FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______.
Commission File Number: 1-10398
GIANT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0642718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23733 North Scottsdale Road, Scottsdale, Arizona 85255
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(480) 585-8888
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of Common Shares outstanding at April 30, 2002: 8,571,779 shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets March 31, 2002 (Unaudited)
and December 31, 2001
Condensed Consolidated Statements of Earnings for the Three
Months Ended March 31, 2002 and 2001 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 and 2001 (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)
MARCH 31, DECEMBER 31,
- -----------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 9,730 $ 26,326
Receivables, net 51,539 43,530
Inventories 62,494 58,729
Prepaid expenses and other 2,955 3,661
Deferred income taxes 3,735 3,735
- -----------------------------------------------------------------------------------------
Total current assets 130,453 135,981
- -----------------------------------------------------------------------------------------
Property, plant and equipment 527,001 525,345
Less accumulated depreciation and amortization (209,602) (201,823)
- -----------------------------------------------------------------------------------------
317,399 323,522
- -----------------------------------------------------------------------------------------
Goodwill, net 19,815 19,815
Other assets 38,900 27,856
- -----------------------------------------------------------------------------------------
$ 506,567 $ 507,174
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 41 $ 45
Accounts payable 47,181 42,255
Accrued expenses 31,006 36,537
- -----------------------------------------------------------------------------------------
Total current liabilities 78,228 78,837
- -----------------------------------------------------------------------------------------
Long-term debt, net of current portion 256,741 256,749
Deferred income taxes 32,816 32,772
Other liabilities 2,249 2,406
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity:
Preferred stock, par value $.01 per share, 10,000,000
shares authorized, none issued
Common stock, par value $.01 per share, 50,000,000
shares authorized, 12,305,859 shares issued 123 123
Additional paid-in capital 73,589 73,589
Retained earnings 99,275 99,152
- -----------------------------------------------------------------------------------------
172,987 172,864
Less common stock in treasury - at cost, 3,751,980 shares (36,454) (36,454)
- -----------------------------------------------------------------------------------------
Total stockholders' equity 136,533 136,410
- -----------------------------------------------------------------------------------------
$ 506,567 $ 507,174
=========================================================================================
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 ENDED MARCH 31,
- -------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------
Net revenues $ 188,396 $ 251,212
Cost of products sold 141,839 200,502
- -------------------------------------------------------------------------
Gross margin 46,557 50,710
Operating expenses 26,411 28,848
Depreciation and amortization 8,771 8,113
Selling, general and administrative expenses 5,197 6,583
Loss on disposal/write-down of assets 30 139
- -------------------------------------------------------------------------
Operating income 6,148 7,027
Interest expense, net 5,939 5,480
- -------------------------------------------------------------------------
Earnings before income taxes 209 1,547
Provision for income taxes 86 597
- -------------------------------------------------------------------------
Net earnings $ 123 $ 950
=========================================================================
Net earnings per common share:
Basic $ 0.01 $ 0.11
=========================================================================
Assuming dilution $ 0.01 $ 0.11
=========================================================================
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
- -----------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 123 $ 950
Adjustments to reconcile net earnings to net
cash (used) provided by operating activities:
Depreciation and amortization 8,771 8,113
Deferred income taxes 44 318
Loss on the disposal/write-down of assets 30 139
Other 235 275
Changes in operating assets and liabilities:
(Increase) decrease in receivables (8,009) 15,181
Increase in inventories (3,759) (8,277)
Decrease in prepaid expenses and other 706 757
Increase (decrease) in accounts payable 4,926 (6,571)
Decrease in accrued expenses (5,629) (3,108)
- -----------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (2,562) 7,777
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Yorktown refinery acquisition deposit and costs (10,158) -
Purchases of property, plant and equipment (2,332) (2,222)
Refinery acquisition contingent payment - (5,139)
Purchase of other assets - (5,014)
Proceeds from sale of property, plant and equipment 32 201
- -----------------------------------------------------------------------------------------
Net cash used by investing activities (12,458) (12,174)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of long-term debt (12) (11)
Deferred financing costs (1,564) -
- -----------------------------------------------------------------------------------------
Net cash used by financing activities (1,576) (11)
- -----------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (16,596) (4,408)
Cash and cash equivalents:
Beginning of period 26,326 26,618
- -----------------------------------------------------------------------------------------
End of period $ 9,730 $ 22,210
=========================================================================================
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Giant Industries, Inc., a Delaware corporation (together with its
subsidiaries, "Giant" or the "Company"), through its wholly-owned
subsidiary Giant Industries Arizona, Inc. and its subsidiaries ("Giant
Arizona"), is engaged in the refining and marketing of petroleum products
in New Mexico, Arizona and Colorado, 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 a wholesale petroleum products distribution operation.
(See Note 2 for a further discussion of Company operations and Note 8 for
a discussion of the pending Yorktown refinery acquisition.)
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, hereafter referred to
as generally accepted accounting principles, for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. Operating results for the three months ended March 31, 2002 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. The enclosed financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
Effective for 2002, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142, among other things, specifies that goodwill and
certain intangible assets with indefinite lives no longer be amortized,
but instead be subject to periodic impairment testing. At March 31, 2002,
the Company determined that there was no impairment to its indefinite
lived intangible assets. These indefinite lived intangible assets will
continue to be evaluated for impairment as required by SFAS No. 142. As
required by SFAS No. 142, the transitional impairment test for goodwill
will be completed during the second quarter of 2002. At March 31, 2002 and
December 31, 2001, the Company had goodwill of $19,815,000, of which
$14,722,000 related to the acquisition of Phoenix Fuel and $4,891,000
related to various retail acquisitions.
Intangible assets with finite lives will continue to be amortized
over their respective useful lives and will be tested for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," more fully discussed below.
A summary of intangible assets at March 31, 2002 is presented below:
Gross Net
Carrying Accumulated Carrying
(In thousands) Value Amortization Value
-------- ------------ --------
Amortized intangible assets:
Rights-of-way $ 3,585 $ 2,254 $ 1,331
Contracts 3,971 3,387 584
------- ------- -------
7,556 5,641 1,915
------- ------- -------
Unamortized intangible assets:
Liquor licenses 7,303 - 7,303
------- ------- -------
Total intangible assets: $14,859 $ 5,641 $ 9,218
======= ======= =======
Intangible asset amortization expense for the three months ended
March 31, 2002 was $ 73,000. Estimated amortization expense for the five
succeeding fiscal years is as follows:
(In thousands)
----------------------------
2002 $ 291
2003 291
2004 291
2005 291
2006 288
The following sets forth a reconciliation of net income and earnings
per share information for the three months ended March 31, 2002 and 2001
adjusted for the non-amortization provisions of SFAS No. 142.
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2002 2001
-------- --------
Reported net earnings $ 123 $ 950
Add: Goodwill amortization, net of tax effect - 160
-------- --------
Adjusted net earnings $ 123 $ 1,110
======== ========
Basic earnings per share:
Reported net earnings $ 0.01 $ 0.11
Adjusted net earnings $ 0.01 $ 0.12
Diluted earnings per share:
Reported net earnings $ 0.01 $ 0.11
Adjusted net earnings $ 0.01 $ 0.12
Effective for 2002, the Company adopted 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." The Statement provides for 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
adoption of this new standard had no initial effect on the Company's
financial position and results of operations.
In June 2001, the Financial Accounting Standards Board ("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 reconciliation of changes in the components of
those obligations. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company has not
determined, but is in the process of evaluating, the effect SFAS No. 143
will have relative to its refining and marketing assets.
Certain reclassifications have been made to the 2001 financial
statements and notes to conform to the statement classifications used in
2002.
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 follows:
- Refining Group: The Refining Group owns and operates the Company's
two refineries, its crude oil gathering pipeline system, two finished
products distribution terminals, and a fleet of crude oil and finished
product truck transports. The Company's two refineries manufacture various
grades of gasoline, diesel 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 stations with
convenience stores or kiosks 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 Refining
Group or Phoenix Fuel supplies the petroleum fuels sold by the Retail
Group. General merchandise and food products are obtained from third party
suppliers.
- Phoenix Fuel: Phoenix Fuel is a wholesale petroleum products
distribution operation, which includes several lubricant and bulk
petroleum distribution plants, an unmanned fleet fueling ("cardlock")
operation, a bulk lubricant terminal facility, and a fleet of finished
product and lubricant delivery trucks. 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
reconciliation to consolidated totals are presented below.
As of and for the Three Months Ended March 31, 2002 (In thousands)
-----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
Customer net revenues:
Finished products $ 46,810 $ 39,419 $ 56,782 $ - $ - $143,011
Merchandise and lubricants - 32,837 5,968 - - 38,805
Other 1,843 3,959 728 50 - 6,580
-------- -------- -------- ------- -------- --------
Total 48,653 76,215 63,478 50 - 188,396
-------- -------- -------- ------- -------- --------
Intersegment net revenues:
Finished products 29,592 - 12,306 - (41,898) -
Other 4,473 - - - (4,473) -
-------- -------- -------- ------- -------- --------
Total 34,065 - 12,306 - (46,371) -
-------- -------- -------- ------- -------- --------
Total net revenues $ 82,718 $ 76,215 $ 75,784 $ 50 $(46,371) $188,396
======== ======== ======== ======= ======== ========
Operating income (loss) $ 9,059 $ (672) $ 1,473 $(3,682) $ (30) $ 6,148
Interest expense (6,003)
Interest income 64
--------
Earnings before income taxes $ 209
========
Depreciation and amortization $ 4,549 $ 3,200 $ 538 $ 484 $ - $ 8,771
Total assets $235,682 $155,653 $ 65,230 $50,002 $ - $506,567
Capital expenditures $ 890 $ 308 $ 216 $ 918 $ - $ 2,332
For the Three Months Ended March 31, 2001 (In thousands)
-----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
Customer net revenues:
Finished products $ 66,049 $ 56,621 $ 82,189 $ - $ - $204,859
Merchandise and lubricants - 32,826 5,658 - - 38,484
Other 2,953 4,096 748 72 - 7,869
-------- -------- -------- ------- -------- --------
Total 69,002 93,543 88,595 72 - 251,212
-------- -------- -------- ------- -------- --------
Intersegment net revenues:
Finished products 38,527 - 21,013 - (59,540) -
Other 3,661 - - - (3,661) -
-------- -------- -------- ------- -------- --------
Total 42,188 - 21,013 - (63,201) -
-------- -------- -------- ------- -------- --------
Total net revenues $111,190 $ 93,543 $109,608 $ 72 $(63,201) $251,212
======== ======== ======== ======= ======== ========
Operating income (loss) $ 11,085 $ (362) $ 1,468 $(5,025) (139) $ 7,027
Interest expense (6,043)
Interest income 563
--------
Earnings before income taxes $ 1,547
========
Depreciation and amortization $ 3,949 $ 2,986 $ 660 $ 518 $ - $ 8,113
Capital expenditures $ 1,396 $ 420 $ 299 $ 107 $ - $ 2,222
NOTE 3 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for net earnings:
Three Months Ended March 31,
-------------------------------------------------------------------
2002 2001
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Earnings per common
share - basic:
Net earnings $123,000 8,553,879 $0.01 $950,000 8,948,008 $0.11
Effect of dilutive
stock options 17,843 5,727
------- --------- ----- -------- --------- -----
Earnings per common
share - assuming dilution:
Net earnings $123,000 8,571,722 $0.01 $950,000 8,953,735 $0.11
======== ========= ===== ======== ========= =====
At March 31, 2002, there were 8,553,879 shares of the Company's
common stock outstanding. Except as set forth below, there were no
transactions subsequent to March 31, 2002, that if the transactions had
occurred before March 31, 2002, would materially change the number of
common shares or potential common shares outstanding as of March 31, 2002.
On April 29, 2002, 17,900 stock options granted May 1, 1992, were
exercised. These stock options were scheduled to expire on April 30, 2002.
NOTE 4 - INVENTORIES:
MARCH 31, DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
- --------------------------------------------------------------------------------
First-in, first-out ("FIFO") method:
Crude oil $ 12,824 $ 12,835
Refined products 25,756 21,982
Refinery and shop supplies 8,437 8,111
Merchandise 3,667 3,928
Retail method:
Merchandise 8,968 9,179
- --------------------------------------------------------------------------------
Subtotal 59,652 56,035
Adjustment for last-in, first-out ("LIFO") method 2,842 5,996
Allowance for lower of cost or market - (3,302)
- --------------------------------------------------------------------------------
Total $ 62,494 $ 58,729
================================================================================
The portion of inventories valued on a LIFO basis totaled $34,339,000
and $30,872,000 at March 31, 2002 and December 31, 2001, respectively. The
following data will facilitate comparison with the operating results of
companies using the FIFO method of inventory valuation.
If inventories had been determined using the FIFO method at March 31,
2002 and 2001, net earnings and diluted earnings per share for the three
months ended March 31, 2002 and 2001, would have been lower by $89,000 and
$0.01, and $1,801,000 and $0.20, respectively.
For interim reporting purposes, inventory increments expected to be
liquidated by year-end are valued at the most recent acquisition costs,
and inventory liquidations that are expected to be reinstated by year end
are ignored for LIFO inventory valuation calculations. The LIFO effects of
inventory increments not expected to be liquidated by year-end, and the
LIFO effects of inventory liquidations not expected to be reinstated by
year-end, are recorded in the period such increments and liquidations
occur.
NOTE 5 - 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 recently completed solicitation of consents from the
holders of its 9% Notes to amend the 9% Notes indenture to permit the
Company to refinance the 9 3/4% Notes prior to their maturity. The Company
is in the process of offering for sale $200,000,000 of 11% senior
subordinated notes due 2012 in a private placement transaction. See Note 8
for a more detailed discussion of these notes. The net proceeds of the
offering will be used to redeem all $100,000,000 principal amount of the 9
3/4% Notes and partially fund the Company's pending acquisition of the
Yorktown refinery and related transaction fees and expenses.
The Company has a $65,000,000 secured Credit Agreement (the "Credit
Agreement") with a group of banks that expires November 14, 2003. 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 also allows the Company to borrow up to $10,000,000 for other
acquisitions as defined in the Credit Agreement. The availability of funds
under this facility is the lesser of (i) $65,000,000, or (ii) the amount
determined under a borrowing base calculation tied to the eligible
accounts receivable and inventories. At March 31, 2002, the availability
of funds under the Credit Agreement was $65,000,000. There were no direct
borrowings outstanding under this facility at March 31, 2002, and there
were approximately $3,286,000 of irrevocable letters of credit
outstanding, primarily to insurance companies and regulatory agencies.
The interest rate applicable to the Credit Agreement is tied to
various short-term indices. At March 31, 2002, this rate was approximately
4% 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.
In connection with the acquisition of the Yorktown refinery, the
Company expects to replace the Credit Agreement with a new $100,000,000
senior secured revolving credit facility and borrow $40,000,000 under a
new senior secured mortgage loan facility. See Note 8 for a more detailed
discussion of these credit facilities.
The Company also had approximately $6,703,000 of capital lease
obligations outstanding at March 31, 2002, which require annual lease
payments of approximately $753,000, 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 five years for $6,703,000, of which
$2,000,000 has been paid in advance and is recorded in "Other Assets" in
the Company's Consolidated Balance Sheets.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
Various legal actions, claims, assessments and other contingencies
arising in the normal course of the Company's business, including those
matters described below, are pending against the Company and certain of
its subsidiaries. Certain of these matters involve or may involve
significant claims for compensatory, punitive or other damages. These
matters are subject to many uncertainties, and it is possible that some of
these matters could be ultimately decided, resolved or settled adversely.
The Company has recorded accruals for losses related to those matters that
it considers to be probable and that can be reasonably estimated. Although
the ultimate amount of liability at March 31, 2002, 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.
In June 2001, the New Mexico Environment Department ("NMED") issued
four compliance orders ("Orders") to the Company 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 proposed in connection
with the Orders originally totaled approximately $550,000. The Company
settled the alleged violations for $135,000 during the first quarter of
2002.
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's environmental reserve for this
matter is approximately $570,000.
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. While the Landfill was operational,
the Company used it to dispose of office trash, maintenance shop trash,
used tires and water from the Farmington refinery's evaporation pond.
The Landfill was added to the National Priorities List as a
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") Superfund site in 1990. In connection with this listing, the
Environmental Protection Agency ("EPA") defined the site as the Landfill
and the Landfill's associated groundwater plume. EPA excluded any releases
from the Farmington refinery itself from the definition of the site. In
May 1991, EPA notified the Company that it may be a potentially
responsible party under CERCLA for the release or threatened release of
hazardous substances, pollutants or contaminants at the Landfill.
BLM made a proposed plan of action for the Landfill available to the
public in 1996. Remediation alternatives examined by BLM in connection
with the development of its proposed plan ranged in projected cost from no
cost to approximately $14,500,000. BLM proposed the adoption of a remedial
action alternative that it believes would cost approximately $3,900,000 to
implement. BLM's $3,900,000 cost estimate is based on certain assumptions
that may or may not prove to be correct and is contingent on confirmation
that the remedial actions, once implemented, are adequately addressing
Landfill contamination. For example, if assumptions regarding groundwater
mobility and contamination levels are incorrect, BLM is proposing to take
additional remedial actions with an estimated cost of approximately
$1,800,000.
BLM has received public comment on its proposed plan. The final
remedy for the site, however, has not yet been selected. Although the
Company was given reason to believe that a final remedy would be selected
in 2001, that selection did not occur. The Company has been advised that
the site remedy may be announced in 2002. In 1989, a consultant to the
Company estimated, based on various assumptions, that the Company's share
of potential liability could be approximately $1,200,000. This figure was
based upon estimated Landfill remediation costs significantly higher than
those being proposed by BLM. The figure also was based on the consultant's
evaluation of such factors as available clean-up technology, BLM's
involvement at the site and the number of other entities that may have had
involvement at the site, but did not include an analysis of all of the
Company's potential legal defenses and arguments, including possible
setoff rights.
Potentially responsible party liability is joint and several, such
that a responsible party may be liable for all of the clean-up costs at a
site even though the party was responsible for only a small part of such
costs. Although it is possible that the Company may ultimately incur
liability for clean-up costs associated with the Landfill, a reasonable
estimate of the amount of this liability, if any, cannot be made at this
time because, among other reasons, the final site remedy has not been
selected, a number of entities had involvement at the site, allocation of
responsibility among potentially responsible parties has not yet been
made, and potentially applicable factual and legal issues have not been
resolved. Based on current information, the Company does not believe that
it needs to record a liability in relation to BLM's proposed plan.
BLM may assert claims against the Company and others for
reimbursement of investigative, cleanup and other costs incurred by BLM in
connection with the Landfill and surrounding areas. It is also 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. EPA has delegated its
oversight authority over the Order to NMED's Hazardous Waste Bureau
("HWB"). In 2000, OCD approved the groundwater discharge permit for the
refinery, which included an abatement plan that addressed the Company's
environmental obligations under the Order. The abatement plan reflects new
information relating to the site as well as remediation methods that were
not originally contemplated in connection with the Order. Discussions
between OCD, HWB and the Company have resulted in proposed revisions to
the abatement plan. Adoption of the abatement plan as the appropriate
corrective action remedy under the Order 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 request is not granted, the
Company estimates that remaining remediation expenses could range as high
as $800,000, after taking into account first quarter 2002 expenditures,
and could be as low as $600,000. The Company's environmental reserve for
this matter is approximately $800,000. If, as expected, the abatement plan
is approved as submitted, the Company anticipates that the reserve will be
reduced.
The Company has discovered hydrocarbon contamination adjacent to a
55,000 barrel crude oil storage tank (the "Tank") that was located in
Bloomfield, New Mexico. The Company believes that all or a portion of the
Tank and the 5.5 acres owned by the Company on which the Tank was located
may have been a part of a refinery, owned by various other parties, that,
to the Company's knowledge, ceased operations in the early 1960s. Based
upon a January 13, 2000 report filed with OCD, 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. In the course of conducting cleanup activities approved by OCD, it
was discovered that the extent of contamination was greater than
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 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, and the Company has created an environmental
reserve in this amount. 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.
As of March 31, 2002, the Company had an environmental liability
accrual of approximately $2,300,000. Approximately $1,500,000 of this
accrual is for the following previously discussed projects: (i) the
remediation of the hydrocarbon plume that appears to extend no more than
1,800 feet south of the Company's inactive Farmington refinery; (ii)
environmental obligations assumed in connection with the acquisition of
the Bloomfield Refinery; and (iii) hydrocarbon contamination on and
adjacent to the 5.5 acres that the Company owns in Bloomfield, New Mexico.
The remaining amount of the accrual relates to 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; closure of the Ciniza Refinery land treatment
facility including post-closure expenses; and certain other smaller
remediation projects. The environmental accrual is recorded in the current
and long-term sections of the Company's Condensed Consolidated Balance
Sheets.
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 Court
of Federal Claims, dealing with contract provisions similar to those
contained in the contracts that are the subject of the Company's claims.
On March 12, 2002, the DESC denied the Company's claims. The Company has
12 months to bring an action in the United States Court of Federal Claims
relating to the denied claims. The DESC has indicated that it will
counterclaim if the Company pursues its claims and will assert, based on
its interpretation of the contract provisions, that the Company may owe
additional amounts of approximately $4,900,000. The Company is evaluating
its options. Due to the preliminary nature of this matter, there can be no
assurance that the Company would ultimately prevail should it decide to
pursue its claims nor is it possible to predict when any payment would be
received if the Company were successful. Accordingly, the Company has not
recorded a receivable for this claim.
Giant Arizona leases approximately 8,176 square feet of space from a
limited liability company in which the Company's former Chairman and Chief
Executive Officer ("CCEO") owns a 51% interest. Pursuant to a sublease
between Giant Arizona and a separate limited liability company controlled
by its former CCEO, Giant Arizona subleases the space to such entity for
use as an inn. The initial term for each of the lease and the sublease is
for five years, terminating on June 30, 2003, with one option to renew for
an additional five years, and the annual rent under each currently is
$21.76 per square foot. The rent is subject to adjustment annually based
on changes in the Consumer Price Index. The sublease also provides that
the Company may terminate the sublease at any time upon 120 days prior
written notice. The owner of the 49% interest in the lessor has notified
Giant Arizona that the sublessee is delinquent on the payment of the rent
due, and on or about December 28, 2001, such owner filed a derivative
lawsuit for and on behalf of the lessor against Giant Arizona to collect
all amounts owing under the lease. The suit is for the recovery of rents
past due and owing in excess of $156,990 from August 1, 2000 through the
date of the complaint. The plaintiff claims that the amount owing
currently approximates $275,000, and amounts will continue to accrue at a
rate of approximately $22,000 per month plus interest. Pursuant to a
letter dated January 16, 2002, Giant Arizona made a formal demand on the
sublessee for the sublessee to pay all of the past due amounts. In
addition, Giant Arizona filed a motion to dismiss the lawsuit for failure
to comply with the express provisions of the Arizona derivative action
statute or, alternatively, to compel binding arbitration pursuant to the
terms of the lease. The court has ruled that the arbitration clause
applies, and has referred the dispute to the arbitrators.
NOTE 7 - OTHER:
In the first quarter of 2002, the Company revised its estimate for
accrued management incentive bonuses for the year ended December 31, 2001,
following the determination of bonuses to be paid to employees. This
resulted in an increase in net earnings for the first quarter of 2002 of
approximately $283,000 or $0.03 per share.
NOTE 8 - YORKTOWN REFINERY ACQUISITION
On February 8, 2002, the Company entered into a definitive agreement
with BP Corporation North America Inc. and BP Products North America Inc.
(collectively, "BP") to acquire the Yorktown refinery for $127,500,000,
plus the value of associated inventory at closing, estimated to be
approximately $53,200,000, the assumption of certain liabilities, and an
earn-out. Pursuant to the terms of the agreement, the Company paid a
$10,000,000 deposit to BP, which is refundable only in certain limited
circumstances. The acquisition is expected to close in May 2002.
As part of the Yorktown acquisition, the Company agreed to pay to BP,
beginning in 2003 and concluding at the end of 2005, earn-out payments up
to a maximum of $25,000,000 when the average monthly spreads for regular
reformulated gasoline or No. 2 distillate over West Texas Intermediate
("WTI") equivalent light crude oil on the New York Mercantile Exchange
(the "MERC Spreads") exceed $5.50 or $4.00 per barrel, respectively. The
MERC Spreads are correlated with historical Yorktown refinery margins. The
earn-out payment will equal the MERC Spreads multiplied by a fixed volume
of 10,000 bpd each (approximately one-third of capacity of the Yorktown
refinery). If the earn-out is triggered, the Company expects to benefit
from the improved margins on any volumes in excess of 10,000 bpd, provided
that the MERC Spreads are not excessively volatile. The average monthly
MERC spreads for March 2002 were $8.62 and $2.41 for reformulated gasoline
and No. 2 distillate, respectively.
The Company will assume certain liabilities and obligations in
connection with the Company's purchase of the Yorktown refinery. These
assumed liabilities include, subject to certain exceptions, all
obligations and liabilities under health, safety and environmental laws
caused by, arising from, incurred in connection with or relating in any
way to the ownership of the Yorktown refinery or its operation. The
Company has agreed to indemnify BP against losses of any kind incurred in
connection with or related to the liabilities and obligations the Company
has assumed. As described below, the Company only has limited
indemnification rights against BP.
In particular, the Company assumed BP's responsibilities and
liabilities under a consent decree, dated August 29, 2001, among the
United States, BP Exploration and Oil Co., Amoco Oil Company, and Atlantic
Richfield Company. The consent decree requires the Yorktown refinery,
among other things, to reduce NOx, SO2 and particulate matter emissions
and to upgrade the refinery's leak detection and repair program. The
Company estimates, and considered in its purchase price for the Yorktown
refinery, that the Company will incur capital expenditures of
approximately $20,000,000 to $27,000,000 to comply with the consent decree
over a period of approximately five years, although the Company believes
it will incur most of these expenditures in 2006. In addition, the Company
estimates that it will incur operating expenses associated with the
requirements of the consent decree of approximately $1,600,000 to
$2,600,000 per year.
BP has agreed to indemnify the Company for all losses that are
incurred by the Company and relating to (a) BP's breach or failure to
perform any covenant or agreement in the agreement, (b) BP's breach of a
representation or warranty in the agreement that survives the closing of
the Yorktown acquisition, (c) liabilities prior to the closing date for
litigation, personal injury or wrongful death claims, or (d) BP's failure
to comply with bulk sales laws. In order to have a claim against BP for
losses relating to any of these matters, the aggregate of all losses from
these matters must exceed $4,000,000. Losses amounting to less than
$250,000 in the aggregate arising out of the same occurrence or matter are
not aggregated with other losses for the purpose of reaching the
$4,000,000 threshold. After the threshold has been reached, BP has no
obligation to indemnify the Company with respect to such matters for any
losses amounting to less than $250,000 in the aggregate arising out of the
same occurrence or matter.
BP also has agreed to indemnify the Company for losses that are
incurred by the Company and relating to liabilities prior to the closing
date for taxes, including real property taxes, accounts payable,
indebtedness for borrowed money, violations of anti-trust laws,
environmental liabilities associated with off-site disposal, civil or
criminal penalties imposed upon BP or its affiliates by governmental
entities, expenses or brokerage fees related to the Yorktown acquisition
and the excluded assets. There is no threshold or minimum claim amount
that is required for the Company to seek a claim against BP for any of
these matters.
BP also has agreed to indemnify the Company for all losses that are
incurred by the Company in connection with or related in any way to
property damage caused by, or any environmental remediation required due
to, a violation of health, safety and environmental laws during the
operation of the refinery by BP ("Remediation Losses"). In order to have a
claim against BP, however, the aggregate of all Remediation Losses must
exceed $5,000,000, in which event the Company's claim only relates to the
amount exceeding $5,000,000 (the "First Threshold"). After the First
Threshold is reached, the Company's claim is limited to 50% of the amount
by which the Remediation Losses exceed the First Threshold until the
aggregate of all such losses exceeds $10,000,000 (the "Second Threshold").
After the Second Threshold is reached, the Company's claim would be for
100% of the amount by which the Remediation Losses exceed the Second
Threshold. In applying these provisions, Remediation Losses amounting to
less than $250,000 in the aggregate arising out of the same occurrence or
matter are not aggregated with any other Remediation Losses for purposes
of determining whether and when the First Threshold or Second Threshold
has been reached. After the First Threshold or Second Threshold has been
reached, BP has no obligation to indemnify the Company with respect to
such matters for any Remediation Losses amounting to less than $250,000 in
the aggregate arising out of the same occurrence or matter.
Except as specified, in order to seek indemnification from BP, the
Company must notify BP of a claim within two years following the closing
date. BP's aggregate liability for indemnification under the refinery
purchase agreement, including liability for environmental indemnification,
is limited to $35,000,000.
At the closing of the Yorktown acquisition, the Company expects to
enter into agreements that provide for 100% of the supply of crude oil to,
and 100% of the off-take (including propane and butane at prices based on
an index) of production from, the Yorktown refinery. The Company
anticipates these agreements will include: (a) transitional feedstock
supply agreements, with terms ranging from six months to one year, by
which BP will supply 100% of the refinery's crude oil and other raw
material needs; (b) a one-year contract with BP under which the Yorktown
refinery will continue to supply BP's branded product in the local area
and Salisbury, Maryland; (c) the assumption of existing contracts with
Exxon Mobil, Chevron, Citgo, Southern States, and Sunoco to supply them
product on a wholesale basis; and (d) transitional contracts, with terms
ranging from six months to one year, requiring BP to purchase the balance
of production from the Yorktown refinery, estimated to be 33,400 bpd.
Given market dynamics and conversations the Company has had with current
and potential new customers, the Company believes there is sufficient
demand to purchase all of the Yorktown refinery's production once the
transitional off-take agreements have expired.
The Company intends to finance the acquisition of the Yorktown
refinery with a combination of debt and cash on hand. The debt financing
is anticipated to consist of borrowings under: (i) a new $100,000,000
senior secured revolving credit facility; (ii) a new $40,000,000 senior
secured mortgage loan facility; and (iii) part of the proceeds from the
issuance of $200,000,000 of 11% senior subordinated notes due 2012. The
Company anticipates that transaction fees and expenses associated with the
Yorktown refinery acquisition and the related financing transactions will
be approximately $15,000,000.
New Senior Secured Revolving Credit Facility
- --------------------------------------------
In connection with the Yorktown acquisition, the Company expects to
enter into a $100,000,000 senior secured revolving credit facility
provided by a syndicate of lenders led by Bank of America, N.A., an
affiliate of Banc of America Securities LLC. The new senior secured
revolving credit facility would replace the Company's current $65,000,000
amended and restated credit agreement. The Company's obligations under the
new senior secured revolving credit facility will be guaranteed by certain
of the Company's subsidiaries and secured by a security interest in the
Company's personal property and the personal property of the Company's
subsidiaries, including accounts receivable, inventory, contracts, chattel
paper, trademarks, copyrights, patents, license rights, deposit and
investment accounts and general intangibles, but excluding equipment,
fixtures, rolling stock and the stock of the Company's subsidiaries.
The availability of borrowings under the new senior secured revolving
credit facility will be limited to the lesser of the maximum commitment
amount or the sum of the eligible accounts receivable (85% of regular
accounts receivable and 90% of preferred accounts receivable) and eligible
refinery hydrocarbon inventory (80% of refinery hydrocarbon inventory
except for refinery hydrocarbon inventory at service stations and the
travel center, which is calculated at 50%) plus 50% of eligible lubricants
inventory and reduced by 100% of certain first purchase crude payables and
amounts outstanding under letters of credit. The percentage of the
Company's borrowing base from eligible inventory is initially limited to
75% and will be reduced to 60% over time. The availability of borrowings
will be determined weekly and advances of a minimum of $2,000,000 are
required. The new senior secured revolving credit facility will be due and
payable in full three years from closing.
The new senior secured revolving credit facility will bear interest,
at the Company's option, at a spread over the euro dollar rate for one,
two, three or six months as elected by the Company, or a spread over a
base rate, which is defined as the higher of (a) the Federal Funds Rate
plus 1/2 of 1% or (b) the reference rate announced by Bank of America,
N.A. from time to time. The exact percentage will be determined by the
Company's total leverage ratio from time to time. The total leverage ratio
is determined by dividing (a) consolidated funded indebtedness (the sum of
borrowed money, off balance sheet leases, including synthetic leases, but
excluding operating leases, obligations to redeem or purchase any of the
Company's capital stock or the capital stock of a subsidiary, and any
guaranty of the foregoing obligations for the Company and the Company's
subsidiaries) by (b) EBITDA (as defined and adjusted in the new senior
secured revolving credit facility) for the Company and the Company's
subsidiaries, determined on a pro forma basis taking into account the
Yorktown acquisition. The Company also will pay a fee based upon the
unused commitment of the facility at the rate of 0.5% per annum. The
initial rate for borrowings under the new senior secured revolving credit
facility will be the euro dollar rate plus 2.75%. The following table
shows the relationship of the total leverage ratio and the various pricing
options:
Libor Base
Total Leverage Ratio Margin Rate Margin
- ------------------------------------------------ ------ -----------
Less than or equal to 2.50 2.25% 1.25%
Greater than 2.50 but less than or equal to 3.50 2.50% 1.50%
Greater than 3.50 2.75% 1.75%
The new senior secured revolving credit facility will contain
negative covenants limiting, among other things, the Company's ability,
and the ability of the Company's subsidiaries, to:
- incur additional indebtedness;
- create liens;
- dispose of assets;
- consolidate or merge;
- make loans and investments;
- enter into transactions with affiliates;
- use loan proceeds for certain purposes;
- guarantee obligations and incur contingent obligations;
- enter into agreements restricting the ability of subsidiaries
to pay dividends to the Company;
- make distributions or stock repurchases;
- make significant changes in accounting practices or change the
Company's fiscal year; and
- except on terms acceptable to the senior secured lenders, to
prepay or modify subordinated indebtedness.
The new senior secured revolving credit facility will require the
Company to maintain certain financial ratios, each calculated on a pro
forma basis for the Yorktown acquisition, including maintaining:
- a minimum consolidated tangible net worth not less than the sum of
(a) $99,110,000, which was 85% of consolidated tangible net worth
at December 31, 2001, plus (b) 50% of positive consolidated net
income on a cumulative basis for periods beginning January 1, 2002,
plus (c) 75% of the proceeds of any equity offering after December
31, 2001;
- a minimum fixed charge coverage ratio of not less than 1.1 to 1.0
for the prior four fiscal quarters (determined by a formula of the
ratio of (a) consolidated EBITDA (as defined and adjusted in the
new senior secured revolving credit facility), plus consolidated
rents payable, plus earn-out payments to BP under the Yorktown
refinery purchase agreement, less capital expenditures, less cash
taxes, to (b) consolidated interest expense plus consolidated rents
plus scheduled amortization of any indebtedness plus payments under
the earn-out agreement);
- a total leverage ratio of not greater than 4.25 to 1.0 for the
prior four fiscal quarters with step-downs; and
- a senior leverage ratio of consolidated senior indebtedness to
consolidated EBITDA for the prior four fiscal quarters of not
greater than 1.50 to 1.0.
The Company's failure to satisfy any of these financial covenants
will be an event of default under the new senior secured revolving credit
facility. The new senior secured revolving credit facility also will
include other customary events of default, including, among other things,
a cross-default to the Company's other material indebtedness and certain
changes of control.
The foregoing description of the Company's $100,000,000 new senior
secured revolving credit facility is based upon the commitments and drafts
of documents the Company's lenders provided to the Company. The Company is
in the process of finalizing the credit agreement, and the terms of the
final credit agreement may vary from those described above.
New Senior Secured Mortgage Loan Facility
- --------------------------------------------
In connection with the Yorktown acquisition, the Company expects to
enter into a $40,000,000 senior secured mortgage loan facility provided by
a syndicate of lenders led by Bank of America Facilities Leasing, LLC, an
affiliate of Banc of America Securities LLC, as lead arranger and book
manager. The Company and the certain of the Company's subsidiaries will
guarantee the obligations under the facility.
The Company will issue notes to the lenders which will bear interest,
at the Company's option, at a spread over the euro dollar rate for one
month of 4.25% per annum or the Bank of America prime rate plus 3.0%. The
notes will fully amortize during the three-year term. The notes will be
secured by a mortgage on and security interest in the Yorktown refinery
property, fixtures and equipment, excluding inventory and accounts
receivable.
The senior secured mortgage loan facility will contain negative
covenants limiting the Company's ability and the ability of the Company's
subsidiaries to, among other things:
- incur debt;
- create liens;
- dispose of assets;
- consolidate or merge;
- make loans and investments;
- enter into transactions with affiliates;
- use loan proceeds for certain purposes;
- guarantee obligations and incur contingent obligations;
- pay dividends or make distributions or stock repurchases;
- make significant changes in accounting practices; or
- change the Company's fiscal year.
The Company's failure to satisfy any of these financial covenants
will be an event of default under the new senior secured mortgage loan
facility. The new senior secured mortgage loan facility also will include
other customary events of default, including, among other things, a cross-
default to the Company's other material indebtedness and certain changes
of control.
The new senior secured mortgage loan facility will require the
Company to maintain certain financial ratios, including maintaining (a)
ratios substantially the same as the new senior secured revolving credit
facility and (b) total senior debt to tangible net worth (consolidated
senior funded indebtedness to total consolidated net worth less intangible
assets) ratio of not to exceed 1.65 to 1.
The foregoing description of the Company's new senior secured
mortgage loan facility is based upon the commitments and drafts of
documents the Company's lenders provided the Company. The Company is in
the process of finalizing the agreements relating to the new senior
secured mortgage loan facility, and the terms of the final agreements may
vary from those described above.
11% Senior Subordinated Notes due 2012
- --------------------------------------
In connection with the acquisition of the Yorktown refinery, the
Company expects to issue $200,000,000 of 11% senior subordinated notes due
2012 (the "11% Notes"). The 11% Notes are being offered at a discount and
the price to investors will be 97.0721%, plus accrued interest, if any.
The 11% Notes mature on May 15, 2012, with interest payable semi-annually
on May 15 and November 15 of each year.
The indenture supporting the 11% Notes contains restrictive covenants
that, among other things, restrict the ability of the Company and its
subsidiaries to (i) pay dividends, or redeem or repurchase the Company's
stock or prepay indebtedness that is pari passu with, or subordinated in
right of payment to, the 11% Notes; (ii) make certain types of
investments; (iii) borrow money or sell preferred stock; (iv) create
liens; (v) sell stock in the Company's restricted subsidiaries; (vi)
restrict dividends and other payments from the Company's subsidiaries;
(vii) enter into transactions with affiliates; and (viii) sell assets or
merge with other companies. In addition, subject to certain conditions,
the Company is obligated to offer to purchase a portion of the 11% 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
11% Notes at 101% of the principal amount thereof, plus accrued interest,
if any, to the date of purchase.
Repayment of the 11% Notes is fully and unconditionally guaranteed,
jointly and severally, on a senior subordinated basis, by all of the
Company's existing and future domestic restricted subsidiaries.
The Company may redeem the 11% Notes at the redemption prices
indicated below, plus accrued but unpaid interest to the redemption date,
at any time, in whole or in part, on or after May 15, 2007, if redeemed
during the 12-month period beginning May 15 of the years indicated, as
follows: 2007 - 105.5%, 2008 - 103.667%, 2009 - 101.833%, and 2010 and
thereafter - 100%.
In addition, at any time prior to May 15, 2007, the Company may
redeem all or part of the 11% Notes at a redemption price equal to the sum
of (i) the principal amount thereof, (ii) accrued and unpaid interest, if
any, and (iii) the Make-Whole Premium. The "Make-Whole Premium" means the
greater of (x) 1% of the principal amount of the 11% Note or (y) the
excess of (A) the present value at the date of redemption of (1) the
redemption price at May 15, 2007 as described above plus (2) all remaining
required interest payments (exclusive of interest accrued and unpaid to
the date of redemption) due on the 11% Note through May 15, 2007, computed
using a discount equal to the Treasury Rate plus 50 basis points, over (B)
the then outstanding principal amount of the 11% Note.
In addition, on or before May 15, 2005, the Company may redeem up to
35% of the aggregate principal amount of the 11% Notes at the redemption
price of 111% of the principal amount thereof, plus accrued and unpaid
interest, if any, with the net cash proceeds from certain equity
offerings. Such redemptions may only be made, however, if at least 65% of
the aggregate principal amount of the 11% Notes originally issued remains
outstanding after each such redemption.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Inherent in the preparation of the Company's financial statements are
the selection and application of certain accounting principles, policies,
and procedures that affect the amounts that are reported. In order to
apply these principles, policies, and procedures, the Company must make
judgments, assumptions, and estimates based on the best available
information at the time. Actual results may differ based on the accuracy
of the information utilized and subsequent events, some of which the
Company may have little or no control over. In addition, the methods used
in applying the above may result in amounts that differ considerably from
those that would result from the application of other acceptable methods.
The Company's significant accounting policies are described in Note 1
to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. Certain critical
accounting policies that materially affect the amounts recorded in the
consolidated financial statements are the use of the last in, first-out
("LIFO") method of valuing certain inventories, the accounting for certain
environmental remediation liabilities, the accounting for certain related
party transactions, and assessing the possible impairment of certain long-
lived assets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 2002 2001
- ---------------------------------------------------------------------------
Net revenues $ 188,396 $ 251,212
Cost of products sold 141,839 200,502
- ---------------------------------------------------------------------------
Gross margin 46,557 50,710
Operating expenses 26,411 28,848
Depreciation and amortization 8,771 8,113
Selling, general and administrative expenses 5,197 6,583
Loss on disposal/write-down of assets 30 139
- ---------------------------------------------------------------------------
Operating income 6,148 7,027
Interest expense, net 5,939 5,480
- ---------------------------------------------------------------------------
Earnings before income taxes 209 1,547
Provision for income taxes 86 597
- ---------------------------------------------------------------------------
Net earnings $ 123 $ 950
===========================================================================
Net earnings per common share:
Basic $ 0.01 $ 0.11
Assuming dilution $ 0.01 $ 0.11
===========================================================================
Net revenues:(1)
Refining Group $ 82,718 $ 111,190
Retail Group 76,215 93,543
Phoenix Fuel 75,784 109,608
Other 50 72
Intersegment (46,371) (63,201)
- ---------------------------------------------------------------------------
Consolidated $ 188,396 $ 251,212
===========================================================================
Income (loss) from operations:(1)
Refining Group $ 9,059 $ 11,085
Retail Group (672) (362)
Phoenix Fuel 1,473 1,468
Other (3,682) (5,025)
Loss on disposal/write-down of assets (30) (139)
- ---------------------------------------------------------------------------
Consolidated $ 6,148 $ 7,027
===========================================================================
(1) The Refining Group owns and operates the Company's two refineries, its crude
oil gathering pipeline system, two finished products distribution terminals,
and a fleet of crude oil and finished product truck transports. The Retail
Group consists of service stations with convenience stores or kiosks and one
travel center. Phoenix Fuel is a wholesale petroleum products distribution
operation, which includes several lubricant and bulk petroleum distribution
plants, an unmanned fleet fueling ("cardlock") operation, a bulk lubricant
terminal facility, and a fleet of finished product and lubricant delivery
trucks. The Other category is primarily Corporate staff operations.
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------
REFINING GROUP OPERATING DATA:
Crude Oil/NGL Throughput (BPD) 33,785 33,417
Refinery Sourced Sales Barrels (BPD) 31,161 30,651
Average Crude Oil Costs ($/Bbl) $ 18.90 $ 27.90
Refining Margins ($/Bbl) $ 7.36 $ 8.23
RETAIL GROUP OPERATING DATA:
Fuel Gallons Sold (000's) 48,237 51,358
Fuel Margins ($/gal) $ 0.131 $ 0.151
Merchandise Sales ($ in 000's) $ 32,837 $ 32,826
Merchandise Margins 27.7% 30.2%
Number of Units at End of Period 150 171
PHOENIX FUEL OPERATING DATA:
Fuel Gallons Sold (000's) 92,471 104,920
Fuel Margins ($/gal) $ 0.052 $ 0.049
Lubricant Sales ($ in 000's) $ 5,387 $ 5,053
Lubricant Margins 16.5% 18.3%
Earnings Before Income Taxes
- ----------------------------
For the three months ended March 31, 2002, earnings before income
taxes were $209,000, a decrease of $1,338,000 from $1,547,000 for the
three months ended March 31, 2001. The decrease was primarily due to an
11% decrease in refinery margins; an 8% decline in retail merchandise
margins on relatively flat sales, although same store merchandise sales
were up approximately 6%; a 14% decrease in retail fuel margins; a 9%
decrease in wholesale fuel volumes sold by Phoenix Fuel to third-party
customers; higher depreciation and amortization costs; and higher net
interest expense. These decreases were offset in part by reduced operating
expenses, lower selling, general, and administrative ("SG&A") expenses, a
5% increase in Phoenix Fuel finished product margins, and a 2% increase in
refinery sourced finished product sales volumes.
Revenues
- --------
Revenues for the three months ended March 31, 2002, decreased
approximately $62,816,000 or 25% to $188,396,000 from $251,212,000 in the
comparable 2001 period. The decrease was primarily due to a 28% decline in
refinery weighted average selling prices; a 15% decrease in Phoenix Fuel's
weighted average selling prices, along with a 9% decline in wholesale fuel
volumes sold by Phoenix Fuel to third-party customers; and a 19% decrease
in retail refined product selling prices, along with a 6% decline in
retail fuel volumes sold. These increases were partially offset by a 2%
increase in refinery sourced finished product sales volumes.
The volumes of refined products sold through the Company's retail
units decreased approximately 6% from period to period. The volume
declines were primarily related to the sale or closure of 29 retail units
since the end of 2000. The volume of finished product sold from retail
units that were in operation for a full year in each period increased
approximately 2%, in spite of reduced volumes from stores in the Company's
Phoenix market area because of increased price competition. Volumes sold
from the Company's travel center increased approximately 15%.
Cost of Products Sold
- ---------------------
For the three months ended March 31, 2002, cost of products sold
decreased $58,663,000 or 29% to $141,839,000 from $200,502,000 in the
comparable 2001 period. The decrease was primarily due to a 17% decline in
the cost of finished products purchased by Phoenix Fuel, along with a 9%
decrease in wholesale fuel volumes sold by Phoenix Fuel to third-party
customers, and a 32% decline in weighted average crude oil costs. These
decreases were partially offset by a 2% increase in refinery sourced
finished product sales volumes.
Operating Expenses
- ------------------
For the three months ended March 31, 2002, operating expenses
decreased approximately $2,437,000 or 8% to $26,411,000 from $28,848,000
in the comparable 2001 period. The decrease was due to, among other
things, lower lease expense due to the repurchase of 59 retail units from
FFCA Capital Holding Corporation ("FFCA") in July 2001 that had been sold
to FFCA as part of a sale-leaseback transaction between the Company and
FFCA in December 1998, and reduced expenses for payroll and related costs,
and other operating expenses, for retail operations, due in part to the
closure of 29 retail units since the end of 2000, as well as the
implementation of certain cost reduction programs. These decreases were
offset in part by higher general insurance premiums.
Depreciation and Amortization
- -----------------------------
For the three months ended March 31, 2002, depreciation and
amortization increased approximately $658,000 or 8% to $8,771,000 from
$8,113,000 in the comparable 2001 period. The increase was primarily
related to additional depreciation expense related to the repurchase of 59
retail units from FFCA in July 2001; higher refinery amortization costs in
2002 due to a revision in the estimated amortization period for certain
refinery turnaround costs incurred in 1998; and construction, remodeling
and upgrades in retail and refining operations during 2001. These
increases were offset in part by reductions in depreciation expense due to
the closure or sale of 29 retail units since the end of 2000 and the non-
amortization of goodwill in 2002 due to the adoption of SFAS 142.
Selling, General and Administrative Expenses
- --------------------------------------------
For the three months ended March 31, 2002, selling, general and
administrative expenses decreased approximately $1,386,000 or 21% to
$5,197,000 from $6,583,000 in the comparable 2001 period. The decrease was
primarily due to the revision of estimated accruals for 2001 management
incentive bonuses, following the determination of bonuses to be paid to
employees; lower claims experience for the Company's self-insured health
insurance plan; and lower workers compensation costs.
Interest Expense, Net
- ---------------------
For the three months ended March 31, 2002, net interest expense
(interest expense less interest income) increased approximately $459,000
or 8% to $5,939,000 from $5,480,000 in the comparable 2001 period. The
increase was primarily due to a reduction in interest and investment
income from the investment of funds in short-term instruments. This
reduction in interest and investment income was due in part to a reduction
in the amount of funds available for investment because of the repurchase
of 59 retail units from FFCA in July 2001 and a $10,000,000 deposit made
in February 2002 in connection with the pending acquisition of the
Yorktown refinery.
Income Taxes
- ------------
The effective tax rate for the three months ended March 31, 2002 was
approximately 41% and for the three months ended March 31, 2001 was
approximately 39%. The difference in the two rates is primarily due to the
relationship of permanent tax differences to estimated annual income used
in each period to estimate quarterly income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operations
- -------------------------
Operating cash flows decreased for the three months ended March 31,
2002 compared to the three months ended March 31, 2001, primarily as a
result of a decrease in cash flows related to changes in operating assets
and liabilities in each period, along with a decrease in net earnings in
2002. Net cash used by operating activities totaled $2,562,000 for the
three months ended March 31, 2002, compared to net cash provided by
operating activities of $7,777,000 in the comparable 2001 period.
Working Capital
- ---------------
Working capital at March 31, 2002 consisted of current assets of
$130,453,000 and current liabilities of $78,228,000, or a current ratio of
1.67:1. At December 31, 2001, the current ratio was 1.72:1 with current
assets of $135,981,000 and current liabilities of $78,837,000.
Current assets have decreased since December 31, 2001, primarily due
to a decrease in cash and cash equivalents. These decreases were offset in
part by increases in accounts receivable and inventories. Accounts
receivable have increased primarily due to an increase in trade
receivables resulting from increased sales volumes and higher finished
product selling prices. Inventories have increased primarily due to an
increase in refined product prices and exchange, terminal, and refinery
onsite refined product inventory volumes. These increases were offset in
part by a decrease in Phoenix Fuel and retail refined product inventory
volumes.
Current liabilities have decreased slightly since December 31, 2001,
due to a decrease in accrued expenses, offset in part by an increase in
accounts payable. Accrued expenses have decreased primarily as a result of
the payment and reversal of 2001 accrued bonuses, the payment of 401(k)
Company matching and discretionary contributions, and the payment of
certain accrued interest balances. These decreases were offset in part by
higher balances in accounts that were subsequently paid to the Company's
self-insured health insurance trust and 2002 401(k) Company matching and
discretionary contributions. Accounts payable have increased primarily as
a result of higher raw material and finished product costs.
Capital Expenditures and Resources
- ----------------------------------
Net cash used in investing activities for the purchase of property,
plant and equipment totaled approximately $2,332,000 for the three months
ended March 31, 2002. Expenditures were primarily for financial accounting
software upgrades, operational and environmental projects for the
refineries, and retail operation upgrades. In addition, the Company made a
deposit of $10,000,000 in connection with the pending acquisition of the
Yorktown refinery discussed in more detail below.
On February 8, 2002, the Company entered into a definitive agreement
with BP Corporation North America Inc. and BP Products North America Inc.
to purchase a refinery in Yorktown, Virginia. See Note 8 to the Company's
Condensed Consolidated Financial Statements in Item 1 for a more detailed
discussion of this transaction.
In 2001, the Company identified 60 non-strategic or under-performing
retail units for possible divestiture, most of which included kiosks
rather than full convenience stores. As of April 15, 2002, 13 of these
units had been removed from the list due to improved performance. Of the
remaining 47 units, 11 units were sold; six units were closed and
reclassified as assets held for sale; one leased unit was returned to the
lessor; three units were in escrow, two of which were sold on May 2, 2002,
and the sale of other unit is expected to close in the second quarter of
2002; and 26 stores continue to be operated by the Company. These 26 units
are being marketed for potential sale and may be divested if acceptable
offers are received and negotiated during 2002.
The Company owns approximately 371 miles of pipeline for the
gathering and delivery of crude oil to its refineries. Approximately 132
miles of this pipeline were purchased in 2000 and 2001. During the second
quarter of 2002, the Company entered into a contract with a third-party to
sell substantially all of the pipeline segments acquired in 2000 and 2001.
The Company believes that this sale will close during the second quarter
of 2002. The Company expects to continue to ship crude oil on these
pipeline segments after the sale is completed.
The Company has recently revised its budget for capital spending for
2002. The revised budget is $17,600,000, down from $20,900,000 previously
reported. The revised budget also excludes growth projects, the Yorktown
refinery acquisition and any related capital expenditures, and any other
potential acquisitions.
The Company continues to investigate other capital improvements to
its existing facilities. Capital projects that are actually undertaken in
2002 will depend on, among other things, general business conditions,
results of operations, and financial constraints resulting from the
Yorktown refinery acquisition. The Company is also evaluating the possible
sale or exchange of other non-strategic or under-performing assets in
addition to the retail assets described above.
Net cash used by financing activities of approximately $1,564,000
relates to fees paid to various financial institutions in connection with
financing arrangements for the Company's pending acquisition of the
Yorktown refinery.
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. The Company
believes that it will have sufficient working capital to meet its needs
over the next 12-month period.
The Company's operations are subject to fluctuations in supply and
demand that could adversely affect costs and selling prices, and in return
margins realized. Any long-term adverse relationships between costs and
prices could impact the Company's ability to generate sufficient operating
cash flows to meet its working capital needs. In addition, the Company's
ability to borrow funds under its current Credit Agreement could be
adversely impacted by low product prices that could limit the availability
of funds by reducing the borrowing base tied to eligible accounts
receivable and inventories. The Company's Credit Agreement also contains
certain restrictive covenants that could limit the Company's ability to
borrow funds if certain thresholds are not maintained. Although the above
factors could impact the Company's ability to generate or access funds,
the Company is not aware of any limiting factors at this time.
On May 6, 2002, Standard & Poor's lowered its corporate credit rating
on the Company to "BB-" from "BB" due to the pending acquisition of the
Yorktown refinery, which will primarily be debt financed, and removed the
Company's ratings from CreditWatch. At the same time, Standard & Poor's
assigned its "B" rating to the Company's proposed issuance of $200,000,000
of 11% senior subordinated notes due 2012. On May 8, 2002, Moody's
Investors Service downgraded the Company's current senior subordinated
notes to "B3" from "B2" and assigned its "B3" rating to the Company's
proposed issuance of $200,000,000 of 11% senior subordinated notes due
2012. This should not have an impact on the Company's ability to borrow
funds under its Credit Agreement or trigger any event of default under its
current outstanding notes. The Company presently has senior subordinated
ratings of "B3" from Moody's Investor Services and "B" from Standard &
Poor's.
Capital Structure
- -----------------
At March 31, 2002 and December 31, 2001, the Company's long-term debt
was 65.3% of total capital and the Company's net debt (long-term debt less
cash and cash equivalents) to total capitalization percentages were 64.4%
and 62.8%, respectively.
The Company's current 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
allowed 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 November 14, 2003. The
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 also allows the Company to borrow up to $10,000,000 for other
acquisitions as defined in the Credit Agreement. The availability of funds
under this facility is the lesser of (i) $65,000,000, or (ii) the amount
determined under a borrowing base calculation tied to the eligible
accounts receivable and inventories. At March 31, 2002, the availability
of funds under the Credit Agreement was $65,000,000. There were no direct
borrowings outstanding under this facility at March 31, 2002, and there
were approximately $3,286,000 of irrevocable letters of credit
outstanding, primarily to insurance companies and regulatory agencies.
The interest rate applicable to the Credit Agreement is tied to
various short-term indices. At March 31, 2002, this rate was approximately
4% 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.
In connection with the acquisition of the Yorktown refinery, the
Company expects to replace the Credit Agreement with a new $100,000,000
senior secured revolving credit facility and borrow $40,000,000 under a
new senior secured mortgage loan facility. See Note 8 to the Company's
Condensed Consolidated Financial Statements in Item 1 hereof for a more
detailed discussion of these facilities.
The indentures supporting the Company's Notes and the Company's
Credit Agreement contain certain restrictive covenants, as described in
more detail above, and other terms and conditions that if not maintained,
if violated, or if certain conditions are met, could result in default,
early purchase of the Notes, and affect the Company's ability to borrow
funds, make certain payments, or engage in certain activities.
As of March 31, 2002, the Company was not aware of any matters that
it reasonably expected to restrict its ability to borrow funds, make
payments, or engage in other contemplated activities under the terms of
the indentures supporting its Notes or its Credit Agreement. The
acquisition of the Yorktown refinery, however, could constrain the
Company's ability to take such actions, particularly in the first three
years of operations, but the Company does not believe that any presently
contemplated activities will be constrained. A prolonged period of low
refining margins, however, would have a negative impact on the Company's
ability to borrow funds and to make expenditures for certain purposes.
The Company recently completed solicitation of consents from the
holders of its 9% Notes to amend the 9% Notes indenture to permit the
Company to refinance the 9 3/4% Notes prior to their maturity. The Company
is in the process of offering for sale $200,000,000 of 11% senior
subordinated notes due 2012 in a private placement transaction. See Note 8
to the Company's Condensed Consolidated Financial Statements in Item 1
hereof for a more detailed discussion of these notes. The net proceeds of
the offering will be used to redeem all $100,000,000 principal amount of
the 9 3/4% Notes and partially fund the Company's pending acquisition of
the Yorktown refinery and related transaction fees and expenses. The cost
of the consent solicitation was approximately $1,200,000.
Included in the tables below are a list of the Company's obligations
and commitments to make future payments under contracts and under
commercial commitments as of March 31, 2002.
PAYMENTS DUE
----------------------------------------------------------------------------------------
ALL REMAINING
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003 2004 2005 2006 YEARS
- -------------------------------------------------------------------------------------------------------------------
Long-Term Debt $250,079,000 $ 33,000 $100,029,000 $ 17,000 $ - $ - $150,000,000
Capital Lease Obligations 6,703,000 - - - - - 6,703,000
Operating Leases 18,256,000 3,454,000 3,414,000 2,577,000 1,711,000 1,096,000 6,004,000
- -------------------------------------------------------------------------------------------------------------------
Total Contractual
Cash Obligations $275,038,000 $3,487,000 $103,443,000 $2,594,000 $1,711,000 $1,096,000 $162,707,000
===================================================================================================================
The Company is committed under a long-term purchase contract that
expires in August 2005 to purchase a minimum of 3,500 barrels per day of
natural gasoline at market price plus an additional amount per gallon.
AMOUNT OF COMMITMENT EXPIRATION
----------------------------------------------------------------------------------------
OTHER ALL REMAINING
COMMERCIAL COMMITMENTS TOTAL 2002 2003 2004 2005 2006 YEARS
- -------------------------------------------------------------------------------------------------------------------
Lines of Credit $65,000,000 $ - $65,000,000 $ - $ - $ - $ -
Standby Letters of Credit 3,286,000 3,286,000 - - - - -
- -------------------------------------------------------------------------------------------------------------------
Total
Commercial Commitments $68,286,000 $3,286,000 $65,000,000 $ - $ - $ - $ -
===================================================================================================================
The Company's Board of Directors (the "Board")has authorized the
repurchase of up to 2,900,000 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. During the first quarter of 2002,
the Company made no purchases of its common stock under this program.
Since 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
the results of the Company's operations, 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 has in the past
used 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
March 31, 2002.
The Company's Credit Agreement is floating-rate debt tied to various
short-term indices. As a result, the Company's annual interest costs
associated with this debt may fluctuate. At March 31, 2002, however, there
were no direct borrowings outstanding under this Credit Agreement.
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company
maintains various insurance coverages, including business interruption
insurance, subject to certain deductibles. The Company is not fully
insured against certain risks because such risks are not fully insurable,
coverage is unavailable or premium costs, in the judgment of the Company,
do not justify such expenditures.
Credit risk with respect to customer receivables is concentrated in
the geographic area in which the Company operates and relates primarily to
customers in the oil and gas industry. To minimize this risk, the Company
performs ongoing credit evaluations of its customers' financial position
and requires collateral, such as letters of credit, in certain
circumstances.
OTHER
- -----
Federal, state and local laws and regulations relating to health and
the environment affect nearly all of the operations of the Company. As is
the case with other companies engaged in similar industries, the Company
faces significant exposure from actual or potential claims and lawsuits
involving environmental matters. These matters include soil and water
contamination, air pollution and personal injuries or property damage
allegedly caused by substances manufactured, handled, used, released or
disposed of by the Company. Future expenditures related to health and
environmental matters cannot be reasonably quantified in many
circumstances for various reasons, including the speculative nature of
remediation and cleanup cost estimates and methods, imprecise and
conflicting data regarding the hazardous nature of various types of
substances, the number of other potentially responsible parties involved,
various defenses that may be available to the Company and changing
environmental laws and interpretations of environmental laws.
Rules and regulations implementing federal, state and local laws
relating to health and the environment will continue to affect the
operations of the Company. The Company cannot predict what health or
environmental legislation or regulations will be enacted or become
effective in the future or how existing or future laws or regulations will
be administered or enforced with respect to products or activities of the
Company. Compliance with more stringent laws or regulations, as well as
more vigorous enforcement policies of the regulatory agencies, could have
an adverse effect on the financial position and the results of operations
of the Company and could require substantial expenditures by the Company
for, among other things: (i) the installation and operation of refinery
equipment, pollution control systems and other equipment not currently
possessed by the Company; (ii) the acquisition or modification of permits
applicable to Company activities; and (iii) the initiation or modification
of cleanup activities.
As of March 31, 2002, the Company had an environmental liability
accrual of approximately $2,300,000. Approximately $1,500,000 of this
accrual is for the following projects, all of which are discussed in more
detail in Note 6 to the Company's Condensed Consolidated Financial
Statements in Item 1 hereof: (i) the remediation of the hydrocarbon plume
that appears to extend no more than 1,800 feet south of the Company's
inactive Farmington refinery; (ii) environmental obligations assumed in
connection with the acquisition of the Bloomfield Refinery; and (iii)
hydrocarbon contamination on and adjacent to the 5.5 acres that the
Company owns in Bloomfield, New Mexico. The remaining amount of the
accrual relates to 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; closure of the
Ciniza Refinery land treatment facility, including post-closure expenses;
and certain other smaller remediation projects. The environmental accrual
is recorded in the current and long-term sections of the Company's
Condensed Consolidated Balance Sheets.
"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," "may,"
"projects," "predicts," "will," 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 the negotiation of crude
oil supply contracts; risks associated with non-compliance with certain
debt covenants or the satisfaction of financial ratios contained in such
covenants; the risk that the Company will not be able to refinance its 9
3/4% Notes; the adequacy of the Company's reserves, including its reserves
for environmental and tax 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 risk that the Company may
not be able to close the Yorktown refinery acquisition; the risk that the
Company will be unable to enter into the new senior secured revolving
credit facility and the new senior secured mortgage loan facility; the
risk that the Company will be unable to issue the 11% senior subordinated
notes due 2012; the risk that the Yorktown refinery may not be
successfully integrated into and may not be profitable to the Company; the
risks associated with liabilities that will be assumed in the Yorktown
refinery acquisition; 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, and various actions that have been undertaken to
increase the supply of refined products to El Paso, Texas, as they relate
to the Company's market area and future profitability; the ability of the
Company to reduce operating expenses and non-essential capital
expenditures; the risk that the Company will not be able to sell non-
strategic and under-performing assets on terms favorable to the Company;
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 hereof.
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 6 to the Condensed
Consolidated Financial Statements set forth in Item 1, Part I hereof and
the discussion of certain contingencies contained in Item 2, Part 1
hereof, under the heading "Liquidity and Capital Resources - Other."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
On February 12, 2002, the Company filed a Form 8-K dated February 8,
2002, relating to an Asset Purchase Agreement between the Company and
BP Corporation North America Inc. and BP Products North America Inc.
(collectively, "BP") pursuant to which the Company will purchase BP's
Yorktown, Virginia refinery and related assets.
On April 26, 2002, the Company filed a Form 8-K dated April 26, 2002,
relating to the Company's announcement of its intention to offer
$200,000,000 of senior subordinated notes due 2012 in a private
placement, the proceeds of which would be used to partially fund the
Company's acquisition of the Yorktown, Virginia refinery and
associated inventories from BP, to redeem all $100,000,000 of its 9
3/4% senior subordinated notes due 2003, and pay related transaction
fees and expenses.
On April 29, 2002, the Company filed a Form 8-K dated April 26, 2002,
relating to the filing of certain pro forma financial statements and
historical and unaudited pro forma financial and other data, that was
being provided to certain parties, concerning Giant Industries, Inc.
("Giant") and the Yorktown refinery, which Giant was under contract
to acquire.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q for the quarter
ended March 31, 2002 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,
Chief Accounting Officer and Assistant Secretary
(Principal Accounting Officer)
Date: May 13, 2002
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