SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported)
May 14, 2002
GIANT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or jurisdiction of incorporation)
1-10398 86-0642718
(Commission File Number) (IRS Employer Identification No.)
23733 North Scottsdale Road
Scottsdale, Arizona 85255
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(602) 585-8888
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
(a) The Acquisition
On May 14, 2002, Giant Industries, Inc. ("the Company") completed the
purchase of the 61,900 barrel per day ("bpd") Yorktown Refinery (the
"Refinery") located in Yorktown, Virginia. The Refinery was purchased from
BP Corporation North America Inc. and BP Products North America Inc.
(collectively, "BP") for a price of $127.5 million, plus approximately
$53.2 million for crude oil, other feedstocks, and refined products
inventories associated with the refinery operations. In addition, the
Company will assume certain liabilities and obligations of the Refinery,
and may pay BP an earn-out. The price was determined through arm's length
negotiations between the Company and BP, which is not affiliated with the
Company.
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 $25.0 million 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 $20.0 million to $27.0 million 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 $1.6 million
to $2.6 million 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 $4.0 million. 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 $4.0
million 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 $5.0 million, in which event the Company's claim only relates to
the amount exceeding $5.0 million (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 $10.0 million (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 $35.0 million.
The Company has entered 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.
(b) The Yorktown Refinery
Refining
The Yorktown refinery is a 61,900 bpd coking refinery located on 570
acres of land known as Goodwin's Neck, which lies along the York River in
York County, Virginia. The Yorktown refinery is situated adjacent to its
own deep-water port on the York River, close to the Norfolk military
complex and Hampton Roads shipyards. The Company believes this location
allows the refinery to realize transportation advantages of as much as
$1.25 per barrel compared with Gulf Coast refineries shipping to the mid-
Atlantic market. The Yorktown refinery began operations in 1956 under the
ownership of Amoco Oil Company, and has been repeatedly expanded and
upgraded to be modern and efficient. The Yorktown refinery's sales
historically have been concentrated in Eastern Virginia and Maryland,
where more than 50% of its gasoline production was sold. The Yorktown
refinery's most profitable markets are the Yorktown peninsula and
Salisbury, Maryland. Under the Company's ownership, the Company believes
it can expand the Yorktown refinery's refining capacity to 75,000 bpd at a
total cost of approximately $5 million, and will consider doing so
depending on market conditions. The Company's strategy at the Yorktown
refinery will focus on maximizing its profitability, which may include
processing lower-grade, low cost crude oil and selling products into
higher-margin markets. As a result, the Company believes it can operate
the Yorktown refinery more profitably than it was operated historically.
The Yorktown refinery has a Solomon complexity rating of 11.0 and in
2001 yielded 88% of high-value products from each barrel of refinery
intake. The Yorktown refinery can manufacture both conventional and
reformulated gasoline, as well as low- and high-sulfur diesel. It is
capable of processing heavy, high acid crude oils, as well as light and
heavy sweet crude oils. It has demonstrated its ability to process 21
different types of crude oil annually, which are sourced from Canada, the
North Sea, West Africa, South America and the Far East. The refinery's
strategic location on the York River and its own deep-water port access
allow it to easily receive supply shipments from these regions and provide
flexibility to transport finished products by barge, without dependence on
area pipelines. During 2001, the Yorktown refinery sold approximately 11.6
million barrels of gasoline, 7.1 million barrels of diesel fuel and No. 2
fuel oil, 870,000 barrels of liquid petroleum gases and 222,806 short tons
of petroleum coke.
Set forth below is data with respect to the Yorktown refinery
operations and the primary refined products produced during the indicated
periods.
Year Ended December 31,
---------------------------------
2001 2000 1999 1998
------ ------ ------ ------
Feedstock throughput (bpd):
Crude oil and residual feedstocks 55,478 59,996 56,256 55,468
Intermediates 5,210 5,784 4,549 2,451
------ ------ ------ ------
Total 60,688 65,780 60,805 57,919
====== ====== ====== ======
Rated crude oil capacity utilized 90% 97% 91% 90%
Products (bpd):
Gasoline 33,356 36,000 32,898 28,318
Diesel fuel and No. 2 fuel oil 19,941 22,589 19,433 19,865
Other(a) 9,419 9,501 11,166 11,567
------ ------ ------ ------
Total 62,716 68,090 63,497 59,750
====== ====== ====== ======
High-value products (as a percentage
of total feedstocks):
Gasoline 55% 55% 54% 49%
Diesel fuel and No. 2 fuel oil 33% 34% 32% 34%
------ ------ ------ ------
Total 88% 89% 86% 83%
====== ====== ====== ======
__________
(a) Other products include petroleum coke converted to a fuel oil
equivalent number of barrels.
During 1999, the Yorktown refinery switched from a sour crude
facility to a heavy sweet crude facility, partially due to the decreased
supply of Venezuelan sour crude oil. Completed at a cost of approximately
$100,000, the project reduced the refinery's crude sulfur input by a
factor of four, enabling it to reduce sulfur content in compliance with
EPA-mandated specifications well in advance of the 2004 deadline. This
reduction in crude sulfur input allowed the refinery to reduce sulfur in
its products while increasing production of higher-quality reformulated
gasoline and low sulfur distillate. As part of the crude switch project,
the sulfur recovery unit was modified to permit appropriate turndown when
operating on low sulfur input; however, the refinery is capable of
processing sour crude oils by reversing the prior modifications should
there be an economic advantage to do so. As a result of the decision to
switch from sour to sweet crude oil, the Yorktown refinery ran at a
reduced rate for seven days. Additionally, due to the residual of sour
crude in the tanks post-switch, the Yorktown refinery was forced to sell
product at lower margins, resulting in reduced operating profits.
Raw Material Supply
Most of the Yorktown refinery's feedstocks come from Canada, the
North Sea, West Africa, South America, and the Far East. The ability to
process a wide range of crude oils allows the Yorktown refinery to vary
crude oils in order to maximize margins. The incoming crude slate includes
30,000-40,000 bpd of heavy sweet crude, 10,000-15,000 bpd of low sulfur
atmospheric and/or vacuum residuum, and 5,000-10,000 bpd of light sweet
crude oil. To assure continued supply while the Company integrates the
Yorktown refinery, the Company entered into agreements requiring BP to
provide, for periods ranging from six months to one year after the
acquisition, 100% of the refinery's feedstock supply, including crude oil
and intermediate feedstocks, and other raw material needs. The Company is
not obligated to receive its feedstock supply from BP, and may terminate
the agreements at any time with 30 days notice. The Company believes there
are abundant sources of crude oil and other raw material supply for the
Yorktown refinery.
The Yorktown refinery also imports process unit feedstocks to
supplement the various process units, and blendstocks to optimize the
product blending operations. Reformer naphtha is the most commonly
imported feedstock, although gas oil is imported from time to time.
Subsequent to the crude switch project, the refinery increased its
alkylate and MTBE imports for increased levels of reformulated gasoline
production. The refinery also occasionally imports reformates, aromatics
and sub-octane gasolines.
Transportation
The Yorktown refinery's strategic location on the York River and its
own deep-water port access allow it to easily receive supply shipments
from various regions of the world. All of the crude oil supplied to the
Yorktown refinery is delivered to it by barge to its docks. As a result,
it has greater flexibility to receive and move product than its
competitors who rely on pipeline systems.
Marketing and Distribution
The Company groups the Yorktown refinery's end markets into tiers,
which represent varying refining margin potential. Tier 1 areas have the
highest refining margin potential and include the Yorktown region. Tier 2
markets include Salisbury and Baltimore, Maryland. Norfolk and North and
South Carolina are considered Tier 3 markets, and the New York Harbor area
is designated Tier 4. The Company will focus on selling products within
Tiers 1, 2 and 3, unless favorable refining margin opportunities arise in
markets like the New York Harbor.
During 2001, the Yorktown refinery's sales were concentrated in
Eastern Virginia and Maryland, where more than 50% of its gasoline
production was sold. Approximately 90% of product volume moves across the
marine dock, with the remaining amount being transported by truck or rail.
Third-party truck transports are primarily used to deliver products to the
refinery's Tier 1 customers. The CSX rail system, on which the refinery is
located, transports shipments of mixed butane and anode coke from the
refinery to its customers.
Terminal Operations
The refinery's dock system, which is capable of handling 80,000 ton
deadweight tankers and barges up to 100,000 barrels, handles all crude oil
receipts and the bulk of the finished product. The refinery includes
approximately 1.9 million barrels of crude tankage, including
approximately 500,000 barrels of storage capacity through leased tanks
from Virginia Power. The refinery also owns approximately 600,000 barrels
of gasoline tank storage, 800,000 barrels of gasoline blendstock storage,
and 300,000 barrels of distillate tank storage. The Company believes it
can increase the capacity of the truck loading rack through an upgrade of
the rack for a cost of approximately $800,000.
(c) Financing of the Yorktown Acquisition and Refinancing of 9-3/4% Notes
At closing on May 14, 2002, the Company used the net proceeds from
the issuance of $200.0 million of 11% Senior Subordinated Notes due 2012,
together with $23.6 million of cash on hand (including a $10.0 million
deposit paid to BP on February 8, 2002), $32.0 million in borrowings under
the Company's new $100.0 million senior secured revolving credit facility
and $40.0 million in borrowings from a new senior secured mortgage loan
facility, to acquire the Refinery and associated inventory, to irrevocably
deposit with the trustee an amount sufficient to redeem on June 28, 2002
all $100.0 million of its 9-3/4% Senior Subordinated Notes due 2003, and
to pay related transaction fees and expenses.
On May 14, 2002, the Company issued $200.0 million of 11% Senior
Subordinated Notes due 2012 (the "11% Notes"). The 11% Notes were sold at
a discount of approximately $5.9 million and the price to investors was
97.0721%. 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.
The $100.0 million senior secured revolving credit facility was
provided by a syndicate of lenders led by Bank of America, N.A., as
administrative agent and as letter of credit issuing bank; BNP Paribas and
Fleet National Bank as co-syndication agents; Comerica Bank, as document
agent; and Banc of America Securities LLC, as sole lead arranger and sole
book manager. The new senior secured revolving credit facility replaces
the Company's prior $65.0 million amended and restated credit agreement.
The Company's obligations under the new senior secured revolving credit
facility have been guaranteed by all of the Company's material
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 is 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 an amount equal to 100% of the liens related to 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 is determined weekly and advances of a minimum
of $2.0 million are required. The new senior secured revolving credit
facility is due and payable in full three years from closing.
The new senior secured revolving credit facility bears 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 is 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 contains 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,
prepay or modify subordinated indebtedness.
The new senior secured revolving credit facility requires 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
income 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
would be an event of default under the new senior secured revolving credit
facility. The new senior secured revolving credit facility also includes
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 $40.0 million senior secured mortgage loan facility was provided
by Banc of America Leasing and Capital, LLC. The Company and all of the
Company's material subsidiaries have guaranteed the obligations under the
facility.
The Company has issued notes to the lenders, which bear interest, at
the Company's option, at a spread over the euro dollar rate for one month
of 4.25% per annum or a base rate equal to the higher of the federal funds
rate plus 0.5% or the Bank of America prime rate plus 2.0%. The notes will
note fully amortize during the three-year term, and provide for a final
balloon payment of $5,333,332 at maturity. The notes are 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 contains 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
would be an event of default under the new senior secured mortgage loan
facility. The new senior secured mortgage loan facility also includes
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 requires the Company to
maintain certain financial ratios, including maintaining ratios
substantially the same as the new senior secured revolving credit
facility.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
REPORT OF INDEPENDENT AUDITORS
Board of Directors
BP Corporation North America Inc.
We have audited the accompanying balance sheets of the Yorktown
Refinery of BP Corporation North America Inc. as of December 31, 2001 and
2000, and the related statements of income, parent company investment and
cash flows for the years then ended. These financial statements are the
responsibility of BP Corporation North America Inc.'s management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Yorktown
Refinery of BP Corporation North America Inc. at December 31, 2001 and
2000, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Ernst & Young LLP
Chicago, Illinois
March 20, 2002
THE YORKTOWN REFINERY
OF BP CORPORATION NORTH AMERICA INC.
BALANCE SHEETS
(Millions of dollars)
December 31
-------------------
2001 2000
-------- --------
ASSETS
Current assets
Accounts receivable $ 12.9 $ 20.7
Accounts receivable - affiliates 1.0 7.4
Inventories 37.4 42.5
Deferred tax .8 1.5
Prepayments and other .1 .4
-------- --------
Total current assets 52.2 72.5
Property, plant and equipment
Property, plant and equipment - gross 249.3 245.1
Accumulated depreciation and amortization (157.8) (149.6)
-------- --------
Net property plant and equipment 91.5 95.5
-------- --------
Total assets $ 143.7 $ 168.0
======== ========
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities
Accounts payable $ 27.1 $ 29.5
Accounts payable - affiliates 11.1 37.8
Accrued expenses 7.3 10.7
-------- --------
Total current liabilities 45.5 78.0
Long term liabilities
Environmental accruals 11.4 3.7
Deferred income taxes 17.6 19.1
-------- --------
Total long term liabilities 29.0 22.8
Parent company investment 69.2 67.2
-------- --------
Total liabilities and parent company investment $ 143.7 $ 168.0
======== ========
See accompanying Notes to Financial Statements.
THE YORKTOWN REFINERY
OF BP CORPORATION NORTH AMERICA INC.
STATEMENTS OF INCOME
(Millions of dollars)
Year Ended
December 31
-------------------
2001 2000
-------- --------
Revenues
Sales and other revenues $ 688.4 $ 832.8
Costs and expenses
Cost of products sold 588.5 735.8
Operating expenses 76.5 40.3
Selling, general and administrative 5.5 4.7
Corporate overhead allocations 6.7 6.5
Depreciation and amortization 8.2 8.1
-------- --------
Total costs and expenses 685.4 795.4
Income before income taxes 3.0 37.4
Income tax provision (1.2) (14.6)
-------- --------
Net income $ 1.8 $ 22.8
======== ========
See accompanying Notes to Financial Statements.
THE YORKTOWN REFINERY
OF BP CORPORATION NORTH AMERICA INC.
STATEMENTS OF PARENT COMPANY INVESTMENT
(Millions of dollars)
Balance at December 31, 1999 $ 78.8
Net income 22.8
Net distributions to parent (34.4)
--------
Balance at December 31, 2000 67.2
Net income 1.8
Net contributions by parent .2
--------
Balance at December 31, 2001 $ 69.2
========
See accompanying Notes to Financial Statements.
THE YORKTOWN REFINERY
OF BP CORPORATION NORTH AMERICA INC.
STATEMENTS OF CASH FLOWS
(Millions of dollars)
Year Ended
December 31
-------------------
2001 2000
-------- --------
Operating activities
Net income $ 1.8 $ 22.8
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 8.2 8.1
Deferred income tax (benefit) provision (.8) 2.2
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 14.2 (0.4)
(Increase) decrease in inventories 5.1 (24.3)
(Increase) decrease in prepayments and other .3 (.1)
Increase (decrease) in accounts payable (29.1) 28.4
Increase (decrease) in accrued expenses (3.4) 3.1
Increase (decrease) in environmental accruals 7.7 (2.3)
-------- --------
Cash provided by operating activities 4.0 37.5
Investing activities
Capital expenditures (4.2) (3.1)
-------- --------
Cash used in investing activities (4.2) (3.1)
Financing activities
Net contributions by (distributions to) parent .2 (34.4)
-------- --------
Net cash provided by (used in) financing activities .2 (34.4)
Cash and cash equivalents - beginning of period - -
-------- --------
Cash and cash equivalents - end of period $ - $ -
======== ========
See accompanying Notes to Financial Statements.
THE YORKTOWN REFINERY
OF BP CORPORATION NORTH AMERICA INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
1. BASIS OF PRESENTATION
On February 12, 2002, BP Corporation North America Inc. (the
Company), an indirect wholly owned subsidiary of BP p.l.c., entered into
an agreement (the Agreement) providing for the purchase by Giant
Industries, Inc. ("Giant") of substantially all of the Company's Yorktown,
Virginia refining business (the Refinery). The Refinery is located on the
York River and has a crude oil processing capacity of approximately 62,000
barrels per day. The product slate, approximately 50% gasoline, also
includes a wide range of products such as diesel fuel, heating oil and
petroleum coke. The refinery serves the local area, as well as the New
York Harbor.
The accompanying special-purpose financial statements reflect the
specific assets, liabilities and related operations of the Refinery to be
purchased by Giant pursuant to the Agreement on a historical cost basis.
The effects of the acquisition of the Refinery by Giant are not reflected
in these special-purpose financial statements. The accompanying financial
statements are not intended to be a complete presentation of the assets,
liabilities or the results of operations of the Company or of the Refinery
on a stand alone basis.
The Refinery has certain shared assets and incurs certain common
costs which relate to both the Refinery and other Company operations. As
such, for purposes of preparing these special-purpose financial
statements, management of the Company has made certain allocations of
assets, liabilities and expenses to the Refinery. While the basis for
allocating such costs is considered reasonable by management, amounts
allocated to the Refinery could differ significantly from amounts that
would otherwise be determined if the Refinery were operated on a stand
alone basis.
The parent company investment reflects the Company's investment in
the Refinery, accumulated earnings and losses of the Refinery and
intercompany balances with the Company and other affiliates that are not
settled on a current basis.
The financial information included herein may not necessarily reflect
the financial position, results of operations or cash flows of the
Refinery in the future or what the financial position, results of
operations or cash flows of the Refinery would have been if it had been a
separate stand alone entity during the periods presented.
2. ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect reported amounts and disclosures in the notes to financial
statements. Actual results could differ from the estimates and assumptions
used.
Inventories: Inventories are stated at cost, but not in excess of
net realizable value. The cost of inventories is determined primarily by
the last-in, first-out method (LIFO), except for materials and supplies,
for which cost is determined using the average cost method.
Property, Plant and Equipment: Property, plant and equipment is
stated at cost. Depreciation is computed on a straight-line basis over the
estimated useful life generally as following:
Land improvements 20 years
Buildings 40 years
Machinery and equipment 20 years
Computers and telecom 3 to 5 years
Transportation equipment 3 to 5 years
Furniture and fixtures 10 years
Expenditures for renewals and improvements that extend the useful
life of an asset are capitalized. Expenditures for routine repairs and
maintenance, including those for refinery turnarounds, are charged to
operations when incurred. Property items retired or otherwise disposed of
are removed from the property and related accumulated depreciation
accounts. Any profit or loss is included in operations.
Impairment of Long-lived Assets: Carrying amounts of long-lived
assets are reviewed when events or circumstances indicate that such
carrying amounts may not be recoverable. Assets that are to be held and
used with recorded values that are not expected to be recovered through
future cash flows are written down to current fair value. Fair value is
generally determined from estimated discounted future net cash flows.
Assets that are held for sale are reported at the lower of carrying amount
or fair value less cost to sell.
Environmental Liabilities: The Refinery has provided in its accounts
for the reasonably estimable future costs of probable environmental
remediation obligations relating to current and past activities, including
obligations for previously disposed assets. In the case of long-lived
cleanup projects, the effects of inflation and other factors, such as
improved application of known technologies and methodologies, are
considered in determining the amount of estimated liabilities. The
liability is undiscounted and primarily consists of costs such as site
assessment, monitoring, equipment, utilities and soil and ground water
treatment and disposal.
Revenue Recognition: Revenues from product sales are generally
recognized upon delivery to customers. Sales to affiliates are made at
internal transfer prices.
Shipping, Handling and Other Transportation Costs: Shipping,
handling and other transportation costs are included in costs and
expenses.
Fair Value of Financial Instruments: The carrying value of
receivables and payables, which is based on historical cost, approximates
their fair value.
Business Segments: The Refinery operates in one business segment,
the refining of petroleum products.
New Accounting Pronouncements: Effective January 1, 2001, the
Refinery adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The adoption of SFAS 133
did not have a significant effect on the results of operations or
financial position of the Refinery.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS
143). SFAS 143 requires companies to record liabilities equal to the fair
value of their asset retirement obligations when they are incurred. When
the liability is initially recorded, companies capitalize an equivalent
amount as part of the cost of the asset. Over time, the liability is
accreted for the change in its present value each period, and the initial
capitalized cost is depreciated over the useful life of the related asset.
SFAS 143 is effective for accounting periods beginning after June 15,
2002.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets" (SFAS 144). SFAS 144 retains the requirement to recognize an
impairment loss only where the carrying value of a long-lived asset is not
recoverable from its undiscounted cash flows and to measure such loss as
the difference between the carrying amount and fair value of the asset.
SFAS 144, among other things, changes the criteria that have to be met to
in order to classify an asset as held-for-sale and requires that operating
losses from discontinued operations be recognized in the period that the
losses are incurred rather than as of the measurement date. SFAS 144 is
effective for accounting periods beginning after December 15, 2001.
The Refinery has not yet determined the effect of adopting SFAS 143
and SFAS 144 on its results of operations and financial condition.
3. INVENTORIES
As a result of the use of the LIFO inventory valuation method,
certain inventories are reported in the balance sheet at amounts less than
current cost. Inventories valued under the LIFO method were approximately
88% and 90% of total inventories in the balance sheet at December 31, 2001
and 2000, respectively. The following is information about the current
cost of inventories, determined primarily using the first-in, first-out
method (in millions).
Year Ended
December 31
-------------------
2001 2000
-------- --------
Crude oil and other feedstocks $ 31.7 $ 53.6
Refined and other finished products 29.2 38.6
Materials and supplies 4.4 4.2
-------- --------
65.3 96.4
Excess of current cost over reported balance
sheet amounts (27.9) (53.9)
-------- --------
Reported balance sheet amounts $ 37.4 $ 42.5
======== ========
In 2001, inventory volumes decreased resulting in a liquidation of
LIFO inventory quantities carried at lower costs prevailing in prior years
as compared with the cost of 2001 purchases. The effect of this
liquidation was to decrease 2001 income before income taxes by $.1
million.
4. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows (in
millions).
Year Ended
December 31
-------------------
2001 2000
-------- --------
Land $ 3.0 $ 3.0
Buildings and land improvements 17.3 16.1
Machinery, equipment and other 229.0 226.0
-------- --------
249.3 245.1
Accumulated depreciation and amortization (157.8) (149.6)
-------- --------
$ 91.5 $ 95.5
======== ========
5. RELATED PARTY TRANSACTIONS
The Refinery is part of a centralized cash management system whereby
all cash disbursements of the Refinery are funded by, and all cash
receipts are transferred to, the Company.
The Refinery enters into transactions with the Company and its
affiliates. Such transactions are made at prices that generally
approximate market. Transactions involving the transfer of propane, butane
and petroleum coke reflect fixed fee arrangements. Sales to the Company
and its affiliates, sales to third parties and other revenues were as
follows (in millions):
Year Ended
December 31
-------------------
2001 2000
-------- --------
Sales to affiliates $ 311.1 $ 262.9
Sales to third parties 375.9 568.4
Other revenues 1.4 1.5
-------- --------
$ 688.4 $ 832.8
======== ========
Purchases of crude oil from the Company and its affiliates amounted
to $229.4 million and $243.0 million during the years ended December 31,
2001 and 2000, respectively.
The Company provides the Refinery with various financial and
administrative services for which the Refinery was charged associated
direct costs and an allocation of certain centrally incurred costs. These
services include, among others, information technology, research and
development, tax, treasury, legal and employee benefit administration. For
these services, the Refinery receives an allocation which amounted to $6.7
million and $6.5 million during the years ended December 31, 2001 and
2000, respectively. It is the policy of the Company to allocate centrally
incurred costs primarily on the basis of usage or on estimated time spent.
In the opinion of management, these allocations and charges have been made
on a reasonable basis; however, they are not necessarily indicative of the
level of expenses which might have been incurred had the Refinery been
operating as a separate stand alone entity.
Certain equipment in use at the Refinery is recorded under a capital
lease between the Company and the Industrial Development Authority of York
County, Virginia. This equipment had a net book value of nil at December
31, 2001, and is pledged as security for Environmental and Pollution
Control Revenue Bonds which are recorded on the books of the Company.
Amounts outstanding with respect to these bonds amounted to $3.3 million
at December 31, 2001 and 2000, and these amounts are recorded as a
component of parent company investment. Related interest expense, which
was allocated to the Refinery by the Company, amounted to $.2 million
during each of the years ended December 31, 2001 and 2000, and is included
in corporate overhead allocations.
6. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
The Refinery participates in defined benefit retirement plans
sponsored by the Company. The Company's master defined benefit retirement
plans cover substantially all domestic employees of the Company. The
assets of these plans are held in U.S. and foreign equity securities,
fixed income securities, interest bearing cash and real estate. Net
pension expense (income) allocated to the Refinery amounted to $(.7)
million and $(.4) million during the years ended December 31, 2001 and
2000, respectively. Amounts allocated are principally determined based on
payroll.
The Refinery participates in postretirement benefit plans sponsored
by the Company. Through these plans, the Company provides certain health
care and life insurance benefits for retired employees who meet
eligibility requirements. These benefits are provided through insured and
self-insured arrangements. Net postretirement benefit expense allocated to
the Refinery amounted to $1.3 million and $.6 million during the years
ended December 31, 2001 and 2000, respectively. Amounts allocated are
principally determined based on payroll.
7. INCOME TAXES
The results of operations of the Refinery are included in the
consolidated income tax returns filed by its parent. The Refinery's
provision for income taxes is computed as if the Refinery filed its annual
tax returns on a separate company basis. The current portion of the income
tax provision is satisfied by the Refinery through a charge or credit to
parent company investment.
The provision for income taxes consists of the following (in millions).
Year Ended
December 31
-------------------
2001 2000
-------- --------
Current
Federal $ (1.7) $ (10.5)
State (.3) (1.9)
-------- --------
(2.0) (12.4)
Deferred
Federal .7 (1.9)
State .1 (.3)
-------- --------
.8 (2.2)
-------- --------
$ (1.2) $ (14.6)
======== ========
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate as follows (in millions).
Year Ended
December 31
-------------------
2001 2000
-------- --------
Income tax provision at statutory rate $ (1.1) $ (13.1)
State income taxes, net of federal benefit (.1) (1.5)
-------- --------
$ (1.2) $ (14.6)
======== ========
The major components of deferred tax assets and liabilities were as
follows (in millions).
December 31
-------------------
2001 2000
-------- --------
Deferred tax liabilities
Property, plant and equipment $ 23.7 $ 22.9
Deferred tax assets
Accrued liabilities (6.9) (5.3)
-------- --------
Net deferred tax liability $ 16.8 $ 17.6
======== ========
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into futures contracts to manage the commodity
price risk associated with certain crude oil acquisition costs of the
Refinery. These contracts are marked to market with gains (losses)
included in cost of products sold and amounted to $(11.9) million and $9.7
million for the years ended December 31, 2001 and 2000, respectively.
The notional amount of outstanding contracts at December 31, 2001 and
2000 amounted to 5.7 million barrels and 3.8 million barrels,
respectively. All of the open futures contracts at December 31, 2001 were
closed in January 2002.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases: The Refinery rents certain machinery and equipment
under various operating leases that are renewable on an annual basis.
Total rental expense for the years ended December 31, 2001 and 2000
amounted to $.8 million and $.6 million, respectively.
Receivables: Financial instruments that potentially subject the
Refinery to concentration of credit risk consist principally of trade
receivables. Substantially all of the Refinery's non-affiliate accounts
receivable are due from companies operating in various industries located
in the eastern United States. Credit is extended based on an evaluation of
the customer's financial condition, and collateral or other forms of
security are generally not required.
Environmental Matters: In the normal course of business, the
Refinery is required to comply with the environmental standards and
regulations of various regulatory agencies. Under these standards and
regulations, the Refinery is subject to possible obligations to remove or
mitigate the effects on the environment resulting from the placement,
storage, disposal or release of certain chemical or petroleum substances
by the Refinery or other parties.
The Refinery is currently participating in the cleanup of several
sites. The reasonably estimable future costs of probable environmental
obligations, including the Refinery's probable costs for obligations for
which the Refinery is jointly and severally liable, have been provided for
in the Refinery's results of operations. During 2001, several
environmental studies were completed. As a result of these studies, the
results of operations for the year ended December 31, 2001 includes a pre-
tax charge of $11.3 million relating to expected remediation costs
associated with the refinery site. The accrued liability, which amounted
to $14.9 million at December 31, 2001, represents a reasonable best
estimate of the expenditures expected to be incurred in the future to
remediate sites with known environmental obligations. As the scope of the
obligations becomes better defined, there may be changes in the estimated
future costs, which could result in charges against the Refinery's future
operations.
Litigation: The Refinery is engaged in various litigation and
proceedings with private parties and governmental authorities and has a
number of unresolved claims pending. While the amounts claimed in the
aggregate are substantial and the ultimate liability in respect of such
litigation, proceedings and claims cannot be determined at this time,
management of the Refinery is of the opinion that the aggregate amount of
any such liability will not have a material effect on the financial
position of the Refinery or the results of its operations.
10. RESULTS OF OPERATIONS
Repairs and Maintenance: During 2001, a fire occurred at the
Refinery. Costs incurred to repair certain equipment, included in 2001
operating expenses, amounted to $13.3 million. Also included in operating
expenses for 2001 are costs related to a major turnaround of $9.7 million.
(b) PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed balance sheet
gives effect to the following events as if each had occurred on December
31, 2001 and the following unaudited pro forma combined condensed
statement of operations gives effect to the following events as if each
had occurred on January 1, 2001:
- the Yorktown acquisition;
- the issuance of $200.0 million of 11% senior subordinated notes
at a discount of $5.9 million;
- borrowings of $38.0 million under the Company's new senior secured
revolving credit facility;
- borrowings of $40.0 million under the Company's new senior secured
mortgage loan facility; and
- the application of the proceeds from the above financings together
with cash on hand as of December 31, 2001 to make the Yorktown
acquisition, redeem in full the 9-3/4% Notes, and pay related
transaction fees and expenses.
The Yorktown acquisition will be accounted for using the purchase
method of accounting. The estimates of the fair value of the Yorktown
refinery assets and related liabilities are based on preliminary
estimates. These estimates will be updated based on valuations with
respect to inventories, property, plant and equipment, intangible assets
and certain assumed liabilities, and may change from the amounts shown.
The unaudited pro forma combined condensed financial statements are
based on assumptions that the Company believes are reasonable under the
circumstances and are intended for informational purposes only. They are
not necessarily indicative of the future financial position or future
results of the combined operations or of the financial position or the
results of operations that would have actually occurred had the Yorktown
acquisition taken place as of the dates or for the periods presented. The
Yorktown refinery has certain shared assets and incurs or is charged
certain common costs which relate to both the Yorktown refinery and other
BP operations. As such, BP has made certain allocations of assets,
liabilities and expenses to the refinery in its financial statements.
While the basis for allocating such costs is considered reasonable by BP,
amounts allocated to the refinery could differ significantly from amounts
that would otherwise be determined if the refinery were operated on a
standalone basis. The unaudited pro forma combined condensed statement of
operations contains allocations of corporate overhead totaling $6.7
million related to the historical financial statements. The Company
believes the actual incremental corporate overhead that it will incur will
be less than the allocated amounts.
These unaudited pro forma combined condensed financial statements
should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our historical
financial statements and related notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2001, and the
historical financial statements of the Yorktown refinery business and
related notes thereto included in this Form 8-K.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 2001
HISTORICAL PRO FORMA
------------------ ---------------------
GIANT Y0RKTOWN ADJUSTMENTS COMBINED
------- -------- ----------- --------
(dollars in millions)
ASSETS
Current Assets:
Cash and cash equivalents $ 26.3 $ - $ (23.6)(a) $ 2.7
Receivables, net 43.5 12.9 (12.9)(b) 43.5
Accounts receivable, affiliates - 1.0 (1.0)(b) -
Inventories 58.7 37.4 20.2 (a) 116.3
Prepaid expenses and other 3.7 0.1 (0.1)(b) 3.7
Deferred income taxes 3.8 0.8 (0.8)(b) 3.8
------- ------- ------- -------
Total current assets 136.0 52.2 (18.2) 170.0
------- ------- ------- -------
Property, plant and equipment 525.3 249.3 (117.7)(a) 656.9
Less accumulated depreciation
and amortization (201.8) (157.8) 157.8 (a) (201.8)
------- ------- ------- -------
323.5 91.5 40.1 455.1
------- ------- ------- -------
Goodwill 19.8 - - 19.8
Other assets 27.9 - 13.6 (c) 41.5
------- ------- ------- -------
$ 507.2 $ 143.7 $ 35.5 $ 686.4
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 42.3 $ 27.1 $ (27.1)(b) $ 42.3
Accounts payable, affiliates - 11.1 (11.1)(b) -
Accrued expenses 36.5 7.3 (7.4)(b) 36.4
------- ------- ------- -------
Total current liabilities 78.8 45.5 (45.6) 78.7
------- ------- ------- -------
Long-term debt, net of current portion 256.8 - 172.1 (c) 428.9
Deferred income taxes 32.8 17.6 (17.6)(b) 32.8
Other liabilities 2.4 11.4 (3.9)(a) 9.9
Parent company investment - 69.2 (69.2)(d) -
Stockholders' equity 136.4 - (.3)(e) 136.1
------- ------- ------- -------
$ 507.2 $ 143.7 $ 35.5 $ 686.4
======= ======= ======= =======
See accompanying notes to unaudited pro forma combined condensed balance sheet.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 2001
(a) The following is a preliminary estimate of the purchase price and
financing fees related to the Yorktown acquisition (in millions):
Purchase price under the purchase agreement $ 127.5
Assumed purchased value of associated
hydrocarbon inventories 53.2
Estimated direct costs of acquisition,
including financing fees of $14.0 million 15.0
-------
Total purchase price and financing fees $ 195.7
=======
As part of the Yorktown acquisition, the Company agreed to pay to BP,
beginning in 2003 and concluding at the end of 2005, under certain
circumstances, earn-out payments up to a maximum of $25.0 million. See
Item 2.
For purposes of this pro forma analysis, the above estimated purchase
price and financing fees have been allocated based on a preliminary
assessment of the fair value of the assets to be acquired and
liabilities to be assumed as follows (in millions):
Property, plant and equipment, including
turnaround assets $ 131.6
Inventories:
Feedstocks and refined products 53.2
Materials and supplies 4.4
Other assets, consisting of financing
fees and intangibles 14.0
Environmental liabilities assumed (7.5)
-------
Total purchase price and financing fees $ 195.7
=======
The final allocation of the purchase price may result in values
assigned to goodwill and other intangibles. Such values are not
expected to be material.
The adjustment of $23.6 million in cash represents the amount to be
used for the Yorktown acquisition. This amount does not reflect any
increases in cash subsequent to December 31, 2001. This amount
includes a $10.0 million deposit paid to BP on February 8, 2002.
The adjustment of $20.2 million to inventories is to reflect estimated
fair values for the Yorktown refinery inventories to be purchased in
excess of the historical carrying values as follows (in millions):
Feedstocks and refined products $ 53.2
Materials and supplies 4.4
-------
Total inventories purchased 57.6
Historical values of inventories (37.4)
-------
Adjustment to inventories $ 20.2
=======
(note: materials and supplies are included in the $127.5 million
purchase of the Yorktown refinery).
The adjustment of $117.7 million to property, plant and equipment
represents the difference in the preliminary allocated purchase price
compared to historical costs of the Yorktown refinery property, plant
and equipment.
The adjustment of $157.8 million to accumulated depreciation and
amortization represents the elimination of the historical Yorktown
refinery amounts.
The adjustment to other liabilities for $3.9 million reflects the
amount of the environmental liability assumed by us, after
giving effect to the environmental indemnification provisions of the
acquisition agreement. The total accrual at December 31, 2001 as
discussed in Note 9 of the audited financial statements for the
Yorktown refinery business amounted to $14.9 million of which a
portion was included in accrued expenses. The liability assumed by us
is $7.5 million.
(b) Represents an adjustment to exclude assets and liabilities of the
Yorktown refinery business we are not acquiring or assuming.
(c) Represents an adjustment to reflect (1) $194.1 million aggregate
principal amount of 11% Notes sold ($200.0 million net of original
issue discount of $5.9 million), (2) $38.0 million initial borrowings
under the Company's new senior secured revolving credit facility, (3)
$40.0 million of borrowings under the Company's new senior secured
mortgage loan facility and (4) the redemption of all $100.0 million
aggregate principal amount of our 9-3/4% Notes.
The adjustment of $13.6 million to other assets represents the
financing fees to be incurred in the amount of $14.0 million less the
write-off of unamortized debt issuance costs associated with the 9
3/4% Notes.
(d) Represents the elimination of BP's investment related to the Yorktown
refinery business.
(e) Represents an after-tax adjustment of $0.3 million to write-off
unamortized debt issuance costs associated with the 9-3/4% Notes.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
HISTORICAL
------------------
YORKTOWN PRO FORMA
REFINERY ----------------------
GIANT BUSINESS ADJUSTMENTS COMBINED
------- -------- ----------- ---------
(dollars in millions, except per share data)
Revenues $ 968.7 $ 688.4(1) $ 7.7 (a) $1,664.8
Costs and Expenses:
Costs of products sold 738.5 588.5 - 1,327.0
Operating expenses 114.3 76.5(2) (7.4)(b) 173.7
(9.7)(c)
Selling, general and administrative expenses 27.9 5.5 - 33.4
Corporate overhead allocation - 6.7(3) - 6.7
Depreciation and amortization 33.9 8.2 (0.2)(d) 41.9
Loss on the disposal/write-down of assets 6.2 - - 6.2
Allowance for related party note and
Interest receivable 5.4 - - 5.4
------- ------- ------- --------
Operating income 42.5 3.0(1)(2) 25.0 70.5
Interest and financing costs (24.1) - (20.6)(e) (44.7)
Interest income 1.7 - 1.7
------- ------- ------- --------
Earnings before income tax 20.1 3.0 4.4 27.5
Income tax provision 7.7 1.2 1.7 (f) 10.6
------- ------- ------- --------
Net earnings $ 12.4 $ 1.8 $ 2.7 $ 16.9
------- ------- ------- --------
Weighted average common shares (in millions)
Basic 8.87 8.87
======= ========
Diluted 8.89 8.89
======= ========
Net earnings per share:
Basic $ 1.40 $ 1.91
======= ========
Diluted $ 1.39 $ 1.90
======= ========
See accompanying notes to unaudited pro forma combined condensed statements of operations.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
INFORMATIONAL NOTES:
(1) Under BP's ownership, the Yorktown refinery was operated as a part of
BP's global refining, production and distribution system. As such,
the Company believes the Yorktown refinery was not always operated to
maximize the sales and profitability of the refinery, but rather the
refinery's contribution to BP's overall operations. In addition, in
2001 the Yorktown refinery experienced a fire that damaged certain
equipment, including its catalytic reformer and conducted a major
planned maintenance turnaround. The interruption of business caused
by the fire and turnaround, which lasted 92 days, resulted in
significant lost sales and profit opportunities at the Yorktown
refinery in 2001.
(2) As discussed in Note 10 of the audited financial statements for the
Yorktown refinery business, operating expenses include $13.3 million
for the costs to repair certain equipment damaged by a fire during
2001. Also included in operating expenses for 2001 are costs related
to a major planned maintenance turnaround in the amount of $9.7
million. See note (c) below.
(3) Historical Yorktown refinery business results include $6.7 million of
allocated corporate overhead. The Company estimates that the amount
of incremental overhead related to the Yorktown refinery will be
approximately $2.0 million per year, which represents a reduction of
$4.7 million per year. BP was self-insured with respect to the
Yorktown refinery. The Company expects to obtain insurance coverage
for the Yorktown refinery at an estimated cost of $3.0 million for
the first year of coverage.
YORKTOWN REFINERY ADJUSTMENTS:
(a) As discussed in Note 5 of the audited financial statements for the
Yorktown refinery business, the Yorktown refinery business
transferred 100% of its propane and butane production to BP and its
affiliates at fixed fee arrangements. The Company has entered into
new contracts with BP, through March 2003, for the sale of
butane and propane to BP at market-indexed prices that are
higher than the current fixed fee arrangements. Under the new
contracts, sales revenues for 2001 would have been higher by $7.7
million. The new contract pricing is effective as of the closing date
of the Yorktown acquisition.
(b) Represents the adjustment to the environmental liability accrual to
reflect the liability assumed by the Company, as provided for in the
environmental indemnification provisions of the Yorktown transaction.
As discussed in Note 9 of the audited financial statements for the
Yorktown refinery business, a pre-tax charge of $11.3 million was
incurred during 2001 relating to expected remediation costs
associated with the refinery site. The total amount of the accrual at
December 31, 2001 amounted to $14.9 million, of which $7.5 million
has been assumed by the Company.
(c) Represents an adjustment to conform the accounting policy for
refinery maintenance turnaround costs to the Company's current policy
of deferring and amortizing such costs. An exposure draft has been
issued by the American Institute of Certified Public Accountants that
is expected to require companies to expense the non-capital portion
of major maintenance costs as incurred. This change in accounting is
expected to be adopted for fiscal years beginning after June 15,
2002, and it is expected that the effect of expensing existing
unamortized deferred non-capital major maintenance costs, if any,
will be reported as a cumulative effect of an accounting change in
the consolidated statement of operations.
(d) Represents an adjustment to record depreciation expense based upon
the Company's preliminary allocation of fair values to property,
plant and equipment based on a weighted-average estimated useful life
of 20 years. Turnaround assets are amortized over a 5-year period.
(e) Represents an adjustment to record interest expense (and amortization
of deferred financing costs and original issue discount) on the 11%
Notes and our new senior secured credit facilities required to
finance the Yorktown acquisition and to pay related transaction fees
and expenses, at a weighted average annual interest cost of 9.99% and
the amortization of consent fees, offset by a decrease in interest
expense (and amortization of deferred financing costs) related to the
9-3/4% Notes. A 1/8% change in the weighted average interest rate
associated with the notes offered hereby and the new senior secured
credit facilities would have a $0.3 million effect on our annual
interest expense.
(f) Represents the income tax effect of the adjustments above at a
combined statutory tax rate of 38%.
(c) Exhibits
2.1 Asset Purchase Agreement, dated February 8, 2002, by and among,
BP Corporation North America Inc., BP Products North America
Inc., and Giant Industries, Inc. Incorporated by reference to
Exhibit 2.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.
23.1 Consent of Ernst & Young LLP to incorporate reports in previously
filed Registration Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto 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 14, 2002