FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period _______ to _______.
For Quarter Ended June 30, 1994 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: (602) 585-8888
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of Common Shares outstanding at July 31, 1994: 12,147,570 shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1994 (Unaudited) and December 31, 1993
Condensed Consolidated Statements of Earnings (Unaudited)
Three and Six Months Ended June 30, 1994 and 1993
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1994 and 1993
Notes to Condensed Consolidated Financial
Statements (Unaudited)
Computation of Per Share Data (Exhibit 11)
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURE
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 1994 December 31, 1993
------------- -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 26,232 $ 19,807
Marketable securities 24,578 36,146
Accounts receivable, net 14,109 15,082
Income tax refunds receivable 198 254
Inventories 31,361 23,341
Prepaid expenses and other 1,879 3,571
Deferred income taxes 3,499 3,749
--------- ---------
Total current assets 101,856 101,950
--------- ---------
Property, plant and equipment 308,756 292,519
Less accumulated depreciation,
depletion and amortization (137,615) (130,276)
--------- ---------
171,141 162,243
--------- ---------
Other assets 12,742 15,106
--------- ---------
$ 285,739 $ 279,299
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 4,007 $ 3,035
Accounts payable 16,583 14,883
Accrued expenses 17,905 19,725
--------- ---------
Total current liabilities 38,495 37,643
--------- ---------
Long-term debt, net of current portion 117,725 117,270
Deferred income taxes 15,748 15,850
Other liabilities 3,632 2,622
Common stockholders' equity 110,139 105,914
--------- ---------
$ 285,739 $ 279,299
========= =========
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands except shares and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1994 1993 1994 1993
------------------------- -------------------------
Net revenues $ 74,285 $ 85,919 $ 138,080 $ 163,282
----------- ----------- ----------- -----------
Cost of products sold 47,733 57,142 89,387 111,562
Operating expenses 19,686 18,354 37,554 35,518
Interest expense, net 2,402 867 4,714 1,911
----------- ----------- ----------- -----------
69,821 76,363 131,655 148,991
----------- ----------- ----------- -----------
Earnings before income taxes 4,464 9,556 6,425 14,291
Provision for income taxes 1,507 3,293 2,056 4,761
----------- ----------- ----------- -----------
Net earnings $ 2,957 $ 6,263 $ 4,369 $ 9,530
=========== =========== =========== ===========
Earnings per common share $ 0.24 $ 0.51 $ 0.36 $ 0.78
=========== =========== =========== ===========
Weighted average number
of shares outstanding 12,173,306 12,223,768 12,182,984 12,223,768
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
-------------------
1994 1993
------- -------
Cash flows from operating activities:
Net earnings $ 4,369 $ 9,530
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation, depletion and amortization 7,697 7,809
Deferred income taxes 148 221
Restricted stock award compensation 244 244
Proceeds from settlement of interest
rate swap agreement 1,514
Increase in other non-current liabilities 1,010
Changes in operating assets and liabilities:
Decrease (increase) in receivables 1,029 (1,207)
(Increase) decrease in inventories (8,020) 1,721
Decrease in prepaid expenses and other 1,692 487
Increase (decrease) in accounts payable 1,700 (2,032)
(Decrease) increase in accrued expenses (2,186) 5,511
------- -------
Net cash provided by operating activities 7,683 23,798
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment
and other assets (10,983) (7,220)
Proceeds from sale of property, plant and
equipment 134 135
Purchases of marketable securities (42,450)
Proceeds from sales of marketable securities 54,018
------- -------
Net cash provided by (used in)
investing activities 719 (7,085)
------- -------
Cash flows from financing activities:
Payments of long-term debt (1,490) (3,785)
Purchase of treasury stock (390)
Deferred financing costs (100)
Proceeds from exercise of stock options 3
------- -------
Net cash used in financing activities (1,977) (3,785)
------- -------
Net increase in cash and cash equivalents 6,425 12,928
Cash and cash equivalents:
Beginning of period 19,807 8,842
------- -------
End of period $26,232 $21,770
======= =======
Noncash Investing and Financing Activities. A portion of the acquisition
price of nine retail units was seller financed for $2,917.
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with 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 six months ended June 30, 1994 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1994. 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, 1993.
NOTE 2 - MARKETABLE SECURITIES:
The Company has implemented Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt
and Equity Securities." Marketable securities are comprised of taxable
corporate bonds, taxable and non-taxable municipal bonds and adjustable
rate preferred stocks and are managed as part of the Company's
short-term cash management program and are classified as
available-for-sale securities. Such classification requires these
securities to be reported at fair market value, with unrealized gains
and losses excluded from earnings and reported in a separate component
of stockholders' equity. At June 30, 1994, the cost of these
securities approximated fair market value.
NOTE 3 - INVENTORIES:
June 30, 1994 December 31, 1993
------------- -----------------
(In thousands)
Inventories consist of the following:
First-in, first-out ("FIFO") method:
Crude oil $11,109 $ 4,820
Refined products 11,081 10,607
Refinery and shop supplies 5,194 5,372
Retail method:
Merchandise 2,550 2,495
------- -------
29,934 23,294
Allowance for last-in, first-out
("LIFO") method 1,927 3,747
Allowance for lower of cost or market (500) (3,700)
------- -------
$31,361 $23,341
======= =======
NOTE 4 - LONG-TERM DEBT:
In November 1993, the Company issued $100,000,000 of 9-3/4% senior
subordinated notes ("Notes"). Repayment of the Notes is jointly and
severally guaranteed on an unconditional basis by the Company's direct
and indirect wholly-owned subsidiaries, subject to a limitation designed
to ensure that such guarantees do not constitute a fraudulent
conveyance. Except as otherwise allowed in the Indenture 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.
No separate financial statements of the subsidiaries are included
herein because the subsidiaries are jointly and severally liable; 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; and the separate
financial statements and other disclosures concerning the subsidiaries
are not deemed material to investors.
NOTE 5 - CONTINGENCIES:
The Company and certain subsidiaries are defendants to various
legal actions. Certain of these pending legal actions involve or may
involve compensatory, punitive or other damages. Litigation is subject
to many uncertainties and it is possible that some of the legal actions,
proceedings or claims referred to above could be decided adversely.
Although the amount of liability at June 30, 1994 with respect to these
matters is not ascertainable, the Company believes that any resulting
liability should not materially affect the Company's financial condition
or results of operations.
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 involve alleged
soil and water contamination and air pollution and personal injuries or
property damage allegedly caused by exposure to hazardous materials
manufactured, handled or used by the Company. Future expenditures
related to health and environmental matters cannot be reasonably
quantified in many circumstances due to the speculative nature of
remediation and clean-up cost estimates and methods, the imprecise and
conflicting data regarding the hazardous nature of various types of
waste, the number of other potentially responsible parties involved,
various defenses which may be available to the Company and changing
environmental laws and interpretations of environmental laws.
The United States Environmental Protection Agency notified the
Company in May 1991 that it may be a potentially responsible party for
the release or threatened release of hazardous substances, pollutants,
or contaminants at the Lee Acres Landfill, which is owned by the United
States Bureau of Land Management ("BLM") and which is adjacent to the
Company's Farmington refinery which was operated until 1982. 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. At the present time, the Company is unable to determine the
extent of potential liability, if any, in this matter and has made no
provision therefore in its financial statements.
At December 31, 1993, the Company had received approximately $2.4
million in connection with the settlement of past and future claims of
the Company against various of its insurance carriers relating to
various environmental issues. In April 1994, the Company completed a
review of its environmental matters and determined that approximately
$1.4 million of these settlements related to ongoing environmental
projects, including the remediation of a free phase hydrocarbon plume
that extends approximately 1,000 feet south of the Company's Farmington
refinery, and therefore such amounts have been designated as
environmental liability accruals in the current and long-term sections
of the Company's condensed consolidated balance sheet at June 30, 1994.
The remaining $1.0 million was recorded as a credit to operating
expenses in the first quarter of 1994, reflecting a recovery of
environmental costs expensed in prior years.
The Company has received several tax notifications and assessments
from the Navajo Tribe relating to crude oil and natural gas removed from
properties located outside the boundaries of the Navajo Indian
Reservation in an area of disputed jurisdiction, including a $1.8 million
severance tax assessment issued to Giant Industries Arizona, Inc., a
wholly-owned subsidiary of the Company, in November 1991. The Company
has invoked its appeal rights with the Tribe's Tax Commission in
connection with this assessment and intends to vigorously oppose the
assessment. It is the Company's understanding that these appeals will
be held in abeyance pending further judicial clarification of the
Tribe's taxing authority by means of litigation involving other
companies. It is possible, however, that the Company's assessments will
have to be litigated by the Company before final resolution. The
Company may receive further tax assessments before judicial resolution
of the Tribe's taxing authority.
EXHIBIT 11
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE DATA
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1994 1993 1994 1993
------------------------ ------------------------
Net earnings $ 2,957,000 $ 6,263,000 $ 4,369,000 $ 9,530,000
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period 12,173,306 12,223,768 12,182,984 12,223,768
=========== =========== =========== ===========
Earnings per common share $0.24 $0.51 $0.36 $0.78
=========== =========== =========== ===========
Additional Primary Computation:
- - -------------------------------
Net earnings $ 2,957,000 $ 6,263,000 $ 4,369,000 $ 9,530,000
=========== =========== =========== ===========
Additional adjustment to weighted average
number of shares outstanding:
Weighted average number of shares
outstanding above 12,173,306 12,223,768 12,182,984 12,223,768
Add - dilutive effect of outstanding
options (a) 30,759 51,046 43,286 29,237
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding as adjusted 12,204,065 12,274,814 12,226,270 12,253,005
=========== =========== =========== ===========
Earnings per common share (b) $0.24 $0.51 $0.36 $0.78
=========== =========== =========== ===========
Fully Diluted Computation:
- - --------------------------
Net earnings $ 2,957,000 $ 6,263,000 $ 4,369,000 $ 9,530,000
=========== =========== =========== ===========
Additional adjustment to weighted average
number of shares outstanding:
Weighted average number of shares
outstanding above 12,173,306 12,223,768 12,182,984 12,223,768
Add - dilutive effect of outstanding
options (a) 30,759 68,271 43,275 68,271
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding as adjusted 12,204,065 12,292,039 12,226,259 12,292,039
=========== =========== =========== ===========
Earnings per common share (b) $0.24 $0.51 $0.36 $0.78
=========== =========== =========== ===========
/TABLE
(a) As determined by the application of the treasury stock method.
(b) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required per note 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Earnings Before Income Taxes
- - ----------------------------
For the three month period ended June 30, 1994, earnings before income
taxes decreased $5.1 million or 53% to $4.5 million from $9.6 million in
the same 1993 period. The decrease is primarily the result of a 10%
decrease in average refinery margins, an 8% decline in refinery sourced
finished product sales volumes, a 4% decline in retail selling prices, a
100% decline in third party ethanol sales volumes, a 28% increase in
ethanol plant grain costs and higher interest and operating expenses. These
negative factors were partially offset by a 26% increase in finished
product sales volumes and a 33% increase in merchandise sales from the
Company's retail units.
For the six months ended June 30, 1994, earnings before income taxes
decreased $7.9 million or 55% to $6.4 million from $14.3 million in the
same 1993 period. The decrease is primarily the result of an 11% decline in
refinery sourced finished product sales volumes, a 2% decline in retail
selling prices, a 28% decline in third party ethanol sales volumes, a 31%
increase in ethanol plant grain costs, a 2% decrease in average refinery
margins and higher interest and operating expenses. These negative factors
were partially offset by a 25% increase in finished product sales volumes
and a 33% increase in merchandise sales from the Company's retail units.
For the three and six month periods ended June 30, 1994, the Company's
exploration and production operations ("Giant E&P") recorded losses of $0.2
million and $0.6 million, respectively, a slight decrease in loss for the
second quarter of 1994 and a slight increase for the 1994 six month period
compared to the same 1993 periods. Each 1994 period reflects declines in
crude oil and natural gas production and selling prices compared to the
same 1993 periods.
Revenues
- - --------
Revenues for the three months ended June 30, 1994, decreased $11.6
million or 14% to $74.3 million from $85.9 million in the comparable 1993
period. The decrease is primarily due to a 16% decrease in refinery
weighted average selling prices, an 8% decline in refinery sourced finished
product sales volumes, a 4% decline in retail selling prices and a 100%
decline in third party ethanol sales volumes. Offsetting these decreases
was a 26% increase in the volume of finished products sold from the retail
units along with a 33% increase in merchandise sales.
The decline in refinery sourced finished product sales volumes was
primarily due to a scheduled major maintenance turnaround started in March
and successfully completed in early April as planned. This turnaround is
performed every four years to conduct preventative maintenance and
equipment upgrading activity. The decline in third party ethanol sales
volumes was the result of lowering of production due to high grain costs
and low selling prices resulting from an over supply of oxygenates. The
Company is planning to operate the ethanol plant at approximately 75% of
capacity in the third quarter due to these factors. The increase in retail
finished product and merchandise sales is the result of increased same
store volumes and the addition of nine units in the Company's primary
market area.
Volumes of refined products sold through retail outlets increased
approximately 26% from 1993 second quarter levels primarily due to a 35%
increase in volumes sold from the service stations and a 5% increase in
travel center volumes.
Revenues, including intercompany revenues, from Giant E&P totaled
$1.5 million for the three months ended June 30, 1994, a decrease of $0.4
million or 22% from the $1.9 million reported for the comparable 1993
period. This decrease is due to a 9% decline in crude oil production, a 10%
decline in crude oil selling prices, a 20% decline in natural gas
production and a 19% decline in natural gas selling prices. The decline in
natural gas production is due to a 1993 upward adjustment of coal seam gas
reserves sold in 1992, determined pursuant to an annual redetermination
clause contained in the 1992 purchase and sale agreement.
Revenues for the six months ended June 30, 1994, decreased $25.2
million or 15% to $138.1 million from $163.3 million in the comparable 1993
period. The decrease is primarily due to a 17% decrease in refinery
weighted average selling prices, an 11% decline in refinery sourced
finished product sales volumes, a 2% decline in retail selling prices and a
28% and 10% decline in third party ethanol sales volumes and selling
prices, respectively. Offsetting these decreases was a 25% increase in the
volume of finished products sold from the retail units along with a 33%
increase in merchandise sales.
The decline in refinery sourced finished product sales volumes was
primarily due to the scheduled major maintenance turnaround. The decline in
third party ethanol sales volumes was caused by operating problems
experienced in the early part of the 1994 first quarter and the lowering of
1994 production due to high grain costs and low selling prices resulting
from an over supply of oxygenates. The increase in service station finished
product and merchandise sales is the result of increased same store volumes
and the addition of nine units in the Company's primary market area.
Volumes of refined products sold through retail outlets increased
approximately 25% from 1993 first half levels primarily due to a 35%
increase in volumes sold from the service stations and 1% increase in
travel center volumes.
Revenues, including intercompany revenues, from Giant E&P totaled
$2.9 million for the six months ended June 30, 1994, a decrease of $1.1
million or 26% from the $4.0 million reported for the comparable 1993
period. This decrease is due to an 11% decline in crude oil production, a
19% decline in crude oil selling prices, a 20% decline in natural gas
production and a 14% decline in natural gas selling prices. The decline in
natural gas production is due to a 1993 upward adjustment of coal seam gas
reserves sold in 1992, determined pursuant to an annual redetermination
clause contained in the 1992 purchase and sale agreement.
Cost of Products Sold
- - ---------------------
For the three months ended June 30, 1994, cost of products sold
decreased $9.4 million or 16% to $47.7 million from $57.1 million for the
corresponding 1993 period. A 15% decline in average crude oil costs and an
8% decline in the volume of finished products sold from the refinery
accounts for the decrease. These decreases were partially offset by an
increase in costs relating to increased merchandise sales from the retail
units and a 28% increase in average grain costs.
Cost of products sold by Giant E&P decreased approximately 29% in
the three months ended June 30, 1994, compared to the same 1993 period. The
decline is primarily related to a decrease in production.
For the six months ended June 30, 1994, cost of products sold
decreased $22.2 million or 20% to $89.4 million from $111.6 million for the
corresponding 1993 period. A 19% decline in average crude oil costs and an
11% decline in the volume of finished products sold from the refinery
accounts for the decrease. These decreases were partially offset by an
increase in costs relating to increased merchandise sales from the retail
units and a 31% increase in average grain costs.
Cost of products sold by Giant E&P decreased approximately 26% in
the six months ended June 30, 1994, compared to the same 1993 period. The
decline is primarily related to a decrease in production.
Operating Expenses
- - ------------------
For the three and six month periods ended June 30, 1994, operating
expenses increased $1.3 million or 7% and $2.0 million or 6%, respectively,
compared to the corresponding 1993 periods. The increase in each period is
primarily due to operating expenses relating to the nine retail units
acquired, an increase in payroll and related costs for other operations and
increases in other expenses, primarily depreciation, utilities, supplies
and advertising. The six month increases were partially offset by the
recording of a $1.0 million insurance settlement in the first quarter
relating to environmental costs incurred in prior years.
Interest Expense, Net
- - ---------------------
For the three and six months ended June 30, 1994, interest expense,
net (interest expense less interest income) increased $1.5 million or 177%
and $2.8 million or 147% compared to the same periods in 1993. The increase
in each period is primarily due to the issuance of $100 million of 9-3/4%
senior subordinated notes in November 1993, the proceeds of which were
partially used to retire existing debt with lower effective interest rates,
but with significantly shorter maturities. In addition, the amortization of
proceeds from an interest rate management strategy utilizing an interest
rate swap were lower in the 1994 periods. Partially offsetting these items
was an increase in interest income resulting from the investment of excess
cash in marketable securities and short-term financial instruments.
Income Taxes
- - ------------
Income taxes for the three and six months ended June 30, 1994 and 1993
have been computed in accordance with Statement of Financial Accounting
Standards No. 109, resulting in effective tax rates ranging from
approximately 32% to 34%. The variance from the statutory U.S. federal tax
rate of 35% for the 1994 periods and 34% for the 1993 periods is primarily
due to the relationship of estimated alcohol fuel and coal seam gas credits
to estimated annual income, partially offset by estimated state income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operations
- - -------------------------
Net cash provided by operating activities totaled $7.7 million for the
six months ended June 30, 1994, compared to $23.8 million for the
comparable 1993 period. Operating cash flows decreased primarily as the
result of a decline in net earnings and the net changes in working capital
items.
Working Capital
- - ---------------
Working capital at June 30, 1994 consisted of current assets of $101.9
million and current liabilities of $38.5 million, or a current ratio of
2.6:1. At December 31, 1993, the current ratio was 2.7:1 with current
assets of $102.0 million and current liabilities of $37.6 million.
Current assets have decreased since December 31, 1993, primarily due
to a net decrease in cash and cash equivalents and marketable securities, a
decline in trade receivables, primarily product supply receivables, and a
decrease in prepaid expenses, principally deposits and prepaid insurance
premiums. Partially offsetting these decreases is an increase in
inventories due to an 82% increase in crude oil volumes on hand,
partially resulting from the scheduled major maintenance turnaround in
March and April, and an increase in market values. Finished product volumes
were up slightly from year end levels. Current liabilities have increased
primarily due to an increase in the current portion of long-term debt and
accounts payable, offset in part by a decrease in accrued expenses.
Accounts payable have increased primarily due to an increase in raw
material costs. Accrued expenses have declined primarily due to the
reclassification of deferred insurance refunds in part to a long-term
reserve for environmental liabilities and in part as a recovery of
previously incurred environmental expenditures, the payment of management
incentive bonuses and a decline in estimated income taxes payable. These
decreases were offset in part by increases in accrued interest, payroll
and excise taxes.
Capital Expenditures and Resources
- - ----------------------------------
Net cash used in investing activities for the purchase of property,
plant and equipment and other assets totaled approximately $11.0 million
for the first six months of 1994, including the cash portion of the
acquisition of nine retail units and certain other assets from a
privately-held retailer/jobber, scheduled major maintenance turnaround
costs, oil and gas well drilling and leasehold costs and various other
projects. In addition, as part of the Company's short-term cash management
program there were net sales of marketable securities of approximately
$11.6 million.
Working capital, including that necessary for capital expenditures and
debt service will be funded through cash generated from operating
activities, existing cash and marketable securities balances and, if
necessary, future borrowings. Future liquidity, both short and long-term,
will continue to be primarily dependent on producing and selling sufficient
quantities of refined products at margins sufficient to cover fixed and
variable expenses.
The Company continues to investigate other strategic acquisitions,
including the possibility of acquiring an additional refinery and the
acquisition of producing oil and gas properties, as well as capital
improvements to its existing facilities and is actively pursuing the
possible sale or exchange of certain non-strategic assets.
Capital Structure
- - -----------------
At June 30, 1994, and December 31, 1993, the Company's long-term debt
was 52% and 53% of total capital, respectively.
In November 1993, the Company issued $100 million of 10 year 9-3/4%
senior subordinated notes ("Notes"). Repayment of the Notes is jointly and
severally guaranteed on an unconditional basis by the Company's direct and
indirect wholly-owned subsidiaries, subject to a limitation designed to
ensure that such guarantees do not constitute a fraudulent conveyance.
Except as otherwise allowed in the Indenture 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.
The Company has a $5.0 million cash secured credit facility available
to support the issuance of letters of credit in the ordinary course of
business. At June 30, 1994, there were approximately $2.6 million in
irrevocable letters of credit outstanding under this arrangement.
No dividends were declared for the first or second quarter of 1994.
Future dividends, if any, are subject to the results of the Company's
operations, existing debt covenants and declaration by the Company's Board
of Directors.
On April 15, 1994, the Company's Board of Directors authorized the
repurchase of up to 5% or approximately 600,000 shares of the Company's
common stock. In the second quarter, the Company repurchased 45,700 shares
of its common stock on the open market for $390,323, a weighted average
cost of $8.54 per share, including commissions. These shares are being
treated as treasury shares. Additional repurchases may be made from time to
time in the open market in compliance with Securities and Exchange
Commission guidelines.
Any repurchased shares would be available for a variety of corporate
purposes. The number of shares actually repurchased will be dependent upon
market conditions and there is no guarantee as to the exact number of
shares to be repurchased by the Company. The Company may suspend or
discontinue the program at any time without notice.
Other
- - -----
In May 1991, the EPA notified the Company that it may be a potentially
responsible party for the release, or threatened release, of hazardous
substances, pollutants or contaminants at the Lee Acres Landfill, which is
adjacent to the Company's Farmington refinery which was operated until
1982. At the present time, the Company is unable to determine the extent of
its potential liability, if any, in the matter. In 1989, a consultant to
the Company estimated, based on various assumptions, that the Company's
share of potential liability could be approximately $1.2 million. This
figure was based upon 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. The
consultant, however, did not conduct an analysis 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. Actual
liability, if any, may differ significantly from the consultant's estimate.
In addition, the Company is remediating a free phase hydrocarbon plume that
extends approximately 1,000 feet south of the Farmington refinery.
The Company is subject to audit on an ongoing basis of the various
taxes that it pays to federal, state, local and Tribal agencies. These
audits may result in additional assessments or refunds along with interest
and penalties. In some cases the jurisdictional basis of the taxing
authority is in dispute and is the subject of litigation or administrative
appeals. In one such case, the Company has received several tax assessments
from the Navajo Tribe, including a $1.8 million severance tax assessment
issued to Giant Industries Arizona, Inc., a wholly-owned subsidiary of the
Company, in November 1991 relating to crude oil removed from properties
located outside the boundaries of the Navajo Indian Reservation in an area
of disputed jurisdiction. It is the Company's position that it is in
substantial compliance with laws applicable to the disputed area, and such
assessments are or will be the subject of litigation or administrative
appeals.
The Company uses the full cost method of accounting for oil and gas
activities. Under this method, the Company is required to write down
capitalized costs, adjusted for accumulated amortization and related
deferred income taxes, if those costs exceed a "cost ceiling." This "cost
ceiling" is determined by calculating the value of the Company's estimated
reserves utilizing, among other things, the price of crude oil and natural
gas at the end of each quarter. During periods of declining prices and
reserves, the Company may be required to write down these capitalized costs
due to impairment in value. At June 30, 1994, the "cost ceiling" exceeded
the adjusted capitalized costs and no writedown was required. Whether or
not a writedown will be necessary in the future depends upon future prices
and reserve volumes.
On July 16, 1994, a propane treatment vessel associated with the
refinery's alkylation unit failed, causing several units at the refinery to
be temporarily shutdown and damaging the alkylation unit, necessitating
extensive repairs to the propane treatment equipment. All units temporarily
shutdown by the incident, except the alkylation unit, were subsequently
returned to service. Repairs to the alkylation unit could take until
late August to be completed. It is estimated that gasoline production will
be reduced approximately 2,000 barrels per day, or roughly 12%, until the
alkylation unit is back on-line. Existing gasoline inventories and third
party purchases will be utilized to meet customer needs. The financial
impact on the Company's results of operations is not determinable at this
time, but based on current information available the Company believes that
the negative impact, after insurance recoveries, will be less than $0.05
per share.
Due primarily to major refinery maintenance projects in early 1994,
the Company's inventories of crude oil have increased to approximately
620,000 barrels as of June 30, 1994. Based upon projections of local
crude oil availability in the field, current levels of usage of Alaska
North Slope crude oil ("ANS") and Company inventory levels, the Company
believes an adequate crude oil supply will be available to sustain refinery
operations at planned levels through the remainder of 1994 and well into
1995. The Company believes that local crude oil supply is currently
approximately 5% below aggregate local crude oil demand. Exploration and
production activity in the Four Corners Area has been at a relatively low
level over the last few years with the result that total local crude oil
production currently reflects the trend of normal depletion of reservoirs
without the supplements of significant new discoveries. The Company is
able to supplement local crude oil supplies with ANS and other alternate
grades of crude oil through its gathering system's interconnection with the
Four Corners and Texas-New Mexico common carrier pipeline systems and by
truck or rail, although the quality and delivered cost of such crude oil
varies from that produced locally. The Company has used ANS, a higher
sulfur, lower quality crude oil, at various times in the past, and the
Company has been in the planning stages to make certain modifications to
the Refinery to increase its ability to use ANS crude oil from approximately
1,000 barrels per day under the current equipment configuration to 5,000-6,000
barrels per day at a capital cost of approximately $11.0 million. With the
improved inventory position and because of the changing regulatory
environment and the Company's desire to ensure its selection of the most cost
effective supplemental supply alternatives, the Company has delayed the
implementation of this project and is reevaluating whether this or various
other alternatives constitute the most desirable strategy to supplement local
crude oil supplies on a long-term basis.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings required to be
reported pursuant to Item 103 of Regulation S-K. The Company is a party
to ordinary routine litigation incidental to its business. In addition,
there is hereby incorporated by reference the information regarding
contingencies in Note 5 to the Unaudited Condensed Consolidated
Financial Statements set forth in Item 1, Part I hereof and the
discussion of certain contingencies contained herein under the heading
"Liquidity and Capital Resources - Other."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
11 - Computation of Per Share Data (see Part I, Item 1).
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for
the three months ended June 30, 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report on Form 10-Q for the
quarter ended June 30, 1994 to be signed on its behalf by the
undersigned thereunto duly authorized.
GIANT INDUSTRIES, INC.
A. WAYNE DAVENPORT
-------------------------------------
A. Wayne Davenport
Vice President and Corporate Controller
(Principal Accounting Officer)
Date: August 15, 1994