SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
Commission File Number 333-45093
HUNTWAY REFINING COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4680045
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
25129 The Old Road, Suite 322
Newhall, California
(Address of Principal Executive Offices)
91381
(Zip Code)
Registrant's Telephone Number Including Area Code: (661) 286-1582
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(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 .
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of August 12, 1999, was 15,000,771.
QUARTERLY REPORT ON FORM 10-Q
HUNTWAY REFINING COMPANY
For the Quarter Ended June 30, 1999
INDEX
Part I. Financial Information Page
Condensed Consolidated Balance Sheets as
of June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of
Operations for the Three and Six Months
Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1999 and 1998 5
Condensed Consolidated Statement of
Capital for the Six Months
Ended June 30, 1999 6
Notes to Condensed Consolidated
Financial Statements 7
Management's Discussion and Analysis
of Results of Operations and
Financial Condition 9
Quantitative and Qualitative Disclosures
About Market Risk 15
Part II. Other Information 16
<TABLE>
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash $3,799,000 $10,910,000
Accounts Receivable 8,737,000 3,983,000
Inventories 5,730,000 3,551,000
Prepaid Expenses 1,899,000 449,000
Total Current Assets 20,165,000 18,893,000
PROPERTY - Net 64,012,000 59,827,000
OTHER ASSETS - Net 1,784,000 1,280,000
GOODWILL - Net 1,616,000 1,644,000
TOTAL ASSETS $87,577,000 $81,644,000
CURRENT LIABILITIES:
Accounts Payable $8,833,000 $3,515,000
Current Portion of
Long-Term Obligations 1,475,000 757,000
Accrued Interest 457,000 593,000
Other Accrued Liabilities 1,156,000 2,089,000
Total Current Liabilities 11,921,000 6,954,000
Long-Term Debt 35,681,000 36,110,000
Deferred Income Taxes and
Other Long-Term Obligations 1,468,000 990,000
CAPITAL:
Preferred Stock (1,000,000 shares
authorized, none issued) - -
Common Stock (75,000,000 shares
authorized, 14,983,271 outstanding) 150,000 149,000
Additional Paid-In Capital 34,563,000 34,334,000
Retained Earnings 3,794,000 3,107,000
Total Capital 38,507,000 37,590,000
TOTAL LIABILITIES AND CAPITAL $87,577,000 $81,644,000
</TABLE>
<TABLE>
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $22,655,000 $20,277,000 $35,254,000 $32,830,000
COSTS AND EXPENSES:
Material and
Processing Costs 18,736,000 15,970,000 28,605,000 26,774,000
Selling and
Administration Expenses 1,256,000 1,396,000 2,528,000 2,372,000
Interest Expense 841,000 871,000 1,697,000 1,703,000
Depreciation and
Amortization 692,000 702,000 1,259,000 1,309,000
Total Costs and Expenses 21,525,000 18,939,000 34,089,000 32,158,000
INCOME BEFORE INCOME TAXES 1,130,000 1,338,000 1,165,000 672,000
Provision for Income Taxes 464,000 254,000 478,000 254,000
NET INCOME $666,000 $1,084,000 $687,000 $418,000
Net Income per Basic Share $0.04 $0.07 $0.05 $0.03
Net Income per Diluted Share $0.03 $0.05 $0.04 $0.02
Weighted Average Basic
Common Shares Outstanding 14,983,000 14,781,000 14,942,000 14,756,000
Weighted Average Diluted
Common Shares Outstanding 31,377,000 32,281,00 16,938,000 17,851,000
Pro Forma Pro Forma
NET INCOME BEFORE TAXES $1,338,000 $672,000
Pro Forma Provision
for Income Taxes 535,000 269,000
PRO FORMA NET INCOME $803,000 $403,000
Pro Forma Basic Income per Share $0.06 $0.03
Pro Forma Diluted Income per Share $0.03 $0.02
</TABLE>
<TABLE>
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $687,000 $418,000
Adjustments to Reconcile Net
Income to Net Cash Used by
Operating Activities:
Interest Expense Paid by the Issuance
of Notes 278,000 248,000
Depreciation and Amortization 1,259,000 1,309,000
Deferred Income Taxes 478,000 254,000
Changes in Operating Assets and Liabilities:
Increase in Accounts Receivable (4,754,000) (3,838,000)
Increase in Inventories (2,135,000) (843,000)
Increase in Prepaid Expenses (1,445,000) (50,000)
Increase (Decrease) in Accounts Payable 5,318,000 (1,317,000)
Increase (Decrease) in Accrued Liabilities (1,070,000) 307,000
NET CASH USED BY OPERATING ACTIVITIES (1,384,000) (3,512,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property (5,242,000) (1,531,000)
Other Assets (605,000) (529,000)
NET CASH USED BY INVESTING ACTIVITIES (5,847,000) (2,060,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock 109,000 246,000
Proceeds of Notes Payable 13,390,000
Repayment of Long-term Obligations (13,379,000) (792,000)
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 120,000 (546,000)
NET DECREASE IN CASH (7,111,000) (6,118,000)
CASH BALANCE - BEGINNING OF PERIOD 10,910,000 9,406,000
CASH BALANCE - END OF PERIOD $3,799,000 $3,288,000
Supplemental Disclosures:
Interest Paid in Cash During the Period $1,555,000 $1,472,000
Income Taxes Paid in Cash During the Period $- $-
</TABLE>
<TABLE>
HUNTWAY REFINING COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CAPITAL
<CAPTION>
Common Additional Treasury
Shares Common Paid In Retained Stock Total
Outstanding Stock Capital Earnings (at cost) Capital
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1999 14,881,000 $157,000 $34,335,000$3,107,000$(9,000)$37,590,000
Earned Portion
of Option Awards 121,000 121,000
Exercise of
Stock Options 102,000 1,000 108,000 109,000
Net Income for
the Six Months
Ended June 30,1999 687,000 687,000
Balance at June
30, 1999 14,983,000 $158,000 $34,564,000$3,794,000$(9,000)$38,507,000
</TABLE>
HUNTWAY REFINING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements of Huntway
Refining Company and subsidiary as of June 30, 1999 and 1998 and for the three
and six month periods then ended are unaudited, but in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of such financial statements in
accordance with generally accepted accounting principles. The results of
operations for an interim period are not necessarily indicative of results for
a full year. The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Companys annual report for the year ended December 31, 1998.
Huntway Refining Company (the Company) was formed for the purpose of
effecting the conversion of Huntway Partners, L.P. (the Partnership) from a
publicly traded limited partnership to a publicly traded corporation on June
1, 1998 through the merger of the Partnership into the Company (the
Conversion). As a result of the merger, the Company succeeded to the
Partnership's assets, liabilities and operations. The financial statements
through the date of the Conversion reflect the operations of the Partnership.
Pro forma information is presented to assist in comparing the results of
operations as if the Conversion had occurred at the beginning of each period
for which financial statements are presented. The pro forma provision for
income taxes has been calculated at an estimated combined Federal and State
rate of 40%.
Crude oil and finished product inventories are stated at cost determined
by the last-in, first-out method, which is not in excess of market. For the
first six months of 1999 and 1998, the effect of LIFO was to decrease net
income by approximately $1,460,000 and to increase net income by approximately
$1,028,000 respectively. For the quarter ended June 30, 1999 the effect of
LIFO was to decrease net income by approximately $1,201,000. LIFO did not
have an effect on net income for the comparable quarter of 1998.
<TABLE>
Inventories at June 30, 1999 and December 31, 1998 were as follows:
<CAPTION>
1999 1998
<S> <C> <C>
Finished Products $3,785,000 $2,180,000
Crude Oil and Supplies 3,405,000 1,371,000
7,190,000 3,551,000
Less LIFO Reserve (1,460,000) -
Total $5,730,000 $3,551,000
</TABLE>
2. CONTINGENCIES
The Company's business is the refining of crude oil into liquid asphalt
and other light-end products which is subject to various environmental laws
and regulations. Adherence to these environmental laws and regulations creates
the opportunity for unknown costs and loss contingencies to arise in the
future. Unknown costs and loss contingencies could also occur due to the
nature of the Companys business. The Company is not aware of any costs or
loss contingencies relating to environmental laws and regulations that have
not been recorded in its financial statements. However, future environmental
costs cannot be reasonably estimated due to unknown factors. Although
environmental costs may have a significant impact on results of operations for
any single period, the Company believes that such costs will not have a
material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
The Company is party to a number of lawsuits and other proceedings
arising in the ordinary course of its business. While the results of such
lawsuits and proceedings cannot be predicted with certainty, management does
not expect that the ultimate liability, if any, will have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In the following discussion, "Huntway" or the "Company" refers to
Huntway Partners, L.P. prior to June 1, 1998 and to Huntway Refining
Company thereafter. The following discussion should be read in conjunction
with the financial statements included elsewhere in this report and the
financial statements and Management's Discussion and Analysis of Results of
Operations and Financial Condition included in Huntway's annual report for
1998 on Form 10-K. All per share amounts are diluted.
This Form 10-Q contains forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, that involve a number of
risks and uncertainties. Important factors that could cause actual results
to differ materially from those indicated by such forward-looking
statements are set forth in Managements Discussion and Analysis of Results
of Operations and Financial Condition in Huntways annual report on Form
10K for the year ended December 31, 1998. These risks and uncertainties
include the price of crude oil, demand for liquid asphalt and government
and private funding for road construction and repair. The Companys actual
results may differ materially from these forward-looking statements.
Results of Operations
Huntway is principally engaged in the processing and sale of liquid
asphalt products, as well as the production of other refined petroleum
products such as gas oil, naphtha, kerosene distillate, diesel fuel, jet
fuel and bunker fuel.
Huntway's ability to generate income depends principally upon the
margins between the prices for its refined petroleum products and the cost
of crude oil, as well as upon demand for liquid asphalt, which affects both
price and sales volume.
Historically, refined petroleum product prices (including prices for
liquid asphalt, although to a lesser degree than Huntway's other refined
petroleum products) generally fluctuate with crude oil price levels. There
has not been a relationship between total revenues and income due to the
volatile commodity character of crude oil prices.
Accordingly, management believes earnings before interest,
depreciation and amortization and income taxes provides the most meaningful
basis for comparing historical results of operations discussed below.
Earnings before interest, depreciation and amortization and income taxes is
not a measuring criteria under generally accepted accounting principles and
should not be viewed as superior to or in isolation from net income. The
following discussion should be read in conjunction with the financial
statements included elsewhere in this report.
Three Months Ended June 30, 1999 Compared with the Three Months Ended June
30, 1998
Second quarter 1999 net income was $666,000, or $.03 per share,
versus 1998 second quarter net income of $803,000, or $.03 per share after
an additional pro forma provision for income taxes of $281,000. Reported
net income for the second quarter of 1998 was $1,084,000, or $.05 per
share. However, for the first five months of 1998 Huntway operated as a
partnership and was not subject to income taxes. Accordingly, Huntway did
not record a tax provision on earnings during that period.
During the second quarter of 1999, the Benicia refinery was shut down
for a period of 40 days during late April and May in order to install a
number of process plant and tankage improvements intended to expand and
modernize its production, storage and shipment capabilities. The
improvements increased the refinerys production capacity by approximately
25% and have improved the quality of the plants asphalt and light-end
products through increased fractionation. The project also added 74,000
barrels of additional product storage. The improvements are also
beneficial to the environment, as air emissions have been reduced by more
than 15 percent despite the increased production levels. Overall, the
Company invested approximately $5,800,000 in this project, which was
substantially completed and placed in service in June, 1999.
Income before income taxes for the second quarter of 1999 was
$1,130,000 versus $1,338,000 for the comparable quarter of 1998. The
decline reflects increased operating costs between periods due to storage
tank repairs at our Wilmington refinery and the 40-day production shutdown
during the expansion and modernization of our Benicia refinery.
As a result of the aforementioned production shutdown, sales and
production volume declined 5% for the second quarter of 1999 as compared to
the second quarter of 1998. However, revenues increased 12%, reflecting
higher average selling prices due to the impact of rising crude oil prices,
stronger than anticipated demand for our specialty asphalt products in
Northern California and higher West Coast gasoline prices due to production
shortfalls.
<TABLE>
The following table sets forth the effects of changes in price and
volume on sales and material and processing costs on the quarter ended June
30, 1999 as compared to the quarter ended June 30, 1998:
<CAPTION>
Material & Barrels
Sales Processing Net Sold
<S> <C> <C> <C> <C>
Three Months Ended
June 30, 1998 $20,277,000 $15,970,000 $4,307,000 1,139,000
Effect of changes
in price 3,393,000 3,565,000 (172,000)
Effect of changes
in volume (1,015,000) (799,000) (216,000) (57,000)
Three Months Ended
June 30, 1999 $22,655,000 $18,736,000 $3,919,000 1,082,000
</TABLE>
Despite the decline in unit volume of 5% to 1,082,000 barrels in the
second quarter of 1999 versus the second quarter of 1998 due to the
shutdown of the Benicia refinery during the expansion and modernization
project, overall sales increased 12% on overall higher product prices.
Asphalt prices rose between quarters by 12%, primarily due to product mix
as sales of modified asphalt far exceeded the prior year as a result of
increasing demand for these products by state highway departments.
Intermediate refinery feedstock prices rose 22% as a result of a series of
refinery outages in Huntways market area as well as in response to
increasing crude oil prices.
Overall, material and processing costs increased by 17%, or
$2,766,000, for the second quarter as compared to the comparable quarter of
1998. On a per barrel basis, material and processing costs rose 24% from
$14.02 to $17.32. This increase was primarily the result of higher crude
oil prices, as the major producing countries have reduced production in an
effort to raise prices. Planned and unplanned tank repairs and related
waste disposal as well as increased crude oil storage costs related to the
shutdown of the Benicia refinery during the expansion and modernization
project also contributed.
Overall net margins fell by 9% or $388,000 between quarters. The
decline in unit volume accounted for $216,000 or 56% of the decrease and
the balance resulted from crude oil price and processing cost increases in
excess of improved selling prices.
Selling, general and administrative costs decreased by $140,000 as
compared to the second quarter of 1998, primarily as a result of decreased
compensation accruals.
Despite higher debt levels, net interest expense also decreased in
the quarter by a nominal $30,000 due to the capitalization of interest on
the Benicia expansion and modernization project.
Six Months Ended June 30, 1999 Compared with the Six Months Ended June 30,
1998
First half 1999 net income was $687,000, or $.04 per share, versus
1998 first half net income of $418,000, or $.02 per share.
Margins on all products were up slightly in the current period
resulting in an increase in net income between periods of $269,000. The
effect of the additional pro forma provision for income taxes of $15,000
was not significant.
<TABLE>
The following table sets forth the effects of changes in price and
volume on sales and material and processing costs on the six month period
ended June 30, 1999 as compared to the six month period ended June 30,
1998:
<CAPTION>
Material & Barrels
Sales Processing Net Sold
<S> <C> <C> <C> <C>
Six Months Ended
June 30, 1998 $32,830,000 $26,774,000 $6,056,000 1,886,000
Effect of changes
in price 2,267,000 1,703,000 564,000
Effect of changes
in volume 157,000 128,000 29,000 9,000
Six Months Ended
June 30, 1999 $35,254,000 $28,605,000 $6,649,000 1,895,000
</TABLE>
As reflected in the table, overall unit sales were flat between
periods, increasing to 1,895,000 barrels in the first half of 1999 versus
1,886,000 barrels in the first half of 1998. However, asphalt volumes
increased 12% between periods as the paving season experienced an
exceptionally strong start due to increased funding for road construction
and repair. On the other hand, intermediate refinery feedstock volumes
fell 10% due to the timing of shipments. Sales increased 7% between
periods to $35,254,000 from $32,830,000 as asphalt prices increased 8%
primarily due to product mix as sales of modified asphalt far exceeded the
prior year as a result of increasing demand for these products by state
highway departments. Light intermediate feedstock prices rose between
periods by a modest 2% as a first quarter decline in prices was offset by
the second quarter increase discussed above.
Material and processing costs rose 7%, or $1,831,000, for the first
half of 1999 as compared to the first half of 1998. Of this amount,
$128,000 was the result of the nominal increase in volume while the
remainder primarily resulted from higher materials cost due to higher
volumes of specialty modified asphalt sales, higher processing costs due to
the impact of the production shutdown in April and May to accommodate the
expansion and modernization of the Benicia refinery and increased tankage-
related repair and maintenance activities.
Overall net margins rose by 10% or $593,000 between periods primarily
due to increased sales of higher margin specialty modified asphalt
products.
Selling, general and administrative costs increased by $156,000 as
compared to the first half of 1998 primarily as a result of increased legal
and professional fees, investor relations expenditures, and franchise
taxes, all of which increased between periods as a result of doing business
as a corporation as opposed to a partnership. Partially offsetting these
increases was a reduction in compensation accruals.
Despite higher debt levels, net interest expense decreased in the
first half of 1999 by a nominal $6,000 due to the capitalization of
interest on the Benicia expansion and modernization project.
On January 21, 1999 the Company obtained a new seven year,
$13,390,000 senior debt facility. The facility bears interest at a fixed
rate of 9.234%. Proceeds from the borrowings were used to retire all
$12,699,000 of the Companys then existing senior debt, to pay transaction
costs and to provide the Company with a small amount of working capital.
The facility also provides that the Company may borrow up to an additional
$2,800,000 later in 1999 to provide partial funding for improvements to its
Benicia refinery. These borrowings, if any, will also amortize over seven
years at fixed rates of interest determined at funding. However, it is not
the Companys present intention to borrow the additional funds.
The blended interest rate on the $12,699,000 of senior debt paid off
on January 21, 1999 was approximately 8.2%. The Company anticipates that
net interest expense in 1999 will only slightly exceed net interest expense
in 1998 despite higher debt levels due to increased interest income.
Because of the foregoing, as well as other factors affecting the
Companys operating results, past financial performance should not be
considered to be a reliable indicator of future performance and investors
should not use historical trends to anticipate results or trends in future
periods.
Year 2000 Issue
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
computer programs that have time-sensitive software may recognize a date
using 00 as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
Management has determined that the year 2000 issue will not pose
significant operational problems for either its computer systems (IT
systems) or its process controls (Non-IT systems), and believes any
remediation costs are not material. Such remediation costs are charged to
operations as incurred. The Companys process controls are not
computerized and do not rely upon time/date sensitive control equipment.
The Companys accounting and billing systems are computerized and are
sensitive to the year 2000 issue. However, these applications are being
replaced and the new applications are currently in the process of being
placed service. Huntway management believes that this process will be
completed in the fourth quarter of 1999. In the event that these
applications are not in place by the year 2000 the Company believes that it
has sufficient manual backup systems that could be used to prevent any
material disruption of its operations.
The Company has entered into formal communications with its
significant suppliers and customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties failure
to remediate their own Year 2000 Issue. However, the Company does not
utilize any electronic data interchange directly with its customers and
believes its exposure is limited to systems associated with the Federal
Wire system, common carrier pipelines and utilities. While there can be no
guarantee that the systems of other companies on which the Company relies
will be timely converted and would not have an adverse effect on its
operations, management does not currently anticipate significant problems
with these systems. However, should the Company be denied access to crude
supplies, natural gas or other vital materials and services due to the
failure of its suppliers' delivery systems resulting from year 2000
compliance problems, it could be forced to either curtail operations or
shut down until such materials can again be delivered. Additionally,
should its customers be unable to make payments for their purchases, the
Company could be faced with a liquidity shortfall.
Capital Resources And Liquidity
The primary factors that affect the Companys cash requirements and
liquidity position are fluctuations in the selling prices for its refined
products caused by local market supply and demand factors including public
and private demand for road construction and improvement. Demand for
diesel fuel and gasoline, as well as fluctuations in the cost of crude oil,
which is impacted by a myriad of market factors, both foreign and domestic,
influence the Companys cash requirements and liquidity position. In
addition, capital expenditure requirements, including costs to maintain
compliance with environmental regulations as well as debt service
requirements, impact the Companys cash needs.
In the first half of 1999, operating activities used $1,384,000 in
cash. The periods net income of $687,000 along with depreciation and
amortization of $1,259,000, the payment of interest by the issuance of
notes of $278,000 and a provision for deferred income taxes of $478,000
provided $2,702,000 in cash. Additionally, an increase in accounts payable
provided $5,318,000. Offsetting these sources of cash were seasonal
increases in accounts receivable and inventories of $4,754,000 and
$2,135,000, respectively. Additionally, other accrued liabilities
decreased, requiring cash of $1,070,000, primarily for payment of incentive
plan awards and prepaid expenses consumed $1,445,000, primarily for
turnaround costs associated with the Benicia and Wilmington refineries as
well as the renewal of insurance coverage.
In comparison, in the first half of 1998, operating activities used
$3,512,000 in cash. Net income of $418,000 along with depreciation and
amortization of $1,309,000, the payment of interest by the issuance of
notes of $248,000 and the provision for deferred income taxes of $254,000
provided $2,229,000 in cash. Seasonal increases in inventories and
accounts receivable of $843,000 and $3,838,000 respectively, were financed
with cash. Accounts payable decreased by $1,317,000 due to falling crude
prices. Accrued liabilities increased by $307,000 because of incentive
accruals and because only two-thirds of the interest accrued under the
senior debt agreements for the six month period was due and paid in the
period. Prepaid expenses used a nominal $50,000.
During the first half of 1999, investing activities consumed
$5,847,000. Additions to property, primarily for the expansion and
modernization of the Benicia refinery, required $5,242,000, while additions
to other assets, primarily loan costs associated with the new term debt
facility, used $605,000. Investing activities consumed $2,060,000 in cash
during the first half of 1998 primarily relating to the construction of a
new wastewater treatment facility in the Wilmington refinery and various
storage-related improvements in the Benicia refinery.
Financing activities, primarily the exercise of employee stock
options, provided $120,000 during the first half of 1999 as proceeds from
and repayments of notes payable offset each other. In contrast, financing
activities consumed $546,000 in the first half of 1998 for principal
payments on notes payable.
The Company believes its current level of letter of credit facility
is sufficient to guarantee requirements for crude oil purchases,
collateralization of other obligations and for hedging activities at
current crude price levels. However, due to the volatility in the price of
crude oil there can be no assurance that these facilities will be adequate
in the future. If crude oil prices increased beyond the level of the
Company's letter of credit facilities, it would be required to prepay for
crude oil or reduce its crude oil purchases, either of which would
adversely impact profitability.
At June 30, 1999 the cash position of the Company was $3,799,000, an
increase of $511,000 from the balance at June 30, 1998 of $3,288,000. In
the opinion of management, cash on hand, together with anticipated future
cash flows, will be sufficient to meet Huntway's liquidity obligations for
the next 12 months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As previously noted, the Companys profitability depends largely on
the spread between market prices for its refined products and its crude oil
costs. A substantial and prolonged decrease in this overall spread would
have a significant negative effect on the Companys earnings, financial
position and cash flows. Approximately half of Huntways production
consists of light products and half of asphalts. The prices of Huntways
light products have historically followed changes in crude oil prices over
12- to 18-month time periods despite high short-term volatility.
Management believes that approximately 20% of Huntways asphalt unit sales
volume will be covered by contractual escalation and de-escalation clauses
with various state highway agencies, which are based upon various crude oil
cost indexes. In an effort to mitigate the remaining risk, the Company
enters into contracts intended to partially hedge its exposure to crude oil
price fluctuations. Historically, such contracts are zero cost collars
under which the Company receives or makes a monthly payment if crude oil
prices for the month rise above, or fall below, the contracts ceiling
or floor levels, respectively. The Company does not enter into such
arrangements for trading or other speculative purposes.
To a lesser extent, the Company is also exposed to risks associated
with interest rate fluctuations. However, because the Company invests only
in short-term investment grade securities and has only fixed rate debt,
such risks to its cash flows are not material.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to a number of lawsuits and other proceedings
arising in the ordinary course of its business. While the results of such
lawsuits and proceedings cannot be predicted with certainty, management
does not expect that the ultimate liability, if any, will have a material
adverse effect on the consolidated financial position, results of
operations or of the cash flows of the Company.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders on May 12, 1999, the following
proposal was voted upon:
Election of Directors for a three year term expiring in 2002
Votes Votes
Nominees for Director Cast For Withheld
Harris Kaplan 14,227,149 93,390
Richard Spencer 14,230,779 89,760
The directors whose terms expire in 2001 are:
Juan Y. Forster
Warren J. Nelson
The director whose term expires in 2000 are:
J. C. McFarland
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on August 12, 1999.
HUNTWAY REFINING COMPANY
(Registrant)
By:
Warren J. Nelson
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
- -1-
- -38-
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