Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[x] For the Fiscal Year Ended: December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] For the transition period from . . . . to . . . .
Commission File Number: 1-7627
WAINOCO OIL CORPORATION
(Exact name of registrant as specified in its charter)
Wyoming 74-1895085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10000 Memorial Drive, Suite 600 77024-3411
Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 688-9600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock New York Stock Exchange
12% Senior Notes, due 2002 New York Stock Exchange
7-3/4% Convertible Subordinated Debentures,
due 2014 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 if disclosure of delinquent filers pursuant to rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.{x}
As of February 24, 1998, there were 28,092,789 common shares outstanding, and
the aggregate market value of the common shares (based upon the closing price of
these shares on the New York Stock Exchange) of Wainoco Oil Corporation held by
nonaffiliates was approximately $233.5 million at that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1997 are incorporated by reference into Item 1 of Part 1 and Items 5 through 8
of Part II.
Portions of the Annual Proxy Statement for the year ended December 31, 1997 are
incorporated by reference into Items 10 through 13 of Part III.
<PAGE>
Table of Contents
Part I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 9
Part III
Item 10. Directors and Executive Officers of the Registrant 9
Item 11. Executive Compensation 9
Item 12. Security Ownership of Certain Beneficial Owners
and Management 9
Item 13. Certain Relationships and Related Transactions 9
Part IV
Item 14. Exhibits, Financial Statements Schedules, and
Reports on Form 8-K 9
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FORWARD-LOOKING STATEMENTS
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), including, without limitation,
statements that include the words "anticipates," "believes," "could,"
"estimates," "expects," "intends," "may," "plan," "predict," "project,"
"should," and similar expressions, and statements relating to the Company's
strategic plans, capital expenditures, industry trends and prospects and the
Company's financial position. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause actual results,
performance or achievements of the Company to differ materially from those
expressed or implied by such forward-looking statements. Although the Company
believes that its plans, intentions and expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
plans, intentions or expectations will be achieved. Important factors that
could cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are set forth under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this document. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
PART 1
ITEM 1. BUSINESS
Overview
Wainoco Oil Corporation was originally incorporated in Canada in 1949 and
changed its jurisdiction of incorporation to Wyoming in 1976. As used herein,
the "Company" or "Wainoco" refers to Wainoco Oil Corporation and its
subsidiaries. The Company's refining assets are held through its subsidiary,
Frontier Holdings Inc. ("Frontier"), a Delaware corporation. The Company
directs its activities from its corporate office in Houston, Texas and its
refining subsidiary offices in Denver, Colorado and Cheyenne, Wyoming.
Wainoco is engaged in the business of crude oil refining and wholesale
marketing of refined petroleum products (the "refining operations"). Wainoco
conducts its refining operations in the Rocky Mountain region of the
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United States. The Company's Cheyenne, Wyoming refinery (the "Frontier
Refinery") purchases the crude oil to be refined and markets the refined
petroleum products produced, including various grades of gasoline, diesel fuel,
asphalt and petroleum coke.
Prior to the third quarter of 1997, Wainoco explored for and produced oil and
gas in western Canada. On June 16, 1997, Wainoco completed the sale of all its
Canadian oil and gas properties. Prior to their sale in June 1997, the
Company's Canadian oil and gas assets were held by Wainoco Oil Corporation.
Prior to the first quarter of 1996, Wainoco also explored for and produced oil
and gas in the United States. During the third quarter of 1994, the Company
announced that it intended to cease all exploration activities in the United
States and to sell its United States oil and gas assets. Wainoco finalized the
sale of all of its United States oil and gas properties during 1995.
Operating results for Wainoco's discontinued oil and gas operations segment,
comprising the Canadian and United States oil and gas properties, are presented
as discontinued operations in the Financial Statements to the 1997 Annual Report
to Shareholders which is incorporated herein by reference.
Refining Operations
Wainoco's refining activities are conducted through Frontier, which was
acquired in October 1991. The refining facilities are located on approximately
125 acres in Cheyenne, Wyoming, on property owned by Frontier. The Frontier
Refinery's permitted crude capacity is 41,000 barrels per day ("bpd"). The
Frontier Refinery can also process in excess of 4,000 bpd of purchased natural
gasoline, butanes and other petroleum liquids. The Frontier Refinery contains
all of the major refinery units that comprise a complex refinery, including a
coker. Therefore, the Frontier Refinery has the capability of producing a high
yield of lighter, more valuable petroleum products such as gasoline and diesel
fuel from heavy sour crude oil, which is less expensive than sweet crude oil.
The Frontier Refinery's units have the capacity to process up to 100% of heavy
crude oil. The differential between the price of lower cost heavy crude oil and
the price of more expensive sweet crude oil is referred to as the light/heavy
spread. Frontier also owns an undivided interest equal to 25,000 bpd in a crude
oil pipeline (the "Centennial Pipeline") from Guernsey, Wyoming to Cheyenne.
The Centennial Pipeline was constructed to help serve the Frontier Refinery's
long-term strategic crude oil needs.
Marketing, Products and Distribution
The Company markets refined products primarily in eastern Colorado (including
the Denver metropolitan area) and eastern Wyoming, or the "Eastern Slope area"
of the Rocky Mountain region. The Company also markets refined products in
western Nebraska and, through exchange agreements with other refiners, in the
Dakotas and Utah. For the year ended December 1997, the Frontier Refinery's
product mix included various grades of gasoline (43%), diesel fuel (32%) and
asphalt and other refined petroleum products (25%).
The Company sells refined products to a broad base of independent retailers,
jobbers and major oil companies. Prices are determined by local market
conditions at the "terminal rack", and the customer typically supplies his own
truck transportation. In 1997, approximately 13% of gasoline production and
approximately 49% of diesel production was sold at the Frontier Refinery. The
remaining gasoline and diesel produced by the Frontier Refinery is primarily
shipped via pipeline to third party terminals for sale.
While it has in the past generally marketed unbranded products, in the second
half of 1997, the Company entered into a seven-year marketing agreement with
CITGO Petroleum Corporation ("CITGO") to market branded products to independent
and other branded retail operators in its market area. The Company believes the
CITGO agreement offers potential to increase its market share in the Eastern
Slope area because CITGO currently has only a small share of the Eastern Slope
market. The agreement allows the Company to produce gasoline and diesel to
CITGO's specifications, sign up independent and other branded retail operators
as CITGO branded locations and sell its own refined products to these operators.
The agreement also allows the Company to offer additional benefits to its
customers such as access to CITGO's proprietary credit card and pay-at-the-pump
systems. Moreover, the Company believes that its affiliation with the
nationally-recognized CITGO brand will allow it to continue to effectively
compete in its market area as more independent regional retailers seek
relationships with suppliers of branded products.
Crude Oil Supply
The Company prefers to process locally produced heavy crude oil. In the year
ended December 31, 1997, the Company obtained approximately 84% of its crude oil
supply, or charge, from Wyoming producers while Canadian heavy crude oil made up
a majority of the Frontier Refinery's remaining feedstocks. During the same
period, heavy crude oil constituted approximately 91% of the Frontier Refinery's
total crude oil charge. The Company believes it is able to obtain favorable
pricing terms for the heavy crude oil it uses as feedstock because
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available supply currently outstrips demand. None of the Company's direct
refinery competitors and only three other refineries in the entire Rocky
Mountain region operate coking units necessary to process high volumes of heavy
crude oil. The Company has recently benefitted from an increase in its
light/heavy spread; for the year ended December 1997 the Company's light/heavy
spread improved to $3.54 per barrel ("bbl") from $2.56 per bbl for the same
period in 1996. In addition, while Wyoming crude oil is declining, the
completion of the 785 mile Express Pipeline from Hardisty, Alberta to Casper,
Wyoming in April 1997 immediately doubled available pipeline capacity for
Canadian crude oil to the Wyoming market. The Express Pipeline has reduced
transportation costs incurred by the Company for Canadian crude oils by
approximately $.75 per bbl, and the Company believes the Express Pipeline has
reduced transportation time for Canadian crude oils from approximately 30 days
to 15 days. The Company has entered into a 15 year commitment with the Express
Pipeline for the delivery of approximately 13,800 bpd, subject to an assignment
of a portion of the capacity in early years for additional capacity in later
years. The Company also receives a supply cost advantage on up to 25,000 bpd
from its partial ownership in the Centennial Pipeline that runs from the
regional hub at Guernsey, Wyoming to the Frontier Refinery.
Competition
Frontier's business is highly competitive and price is the principal basis of
competition. There are 15 crude oil refineries in the Rocky Mountain region
(including several owned by major integrated oil companies). Many of the
refineries in the Rocky Mountain region are owned by companies that have
significantly greater financial resources and/or refining capacity than
Frontier. Certain of these competitors, as integrated oil companies, also have
the advantage of owning or controlling crude oil reserves or other sources of
crude oil supply, crude oil and product pipelines and service stations and other
product marketing outlets.
Principal Competitors. Of the 15 crude oil refineries in the Rocky Mountain
region, the Company only considers the four other refineries (two in Denver and
two in Wyoming) located within the Eastern Slope area to be competitors,
although additional competition comes from refineries outside the Eastern Slope
area that supply refined products to the area via pipeline. The Company
believes it has an advantage over (I) its four refinery competitors because only
the Company operates a coking unit, which enables it to produce a higher yield
of gasoline and diesel from heavy crude oil, and (ii) the pipeline competitors
that ship product into the Eastern Slope area because they must incur a
transportation cost, which for Gulf Coast refiners equates to approximately
$1.60 per bbl. Based on proximity to the Denver and Cheyenne areas, Frontier's
principal refinery competitors in the wholesale segment are Sinclair Oil
Company ("Sinclair") with a 54,000 bpd refinery near Rawlins, Wyoming and a
22,000 bpd refinery in Casper, Wyoming, Ultramar Diamond Shamrock ("UDS") with a
28,000 bpd refinery in Denver, Colorado and Conoco, Inc. ("Conoco") with a
57,500 bpd refinery in Denver, Colorado. Frontier sells its products
exclusively at wholesale, principally to independent retailers, jobbers and
major oil companies, while Sinclair, UDS and Conoco service both the retail and
wholesale markets. In addition, three product pipelines from outside the
Rockies terminate in the area.
Frontier and its principal competitors all service the Denver market.
Because their refineries are located in Denver, UDS's and Conoco's product
transportation costs in servicing that area are lower than those of Frontier.
Conversely, Frontier has lower crude transportation costs due to its proximity
to Guernsey, Wyoming, the major crude oil pipeline hub in the Rocky Mountain
region, and further due to its ownership interest in the Centennial Pipeline.
Effect of Crude Oil and Refined Product Prices. Frontier's income and cash
flow are derived from the margin between its costs to obtain and refine crude
oil and the price for which it can sell products produced in its refining
process. The price at which Frontier can sell gasoline and its other refined
products will be strongly influenced by the price of crude oil. Frontier
maintains inventories of crude oil, intermediate products and refined products,
the value of each of which is subject to rapid fluctuations in market prices.
Inventories are recorded at the lower of cost on a first in, first out ("FIFO")
basis or market. A rapid and significant movement in the market prices for
crude oil or refined products could have an adverse short-term impact on
earnings and cash flow. Crude oil prices, in general, are affected by a number
of factors, including domestic and international demand, domestic and foreign
energy legislation, production guidelines established by the Organization of
Petroleum Exporting Countries ("OPEC"), relative supplies of other fuels, such
as natural gas, and changing international economic and political conditions.
Frontier can process a high percentage of heavy crude oil, enabling it to
benefit from the lower cost of heavy crude relative to light crude. Because
income and cash flow from refining operations are dependent in part on this cost
differential, any narrowing of the light/heavy crude spread would likely cause a
reduction in operating margin and a decrease in earnings and cash flow of
Frontier. A narrowing of the light/heavy crude spread could result from, among
other things, a decrease in the supply of heavy crude or an increase in heavy
crude refining capacity of the Frontier's competitors.
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General. Wainoco competes with other oil and gas concerns and other
investment opportunities, whether or not related to the petroleum industry, in
raising capital. The Company's ability to compete successfully in the capital
markets is largely dependent on the success of its refining activities and the
economic environment in which it operates.
Government Regulation
Safety Matters. The Company is subject to the requirements of the federal
Occupational Safety and Health Act ("OSHA") and comparable state occupational
safety statutes. The Company believes that it has operated in substantial
compliance with OSHA requirements, including general industry standards,
recordkeeping and reporting, hazard communication, and process safety
management. The nature of the Company's business may result from time to time
in industrial accidents. It is possible that changes in safety and health
regulations or a finding of non-compliance with current regulations could result
in additional capital expenditures or operating expenses.
Environmental Matters. The Company's refining and marketing operations are
subject to a variety of federal, state and local health and environmental laws
and regulations governing product specifications, the discharge of pollutants
into the air and water, and the generation, treatment, storage, transportation
and disposal of solid and hazardous waste and materials. Permits are required
for the operation of the Frontier Refinery, and these permits are subject to
revocation, modification and renewal. Governmental authorities have the power
to enforce compliance with these regulations and permits, and violators are
subject to injunctions, civil fines and even criminal penalties. The Company
believes the Frontier Refinery is in substantial compliance with existing
environmental laws, regulations and permits.
Among these requirements are regulations recently promulgated by the EPA
under the authority of Title III of the Clean Air Act Amendments. The Company
estimates that the Title III regulations will require the Company to expend
approximately $600,000 by the regulatory compliance deadline of August 1, 1998
to improve the Frontier Refinery's control of emissions of hazardous air
pollutants. Subsequent rulemaking authorized by this or other titles of the
Clean Air Act Amendments or similar laws may necessitate additional expenditures
in future years. Because other refineries will be required to make similar
expenditures, the Company does not expect such expenditures to materially
adversely impact its competitive position.
Nevertheless, rules and regulations implementing federal, state and local
laws relating to health and the environment will continue to affect operations
of the Company, and the Company cannot predict what additional health and
environmental legislation or regulations will be enacted or become effective in
the future or how existing or future laws or regulations will be administered or
interpreted with respect to products or activities to which they have not been
applied previously. Compliance with more stringent laws or regulations, as well
as more vigorous enforcement policies of regulatory agencies, could have a
materially adverse effect on the financial position and the results of
operations of the Company as well as the refining industry in general, and may
result in substantial expenditures for the installation and operation of
pollution control or other environmental systems and equipment.
The Company is party to an agreement with the State of Wyoming requiring the
investigation and possible eventual remediation of certain areas of Frontier
Refinery's property which may have been impacted by past operational activities.
Prior to this agreement, the Company addressed tasks required under a consent
decree ("Consent Decree") entered by the Wyoming State District Court on
November 28, 1984 and involving the State of Wyoming, the Wyoming Department of
Environmental Quality, and the predecessor owners of the Frontier refinery.
This action primarily addressed the threat of groundwater and surface water
contamination at the Frontier refinery. As a result of these investigative
efforts, substantial capital expenditures and remediation of conditions found to
exist have already taken place or are in progress. Additionally, the EPA issued
an administrative order on consent ("Federal Order") with respect to the
Frontier Refinery on September 24, 1990 pursuant to the Resource Conservation
and Recovery Act ("RCRA"). The Federal Order requires the technical
investigation of the Frontier refinery to determine if certain areas have been
adversely impacted by past operational activities. Based upon the results of
the investigation, additional remedial action could be required by a subsequent
administrative order or permit. Both the state Consent Decree and the Federal
Order are now vacated.
On March 21, 1995, the Company and the Wyoming Department of Environmental
Quality entered into an administrative consent order ("State Order") that
generally parallels the Federal Order and replaces the Consent Decree.
Accordingly, the Consent Decree was dismissed in an Order entered March 21,
1995. The State Order eliminates certain of the Consent Decree requirements,
unifies state and federal regulatory expectations regarding site investigation
and remediation and, consequently, helps to streamline certain of the Company's
current environmental obligations. The EPA withdrew the Federal Order on March
19, 1997 in recognition of the State Order and of Wyoming's assumption of RCRA
corrective action authority. The ultimate cost of any environmental remediation
projects that may be identified by the site investigation required by the State
Order cannot be reasonably estimated at this time. However, the continuation of
the present investigative process, other more extensive investigations over time
or changes in regulatory requirements could result in future liabilities.
The Company has a 34.72% undivided ownership interest in the Centennial
Pipeline. Conoco Pipe Line Company is the sole operator of the Centennial
Pipeline as the holder of the remaining ownership interest. The Centennial
Pipeline runs approximately 88 miles from Guernsey to Cheyenne, Wyoming. The
Frontier Refinery receives up to 25,000 bpd of crude oil feed through the
Centennial Pipeline. Under the terms of the operating agreement for the
Centennial Pipeline, the costs and expenses incurred to operate and maintain the
Centennial Pipeline are allocated to the Company on the basis of either its
throughput or ownership interest. The Centennial Pipeline is subject to
numerous federal, state and local laws and
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regulations relating to the protection of health, safety and the environment.
The Company believes the Centennial Pipeline is operated in accordance with all
applicable laws and regulations. The Company is not aware of any material
pending legal proceedings to which the Centennial Pipeline is a party.
In 1997, the Company completed divesting itself of its former oil and gas
properties and assets. While the transactions that conveyed these properties
and assets to new owners were intended to transfer any attendant environmental
liabilities to new owners, there can be no assurances that the Company will
never be subject to liability for any former activity respecting the divested
oil and gas properties. The Company has been named as a potentially responsible
party ("PRP") under CERCLA (as defined herein) at the Gulf Coast Vacuum Services
Superfund Site located in Vermilion Parish, Louisiana, one of the divested
properties. The Company has entered into a consent decree resolving its
liabilities as a PRP at this Superfund site. The Company believes that any
future liabilities related to this site will not have a material adverse effect
on the financial condition of the Company. The Company also believes that any
liability relating to its historical practices respecting the oil and gas
properties will not have a material adverse effect on the financial condition of
the Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund", imposes liability, without regard to
fault or the legality of the original conduct, on certain classes of persons who
are considered to be responsible for the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the disposal
site or sites where the release occurred and companies that disposed or arranged
for the disposal of the hazardous substances. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources, and for the costs of certain health studies. It is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by hazardous substances or
other pollutants released into the environment. Analogous state laws impose
similar responsibilities and liabilities on responsible parties. In the course
of its historical operations, as well as in its current ordinary operations, the
Company has generated waste, some which falls within the statutory definition of
a "hazardous substance" and some of which may have been disposed of at sites
that may require cleanup under Superfund.
As is the case with all companies engaged in similar industries, the Company
faces potential exposure from future claims and lawsuits involving environmental
matters. These matters include soil and water contamination, air pollution, and
personal injuries or property damage allegedly caused by substances
manufactured, handled, used, released or disposed of by the Company.
Seasonality
Due to seasonal increases in tourist related volume and road construction
work, a higher demand exists in the Rocky Mountain region for gasoline and
asphalt products during the summer months than during the winter months. Diesel
demand is relatively constant throughout the year because two major east-west
truck routes, and at least two railroads, extend into or through Frontier's
principal marketing area. However, reduced road construction and agricultural
work during the winter months does somewhat reduce demand for diesel. As a
result, the Company's operating results for the first and fourth calendar
quarters are generally lower than those for the second and third calendar
quarters. The Frontier Refinery normally schedules its maintenance turnaround
work during the spring or fall of each year. During the second quarter of 1998,
Frontier has scheduled significant turnaround work on its fluid catalytic
cracking unit and alkylation unit.
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Industry Segments
The Company currently has one industry segment, refining operations.
Industry segment information for the discontinued Canadian and United States oil
and gas operations for the three years ended December 31, 1997 is set forth in
Note 3 of the Financial Statements in the 1997 Annual Report to Shareholders
which is incorporated herein by reference.
Operating Hazards and Risks
The Company's refinery operations are subject to significant interruption if
the Frontier Refinery were to experience a major accident or fire or if it were
damaged by severe weather or other natural disaster. Should the crude oil
pipeline become inoperative, crude oil would be supplied to the refinery by an
alternative pipeline and from additional tank trucks. A substantial portion,
but not all, of such loss would be covered by business interruption, property or
other insurance carried by Frontier. Frontier's safety measures substantially
mitigate but do not eliminate the risk of damage to the refinery or the
environment and personal injury should a major adverse event occur. The
occurrence of a significant event that is not fully insured against could have a
material adverse effect on the Company and its financial position and results of
operation.
Employees
At December 31, 1997 the Company employed 291 full-time employees, 42 at the
Houston and Denver offices and 249 at the Frontier Refinery. The Frontier
Refinery employees include 81 administrative and technical personnel and 168
union members. The union members are represented by seven bargaining units, the
largest being the Oil, Chemical and Atomic Workers International Union ("OCAW").
Six AFL-CIO affiliated unions represent Frontier's craft workers. The current
three year OCAW contract expires in July 1999, while the six year AFL-CIO
affiliated union's six year contract expires in June 2002. The Company
considers its current relations with its employees to be good.
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ITEM 2. PROPERTIES
Refining Operations
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
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<S> <C> <C> <C>
Charges (bpd)
Light crude 3,162 4,322 8,098
Heavy crude 31,967 31,677 27,174
Other feed and blend stocks 6,154 5,192 5,072
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Total 41,283 41,191 40,344
Manufactured product yields (bpd)
Gasoline 17,060 16,825 17,263
Diesel 12,856 13,712 13,744
Asphalt and other 10,200 9,215 7,951
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Total 40,116 39,752 38,958
Total product sales (bpd)
Gasoline 20,499 20,311 20,767
Diesel 12,110 12,561 13,625
Asphalt and other 7,949 7,306 6,781
--------- --------- ---------
Total 40,558 40,178 40,813
Operating margin information (per sales bbl)
Average sales price $ 25.27 $ 25.98 $ 22.14
Material costs (under FIFO inventory accounting) 19.49 21.50 18.11
--------- --------- ---------
Product spread 5.78 4.48 4.03
Operating expenses excluding depreciation 3.30 3.15 3.19
Depreciation .61 .59 .55
--------- --------- ---------
Operating margin $ 1.87 $ .74 $ .29
Manufactured product margin
before depreciation (per bbl) $ 2.47 $ 1.33 $ .84
Purchased product margin
(per purchased product bbl) $ 3.14 $ 2.03 $ .98
Light/heavy crude spread (per bbl) $ 3.54 $ 2.56 $ 2.94
Average sales price (per sales bbl)
Gasoline $ 28.83 $ 28.78 $ 24.68
Diesel 27.22 28.89 23.48
Asphalts and other 13.13 13.21 11.73
</TABLE>
Other Properties
The Company leases approximately 3,300 square feet of office space in Houston
for its corporate headquarters under a three and one half year lease expiring in
October 1999. Frontier leases approximately 16,000 square feet in Englewood,
Colorado for its refining operations headquarters under a seven-year lease
expiring in July 2002.
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ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings which in the opinion of management would have a
material adverse impact on the Company. See Item 1. Business - Government
Regulation regarding certain ongoing proceedings regarding environmental
matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information in the 1997 Annual Report to Shareholders under the heading
"Common Stock" is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information in the 1997 Annual Report to Shareholders under the heading
"Five Year Financial Data" is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in the 1997 Annual Report to Shareholders under the heading
"Management's Discussion and Analysis" is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the data contained in the 1997 Annual Report to
Shareholders are incorporated herein by reference. See index to financial
statements and supplemental data appearing under Item 14(a)1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III of this Form is incorporated by
reference from the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A within 120 days after the close of its
last fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements and Supplemental Data Page*
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Consolidated Statements of Operations 17
Consolidated Balance Sheets 18
Consolidated Statements of Cash Flows 19
Consolidated Statements of Shareholders' Equity 20
Notes to Financial Statements 21
Report of Independent Public Accountants 28
Selected Quarterly Financial Data 14
*Reference to pages in the 1997 Annual Report to Shareholders (as published),
which portions thereof are incorporated herein by reference.
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(a)2. Financial Statements Schedules
Report of Independent Public Accountants
Schedule I - Condensed Financial Information of Registrant
Other Schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in the
financial statements or notes thereto.
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(a)3. List of Exhibits
* 3.1 - Articles of Domestication of the Company, as amended (filed as
Exhibit 2.3 to Registration Statement No. 2-62518 and Exhibit 2.2 to
Registration Statement No. 2-69149).
* 3.2 - Fourth restated By-Laws of the Company as amended through February
20, 1992 (filed as Exhibit 3.2 to Form 10-K dated December 31, 1992).
* 4.1 - Indenture dated as of October 1, 1978, between the Company and First
City National Bank of Houston, as Trustee relating to the Company's
10-3/4% Subordinated Debentures due 1998 (filed as Exhibit 2.5 to
Registration Statement No. 2-59649).
* 4.2 - Agreement of Resignation, Appointment and Acceptance by and among the
Company, First City National Bank of Houston (Resigning Trustee) and
Texas Commerce Bank National Association, Houston, (Successor
Trustee) relating to the Company's 10-3/4% Subordinated Debentures
due 1998 (filed as Exhibit 4.2 to Form 10-K dated December 31, 1985).
* 4.3 - First Supplemental Indenture dated as of January 20, 1987 between the
Company and Texas Commerce Bank National Association, supplementing
and amending the Indenture dated as of October 1, 1978, relating to
the Company's 10-3/4% Subordinated Debentures due 1998 (filed as
Exhibit 4.3 to Form 10-K dated December 31, 1986).
* 4.6 - Indenture dated as of June 1, 1989 between the Company and Texas
Commerce Trust Company of New York as Trustee relating to the
Company's 7-3/4% Convertible Subordinated Debentures due 2014 (filed
as Exhibit 4.6 to Form 10-K dated December 31, 1989).
* 4.7 - Indenture dated as of August 1, 1992 between the Company and Bank
One, N.A., as Trustee relating to the Company's 12% Senior Notes due
2002 (filed as Exhibit 4.7 to Form 10-K dated December 31, 1992).
* 10.1 - Amended and Restated Revolving Credit and Letter of Credit Agreement
dated June 30, 1997 among Frontier Oil and Refining Company, certain
banks and Union Bank of California (filed as Exhibit 10.1 to Form
10-K dated June 30, 1997).
* 10.2 - Purchase and Sale Agreement, dated May 5, 1997, for the sale of
Canadian oil and gas properties (filed as an Exhibit to From 8-K
filed June 30, 1997).
*^ 10.3 - The 1968 Incentive Stock Option Plan as amended and restated (filed
as Exhibit 10.1 to Form 10-K dated December 31, 1987).
*^ 10.4 - The 1977 Stock Option Plan as amended and restated (filed as Exhibit
10.2 to Form 10-K dated December 31, 1989).
*^ 10.5 - 1995 Stock Grant Plan for Non-employee Directors (filed as Exhibit
10.14 to Form 10-Q dated June 30, 1995).
*^ 10.6 - Wainoco Deferred Compensation Plan dated October 29, 1993 (filed as
Exhibit 10.19 to Form 10-K dated December 31, 1994).
*^ 10.7 - Wainoco Deferred Compensation Plan for Directors dated May 1, 1994
(filed as Exhibit 10.20 to Form 10-K dated December 31, 1994).
*^ 10.8 - Executive Employment Agreement dated April 3, 1995 between the
Company and James R. Gibbs (filed as Exhibit 10.09 to Form 10-Q dated
June 30, 1995).
*^ 10.9 - Executive Employment Agreement dated April 3, 1995 between the
Company and Julie H. Edwards (filed as Exhibit 10.10 to Form 10-Q
dated June 30, 1995).
*^ 10.10 - Executive Employment Agreement dated April 3, 1995 between the
Company and S. Clark Johnson (filed as Exhibit 10.11 to Form 10-Q
dated June 30, 1995).
*^ 10.11 - Executive Employment Agreement dated April 3, 1995 between the
Company and Robert D. Jones (filed as Exhibit 10.12 to Form 10-Q
dated June 30, 1995).
*^ 10.12 - Executive Employment Agreement dated April 1, 1996 between the
Company and Joel M. Mann (filed as Exhibit 10.01 to Form 10-Q dated
June 30, 1996).
13.1 - Portions of the Company's 1997 Annual Report covering pages 9 through
28.
* 21.1 - Subsidiaries of the Registrant (filed as Exhibit 21.1 to Form 10-K
dated December 31, 1996).
23.1 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule.
* Asterisk indicates exhibits incorporated by reference as shown.
^ Indicates management contract or compensatory plan or arrangement.
- 10 -
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the fourth
quarter of 1997.
(c) Exhibits
The Company's 1997 Annual Report is available upon request. Shareholders of
the Company may obtain a copy of any other exhibits to this Form 10-K at a
charge of $.25 per page. Requests should be directed to:
Larry Bell
Corporate Communications
Wainoco Oil Corporation
10000 Memorial Drive, Suite 600
Houston, Texas 77024-3411
- 11 -
<PAGE>
(d) Schedules
Report of Independent Public Accountants on Financial Statement Schedules:
To Wainoco Oil Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Wainoco Oil Corporation's annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 10, 1998. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index above is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 1998
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Wainoco Oil Corporation
Condensed Financial Information of Registrant
Balance Sheets
As of December 31, Schedule I
(in thousands)
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 20,283 $ 2,528
Receivables 121 3,827
Other current assets 1,019 212
--------- ---------
Total current assets 21,423 6,567
--------- ---------
Property, Plant and Equipment, at cost -
Oil and gas properties, on a full-cost basis - 170,879
Furniture, fixtures and other 468 1,354
--------- ---------
468 172,233
Less - Accumulated depreciation,
depletion and amortization (245) (102,800)
--------- ---------
223 69,433
Investment in Subsidiaries 138,778 137,193
Other Assets 3,104 4,791
--------- ---------
$ 163,528 $ 217,984
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 52 $ 2,914
Other accrued liabilities 2,336 5,792
Current maturities of long-term debt - 2,500
--------- ---------
Total current liabilities 2,388 11,206
--------- ---------
Deferred Income Taxes 840 1,718
Deferred Revenues and Other 1,061 1,077
Payable to Affiliated Companies 32,733 32,786
Long-Term Debt 70,572 145,928
Shareholders' Equity 55,934 25,269
--------- ---------
$ 163,528 $ 217,984
========= =========
</TABLE>
The "Notes to Condensed Financial Information of Registrant" and the "Notes to
Financial Statements of Wainoco Oil Corporation and Subsidiaries" are an
integral part of these financial statements.
- 13 -
<PAGE>
<TABLE>
<CAPTION>
Wainoco Oil Corporation
Condensed Financial Information of Registrant
Statements of Operations
For the three years ended December 31, Schedule I
(in thousands)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Equity in earnings of subsidiaries $ 22,707 $ 6,666 $ 559
Other income 645 - (121)
--------- --------- ---------
23,352 6,666 438
--------- --------- ---------
Costs and Expenses:
Selling and general expenses 2,472 2,099 2,527
Depreciation, depletion and amortization 71 77 -
--------- --------- ---------
2,543 2,176 2,527
--------- --------- ---------
Operating Income (Loss) 20,809 4,490 (2,089)
Interest Expense, net 12,997 16,134 17,247
--------- --------- ---------
Income (Loss) from Continuing
Operations Before Income Taxes 7,812 (11,644) (19,336)
Provision (Benefit) for Income Taxes - - -
--------- --------- ---------
Income (Loss) From Continuing Operations 7,812 (11,644) (19,336)
Discontinued Operations:
Income from oil and gas operations, net of taxes 1,721 4,752 211
Gain on disposal of Canadian oil and gas
properties, net of taxes 23,301 - -
Recognition of cumulative translation adjustment (9,862) - -
--------- --------- ---------
Income (Loss) Before Extraordinary Item 22,972 (6,892) (19,125)
Extraordinary Loss on Retirement of Debt,
net of taxes 3,917 - -
--------- --------- ---------
Net Income (Loss) $ 19,055 $ (6,892) $ (19,125)
========= ========= =========
</TABLE>
The "Notes to Condensed Financial Information of Registrant" and the "Notes to
Financial Statements of Wainoco Oil Corporation and Subsidiaries" are an
integral part of these financial statements.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
Wainoco Oil Corporation
Condensed Financial Information of Registrant
Statements of Cash Flow
For the three years ended December 31, Schedule I
(in thousands)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 19,055 $ (6,892) $ (19,125)
Equity in earnings of subsidiaries (22,707) (7,653) 1,149
Gain on disposal of Canadian oil and gas properties (23,301) - -
Recognition of cumulative translation adjustment 9,862 - -
Extraordinary loss on retirement of debt 3,917 - -
Depreciation, depletion and amortization 3,919 8,200 9,641
Deferred income taxes (878) - -
Other (3,232) (931) (246)
--------- --------- ---------
Net cash used by operating activities (13,365) (7,276) (8,581)
--------- --------- ---------
Investing Activities
Additions to property, plant and equipment (3,333) (8,989) (11,345)
Sale of Canadian oil and gas properties 91,307 - -
Proceeds from sale of other properties 259 990 2,692
Acquisition costs and other (849) 429 486
--------- --------- ---------
Net cash provided by (used by) investing activities 87,384 (7,570) (8,167)
--------- --------- ---------
Financing Activities
Long-term borrowings - 12% Senior Notes 2,000 3,000 -
Repayments -
12% Senior Notes, including premium (74,932) - (8,000)
Debentures (7,500) - (2,500)
Common stock 3,109 - -
Change in intercompany balances, net (53) (1,805) 14,000
Dividends paid to Parent 21,122 12,902 14,450
Other - (11) 9
--------- --------- ---------
Net cash provided by (used by) financing activities (56,254) 14,086 17,959
Effect of exchange rate changes on cash (10) 13 (38)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 17,755 (747) 1,173
Cash and cash equivalents, beginning of period 2,528 3,275 2,102
--------- --------- ---------
Cash and cash equivalents, end of period $ 20,283 $ 2,528 $ 3,275
========= ========= =========
</TABLE>
The "Notes to Condensed Financial Information of Registrant" and the "Notes to
Financial Statements of Wainoco Oil Corporation and Subsidiaries" are an
integral part of these financial statements.
- 15 -
<PAGE>
Wainoco Oil Corporation
Notes to Condensed Financial Information of Registrant
December 31, 1997 Schedule I
(1) General
The accompanying condensed financial statements of Wainoco Oil Corporation
(Registrant) should be read in conjunction with the consolidated financial
statements of the Registrant and its subsidiaries included in the Registrant's
1997 Annual Report to Shareholders.
(2) Sale of oil and gas properties
All of the Registrant's oil and gas properties were located in Canada. On
June 16, 1997, Wainoco completed the sale of all its Canadian oil and gas
properties. The contract purchase price of C$133.6 million was adjusted from
the January 1, 1997 effective date of the sale to June 16, 1997. Net proceeds
after these adjustments, transaction expenses and severance costs were
approximately C$126.7 million (US$91.3 million) as of June 16, 1997.
Wainoco's subsidiary, Wainoco Oil & Gas Company, ceased oil and gas
exploration activities in the United States in 1994 and sold all of its United
States oil and gas properties in 1994 and 1995. Information relating to the
sales are disclosed in the "Notes to Financial Statements of Wainoco Oil
Corporation and Subsidiaries."
Operating results for Wainoco's oil and gas operations segment, comprising the
Canadian and United States oil and gas properties, are presented as discontinued
operations. Accordingly, reported results of operations prior to June 16, 1997
are restated.
(3) Long-term debt
The components (in thousands) of long-term debt are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
12% Senior Notes $ 24,572 $ 95,000
7-3/4% Convertible Subordinated Debentures 46,000 46,000
10-3/4% Subordinated Debentures - 4,928
--------- ---------
$ 70,572 $ 145,928
========= =========
</TABLE>
(4) Five-year maturities of long-term debt
The estimated five-year maturities of long-term debt are none in the years
1998 and 1999, $2.3 million in 2000 and 2001 and $26.9 million in 2002.
- 16 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 the date indicated.
WAINOCO OIL CORPORATION
By: /s/ James R. Gibbs
-------------------
James R. Gibbs
President
(chief executive officer)
Date: February 26, 1998
- -----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Wainoco Oil
Corporation and in the capacities and on the date indicated.
/s/ James R. Gibbs /s/ Paul B. Loyd, Jr.
- ------------------------- -----------------------
James R. Gibbs Paul B. Loyd, Jr.
President and Director Director
(chief executive officer)
/s/ Julie H. Edwards /s/ James S. Palmer
- ------------------------- -----------------------
Julie H. Edwards James S. Palmer
Senior Vice President - Finance and Director
Chief Financial Officer
(principal financial officer)
/s/ Jon D. Galvin /s/ Derek A. Price
- ------------------------- -----------------------
Jon D. Galvin Derek A. Price
Vice President - Controller Director
(principal accounting officer)
/s/ Douglas Y. Bech /s/ Carl W. Schafer
- ------------------------- -----------------------
Douglas Y. Bech Carl W. Schafer
Director Director
Date: February 24, 1998
Management's Discussion and Analysis
General
In 1997 the Company decided to focus entirely on its refining business and to
divest its remaining exploration and production operations. The Company had
previously completed the sale of its domestic oil and gas properties (the "U.S.
Disposition") in 1995, and in June 1997, it closed the sale of all of its
Canadian oil and gas properties (the "Canadian Disposition"). After such
dispositions, the Company's primary continuing operation is the Frontier
Refinery. Accordingly, the Company's operating results for its oil and gas
operations segment, comprising the oil and gas properties divested in the U.S.
Disposition and the Canadian Disposition, are presented as discontinued
operations in the consolidated financial statements.
The Company experiences stronger demand for its refined products,
particularly gasoline and asphalt, during the summer months due to seasonal
increases in highway traffic and road construction work. As a result, the
Company's operating results for the first and fourth calendar quarters are
generally lower than those for the second and third quarters. Demand for diesel
is more stable, but reduced road construction and agricultural work during the
winter months does have an impact on demand for diesel. Consistent with the
seasonality of its business, the Company invests in working capital during the
first half of the year and recovers working capital investment in the second
half of the year.
Results of Operations
1997 Compared with 1996. The Company had net income for the year ended
December 31, 1997 of $19.1 million or $0.69 per share, compared to a loss of
$6.9 million or ($0.25) per share for 1996. The 1997 results include a $23.3
million gain resulting from the Canadian Disposition which closed on June 16,
1997, a $9.9 million reduction to income in recognition of the cumulative
translation adjustment and a $3.9 million extraordinary loss on early retirement
of debt.
Operating income increased by $16.1 million in the year ended December 31,
1997 as compared to 1996 due to an increase in the refined product spread
(revenues less material costs) of $19.5 million and an increase in other income
of $1.1 million, offset by an increase in refining operating expenses of $2.6
million and selling and general costs of $1.8 million.
Refined product revenues and refining operating costs are impacted by changes
in the price of crude oil. The price of crude oil was lower in 1997 than in
1996. The refined product spread for 1997 was $5.78 per bbl compared to $4.48
per bbl for 1996. The refined product spread increased due to better light
product margins, primarily gasoline, and an improved light/heavy spread which
more than offset inventory losses in the first quarter of 1997 of approximately
$4.0 million from a decline in crude oil prices of more than $6.00 per bbl.
Inventories are recorded at the lower of cost on a FIFO basis or market. Refined
product revenues decreased $8.0 million, or 2%, in 1997 as compared to 1996. The
decrease in refined product revenues resulted primarily from $1.67 per bbl
decrease in average diesel sales prices offset by a $0.05 per bbl increase in
average gasoline sales prices. Refined product sales volumes were nearly the
same for the 1997 and 1996 periods.
Other income increased $1.1 million to $2.3 million for the year ended
December 31, 1997 as compared to 1996 mostly due to foreign currency transaction
gains of $522,000 related to the Canadian sales proceeds and higher processing
fees.
Refining operating costs decreased $25.0 million, or 7%, in the year ended
December 31, 1997 from 1996 due to a $27.6 million decrease in material costs
partially offset by an increase in refining operating expenses of $2.6 million.
Material costs per bbl decreased 9%, or $2.01 per bbl in 1997 due to lower oil
prices, lower crude oil charges, increased use of heavy crude oil and an
increase in the light/heavy spread. The crude oil charge rate declined by 870
bpd in 1997 due to turnaround work conducted on the crude unit in the fourth
quarter of 1997. During 1997, Frontier increased its use of heavy crude oil by
1% and the heavy crude oil utilization rate expressed as a percent of total
crude oil increased to 91% in 1997 from 88% in 1996. In addition, the
light/heavy
- 10 -
<PAGE>
spread increased 38% to average $3.54 per bbl for the year ended December 31,
1997 because the Company contracted for approximately 30,000 bpd of Wyoming and
Canadian heavy crude oil for much of 1997 at a light/heavy spread substantially
better than it obtained for the same period in 1996. For 1998, the Company has
contracted for an average of 29,000 bpd of Wyoming and Canadian heavy crudes at
a light/heavy spread ranging from $4.80 to $5.25 per bbl. Refining operating
expenses increased by $0.15 per bbl to $3.30 due to higher maintenance and
turnaround costs and leased equipment costs offset by decreased natural gas and
utility costs. Prior year operating expenses were reduced by a $1.3 million
settlement of repair costs rela ted to a 1995 pipeline gas explosion. Although
efforts to reduce refining operating expenses will continue, maintenance
problems may arise in the future, resulting in downtime of certain processing
units and reduced yields which may increase operating expenses and negatively
impact profitability. A major turnaround is scheduled in the spring of 1998 on
the fluid catalytic cracking unit and alkylation and related units. These units
are scheduled to be down for 28 days, which will decrease average yields during
that time. Other turnaround work is scheduled for several Refinery units during
1998, but this work should not materially impact yields.
Selling and general expenses increased $1.8 million, or 28%, for the year
ended December 31, 1997 reflecting increases in salaries and benefits. Included
in 1996 is $0.2 million of salary and salary-related expenses of certain
employees who were not retained after March 31, 1996, in connection with the
U.S. Disposition in late 1995 and a corporate reorganization in early 1996.
Depreciation increased $152,000 or 2% for the year ended December 31, 1997 as
compared to 1996. Such increase was attributable to ongoing capital investment
in the Refinery.
Net interest expense decreased by $3.3 million, or 19%, in the year ended
December 31, 1997 as compared to 1996. Such decrease was attributable to
interest income of $2.0 million earned primarily on the sale proceeds of the
Canadian Disposition and reduced interest expense of $1.3 million due to early
retirement of debt. On October 1, 1997, the Company retired $7.5 million of its
10-3/4% Subordinated Debentures, and by the end of 1997, $72.4 million principal
amount of its 12% Senior Notes was retired. Average debt decreased from $154
million for the year ended December 31, 1996 to $138 million in 1997.
Income from discontinued oil and gas operations includes the Company's
Canadian oil and gas operation through May 5, 1997. Income from discontinued
operations was $1.7 million for the year ended December 31, 1997 as compared to
$4.8 million for 1996.
1996 Compared with 1995. Operating income increased $6.7 million, or 605%, in
1996 compared to 1995. Such increase was attributable to improved refined
product spread of $5.9 million, reduced operating costs of $1.2 million and
reduced selling and general costs of $0.9 million, offset by a decrease in other
income of $0.8 million and an increased depreciation expense of $0.5 million.
The 1995 other income was related to a settlement of a contract dispute.
Refined products revenues and refining operating costs are impacted by
changes in the price of crude oil. Generally, the price of crude oil remained
strong throughout 1996 compared to a lower average price in 1995. The refined
product spread increased 11%, to $4.48 per bbl, in 1996. Lower national
distillate inventory levels in 1996 contributed to the improved diesel margins;
however, a continued decline in the light/heavy spread in 1996 compared to 1995
increased material costs. The adverse impact of higher crude oil prices
significantly reduced margins for by-products, such as asphalt, in 1996 compared
to 1995 levels. In 1996, refined product revenues increased 16% from 1995 due to
a $3.84 per bbl increase in average sales price, offset by a 2% decrease in
sales volumes.
- 11 -
<PAGE>
Refining operating costs increased $45.2 million, or 14%, in 1996 compared to
1995 due to a 17% increase in material costs associated with the strong
worldwide crude oil market, offset by a reduction in the refining operating
expenses of $1.2 million. During 1996, Frontier increased its use of heavy crude
oil by 17% which favorably impacted material costs. The heavy crude oil
utilization rate expressed as a percent of total crude oil increased to 88% in
1996 from 77% in 1995. The favorable impact of the increased use of heavy crude
oil in 1996 was offset somewhat by the continued decline in the light/heavy
spread during 1996. In 1996, the light/heavy spread declined 13% from 1995 to
average $2.56 per bbl as a result of increased competition for Wyoming heavy
crude oil and other sources of heavy crude oil in the Company's market area.
However, in the fourth quarter of 1996, the Frontier Refinery experienced an
increase in the light/heavy spread when it contracted for delivery in 1997 of
approximately 25,000 bpd of Wyoming heavy crude oil at a light/heavy spread of
$3.25 to $3.75 per bbl. The $1.2 million decrease in refinery operating expenses
in 1996 was primarily attributable to recovery in the first quarter of 1996 of
approximately $1.3 million of repair costs related to a pipeline gas explosion
in 1995. The repair costs approximating $1.3 million in 1995, and related
recovery in 1996, were both included in refinery operating expense. During 1996,
refinery operating expenses were reduced in various categories including
insurance and turnaround expense; however, these savings were offset by cost
increases associated with higher natural gas prices and general maintenance
costs. The strike by approximately 150 union employees which commenced May 8,
1996 and settled July 29, 1996 did not adversely impact operating costs or
throughput. The increase in depreciation expense reflected in 1996 of $500,000,
or 6%, from 1995 was primarily attributable to ongoing capital investment in the
Frontier Refinery.
Selling and general expenses decreased $0.9 million, or 12%, to $6.3 million
in 1996 compared to 1995 due to a reduction in corporate staff after the U.S.
Disposition. Additionally, 1996 included approximately $0.2 million in expenses
for corporate staff who were retained until March 31, 1996.
Net interest expense decreased $1.0 million, or 5%, in 1996 compared to 1995
as a result of lower average debt balance outstanding throughout 1996 with
proceeds from the U.S. Disposition applied to reduce debt primarily in December
1995.
Discontinued oil and gas operations includes both Canadian and United States
oil and gas operations. Income from discontinued operations was $4.8 million in
1996 compared to $211,000 in 1995.
Liquidity and Capital Resources
On June 16, 1997, the Company completed the Canadian Disposition. Net
proceeds after purchase price adjustments, transaction expenses and severance
costs were approximately $91.3 million (C$126.7 million). With proceeds from the
sale, the Company redeemed $49.2 million of its 12% Senior Notes, including
redemption premium, during the third quarter of 1997, and on October 1, 1997,
redeemed the remaining $7.5 million outstanding of 10-3/4% Subordinated
Debentures at par. In addition, on December 30, 1997, the Company redeemed $25.6
million of its 12% Senior Notes, including redemption premium. In total, $79.9
million principal amount of debt was retired with sales proceeds. As of December
31, 1997, the Company had a debt to capitalization ratio of 56% compared to the
highly leveraged percentage of 85% as of year-end 1996.
On February 9, 1998, the Company issued $70 million of 9-1/8% Senior Notes
(the "New Senior Notes") due 2006. On February 10, 1998, the Company called for
redemption the remaining $24.6 million of its Senior Notes and $46 million of
its Convertible Subordinated Debentures outstanding at December 31, 1997
(together, the "Redemptions"). The Company will use the net proceeds from the
issuance of the New Senior Notes and available cash to fund the Redemptions. To
the extent the holders of the Convertible Subordinated Debentures elect to
convert their Convertible Subordinated Debentures into shares of the Company's
common stock prior to redemption, a portion of the net proceeds will not be
needed to effect such redemption. Depending on market conditions, the Company
may use any such excess proceeds to repurchase shares of its common stock in the
open market. Any remaining unused proceeds will be used for general corporate
purposes.
- 12 -
<PAGE>
At December 31, 1997, the Company had $21.7 million available in cash, $20
million available under the Frontier Credit Facility and $250,000 of 12% Senior
Notes held by Wainoco. The Company had working capital of $20.9 million at
December 31, 1997, including the portion of the sales proceeds from the Canadian
Disposition remaining after debt retirement.
Net cash provided by operating activities was $12.5 million, $8.5 million and
$9.9 million for 1997, 1996 and 1995, respectively. Working capital changes
required $9.9 million and $2.6 million of cash flows for 1997 and 1996,
respectively. Consistent with the seasonality of its business, the Company
invests in working capital during the first half of the year and recovers
working capital investment in the second half of the year.
Investing activities in 1997 included capital expenditures of $9.0 million, a
decrease of $4.4 million from 1996, primarily due to a $5.4 million decrease in
oil and gas operations investment. Investing activities include proceeds from
the Canadian Disposition of $91.3 million for the year ended December 31, 1997.
Capital expenditures were $13.4 for the year ended December 31, 1996 compared to
$17.2 million in 1995. Refinery capital expenditures of $13 million are planned
in 1998. It is anticipated that cash generated from operating activities will
be sufficient to meet its 1998 investing requirements.
The Company's 12% Senior Notes currently restrict it from the payment of
dividends. Additionally, under certain conditions, the Frontier credit facility
restricts the transfer of cash in the form of dividends, loans or advances to
the Company from Frontier. Wainoco does not believe these restrictions limit its
current operating plans.
Other Matters
IMPACT OF CHANGING PRICES/HEDGING
The Company's revenues and cash flows, as well as estimates of future cash
flows are very sensitive to changes in energy prices. Major shifts in the cost
of crude and the price of refined products can result in large changes in
operating margin from refining operations. Energy prices also determine the
carrying value of the Refinery's inventory.
The Company, at times, engages in futures transactions in its refining
operations for the purpose of hedging its refining position. To date, the use of
future transactions has been limited to protect against price declines for
excess inventory volumes. Futures contracts and options may also, in the future,
be used to fix margins in its refining and marketing operations. In addition,
the Company, at times, engages in futures transactions for the purchase of
natural gas at fixed prices. Natural gas is consumed by the Refinery for energy
purposes.
ENVIRONMENTAL
Numerous local, state and federal laws, rules and regulations relating to the
environment are applicable to the Company's operations. As a result, the Company
falls under the jurisdiction of numerous state and federal agencies for
administration and is exposed to the possibility of judicial or administrative
actions for remediation and/or penalties brought by those agencies. Among these
requirements are regulations recently promulgated by the EPA under the authority
of Title III of the Clean Air Act Amendments. The Company estimates that the
Title III regulations will require the Company to expend approximately $600,000
by the regulatory compliance deadline of August 1, 1998 to improve the Frontier
Refinery's control of emissions of hazardous air pollutants. Subsequent rule
making authorized by this or other titles of the Clean Air Act Amendments or
similar laws may necessitate additional expenditures in future years. Because
other refineries will be required to make similar expenditures, the Company does
not expect such expenditures to materially adversely impact its competitive
position. Frontier is party to one consent decree requiring the investigation
and, in certain instances, mitigation of environmental impacts resulting from
past operational activities. The Company has been and will be responsible for
costs related to compliance with or remediations resulting from environmental
regulations. There are currently no identified environmental remediation
projects of which the costs can be reasonably estimated. However, the
continuation of the present investigative process, other more extensive
investigations over time or changes in regulatory requirements could result in
future liabilities. The effects to the future consolidated financial position,
results of operations or capital expenditures is unknown.
- 13 -
<PAGE>
YEAR 2000
Many of the computer systems used by the Company today were designed and
developed using two digits, rather than four, to specify the year. As a result,
such systems will recognize the year 2000 as "00". This could cause many
computer applications to fail completely or to create erroneous results unless
corrective measures are taken. The Company utilizes software and related
computer technology essential to its operations that may be affected by the Year
2000 issue. A review of the Company's primary computer accounting system
indicated only minor modifications will be required to make it Year 2000
compliant. Reviews are being done to determine what actions will be necessary to
make its remaining computer systems Year 2000 compliant. The Company expects to
complete its remaining reviews and prepare cost estimates by mid-1998.
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL AND OPERATING DATA
1997 1996
(Unaudited, dollars in thousands --------------------------------------- ---------------------------------------
except per share) Fourth Third Second First Fourth Third Second First
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 82,410 $108,108 $ 96,330 $ 89,570 $100,448 $107,039 $100,320 $ 75,566
Operating income (loss) 3,489 14,743 9,045 (5,574) (513) 3,178 5,921 (3,001)
Income (loss) from
continuing operations 1,505 11,806 4,534 (10,033) (4,716) (1,262) 1,545 (7,211)
Income from discontinued
operations, net of taxes (1) - - 13,606 1,554 2,497 294 192 1,769
Income (loss) before
extraordinary item 1,505 11,806 18,140 (8,479) (2,219) (968) 1,737 (5,442)
Extraordinary loss,
net of taxes 1,295 2,622 - - - - - -
Net income (loss) 210 9,184 18,140 (8,479) (2,219) (968) 1,737 (5,442)
Basic and diluted earnings
(loss) per share:
Continuing operations 0.05 0.42 0.17 (0.37) (0.17) (0.05) 0.06 (0.26)
Net income (loss) 0.01 0.33 0.66 (0.31) (0.08) (0.04) 0.06 (0.20)
EBITDA (2) 5,826 17,037 11,311 (3,301) 1,740 5,467 8,186 (790)
Net cash provided by (used in)
operating activities 5,698 11,620 9,245 (14,065) 14,420 1,358 1,140 (8,453)
Refining operations
Total charges (bpd) 39,215 44,907 42,341 38,623 40,659 43,718 42,296 38,070
Heavy crude
charge rate (%) 92 91 92 90 97 87 84 84
Gasoline yields (bpd) 15,834 18,679 16,456 17,268 14,775 17,900 16,969 17,668
Diesel yields (bpd) 11,393 12,936 13,676 13,441 14,973 13,129 14,169 12,570
Total product sales (bpd) 36,036 46,205 41,848 38,105 38,946 44,248 40,910 36,579
Average light/heavy spread based on
layed-in crude costs (per bbl) $ 3.82 $ 3.54 $ 3.32 $ 3.48 $ 2.63 $ 2.51 $ 2.58 $ 2.53
</TABLE>
(1) Discontinued operations reflected in the above periods represent the
Company's oil and gas operating segment, comprising the Canadian and United
States oil and gas properties. On June 16, 1997, the Company completed the
Canadian Disposition. The Company completed the U.S. Disposition during
1995.
(2) EBITDA represents income from continuing operations before interest expense,
income tax and depreciation 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. In addition, 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.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
FIVE YEAR FINANCIAL DATA
(In thousands except per share) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $376,418 $383,373 $331,832 $313,187 $326,138
Operating income (loss) 21,703 5,585 (1,106) 20,416 15,700
Income (loss) from continuing operations 7,812 (11,644) (19,336) 1,693 (2,232)
Income (loss) from discontinued operations,
net of taxes (1) 15,160 4,752 211 (14,300) 4,736
Income (loss) before extraordinary item 22,972 (6,892) (19,125) (12,607) 2,504
Extraordinary loss, net of taxes 3,917 - - - -
Net income (loss) 19,055 (6,892) (19,125) (12,607) 2,504
Basic and diluted earnings (loss) per share:
Continuing operations 0.28 (0.43) (0.71) 0.06 (0.09)
Net income (loss) 0.69 (0.25) (0.70) (0.46) 0.10
EBITDA (2) 30,873 14,603 7,365 28,118 22,566
Net cash provided by operating activities 12,498 8,465 9,878 32,108 32,800
Working capital (deficit) 20,928 (3,752) (2,485) 1,532 (1,905)
Total assets 177,915 239,865 238,382 277,536 296,811
Long-term debt 70,572 145,928 145,377 170,797 176,900
Shareholders' equity 55,934 25,269 32,464 49,449 66,040
Capital expenditures from continuing operations 5,675 4,760 5,217 7,979 28,700
Dividends declared - - - - -
</TABLE>
(1) Discontinued operations reflected in the above periods represent the
Company's oil and gas operating segment, comprising the Canadian and United
States oil and gas properties. On June 16, 1997, the Company completed the
Canadian Disposition. The Company completed the U.S. Disposition during
1995.
(2) EBITDA represents income from continuing operations before interest expense,
income tax and depreciation 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. In addition, 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.
- 15 -
<PAGE>
<TABLE>
<CAPTION>
FIVE YEAR OPERATING DATA
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Charges (bpd)
Light crude 3,162 4,322 8,098 6,165 6,581
Heavy crude 31,967 31,677 27,174 27,025 25,909
Other feed and blend stocks 6,154 5,192 5,072 4,105 2,957
Total charges 41,283 41,191 40,344 37,295 35,447
Manufactured product yields (bpd)
Gasoline 17,060 16,825 17,263 16,106 15,129
Diesel 12,856 13,712 13,744 13,094 11,777
Asphalt and other 10,200 9,215 7,951 6,575 7,128
Total manufactured product yields 40,116 39,752 38,958 35,775 34,034
Product sales (bpd)
Gasoline 20,499 20,311 20,767 19,437 19,837
Diesel 12,110 12,561 13,265 12,628 11,819
Asphalt and other 7,949 7,306 6,781 6,724 7,682
Total product sales 40,558 40,178 40,813 38,789 39,338
Average sales price (per sales bbl)
Gasoline $ 28.83 $ 28.78 $ 24.68 $ 24.57 $ 25.24
Diesel 27.22 28.89 23.48 23.48 25.06
Asphalt and other 13.13 13.21 11.73 12.18 12.00
Operating margin information (per sales bbl)
Average sales price $ 25.27 $ 25.98 $ 22.14 $ 22.06 $ 22.60
Material costs 19.49 21.50 18.11 16.18 17.09
Product spread 5.78 4.48 4.03 5.88 5.51
Operating expenses excluding depreciation 3.30 3.15 3.19 3.45 3.55
Depreciation 0.61 0.59 0.55 0.53 0.42
Operating margin 1.87 0.74 0.29 1.90 1.54
Average light/heavy spread based on layed-in
crude costs (per bbl) $ 3.54 $ 2.56 $ 2.94 $ 3.61 $ 4.48
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(In thousands except per share amounts)
For the years ended December 31, 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Refined products $ 374,091 $ 382,098 $ 329,784
Other 2,327 1,275 2,048
--------- --------- ---------
376,418 383,373 331,832
--------- --------- ---------
Costs and Expenses:
Refining operating costs 337,495 362,485 317,311
Selling and general expenses 8,050 6,285 7,156
Depreciation 9,170 9,018 8,471
--------- --------- ---------
354,715 377,788 332,938
--------- --------- ---------
Operating Income (loss) 21,703 5,585 (1,106)
Interest expense, net 13,891 17,229 18,230
--------- --------- ---------
Income (loss) from continuing operations
before income taxes 7,812 (11,644) (19,336)
Provision for Income Taxes - - -
--------- --------- ---------
Income (loss) from continuing operations 7,812 (11,644) (19,336)
Discontinued operations
Income from oil and gas operations, net of taxes 1,721 4,752 211
Gain on disposal of Canadian oil and gas
properties, net of taxes 23,301 - -
Recognition of cumulative translation adjustment (9,862) - -
--------- --------- ---------
Income (loss) before extraordinary item 22,972 (6,892) (19,125)
Extraordinary loss on retirement of debt, net of taxes 3,917 - -
--------- --------- ---------
Net income (loss) $ 19,055 $ (6,892) $ (19,125)
========= ========= =========
Basic and diluted earnings (loss) per share
of common stock:
Continuing operations $ .28 $ (.43) $ (.71)
Discontinued operations .55 .18 .01
Extraordinary loss (.14) - -
--------- --------- ---------
Net Income (Loss) $ .69 $ (.25) $ (.70)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 17 -
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(In thousands except shares)
December 31, 1997 1996
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash, including cash equivalents of $19,981 and $609 at
December 31, 1997 and 1996, respectively $ 21,735 $ 5,183
Trade receivables 16,674 19,422
Other receivables 530 1,357
Inventory of crude oil, products and other 27,666 29,617
Other current assets 1,391 730
--------- ---------
Total current assets 67,996 56,309
--------- ---------
Property, plant and equipment, at cost:
Refinery and pipeline 149,201 143,172
Furniture, fixtures and other equipment 3,044 3,646
Oil and gas properties, on a full-cost basis - 170,879
--------- ---------
152,245 317,697
Less - accumulated depreciation, depletion and amortization 45,586 139,091
--------- ---------
106,659 178,606
Other assets 3,260 4,950
--------- ---------
Total assets $ 177,915 $ 239,865
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 33,527 $ 43,789
Accrued turnaround cost 6,771 3,490
Accrued liabilities and other 5,240 5,033
Accrued interest 1,530 5,249
Current maturities of long-term debt - 2,500
--------- ---------
Total current liabilities 47,068 60,061
--------- ---------
Long-Term Debt, net of current maturities 70,572 145,928
Deferred Credits and Other 2,801 6,189
Deferred Income Taxes 1,540 2,418
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $100 par value, 500,000 shares authorized,
no shares issued - -
Common stock, no par, 50,000,000 shares authorized,
28,111,289 shares and 27,313,502 shares
issued in 1997 and 1996, respectively 57,251 57,172
Paid-in capital 84,785 81,767
Retained earnings (deficit) (85,866) (104,921)
Cumulative translation adjustment - (8,501)
Treasury stock, 52,500 shares and 55,000 shares
at December 31, 1997 and 1996, respectively (236) (248)
--------- ---------
Total shareholders' equity 55,934 25,269
--------- ---------
Total liabilities and shareholders' equity $ 177,915 $ 239,865
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands)
For the years ended December 31, 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 19,055 $ (6,892) $ (19,125)
Gain on disposal of Canadian oil and gas properties (23,301) - -
Recognition of cumulative translation adjustment 9,862 - -
Extraordinary loss on retirement of debt 3,917 - -
Depreciation, depletion and amortization 13,018 17,141 21,411
Other (202) 795 734
--------- --------- ---------
22,349 11,044 3,020
--------- --------- ---------
Changes in components of working capital from operations
(Increase) decrease in receivables 905 765 (1,283)
(Increase) decrease in inventory 1,856 (9,881) 3,884
(Increase) decrease in other current assets (642) (35) 175
Increase (decrease) in accounts payable (8,617) 7,659 4,161
Increase (decrease) in accrued liabilities (3,353) (1,087) (79)
--------- --------- ---------
(9,851) (2,579) 6,858
--------- --------- ---------
Net cash provided by operating activities 12,498 8,465 9,878
--------- --------- ---------
Investing activities
Additions to property, plant and equipment:
Continuing operations (5,675) (4,760) (5,217)
Discontinued operations (3,298) (8,654) (11,960)
Sales of oil and gas and other properties 91,307 990 34,145
Other (590) 429 (606)
--------- --------- ---------
Net cash provided by (used in) investing activities 81,744 (11,995) 16,362
--------- --------- ---------
Financing activities
Borrowings:
Senior notes 2,000 3,000 -
Payments of debt:
Bank debt, net - - (15,000)
Senior notes, including redemption premium (74,932) - (8,000)
Subordinated debentures (7,500) - (2,500)
Issuance of common stock 3,109 - -
Other (357) (345) (488)
--------- --------- ---------
Net cash provided by (used in) financing activities (77,680) 2,655 (25,988)
Effect of exchange rate changes on cash (10) 13 (38)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 16,552 (862) 214
Cash and cash equivalents, beginning of period 5,183 6,045 5,831
--------- --------- ---------
Cash and cash equivalents, end of period $ 21,735 $ 5,183 $ 6,045
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 19 -
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Common Stock
-----------------------
Number Retained Cumulative
of Shares Paid-In Earnings Translation Treasury
(In thousands except shares) Issued Amount Capital (Deficit) Adjustment Stock Total
----------- --------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 27,310,842 $ 57,172 $ 81,758 $ (78,904) $ (10,307) $ (270) $ 49,449
Shares issued under:
Stock option plan 2,660 - 9 - - - 9
Directors' stock plan - - - - - 11 11
Translation adjustment - - - - 2,120 - 2,120
Net loss - - - (19,125) - - (19,125)
----------- --------- --------- ---------- ----------- --------- ---------
December 31, 1995 27,313,502 57,172 81,767 (98,029) (8,187) (259) 32,464
Shares issued under:
Directors' stock plan - - - - - 11 11
Translation adjustment - - - - (314) - (314)
Net loss - - - (6,892) - - (6,892)
----------- --------- --------- ---------- ----------- --------- ---------
December 31, 1996 27,313,502 57,172 81,767 (104,921) (8,501) (248) 25,269
Shares issued under:
Stock option plan 797,787 79 3,018 - - - 3,097
Directors' stock plan - - - - - 12 12
Translation adjustment - - - - (1,361) - (1,361)
Net income - - - 19,055 - - 19,055
Disposition of Canadian assets - - - - 9,862 - 9,862
----------- --------- --------- ---------- ----------- --------- ---------
December 31, 1997 28,111,289 $ 57,251 $ 84,785 $ (85,866) $ - $ (236) $ 55,934
=========== ========= ========= ========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 20 -
<PAGE>
Notes to Consolidated Financial Statements
1 Nature of Operations
The financial statements include the accounts of Wainoco Oil Corporation, a
Wyoming corporation, and its wholly-owned subsidiaries, including Frontier
Holdings Inc. ("Frontier"), collectively referred to as Wainoco or the Company.
Wainoco is engaged in the crude oil refining and wholesale marketing of refined
petroleum products business (the "refining operations").
Wainoco conducts its refining operations in the Rocky Mountain region of the
United States. The Company's Cheyenne, Wyoming Refinery purchases the crude oil
to be refined and markets the refined petroleum products produced, including
various grades of gasoline, diesel fuel, asphalt and petroleum coke.
Prior to the third quarter of 1997, Wainoco also explored for and produced
oil and gas in Canada and prior to the first quarter of 1996 in the United
States (together, the "oil and gas operations"). On June 16, 1997, Wainoco
completed the sale of all its Canadian oil and gas properties. During the third
quarter of 1994, the Company announced that it intended to cease all exploration
activities in the United States and during 1995 completed the sale of its United
States oil and gas assets. Operating results for Wainoco's oil and gas
operations segment are presented as discontinued operations in the accompanying
statements of operations and all previously reported results are restated to
this presentation.
2 Significant Accounting Policies
PROPERTY, PLANT AND EQUIPMENT
Refinery plant and equipment is depreciated based on the straight-line method
over estimated useful lives of three to twenty years.
Maintenance and repairs are expensed as incurred except for major scheduled
repairs and maintenance ("turnaround") of the Refinery operating units. The
costs for turnarounds are ratably accrued over the period from the prior
turnaround to the next scheduled turnaround. Major improvements are capitalized,
and the assets replaced are retired.
NEW ACCOUNTING STATEMENTS
The Company adopted the Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" in 1997 which establishes new standards for computing and presenting
earnings per share. SFAS No. 128 requires the presentation of basic and diluted
earnings per share for each period presented. Earnings (loss) per share has been
restated for periods presented to give effect for the adoption of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which establishes standards for reporting and displaying comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of this statement
requires incremental financial statement disclosures and thus will have no
effect on the Company's financial position or results of operations.
INVENTORIES
Inventories of crude oil, other unfinished oils and all finished products are
recorded at the lower of cost on a first-in, first-out (FIFO) basis or market.
Refined product exchange transactions are considered asset exchanges with
deliveries offset against receipts. The net exchange balance is included in
inventory. Inventories of materials and supplies are recorded at cost.
<TABLE>
<CAPTION>
SCHEDULE OF COMPONENTS OF INVENTORY
(In thousands)
December 31, 1997 1996
--------- ---------
<S> <C> <C>
Crude oil $ 3,904 $ 2,863
Unfinished products 6,338 7,024
Finished products 9,929 12,816
Chemicals 1,534 851
Repairs and maintenance supplies and other 5,961 6,063
--------- ---------
$ 27,666 $ 29,617
========= =========
</TABLE>
ENVIRONMENTAL EXPENDITURES
Environmental expenditures are expensed or capitalized based upon their
future economic benefit. Costs which improve a property's pre-existing condition
and costs which prevent future environmental contamination are capitalized.
Costs related to environmental damage resulting from operating activities
subsequent to acquisition are expensed. Liabilities for these expenditures are
recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated.
- 21 -
<PAGE>
HEDGING
The Company, at times, engages in futures transactions in its refining
operations for the purpose of hedging its inventory position and natural gas
prices. Gains and losses on futures contracts designated as hedges are
recognized in refining operating costs when the associated hedge transaction is
consummated. The Company does not enter into derivative contracts for
speculative purposes.
INTEREST
Interest is reported net of interest capitalized and interest income.
Interest income of $2.0 million, $109,000 and $140,000 was recorded in the years
ended December 31, 1997, 1996 and 1995, respectively. During 1996, the Company
capitalized interest of $24,000. Wainoco capitalizes interest on debt incurred
to fund the construction or acquisition of a significant asset.
Additionally, to manage its interest cost and exposure to interest rate
movements, the Company, at times, enters into interest rate swaps. Such
agreements effectively change the Company's interest rate exposure. At December
31, 1997, the Company was not subject to any such agreements.
STOCK BASED COMPENSATION
Compensation cost is measured using the intrinsic value method. Under this
method, compensation cost is the excess, if any, of the quoted market value of
the Company's common stock at the grant date over the amount the employee must
pay to acquire the stock. No compensation cost was recognized for the years
ended December 31, 1997, 1996 and 1995.
CURRENCY TRANSLATION
The Canadian dollar financial statements of the Canadian oil and gas
operations have been translated to United States dollars. Gains and losses on
currency transactions are included in the consolidated statements of operations
currently, and translation adjustments are included in the consolidated
statements of shareholders' equity. See Note 3 for information relating to the
recognition of the cumulative translation adjustment in 1997.
INTERCOMPANY TRANSACTIONS
Significant intercompany transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH FLOW REPORTING
Highly liquid investments with a maturity, when purchased, of three months or
less are considered to be cash equivalents. Cash payments for interest during
1997, 1996 and 1995 were $18.4 million, $16.3 million and $18.8 million,
respectively. Cash payments for income taxes during 1997, 1996 and 1995 were
$930,000, $187,000 and $133,000, respectively.
3 Sale of Oil and Gas Operations
On June 16, 1997, Wainoco completed the sale of all its Canadian oil and gas
properties. The transaction was initiated by the Company through a negotiated
bid process in order to maximize shareholder value. The oil and gas assets were
located in British Columbia and Alberta and included approximately 94 billion
cubic feet of natural gas, 1.7 million barrels of oil, condensate and natural
gas liquids, 121,500 net undeveloped leasehold acres and a significant amount of
seismic data. Additionally, value was received for certain Canadian income tax
pools of the Company.
The contract purchase price of C$133.6 million was adjusted from the January
1, 1997 effective date of the sale to June 16, 1997. Net proceeds after these
adjustments, transaction expenses and severance costs were approximately C$126.7
million (US$91.3 million) as of June 16, 1997. A net gain of $23.3 million was
realized on the transaction. No Canadian taxes are estimated to be payable due
to available oil and gas deductions and net operating loss carryforwards. For
U.S. federal income taxes, available net operating loss carryforwards will be
utilized to offset the gain; however, alternative minimum taxes of approximately
$800,000 are estimated and have been paid.
- 22 -
<PAGE>
The cumulative translation adjustment as of May 5, 1997 (the measurement date
of the sale) of $9.9 million was realized against income as a result of the
sale. In prior periods, Wainoco had recognized the currency translation impact
of its Canadian operations as a direct reduction to shareholders' equity.
Consequently, the recognition of the cumulative translation adjustment in the
accompanying statements of operations has no effect on shareholders' equity.
A net loss of $54,000 from Canadian operations from the measurement date
until June 16, 1997 was included in the gain calculation. As of December 31,
1997, the assets and liabilities of the Canadian operations retained by Wainoco
were not material.
In the fourth quarter of 1995, Wainoco culminated the restructuring of
exploration activities in the United States and sold its last domestic oil and
gas assets.
The following schedule presents certain discontinued oil and gas operating
income (loss) information and capital expenditures for the three years ended
December 31, 1997, 1996 and 1995 and identifiable assets as of December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
(in thousands)
December 31, 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Oil and gas sales
Canada $ 7,280 $ 19,592 $ 21,096
United States - 987 9,696
Depreciation, depletion and amortization
Canada 3,002 8,123 9,641
United States - - 3,299
Operating income (loss)
Canada 1,954 4,129 2,737
United States - 987 (623)
Capital expenditures
Canada 2,815 7,917 10,865
United States - - 277
Identifiable assets
Canada - 74,001 75,229
United States - - -
</TABLE>
4 Long-term Debt
<TABLE>
<CAPTION>
SCHEDULE OF LONG-TERM DEBT
(in thousands)
December 31, 1997 1996
--------- ---------
<S> <C> <C>
Refining credit facility $ - $ -
12% Senior Notes 24,572 95,000
7-3/4% Convertible Subordinated Debentures 46,000 46,000
10-3/4% Subordinated Debentures - 7,428
--------- ---------
70,572 148,428
Less current maturities - 2,500
--------- ---------
$ 70,572 $ 145,928
========= =========
</TABLE>
REFINING CREDIT FACILITY
The refining operations has a working capital credit facility with a group of
three banks which expires on April 2, 1999. The facility is a collateral-based
facility with total capacity of up to $50 million, of which maximum cash
borrowings are $20 million. Any unutilized capacity after cash borrowings is
available for letters-of-credit. No debt was outstanding on this facility at
December 31, 1997 and 1996. Standby letters of credit outstanding were $4.5
million and $19.5 million at December 31, 1997 and 1996, respectively.
The facility provides working capital financing for operations, generally the
financing of crude and product supply. It is generally secured by Frontier's
current assets. The agreement provides for a quarterly commitment fee of .375 of
1% per annum. Interest rates are based, at the Company's option, on the agent
bank's prime rate plus 1/2% or the reserve-adjusted LIBOR plus 1-3/4%. Standby
letters-of-credit issued bear a fee of 1-1/4% annually, plus standard issuance
and renewal fees. The facility agreement includes certain financial covenant
requirements relating to Frontier's working capital, cash earnings, tangible net
worth and fixed charge coverage.
SENIOR NOTES
The $24.6 million of unsecured 12% Senior Notes ("Senior Notes") are due
2002. The notes are redeemable, at the option of the Company, at a premium of
103.43% after July 31, 1997, declining to 100% in 1999. Interest is payable
semiannually. See Note 9 for information related to the December 31, 1997 debt
balance and activity subsequent thereto.
- 23 -
<PAGE>
CONVERTIBLE SUBORDINATED DEBENTURES
The $46 million of 7-3/4% Convertible Subordinated Debentures ("Convertible
Subordinated Debentures") are due in 2014. The debentures are convertible into
the Company's common stock at $8.75 per share. Interest is payable semiannually.
The debentures are redeemable at a premium of 102.325% declining to 100% in
1999. Sinking fund payments of 5% of the principal amount commence in 2000, and
are calculated to retire 70% of the principal amount prior to maturity. See Note
9 for information related to the December 31, 1997 debt balance and activity
subsequent thereto.
EARLY RETIREMENT OF DEBT
On July 21, 1997, the Company initiated a tender offer for $91.4 million of
its Senior Notes at a price of par as required by the Senior Notes Indenture
after a material sale of assets. The par tender offer expired on August 20, 1997
with approximately $2.2 million being acquired by the Company. On August 21,
1997, the Company called $48.0 million principal amount of its Senior Notes
(including approximately $2.5 million held by the Company) at a price of 103.43%
and redeemed them on September 23, 1997. The Company called all $7.5 million
principal amount of 10-3/4% Subordinated Debentures and redeemed them on October
1, 1997. In addition, on November 25, 1997 the Company called $25.0 million
principal amount of its Senior Notes (including approximately $.3 million held
by the Company) at a price of 103.43% and redeemed them on December 30, 1997.
The debt redemptions were funded with proceeds from the sale of the Canadian oil
and gas operations as disclosed in Note 3. Based on the redemptions, the Company
has recognized an extraordinary loss, net of taxes, of approximately $3.9
million due to the redemption premium of 103.43% on the Senior Notes and
reduction in debt issuance costs.
RESTRICTIONS ON LOANS, TRANSFER OF FUNDS AND PAYMENT OF DIVIDENDS
The Frontier credit facility restricts Frontier as to the distribution of
capital assets and the transfer of cash in the form of dividends, loans or
advances when there are any outstanding borrowings under the facility or when a
default exists or would occur.
FIVE-YEAR MATURITIES
The estimated five-year maturities of long-term debt are none in 1998 and
1999, $2.3 million in 2000 and 2001, and $26.9 million in 2002.
5 Income Taxes
The following is the provision (benefit) for income taxes for the three years
ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
PROVISION (BENEFIT) FOR INCOME TAXES
(In thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current $ 194 $ - $ -
Deferred (194) - -
--------- --------- ---------
$ - $ - $ -
========= ========= =========
</TABLE>
The following is a reconciliation of the provision (benefit) for income taxes
computed at the statutory United States income tax rates on pretax income (loss)
and the provision (benefit) for income taxes as reported for the three years
ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
RECONCILIATION OF TAX PROVISION
(In thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Provision (benefit)
based on
statutory rates $ 2,656 $ (4,242) $ (6,563)
--------- --------- ---------
Increase (decrease)
resulting from:
Net operating
loss carryforward (2,656) 4,242 6,563
--------- --------- ---------
Provision
as reported $ - $ - $ -
========= ========= =========
</TABLE>
- 24 -
<PAGE>
The following are the significant components, by type of temporary
differences or carryforwards, of deferred tax liabilities and tax assets,
computed at the federal statutory rate as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
COMPONENTS OF DEFERRED TAXES
(In thousands)
December 31, 1997 1996
--------- ---------
<S> <C> <C>
Deferred tax liabilities
Property, plant and equipment due to
differences in depreciation $ 14,189 $ 14,874
Installment sale 5,435 5,435
Other 918 1,415
--------- ---------
Deferred tax liabilities 20,542 21,724
--------- ---------
Deferred tax assets
Tax loss carryforwards 50,960 34,944
Depletion carryforwards 3,045 3,045
Tax credit carryforwards - 1,209
Other 3,069 3,151
--------- ---------
57,074 42,349
--------- ---------
Less - valuation allowance 38,072 23,043
--------- ---------
Net deferred tax assets 19,002 19,306
--------- ---------
Net deferred tax liabilities $ 1,540 $ 2,418
--------- ---------
</TABLE>
Realization of deferred tax assets is dependent on the Company's ability to
generate taxable income within the life of the tax loss carryforwards. As a
result of the Company's history of operating losses, a valuation allowance has
been provided for deferred tax assets that are not offset by scheduled future
reversals of deferred tax liabilities.
At December 31, 1997, the Company had regular net operating loss ("NOL")
carryforwards for United States tax reporting purposes of $145.6 million
available to reduce future federal taxable income. The regular NOL carryforwards
will expire as follows: $32.2 million in 2002, $7.7 million in 2003, $11.3
million in 2004, $29.5 million in 2005, $17.2 million in 2006, $13.7 million in
2007, $11.3 million in 2008, $2.2 million in 2009, $16.1 million in 2010 and
$4.4 million in 2011.
Also at December 31, 1997, the Company had alternative minimum tax net
operating loss ("AMT NOL") carryforwards for United States tax reporting of
$98.4 million to reduce future taxable income. The AMT NOL carryforwards will
expire as follows: $2.8 million in 2002, $5.4 million in 2003, $9.0 million in
2004, $27.0 million in 2005, $13.1 million in 2006, $11.6 million in 2007, $8.6
million in 2008, $1.4 million in 2009, $16.8 million in 2010 and $2.7 million in
2011.
The Company has tax depletion carryforwards of $8.7 million which are
indefinitely available to reduce future United States income taxes payable.
As of December 31, 1996, the Company had net operating loss carryforwards for
Canadian tax reporting purposes of $2.1 million which expire in 2003. The
Company also had oil and gas deductions of $116.7 million and earned depletion
of $8.6 million which are available indefinitely to reduce future taxable
income. In June 1997, these tax benefits were acquired by the purchaser of the
Canadian oil and gas properties.
6 Common Stock
EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used in
the calculation of basic and diluted earnings per share ("EPS") for income
(loss) from continuing operations for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------- ----------------------------------- -----------------------------------
(In thousands,
except per share Income Shares Per Share Income Shares Per Share Income Shares Per Share
amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) from
continuing operations $ 7,812 27,457 $ .28 $ (11,644) 27,257 $ (.43) $ (19,336) 27,256 $ (.71)
Dilutive securities
Stock options - 494 - - - -
Dilutive EPS
Income (loss) from
continuing operations $ 7,812 27,951 $ .28 $ (11,644) 27,257 $ (.43) $ (19,336) 27,256 $ (.71)
</TABLE>
- 25 -
<PAGE>
NON-EMPLOYEE DIRECTORS STOCK GRANT PLAN
During 1995, the Company established a stock grant plan for non-employee
directors. The purpose of the plan is to provide a portion of non-employee
directors compensation in Company stock. The plan will be beneficial to the
Company and its stockholders by allowing non-employee directors to have a
personal financial stake in the Company through an ownership interest in the
Company's common stock. The plan may grant an aggregate of 60,000 shares of the
Company's common stock initially held in treasury. The Company made grants to
directors under this plan of 2,500 shares in 1997, 1996 and 1995.
STOCK OPTION PLANS
Wainoco has three stock option plans which authorize the granting of
restricted stock and options to purchase shares. The plans through December 31,
1997 have reserved for issuance a total of 4,282,700 shares of common stock of
which 2,364,675 shares were granted and exercised, 1,656,340 shares were granted
and were outstanding and 261,685 shares were available to be granted. Options
under the plans are granted at not less than fair market value on the date of
grant. No entries are made in the accounts until the options are exercised, at
which time the proceeds are credited to common stock and paid-in capital.
Generally, the options vest ratably throughout their five-year terms.
A summary of the status of the Company's plans as of December 31, 1997, 1996
and 1995, and changes during the years ended on those dates is presented below.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,331,904 $ 3.81 2,332,842 $ 4.32 1,858,447 $ 4.84
Granted 742,800 4.74 981,229 3.31 760,500 4.34
Exercised (797,787) 3.89 - - (2,660) 3.50
Reissued - - (669,229) 4.30 (129,400) 7.39
Expired (620,577) 3.48 (312,938) 4.53 (154,045) 5.55
---------- --------- ---------- --------- ---------- ---------
Outstanding at end of year 1,656,340 4.31 2,331,904 3.81 2,332,842 4.32
---------- --------- ---------- --------- ---------- ---------
Exercisable at end of year 940,850 4.14 1,526,561 4.04 1,707,312 4.41
---------- --------- ---------- --------- ---------- ---------
Available for grant at end of year 261,685 68,208 119,720
---------- ---------- ----------
Weighted-average fair value of
options granted during the year 1.51 .65 1.04
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Number Weighted-Average Weighted-
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Range of exercise prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.88 to $7.82 1,656,340 3.23 $ 4.31 940,850 $ 4.14
</TABLE>
Had compensation costs been determined based on the fair value at the grant
dates for awards made in 1997, 1996 and 1995, the Company's net income (loss)
and income (loss) per share would have been the pro forma amounts indicated on
the following page for the years ended December 31, 1997, 1996 and 1995.
- 26 -
<PAGE>
<TABLE>
<CAPTION>
(In thousands,
except per share amounts) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported $ 19,055 $ (6,892) $ (19,125)
Pro forma 18,578 (7,263) (19,316)
Basic and diluted income (loss)
per share:
As reported $ .69 $ (.25) $ (.70)
Pro forma .67 (.27) (.71)
</TABLE>
The fair value of grants was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used: risk-free interest rates of 5.91%, 5.33% and 6.54%, expected
volatilities of 41.07%, 32.95% and 38.11%, expected lives of 2.32, 1.59 and 1.93
years and no dividend yield in 1997, 1996 and 1995, respectively.
7 Commitments and Contingencies
LEASE AND OTHER COMMITMENTS
Wainoco has noncapitalized building, equipment and vehicle lease agreements
which expire from 1998 through 2005 having minimum annual payments as of
December 31, 1997 of $2.5 million for 1998, $3.9 million for 1999, $489,000 for
2000, $396,000 for 2001, $202,000 for 2002, $42,000 each for 2003 and 2004 and
$25,000 in 2005. Operating lease rental expense was $2.6 million, $1.7 million
and $1.7 million for the three years ended December 31, 1997, 1996 and 1995,
respectively.
The Company has contracted for pipeline capacity of approximately 13,800 bpd
on the Express Pipeline from Hardisty, Alberta to Guernsey, Wyoming commencing
in 1997 for a period of 15 years. The Company's commitment for pipeline capacity
is approximately $5.8 million per year. The agreement allows the Company to
assign a portion of its capacity in early years for additional capacity in later
years. The Company also has commitments to purchase crude oil from various
suppliers to meet its Refinery throughput requirements.
CONCENTRATION OF CREDIT RISK
The Company has concentrations of credit risk with respect to sales within
the same or related industry and within limited geographic areas. The Refining
operation sells its products exclusively at wholesale, principally to
independent retailers and major oil companies located primarily in the Denver,
western Nebraska and eastern Wyoming regions, with 13% of its customers
accounting for approximately 66% of total refined product sales in 1997. Wainoco
extends credit to its customers based on ongoing credit evaluations. An
allowance for doubtful accounts is provided based on the current evaluation of
each customer's credit risk, past experience and other factors. During 1997, the
Company made sales to CITGO Petroleum Products of approximately $72 million,
which accounted for 19% of consolidated revenues.
CONTRIBUTION PLANS
Wainoco sponsors separate defined contribution plans for employees covered by
a collective bargaining agreement and employees not covered by such an
agreement. All employees may participate by contributing a portion of their
annual earnings to the plans. The Company makes basic and/or matching
contributions on behalf of participating employees. The cost of the plans for
the three years ended December 31, 1997, 1996 and 1995 was $1.3 million, $1.2
million and $1.4 million, respectively.
ENVIRONMENTAL
Wainoco accrues for environmental costs as indicated in Note 1. Numerous
local, state and federal laws, rules and regulations relating to the environment
are applicable to the Company's operations. As a result, the Company falls under
the jurisdiction of numerous state and federal agencies and is exposed to the
possibility of judicial or administrative actions for remediation and/or
penalties brought by those agencies. Frontier is party to one consent decree
requiring the investigation and, in certain instances, mitigation of
environmental impacts resulting from past operational activities. The Company
has been and will be responsible for costs related to compliance with or
remediations resulting from environmental regulations. There are currently no
identified environmental remediation projects of which the costs can be
reasonably estimated. However, the continuation of the present investigative
process, other more extensive investigations over time or changes in regulatory
requirements could result in future liabilities.
LITIGATION
The Company is involved in various lawsuits which are incidental to its
business. In management's opinion, the adverse determination of
- 27 -
<PAGE>
such lawsuits would not have a material adverse effect on the Company's
financial position or results of operations.
COLLECTIVE BARGAINING AGREEMENT EXPIRATION
Wainoco's refining unit hourly employees are represented by seven bargaining
units, the largest being the Oil, Chemical and Atomic Workers International
Union ("OCAW"). Six AFL-CIO affiliated unions represent the craft workers. In
July 1996, the Company concluded new bargaining agreements, with the three-year
OCAW agreement to expire in July 1999, while the six-year AFL-CIO contract
expires in June 2002. The union employees represent approximately 58% of the
Company's work force at December 31, 1997.
8 Fair Value of Financial Instruments
The fair value of the Company's Senior Notes, Convertible Subordinated
Debentures and 10-3/4% Subordinated Debentures was estimated based on quotations
obtained from broker-dealers who make markets in these and similar securities.
The bank credit facilities are based on floating interest rates and, as such,
the carrying amount is a reasonable estimate of fair value. At December 31, 1997
and 1996, the carrying amounts of long-term debt instruments (including current
maturities) were $70.6 million and $148.4 million, respectively, and the
estimated fair values were $72.0 million and $145.0 million.
As of December 31, 1997, the Company had entered into futures contracts to
hedge a portion of its natural gas consumption requirements. The futures
contracts are placed with a major financial institution the Company believes is
a minimum credit risk. The futures contracts mature each month through April
1998. The fair value of the Company's open natural gas futures contract at
December 31, 1997 was $(281,000).
9 Subsequent Event
DEBT REFINANCING
February 9, 1998, the Company issued $70 million of 9-1/8% Senior Notes (the
"New Senior Notes") due 2006. On February 10, 1998, the Company called for
redemption the remaining $24.6 million of its Senior Notes and $46 million of
its Convertible Subordinated Debentures outstanding at December 31, 1997
(together, the "Redemptions"). The Company will use the net proceeds from the
issuance of the New Senior Notes and available cash to fund the Redemptions.
Report of Independent Public Accountants
TO THE SHAREHOLDERS OF WAINOCO OIL CORPORATION:
We have audited the accompanying consolidated balance sheets of Wainoco Oil
Corporation (a Wyoming corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the over financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wainoco Oil Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 1998
- 28 -
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 10, 1998, incorporated by reference in this Form 10-K,
into the Wainoco Oil Corporation previously filed Registration Statement file
No. 33-15598 on Form S-8.
ARTHUR ANDERSEN LLP
Houston, Texas
February 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,735
<SECURITIES> 0
<RECEIVABLES> 17,204
<ALLOWANCES> 0
<INVENTORY> 27,666
<CURRENT-ASSETS> 67,996
<PP&E> 152,245
<DEPRECIATION> 45,586
<TOTAL-ASSETS> 177,915
<CURRENT-LIABILITIES> 47,068
<BONDS> 70,572
0
0
<COMMON> 57,251
<OTHER-SE> (1,317)
<TOTAL-LIABILITY-AND-EQUITY> 177,915
<SALES> 374,091
<TOTAL-REVENUES> 376,418
<CGS> 346,665
<TOTAL-COSTS> 346,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,891
<INCOME-PRETAX> 7,812
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,812
<DISCONTINUED> 15,160
<EXTRAORDINARY> (3,917)
<CHANGES> 0
<NET-INCOME> 19,055
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
