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, 1999
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:
(661) 286-1582
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(b) 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 .
QUARTERLY REPORT ON FORM 10-Q
HUNTWAY REFINING COMPANY
For the Quarter Ended March 31, 1999
INDEX
Part I. Financial Information Page
Condensed Consolidated Balance Sheets as
of March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of
Operations for the Three Months
Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1999 and 1998 5
Condensed Consolidated Statement of
Capital for the Three Months
Ended March 31, 1999 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 14
Part II. Other Information 15
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
CURRENT ASSETS:
Cash $8,031,000 $10,910,000
Accounts Receivable 4,085,000 3,983,000
Inventories 5,849,000 3,551,000
Prepaid Expenses 1,335,000 449,000
Total Current Assets 19,300,000 18,893,000
PROPERTY - Net 61,196,000 59,827,000
OTHER ASSETS - Net 1,701,000 1,280,000
GOODWILL - Net 1,630,000 1,644,000
TOTAL ASSETS $83,827,000 $81,644,000
CURRENT LIABILITIES:
Accounts Payable $5,866,000 $3,515,000
Current Portion of Long-Term Obligations 1,440,000 757,000
Accrued Interest 869,000 593,000
Other Accrued Liabilities 805,000 2,089,000
Total Current Liabilities 8,980,000 6,954,000
Long-Term Debt 36,062,000 36,110,000
Deferred Income Taxes and
Other Long-Term Obligations 1,004,000 990,000
CAPITAL:
Preferred Stock (1,000,000 shares
authorized, none issued) - -
Common Stock (75,000,000 shares
authorized, 14,983,271 outstanding) 150,000 149,000
Additional Paid-In Capital 34,503,000 34,334,000
Retained Earnings 3,128,000 3,107,000
Total Capital 37,781,000 37,590,000
TOTAL LIABILITIES AND CAPITAL $83,827,000 $81,644,000
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
SALES $12,599,000 $12,553,000
COSTS AND EXPENSES:
Material and Processing Costs 9,869,000 10,804,000
Selling and Administration Expenses 1,272,000 976,000
Interest Expense 856,000 832,000
Depreciation and Amortization 567,000 607,000
Total Costs and Expenses 12,564,000 13,219,000
INCOME (LOSS) BEFORE INCOME TAXES 35,000 (666,000)
Provision for Income Taxes 14,000 -
NET INCOME (LOSS) $21,000 $(666,000)
Net Income (Loss) per Basic Share or Unit $- $(0.05)
Net Income (Loss) per Diluted Share or Unit $- $(0.05)
Weighted Average Basic Common Shares
or Equivalent Units Outstanding 14,898,000 14,731,000
Weighted Average Diluted Common Shares
or Equivalent Units Outstanding 16,887,000 14,731,000
Pro Forma (See Note 1 to Condensed
Consolidated Financial Statements)
NET LOSS BEFORE TAXES $(666,000)
Pro Forma Income Tax Benefit (266,000)
PRO FORMA NET LOSS $(400,000)
Pro Forma Basic Loss per Share $(0.03)
Pro Forma Diluted Loss per Share $(0.03)
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) 21,000 (666,000)
Adjustments to Reconcile Net Income(Loss)
to Net Cash Used by Operating Activities:
Interest Expense Paid by the Issuance
of Notes 278,000 248,000
Depreciation and Amortization 567,000 607,000
Deferred Income Taxes 14,000 -
Changes in Operating Assets and
Liabilities:
Decrease (Increase) in Accounts
Receivable (102,000) 978,000
Increase in Inventories (2,224,000) (2,804,000)
Increase in Prepaid Expenses (886,000) (30,000)
Increase (Decrease) in Accounts Payable 2,351,000 (1,674,000)
Increase (Decrease) in Accrued
Liabilities (1,008,000) 165,000
NET CASH USED BY OPERATING ACTIVITIES (989,000) (3,176,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property (1,889,000) (844,000)
Other Assets (469,000) (166,000)
NET CASH USED BY INVESTING ACTIVITIES (2,358,000) (1,010,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of Stock Options 109,000
Proceeds of Notes Payable 13,390,000
Repayment of Long-term Obligations (13,031,000) (292,000)
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 468,000 (292,000)
NET DECREASE IN CASH (2,879,000) (4,478,000)
CASH BALANCE - BEGINNING OF PERIOD 10,910,000 9,406,000
CASH BALANCE - END OF PERIOD $8,031,000 $4,928,000
Supplemental Disclosures:
Interest Paid in Cash During the Period $302,000 $473,000
Income Taxes Paid in Cash During the Period $- $-
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, 1999 14,881,000 $157,000 $34,335,000 $3,107,000$(9,000)$37,590,000
Earned Portion
of Option Awards 61,000 61,000
Exercise of
Stock Options 102,000 1,000 108,000 109,000
Net Income for
the Three Months
Ended March 31,
1999 21,000 21,000
Balance at
March 31, 1999 14,983,000 $158,000 $34,504,000 $3,128,000$(9,000)$37,781,000
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, 1999
and for the three month periods ended March 31, 1999 and 1998 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 Companys annual report for the year ended
December 31, 1998.
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). As a result
of the merger, the Company succeeded to the Partnership's assets,
liabilities and operations. 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%.
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 1999 and 1998,
the effect of LIFO was to decrease net income by approximately
$155,000 and to decrease the net loss by approximately
$1,028,000, respectively.
Inventories at March 31, 1999 and December 31, 1998 were as
follows:
1999 1998
Finished Products $3,641,000 $2,180,000
Crude Oil and Supplies 2,467,000 1,371,000
6,108,000 3,551,000
Less LIFO Reserve (259,000) -
Total $5,849,000 $3,551,000
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 Companys 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 1998 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, 1998. 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 and income taxes
provides the most meaningful basis for comparing historical
results of operations discussed below. Earnings before
interest, depreciation and amortization and income taxes is
not a measuring criteria under generally accepted accounting
principles and should not be viewed as superior to or in
isolation from net income. The following discussion should be
read in conjunction with the financial statements included
elsewhere in this report.
Three Months Ended March 31, 1999 Compared with the Three
Months Ended March 31, 1998
First quarter 1999 net income was $21,000, or less than
$.01 per share, versus the 1998 first quarter net loss of
$666,000, or $.05 cents per unit.
Margins on paving and roofing asphalt products were
substantially higher in the current quarter and margins on
other products were up slightly resulting in an increase in
results between quarters of $687,000.
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, 1999 as compared to the quarter
ended March 31, 1998:
Material & Barrels
Sales Processing Net Sold
Three months ended
March 31, 1998 $12,553,000 $10,804,000 $1,749,000 747,000
Effect of changes
in price (1,063,000) (1,890,000) 827,000
Effect of changes
in volume 1,109,000 955,000 154,000 66,000
Three months ended
March 31, 1999 $12,599,000 $9,869,000 $2,730,000 813,000
As reflected in the table, unit sales increased by 9% to
813,000 barrels in the first quarter of 1999 versus the first
quarter of 1998. However, while asphalt prices were constant
between quarters, intermediate refinery feedstock prices fell
14%. As a result, sales dollars increased only slightly
between quarters to $12,599,000 from $12,553,000. The decline
in prices for the Company's light intermediate refinery feed
stocks as compared to 1998 resulted from lower crude oil
prices due to a decline in world wide demand for gasoline and
diesel fuel and/or overproduction by the major oil producing
countries.
Overall, material and processing costs were reduced by 8%
or $935,000, for the quarter, as compared to the comparable
quarter of 1998. On a per barrel basis, material and
processing costs fell 16% from $14.46 to $12.14 in the
comparable quarters of 1998 and 1999 respectively. These
declines were primarily the result of lower crude oil prices
due to a perceived world wide oversupply due to a decline in
demand (primarily in Asia) coupled with continued high
production levels by a number of oil producing countries.
Overall net margins rose by 56% or $981,000 between
quarters. Increased volume accounted for $154,000 or 16% of
the increase and the balance results from steady asphalt
prices in the face of declining crude oil and light
intermediate refinery feed stock prices.
Selling, general and administrative costs increased by
$296,000 as compared to the first quarter of 1998 primarily as
a result of increased compensation accruals (primarily
retirement). Investor relations expenditures, franchise taxes
and legal and professional fees also increased in the quarter
as a result of doing business as a corporation as opposed to a
partnership.
Net interest expense increased in the quarter by a
nominal $24,000 despite higher debt levels due to higher cash
balances which generated increased interest income.
On January 21, 1999 the Company obtained a new seven
year, $13,390,000 senior debt facility. The facility bears
interest at a fixed rate of 9.234%. Proceeds from the
borrowings were used to retire all $12,699,000 of Huntways
then existing senior debt, to pay transaction costs and to
provide the Company with a small amount of working capital.
The facility also provides that the Company may also borrow up
to an additional $2,800,000 later in 1999 to provide partial
funding for improvements to its Benicia refinery. These
borrowings, if any, will also amortize over seven years at
fixed rates of interest determined at funding. However, it is
the Companys present intention to repay any such additional
borrowings on March 31, 2000 (although there will be no
requirement to do so). Overall, the Company expects to invest
$5,600,000 in these improvements, currently nearing
completion, at the Benicia refinery. It is expected that
these improvements will increase asphalt and light end
production and improve asphalt and light end product quality.
Construction of these improvements has required cessation of
production for a period of time estimated at 30 days. During
this period, light-product sales have been curtailed but
asphalt sales have continued from inventory. Production is
expected to resume in the second half of May, 1999.
The blended interest rate on the $12,699,000 of senior
debt paid off on January 21, 1999 was approximately 8.2%. The
Company anticipates that net interest expense in 1999 will
only slightly exceed net interest expense in 1998 despite
higher debt levels due to increased interest income.
Because of the foregoing, as well as other factors
affecting the Companys 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.
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 Companys process controls are not computerized
and do not rely upon time/date sensitive control equipment.
The Companys accounting and billing systems are computerized
and are sensitive to the year 2000 issue. However, these
applications are being replaced and the new applications
should be in place by July 1999. In the event that these
applications are not in place by the year 2000 the Company
believes that it has sufficient manual backup systems that
could be used to prevent any material disruption of its
operations.
The Company has initiated 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 three months of 1999, operating activities
used $989,000 in cash. The periods net income of $21,000
along with depreciation and amortization of $567,000, the
payment of interest by the issuance of notes of $278,000 and a
provision for deferred income taxes of $14,000 provided
$880,000 in cash. Additionally, an increase in accounts
payable provided $2,351,000. Offsetting these sources of
cash, was a seasonal increase in inventory of $2,224,000 and
a nominal increase in accounts receivable of $102,000.
Additionally, other accrued liabilities decreased, requiring
cash of $1,008,000 primarily for payment of incentive plan
awards and prepaid expenses consumed $886,000 primarily for
the renewal of insurance coverage and to a lesser extent
turnaround costs associated with the Wilmington refinery.
In comparison, during the first quarter of 1998,
operating activities used $3,176,000 in cash. The periods net
loss of $666,000 offset by depreciation and amortization of
$607,000 and the payment of interest by the issuance of notes
of $248,000 provided $189,000 in cash. A seasonal increase in
inventory of $2,804,000 was partially financed by a seasonal
decrease in accounts receivable of $978,000. Accounts payable
decreased by $1,674,000 due to a seasonal decrease in crude
purchases and falling crude prices. Accrued liabilities
increased by $165,000 as only one half of the interest accrued
under the senior debt agreements was scheduled for payment in
the quarter. Prepaid expenses consumed a nominal $30,000.
During the first quarter of 1999, investing activities
consumed $2,358,000. Additions to property, primarily
construction in progress for modernization of the Benicia
refinery, required $1,889,000 while additions to other assets,
primarily loan costs associated with the new term debt
facility, used $469,000. Investing activities consumed
$1,010,000 in cash during the first quarter of 1998 relating
to the construction of a new wastewater treatment facility in
the Wilmington refinery
Financing activities, primarily the funding of the new
term loan facility and the related retirement of the senior
notes, provided $468,000 during the first quarter of 1999. In
contrast, financing activities consumed $292,000 in the first
quarter of 1998 for principal payments on the senior notes.
The Company believes its current level of letter of
credit facilities are sufficient to guarantee requirements for
crude oil purchases, collateralization of 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 March 31, 1999, the cash position of the Company was
$8,031,000 an increase of $3,103,000 from the balance at March
31, 1998 of $4,928,000. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As previously noted, the Companys 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 Companys earnings, financial position
and cash flows. Approximately half of Huntways production
consists of light products and half of asphalts. The prices
of Huntways light 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 20% of Huntways asphalt unit sales volume will
be covered by contractual escalation and de-escalation 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.
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
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
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, on May 14, 1999.
HUNTWAY REFINING COMPANY
(Registrant)
By:
Warren J. Nelson
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
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