UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------------- to ----------------
Commission File Number 1-3876
HOLLY CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1056913
---------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 871-3555
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
15,502,028 shares of Common Stock, par value $.01 per share, were outstanding on
June 9, 2003.
HOLLY CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Forward-Looking Statements 3
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited) -
April 30, 2003 and July 31, 2002 5
Consolidated Statement of Income (Unaudited) -
Three Months and Nine Months Ended April 30, 2003 and 2002 6
Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended April 30, 2003 and 2002 7
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months and Nine Months Ended April 30, 2003 and 2002 8
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 34
Item 4. Controls and Procedures 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 38
Certifications 39
Holly Corporation is filing this Amendment No. 2 to its Quarterly
Report on Form 10-Q for the quarter ended April 30, 2003, originally filed on
June 12, 2003 and amended on Form 10-Q/A on September 9, 2003, in response to
comments received from the Securities and Exchange Commission in order to comply
with Item 10(e) of Regulation S-K regarding the use of non-GAAP financial
measures. This Amendment No. 2 amends and restates in its entirety the original
Form 10-Q as amended, but continues to speak as of the date of the original
filing of the original Form 10-Q. Holly Corporation has not updated the
disclosure in this Amendment No. 2 to speak as of a later date. All information
contained in this amendment and the original Form 10-Q as amended is subject to
updating and supplementing as provided in the periodic reports filed subsequent
to the original filing date with the Securities and Exchange Commission.
PART I
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q/A contains certain "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts included
in this Form 10-Q/A, including without limitation those under "Results of
Operations," "Liquidity and Capital Resources" and "Additional Factors that May
Affect Future Results" (including "Risk Management") regarding the Company's
financial position and results of operations in Item 2 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Part I and
those in Item 1 "Legal Proceedings" in Part II, are forward-looking statements.
Such statements are subject to risks and uncertainties, including but not
limited to risks and uncertainties with respect to the actions of actual or
potential competitive suppliers of refined petroleum products in the Company's
markets, the demand for and supply of crude oil and refined products, the spread
between market prices for refined products and market prices for crude oil, the
possibility of constraints on the transportation of refined products, the
possibility of inefficiencies or shutdowns in refinery operations or pipelines,
effects of governmental regulations and policies, the availability and cost of
financing to the Company, the effectiveness of the Company's capital investments
and marketing strategies, the Company's efficiency in carrying out construction
projects, the successful integration of the Woods Cross refinery, the completion
of the proposed transaction with Frontier Oil Corporation, the possibility of
terrorist attacks and the consequences of any such attacks, and general economic
conditions. Should one or more of these risks or uncertainties, among others as
set forth in this Form 10-Q/A, materialize, actual results may vary materially
from those estimated, anticipated or projected. Although the Company believes
that the expectations reflected by such forward-looking statements are
reasonable based on information currently available to the Company, no
assurances can be given that such expectations will prove to have been correct.
Cautionary statements identifying important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
this Form 10-Q/A, including without limitation in conjunction with the
forward-looking statements included in this Form 10-Q/A that are referred to
above. This summary discussion of risks and uncertainties that may cause actual
results to differ from those indicated in forward-looking statements should be
read in conjunction with the discussion under the heading "Additional Factors
That May Affect Future Results" included in Item 7 of the Company's Annual
Report on Form 10-K/A for the fiscal year ended July 31, 2002 and in conjunction
with the discussion in this Form 10-Q/A in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under the headings "Liquidity
and Capital Resources" and "Additional Factors That May Affect Future Results."
All forward-looking statements included in this Quarterly Report on Form 10-Q/A
and all subsequent oral forward-looking statements attributable to the Company
or persons acting on its behalf are expressly
3
qualified in their entirety by the cautionary statements. The forward-looking
statements speak only as of the date made, other than as required by law, and
the Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
Unaudited
APRIL 30, JULY 31,
2003 2002
------------ --------------
(In thousands, except share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................. $ 38,050 $ 71,630
Accounts receivable: Product ....................................... 46,754 46,929
Crude oil resales ............................. 97,418 88,466
----------- --------------
144,172 135,395
Inventories: Crude oil and refined products ................ 54,853 35,120
Materials and supplies ........................ 10,483 10,188
----------- --------------
65,336 45,308
Income taxes receivable .................................................... - 8,699
Prepayments and other ...................................................... 19,464 17,812
----------- --------------
TOTAL CURRENT ASSETS..................................................... 267,022 278,844
Properties, plants and equipment, at cost ..................................... 439,586 410,987
Less accumulated depreciation, depletion and amortization ..................... (216,477) (211,526)
----------- --------------
223,109 199,461
Investments in and advances to joint ventures ................................. 15,214 15,732
Other assets: Prepaid transportation ........................ 25,000 -
Refinery acquisition deposit .................. 2,500 -
Other, net .................................... 9,054 8,269
----------- --------------
36,554 8,269
----------- --------------
TOTAL ASSETS ............................................................. $ 541,899 $ 502,306
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................................... $ 196,831 $ 185,058
Accrued liabilities ........................................................ 26,888 25,342
Income taxes payable ....................................................... 7,272 -
Current maturities of long-term debt ....................................... 8,571 8,571
----------- --------------
TOTAL CURRENT LIABILITIES................................................. 239,562 218,971
Deferred income taxes ......................................................... 32,912 29,065
Long-term debt, less current maturities ....................................... 17,143 25,714
Commitments and contingencies ................................................. - -
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value - 1,000,000 shares authorized; none
issued ................................................................... - -
Common stock, $.01 par value - 20,000,000 shares authorized;
16,873,896 and 16,759,396 shares issued as of April 30, 2003 and July 31,
2002...................................................................... 169 168
Additional capital ......................................................... 15,607 14,013
Retained earnings .......................................................... 249,005 223,770
----------- --------------
264,781 237,951
Common stock held in treasury, at cost -
1,371,868 and 1,197,968 shares as of April 30, 2003 and July 31, 2002 .... (12,499) (9,395)
----------- --------------
TOTAL STOCKHOLDERS' EQUITY ............................................... 252,282 228,556
----------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 541,899 $ 502,306
=========== ==============
See accompanying notes.
5
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
-------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ----------
(In thousands, except per share data)
SALES AND OTHER REVENUES ............................................... $ 312,180 $ 210,327 $ 858,198 $ 635,028
OPERATING COSTS AND EXPENSES
Cost of products sold (exclusive of depreciation,depletion,
and amortization) ................................................. 255,376 165,350 719,764 491,356
Operating expenses (exclusive of depreciation,depletion,
and amortization) ................................................. 28,439 23,717 78,768 71,729
Selling, general and administrative expenses (exclusive of
depreciation,depletion, and amortization) ......................... 7,057 5,452 17,597 16,110
Depreciation, depletion and amortization ............................ 8,979 6,884 23,336 20,029
Exploration expenses, including dry holes ........................... 233 282 711 824
--------- --------- --------- ---------
TOTAL OPERATING COSTS AND EXPENSES ............................. 300,084 201,685 840,176 600,048
--------- --------- --------- ---------
GAIN ON SALE OF ASSETS ................................................. 16,447 - 16,447 -
INCOME FROM OPERATIONS ................................................. 28,543 8,642 34,469 34,980
OTHER INCOME (EXPENSE)
Equity in earnings (loss) of joint ventures ......................... (690) 1,571 (86) 6,639
Interest income ..................................................... 172 217 649 1,264
Interest expense .................................................... (135) (622) (1,224) (2,320)
Reparations payment received ........................................ 15,226 - 15,226 -
Gain on sale of equity securities ................................... - - - 1,522
--------- --------- --------- ---------
14,573 1,166 14,565 7,105
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ............................................. 43,116 9,808 49,034 42,085
Income tax provision
Current ............................................................. 11,969 2,334 14,903 13,624
Deferred ............................................................ 4,446 1,275 3,779 2,525
--------- --------- --------- ---------
16,415 3,609 18,682 16,149
--------- --------- --------- ---------
NET INCOME ............................................................. $ 26,701 $ 6,199 $ 30,352 $ 25,936
========= ========= ========= =========
NET INCOME PER COMMON SHARE - BASIC .................................... $ 1.72 $ 0.40 $ 1.96 $ 1.67
========= ========= ========= =========
NET INCOME PER COMMON SHARE - DILUTED .................................. $ 1.67 $ 0.39 $ 1.90 $ 1.62
========= ========= ========= =========
CASH DIVIDENDS DECLARED PER COMMON SHARE ............................... $ 0.11 $ 0.10 $ 0.33 $ 0.30
========= ========= ========= =========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ............................................................... 15,493 15,581 15,509 15,549
Diluted ............................................................. 15,986 16,016 15,938 15,981
See accompanying notes.
6
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
NINE MONTHS ENDED
APRIL 30,
----------------------
2003 2002
-------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................ $ 30,352 $ 25,936
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization .......................... 23,336 20,029
Deferred income taxes ............................................. 3,779 2,525
Dry hole costs and leasehold impairment ........................... - -
Equity in earnings of joint ventures .............................. 86 (6,639)
Gain on sale of assets ............................................ (16,447) -
(Increase) decrease in current assets
Accounts receivable ............................................. (8,777) 16,657
Inventories ..................................................... (20,028) (12,160)
Income taxes receivable ......................................... 8,699 (6,068)
Prepayments and other ........................................... (1,584) (2,391)
Increase (decrease) in current liabilities
Accounts payable ................................................ 11,773 (3,744)
Accrued liabilities ............................................. 1,546 (3,225)
Income taxes payable ............................................ 7,272 (4,661)
Turnaround expenditures ........................................... (4,704) (13,957)
Prepaid transportation ............................................ (25,000) -
Other, net ........................................................ (2,441) (1,097)
-------- --------
NET CASH PROVIDED FOR OPERATING ACTIVITIES ....................... 7,862 11,205
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt ............................................. (8,571) (8,572)
Debt issuance costs ................................................... (635) -
Issuance of common stock upon exercise of options ..................... 1,595 1,506
Purchase of treasury stock ............................................ (3,104) (160)
Cash dividends ........................................................ (5,117) (4,663)
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES ........................... (15,832) (11,889)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment ......................... (47,556) (20,816)
Refinery acquisition deposit .......................................... (2,500) -
Investments and advances to joint ventures ............................ (78) -
Distributions from joint ventures ..................................... 524 8,250
Proceeds from the sale of partial interest in joint venture ........... - 460
Proceeds from sale of marketable equity securities .................... - 4,500
Proceeds from the sale of pipeline assets ............................. 24,000 -
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES ........................... (25,610) (7,606)
-------- --------
CASH AND CASH EQUIVALENTS
DECREASE FOR THE PERIOD ............................................... (33,580) (8,290)
Beginning of year ..................................................... 71,630 65,840
-------- --------
END OF PERIOD ......................................................... $ 38,050 $ 57,550
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest ......................................................... $ 1,859 $ 2,303
Income taxes ..................................................... $ 6,365 $ 23,958
See accompanying notes.
7
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands)
NET INCOME ....................................................................... $ 26,701 $ 6,199 $ 30,352 $ 25,936
Other comprehensive income (loss)
Reclassification adjustment to net income on sale of equity securities ....... - - - (1,522)
Derivative instruments qualifying as cash flow hedging instruments
Change in fair value of derivative instruments ............................. 102 218 (108) (1,188)
Reclassification adjustment into net income ................................ 108 1,029 108 3,116
-------- -------- -------- --------
Total income on cash flow hedges ............................................. 210 1,247 - 1,928
-------- -------- -------- --------
Other comprehensive income before income taxes ............................... 210 1,247 - 406
Income tax expense ........................................................... 80 488 - 163
-------- -------- -------- --------
Other comprehensive income ....................................................... 130 759 - 243
-------- -------- -------- --------
TOTAL COMPREHENSIVE INCOME ....................................................... $ 26,831 $ 6,958 $ 30,352 $ 26,179
======== ======== ======== ========
See accompanying notes.
8
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's consolidated financial position as of April 30,
2003, the consolidated results of operations and comprehensive income for the
three months and nine months ended April 30, 2003 and 2002, and consolidated
cash flows for the nine months ended April 30, 2003 and 2002.
Certain notes and other information have been condensed or omitted,
therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K/A for the fiscal year ended July 31, 2002.
References herein to the "Company" are for convenience of presentation
and may include obligations, commitments or contingencies that pertain solely to
one or more affiliates of the Company. Results of operations for the first nine
months of fiscal 2003 are not necessarily indicative of the results to be
expected for the full year.
Note B - New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" which changes how goodwill and other intangible assets are
accounted for subsequent to their initial recognition. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, with early adoption
permitted; however, all goodwill and intangible assets acquired after June 30,
2001, are immediately subject to the provisions of this statement. The Company
adopted the standard effective August 1, 2002 and there was no material effect
on its financial condition, results of operations, or cash flows.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" which requires that the fair value for an asset retirement
obligation be capitalized as part of the carrying amount of the long-lived asset
if a reasonable estimate of fair value can be made. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company adopted the standard effective August 1, 2002 and there was no
material effect on the Company's financial condition, results of operations, or
cash flows.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", but carries over the key guidance from SFAS No. 121 in
establishing the framework for the recognition and measurement of long-lived
assets to be disposed of by sale and addresses significant implementation
issues. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, with early adoption permitted. The Company adopted the standard effective
August 1, 2002 and there was no material effect on its financial condition,
results of operations, or cash flows.
9
HOLY CORPORATION
In June 2002, FASB issued SFAS No. 146 "Accounting for Certain Costs
Associated with Exit or Disposal Activities" which nullifies Emerging Issues
Task Force ("EITF") 94-3 and requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
and establishes fair value as the objective for initial measurement of
liabilities. This differs from EITF 94-3 which stated that liabilities for exit
costs were to be recognized as of the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted SFAS No. 146 on January
1, 2003, and the standard had no effect on its financial condition, results of
operations, or cash flows.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure", an amendment of SFAS No. 123. This
statement provides alternative methods of transition to SFAS 123's fair value
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to require disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. SFAS 148's amendment of the disclosure requirements is
effective for interim periods beginning after December 15, 2002. SFAS 148's
amendment of the transition and annual disclosure requirements of SFAS 123 are
effective for fiscal years ending after December 15, 2002. See Note D to
Consolidated Financial Statements for effect of this standard on the Company's
financial condition, results of operations, or cash flows.
In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement will result in a more complete depiction of an entity's liabilities
and equity and will, thereby, assist investors and creditors in assessing the
amount, timing, and likelihood of potential future cash outflows and equity
share issuances. This statement is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company expects that the standard will have no
effect on its financial condition, results of operations, or cash flows.
The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, "Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. As of
April 30, 2003, the Company had approximately $11.6 million of deferred
maintenance costs, all relating to refinery turnarounds in prior periods, which
are being amortized over various benefit periods. The current monthly
amortization is $782,000. If this proposed Statement of Position had been
adopted in its current form, as of April 30, 2003, the Company would have been
required to expense $11.6 million of deferred maintenance costs and would be
required to expense all future turnaround costs as incurred.
10
HOLLY CORPORATION
Note C - Earnings Per Share
Basic income per share is calculated as net income divided by average
number of shares of common stock outstanding. Diluted income per share assumes,
when dilutive, issuance of the net incremental shares from stock options. In
2000 options to purchase 50,000 shares of common stock were not included in
computing diluted income per share because their effects were antidilutive. The
following is a reconciliation of the numerators and denominators of the basic
and diluted per share computations for net income:
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------- -----------------------
2003 2002 2003 2002
-------- --------- ---------- ---------
(In thousands, except per share data)
Net income........................ ................... $ 26,701 $ 6,199 $ 30,352 $ 25,936
Average number of shares of common stock outstanding.. 15,493 15,581 15,509 15,549
Effect of dilutive stock options...................... 493 435 429 432
-------- --------- ---------- ---------
Average number of shares of common stock
outstanding assuming dilution................. 15,986 16,016 15,938 15,981
======== ========= ========== =========
Income per share - basic.............................. $ 1.72 $ 0.40 $ 1.96 $ 1.67
======== ========= ========== =========
Income per share - diluted............................ $ 1.67 $ 0.39 $ 1.90 $ 1.62
======== ========= ========== =========
Note D - Stock-based Compensation
The Company has stock option plans under which certain officers and
employees have been granted options. All the options have been granted at prices
equal to the market value of the shares at the time of the grant and expire on
the tenth anniversary of the grant date. The Company's stock-based compensation
is measured in accordance with the provisions of Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, no compensation expense is recognized for fixed
option plans because the exercise prices of Employee stock options equal or
exceed the market prices of the underlying stock on the dates of grant.
The following table represents the effect on net income and earnings
per share if the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," to stock based Employee compensation.
11
HOLLY CORPORATION
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------- -----------------------
2003 2002 2003 2002
-------- --------- ---------- ---------
(In thousands, except share data)
Net income, as reported............................. $ 26,701 $ 6,199 $ 30,352 $ 25,936
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects 113 113 339 353
-------- --------- ---------- ---------
Pro forma net income................................ $ 26,588 $ 6,086 $ 30,013 $ 25,583
======== ========= ========== =========
Net income per share - basic
As reported........................................ $ 1.72 $ 0.40 $ 1.96 $ 1.67
Pro forma.......................................... $ 1.72 $ 0.39 $ 1.94 $ 1.65
Net income per share - diluted
As reported........................................ $ 1.67 $ 0.39 $ 1.90 $ 1.62
Pro forma.......................................... $ 1.66 $ 0.38 $ 1.88 $ 1.60
Note E - Investments in Joint Ventures
The Company currently has a 49% interest in NK Partners, a joint
venture that manufactures and markets asphalt products from various terminals in
Arizona and New Mexico. The Company accounts for earnings using the equity
method. The Company's Navajo Refinery sells at market prices all of its produced
asphalt to the joint venture. Sales to the joint venture during the three months
ended April 30, 2003 and 2002 were $5.9 million and $4.9 million, respectively.
Sales to the joint venture during the nine months ended April 30, 2003 and 2002
were $18.5 million and $14.8 million, respectively.
NK Asphalt Partners Joint Venture (Unaudited):
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------- -----------------------
2003 2002 2003 2002
-------- --------- ---------- ---------
(In thousands) (In thousands)
Sales (net)......................................... $ 13,057 $ 14,259 $ 50,990 $ 59,488
======== ========= ========== =========
Gross Profit........................................ $ 1,602 $ 4,962 $ 7,135 $ 17,377
======== ========= ========== =========
Income (loss) from operations....................... $ (1,065) $ 2,548 $ (381) $ 12,578
======== ========= ========== =========
Net income (loss) before taxes...................... $ (1,507) $ 2,136 $ (1,699) $ 11,412
======== ========= ========== =========
12
HOLLY CORPORATION
Note F - Debt
In May 2003, the Company amended its Revolving Credit Agreement with a
group of banks led by Canadian Imperial Bank of Commerce and increased the
commitment from $75 million to $100 million. The Company now has access to $100
million of commitments that can be used for revolving credit loans and letters
of credit. Previously the Company had access to $75 million of commitments, of
which only $37.5 million could be used for revolving credit loans. The Company
borrowed $10 million under the Revolving Credit Agreement in the quarter ended
April 30, 2003, all of which was paid back during the quarter. At April 30,
2003, the Company had letters of credit outstanding under the facility of $12.7
million and had no borrowings outstanding.
Note G - Environmental
The Company expenses environmental costs if they relate to an existing
condition caused by past operations and do not contribute to current or future
revenue generations. Liabilities are recorded when site restoration and
environmental remediation and cleanup obligations are either known or considered
probable and can be reasonably estimated. Recoveries of environmental costs
through insurance, indemnification arrangements or other sources are included in
other assets to the extent such recoveries are considered probable. Consistent
with our accounting policy, the Company recorded $2.6 million for environmental
remediation and cleanup obligations in the quarter ended April 30, 2003, which
are included in Accrued liabilities on the Consolidated Balance Sheet. Costs of
future expenditures for environmental remediation obligations are not discounted
to their present value.
Note H - Stockholders' Equity
On October 30, 2001, the Company announced plans to repurchase up to
$20 million of the Company's common stock. Such repurchases have been made from
time to time in open market purchases or privately negotiated transactions,
subject to price and availability. The repurchases have been financed with
currently available corporate funds. During the nine months ended April 30,
2003, the Company repurchased 173,900 shares at a cost of approximately $3.1
million or an average of $17.85 per share. From inception of the plan through
June 9, 2003, the Company has repurchased 272,400 shares at a cost of
approximately $4.7 million.
Note I - Derivative Instruments and Hedging Activities
In fiscal 2001, the Company entered into commodity price swaps and
collar options to help manage the exposure to price volatility relating to
forecasted purchases of natural gas from May 2001 through May 2002. These
transactions were designated as cash flow hedges of forecasted purchases. During
the nine months ended April 30, 2002, the Company marked the value of the
outstanding hedges to fair value in accordance with SFAS No. 133 and included
$1.9 million of income in comprehensive income. Gains (losses) on the natural
gas hedges were reclassified from comprehensive income to operating expenses
through May 2002 when the forecasted transactions impacted earnings.
13
HOLLY CORPORATION
The Company's profitability depends largely on the spread between
market prices for refined products and market prices for crude oil. A
substantial or prolonged reduction in this spread could have a significant
negative effect on the Company's earnings, financial condition and cash flows.
At times, the Company utilizes petroleum commodity futures contracts to minimize
a portion of its exposure to price fluctuations associated with crude oil and
refined products. In December 2002, the Company entered into cash flow hedges
relating to certain forecasted transactions to buy crude oil and sell gasoline
in March 2003. The purpose of the hedges is to help protect the Company from the
risk that the refined product margin would decline with respect to the hedged
crude oil and refined products. To effect the hedges, the Company entered into
gasoline and crude oil futures transactions. During the quarter ended April 30,
2003, the Company marked the value of the outstanding hedges to fair value in
accordance with SFAS No. 133 and included $102,000 of gain in comprehensive
income. In March 2003, as the forecasted transactions occurred, the Company
reclassified $108,000 of actual losses from comprehensive income to cost of
sales. The ineffective portion of the hedges resulted in a $32,000 gain that was
also included in cost of sales. During the fiscal quarter ended April 30, 2003,
the Company also entered into commodity derivative contracts to help protect
refined product margins, which the Company defines as the difference between
refined product sales prices and the costs for crude oil and other feedstocks
exclusive of depreciation, depletion and amortization, that while an economic
hedge, did not qualify for hedge accounting treatment. The Company realized a
gain of $302,000 which was included in cost of sales. As of April 30, 2003,
there were no hedges outstanding.
Note J - Segment Information
The Company has two major business segments: Refining and Pipeline
Transportation. The Refining segment involves the refining of crude oil and
wholesale marketing of refined products, such as gasoline, diesel fuel and jet
fuel, and includes the Company's Navajo Refinery and Montana Refinery. The
petroleum products produced by the Refining segment are marketed in the
southwestern United States, Montana and northern Mexico. Certain pipelines and
terminals operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Refining segment also includes
the equity earnings from the Company's 49% interest in NK Asphalt Partners,
which manufactures and markets asphalt and asphalt products in Arizona and New
Mexico. Prior to March 2003, the Company's Pipeline Transportation segment
included approximately 1,000 miles of pipeline assets in Texas and New Mexico.
In March 2003, the Company sold the 400 mile Iatan crude oil gathering system
located in West Texas to Plains Marketing L.P. Revenues of the Pipeline
Transportation segment are earned through transactions with unaffiliated parties
for pipeline transportation, rental and terminalling operations. Pipeline
Transportation segment revenues do not include any amount relating to pipeline
transportation services provided for the Company's refining operations. The
Pipeline Transportation segment also includes the equity earnings from the
Company's 25% interest in Rio Grande Pipeline Company, which provides petroleum
products transportation. Operations of the Company that are not included in the
two reportable segments are included in Corporate and Other, which includes
costs of Holly Corporation, the parent company, consisting primarily of general
and administrative expenses and interest charges, as well as a small-scale oil
and gas exploration and production program, and a small equity investment in
retail gasoline stations and convenience stores.
The accounting policies for the segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K/A for the year ended July 31, 2002. The Company's
reportable segments are strategic business units that offer
14
HOLLY CORPORATION
different products and services.
TOTAL FOR
PIPELINE REPORTABLE CORPORATE CONSOLIDATED
REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL
---------- -------------- ---------- --------- ------------
(In thousands)
THREE MONTHS ENDED APRIL 30, 2003
Sales and other revenues.................. $ 307,715 $ 3,742 $ 311,457 $ 723 $ 312,180
Depreciation and amortization............. $ 8,262 $ 220 $ 8,482 $ 497 $ 8,979
Income (loss) from operations............. $ 14,446 $ 17,917 $ 32,363 $ (3,820) $ 28,543
Income (loss) before income taxes......... $ 28,742 $ 18,077 $ 46,819 $ (3,703) $ 43,116
THREE MONTHS ENDED APRIL 30, 2002
Sales and other revenues.................. $ 205,692 $ 4,294 $ 209,986 $ 341 $ 210,327
Depreciation and amortization............. $ 6,381 $ 327 $ 6,708 $ 176 $ 6,884
Income (loss) from operations............. $ 8,409 $ 2,593 $ 11,002 $ (2,360) $ 8,642
Income (loss) before income taxes......... $ 9,339 $ 3,199 $ 12,538 $ (2,730) $ 9,808
NINE MONTHS ENDED APRIL 30, 2003
Sales and other revenues.................. $ 842,926 $ 13,742 $ 856,668 $ 1,530 $ 858,198
Depreciation and amortization............. $ 20,869 $ 935 $ 21,804 $ 1,532 $ 23,336
Income (loss) from operations............. $ 19,933 $ 23,743 $ 43,676 $ (9,207) $ 34,469
Income (loss) before income taxes......... $ 33,434 $ 24,922 $ 58,356 $ (9,322) $ 49,034
NINE MONTHS ENDED APRIL 30, 2002
Sales and other revenues.................. $ 620,367 $ 13,395 $ 633,762 $ 1,266 $ 635,028
Depreciation and amortization............. $ 18,372 $ 1,037 $ 19,409 $ 620 $ 20,029
Income (loss) from operations............. $ 34,146 $ 7,579 $ 41,725 $ (6,745) $ 34,980
Income (loss) before income taxes......... $ 39,342 $ 8,816 $ 48,158 $ (6,073) $ 42,085
Note K - Contingencies
In November 2002, the Company settled by agreement litigation brought
in August 1998 by Longhorn Partners Pipeline, L.P. ("Longhorn Partners") against
the Company in a state court in El Paso, Texas and litigation brought in August
2002 by the Company against Longhorn Partners and related parties in a state
court in Carlsbad, New Mexico. Under the settlement agreement, which was
developed in voluntary mediation, in November 2002, the Company paid $25 million
to Longhorn Partners as a prepayment for the transportation of 7,000 barrels per
day of refined products from the Gulf Coast to El Paso for a period of up to 6
years from the date of the Longhorn Pipeline's start-up. Longhorn Partners has
also issued to the Company an unsecured $25 million promissory note,
subordinated to certain other indebtedness, that would become payable with
interest in the event that the Longhorn Pipeline does not begin operations by
July 1, 2004, or to the extent Longhorn Partners is unable to provide the
Company the full amount of the agreed transportation services. In the unaudited
consolidated balance sheet at April 30, 2003, the $25 million settlement is
reflected in Assets as "Other assets - Prepaid transportation."
In September 2002, the Federal Energy Regulatory Commission ("FERC")
issued an order in proceedings brought by the Company and other parties against
Kinder Morgan's SFPP, L.P. ("SFPP") relating to tariffs of common carrier
pipelines, which are owned and operated by SFPP, for shipments of refined
products from El Paso, Texas to Tucson and Phoenix, Arizona and from points in
California to points in Arizona. The Company is one of several refiners that
15
HOLLY CORPORATION
regularly utilize an SFPP pipeline to ship refined products from El Paso, Texas
to Tucson and Phoenix, Arizona. The September 2002 order resolved most remaining
issues relating to SFPP's tariffs on the pipelines to points in Arizona,
including issues related to payments made by the Company for shipments of
petroleum products from El Paso, Texas to Tucson and Phoenix, Arizona
principally for the period from 1993 through July 2000. On January 29, 2003, the
FERC issued an order accepting most of the computations prepared by SFPP
pursuant to the September 2002 order and requiring a change in one item. In
April 2003, the Company received $15.2 million from Kinder Morgan as payment for
the reparations ordered by FERC and such amount has been included as reparations
payment received in net income for the fiscal quarter ended April 30, 2003. In
June 2003 the FERC issued a further order requiring an adjustment in the
computations which is expected to result in a small additional payment to the
Company. The final FERC decision in this case is subject to judicial review by
the Court of Appeals for the District of Columbia Circuit. In the event SFPP
prevails in whole or in part in such judicial review, the reparations actually
owed may be less than the $15.2 million and in that event part or all of the
$15.2 million received by the Company in April 2003 would have to be refunded.
At the date of this report, it is not possible to predict the result of judicial
review proceedings on this matter in the Court of Appeals for the District of
Columbia Circuit.
Note L - Sale of Pipeline Assets
On March 3, 2003, the Company sold its Iatan crude oil gathering
pipeline system located in West Texas to Plains Marketing L.P. for a purchase
price of $24 million in cash. In connection with the transaction, the Company
and Plains entered into a six and one-half year agreement which commits the
Company to transport any crude oil purchased by the Company in the relevant area
on the Iatan system at an agreed upon tariff. The sale resulted in a pre-tax
gain for the Company of approximately $16.4 million.
16
HOLLY CORPORATION
Note M - Frontier Oil Corporation and Holly Corporation Merger Agreement
On March 31, 2003, Frontier and the Company announced an agreement
pursuant to which the two companies will merge. The merged company will be
called Frontier Oil Corporation and will be headquartered in Houston, Texas.
Following the merger, the combined company will own five refineries with
refining capacity in excess of 260,000 barrels-per-day including several highly
complex, niche refineries. Terms of the deal provide for the Company's
stockholders to receive one share of Frontier common stock for each share of
Holly common stock, plus an aggregate cash payment of $172.5 million or
approximately $11.13 per common share based on the current number of outstanding
Holly shares. Holly has approximately 15.5 million common shares outstanding,
and Frontier has approximately 26.1 million common shares outstanding. Holly
stockholders will also retain a non-transferable interest in potential future
recoveries in litigation related to past sales of jet fuel to the United States
government. The transaction is expected to be non-taxable to the shareholders of
both companies, except for the cash consideration and contingent value rights to
be received by Holly stockholders. The agreement between the companies contains
reciprocal provisions for the payment of $15 million termination fees under
certain circumstances.
In May 2003, Frontier and the Company announced that the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act had expired, satisfying
one of the conditions to the completion of the pending merger of Frontier and
Holly. As discussed in Note K, effective June 1, 2003, the Company closed its
acquisition of the Woods Cross refinery which was another condition to the
completion of the merger with Frontier. Completion of the merger is expected in
the third calendar quarter of 2003. A registration statement on Form S-4
relating to the merger was filed with the Securities and Exchange Commission on
May 13, 2003 by Front Range Himalaya Corporation.
Note N - Subsequent Event - Refinery Acquisition
Effective June 1, 2003, the Company closed the acquisition of the Woods
Cross refinery, located near Salt Lake City, Utah, and related assets, including
a refined products terminal in Spokane, WA, and a 50% ownership interest in
refined products terminals in Boise and Burley, Idaho, from ConocoPhillips. The
assets were purchased for cash in the amount equal to $25 million less $3.8
million for certain assumed pension obligations plus $41 million for crude oil,
refined product and other inventories. The pension obligation and inventory
value are subject to adjustment. The Woods Cross refinery has a crude oil
capacity of 25,000 barrels per day and has operated at close to capacity over
the last three years. The purchase also included certain pipelines and other
transportation assets used in connection with the refinery, 25 retail service
stations located in Utah and Wyoming, and a 10-year exclusive license to market
fuels under the Phillips brand in the states of Utah, Wyoming, Idaho and
Montana. The purchase was financed from existing working capital and a $25
million borrowing under the Company's credit facility.
17
HOLLY CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Item 2, including but not limited to the sections on "Liquidity
and Capital Resources" and "Additional Factors that May Affect Future Results,"
contains "forward-looking" statements. See "Forward-Looking Statements" at the
beginning of Part I.
RESULTS OF OPERATIONS
FINANCIAL DATA(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands, except per share data)
Sales and other revenues ..................................... $ 312,180 $ 210,327 $ 858,198 $ 635,028
Operating costs and expenses
Cost of products sold (exclusive of depreciation, depletion,
and amortization) ....................................... 255,376 165,350 719,764 491,356
Operating expenses (exclusive of depreciation, depletion,
and amortization) ....................................... 28,439 23,717 78,768 71,729
Selling, general and administrative expenses (exclusive of
depreciation, depletion, and amortization) .............. 7,057 5,452 17,597 16,110
Depreciation, depletion and amortization .................. 8,979 6,884 23,336 20,029
Exploration expenses, including dry holes ................. 233 282 711 824
--------- --------- --------- ---------
Total operating costs and expenses ................... 300,084 201,685 840,176 600,048
--------- --------- --------- ---------
Gain on sale of assets ....................................... 16,447 - 16,447 -
Income from operations ....................................... 28,543 8,642 34,469 34,980
Other income (expense)
Equity in earnings of joint ventures ...................... (690) 1,571 (86) 6,639
Interest expense, net ..................................... 37 (405) (575) (1,056)
Reparations payment received .............................. 15,226 - 15,226 -
Gain on sale of equity securities ......................... - - - 1,522
--------- --------- --------- ---------
14,573 1,166 14,565 7,105
--------- --------- --------- ---------
Income before income taxes ................................... 43,116 9,808 49,034 42,085
Income tax provision ......................................... 16,415 3,609 18,682 16,149
--------- --------- --------- ---------
Net income ................................................... $ 26,701 $ 6,199 $ 30,352 $ 25,936
========= ========= ========= =========
Net income per common share - basic .......................... $ 1.72 $ 0.40 $ 1.96 $ 1.67
Net income per common share - diluted ........................ $ 1.67 $ 0.39 $ 1.90 $ 1.62
Average number of common shares outstanding:
Basic ...................................................... 15,493 15,581 15,509 15,549
Diluted .................................................... 15,986 16,016 15,938 15,981
18
HOLLY CORPORATION
BALANCE SHEET DATA (UNAUDITED)
APRIL 30, JULY 31,
2003 2002
------------ ------------
(In thousands, except ratio data)
Cash and cash equivalents .......................... $ 38,050 $ 71,630
Working capital .................................... $ 27,460 $ 59,873
Total assets ....................................... $ 541,899 $ 502,306
Total long-term debt, including current maturities.. $ 25,714 $ 34,285
Stockholders' equity ............................... $ 252,282 $ 228,556
Total debt to capitalization ratio(1) .............. 9.2% 13.0%
(1) The total long-term debt to capitalization ratio is calculated by
dividing total long-term debt including current maturities by the sum
of total long-term debt including current maturities and stockholders'
equity.
OTHER FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands) (In thousands)
Sales and other revenues (1)
Refining ........................................... $ 307,715 $ 205,692 $ 842,926 $ 620,367
Pipeline Transportation ............................ 3,742 4,294 13,742 13,395
Corporate and Other ................................ 723 341 1,530 1,266
--------- --------- --------- ---------
Consolidated ....................................... $ 312,180 $ 210,327 $ 858,198 $ 635,028
========= ========= ========= =========
Income (loss) from operations (1)
Refining ........................................... $ 14,446 $ 8,409 $ 19,933 $ 34,146
Pipeline Transportation ............................ 17,917 2,593 23,743 7,579
Corporate and Other ................................ (3,820) (2,360) (9,207) (6,745)
--------- --------- --------- ---------
Consolidated ....................................... $ 28,543 $ 8,642 $ 34,469 $ 34,980
========= ========= ========= =========
Net cash provided by operating activities ............. $ 18,406 $ 17,677 $ 7,862 $ 11,205
Net cash used by financing activities ................. $ (2,185) $ (1,558) $ (15,832) $ (11,889)
Net cash provided (used) by investing activities ...... $ 4,078 $ (6,823) $ (25,610) $ (7,606)
Capital expenditures .................................. $ 19,922 $ 8,133 $ 47,556 $ 20,816
EBITDA (2) ............................................ $ 52,058 $ 17,097 $ 72,945 $ 63,170
(1) The Refining segment includes the Company's principal refinery in
Artesia, New Mexico, which is operated in conjunction with refining
facilities in Lovington, New Mexico (collectively, the Navajo Refinery)
and the Company's refinery near Great Falls, Montana. Included in the
Refining Segment are costs relating to pipelines and terminals that
operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Pipeline
Transportation segment includes approximately 1,000 miles
(approximately 600 miles after the sale of pipelines as described in
Note L of the Consolidated Financial Statements) of the Company's
pipeline assets in Texas and New Mexico. Revenues of the Pipeline
Transportation segment are earned through transactions with
unaffiliated parties for pipeline transportation, rental and
terminalling operations.
19
HOLLY CORPORATION
(2) Earnings before interest, taxes, depreciation and amortization -
EBITDA is calculated as net income plus (i) interest expense net of
interest income, (ii) income tax provision, and (iii) depreciation,
depletion and amortization. EBITDA is not a calculation based upon
generally accepted accounting principles: however, the amounts included
in the EBITDA calculation are derived from amounts included in the
consolidated financial statements of Holly. EBITDA should not be
considered as an alternative to net income or operating income, as an
indication of operating performance of Holly or as an alternative to
operating cash flow as a measure of liquidity. EBITDA is not
necessarily comparable to similarly titled measures of other companies.
EBITDA is presented here because it enhances an investor's
understanding of Holly's ability to satisfy principal and interest
obligations with respect to Holly's indebtedness and to use cash for
other purposes, including capital expenditures. EBITDA is also used by
Holly management for internal analysis and as a basis for financial
covenants. Our EBITDA presented above is reconciled to net income as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands) (In thousands)
Net Income ............................. $ 26,701 $ 6,199 $ 30,352 $ 25,936
Add provision for income tax ........ 16,415 3,609 18,682 16,149
Add interest expense ................ 135 622 1,224 2,320
Subtract interest income ............ (172) (217) (649) (1,264)
Add depreciation and amortization ... 8,979 6,884 23,336 20,029
--------- --------- --------- ---------
EBITDA ................................. $ 52,058 $ 17,097 $ 72,945 $ 63,170
========= ========= ========= =========
REFINING SEGMENT OPERATING DATA (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Crude charge (BPD) (1) ..................................... 60,500 63,400 63,300 58,500
Sales of refined products (BPD) (2) ........................ 80,700 76,600 81,700 74,500
Average sales price per sales barrel ....................... $ 42.84 $ 30.26 $ 37.77 $ 30.43
Sales of produced refined products (BPD) ................... 66,300 69,700 69,500 64,500
Average sales price per produced barrel .................... $ 41.94 $ 30.04 $ 37.25 $ 30.36
Reconciliation of Sales and other revenues in
Consolidated Financial Statements
(Also see Note H to Consolidated Financial
Statements)
Sales of refined product (BPD) ............................. 80,700 76,600 81,700 74,500
Average sales price per sales barrel ....................... $ 42.84 $ 30.26 $ 37.77 $ 30.43
Refinery segment sales and other revenues (3) .............. $ 307,715 $ 205,692 $ 842,926 $ 620,367
Pipeline transportation segment sales and other revenues ... $ 3,742 $ 4,294 $ 13,742 $ 13,395
Corporate and Other sales and other revenues ............... $ 723 $ 341 $ 1,530 $ 1,266
--------- --------- --------- ---------
Consolidated Sales and other revenues ...................... $ 312,180 $ 210,327 $ 858,198 $ 635,028
========= ========= ========= =========
(1) Crude charge represents the barrels per day of crude oil processed through
the crude units at the Company's refineries.
(2) Includes refined products purchased for resale representing 14,300 BPD,
6,900 BPD, 12,200 BPD and 10,000 BPD, respectively.
(3) In addition to revenues from sales of refined products, the refining
segment includes other miscellaneous revenues amounting to $25, ($603),
$500, and $1,466, respectively.
20
HOLLY CORPORATION
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sales of produced refined products
Gasolines ...................... 58.3% 58.2 57.6% 56.3%
Diesel fuels ................... 21.9% 21.4 21.6% 21.2%
Jet fuels ...................... 9.3% 10.2 9.9% 10.5%
Asphalt ........................ 6.8% 6.1 7.3% 8.3%
LPG and other .................. 3.7% 4.1 3.6% 3.7%
-------- -------- -------- --------
Total ..................... 100.0% 100.0 100.0% 100.0%
======== ======== ======== ========
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 2003
COMPARED WITH THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 2002
Summary
Net income for the three months ended April 30, 2003 was $26.7 million
($1.72 per basic share and $1.67 per diluted share) compared to net income of
$6.2 million ($.40 per basic share and $.39 per diluted share) for the three
months ended April 30, 2002. For the nine months ended April 30, 2003, net
income was $30.4 million ($1.96 per basic share and $1.90 per diluted share)
compared to $25.9 million ($1.67 per basic share and $1.62 per diluted share)
for the nine months ended April 30, 2002.
Net income before taxes for the third quarter ended April 30, 2003
increased by $33.3 million as compared to the prior year's third quarter
primarily due to the $15.2 million reparation payment received from Kinder
Morgan as discussed in Note K to Consolidated Financial Statements, $16.4
million gain on the sale of pipeline assets to Plains Marketing L.P. as
discussed in Note L to Consolidated Financial Statements, and $11.8 million from
improved refined product margins, which the Company defines as the difference
between refined product sales prices and the costs for crude oil and other
feedstocks exclusive of depreciation, depletion and amortization, offset by $8.4
million of higher operating, depreciation and administrative costs.
Net income before taxes for the nine months ended April 30, 2003
increased by $6.9 million compared to the nine months ended April 30, 2002 due
to the $15.2 million reparation payment received as discussed in Note K to
Consolidated Financial Statements, $16.4 million gain on sale of pipeline assets
as discussed in Note L to Consolidated Financial Statements offset by $5.9
million in lower refined product margins, $11.8 million of higher operating,
depreciation and administrative costs and $1.1 million in losses rather than
$5.5 million in earnings from the asphalt joint venture.
Three Months Ended April 30, 2003 Compared with Three Months Ended April 30,
2002
For the third fiscal quarter of 2003, the Company's net income was
$26.7 million compared to net income of $6.2 million in the third fiscal quarter
of 2002. The $33.3 million net increase in net income before taxes for the third
quarter ended April 30, 2003 as compared to the prior year's third quarter was
due to the $15.2 million reparation payment as discussed in Note K to
Consolidated Financial Statements, $16.4 million gain on the sale of pipeline
assets as discussed in Note L to Consolidated Financial Statements, and $11.8
million in improved refined product margins offset by $8.4 million of higher
operating, depreciation and administrative costs.
21
HOLLY CORPORATION
Revenues from the sale of refined products and other revenues increased
to $312.2 million in the third quarter of fiscal 2003 from $210.3 million in the
third quarter of fiscal 2002 due principally to higher refined product sales
prices and to higher refined product volumes sold. For the third quarter ended
April 30, 2003, refined product sales volumes, purchased and produced, increased
approximately 5% and refined product margins increased compared to the prior
year's third quarter.
Cost of products sold for the third quarter of fiscal 2003 as compared
to the same quarter of fiscal 2002 increased significantly by $90.0 million to
$255.4 million primarily reflecting the substantially higher costs of crude oil.
Operating expenses increased $4.7 million to $28.4 million in the third
quarter of fiscal 2003 from $23.7 million in the third quarter of fiscal 2002
primarily due to higher utility costs, higher environmental costs and increased
compensation expense.
Selling, general and administrative expenses increased $1.6 million to
$7.1 million in the third fiscal quarter of 2003 from $5.5 million in the third
fiscal quarter of 2002 primarily due to increases in corporate development costs
associated with the consideration of various strategic alternatives and
increases in compensation expense offset by decreases in costs associated with
legal proceedings.
Depreciation, depletion and amortization expenses increased $2.1
million to $9.0 million for the three months ended April 30, 2003 from $6.9
million for the three months ended April 30, 2002 due to higher depreciation
expense which included the abandonment of two crude field tanks in West Texas
and higher amortization expense due to changes in turnaround benefit periods for
certain refinery units now scheduled for turnaround in December 2003.
Equity in earnings of joint ventures was a loss of $690,000 for the
quarter ended April 30, 2003 as compared to income of $1.6 million in the
quarter ended April 30, 2002. The $2.3 million decrease is primarily due to
losses incurred by our asphalt joint venture because of lower margins compared
to substantial income of the asphalt joint venture in the comparable quarter of
fiscal 2002.
Nine Months Ended April 30, 2003 Compared with Nine Months Ended April 30, 2002
Net income for the nine months ended April 30, 2003 was $30.4 million
compared to $25.9 million for the nine months ended April 30, 2002. The $6.9
million net increase in income before taxes for the nine months ended April 30,
2003 compared to the nine months ended April 30, 2002 was due to the $15.2
million reparation payment received as discussed in Note K to Consolidated
Financial Statements, $16.4 million gain on sale of pipeline assets as discussed
in Note L to Consolidated Financial Statements, offset by decreases of lower
refined product margins, $11.8 million of higher operating, depreciation and
administrative costs and $1.1 million in losses rather than $5.5 million in
earnings from the asphalt joint venture. For the nine months ended April 30,
2003, refined product margins declined for the nine months ended April 30, 2002.
Revenues from the sale of refined products and other revenues increased
to $858.2 million in the first nine months of fiscal 2003 from $635.0 million in
the first nine months of fiscal 2002 due principally to higher refined product
sales prices. Total product sales volumes for the nine months ended April 30,
2003 increased approximately 10% from the nine months
22
HOLLY CORPORATION
ended April 30, 2002. Production of refined products in the nine months ended
April 2002 was lower as a result of an extended 29-day planned maintenance
turnaround at the Artesia and Lovington facilities during the second quarter of
fiscal 2002.
Cost of sales for the nine months ended April 30, 2003 increased to
$719.8 million from $491.4 million for the nine months ended April 30, 2002. The
$228.4 million increase was primarily due to higher costs of crude oil and, to a
lesser extent, higher production volumes.
Operating expenses increased $7.1 million to $78.8 million in the first
nine months of fiscal 2003 from $71.7 million in the first nine months of fiscal
2002 primarily due to higher utility costs, higher environmental costs,
increased insurance costs and increased compensation expense.
Selling, general and administrative expenses increased $1.5 million to
$17.6 million in the first nine months of fiscal 2003 from $16.1 million in the
first nine months of fiscal 2002 primarily due to increases in corporate
development costs associated with the consideration of various strategic
alternatives and increases in compensation expense offset by decreases in costs
associated with legal proceedings.
Depreciation, depletion and amortization expenses increased $3.3
million to $23.3 million for the three months ended April 30, 2003 from $20.0
million for the three months ended April 30, 2002 due to higher depreciation
expense which included the abandonment of two crude field tanks in West Texas
and higher amortization expense due to changes in turnaround benefit periods for
certain refinery units now scheduled for turnaround in December 2003.
Interest expense declined by $1.1 million during the nine months ended
April 30, 2003 primarily due to reduced interest costs as the Company has made
required principal payments on term debt and to a higher percentage of interest
capitalized as a result of the Company's current construction projects. The
reduction in interest expense was partially offset by a $615,000 decrease in
interest income primarily due to lower funds available for investment and lower
interest rates.
Equity in earnings of joint ventures declined substantially to an
$86,000 loss for the nine months ended April 30, 2003, from $6.6 million in
income for the nine months ended April 30, 2002. The $6.7 million decline
resulted primarily from losses incurred by our asphalt joint venture because of
lower margins for the first nine months of fiscal 2003, which included an
inventory charge of $1.3 million in the second fiscal quarter of 2003, compared
to substantial income for the joint venture in the first nine months of fiscal
2002.
23
HOLLY CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $33.6 million during the nine
months ended April 30, 2003. The reduction in cash was due to $47.6 million in
capital expenditures, principally for the Navajo Refinery's gas oil hydrotreater
and refinery expansion projects, a $2.5 million deposit related to the
acquisition of the Woods Cross refinery, $8.6 million for scheduled principal
payments of long-term debt, $3.1 million paid for repurchase of treasury shares
and $5.1 million for cash dividends, partially offset by $24 million of proceeds
from the sale of pipeline assets, proceeds of $1.6 million for common stock
issued upon exercise of stock options and $7.9 million provided from operating
activities. Cash flows provided by operating activities included a payment of
$25 million for prepaid transportation as part of settlement by agreement of
litigation with Longhorn Partners Pipeline, L.P. and included a receipt of $15.2
million reparation payment from Kinder Morgan.
On October 30, 2001, the Company announced plans to repurchase up to
$20 million of the Company's common stock. Such repurchases have been made from
time to time in open market purchases or privately negotiated transactions,
subject to price and availability. The repurchases have been financed with
currently available corporate funds. During the nine months ended April 30,
2003, the Company repurchased 173,900 shares at a cost of approximately $3.1
million or an average of $17.85 per share. From inception of the plan through
June 9, 2003, the Company has repurchased 272,400 shares at a cost of
approximately $4.7 million.
In December 2001, an agreement was reached among the Company, the
Environmental Protection Agency, the New Mexico Environment Department, and the
Montana Department of Environmental Quality with respect to a global settlement
of issues concerning the application of air quality requirements to past and
future operations of the Company's refineries. The Consent Decree implementing
this agreement requires investments by the Company currently expected to total
between $15 million and $17 million over a number of years, of which
approximately $7 million has been expended to date, for the installation of
certain state of the art pollution control equipment at the Company's New Mexico
and Montana refineries.
In May 2003, the Company amended its Revolving Credit Agreement with a
group of banks led by Canadian Imperial Bank of Commerce and increased the
commitment from $75 million to $100 million. The Company now has access to $100
million of commitments that can be used for revolving credit loans and letters
of credit. Previously the Company had access to $75 million of commitments of
which only $37.5 million could be used for revolving credit loans. The Company
borrowed $10 million under the Revolving Credit Agreement in the quarter ended
April 30, 2003, all of which was paid back during the quarter. At April 30, 2003
the Company had letters of credit outstanding under the facility of $12.7
million and had no borrowings outstanding.
Effective June 1, 2003, the Company closed the acquisition of the Woods
Cross refinery, located near Salt Lake City, Utah, and related assets, including
a refined products terminal in Spokane, WA, and a 50% ownership interest in
refined product terminals in Boise and Burley, Idaho, from ConocoPhillips. The
assets were purchased for cash in an amount equal to $25 million less $3.8
million for certain assumed pension obligations plus $41 million for crude oil,
refined product and other inventories. The pension obligation and inventory
value are subject to adjustment. The purchase was financed from working capital
and a $25 million borrowing under the Company's credit facility.
24
HOLLY CORPORATION
On March 3, 2003, the Company sold its Iatan crude oil gathering
pipeline system located in West Texas to Plains Marketing L.P. for a purchase
price of $24 million in cash. In connection with the transaction, the Company
and Plains entered into a six and one-half year agreement which commits the
Company to transport any crude oil purchased by the Company in the relevant area
on the Iatan system at an agreed upon tariff. The sale resulted in a pre-tax
gain for the Company of approximately $16.4 million.
The Company believes its internally generated cash flow together with
its Credit Agreement should provide adequate resources to fund planned capital
projects and acquisitions, scheduled repayments of the Senior Notes, continued
payment of dividends (although dividend payments must be approved by the Board
of Directors and cannot be guaranteed) and the Company's current liquidity
needs.
Cash Flows from Operating Activities
Cash flows provided by operating activities for the first nine months
of fiscal 2003 were $7.9 million. For the comparable nine month period of fiscal
2002, cash provided by operating activities was $11.2 million. The $3.3 million
decrease in cash provided by operating activities for the first nine months of
fiscal 2003 as compared to the first nine months of fiscal 2002 was primarily
due to $25 million paid for prepaid transportation services and a decrease in
operating income of $17.0 million, primarily due to lower refined product
margins, offset by the $15.2 million reparation payment received as discussed in
Note K to Consolidated Financial Statements, $9.3 million in reduced turnaround
expenditures as compared to the first nine months of the 2002 fiscal year, and a
$14.5 million decrease in working capital items. In the first nine months of
fiscal 2003, changes in working capital items used $1.1 million as compared to
the first nine months of fiscal 2002 when changes in working capital used $15.6
million primarily due to a payment of $24.0 million for estimated income taxes.
25
HOLLY CORPORATION
Cash Flows from Financing Activities
Cash flows used for financing activities were $15.8 million for the
nine months ended April 30, 2003, as compared to $11.9 million in the same
period of the prior year. During the first nine months of fiscal 2003, the
Company made a scheduled repayment of long-term debt for $8.6 million, incurred
$635,000 in debt issuance costs in connection with extending its credit facility
to October 2004, spent $3.1 million to repurchase 173,900 shares of common
stock, paid $5.1 million in dividends and received $1.6 million upon the
exercise of options to acquire 114,500 shares of common stock. During the first
nine months of fiscal 2002, the Company made scheduled repayment of long-term
debt for $8.6 million, spent $160,000 to repurchase 8,600 shares of its common
stock, paid $4.7 million in dividends and received $1.5 million upon the
exercise of options to acquire 108,500 shares of common stock.
Cash Flows Used for Investing Activities and Capital Projects
Cash flows used for investing activities were $25.6 million for the
nine months ended April 30, 2003, as compared to $7.6 million for the same
period of the 2002 fiscal year. Cash expenditures for property, plant and
equipment for the first nine months of the current and prior fiscal years were
$47.6 million and $20.8 million respectively. Most of the increase is due to the
Navajo Refinery's gas oil hydrotreater and expansion projects. Also in the nine
months ended April 30, 2003, the Company made a $2.5 million deposit in
connection with the acquisition of the Woods Cross refinery. The Company's net
cash flow used for investing activities was reduced during the first nine months
of fiscal 2003 by a $487,500 distribution to the Company from the Rio Grande
Pipeline joint venture and by $24 million in proceeds from the sale of a crude
oil gathering pipeline system located in West Texas as discussed in Note L to
Consolidated Financial Statements. During the first nine months of fiscal 2002,
the Company's net cash flow used by investing activities was reduced by a $2.8
million distribution to the Company from the Rio Grande Pipeline joint venture,
a $5.5 million distribution to the Company from the asphalt joint venture and by
$4.5 million of proceeds from the sale of marketable equity securities held for
investment.
The Company's capital budget adopted for fiscal year 2003 totals $14.8
million - $6.5 million for additional costs relating to the hydrotreater project
and refinery expansion, $3.2 million for other refinery improvements, $3 million
for pipeline transportation projects, $.6 million for oil and gas exploration
and production, and $1.5 million for information technology and other. The 2003
capital budget includes authorizations for some expenditures that are expected
to be made after the close of the 2003 fiscal year. The Company expects to
expend approximately $55 million in fiscal 2003 for capital improvements, which
includes amounts authorized in previous fiscal years. This amount is expected to
be allocated approximately $30 million for the hydrotreater project and the
refinery expansion to an estimated 75,000 barrels per day ("BPD") as described
below, approximately $6 million for other refinery improvements, approximately
$2 million for pipeline and transportation projects, and approximately $2
million for other projects, including information technology projects and oil
and gas exploration and development. These expenditures include projects
authorized in the Company's 2003 capital budget as well as expenditures
authorized in prior capital budgets but expected to be carried out in fiscal
2003.
In November 1997, the Company purchased a hydrotreater unit for $5.1
million from a closed refinery. This purchase gave the Company the ability to
reconstruct the unit at the Navajo Refinery at an estimated savings of
approximately $20.0 million as compared to the purchase
26
HOLLY CORPORATION
cost of a new unit. During the last four years, the Company spent approximately
$41.6 million on relocation, engineering, equipment fabrication, and
construction related to the hydrotreater and expansion projects. The remaining
costs to complete the hydrotreater project and the expansion project are
estimated to be approximately $22.2 million. The Company expects that the
hydrotreater and expansion projects will be completed by December 2003. The
hydrotreater will enhance higher value light product yields and expand the
Company's ability to produce additional quantities of gasolines meeting the
present California Air Resources Board ("CARB") standards, which have been
adopted in the Company's Phoenix market for winter months beginning in late
2000, and to meet the recently adopted EPA nationwide Low-Sulfur Gasoline
requirements scheduled to begin in 2004. In fiscal 2001 the Company completed
the construction of a new additional sulfur recovery unit, which is currently
utilized to enhance sour crude processing capabilities and will provide
sufficient capacity to recover the additional extracted sulfur that will result
from operation of the hydrotreater.
Contemporaneous with the hydrotreater project, the Navajo Refinery will
be making necessary modifications to several of the Artesia processing units for
the first phase of Navajo's expansion, which will increase crude oil refining
capacity from 60,000 BPD to approximately 75,000 BPD. The first phase of the
expansion is expected to be completed by December 2003. Additional air emission
permits will be required to implement needed modifications at Navajo's
Lovington, New Mexico refining facility which is operated in conjunction with
the Artesia facility. It is envisioned that these necessary modifications to the
Lovington facility would also be completed by December 2003. The permits
received by Navajo to date for the Artesia facility, subject to possible minor
modifications, should also permit a second phase expansion of Navajo's crude oil
capacity from an estimated 75,000 BPD to an estimated 80,000 BPD, but a schedule
for such additional expansion has not been determined. Engineering and planning
for the projects has been completed and the Company's estimate of the total cost
of the projects has increased from the original estimate of approximately $56
million to approximately $68.9 million due to the increased costs and scope of
certain refinery infrastructure upgrades, added capacity and sulfur recovery
capabilities and the increased actual costs of previously estimated portions of
the projects.
Effective June 1, 2003, the Company closed the acquisition of the Woods
Cross refinery located near Salt Lake City, Utah, and related assets from
ConocoPhillips. The assets were purchased for $25 million less $3.8 million for
certain assumed pension obligations plus $41 million for crude oil, refined
product and other inventories. The pension obligation and inventory value are
subject to adjustment. The Woods Cross refinery has a crude oil capacity of
25,000 barrels per day and has operated at close to capacity over the last three
years. The purchase also included certain pipelines and other transportation
assets used in connection with the refinery, 25 retail service stations located
in Utah and Wyoming, and a 10-year exclusive license to market fuels under the
Phillips brand in the states of Utah, Wyoming, Idaho and Montana. The purchase
was financed with cash and $25 million borrowing under the Company's credit
facility.
The Company leases from Mid-America Pipeline Company more than 300
miles of 8" pipeline running from Chaves County to San Juan County, New Mexico
(the "Leased Pipeline"). The Company owns and operates a 12" pipeline from the
Navajo Refinery to the Leased Pipeline as well as terminalling facilities in
Bloomfield, New Mexico, which is located in the northwest corner of New Mexico
and in Moriarty, which is 40 miles east of Albuquerque. Transportation of
petroleum products to markets in northwest New Mexico and diesel fuels to
Moriarty began in the last months of calendar 1999. In December 2001, the
Company completed its expansion of
27
HOLLY CORPORATION
the Moriarty terminal and its pumping capacity on the Leased Pipeline. The
terminal expansion included the addition of gasoline and jet fuel to the
existing diesel fuel delivery capabilities, thus permitting the Company to
provide a full slate of light products to the growing Albuquerque and Santa Fe,
New Mexico areas. The enhanced pumping capabilities on the Company's leased
pipeline extending from the Artesia refinery through Moriarty to Bloomfield will
permit the Company to deliver a total of over 45,000 BPD of light products to
these locations. If needed, additional pump stations could further increase the
pipeline's capabilities.
Contractual Obligations and Commitments
The following table presents long-term contractual obligations of the
Company in total and by period due. These items include the Company's long-term
debt based on maturity dates and the Company's operating lease commitments. The
Company's operating leases contain renewal options that are not reflected in the
table below and that are likely to be exercised.
PAYMENTS DUE BY PERIOD
-----------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS OVER 5 YEARS
--------- --------- --------- --------- ------------
(In thousands)
Long-term debt (stated maturities).. $ 25,714 $ 8,571 $ 17,143 $ - $ -
Operating leases ................... $ 25,336 $ 6,091 $ 11,976 $ 6,982 $ 287
In July 2000, Navajo Western Asphalt Company ("Navajo Western"), a
wholly-owned subsidiary of the Company, and a subsidiary of Koch Materials
Company ("Koch") formed a joint venture, NK Asphalt Partners, to manufacture and
market asphalt and asphalt products in Arizona and New Mexico under the name
"Koch Asphalt Solutions - Southwest." Navajo Western contributed all of its
assets to NK Asphalt Partners and Koch contributed its New Mexico and Arizona
asphalt and manufacturing assets to NK Asphalt Partners. All asphalt produced at
the Navajo Refinery is sold at market prices to the joint venture under a supply
agreement. The Company is required to make additional contributions to the joint
venture of up to $3,250,000 for each of the next eight years contingent on the
earnings level of the joint venture. In the event that Holly fails to make the
required contributions, Holly may lose its voting rights during such default and
the other partner could cause the partnership to bring a proceeding to collect
the unpaid contributions plus interest at the prime rate plus 2%.
As part of the Consent Decree filed December 2001 implementing an
agreement reached among the Company, the Environmental Protection Agency, the
New Mexico Environment Department, and the Montana Department of Environmental
Quality, the Company is required to make investments at the Company's New Mexico
and Montana refineries for the installation of certain state of the art
pollution control equipment currently expected to total between $15 million and
$17 million over a period expected to end 2009.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
This discussion should be read in conjunction with the discussion under
the heading "Additional Factors That May Affect Future Results" included in Item
7 of the Company's Annual Report on Form 10-K/A for the fiscal year ended July
31, 2002.
The proposed Longhorn Pipeline, which is owned by Longhorn Partners
Pipeline, L.P. ("Longhorn Partners"), is an additional potential source of
pipeline transportation from Gulf
28
HOLLY CORPORATION
Coast refineries to El Paso. This pipeline is proposed to run approximately 700
miles from the Houston area of the Gulf Coast to El Paso, utilizing a direct
route. Longhorn Partners has proposed to use the pipeline initially to transport
approximately 72,000 BPD of refined products from the Gulf Coast to El Paso and
markets served from El Paso, with an ultimate maximum capacity of 225,000 BPD.
Although most construction has been completed, the Longhorn Pipeline will not
begin operations until the completion of certain agreed improvements and
pre-start-up steps. Published reports indicate that construction in preparation
for start-up of the Longhorn Pipeline continued until late July 2002, when the
construction activities were halted before completion of the project. The latest
public statements from Longhorn Partners indicate that Longhorn Partners is
seeking additional financing to complete the project and that no specific target
date for commencement of operations is currently set. The proposed operation of
the Longhorn Pipeline is also the subject of a pending appeal in the United
States Court of Appeals for the Fifth Circuit of a decision by the federal
district court in Austin, Texas that allows the Longhorn Pipeline to begin
operations when agreed improvements have been completed. This appeal seeks a
ruling that would reverse the federal district court's decision and require a
full environmental impact study before the Longhorn Pipeline is allowed to
operate.
If the Longhorn Pipeline operates as currently proposed, lower
requirements for capital investment permitted by the direct route through
Austin, Texas and over the Edwards Aquifers could allow Longhorn Partners to
give its shippers a cost advantage through lower tariffs that could, at least
for a period, result in significant downward pressure on wholesale refined
products prices and refined products margins which the Company defines as the
difference between refined product sales prices and the costs for crude oil and
other feedstocks exclusive of depreciation, depletion and amortization in El
Paso and related markets. However, any effects on the Company's markets in
Tucson and Phoenix, Arizona and Albuquerque, New Mexico would be expected to be
limited in the next few years because current common carrier pipelines from El
Paso to these markets are now running at capacity and proration policies of
these pipelines allocate only limited capacity to new shippers. Although the
Company's results of operations might be adversely impacted and some current
suppliers in the market might not compete in such a climate, the Company's
analyses indicate that, because of location, recent capital improvements, and
enhancements to operational efficiency, the Company's position in El Paso and
markets served from El Paso could withstand a period of lower prices and refined
product margins that might result from operation of the Longhorn Pipeline as
currently proposed.
As a result of the Company's settlement in November 2002 of litigation
with Longhorn Partners as described in Part II, Item 1 "Legal Proceedings," on
November 26, 2002 the Company prepaid $25,000,000 to Longhorn Partners for the
shipment of 7,000 BPD of refined products from the Gulf Coast to El Paso in a
period of up to 6 years from the date the Longhorn Pipeline begins operations if
such operations begin by July 1, 2004. Under the agreement, the prepayment would
cover shipments of 7,000 BPD by the Company for approximately 4 1/2 years
assuming there were no curtailments of service once operations began. The
Company plans to make use of the prepaid transportation services to ship
purchased refined products on the Longhorn Pipeline to meet obligations of the
Company to deliver refined products to customers in El Paso. These
transportation services are expected to be of benefit to the Company because the
Company believes that most or all of such refined products shipped by the
Company on the Longhorn Pipeline would take the place of products that would
otherwise have been purchased by the Company from other suppliers.
At the date of this report, it is not possible to predict whether and,
if so, under what conditions, the Longhorn Pipeline will ultimately be operated,
nor is it possible to predict the
29
HOLLY CORPORATION
overall impact on the Company if the Longhorn Pipeline does not ultimately begin
operations or begins operations at different possible future dates. Under the
terms of the November 2002 settlement agreement that terminated litigation
between the Company and Longhorn Partners, the Company would have an unsecured
claim for repayment of the Company's $25,000,000 prepayment to Longhorn Partners
for transportation services in the event the Longhorn Pipeline did not begin
operations by July 1, 2004 or announced that it would not begin operations by
that date.
Frontier Oil Corporation and Holly Corporation Merger Agreement
On March 31, 2003, Frontier and the Company announced an agreement
pursuant to which the two companies will merge. The merged company will be
called Frontier Oil Corporation and will be headquartered in Houston, Texas.
Following the merger, the combined company will own five refineries with
refining capacity in excess of 260,000 barrels-per-day including several highly
complex, niche refineries. Terms of the deal provide for the Company's
stockholders to receive one share of Frontier common stock for each share of
Holly common stock, plus an aggregate cash payment of $172.5 million or
approximately $11.13 per common share based on the current number of outstanding
Holly shares. Holly has approximately 15.5 million common shares outstanding,
and Frontier has approximately 26.1 million common shares outstanding. Holly
stockholders will also retain a non-transferable interest in potential future
recoveries in litigation related to past sales of jet fuel to the United States
government. The transaction is expected to be non-taxable to the shareholders of
both companies, except for the cash consideration and contingent value rights to
be received by Holly stockholders. The agreement between the companies contains
reciprocal provisions for the payment of $15 million termination fees under
certain circumstances.
In May 2003, Frontier and the Company announced that the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act had expired, satisfying
one of the conditions to the completion of the pending merger of Frontier and
Holly. As discussed in Note K, effective June 1, 2003, the Company closed its
acquisition of the Woods Cross refinery which was another condition to the
completion of the merger with Frontier. Completion of the merger is expected in
the third calendar quarter of 2003. A registration statement on Form S-4
relating to the merger was filed with the Securities and Exchange Commission on
May 13, 2003 by Front Range Himalaya Corporation.
Other legal proceedings that could affect future results are described in Part
II, Item 1 "Legal Proceedings."
RISK MANAGEMENT
The Company uses certain strategies to reduce some commodity price and
operational risks. The Company does not attempt to eliminate all market risk
exposures when the Company believes the exposure relating to such risk would not
be significant to the Company's future earnings, financial position, capital
resources or liquidity or that the cost of eliminating the exposure would
outweigh the benefit.
The Company's profitability depends largely on the spread between
market prices for refined products and market prices for crude oil. A
substantial or prolonged reduction in this
30
HOLLY CORPORATION
spread could have a significant negative effect on the Company's earnings,
financial condition and cash flows. At times, the Company utilizes petroleum
commodity futures contracts to minimize a portion of its exposure to price
fluctuations associated with crude oil and refined products. In December 2002,
the Company entered into cash flow hedges relating to certain forecasted
transactions to buy crude oil and sell gasoline in March 2003. The purpose of
the hedges is to help protect the Company from the risk that the refined product
margin would decline with respect to the hedged crude oil and refined products.
To effect the hedges, the Company entered into gasoline and crude oil futures
transactions. During the quarter ended April 30, 2003, the Company marked the
value of the outstanding hedges to fair value in accordance with SFAS No. 133
and included $102,000 of gain in comprehensive income. In March 2003, as the
transactions occurred, the Company reclassified $108,000 of actual losses from
comprehensive income to cost of sales. The ineffective portion of the hedges was
a $32,000 gain that was also included in cost of sales. For the fiscal quarter
ended April 30, 2003, the Company entered into commodity derivative contracts to
help protect refined product margins, which the Company defines as the
difference between refined product sales prices and the costs for crude oil and
other feedstocks exclusive of depreciation, depletion and amortization, that
while an economic hedge, did not qualify for hedge accounting treatment. The
Company realized a gain of $302,000 which was included in cost of sales. As of
April 30, 2003, there were no hedges outstanding.
At April 30, 2003, the Company had outstanding unsecured debt of $25.7
million and had no borrowings outstanding under its Credit Agreement. The
Company does not have significant exposure to changing interest rates on its
unsecured debt because the interest rates are fixed, the average maturity is
less than two years and such debt represents approximately 10% of the Company's
total capitalization. As the interest rates on the Company's bank borrowings are
reset frequently based on either the bank's daily effective prime rate, or the
LIBOR rate, interest rate market risk is very low. There were no bank borrowings
in fiscal 2002. The Company had a short-term borrowing of $10 million in March
2003 which was repaid in April 2003. Additionally, the Company invests any
available cash only in investment grade, highly liquid investments with
maturities of three months or less and hence the interest rate market risk
implicit in these cash investments is low. A one percent change in the market
interest rate over the next year would not materially impact the Company's
earnings or cash flow since the interest rates on the Company's long-term debt
are fixed and the Company's borrowings under the Credit Agreement, if any, and
cash investments are at short-term market rates and such interest has
historically not been significant as compared to the total operations of the
Company. A one percent change in the market interest rate over the next year
would not materially impact the Company's financial condition since the average
maturity of the Company's long-term debt is less than two years, such debt
represents approximately 10% of the Company's total capitalization, and the
Company's borrowings under the Credit Agreement and cash investments are at
short-term market rates.
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company maintains
various insurance coverages, including business interruption insurance, subject
to certain deductibles. The Company is not fully insured against certain risks
because such risks are not fully insurable, coverage is unavailable, or premium
costs, in the judgment of the Company, do not justify such expenditures. Shortly
after the events of September 11, 2001, the Company completed a security
assessment of its principal facilities. Several security measures identified in
the assessment have been implemented and others are in the process of being
implemented. Because of recent changes in insurance markets, insurance coverages
available to the Company are becoming more
31
HOLLY CORPORATION
costly and in some cases less available. So long as this current trend
continues, the Company expects to incur higher insurance costs and anticipates
that, in some cases, it will be necessary to reduce somewhat the extent of
insurance coverages because of reduced insurance availability at acceptable
premium costs.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" which changes how goodwill and other intangible assets are
accounted for subsequent to their initial recognition. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, with early adoption
permitted; however, all goodwill and intangible assets acquired after June 30,
2001, are immediately subject to the provisions of this statement. The Company
adopted the standard effective August 1, 2002 and there was no material effect
on its financial condition, results of operations, or cash flows.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" which requires that the fair value for an asset retirement
obligation be capitalized as part of the carrying amount of the long-lived asset
if a reasonable estimate of fair value can be made. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company adopted the standard effective August 1, 2002 and there was no
material effect on the Company's financial condition, results of operations, or
cash flows.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", but carries over the key guidance from SFAS No. 121 in
establishing the framework for the recognition and measurement of long-lived
assets to be disposed of by sale and addresses significant implementation
issues. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, with early adoption permitted. The Company adopted the standard effective
August 1, 2002 and there was no material effect on its financial condition,
results of operations, or cash flows.
In June 2002, FASB issued SFAS No. 146 "Accounting for Certain Costs
Associated with Exit or Disposal Activities" which nullifies Emerging Issues
Task Force ("EITF") 94-3 and requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
and establishes fair value as the objective for initial measurement of
liabilities. This differs from EITF 94-3 which stated that liabilities for exit
costs were to be recognized as of the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted SFAS No. 146 on January
1, 2003, and the standard has had no effect on its financial condition, results
of operations, or cash flows.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure", an amendment of SFAS No. 123. This
statement provides alternative methods of transition to SFAS 123's fair value
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to require disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. SFAS 148's amendment of the disclosure requirements is
32
HOLLY CORPORATION
effective for interim periods beginning after December 15, 2002. SFAS 148's
amendment of the transition and annual disclosure requirements of SFAS 123 are
effective for fiscal years ending after December 15, 2002. See Note D to
Consolidated Financial Statements for effect of this standard on the Company's
financial condition, results of operations, or cash flows.
In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement will result in a more complete depiction of an entity's liabilities
and equity and will, thereby, assist investors and creditors in assessing the
amount, timing, and likelihood of potential future cash outflows and equity
share issuances. This statement is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company expects that the standard will have no
effect on its financial condition, results of operations, or cash flows.
The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, "Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. As of
April 30, 2003, the Company had approximately $11.6 million of deferred
maintenance costs, all relating to refinery turnarounds in prior periods, which
are being amortized over various benefit periods. The current monthly
amortization is $782,000. If this proposed Statement of Position had been
adopted in its current form, as of April 30, 2003, the Company would have been
required to expense, as of April 30, 2003, $11.6 million of deferred maintenance
costs and would be required to expense all future turnaround costs as incurred.
33
HOLLY CORPORATION
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and principal financial
officer have evaluated the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this quarterly report on Form 10-Q/A.
Based on that evaluation, these officers concluded that the design and operation
of the Company's disclosure controls and procedures are effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in internal controls.
There have been no significant changes in the Company's internal
controls, or in other factors that could significantly affect internal controls,
subsequent to the date the principal executive officer and principal financial
officer of the Company completed their evaluation.
34
HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the Company's pending lawsuit in the United States Court of Federal
Claims against the Department of Defense relating to claims totaling
approximately $298 million with respect to jet fuel sales by two subsidiaries in
the years 1982 through 1999, a motion for summary judgment filed in January 2003
by the United States Government and a cross-motion for summary judgment filed in
February 2003 by the Company remain pending and no date has yet been set for a
hearing on these motions. In the past few months, the United States Court of
Federal Claims has issued rulings in other cases concerning jet fuel sales by
unrelated refining companies that have generally supported the positions taken
by the Company with respect to the pending motions in the Company's case.
Decisions favorable to the Company on the pending motions for summary judgment
in the Company's case would not immediately result in a final ruling for the
Company but would instead be followed by substantial discovery proceedings and
then a trial on factual issues. It is not possible at the date of this report to
predict what amount, if any, will ultimately be payable to the Company with
respect to this lawsuit.
In September 2002, the Federal Energy Regulatory Commission ("FERC")
issued an order in proceedings brought by the Company and other parties against
Kinder Morgan's SFPP, L.P. ("SFPP") relating to tariffs of common carrier
pipelines, which are owned and operated by SFPP, for shipments of refined
products from El Paso, Texas to Tucson and Phoenix, Arizona and from points in
California to points in Arizona. The Company is one of several refiners that
regularly utilize an SFPP pipeline to ship refined products from El Paso, Texas
to Tucson and Phoenix, Arizona. The September 2002 order resolved most remaining
issues relating to SFPP's tariffs on the pipelines to points in Arizona,
including issues related to payments made by the Company for shipments of
petroleum products from El Paso, Texas to Tucson and Phoenix, Arizona
principally for the period from 1993 through July 2000. On January 29, 2003, the
FERC issued an order accepting most of the computations prepared by SFPP
pursuant to the September 2002 order and requiring a change in one item. In
April 2003, the Company received $15.2 million from Kinder Morgan as payment for
the reparations ordered by FERC and such amount has been included in net income
for the fiscal quarter ended April 30, 2003. In June 2003 the FERC issued a
further order requiring an adjustment in the computations which is expected to
result in a small additional payment to the Company. The final FERC decision on
this matter is subject to judicial review by the Court of Appeals for the
District of Columbia Circuit. In the event SFPP prevails in whole or in part in
such judicial review, the reparations actually owed may be less than the $15.2
million and in that event part or all of the $15.2 million received by the
Company in April 2003 would have to be refunded. At the date of this report, it
is not possible to predict the result of judicial review proceedings on this
matter in the Court of Appeals for the District of Columbia Circuit.
In October 2002, the Company filed a motion to intervene and protest
with the FERC with respect to a September 2002 petition for declaratory order
filed by SFPP. SFPP's filing concerns its proposal to expand the capacity of its
common carrier pipelines running from El Paso to Tucson and Phoenix by
approximately 54,000 BPD. The Company's protest asks the FERC to rule that the
costs of the proposed expansion should be reflected only in pipeline
transportation rates for use of the proposed additional capacity rather than in
rates for use of both the proposed additional capacity and the current capacity
of these pipelines. On January 29, 2003, the FERC issued an order that, along
with addressing other issues, did not accept the Company's position. In early
March 2003 the Company filed with the FERC a request for rehearing on this
matter. As of the date of this report, no action has been taken by the FERC
35
HOLLY CORPORATION
regarding the Company's request for hearing.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K:
On March 4, 2003, a Current Report on Form 8-K was filed under Item 5
Other Events, concerning an announcement by the Company of the sale of
its Iatan crude oil gathering system.
On March 7, 2003, a Current Report on Form 8-K was filed under Item 5
Other Events, concerning the Company's earnings release for the second
quarter and six months ended January 31, 2003.
On April 2, 2003, a Current Report on Form 8-K dated March 30, 2003 was
filed under Item 5 Other Events and under Item 7(c) Financial
Statements and Exhibits, concerning the announcement by the Company of
its agreement to merge with Frontier Oil Corporation (NYSE: FTO).
Exhibits included were the Agreement and Plan of Merger dated March 30,
2003 among Frontier, Holly, Front Range Himalaya Corporation
("Parent"), Front Range Merger Corporation ("Front Range") and Himalaya
Merger Corporation ("Himalaya") and related supporting agreements
including Holly Holder Support Agreement, Frontier Affiliate's Support
Agreement and Registration Rights Agreement.
On May 13, 2003, a Current Report on Form 8-K dated May 12, 2003 was
filed under Item 5 Other Events and under Item 7 (c) Financial
Statements and Exhibits concerning the Amendment to the Merger
Agreement dated May 12, 2003 amending the Agreement and Plan of Merger
dated March 30, 2003 among Holly, Frontier, Parent, Front Range and
Himalaya. The Merger Agreement was previously filed on Holly's current
report on Form 8-K filed on April 2, 2003. Exhibits included were the
Amendment to the Merger Agreement dated May 12, 2003 and the Contingent
Value Rights Agreement dated May 12, 2003.
On May 21, 2003, a Current Report on Form 8-K dated May 20, 2003 was
filed under Item 5 Other Events concerning the Company's announcements
that the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act had expired, satisfying one of the conditions to the
completion of the pending merger of Frontier and Holly and that the
Federal Trade Commission approved Holly's pending acquisition from
ConocoPhillips of the Woods Cross refinery.
On June 2, 2003, a Current Report on Form 8-K was filed under Item 5
Other Events and under Item 7 (c) Financial Statements and Exhibits
concerning the Company's
36
HOLLY CORPORATION
announcement that it had closed its acquisition of the Woods Cross
refinery, located near Salt Lake City, Utah, and related assets from
ConocoPhillips and that it has amended its Credit and Reimbursement
Agreement with a group of banks headed by the Canadian Imperial Bank of
Commerce, and increased the commitment level of the Agreement. Exhibits
included the Company's press release issued June 2, 2003.
On June 4, 2003, a Current Report on Form 8-K dated June 1, 2003 was
filed under Item 2 Acquisition or Disposition of Assets and under Item
7 Financial Statements and Exhibits concerning the acquisition of
assets from ConocoPhillips of its Woods Cross refinery located near
Salt Lake City, Utah. Exhibits included the Asset Purchase and Sale
Agreement, dated December 20, 2002, between Holly and ConocoPhillips
(incorporated by reference to Exhibit 10.1 to Holly's Quarterly Report
on Form 10-Q for the quarterly period ended January 31, 2003) and
Amendment No. 7, dated as of May 15, 2003, to Amended and Restated
Credit and Reimbursement Agreement, dated April 14, 2000, as amended,
among Holly, certain of its subsidiaries, CIBC and other lenders.
37
HOLLY CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HOLLY CORPORATION
----------------------------------------------
(Registrant)
Date: November 3, 2003 By s/ Kathryn H. Walker
--------------------------------------------
Kathryn H. Walker
Vice President, Accounting
(Principal Accounting Officer)
By s/ Stephen J. McDonnell
--------------------------------------------
Stephen J. McDonnell
Vice President and Chief Financial
Officer
(Principal Financial Officer)
38
CERTIFICATION
I, Lamar Norsworthy, Chairman of the Board and Chief Executive Officer of Holly
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Holly
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 3, 2003 s/ C. Lamar Norsworthy
-------------------------------------------------
C. Lamar Norsworthy
Chairman of the Board and Chief Executive Officer
39
CERTIFICATION
I, Stephen J. McDonnell, Vice President and Chief Financial Officer of Holly
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Holly
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 3, 2003 s/ Stephen J. McDonnell
--------------------------------------------
Stephen J. McDonnell
Vice President and Chief Financial Officer
40