1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2001 Commission File Number 1-14159
HUNTWAY REFINING COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4680045
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
25129 The Old Road, Suite 322
Newhall, California
(Address of Principal Executive Offices)
91381
(Zip Code)
Registrant's Telephone Number Including Area Code: (661) 286-1582
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
--- ---
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of May 9, 2001, was 15,004,771.
-1-
2
QUARTERLY REPORT ON FORM 10-Q
HUNTWAY REFINING COMPANY
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Part I. Financial Information Page
----
Condensed Consolidated Balance Sheets as
of March 31, 2001 and December 31, 2000........................3
Condensed Consolidated Statements of
Operations for the Three Months
Ended March 31, 2001 and 2000..................................4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 2001 and 2000........................................5
Condensed Consolidated Statement of
Capital for the Three Months
Ended March 31, 2001............................................6
Notes to Condensed Consolidated
Financial Statements...........................................7
Management's Discussion and Analysis
of Results of Operations and
Financial Condition............................................9
Quantitative and Qualitative Disclosures
About Market Risk............................................12
Part II. Other Information..........................................13
-2-
3
HUNTWAY REFINING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
------------ ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 14,800,000 $ 18,022,000
Accounts Receivable - Net 7,989,000 10,917,000
Inventories 11,873,000 6,287,000
Prepaid Expenses & Other Current Assets 868,000 690,000
------------ ------------
Total Current Assets 35,530,000 35,916,000
PROPERTY - NET 65,566,000 65,935,000
OTHER ASSETS - NET 1,832,000 1,748,000
GOODWILL - NET 1,516,000 1,530,000
------------ ------------
TOTAL ASSETS $104,444,000 $105,129,000
============ ============
CURRENT LIABILITIES:
Accounts Payable $ 11,076,000 $ 9,480,000
Current Portion of Long-Term Debt 2,154,000 2,104,000
Accrued Interest 669,000 825,000
Other Current Liabilities 145,000 2,126,000
------------ ------------
Total Current Liabilities 14,044,000 14,535,000
Long-Term Debt 35,548,000 35,344,000
Deferred Income Taxes and
Other Long-Term Obligations 4,264,000 4,264,000
CAPITAL:
Preferred Stock (1,000,000 shares
authorized, none issued) -- --
Common Stock (75,000,000 shares
authorized, 15,004,771 outstanding) 150,000 150,000
Additional Paid-In Capital 34,898,000 34,898,000
Retained Earnings 15,540,000 15,938,000
------------ ------------
Total Capital 50,588,000 50,986,000
------------ ------------
TOTAL LIABILITIES AND CAPITAL $104,444,000 $105,129,000
============ ============
-3-
4
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
Ended Ended
March 31, March 31,
2001 2000
(Unaudited) (Unaudited)
------------ ------------
SALES $ 29,599,000 $ 23,853,000
------------ ------------
COSTS AND EXPENSES:
Material and Processing Costs 26,453,000 21,673,000
Selling and Administration Expenses 2,547,000 1,231,000
Interest Expense 684,000 824,000
Unrealized Gain on Derivatives (40,000) --
Depreciation and Amortization 629,000 556,000
------------ ------------
Total Costs and Expenses 30,273,000 24,284,000
------------ ------------
LOSS BEFORE INCOME TAXES (674,000) (431,000)
------------ ------------
Provision (Benefit) for Income Taxes (276,000) (177,000)
------------ ------------
NET LOSS $ (398,000) $ (254,000)
============ ============
Net Loss per Basic Share $ (0.03) $ (0.02)
============ ============
Net Loss per Diluted Share $ (0.03) $ (0.02)
============ ============
Weighted Average Basic
Common Shares Outstanding 15,004,771 15,004,771
============ ============
Weighted Average Diluted
Common Shares Outstanding 15,004,771 15,004,771
============ ============
-4-
5
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
March 31, March 31,
2001 2000
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (398,000) $ (254,000)
Adjustments to Reconcile Net Loss
to Net Cash Provided by Operating Activities:
Interest Expense Paid by the Issuance of Notes 766,000 286,000
Unrealized Gain on Derivatives (40,000) --
Depreciation and Amortization 629,000 556,000
Changes in Operating Assets and Liabilities:
Decrease in Accounts Receivable 2,928,000 2,151,000
Increase in Inventories (5,477,000) (7,977,000)
Decrease (Increase) in Prepaid Expenses (178,000) 102,000
Increase in Accounts Payable 1,596,000 701,000
Decrease in Accrued Liabilities (2,137,000) (111,000)
------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (2,311,000) (4,546,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property (225,000) (1,532,000)
Other Assets (176,000) (87,000)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (401,000) (1,619,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Long-term Obligations (510,000) (475,000)
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (510,000) (475,000)
------------ ------------
NET DECREASE IN CASH (3,222,000) (6,640,000)
CASH BALANCE - BEGINNING OF PERIOD 18,022,000 10,445,000
------------ ------------
CASH BALANCE - END OF PERIOD $ 14,800,000 $ 3,805,000
============ ============
Supplemental Disclosures:
Interest Paid in Cash During the Period $ 74,000 $ 228,000
============ ============
Income Taxes Paid in Cash During the Period $ 220,000 $ --
============ ============
-5-
6
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CAPITAL
Common Additional Treasury
Shares Common Paid In Retained Stock Total
Outstanding Stock Capital Earnings (at cost) Capital
-----------------------------------------------------------------------------------
Balance at January 1, 2001 15,004,771 $ 158,000 $34,899,000 $15,938,000 $ (9,000) $50,986,000
Earned Portion of Option Awards
Exercise of Stock Options
Net Loss for the Three Months
Ended March 31, 2001 (398,000) (398,000)
---------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2001 15,004,771 $ 158,000 $34,899,000 $15,540,000 $ (9,000) $50,588,000
=========== =========== =========== =========== =========== ===========
-6-
7
HUNTWAY REFINING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements of Huntway
Refining Company and subsidiary as of March 31, 2001 and December 31, 2000 and
for the three month periods ended March 31, 2001 and 2000 are unaudited, but in
the opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for fair presentation of such financial
statements in accordance with generally accepted accounting principles. The
results of operations for an interim period are not necessarily indicative of
results for a full year. The condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto contained in the Company's annual report for the year ended December 31,
2000.
Crude oil and finished product inventories are stated at cost
determined by the last-in, first-out method, which is not in excess of market.
For the first three months of 2001 and 2000, the effect of LIFO was to decrease
net income by approximately $244,000 and approximately $759,000, respectively.
Inventories at March 31, 2001 and December 31, 2000 were as follows:
2001 2000
----------- -----------
Finished Products $ 8,956,000 $ 5,991,000
Crude Oil and Supplies 6,280,000 3,253,000
----------- -----------
15,236,000 9,244,000
Less LIFO Reserve (3,363,000) (2,957,000)
----------- -----------
Total $11,873,000 $ 6,287,000
=========== ===========
2. CONTINGENCIES
The Company's business is the refining of crude oil into liquid asphalt
and other light-end products, which is subject to various environmental laws and
regulations. Adherence to these environmental laws and regulations creates the
opportunity for unknown costs and loss contingencies to arise in the future.
Unknown costs and loss contingencies could also occur due to the nature of the
Company's business. The Company is not aware of any costs or loss contingencies
relating to environmental laws and regulations that have not been recorded in
its financial statements. However, future environmental costs cannot be
reasonably estimated due to unknown factors. Although environmental costs may
have a significant impact on results of operations for any single period, the
Company believes that such costs will not have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
-7-
8
The Company is party to a number of lawsuits and other proceedings
arising in the ordinary course of its business. While the results of such
lawsuits and proceedings cannot be predicted with certainty, management does not
expect that the ultimate liability, if any, will have a material adverse effect
on the consolidated financial position, results of operations or cash flows of
the Company.
3. CURRENT AND SUBSEQUENT EVENTS
On March 20, 2001, the Company entered into an Agreement and Plan of
Merger with a wholly-owned subsidiary of Valero Energy Corporation ("Valero").
In the merger, holders of Huntway common stock will receive $1.90 per share,
without interest, for each share of the Huntway common stock. Pursuant to the
Agreement and Plan of Merger, Valero will also repay or acquire certain of the
outstanding indebtedness of the Company.
Consummation of the merger is subject to a number of conditions
precedent described in the Agreement and Plan of Merger, including without
limitation approval by Huntway stockholders. The merger is not subject to a
financing contingency.
The Agreement and Plan of Merger contains covenants that require the
Company to conduct its business in the ordinary course and restrict the ability
of the Company to among other things buy and sell assets, invest in certain
capital projects and enter into hedging arrangements, without the prior written
consent of Valero.
For more detailed information concerning the foregoing, please refer to
the Agreement and Plan of Merger, which was filed as Exhibit 2.1 to the Form 8-K
of the Company's filed on March 22, 2001.
In February 2001, the Company entered into an agreement to acquire a portion
of the land underlying the Wilmington refinery along with approximately 1.4
acres that are contiguous to the refinery for approximately $2,600,000. The
transaction, which is subject to certain conditions, is expected to close in May
2001.
On April 5, 2001 the New York Stock Exchange (NYSE) announced that it had
moved to delist the Company's common stock. The Company subsequently timely
filed a request for review of this decision of the NYSE and the NYSE has
informed Huntway that a Committee of the Board of Directors of the NYSE will
hear such request for review on June 6, 2001. Huntway expects that the closing
of the pending merger with Valero Refining and Marketing Company, which Huntway
announced on March 20, 2001, will occur before the anticipated June 6, 2001 NYSE
review date. As previously announced, Huntway anticipates that its common stock
will continue to be listed on the NYSE until this review date.
-8-
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In the following discussion, "Huntway" or the "Company" refers to
Huntway Refining Company. The following discussion should be read in conjunction
with the financial statements included elsewhere in this report and the
financial statements and Management's Discussion and Analysis of Results of
Operations and Financial Condition included in Huntway's annual report for 2000
on Form 10-K. All per share amounts are diluted.
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and we intend that such
forward-looking statements be subject to the safe harbors created thereby. Such
forward-looking statements involve risks and uncertainties and include, but are
not limited to, such statements regarding future events and our plans, goals and
objectives. Such statements are generally accompanied by words such as "intend",
"anticipate", "believe", "estimate", "expect", "looks", "probably", "should" or
similar statements. Our actual results or events may differ materially from such
statements.
Important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are set forth in Management's
Discussion and Analysis of Results of Operations and Financial Condition
(including, but not limited to, Outlook and Factors that Affect Future Results)
in Huntway's annual report on Form 10-K for the year ended December 31, 2000.
Such factors include without limitation the price and availability of crude oil,
demand for liquid asphalt and light-end products and government and private
funding for road construction and repair as well as disruptions in operations as
a result of extended periods of inclement weather or natural disaster and
increased competition from other refiners.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded as a representation by us or
any other person that the future events, plans or expectations contemplated by
us will be achieved.
RESULTS OF OPERATIONS
Huntway is principally engaged in the processing and sale of liquid
asphalt products, as well as the production of other refined petroleum products
such as gas oil, naphtha, kerosene distillate, diesel fuel, jet fuel and bunker
fuel.
Huntway's ability to generate income depends principally upon the
margins between the prices for its refined petroleum products and the cost of
crude oil, as well as upon demand for liquid asphalt, which affects both price
and sales volume.
Historically, refined petroleum product prices (including prices for
liquid asphalt, although to a lesser degree than Huntway's other refined
petroleum products) generally fluctuate with crude oil price levels. There has
not been a relationship between total revenues and income due to the volatile
commodity character of crude oil prices. As a result, management believes that
increases or decreases in revenues are not a meaningful basis for comparing
historical results of operations.
-9-
10
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 2000
First quarter 2001 net loss was $398,000, or $.03 per share, versus
2000 first quarter net loss of $254,000, or $.02 cents per share. Merger related
professional fees of $1,062,000 reduced first quarter 2001 income by $637,000
after tax. Absent these charges, net income for the first quarter of 2001 would
have been $239,000 or one cent per diluted share.
The following table sets forth the effects of changes in price and
volume on sales and material and processing costs on the quarter ended March 31,
2001 as compared to the quarter ended March 31, 2000:
Material & Net Refining Barrels
Sales Processing Margin Sold
----------- ----------- ----------- -------
Three Months Ended March 31, 2000 $23,853,000 $21,673,000 $ 2,180,000 813,000
Effect of changes in price 1,316,000 755,000 561,000
Effect of changes in volume 4,430,000 4,025,000 405,000 151,000
----------- ----------- ----------- -------
Three Months Ended March 31, 2001 $29,599,000 $26,453,000 $ 3,146,000 964,000
=========== =========== =========== =======
The increase in net refining margin of $966,000 or 44% in the first
quarter of 2001 versus the first quarter of 2000 was the result of both
increased volumes due to unusually good weather in Northern California, which
extended the paving season through most of the quarter, and a 5% increase in
overall product prices partially offset by increased material and processing
costs. The increase in material and processing costs was primarily due to a
$1,576,000 or 320% increase in natural gas costs which more than offset a
decline in other costs.
On a period to period basis, prices for both asphalt and light ends
increased despite slightly lower crude oil prices due to the extended paving
season, which increased demand for asphalt and the increase in California
gasoline prices due to shortage in supply resulting from a series of refinery
production shortfalls due to equipment problems in Huntway's market area. The
extended paving season along with the 155,000 barrel asphalt storage tank placed
in service in the second quarter of 2000 also allowed for a 7% increase in
production.
Selling, general and administrative costs increased by $1,316,000 as
compared to the first quarter of 2000, primarily as a result of $1,062,000 in
merger related expenses and an increase in incentive plan accruals of $176,000.
Net interest expense decreased in the quarter by $140,000 due to lower
debt levels.
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 Accounting for
Derivative Instruments and Hedging Activities. This statement as amended by SFAS
137 and 138 was adopted by the Company on January 1, 2001. The statement
generally requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet measured at fair value. The statement also
generally requires that changes during a reporting period in the fair value of a
derivative instrument, be recognized in that periods' earnings unless the
derivative instrument is considered a cash flow hedge and qualifies for hedge
accounting and is designated for that period, by the reporting company, as a
cash flow hedging instrument. As of January 1, 2001 the Company had not so
designated any of its derivative
-10-
11
instruments and accordingly, has reported the changes in fair value during the
period in its results of operations. Upon adoption on January 1, 2001 the fair
value of the Company's derivative instruments of a negative $531,000 was
recorded in operations as an implementation adjustment. During the quarter
positive adjustments totaling $571,000 were recorded to reflect the change in
fair market value from a liability of $531,000 at January 1, 2001 to an asset of
$40,000 at March 31, 2001. In contrast, during the comparable quarter of 2000
the Company had realized gains on its derivative instruments totaling
$1,589,000, which is reflected as a reduction in material and processing costs
for that period. There were no realized gains or losses on derivatives during
the first quarter of 2001.
Depreciation and amortization increased between quarters by $73,000 due
to increased sales volume.
Because of the foregoing, as well as other factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance and investors should not use
historical trends to anticipate results or trends in future periods.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash requirements and liquidity position are affected by
various factors, including the selling prices for its refined products (liquid
asphalt and light-end products) and the price of crude oil. The selling prices
for asphalt products are influenced by the price of crude oil and by local
market supply and demand factors for asphalt, including public and private
demand for road construction and improvements. The selling prices for Huntway's
light end products (naphtha, kerosene distillate and gas oil) are also strongly
impacted by the price of crude oil and by supply and demand factors for finished
gasoline and diesel products in California. Fluctuations in the cost of crude
oil are impacted by a myriad of market factors, both foreign and domestic.
The other primary factors that affect the Company's investment requirements and
liquidity position generally include the timing and funding of capital
expenditures either to improve operations and business growth or to comply with
environmental regulations, to provide for the funding of inventories and
accounts receivables during periods of increasing crude costs and to provide for
the funding of increasing inventory and accounts receivable during the months
prior to (generally December through March) and during the initial start
(generally April through June) of the annual paving season.
In the first three months of 2001, operating activities used $2,311,000
in cash. The period's net loss of $398,000 offset by depreciation and
amortization of $629,000, the payment of interest by the issuance of notes of
$766,000, coupled with the unrealized gain on derivatives of $40,000 provided
$957,000 in cash. Additionally, net collections of accounts receivable and an
increase in accounts payable provided $2,928,000 and $1,596,000 in cash,
respectively. These increases were more than offset by the seasonal increase in
inventories which used $5,477,000 in cash. Other uses of cash consisted of a
decrease in accrued liabilities and an increase in prepaid expenses which
together used cash of $2,315,000 primarily for the payment of 2000 incentive and
pension plan accruals as well as income taxes.
In comparison, in the first three months of 2000, operating activities
used $4,546,000 in cash. The period's net loss of $254,000 offset by
depreciation and amortization of $556,000 and by the payment of interest by the
issuance of notes of $286,000 provided $588,000 in cash. Additionally, net
collections of accounts receivable and an increase in accounts payable provided
$2,151,000 and
-11-
12
$701,000 in cash, respectively. These increases were more than offset by the
seasonal increase in inventories which used $7,977,000 in cash. Other changes
only used cash of $9,000.
Investing activities used $401,000 during the first quarter of 2001,
primarily for tankage improvements at the Wilmington refinery and process piping
improvements at the Benicia refinery. During the first three months of 2000,
investing activities consumed $1,619,000 in cash. Additions to property,
primarily for a new 155,000 barrel asphalt tank at the Benicia refinery,
required cash of $1,532,000, while additions to other assets, primarily loan
costs associated with the new term debt used $87,000 in cash.
Financing activities consumed $510,000 and $475,000 in cash in the
first three months of 2001 and 2000, respectively as a result of monthly
principal payments on long-term debt.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As previously noted, the Company's profitability depends largely on the
spread between market prices for its refined products and its crude oil costs. A
substantial and prolonged decrease in this overall spread would have a
significant negative effect on the Company's earnings, financial position and
cash flows. Approximately half of Huntway's production consists of light end
products and half of liquid asphalt. The prices of Huntway's light end products
have historically followed changes in crude oil prices over 12 to 18 month time
periods despite high short-term volatility. Management believes that
approximately 15% of Huntway's asphalt unit sales volume will be covered by
contractual escalation and deescalation clauses with various state highway
agencies, which are based upon various crude oil cost indexes. In an effort to
mitigate the remaining risk, the Company enters into contracts intended to
partially hedge its exposure to crude oil price fluctuations. Historically, such
contracts are "zero cost collars" under which the Company receives or makes a
monthly payment if crude oil prices for the month rise above, or fall below, the
contracts' "ceiling" or "floor" levels, respectively. The Company does not enter
into such arrangements for trading or other speculative purposes.
To a lesser extent, the Company is also exposed to risks associated
with interest rate fluctuations. However, because the Company invests only in
short-term investment grade securities and has only fixed rate debt, such risks
to its cash flows are not material.
-12-
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to a number of lawsuits and other proceedings
arising in the ordinary course of its business. While the results of such
lawsuits and proceedings cannot be predicted with certainty, management does not
expect that the ultimate liability, if any, will have a material adverse effect
on the consolidated financial position, results of operations or the cash flows
of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 22, 2001 to file the
following documents:
Agreement and Plan of Merger, dated March 20, 2001, by and among
Huntway Refining Company, Valero Refining and Marketing Company and HAC
Company.
Press Release dated March 20, 2001.
-13-
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 15, 2001.
HUNTWAY REFINING COMPANY
(Registrant)
By: /s/ Earl G. Fleisher
---------------------------------------
Earl G. Fleisher
Chief Financial Officer
(Principal Accounting Officer)
-14-