UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-92871-02
SABINE RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 43-1857408
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1801 S. Gulfway Drive
Office No. 36 77640
Port Arthur, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (409) 982-7491
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 ( )
Number of shares of registrant's common stock, $.01 par value,
outstanding as of August 11, 2000: 6,818,182.
1
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of Sabine River Holding Corp:
We have reviewed the accompanying consolidated balance sheet of Sabine
River Holding Corp. and Subsidiaries (a development stage company) (the
"Company") as of June 30, 2000 and the related consolidated statements
of operations for the period from May 4, 1999 (date of inception) to
June 30, 2000, and for the three-month and six-month periods ended June
30, 2000, and consolidated statements of cash flows for the period from
May 4, 1999 (date of inception) to June 30, 2000, and the six-month
period then ended. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States of America, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be
in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated
balance sheet of the Company as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the period from May 4, 1999 (inception) to December 31, 1999
(not presented herein); and in our report dated March 2, 2000, we
expressed an unqualified opinion on those consolidated financial
statements.
Deloitte & Touche LLP
St. Louis, Missouri
August 2, 2000
2
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
Reference December 31, June 30,
Note 1999 2000
---------- ------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 51 $ 53
Receivable from affiliate 7 90 91
Prepaid expenses 845 1,362
------------- ------------
Total current assets 986 1,506
CONSTRUCTION IN PROGRESS 378,411 531,578
CASH AND CASH EQUIVALENTS RESTRICTED FOR
CAPITAL ADDITIONS 46,657 1,157
OTHER ASSETS 3 20,575 21,222
------------- ------------
$ 446,629 $ 555,463
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,145 $ 21,154
Accrued expenses and other 5 14,721 19,241
Payable to affiliate 7 497 573
Accrued taxes other than income - 1,050
------------- ------------
Total current liabilities 43,363 42,018
LONG-TERM DEBT 360,000 443,810
COMMITMENTS AND CONTINGENCIES 7 - -
COMMON STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 6,818,182
shares issued 68 68
Capital contribution commitments 134,932 134,932
Capital contribution receivable 4 (77,830) (48,161)
------------- ------------
Total paid-in capital 57,102 86,771
Deficit accumulated during development
stage (13,904) (17,204)
------------- ------------
Total common stockholders' equity 43,266 69,635
------------- ------------
$ 446,629 $ 555,463
============= ============
The accompanying notes are an integral part of these financial statements.
3
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in thousands)
Cumulative
From May 4, 1999 Period Ended June 30, 2000
Reference (inception) to --------------------------
Note June 30, 2000 Three Months Six Months
----------- ----------------- -------------- -----------
EXPENSES:
Operating expenses $ (1,883) $ (1,019) $ (1,883)
General and administrative
expenses (3,425) (165) (276)
----------------- -------------- -----------
(5,308) (1,184) (2,159)
INTEREST AND FINANCE
COST, NET 3, 5 (11,896) (1,007) (1,141)
INCOME TAX PROVISION - - -
----------------- -------------- -----------
NET LOSS $ (17,204) $ (2,191) $ (3,300)
================= ============== ===========
The accompanying notes are an integral part of these financial statements.
4
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
4
Cumulative
From May 4, 1999 For the Six Months
(inception) to Ended June 30,
June 30, 2000 2000
---------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (17,204) $ (3,300)
Amortization of deferred costs 1,668 1,134
Other, net (895) (895)
Cash provided by (used in) working capital
Prepaid expenses (1,362) (517)
Accounts payable, accrued expenses,
taxes other than income, and other 41,927 (1,346)
---------------- ------------------
Net cash provided by (used in)
operating activities 24,134 (4,924)
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for construction in
progress (533,752) (153,167)
Cash and cash equivalents restricted
for investment in capital additions (1,157) 45,500
---------------- ------------------
Net cash used in investing
activities (534,909) (107,667)
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt 443,810 83,810
Proceeds from equity contributions 86,839 29,669
Deferred financing costs (19,821) (886)
---------------- ------------------
Net cash provided by
financing activities 510,828 112,593
---------------- ------------------
NET INCREASE IN CASH 53 2
CASH, beginning of period - 51
---------------- ------------------
CASH, end of period $ 53 $ 53
================ ==================
The accompanying notes are an integral part of these financial statements.
5
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Sabine River Holding Corp. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2000
(tabular dollar amounts in millions of U.S. dollars)
1. Basis of Preparation and Nature of Business
Independent accountants have reviewed the consolidated interim
financial statements of Sabine River Holding Corp., a Delaware
corporation, and its Subsidiaries (all development stage companies) (the
"Company" or "Sabine River"). In the opinion of the management of
the Company, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial
statements have been included therein. The financial statements are
presented in accordance with the disclosure requirements for Form 10-Q.
These unaudited financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Form
S-4 Registration Statement filed on April 19, 2000, by the Company's
indirect, wholly-owned subsidiary, Port Arthur Finance Corp. ("Port
Arthur Finance").
The financial statements include the operations of Port Arthur Coker
Company L.P., a Delaware limited partnership ("PACC"), which is the
principal, wholly-owned subsidiary of the Company. PACC was formed to
develop, construct, own, operate, and finance a heavy oil processing
facility that includes a new 80,000 barrel per stream day delayed coking
unit, a 35,000 barrel per stream day hydrocracker, a 417 long tons per
day sulfur complex, and related assets (the "Coker Project") at the
Port Arthur, Texas refinery of an affiliate, The Premcor Refining Group Inc.
(the "Refining Group"). In addition, the consolidated financial statements
of the Company include Port Arthur Finance, a wholly-owned subsidiary of
PACC, and Neches River Holding Corp., ("Neches River"), a wholly-owned
subsidiary of Sabine River. The purpose of Port Arthur Finance is
solely to facilitate the financing activities of the Coker Project by,
among other things, issuing the 12.5% senior secured notes due 2009
described below, and the purpose of Neches River is solely to act as the
99% limited partner of PACC and to act as a joint and several co-
guarantor with PACC and Sabine River of the 12.5% senior secured notes
and the other debt of Port Arthur Finance. Each of PACC, Neches River,
and Sabine River have fully and unconditionally guaranteed the 12.5%
senior secured notes and the other debt of Port Arthur Finance on a
joint and several, senior secured basis. Because PACC has significant
independent operations, summarized financial data for PACC is presented
in Note 6, "PACC Condensed Consolidated Financial Information." No
separate or summarized financial statements are presented for Neches
River and Port Arthur Finance because Neches River and Port Arthur
Finance have only nominal assets and do not conduct any independent
operations, and management has determined that separate financial
statements for Neches River and Port Arthur Finance would not be
material to investors.
Sabine River was incorporated in May of 1999 and capitalized in
August of 1999. The Company is the 1% general partner of PACC and the
100% owner of Neches River, which is the 99% limited partner of PACC.
Sabine River is owned 90% by Premcor Inc. (previously Clark Refining
Holdings Inc.) and is owned 10% by Occidental Petroleum Corporation
("Occidental"). After giving effect to anticipated equity contributions
to be made in connection with the funding of the Coker Project, Premcor
Inc. will be principally owned, indirectly through subsidiaries, by
Blackstone Capital Partners III Merchant Banking Fund L.P. and its
affiliates ("Blackstone") with approximately an 82% interest, and by
Occidental with approximately a 17% interest. The Company is an
affiliate of the Refining Group because Premcor Inc. owns 100% of the
capital stock of Premcor USA Inc. ("Premcor USA"), which in turn owns
100% of the capital stock of the Refining Group.
The total cost of the Coker Project is estimated to be approximately
$715 million, including development, property acquisition, construction,
6
capitalized interest, testing and start-up, and an allowance for
estimated price escalation and contingencies. In order to fund the
Coker Project, the Company and Neches River entered into capital
contribution agreements in 1999 totaling $135 million, and Port Arthur
Finance issued $255 million of 12.5% senior secured notes, entered
into a $325 million secured construction and term loan facility, and
obtained a $75 million secured working capital facility. Sabine River,
Neches River, and PACC are joint and several guarantors of the notes and
loans.
Because PACC is the principal operating subsidiary of the Company, a
discussion of the Company's results of operations consists principally
of a discussion of the Coker Project and PACC's construction activity
and results of operations. Sabine River and Neches River as stand-alone
entities have no material assets, liabilities, or operations, other than
the guarantee obligations described above and their ownership interest
in PACC.
Since inception the Company and its subsidiaries have been in a
construction and pre-operation stage and have no material operating
revenues or expenses. Testing and gradual start-up of the Coker Project
is scheduled for the fourth quarter of 2000 with full operations
expected by March 2001.
2. New Accounting Standard
In June 1998, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement, as amended, will
be adopted by the Company effective January 1, 2001. Management is
continuing to evaluate the impact the adoption of this standard will
have on the Company's financial position and results of operations.
Based on an initial analysis, management believes no material effect of
adoption is currently expected.
3. Other Assets
Amortization of deferred financing costs for the period from May 4,
1999 (date of inception) to June 30, 2000, and for the three- and six-
month periods ended June 30, 2000 was $1.6 million, $0.5 million, and
$1.1 million, respectively and was included in "Interest and finance
costs, net."
4. Capital Contributions Receivable
As of June 30, 2000, Blackstone had contributed $78.1 million of the
$121.5 million it had committed, and Occidental had contributed $8.7
million of the $13.5 million it had committed under their capital
contribution agreements.
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
Cumulative For the Period
From May 4, 1999 Ended June 30, 2000
(inception) to ------------------------
June 30, 2000 Three Months Six Months
---------------- ------------ ----------
Interest expense............. $ 40.8 $ 13.0 $ 25.2
Financing costs.............. 12.4 0.9 1.7
Interest and finance income.. (2.3) (0.3) (0.6)
---------------- ------------ ----------
50.9 13.6 26.3
Capitalized interest......... (39.0) (12.6) (25.2)
---------------- ------------ ----------
Interest and finance costs,
net...................... $ 11.9 $ 1.0 $ 1.1
================ ============ ==========
Cash paid for interest expense for the period from May 4, 1999 (date
of inception) to June 30, 2000 and for the three- and six-month periods
ended June 30, 2000 was $16.7 million, zero, and $16.7 million,
7
respectively. Accrued interest payable as of June 30, 2000 of $19.0
million (December 31, 1999 - $14.1 million) was included in "Accrued
expenses and other."
6. PACC Condensed Consolidated Financial Information
Separate financial information is not presented for either Port
Arthur Finance or Neches River because neither Port Arthur Finance nor
Neches River has independent operations.
PACC condensed consolidated financial information consisted of the
following:
Consolidated statement of operations:
Cumulative For the Period
From May 4, 1999 Ended June 30, 2000
(inception) to ---------------------------
June 30, 2000 Three Months Six Months
------------------ ------------- ------------
Operating expenses $ (1.9) $ (0.9) $ (1.9)
General and administrative expenses (3.4) (0.2) (0.3)
------------------ ------------- ------------
(5.3) (1.1) (2.2)
Interest and finance costs, net (11.9) (1.1) (1.1)
------------------ ------------- ------------
Net loss $ (17.2) $ (2.2) $ (3.3)
================== ============= ============
Consolidated balance sheet information:
December 31, June 30,
1999 2000
------------ ------------
Total current assets $ 0.9 $ 1.4
Construction in progress $ 378.4 $ 531.6
Total assets $ 446.6 $ 555.4
Total current liabilities $ 43.4 $ 42.0
Long term debt $ 360.0 $ 443.8
Partners' capital contributed $ 57.1 $ 86.8
Deficit accumulated during development stage $ 13.9 $ 17.2
Total liabilities and partners' capital $ 446.6 $ 555.4
7. Commitments and Contingencies
PACC, Sabine River, and Neches River have unconditionally, jointly
and severally guaranteed to each note holder:
* the due and punctual payment of principal and interest on the
notes;
* the performance by Port Arthur Finance of its obligations under
the indenture and other financing documents; and
* that its guarantor obligations will be as if it were principal
debtor and obligor and not merely a surety.
In July 1999, PACC entered into a contract for the engineering,
procurement and construction of PACC's Coker Project with Foster Wheeler
USA. Under this construction contract, Foster Wheeler USA will continue
to engineer, design, procure equipment for, construct, test, and oversee
start-up of the Coker Project and integrate the Coker Project with the
Port Arthur refinery of the Refining Group. Under the construction
contract, PACC will pay Foster Wheeler USA a fixed price of
approximately $544 million of which $157.1 million was credited to PACC
for amounts the Refining Group had already paid Foster Wheeler USA for
8
work performed on the Coker Project prior to August 1999. PACC
purchased this work in progress from the Refining Group when the
financings were consummated in August 1999. PACC and Foster Wheeler USA
have the ability to initiate changes to work under the contract that may
affect the final total price paid. The project's independent engineer
must approve changes in excess of $0.5 million individually or $5.0
million in the aggregate. The contract has provisions whereby Foster
Wheeler USA will pay PACC up to $145 million in damages for delays in
achieving mechanical completion or guaranteed reliability, based on a
defined formula. PACC is required to pay Foster Wheeler USA an early
completion bonus of up to $6 million if mechanical completion is
achieved prior to November 1, 2000. PACC can terminate the contract
with Foster Wheeler USA at any time upon written notice, at which time
it will be obligated to pay actual project costs to the date of
termination and other costs related to demobilizing, canceling
subcontractors, or withdrawing from the project site. Foster Wheeler
USA cannot terminate the contract unless PACC defaults on required
payments under the contract.
In August 1999, PACC entered into agreements with the Refining Group
pursuant to which PACC will receive certain operating, maintenance, and
other services from the Refining Group and will sell, at market prices,
the output from the new coking and hydrocracking equipment to the
Refining Group for further processing into finished products. PACC also
entered into agreements under which it will process certain hydrocarbon
streams owned by the Refining Group. In addition, PACC entered into
lease agreements under which it will lease the Refining Group's crude
unit, vacuum tower, two distillate hydrotreaters, and a naphtha
hydrotreater at the Port Arthur refinery as well as the site where
PACC's new processing units are located. PACC will receive and pay
compensation at what it believes to approximate fair market value under
these agreements. At June 30, 2000, PACC had a net outstanding payable
balance of $0.5 million (December 31, 1999 - $0.4 million) due to the
Refining Group consisting of a payable of $0.6 million for services
provided under a services and supply agreement and fees paid by the
Refining Group on PACC's behalf and a $0.1 million receivable for the
overpayment of such services in a prior period.
In August 1999, PACC purchased a long-term crude oil supply agreement
with P.M.I. Comercio Internacional, S. A. de C.V. ("PMI") from the
Refining Group for approximately $0.8 million. The contract includes a
gross margin support mechanism designed to provide a minimum average
coker gross margin over its initial term. Pursuant to the terms of the
contract, PMI will supply to PACC Maya crude oil for a price based on
published market prices for crude and refined products, as defined in
the contract. The contract extends for eight years from the later of
the start-up date of the coker, the scheduled completion date of January
2001, or the guarantee date of July 2001. The completion date is the
date the coker meets prescribed operating performance. If the
completion date extends beyond January 2001, PACC must pay PMI $400,000
per month for the first six months of delay and $200,000 per month for
up to an additional six months of delay thereafter to extend the
completion date or PMI may terminate the contract. PACC may terminate
the contract after paying PMI a termination payment of approximately
$170,000 per month after August 31, 1998 plus actual damages that PMI
has suffered. PACC does not currently anticipate the Coker Project
completion date being extended beyond January 2001.
In August 1999, PACC entered into an agreement with Air Products and
Chemicals, Inc. ("Air Products") to supply the hydrogen needs of the
Coker Project. Air Products will also supply steam and electricity to
PACC under this agreement. Prices under the contract are based on
market prices at the time of the contract, subject to adjustment
according to a formula based on inflation indices. Air Products will be
required to pay PACC liquidated damages of up to $1.2 million if the
plant fails to be ready for commercial operation on or before December
2000, and PACC will be required to pay Air Products liquidated damages
of up to $1.2 million if PACC is unable to start-up the coker for
initial operations prior to December 2000. PACC does not currently
anticipate the Coker Project initial start-up date being extended beyond
December 2000.
9
ITEM 2 - Management's Discussion and Analysis of Financial Condition
General
Sabine River Holding Corp., a Delaware corporation, and its
Subsidiaries (a development stage company) (the "Company" or "Sabine
River") was incorporated in May of 1999 and capitalized in August of
1999. The Company is the 1% general partner of Port Arthur Coker
Company L.P., a Delaware limited partnership, ("PACC") and the 100%
owner of Neches River Holding Corp. ("Neches River"), which is the 99%
limited partner of PACC. Sabine River is owned 90% by Premcor Inc.
(previously Clark Refining Holdings Inc.) and is owned 10% by Occidental
Petroleum Corporation ("Occidental"). After giving effect to
anticipated equity contributions to be made in connection with the
funding of the Coker Project, Premcor Inc. will be principally owned,
indirectly through subsidiaries, by Blackstone Capital Partners III
Merchant Banking Fund L.P. and its affiliates ("Blackstone") with
approximately an 82% interest, and by Occidental with approximately a
17% interest.
The Company's consolidated financial statements include the
operations of PACC, which is the principal, wholly-owned subsidiary of
the Company. PACC was formed to develop, construct, own, operate, and
finance a heavy oil processing facility that includes a new 80,000
barrel per stream day delayed coking unit, a 35,000 barrel per stream
day hydrocracker, a 417 long tons per day sulfur complex, and related
assets (the "Coker Project") at the Port Arthur, Texas refinery of an
affiliate, The Premcor Refining Group Inc. (the "Refining Group"). The Company
is an affiliate of the Refining Group because Premcor Inc. owns 100% of the
capital stock of Premcor USA Inc. ("Premcor USA"), which in turn owns
100% of the capital stock of the Refining Group. In addition, the
consolidated financial statements of the Company include Port Arthur
Finance Corp. ("Port Arthur Finance") and Neches River. The purpose of
Port Arthur Finance is solely to facilitate the financing activities of
the Coker Project by, among other things, issuing the 12.5% senior
secured notes due 2009 described below, and the purpose of Neches River
is solely to act as the 99% limited partner of PACC and to act as a
joint and several co-guarantor with PACC and Sabine River of the 12.5%
senior secured notes and the other debt of Port Arthur Finance. Each of
PACC, Neches River, and Sabine River have fully and unconditionally
guaranteed the 12.5% senior secured notes and the other debt of Port
Arthur Finance on a joint and several, senior secured basis. Because
PACC has significant independent operations, summarized financial data
for PACC is presented in Note 6, "PACC Condensed Consolidated Financial
Information" of the financial statements. No separate or summarized
financial statements are presented for Neches River and Port Arthur
Finance because Neches River and Port Arthur Finance have only nominal
assets and do not conduct any independent operations, and management
has determined that separate financial statements for Neches River
and Port Arthur Finance would not be material to investors.
The total cost of the Coker Project is estimated to be approximately
$715 million, including development, property acquisition, construction,
capitalized interest, testing and start-up, and an allowance for
estimated price escalation and contingencies. In order to fund the
Coker Project, the Company and Neches River entered into capital
contribution agreements in 1999 totaling $135 million and Port Arthur
Finance issued $255 million of 12.5% senior secured notes, entered
into a $325 million secured construction and term loan facility, and
obtained a $75 million secured working capital facility. Sabine River,
Neches River, and PACC are joint and several guarantors of the notes and
loans. Because PACC is the principal operating subsidiary of the
Company, a discussion of the Company's results of operations consists
principally of a discussion of the Coker Project and PACC's construction
activity and results of operations. Sabine River and Neches River as
stand-alone entities have no material assets, liabilities, or operations, other
than the guarantee obligations described above and their ownership interest
in PACC.
See the Form S-4 Registration Statement filed by Port Arthur
Finance with the Securities and Exchange Commission on April 19, 2000
for more information on the Coker Project.
10
Operations
Since inception, the Company and its subsidiaries have been in a
construction and pre-operation stage and have no material operating
revenues or expenses. The Company has recorded some expenses related to
insurance, taxes, and salaries.
The Coker Project overall was 85% complete as of June 30, 2000 with
100% of major equipment procurement, 100% of detailed design and
engineering, 100% of total materials procurement, and 75% of
construction completed as of June 30, 2000. Construction activities to
date have included the construction of the new coker, hydrocracker, and
sulfur complex and associated piping and wiring of the units and control
room. The current work is focused on piping and electrical testing,
training, and offsite construction. In June 2000, the project staffing
was approximately 1,950 people. All personnel except one were employees
of Foster Wheeler USA, its subcontractors, or the Refining Group, the
latter working under the services and support agreement with PACC, and
the former being the principal contractor responsible for all
construction of the Coker Project. The Coker Project staffing passed
its peak headcount of approximately 3,300 people in April 2000.
The Coker Project is expected to begin operations and revenue
generation in the first quarter of 2001 with operations in the initial
three to six months at less than full capacity. The Company currently
plans to turn over the sulfur plant to operations in September of 2000
and the coker and hydrocracker in late October or early November at
which time commissioning activities are expected to begin. This
schedule is subject to change. Operator training began on a full time
basis in May 2000. Once complete, the new heavy oil processing facility
will allow PACC to process an average of 200,000 barrels per stream day
of crude oil. At least 150,000 barrels per stream day of heavy sour
crude oil will be purchased from P.M.I. Comercio Internacional ("PMI")
under a long-term crude oil supply agreement.
In connection with the Coker Project, the Refining Group is
obligated to perform certain modifications and revamps to its crude and
other ancillary units at the Port Arthur refinery, which are leased to
PACC. In May 2000, the Refining Group completed a 33-day maintenance
turnaround at its Port Arthur refinery that included significant
modifications to the crude unit, increasing the rated crude oil
throughput capacity from 232,000 to 250,000 barrels per day, and to the
hydrotreaters thereby completing key parts of these obligations. Also
in conjunction with the Coker Project, Air Products and Chemicals, Inc.
is building a new hydrogen supply plant that will supply hydrogen for
the heavy oil processing facility under a long-term agreement, and the
Company believes the plant will be completed to allow an on time start-
up of the Company's operations.
Liquidity and Capital Resources
Cash flows used in investing activities were $534.9 million and
$107.7 million for the period from May 4, 1999 (date of inception) to
June 30, 2000 and for the six-month period ended June 30, 2000,
respectively. All proceeds from the Company's debt financings are
restricted for use on the construction, financing, and start-up
operations of the Coker Project. As a result, cash and cash equivalents
associated with the Coker Project were classified as a non-current asset
and the restricted cash and cash equivalent activity was reflected as
investing activity. Expenditures in 1999 and during the first six
months of 2000 were associated with the Coker Project.
The principal contract for the construction of the Coker Project
is a fixed price construction contract. Therefore, the primary
components the Company has, and will, manage are schedule and change
orders. The Coker Project is currently on schedule with the final
mechanical completion expected in November 2000. As of June 30, 2000,
change orders were less than $1.1 million with an additional $1.0
million still pending approval.
Cash flows from financing activities were principally shareholder
contributions received pursuant to capital contribution agreements and
11
additional draws on the secured construction and term loan facility. As
of June 30, 2000, Blackstone had contributed $78.1 million of the $121.5
million it had committed and Occidental had contributed $8.7 million of
the $13.5 million it had committed under the capital contribution
agreements. As of June 30, 2000, Port Arthur Finance had drawn $188.8
million of the $325.0 million available from the secured construction
and term loan facility.
In 1999, Port Arthur Finance entered into a $75 million working
capital facility that was reduced to $35 million in the first quarter of
2000. The working capital facility is primarily for the issuance of
letters of credit for the future purchases of crude oil other than the
Maya crude oil to be received under the long-term crude oil supply
agreement with PMI. As of June 30, 2000, there were no outstanding
letters of credit on this facility. The $40 million reduction, a
portion of which had been outstanding in the form of a letter of credit
to PMI to secure against a default by PACC under its long term crude oil
supply agreement, was replaced by an insurance policy under which an
affiliate of American International Group agreed to insure PMI against
PACC's default under the long term crude oil supply agreement up to a
maximum liability of $40 million.
Funds generated from the remainder of the $325 million secured
construction and term loan facility together with existing cash and cash
equivalents are expected to be adequate to fund existing requirements
for working capital, the construction of the Coker Project, and start-up
operations. Once operational, the Company's operating results will be
subject to rapid and wide fluctuations due to the commodity nature of
its feedstocks and products. The Company expects cash flow generated
from operating activities and existing financings to be sufficient to
provide the Company with adequate liquidity through the next year.
However, there can be no assurance that market conditions or actual
operations will not be worse than anticipated. Future working capital
and discretionary and mandatory capital expenditures may require
additional debt or equity capital.
Under the common security agreement, which contains common
covenants, representations, defaults and other terms with respect to the
12.5% senior secured notes due 2009, Port Arthur Finance's other debt
and the guarantees thereof by PACC, Sabine River, and Neches River, PACC
is subject to restrictions on the making of distributions to Sabine
River and Neches River until, among other things, the final completion
of the Coker Project has occurred. PACC may, however, make up to
$100,000 in distributions to Sabine River and Neches River each year to
permit them to pay directors' fees, accounting expenses, and other
administrative expenses.
On May 17, 2000, Port Arthur Finance consummated an exchange offer
for $251.5 million of its outstanding 12.5% senior secured notes due
2009 and issued in exchange therefore a like principal amount of 12.5%
senior secured notes due 2009. The exchange notes have the same terms
as Port Arthur Finance's old notes, except that the exchange notes are
registered under the Securities Act of 1933 and do not include the
restrictions on transfer applicable to the old notes. The exchange
notes and the old notes which remain outstanding are fully and
unconditionally guaranteed by Sabine River, Neches River, and PACC on a
senior secured basis.
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company entered into a transaction in April 2000 that placed a
7.5% London Interbank Offered Rate ("LIBOR") rate cap on the interest
rate for the following notional principal outstanding amounts of the
Company's floating rate secured construction and term loan (in
millions):
12
Last Date of
Calculation Notional Amount
Period Outstanding
------------ ----------------
15-Jul-00 $ 91.8
15-Oct-00 $ 125.2
15-Jan-01 $ 144.7
15-Jul-01 $ 162.5
15-Jan-02 $ 108.4
15-Jul-02 $ 81.2
15-Jan-03 $ 54.0
15-Jul-03 $ 30.7
15-Jan-04 $ 7.5
The interest rates on the Tranche A and B portion of the secured
construction and term loan are based on the LIBOR plus a margin. The
policy covers April 2000 through January 2004.
See the Form S-4 Registration Statement filed by Port Arthur
Finance with the Securities and Exchange Commission on April 19, 2000
for more information on Quantitative and Qualitative Disclosures about
Market Risk.
Forward-Looking Statements
Certain statements in this document are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements
are subject to the safe harbor provisions of this legislation. Words
such as "expects," "intends," "plans," "projects," "believes,"
"estimates" and similar expressions typically identify such forward-
looking statements.
Even though the Company believes its expectations regarding future
events are based on reasonable assumptions, forward-looking statements
are not guarantees of future performance. There are many reasons why
actual results could, and probably will, differ from those contemplated
in the Company's forward-looking statements. These include, among
others, changes in:
* Industry-wide refining margins
* Crude oil and other raw material costs, embargoes, industry
expenditures for the discovery and production of crude oil, and
military conflicts between, or internal instability in, one or more
oil-producing countries, and governmental actions
* Market volatility due to world and regional events
* Availability and cost of debt and equity financing
* Labor relations
* U.S. and world economic conditions
* Supply and demand for refined petroleum products
* Reliability and efficiency of the Company's operating facilities.
There are many hazards common to operating oil refining facilities.
Such hazards may include equipment malfunctions, plant
construction/repair delays, explosions, fires, oil spills and the
impact of severe weather
* Actions taken by competitors which may include both pricing and
expansion or retirement of refinery capacity
* The enforceability of contracts
* Civil, criminal, regulatory or administrative actions, claims or
proceedings and regulations dealing with protection of the
environment
* Other unpredictable or unknown factors not discussed
Because of all of these uncertainties, and others, you should not
place undue reliance on the Company's forward-looking statements.
13
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
14
SIGNATURE
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.
Sabine River Holding Corp.
(Registrant)
/s/ Dennis R. Eichholz
-----------------------------------
Dennis R. Eichholz
Controller and Treasurer (Principal
Accounting Officer)
August 11, 2000