FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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 March 31, 1995 Commission File Number:
1-10398
GIANT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0642718
(State of 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 April 30, 1995: 11,698,929 shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1995 (Unaudited) and December 31, 1994
Condensed Consolidated Statements of Earnings
(Unaudited) Three Months Ended March 31, 1995 and 1994
Condensed Consolidated Statements of Cash Flows
(Unaudited) Three Months Ended March 31, 1995 and 1994
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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)
March 31, 1995 December 31, 1994
-------------- -----------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 10,429 $ 12,597
Marketable securities 29,063 35,631
Accounts receivable, net 18,922 20,368
Income tax refunds receivable 519 2,144
Inventories 34,257 32,270
Prepaid expenses and other 2,141 2,476
Deferred income taxes 2,371 2,490
--------- ---------
Total current assets 97,702 107,976
--------- ---------
Property, plant and equipment 313,075 306,717
Less accumulated depreciation,
depletion and amortization (147,425) (143,801)
--------- ---------
165,650 162,916
--------- ---------
Other assets 14,199 14,675
--------- ---------
$ 277,551 $ 285,567
========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 4,107 $ 4,107
Accounts payable 17,672 20,707
Accrued expenses 18,088 17,591
--------- ---------
Total current liabilities 39,867 42,405
--------- ---------
Long-term debt, net of current portion 113,718 116,090
Deferred income taxes 13,756 13,752
Other liabilities 3,539 3,630
Common stockholders' equity 106,671 109,690
--------- ---------
$ 277,551 $ 285,567
========= =========
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
March 31,
------------------------------
1995 1994
----------- -----------
Net revenues $ 69,993 $ 63,795
Cost of products sold 48,503 40,881
----------- -----------
Gross margin 21,490 22,914
Operating expenses 12,591 12,631
Depreciation, depletion and amortization 3,792 3,801
Selling, general and administrative expenses 2,842 2,209
----------- -----------
Operating income 2,265 4,273
Interest expense, net 2,047 2,312
----------- -----------
Earnings before income taxes 218 1,961
Provision for income taxes 71 549
----------- -----------
Net earnings $ 147 $ 1,412
=========== ===========
Earnings per common share $ 0.01 $ 0.12
=========== ===========
Weighted average number of shares outstanding 11,810,573 12,192,770
=========== ===========
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
--------------------
1995 1994
------- --------
Cash flows from operating activities:
Net earnings $ 147 $ 1,412
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation, depletion and amortization 3,792 3,801
Deferred income taxes 122 (162)
Restricted stock award compensation 116 122
Changes in operating assets and liabilities:
Decrease in receivables 3,071 948
Increase in inventories (1,987) (2,478)
Decrease in prepaid expenses and other 335 1,372
Decrease in accounts payable (3,035) (806)
Decrease in accrued expenses (85) (1,095)
(Decrease) increase in other non-current liabilities (91) 1,157
Other 86
------- --------
Net cash provided by operating activities 2,471 4,271
------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment and other assets (7,150) (7,010)
Proceeds from sale of property, plant and equipment 1,062 120
Purchases of marketable securities (23,685)
Proceeds from sales and maturities of marketable securities 6,707 39,673
------- --------
Net cash provided by investing activities 619 9,098
------- --------
Cash flows from financing activities:
Payments of long-term debt (2,372) (92)
Purchase of treasury stock (2,293)
Payment of dividends (593)
Deferred financing costs (124)
------- --------
Net cash used in financing activities (5,258) (216)
------- --------
Net (decrease) increase in cash and cash equivalents (2,168) 13,153
Cash and cash equivalents:
Beginning of period 12,597 19,807
------- --------
End of period $10,429 $ 32,960
======= ========
Noncash Investing and Financing Activities. In 1994, a portion of the
acquisition price of nine retail units was seller financed for $2,917,000.
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 three months ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1995. 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, 1994.
NOTE 2 - MARKETABLE SECURITIES:
Marketable securities are comprised of taxable corporate bonds,
taxable and non-taxable municipal bonds and adjustable rate preferred
stock 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 value,
with unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity. At March 31, 1995 and
December 31, 1994, there were valuation allowances of $348,000 and
$654,000, respectively, reducing the carrying value of the portfolio to
estimated fair value and the after-tax adjustments necessary to mark the
securities to market reduced stockholders' equity by $213,000 at March 31,
1995 and $398,000 at December 31, 1994.
NOTE 3 - INVENTORIES:
March 31, 1995 December 31, 1994
-------------- -----------------
(In thousands)
Inventories consist of the following:
First-in, first-out ("FIFO") method:
Crude oil $15,685 $13,611
Refined products 10,418 11,054
Refinery and shop supplies 5,754 5,705
Retail method:
Merchandise 2,541 2,428
------- -------
34,398 32,798
Allowance for last-in, first-out
("LIFO") method (141) (528)
------- -------
$34,257 $32,270
======= =======
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 - COMMON STOCK:
On January 9, 1995, the Company's Board of Directors declared a
common stock dividend of $0.05 per share payable to stockholders of
record on January 23, 1995. This dividend was paid on February 3,
1995. On March 2, 1995, the Company's Board of Directors declared
another common stock dividend of $0.05 per share payable to
stockholders of record on April 24, 1995. This dividend was paid on
May 5, 1995.
In the first quarter of 1995, the Company repurchased 276,200
shares of its common stock for approximately $2,300,000. From the
inception of the Company's common stock repurchase program in 1994
through April 30, 1995, the Company had repurchased 488,700 shares
at a weighted average cost of approximately $8.23 per share, including
commissions, or approximately $4,000,000. These shares are being
treated as treasury shares. Any repurchased shares would be available
for a variety of corporate purposes.
NOTE 6 - CONTINGENCIES:
The Company and certain subsidiaries are defendants in 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 March 31, 1995 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, 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,
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 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.
The Company has established an environmental liability accrual of
approximately $1,500,000 relating to ongoing environmental projects,
including the remediation of a free-phase hydrocarbon plume at the
Company's Farmington Refinery and hydrocarbon contamination on 5.5 acres
the Company owns in Bloomfield, New Mexico. In connection with the
latter, the Company is in the process of an investigation to determine
the extent of the contamination. The accrual is recorded in the current
and long-term sections of the Company's consolidated balance sheet.
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 $1,800,000
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Earnings Before Income Taxes
- -----------------------------
Earnings before income taxes were $218,000 for the three months
ended March 31, 1995, a decrease of approximately $1.8 million from
$2.0 million for the three months ended March 31, 1994. The decrease is
primarily the result of a 30% decrease in average refinery margins and
higher selling, general and administrative expenses, partially offset
by an 8% increase in refinery sourced finished product sales volumes, a
21% increase in service station merchandise sales, lower ethanol plant
grain costs, a 4% and 3% increase in third party ethanol sales volumes
and prices, respectively, and lower net interest costs.
For the three months ended March 31, 1995 and 1994, the Company's
exploration and production operations ("Giant E&P") recorded earnings
of $73,000 and a loss of $373,000, respectively. The improvement is due
primarily to increases in crude oil and natural gas production and
crude oil selling prices, offset in part by a decline in natural gas
selling prices.
Revenues
- --------
Revenues for the three months ended March 31, 1995, increased $6.2
million or 10% to $70.0 million from $63.8 million in the comparable
1994 period. The increase is primarily due to an 8% increase in
refinery weighted average selling prices, an 8% increase in refinery
sourced finished product sales volumes and a 21% increase in service
station merchandise sales. Offsetting these increases was an overall
decline in revenues from the retail operations.
The increase in refinery sourced finished product sales volumes
was primarily the result of a decline in first quarter 1994 sales
volumes due to a scheduled major maintenance turnaround started in
March and completed in April of that year. The increase in service
station merchandise sales is the result of increased same store volumes
and the addition of three units. The overall decline in revenues from
retail operations is primarily related to the sale of the Giant Express
travel center in November 1994.
Volumes of refined products sold through retail outlets decreased
approximately 6% from 1994 levels due to a 33% decrease in volumes sold
from the travel centers, primarily related to the sale of the Giant
Express, offset in part by a 3% increase in service station volumes.
Revenues, including intercompany revenues of $1.5 million in 1995
and $830,000 in 1994, from Giant E & P totaled $1.9 million for the
three months ended March 31, 1995, an increase of approximately $484,000
or 34% from the $1.4 million reported for the comparable 1994 period. This
increase is due to a 39% increase in crude oil production, a 27% increase
in average crude oil selling prices and a 16% increase in natural gas
production. These increases are offset in part by a 31% decline in
natural gas selling prices. The increase in crude oil production is
primarily the result of the acquisition of approximately one million
barrels of crude oil producing reserves in the first quarter of 1995.
The increase in natural gas production is due to a 1994 year end
downward adjustment of coal seam gas reserves sold in 1992, determined
pursuant to an annual redetermination clause contained in the 1992
purchase and sale agreement, which resulted in the addition of
approximately 1,018 million cubic feet of natural gas reserves.
Cost of Products Sold
- ---------------------
For the three months ended March 31, 1995, cost of products sold
increased $7.6 million or 19% to $48.5 million from $40.9 million for
the corresponding 1994 period. A 25% increase in average crude oil
costs, an 8% increase in the volume of finished products sold from the
refinery and a 21% increase in merchandise sales from the service
stations accounts for most of the increase. These increases were
partially offset by a credit to cost of products sold for approximately
$900,000 resulting from the liquidation of certain LIFO inventory
layers, a decrease in merchandise sales from the travel centers and a
decrease in average grain costs resulting in part from an improved
grain harvest in 1994.
Cost of products sold by Giant E & P increased approximately 20%
for the three months ended March 31, 1995, compared to the same 1994
period. The increase is primarily related to an increase in production.
Operating Expenses
- ------------------
For the three months ended March 31, 1995, operating expenses
decreased $40,000, less than 1%, to slightly less than $12.6 million
from slightly more than $12.6 million in the corresponding 1994 period.
The decrease is primarily related to the sale of the Giant Express and
a decline in purchased fuel costs for the refinery. Partially
offsetting these decreases was an increase in payroll and related costs
and outside services for other operations.
Selling, General and Administrative Expenses
- --------------------------------------------
For the three months ended March 31, 1995, selling, general and
administrative expenses increased $633,000 or 29% to $2.8 million from
$2.2 million in the corresponding 1994 period. The increase is
primarily the result of a reduction in 1994 first quarter expenses from
the recording of a $1.0 million insurance settlement relating to
environmental costs incurred in prior years and higher payroll costs in
the 1995 period. Offsetting these items are reductions in 1995 first
quarter expenses for a decrease in the estimated liability for self
insured workmen's compensation claims and an adjustment in the
estimated allowance for doubtful accounts.
Interest Expense, Net
- ---------------------
For the three months ended March 31, 1995, net interest expense
(interest expense less interest income) decreased $265,000 or 11% to
$2.0 million from $2.3 million in the same 1994 period. The decrease is
primarily due to interest income received on the refund of income taxes
paid in prior periods.
Income Taxes
- ------------
Income taxes for the three months ended March 31, 1995 and 1994
were computed in accordance with Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), resulting in effective tax rates of
approximately 33% and 28%, respectively. The difference in the two
rates is primarily due to the relationship of relatively consistent
amounts of estimated alcohol fuel and coal seam gas tax credits to
varying amounts of estimated annual income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operations
- -------------------------
Net cash provided by operating activities totaled $2.5 million for
the three months ended March 31, 1995, compared to $4.3 million for the
comparable 1994 period. Operating cash flows decreased primarily as the
result of a decline in net earnings adjusted for non-cash items and the
net changes in working capital items.
Working Capital
- ---------------
Working capital at March 31, 1995 consisted of current assets of
$97.7 million and current liabilities of $39.9 million, or a current
ratio of 2.45:1. At December 31, 1994, the current ratio was 2.55:1
with current assets of $108.0 million and current liabilities of $42.4
million.
Current assets have decreased since December 31, 1994, primarily
due to a decrease in cash and cash equivalents, marketable securities
and income tax refunds receivable. Inventories have increased somewhat
due to a 12% increase in crude oil volumes on hand at slightly higher
prices.
Current liabilities have decreased due to a decrease in accounts
payable. Accounts payable have declined primarily due to the timing of
certain payments which would have normally occurred at year end but
were not due and payable until 1995. Partially offsetting this decrease
is an increase in accrued expenses, primarily due to an increase in
accrued interest and dividends payable, offset in part by the payment of
certain other year end accruals.
Capital Expenditures and Resources
- ----------------------------------
Net cash used in investing activities for the purchase of
property, plant and equipment totaled approximately $7.1 million for
the first three months of 1995. These expenditures were primarily for
the acquisition of proved reserves, oil and gas well drilling and
leasehold costs and for the acquisition, construction, rebuilding and
remodeling of various retail units.
The Company, through its subsidiary Giant E & P, has acquired an
average 33.5% working interest in certain producing properties
southwest of San Antonio, Texas for $2.5 million plus a residual
interest in all current and future wells drilled on the acquired
property. Proved net reserves acquired in the transaction totaled
approximately one million barrels of oil equivalent, comprised of
approximately 98% crude oil and 2% natural gas. The transaction closed
in March 1995.
The Company has acquired two service station/convenience stores in
its primary market area. One unit was purchased on January 10, 1995 and
the other unit, which is located on the Navajo Indian Reservation, will
be operated by the Company under a management agreement effective
January 11, 1995, with formal possession pending approval by the Navajo
Tribe.
In addition, the Company has entered into an agreement to exchange
two of its retail service stations located in Tucson, Arizona for a
finished products terminal in Albuquerque, New Mexico owned by a major
oil Company. The effect of the non-cash exchange is to replace two
service stations not considered to be strategic to the Company's
overall marketing strategies with a finished products terminal which is
an integral step in the Company's strategy to maximize both product
volumes and netbacks to the Ciniza Refinery. The transaction is
expected to close by early summer, unless cancelled by either party in
accordance with the terms of the agreement.
During the quarter, the Company received proceeds of approximately
$1.1 million from the sale of certain non-strategic real estate assets.
No gain or loss resulted from these sales.
The Company continues to investigate other strategic acquisitions,
including the possibility of acquiring an additional refinery,
marketing assets, retail outlets 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 other non-strategic assets.
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.
Capital Structure
- -----------------
At March 31, 1995, and December 31, 1994, the Company's long-term
debt was 52% and 51% of total capital, respectively. The increase is
the result of a decrease in stockholders' equity due to the purchase
of treasury stock and the declaration and payment of common stock
dividends, offset in part by a decrease in long-term debt.
The Company's capital structure includes $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 $20.0 million uncommitted line of credit
available to support the issuance of letters of credit in the ordinary
course of business. At March 31, 1995, there were approximately $12.4
million in irrevocable letters of credit outstanding under this
arrangement. This uncommitted line of credit is subject to a negative
pledge on working capital.
In 1994, the Company's Board of Directors authorized the
repurchase of 1,000,000 shares of the Company's common stock, or
approximately 8% of all outstanding shares. These purchases may be made
from time to time as conditions permit. Shares may be repurchased
through privately-negotiated transactions, block share purchases and
open market transactions. In the first quarter of 1995, the Company
repurchased 276,200 shares of its common stock for approximately $2.3
million. From inception through April 30, 1995 the Company had
repurchased 488,700 shares at a weighted average cost of approximately
$8.23 per share, including commissions, or approximately $4.0 million.
These shares are being treated as treasury shares.
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.
On March 2, 1995, the Company's Board of Directors declared a
common stock dividend of $0.05 per share payable to stockholders of
record on April 24,1995. This dividend was paid on May 5, 1995. 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.
Other
- -----
Federal, state and local laws and regulations relating to health
and the environment affect nearly all of the operations of the Company.
As is the case with 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, 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, 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.
It is expected that rules and regulations implementing federal,
state and local laws relating to health and the environment will
continue to affect the operations of the Company. The Company cannot
predict what additional health or environmental legislation or
regulations will be enacted or become effective in the future or how
existing or future laws or regulations will be administered or enforced
with respect to products or activities of the Company. Compliance with
more stringent laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies, could have an adverse
effect on the financial position and the results of operations of the
Company and could require substantial expenditures by the Company for
the installation and operation of pollution control systems and
equipment not currently possessed by the Company.
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 has established an environmental liability accrual of
approximately $1.5 million relating to ongoing environmental projects,
including the remediation of the free-phase hydrocarbon plume described
above and hydrocarbon contamination on 5.5 acres the Company owns in
Bloomfield, New Mexico. In connection with the latter, the Company is
in the process of an investigation to determine the extent of the
contamination. The accrual is recorded in the current and long-term
sections of the Company's consolidated balance sheet.
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 writedown
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 writedown
these capitalized costs due to impairment in value. At March 31, 1995,
the "cost ceiling" exceeded the Company's adjusted capitalized costs.
Whether or not a writedown will be necessary in the future depends upon
future prices and reserve volumes.
The Company has reached final settlement with its insurance
companies under its business interruption policies as they relate to
the accident that occurred at the refinery in July 1994 for
approximately $1.5 million. Approximately $1.4 million of this amount
had been accrued during 1994.
Due in part to a decision to accumulate raw material inventory
during periods of reduced production such as those resulting from a
major maintenance project at the refinery in early 1994 and an accident
in July 1994, and due in part to better than forecasted receipts of
crude oil from the field, the Company's inventories of crude oil have
increased to approximately 852,000 barrels as of March 31, 1995. Based
on projections of local crude oil availability from the field, current
levels of usage of Alaska North Slope crude oil ("ANS"), and the
Company's inventory levels, the Company believes an adequate crude oil
supply will be available, without the use of additional supplemental
supply alternatives, to sustain refinery operations at planned levels
into the fourth quarter of 1996.
Because exploration and production activity has been at a
relatively low level over the last few years, total crude oil
production in the Four Corners area currently reflects the trend of
normal depletion of reservoirs without the supplements of significant
new discoveries. The Company believes that local crude oil supply
currently approximates 95% of aggregate local crude oil demand. The
Company is currently able to supplement local crude oil supplies with
ANS and other alternate grades of crude oil through its gathering
systems' interconnection with the Four Corners and Texas-New Mexico
common carrier pipeline systems and by truck or rail. Generally, such
crude oil is of lesser quality than locally available crude oils, and,
with the exception of ANS, the Company believes such crude oil
generally has a delivered cost greater than that of locally available
crude oil.
In response to the decline in local crude oil production, the
Company has evaluated, and will continue in the future to evaluate,
supplemental crude oil supply alternatives on both a short-term and
long-term basis. Among other alternatives, the Company has considered
making equipment modifications to the refinery to increase its ability
to use ANS crude oil from its current level of approximately 1,000
barrels per day and has considered the installation of additional rail
facilities to enable the Company to provide the incremental crude oil
to supplement local supply sources when required in the most cost
effective manner available. In addition, the Company has considered,
and has in fact entered into, additional long-term agreements with
local crude oil suppliers to provide additional security for the
Company's local supply sources.
As additional supplemental crude oil becomes necessary, the
Company intends to implement one or more of these available
alternatives as necessary and as is most advantageous under the then
prevailing conditions. The Company currently believes that the most
desirable strategy to supplement local crude oil supplies, on a long-
term basis, is the delivery of supplemental crude oil from outside of
the Four Corners area by pipeline. Implementation of supplemental
supply alternatives will result in additional raw material costs,
operating costs, capital costs, or a combination thereof in amounts
which are not presently ascertainable by the Company but which will
vary depending on factors such as the specific alternative implemented,
the quantity of supplemental crude oil required, and the date of
implementation. Implementation of some supply alternatives requires the
consent or cooperation of third parties and other considerations beyond
the control of the Company.
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 6 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) Exhibits:
11 - Computation of Per Share Data.
27 - Financial Data Schedule.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for
the three months ended March 31, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report on Form 10-Q for the
quarter ended March 31, 1995 to be signed on its behalf by the
undersigned thereunto duly authorized.
GIANT INDUSTRIES, INC.
/s/ A. WAYNE DAVENPORT
-------------------------------------
A. Wayne Davenport
Vice President and Corporate Controller
(Principal Accounting Officer)
Date: May 12, 1995