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, 1996
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, 1996 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, 1996: 11,261,118 shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1996 (Unaudited) and December 31, 1995
Condensed Consolidated Statements of Earnings
(Unaudited) Three Months Ended March 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows
(Unaudited) Three Months Ended March 31, 1996 and 1995
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, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 470 $ 9,549
Accounts receivable, net 26,078 24,025
Inventories 50,449 42,581
Prepaid expenses and other 5,767 3,880
Net assets of discontinued operations 26,770 26,689
Deferred income taxes 2,070 2,145
--------- ---------
Total current assets 111,604 108,869
--------- ---------
Property, plant and equipment 294,291 292,919
Less accumulated depreciation
and amortization (97,066) (94,357)
--------- ---------
197,225 198,562
--------- ---------
Other assets 17,086 17,431
--------- ---------
$ 325,915 $ 324,862
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,264 $ 4,063
Accounts payable 35,498 34,162
Accrued expenses 20,847 20,316
--------- ---------
Total current liabilities 61,609 58,541
--------- ---------
Long-term debt, net of current portion 138,603 142,676
Deferred income taxes 13,130 12,864
Other liabilities 922 1,049
Common stockholders' equity 111,651 109,732
--------- ---------
$ 325,915 $ 324,862
========= =========
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,
------------------------------
1996 1995
----------- -----------
Net revenues $ 104,100 $ 69,562
Cost of products sold 73,960 49,357
----------- -----------
Gross margin 30,140 20,205
Operating expenses 15,408 12,115
Depreciation and amortization 4,096 3,056
Selling, general and administrative expenses 3,595 2,842
----------- -----------
Operating income 7,041 2,192
Interest expense, net 3,366 2,047
----------- -----------
Earnings from continuing operations before income taxes 3,675 145
Provision for income taxes 1,350 33
----------- -----------
Earnings from continuing operations 2,325 112
Earnings from discontinued operations, net 79 35
----------- -----------
Net earnings $ 2,404 $ 147
=========== ===========
Earnings per common share:
Continuing operations $ 0.21 $ 0.01
Discontinued operations - -
----------- -----------
Net earnings $ 0.21 $ 0.01
=========== ===========
Weighted average number of shares outstanding 11,251,386 11,810,573
=========== ===========
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,
-------------------
1996 1995
------- -------
Cash flows from continuing operating activities:
Net earnings $ 2,404 $ 147
Adjustments to reconcile net earnings to net cash (used)
provided by continuing operating activities:
Earnings from discontinued operations (79) (35)
Depreciation and amortization 4,096 3,056
Deferred income taxes 341 122
Restricted stock award compensation 38 116
Decrease in other non-current liabilities (127) (91)
Other (89) 43
Changes in operating assets and liabilities:
(Increase) decrease in receivables (1,847) 2,670
Increase in inventories (7,868) (1,987)
(Increase) decrease in prepaid expenses and other (1,887) 379
Increase (decrease) in accounts payable 1,336 (2,170)
Increase (decrease) in accrued expenses 562 (132)
------- -------
Net cash (used) provided by continuing operating activities (3,120) 2,118
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment and other assets (4,920) (3,825)
Proceeds from sale of property, plant and equipment 2,389 1,062
Proceeds from sales and maturities of marketable securities 6,707
Net change in assets of discontinued operations (2) (2,996)
------- -------
Net cash (used) provided by investing activities (2,533) 948
------- -------
Cash flows from financing activities:
Payments of long-term debt (2,872) (2,372)
Purchase of treasury stock (2,293)
Payment of dividends (594) (593)
Proceeds from exercise of stock options 40
------- -------
Net cash used by financing activities (3,426) (5,258)
------- -------
Net decrease in cash and cash equivalents (9,079) (2,192)
Cash and cash equivalents:
Beginning of period 9,549 12,860
------- -------
End of period $ 470 $10,668
======= =======
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, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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, 1995.
Certain reclassifications have been made to the March 31,
1995 financial statements to conform to the statement
classifications used in the 1996 period relating to the
classification of the exploration and production business as
discontinued operations.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Company adopted this standard in the
first quarter of 1996 and based on an evaluation of its operations
in accordance with the criteria specified in the standard,
determined that there was no current impact on the Company's
financial position or results of operations.
NOTE 2 - PRO FORMA FINANCIAL INFORMATION:
On October 4, 1995, the Company, completed the purchase of the
Bloomfield Refinery along with related pipeline and transportation
assets from Gary-Williams Energy Co. and its wholly-owned subsidiary,
Bloomfield Refining Company ("BRC").
The following Statements of Earnings compare the consolidated
results of Giant Industries, Inc. ("Giant"), including the results
of the Bloomfield Refinery, for the three months ended March 31,
1996 with the pro forma combined condensed statement of earnings of
the Company and BRC ("Pro Forma") for the three months ended March
31, 1995. The pro forma statement includes the results of operations
of the Company and BRC, along with adjustments which give effect to
events that are directly attributable to the transaction and which
are expected to have a continuing impact. The information assumes
the transaction was consummated as of the beginning of the period
presented.
The unaudited pro forma combined condensed financial
information does not purport to represent the results of operations
that actually would have resulted had the purchase occurred on the
date specified, nor should it be taken as indicative of the future
results of operations.
STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(In thousands except shares and per share data)
(Unaudited)
Giant Pro Forma
1996 1995
---------- ----------
Net revenues $ 104,100 $ 99,231
Cost of products sold 73,960 71,424
---------- ----------
Gross margin 30,140 27,807
Operating expenses 15,408 15,166
Depreciation and amortization 4,096 3,744
Selling, general and administrative expenses 3,595 3,491
---------- ----------
Operating income 7,041 5,406
Interest expense, net 3,366 3,034
---------- ----------
Earnings from continuing operations before income taxes 3,675 2,372
Provision for income taxes 1,350 900
---------- ----------
Earnings from continuing operations $ 2,325 $ 1,472
========== ==========
Earnings per common share $ 0.21 $ 0.12
========== ==========
Weighted average number of shares outstanding 11,251,386 11,810,573
========== ==========
NOTE 3 - DISCONTINUED OPERATIONS
In early 1996, the Company approved a plan of disposition of
its exploration and production operations. The decision was based
upon management's review of the prospects for this operation,
which indicated that substantial new capital would be necessary to
further develop this business and reach an acceptable level of
profitability and integration. The Company expects to complete a
sale by mid-1996. Based on current information, the Company does
not expect to incur a loss on the disposal of the segment.
The summarized balance sheet of the exploration and production
segment was as follows:
March 31, December 31,
1996 1995
-------- ------------
(In thousands)
Assets:
Current assets $ 877 $ 1,489
Oil and gas properties, plant and equipment, net 32,158 33,140
Other assets 373 373
------- -------
Total assets 33,408 35,002
------- -------
Liabilities:
Current liabilities 321 1,996
Deferred taxes and other liabilities 6,317 6,317
------- -------
Total liabilities 6,638 8,313
------- -------
Net assets of discontinued operations $26,770 $26,689
======= =======
The following is a summary of the operating results of the
exploration and production operations for the three months ended March 31:
1996 1995
------ ------
(In thousands)
Net revenues $2,494 $1,906
Operating costs and expenses 2,353 1,833
------ ------
141 73
Provision for income taxes(1) 62 38
------ ------
Net earnings from discontinued operations $ 79 $ 35
====== ======
(1) Coal seam gas tax credits generated from these operations, which
could not be used on a separate return basis, have been allocated
to continuing operations based on the Company's tax sharing
arrangement.
NOTE 4 - INVENTORIES:
(In thousands)
March 31, 1996 December 31, 1995
-------------- -----------------
Inventories consist of the following:
First-in, first-out ("FIFO") method:
Crude oil $22,108 $15,465
Refined products 19,198 17,605
Refinery and shop supplies 6,787 6,871
Retail method:
Merchandise 2,603 2,721
------- -------
50,696 42,662
Allowance for last-in, first-out
("LIFO") method (247) (81)
------- -------
$50,449 $42,581
======= =======
/TABLE
NOTE 5 - 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 6 - 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 March 31,
1996 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 include soil and water contamination, air pollution and
personal injuries or property damage allegedly caused by substances
manufactured, handled, used, released or disposed of by the Company.
Future expenditures related to health and environmental matters
cannot be reasonably quantified in many circumstances 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 substances, the number of other
potentially responsible parties involved, various defenses which may
be available to the Company and changing environmental laws and
interpretations of environmental laws.
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 it 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 for approximately $1,000,000 relating to ongoing
environmental projects, including the remediation of a hydrocarbon
plume at the Company's Farmington refinery and hydrocarbon
contamination on 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. In
addition, the Company assumed certain environmental obligations
related to the acquisition of the Bloomfield Refinery and is in
the process of gathering and analyzing information in order to
establish an environmental reserve. Such reserve, which the
Company does not believe will be material, will be recorded as
additional purchase price and allocated to the assets acquired.
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
Arizona in November 1991. The Company has invoked its appeal rights
with the Tribe's Tax Commission in connection with this assessment and
intends to 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 from continuing operations before income taxes were
$3.7 million for the three months ended March 31, 1996, an
increase of approximately $3.5 million from $145,000 for the three
months ended March 31, 1995. The increase is primarily the result
of the acquisition of the Bloomfield Refinery and an increase in
Ciniza Refinery average margins. These increases were partially
offset by increases in operating and administrative costs.
Revenues
- --------
Revenues for the three months ended March 31, 1996, increased
$34.5 million or 50% to $104.1 million from $69.6 million in the
comparable 1995 period. Finished product sales of $29.1 million
from the Bloomfield Refinery accounts for approximately 84% of the
increase. In addition, an 11% increase in Ciniza Refinery weighted
average selling prices and a 15% increase in service station
merchandise sales contributed to increased revenues. Offsetting
these increases was a decline in third party sales from the
Company's ethanol plant due to a temporary suspension of
operations and a slight decline in Ciniza Refinery finished
product sales volumes.
The increase in service station merchandise sales is the
result of increased same store sales and an increase in sales
from five new or reopened units over the sales of ten units that
have been disposed of.
Cost of Products Sold
- ---------------------
For the three months ended March 31, 1996, cost of products
sold increased $24.6 million or 50% to $74.0 million from $49.4
million for the corresponding 1995 period. Cost of products sold
of $21.9 million relating to the Bloomfield Refinery accounts for
approximately 89% of the increase. Also contributing to increased
costs was a 6% increase in average crude oil costs and a 17%
increase in the cost of merchandise sales from the service
stations. These increases were partially offset by a decrease in
costs relating to the temporary closure of the Company's ethanol
plant and the liquidation of certain lower cost LIFO inventory
layers in the first quarter of 1996 which resulted in a reduction
in cost of products sold of approximately $2.1 million compared
to a similar reduction of approximately $900,000 in the 1995 first
quarter.
Operating Expenses
- ------------------
For the three months ended March 31, 1996, operating expenses
increased $3.3 million or 27% to $15.4 million from $12.1 million
in the three months ended March 31, 1995.
Operating expenses increased approximately 24% due to the
acquisition of the Bloomfield Refinery and 5% due to increases in
payroll and related costs for other operations. Partially
offsetting these increases was a decrease of 6% due to the closure
of the ethanol plant.
Depreciation and Amortization
- -----------------------------
For the three months ended March 31, 1996, depreciation and
amortization increased $1.0 million or 34% to $4.1 million from
$3.1 million in the corresponding 1995 period. The increase is
primarily the result of the acquisition of the Bloomfield Refinery,
along with other 1995 property, plant and equipment additions.
Selling, General and Administrative Expenses
- --------------------------------------------
For the three months ended March 31, 1996, selling, general
and administrative expenses increased approximately $753,000 or
26% to $3.6 million from $2.8 million in the corresponding 1995
period. The increase is primarily the result of a reduction in
1995 first quarter expenses due to 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, 1996, net interest
expense (interest expense less interest income) increased $1.3
million or 64% to $3.4 million from $2.1 million in the same 1995
period. The increase is primarily due to a decline in investment
income because of a decrease in excess funds available for
investment and an increase in interest expense from the addition
of certain variable rate long-term debt, both related to the
acquisition of the Bloomfield Refinery in October 1995. In
addition, the 1995 first quarter included interest income received
on the refund of income taxes paid in prior periods.
Income Taxes
- ------------
Income taxes for the three months ended March 31, 1996 and
1995 were computed in accordance with Statement of Financial
Accounting Standards No. 109, resulting in effective tax rates
of approximately 37% and 23%, respectively. The difference in the
two rates is primarily due to estimated alcohol fuel tax credits
in 1995, due to the operation of the Company's ethanol plant
which temporarily suspended operations in October 1995, as well as
estimated coal seam gas tax credits in each year, as they relate
to varying amounts of estimated annual income.
Discontinued Operations
- -----------------------
For the three months ended March 31, 1996 and 1995, the
Company's exploration and production operations recorded net
earnings of $79,000 and $35,000, respectively.
Revenues, including intercompany revenues of $1.5 million in
both periods, totaled $2.5 million for the three months ended March
31, 1996, an increase of approximately $588,000 or 31% from the $1.9
million reported for the comparable 1995 period. This increase is
due to a 25% increase in crude oil production, an 8% increase in
average crude oil selling prices, a 7% increase in natural gas
production, and an 8% increase in average natural gas selling prices.
The increase in crude oil production is primarily the result of
the acquisition of various crude oil producing reserves during 1995.
For the three months ended March 31,1996, operating costs and
expenses increased approximately $520,000 or 28% to $2.4 million
from $1.8 million in the comparable 1995 period primarily due to
increases in production.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operations
- -------------------------
Net cash used by operating activities of continuing
operations totaled $3.1 million for the three months ended March
31, 1996, compared to net cash provided of $2.1 million for the
comparable 1995 period. Operating cash flows decreased primarily
as the result of the differences in the net changes in working
capital items in each period, offset in part by improved earnings
in the 1996 first quarter.
Working Capital
- ---------------
Working capital at March 31,1996 consisted of current assets
of $111.6 million and current liabilities of $61.6 million, or a
current ratio of 1.81:1. At December 31, 1995, the current ratio
was 1.86:1 with current assets of $108.9 million and current
liabilities of $58.5 million.
Current assets have increased since December 31, 1995,
primarily due to an increase in inventories, trade receivables and
deposits, offset in part by a decrease in cash and cash
equivalents. Inventories have increased primarily as the result
of a 51% increase in pipeline crude oil inventory volumes, along with
an increase in crude oil acquisition costs and the liquidation of
certain lower cost LIFO inventory layers. Trade receivables have
increased due to increased raw material inventory sales. Deposits
have increased because of funds deposited in an escrow account
pending completion of a tax free exchange of certain retail
assets. Current liabilities have increased due to an increase in
accounts payable and the current portion of long-term debt.
Accounts payable have increased primarily due to a 12% increase in
the cost of crude oil purchases.
Capital Expenditures and Resources
- ----------------------------------
Net cash used in investing activities for the purchase of
property, plant and equipment and other assets totaled
approximately $4.9 million for the first quarter of 1996,
including the acquisition of finished product and crude truck
transports; the construction and remodeling of various retail
units and upgrades and turnaround expenditures to improve
operations and efficiencies at the refineries.
In the quarter, the Company received proceeds of
approximately $2.4 million from the sale of three operating
service stations. A gain of approximately $281,000 resulted from
these sales.
The Company continues to investigate other strategic
acquisitions as well as capital improvements to its existing
facilities. The Company is also actively pursuing the possible
sale or exchange of non-strategic or underperforming assets.
Working capital, including that necessary for capital
expenditures and debt service, will be funded through cash
generated from operating activities, the sale of the exploration
and production assets, existing cash 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.
Discontinued Operations
- -----------------------
In early 1996, the Company approved a plan of disposition of
its exploration and production operations. The decision was based
upon management's review of the prospects for this operation,
which indicated that substantial new capital would be necessary to
further develop this business and reach an acceptable level of
profitability and integration. The Company expects to complete a
sale by mid-1996. Based on current information, the Company does
not expect to incur a loss on the disposal of the segment.
Net assets, including deferred tax liabilities of $4.2
million in each period, of this operation were $26.8 million and
$26.7 million at March 31, 1996 and December 31, 1995,
respectively. Net earnings were $79,000 and $35,000 for the three
months ended March 31, 1996 and 1995, respectively.
Capital Structure
- -----------------
At March 31, 1996 and December 31, 1995, the Company's
long-term debt was 55.4% and 56.5% of total capital, respectively.
The decrease is primarily due to a reduction in long-term debt,
through repayment and reclassification to current portion, along
with an increase in stockholders' equity due to net earnings.
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.
In October 1995, the Company entered into a Credit Agreement
with a group of banks under which $30.0 million was borrowed
pursuant to a three-year unsecured revolving term facility to
provide financing for the purchase of the Bloomfield Refinery. On
November 6, 1995, $10.0 million of this revolving term facility was
prepaid from cash on hand. The $10.0 million that was repaid is
currently available under this facility for the acquisition of
property, plant and equipment.
In addition, the Credit Agreement contains a three-year
unsecured working capital facility to provide working capital and
letters of credit in the ordinary course of business. The
availability under this working capital facility is the lesser of
(i) $40.0 million, or (ii) the amount determined under a borrowing
base calculation tied to eligible accounts receivable and
inventories as defined in the Credit Agreement. At March 31,
1996, the lesser amount was $40.0 million. Direct borrowings
under this arrangement at March 31, 1996 were $10.0 million and
there were $16.0 million of irrevocable letters of credit
outstanding, primarily to secure purchases of raw materials.
Borrowings under this facility are generally higher at month end
due to payments for raw materials and various taxes.
On March 20, 1996, the Company's Board of Directors declared
a common stock dividend of $0.05 per share payable to stockholders
of record on April 24,1996. This dividend was paid on May 6, 1996.
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 include soil and water contamination, air pollution and
personal injuries or property damage allegedly caused by substances
manufactured, handled, used, released or disposed of by the Company.
Future expenditures related to health and environmental matters
cannot be reasonably quantified in many circumstances 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 substances, the number of other
potentially responsible parties involved, various defenses which may
be available to the Company and changing environmental laws and
interpretations of environmental laws.
Rules and regulations implementing federal, state and local
laws relating to health and the environment will continue to affect
the operations of the Company. The Company cannot predict what
health or environmental legislation or regulations will be enacted
or become effective in the future or how existing or future laws or
regulations will be administered or enforced with respect to
products or activities of the Company. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement
policies of the regulatory agencies, could have an adverse effect
on the financial position and the results of operations of the
Company and could require substantial expenditures by the Company
for the installation and operation of pollution control systems and
equipment not currently possessed by the Company.
In May 1991, the Environmental Protection Agency 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 hydrocarbon
plume that appears to extend no more than 1,800 feet south of its
inactive Farmington refinery.
The Company has an environmental liability accrual of
approximately $1.0 million relating to ongoing environmental
projects, including the remediation of the 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. In addition, the Company assumed certain
environmental obligations related to the acquisition of the
Bloomfield refinery and is in the process of gathering and analyzing
information in order to establish an environmental reserve. Such
reserve, which the Company does not believe will be material, will be
recorded as additional purchase price and allocated to the assets
acquired.
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.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Company adopted this standard in the
first quarter of 1996 and based on an evaluation of its operations
in accordance with the criteria specified in the standard,
determined that there was no current impact on the Company's
financial position or results of operations.
With the acquisition of the Bloomfield Refinery and 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 both refineries'
operations at planned levels, at least through 1996.
The Company believes that local crude oil production 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.
The Company continues to evaluate supplemental crude oil supply
alternatives for both of its refineries on both a short-term and
long-term basis. Among other alternatives, the Company has
considered making equipment modifications to increase its ability to
use alternative crude oils and may install additional rail facilities
to enable the Company to provide incremental crude oil and other
intermediate feedstocks to supplement local supply sources in the most
cost effective manner.
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.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995: This report contains forward-looking statements
that involve risks and uncertainties, including but not limited to
economic, competitive and governmental factors affecting the
Company's operations, markets, products, services and prices; the
ability of the Company to sustain and leverage the competitive
advantages generated by the acquisition of the Bloomfield Refinery;
the results of the disposal of the Company's exploration and
production operations; the ability of the Company to successfully
abate various tax assessments and other risks detailed from time to
time in the Company's filings with the Securities and Exchange
Commission.
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, 1996.
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, 1996 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 Financial and Accounting Officer)
Date: May 13, 1996