1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000
--------------------------
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 1-3876
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HOLLY CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1056913
- --------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
- ---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 871-3555
---------------------
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
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
---- -----
8,253,514 shares of Common Stock, par value $.01 per share, were outstanding on
March 8, 2000.
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HOLLY CORPORATION
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet -
January 31, 2000 (Unaudited) and July 31, 1999 3
Consolidated Statement of Income (Unaudited) -
Three Months and Six Months Ended January 31, 2000 and 1999 4
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended January 31, 2000 and 1999 5
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months and Six Months Ended January 31, 2000 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
This Quarterly Report on Form 10-Q (including documents incorporated by
reference herein) contains statements with respect to the Company's
expectations or beliefs as to future events. These types of statements are
"forward-looking" and are subject to uncertainties. See "Factors Affecting
Forward-Looking Statements" on page 11.
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3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
January 31, July 31,
2000 1999
----------- --------
ASSETS
Current assets
Cash and cash equivalents $ 6,892 $ 4,194
Accounts receivable: Product 47,188 47,832
Crude oil resales 104,569 75,670
---------- ----------
151,757 123,502
Inventories: Crude oil and refined products 45,729 47,364
Materials and supplies 10,687 10,553
Reserve for lower of cost or market (2,921) (2,993)
---------- ----------
53,495 54,924
Income taxes receivable 5,447 --
Prepayments and other 12,537 12,158
---------- ----------
Total current assets 230,128 194,778
Properties, plants and equipment, at cost 360,024 352,179
Less accumulated depreciation, depletion and amortization (177,777) (171,285)
---------- ----------
182,247 180,894
Investments and advances to joint ventures 3,843 4,035
Other assets 9,423 11,275
---------- ----------
$ 425,641 $ 390,982
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 194,441 $ 144,287
Accrued liabilities 14,104 14,688
Income taxes payable 565 8,206
Current maturities of long-term debt 13,738 13,746
Borrowings under credit agreement 4,300 --
---------- ----------
Total current liabilities 227,148 180,927
Deferred income taxes 25,286 24,580
Long-term debt, less current maturities 48,024 56,595
Commitments and contingencies
Stockholders' equity
Preferred stock, $1.00 par value - 1,000,000 shares authorized; none issued -- --
Common stock, $.01 par value - 20,000,000 shares authorized; 8,650,282 shares issued 87 87
Additional capital 6,132 6,132
Retained earnings 119,858 124,341
---------- ----------
126,077 130,560
Common stock held in treasury, at cost - 396,768 shares (569) (569)
Accumulated other comprehensive income - net unrealized loss on
securities available for sale (325) (1,111)
---------- ----------
Total stockholders' equity 125,183 128,880
---------- ----------
Total liabilities and stockholders' equity $ 425,641 $ 390,982
========== ==========
See accompanying notes.
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
Unaudited Unaudited
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Sales and other revenues $ 218,424 $ 120,684 $ 419,055 $ 263,679
Operating costs and expenses
Cost of products sold 190,692 85,191 350,522 190,848
Inventory market writedowns -- 4,371 -- 5,762
Operating expenses 21,885 19,922 45,124 39,471
Selling, general and administrative expenses 5,287 5,912 10,155 10,240
Depreciation, depletion and amortization 6,957 6,638 13,373 12,625
Exploration expenses, including dry holes 299 415 602 720
--------- --------- --------- ---------
225,120 122,449 419,776 259,666
--------- --------- --------- ---------
Income (loss) from operations (6,696) (1,765) (721) 4,013
Other
Equity in earnings (loss) of joint ventures (73) 742 558 1,136
Interest income 159 43 423 93
Interest expense (1,458) (1,982) (3,019) (3,913)
--------- --------- --------- ---------
(1,372) (1,197) (2,038) (2,684)
--------- --------- --------- ---------
Income (loss) before income taxes (8,068) (2,962) (2,759) 1,329
Income tax provision (benefit)
Current (2,917) 105 (585) 1,956
Deferred (248) (1,260) (497) (1,438)
--------- --------- --------- ---------
(3,165) (1,155) (1,082) 518
--------- --------- --------- ---------
Net income (loss) $ (4,903) $ (1,807) $ (1,677) $ 811
========= ========= ========= =========
Income (loss) per common share (basic
and diluted) $ (.59) $ (.22) $ (.20) $ .10
Cash dividends paid per share $ .17 $ .16 $ .34 $ .32
Average number of shares of common
stock outstanding (in thousands) 8,254 8,254 8,254 8,254
See accompanying notes.
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Unaudited
Six Months Ended
January 31,
-------------------------
2000 1999
-------- --------
Cash flows from operating activities
Net income (loss) $ (1,677) $ 811
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation, depletion and amortization 13,373 12,625
Deferred income taxes (497) (1,438)
Equity in earnings of joint venture (558) (1,136)
Dry hole costs and leasehold impairment -- 47
Inventory market writedowns -- 5,762
(Increase) decrease in operating assets
Accounts receivable (28,255) (1,423)
Inventories 1,429 6,613
Income taxes receivable (5,447) (649)
Prepayments and other 51 (872)
Increase (decrease) in operating liabilities
Accounts payable 50,154 (10,981)
Accrued liabilities (584) (2,109)
Income taxes payable (7,641) (221)
Turnaround expenditures (125) --
Other, net (308) (1,502)
-------- --------
Net cash provided by operating activities 19,915 5,527
Cash flows from financing activities
Increase in borrowings under credit agreement 4,300 5,900
Payment of long-term debt (8,579) (8)
Cash dividends (2,806) (2,642)
-------- --------
Net cash provided by (used for) financing activities (7,085) 3,250
Cash flows from investing activities
Additions to properties, plants and equipment (10,882) (9,941)
Distributions from joint venture 750 1,400
-------- --------
Net cash used for investing activities (10,132) (8,541)
-------- --------
Cash and cash equivalents
Increase for the period 2,698 236
Beginning of year 4,194 2,602
-------- --------
End of period $ 6,892 $ 2,838
======== ========
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 3,307 $ 3,671
Income taxes $ 12,456 $ 2,772
See accompanying notes.
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
Unaudited Unaudited
Three Months Ended Six Months Ended
January 31, January 31,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss) $ (4,903) $ (1,807) $ (1,677) $ 811
Other comprehensive income
Unrealized gain (loss) on securities
available for sale 787 (474) 1,312 (749)
Income tax provision (benefit) 309 (189) 526 (299)
-------- -------- -------- --------
478 (285) 786 (450)
-------- -------- -------- --------
Total comprehensive income (loss) $ (4,425) $ (2,092) $ (891) $ 361
======== ======== ======== ========
See accompanying notes.
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HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants (except for
the consolidated balance sheet as of July 31, 1999), reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position as of January 31, 2000, the
consolidated results of operations and comprehensive income for the three and
six months ended January 31, 2000 and 1999, and consolidated cash flows for the
six months ended January 31, 2000 and 1999. Certain reclassifications have been
made to the prior years' financial statements to conform to the current
presentation.
Certain notes and other information have been condensed or omitted.
Therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1999.
References herein to the "Company" are for convenience of presentation
and may include obligations, commitments or contingencies that pertain solely to
one or more affiliates of the Company. Results of operations for the first six
months of fiscal 2000 are not necessarily indicative of the results to be
expected for the full year.
Note B - Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for net income.
Three Months Ended January 31,
------------------------------
(in thousands, except per share amounts) 2000 1999
-------- ------
Net income (loss) $ (4,903) $ (1,807)
======== ========
Average number of shares of common
stock outstanding 8,254 8,254
Effect of dilutive stock options -- --
-------- --------
Average number of shares of common
stock outstanding assuming dilution 8,254 8,254
======== ========
Income (loss) per share - basic $ (.59) $ (.22)
======== ========
Income (loss) per share - diluted $ (.59) $ (.22)
======== ========
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HOLLY CORPORATION
Six Months Ended January 31,
-----------------------------
(in thousands, except per share amounts) 2000 1999
-------- ------
Net income (loss) $ (1,677) $ 811
========= =======
Average number of shares of common
stock outstanding 8,254 8,254
Effect of dilutive stock options -- --
-------- -------
Average number of shares of common
stock outstanding assuming dilution 8,254 8,254
======== =======
Income (loss) per share -- basic $ (.20) $ .10
========= =======
Income (loss) per share -- diluted $ (.20) $ .10
========= =======
Note C - Segment Information
The Company has two major business segments: Refining and Pipeline
Transportation. The Refining segment is engaged in the refining of crude oil and
wholesale marketing of refined products, such as gasoline, diesel fuel and jet
fuel, and includes the Company's Navajo Refinery and Montana Refinery. The
petroleum products produced by the Refining segment are marketed in the
southwestern United States, Montana and northern Mexico. Certain pipelines and
terminals operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Pipeline Transportation segment
includes approximately 900 miles of the Company's pipeline assets in Texas and
New Mexico. Revenues from the Pipeline Transportation segment are earned through
transactions with unaffiliated parties for pipeline transportation, rental and
terminalling operations. The Pipeline Transportation segment also includes the
equity earnings from the Company's 25% investment in Rio Grande Pipeline
Company, which provides petroleum products transportation. Operations of the
Company that are not included in the two reportable segments are included in
Corporate and other, which includes costs of Holly Corporation, the parent
company, consisting primarily of general and administrative expenses and
interest charges, as well as a small-scale oil and gas exploration and
production program and a small equity investment in retail gasoline stations and
convenience stores.
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HOLLY CORPORATION
The accounting policies for the segments are the same as those described
in the summary of significant accounting policies in the Company's Form 10-K for
the year ended July 31, 1999. The Company's reportable segments are strategic
business units that offer different products and services.
Total for
Pipeline Reportable Corporate Consolidated
Refining Transportation Segments & Other Total
-------- -------------- ---------- --------- ------------
($ in thousands)
Three Months Ended January 31, 2000
Sales and other operating revenues $ 213,686 $ 3,683 $ 217,369 $ 1,055 $ 218,424
EBITDA (1) $ (1,249) $ 2,296 $ 1,047 $ (859) $ 188
Income (loss) from operations $ (7,510) $ 2,022 $ (5,488) $ (1,208) $ (6,696)
Income (loss) before income taxes $ (7,584) $ 2,007 $ (5,577) $ (2,491) $ (8,068)
Three Months Ended January 31, 1999
Sales and other operating revenues $ 116,727 $ 3,013 $ 119,740 $ 944 $ 120,684
EBITDA(1) $ 4,567 $ 2,691 $ 7,258 $ (1,643) $ 5,615
Income (loss) from operations $ (809) $ 1,695 $ 886 $ (2,651) $ (1,765)
Income (loss) before income taxes $ (890) $ 2,436 $ 1,546 $ (4,508) $ (2,962)
Six Months Ended January 31, 2000
Sales and other operating revenues $ 409,535 $ 7,334 $ 416,869 $ 2,186 $ 419,055
EBITDA (1) $ 9,451 $ 5,243 $ 14,694 $ (1,484) $ 13,210
Income (loss) from operations $ (2,388) $ 4,008 $ 1,620 $ (2,341) $ (721)
Income (loss) before income taxes $ (2,528) $ 4,661 $ 2,133 $ (4,892) $ (2,759)
Six Months Ended January 31, 1999
Sales and other operating revenues $ 255,854 $ 6,019 $ 261,873 $ 1,806 $ 263,679
EBITDA(1) $ 15,043 $ 5,070 $ 20,113 $ (2,339) $ 17,774
Income (loss) from operations $ 4,567 $ 3,397 $ 7,964 $ (3,951) $ 4,013
Income (loss) before income taxes $ 4,405 $ 4,567 $ 8,972 $ (7,643) $ 1,329
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
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HOLLY CORPORATION
Note D - Contingencies
In August 1998, a lawsuit (the "Longhorn Suit") was filed in state
district court in El Paso, Texas against the Company and two of its subsidiaries
(along with an Austin, Texas law firm which was subsequently dropped from the
case). The suit was filed by Longhorn Partners Pipeline, L.P. ("Longhorn
Partners"), a Delaware limited partnership composed of Longhorn Partners GP,
L.L.C. as general partner and affiliates of Exxon Pipeline Company, Amoco
Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy
Investment Fund, L.P. as well as Chisholm Holdings as limited partners. The
suit, as amended by Longhorn Partners in March and November 1999 and in March
2000, seeks damages alleged to total up to $1,050,000,000 (after trebling) based
on claims of violations of the Texas Free Enterprise and Antitrust Act, unlawful
interference with existing and prospective contractual relations, and conspiracy
to abuse process. After the March 2000 amendment, the specific actions of the
Company complained of in the Longhorn Lawsuit are alleged solicitation of and
support for allegedly baseless lawsuits brought by Texas ranchers in federal and
state courts to challenge the proposed Longhorn Pipeline project, support of
allegedly fraudulent public relations activities against the proposed Longhorn
Pipeline project, entry into contracts with Fina Oil and Chemical Company and
with ARCO Products Company, and alleged interference with the federal court
settlement agreement that provided for an environmental assessment of the
Longhorn Pipeline. The Company believes that the Longhorn Suit is wholly without
merit and plans to continue to defend itself vigorously. In February 2000, the
Company filed a motion for summary judgment seeking a court ruling that would
terminate this litigation. The Company plans to pursue at the appropriate time
any affirmative remedies that may be available to it relating to the Longhorn
Suit.
10
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts included
in this Form 10-Q, including without limitation those under "Results of
Operations," "Liquidity and Capital Resources" and "Additional Factors that May
Affect Future Results" (including "Risk Management" and "Year 2000 Issue") under
this Item 2 regarding the Company's financial position and results of
operations, are forward-looking statements. Such statements are subject to risks
and uncertainties, including but not limited to risks and uncertainties with
respect to the actions of actual or potential competitive suppliers of refined
petroleum products in the Company's markets, the demand for and supply of crude
oil and refined products, the spread between market prices for refined products
and crude oil, the possibility of constraints on the transportation of refined
products, the possibility of inefficiencies or shutdowns in refinery operations
or pipelines, governmental regulations and policies, the availability and cost
of financing to the Company, the effectiveness of capital investments and
marketing strategies by the Company, the costs of defense and the risk of an
adverse decision in the Longhorn Pipeline litigation, the accuracy of technical
analysis and evaluations relating to the Year 2000 Issue, and the abilities of
third-party suppliers to the Company to avoid adverse effects of the Year 2000
issue on their capabilities to supply the Company. Because of these and other
risks and uncertainties, actual results may vary materially from those
estimated, anticipated or projected. Although the Company believes that the
expectations reflected by the forward-looking statements contained in this
Quarterly Report are reasonable based on information currently available to the
Company, no assurances can be given that such expectations will prove to be
correct. This summary discussion of risks and uncertainties that may cause
actual results to differ from those indicated in forward-looking statements
should be read in conjunction with the discussion under the heading "Additional
Factors That May Affect Future Results" included in Item 7 of the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1999 and in
conjunction with the discussion below under the headings "Liquidity and Capital
Resources" and "Additional Factors That May Affect Future Results." All
forward-looking statements included in this Form 10-Q and all subsequent oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the cautionary statements
set forth above.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
FINANCIAL DATA (Unaudited)
Three Months Ended Six Months Ended
(in thousands, except per share data) (1) January 31, January 31,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Sales and other revenues $ 218,424 $ 120,684 $ 419,055 $ 263,679
Costs and expenses
Cost of products sold 190,692 85,191 350,522 190,848
Inventory market writedowns -- 4,371 -- 5,762
Operating expenses 21,885 19,922 45,124 39,471
Selling, general and administrative expenses 5,287 5,912 10,155 10,240
Depreciation, depletion and amortization 6,957 6,638 13,373 12,625
Exploration expenses, including dry holes 299 415 602 720
--------- --------- --------- ---------
225,120 122,449 419,776 259,666
--------- --------- --------- ---------
Income (loss) from operations (6,696) (1,765) (721) 4,013
Other
Equity in earnings of joint ventures (73) 742 558 1,136
Interest expense, net (1,299) (1,939) (2,596) (3,820)
--------- --------- --------- ---------
(1,372) (1,197) (2,038) (2,684)
--------- --------- --------- ---------
Income (loss) before income taxes (8,068) (2,962) (2,759) 1,329
Income tax provision (benefit) (3,165) (1,155) (1,082) 518
--------- --------- --------- ---------
Net income (loss) $ (4,903) $ (1,807) $ (1,677) $ 811
========= ========= ========= =========
Income (loss) per common share (basic and diluted) $ (.59) $ (.22) $ (.20) $ .10
Sales and other revenues (2)
Refining $ 213,686 $ 116,727 $ 409,535 $ 255,854
Pipeline Transportation 3,683 3,013 7,334 6,019
Corporate and other 1,055 944 2,186 1,806
--------- --------- --------- ---------
Consolidated $ 218,424 $ 120,684 $ 419,055 $ 263,679
========= ========= ========= =========
Income (loss) from operations (2)
Refining $ (7,510) $ (809) $ (2,388) $ 4,567
Pipeline Transportation 2,022 1,695 4,008 3,397
Corporate and other (1,208) (2,651) (2,341) (3,951)
--------- --------- --------- ---------
Consolidated $ (6,696) $ (1,765) $ (721) $ 4,013
========= ========= ========= =========
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
1) Certain reclassifications have been made to prior reported amounts to
conform to current classifications.
2) The Refining segment includes the Company's principal refinery in
Artesia, New Mexico, which is operated in conjunction with refining
facilities in Lovington, New Mexico (collectively, the Navajo Refinery)
and the Company's refinery near Great Falls, Montana. Certain pipelines
and terminals operate in conjunction with the Refining segment as part
of the supply and distribution networks of the refineries, which costs
are included in the Refining segment. The Pipeline Transportation
segment includes approximately 900 miles of the Company's pipeline
assets in Texas and New Mexico. Revenues from the Pipeline
Transportation segment are earned through transactions with
unaffiliated parties for pipeline transportation, rental and
terminalling operations.
REFINING SEGMENT OPERATING DATA (Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Crude charge (BPD)(1) 66,300 65,600 63,900 65,800
Refinery production (BPD)(2) 72,700 70,000 70,100 70,600
Sales of produced refined products (BPD) 69,400 68,200 68,700 70,000
Sales of refined products (BPD) (3) 76,100 72,300 75,400 74,800
Refinery utilization (4) 99.0% 97.9% 95.4% 98.2%
Average per barrel (5)
Net sales $ 30.62 $ 17.58 $ 29.74 $ 18.65
Raw material costs 27.18 12.56 25.19 13.62
-------- -------- -------- --------
Refinery margin 3.44 5.02 4.55 5.03
Cash operating costs (6) 3.77 3.59 3.90 3.42
-------- -------- -------- --------
Net cash operating margin $ (.33) $ 1.43 $ .65 $ 1.61
======== ======== ======== ========
Sales of produced refined products
Gasolines 60.2% 57.7% 58.4% 56.7%
Diesel fuels 21.1 22.6 20.7 21.2
Jet fuels 10.0 11.1 9.9 10.4
Asphalt 5.4 4.6 7.4 7.7
LPG and other 3.3 4.0 3.6 4.0
-------- -------- -------- --------
Total 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
----------
(1) Barrels per day of crude oil processed.
(2) Barrels per day of refined products produced from crude oil and other
feed and blending stocks.
(3) Includes refined products purchased for resale representing 6,700,
4,100, 6,700 and 4,800 BPD respectively.
(4) Crude charge divided by total crude capacity of 67,000 BPD.
(5) Represents average per barrel amounts for produced refined products
sold.
(6) Includes operating costs and selling, general and administrative
expenses of refineries, as well as pipeline expenses that are part of
refinery operations.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
SECOND QUARTER OF FISCAL 2000 COMPARED TO SECOND QUARTER OF FISCAL 1999
For the three months ended January 31, 2000, the Company reported a net
loss of $4.9 million ($.59 per share) as compared to a net loss of $1.8 million
($.22 per share) for the three months ended January 31, 1999. Both revenues and
cost of products sold increased during the three month period due to the
increased cost of purchased crude oil. The decrease in income during the quarter
was primarily due to a decrease in refinery gross margins, an increase in
refinery operating expenses and lower equity in earnings of joint ventures
offset by a reduction in selling, general and administrative expenses and
interest expense and charges in fiscal 1999 relating to the decrease in value of
crude oil and refined product inventory. Refinery margins decreased 31.5% in the
second quarter of fiscal 2000 compared to the second quarter of fiscal 1999 as
average product prices increased by less than average crude costs during the
period.
Operating expenses increased during the fiscal quarter of 2000 due
principally to increased fuel costs at the Artesia facility.
Transportation revenues, net of related expenses, increased modestly due
to the initiation of LPG deliveries on a new Company pipeline in June 1999.
Selling, general and administrative expenses decreased due primarily to reduced
legal costs. Equity in earnings of joint ventures decreased due to lower
revenues and increased costs at the Rio Grande Pipeline Company associated with
a pipeline accident in November 1999. The decrease in interest expense, net of
interest income, reflects lower borrowings and higher levels of excess cash.
FIRST SIX MONTHS OF FISCAL 2000 COMPARED TO FIRST SIX MONTHS OF FISCAL 1999
For the first six months of fiscal 2000, the Company reported a net loss
of $1.7 million ($.20 per share) as compared to net income of $.8 million ($.10
per share) during the first six months of fiscal 1999. Both revenues and cost of
products sold increased during the six month period due to the increased cost of
purchased crude oil. The decrease in net income was due to lower refinery gross
margins, higher depreciation expenses and lower equity in earnings of joint
ventures offset by charges in fiscal 1999 relating to the decrease in the value
of crude oil and refined inventory and lower interest expense. Refinery margins
decreased 9.5% during the first six months of fiscal 2000 compared to the first
six months of fiscal 1999 as average product prices increased by less than
average crude costs during the period.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Depreciation expense increased due to the abandonment of right-of-way
costs associated with pipeline expansion. Equity in earnings of joint ventures
decreased due to lower revenues and increased costs at the Rio Grande Pipeline
Company associated with a pipeline accident in November 1999. Transportation
revenues, net of related expenses, increased modestly due to the initiation of
LPG deliveries on a new Company pipeline in June 1999. The decrease in interest
expense, net of interest income, reflects lower borrowings and higher levels of
excess cash.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased during the six months ended
January 31, 2000 by $2.7 million as cash flows generated from operations and
borrowings under the Company's Revolving Credit Agreement exceeded cash flows
required for investing activities, amortization payments on long term fixed rate
debt and dividends paid. Working capital decreased during the six months ended
January 31, 2000 by $10.8 million to $3.0 million due primarily to increased
accounts payable associated with a sharp increase in crude acquisition costs.
Additionally, the Company had $46 million of unused borrowing capacity available
at January 31, 2000 under its $100 million Credit Agreement, which expires in
October 2000. The Company is in discussions with its banks on a one-year
extension of this agreement. While the Company expects negotiations to result in
such an extension, there can be no assurance that such negotiations will be
successful. The Company also believes that alternative debt financing could be
arranged in such a circumstance.
The Company believes that these sources of funds, together with future
cash flows from operations, should provide sufficient resources to enable the
Company to satisfy its liquidity needs, capital requirements and debt service
obligations while continuing the payment of dividends if authorized by the Board
of Directors.
Net cash provided by operating activities amounted to $19.9 million for
the first six months of fiscal 2000, as compared to $5.5 million for the same
period of the prior year. This increase was primarily due to decreases in
working capital related to increased crude acquisition payables, as the Company
receives payment on its receivables more quickly than it pays for its
acquisition of crude oil. This increase was partially offset by lower cash flows
from operations, as refinery margins were lower during the first six months of
fiscal 2000 than in the prior fiscal year. Such margins generally decline during
periods of increased crude oil prices, as has occurred during the first six
months of fiscal 2000.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Cash flows used for financing activities amounted to $7.1 million for
the first six months of fiscal 2000 as compared to cash provided of $3.2 million
for the first six months of fiscal 1999. During this period, the Company repaid
$8.6 million of its fixed rate term debt and paid out $2.8 million of dividends.
During the prior year, the Company paid similar amounts of dividends but was not
obligated to make any principal payments. As of January 31, 2000, the Company
had $4.3 million of outstanding bank borrowings, while the next principal
payment on its Senior Notes of $5.2 million is due in June 2000.
Cash flows used for investing activities were $10.1 million as compared
to $8.5 million for the same period in the prior year. All amounts expended were
on capital projects. The net negative cash flow for investing activities was
reduced during the first six months of fiscal 2000 by a $0.8 million
distribution to the Company from the Rio Grande Pipeline Company joint venture
as compared to a $1.4 million distribution during the same period of fiscal
1999.
The Company has adopted a capital budget of $23 million for fiscal 2000.
The components of this budget are $9 million for various refinery improvements,
$9 million for costs relating to a gasoil hydrotreater project, as described
below, $4 million for various pipeline and transportation projects and $1
million for oil and gas exploration and production activities. In addition to
these projects, the Company plans to expend during fiscal 2000 a total of $8
million on items that were approved in previous capital budgets, primarily
relating to pipeline and terminalling activities.
In November 1997, the Company purchased a hydrotreater unit for $5
million from an inactive refinery. This purchase should give the Company the
ability to reconstruct the unit at the Navajo Refinery at a substantial savings
relative to the purchase cost of a new unit. The hydrotreater will enhance
higher value, light product yields and facilitate the Company's ability to meet
the present California Air Resources Board ("CARB") standards, which have been
adopted for winter months in the Company's Phoenix market beginning in the
latter part of 2000.
Included in the fiscal 2000 capital budget are commitments of $9 million
related to the hydrotreater, which include costs to relocate the unit to the
Navajo Refinery, which occurred during the second quarter of fiscal 2000, to
construct a sulfur recovery unit, which will be immediately utilized and work in
conjunction with the hydrotreater when completed, and to purchase certain
long-lead-time pieces of equipment. The Company, subject to obtaining necessary
permitting in a timely manner, expects to complete the hydrotreater in the
latter part of 2001. Remaining costs to complete the hydrotreater are estimated
to be approximately $20 million, in addition to the current $9 million budgeted
amount. Based on the current configuration of the Navajo Refinery, the Company
believes it can supply current sales volumes which meet the new CARB standards
into the Phoenix market prior to completion of the hydrotreater.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company has leased from Mid-America Pipeline Company more than 300
miles of 8" pipeline running from Chavez County to San Juan County, New Mexico
(the "Leased Pipeline"). The Company has also completed a 12" pipeline from the
Navajo Refinery to the Leased Pipeline as well as terminalling facilities in
Bloomfield in northwestern New Mexico. The Company has completed the
construction of a diesel fuel terminal 40 miles east of Albuquerque in Moriarty
and is considering various alternatives regarding its terminalling needs in
Albuquerque. When the entire project is completed, these facilities will allow
the Company to use the Leased Pipeline to transport petroleum products from the
Navajo Refinery to Albuquerque and markets in northwest New Mexico.
Transportation of petroleum products to markets in northwest New Mexico and
diesel fuels to Moriarty, New Mexico, near Albuquerque, began in the latter part
of calendar year 1999.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
This discussion should be read in conjunction with the discussion under
the heading "Additional Factors That May Affect Future Results" included in Item
7 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1999.
The Longhorn Pipeline is a potential source of additional supplies of
refined products to El Paso and markets served from El Paso that are also served
by the Company's Navajo Refinery. This pipeline is proposed to run approximately
700 miles from the Houston area of the Gulf Coast to El Paso, utilizing a direct
route. The owner of the Longhorn Pipeline, Longhorn Partners Pipeline, L.P., a
Delaware limited partnership that includes affiliates of Exxon Pipeline Company,
BP/Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group
Energy Investment Fund, L.P. and Chisholm Holdings as limited partners
("Longhorn Partners"), has proposed to use the pipeline initially to transport
approximately 72,000 barrels per day ("BPD") of refined products from the Gulf
Coast to El Paso and markets served from El Paso, with an ultimate maximum
capacity of 225,000 BPD. A critical feature of this proposed petroleum products
pipeline is that it would utilize, for approximately 450 miles (including areas
overlying the environmentally sensitive Edwards Aquifer and Edwards-Trinity
Aquifer and densely populated areas in the southern part of Austin, Texas) an
existing pipeline (previously owned by Exxon Pipeline Company) that was
constructed in about 1950 for the shipment of crude oil from West Texas to the
Houston area.
The Longhorn Pipeline is not currently operating because of a federal
court injunction in August 1998 and a settlement agreement in March 1999 entered
into by Longhorn Partners, the United States Environmental Protection Agency
("EPA") and Department of Transportation ("DOT"), and the other parties to the
federal lawsuit that had resulted in the injunction and settlement. The March
1999 settlement agreement required the preparation of an Environmental
Assessment under the authority of the EPA and the DOT while the federal court
retained jurisdiction. A draft Environmental Assessment (the "Draft EA") on the
Longhorn Pipeline was released on October 22, 1999. The Draft EA proposes a
preliminary Finding of No Significant Impact with respect to the Longhorn
Pipeline provided that Longhorn Partners carries out a
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
proposed mitigation plan developed by Longhorn Partners which contains 34
elements. Some elements of the proposed mitigation plan are required to be
completed before the Longhorn Pipeline is allowed to operate, with the remainder
required to be completed later or to be implemented for as long as operations
continue. The EPA and DOT have conducted a series of public meetings in Texas
and have received public comments relating to the determination as to whether
the proposed findings of the Draft EA should be made final, revised or reversed
by the EPA and the DOT. The Company has provided financial support for the
preparation of expert analyses of the Draft EA and for certain groups and
individuals who have wished to express their concerns about the Longhorn
Pipeline. A final determination by the EPA and DOT with respect to the matters
considered in the Draft EA is currently expected to be issued in March or April
2000.
In August 1998, a lawsuit (the "Longhorn Suit") was filed by Longhorn
Partners in state district court in El Paso, Texas against the Company and two
of its subsidiaries (along with an Austin, Texas law firm which was subsequently
dropped from the case). The suit, as amended by Longhorn Partners in March and
November 1999 and in March 2000, seeks damages alleged to total up to
$1,050,000,000 (after trebling) based on claims of violations of the Texas Free
Enterprise and Antitrust Act, unlawful interference with existing and
prospective contractual relations, and conspiracy to abuse process. After the
March 2000 amendment, the specific actions of the Company complained of in the
Longhorn Lawsuit are alleged solicitation of and support for allegedly baseless
lawsuits brought by Texas ranchers in federal and state courts to challenge the
proposed Longhorn Pipeline project, support of allegedly fraudulent public
relations activities against the proposed Longhorn Pipeline project, entry into
contracts with Fina Oil and Chemical Company and with ARCO Products Company, and
alleged interference with the federal court settlement agreement that provided
for an environmental assessment of the Longhorn Pipeline. The Company believes
that the Longhorn Suit is wholly without merit and plans to continue to defend
itself vigorously. In February 2000, the Company filed a motion for summary
judgment seeking a court ruling that would terminate this litigation. The
Company plans to pursue at the appropriate time any affirmative remedies that
may be available to it relating to the Longhorn Suit. For additional items on
this matter, see Part II "Other Information," Item 1, "Legal Proceedings".
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
RISK MANAGEMENT
The Company uses certain strategies to reduce some commodity price and
operational risks. The Company does not attempt to eliminate all market risk
exposures when the Company believes the exposure relating to such risk would not
be significant to the Company's future earnings, financial position, capital
resources or liquidity or that the cost of eliminating the exposure would
outweigh the benefit.
The Company's profitability depends largely on the spread between
market prices for refined products and crude oil. A substantial or prolonged
decrease in this spread could have a significant negative effect on the
Company's earnings, financial condition and cash flows. At times, the Company
utilizes petroleum commodity futures contracts to minimize a portion of its
exposure to price fluctuations associated with crude oil and refined products.
Such contracts are used solely to help manage the price risk inherent in
purchasing crude oil in advance of the delivery date and as a hedge for
fixed-price sales contracts of refined products and do not increase the market
risks to which the Company is exposed. Gains and losses on contracts are
deferred and recognized in cost of refined products when the related inventory
is sold or the hedged transaction is consummated. No such contracts were
outstanding at January 31, 2000.
At January 31, 2000, the Company had outstanding unsecured debt of
$61.8 million and had $4.3 million of borrowings outstanding under its Credit
Agreement. The Company does not have significant exposure to changing interest
rates on its unsecured debt because the interest rates are fixed, the average
maturity is less than three years and such debt represents less than 40% of the
Company's total capitalization. As the interest rates on the Company's bank
borrowings under its Credit Agreement are reset frequently based on either the
bank's daily effective prime rate or the LIBOR rate, interest rate market risk
is very low. Additionally, the Company invests any available cash only in
investment grade, highly liquid investments with maturities of three months or
less. As a result, the interest rate market risk implicit in these cash
investments is low, as the investments mature within three months. A ten percent
change in the market interest rate over the next year would also not materially
impact the Company's earnings or cash flow, as the interest rates on the
Company's long-term debt are fixed, and the Company's borrowings under the
Credit Agreement and cash investments are at short-term market rates and such
interest has historically not been significant as compared to the total
operations of the Company. A ten percent change in the market interest rate over
the next year would also not materially impact the Company's financial
condition, as the average maturity of the Company's long-term debt is less than
three years and such debt represents less than 40% of the Company's total
capitalization, and the Company's borrowings under the Credit Agreement and cash
investments are at short-term market rates.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company maintains
various insurance coverages, including business interruption insurance, subject
to certain deductibles. The Company is not fully insured against certain risks
because such risks are not fully insurable, coverage is unavailable or premium
costs, in the judgment of the Company, do not justify such expenditures.
YEAR 2000 ISSUE
In prior years, the Company discussed the nature and progress of its
plans to become year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the year 2000 date change.
The costs associated with remediating any year 2000 problems have not been
material to date. The Company is not aware of any material problems resulting
from year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent year 2000 matters that may
arise are addressed promptly.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1998, a lawsuit was filed by Longhorn Partners Pipeline, L.P.
("Longhorn Partners") in state district court in El Paso, Texas against the
Company and two of its subsidiaries. The suit seeks damages against the Company
alleged to total up to $1,050,000,000 (after trebling) based on claims of
violations of the Texas Free Enterprise and Antitrust Act, unlawful interference
with existing and prospective contractual relations, and conspiracy to abuse
process. See Note D to the Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
further description of this lawsuit. In February 2000, the Company filed a
motion for summary judgment seeking a court ruling that would terminate this
litigation.
In a related proceeding, Longhorn Partners filed in January 2000 in the
El Paso, Texas state district court an application for temporary injunction
alleging that the Company has committed criminal barratry under Texas law and
fraudulent acts and seeking to bar the Company from continuing to provide
assistance to parties in pending proceedings against Longhorn Partners in state
and federal courts in Texas and from providing funds for advertisements or
public messages concerning the Longhorn Pipeline that do not identify the
Company as the sponsor. In response to this application for temporary
injunction, the Company in February 2000 filed a statement in opposition,
special exceptions, a motion to strike Longhorn Partners' application for
temporary injunction, and a memorandum of facts and authorities refuting
Longhorn Partners' accusations of barratry.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits on page 23.
(b) Reports on Form 8-K: None.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLY CORPORATION
----------------------------------------
(Registrant)
Date: March 15, 2000 By /s/ David F. Chavenson
---------------- ---------------------------------------
David F. Chavenson
Vice President and
Chief Financial Officer
(Duly Authorized Principal
Financial and Accounting
Officer)
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HOLLY CORPORATION
INDEX TO EXHIBITS
(Exhibits are numbered to correspond to the
exhibit table in Item 601 of Regulation S-K)
Exhibit
Number Description
------ -----------
27 - Financial Data Schedule
23