECEMBER 31,
- -----------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 17,821 $ 26,618
Receivables, net 58,410 75,547
Inventories 57,995 56,607
Prepaid expenses and other 2,624 3,659
Deferred income taxes 2,753 2,753
- -----------------------------------------------------------------------------
Total current assets 139,603 165,184
- -----------------------------------------------------------------------------
Property, plant and equipment 539,063 508,384
Less accumulated depreciation and amortization (205,109) (192,234)
- -----------------------------------------------------------------------------
333,954 316,150
- -----------------------------------------------------------------------------
Goodwill, net 20,004 20,806
Other assets 31,560 26,425
- -----------------------------------------------------------------------------
$ 525,121 $ 528,565
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 143 $ 213
Accounts payable 52,155 66,461
Accrued expenses 34,384 44,016
- -----------------------------------------------------------------------------
Total current liabilities 86,682 110,690
- -----------------------------------------------------------------------------
Long-term debt, net of current portion 257,160 258,009
Deferred income taxes 33,785 27,621
Other liabilities and deferred income 1,906 4,542
Commitments and contingencies (Notes 7 and 8)
Common stockholders' equity 145,588 127,703
- -----------------------------------------------------------------------------
$ 525,121 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------
Net revenues $ 241,228 $ 301,213 $ 773,598 $ 792,413
Cost of products sold 181,667 240,792 591,932 629,215
- -----------------------------------------------------------------------------------
Gross margin 59,561 60,421 181,666 163,198
Operating expenses 28,124 30,510 85,862 89,539
Depreciation and amortization 8,608 8,650 24,860 25,325
Selling, general and
administrative expenses 7,659 7,202 22,997 20,000
Loss on asset write-offs/write-downs 1,301 - 1,783 -
- -----------------------------------------------------------------------------------
Operating income 13,869 14,059 46,164 28,334
Interest expense, net 5,665 5,603 16,698 17,119
- -----------------------------------------------------------------------------------
Earnings before income taxes 8,204 8,456 29,466 11,215
Provision for income taxes 3,069 3,441 11,428 4,551
- -----------------------------------------------------------------------------------
Net earnings $ 5,135 $ 5,015 $ 18,038 $ 6,664
===================================================================================
Net earnings per common share:
Basic $ 0.57 $ 0.55 $ 2.01 $ 0.72
===================================================================================
Assuming dilution $ 0.57 $ 0.55 $ 2.01 $ 0.72
===================================================================================
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
- -----------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 18,038 $ 6,664
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 24,860 25,325
Deferred income taxes 6,164 1,359
Loss on write-off/write-down of assets 1,783 -
Other 1,237 387
Changes in operating assets and liabilities:
Decrease (increase) in receivables 17,210 (5,360)
Increase in inventories (1,201) (6,601)
Decrease in prepaid expenses and other 1,035 1,269
(Decrease) increase in accounts payable (14,306) 8,556
Decrease in accrued expenses (4,155) (2,293)
- -----------------------------------------------------------------------------------
Net cash provided by operating activities 50,665 29,306
- -----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (48,144) (18,830)
Purchase of other assets (6,589) -
Refinery acquisition contingent payment (5,139) (5,442)
Proceeds from sale of property, plant and equipment 1,482 4,461
- -----------------------------------------------------------------------------------
Net cash used by investing activities (58,390) (19,811)
- -----------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of long-term debt - 68,000
Payments of long-term debt (919) (68,161)
Purchase of treasury stock (153) (11,670)
Proceeds from exercise of stock options - 109
- -----------------------------------------------------------------------------------
Net cash used by financing activities (1,072) (11,722)
- -----------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (8,797) (2,227)
Cash and cash equivalents:
Beginning of period 26,618 32,945
- -----------------------------------------------------------------------------------
End of period $ 17,821 $ 30,718
===================================================================================
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
("CCEO") as payment for the exercise by the CCEO of 126,601 common stock
options. These shares were immediately cancelled. In the third quarter of
2001, the Company repurchased, for cash, 59 service station/convenience
stores from FFCA Capital Holding Corporation ("FFCA") for approximately
$38,052,000 plus closing costs. These service station/convenience stores
had been sold to FFCA in a sale-leaseback transaction completed in
December 1998. Certain deferrals on the Balance Sheet relating to the
sale-leaseback transaction reduced the cost basis of the assets recorded
in "Property, Plant and Equipment" by approximately $1,736,000. These
deferrals included a deferred gain on the original sale to FFCA and
deferred lease allocations included in "Other Liabilities and Deferred
Income," and deferred costs associated with the original sale included in
"Other Assets."
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 nine months ended September 30, 2001 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. The accompanying 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." 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. There was no effect on the Company's financial position,
results of operations or cash flows as a result of adopting SFAS No. 133.
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.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This Statement requires, among other things, that
goodwill not be amortized, but be tested for impairment. The provisions of
the Statement apply to 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) must be reported as resulting from a change
in accounting principle.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of
lessees. As used in this Statement, a legal obligation is an obligation
that a party is required to settle as a result of an existing or enacted
law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Disclosure requirements include descriptions of asset
retirement obligations and reconciliations of changes in the components of
those obligations. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement defines an
impairment as "the condition that exists when the carrying amount of a
long-lived asset (asset group) is not recoverable and exceeds its fair
value." It develops a single accounting model for the disposal of long-
lived assets, whether previously held or newly acquired. This Statement
applies to recognized long-lived assets of an entity to be held and used
or to be disposed of, and applies to the entire group when a long-lived
asset is a part of the group. A group is defined as the lowest level of
operations with identifiable cash flows that are largely independent of
the cash flows of other assets and liabilities. The Statement identifies
the circumstances that apply when testing for recoverability, as well as
other potential adjustments or revisions relating to recoverability.
Specific guidance is provided for recognition and measurement and
reporting and disclosure for long-lived assets held and used, disposed of
other than by sale, and disposed of by sale. The Statement will be
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with
initial application as of the beginning of the fiscal year.
The Company is in the process of evaluating the effect that SFAS Nos.
141 through 144 will have on its financial position and results of
operations.
Certain reclassifications have been made to the 2000 financial
statements to conform to the statement classifications used in 2001. These
reclassifications had no effect on gross margin or net income.
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 operations consist primarily of
corporate staff operations, including selling, general and administrative
expenses.
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
September 30, 2001 and 2000, are presented below.
For the Three Months Ended September 30, 2001 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- -------- ----------- ------------
Customer net revenues:
Finished products $ 64,074 $ 59,437 $ 65,313 $ - $ - $188,824
Merchandise and lubricants - 38,858 6,724 - - 45,582
Other 1,161 4,962 642 57 - 6,822
-------- -------- -------- -------- ---------- --------
Total 65,235 103,257 72,679 57 - 241,228
-------- -------- -------- -------- ---------- --------
Intersegment net revenues:
Finished products 44,303 - 19,063 - (63,366) -
Other 5,212 - - - (5,212) -
-------- -------- -------- -------- ---------- --------
Total 49,515 - 19,063 - (68,578) -
-------- -------- -------- -------- ---------- --------
Total net revenues $114,750 $103,257 $ 91,742 $ 57 $ (68,578) $241,228
======== ======== ======== ======== ========== ========
Operating income (loss) $ 16,597 $ 2,657 $ 1,082 $ (6,467) $ - $ 13,869
Interest expense (6,026)
Interest income 361
--------
Earnings before income taxes $ 8,204
========
Depreciation and amortization $ 4,110 $ 3,325 $ 682 $ 491 $ - $ 8,608
Capital expenditures $ 4,015 $ 38,911 $ 204 $ 85 $ - $ 43,215
For the Three Months Ended September 30, 2000 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- -------- ----------- ------------
Customer net revenues:
Finished products $ 91,744 $ 65,579 $ 91,562 $ - $ - $248,885
Merchandise and lubricants - 38,689 6,695 - - 45,384
Other 2,456 3,622 743 123 - 6,944
-------- -------- -------- -------- ---------- --------
Total 94,200 107,890 99,000 123 - 301,213
-------- -------- -------- -------- ---------- --------
Intersegment net revenues:
Finished products 48,041 - 24,944 - (72,985) -
Other 3,772 - - - (3,772) -
-------- -------- -------- -------- ---------- --------
Total 51,813 - 24,944 - (76,757) -
-------- -------- -------- -------- ---------- --------
Total net revenues $146,013 $107,890 $123,944 $ 123 $ (76,757) $301,213
======== ======== ======== ======== ========== ========
Operating income (loss) $ 14,693 $ 694 $ 3,423 $ (4,751) $ - $ 14,059
Interest expense (6,178)
Interest income 575
--------
Earnings before income taxes $ 8,456
========
Depreciation and amortization $ 4,523 $ 2,921 $ 649 $ 557 $ - $ 8,650
Capital expenditures $ 1,770 $ 3,574 $ 228 $ 563 $ - $ 6,135
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals for the nine months ended
September 30, 2001 and 2000, are presented below.
As of and for the Nine Months Ended September 30, 2001 (In thousands)
---------------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- -------- ----------- ------------
Customer net revenues:
Finished products $211,843 $183,615 $228,073 $ - $ - $623,531
Merchandise and lubricants - 109,314 18,392 - - 127,706
Other 6,966 13,192 1,997 206 - 22,361
-------- -------- -------- -------- --------- --------
Total 218,809 306,121 248,462 206 - 773,598
-------- -------- -------- -------- --------- --------
Intersegment net revenues:
Finished products 135,517 - 65,653 - (201,170) -
Other 12,380 - - - (12,380) -
-------- -------- -------- -------- --------- --------
Total 147,897 - 65,653 - (213,550) -
-------- -------- -------- -------- --------- --------
Total net revenues $366,706 $306,121 $314,115 $ 206 $(213,550) $773,598
======== ======== ======== ======== ========= ========
Operating income (loss) $ 56,146 $ 4,441 $ 4,307 $(18,730) $ - $ 46,164
Interest expense (18,109)
Interest income 1,411
--------
Earnings before income taxes $ 29,466
========
Depreciation and amortization $ 12,070 $ 9,245 $ 2,011 $ 1,534 $ - $ 24,860
Total assets $229,385 $179,665 $ 76,967 $ 39,104 $ - $525,121
Capital expenditures $ 7,162 $ 39,844 $ 782 $ 356 $ - $ 48,144
For the Nine Months Ended September 30, 2000 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- -------- ----------- ------------
Customer net revenues:
Finished products $204,032 $202,034 $240,299 $ - $ - $646,365
Merchandise and lubricants - 104,698 20,041 - - 124,739
Other 6,913 11,646 2,458 292 - 21,309
-------- -------- -------- -------- --------- --------
Total 210,945 318,378 262,798 292 - 792,413
-------- -------- -------- -------- --------- --------
Intersegment net revenues:
Finished products 166,266 - 56,732 - (222,998) -
Other 11,758 - - - (11,758) -
-------- -------- -------- -------- --------- --------
Total 178,024 - 56,732 - (234,756) -
-------- -------- -------- -------- --------- --------
Total net revenues $388,969 $318,378 $319,530 $ 292 $(234,756) $792,413
======== ======== ======== ======== ========= ========
Operating income (loss) $ 35,436 $ 1,780 $ 6,091 $(14,973) $ - $ 28,334
Interest expense (18,433)
Interest income 1,314
--------
Earnings before income taxes $ 11,215
========
Depreciation and amortization $ 13,042 $ 8,557 $ 1,903 $ 1,823 $ - $ 25,325
Capital expenditures $ 4,890 $ 12,205 $ 1,150 $ 585 $ - $ 18,830
NOTE 3 - ACQUISITIONS AND ASSET WRITE-OFFS/WRITE-DOWNS
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 these service
station/convenience stores. In the second quarter of 2001, FFCA approached
the Company to determine whether the Company had any interest in acquiring
the remaining 59 service station/convenience stores. Subsequently, in July
2001, the Company repurchased, for cash, the 59 service
station/convenience stores for approximately $38,052,000, which was the
original selling price, plus closing costs. Certain deferrals on the
Balance Sheet relating to the sale-leaseback transaction reduced the cost
basis of the assets recorded in "Property, Plant and Equipment" by
approximately $1,736,000. These deferrals included a deferred gain on the
original sale to FFCA and deferred lease allocations included in "Other
Liabilities and Deferred Income," and deferred costs associated with the
original sale included in "Other Assets." 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 third quarter of 2001, the Company reclassified 10 retail
service station/convenience stores with a net book value of approximately
$2,186,000 from "Property, Plant and Equipment" to "Other Assets" as
assets held for sale. These retail units had been closed during 2001 and
are actively being marketed for sale. The units were tested for impairment
in accordance with SFAS No. 121 and three units were subsequently written
down in the third quarter by $530,000. In addition, three other retail
units were closed in the second and third quarters and write-downs of
approximately $741,000 were recorded in the third quarter. The Company is
in the process of trying to lease two of these units and the third unit
was returned to the lessor. The two units the Company is trying to lease
were written down in accordance with SFAS No. 121. The net book value of
the leasehold improvements were written off in connection with the unit
returned to the lessor.
The Company also has recorded the retirement of certain property,
plant and equipment with a net book value of approximately $409,000. The
Company recorded a loss for that amount in the second and third quarters.
NOTE 4 - 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 September 30,
-------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Earnings per common
share - basic:
Net earnings $ 5,135,000 8,964,551 $0.57 $5,015,000 9,086,099 $0.55
Effect of dilutive
stock options - 13,446 - - 4,344 -
----------- --------- ----- ---------- --------- -----
Earnings per common
share - assuming dilution:
Net earnings $ 5,135,000 8,977,997 $0.57 $5,015,000 9,090,443 $0.55
=========== ========= ===== ========== ========= =====
Nine Months Ended September 30,
-------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Earnings per common
share - basic:
Net earnings $18,038,000 8,956,808 $2.01 $6,664,000 9,293,503 $0.72
Effect of dilutive
stock options - 13,721 - - 10,608 -
----------- --------- ----- ---------- --------- -----
Earnings per common
share - assuming dilution:
Net earnings $18,038,000 8,970,529 $2.01 $6,664,000 9,304,111 $0.72
=========== ========= ===== ========== ========= =====
In October 2001, the Company's Board of Directors (the "Board")
directed the Company to purchase 400,000 shares of its common stock under
its stock repurchase program from the CCEO for $3,520,000 or $8.80 per
share. This was the closing price of the Company's common stock on the
date that the conditions to purchase set by the Board were satisfied,
including the receipt of necessary bank waivers and consents.
At September 30 and October 31, 2001, there were 8,953,879 and
8,553,879 shares, respectively, of the Company's common stock outstanding.
There were no transactions subsequent to September 30, 2001, other than
the transaction described above, that if the transactions had occurred
before September 30, 2001, would materially change the number of common
shares or potential common shares outstanding as of September 30, 2001.
NOTE 5 - RELATED PARTY TRANSACTIONS:
As discussed in Note 4, during October 2001 the Company purchased
400,000 shares of its common stock under its stock repurchase program from
the CCEO.
As previously disclosed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, on January 25, 2001, the Board
accepted an offer from the 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 for the lesser of $5,000,000 or the Jomax Property's appraised
value. In March 2001, the Jomax Property was sold to the Company for
$5,000,000. The trust had 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 or the property's appraised value. The
trust also had 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. On September 20, 2001, the Board
directed the Company to purchase the trust's option and right of first
refusal (collectively, the "Rights") for $600,000, and the Rights were
subsequently sold to the Company for this price. At the time of the sale,
the Company was negotiating with a potential purchaser for the sale of the
Jomax Property for a price in excess of the Company's purchase price. The
potential purchaser was requiring the Company to represent in the purchase
and sale agreement that there were no effective options to purchase, or
rights of first refusal, affecting the property. The Company's purchase of
the Rights would have enabled the Company to make this representation and
would have avoided any other complications associated with the Rights that
potentially could have affected the sale. The potential purchaser
subsequently advised the Company that it was discontinuing negotiations
regarding the possible sale for the present time because general market
and economic conditions, coupled with the financial uncertainties arising
out of the terrorist attack on the World Trade Center and other terrorist
activities that occurred on September 11, 2001, had severely depressed the
real estate market. The potential purchaser has indicated that it may
reapproach the Company early next year regarding the possible purchase of
the property.
In the third quarter of 2001, the Board directed the transfer to the
CCEO of a life insurance policy on his life with a cash value of
approximately $251,000. This policy and life insurance policies for
another executive had been issued prior to the Company's going public in
1989. In connection with its determination that the policy should be
transferred to the CCEO, the Board considered historical information and
other relevant matters relating to the policy, including the fact that
several life insurance policies on the other executive's life had
previously been transferred to that executive. It is anticipated that the
cash value of the life insurance policy will be considered compensation to
the CCEO for tax purposes. The $251,000 cash value recorded on the
Company's books was expensed by the Company in the third quarter and is
included in selling, general and administrative expenses ("SG&A").
In the third quarter of 2001, the CCEO submitted statements to the
Company for reimbursement of certain expenditures made by the CCEO on
behalf of the Company in the current year and prior years for which the
CCEO had not previously been reimbursed. In August 2001, the Company
reimbursed the CCEO approximately $204,000 in connection with such
statements. It is anticipated that a substantial portion of such amount
will be considered compensation to the CCEO for tax purposes. The $204,000
was expensed by the Company in the third quarter and is included in SG&A.
In the third quarter of 2001, the Company expensed a payment of
approximately $250,000 made on behalf of the Company's CCEO. This payment
was previously discussed in the Company's Form 10-Q for the quarterly
period ended June 30, 2001, and is included in SG&A.
NOTE 6 - INVENTORIES:
SEPTEMBER 30, DECEMBER 31,
- ----------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
- ----------------------------------------------------------------------
First-in, first-out ("FIFO") method:
Crude oil $ 9,439 $ 17,420
Refined products 29,914 24,679
Refinery and shop supplies 9,555 10,829
Merchandise 4,679 3,882
Retail method:
Merchandise 8,457 8,737
- ----------------------------------------------------------------------
Subtotal 62,044 65,547
Allowance for last-in,
first-out ("LIFO") method (4,049) (8,940)
- ----------------------------------------------------------------------
Total $ 57,995 $ 56,607
======================================================================
The portion of inventories valued on a LIFO basis totaled $27,149,000
and $28,319,000 at September 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 September
30, 2001 and 2000, net earnings and diluted earnings per share for the
three months ended September 30, 2001 and 2000, would have been (lower)
higher by $(791,000) and $(0.09), and $1,767,000 and $0.19, respectively,
and net earnings and diluted earnings per share for the nine months ended
September 30, 2001 and 2000 would have been (lower) higher by $(2,935,000)
and $(0.33), and $4,679,000 and $0.50, 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.
In the third quarter of 2001, certain higher cost refining LIFO
inventory layers were liquidated resulting in a reduction of earnings of
approximately $170,000 or $0.02 per share for the three and nine months
ended September 30, 2001.
NOTE 7 - 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.
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
September 30, 2001, the availability of funds under the Credit Agreement
was $65,000,000. There were no direct borrowings outstanding under this
facility at September 30, 2001 or October 31, 2001, and there were
approximately $2,750,000 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 September 30, 2001, this rate was
approximately 4.5% per annum. The Company is required to pay a quarterly
commitment fee ranging from 0.325% to 0.500% per annum of the unused
amount of the facility. The exact rate depends on meeting certain
conditions in the Credit Agreement.
The Credit Agreement contains certain restrictive covenants that
require the Company to, among other things, maintain a minimum
consolidated net worth, a minimum interest coverage ratio and a maximum
capitalization ratio. It also places limits on investments, dispositions
of assets, prepayments of senior subordinated debt, guarantees, liens and
restricted payments. The Credit Agreement is guaranteed by certain of the
Company's direct and indirect wholly-owned subsidiaries.
The Company is currently in discussions with its existing bank group
to replace the Credit Agreement with a new secured credit agreement. The
terms and conditions are expected to be similar to those in the current
Credit Agreement. The Company anticipates completing the new agreement by
the end of November 2001.
The Company also had approximately $7,103,000 of capital lease
obligations outstanding at September 30, 2001, which require annual lease
payments of approximately $798,000, 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 $7,103,000, of which
$2,000,000 has been paid in advance and is recorded in "Other Assets" in
the Company's Consolidated Balance Sheets.
NOTE 8 - 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 September 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 an 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.
In June 2001, the Company received four Compliance Orders ("Orders")
from the NMED in connection with alleged violations of air regulations at
the Company's Ciniza and Bloomfield refineries. The Orders allege
violations discovered during NMED inspections in 1999 and 2000. The civil
penalties assessed in connection with the Orders total approximately
$550,000. On July 13, 2001, the Company filed a Request for Hearing and
Answer with respect to each Order. The NMED subsequently reduced the civil
penalty assessments to approximately $360,000 and has represented that it
is willing to settle the alleged violations for $135,000. The Company is
engaged in settlement negotiations with NMED.
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 alleged 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 sought monetary damages under
CERCLA for all past, present and future damages to natural resources, plus
interest, costs and attorneys' fees. The State complaint contained 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 sought 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. After its
original filing, the State complaint was removed to federal court and
consolidated with the CERCLA action.
Although neither complaint stated 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 a motion for leave to
file an amended complaint in which it alleged what it contended were
releases by the Company during its ownership and operation of the
Albuquerque Terminal. The Company denied that it has had any releases that
have contributed to soil and groundwater contamination at the South Valley
Superfund Site. Subsequently, during the third quarter of 2001, the Court
ruled against the State's motion and further ruled that there was an
insufficient basis for the Company to be a party to the litigation.
Accordingly, the Company does not believe that it needs to record a
liability in connection with this matter.
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. Although the
Company was given reason to believe that a final remedy for the site would
be selected in 2000, that selection did not occur. The Company has been
advised that the site remedy may be announced in the near future. 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. Accordingly, the Company has not recorded 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 $150,000, 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
the Company believes 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 has submitted a remediation plan to OCD that proposes
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 $43,000 remains.
At September 30, 2001, the Company had an environmental liability
accrual of approximately $2,400,000. This accrual is for, among other
things, 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, (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, and (vi) certain well closures at the Ciniza
refinery. The environmental accrual is recorded in the current and long-
term sections of the Company's Consolidated Balance Sheets.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------
Net revenues $ 241,228 $ 301,213 $ 773,598 $ 792,413
Cost of products sold 181,667 240,792 591,932 629,215
- ---------------------------------------------------------------------------------
Gross margin 59,561 60,421 181,666 163,198
Operating expenses 28,124 30,510 85,862 89,539
Depreciation and amortization 8,608 8,650 24,860 25,325
Selling, general and
administrative expenses 7,659 7,202 22,997 20,000
Loss on asset write-offs/write-downs 1,301 - 1,783 -
- ---------------------------------------------------------------------------------
Operating income 13,869 14,059 46,164 28,334
Interest expense, net 5,665 5,603 16,698 17,119
- ---------------------------------------------------------------------------------
Earnings before income taxes 8,204 8,456 29,466 11,215
Provision for income taxes 3,069 3,441 11,428 4,551
- ---------------------------------------------------------------------------------
Net earnings $ 5,135 $ 5,015 $ 18,038 $ 6,664
=================================================================================
Net earnings per common share:
Basic $ 0.57 $ 0.55 $ 2.01 $ 0.72
=================================================================================
Assuming dilution $ 0.57 $ 0.55 $ 2.01 $ 0.72
=================================================================================
Net revenues:(1)
Refining Group $ 114,750 $ 146,013 $ 366,706 $ 388,969
Retail Group 103,257 107,890 306,121 318,378
Phoenix Fuel 91,742 123,944 314,115 319,530
Other 57 123 206 292
Intersegment (68,578) (76,757) (213,550) (234,756)
- ---------------------------------------------------------------------------------
Consolidated $ 241,228 $ 301,213 $ 773,598 $ 792,413
=================================================================================
Income (loss) from operations:(1)
Refining Group $ 16,597 $ 14,693 $ 56,146 $ 35,436
Retail Group 2,657 694 4,441 1,780
Phoenix Fuel 1,082 3,423 4,307 6,091
Other (6,467) (4,751) (18,730) (14,973)
- ---------------------------------------------------------------------------------
Consolidated $ 13,869 $ 14,059 $ 46,164 $ 28,334
=================================================================================
(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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------------
REFINING GROUP OPERATING DATA:
Crude Oil/NGL Throughput (BPD) 35,102 37,159 34,645 36,305
Refinery Sourced Sales Barrels (BPD) 32,830 36,890 33,071 35,165
Average Crude Oil Costs ($/Bbl) $ 25.19 $ 30.45 $ 26.44 $ 28.56
Refining Margins ($/Bbl) $ 9.45 $ 7.96 $ 10.09 $ 7.36
RETAIL GROUP OPERATING DATA:
Fuel Gallons Sold (000's) 54,591 60,165 161,323 180,811
Fuel Margins ($/gal) $ 0.177 $ 0.158 $ 0.166 $ 0.157
Merchandise Sales ($ in 000's) $ 38,858 $ 38,689 $109,314 $104,698
Merchandise Margins 27.9% 28.8% 29.1% 29.1%
Number of Units at End of Period 165 180 165 180
PHOENIX FUEL OPERATING DATA:
Fuel Gallons Sold (000's) 91,794 115,907 300,943 318,806
Fuel Margins ($/gal) $ 0.054 $ 0.063 $ 0.052 $ 0.054
Lubricant Sales ($ in 000's) $ 6,217 $ 6,117 $ 16,692 $ 18,218
Lubricant Margins 15.8% 14.8% 17.5% 15.8%
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 September 30, 2001, operating income was
$13,869,000, a decrease of $190,000 from $14,059,000 for the three months
ended September 30, 2000. The decrease was primarily due to an 11% decline
in refinery sourced finished product sales volumes, due in part to reduced
crude oil production and competitive conditions in the Four Corners area;
a 21% decrease in Phoenix Fuel finished product sales volumes, due in part
to a slowdown in the commercial/industrial sector in the State of Arizona
and increased sales volumes in the third quarter of 2000 related to
increased diesel demand because of disruptions of natural gas supplies
into Arizona; a 14% decline in Phoenix Fuel finished product margins; a
$1,301,000 loss on the write-off/write-down of certain Refinery Group and
Retail Group assets; and higher selling, general and administrative
expenses ("SG&A"). These decreases were offset in part by a 19% increase
in refinery margins; lower operating expenses; and a 12% increase in
retail fuel margins.
For the nine months ended September 30, 2001, operating income was
$46,164,000, an increase of $17,830,000 from $28,334,000 for the nine
months ended September 30, 2000. The increase was primarily due to a 37%
increase in refinery margins; a decline in operating expenses; and a 4%
increase in retail merchandise sales with relatively flat margins year-
to-year. These increases were offset in part by a 6% decline in refinery
sourced finished product sales volumes; higher SG&A expenses; a 6%
decrease in Phoenix Fuel finished product sales volumes, due in part to
the factors stated above, along with a 4% decline in related fuel margins;
and a $1,783,000 loss on the write-off/write-down of certain Refinery
Group and Retail Group assets.
Higher refining margins had a significant impact on operating income
for the three and nine months ended September 30, 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 September 30, 2001, decreased
approximately $59,985,000 or 20% to $241,228,000 from $301,213,000 in the
comparable 2000 period. The decrease was due to, among other things, a 23%
decline in wholesale fuel volumes sold by Phoenix Fuel to third party
customers, along with a 6% decrease in Phoenix Fuel weighted average
selling prices; a 13% decrease in refinery weighted average selling
prices, along with an 11% decline in refinery sourced finished product
sales volumes; and a 5% decline in retail refined products selling prices.
The volumes of refined products sold through the Company's retail
units decreased approximately 9% 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 primarily due to increased price competition in the
Company's Phoenix and Tucson markets. In addition, the Company has closed
or sold 17 service station/convenience stores and opened one store since
the end of the second quarter of 2000. Volumes sold from the Company's
travel center declined approximately 5%.
Revenues for the nine months ended September 30, 2001, decreased
approximately $18,815,000 or 2% to $773,598,000 from $792,413,000 in the
comparable 2000 period. The decrease was due to, among other things, a 9%
decline in wholesale fuel volumes sold by Phoenix Fuel to third party
customers and a 6% decline in refinery sourced finished product sales
volumes. These decreases were partially offset by a 1% increase in Phoenix
Fuel weighted average selling prices, a 4% increase in retail merchandise
sales, and a 2% increase in retail refined products selling prices.
The volumes of refined products sold through the Company's retail
units decreased approximately 11% 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 8%. These
declines were in large part due to increased price competition in the
Company's Phoenix and Tucson markets. In addition, the Company has closed
or sold 25 service station/convenience stores and opened two stores since
the beginning of 2000. Volumes sold from the Company's travel center
declined approximately 6%.
COST OF PRODUCTS SOLD
- ---------------------
For the three months ended September 30, 2001, cost of products sold
decreased approximately $59,125,000 or 25% to $181,667,000 from
$240,792,000 in the comparable 2000 period. The decrease is due in part to
a 23% decline in wholesale fuel volumes sold by Phoenix Fuel to third
party customers, along with a 6% decrease in the cost of finished products
purchased by Phoenix Fuel; a 17% decline in refinery average crude oil
costs; and an 11% decline in refinery sourced finished product sales
volumes.
For the nine months ended September 30, 2001, cost of products sold
decreased approximately $37,283,000 or 6% to $591,932,000 from
$629,215,000 in the comparable 2000 period. The decrease is due in part to
a 7% decline in refinery average crude oil costs, a 9% decline in
wholesale fuel volumes sold by Phoenix Fuel to third party customers, and
a 6% decline in refinery sourced finished product sales volumes. These
decreases were partially offset by a 2% increase in the cost of finished
products purchased by Phoenix Fuel and a 4% increase in retail merchandise
sales.
OPERATING EXPENSES
- ------------------
For the three months ended September 30, 2001, operating expenses
decreased approximately $2,386,000 or 8% to $28,124,000 from $30,510,000
in the comparable 2000 period. For the nine months ended September 30,
2001, operating expenses decreased approximately $3,677,000 or 4% to
$85,862,000 from $89,539,000 in the comparable 2000 period. The decrease
in each period is due to, among other things, reduced expenses for payroll
and related costs for retail operations, including operating bonuses, due
in part to the closure of 15 retail units and sale of one other in the
first nine months of 2001; lower lease expense due to the repurchase of 59
service station/ convenience stores from FFCA Capital Holding Corporation
("FFCA") that had been sold as part of a sale-leaseback transaction
between the Company and FFCA in December 1998; and decreased payroll and
related costs and repair and maintenance expenses for Phoenix Fuel. These
decreases were offset in part by higher utility costs for both refining
and retail operations, along with higher contract labor and material
expenditures for the refining operations.
DEPRECIATION AND AMORTIZATION
- -----------------------------
For the three months ended September 30, 2001, depreciation and
amortization decreased approximately $42,000 or 0.5% to $8,608,000 from
$8,650,000 in the comparable 2000 period. For the nine months ended
September 30, 2001, depreciation and amortization decreased approximately
$465,000 or 2% to $24,860,000 from $25,325,000 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 the repurchase of 59 service station/
convenience stores from FFCA; 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 September 30, 2001, SG&A expenses
increased approximately $457,000 or 6% to $7,659,000 from $7,202,000 in
the comparable 2000 period. The increase is primarily due to certain
related party transactions discussed in more detail in Note 5 to the
Condensed Consolidated Financial Statements; accruals for certain
environmental costs; and higher payroll and related costs. These increases
were partially offset by lower self-funded group health insurance costs
due to improved claims experience and lower expense accruals for bonuses
under the Company's management incentive bonus plan.
For the nine months ended September 30, 2001, SG&A expenses increased
approximately $2,997,000 or 15% to $22,997,000 from $20,000,000 in the
comparable 2000 period. The increase 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; certain related party
transactions discussed in more detail in Note 5 to the Condensed
Consolidated Financial Statements; accruals for certain environmental
costs; and higher workers' compensation costs. These increases were offset
in part by lower self-funded group health insurance costs due to improved
claims experience, expenditures incurred in 2000 for certain strategic
planning costs, and 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 September 30, 2001, net interest expense
(interest expense less interest income) increased approximately $62,000 or
1% to $5,665,000 from $5,603,000 in the comparable 2000 period. For the
nine months ended September 30, 2001, net interest expense decreased
approximately $421,000 or 2% to $16,698,000 from $17,119,000 in the
comparable 2000 period. The increase for the three month period is
primarily due to a decrease in interest and investment income from the
investment of funds in short-term instruments. The decrease in the nine
month 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 rates for the three and nine months ended September
30, 2001 were approximately 37.4% and 38.8%, respectively, and for the
three and nine months ended September 30, 2000 were approximately 40.7%
and 40.6%, respectively. The difference in the rates between each of the
periods in the two years is related to certain fuel tax credits generated
in 2001.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
- -------------------------
Operating cash flows increased for the nine months ended September
30, 2001, compared to the nine months ended September 30, 2000, primarily
as a result of an increase in net earnings in 2001, along with an increase
in cash flows related to changes in operating assets and liabilities and
deferred taxes in each period. Net cash provided by operating activities
totaled $50,665,000 for the nine months ended September 30, 2001, compared
to $29,306,000 in the comparable 2000 period.
WORKING CAPITAL
- ---------------
Working capital at September 30, 2001 consisted of current assets of
$139,603,000 and current liabilities of $86,682,000, or a current ratio of
1.61:1. At December 31, 2000, the current ratio was 1.49:1 with current
assets of $165,184,000 and current liabilities of $110,690,000.
Current assets have decreased since December 31, 2000, primarily due
to a decrease in accounts receivable and cash and cash equivalents.
Accounts receivable have decreased primarily due to a reduction in Phoenix
Fuel and refinery trade receivable balances outstanding, due in part to a
decline in the volume and prices of finished products sold.
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. 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 and interest accruals. These decreases were
offset in part by accruals for 2001 management incentive and operating
bonuses, income and property taxes, 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, excluding the $38,052,000 repurchase of 59 service
station/convenience stores from FFCA, totaled approximately $10,092,000
for the nine months ended September 30, 2001. Expenditures were primarily
for operational and environmental projects for the refineries, retail
operation upgrades, and the acquisition of certain pipeline assets. The
Company has budgeted approximately $24,000,000 for capital expenditures in
2001, excluding any potential acquisitions, the FFCA repurchase and the
Bloomfield contingent payment discussed below. The Company expects to
spend approximately $12,800,000 for capital expenditures in the fourth
quarter, including expenditures for the major maintenance turnaround at
the Company's Bloomfield refinery discussed below.
The Company received proceeds of approximately $1,482,000 from the
sale of property, plant and equipment in the first nine months of 2001. In
addition, the Company recorded the retirement of certain property, plant,
and equipment with a net book value of approximately $409,000. The Company
recorded a loss for that amount in the second and third quarters.
In October 1995, the Company acquired 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 (the "Board")
accepted an offer from its Chairman and Chief Executive Officer ("CCEO"),
on behalf of a trust of which the CCEO is the beneficiary, to sell a
parcel of land (the "Jomax Property") to the Company for the lesser of
$5,000,000 or the Jomax Property's appraised value. In March 2001, the
Jomax Property was sold to the Company for $5,000,000. The trust had 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 had 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. On September 20, 2001, the Board directed the Company to
purchase the trust's option and right of first refusal (collectively, the
"Rights") for $600,000, and the Rights were subsequently sold to the
Company for this price. At the time of the sale, the Company was
negotiating with a potential purchaser for the sale of the Jomax Property
for a price in excess of the Company's purchase price. The potential
purchaser was requiring the Company to represent in the purchase and sale
agreement that there were no effective options to purchase, or rights of
first refusal, affecting the property. The Company's purchase of the
Rights would have enabled the Company to make this representation and
would have avoided any other complications associated with the Rights that
potentially could have affected the sale. The potential purchaser
subsequently advised the Company that it was discontinuing negotiations
regarding the possible sale for the present time because general market
and economic conditions, coupled with the financial uncertainties arising
out of the terrorist attack on the World Trade Center and other terrorist
activities that occurred on September 11, 2001, had severely depressed the
real estate market. The potential purchaser has indicated that it may
reapproach the Company early next year regarding the possible purchase of
the property. The property is recorded as assets held for sale in "Other
Assets" in the Company's Consolidated Balance Sheet at September 30, 2001.
In December 1998, the Company and 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 the
second quarter of 2001, FFCA approached the Company to determine whether
the Company had any interest in acquiring the remaining 59 service
station/convenience stores. Subsequently, in July 2001 the Company
repurchased, for cash, the 59 service station/convenience stores for
approximately $38,052,000, which was the original selling price, plus
closing costs. Certain deferrals on the Balance Sheet relating to the
sale-leaseback transaction reduced the cost basis of the assets recorded
in "Property, Plant and Equipment" by approximately $1,736,000. These
deferrals included a deferred gain on the original sale to FFCA and
deferred lease allocations included in "Other Liabilities and Deferred
Income," and deferred costs associated with the original sale included in
"Other Assets." 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 nine months of 2001, the Company closed 15 non-strategic
or underperforming retail units. Ten of these retail units are listed as
assets held for sale, the Company is in the process of trying to lease two
other units, two were returned to the lessors, and one was dismantled.
In March 2001, the Company completed an evaluation of its retail
assets. The Company identified approximately 60 retail units that were
non-strategic or are underperforming for possible sale, although the units
had positive cash flow in 2000. These 60 retail units included
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. Seven of the units on this list have subsequently been removed
due to improved performance. The Company has completed the sale of one
unit, 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. Since the
end of the third quarter, three of these units were closed. It is possible
that other units may be closed by the Company prior to sale depending upon
operating performance. 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 and the satisfactory completion of due diligence by
the prospective purchasers.
In October 2001, the Company's Bloomfield refinery underwent a four-
year major maintenance turnaround. Maintenance was performed in all areas
of the refinery. The cost of the turnaround is expected to be
approximately $4,400,000. All of the refinery's operating units have been
returned to operation. The Company does not expect the turnaround to have
a material impact on fourth quarter refinery operating earnings.
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 September 30, 2001 and December 31, 2000, the Company's long-term
debt was 63.9% 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 62.2% 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.
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
September 30, 2001, the availability of funds under the Credit Agreement
was $65,000,000. There were no direct borrowings outstanding under this
facility at September 30, 2001 or October 31, 2001, and there were
approximately $2,750,000 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 September 30, 2001, this rate was
approximately 4.5% per annum. The Company is required to pay a quarterly
commitment fee ranging from 0.325% to 0.500% per annum of the unused
amount of the facility. The exact rate depends on meeting certain
conditions in the Credit Agreement.
The Credit Agreement contains certain restrictive covenants which
require the Company to, among other things, maintain a minimum
consolidated net worth, a minimum interest coverage ratio, and a maximum
capitalization ratio. It also places limits on investments, dispositions
of assets, prepayments of senior subordinated debt, guarantees, liens, and
restricted payments. The Credit Agreement is guaranteed by certain of the
Company's direct and indirect wholly-owned subsidiaries.
The Company is currently in discussions with its existing bank group
to replace the Credit Agreement with a new secured credit agreement. The
terms and conditions are expected to be similar to those in the current
Credit Agreement. The Company anticipates completing the new agreement by
the end of November 2001.
The Board 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. In the third quarter of 2001, the Company repurchased 17,300
shares of its common stock under this program. In addition to the
2,500,000 shares previously authorized, in October 2001 the Board directed
the Company to repurchase 400,000 shares of its common stock from its
Chairman and Chief Executive Officer for $3,520,000 or $8.80 per share.
This was the closing price of the Company's common stock on the date that
the conditions to purchase set by the Board were satisfied, including the
receipt of necessary bank waivers and consents. The Board directed the
Company to purchase these shares under the stock repurchase program. From
the inception of the stock repurchase program, the Company has repurchased
2,582,566 shares for approximately $25,716,000, resulting in a weighted
average cost of $9.96 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 including, among other things, for options,
bonuses, and other employee stock benefit plans. 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 Board suspended the payment of cash dividends on common stock in
the fourth quarter of 1998. At the present time, the Company has no plans
to reinstate such dividends. The payment of future dividends is subject to
declaration by the Company's Board 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
September 30, 2001.
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 September 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." 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. There was no effect on the Company's financial position,
results of operations or cash flows as a result of adopting SFAS No. 133.
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
- -----
During the third quarter, the Board unanimously approved the election
of George M. Rapport to the Board. Mr. Rapport, age 58, formerly served in
a number of capacities with Chase Manhattan Bank in the United States and
Europe during a career that spanned thirty-three years. He presently
serves as the Senior Vice President and Chief Financial Officer for Nimir
Petroleum Limited, a London-based, international oil and gas exploration
and production company. He also serves as a Trustee for the International
Center of Photography and for the VMI Foundation. In addition to serving
on the Board, Mr. Rapport will serve as the Chairman of the Board's Audit
Committee. Mr. Rapport's addition to the Board followed the third quarter
resignations of F. Michael Geddes and Michael H. K. Starr.
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. Material
developments have occurred in connection with the following health and
environmental matters that were previously discussed in either the
Company's Annual Report on Form 10-K for the year ended December 31, 2000,
or the Company's Quarterly Reports on Form 10-Q for the first and second
quarters of 2001, under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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. After its
original filing, the State complaint was 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 a motion for leave to
file an amended complaint in which it alleged what it contended were
releases by the Company during its ownership and operation of the
Albuquerque Terminal. The Company denied that it has had any releases that
have contributed to soil and groundwater contamination at the South Valley
Superfund Site. Subsequently, during the third quarter of 2001, the Court
ruled against the State's motion and further ruled that there was an
insufficient basis for the Company to be a party to the litigation.
Accordingly, the Company does not believe that it needs to record a
liability in connection with this matter.
At September 30, 2001, the Company had an environmental liability
accrual of approximately $2,400,000. This accrual is for, among other
things, 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, (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, and (vi) certain well closures at the Ciniza
refinery. The environmental accrual is recorded in the current and long-
term sections of the Company's Consolidated Balance Sheets.
Rules and regulations implementing federal, state and local laws
relating to health and the environment will continue to affect the
operations of the Company. The Company cannot predict what health or
environmental legislation or regulations will be enacted or become
effective in the future or how existing or future laws or regulations will
be administered or enforced with respect to products or activities of the
Company. Compliance with more stringent laws or regulations, as well as
more vigorous enforcement policies of the regulatory agencies, could have
an adverse effect on the financial position and the results of operations
of the Company and could require substantial expenditures by the Company
for: (i) the installation and operation of refinery equipment, pollution
control systems and other equipment not currently possessed by the
Company, (ii) the acquisition or modification of permits applicable to
Company activities, and (iii) the initiation or modification of cleanup
activities.
The Company'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 anticipates that it will do so through 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, potential third
party exploration and production activities 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.
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. Transportation of diesel fuel to a terminal near Albuquerque
associated with this project began in the latter part of 2000. An
expansion of the pumping capacity of the pipeline and the terminal near
Albuquerque to include gasoline and jet fuel is being undertaken. Gasoline
and jet fuel deliveries into the expanded terminal are expected to begin
in the fourth 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.
The Company had certain natural gas contracts for the purchase of
fuel used in operating the Company's refineries that expired at the end of
October 2001. In the third quarter of 2001, the Company entered into a
contract for the purchase of natural gas for a one year period beginning
November 1, 2001. Purchases during the first six months are at a fixed
price that will result in an increase in natural gas costs for the six
months of approximately $415,000 over the previous fixed contract rate.
Purchases during the second six months are at a rate tied to a market
index.
"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 matters; 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 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; risks
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, and its Quarterly Reports on Form 10-Q for the first
and second quarters of 2001; 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 8 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:
10.1 - Rights Purchase Agreement, dated September 20, 2001, by and
between Giant Industries Arizona, Inc. and James E. Acridge, Trustee
for and on behalf of the Acridge Family Trust.
10.2 - Other Arrangements.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K for the
quarter ended September 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 September 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: November 13, 2001
37