SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[x] FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
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
FRONTIER 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
9-1/8% Senior Notes, due 2006 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.{ }
As of February 24, 1999 there were 27,602,594 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 Frontier Oil Corporation held by
nonaffiliates was approximately $147 million at that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1998 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, 1998 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
FORWARD-LOOKING STATEMENTS
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act, as amended, 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
Frontier Oil Corporation (formerly known as 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 "Frontier"
refers to Frontier Oil Corporation and its subsidiaries. The Company's refining
assets are held through its subsidiary, Frontier Holdings Inc. ("Frontier
Holdings"), 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.
Frontier is engaged in the business of crude oil refining and wholesale
marketing of refined petroleum products
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(the "refining operations"). Frontier conducts its refining operations in the
Rocky Mountain region of the 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, Frontier explored for and produced oil
and gas in western Canada. On June 16, 1997, Frontier 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 Frontier Oil Corporation.
Prior to the first quarter of 1996, Frontier 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. Frontier finalized the
sale of all of its United States oil and gas properties during 1995.
Operating results for the Company'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 1998
Annual Report to Shareholders which is incorporated herein by reference.
REFINING OPERATIONS
Frontier's refining activities are conducted through its subsidiary Frontier
Holdings, which was acquired in October 1991. 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 lighter 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 lighter 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 1998, the Frontier Refinery's
product mix included various grades of gasoline (40%), diesel fuel (34%) and
asphalt and other refined petroleum products (26%).
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 their own
truck transportation. In 1998, approximately 10% 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, 1998, the Company obtained approximately 57% 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 94% 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 until the
last half of 1998 available supply outstripped demand. None of the Company's
direct refinery competitors and only three other refineries
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in the entire Rocky Mountain region operate coking units necessary to process
high volumes of heavy crude oil. The Company benefitted from an increase in its
light/heavy spread to $4.15 per barrel ("bbl") for the year ended December 1998
from $3.54 per bbl for the same period in 1997. Throughout 1998, and especially
during the second half of 1998, the price of crude oil has declined
significantly. The low price of crude oil has caused the production of some
heavy crude oil in both Wyoming and Canada to become uneconomical. The reduced
supply of heavy crude oil and strong demand for heavy crude oil due to
attractive asphalt margins are major factors contributing to the second half of
1998 decline in the light/heavy spread. In addition, while Wyoming crude oil
production 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. 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. 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.
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.
General. Frontier 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.
VOLATILITY OF CRUDE OIL PRICES AND REFINING MARGINS
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. The Company generally does not hedge its
refined product prices. 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.
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LIGHT/HEAVY CRUDE OIL SPREAD
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 due to a substantial drop
in crude oil prices that could depress the spread by making it uneconomical for
production companies to produce heavy crude oil or an increase in heavy crude
refining capacity of the Frontier's competitors.
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 Title III
regulations required 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.
On March 21, 1995, the Company and the Wyoming Department of Environmental
Quality entered into an administrative consent order ("State Order") that
generally parallels a September 24, 1990 Administrative Order on Consent
("Federal Order") pursuant to the Resource Conservation and Recovery Act
("RCRA") and replaces the 1984 state consent decree ("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
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numerous federal, state and local laws and 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.
Product Specifications. The provisions of the Clean Air Act Amendments of
1990 requiring the EPA to reassess the adequacy of existing limits on automobile
emissions, coupled with the recent promulgation of new National Ambient Air
Quality Standards ("NAAQS") for ozone and particulate matter have resulted, in
part, in initial state and federal agency consideration of requirements to
modify certain transportation fuel characteristics including, but not limited
to, gasoline sulfur content and vapor pressure. Although no such regulations
have yet been proposed, Frontier may in the future incur certain, as yet
unquantified, costs necessary to assure compliance.
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 first quarter of 1999,
Frontier has scheduled turnaround work on its crude unit.
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OPERATING HAZARDS; SINGLE REFINERY
All of the Company's refining activities currently are conducted at the
Frontier Refinery, which is the Company's principal operating asset. As a
result, the operations of the Company are subject to significant interruption if
the Frontier Refinery were to experience a major accident or fire, be damaged by
severe weather or other natural disaster, or otherwise be forced to curtail its
operations or shutdown. Should the Centennial Pipeline, which runs from the
Guernsey Station hub to the Frontier Refinery, become inoperative, crude oil
would have to be supplied to the Frontier Refinery through an alternative
pipeline or from additional tank trucks, the economic impact of which could be
adverse to the Company. In addition, despite safety procedures put in place by
the Company, a major accident, fire or other event could damage the Frontier
Refinery or the environment or cause personal injuries. Although the Company
maintains business interruption, property and other insurance against these
risks in amounts it believes to be economically prudent, if the Frontier
Refinery were to experience a major accident or fire or an interruption in
supply or operations, the Company's business could be materially adversely
affected. In addition, the Frontier Refinery consists of many processing units,
a number of which have been in operation for a long time. Although the Company
schedules down time for repair, or "turnaround," for each unit every one to
three years, there can be no assurance that one or more of such units will not
require additional, unscheduled turnarounds for unanticipated maintenance or
repairs. During the first quarter of 1999, the Company has scheduled a
turnaround on one of its major units at the Frontier Refinery.
EMPLOYEES
At December 31, 1998 the Company employed 298 full-time employees, 46 at the
Houston and Denver offices and 252 at the Frontier Refinery. The Frontier
Refinery employees include 83 administrative and technical personnel and 169
union members. The union members are represented by seven bargaining units, the
largest being the Paper, Allied-Industrial, Chemical and Energy Workers
International Union ("PACE"). Six AFL-CIO affiliated unions represent Frontier's
craft workers. In December 1998, the Company concluded new bargaining
agreements, with the three year PACE agreement due to expire in July 1999
extended to July 2002, while the six year AFL-CIO contract due to expire in June
2002 extended to June 2005. The Company considers its current relations with
its employees to be good.
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ITEM 2. PROPERTIES
REFINING OPERATIONS
The refining facilities are located on approximately 125 acres in Cheyenne,
Wyoming, on property owned by Frontier. The following table sets forth the
Frontier Refinery's charges, yields and margins achieved for the past three
years:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Charges (bpd)
Light crude 2,174 3,162 4,322
Heavy crude 32,303 31,967 31,677
Other feed and blend stocks 5,909 6,154 5,192
--------- --------- ---------
Total 40,386 41,283 41,191
Manufactured product yields (bpd)
Gasoline 15,738 17,060 16,825
Diesel 13,097 12,856 13,712
Asphalt and other 10,236 10,200 9,215
--------- --------- ---------
Total 39,071 40,116 39,752
Total product sales (bpd)
Gasoline 21,421 20,499 20,311
Diesel 12,484 12,110 12,561
Asphalt and other 8,797 7,949 7,306
--------- --------- ---------
Total 42,702 40,558 40,178
Operating margin information (per sales bbl)
Average sales price $ 19.10 $ 25.27 $ 25.98
Material costs (under FIFO inventory accounting) 13.01 19.49 21.50
--------- --------- ---------
Product spread 6.09 5.78 4.48
Operating expenses excluding depreciation 3.34 3.30 3.15
Depreciation .68 .61 .59
--------- --------- ---------
Operating margin $ 2.07 $ 1.87 $ .74
Manufactured product margin
before depreciation (per bbl) $ 2.80 $ 2.47 $ 1.33
Purchased product margin
(per purchased product bbl) $ 1.62 $ 3.14 $ 2.03
Light/heavy crude spread (per bbl) $ 4.15 $ 3.54 $ 2.56
Average sales price (per sales bbl)
Gasoline $ 21.52 $ 28.83 $ 28.78
Diesel 19.90 27.22 28.89
Asphalts and other 12.07 13.13 13.21
</TABLE>
OTHER PROPERTIES
The Company leases approximately 4,600 square feet of office space in Houston
for its corporate headquarters under a six and one half year lease expiring in
October 2004. 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 1998 Annual Report to Shareholders under the heading
"Common Stock" is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information in the 1998 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 1998 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 1998 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*
-----
Consolidated Statements of Operations 17
Consolidated Balance Sheets 18
Consolidated Statements of Cash Flows 19
Consolidated Statements of Changes in Shareholders' Equity 20
Notes to Consolidated Financial Statements 21
Report of Independent Public Accountants 28
Selected Quarterly Financial Data 13
*Reference to pages in the 1998 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.
(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 - Articles of Amendment to the Restated Articles of Incorporation of
the Company (filed as Exhibit 3.2 to Registration Statement No.
333-47745 dated May 4, 1998).
* 3.3 - 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 February 9, 1998 between the Company and Chase
Bank of Texas, National Association, as Trustee relating to the
Company's 9-1/8% Senior Notes due 2006 (filed as Exhibit 4.8 to
Registration Statement No. 333-47745 dated May 4, 1998).
* 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 - First Amendment to Amended and Restated Revolving Credit and Letter
of Credit Agreement dated June 30, 1998 among Frontier Oil and
Refining Company, certain banks and Union Bank of California (filed
as Exhibit 10.01 to Form 10-Q dated June 30, 1998).
* 10.3 - 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).
*+ 10.4 - The 1968 Incentive Stock Option Plan as amended and restated (filed
as Exhibit 10.1 to Form 10-K dated December 31, 1987).
*+ 10.5 - The 1977 Stock Option Plan as amended and restated (filed as Exhibit
10.2 to Form 10-K dated December 31, 1989).
*+ 10.6 - 1995 Stock Grant Plan for Non-employee Directors (filed as Exhibit
10.14 to Form 10-Q dated June 30, 1995).
*+ 10.7 - Wainoco Deferred Compensation Plan dated October 29, 1993 (filed as
Exhibit 10.19 to Form 10-K dated December 31, 1994).
*+ 10.8 - Wainoco Deferred Compensation Plan for Directors dated May 1, 1994
(filed as Exhibit 10.20 to Form 10-K dated December 31, 1994).
*+ 10.9 - Executive Employment Agreement dated April 2, 1998 between the
Company and James R. Gibbs (filed as Exhibit 10.01 to Form 10-Q dated
March 31, 1998).
*+ 10.10 - Executive Employment Agreement dated April 2, 1998 between the
Company and Julie H. Edwards (filed as Exhibit 10.02 to Form 10-Q
dated March 31, 1998).
*+ 10.11 - Executive Employment Agreement dated April 2, 1998 between the
Company and S. Clark Johnson (filed as Exhibit 10.03 to Form 10-Q
dated March 31, 1998).
*+ 10.12 - Executive Employment Agreement dated April 2, 1998 between the
Company and J. Currie Bechtol (filed as Exhibit 10.04 to Form 10-Q
dated March 31, 1998).
*+ 10.13 - Executive Employment Agreement dated April 2, 1998 between the
Company and Gerald B. Faudel (filed as Exhibit 10.05 to Form 10-Q
dated March 31, 1998).
*+ 10.14 - Executive Employment Agreement dated April 2, 1998 between the
Company and Jon D. Galvin (filed as Exhibit 10.06 to Form 10-Q dated
March 31, 1998).
13.1 - Portions of the Company's 1998 Annual Report covering pages 9 through
28.
21.1 - Subsidiaries of the Registrant.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule.
* Asterisk indicates exhibits incorporated by reference as shown.
+ Plus 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 1998.
(c) Exhibits
The Company's 1998 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
Frontier 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 Frontier Oil Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Frontier Oil Corporation's annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 5, 1999. 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 5, 1999
-12 -
<PAGE>
FRONTIER OIL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, SCHEDULE I
(in thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 33,234 $ 20,283
Receivables 248 121
Other current assets 51 1,019
--------- ---------
Total current assets 33,533 21,423
--------- ---------
Property, Plant and Equipment, at cost -
Furniture, fixtures and other 502 468
Less - Accumulated depreciation (324) (245)
178 223
Investment in Subsidiaries 140,503 138,778
Other Assets 4,577 3,104
--------- ---------
$ 178,791 $ 163,528
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 454 $ 52
Other accrued liabilities 3,162 2,336
--------- ---------
Total current liabilities 3,616 2,388
--------- ---------
Deferred Income Taxes 421 840
Deferred Revenues and Other 1,830 1,061
Payable to Affiliated Companies 32,571 32,733
Long-Term Debt 70,000 70,572
Shareholders' Equity 70,353 55,934
--------- ---------
$ 178,791 $ 163,528
========= =========
</TABLE>
The "Notes to Condensed Financial Information of Registrant" and the "Notes to
Financial Statements of Frontier Oil Corporation and Subsidiaries" are an
integral part of these financial statements.
- 13 -
<PAGE>
FRONTIER OIL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, SCHEDULE I
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Equity in earnings of subsidiaries $ 27,655 $ 22,707 $ 6,666
Other income (43) 645 -
--------- --------- ---------
27,612 23,352 6,666
--------- --------- ---------
Costs and Expenses:
Selling and general expenses 2,433 2,472 2,099
Depreciation, depletion and amortization 79 71 77
--------- --------- ---------
2,512 2,543 2,176
--------- --------- ---------
Operating Income 25,100 20,809 4,490
Interest Expense, net 6,132 12,997 16,134
--------- --------- ---------
Income (Loss) from Continuing
Operations Before Income Taxes 18,968 7,812 (11,644)
Provision (Benefit) for Income Taxes 150 - -
--------- --------- ---------
Income (Loss) From Continuing Operations 18,818 7,812 (11,644)
Discontinued Operations:
Income from oil and gas operations, net of taxes - 1,721 4,752
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 18,818 22,972 (6,892)
Extraordinary Loss on Retirement of Debt, net of taxes 3,013 3,917 -
--------- --------- ---------
Net Income (Loss) $ 15,805 $ 19,055 $ (6,892)
========= ========= =========
</TABLE>
The "Notes to Condensed Financial Information of Registrant" and the "Notes to
Financial Statements of Frontier Oil Corporation and Subsidiaries" are an
integral part of these financial statements.
- 14 -
<PAGE>
FRONTIER OIL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOW
FOR THE THREE YEARS ENDED DECEMBER 31, SCHEDULE I
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 15,805 $ 19,055 $ (6,892)
Equity in earnings of subsidiaries (27,655) (22,707) (7,653)
Gain on disposal of Canadian oil and gas properties - (23,301) -
Recognition of cumulative translation adjustment - 9,862 -
Extraordinary loss on retirement of debt 3,013 3,917 -
Depreciation, depletion and amortization 79 3,919 8,200
Deferred income taxes (419) (878) -
Other 2,480 (3,232) (931)
--------- --------- ---------
Net cash used by operating activities (6,697) (13,365) (7,276)
--------- --------- ---------
Investing Activities
Additions to property, plant and equipment (34) (3,333) (8,989)
Sale of Canadian oil and gas properties - 91,307 -
Proceeds from sale of other properties - 259 990
Acquisition costs and other - (849) 429
--------- --------- ---------
Net cash provided by (used by) investing activities (34) 87,384 (7,570)
--------- --------- ---------
Financing Activities
Long-term borrowings:
9-1/8% Senior Notes 70,000 - -
12% Senior Notes - 2,000 3,000
Payments of debt:
12% Senior Notes, including premium (25,423) (74,932) -
7-3/4% Convertible debentures, including premium (45,971) - -
Subordinated debentures - (7,500) -
Debt issuance costs (2,575) - -
Issuance of common stock 816 3,109 -
Purchase of treasury stock (2,933) - -
Change in intercompany balances, net (162) (53) (1,805)
Dividends paid to Parent 25,930 21,122 12,902
Other - - (11)
--------- --------- ---------
Net cash provided by (used by) financing activities 19,682 (56,254) 14,086
Effect of exchange rate changes on cash - (10) 13
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 12,951 17,755 (747)
Cash and cash equivalents, beginning of period 20,283 2,528 3,275
--------- --------- ---------
Cash and cash equivalents, end of period $ 33,234 $ 20,283 $ 2,528
========= ========= =========
</TABLE>
The "Notes to Condensed Financial Information of Registrant" and the "Notes to
Financial Statements of Frontier Oil Corporation and Subsidiaries" are an
integral part of these financial statements.
- 15 -
<PAGE>
FRONTIER OIL CORPORATION
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1998 SCHEDULE I
(1) General
The accompanying condensed financial statements of Frontier Oil Corporation
(Registrant) should be read in conjunction with the consolidated financial
statements of the Registrant and its subsidiaries included in the Registrant's
1998 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, the Company 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.
The Company'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 Frontier Oil
Corporation and Subsidiaries."
Operating results for the Company's oil and gas operations segment, comprising
the Canadian and United States oil and gas properties, are presented as
discontinued operations.
(3) Long-term debt
The components (in thousands) of long-term debt are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
9-1/8% Senior Notes $ 70,000 $ -
12% Senior Notes - 24,572
7-3/4% Convertible Subordinated Debentures - 46,000
--------- ---------
$ 70,000 $ 70,572
========= =========
</TABLE>
(4) Five-year maturities of long-term debt
The 9-1/8% Senior Notes are due 2006, until then there are no maturities of
long-term debt.
- 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.
FRONTIER OIL CORPORATION
By: /s/ James R. Gibbs
-----------------------
James R. Gibbs
President
(chief executive officer)
Date: February 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Frontier 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 25, 1999
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
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.
RESULT OF OPERATIONS
1998 Compared with 1997. The Company had net income for the year ended
December 31, 1998 of $15.8 million, or $.55 per diluted share, compared to net
income of $19.1 million, or $.69 per diluted share for 1997. The 1998 results
include a $3.0 million extraordinary loss on early retirement of debt. The 1997
results included a $23.3 million gain on the sale of the Canadian oil and gas
operations which closed on June 16, 1997, a $9.9 million reduction to income in
recognition of the cumulative translation adjustment, a $3.9 million
extraordinary loss on retirement of debt and $1.7 million of income from the
discontinued Canadian oil and gas operations. Income from continuing operations
for the year ended December 31, 1998 was $18.8 million compared to $7.8 million
for 1997. The 1997 and prior operating results for the Company's oil and gas
exploration and production segment have been presented as discontinued
operations in the accompanying financial statements. Frontier's primary
continuing operation is its refining operation in the Rocky Mountain region of
the United States.
Operating income increased $4.0 million in 1998 as compared to 1997 due to an
increase in the refined product spread (revenues less material costs) of $9.5
million offset by a decrease in other income of $621,000 and increases in
refining operating expenses of $3.1 million, selling and general expenses of
$175,000 and depreciation of $1.5 million.
Refined product revenues and refining operating costs are impacted by changes
in the price of crude oil. The price of crude oil was significantly lower in
1998 than in 1997. The refined product spread was $6.09 per bbl compared to
$5.78 per bbl in 1997. The 1998 refined product spread increased due to an
improved light/heavy crude oil spread and better by-product margins from lower
crude oil prices. Light product margins were approximately 14% lower than in
1997 which reduced the refined product spread. Both periods' refined product
spreads were negatively impacted by declines in crude oil prices totaling
approximately $3.7 million in the first quarter and $1.1 million in the fourth
quarter of 1998 and approximately $4.0 million in the first quarter of 1997.
Inventories are recorded at the lower of cost on a first in, first out (FIFO)
basis or market. Refined product revenues decreased $76.4 million or 20%. The
decrease in refined product revenues resulted from a $7.31 per bbl decrease in
average gasoline sales prices and
- 9 -
<PAGE>
a $7.32 per bbl decrease in average diesel sales prices. Refined product sales
volumes increased 5% in 1998 over 1997 levels. Yields of gasoline decreased by
8% while yields of diesel increased 2% in 1998 compared to 1997. The decrease in
gasoline yields was due to the major turnaround, which commenced April 19, 1998
and was completed May 15, 1998, on the fluid catalytic cracking unit and
alkylation and related units.
Other income, which consists primarily of processing fees, decreased $621,000
to $1.7 million in 1998 as compared to 1997. Other income for 1997 included a
gain on foreign currency swaps of $522,000 related to the Canadian sale proceeds
while other income for 1998 includes sulfur credit sales of $360,000.
Refining operating costs decreased $82.8 million or 25% in the year ended
December 31, 1998 from 1997 levels due to a decrease in material costs offset by
an increase in operating expenses. Material costs per bbl decreased 33% or
$6.48 per bbl in 1998 due to lower oil prices, increased percentage use of heavy
crude oil, an increase in the light/heavy spread and a 2% decrease in refinery
charge rates. During 1998, the Refinery heavy crude oil utilization rate
expressed as a percentage of total crude oil increased to 94% from 91% in 1997.
The light/heavy spread increased 17% to average $4.15 per bbl in 1998. Refinery
operating expenses increased $3.1 million in 1998 as compared to 1997, and
refining operating expense per bbl increased $.04 per bbl to $3.34 per bbl in
1998. The increase in refining operating expenses during 1998 was due to higher
natural gas usage during the turnaround, increased chemical usage due to unit
operating problems which were corrected during the turnaround and increased
transportation costs for asphalt and other product sales. Although focus 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 turnaround is scheduled in the spring of 1999 on the crude
unit. This unit is scheduled to be down for 14 days, which will decrease
average yields during that time. Other turnaround work is scheduled for several
Refinery units during 1999, but this work should not materially impact yields.
Selling and general expenses increased $175,000 or 2% for the year ended
December 31, 1998 reflecting increases in salaries and benefits.
Depreciation increased $1.5 million or 17% for the year ended December 31,
1998 as compared to 1997, attributable to increases in capital investment and
the write-off of certain equipment replaced in connection with the turnaround
work.
The interest expense decrease of $7.2 million or 52% in 1998 was attributable
to utilizing Canadian sale proceeds to retire debt during the third and fourth
quarters of 1997. Average debt decreased from $138 million in 1997 to $79
million in 1998.
During 1998, the price of light crude oil declined by approximately $6.00 per
bbl to $12.05 per bbl at December 31, 1998. The price of heavy crude oil
likewise declined. The low price of crude oil has caused the production of some
heavy crude oil in both Wyoming and Canada to become uneconomical. The reduced
supply of heavy crude oil and the high demand for heavy crude oil due to
attractive asphalt margins are major factors contributing to the current decline
in the light/heavy spread. During the third and fourth quarters of 1998, the
Company experienced a shortfall in contracted heavy crude oil deliveries from
Wyoming of approximately 5,100 bpd which required the Company to buy additional
heavy Canadian crude oil at spot prices. The price of heavy crude oil purchased
at spot prices was substantially higher than contracted Wyoming and Canadian
crude oil resulting in the decline of the light/heavy spread from $4.81 per bbl
in the second quarter of 1998 to $3.66 per bbl in the third quarter of 1998, and
to $3.40 per bbl in the fourth quarter of 1998.
The Company is dependent upon regional and Canadian crude oil for its
refinery. Should low crude oil prices continue into 1999, the Company expects
the supply of heavy crude oil to continue to decline which should cause the
price of such heavy crude oil to increase. Consequently, the light/heavy spread
will decline. The Company plans to increase its use of lighter crude oil,
should prices stay at current levels, to offset declining heavy crude oil
supply. Since the Company is dependent upon regional and Canadian crude oil, it
is possible at current prices the Company may not be able to obtain
- 10 -
<PAGE>
the quantity of crude oil it desires which will result in reduce refinery crude
oil charge rates and negatively impact profitability. Based on contracts for
1999 heavy crude oil averaging approximately 14,000 bpd, the light/heavy spread
will average $1.50 to $2.00 per bbl less than 1998. Because of the higher cost
of heavy crude oil, fewer bbls have been contracted for at a fixed price above
postings than in prior years and the length of the 1999 contracts shortened to
mainly average three to six months. Consequently, any sustained improvement in
crude oil prices may enable the Company to benefit from an improvement in the
light/heavy spread.
1997 Compared with 1996. The Company had net income for the year ended
December 31, 1997 of $19.1 million or $.69 per share, compared to a loss of $6.9
million or ($.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 materials cost) 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 despite
the first quarter 1997 inventory losses 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 $.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, which consists primarily of processing fees, increased $1.1
million to $2.3 million for the year ended December 31, 1997 as compared to 1996
mostly due to gains on foreign currency swaps 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, (or the volume
of crude oil processed by the crude unit), 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 spread increased
38%, to average $3.54 per bbl for the year ended December 31, 1997 because the
Company contracted 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 contracted an
average of 29,000 bpd of Wyoming and Canadian heavy crude at a light/heavy
spread ranging from $4.80 to $5.25 per bbl. Refining operating expenses per bbl
increased by $.15, to $3.30 per bbl due to higher maintenance and turnaround
costs and lease equipment costs offset by decreased natural gas and utility
costs compared to operating expenses for the prior year, which were reduced by a
$1.3 million settlement of repair costs related to a 1995 pipeline gas
explosion.
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 $.2 million of salary and salary-related expenses of certain employees
who were not retained after March 31, 1996, in connection with the
- 11 -
<PAGE>
U.S. disposition in late 1995 and a corporate reorganization to reduce the
number of corporate employees and to transfer some job functions to other
locations 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 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.
LIQUIDITY AND CAPITAL RESOURCES
On February 9, 1998, the Company issued $70 million of 9-1/8% Senior Notes due
2006 and received net proceeds of approximately $67.9 million. On February 10,
1998, the Company called for redemption the remaining $24.8 million of its 12%
Senior Notes and $46 million of its 7-3/4% Convertible Subordinated Debentures.
This redemption was completed on March 12, 1998 resulting in the payment of
$71.4 million, including redemption premiums and the issuance of 83,535 shares
of common stock. Under a stock repurchase plan, approved by the board of
directors to purchase the approximate number of shares issued upon conversion of
the Convertible Debentures, 83,500 shares of common stock have been repurchased
by the Company for $651,000.
On September 1, 1998, the Company announced that the Board of Directors had
approved a stock repurchase program of up to three million shares of common
stock. Through December 31, 1998, an additional 469,700 shares of common stock
have been purchased by the Company for $2.3 million.
Net cash provided by operating activities was $31.3 million, $12.5 million and
$8.5 million for 1998, 1997 and 1996, respectively. Working capital changes
provided $1.7 million of cash flows in 1998 while requiring $9.9 million and
$2.6 million of cash flows for 1997 and 1996, respectively. During 1998,
significant declines occurred in receivables, inventory and payables due to
declining crude oil prices. The Company was able to increase cash flows from
working capital changes by reducing inventory quantities of unfinished products
and timing of receivable collections. The major use of cash for working capital
changes was the reduction in accrued liabilities for the 1998 turnaround work.
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.
At December 31, 1998, the Company had $33.6 million of cash and $6.8 million
available under the Refinery line of credit. The Company had working capital of
$30.1 million at December 31, 1998.
Additions to property and equipment during 1998 of $16.8 million, increased
$7.8 million from 1997 attributable to an increase of $11.1 million in Refinery
capital expenditures in 1998 offset by the 1997 discontinued Canadian oil and
gas operations capital expenditures of $3.3 million. Refinery capital
expenditures of $9.1 million are planned in 1999. It is anticipated that cash
generated from operating activities will be sufficient to meet its 1999
investment requirements.
Under certain conditions, the Refinery's revolving credit facility restricts
the transfer of cash in the form of dividends, loans or advances to the Company
from the Refinery. The Company does not believe these restrictions limit its
current operating plans.
MARKET RISKS
Impact of Changing Prices. 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 oil and the price of refined products can
result in large changes in the operating margin from refining operations. Energy
prices also determine the carrying value of the Refinery's inventory.
- 12 -
<PAGE>
Hedging Activities. 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 futures transactions has been limited to protect against price
declines for excess inventory volumes. No futures transactions were entered into
during 1998 to hedge excess inventories. 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. Gains and losses
on futures contracts designated as hedges are recognized in refinery operating
costs when the associated hedge transaction is consummated. In 1998, the
Company recognized a net loss from forward purchases of natural gas of $644,000.
As of December 31, 1998, the Company had entered
SELECTED QUARTERLY FINANCIAL AND OPERATING DATA
(Dollars in thousands except per share)
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ------------------------------------------
Unaudited Fourth Third Second First Fourth Third Second First
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 64,555 $ 80,863 $ 84,259 $ 69,691 $ 82,410 $ 108,108 $ 96,330 $ 89,570
Operating income (loss) 2,581 11,015 10,973 1,131 3,489 14,743 9,045 (5,574)
Income (loss) from continuing operations 1,004 9,448 9,205 (839) 1,505 11,806 4,534 (10,033)
Income from discontinued operations,
net of taxes (1) - - - - - - 13,606 1,554
Income (loss) before extraordinary item 1,004 9,448 9,205 (839) 1,505 11,806 18,140 (8,479)
Extraordinary loss, net of taxes - - - 3,013 1,295 2,622 - -
Net income (loss) 1,004 9,448 9,205 (3,852) 210 9,184 18,140 (8,479)
Basic earnings (loss) per share:
Continuing operations .04 .34 .33 (.03) .05 .42 .17 (.37)
Net income (loss) .04 .34 .33 (.14) .01 .33 .66 (.31)
Diluted earnings (loss) per share:
Continuing operations .04 .33 .32 (.03) .05 .42 .17 (.37)
Net income (loss) .04 .33 .32 (.14) .01 .33 .66 (.31)
EBITDA (2) 5,365 13,743 13,795 3,507 5,826 17,037 11,311 (3,301)
Net cash provided by (used in) operating
activities 8,009 17,241 11,975 (5,962) 5,698 11,620 9,245 (14,065)
Refining operations
Total charges (bpd) 40,450 41,782 37,953 41,355 39,215 44,907 42,341 38,623
Heavy crude charge rate (%) 94 94 93 93 92 91 92 90
Gasoline yields (bpd) 16,092 16,233 13,368 17,268 15,834 18,679 16,456 17,268
Diesel yields (bpd) 13,975 11,951 12,248 14,228 11,393 12,936 13,676 13,441
Total product sales (bpd) 40,993 45,010 44,479 40,293 36,036 46,205 41,848 38,105
Average light/heavy spread based on
delivered crude costs (per bbl) $ 3.40 $ 3.66 $ 4.81 $ 4.72 $ 3.82 $ 3.54 $ 3.32 $ 3.48
</TABLE>
(1) Discontinued operations reflected in the above periods represent the
Company's Canadian oil and gas operating segment. On June 16, 1997 the
Company completed the Canadian disposition.
(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.
- 13 -
<PAGE>
into futures contracts to purchase through April 1999 an average of 6,000 mcf
per day of natural gas at an average futures price of $2.47 per mcf per the New
York Mercantile Exchange. The estimated fair value of the Company's open natural
gas contracts at December 31, 1998 was $(371,000). Futures contracts and options
may also, in the future, be used to fix margins in its refining and marketing
operations.
Interest Rate Risk. Borrowings under the Refinery credit facility are
generally repaid monthly and bear a current market rate of interest. The
average effective interest rate was 8% during 1998. The Company's $70.0 million
of 9-1/8% Senior Notes, Due 2006, have a fixed interest rate and the Company has
no current plans to redeem these notes. Thus the Company's long-term debt is
not exposed to cash flow or fair value risk from interest rate changes. The
estimated fair value of the 9-1/8% Senior Notes at December 31, 1998 was $65.1
million.
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 expended
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.
FIVE YEAR FINANCIAL DATA
(In thousands except per share)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $299,368 $376,418 $383,373 $331,832 $313,187
Operating income (loss) 25,700 21,703 5,585 (1,106) 20,416
Income (loss) from continuing operations 18,818 7,812 (11,644) (19,336) 1,693
Income (loss) from discontinued operation,
net of taxes (1) - 15,160 4,752 211 (14,300)
Income (loss) before extraordinary item 18,818 22,972 (6,892) (19,125) (12,607)
Extraordinary loss, net of taxes 3,013 3,917 - - -
Net income (loss) 15,805 19,055 (6,892) (19,125) (12,607)
Basic earnings (loss) per share:
Continuing operations .67 .28 (.43) (.71) .06
Net income (loss) .56 .69 (.25) (.70) (.46)
Diluted earnings (loss) per share:
Continuing operations .65 .28 (.43) (.71) .06
Net income (loss) .55 .69 (.25) (.70) (.46)
EBITDA (2) 36,410 30,873 14,603 7,365 28,118
Net cash provided by operating activities 31,263 12,498 8,465 9,878 32,108
Working capital (deficit) 30,125 20,928 (3,752) (2,485) 1,532
Total assets 182,026 177,915 239,865 238,382 277,536
Long-term debt 70,000 70,572 145,928 145,377 170,797
Shareholders' equity 70,353 55,934 25,269 32,464 49,449
Capital expenditures from continuing operations 16,763 5,675 4,760 5,217 7,979
Dividends declared - - - - -
</TABLE>
(1) Discontinued operations reflected in the above periods represent the
Company's oil and gas operating segment, comprising the Canadian and Unite
States oil and gas properties. On June 16, 1997, the Company completed th
Canadian disposition. The Company completed the U.S. dispositon during
1995.
(2) EBITDA represents income from continuing operations before interest expense,
income tax and depreciation and amortization. EBITDA is not a calculaton
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>
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.
YEAR 2000 ISSUES
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
information technology ("IT") essential to its operations that may be affected
by the Year 2000 issue. The company also relies on non-IT systems in its daily
operations, such as fax machines, radios, voice mail systems, alarms, monitors
and other miscellaneous systems. Additionally the company is dependent upon
third party relationships with both suppliers and customers.
FIVE YEAR OPERATING DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Charges (bpd)
Light crude 2,174 3,162 4,322 8,098 6,165
Heavy crude 32,303 31,967 31,677 27,174 27,025
Other feed and blend stocks 5,909 6,154 5,192 5,072 4,105
Total charges 40,386 41,283 41,191 40,344 37,295
Manufactured product yields (bpd)
Gasoline 15,738 17,060 16,825 17,263 16,106
Diesel 13,097 12,856 13,712 13,744 13,094
Asphalt and other 10,236 10,200 9,215 7,951 6,575
Total manufactured product yield 39,071 40,116 39,752 38,958 35,775
Product sales (bpd)
Gasoline 21,421 20,499 20,311 20,767 19,437
Diesel 12,484 12,110 12,561 13,265 12,628
Asphalt and other 8,797 7,949 7,306 6,781 6,724
Total product sales 42,702 40,558 40,178 40,813 38,789
Average sales price (per bbl)
Gasoline $ 21.52 $ 28.83 $ 28.78 $ 24.68 $ 24.57
Diesel 19.90 27.22 28.89 23.48 23.48
Asphalt and other 12.07 13.13 13.21 11.73 12.18
Operating margin information (per sales bbl)
Average sales price $ 19.10 $ 25.27 $ 25.98 $ 22.14 $ 22.06
Material costs 13.01 19.49 21.50 18.11 16.18
Product spread 6.09 5.78 4.48 4.03 5.88
Operating expenses excluding depreciation 3.34 3.30 3.15 3.19 3.45
Depreciation .68 .61 .59 .55 .53
Operating margin 2.07 1.87 .74 .29 1.90
Average light/heavy spread based
on delivered crude costs (per bbl) $ 4.15 $ 3.54 $ 2.56 $ 2.94 $ 3.61
</TABLE>
- 15 -
<PAGE>
The Company initiated a company wide task force to assess and resolve the
business risks associated with the Year 2000 issues. The process implemented by
the task force included identification of possibly effected systems, assessment
of probability of and implications of noncompliance, alternative modifications
to or replacements of existing systems or technology and cost and timetables for
completion. The analysis is being substantially completed by internal resources
with third party vendor verification when available.
The Company has completed a preliminary review of its' IT, accounting and
operational, systems for Year 2000 compliance. The review of the Company's
primary financial computer systems, including its accounting system, indicated
only minor modifications will be required to make them Year 2000 compliant. The
process control system has been documented as Year 2000 compliant by the vendor
literature but further testing is being pursued to verify this. The Company
believes it will be able to implement the necessary corrections to all of its
critical information technology and non-IT systems by mid 1999. Systems
identified as non-critical noncompliant will be addressed at later dates.
The Company does significant business with and is dependent upon various third
party entities. These relationships include customers, critical suppliers of
products and utilities, financial institutions, transportation companies and
others. The Company is also reviewing the possible impact of Year 2000
noncompliance by its outside providers. Communications with critical third
parties regarding their plans and progress addressing the Year 2000 has been
initiated and continues. The Company is dependent upon the reliability and
completeness of the third parties representations in assessing their Year 2000
readiness.
The estimated costs of the software and hardware modifications and some
consultant support identified to date will be between $125,000 to $350,000 to
implement and will be financed from operating cash flows. Expenditures through
January 31, 1999 totaled approximately $18,000. The Company does not separately
track the internal costs for the Year 2000 project, and such costs are
principally the related payroll costs for its information systems group.
The Company's refinery operations are very dependent upon outside providers
and in certain areas an alternative to the Company is not available. Failure to
correct a material year 2000 issue could result in an interruption in, or a
failure of, certain normal business activities or operations. Although the
Company is taking steps to reduce the likelihood of interruption or failure of
normal operations, there can be no guarantee that other companies' systems, on
which our systems rely, will be timely Year 2000 compliant. To date, the Company
is not aware of any significant Year 2000 problems with these outside providers
that would have a material adverse effect on the Company's business or results
of operations, liquidity and financial operations.
The Company is in the process of developing contingency plans to address
issues associated with the reasonably likely worst case scenarios. The Company
expects to have such contingency plans formulated by the end of August 1999.
- 16 -
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Refined products $ 297,662 $ 374,091 $ 382,098
Other 1,706 2,327 1,275
--------- --------- ---------
299,368 376,418 383,373
--------- --------- ---------
Costs and Expenses:
Refining operating costs 254,733 337,495 362,485
Selling and general expenses 8,225 8,050 6,285
Depreciation 10,710 9,170 9,018
--------- --------- ---------
273,668 354,715 377,788
--------- --------- ---------
Operating Income 25,700 21,703 5,585
Interest expense, net 6,732 13,891 17,229
--------- --------- ---------
Income (Loss) From Continuing Operations Before Income Taxes 18,968 7,812 (11,644)
Provision for income taxes 150 - -
--------- --------- ---------
Income (Loss) From Continuing Operations 18,818 7,812 (11,644)
Discontinued Operations:
Income from oil and gas operations, net of taxes - 1,721 4,752
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 18,818 22,972 (6,892)
Extraordinary loss on retirement of debt, net of taxes 3,013 3,917 -
--------- --------- ---------
Net Income (Loss) $ 15,805 $ 19,055 $ (6,892)
========= ========= =========
Basic Earnings (Loss) Per Share of Common Stock:
Continuing operations $ .67 $ .28 $ (.43)
Discontinued operations - .55 .18
Extraordinary loss (.11) (.14) -
--------- --------- ---------
Net income (loss) $ .56 $ .69 $ (.25)
========= ========= =========
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing operations $ .65 $ .28 $ (.43)
Discontinued operations - .55 .18
Extraordinary loss (.10) (.14) -
--------- --------- ---------
Net income (loss) $ .55 $ .69 $ (.25)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 17 -
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash, including cash equivalents of $31,781 and $19,981
at December 31, 1998 and 1997, respectively $ 33,589 $ 21,735
Trade receivables, less allowance for doubtful accounts
of $500 at December 31, 1998 and 1997 9,986 16,674
Other receivables 1,035 530
Inventory of crude oil, products and other 20,269 27,666
Other current assets 560 1,391
--------- ---------
Total current assets 65,439 67,996
--------- ---------
Property, Plant and Equipment, at cost:
Refinery and pipeline 164,664 149,201
Furniture, fixtures and other equipment 3,426 3,044
--------- ---------
168,090 152,245
Less - Accumulated depreciation 56,217 45,586
--------- ---------
111,873 106,659
Other Assets 4,714 3,260
--------- ---------
Total Assets $ 182,026 $ 177,915
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 23,492 $ 33,527
Revolving credit facility 3,800 -
Accrued turnaround cost 1,339 6,771
Accrued liabilities and other 4,280 5,240
Accrued interest 2,403 1,530
--------- ---------
Total current liabilities 35,314 47,068
--------- ---------
Long-Term Debt, net of current maturities 70,000 70,572
Deferred Credits and Other 5,238 2,801
Deferred Income Taxes 1,121 1,540
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,
28,385,584 shares and 28,111,289 shares
issued in 1998 and 1997, respectively 57,278 57,251
Paid-in capital 86,305 84,785
Retained earnings (deficit) (70,061) (85,866)
Treasury stock, 605,700 shares and 52,500 shares
at December 31, 1998 and 1997, respectively (3,169) (236)
--------- ---------
Total shareholders' equity 70,353 55,934
--------- ---------
Total liabilities and shareholders' equity $ 182,026 $ 177,915
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 18 -
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $ 15,805 $ 19,055 $ (6,892)
Extraordinary loss on retirement of debt 3,013 3,917 -
Depreciation, depletion and amortization 10,710 13,018 17,141
Gain on disposal of Canadian oil and gas properties - (23,301) -
Recognition of cumulative translation adjustment - 9,862 -
Other 20 (202) 795
Changes in components of working capital from operations
(Increase) decrease in receivables 6,183 905 765
(Increase) decrease in inventory 7,397 1,856 (9,881)
(Increase) decrease in other current assets 831 (642) (35)
Increase (decrease) in accounts payable (9,196) (8,617) 7,659
Increase (decrease) in accrued liabilities and other (3,500) (3,353) (1,087)
--------- --------- ---------
Net cash provided by operating activities 31,263 12,498 8,465
INVESTING ACTIVITIES
Additions to property, plant and equipment:
Continuing operations (16,763) (5,675) (4,760)
Discontinued operations - (3,298) (8,654)
Sales of oil and gas and other properties - 91,307 990
Other - (590) 429
--------- --------- ---------
Net cash provided by (used in) investing activities (16,763) 81,744 (11,995)
FINANCING ACTIVITIES
Borrowings:
9-1/8% Senior notes 70,000 - -
Revolving credit facility 3,800 - -
12% Senior notes - 2,000 3,000
Payments of debt:
12% Senior notes, including redemption premium (25,423) (74,932) -
7-3/4% Convertible subordinated debentures,
including redemption premium (45,971) - -
Subordinated debentures - (7,500) -
Debt issuance costs (2,575) - -
Issuance of common stock 816 3,109 -
Purchase of treasury stock (2,933) - -
Other (360) (357) (345)
--------- --------- ---------
Net cash provided by (used in) financing activities (2,646) (77,680) 2,655
Effect of exchange rate changes on cash - (10) 13
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 11,854 16,552 (862)
Cash and cash equivalents, beginning of period 21,735 5,183 6,045
--------- --------- ---------
Cash and cash equivalents, end of period $ 33,589 $ 21,735 $ 5,183
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 19 -
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands except shares)
<TABLE>
<CAPTION>
Common Stock
---------------------- Accumulated
Number Other Retained
of Shares Treasury Paid-In Comprehensive Earnings Comprehensive
Issued Amount Stock Capital Income (Deficit) Total Income
----------- --------- --------- --------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995 27,313,502 $ 57,172 $ (259) $ 81,767 $ (8,187) $ (98,029) $ 32,464
Comprehensive income
Net loss -- -- -- -- -- (6,892) (6,892) $ (6,892)
Foreign currency translation -- -- -- -- (314) -- (314) (314)
---------
Comprehensive income $ (7,206)
=========
Shares issued under:
Directors' stock plan -- -- 11 -- -- -- 11
----------- --------- --------- --------- ------------- --------- ---------
DECEMBER 31, 1996 27,313,502 57,172 (248) 81,767 (8,501) (104,921) 25,269
Comprehensive income
Net income -- -- -- -- -- 19,055 19,055 $ 19,055
Foreign currency translation -- -- -- -- (1,361) -- (1,361) (1,361)
Disposition of Canadian
assets -- -- -- -- 9,862 -- 9,862 9,862
---------
Comprehensive income $ 27,556
=========
Shares issued under:
Stock option plan 797,787 79 -- 3,018 -- -- 3,097
Directors' stock plan -- -- 12 -- -- -- 12
----------- --------- --------- --------- ------------- --------- ---------
DECEMBER 31, 1997 28,111,289 57,251 (236) 84,785 -- (85,866) 55,934
Comprehensive income
Net income 15,805 15,805 $ 15,805
---------
Comprehensive income $ 15,805
=========
Shares issued under:
Stock option plan 190,760 19 -- 797 -- -- 816
Debentures converted 83,535 8 -- 723 -- -- 731
Shares purchased under stock
repurchase plans (1) -- -- (2,933) -- -- -- (2,933)
----------- --------- --------- --------- ------------- --------- ---------
DECEMBER 31, 1998 28,385,584 $ 57,278 $ (3,169) $ 86,305 $ -- $ (70,061) $ 70,353
========== ========= ========= ========= ============= ========= =========
</TABLE>
(1) Consists of 553,200 shares repurchased during 1998 that are held in
treasury.
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 Frontier Oil Corporation
(formerly known as Wainoco Oil Corporation), a Wyoming corporation, and its
wholly-owned subsidiaries, including Frontier Holdings Inc. (the "Refinery"),
collectively referred to as Frontier or the Company. At the Annual Meeting held
on April 27, 1998, the shareholders of the Company approved the change in the
Company's corporate name from "Wainoco Oil Corporation" to "Frontier Oil
Corporation." The Company is engaged in the crude oil refining and wholesale
marketing of refined petroleum products business (the "refining operations").
The Company 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, the Company 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"). Operating results for the
Company'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
Property, plant and equipment are depreciated based on the straight-line
method over their estimated useful lives. The estimated useful lives are:
Refinery plant and equipment . . 5 to 20 years
Pipeline and pumps . . . . . . . 10 to 20 years
Furniture, fixtures and other. . 3 to 10 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.
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 the lower of
average cost or market.
SCHEDULE OF COMPONENTS OF INVENTORY
<TABLE>
<CAPTION>
(In thousands)
December 31, 1998 1997
--------- ---------
<S> <C> <C>
Crude oil $ 1,407 $ 3,904
Unfinished products 2,644 6,338
Finished products 8,602 9,929
Chemicals 1,333 1,534
Repairs and maintenance supplies and other 6,283 5,961
--------- ---------
$ 20,269 $ 27,666
========= =========
</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.
REFINED PRODUCT REVENUES
Revenues are recognized when product ownership is transferred to the customer.
Excise and other taxes on products sold are netted against revenues.
- 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 $1.5 million, $2.0 million and $109,000 was recorded in the years
ended December 31, 1998, 1997 and 1996, respectively. During 1998 and 1996 the
Company capitalized interest of $101,000 and $24,000, respectively. The Company
capitalizes interest on debt incurred to fund the construction or acquisition of
a significant asset.
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, 1998, 1997 and 1996.
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 were included in the consolidated statements of operations
currently, and translation adjustments were included in the consolidated
statements of changes in shareholders' equity. See Note 8 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.
NEW ACCOUNTING STATEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement established accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
The Company has not yet quantified the impacts of adopting Statement 133 on
the financial statements. However, the Statement could increase volatility in
earnings and other comprehensive income.
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
1998, 1997 and 1996 were $6.3 million, $18.4 million and $16.3 million,
respectively. Cash payments for income taxes during 1998, 1997 and 1996 were
$582,000, $930,000 and $187,000, respectively.
- 22 -
<PAGE>
3. DEBT
SCHEDULE OF LONG-TERM DEBT
<TABLE>
<CAPTION>
(In thousands)
December 31, 1998 1997
--------- ---------
<S> <C> <C>
9-1/8% Senior Notes $ 70,000 $ --
12% Senior Notes -- 24,572
7-3/4% Convertible Subordinated Debentures -- 46,000
--------- ---------
$ 70,000 $ 70,572
========= =========
</TABLE>
SENIOR NOTES
On February 9, 1998, the Company issued $70 million of 9-1/8% Senior Notes due
2006. The Notes are redeemable, at the option of the Company, at a premium of
104.563% after February 15, 2002, declining to 100% in 2005. Prior to February
15, 2002, the Company at its option may redeem the Notes at a defined make-whole
amount. Interest is paid semiannually. The net proceeds were utilized to fund
redemptions of the Company's 12% Senior Notes and 7-3/4% Convertible
Subordinated Debentures.
EARLY RETIREMENT OF DEBT
On February 10, 1998, the Company called for redemption the remaining $24.8
million of its 12% Senior Notes and the $46 million 7-3/4% Convertible
Subordinated Debentures. The redemptions were completed on March 12, 1998.
Holders of $731,000 of 7-3/4% Convertible Subordinated Debentures elected to
convert into 83,535 shares of the Company's common stock. Based on the
redemptions, the Company has recognized a 1998 extraordinary loss of
approximately $3.0 million, net of taxes, due to the redemption premiums on the
Senior Notes and Convertible Debentures and the write-off of the related
remaining debt issuance costs. The redemptions and retirement of these debt
obligations were funded with proceeds from the issuance of the 9-1/8% Senior
Notes.
Based on early debt redemptions during 1997, the Company recognized an
extraordinary loss of approximately $3.9 million, net of taxes, due to the
redemption premium on the 12% Senior notes and reduction of debt issuance costs.
The debt redemptions were funded with proceeds from the sale of the Canadian oil
and gas operations.
REVOLVING CREDIT FACILITY
The refining operations has a working capital credit facility with a group of
three banks which expires on June 30, 2000. 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. Short-term debt outstanding was $3.8 million
at December 31, 1998. Standby letters of credit outstanding were $7.7 million
and $4.5 million at December 31, 1998 and 1997, respectively.
The facility provides working capital financing for operations, generally the
financing of crude and product supply. It is generally secured by the
Refinery'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%, the prevailing Federal Funds Rate plus
2-1/4% 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 agreement includes certain financial covenant requirements relating to the
Refinery's working capital, cash earnings, tangible net worth and fixed charge
coverage.
RESTRICTIONS ON LOANS, TRANSFER OF FUNDS AND PAYMENT OF DIVIDENDS
The Refinery credit facility restricts the Refinery 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 9-1/8% Senior Notes are due 2006; until then there are no maturities of
long-term debt.
- 23 -
<PAGE>
4. INCOME TAXES
The following is the provision (benefit) for income taxes for the three years
ended December 31, 1998, 1997 and 1996.
PROVISION (BENEFIT) FOR INCOME TAXES
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current $ 569 $ 194 $ --
Deferred (419) (194) --
--------- --------- ---------
$ 150 $ -- $ --
========= ========= =========
</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, 1998, 1997 and 1996.
RECONCILIATION OF TAX PROVISION
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Provision (benefit) based on statutory rates $ 6,639 $ 2,656 $ (4,242)
Increase (decrease) resulting from:
Net operating loss carryforwards (6,639) (2,656) 4,242
State income taxes 150 -- --
--------- --------- ---------
Provision as reported $ 150 $ -- $ --
========= ========= =========
</TABLE>
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, 1998 and 1997.
COMPONENTS OF DEFERRED TAXES
<TABLE>
<CAPTION>
(In thousands)
December 31, 1998 1997
--------- ---------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Property, plant and equipment due
to differences in depreciation $ 17,731 $ 19,624
Other 697 918
--------- ---------
DEFERRED TAX LIABILITIES 18,428 20,542
--------- ---------
DEFERRED TAX ASSETS
Tax loss carryforwards 43,820 50,960
Depletion carryforwards 3,045 3,045
Other 1,828 3,069
--------- ---------
48,693 57,074
--------- ---------
LESS-VALUATION ALLOWANCE 31,386 38,072
--------- ---------
NET DEFERRED TAX ASSETS 17,307 19,002
--------- ---------
NET DEFERRED TAX LIABILITIES $ 1,121 $ 1,540
========= =========
</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, 1998, the Company had regular net operating loss ("NOL")
carryforwards for United States tax reporting purposes of $125.2 million
available to reduce future federal taxable income. The regular NOL
carryforwards will expire as follows: $11.8 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, 1998, the Company had alternative minimum tax net
operating loss ("AMT NOL") carryforwards for United States tax reporting of
$79.6 million to reduce future taxable income. The AMT NOL carryforwards will
expire as follows: $25.4 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 alternative minimum tax carryforwards of $1.3 million and tax
depletion carryforwards of $8.7 million which are indefinitely available to
reduce future United States income taxes payable.
- 24 -
<PAGE>
5. 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, 1998, 1997,
and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------- ----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Income (loss) from
continuing operations $ 18,818 28,124 $ .67 $ 7,812 27,457 $ .28 $ (11,644) 27,257 $ (.43)
======== ======== ========
DILUTIVE SECURITIES:
Stock options -- 622 -- 494 -- --
----------- ------------- ----------- ------------- ----------- -------------
DILUTED EPS:
Income (loss) from
continuing operations $ 18,818 28,746 $ .65 $ 7,812 27,951 $ .28 $ (11,644) 27,257 $ (.43)
=========== ============= ======== =========== ============= ======== =========== ============= =========
</TABLE>
Certain of the Company's stock options that could potentially dilute basic EPS
in the future were not included in the computation of diluted EPS because to do
so would have been antidilutive for the periods presented.
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 part 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 held in treasury. The Company made grants to directors
under this plan of 2,500 shares in 1997 and 1996.
STOCK OPTION PLANS
The Company has three stock option plans which authorize the granting of
restricted stock and options to purchase shares. The plans through December 31,
1998 have reserved for issuance a total of 3,959,355 shares of common stock of
which 2,555,435 shares were granted and exercised, 1,318,250 shares were granted
and were outstanding and 85,670 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 one- to five-year terms.
A summary of the status of the Company's plans as of December 31, 1998, 1997
and 1996, and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 - Restated 1996
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,526,340 $ 4.06 2,331,904 $ 3.81 2,332,842 $ 4.32
Granted -- -- 612,800 4.09 981,229 3.31
Exercised (190,760) 3.81 (797,787) 3.89 -- --
Reissued -- -- -- -- (669,229) 4.30
Expired (17,330) 5.18 (620,577) 3.48 (312,938) 4.53
--------- --------- --------- --------- --------- ---------
Outstanding at end of year 1,318,250 3.95 1,526,340 4.06 2,331,904 3.81
========= ========= =========
Exercisable at end of year 1,060,320 4.45 914,850 4.03 1,526,561 4.04
========= ========= =========
Available for grant at end of year 85,670 69,390 68,208
========= ========= =========
Weighted-average fair value of
options granted during the year -- 1.51 .65
</TABLE>
- 25 -
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Average
Range of Outstanding Contractual Exercise Exerciseable Exercise
Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
- --------------- ----------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$2.88 to $7.82 1,318,250 2.26 $ 3.95 1,060,320 $ 4.45
</TABLE>
Had compensation costs been determined based on the fair value at the
grant dates for awards made in 1997 and 1996 (no awards were made in 1998), the
Company's net income (loss) and EPS would have been the pro forma amounts
indicated below for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands except per share amounts)
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported $ 15,805 $ 19,055 $ (6,892)
Pro forma 15,281 18,578 (7,263)
Basic EPS:
As reported $ .56 $ .69 $ (.25)
Pro forma .54 .67 (.27)
Diluted EPS:
As reported $ .55 $ .69 $ (.25)
Pro forma .53 .67 (.27)
</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% and 5.33%, expected
volatilities of 41.07%, and 32.95%, expected lives of 2.32 and 1.59 years and
no dividend yield in 1997 and 1996, respectively.
6. COMMITMENTS AND CONTINGENCIES
LEASE AND OTHER COMMITMENTS
The Company has noncapitalized building, equipment and vehicle lease
agreements which expire from 1999 through 2005 having minimum annual payments as
of December 31, 1998 of $4.1 million for 1999, $719,000 for 2000, $591,000 for
2001, $368,000 for 2002, $174,000 for 2003, $132,000 for 2004 and $25,000 in
2005. Operating lease rental expense was $2.6 million, $2.6 million and $1.7
million for the three years ended December 31, 1998, 1997and 1996, respectively.
The Company contracted for pipeline capacity of approximately 13,800 bpd on
the Express Pipeline from Hardisty, Alberta to Guernsey, Wyoming 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 owns a 25,000 bpd interest in a crude oil pipeline from Guernsey,
Wyoming to the refinery. The Company's share of operating costs for the crude
oil pipeline are recorded as refining operating costs. The Company also has
commitments to purchase crude oil from various suppliers on a one month to one
year basis at daily market posted prices 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 14% of its customers
accounting for approximately 69% of total refined product sales in 1998. The
Company 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 1998,
the Company made sales to CITGO Petroleum Products of approximately $56 million,
which accounted for 19% of consolidated revenues.
CONTRIBUTION PLANS
The Company 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
- 26 -
<PAGE>
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, 1998, 1997 and 1996 was $1.4 million, $1.3
million and $1.2 million, respectively.
ENVIRONMENTAL
The Company accrues for environmental costs as indicated in Note 2. 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. The Refinery 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 such lawsuits
would not have a material adverse effect on the Company's financial position or
results of operations.
COLLECTIVE BARGAINING AGREEMENT EXPIRATION
The Company's refining unit hourly employees are represented by seven
bargaining units, the largest being the Paper, Allied-Industrial, Chemical and
Energy Workers International Union ("PACE"). Six AFL-CIO affiliated unions
represent the craft workers. In December 1998, the Company concluded new
bargaining agreements, with the three-year PACE agreement due to expire in July
1999 extended to July 2002, while the six-year AFL-CIO contract due to expire in
June 2002 extended to June 2005. The union employees represent approximately
57% of the Company's work force at December 31, 1998.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's Senior Notes and Convertible Subordinated
Debentures was estimated based on quotations obtained from broker-dealers who
make markets in these and similar securities. The bank revolving credit
facility is based on floating interest rates and, as such, the carrying amount
is a reasonable estimate of fair value. At December 31, 1998 and 1997, the
carrying amounts of long-term debt instruments (including current maturities)
were $70.0 million and $70.6 million, respectively, and the estimated fair
values were $65.1 million and $72.0 million.
As of December 31, 1998, 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
1999. The estimated fair value of the Company's open natural gas futures
contract at December 31, 1998 was $(371,000).
8. SALE OF OIL AND GAS OPERATIONS
On June 16, 1997, the Company 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,
- 27 -
<PAGE>
available net operating loss carryforwards will be utilized to offset the gain;
however, alternative minimum taxes of approximately $800,000 have been paid.
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, the Company 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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Frontier Oil Corporation:
We have audited the accompanying consolidated balance sheets of Frontier Oil
Corporation (formerly known as Wainoco Oil Corporation) (a Wyoming Corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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 overall 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 Frontier Oil Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 5, 1999
- 28 -
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 15, 1999, incorporated by reference in this Form 10-K,
into the Frontier Oil Corporation (formerly known as Wainoco Oil Corporation)
previously filed Registration Statement file No. 33-15598 on Form S-8.
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,589
<SECURITIES> 0
<RECEIVABLES> 11,021
<ALLOWANCES> 0
<INVENTORY> 20,269
<CURRENT-ASSETS> 65,439
<PP&E> 168,090
<DEPRECIATION> 56,217
<TOTAL-ASSETS> 182,026
<CURRENT-LIABILITIES> 35,314
<BONDS> 70,000
0
0
<COMMON> 57,278
<OTHER-SE> 13,075
<TOTAL-LIABILITY-AND-EQUITY> 182,026
<SALES> 297,662
<TOTAL-REVENUES> 299,368
<CGS> 265,443
<TOTAL-COSTS> 265,443
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,732
<INCOME-PRETAX> 18,968
<INCOME-TAX> 150
<INCOME-CONTINUING> 18,818
<DISCONTINUED> 0
<EXTRAORDINARY> (3,013)
<CHANGES> 0
<NET-INCOME> 15,805
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.55
</TABLE>
FRONTIER OIL CORPORATION
LIST OF SUBSIDIARIES OF THE REGISTRANT
Frontier Oil Corporation (incorporated in Wyoming)
662712 Alberta Ltd. (incorporated in Alberta)
Wainoco Resources, Inc. (incorporated in Delaware),
a subsidiary of Frontier Oil Corporation.
Wainoco Oil & Gas Company (incorporated in Delaware),
a subsidiary of Wainoco Resources, Inc.
Frontier Holdings Inc. (incorporated in Delaware),
a subsidiary of Frontier Oil Corporation.
Frontier Refining & Marketing Inc. (incorporated in Delaware),
a subsidiary of Frontier Holdings Inc.
Frontier Refining Inc. (incorporated in Delaware),
a subsidiary of Frontier Refining & Marketing Inc.
Frontier Oil and Refining Company (incorporated in Delaware),
a subsidiary of Frontier Refining & Marketing Inc.
Frontier Pipeline Inc. (incorporated in Delaware),
a subsidiary of Frontier Refining & Marketing Inc.
