UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended --------
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from August 1, 2002 to December 31, 2002
Commission File Number 1-3876
HOLLY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-1056913
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
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(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 [ ]
15,506,028 shares of Common Stock, par value $.01 per share, were outstanding on
September 5, 2003.
HOLLY CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Forward-Looking Statements 4
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited) -
December 31, 2002 and July 31, 2002 5
Consolidated Statement of Income (Unaudited) -
Five Months Ended December 31, 2002 and 2001 6
Consolidated Statement of Cash Flows (Unaudited) -
Five Months Ended December 31, 2002 and 2001 7
Consolidated Statement of Comprehensive Income (Unaudited) -
Five Months Ended December 31, 2002 and 2001 8
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 33
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 40
Holly Corporation is filing this amendment to its Transition Report on
Form 10-Q for the transition period from August 1, 2002 to December 31, 2002,
originally filed on September 12, 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
to the original Transition Report on Form 10-Q amends and restates the original
Transition Report on Form 10-Q in its entirety, but continues to speak as of the
date of the original filing of the original Transition Report on Form 10-Q.
Holly Corporation has not updated the disclosure in this amendment to speak as
of a later date. All information contained in this amendment and the original
Transition Report on Form 10-Q 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.
3
PART I
FORWARD-LOOKING STATEMENTS
This Transition Report on Form 10-Q/A for the transition period from
August 1, 2002 to December 31, 2002 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 Transition Report on 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 outcome with respect to the
litigation 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 Transition Report on 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 Transition Report on Form 10-Q/A, including without limitation in
conjunction with the forward-looking statements included in this Transition
Report on 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, as amended,
for the fiscal year ended July 31, 2002 and in conjunction with the discussion
in this Transition Report on 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 Transition 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 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
DECEMBER 31, JULY 31,
2002 2002
-------------- ---------
ASSETS (In thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents.................................................... $ 24,266 $ 71,630
Accounts receivable: Product............................................... 51,141 46,929
Crude oil resales..................................... 97,017 88,466
---------- ---------
148,158 135,395
Inventories: Crude oil and refined products........................ 50,808 35,120
Materials and supplies................................ 10,329 10,188
---------- ---------
61,137 45,308
Income taxes receivable..................................................... 647 8,699
Prepayments and other........................................................ 19,026 17,812
---------- ---------
TOTAL CURRENT ASSETS 253,234 278,844
Properties, plants and equipment, at cost....................................... 434,292 410,987
Less accumulated depreciation, depletion and amortization....................... (220,142) (211,526)
---------- ---------
214,150 199,461
Investments in and advances to joint ventures................................... 15,955 15,732
Other assets: Prepaid transportation................................ 25,000 -
Refinery acquisition deposit.......................... 2,500 -
Other, net............................................ 3,841 8,269
---------- ---------
31,341 8,269
---------- ---------
TOTAL ASSETS............................................................ $ 514,680 $ 502,306
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................. $ 207,418 $ 185,058
Accrued liabilities.......................................................... 23,722 25,342
Current maturities of long-term debt......................................... 8,571 8,571
---------- ---------
TOTAL CURRENT LIABILITIES............................................... 239,711 218,971
Deferred income taxes........................................................... 28,254 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;
16,846,696 and 16,759,396 shares issued as of December 31, 2002
and July 31, 2002.......................................................... 168 168
Additional capital........................................................... 15,221 14,013
Retained earnings............................................................ 225,759 223,770
---------- ---------
241,148 237,951
Common stock held in treasury, at cost -
1,328,868 and 1,197,968 shares as of December 31, 2002
and July 31, 2002.......................................................... (11,605) (9,395)
Accumulated other comprehensive loss......................................... 29 -
---------- ---------
TOTAL STOCKHOLDERS' EQUITY.............................................. 229,572 228,556
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 514,680 $ 502,306
========== =========
See accompanying notes.
5
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
FIVE MONTHS ENDED
DECEMBER 31,
------------------------------------
2002 2001
------------ -----------
(In thousands, except per share data)
SALES AND OTHER REVENUES........................................................ $ 448,637 $ 363,854
OPERATING COSTS AND EXPENSES
Cost of products sold (exclusive of depreciation, depletion,.................
and amortization).......................................................... 377,538 278,837
Operating expenses (exclusive of depreciation, depletion,....................
and amortization).......................................................... 41,566 40,337
Selling, general and administrative expenses (exclusive of...................
depreciation, depletion, and amortization)................................. 9,025 8,963
Depreciation, depletion and amortization..................................... 11,726 10,875
Exploration expenses, including dry holes.................................... 392 456
---------- ---------
TOTAL OPERATING COSTS AND EXPENSES...................................... 440,247 339,468
---------- ---------
INCOME FROM OPERATIONS.......................................................... 8,390 24,386
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures......................................... 726 5,037
Interest income.............................................................. 415 963
Interest expense............................................................. (1,014) (1,479)
Gain on sale of equity securities............................................ - 1,522
---------- ---------
127 6,043
---------- ---------
INCOME BEFORE INCOME TAXES...................................................... 8,517 30,429
Income tax provision (benefit)
Current...................................................................... 4,613 11,572
Deferred..................................................................... (1,499) 250
---------- ---------
3,114 11,822
---------- ---------
NET INCOME...................................................................... $ 5,403 $ 18,607
========== =========
NET INCOME PER COMMON SHARE - BASIC............................................. $ 0.35 $ 1.20
========== =========
NET INCOME PER COMMON SHARE - DILUTED........................................... $ 0.34 $ 1.17
========== =========
CASH DIVIDENDS PAID PER COMMON SHARE............................................ $ 0.11 $ 0.10
========== =========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic........................................................................ 15,516 15,524
Diluted...................................................................... 15,902 15,949
See accompanying notes.
6
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
FIVE MONTHS ENDED
DECEMBER 31,
--------------------------------
2002 2001
---------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................... $ 5,403 $ 18,607
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization................................. 11,726 10,875
Deferred income taxes.................................................... (1,499) 250
Equity in earnings of joint ventures..................................... (726) (5,037)
(Increase) decrease in current assets
Accounts receivable.................................................... (12,763) 34,734
Inventories............................................................ (15,829) (8,044)
Income taxes receivable................................................ 8,052 3,514
Prepayments and other.................................................. (594) 469
Increase (decrease) in current liabilities
Accounts payable....................................................... 22,360 (27,933)
Accrued liabilities.................................................... (1,570) (1,818)
Income taxes payable................................................... - (4,193)
Turnaround expenditures.................................................. (62) (14,165)
Prepaid transportation................................................... (25,000) -
Other, net............................................................... 1,529 (1,324)
---------- ---------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES..................... (8,973) 5,935
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............................ 1,208 1,450
Purchase of treasury stock................................................... (2,210) (160)
Cash dividends............................................................... (3,414) (3,105)
---------- ---------
NET CASH USED FOR FINANCING ACTIVITIES.................................. (13,622) (10,387)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment................................ (22,793) (10,405)
Refinery acquisition deposit................................................. (2,500) -
Distributions from joint ventures............................................ 524 1,150
Proceeds from sale of marketable equity securities........................... - 4,500
---------- ---------
NET CASH USED FOR INVESTING ACTIVITIES.................................. (24,769) (4,755)
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CASH AND CASH EQUIVALENTS
DECREASE FOR THE PERIOD...................................................... (47,364) (9,207)
Beginning of year............................................................ 71,630 65,840
---------- ---------
END OF PERIOD................................................................ $ 24,266 $ 56,633
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest................................................................ $ 1,738 $ 2,143
Income taxes............................................................ $ 3,959 $ 11,919
See accompanying notes.
7
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
FIVE MONTHS ENDED
DECEMBER 31,
--------------------------------
2002 2001
---------- ---------
(In thousands)
NET INCOME...................................................................... $ 5,403 $ 18,607
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............................ 47 (1,147)
Reclassification adjustment into net income............................... - 1,749
---------- ---------
Total income on cash flow hedges............................................. 47 602
---------- ---------
Other comprehensive income (loss) before income taxes......................... 47 (920)
Income tax expense (benefit)................................................. 18 (355)
---------- ---------
Other comprehensive income (loss)............................................... 29 (565)
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TOTAL COMPREHENSIVE INCOME...................................................... $ 5,432 $ 18,042
========== =========
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 December 31,
2002, the consolidated results of operations and comprehensive income for the
five months ended December 31, 2002 and 2001, and consolidated cash flows for
the five months ended December 31, 2002 and 2001.
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, as amended, 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 five months
ended December 31, 2002 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
HOLLY 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 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
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.
In January 2003, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirement for Guarantees, including Indirect
Guarantees of Indebtedness of Others" (FIN 45"). FIN 45 requires an entity to
recognize a liability for the obligations it has undertaken in issuing a
guarantee. This liability would be recorded at the inception of a guarantee and
would be measured at fair value. Certain guarantees are excluded from the
measurement and disclosure provisions while certain other guarantees are
excluded from the measurement provisions of the interpretation. The adoption of
the statement on January 1, 2003 is expected to have no effect on the Company's
financial condition, results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 requires an entity to consolidate a
variable interest entity if it is designated as the primary beneficiary of that
entity if the entity does not have a majority of voting interests. A variable
interest entity is generally defined as an entity where its equity is unable to
finance its activities or where the owners of the entity lack the risk and
rewards of ownership. The provisions of FIN 46 apply at inception for any entity
created after January 31, 2003. For an entity created before February 1, 2003,
the provisions of this interpretation must be applied at the beginning of the
first interim period beginning after June 15, 2003. The adoption of FIN 46 is
not expected to have a material effect on the Company's 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
December 31, 2002, the Company had approximately $11.1 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 approximately $811,000. If this proposed Statement of Position
had been adopted in its current
10
HOLLY CORPORATION
form, as of December 31, 2002, the Company would have been required to expense
$11.1 million of deferred maintenance costs and would be required to expense all
future turnaround costs as incurred.
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.
Options granted in December 2001 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:
FIVE MONTHS ENDED
DECEMBER 31,
----------------------------
2002 2001
----------- -----------
(In thousands, except per share data)
Net income.................................................... $ 5,403 $ 18,607
Average number of shares of common stock outstanding.......... 15,516 15,524
Effect of dilutive stock options.............................. 386 425
----------- -----------
Average number of shares of common stock
outstanding assuming dilution......................... 15,902 15,949
=========== ===========
Income per share - basic...................................... $ 0.35 $ 1.20
=========== ===========
Income per share - diluted.................................... $ 0.34 $ 1.17
=========== ===========
11
HOLLY CORPORATION
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 generally
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 price 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.
FIVE MONTHS ENDED
DECEMBER 31,
-----------------------------
2002 2001
------------- -------------
(In thousands, except per share data)
Net income, as reported......................................... $ 5,403 $ 18,607
Deduct: Total stock-based employee compensation
expense determined under the fair value
method for all awards, net of related tax effects 189 202
------------ ------------
Pro forma net income............................................ $ 5,214 $ 18,405
============ ============
Net income per share - basic
As reported................................................... $ 0.35 $ 1.20
Pro forma..................................................... $ 0.34 $ 1.19
Net income per share - diluted
As reported................................................... $ 0.34 $ 1.17
Pro forma..................................................... $ 0.33 $ 1.15
12
HOLLY CORPORATION
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 five months
ended December 31, 2002 and 2001 were $11.1 million and $9.2 million,
respectively.
NK Asphalt Partners Joint Venture (Unaudited):
DECEMBER 31,
------------------------------
2002 2001
------------ -------------
(In thousands)
Sales (net)............................................... $ 33,713 $ 42,310
============ =============
Gross Profit.............................................. $ 4,667 $ 11,275
============ =============
Income from operations.................................... $ 824 $ 9,738
============ =============
Net income before taxes................................... $ 97 $ 9,103
============ =============
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. At December
31, 2002, the Company had letters of credit outstanding under the facility of
$11.3 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. Costs of
future expenditures for environmental remediation obligations are not discounted
to their present value.
13
HOLLY CORPORATION
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 five months ended December 31,
2002, the Company repurchased 130,900 shares at a cost of approximately $2.2
million or an average of $16.88 per share. From inception of the plan through
September 5, 2003, the Company has repurchased 272,400 shares at a cost of
approximately $4.7 million.
Note I - Derivative Instruments and Hedging Activities
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 five months ended
December 31, 2001, the Company marked the value of the outstanding hedges to
fair value in accordance with SFAS No. 133 and included $602,000 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.
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. Gains and losses reported in
accumulated other comprehensive income will be reclassified into income when the
forecasted transactions affect income. During the five months ended December 31,
2002, the Company marked the value of the outstanding hedges to fair value in
accordance with SFAS No. 133 and included $47,000 of income in comprehensive
income.
14
HOLLY CORPORATION
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. The Pipeline Transportation segment includes approximately 1,000 miles
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. 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, as amended, for the year ended July 31, 2002. The Company's
reportable segments are strategic business units that offer different products
and services.
TOTAL FOR
PIPELINE REPORTABLE CORPORATE CONSOLIDATED
REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL
----------- -------------- ----------- ------------ ------------
(In thousands)
FIVE MONTHS ENDED DECEMBER 31, 2002
Sales and other revenues............ $ 439,788 $ 8,245 $ 448,033 $ 604 $ 448,637
Depreciation and amortization....... $ 10,264 $ 600 $ 10,864 $ 862 $ 11,726
Income (loss) from operations....... $ 8,017 $ 4,800 $ 12,817 $ (4,427) $ 8,390
Income (loss) before income taxes... $ 7,498 $ 5,728 $ 13,226 $ (4,709) $ 8,517
FIVE MONTHS ENDED DECEMBER 31, 2001
Sales and other revenues............ $ 355,408 $ 7,623 $ 363,031 $ 823 $ 363,854
Depreciation and amortization....... $ 9,884 $ 606 $ 10,490 $ 385 $ 10,875
Income (loss) from operations....... $ 23,887 $ 4,128 $ 28,015 $ (3,629) $ 24,386
Income (loss) before income taxes... $ 27,989 $ 4,786 $ 32,775 $ (2,346) $ 30,429
15
HOLLY CORPORATION
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 December 31, 2002, the $25 million settlement is
reflected in Assets as "Other assets - Prepaid transportation."
Note L - Subsequent Events
Proposed Merger of Company and Frontier Oil Corporation and Related Litigation
On March 31, 2003, Frontier Oil Corporation ("Frontier") and the
Company announced an agreement (the "Frontier Merger Agreement") pursuant to
which the two companies would be combined. The combined company would be called
Frontier Oil Corporation and would be headquartered in Houston, Texas. Terms of
the Frontier Merger Agreement provided 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. The Company has
approximately 15.5 million common shares outstanding, and Frontier has
approximately 26.1 million common shares outstanding. The Company's stockholders
would 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 was expected to be non-taxable to the stockholders of both
companies, except for the cash consideration and contingent value rights to be
received by the Company's stockholders. The Frontier Merger Agreement contained
reciprocal provisions for the payment of $15 million termination fees, plus up
to $1 million of expenses, under certain circumstances. A registration statement
on Form S-4 relating to the merger was initially filed with the Securities and
Exchange Commission on May 13, 2003 by Front Range Himalaya Corporation, and
later amended on June 27, 2003 and August 7, 2003
On August 20, 2003, Frontier filed a lawsuit in the Delaware Court of
Chancery seeking declaratory relief and damages based on allegations that the
Company repudiated its obligations under the Frontier Merger Agreement.
On August 21, 2003, the Company formally notified Frontier of the
Company's position that pending and threatened toxic tort litigation with
respect to oil properties operated by a subsidiary of Frontier from 1985 to 1995
adjacent to the campus of Beverly Hills High School constitute a breach of
Frontier's representations and warranties in the Frontier Merger Agreement as to
the absence of litigation or other circumstances which could reasonably be
expected to have a material adverse effect on Frontier. Under the Frontier
Merger Agreement, if a breach has occurred and is not timely cured, the Company
is not obligated to close the merger and has the
16
HOLLY CORPORATION
right to terminate the Frontier Merger Agreement. To the date on which this
report was filed with the Securities and Exchange Commission, the Company's
Board of Directors has not taken any action to terminate the Frontier Merger
Agreement under this or any other provision, nor has the Company's Board changed
its recommendation with respect to the business combination.
On September 2, 2003, the Company filed in the Delaware Court of
Chancery its Answer and Counterclaims seeking declaratory judgments that the
Company did not repudiate the Frontier Merger Agreement, that Frontier has
repudiated the Frontier Merger Agreement, that Frontier has breached certain
representations made by Frontier in the Frontier Merger Agreement, that the
Company's obligations under the Frontier Merger Agreement were and are excused
and that the Company may terminate the Frontier Merger Agreement without
liability, and seeking damages in an unspecified amount as well as costs and
attorneys' fees.
Trial with respect to Frontier's Complaint and the Company's Answer and
Counterclaims is currently scheduled to begin in early December 2003. The
Company believes that the claims made by Frontier in the litigation are wholly
without merit and that the Company's counterclaims are well founded.
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 $16.2 million.
Reparation Payment
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 as reparations
payment received in net income in April 2003. In June 2003 the FERC issued a
further order requiring an adjustment in the computations which has resulted in
an additional payment to the Company of approximately $104,000 which will be
included in net income for the quarter ended September 30, 2003. The final FERC
decision in this case is subject to judicial review by the Court of Appeals for
the District of Columbia Circuit. Briefing in this case is essentially complete
and oral argument in the Court of Appeals is scheduled for November 2003. In the
event SFPP prevails in whole or in part in such judicial review, the reparations
actually owed may be less than the $15.3 million received by the Company with
17
HOLLY CORPORATION
respect to this matter, and in that event part or all of the amounts received by
the Company 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.
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 $36.1 million for crude
oil, refined product and other inventories. The pension obligation is 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.
Purchase of Additional Interest in Rio Grande Joint Venture
On June 30, 2003, the Company, through a wholly-owned, indirect
subsidiary purchased Juarez Pipeline Company's forty-five percent (45%) interest
in Rio Grande Pipeline Company, adding to the twenty-five percent (25%) that the
Company's subsidiary already owned. The purchase price was $27.5 million plus
$1.1 million for certain purchase price adjustments. Juarez Pipeline Company is
a wholly-owned, indirect subsidiary of The Williams Companies, Inc. The Rio
Grande Pipeline Company, a partnership that will now be owned 70% by the Company
and 30% by BP, serves Northern Mexico by transporting liquid petroleum gases
("LPGs") from a point near Odessa, Texas to Pemex Gas ("Pemex") at a point near
El Paso, Texas. Pemex then transports the LPGs to its Mendez Terminal near
Juarez, Mexico.
Sale of Woods Cross Retail Assets
In August 2003, the Company sold its retail assets located in Utah and
Wyoming for $7 million plus the value of inventories. The asset package included
twenty-five operating retail sites and three closed properties that the Company
acquired from ConocoPhillips on June 1, 2003 in its acquisition of the Woods
Cross Refinery. The Company will continue to supply the stations with fuel from
its Woods Cross Refinery.
18
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)
FIVE MONTHS ENDED
DECEMBER 31,
--------------------------
2002 2001
---------- -----------
(In thousands, except per share data)
Sales and other revenues....................................... $ 448,637 $ 363,854
Operating costs and expenses
Cost of products sold (exclusive of depreciation,depletion,.
and amortization)......................................... 377,538 278,837
Operating expenses (exclusive of depreciation,depletion,....
and amortization)......................................... 41,566 40,337
Selling, general and administrative expenses (exclusive of..
depreciation,depletion, and amortization)................. 9,025 8,963
Depreciation, depletion and amortization.................... 11,726 10,875
Exploration expenses, including dry holes................... 392 456
---------- -----------
Total operating costs and expenses..................... 440,247 339,468
---------- -----------
Income from operations......................................... 8,390 24,386
Other income (expense)
Equity in earnings of joint ventures........................ 726 5,037
Interest expense, net....................................... (599) (516)
Gain on sale of equity securities........................... - 1,522
---------- -----------
127 6,043
---------- -----------
Income before income taxes..................................... 8,517 30,429
Income tax provision........................................... 3,114 11,822
---------- -----------
Net income..................................................... $ 5,403 $ 18,607
========== ===========
Net income per common share - basic............................ $ 0.35 $ 1.20
Net income per common share - diluted.......................... $ 0.34 $ 1.17
Average number of common shares outstanding:
Basic........................................................ 15,516 15,524
Diluted...................................................... 15,902 15,949
19
HOLLY CORPORATION
BALANCE SHEET DATA (UNAUDITED)
DECEMBER 31, JULY 31,
2002 2002
------------ ----------
(In thousands, except ratio data)
Cash and cash equivalents....................................... $ 24,266 $ 71,630
Working capital................................................. $ 13,523 $ 59,873
Total assets.................................................... $ 514,680 $ 502,306
Total long-term debt, including current maturities.............. $ 25,714 $ 34,285
Stockholders' equity............................................ $ 229,572 $ 228,556
Total debt to capitalization ratio(1)........................... 10.1% 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)
FIVE MONTHS ENDED
DECEMBER 31,
--------------------------
2002 2001
---------- -----------
(In thousands)
Sales and other revenues (1)
Refining.......................................... $ 439,788 $ 355,408
Pipeline Transportation........................... 8,245 7,623
Corporate and Other............................... 604 823
---------- ----------
Consolidated...................................... $ 448,637 $ 363,854
========== ==========
Income (loss) from operations (1)
Refining.......................................... $ 8,017 $ 23,887
Pipeline Transportation........................... 4,800 4,128
Corporate and Other............................... (4,427) (3,629)
---------- ----------
Consolidated...................................... $ 8,390 $ 24,386
========== ==========
Net cash provided (used) from operating activities... $ (8,973) $ 5,935
Net cash provided (used) from financing activities... $ (13,622) $ (10,387)
Net cash provided (used) from investing activities... $ (24,769) $ (4,755)
Capital expenditures................................. $ 25,293 $ 10,405
EBITDA (2)........................................... $ 20,842 $ 41,820
(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 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.
20
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 the Company. EBITDA should not be considered as an
alternative to net income or operating income, as an indication of
operating performance of the Company 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 the Company's ability to
satisfy principal and interest obligations with respect to the Company's
indebtedness and to use cash for other purposes, including capital
expenditures. EBITDA is also used by the Company's management for internal
analysis and as a basis for financial covenants. EBITDA presented above is
reconciled to net income as follows:
FIVE MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
-------- --------
(In thousands)
Net Income(loss)................................... $ 5,403 $ 18,607
Add provision for income tax.................... 3,114 11,822
Add interest expense............................ 1,014 1,479
Subtract interest income........................ (415) (963)
Add depreciation and amortization............... 11,726 10,875
-------- --------
EBITDA............................................. $ 20,842 $ 41,820
======== ========
REFINING SEGMENT OPERATING DATA (Unaudited)
FIVE MONTHS ENDED
DECEMBER 31,
--------- ----------
2002 2001
--------- ----------
(IN THOUSANDS EXCEPT
FOR BPD AND PER BARREL)
-----------------------
Crude charge (BPD) (1)...................................... 64,300 54,500
Sales of refined products (BPD) (2)......................... 82,300 73,300
Average sales price per sales barrel........................ $ 34.92 $ 31.68
Sales of produced refined products (BPD).................... 70,500 60,600
Average sales price per produced barrel..................... $ 34.65 $ 31.71
Reconciliation of Sales and other revenues in
Consolidated Financial Statements
(Also see Note H to Consolidated Financial
Statements)
Sales of refined product (BPD).............................. 82,300 73,300
Average sales price per sales barrel........................ $ 34.92 $ 31.68
Refinery segment sales and other revenues (3)............... $ 439,788 $ 355,408
Pipeline transportation segment sales and other revenues.... $ 8,245 $ 7,623
Corporate and Other sales and other revenues................ $ 604 $ 823
--------- ---------
Consolidated Sales and other revenues....................... $ 448,637 $ 363,854
========= =========
(1) Crude charge represents the barrels per day of crude oil processed through
the crude units at the Company's refineries.
21
HOLLY CORPORATION
(2) Includes refined products purchased for resale representing 11,800 BPD, and
12,700 BPD, respectively.
(3) In addition to revenues from sales of refined products, the refining
segment includes other miscellaneous revenues amounting to $79,000, and
$120,000, respectively.
FIVE MONTHS ENDED
DECEMBER 31,
-----------------------
2002 2001
------- -------
Sales of produced refined products
Gasolines...................................... 60.1% 59.2%
Diesel fuels................................... 21.7% 20.7%
Jet fuels...................................... 11.0% 11.0%
Asphalt........................................ 5.2% 7.4%
LPG and other.................................. 2.0% 1.7%
----- -----
Total..................................... 100.0% 100.0%
===== =====
RESULTS OF OPERATIONS - FIVE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH FIVE
MONTHS ENDED DECEMBER 31, 2001
Summary
For the five months ended December 31, 2002, net income was $5.4
million ($0.35 per basic share or $0.34 per diluted share) compared to $18.6
million ($1.20 per basic share or $1.17 per diluted share) for the five months
ended December 31, 2001. The lower level of net income for the five months ended
December 31, 2002, as compared to the prior year period, was principally the
result of lower 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. During
the five months ended December 31, 2001, the Company along with the refining
industry as a whole was still experiencing very favorable refined product
margins, which have since declined. Equity in earnings at the Company's asphalt
joint venture declined substantially for the five months ended December 31, 2002
compared to the five months ended December 31, 2001. Sales volumes increased for
the five months ended December 31, 2002 compared to the five months ended
December 31, 2001 when sales volumes were lower due to planned maintenance
turnarounds.
Five Months Ended December 31, 2002 Compared with Five Months Ended December 31,
2001
Net income for the five months ended December 31, 2002 was $5.4 million
compared to $18.6 million for the five months ended December 31, 2001. Refined
product margins were substantially lower in the five months ended December 31,
2002 as compared to the comparable period ending December 31, 2001 and there
were lower earnings from the Company's asphalt joint venture in the five months
ended December 31, 2002 as compared to substantial earnings for the joint
venture for the same period ended December 31, 2001.
For the five months ended December 31, 2002, refined product margins
were significantly less than the refined product margins for the five months
ended December 31, 2001. During the five months ended December 31, 2001, the
Company along with the refining industry as a whole, was still experiencing very
favorable refined product margins, which have since declined.
22
HOLLY CORPORATION
Revenues from the sale of refined products increased to $448.6 million in the
five months ended December 31, 2002 from $363.9 million in the five months ended
December 31, 2001 due principally to higher refined product sales prices. Total
product sales volumes for the five months ended December 31, 2002 increased
significantly from the five months ended December 31, 2001 when sales volumes
were lower due to planned maintenance turnarounds.
Cost of sales for the five months ended December 31, 2002 increased to
$377.5 million from $278.8 million for the five months ended December 31, 2001.
The $98.7 million increase was primarily due to higher costs of crude oil and,
to a lesser extent, higher production volumes.
Operating expenses increased to $41.6 million for the five months ended
December 31, 2002, compared to $40.3 million for the five months ended December
31, 2001, primarily due to higher natural gas prices and higher maintenance
expenses.
Equity in earnings of joint ventures declined substantially to $726,000
for the five months ended December 31, 2002, from $5.0 million for the five
months ended December 31, 2001. The $4.3 million decline resulted primarily from
lower earnings at the Company's asphalt joint venture because of lower margins
for the five months ended December 31, 2002, compared to substantial earnings
for the joint venture in the five months ended December 31, 2001, and an
inventory charge of $1.3 million in the five months ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $47.4 million during the five
months ended December 31, 2002. The reduction in cash was due partially to the
net use of $9.0 million cash for operating activities that was largely a result
of a $25.0 million payment for prepaid transportation services as part of a
settlement by agreement of litigation with Longhorn Partners Pipeline, L.P. The
reduction in cash was also affected by $25.4 million in capital expenditures,
principally for the Navajo Refinery's gas oil hydrotreater and refinery
expansion projects, $8.6 million for scheduled principal payments of long-term
debt, $2.2 million paid for repurchase of treasury shares and $3.4 million for
cash dividends.
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 five months ended December 31,
2002, the Company repurchased 130,900 shares at a cost of approximately $2.2
million or an average of $16.88 per share. From inception of the plan through
September 5, 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 expected to total between $15
million and $17 million over a number of years for the installation of certain
state of the art pollution control equipment at the Company's New Mexico and
Montana refineries.
23
HOLLY CORPORATION
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. At December
31, 2002 the Company had letters of credit outstanding under the facility of
$11.3 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 products terminals in Boise and Burley, ID, 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 $36.1 million for crude
oil, refined product and other inventories. The pension obligation is 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.
In August 2003, the Company sold its retail assets located in Utah and
Wyoming for $7 million plus the value of inventories. The asset package included
twenty-five operating retail sites and three closed properties that the Company
acquired from ConocoPhillips on June 1, 2003 in its acquisition of the Woods
Cross Refinery. The Company will continue to supply the stations with fuel from
its Woods Cross Refinery.
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 $16.2 million.
On June 30, 2003, the Company, through a wholly-owned, indirect
subsidiary purchased Juarez Pipeline Company's forty-five percent (45%) interest
in Rio Grande Pipeline Company, adding to the twenty-five percent (25%) that the
Company's subsidiary already owned. The purchase price was $27.5 million plus
$1.1 million for certain purchase price adjustments. Juarez Pipeline Company is
a wholly- owned, indirect subsidiary of The Williams Companies, Inc. The Rio
Grande Pipeline Company, a partnership that will now be owned 70% by the Company
and 30% by BP, serves Northern Mexico by transporting liquid petroleum gases
("LPGs") from a point near Odessa, Texas to Pemex Gas ("Pemex") at a point near
El Paso, Texas. Pemex then transports the LPGs to its Mendez Terminal near
Juarez, Mexico.
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.
24
HOLLY CORPORATION
Cash Flows from Operating Activities
Cash flows used for operating activities for the five months ended
December 31, 2002 were $9.0 million. For the comparable five months ended
December 31, 2001, cash provided by operating activities was $5.9 million. The
$14.9 million decrease in cash used for operating activities for the five months
ended December 31, 2002 as compared to the five months ended December 31, 2001
was due to a reduction in net income of $13.2 million (which was principally the
result of lower refined product margins and lower earnings of $4.3 million from
joint ventures), a payment of $25.0 million for prepaid transportation services,
reduced turnaround expenditures of $14.1 million as compared to the five months
ended December 31, 2001 and changes in working capital items. In the five months
ended December 31, 2002, changes in working capital items used $344,000 as
compared to the five months ended December 2001 when changes in working capital
provided $3.3 million.
Cash Flows from Financing Activities
Cash flows used for financing activities were $13.6 million for the
five months ended December 31, 2002, as compared to $10.4 million in the same
period of the prior year. During the five months ended December 31, 2002, 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 $75 million
credit facility to October 2004, spent $2.2 million to repurchase 130,900 shares
of common stock, paid $3.4 million in dividends and received $1.2 million upon
the exercise of options to acquire 87,300 shares of common stock. During the
five months ended December 31, 2001, the Company made a scheduled repayment of
long-term debt for $8.6 million, spent $160,000 to repurchase 8,600 shares of
its common stock, paid $3.1 million in dividends and received $1.5 million upon
the exercise of options to acquire 104,500 shares of common stock.
Cash Flows Used for Investing Activities and Capital Projects
Cash flows used for investing activities were $24.8 million for the
five months ended December 31, 2002, as compared to $4.8 million for the same
period of the prior year. Cash expenditures for property, plant and equipment
for the five months ended December 31, 2002 and for the five months ended
December 31, 2001 were $25.3 million and $10.4 million respectively. Most of the
increase is due to the Navajo Refinery's gas oil hydrotreater and expansion
projects. The Company's net cash flow used for investing activities was reduced
during the five months ended December 31, 2002 by a $487,000 distribution to the
Company from the Rio Grande Pipeline joint venture. During the five months ended
December 31, 2002, the Company's net cash flow used by investing activities was
reduced by a $1.2 million distribution to the Company from the Rio Grande
Pipeline and asphalt joint ventures and by $4.5 million of proceeds from the
sale of marketable equity securities held for investment.
The Company's capital budget adopted for the twelve months ended July
31, 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 capital budget for the twelve months ended July 31,
2003 includes authorizations for some expenditures that are expected to be made
after July 31, 2003. The Company expects to expend approximately $60 million for
the twelve months ended July 31, 2003 for capital improvements, which includes
amounts authorized in previous years, principally
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HOLLY CORPORATION
for the hydrotreater project and the refinery expansion to an estimated 75,000
barrels per day ("BPD") as described below. These expenditures include projects
authorized in the Company's capital budget for the twelve months ended July 31,
2003 as well as expenditures authorized in prior capital budgets but expected to
be carried out during the twelve months ended July 31, 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 cost of a new unit. From
November 1997 through December 31, 2002, in addition to the purchase of the
hydrotreater unit, the Company spent approximately $24.3 million on relocation,
engineering, equipment fabrication, and construction related to the hydrotreater
project. The remaining costs to complete the hydrotreater project and the
expansion project are estimated to be approximately $45.9 million. The
hydrotreater project was completed in late July 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 2001 the Company completed the construction of a new
additional sulfur recovery unit, which is currently utilized to enhance sour
crude processing capabilities and which 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. From November 1997
through December 31, 2002, the Company spent $29.4 of the total cost of the
projects. The Company has increased the estimate of total cost for the gas oil
hydrotreater and the expansion from approximately $56 million to approximately
$75.3 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.
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HOLLY CORPORATION
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 $36.1 million for crude oil, refined
product and other inventories. The pension obligation is 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
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. In August 2003, the
Company sold the 25 retail service stations located in Utah and Wyoming for $7
million plus the value of inventories. The Company will continue to supply the
stations with fuel from its Woods Cross Refinery.
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 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 as of December 31, 2002. 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..................... $ 26,974 $ 6,091 $ 11,976 $ 8,620 $ 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
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HOLLY CORPORATION
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. The Company
expects to finance such contributions from its share of cash flows of the joint
venture. In the event that the Company fails to make the required contributions,
the Company 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 expected to total between $15 million and $17
million over a period expected to end in 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, as amended, 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 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
28
HOLLY CORPORATION
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 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.
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.
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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. Gains and losses reported in
accumulated other comprehensive income will be reclassified into income when the
forecasted transactions affect income. During the five month period ended
December 31, 2002, the Company marked the value of the outstanding hedges to
fair value in accordance with SFAS No. 133 and included $47,000 of income in
comprehensive income.
At December 31, 2002, 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
between July 31, 2002 and December 31, 2002. Additionally, the Company invests
any available cash only in investment grade, highly liquid investments generally
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 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.
30
HOLLY CORPORATION
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
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.
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HOLLY CORPORATION
In January 2003, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirement for Guarantees, including Indirect Guarantees of
Indebtedness of Others" (FIN 45"). FIN 45 requires an entity to recognize a
liability for the obligations it has undertaken in issuing a guarantee. This
liability would be recorded at the inception of a guarantee and would be
measured at fair value. Certain guarantees are excluded from the measurement and
disclosure provisions while certain other guarantees are excluded from the
measurement provisions of the interpretation. The adoption of the statement on
January 1, 2003 is expected to have no effect on the Company's financial
condition, results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46). FIN 46 requires an entity to
consolidate a variable interest entity if it is designated as the primary
beneficiary of that entity if the entity does not have a majority of voting
interests. A variable interest entity is generally defined as an entity where
its equity is unable to finance its activities or where the owners of the entity
lack the risk and rewards of ownership. The provisions of FIN 46 apply at
inception for any entity created after January 31, 2003. For an entity created
before February 1, 2003, the provisions of this interpretation must be applied
at the beginning of the first interim period beginning after June 15, 2003. The
adoption of FIN 46 is not expected to have a material effect on the Company's
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
December 31, 2002, the Company had approximately $11.1 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 approximately $811,000. If this proposed Statement of Position
had been adopted in its current form, as of December 31, 2002, the Company would
have been required to expense, as of December 31, 2002, $11.1 million of
deferred maintenance costs and would be required to expense all future
turnaround costs as incurred.
32
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, as required by Rule 13a-15(b) under the Securities
Exchange Act of 1934 (the "Exchange Act"), the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the
period covered by this transition 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 control over financial reporting.
During the period covered by this transition report on Form 10-Q/A,
there was no change in the Company's internal control over financial reporting
identified in connection with the Company's evaluation of its disclosure
controls and procedures required by Exchange Act Rule 13a-15(b) that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
33
HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 20, 2003, Frontier Oil Corporation ("Frontier") filed a
lawsuit in the Delaware Court of Chancery seeking declaratory relief and damages
based on allegations that the Company repudiated its obligations under an
agreement (the "Frontier Merger Agreement") announced in late March 2003 under
which Frontier and the Company would be combined. On August 21, 2003, the
Company formally notified Frontier of the Company's position that pending and
threatened toxic tort litigation with respect to oil properties operated by a
subsidiary of Frontier from 1985 to 1995 adjacent to the campus of Beverly Hills
High School constitute a breach of Frontier's representations and warranties in
the Frontier Merger Agreement as to the absence of litigation or other
circumstances which could reasonably be expected to have a material adverse
effect on Frontier. Under the Frontier Merger Agreement, if a breach has
occurred and is not timely cured, the Company is not obligated to close the
merger and has the right to terminate the Frontier Merger Agreement. To the date
of this report, the Company's Board of Directors has not taken any action to
terminate the Frontier Merger Agreement under this or any other provision, nor
has the Company's Board changed its recommendation with respect to the merger.
On September 2, 2003, the Company filed in the Delaware Court of Chancery its
Answer and Counterclaims seeking declaratory judgments that the Company did not
repudiate the Frontier Merger Agreement, that Frontier has repudiated the
Frontier Merger Agreement, that Frontier has breached certain representations
made by Frontier in the Frontier Merger Agreement, that the Company's
obligations under the Frontier Merger Agreement were and are excused and that
the Company may terminate the Frontier Merger Agreement without liability, and
seeking damages in an unspecified amount as well as costs and attorneys' fees.
Trial with respect to Frontier's Complaint and the Company's Answer and
Counterclaims is currently scheduled to begin in early December 2003. The
Company believes that the claims made by Frontier in the litigation are wholly
without merit and that the Company's counterclaims are well founded.
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. Any decision 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 the outcome of the pending motions for
summary judgment or what amount, if any, will ultimately be payable to the
Company with respect to this lawsuit. The status of this matter as of the
original filing dates of prior reports for periods after July 31, 2002 is
described in the Company's reports on Form 10-Q/A, as amended, for the fiscal
quarters ended October 31, 2002, January 31, 2003 and April 30, 2003.
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
34
HOLLY CORPORATION
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
initially ordered by FERC and such amount has been included as reparations
payment received in net income in April 2003. In June 2003 the FERC issued a
further order requiring an adjustment in the computations which has resulted in
an additional payment to the Company of approximately $104,000, and this
additional amount will be included in net income for the quarter ended September
30, 2003. The final FERC decision on this matter is subject to judicial review
by the Court of Appeals for the District of Columbia Circuit. Briefing in this
case is essentially complete and oral argument in the Court of Appeals is
scheduled for November 2003. In the event SFPP prevails in whole or in part in
such judicial review, the reparations actually owed may be less than the $15.3
million received by the Company with respect to this matter, and in that event
part or all of the amounts received by the Company 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. The status of this matter as of the original filing dates of
prior reports for periods after July 31, 2002 is described in the Company's
reports on Form 10-Q/A, as amended, for the fiscal quarters ended October 31,
2002, January 31, 2003 and April 30, 2003.
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. On July 23, 2003, the FERC issued an Order on Rehearing that denied the
Company's request for rehearing. The Company expects to take no further action
with respect to SFPP's September 2002 petition for declaratory order. The status
of this matter as of the original filing dates of prior reports for periods
after July 31, 2002 is described in the Company's reports on Form 10-Q/A, as
amended, for the fiscal quarters ended October 31, 2002, January 31, 2003 and
April 30, 2003.
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HOLLY CORPORATION
In August 2003, the United States Environmental Protection Agency
("EPA") asserted that the Company is liable for monetary penalties totaling
approximately $240,000 under the Consent Decree approved and entered by the
United States District Court for the District of New Mexico in March 2002 to
implement a settlement of issues concerning the application of federal and state
air quality requirements to past and future operations of the Company's
refineries. The proposed monetary penalties relate to a number of incidents
after March 2002 reported by the Company that involved the flaring at the
Artesia, New Mexico refinery of gas containing hydrogen sulfide ("acid gas"). In
the Company's reports of these incidents as required under the Consent Decree,
the Company took the position that, except in one case involving a penalty of
approximately $1,500 which has already been paid, the incidents should not be
subject to penalties under the terms of the Consent Decree. The Company is
currently in discussions with the EPA as to the interpretation and application
of the terms of the Consent Decree to past and future acid gas flaring
incidents.
36
HOLLY CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
(b) Reports on Form 8-K:
On August 13, 2002, a Current Report on Form 8-K was filed under
Item 5 Other Events, concerning the extension of the Company's
Credit and Reimbursement Agreement with a group of banks headed
by the Canadian Imperial Bank of Commerce.
On August 23, 2002, a Current Report on Form 8-K was filed under
Item 5 Other Events, concerning the denial of the Company's
motion for summary judgment by the state appeals court in El
Paso, Texas in the pending lawsuit brought by Longhorn Partners
Pipeline, L.P. against the Company.
On August 26, 2002, a Current Report on Form 8-K was filed under
Item 5 Other Events, concerning the filing of a lawsuit in New
Mexico state court against Longhorn Partners Pipeline, L.P. and
related parties.
On September 25, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the award to the Company's
wholly owned subsidiary, Navajo Refining Company, of a contract
to provide up to 8,500 barrels per day of JP-8 jet fuel to the
Department of Defense.
On November 18, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the settlement of
litigation by Longhorn Partners Pipeline, L.P. against the
Company brought in August 1998 and of litigation brought by the
Company against Longhorn Partners Pipeline, L.P. and related
parties in August 2002.
On December 12, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the Company's earnings
release for the three months ended October 31, 2002.
On December 20, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning an announcement by the
Company of an agreement to acquire the Woods Cross Refinery for
$25 million plus inventories.
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.
37
HOLLY CORPORATION
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 the Company'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 the Company and that the Federal Trade Commission approved
the Company'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 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 the Company and ConocoPhillips (incorporated by reference
to Exhibit 10.1 to the Company'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 the Company, certain of its subsidiaries, CIBC and other
lenders.
38
HOLLY CORPORATION
On June 12, 2003, a Current Report on Form 8-K was filed under
Item 7 Financial Statements and Exhibits, Item 9 Regulation FD
Disclosure and Item 12 Disclosure of Results of Operations and
Financial Condition, concerning the Company's earnings release
for the third quarter and nine months ended April 30, 2003.
Exhibits included the Company's press release issued June 12,
2003.
On June 30, 2003, a Current Report on Form 8-K was filed under
Item 5 Other Events and Item 7 Financial Statements and Exhibits,
concerning the Company's purchase of an additional forty-five
percent (45%) share of Rio Grande Pipeline Company, adding to the
twenty-five percent ( 25%) share that was already owned. Exhibits
included the Company's press release issued June 30, 2003.
On July 30, 2003, a Current Report on Form 8-K was filed under
Item 8 Change in Fiscal Year, concerning the Company's change
from a July 31 fiscal year-end to a December 31 fiscal year-end.
On August 21, 2003, a Current Report on Form 8-K was filed under
Item 5 Other Events and Item 7 Financial Statements and Exhibits,
concerning the lawsuit filed against the Company by Frontier Oil
Corporation in Delaware Chancery Court. Exhibits included the
Company's press release issued August 20, 2003.
On August 22, 2003, a Current Report on Form 8-K was filed under
Item 5 Other Events and Item 7 Financial Statements and Exhibits,
concerning the Company's delivery to Frontier Oil Corporation of
a notice of material adverse effect pursuant to the terms of the
Agreement and Plan of Merger, dated as of March 30, 2003.
Exhibits included the Company's press release issued August 21,
2003 and the Notice of Material Adverse Effect, dated August 21,
2003.
On August 26, 2003, a Current Report on Form 8-K was filed under
Item 5 Other Events and Item 7 Financial Statements and Exhibits,
concerning the sale of the Company's retail assets located in
Utah and Wyoming. Exhibits included the Company's press release
issued August 25, 2003.
On September 2, 2003, a Current Report on Form 8-K was filed
under Item 5 Other Events and Item 7 Financial Statements and
Exhibits, concerning the Company's answer and counterclaims
against Frontier Oil Corporation in the lawsuit pending in the
Delaware Court of Chancery, which Frontier filed against the
Company on August 20, 2003. Exhibits included the Company's press
release issued September 2, 2003.
39
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)
40