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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 April 30, 1999
--------------------
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
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(Exact name of registrant as specified in its charter)
Delaware 75-1056913
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
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(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
June 8, 1999.
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HOLLY CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet -
April 30, 1999 (Unaudited) and July 31, 1998 3
Consolidated Statement of Income (Unaudited) -
Three Months and Nine Months Ended April 30, 1999 and 1998 4
Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended April 30, 1999 and 1998 5
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months and Nine Months Ended April 30, 1999 and 1998 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
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 12.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
April 30, July 31,
1999 1998
----------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 3,458 $ 2,602
Accounts receivable: Product 45,437 33,346
Crude oil resales 64,715 49,033
----------- ----------
110,152 82,379
Inventories: Crude oil and refined products 51,388 46,754
Materials and supplies 10,325 12,081
Reserve for lower of cost or market (2,993) (2,993)
----------- ----------
58,720 55,842
Income taxes receivable -- 653
Prepayments and other 13,942 12,911
----------- ----------
Total current assets 186,272 154,387
Properties, plants and equipment, at cost 343,314 325,993
Less accumulated depreciation, depletion and amortization (166,263) (152,696)
----------- ----------
177,051 173,297
Investments and advances to joint ventures 4,788 5,510
Other assets 12,624 16,663
----------- ----------
$ 380,735 $ 349,857
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 126,468 $ 109,139
Accrued liabilities 14,306 13,392
Income taxes payable 2,820 288
Current maturities of long-term debt 13,746 5,175
Borrowings under credit agreement -- 11,600
----------- ----------
Total current liabilities 157,340 139,594
Deferred income taxes 24,573 25,573
Long-term debt, less current maturities 61,762 70,341
Long-term borrowings under credit agreement 17,300 --
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 115,322 109,686
--------- ----------
121,541 115,905
Common stock held in treasury, at cost - 396,768 shares (569) (569)
Accumulated other comprehensive income - net unrealized loss on
securities available for sale (1,212) (987)
----------- ----------
Total stockholders' equity 119,760 114,349
----------- ----------
$ 380,735 $ 349,857
=========== ==========
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 Nine Months Ended
April 30, April 30,
------------------------ -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues
Refined products $ 140,586 $ 132,787 $ 398,440 $ 433,554
Oil and gas 755 1,213 2,287 5,822
Miscellaneous 183 208 547 537
--------- --------- --------- ---------
141,524 134,208 401,274 439,913
Costs and expenses
Cost of refined products 116,865 115,638 343,255 391,855
Recovery of inventory market writedowns (5,762) -- -- --
General and administrative 6,491 3,674 16,731 10,432
Depreciation, depletion and amortization 7,045 6,652 19,670 17,900
Exploration expenses, including dry holes 425 620 1,145 2,224
--------- --------- --------- ---------
125,064 126,584 380,801 422,411
--------- --------- --------- ---------
Income from operations 16,460 7,624 20,473 17,502
Other
Equity in earnings of joint ventures 200 448 1,336 1,357
Interest income 43 40 136 560
Interest expense (2,035) (2,092) (5,948) (6,354)
Transaction costs of terminated merger -- (770) -- (770)
--------- --------- --------- ---------
(1,792) (2,374) (4,476) (5,207)
--------- --------- --------- ---------
Income before income taxes 14,668 5,250 15,997 12,295
Income tax provision (benefit)
Current 4,715 300 6,671 (973)
Deferred 1,166 1,977 (272) 6,068
--------- --------- --------- ---------
5,881 2,277 6,399 5,095
--------- --------- --------- ---------
Net income $ 8,787 $ 2,973 $ 9,598 $ 7,200
========= ========= ========= =========
Income per common share (basic
and diluted) $ 1.06 $ .36 $ 1.16 $ .87
Cash dividends paid per share $ .16 $ .15 $ .48 $ .45
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
Nine Months Ended
April 30,
----------------------
1999 1998
-------- --------
Cash flows from operating activities
Net income $ 9,598 $ 7,200
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation, depletion and amortization 19,670 17,900
Deferred income taxes (272) 6,068
Equity in earnings of joint venture (1,336) (1,357)
Dry hole costs and leasehold impairment 256 707
(Increase) decrease in operating assets
Accounts receivable (27,773) 35,641
Inventories (2,878) 6,683
Income taxes receivable 653 (238)
Prepayments and other (1,650) (3,069)
Increase (decrease) in operating liabilities
Accounts payable 17,329 (37,175)
Accrued liabilities 914 1,976
Income taxes payable 2,532 (112)
Turnaround expenditures -- (18,784)
Other, net (2,179) (23)
-------- --------
Net cash provided by operating activities 14,864 15,417
Cash flows from financing activities
Increase in borrowings under credit agreement 5,700 4,800
Payment of long-term debt (8) (8)
Debt issuance costs -- (547)
Cash dividends (3,962) (3,714)
-------- --------
Net cash provided by financing activities 1,730 531
Cash flows from investing activities
Additions to properties, plants and equipment (17,913) (29,416)
Investment in equity securities -- (2,978)
Distributions from joint venture 2,175 --
-------- --------
Net cash used for investing activities (15,738) (32,394)
-------- --------
Cash and cash equivalents
Increase (decrease) for the period 856 (16,446)
Beginning of year 2,602 20,042
-------- --------
End of period $ 3,458 $ 3,596
======== ========
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 4,336 $ 4,328
Income taxes $ 3,408 $ 360
See accompanying notes.
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
Unaudited Unaudited
Three Months Ended Nine Months Ended
April 30, April 30,
------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
Net income $ 8,787 $ 2,973 $ 9,598 $ 7,200
Other comprehensive income
Unrealized gain (loss) on securities available
for sale 374 784 (375) 784
Income tax provision (benefit) 149 313 (150) 313
------- ------- ------- -------
225 471 (225) 471
------- ------- ------- -------
Total comprehensive income $ 9,012 $ 3,444 $ 9,373 $ 7,671
======= ======= ======= =======
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, 1998), reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position as of April 30, 1999, the
consolidated results of operations and comprehensive income for the three months
and nine months ended April 30, 1999 and 1998, and consolidated cash flows for
the nine months ended April 30, 1999 and 1998.
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, 1998.
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 nine
months of fiscal 1999 are not necessarily indicative of the results to be
expected for the full year.
Note B - Adoption of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." In February 1998, the
FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The Company is adopting all three statements in the
current fiscal year ending July 31, 1999.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In this Form 10-Q, the Company has added a separate
statement of comprehensive income to conform with the new requirements of SFAS
No. 130.
SFAS No. 131 establishes new standards for reporting information about
operating segments in annual financial statements and requires selected
operating segment information to be reported in interim financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
becomes effective for the Company's financial statements beginning with the
fiscal year ending July 31, 1999 at which time prior period segment information
presented for comparative purposes is required. Interim period information is
not required until the second year of application, at which time comparative
information is required. Because interim period information is not required
under this statement for the Company's current fiscal year, the
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HOLLY CORPORATION
requirements of this statement are not reflected in this Report. Because this
statement addresses how supplemental financial information is disclosed in
annual and interim reports, the adoption will have no impact on the Company's
financial condition or results of operations.
SFAS No. 132 standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer useful. This
statement becomes effective for the Company's financial statements beginning
with the fiscal year ending July 31, 1999 at which time restatement of prior
period disclosures presented for comparative purposes is required unless the
information is not readily available. Because interim period information is not
required under this statement, the requirements of this statement are not
reflected in this Report. Because this statement addresses how supplemental
financial information is disclosed in annual reports, the adoption will have no
impact on the Company's financial condition or results of operations.
Note C - Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for net income as required by SFAS
No. 128:
Three Months Ended April 30, 1999
----------------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands, except per share amounts)
Income per common share - basic
Net income $ 8,787 8,254 $ 1.06
Effect of dilutive stock options - - -
---------- ------------- ---------
Income per common share -
assuming dilution
Net income $ 8,787 8,254 $ 1.06
========== ============= =========
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HOLLY CORPORATION
Three Months Ended April 30, 1998
----------------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands, except per share amounts)
Income per common share - basic
Net income $ 2,973 8,254 $ .36
Effect of dilutive stock options - 9 -
---------- ------------- ---------
Income per common share -
assuming dilution
Net income $ 2,973 8,263 $ .36
========== ============= =========
Nine Months Ended April 30, 1999
----------------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands, except per share amounts)
Income per common share - basic
Net income $ 9,598 8,254 $ 1.16
Effect of dilutive stock options - - -
---------- ------------- ---------
Income per common share -
assuming dilution
Net income $ 9,598 8,254 $ 1.16
========== ============= =========
Nine Months Ended April 30, 1998
----------------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands, except per share amounts)
Income per common share - basic
Net income $ 7,200 8,254 $ .87
Effect of dilutive stock options - 3 -
---------- ------------- ---------
Income per common share -
assuming dilution
Net income $ 7,200 8,257 $ .87
========== ============= =========
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HOLLY CORPORATION
Note D - Debt
Beginning for the quarter ended January 31, 1999, the Company changed
its classification of borrowings under its Credit Agreement to long-term since
the Company intends to maintain this facility for more than one year. Amounts
borrowed under this facility are not due until October 2000, the termination
date of the Credit Agreement.
Note E - Contingencies
In December 1998, the Company completed the settlement of a suit filed
in July 1993 by the United States Department of Justice ("DOJ"), on behalf of
the United States Environmental Protection Agency ("EPA"), against the Company's
subsidiary, Navajo Refining Company ("Navajo") alleging wastewater violations at
the Navajo Refinery. Under the settlement agreement among Navajo, the DOJ and
the State of New Mexico, the Company has paid a civil penalty in December 1998
of less than $2 million, which was reserved for in fiscal 1993, and is required
by September 1999 to close the existing evaporation ponds of its wastewater
treatment system and to utilize an alternative wastewater treatment system,
which the Company is in the process of constructing.
In August 1998, a lawsuit (the "Longhorn Suit") was filed in state
district court in El Paso, Texas against the Company, two of its subsidiaries
and an Austin, Texas law firm. 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, Beacon Group Energy
Investment Fund, L.P. and Chisholm Holdings as limited partners. The suit
alleged damages against the Company and the law firm of $1,050,000,000 and
injunctive relief based on claims of violations of the Texas Free Enterprise and
Antitrust Act, unlawful interference with contractual relations, and conspiracy
to abuse process. In early March 1999, Longhorn Partners filed an amended
petition that did not include the Austin, Texas law firm as a defendant, did not
include injunctive relief as a requested remedy, and did not include the
Environmental Suit described below as a basis of the suit. As set forth in the
amended petition, the Longhorn Suit asserts claims of violations of the Texas
Free Enterprise and Antitrust Act, unlawful interference with existing and
prospective contractual relations, and conspiracy to abuse process based in part
on alleged support by the Company of lawsuits brought by ranchers in West Texas
to challenge the use of existing pipeline easements and rights-of-way for the
pipeline transportation of refined products. In May 1999, the Company filed a
motion asking the state district court in El Paso to exercise its discretion to
transfer the venue of the suit to a state district court in Dallas, Texas; a
hearing on this motion is scheduled for July 1999. The Company believes that the
Longhorn Suit is wholly without merit and plans to defend itself vigorously. The
Company also plans to pursue at the appropriate time any affirmative remedies
that may be available to it relating to the Longhorn Suit.
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HOLLY CORPORATION
As originally filed, the Longhorn Suit related principally to the
alleged involvement of subsidiaries of the Company and the named law firm in a
federal lawsuit (the "Environmental Suit") in Austin, Texas filed by ranchers
and joined by the Barton Springs-Edwards Aquifer Conservation District, the City
of Austin and the Lower Colorado River Authority. The Environmental Suit
resulted in a preliminary injunction issued by the Federal Court in August 1998
requiring preparation of an environmental impact statement under the National
Environmental Policy Act before Longhorn Partners could use an existing crude
oil pipeline and a newly constructed pipeline to transport refined petroleum
products across Texas, including areas overlying the Edwards Aquifer in Central
Texas. Following lengthy negotiations, the parties to that suit entered into a
settlement agreement, which was approved by the Federal Court in March 1999,
under which an environmental assessment of the Longhorn Pipeline is being
carried out by the Environmental Protection Agency and the Department of
Transportation pursuant to an agreed procedure. Under this settlement, Longhorn
Partners is prohibited from using the pipeline to transport petroleum products
while the environmental assessment process specified in the settlement agreement
is being carried out. The agreement further provides that the injunction against
use of the Longhorn Pipeline shall be extended if the initial environmental
assessment process results in a determination that a full environmental impact
statement should be prepared with respect to the environmental consequences of
the pipeline.
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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 statements in this Item 2 under
the headings "Results of Operations" and "Liquidity and Capital Resources" 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,
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 outcome of material litigation against the Company, the
accuracy of technical analysis and evaluations relating to the Year 2000
Problem, and the abilities of third-party suppliers to the Company to avoid
adverse effects of the Year 2000 Problem on their capacities 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, 1998 and in conjunction with the discussion below under the heading
"Liquidity and Capital Resources." 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 (Continued)
Results of Operations
Net income for the third quarter ended April 30, 1999 was $8.8 million
as compared to $3.0 million for the third quarter of the prior year. For the
nine months ended April 30, 1999, net income was $9.6 million as compared to
$7.2 million for the same period of fiscal 1998. The results for the third
quarter of 1999 reflect the full reversal of after-tax charges to earnings
totalling $3.5 million for reductions in market values of crude oil and refined
products inventories in the first two quarters. Without the benefit of the
recovery of inventory values in the third quarter, net income for the third
quarter ended April 30, 1999 would have been $5.3 million.
The increase in income during the third quarter of fiscal 1999 was
principally due to the aforementioned recovery of inventory charges and to
improved refinery margins, as compared to the same quarter of the prior year.
Refinery margins increased significantly in April 1999 as product prices
increased in the California refined products market, which impacts product
pricing for Navajo Refining Company, at a greater rate than crude prices.
Refined product margins during this quarter also exceeded those in the
corresponding quarter of 1998. Increased sales volume of 4% during the quarter
also contributed to improved income levels relative to the third quarter of
1998.
For the nine months ending April 30, 1999, overall refining margins were
less than the comparable period of fiscal 1998, as product prices decreased at a
slightly greater rate than crude prices. Fifteen percent higher sales volumes
for the first nine months of the current fiscal year more than offset these
reduced margins, as compared to the same nine month period of fiscal 1998, when
such volumes were reduced due to a turnaround.
Earnings in the current year were favorably impacted by the initiation
of pipeline and terminalling revenues resulting from the Company's alliance with
FINA, Inc., a comprehensive supply network of refined products in the Company's
markets, and by transportation service income resulting from a West Texas crude
oil gathering system which the Company purchased in June 1998. Items negatively
impacting earnings in both the third quarter and first nine months of the
current year were lower oil and gas income due to decreased prices for oil and
gas and a reduction in scope of the Company's oil and gas program, an increase
in general and administrative expenses relating principally to legal
proceedings, and an increase in depreciation and amortization expense in the
current year resulting primarily from the prior year's turnaround expenditures.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Liquidity and Capital Resources
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,
1998.
Cash and cash equivalents increased during the nine months ended April
30, 1999 by only $.9 million, as new borrowings under the three year Credit and
Reimbursement Agreement ("Credit Agreement") increased $5.7 million to offset
capital investment, dividends paid and a working capital increase, net of cash
flow generated from operations. The Company expects most of the working capital
increase to contribute to cash flow during the fourth quarter as the increase
related principally to higher receivables due to increased sales prices of
refined products as well as seasonal increases during the third quarter.
At April 30, 1999, the Company had $32.7 million of unused borrowing
capacity available under the Credit Agreement. The Company believes that this
source of funds, together with future cash flows from operations, should provide
sufficient resources and flexibility to enable the Company to satisfy its
liquidity needs, capital requirements, debt service obligations, and the payment
of dividends for the foreseeable future.
Net cash provided by operating activities amounted to $14.9 million for
the first nine months of fiscal 1999, as compared to $15.4 million for the same
period of the prior year. The decrease in cash provided by operating activities
in the current year was principally due to changes in working capital items
offset by expenditures incurred in the prior year relating to the Navajo
Refinery turnaround in fiscal 1998.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Cash flows provided by financing activities amounted to $1.7 million in
the first nine months of fiscal 1999, as compared to $.5 million in the same
period of the prior year. In October 1997, the Company entered into the Credit
Agreement. The Company increased its net borrowings under the Credit Agreement
by $5.7 million during the first nine months of the current year to an
outstanding balance of $17.3 million as of April 30, 1999. The Company also has
a $5.2 million principal payment on the Company's 10.16% Senior Notes due in
June 1999, which it expects to fund from cash flow and borrowings under the
Credit Agreement.
Cash flows used for investing activities were $15.7 million in the first
nine months of fiscal 1999, as compared to $32.4 million in the same period of
the prior year. All amounts expended were on capital projects. The Company
expects to spend approximately $29 million on capital projects during 1999. This
spending level incorporates both refinery improvement, pipeline and
transportation projects and oil and gas exploration and production activities.
This net negative cash flow for investing activities was reduced in the first
nine months of fiscal 1999 by $2.2 million of distributions to the Company from
the Rio Grande joint venture.
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 completed a 12" pipeline from the
Navajo Refinery to the Leased Pipeline and is in the process of completing
terminalling facilities in Bloomfield. Although portions of the construction
project have been completed, several alternatives are still being pursued to
address terminalling needs in the Albuquerque area. When the project, including
the Albuquerque portion, 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. The Leased Pipeline
and recently constructed facilities will be available in early fiscal 2000 for
the transport of petroleum products to certain markets in northwest New Mexico.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The new pipeline capacity and related terminalling facilities should
allow the Company to increase volumes, through refinery expansion or otherwise,
that are shipped into existing and new markets and could allow the Company to
shift volumes among markets in response to increased competition in particular
markets.
The Company is in the process of constructing for approximately $5
million, 65 miles of new pipeline between Lovington and Artesia, NM, to permit
the delivery of isobutane (and/or other LPGs) to El Paso as well as to increase
the Company's ability to access additional raw materials.
Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), a partnership
composed of Longhorn Partners GP, L.L.C. as general partner and affiliates of
Exxon Pipeline Company, Amoco Pipeline Company, Williams Pipeline Company,
Beacon Group Energy Investment Fund, L.P. and Chisholm Holdings as limited
partners, is in the process of reversing an existing crude oil pipeline and
constructing a connecting pipeline for the transportation of petroleum products
from Gulf Coast refineries to a newly constructed terminal in El Paso. It had
been reported that Longhorn had planned to transport initially 72,000 BPD of
gasoline to the West Texas markets starting in October 1998 on the reversed
existing crude oil pipeline. It had also been reported that once fully
operational the pipeline would have the ultimate capacity to transport 225,000
BPD of refined products from Houston to terminals in Midland and El Paso. Use of
this pipeline is currently prohibited by an injunction issued by the Federal
District Court in Austin, Texas and by the terms of a settlement agreement
recently approved by that court in a lawsuit (the "Environmental Suit") that had
been brought to require a full environmental review of the Longhorn Pipeline
before it could be placed in operation. This new pipeline could significantly
increase the supply of products in the Company's principal markets.
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. The suit in its present form, after the filing by Longhorn
Partners of an amended petition, seeks damages against the Company alleged to
total up to $1,050,000,000 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. Although the
original version of Longhorn Partners' claims in this case appeared to be based
principally on alleged Company involvement in the institution of the
Environmental Suit, the current version of the Longhorn Suit is not based on the
Environmental Suit but rather appears to be based in part on alleged Company
involvement in the filing of lawsuits brought by ranchers in West Texas to
challenge the use of existing pipeline easements and rights-of-way for the
pipeline transportation of refined
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
products. The Company believes the Longhorn Suit is wholly without merit and the
Company plans to defend itself vigorously. The Company also plans to pursue at
the appropriate time any affirmative remedies that may be available to it
relating to the Longhorn Suit.
In April 1999, the Williams Companies and Equilon Enterprises LLC (a
joint venture of Texaco Inc. and the Royal Dutch/Shell Group) announced a
1,010-mile pipeline, called the "Aspen Pipeline," to carry gasoline and other
refined fuels from Texas to Utah. It was announced that the pipeline will have a
capacity of 65,000 BPD and shipments will begin in late 2000. In addition to the
pipeline, product terminals will be built, including a terminal in Albuquerque,
New Mexico. This venture could result in an increase in the supply of products
to some of the Company's markets.
In December 1998, the Company completed the settlement of a suit filed
in July 1993 by the United States Department of Justice ("DOJ"), on behalf of
the United States Environmental Protection Agency ("EPA"), against the Company's
subsidiary, Navajo Refining Company ("Navajo") alleging wastewater violations at
the Navajo Refinery. Under the settlement agreement among Navajo, the DOJ and
the State of New Mexico, the Company has paid a civil penalty in December 1998
of less than $2 million, which was reserved for in fiscal 1993, and is required
by September 1999 to close the existing evaporation ponds of its wastewater
treatment system and to utilize an alternative wastewater treatment system,
which the Company is in the process of constructing.
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 that 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.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company's profitability depends largely on the spread between market
prices for refined products and prices of 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.
At April 30, 1999, the Company has outstanding unsecured debt of $75.5
million and secured borrowings of $17.3 million 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 and such debt now represents
less than 40% of the Company's total capitalization. As the interest rates on
borrowings under the 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 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 current market rates, and such a change in
interest rates would therefore not have a material effect on the value of such
debt or cash investments.
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 judgement of the Company, do not justify such expenditures.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Year 2000 Problem
The Year 2000 Problem is the result of older computer systems using a
two-digit format rather than a four-digit format to define the applicable year
with the result that such computer systems may be unable to interpret properly
dates beyond the year 1999. This inability could lead to a failure of
information systems and disruptions of business and financial operations. Year
2000 risks exist both in information technology ("IT") systems that employ
computer hardware and software and in non-IT systems such as embedded computer
chips or microcontrollers that control the operation of the equipment in which
they are installed. Computer failures because of the Year 2000 problem could
affect the Company either because of failures of computers used in the Company's
operations and record-keeping or because of computer failures that adversely
affect third parties that are suppliers to or customers of the Company.
Partly with the assistance of outside consultants, the Company has taken
steps to identify key financial, informational and operational systems that may
be affected by the Year 2000 Problem. Based on certifications by third-party
suppliers of the Company's principal IT systems, the Company believes that its
principal IT systems either are now unaffected by the Year 2000 Problem or are
the subject of currently scheduled replacement or upgrading that will make these
systems free of Year 2000 issues. Under the Company's current plans, all IT
systems believed by the Company to have significance to the Company's operations
or financial condition will be Year 2000 compliant by September 1999.
The Company has made an inventory of non-IT systems embedded in
equipment used in the Company's operations and has assessed the extent to which
these non-IT systems could fail because of the Year 2000 Problem and thereby
cause significant problems for the Company's operations, financial condition or
liquidity. The Company has identified, based on information and/or
certifications from suppliers or other third parties, the types of non-IT
systems that appear to be significantly at risk of failure due to the Year 2000
Problem; the Company is currently in the process of remediating items of
equipment possibly or certainly containing at-risk chips and ranking such
equipment in order of the consequences of a failure on the Company's operations;
the Company plans by September 1999 to have completed repairs or replacements of
those pieces of equipment that have been identified for which a failure would be
expected to create serious problems for Company operations. Because of the
nature of the non-IT systems, there can be no assurance that the Company has
correctly identified all non-IT systems that are subject to failure because of
the Year 2000 Problem or that all non-IT systems significant to the Company's
operations will be repaired or replaced as necessary prior to the end of 1999.
Any failure of non-IT systems because of the year 2000 problem could reduce
production levels or potentially shut down the refinery operations of the
Company.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
To the extent possible the Company plans to test or receive
certifications with respect to all significant IT and non-IT systems by
September 30, 1999.
The Company has begun contingency planning to respond to the possible
effects of the Year 2000 Problem on third parties that are important to the
Company's operations. The Company is communicating regularly on this issue with
critical third parties, such as suppliers of power or telecommunications
services to the Company's operational facilities, third-party carriers of raw
materials and refined products, and major customers. As problems of third
parties are identified during the preparation of the contingency plan, the
Company will take any steps available to mitigate the impact on the Company of a
failure in a third party caused by the Year 2000 Problem. The contingency plan
will be completed by September 30, 1999.
The cost to the Company of dealing with the Year 2000 Problem is not
expected to be material. Although a portion of the time of IT personnel and
related management has been and will be employed in evaluating the problem,
taking corrective actions and preparing contingency plans, the Company does not
believe that other IT projects or operations have been or will be adversely
affected. Monetary costs expected to be involved in dealing with the Year 2000
Problem are not expected to be significant: all costs to the Company of review,
analysis and corrective action (excluding IT system upgrades that were scheduled
to be implemented without regard to the Year 2000 Problem) are expected to total
less than $750,000.
Based on the analysis performed to this point, the Company believes that
the most important risk of the Year 2000 Problem to the Company's results of
operations and financial condition is that third-party suppliers important to
the operations of the Company's principal operating assets, the Navajo refinery
at Artesia and Lovington, New Mexico and the Montana refinery near Great Falls,
Montana, would for a period of time be unable to perform their normal roles
because of difficulties created by the Year 2000 Problem for the third parties
and/or for persons supplying the third parties. The greatest risk for the
Company would be in the case of the Company's principal or sole sources for
essential inputs -- for example power to operate the refinery. If such a
provider were to be unable to continue supplying the refinery because of the
Year 2000 Problem, the Company would be forced to suspend the affected
operations until the provider could solve the problem or in some cases until an
alternative supply could be arranged. The Company has begun, and intends to
continue until the year 2000, regular contacts with critical suppliers to
determine their evaluations of their vulnerability to the Year 2000 Problem. In
the event that a particular supplier appears to be vulnerable, the Company will
seek to obtain alternative supplies to the extent they are available. However,
in the case of some inputs, alternative supplies may not realistically be
available even if the supply problem is identified months in advance. In other
cases, an unexpected third-party failure could occur in spite of extensive prior
communications
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
with key suppliers and the only feasible remedy to the Company for a substantial
period might be emergency corrective action by the affected third party if the
third party were capable of taking such action.
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.
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 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note E to the
Consolidated Financial Statements for a further discussion of this lawsuit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits on page 24.
(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: June 11, 1999 By /s/ David F. Chavenson
--------------- ------------------------------------
David F. Chavenson
Vice President, Treasurer, Controller
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
------- -----------
10.1 - Employment Agreement, effective as of
April 1, 1999, between David F. Chavenson
and Holly Corporation.
27 - Financial Data Schedule