- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-92871-02
SABINE RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 43-1857408
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1801 S. Gulfway Drive
Office No. 36 77640
Port Arthur, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (409) 982-7491
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 shares of registrant's common stock, $.01 par value, outstanding
as of May 10, 2002: 6,818,182
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Sabine River Holding Corp.
Form 10-Q
March 31, 2002
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Report ..................................................................... 2
Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002 .............................. 3
Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2002 ............ 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2002 ............ 5
Notes to Consolidated Financial Statements .......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................................................... 18
Signature
FORM 10-Q - PART I
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To the Board of Directors of Sabine River Holding Corp.:
We have reviewed the accompanying consolidated balance sheet of Sabine River
Holding Corp. and subsidiaries (the "Company") as of March 31, 2002, and the
related consolidated statements of operations and cash flows for the three-month
periods ended March 31, 2001 and 2002. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2001, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 11, 2002 (March 29, 2002 as
to Note 8), we expressed an unqualified opinion on those consolidated financial
statements.
Deloitte & Touche LLP
St. Louis, Missouri
May 8, 2002
2
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
December 31, March 31,
2001 2002
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 222.8 $ 152.5
Cash and cash equivalents restricted for debt service .............................. 30.8 53.4
Receivable from affiliates ......................................................... 25.1 74.1
Inventories ........................................................................ 40.1 15.8
Prepaid expenses ................................................................... 11.5 8.8
--------- --------
Total current assets .......................................................... 330.3 304.6
PROPERTY, PLANT AND EQUIPMENT, NET ...................................................... 632.4 627.6
OTHER ASSETS ............................................................................ 16.4 16.6
--------- --------
$ 979.1 $ 948.8
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................... $ 82.3 $ 129.6
Payable to affiliates .............................................................. 38.2 54.1
Accrued expenses and other ......................................................... 20.5 11.1
Accrued taxes other than income .................................................... 4.9 2.3
Current portion of long-term debt .................................................. 79.6 26.9
Current portion of notes payable to affiliate ...................................... 2.8 2.6
--------- --------
Total current liabilities ..................................................... 228.3 226.6
LONG-TERM DEBT .......................................................................... 463.0 449.5
DEFERRED INCOME TAXES ................................................................... 40.6 36.0
NOTE PAYABLE TO AFFILIATE ............................................................... 4.9 2.4
OTHER LONG-TERM LIABILITIES ............................................................. -- 0.1
COMMITMENTS AND CONTINGENCIES ........................................................... -- --
COMMON STOCKHOLDER'S EQUITY:
Common stock ($0.01 par value per share, 12,000,000 authorized;
6,818,182 shares issued and outstanding) ........................................ 0.1 0.1
Paid-in capital .................................................................... 121.7 121.7
Retained earnings .................................................................. 120.5 112.4
--------- --------
Total common stockholder's equity ............................................. 242.3 234.2
--------- --------
$ 979.1 $ 948.8
========= ========
The accompanying notes are an integral part of these financial statements.
3
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in millions)
For the Three Months
Ended March 31,
-------------------------------
2001 2002
---------------- --------------
NET SALES AND OPERATING REVENUES
FROM AFFILIATES ......................................................... $ 507.6 $ 420.7
EXPENSES:
Cost of sales ......................................................... 386.0 379.6
Operating expenses .................................................... 49.1 33.7
General and administrative expenses ................................... 1.0 1.1
Depreciation .......................................................... 4.7 5.2
--------- --------
440.8 419.6
--------- --------
OPERATING INCOME ........................................................... 66.8 1.1
Interest and finance expense .......................................... (16.8) (14.6)
Interest income ....................................................... 1.3 0.9
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES .......................................... 51.3 (12.6)
Income tax (provision) benefit ........................................ (18.0) 4.5
--------- --------
NET LOSS ................................................................... $ 33.3 $ (8.1)
========= =========
The accompanying notes are an integral part of these financial statements.
4
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in millions)
For the Three Months
Ended March 31,
------------------------------
2001 2002
---------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 33.3 $ (8.1)
Adjustments
Depreciation ...................................................... 4.7 5.2
Amortization ...................................................... 0.8 0.8
Deferred income taxes ............................................. 9.3 (4.6)
Inventory write-down to market .................................... 2.8 --
Other, net ........................................................ (0.5) 0.2
Cash provided by (reinvested in) working capital -
Prepaid expenses ............................................... (4.9) 2.7
Inventories .................................................... (28.1) 24.3
Affiliate receivable and payable ............................... (24.0) (35.8)
Cash and cash equivalents restricted for debt service .......... -- 4.3
Accounts payable, accrued expenses and taxes
other than income ............................................ 54.3 35.3
---------- --------
Net cash provided by operating activities ................. 47.7 24.3
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant, and equipment ................... (2.2) (0.4)
---------- --------
Net cash used in investing activities ..................... (2.2) (0.4)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt .............................. -- (66.2)
Cash and cash equivalents restricted for debt repayment ........... -- (26.9)
Deferred financing costs .......................................... -- (1.1)
---------- --------
Net cash used in financing activities ..................... -- (94.2)
---------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................................. 45.5 (70.3)
CASH AND CASH EQUIVALENTS, beginning of period ......................... 36.4 222.8
---------- --------
CASH AND CASH EQUIVALENTS, end of period ............................... $ 81.9 $ 152.5
========== ========
The accompanying notes are an integral part of these financial statements.
5
FORM 10-Q - PART I
ITEM 1. FINANCIAL STATEMENTS (continued)
Sabine River Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2002
(tabular dollar amounts in millions of U.S. dollars)
1. Basis of Preparation
Sabine River Holding Corp. is owned 90% by Premcor Inc. and 10% by
Occidental Petroleum Corporation ("Occidental"). Sabine River Holding Corp. is
the 1% general partner of Port Arthur Coker Company L.P., a limited partnership
("Port Arthur Coker Company"), and the 100% owner of Neches River Holding Corp.
("Neches River Holding"), which is the 99% limited partner of Port Arthur Coker
Company. Port Arthur Coker Company is the 100% owner of Port Arthur Finance
Corp. ("Port Arthur Finance").
The accompanying unaudited consolidated financial statements of Sabine
River Holding Corp. and subsidiaries (the "Company") are presented pursuant to
the rules and regulations of the Securities and Exchange Commission in
accordance with the disclosure requirements for Form 10-Q. In the opinion of the
management of the Company, the unaudited consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary to fairly state the results for the interim periods presented.
Operating results for the three-month period ended March 31, 2002 were not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. These unaudited financial statements should be read in
conjunction with the audited financial statements and notes included in the
Company's 2001 Annual Report on Form 10-K.
2. New Accounting Standards
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 142, Goodwill and Other Intangible Assets, and SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. The
adoption of these standards did not have a material impact on the Company's
financial position and results of operations.
In July 2001, the Financial Accounting Standards Board approved SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses when a
liability should be recorded for asset retirement obligations and how to measure
this liability. The initial recording of a liability for an asset retirement
obligation will require the recording of a corresponding asset that will be
required to be amortized. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The implementation of SFAS No. 143 is not expected to have
a material impact on the Company's financial position or results of operations.
3. Inventories
The carrying value of inventories consisted of the following:
December 31, March 31,
2001 2002
---------- ----------
Crude oil ......................... $ 38.1 $ 14.5
Blendstocks ....................... 1.6 0.8
Warehouse stock ................... 0.4 0.5
---------- ----------
$ 40.1 $ 15.8
========== ==========
6
The market value of crude oil, refined products and blendstocks inventories
at March 31, 2002 was approximately $4.2 million (December 31, 2001 - nil) above
carrying value.
As of January 1, 2002, the Company changed its method of inventory costing
from first-in first-out ("FIFO") to last-in first-out ("LIFO") for crude oil and
blendstock inventories. Management believes this change is preferable in that it
achieves a more appropriate matching of revenues and expenses. The adoption of
this inventory accounting method on January 1, 2002 did not have an impact on
pretax earnings. The use of the LIFO accounting method resulted in $12.1 million
less pretax income for the quarter ended March 31, 2002 than if the FIFO method
had been used. Cost for warehouse stock continues to be determined under the
FIFO method.
4. Other Assets
December 31, March 31,
2001 2002
------------ ----------
Deferred financing costs .................... $ 14.2 $ 14.5
Environmental permits ....................... 1.4 1.4
PEMEX long term crude oil supply agreement .. 0.8 0.7
------------ ----------
$ 16.4 $ 16.6
============ ==========
Amortization of deferred financing costs for the three-month period ended
March 31, 2002 was $0.8 million (2001 - $0.8 million), and was included in
"Interest and finance expense". In the first quarter of 2002, the Company
incurred $1.1 million of deferred financing costs for fees to obtain a waiver
related to insurance coverage required under the common security agreement.
5. Long-term Debt
In January 2002, Port Arthur Coker Company made a $66.2 million principal
payment on its bank senior loan agreement with $59.7 million representing a
mandatory prepayment pursuant to the common security agreement and secured
account structure.
The common security agreement requires that the Company carry insurance
coverage with specified terms. However, due to the effects of the events of
September 11, 2001 on the insurance market, coverage meeting such terms,
particularly as it relates to deductibles, waiting periods and exclusions, was
not available on commercially reasonable terms and, as a result, the Company's
insurance program was not in full compliance with the required insurance
coverage at December 31, 2001. However, the requisite parties to the common
security agreement have waived the noncompliance provided that the Company
obtain a reduced deductible limit for property damage, obtain additional
contingent business interruption insurance by June 26, 2002 and continue to
monitor the insurance market on a quarterly basis to determine if additional
insurance coverage required by the common security agreement is available on
commercially reasonable terms, and if so, promptly obtain such insurance. The
required deductible limit for property damage has been secured. The Company
believes that it will be able to comply with the remaining conditions of the
waiver.
6. Interest and Finance Expense
Interest and finance expense consisted of the following:
For the Three Months
Ended March 31,
--------------------
2001 2002
------- -------
Interest expense ................... $ 16.2 $ 12.2
Financing costs .................... 1.3 2.5
Capitalized interest ............... (0.7) (0.1)
------- -------
$ 16.8 $ 14.6
======= =======
7
Cash paid for interest for the three month period ended March 31, 2002 was
$21.4 million (2001 - $ 24.6 million).
7. Income Taxes
During the first quarter of 2002, the common parent of the consolidated
group, Premcor Inc., received a net cash refund of $11.7 million related to a
$13.0 million federal estimated income tax payment made in 2001. This refund is
due to the Company under the terms of its tax sharing agreement with Premcor
Inc. and the common security agreement related to the senior debt. The Company
made no net cash income tax payments nor received any net cash income tax
refunds during the first quarter of 2001.
8. Port Arthur Coker Company Condensed Consolidated Financial Information
Sabine River Holding Corp directly owns a 1% general partnership interest
in Port Arthur Coker Company and through its wholly-owned subsidiary, Neches
River Holding, owns the remaining 99% limited partnership interest. Port Arthur
Finance, which is wholly owned by Port Arthur Coker Company, issued debt on Port
Arthur Coker Company's behalf. Both the Company and Neches River Holding fully
and unconditionally guarantee the debt issued by Port Arthur Finance. Port
Arthur Coker Company is the only company with operations in the consolidated
financial statements of the Company. Neither Neches River Holding nor Port
Arthur Finance have independent operations.
Port Arthur Coker Company's condensed consolidated financial information
consisted of the following:
Consolidated statement of operations:
For the Three Months
Ended March 31,
--------------------
2001 2002
-------- ---------
Revenues................................ $ 507.6 $ 420.7
Cost of sales........................... 386.0 379.6
Operating expenses...................... 49.1 33.7
General and administrative expenses..... 1.0 1.1
Depreciation............................ 4.7 5.2
-------- ---------
66.8 1.1
Interest and finance expense ........... (16.8) (14.6)
Interest income ........................ 1.3 0.9
-------- ---------
Net income (loss) ...................... $ 51.3 $ (12.6)
======== =========
8
Consolidated balance sheet information:
December 31, March 31
2001 2002
----------- ---------
Total current assets .......................................... $ 330.4 $ 304.8
Property, plant and equipment ................................. 632.4 627.6
Other assets .................................................. 16.4 16.7
---------- ---------
Total assets .................................................. $ 979.2 $ 949.1
========== =========
Total current liabilities ..................................... $ 217.0 $ 203.7
Long term debt ................................................ 463.0 449.5
Note payable to affiliates .................................... 4.9 2.4
Other liabilities ............................................. -- 0.1
Partners' capital contributed ................................. 108.8 120.5
Retained earnings ............................................. 185.5 172.9
---------- ---------
Total liabilities and partners' capital ....................... $ 979.2 $ 949.1
========== =========
In the first quarter of 2002, Sabine River Holding Corp. and Neches River
Holding returned an $11.7 million distribution to Port Arthur Coker Company. The
return of this distribution resulted from an income tax refund due to the
Company by Premcor Inc.
9. Related Party Transactions
Port Arthur Coker Company and The Premcor Refining Group Inc.
Port Arthur Coker Company and The Premcor Refining Group Inc. ("Premcor
Refining Group") have entered into certain agreements associated with the
ongoing operations of the coker, hydrocracking, and sulfur removal facilities of
the Port Arthur Coker Company and the Premcor Refining Group's Port Arthur
refinery. Port Arthur Coker Company's general partner, Sabine River Holding
Corp., and the parent company of the Premcor Refining Group, Premcor USA Inc.,
are subsidiaries of Premcor Inc. Related party receivables, payables, revenues,
cost of sales, and operating expenses from these agreements were as follows:
As of March 31, 2002, Port Arthur Coker Company had an outstanding
receivable from the Premcor Refining Group of $62.5 million (December 31, 2001 -
$25.1 million) and a payable to the Premcor Refining Group of $31.0 million
(December 31, 2001 - $26.8 million) related to ongoing operations. As of March
31, 2002, Port Arthur Coker Company had a note payable to the Premcor Refining
Group of $5.0 million (December 31, 2001 - $7.7 million) related to construction
management services of which $2.4 million (December 31, 2001 - $4.9 million) was
accounted for as a long-term liability and the remainder as a current liability.
Port Arthur Coker Company generated $420.7 million and $497.6 million in
revenues for the three month period ended March 31, 2002 and 2001, respectively,
primarily from the sales of finished and intermediate refined products and crude
oil to the Premcor Refining Group. Port Arthur Coker Company incurred $22.1
million and $34.8 million in costs of sales for the three-month period ended
March 31, 2002 and 2001, respectively. These costs included purchases of
feedstocks and hydrogen and the incurrence of pipeline tariffs from the Premcor
Refining Group. Port Arthur Coker Company recorded operating expenses for
services provided by Premcor Refining Group of $9.1 million and $14.6 million
for the three- month periods ended March 31, 2002 and 2001, respectively. Port
Arthur Coker Company also recorded operating expenses related to its lease of
Premcor Refining Group's operating units of $7.6 million and $8.0 million for
the three-month period ended March 31, 2002 and 2001, respectively.
9
10. Commitments and Contingencies
Environmental Product Standards
Tier 2 Motor Vehicle Emission Standards. In February 2000, the
Environmental Protection Agency ("EPA") promulgated the Tier 2 Motor Vehicle
Emission Standards Final Rule for all passenger vehicles, establishing standards
for sulfur content in gasoline. These regulations mandate that the sulfur
content of gasoline at any refinery not exceed 30 ppm during any calendar year
by January 1, 2006. These requirements will be phased in beginning on January 1,
2004. Modifications will be required at the Port Arthur refinery including the
Company's heavy oil processing facility as a result of the Tier 2 standards.
Based on the Company's current estimates, it believes that compliance with the
new Tier 2 gasoline specifications will require capital expenditures in the
aggregate through 2005 of approximately one million dollars for the heavy oil
processing facility.
Low Sulfur Diesel Standards. In January 2001, the EPA promulgated its
on-road diesel regulations, which will require a 97% reduction in the sulfur
content of diesel fuel sold for highway use by June 1, 2006, with full
compliance by January 1, 2010. In its release, the EPA estimated that the
overall cost to fuel producers of the reduction in sulfur content would be
approximately $0.04 per gallon. The EPA has also announced its intention to
review the sulfur content in diesel fuel sold to off-road consumers. If
regulations are promulgated to regulate the sulfur content of off-road diesel,
the Company expects the sulfur requirement to be either 500 ppm, which is the
current on-road limit, or 15 ppm, which will be the future on-road limit. The
Company estimates its capital expenditures in the aggregate through 2006
required to comply with the diesel standards, utilizing existing technologies is
approximately $110 million. More than 90% of the projected investment is
expected to be incurred during 2004 through 2006 with the greatest concentration
of spending occurring in 2005.
Long-Term Crude Oil Contract
Port Arthur Coker Company is party to a long-term crude oil supply
agreement with PMI Comercio Internacional, S.A. de C.V ("PEMEX"), an affiliate
of Petroleos Mexicanos, the Mexican state oil company, which supplies
approximately 160,000 barrels per day of Maya crude oil. Under the terms of this
agreement, Port Arthur Coker Company is obligated to buy Maya crude oil from
PEMEX, and PEMEX is obligated to sell to Port Arthur Coker Company Maya crude
oil. An important feature of this agreement is a price adjustment mechanism
designed to minimize the effect of adverse refining margin cycles and to
moderate the fluctuations of the coker gross margin, a benchmark measure of the
value of coker production over the cost of coker feedstocks. This price
adjustment mechanism contains a formula that represents an approximation of the
coker gross margin and provides for a minimum average coker margin of $15 per
barrel over the first eight years of the agreement, which began on April 1,
2001. The agreement expires in 2011.
On a monthly basis, the actual coker gross margin is calculated and
compared to the minimum. Coker gross margins exceeding the minimum are
considered a "surplus" while coker gross margins that fall short of the minimum
are considered a "shortfall." On a quarterly basis, the surplus and shortfall
determinations since the beginning of the contract are aggregated. Pricing
adjustments to the crude oil the Company purchases are only made when there
exists a cumulative shortfall. When this quarterly aggregation first reveals
that a cumulative shortfall exists, the Company receives a discount on our crude
oil purchases in the next quarter in the amount of the cumulative shortfall. If
thereafter, the cumulative shortfall incrementally increases, the company
receives additional discounts on our crude oil purchases in the succeeding
quarter equal to the incremental increase, and conversely, if thereafter, the
cumulative shortfall incrementally decreases, the Company repays discounts
previously received, or a premium, on our crude oil purchases in the succeeding
quarter equal to the incremental decrease. Cash crude oil discounts received by
the Company in any one quarter are limited to $30 million, while the Company's
repayment of previous crude oil discounts, or premiums, are limited to $20
million in any one quarter. Any amounts subject to the quarterly payment
limitations are carried forward and applied in subsequent quarters.
As of March 31, 2002, a cumulative quarterly surplus of $98.6 million
existed under the contract. As a result, to the extent the Company experiences
quarterly shortfalls in coker gross margins going forward, the price it pays for
10
Maya crude oil in succeeding quarters will not be discounted until this
cumulative surplus is offset by future shortfalls.
11. Subsequent Events
On May 3, 2002, Premcor Inc. completed an initial public offering of 20.7
million shares of common stock. The initial public offering, plus the concurrent
purchase of 850,000 shares in the aggregate by Thomas D. O'Malley, the Company's
chairman of the board, chief executive officer and president, and two directors
of the Company, netted proceeds to Premcor Inc. of approximately $482 million.
The proceeds from the offering are committed to retire debt of its subsidiaries.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Certain statements in this document are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are subject to the safe harbor
provisions of this legislation. Words such as "expects," "intends," "plans,"
"projects," "believes," "estimates," "will" and similar expressions typically
identify such forward-looking statements.
Even though we believe our expectations regarding future events are based
on reasonable assumptions, forward-looking statements are not guarantees of
future performance. Important factors that could cause actual results to differ
materially from those contained in our forward-looking statements include, among
others, changes in:
... Industry-wide refining margins;
... Crude oil and other raw material costs, embargoes, industry expenditures
for the discovery and production of crude oil, and military conflicts
between, or internal instability in, one or more oil-producing countries,
and governmental actions;
... Market volatility due to world and regional events;
... Availability and cost of debt and equity financing;
... Labor relations;
... U.S. and world economic conditions;
... Supply and demand for refined petroleum products;
... Reliability and efficiency of our operating facilities which are effected
by such potential hazards as equipment malfunctions, plant
construction/repair delays, explosions, fires, oil spills and the impact of
severe weather;
... Actions taken by competitors which may include both pricing and expansion
or retirement of refinery capacity;
... The enforceability of contracts;
... Civil, criminal, regulatory or administrative actions, claims or
proceedings and regulations dealing with protection of the environment;
... Other unpredictable or unknown factors not discussed.
Because of all of these uncertainties, and others, you should not place
undue reliance on our forward-looking statements.
12
Results of Operations
The following table reflects our financial and operating highlights for the
three-month periods ended March 31, 2001 and 2002.
Financial Results For the Three Months
(in millions, except as noted) Ended March 31,
---------------------------------
2001 2002
------------ ------------
Net sales and operating revenues $ 507.6 $ 420.7
Cost of sales 386.0 379.6
------------ ------------
Gross margin 121.6 41.1
Operating expenses 49.1 33.7
General and administrative expenses 1.0 1.1
------------ ------------
EBITDA/(1)/ 71.5 6.3
Depreciation expense 4.7 5.2
------------ ------------
Operating income 66.8 1.1
Interest expense and finance income, net (15.5) (13.7)
Income tax (provision) benefit (18.0) 4.5
------------ ------------
Net income (loss) $ 33.3 $ (8.1)
============ ============
(1) Earnings before interest, income taxes, depreciation, and
amortization
Market Indicators For the Three Months
(dollars per barrel, except as noted) Ended March 31,
-----------------------------------
2001 2002
---- ----
West Texas Intermediate (WTI) crude oil ........ $ 28.81 $ 21.59
Gulf Coast crack spread (3/2/1) ................ 5.01 2.80
Crude Oil Differentials:
WTI less WTS (sour) ....................... 4.08 1.32
WTI less Maya (heavy sour) ................ 10.62 5.43
WTI less Dated Brent (foreign) ............ 2.90 0.42
Natural gas (per mmbtu) ........................ 7.00 2.20
Selected Volumetric and Per Barrel Data For the Three Months
(in thousands of barrels per day, except as noted) Ended March 31,
-----------------------------------
2001 2002
---- ----
Production ..................................... 186.2 231.0
Crude oil throughput ........................... 173.2 211.2
Per barrel of throughput (in dollars):
Gross margin ................................. $ 7.80 $ 2.16
Operating expenses ........................... 3.15 1.77
13
Three months ended Three months ended March
March 31, 2001 31, 2002
------------------------------- -----------------------------
Selected Volumetric Data Percent Percent
(in thousands of barrels per day) Barrels of Total Barrels of Total
---------------- ------------- ------------- --------------
Feedstocks:
Crude oil throughput:
Medium sour 42.0 24.2% 46.0 21.8%
Heavy sour 131.2 75.8% 165.2 78.2
---------------- ------------- ------------- --------------
Total crude oil 173.2 100.0% 211.2 100.0%
================ ============= ============= ==============
Production:
Intermediate throughput produced for Premcor
Refining Group 169.9 91.2% 205.7 89.0%
Petroleum coke, sulfur and other 16.3 8.8 25.3 11.0
---------------- ------------- ------------- --------------
Total production 186.2 100.0% 231.0 100.0%
================ ============= ============= ==============
First Quarter 2002 Compared to First Quarter 2001
Overview. Net income decreased $41.4 million to a net loss of $8.1 million
in the first quarter of 2002 from net income of $33.3 million in the
corresponding period in 2001. Operating income decreased $65.7 million to $1.1
million in the first quarter of 2002 from $66.8 million in the corresponding
period in 2001. The operating results for 2002 compared to 2001 were
significantly impacted by historically weak market conditions, particularly
heavy sour crude oil differentials.
Net Sales and Operating Revenue. Net sales and operating revenues decreased
$86.9 million, or 17%, to $420.7 million in the first quarter of 2002 from
$507.6 million in the corresponding period in 2001. This decrease was mainly
attributable to lower prices in the first quarter of 2002 as compared to the
same period of 2001 as evidenced by a $7.22 per barrel decrease in the average
value of WTI.
Gross Margin. Gross margin decreased $80.5 million to $41.1 million in the
first quarter of 2002 from $121.6 million in the corresponding period in 2001.
The decrease in the gross margin for the first quarter of 2002 reflected weak
market conditions, unplanned unit downtime, and a change in accounting method
for inventory valuation.
Refining margins remained at depressed levels through most of the first
quarter of 2002 as high distillate and gasoline inventories and low demand
continued. Mild winter weather, decreased air travel compared to historic
levels, a weak industrial sector, and an overall sluggish economy resulted in
inventories remaining at high levels at 2001 year-end and into the first quarter
of 2002. Refining margins recovered somewhat in March 2002 as supply tightened
due to heavy maintenance turnaround activity in the industry. The average Gulf
Coast crack spread was approximately 44% lower in the first quarter of 2002 than
for the same period of 2001. The crude oil differentials on sour and heavy sour
crude oil were also significantly lower than the prior year with the heavy sour
crude oil discount approximately 50% lower than the prior year.
In February 2002, we shut down our coker unit for ten days for unplanned
maintenance. Crude oil throughput rates of 211,200 barrels per day were
restricted by approximately 16,000 barrels per day, or bpd, during this time,
but returned to near capacity following the maintenance. Due to the coker unit
downtime, we utilized approximately 90% of the crude oil throughput capacity of
the Port Arthur refinery during March 2002 in order to use heavy sour crude oil
inventory that had built during the February outage. On a more normalized basis,
without a coker interruption, we utilize closer to 80% of the refinery's crude
oil throughput capacity while Premcor Refining Group utilizes the remaining 20%
through a processing arrangement. In the first quarter of 2001, crude oil
throughput rates of 173,200 barrels per day were affected by the start-up
operations of our heavy oil processing facility. The heavy oil processing
facility did not run at full capacity during the first quarter of 2001. In
January 2001, our new hydrocracker was brought on-line and our new coker unit
and sulfur plant were still in start-up operations, having
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begun operations in December 2000. In January 2002, both Port Arthur Coker
Company and our affiliate, Premcor Refining Group, shut down the fluid catalytic
cracking unit, gas oil hydrotreating unit and sulfur plant for approximately 39
days at the Port Arthur refinery for planned turnaround maintenance.
Gross margin was also negatively impacted by $12.1 million for a change in
our accounting method for crude oil and blendstock inventories from first-in
first-out, or FIFO, to last-in first-out, or LIFO. We believe the LIFO method
achieves a more appropriate matching of revenues and expenses.
Operating Expenses. Operating expenses decreased $15.4 million to $33.7
million in the first quarter of 2002 from $49.1 million in the corresponding
period in 2001. The decrease in the first quarter of 2002 was principally due to
significantly lower natural gas prices and lower operating fees associated with
the operating agreements between Premcor Refining Group and Port Arthur Coker
Company.
General and Administrative Expenses. General and administrative expenses of
$1.1 million were approximately flat with the corresponding period in 2001.
Depreciation. Depreciation increased $0.5 million to $5.2 million in the
first quarter of 2002 from $4.7 million in the corresponding period in 2001.
Interest Expense and Finance Income, net. Interest expense and finance
income, net decreased $1.8 million to $13.7 million in the first quarter of 2002
from $15.5 million in the corresponding period in 2001. This decrease was
principally due to lower interest rates on the floating rate bank senior loan
and a January 2002 payment of principal on the bank senior loan agreement.
Income Tax (Provision) Benefit. We recorded an income tax benefit of $4.5
million in the first quarter of 2002 compared to a $18.0 million income tax
provision in the corresponding period of 2001. Under the terms of our tax
sharing agreement with the common parent of our consolidated group, Premcor
Inc., and the common security agreement related to our senior debt, we expect a
full refund of a federal estimated income tax payment of $13.0 million made in
2001. In the first quarter of 2002, we recorded a receivable from Premcor Inc.
for $11.7 million related to the refund based on the amount that Premcor Inc.
had received from the federal government. We will record the remaining $1.3
million in the second quarter of 2002.
Outlook
Market. Refining margins for the second and third quarter of 2002 are
expected to be considerably lower than the historical highs seen in 2001. In
2001, we entered the summer driving season with low product inventories. Then
supply disruptions and unplanned downtime further limited supply and spiked
refining margins. In 2002, despite the typical demand increase for gasoline as
we enter the summer driving season, high inventories and very little foreseeable
downtime should provide adequate supply.
Liquidity and Capital Resources
Cash Balances
As of March 31, 2002, we had a cash balance of $205.9 million including
$53.4 million restricted for interest and principal payments on our long-term
debt. Under a common security agreement related to our senior debt, this cash is
reserved under a secured account structure for specific operational uses and
mandatory debt repayment. The operational uses include various levels of
spending, such as current and operational working capital needs, interest and
principal payments, taxes, and maintenance and repairs. Cash is applied to each
level until that level has been fully funded, upon which the remaining cash
flows to the next level. Once these spending levels are funded, any cash surplus
satisfies obligations of a debt service reserve and mandatory debt repayment
with funding occurring semiannually on January and July 15th.
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Cash flows from Operating Activities
Cash flows provided by operating activities for the three-month period
ended March 31, 2002 was $24.3 million compared to cash used in operating
activities of $47.7 million for the same period last year.
In order to provide security to PMI Comercio Internacional, S.A. de C.V.,
or PMI, for our obligation to pay for shipments of Maya crude oil under a long
term crude oil supply agreement, we obtained from Winterthur International
Insurance Company Limited an oil payment guaranty insurance policy for the
benefit of PMI. This oil payment guaranty insurance policy is in the amount of
$150 million and is a source of payment to PMI if we fail to pay PMI for one or
more shipments of Maya crude oil. Under certain senior debt documents, we are
required to reimburse Winterthur for any payments they make on this policy. This
reimbursement obligation to Winterthur has a priority claim on all of the
collateral held for the senior debt equal to the note holders and holders of
Port Arthur Coker Company's other senior debt, except in specified circumstances
in which it has a senior claim to these parties. As of March 31, 2002, $115.5
million of crude oil purchase commitments were outstanding related to this
policy.
We also have in place a $35 million working capital facility, which is
primarily for the issuance of letters of credit for the purchases of non-Maya
crude oil. As of March 31, 2002, none of the facility was utilized for letters
of credit.
Cash Flows from Investing Activities
Cash flows used in investing activities were $0.4 million for the
three-month period ended March 31, 2002 as compared to $2.2 million in the same
period last year. Expenditures for property, plant and equipment in 2001 were
associated with the construction of the heavy oil upgrade facility.
We expect to incur costs in conjunction with our affiliate, Premcor
Refining Group, in order to comply with environmental regulations as discussed
below. The EPA has promulgated new regulations under the Clean Air Act that
establish stringent sulfur content specifications for gasoline and on-road
diesel fuel designed to reduce air emissions from the use of these products.
Tier 2 Motor Vehicle Emission Standards. In February 2000, the EPA
promulgated the Tier 2 Motor Vehicle Emission Standards Final Rule for all
passenger vehicles, establishing standards for sulfur content in gasoline. These
regulations mandate that the sulfur content of gasoline at any refinery not
exceed 30 ppm during any calendar year by January 1, 2006. These requirements
will be phased in beginning on January 1, 2004. Modifications will be required
at the Port Arthur refinery, including our heavy oil processing facility, as a
result of the Tier 2 standards. Based on our current estimates, we believe that
compliance with the new Tier 2 gasoline specifications will require capital
expenditures in the aggregate through 2005 of approximately one million dollars
for our facility.
Low Sulfur Diesel Standards. In January 2001, the EPA promulgated its
on-road diesel regulations, which will require a 97% reduction in the sulfur
content of diesel fuel sold for highway use by June 1, 2006, with full
compliance by January 1, 2010. In its release, the EPA estimated that the
overall cost to fuel producers of the reduction in sulfur content would be
approximately $0.04 per gallon. The EPA has also announced its intention to
review the sulfur content in diesel fuel sold to off-road consumers. If
regulations are promulgated to regulate the sulfur content of off-road diesel,
we expect the sulfur requirement to be either 500 ppm, which is the current
on-road limit, or 15 ppm, which will be the future on-road limit. We estimate
our capital expenditures in the aggregate through 2006 required to comply with
the diesel standards at our heavy oil processing facility, utilizing existing
technologies is approximately $110 million. More than 90% of the projected
investment is expected to be incurred during 2004 through 2006 with the greatest
concentration of spending occurring in 2005.
Cash Flows from Financing Activities
Cash flows used in financing activities were $94.2 million for the
three-month period ended March 31, 2002 compared to nil last year. In January
2002, Port Arthur Coker Company made a $66.2 million payment on its bank senior
loan agreement with $59.7 million representing a mandatory prepayment pursuant
to the common security
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agreement and secured account structure. In addition to this principal payment,
Port Arthur Coker Company restricted an additional $33.4 million of cash for
future debt repayments as required by the secured account structure. In the
first quarter of 2002, we incurred $1.1 million of deferred financing costs for
fees necessary to obtain a waiver related to insurance coverage required under
the common security agreement.
Funds generated from operating activities together with existing cash and
cash equivalents are expected to be adequate to fund existing requirements for
working capital and capital expenditure programs for the next year. Our
operating results are subject to rapid and wide fluctuations due to the
commodity nature of our feedstocks and products. However, there can be no
assurance that market conditions or actual operations will not be worse than
anticipated.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
3.01 Amended and Restated Certificate of Incorporation of Sabine River
Holding Corp. ("Sabine River") and the Certificate of Amendment
thereto dated August 11, 1999 (Incorporated by reference to
Exhibit 3.01(b) filed with the Company's Registration Statement
on Form S-4 (Registration No. 333-92871))
3.02 Amended and Restated By Laws of Sabine River (Incorporated by
reference to Exhibit 3.02(b) filed with the Company's
Registration Statement on Form S-4 (Registration No. 333-92871))
4.01 Indenture, dated as of August 19, 1999, among Sabine River,
Neches River Holding Corp. ("Neches River"), Port Arthur Finance
Corp. ("PAFC"), Port Arthur Coker Company L.P. ("PACC"), HSBC
Bank USA, the capital markets trustee, and Bankers Trust Company,
as Collateral Trustee (Incorporated by reference to Exhibit 4.01
filed with the Company's Registration Statement on Form S-4
(Registration No. 333-92871))
4.02 Form of 12.50% Senior Secured Notes due 2009 (the "Exchange
Note") (Incorporated by reference to Exhibit 4.02 filed with the
Company's Registration Statement on Form S-4 (Registration No.
333-92871))
4.03 Common Security Agreement, dated as of August 19, 1999, among
PAFC, PACC, Sabine River, Neches River, Bankers Trust Company, as
Collateral Trustee and Depositary Bank, Deutsche Bank AG, New
York Branch ("Deutsche Bank"), as Administrative Agent,
Winterthur International Insurance Company Limited, an English
company ("Winterthur"), as Oil Payment Insurers Administrative
Agent and HSBC Bank USA, as Capital Markets Trustee (Incorporated
by reference to Exhibit 4.04 filed with the Company's
Registration Statement on Form S-4 (Registration No. 333-92871))
4.04 Transfer Restrictions Agreement, dated as of August 19, 1999,
among PAFC, PACC, Premcor Inc. (f/k/a Clark Refining Holdings
Inc.), Sabine River, Neches River, Blackstone Capital Partners
III Merchant Banking Fund L.P. ("BCP III"), Blackstone Offshore
Capital Partners III L.P. ("BOCP III"), Blackstone Family
Investment Partnership III ("BFIP III"), Winterthur, as the Oil
Payment Insurers Administrative agent, Bankers Trust Company, as
Collateral Trustee, Deutsche Bank, as Administrative Agent and
HSBC Bank USA, as Capital Markets Trustee (Incorporated by
reference to Exhibit 4.05 filed with the Company's Registration
Statement on Form S-4 (Registration No. 333-92871))
4.05 Intercreditor Agreement, dated as of August 19, 1999, among
Bankers Trust Company, as Collateral Trustee, Deutsche Bank, as
Administrative Agent, Winterthur, as Oil Payment Insurers
Administrative Agent and Debt Service Reserve Insurer and HSBC
Bank, as Capital Markets Trustee (Incorporated by reference to
Exhibit 4.06 filed with the Company's Registration Statement on
Form S-4 (Registration No. 333-92871))
18.01 Preferability letter, dated May 8, 2002, from Deloitte & Touche
LLP concerning the Company's change in method of accounting for
crude oil and blendstock inventories from first-in first-out
("FIFO") to last-in first-out ("LIFO")(filed herewith).
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the period
covered by this report and up to and including the date of filing of this
report:
(1) a report dated February 5, 2002 (announcing that Premcor Inc. had
appointed Thomas D. O'Malley Chairman, Chief Executive Officer and
President of Premcor); and
(2) a report dated February 12, 2002 (announcing that Premcor Inc. had
announced its fourth quarter and full year results)
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sabine River Holding Corp.
(Registrant)
/s/ Dennis R. Eichholz
-------------------------------------
Dennis R. Eichholz
Controller (principal
accounting officer and
duly authorized officer)
May 13, 2002
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