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 Quarterly Period Ended September 30, 1998 Commission
File Number 333-45093
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: (805) 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 .
As of November 12, 1998, Huntway Refining Company had 14,881,271 common shares
outstanding.
QUARTERLY REPORT ON FORM 10-Q
HUNTWAY REFINING COMPANY
For the Quarterly Period Ended September 30, 1998
INDEX
Part I. Financial Information Page
Condensed Consolidated Balance Sheets as
of September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of
Operations for the Three and Nine Months
Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1998 and 1997 5
Condensed Consolidated Statement of
Capital for the Nine Months
Ended September 30, 1998 6
Notes to Condensed Consolidated
Financial Statements 7
Management's Discussion and Analysis
of Results of Operations and
Financial Condition 9
Part II. Other Information 15
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
CURRENT ASSETS:
CASH $8,287,000 $ 9,406,000
ACCOUNTS RECEIVABLE 7,955,000 4,066,000
INVENTORIES 4,827,000 4,112,000
PREPAID EXPENSES 586,000 587,000
TOTAL CURRENT ASSETS 21,655,000 18,171,000
PROPERTY NET 60,089,000 59,346,000
OTHER ASSETS 1,223,000 1,025,000
GOODWILL 1,659,000 1,701,000
TOTAL ASSETS 84,626,000 80,243,000
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $6,708,000 $6,730,000
CURRENT PORTION OF LONG-TERM OBLIGATIONS 657,000 1,449,000
ACCRUED INTEREST 1,079,000 571,000
OTHER ACCRUED LIABILITIES 2,270,000 1,046,000
TOTAL CURRENT LIABILITIES 10,714,000 9,796,000
LONG-TERM OBLIGATIONS 37,344,000 36,668,000
CAPITAL:
PARTNERS CAPITAL - 33,779,000
COMMON STOCK (14,881,000 SHARES ISSUED
75,000,000 AUTHORIZED) 157,000 -
OTHER STOCKHOLDERS CAPITAL 36,411,000 -
TOTAL CAPITAL 36,568,000 33,779,000
TOTAL LIABILITIES AND CAPITAL 84,626,000 80,243,000
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEP-30-98 SEP-30-97 SEP-30-98 SEP-30-97
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
SALES $25,592,000 28,505,000 58,422,000 71,239,000
COSTS AND EXPENSES:
MATERIAL AND
PROCESSING COSTS 19,040,000 25,026,000 45,814,000 62,295,000
SELLING AND ADMIN-
ISTRATION EXPENSES 2,041,000 1,238,000 4,413,000 3,407,000
INTEREST EXPENSE 865,000 895,000 2,568,000 2,664,000
DEPRECIATION AND
AMORTIZATION 706,000 654,000 2,015,000 1,776,000
TOTAL COSTS AND
EXPENSES 22,652,000 27,813,000 54,810,000 70,142,000
INCOME BEFORE INCOME
TAXES 2,940,000 692,000 3,612,000 1,097,000
PROVISION FOR INCOME
TAXES
CURRENT 640,000 - 640,000 -
DEFERRED 536,000 - 790,000 -
TOTAL PROVISION FOR
INCOME TAXES 1,176,000 - 1,430,000 -
NET INCOME 1,764,000 692,000 2,182,000 1,097,000
NET INCOME PER BASIC
UNIT OR SHARE 0.12 0.03 0.15 0.04
NET INCOME PER DILUTED
UNIT OR SHARE 0.07 0.02 0.11 0.04
BASIC COMMON SHARES OR
EQUIVALENT UNITS
OUTSTANDING 14,881,000 25,599,000 14,881,000 25,599,000
DILUTED COMMON SHARES OR
EQUIVALENT UNITS
OUTSTANDING 32,067,000 28,158,000 32,318,000 28,098,000
PRO FORMA (SEE NOTE 1 TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS)
NET INCOME BEFORE TAXES $692,000 $3,612,000 $1,097,000
PRO FORMA INCOME TAX PROVISION 277,000 1,444,000 439,000
PRO FORMA NET INCOME 415,000 2,168,000 658,000
PRO FORMA BASIC INCOME PER SHARE 0.02 0.15 0.03
PRO FORMA DILUTED INCOME PER SHARE 0.01 0.11 0.02
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $2,182,000 $1,097,000
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
INTEREST EXPENSE PAID BY THE
ISSUANCE OF NOTES 248,000 -
DEPRECIATION AND AMORTIZATION 2,015,000 1,776,000
DEFERRED INCOME TAXES 790,000 -
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE (3,889,000) (1,601,000)
INCREASE IN INVENTORIES (680,000) (2,658,000)
DECREASE (INCREASE) IN PREPAID
EXPENSES 1,000 (9,000)
INCREASE (DECREASE) IN ACCOUNTS
PAYABLE (22,000) 1,275,000
INCREASE IN ACCRUED LIABILITIES 1,632,000 1,427,000
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,277,000 1,307,000
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY (2,297,000) (1,407,000)
ADDITIONS TO OTHER ASSETS (291,000) (269,000)
NET CASH USED BY INVESTING ACTIVITIES (2,588,000) (1,676,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
SALE OF COMMON STOCK 262,000 -
ISSUANCE COSTS AND EXPENSES (16,000) -
REPAYMENT OF LONG TERM OBLIGATIONS (1,054,000) (100,000)
NET CASH USED BY FINANCING ACTIVITIES (808,000) (100,000)
NET (DECREASE IN CASH (1,119,000) (469,000)
CASH BALANCE - BEGINNING OF PERIOD 9,406,000 5,287,000
CASH BALANCE - END OF PERIOD 8,287,000 4,818,000
INTEREST PAID IN CASH DURING THE
PERIOD 1,812,000 1,529,000
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CAPITAL
ADDITIONAL TREASURY
PARTNERS COMMON PAID IN RETAINED STOCK TOTAL
CAPITAL STOCK CAPITAL EARNINGS (AT COST) CAPITAL
BALANCE AT JANAUARY
1, 1998 $33,779,000 $33,779,000
EARNED PORTION OF
OPTION AWARDS 212,000 149,000 361,000
NET INCOME FOR
THE NINE MONTHS
ENDED SEPTEMBER
30, 1998 37,000 2,145,000 2,182,000
ISSUANCE OF 14,731,271
SHARES IN EXCHANGE
FOR PARTNERSHIP
INTERESTS (34,028,000) 147,000 33,881,000 -
SALE AND ISSUANCE
OF 150,000 SHARES 2,000 260,000 262,000
ISSUANCE COSTS (16,000) (16,000)
SALE AND ISSUANCE OF
850,000 SHARES TO
HUNTWAY PARTNERS
L.P. AND RECLASSIFIED
TO TREASURY STOCK
UPON MERGER 8,000 1,000 (9,000) -
BALANCE AT SEPTEMBER
30, 1998 - 157,000 34,275,000 2,145,000 (9,000)36,568,000
HUNTWAY REFINING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Huntway Refining Company (the Company) was formed for the purpose of
effecting the conversion of Huntway Partners, L.P. (the Partnership) from a
publicly traded limited partnership to a publicly traded corporation on June
1, 1998 through the merger of the Partnership into the Company (the
Conversion). The Company issued 14,583,958 shares of $0.01 par value common
stock to the Partnership's limited partners in a one for one exchange for
their limited partner units. The Company also issued 147,313 shares of common
stock to the Partnership's general partners in exchange for their 1% general
partner interest. As a result of the merger, the Company succeeded to the
Partnership's assets, liabilities and operations.
The transaction has been accounted for as a reorganization of affiliated
entities with the assets and liabilities of the Partnership recorded at their
historical cost basis. The financial statements through the date of the
Conversion reflect the operations of the Partnership. Pro forma information is
presented to assist in comparing the results of operations as if the
Conversion had occurred at the beginning of each period for which financial
statements are presented. The pro forma provision for income taxes has been
calculated at an estimated combined Federal and State rate of 40%.
The accompanying condensed consolidated financial statements of Huntway
Refining Company and subsidiary as of September 30, 1998 and for the three and
nine month periods ended September 30, 1998 and 1997 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 Partnerships annual report for 1997 on Form
10-K.
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 nine months of 1998 and 1997, the effect of LIFO was to increase net
income by $1,028,000 and $1,091,000, respectively. LIFO did not have an effect
on income for the third quarter of 1998 and decreased net income by $828,000
in the comparable quarter of 1997.
Inventories at September 30, 1998 and December 31, 1997 were as follows:
1998 1997
FINISHED PRODUCTS $2,323,000 $2,480,000
CRUDE OIL SUPPLIES 2,504,000 2,660,000
4,827,000 5,140,000
LESS LIFO RESERVE - (1,028,000)
TOTAL 4,827,000 4,112,000
2. CONTINGENCIES
The Company's business is the refining of crude oil into liquid asphalt
and other products, which is subject to various environmental laws and
regulations. Adherence to these environmental laws and regulations creates the
possibility of unknown costs and loss contingencies 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.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In the following discussion, "Huntway" or the "Company" refers to
Huntway Partners, L.P. prior to June 1, 1998 and to Huntway Refining
Company thereafter. 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
1997 on Form 10-K. All per share amounts are diluted and should be read as
per unit amounts for periods prior to June 1, 1998.
This Form 10-Q contains forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, that involve a number of
risks and uncertainties. Important factors that could cause actual results
to differ materially from those indicated by such forward-looking
statements are set forth in Managements Discussion and Analysis of Results
of Operations and Financial Condition in Huntways annual report on Form
10K for the year ended December 31, 1997. These risks and uncertainties
include the price of crude oil, demand for liquid asphalt and government
and private funding for road construction and repair. The Companys actual
results may differ materially from these forward-looking statements.
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.
Accordingly, management believes earnings before interest,
depreciation and amortization provides the most meaningful basis for
comparing historical results of operations discussed below. Earnings
before interest, depreciation and amortization is not a measuring criteria
under generally accepted accounting principles and should not be viewed as
superior to or in isolation from net income.
Overall, demand for Huntways asphalt products has been strong in
1998, particularly our specialized modified asphalt products which are
increasingly being called for in California road projects. The outlook
appears particularly encouraging due to a combination of factors including
the passage in June of the $217 billion federal highway bill and the
passage on November 3, 1998 by the voters in California of Proposition 2
which requires any monies borrowed from the California State Transportation
Fund be repaid the same year plus interest. These events, coupled with
continuing growth in the California economy, auger well for continued
growth in demand for our asphalt products from both the public and private
sectors.
The $217 billion federal highway bill translates into a 45% increase
in projected transportation related expenditures in California. This
equates to an increase in expenditures of $800 million a year for each of
the next six years. Management anticipates that these increased
expenditures from the passage of this bill will begin to be felt in
California in the second half of 1999. Moreover, the transportation
budget, is now essentially off-budget from the general budget meaning
that gasoline taxes raised at the pump will go towards funding
transportation projects and not to balance the federal budget as has been
the case prior to the passage of the bill. Management believes that the
passage of the highway bill is a very important change that should benefit
the industry and Huntway into the foreseeable future. Finally the passage
of Proposition 2 will eliminate a repetition of borrowings from the
Transportation Fund of over $1.5 billion in the years 1991 through 1995,
that were never repaid. Dedicated transportation tax dollars will be used
for transportation needs in the future.
Three Months Ended September 30, 1998 Compared with the Three Months Ended
September 30, 1997
Third quarter 1998 net income was $1,764,000, or $.07 per share,
versus 1997 third quarter net income of $692,000, or $.02 per share.
Margins on paving and roofing asphalt products were substantially
higher in the current quarter, which more than offset lower margins on
other products and resulted in a increase in net income between quarters of
$1,072,000. This improvement in results occurred despite a provision for
Federal and State taxes on income of $1,176,000 for the 1998 quarter versus
no such provision in 1997; accordingly, income before income taxes
increased from $692,000 in the third quarter of 1997 to $2,940,000 in the
third quarter of 1998. During 1997 the operations of Huntway were carried
on under the partnership form of organization, which is not subject to
taxes on income and passes its taxable income or loss on to its partners.
Effective June 1, 1998 Huntway began to operate as a corporation and
accordingly is subject to Federal and State taxes on income subsequent to
that date.
The following table sets forth the effects of changes in price and
volume on sales and material and processing costs on the quarter ended
September 30, 1998 as compared to the quarter ended September 30, 1997:
MATERIAL AND BARRELS
SALES PROCESSING NET SOLD
THREE MONTHS ENDED
SEPTEMBER 30, 1997 $28,505,000 $25,026,000 $3,479,000 1,350,000
EFFECT OF CHANGES
IN PRICE (4,454,000) (7,339,000) 2,885,000
EFFECT OF CHANGES
IN VOLUME 1,541,000 1,353,000 188,000 73,000
THREE MONTHS ENDED
SEPTEMBER 30, 1998 $25,592,000 $19,040,000 $6,552,000 1,423,000
As reflected in the table, sales fell by 10% or $2,913,000 in the third
quarter of 1998 versus the comparable quarter of 1997. This decline was
due to lower light refinery feed stock prices which were not offset by a 5%
increase in unit volume and nominally higher paving asphalt prices. The
significantly lower prices for Huntway's light refinery feed stocks as
compared to 1997 was primarily due to lower crude prices and to a lesser
extent as a result of lower demand for and higher inventory levels of
gasoline and diesel fuel on the West Coast. In contrast, improved market
conditions for asphalt products resulted in stable pricing despite the
decline in crude costs.
Material and processing costs were reduced by 24% or $5,986,000 for
the quarter as compared to the comparable quarter of 1997, primarily as a
result of much lower crude prices due to a perceived worldwide oversupply
due to overproduction by a number of oil producing countries.
Overall net margins improved by 88% or $3,073,000 between quarters as
declines in crude prices exceeded the decline in light refinery feed stock
prices while asphalt paving and roofing product prices held steady.
Selling, general and administrative costs increased by $803,000 as
compared to the third quarter of 1997 primarily as a result of higher labor
costs, including incentive plan accruals, and to a lesser extent as a
result of increased professional fees associated with the conversion to
corporate form.
Interest expense was reduced in the quarter by $30,000 due to lower
interest rates offsetting higher debt levels. On October 31, 1997 Huntway
issued $21,750,000 in 9.25% Senior Subordinated Secured Convertible Debt due
2007, retired $11,707,000 in 12% senior debt, and redeemed 10,758,696 units
or 42% of its total units outstanding. The transaction also reduced the
effective interest rate on Huntway's $8,600,000 Industrial Development Bond
from 12% to approximately 6% and provided Huntway with $2,500,000 in
additional working capital. As a result of this transaction, Huntway's
debt increased from $27,924,000 to $37,967,000 effective October 31, 1997.
Net interest expense however remained essentially unchanged due to the
lower net interest rate on the new convertible debt and the buydown of the
approximate 6% interest spread on the Industrial Development Bond.
Additionally, principal payments of $1,054,000 were also made in the first
nine months of 1998 reducing Huntway's outstanding indebtedness.
Due to the conversion from a partnership to a corporation, as
described in Note 1 to the financial statements included in this report,
the operations of the Company became subject to Federal and State income
taxes beginning June 1, 1998. As a result, a provision for such taxes of
$1,176,000 has been recorded for the third quarter of 1998.
Because of the foregoing, as well as other factors affecting
Huntway'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.
Nine Months Ended September 30, 1998 Compared with the Nine Months Ended
September 30, 1997
Net income for the first nine months of 1998 was $2,182,000, or $.11
per share, versus 1997 nine month income of $1,097,000, or $.04 per share.
The improvement in results between periods of $1,085,000 is
principally attributable to significantly higher paving and roofing asphalt
margins offset by lower margins on other products and the provision for
Federal and State income taxes of $1,430,000. Accordingly, income before
income taxes in the comparative nine month periods increased to $3,612,000
from $1,097,000 in 1998 and 1997 respectively. Per barrel gross margins on
paving and roofing asphalt products improved 79% as prices generally held
up in the face of significant decreases in crude prices. Per barrel gross
margins on Huntway's light refinery feedstocks fell 23% as light product
margins continue to reflect the impact of higher inventory levels of and
lower demand for gasoline and diesel fuel on the West Coast. Contrary to
1997, Huntway also sold residual fuel oil during the 1998 period at a
negative margin in order to optimize refinery production levels and support
paving and roofing product pricing.
The following table sets forth the effects of changes in price and
volume on sales and material and processing costs on the period ended
September 30, 1998 as compared to the period ended September 30, 1997:
MATERIAL AND BARRELS
SALES PROCESSING NET SOLD
NINE MONTHS ENDED
SEPTEMBER 30, 1997 $71,239,000 $62,295,000 $8,944,000 3,313,000
EFFECT OF CAHNGES IN
PRICE (12,860,000) (16,519,000) 3,659,000
EFFECT OF CHANGES IN
VOLUME 43,000 38,000 5,000 2,000
NINE MONTHS ENDED
SEPTEMBER 30, 1998 $58,422,000 $45,814,000 $12,608,000 3,315,000
The net margin between sales and material and processing costs improved
from $2.70 per barrel for the first nine months of 1997 to $3.80 per barrel
for the first nine months of 1998. This improvement in net margin of
$3,664,000 is attributable to the Company's improved margin on paving and
roofing asphalt products in the period offset by lower margins on other
products. Asphalt prices declined by only 6% compared to the first nine
months of 1997 in the face of crude costs which fell by 34%. Asphalt
paving and roofing product pricing was sustained by an overall strong
market influenced by expected shortages late in the 1998 paving season.
Light refinery feedstock prices, on the other hand, declined by 31% due to
an oversupply of gasoline and diesel fuel in the period. Overall, sales
prices averaged $17.62 per barrel for the first nine months of 1998 as
compared to $21.50 per barrel for the comparable period of 1997, a decrease
of $3.88, or 18%. Material and processing costs averaged $13.82 and $18.80
for the periods ended September 30, 1998 and 1997, respectively, a decrease
of $4.98 or 26%.
Selling, general and administrative costs increased by $1,006,000 as
compared to the first three quarters of 1997 primarily as a result of
higher labor costs, including incentive plan accruals, and conversion
costs.
Interest expense was reduced in the period by $96,000 due to lower
interest rates offsetting higher debt levels.
Due to the conversion from a partnership to a corporation, as
described in Note 1 to the financial statements included in this report,
the operations of the Company became subject to Federal and State taxes
beginning June 1, 1998. As a result, a provision for such taxes of
$1,430,000 has been recorded for the nine month period ended September 30,
1998.
Due to the volatility inherent in Huntway's business, 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.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
Management has determined that the year 2000 issue will not pose
significant operational problems for either its computer systems (IT
systems) or its process controls (Non-IT systems), and believes any
remediation costs are not material. Any such remediation costs will be
charged to operations as incurred.
The Company has begun to initiate formal communications with its
significant suppliers and customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties failure
to remediate their own Year 2000 Issue. However, the Company does not
utilize any electronic data interchange directly with its customers and
believes its exposure is limited to systems associated with the Federal
Wire system, common carrier pipelines and utilities. While there can be no
guarantee that the systems of other companies on which the Company relies
will be timely converted and would not have an adverse effect on its
operations, management does not currently anticipate significant problems
with these systems and has not yet done any contingency planning pending
the results of its communications with its suppliers and customers.
However, should the Company be denied access to crude supplies, natural gas
or other vital materials and services due to the failure of its suppliers'
delivery systems due to year 2000 compliance problems, it could be forced
to either curtail operations or shut down until such materials can again be
delivered. Additionally, should its customers be unable to make payments
for their purchases, the Company could be faced with a liquidity shortfall.
Capital Resources And Liquidity
The primary factors that affect the Companys cash requirements and
liquidity position are fluctuations in the selling prices for its refined
products caused by local market supply and demand factors including public
and private demand for road construction and improvement. Secondly, demand
for diesel fuel and gasoline, as well as fluctuations in the cost of crude
oil, which is impacted by a myriad of market factors, both foreign and
domestic, influence the Companys cash requirements and liquidity position.
In addition, capital expenditure requirements, including costs to maintain
compliance with environmental regulations as well as debt service
requirements, impact the Companys cash needs.
In the first nine months of 1998, operating activities provided
$2,277,000 in cash. The periods net income of $2,182,000 along with
depreciation and amortization of $2,015,000, the payment of interest by the
issuance of notes of $248,000 and the provision for deferred income taxes
of $790,000 provided $5,235,000 in cash. Seasonal increases in inventories
and accounts receivable of $4,569,000 were financed with cash. Accrued
liabilities provided $1,632,000 because of incentive accruals and interest
accrued under convertible debt agreements payable June 30 and December 31.
Accounts payable and prepaid expenses were virtually unchanged and consumed
$21,000 in cash as lower crude prices and higher purchased volumes in
September of 1998 offset higher crude prices and lower purchased volumes in
December of 1997.
In comparison, in the first nine months of 1997, operating
activities provided $1,307,000 in cash. Net income of $1,097,000 plus
depreciation and amortization of $1,776,000 provided $2,873,000 in cash.
An increase in inventory of $2,658,000 was partially financed by a similar
increase in accounts payable of $1,275,000. Accrued liabilities increased
by $1,427,000 due to the timing of interest payments, as well as increases
in accruals for property taxes and incentive compensation. Prepaid expenses
consumed $9,000 while accounts receivable experienced a seasonal increase
of $1,601,000.
Investing activities consumed $2,588,000 in cash during the first
nine months of 1998 primarily relating to the construction of a new
wastewater treatment facility in the Wilmington refinery and various
storage related improvements in the Benicia refinery. During the first nine
months of 1997, investing activities consumed $1,676,000 primarily for
refinery equipment including polymer plant enhancements and tankage in the
Benicia refinery and improved pipeline connections in Wilmington.
Financing activities consumed $808,000 in the first nine months of
1998 for principal payments on the Senior notes and stock issuance costs
partially offset by proceeds from the related sale of common stock. In
January of 1997 $100,000 was used pursuant to a 1993 settlement with the
State of Arizona.
The Company believes its current level of letter of credit facilities
are sufficient to guarantee requirements for crude oil purchases,
collateralizing other obligations and for hedging activities at current
crude price levels. However, due to the volatility in the price of crude
oil there can be no assurance that these facilities will be adequate in the
future. If crude oil prices increased beyond the level of the Company's
letter of credit facilities, it would be required to prepay for crude oil
or reduce its crude oil purchases, either of which would adversely impact
profitability.
At September 30, 1998, the cash position of the Company was
$8,287,000. In the opinion of management, cash on hand, together with
anticipated future cash flows, will be sufficient to meet Huntway's
liquidity obligations for the next 12 months.
On June 1, 1998, pursuant to a vote of Huntway's unitholders at a
special meeting held on May 29, 1998, the operations of Huntway ceased to
be carried on by a partnership and began to be carried on by a corporation.
As a result of this conversion to corporate form, the operations became
subject to income taxes at the corporation level rather than passing its
taxable income or loss on to its partners as was the case under the
partnership form. Huntway is unable to estimate the impact of this change
on its future cash flows; however, management believes that approximately
$2,000,000 and $5,000,000 of book income in 1998 and 1999, respectively,
will be sheltered from current taxation due to the effects of accelerated
depreciation on its assets.
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 of the cash flows of the Company other than as previously
reported.
Item 2. Changes in Securities and Use of Proceeds
None.
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
None
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.
HUNTWAY REFINING COMPANY
(Registrant)
Date: November 15, 1998 By: Warren J. Nelson
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)