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, 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 June 30, 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 July 31, 1995: 11,321,229 shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1995 (Unaudited) and December 31, 1994
Condensed Consolidated Statements of Earnings
(Unaudited) Three and Six Months Ended June 30, 1995 and 1994
Condensed Consolidated Statements of Cash Flows
(Unaudited) Six Months Ended June 30, 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 4 - Submission of Matters to a Vote of Security Holders
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, 1995 December 31, 1994
------------- -----------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 11,518 $ 12,597
Marketable securities 26,039 35,631
Accounts receivable, net 17,804 20,368
Income tax refunds receivable 259 2,144
Inventories 34,089 32,270
Prepaid expenses and other 2,344 2,476
Deferred income taxes 2,419 2,490
--------- ---------
Total current assets 94,472 107,976
--------- ---------
Property, plant and equipment 319,903 306,717
Less accumulated depreciation,
depletion and amortization (151,113) (143,801)
--------- ---------
168,790 162,916
--------- ---------
Other assets 13,382 14,675
--------- ---------
$ 276,644 $ 285,567
========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 4,133 $ 4,107
Accounts payable 19,745 20,707
Accrued expenses 16,791 17,591
--------- ---------
Total current liabilities 40,669 42,405
--------- ---------
Long-term debt, net of current portion 113,523 116,090
Deferred income taxes 13,851 13,752
Other liabilities 3,462 3,630
Common stockholders' equity 105,139 109,690
--------- ---------
$ 276,644 $ 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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
Net revenues $ 81,565 $ 74,285 $ 151,558 $ 138,080
Cost of products sold 56,124 46,940 104,627 87,821
----------- ----------- ----------- -----------
Gross margin 25,441 27,345 46,931 50,259
Operating expenses 12,885 13,038 25,476 25,669
Depreciation, depletion and amortization 3,902 3,896 7,694 7,697
Selling, general and administrative expenses 3,365 3,545 6,207 5,754
----------- ----------- ----------- -----------
Operating income 5,289 6,866 7,554 11,139
Interest expense, net 2,126 2,402 4,173 4,714
----------- ----------- ----------- -----------
Earnings before income taxes 3,163 4,464 3,381 6,425
Provision for income taxes 1,011 1,507 1,082 2,056
----------- ----------- ----------- -----------
Net earnings $ 2,152 $ 2,957 $ 2,299 $ 4,369
=========== =========== ===========
===========
Earnings per common share $ 0.19 $ 0.24 $ 0.20 $ 0.36
=========== =========== ===========
===========
Weighted average number of shares outstanding 11,516,074 12,173,306 11,662,510
12,182,984
=========== =========== ===========
===========
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,
---------------------
1995 1994
-------- --------
Cash flows from operating activities:
Net earnings $ 2,299 $ 4,369
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation, depletion and amortization 7,694 7,697
Deferred income taxes 170 148
Restricted stock award compensation 231 244
Changes in operating assets and liabilities:
Decrease in receivables 4,449 1,029
Increase in inventories (1,819) (8,020)
Decrease in prepaid expenses and other 132 1,692
(Decrease) increase in accounts payable (962) 1,700
Decrease in accrued expenses (1,373) (2,186)
(Decrease) increase in other non-current liabilities (168) 1,010
Other 272
-------- --------
Net cash provided by operating activities 10,925 7,683
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment and other assets (13,411) (10,983)
Proceeds from sale of property, plant and equipment 1,150 134
Purchases of marketable securities (42,450)
Proceeds from sales and maturities of marketable securities 9,592 54,018
-------- --------
Net cash (used in) provided by investing activities (2,669) 719
-------- --------
Cash flows from financing activities:
Payments of long-term debt (2,541) (1,490)
Purchase of treasury stock (5,620) (390)
Payment of dividends (1,174)
Deferred financing costs (100)
Proceeds from exercise of stock options 3
-------- --------
Net cash used in financing activities (9,335) (1,977)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,079) 6,425
Cash and cash equivalents:
Beginning of period 12,597 19,807
-------- --------
End of period $ 11,518 $ 26,232
======== ========
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 six months ended June 30, 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, 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 June 30, 1995 and
December 31, 1994, there were valuation allowances of $183,000 and
$654,000, respectively, reducing the carrying value of the portfolio to
estimated fair value. The after-tax adjustments necessary to mark the
securities to market reduced stockholders' equity by $111,000 at June 30,
1995 and $398,000 at December 31, 1994.
NOTE 3 - INVENTORIES:
(In thousands)
June 30, 1995 December 31, 1994
------------- -----------------
Inventories consist of the following:
First-in, first-out ("FIFO") method:
Crude oil $ 15,487 $ 13,611
Refined products 11,253 11,054
Refinery and shop supplies 5,793 5,705
Retail method:
Merchandise 2,689 2,428
-------- --------
35,222 32,798
Allowance for last-in, first-out
("LIFO") method (1,133) (528)
-------- --------
$ 34,089 $ 32,270
======== ========
/TABLE
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.
Separate financial statements of the subsidiaries are not 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:
In May 1995, the Company's Board of Directors declared a
common stock dividend of $0.05 per share payable to stockholders of
record on July 24, 1995. This dividend was paid on August 4, 1995. In
1995, the Company has paid dividends of $0.15 per share.
In the first six months of 1995, the Company repurchased 664,100
shares of its common stock for approximately $5,600,000. From the
inception of the Company's common stock repurchase program in 1994
through July 31, 1995, the Company repurchased 866,400 shares at
a weighted average cost of approximately $8.39 per share, including
commissions, or approximately $7,300,000. These shares are treated
as treasury shares. Any repurchased shares are available for a
variety of corporate purposes.
The Company's Board of Directors has authorized an increase in
the existing stock repurchase program from 1,000,000 shares to
1,500,000 shares.
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 June 30, 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 cleanup 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 cleanup 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 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 inactive
Farmington refinery and hydrocarbon contamination on and adjacent to 5.5
acres the Company owns in Bloomfield, New Mexico. 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 Nation 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 Navajo Nation'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
Navajo Nation'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 Navajo Nation'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 $3.2 million for the
three months ended June 30, 1995, a decrease of approximately
$1.3 million from $4.5 million for the three months ended June
30, 1994. The decrease is primarily the result of a 23%
decrease in average refinery margins. This decrease was
partially offset by a 4% increase in refinery sourced finished
product sales volumes, a 14% increase in service station
merchandise sales, a decrease in ethanol plant grain costs,
lower net interest costs and declines in both selling, general
and administrative costs and operating expenses.
Earnings before income taxes were $3.4 million for the six
months ended June 30, 1995, a decrease of approximately $3.0
million from $6.4 million for the six months ended June 30,
1994. The decrease is primarily the result of a 26% decrease in
average refinery margins and an increase in selling, general
and administrative costs. These decreases were partially offset
by a 6% increase in refinery sourced finished product sales
volumes, a 17% increase in service station merchandise sales, a
decrease in ethanol plant grain costs, lower net interest costs
and a decline in operating expenses.
For the three and six month periods ended June 30 the
Company's exploration and production operations ("Giant E&P")
recorded pretax earnings of $123,000 and $196,000 for 1995 and
pretax losses of $226,000 and $600,000 for 1994, respectively. The
improvement in each period 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 June 30, 1995
increased $7.3 million or 10% to $81.6 million from $74.3
million in the comparable 1994 period. The increase is
primarily due to a 9% increase in refinery weighted average
selling prices, a 4% increase in refinery sourced finished
product sales volumes and a 14% increase in service station
merchandise sales. Offsetting these increases was an overall
decline in other revenues from the retail operations.
Revenues for the six months ended June 1995 increased
$13.5 million or 10% to $151.6 million from $138.1 million in
the comparable 1994 period. The increase is primarily due to a
9% increase in refinery weighted average selling prices, a 6%
increase in refinery sourced finished product sales volumes and
a 17% increase in service station merchandise sales. Offsetting
these increases was an overall decline in other revenues from
the retail operations.
The increase in refinery sourced finished product sales
volumes in each period was primarily the result of lower
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 in the Company's primary market area. The overall
decline in other revenues from retail operations is primarily
related to the sale of the Giant Express travel center in
November 1994.
In each period, volumes of refined products sold through
retail outlets decreased approximately 8% from 1994 levels due
to a 34% decrease in volumes sold from the travel centers,
primarily related to the sale of the Giant Express, offset in
part by a slight increase in service station volumes.
Revenues, including intercompany revenues of $1.1 million
in 1995 and 1994, from Giant E&P totaled $2.0 million for the
three months ended June 30, 1995, an increase of $500,000 or
31% from the $1.5 million reported for the comparable 1994
period. This increase is due to a 40% increase in crude oil
production, a 9% increase in average crude oil selling prices
and a 12% increase in natural gas production. These increases
are offset in part by a 25% decline in natural gas selling
prices.
Revenues, including intercompany revenues of $2.5 million
in 1995 and $1.9 million in 1994, from Giant E&P totaled $3.9
million for the six months ended June 30, 1995, an increase of
$1.0 million or 32% from the $2.9 million reported for the
comparable 1994 period. This increase is due to a 40% increase
in crude oil production, a 17% increase in average crude oil
selling prices and a 14% increase in natural gas production.
These increases are offset in part by a 28% decline in natural
gas selling prices.
In each period, 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 redetermination 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 June 30, 1995, cost of products
sold increased $9.2 million or 20% to $56.1 million from $46.9
million for the corresponding 1994 period. A 16% increase in
average crude oil costs, a 4% increase in the volume of finished
products sold from the refinery and a 14% increase in merchandise
sales from the service stations account for most of the increase.
For the six months ended June 30, 1995, cost of products
sold increased $16.8 million or 19% to $104.6 million from
$87.8 million for the corresponding 1994 period. A 19% increase
in average crude oil costs, a 6% increase in the volume of
finished products sold from the refinery and a 17% increase in
merchandise sales from the service stations account for most
of the increase.
In each period, the increases were partially offset by a
decrease in merchandise sales from the travel centers, primarily
related to the sale of the Giant Express, and a decrease in
average grain costs resulting in part from a return to more
stable prices after the effects of a poor grain harvest in 1993
adversely affected 1994 prices.
Cost of products sold by Giant E&P increased
approximately 50% and 26% for the three and six month periods
ended June 30, 1995, respectively, compared to the same 1994
periods. The increases are primarily related to an increase in
production resulting from recent acquisitions.
Operating Expenses
- ------------------
For the three months ended June 30, 1995, operating
expenses decreased $153,000 or 1%, to $12.9 million from $13.0
million in the corresponding 1994 period.
For the six months ended June 30, 1995, operating expenses
decreased $193,000 or 1%, to $25.5 million from $25.7 million
in the corresponding 1994 period.
The decreases in each period are primarily related to the
sale of the Giant Express and a decline in utility and
purchased fuel costs for the refinery. Partially offsetting
these decreases are increases in payroll and related costs and
outside services for other operations.
Selling, General and Administrative Expenses
- --------------------------------------------
For the three months ended June 30, 1995, selling, general
and administrative expenses decreased $180,000 or 5% to $3.3
million from $3.5 million in the corresponding 1994 period. The
decrease is primarily the result of not accruing a management
incentive bonus expense, offset in part by higher payroll
costs, in the 1995 period.
For the six months ended June 30, 1995, selling, general
and administrative expenses increased $453,000 or 8% to $6.2
million from $5.8 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 is a reduction in expenses from not accruing a
management incentive bonus expense in the 1995 period and
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 June 30, 1995, net interest
expense (interest expense less interest income) decreased
$276,000 or 11% to $2.1 million from $2.4 million and for the
six months ended June 30, 1995, decreased $541,000 or 11% to
$4.2 million from $4.7 million, when compared to the same
1994 periods.
The decrease in each period is primarily due to a decrease
in interest expense related to a reduction in long-term debt
and an increase in interest income primarily from interest
received on the refund of income taxes paid in prior periods.
Income Taxes
- ------------
Income taxes for the three and six months ended June 30,
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 32% to 34%.
The difference in rates is primarily due to the relationship of
relatively consistent amounts of estimated alcohol fuel and
coal seam gas credits to varying amounts of estimated annual
income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operations
- -------------------------
Net cash provided by operating activities totaled $10.9
million for the six months ended June 30, 1995, compared to
$7.7 million for the comparable 1994 period. Operating cash
flows increased primarily as the result of differences in
the net changes in working capital items offset in part by a
decline in net earnings.
Working Capital
- ---------------
Working capital at June 30, 1995 consisted of current
assets of $94.5 million and current liabilities of $40.7
million, or a current ratio of 2.32:1. 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, accounts receivable and income tax
refunds receivable. Marketable securities have declined due to
sales and maturities. Accounts receivable have decreased as
a result of a reduction in trade receivables and insurance
reimbursements received. Inventories have increased due to an
8% increase in crude oil volumes on hand at slightly higher
prices. Current liabilities have decreased due to a decrease
in accounts payable and accrued liabilities. Accounts payable
have declined primarily due to the timing of certain payments
which would have normally occurred at the end of the year but
were not due and payable until 1995. Accrued liabilities have
declined as the result of the payment of certain year-end
accruals.
Capital Expenditures and Resources
- ----------------------------------
Net cash used in investing activities for the purchase of
property, plant and equipment totaled approximately $13.4
million for the first six months of 1995. These expenditures
were primarily for the acquisition, construction, rebuilding
and remodeling of various retail units; the acquisition of
proved reserves, oil and gas well drilling and leasehold costs
and information system enhancements.
The Company, through its subsidiary Giant E&P, has added
approximately 1.5 million barrels of oil equivalent, primarily
crude oil, to its net proved reserves in 1995 through various
acquisitions.
The Company has acquired two service station/convenience
stores in the Company's primary market area. One unit was
purchased on January 10, 1995, and the other unit, which is
located on the Navajo Indian Reservation, is being operated by
the Company under a management agreement effective January 11,
1995, with formal possession pending approval by the Navajo
Nation.
On July 25, 1995, the Company completed the exchange of
two of its retail service stations located in Tucson, Arizona
for a finished products terminal in Albuquerque, New Mexico,
previously owned by a major oil company. The effect of the
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 a part of the Company's
strategy to maximize both product volumes and netbacks to the
Ciniza Refinery.
During the first quarter of 1995, 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 June 30, 1995, and December 31, 1994, the Company's
long-term debt was 52% and 51% of total capital, respectively.
The increase is primarily the result of a decrease in
shareholders' 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 June 30, 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.
The Company's Board of Directors has authorized the repurchase
of a total of 1,500,000 shares of the Company's common stock, or
approximately 13% of all outstanding shares. This is an increase of
500,000 shares over the previous authorizations. 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 half of 1995,
the Company repurchased 664,100 shares of its common stock for
approximately $5.6 million. From inception through July 31, 1995,
the Company repurchased 866,400 shares at a weighted average cost
of approximately $8.39 per share, including commissions, or
approximately $7.3 million. These shares are treated as treasury
shares.
Any repurchased shares are 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.
In May 1995, the Company's Board of Directors declared
a common stock dividend of $0.05 per share payable to
stockholders of record on July 24,1995. This dividend was paid
on August 4, 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 cleanup 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 cleanup
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 cleanup 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 if its inactive Farmington refinery.
The Company has 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 and
adjacent to 5.5 acres the Company owns in Bloomfield, New Mexico.
The accrual is recorded in the current and long-term sections of
the Company's consolidated balance sheet.
Due to rains and flooding in the Midwest, there were some
delays in the planting of grain crops which could have an
adverse effect on the Company's ability to purchase grain
supplies for its ethanol plant on a cost effective basis for
the fourth quarter of 1995 and into 1996.
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 Nation, 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
write down these capitalized costs due to impairment in value.
At June 30, 1995, the Company's adjusted capitalized costs
were approximately equal to the "cost ceiling". 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 insurance
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 in 1994.
Due in part to a decision to accumulate raw material
inventory and in part to better than forecasted receipts of crude
oil from the field, the Company's inventories of crude oil have
increased to approximately 822,000 barrels as of June 30, 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.
Exploration and production activity in the Four Corners area
has been at a relatively low level over the last few years. As a
result, total crude oil production in the 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on May 18, 1995.
Proxies for the meeting were solicited under Regulation 14A. There
were no matters submitted to a vote of security holders other than the
election of three directors and approval of auditors as specified in
the Company's Proxy Statement. There was no solicitation in opposition
to management's nominees to the Board of Directors.
James E. Acridge was elected as a director of the Company. The
vote was as follows:
Shares Voted Shares Voted
"FOR" "WITHHOLDING"
------------ -------------
11,204,702 55,414
George C. Hixon was elected as a director of the Company. The
vote was as follows:
Shares Voted Shares Voted
"FOR" "WITHHOLDING"
------------ -------------
11,220,538 39,578
Richard T. Kalen, Jr. was elected as a director of the Company.
The vote was as follows:
Shares Voted Shares Voted
"FOR" "WITHHOLDING"
------------ -------------
11,215,970 44,146
Deloitte & Touche LLP were ratified as independent auditors for
the Company for the year ending December 31, 1995. The vote was as
follows:
Shares Voted Shares Voted Shares Voted
"FOR" "AGAINST" "ABSTAINING"
------------ ------------ ------------
11,197,656 23,369 39,091
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 June 30, 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 June 30, 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 Chief Financial Officer
(Principal Accounting Officer)
Date: August 4, 1995