UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-92871-02
SABINE RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 43-1857408
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1801 S. Gulfway Drive
Office No. 36 77640
Port Arthur, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (409) 982-7491
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Number of shares of registrant's common stock, $.01 par value, outstanding
as of November 10, 2000: 6,818,182
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of Sabine River Holding Corp:
We have reviewed the accompanying consolidated balance sheet of Sabine
River Holding Corp. and Subsidiaries (a development stage company) (the
"Company") as of September 30, 2000 and the related consolidated statements of
operations for the period from May 4, 1999 (date of inception) to September 30,
2000, and for the three-month and nine-month periods ended September 30, 1999
and 2000, and consolidated statements of cash flows for the period from May 4,
1999 (date of inception) to September 30, 2000, and the nine-month periods ended
September 30, 1999 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the period from May 4, 1999
(inception) to December 31, 1999 (not presented herein); and in our report dated
March 2, 2000, we expressed an unqualified opinion on those consolidated
financial statements.
Deloitte & Touche LLP
St. Louis, Missouri
November 7, 2000
1
<PAGE>
<TABLE>
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
Reference December 31, September 30,
Note 1999 2000
------------ ------------- ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 51 $ 53
Receivable from affiliate 7 90 91
Prepaid expenses 845 1,774
------------- ------------
Total current assets 986 1,918
CONSTRUCTION IN PROGRESS 378,411 589,008
CASH AND CASH EQUIVALENTS RESTRICTED FOR
CAPITAL ADDITIONS 46,657 1,953
OTHER ASSETS 3 20,575 20,973
------------- ------------
$ 446,629 $ 613,852
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,145 $ 15,222
Accrued expenses and other 5 14,721 12,681
Payable to affiliate 7 497 1,007
Accrued taxes other than income - 1,422
------------- ------------
Total current liabilities 43,363 30,332
<C>
LONG-TERM DEBT 360,000 497,609
COMMITMENTS AND CONTINGENCIES 7 - -
COMMON STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 6,818,182 shares issued 68 68
Capital contribution commitments 134,932 134,932
Capital contribution receivable 4 (77,830) (29,116)
------------- ------------
Total paid-in capital 57,102 105,816
Deficit accumulated during development stage (13,904) (19,973)
------------- ------------
Total common stockholders' equity 43,266 85,911
------------- ------------
$ 446,629 $ 613,852
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
( A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in thousands)
<TABLE>
For the Three Months
Ended September 30,
Reference -------------------------------
Note 1999 2000
---------- -------------- ---------------
<S> <C> <C> <C>
EXPENSES:
Operating expenses $ - $ (1,309)
General and administrative expenses (3,014) (321)
-------------- ---------------
(3,014) (1,630)
INTEREST AND FINANCE COST, NET 3, 5 (10,068) (1,139)
INCOME TAX PROVISION - -
-------------- ---------------
NET LOSS $ (13,082) $ (2,769)
============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
( A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in thousands)
<TABLE>
Cumulative For the Nine Months
From May 4, 1999 Ended September 30,
Reference (inception) to -------------------------------
Note September 30, 2000 1999 2000
------------ -------------------- -------------- --------------
<S> <C> <C> <C> <C>
EXPENSES:
Operating expenses $ (3,192) $ - $ (3,192)
General and administrative expenses (3,746) (3,014) (597)
-------------------- -------------- --------------
(6,938) (3,014) (3,789)
INTEREST AND FINANCE COST, NET 3, 5 (13,035) (10,068) (2,280)
INCOME TAX PROVISION - - -
-------------------- -------------- --------------
NET LOSS $ (19,973) $ (13,082) $ (6,069)
==================== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SABINE RIVER HOLDING CORP. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
<TABLE>
Cumulative For the Nine Months
From May 4, 1999 Ended September 30,
(inception) to --------------------------------
September 30, 2000 1999 2000
----------------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,973) $ (13,082) $ (6,069)
Amortization of deferred costs 2,412 107 1,878
Other, net (895) - (895)
Cash provided by (used in) working capital
Prepaid expenses (1,774) (1,175) (929)
Accounts payable, accrued expenses, taxes other than
income, and other 30,242 89,485 (13,031)
--------------------- --------------- ---------------
Net cash provided by (used in) operating activities 10,012 75,335 (19,046)
--------------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for construction in progress (591,182) (284,898) (210,597)
Cash and cash equivalents restricted for investment in capital (1,953) (47,836) 44,704
additions --------------------- --------------- ---------------
Net cash used in investing activities (593,135) (332,734) (165,893)
--------------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 497,609 255,000 137,609
Proceeds from equity contributions 105,884 20,000 48,714
Deferred financing costs (20,317) (17,550) (1,382)
--------------------- --------------- ---------------
Net cash provided by financing activities 583,176 257,450 184,941
--------------------- --------------- ---------------
NET INCREASE IN CASH 53 51 2
CASH, beginning of period - - 51
--------------------- --------------- ---------------
CASH, end of period $ 53 $ 51 $ 53
===================== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Sabine River Holding Corp. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2000
(tabular dollar amounts in millions of U.S. dollars)
1. Basis of Preparation and Nature of Business
Independent accountants have reviewed the consolidated interim financial
statements of Sabine River Holding Corp., a Delaware corporation, and its
Subsidiaries (all development stage companies) (the "Company" or Sabine River").
In the opinion of the management of the Company, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial statements have been included therein. The financial statements are
presented in accordance with the disclosure requirements for Form 10-Q. These
unaudited financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Form S-4 Registration
Statement filed on April 19, 2000, by the Company's indirect, wholly-owned
subsidiary, Port Arthur Finance Corp. ("Port Arthur Finance").
The financial statements include the operations of Port Arthur Coker
Company L.P., a Delaware limited partnership ("PACC"), which is the principal,
wholly-owned subsidiary of the Company. PACC was formed to develop, construct,
own, operate, and finance a heavy oil processing facility that includes a new
80,000 barrel per stream day delayed coking unit, a 35,000 barrel per stream day
hydrocracker, a 417 long tons per day sulfur complex, and related assets (the
"Coker Project") at the Port Arthur, Texas refinery of an affiliate, The Premcor
Refining Group Inc. (the "Refining Group"). In addition, the consolidated
financial statements of the Company include Port Arthur Finance, a wholly-owned
subsidiary of PACC, and Neches River Holding Corp., ("Neches River"), a
wholly-owned subsidiary of Sabine River. The purpose of Port Arthur Finance is
solely to facilitate the financing activities of the Coker Project by, among
other things, issuing the 12.5% senior secured notes due 2009 described below.
The purpose of Neches River is solely to act as the 99% limited partner of PACC
and to act as a joint and several co-guarantor with PACC and Sabine River of the
12.5% senior secured notes and the other debt of Port Arthur Finance. Each of
PACC, Neches River, and Sabine River have fully and unconditionally guaranteed
the 12.5% senior secured notes and the other debt of Port Arthur Finance on a
joint and several, senior secured basis. Because PACC has significant
independent operations, summarized financial data for PACC is presented in Note
6, "PACC Condensed Consolidated Financial Information." No separate or
summarized financial statements are presented for Neches River and Port Arthur
Finance as management has determined that separate financial statements for
Neches River and Port Arthur Finance would not be material to investors because
they have only nominal assets and do not conduct any independent operations.
Sabine River was incorporated in May of 1999 and capitalized in August of
1999. The Company is the 1% general partner of PACC and the 100% owner of Neches
River, which is the 99% limited partner of PACC. Sabine River is owned 90% by
Premcor Inc. (previously Clark Refining Holdings Inc.) and is owned 10% by
Occidental Petroleum Corporation ("Occidental"). After giving effect to
anticipated equity contributions to be made in connection with the funding of
the Coker Project, Premcor Inc. will be principally owned, indirectly through
subsidiaries, by Blackstone Capital Partners III Merchant Banking Fund L.P. and
its affiliates ("Blackstone") with approximately an 82% interest, and by
Occidental with approximately a 17% interest. The Company is an affiliate of the
Refining Group because Premcor Inc. owns 100% of the capital stock of Premcor
USA Inc. ("Premcor USA"), which in turn owns 100% of the capital stock of the
Refining Group.
6
<PAGE>
The total cost of the Coker Project is estimated to be approximately $715
million, including development, property acquisition, construction, capitalized
interest, testing and start-up, and an allowance for estimated price escalation
and contingencies. In order to fund the Coker Project, the Company and Neches
River entered into capital contribution agreements in 1999 totaling $135
million, and Port Arthur Finance issued $255 million of 12.5% senior secured
notes, entered into a $325 million secured construction and term loan facility,
obtained a $150 Guarantee Insurance Policy that guarantees payments on crude oil
purchases from P.M.I. Comercio Internacional, and obtained a $75 million secured
working capital facility. Sabine River, Neches River, and PACC are joint and
several guarantors of the notes and loans.
Because PACC is the principal operating subsidiary of the Company, a
discussion of the Company's results of operations consists principally of a
discussion of the Coker Project and PACC's construction activity and results of
operations. Sabine River and Neches River as stand-alone entities have no
material assets, liabilities, or operations, other than the guarantee
obligations described above and their ownership interest in PACC.
Since inception, the Company and its subsidiaries have been in a
construction and pre-operation stage and have no material operating revenues or
expenses. Testing and gradual start-up of the Coker Project is scheduled for the
fourth quarter of 2000 with full operations expected by March 2001.
2. New Accounting Standard
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement, as
amended, will be adopted by the Company effective January 1, 2001. Management is
continuing to evaluate the impact the adoption of this standard will have on the
Company's financial position and results of operations. Based on an initial
analysis, management believes no material effect of adoption is currently
expected.
3. Other Assets
Amortization of deferred financing costs for the period from May 4, 1999
(date of inception) to September 30, 2000, was $2.4 million, and was included in
"Interest and finance costs, net." Amortization of deferred financing costs for
the three-and nine-month periods ended September 30, 2000 was $0.8 million (1999
- $0.1 million) and $1.9 million (1999 - $0.1 million), respectively.
4. Capital Contributions Receivable
As of September 30, 2000, Blackstone had contributed $95.3 million of the
$121.5 million it had committed, and Occidental had contributed $10.6 million of
the $13.5 million it had committed under their respective capital contribution
agreements.
5. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
<TABLE>
Cumulative For the Three Months For the Nine Months
From May 4, 1999 Ended September 30, Ended September 30,
(inception) to ---------------------- ---------------------
September 30, 2000 1999 2000 1999 2000
------------------ --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Interest expense............ $ 55.5 $ 4.5 $ 14.7 $ 4.5 $ 39.9
Financing costs............. 13.6 9.5 1.2 9.5 2.9
Interest income............. (2.3) (0.4) -- (0.4) (0.6)
---------- ---------- --------- -------- ---------
66.8 13.6 15.9 13.6 42.2
Capitalized interest ....... (53.7) (3.5) (14.7) (3.5) (39.9)
---------- ---------- --------- --------- ---------
$ 13.1 $ 10.1 $ 1.2 $ 10.1 $ 2.3
========= ========== ========= ========= =========
</TABLE>
7
<PAGE>
Cash paid for interest expense for the period from May 4, 1999 (date of
inception) to September 30, 2000 and for the three- and nine-month periods ended
September 30, 2000 was $41.7 million, 21.4 million, and $41.7 million,
respectively. Accrued interest payable as of September 30, 2000 of $12.3 million
(December 31, 1999 - $14.1 million) was included in "Accrued expenses and
other."
6. PACC Condensed Consolidated Financial Information
Separate financial information is not presented for either Port Arthur
Finance or Neches River because neither Port Arthur Finance nor Neches River has
independent operations. PACC condensed consolidated financial information
consisted of the following:
Consolidated statement of operations:
<TABLE>
Cumulative For the Three Months For the Nine Months
From May 4, 1999 Ended September 30, Ended September 30,
(inception) to ---------------------- --------------------
September 30, 2000 1999 2000 1999 2000
------------------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Operating expenses.......... $ (3.2) $ -- $ (1.3) $ -- $ (3.2)
General and administrative.. (3.7) (3.0) (0.3) (3.0) (0.6)
---------- ---------- ----------- --------- ---------
(6.9) (3.0) (1.6) (3.0) (3.8)
Interest and finance costs, net (13.1) (10.1) (1.2) (10.1) (2.3)
---------- ---------- ----------- --------- ---------
Net loss $ (20.0) $ (13.1) $ (2.8) $ (13.1) $ (6.1)
========== ========== ========== ========= =========
</TABLE>
Consolidated balance sheet information:
<TABLE>
December 31, September 30,
1999 2000
----------- -----------
<S> <C> <C>
Total current assets ............................................. $ 0.9 $ 1.8
Construction in progress.......................................... 378.4 589.0
Total assets...................................................... 446.6 613.8
Total current liabilities......................................... 43.4 30.3
Long term debt.................................................... 360.0 497.6
Partners' capital contributed..................................... 57.1 105.9
Deficit accumulated during development stage...................... 13.9 20.0
Total liabilities and partners' capital........................... 446.6 613.8
</TABLE>
7. Commitments and Contingencies
PACC, Sabine River, and Neches River have unconditionally, jointly and
severally guaranteed to each note holder:
o the due and punctual payment of principal and interest on the notes;
o the performance by Port Arthur Finance of its obligations under the
indenture and other financing documents; and
o that its guarantor obligations will be as if it were principal debtor
and obligor and not merely a surety.
8
<PAGE>
In July 1999, PACC entered into a contract for the engineering, procurement
and construction of PACC's Coker Project with Foster Wheeler USA. Under this
construction contract, Foster Wheeler USA will continue to engineer, design,
procure equipment for, construct, test, and oversee start-up of the Coker
Project and integrate the Coker Project with the Port Arthur refinery of the
Refining Group. Under the construction contract, PACC will pay Foster Wheeler
USA a fixed price of approximately $544 million of which $157.1 million was
credited to PACC for amounts the Refining Group had already paid Foster Wheeler
USA for work performed on the Coker Project prior to August 1999. PACC purchased
this work in progress from the Refining Group when the financings were
consummated in August 1999. PACC and Foster Wheeler USA have the ability to
initiate changes to work under the contract that may affect the final total
price paid. The project's independent engineer must approve changes in excess of
$0.5 million individually or $5.0 million in the aggregate. The contract has
provisions whereby Foster Wheeler USA will pay PACC up to $145 million in
damages for delays in achieving mechanical completion or guaranteed reliability,
based on a defined formula. PACC can terminate the contract with Foster Wheeler
USA at any time upon written notice, at which time it will be obligated to pay
actual project costs to the date of termination and other costs related to
demobilizing, canceling subcontractors, or withdrawing from the project site.
Foster Wheeler USA cannot terminate the contract unless PACC defaults on
required payments under the contract.
In August 1999, PACC entered into agreements with the Refining Group
pursuant to which PACC will receive certain operating, maintenance, and other
services from the Refining Group and will sell, at market prices, the output
from the new coking and hydrocracking equipment to the Refining Group for
further processing into finished products. PACC also entered into agreements
under which it will process certain hydrocarbon streams owned by the Refining
Group. In addition, PACC entered into lease agreements under which it will lease
the Refining Group's crude unit, vacuum tower, two distillate hydrotreaters, and
a naphtha hydrotreater at the Port Arthur refinery as well as the site where
PACC's new processing units are located. PACC will receive and pay compensation
at what it believes to approximate fair market value under these agreements. At
September 30, 2000, PACC had a net outstanding payable balance of $0.9 million
(December 31, 1999 - $0.4 million) due to the Refining Group consisting of a
payable of $1.0 million for services provided under a services and supply
agreement and fees paid by the Refining Group on PACC's behalf and a $0.1
million receivable for the overpayment of such services in a prior period.
In August 1999, PACC purchased a long-term crude oil supply agreement with
P.M.I. Comercio Internacional, S. A. de C.V. ("PMI") from the Refining Group for
approximately $0.8 million. The contract includes a gross margin support
mechanism designed to provide a minimum average coker gross margin over its
initial term. Pursuant to the terms of the contract, PMI will supply to PACC
Maya crude oil for a price based on published market prices for crude and
refined products, as defined in the contract. The contract extends for eight
years from the later of the start-up date of the coker, the scheduled completion
date of January 2001, or the guarantee date of July 2001. The completion date is
the date the coker meets prescribed operating performance. If the completion
date extends beyond January 2001, PACC must pay PMI $400,000 per month for the
first six months of delay and $200,000 per month for up to an additional six
months of delay thereafter to extend the completion date or PMI may terminate
the contract. PACC may terminate the contract after paying PMI a termination
payment of approximately $170,000 per month after August 31, 1998 plus actual
damages that PMI has suffered. PACC does not currently anticipate the Coker
Project completion date being extended beyond January 2001.
In August 1999, PACC entered into an agreement with a supplier to provide
hydrogen for the Coker Project. This supplier will also provide steam and
electricity to PACC under this agreement. Prices under the contract are based on
market prices at the time of the contract, subject to adjustment according to a
formula based on inflation indices. The supplier will be required to pay PACC
liquidated damages of up to $1.2 million if the plant fails to be ready for
commercial operation on or before December 2000, and PACC will be required to
pay the supplier liquidated damages of up to $1.2 million if PACC is unable to
start-up the coker for initial operations prior to December 2000. PACC does not
currently anticipate the Coker Project initial start-up date being extended
beyond December 2000, and the supplier began operations of their facility in
November 2000.
9
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition
General
Sabine River Holding Corp., a Delaware corporation, and its Subsidiaries (a
development stage company) (the "Company" or "Sabine River") was incorporated in
May of 1999 and capitalized in August of 1999. The Company is the 1% general
partner of Port Arthur Coker Company L.P., a Delaware limited partnership,
("PACC") and the 100% owner of Neches River Holding Corp. ("Neches River"),
which is the 99% limited partner of PACC. PACC was formed to develop, construct,
own, operate, and finance a heavy oil processing facility that includes a new
80,000 barrel per stream day delayed coking unit, a 35,000 barrel per stream day
hydrocracker, a 417 long tons per day sulfur complex, and related assets (the
"Coker Project") at the Port Arthur, Texas refinery of an affiliate, The Premcor
Refining Group Inc. (the "Refining Group"). Sabine River is owned 90% by Premcor
Inc. (previously Clark Refining Holdings Inc.) and is owned 10% by Occidental
Petroleum Corporation ("Occidental"). After giving effect to anticipated equity
contributions to be made in connection with the funding of the Coker Project,
Premcor Inc. will be principally owned, indirectly through subsidiaries, by
Blackstone Capital Partners III Merchant Banking Fund L.P. and its affiliates
("Blackstone") with approximately an 82% interest, and by Occidental with
approximately a 17% interest.
The Company's consolidated financial statements include the operations of
PACC, which is the principal, wholly-owned subsidiary of the Company. The
Company is an affiliate of the Refining Group because Premcor Inc. owns 100% of
the capital stock of Premcor USA Inc. ("Premcor USA"), which in turn owns 100%
of the capital stock of the Refining Group. In addition, the consolidated
financial statements of the Company include Port Arthur Finance Corp. ("Port
Arthur Finance") and Neches River. The purpose of Port Arthur Finance is solely
to facilitate the financing activities of the Coker Project by, among other
things, issuing the 12.5% senior secured notes due 2009 described below, and the
purpose of Neches River is solely to act as the 99% limited partner of PACC and
to act as a joint and several co-guarantor with PACC and Sabine River of the
12.5% senior secured notes and the other debt of Port Arthur Finance. PACC,
Neches River, and Sabine River have each fully and unconditionally guaranteed
the 12.5% senior secured notes and the other debt of Port Arthur Finance on a
joint and several, senior secured basis. Because PACC has significant
independent operations, summarized financial data for PACC is presented in Note
6, "PACC Condensed Consolidated Financial Information" of the financial
statements. No separate or summarized financial statements are presented for
Neches River and Port Arthur Finance as management has determined that separate
financial statements for Neches River and Port Arthur Finance would not be
material to investors because they have only nominal assets and do not conduct
any independent operations.
The total cost of the Coker Project is estimated to be approximately $715
million, including development, property acquisition, construction, capitalized
interest, testing and start-up, and an allowance for estimated price escalation
and contingencies. In order to fund the Coker Project, Sabine River and Neches
River entered into capital contribution agreements in 1999 totaling $135
million, and Port Arthur Finance issued $255 million of 12.5% senior secured
notes, entered into a $325 million secured construction and term loan facility,
obtained a $150 Guarantee Insurance Policy that guarantees payments on crude oil
purchases from P.M.I. Comercio Internacional ("PMI"), and obtained a $75 million
secured working capital facility. Sabine River, Neches River, and PACC are joint
and several guarantors of the notes and loans. Because PACC is the principal
operating subsidiary of the Company, a discussion of the results of operations
consists principally of a discussion of PACC's results of operations and
construction activity on the Coker Project. Sabine River and Neches River as
stand-alone entities have no material assets, liabilities, or operations, other
than the guarantee obligations described above and their ownership interest in
PACC.
See the Form S-4 Registration Statement filed by Port Arthur Finance with
the Securities and Exchange Commission on April 19, 2000 for more information on
the Coker Project.
Operations
Since inception, the Company and its subsidiaries have been in a
construction and pre-operation stage and have had no material operating revenues
or expenses. The Company has recorded some expenses related to insurance, taxes,
and salaries.
The Coker Project overall was 98% complete as of September 30, 2000 with
100% of major equipment procurement, detailed design and engineering, and
materials procurement completed, and 95% of construction completed as of
September 30, 2000. Construction activities to date have included the
construction of the new coker, hydrocracker, and sulfur complex and associated
piping and wiring of the units and control room. The current work is focused on
the testing, commissioning, and start-up of all the units.
10
<PAGE>
Parts of the Coker Project began operations in November 2000, and are
expected to begin revenue generation late in the fourth quarter of 2000. The
sulfur complex began operations in early November, and the coker and
hydrocracker units are expected to begin operations later in the fourth quarter
of 2000. Each of the units will gradually increase throughput rates until the
facility reaches full capacity, which is currently scheduled to be in the first
quarter of 2001, when Foster Wheeler USA, the principal contractor responsible
for all construction of the Coker Project, will begin performance testing. This
schedule is subject to change. Once fully operational, the new heavy oil
processing facility will allow PACC to process an average of 200,000 barrels per
stream day of crude oil. At least 150,000 barrels per stream day of heavy sour
crude oil will be purchased from PMI under a long-term crude oil supply
agreement.
In early November, a supplier-built hydrogen plant that will provide
steam, electricity and hydrogen to PACC and the Refining Group under a long-term
agreement also began operations. In connection with the Coker Project, the
Refining Group is obligated to perform certain modifications and revamps to its
crude and other ancillary units at the Port Arthur refinery, which are leased to
PACC. In May 2000, the Refining Group completed a maintenance turnaround at its
Port Arthur refinery that included significant modifications to the crude unit,
increasing the rated crude oil throughput capacity from 232,000 to 250,000
barrels per day, and to the hydrotreaters thereby completing key parts of these
obligations. The crude unit averaged 247,500 barrels per day of crude oil
throughput in the quarter ended September 30, 2000. As of September 30, 2000,
the Refining Group's portion of the Coker Project was over 95% complete.
At September 2000, the project staffing was approximately 1,300 people. All
personnel except approximately 50 were employees of Foster Wheeler USA, its
subcontractors, or the Refining Group, the latter working under the services and
support agreement with PACC, and the former being the principal contractor
responsible for all construction of the Coker Project. In September of 2000,
approximately 45 equipment operators of the Refining Group were transferred to
PACC.
Liquidity and Capital Resources
Cash flows used in investing activities were $593.1 million and $165.9
million for the period from May 4, 1999 (date of inception) to September 30,
2000 and for the nine-month period ended September 30, 2000, respectively. All
proceeds from the Company's debt financings are restricted for use on the
construction, financing, and start-up operations of the Coker Project. As a
result, cash and cash equivalents associated with the Coker Project were
classified as a non-current asset and the restricted cash and cash equivalent
activity was reflected as investing activity. Expenditures in 1999 and during
the first nine months of 2000 were associated with the Coker Project.
The principal contract for the construction of the Coker Project is a fixed
price construction contract. Therefore, the primary components the Company has,
and will, manage are schedule and change orders. The Coker Project is currently
on schedule with the final mechanical completion and start-up beginning in the
fourth quarter of 2000. As of September 30, 2000, change orders were
approximately $3.1 million.
Cash flows from financing activities were principally shareholder
contributions received pursuant to capital contribution agreements and
additional funding received from the secured construction and term loan
facility. As of September 30, 2000, Blackstone had contributed $95.3 million of
the $121.5 million it had committed and Occidental had contributed $10.6 million
of the $13.5 million it had committed under the capital contribution agreements.
As of September 30, 2000, Port Arthur Finance had drawn $242.6 million of the
$325.0 million available from the secured construction and term loan facility.
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In 1999, Port Arthur Finance entered into a $75 million working capital
facility that was reduced to $35 million in the first quarter of 2000. The
working capital facility is primarily for the issuance of letters of credit for
the future purchases of crude oil other than the Maya crude oil to be received
under the long-term crude oil supply agreement with PMI. As of September 30,
2000, there were no outstanding letters of credit on this facility. The $40
million reduction, a portion of which had been outstanding in the form of a
letter of credit to PMI to secure against a default by PACC under its long term
crude oil supply agreement, was replaced by an insurance policy under which an
affiliate of American International Group agreed to insure PMI against PACC's
default under the long term crude oil supply agreement up to a maximum liability
of $40 million. Port Arthur Finance is currently seeking to expand this $35
million working capital facility and the $150 million Guarantee Insurance Policy
to $50 million and $200 million, respectively. Port Arthur Finance believes this
expansion is necessary due to a potentially higher crude oil price environment
then was contemplated when the facilities were initially secured.
Funds generated from the remainder of the $325 million secured construction
and term loan facility together with existing cash and cash equivalents are
expected to be adequate to fund existing requirements for working capital, the
construction of the Coker Project, and start-up operations. Once operational,
the Company's operating results will be subject to rapid and wide fluctuations
due to the commodity nature of its feedstocks and products. The Company expects
cash flow generated from operating activities and existing financings to be
sufficient to provide the Company with adequate liquidity through the next year.
However, there can be no assurance that market conditions or actual operations
will not be worse than anticipated. Future working capital and discretionary and
mandatory capital expenditures may require additional debt or equity capital.
Under the common security agreement, which contains common covenants,
representations, defaults and other terms with respect to the 12.5% senior
secured notes due 2009, Port Arthur Finance's other debt and the guarantees
thereof by PACC, Sabine River, and Neches River, PACC is subject to restrictions
on the making of distributions to Sabine River and Neches River until, among
other things, the final completion of the Coker Project has occurred. PACC may,
however, make up to $100,000 in distributions to Sabine River and Neches River
each year to permit them to pay directors' fees, accounting expenses, and other
administrative expenses.
On May 17, 2000, Port Arthur Finance consummated an exchange offer for
$251.5 million of its outstanding 12.5% senior secured notes due 2009 and issued
in exchange therefore a like principal amount of 12.5% senior secured notes due
2009. The exchange notes have the same terms as Port Arthur Finance's old notes,
except that the exchange notes are registered under the Securities Act of 1933
and do not include the restrictions on transfer applicable to the old notes. The
exchange notes and the old notes which remain outstanding are fully and
unconditionally guaranteed by Sabine River, Neches River, and PACC on a senior
secured basis.
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company entered into a transaction in April 2000 that placed a 7.5%
London Interbank Offered Rate ("LIBOR") rate cap on the interest rate for the
following notional principal outstanding amounts of the Company's floating rate
secured construction and term loan (in millions):
Last Date of
Calculation Notional Amount
Period Outstanding
------------------ ----------------------
15-Jul-00 $ 91.8
15-Oct-00 125.2
15-Jan-01 144.7
15-Jul-01 162.5
15-Jan-02 108.4
15-Jul-02 81.2
15-Jan-03 54.0
15-Jul-03 30.7
15-Jan-04 7.5
The interest rates on the Tranche A and B portion of the secured construction
and term loan are based on the LIBOR plus a margin. The policy covers April 2000
through January 2004.
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See the Form S-4 Registration Statement filed by Port Arthur Finance with
the Securities and Exchange Commission on April 19, 2000 for more information on
Quantitative and Qualitative Disclosures about Market Risk.
Forward-Looking Statements
Certain statements in this document are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are subject to the safe harbor
provisions of this legislation. Words such as "expects," "intends," "plans,"
"projects," "believes," "estimates" and similar expressions typically identify
such forward-looking statements.
Even though the Company believes its expectations regarding future events
are based on reasonable assumptions, forward-looking statements are not
guarantees of future performance. There are many reasons why actual results
could, and probably will, differ from those contemplated in the Company's
forward-looking statements. These include, among others, changes in:
o Industry-wide refining margins
o Crude oil and other raw material costs, embargoes, industry expenditures
for the discovery and production of crude oil, and military conflicts
between, or internal instability in, one or more oil-producing countries,
and governmental actions
o Market volatility due to world and regional events
o Availability and cost of debt and equity financing
o Labor relations
o U.S. and world economic conditions
o Supply and demand for refined petroleum products
o Reliability and efficiency of the Company's operating facilities. There are
many hazards common to operating oil refining facilities. Such hazards may
include equipment malfunctions, plant construction/ repair delays,
explosions, fires, oil spills and the impact of severe weather
o Actions taken by competitors which may include both pricing and expansion
or retirement of refinery capacity
o The enforceability of contracts
o Civil, criminal, regulatory or administrative actions, claims or
proceedings and regulations dealing with protection of the environment
o Other unpredictable or unknown factors not discussed
Because of all of these uncertainties, and others, you should not place
undue reliance on the Company's forward-looking statements.
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sabine River Holding Corp.
(Registrant)
/s/ Dennis R. Eichholz
------------------------------------
Dennis R. Eichholz
Controller and Treasurer (Principal
Accounting Officer and Duly
Authorized Officer)
November 13, 2000
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