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, 1999
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
11-3/4% Senior Notes, due 2009 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, 2000 there were 27,478,120 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 $179 million at that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1999 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, 1999 are
incorporated by reference into Items 10 through 13 of Part III.
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Table of Contents
Part I
Item 1. Business 2
Risk Factors 9
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Part II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
Part III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
Part IV
Item 14. Exhibits, Financial Statements Schedules, and
Reports on Form 8-K 16
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K concerning us which are (1) projections of
revenues, earnings, earnings per share, capital expenditures or other financial
items, (2) statements of plans and objectives for future operations, including
acquisitions, (3) statements of future economic performance, or (4) statements
of assumptions or estimates underlying or supporting the foregoing are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Exchange Act. The ultimate
accuracy of forward-looking statements is subject to a wide range of business
risks and changes in circumstances, and actual results and outcomes often differ
from expectations.
Important factors that could cause our actual results to differ materially
from estimates or projections contained in forward-looking statements include,
among others:
- the timing and extent of changes in commodity prices and underlying
demand and availability of crude oil and other refinery feedstocks,
refined products and natural gas;
- actions of our customers and competitors;
- changes in the cost and availability of pipelines and other means of
transporting feedstocks and products.
- state and federal environmental, economic, safety and other policies and
regulations, any changes therein, and any legal or regulatory delays or
other factors beyond our control;
- execution of planned capital projects;
- weather conditions affecting our operations or the areas in which our
products are marketed;
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- political developments in foreign countries;
- the conditions of the capital markets and equity markets during the
periods covered by the forward looking statements;
- earthquakes or other natural disasters affecting operations;
- adverse rulings, judgments or settlements in litigation or other legal
matters, including unexpected environmental remediation costs in excess
of any reserves; and
- adverse changes in the credit ratings assigned to our trade credit.
All subsequent written and oral forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. We
undertake no obligation to publicly release the result of any revisions to any
such forward-looking statements that may be made to reflect events or
circumstances after the date of this Form 10-K, or to reflect the occurrence of
unanticipated events.
PART 1
ITEM 1. BUSINESS
Summary
The terms "Frontier" and "we" as used in this Form 10-K refer to Frontier Oil
Corporation and its subsidiaries, except where it is clear that those terms mean
only the parent company. When we use the term "Rocky Mountain region," we refer
to the states of Colorado, Wyoming, Montana and Utah, and when we use the term
"Plains States," we refer to the states of Kansas, Nebraska, Iowa, Missouri,
North Dakota and South Dakota.
Overview
We are an independent energy company engaged in crude oil refining and the
wholesale marketing of refined petroleum products. We operate refineries in
Cheyenne, Wyoming and in El Dorado, Kansas with a total crude oil capacity of
over 150,000 barrels per day. Both of our refineries are complex refineries,
which means that they can process heavier, less expensive types of crude oil and
still produce a high percentage of gasoline, diesel fuel and other high margin
refined products. We focus our marketing efforts in the Rocky Mountain region
and the Plains States, which we believe are among the most attractive refined
products markets in the United States.
Acquisition of El Dorado Refinery. On November 16, 1999, we acquired the
110,000 barrels per day crude oil refinery located in El Dorado, Kansas from
Equilon Enterprises LLC. We also purchased the crude oil, intermediate product
and finished product inventories.
Cheyenne Refinery. Our Cheyenne refinery has a permitted crude capacity of
41,000 barrels per day. We market its refined products primarily in the eastern
slope of the Rocky Mountain region, which encompasses eastern Colorado
(including the Denver metropolitan area) and eastern Wyoming. The Cheyenne
refinery has a coking unit, which allows the refinery to process up to 100%
heavy crude oil for use as a feedstock. This ability to process heavy crude oil
lowers our crude oil supply costs because heavy crude oil is generally less
expensive than other types of crude oil. For the year ended December 31, 1999,
heavy crude oil constituted approximately 87% of the Cheyenne refinery's total
crude oil charge. For the year ended December 31, 1999, the Cheyenne refinery's
product mix included gasoline (41%), diesel fuel (31%) and asphalt and other
refined petroleum products (28%).
El Dorado Refinery. The El Dorado refinery is one of the largest refineries
in the Plains States and the Rocky Mountain region, with a permitted crude
capacity of 110,000 barrels per day. The El Dorado refinery can select from
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many different types of crude oil because of its direct access to the Cushing,
Oklahoma hub which is Gulf Coast connected. This access, combined with the El
Dorado refinery's complexity, gives it the flexibility to refine a wide variety
of crude oils. We have entered into a 15-year refined product offtake agreement
for gasoline and diesel production at this refinery with Equiva Trading Company,
an affiliate of Equilon. The refined product offtake agreement will allow us to
maximize the operating efficiency of the El Dorado refinery during the initial
years of our ownership. As our commitments to Equilon under the refined product
offtake agreement decline over the next ten years, we intend to market an
increasing portion of the El Dorado refinery's gasoline and diesel in the same
markets in which Equilon currently sells the El Dorado refinery's production,
primarily the Denver and Kansas City metropolitan areas. We have also entered
into a one-year foreign crude supply agreement with Equiva, which we expect to
renew after the initial one-year term expires. For the year ended December 31,
1999, the El Dorado refinery's product mix included gasoline (56%), diesel and
jet fuel (35%) and asphalt, chemicals and other refined petroleum products (9%).
Refining Operations
Varieties of Crude Oil. Traditionally, crude oil has been classified as (1)
sweet (if sulfur content is low) or sour (if sulfur content is high), (2) light
(if gravity is high) or heavy (if gravity is low) and (3) intermediate (if
gravity or sulphur content is in between). For the most part, heavy crude oil
tends to be sour and light crude oil tends to be sweet. When refined, light
crude oil produces a higher yield of higher margin refined products such as
gasoline, diesel and jet fuel and as a result, is more expensive than heavy
crude oil. In contrast, heavy crude oil produces more low margin by- products
and heavy residual oils. The discount at which heavy crude oil sells compared
to the sales price of light crude oil is known in the industry as the
light/heavy spread. Coking units, such as the ones used by our refineries, can
process certain by-products and heavy residual oils to produce additional
volumes of gasoline and diesel, thus increasing the aggregate yield of higher
margin refined products from the same initial volume of crude oil.
Products. The Cheyenne and El Dorado refineries are both complex refineries.
Refineries are frequently classified according to their complexity, which refers
to the number, type and capacity of processing units at the refinery. Each of
our refineries also possesses a coking unit which provides substantial upgrading
capacity. Upgrading capacity refers to the ability of a refinery to produce
high yields of high margin refined products such as gasoline and diesel despite
processing significant volumes of heavy and intermediate crude oil. In
contrast, in order to produce high yields of gasoline and diesel, refineries
with low upgrading capacity must process primarily sweet crude oil. Some low
complexity refineries may be capable of processing heavy and intermediate crude
oil, but they will produce large volumes of by-products and heavy residual oils.
The Cheyenne and El Dorado refineries have high upgrading capacity relative to
other refineries in the Plains States and Rocky Mountain region. Because
gasoline, diesel and jet fuel sales generally achieve higher margins than are
available on other refined products, we expect that these products will continue
to make up the bulk of our production.
In addition to its petroleum refining operations, the El Dorado refinery
includes a small petrochemcial complex. The primary products of the
petro-chemical processes are phenol, acetone and toluene, the chemical building
blocks for sandpaper adhesive, rubber belts, fiberglass insulation, high-impact
plastics, plywood adhesive, medicines, cosmetics and other useful everyday
items.
Marketing and Distribution.
Cheyenne Refinery. The primary market for the Cheyenne refinery's refined
products is the eastern slope area of the Rocky Mountain region, which includes
Colorado and Wyoming. For the year ended December 31, 1999, we sold
approximately 80% of the Cheyenne refinery's gasoline sales volumes in Colorado
and 12% in Wyoming. The Colorado market has experienced above-average growth in
demand for gasoline over the past five years. For the year ended December 31,
1999, we sold approximately 22% of they Cheyenne refinery's diesel sales volumes
in Colorado and 61% in Wyoming. Because of the location of the Cheyenne
refinery, we area able to sell a significant portion of its diesel product from
a truck rack at the refinery, eliminating any transportation costs. The
gasoline and diesel produced by this refinery is primarily shipped via pipeline
to terminals for distribution by truck or rail. Pipeline shipments from the
Cheyenne refinery are handled mainly by the Kaneb pipeline, serving Denver and
Colorado Springs, Colorado, and the Continental pipeline, serving Sidney,
Nebraska.
We sell refined products from our Cheyenne refinery to a broad base of
independent retailers, jobbers and major oil companies. Refined product prices
are determined by local market conditions at distribution centers known as
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"terminal racks." The customer at a terminal rack typically supplies his own
truck transportation. Prices at the terminal rack are posted daily by sellers.
In the year ended December 31, 1999, approximately 70% of the Cheyenne
refinery's sales were made to its 25 largest customers. Occasionally, marketing
volumes exceed the refinery's production capabilities. In those instances, we
purchase product in the spot market as needed.
El Dorado Refinery. The primary markets for the El Dorado refinery's refined
products are Colorado and the Plains States, which include the Kansas City
metropolitan area. The gasoline, diesel and jet fuel produced by the El Dorado
refinery are primarily shipped via pipeline to terminals for distribution by
truck or rail. Pipeline shipments from the El Dorado refinery are handled
mainly by the Kaneb pipeline, the Chase pipeline, serving Denver, the Williams
pipeline, serving Kansas City, Carthage, Missouri and Des Moines, Iowa and the
KCPL pipeline, serving Kansas City.
We have entered into a 15-year refined product offtake agreement with Equiva.
For the year ended December 31, 1999, Equiva was the El Dorado refinery's
largest customer. Under the agreement, Equiva will purchase gasoline, diesel
and jet fuel produced by the El Dorado refinery at market-based prices.
Initially, Equiva will purchase substantially all of the El Dorado refinery's
production of these products pursuant to monthly quantity estimates we make.
Beginning in 2000, we will retain and market a portion of the refinery's
gasoline and diesel production. This portion will increase 5,000 barrels per
day each year for ten years, beginning at 5,000 barrels per day in 2000 rising
to 50,000 barrels per day in 2009 and remaining at that level through the term
of the agreement. Equiva will continue to purchase all jet fuel production for
the first five years of the agreement, but thereafter, we can market all of the
El Dorado refinery's jet fuel production. The agreement will allow us to focus
on maximizing the operating efficiency of our El Dorado refinery during the
initial years of our ownership. As our sales to Equiva under this agreement
decrease, we intend to sell the gasoline and diesel produced by the El Dorado
refinery in the same markets as Equilon currently does, as described above.
Competition.
Cheyenne Refinery. The most competitive market for the Cheyenne refinery is
the Denver metropolitan area. Other than the Cheyenne refinery, four principal
refineries serve the Denver market: Sinclair Oil Company, which has a 54,000
barrels per day refinery near Rawlins, Wyoming and a 22,000 barrels per day
refinery in Casper, Wyoming; Ultramar Diamond Shamrock Corporation (UDS), which
has a 28,000 barrels per day refinery in Denver; and Conoco Inc., which as a
57,500 barrels per day refinery in Denver. Denver is also supplied by five
product pipelines, including three from outside the region that enable refined
products from other regions to be sold in the Denver market. However, refined
products shipped from other regions bear the burden of higher transportation
costs.
The UDS and Conoco refineries located in Denver have lower product
transportation costs in servicing the Denver market than we do. However, the
Cheyenne refinery has lower crude oil transportation costs because of its
proximity to the Guernsey, Wyoming hub, the major crude oil pipeline hub in the
Rocky Mountain region, and our ownership interest in the Centennial pipeline,
which runs from Guernsey to the Cheyenne refinery. Moreover, unlike Sinclair,
UDS and Conoco, we only sell our products to the wholesale market. We believe
that this commitment to the wholesale market gives us a customer relations
advantage over our principal competitors in the Eastern Slope area, all of which
also have retail outlets, because we are not in direct competition with
independent retailers of gasoline and diesel.
El Dorado Refinery. The El Dorado refinery faces competition from other
Plains States and mid continent refiners, but the principal competitors for the
El Dorado refinery are gulf coast refiners. Although our gulf coast
competitors typically have lower production costs than the El Dorado refinery,
we believe that their higher refined product transportation costs allow the El
Dorado refinery to compete effectively with these refineries in the Plains
States and Rocky Mountain region. The Plains States and mid continent region
are supplied by three product pipelines that originate from the gulf coast.
Crude Oil Supply.
Cheyenne Refinery. In the year ended December 31, 1999, we obtained
approximately 45% of the Cheyenne refinery's crude oil charge from Wyoming, 43%
from Canada and 12% from Colorado. During the same period, heavy crude oil
constituted approximately 87% of the Cheyenne refinery's total crude oil charge.
Cheyenne is 80 miles southwest of Guernsey, Wyoming, the main hub and crude oil
trading center for the Rocky Mountain region. We
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transport up to 25,000 barrels per day of the crude oil purchased at Guernsey to
the Cheyenne refinery through the Centennial pipeline. Additional crude oil
volumes are transported on an alternative pipeline. Ample quantities of heavy
crude oil are available at Guernsey, including both locally produced Wyoming
general sour and imported Canadian heavy crude oil, which is supplied by the
Express pipeline, which runs from Hardisty, Alberta to Casper, Wyoming. The
Cheyenne refinery's ability to process up to 100% heavy crude oil feedstocks
gives us a distinct advantage over the four other Eastern Slope refineries, none
of which has the necessary upgrading capacity to process high volumes of heavy
crude oil. Upgrading capacity is the ability to produce a higher yield of
higher margin refined products, such as gasoline and diesel, than would
otherwise be possible using heavy crude oil feedstock.
We purchase crude oil for the Cheyenne refinery from a number of suppliers,
including major oil companies, marketing companies and large and small
independent producers, under arrangements which contain market-responsive
pricing provisions. Many of these arrangements are subject to cancellation by
either party or have terms that are not in excess of one year and are subject to
periodic renegotiation.
El Dorado Refinery. In the year ended December 31, 1999, Equilon obtained
approximately 37% of the El Dorado refinery's crude oil charge from Texas, 17%
from Kansas, 36% from Latin America and 10% from other sources. El Dorado is
125 miles north of Cushing, Oklahoma, the location of a major crude oil hub.
The Cushing hub is supplied by the Seaway pipeline, which runs from the gulf
coast, the Basin pipeline, which runs through Wichita Falls from West Texas, and
the Mobil pipeline, which originates at the gulf coast and connects to the Basin
pipeline at Wichita Falls. The Osage pipeline runs from Cushing to El Dorado
and supplied approximately 83% of our crude oil charge during the year ended
December 31, 1999. The remainder of our crude oil charge is transported to the
El Dorado refinery through the Kansas gathering system pipelines.
The Seaway pipeline is currently being upgraded from a capacity of 270,000
barrels per day to a capacity of 350,000 barrels per day. Recently the Seaway
pipeline has experienced proration, which should be reduced or eliminated by the
increase in capacity. This expansion will provide the El Dorado refinery with
significantly greater access to crude oil from the gulf coast, including less
expensive heavy Mexican and Venezuelan crude.
We have entered into a one-year foreign crude oil supply agreement with
Equiva. Under this agreement, we may purchase some or all of the crude oil
charge for the El Dorado refinery from Equiva, although we are not obligated to
do so. We are obligated to pay a monthly commitment fee to Equiva for making
foreign crude volumes available to us under this agreement and a per barrel fee
for crude purchased under this agreement in excess of certain volumes. This
agreement allows us to use Equiva's worldwide network to acquire foreign crude
oil, and we intend primarily to purchase foreign crude under this agreement,
while purchasing domestic and Canadian crude from other supplies. We expect to
renew this agreement after the initial one-year term expires. In the event that
the crude supply agreement is not renewed, we will purchase all of our crude oil
charge from various third parties and will continue to rely primarily on the
Cushing hub and the Osage pipeline to supply crude oil to the El Dorado
refinery.
Refinery Maintenance. Each of the operating units at our refineries requires
regular maintenance and repair shutdowns (referred to as "turnarounds") during
which the unit is not in operation. Turnaround cycles vary for different units
but are generally required every one to five years. In general, turnarounds at
our refineries are managed so that some units continue to operate while others
are down for scheduled maintenance. We also plan to coordinate operations by
staggering turnarounds at the two refineries. Maintenance turnarounds are
implemented using our regular personnel as well as some additional contract
labor. Turnaround work typically proceeds on a continuous 24-hour basis to
minimize unit downtime. We accrue for our turnaround costs. We normally
schedule our maintenance turnaround work during the spring or fall of each year.
When we perform a turnaround, we build up product inventories prior to the
turnaround to minimize the impact of the turnaround on our sales of refined
products.
Safety and Lost Time Accidents. We are subject to the requirements of the
federal Occupational Safety and Health Act (OSHA) and comparable state
occupational safety statues. We believe that we have operated in substantial
compliance with OSHA requirements, including general industry standards, record
keeping and reporting, hazard communication and process safety management. The
nature of our 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. The OSHA recordable rate, which is a
measure of the number of safety incidents at a facility per 200,000 man hours of
work, at the Cheyenne refinery is well below the average of other independent
refining companies. Through a series of safety initiatives, Equilon has been
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able to lower the OSHA recordable rate at the El Dorado refinery substantially
during the past eight years, and we intend to pursue initiatives to continue
this trend.
Government Regulation
Environmental Matters. Our 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 our refineries, 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. We believe that each of
our refineries is in substantial compliance with existing environmental laws,
regulations and permits.
Rules and regulations implementing federal, state and local laws relating to
health and the environment will continue to affect our operations, and we cannot
predict what additional 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 our financial
position and results of operations 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.
Our operations are and many of the products we manufacture are specifically
subject to certain requirements of the Clean Air Act (CAA) and related state and
local regulations. The 1990 amendments to the CAA contain provisions that will
require capital expenditures for the installation of certain air pollution
control devices at our refineries during the next several years. For example,
the EPA recently promulgated regulations under authority of Title III of the
CAA Amendments that required refineries to install maximum achievable control
technology for the control of hazardous air pollutants from several refinery
processing units and storage vessels. We expended approximately $600,000 at our
Cheyenne refinery to meet these new hazardous air pollutant control requirements
by the regulatory deadline of August 1, 1998. Subsequent rule making authorized
by the CAA or similar laws and directed at other refinery processes may
necessitate additional expenditures in future years. Because other refineries
will be required to make similar expenditures, we do not expect such
expenditures to materially adversely impact our competitive position.
The CAA may authorize the EPA to require modifications in the formulation of
the refined transportation fuel products we manufacture in order to limit the
emissions associated with their final use. For example, reformulated gasoline
(RFG) is required in many areas that fail to meet national ambient air quality
standards for ozone. Most recently, on December 21, 1999, the EPA promulgated
national regulations limiting the amount of sulfur that is to be allowed in
gasoline. The EPA believes such limits are necessary to protect new automobile
emission control systems that may be inhibited by sulfur in the fuel. The new
regulations require the phase-in of gasoline sulfur standards beginning in 2004
and continuing through 2008 with special provisions for refiners serving those
Western states exhibiting lesser air quality problems and for small business
refiners, such as Frontier. Since Frontier qualifies as a small business
refiner by having 1,500 or fewer employees, Cheyenne and El Dorado refineries
may comply with an interim gasoline sulfur standard in 2004 that is based on
historic gasoline sulfur levels rather than having to the meet the much lower
standard that will be applied to the general industry. Frontier will then have
an additional four years, until 2008, to reduce our gasoline sulfur content to
the national standard. The total capital expenditures now estimated to achieve
the final gasoline sulfur standard are approximately $19 million at the Cheyenne
refinery and approximately $25 million at the El Dorado refinery.
The EPA is now actively considering the development of diesel engine emission
standards that will likely also result in requirements mandating refiners to
limit the content of sulfur in on-road diesel for similar reasons as those
described for gasoline. Late in 1999, the agency published an Advanced Notice
of Proposed Rule Making (ANPRM) regarding such diesel engine emission limits and
requesting comments from affected entities. The agency has since stated its
intent to propose a diesel engine emission regulation early in 2000 and finalize
a rule by the end of the year. It is still too early in the regulatory process
to predict the final diesel sulfur limits or the schedule by which such limits
may be imposed on the refining industry. We believe, however, that the capital
costs related to reducing the sulfur content of our diesel fuel to a practicable
limit will be substantially less than the costs associated with the
desulfurization of our gasoline.
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In addition, there are potential, but less likely, changes to gasoline
volatility (RVP) standards in certain of our market areas that could result from
future regulatory or judicial developments. The total capital expenditures now
estimated for potential changes to RVP standards are approximately $9 million at
the Cheyenne refinery and zero at the El Dorado refinery.
We are aware of recent public concern regarding possible groundwater
contamination resulting from the use of MTBE (methyl tertiary butyl ether) as a
source of required oxygen in gasolines sold in specified areas of the country.
Gasoline containing a specified amount of oxygen is required by the
Environmental Protection Agency to be used in those regions that exceed the
National Ambient Air Quality Standards for either ozone or carbon monoxide.
That oxygen requirement may be satisfied by adding to gasoline any one of many
oxygen-containing materials including, among others, MTBE and also ethanol, an
oxygen containing compound that is manufactured primarily from "renewable"
agricultural products and that has not been shown to exhibit the environmental
concerns associated with MTBE. Frontier currently supplies such "oxygenated"
gasoline to the Denver metropolitan area, a region that has historically
exceeded the National Ambient Air Quality Standard for carbon monoxide during
the winter months, from both our Cheyenne and our El Dorado refineries. Both
refineries now use only ethanol as the oxygen-containing additive, although the
El Dorado refinery did use MTBE from 1988 until 1991 when under Texaco ownership
and MTBE has been occasionally added to a small percentage of gasoline from our
Cheyenne refinery at the request of certain customers that have preferred that
oxygenate. Frontier is not aware of any environmental concerns or claims
related to the supply, distribution or use of its oxygen additives or oxygenated
products.
Our operations are also subject to the Clean Water Act (CWA) and comparable
state and local requirements. The CWA and analogous laws prohibit any discharge
into surface waters and ground waters except in strict conformance with permits,
such as National Pollutant Discharge Elimination System (NPDES) permits, issued
by federal and state governmental agencies. NPDES, permits and analogous water
discharge permits are valid for a maximum of five years and must be renewed. In
addition, changes in our operations may require us to modify our permits. When
permits are modified or renewed, we may be required to update our wastewater
treatment facilities to comply with potentially stricter discharge limits.
We generate wastes that may be subject to the Resource Conservation and
Recovery Act (RCRA) and comparable state and local requirements. The EPA and
various state agencies have limited the approved methods of disposal for certain
hazardous and nonhazardous wastes. Some of the disposal methods we used in the
past are no longer allowed or substantially limited. This may cause us to incur
additional costs for the disposal of wastes and the maintenance or closure of
waste disposal areas. Because other refineries will be required to make similar
expenditures, we do not expect such expenditures to materially adversely impact
our competitive position.
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 our historical operations, as well as in our current ordinary operations, we
have generated waste, some of 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.
In 1997, we completed divesting ourself of our 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
the new owners, we cannot assure you that we will never be subject to liability
for any former activity respecting the divested oil and gas properties. We have
been named as a potentially responsible party (PRP) under CERCLA at the Gulf
Coast Vacuum Services Superfund Site located in Vermilion Parish, Louisiana, one
of the divested properties. We have entered into a consent decree resolving our
liabilities as a PRP at this Superfund site. We believe that any future
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liabilities related to this site will not have a material adverse effect on our
financial condition. We also believe that any liability relating to our
historical practices respecting the oil and gas properties will not have a
material adverse effect on our financial condition, results of operations or
business.
As is the case with all companies engaged in similar industries, we face
potential exposure from future claims and lawsuits involving environmental
matters. The matters include soil and water contamination, air pollution, and
personal injuries or property damage allegedly caused by substances which we
manufactured, handled, used, released or disposed of.
Cheyenne Refinery. We are party to an agreement with the state of Wyoming
requiring the investigation and possible eventual remediation of certain areas
of the Cheyenne refinery's property which may have been impacted by past
operational activities. Prior to this agreement, we addressed tasks required
under a consent decree entered by the Wyoming State District Court on November
28, 1984 and involving the state of Wyoming, the Wyoming Department of
Environmental Quality (WDEQ) and the predecessor owners of the Cheyenne
refinery. This action primarily addressed the threat of groundwater and surface
water contamination at the Cheyenne refinery. As a result of these
investigative efforts, substantial capital expenditures and remediation of
conditions found to exist have already taken place or are in progress.
Additionally, the EPA issued an administrative consent order with respect to the
Cheyenne refinery on September 24, 1990 pursuant to RCRA. Among other things,
this order required a technical investigation of the Cheyenne refinery to
determine if certain areas have been adversely impacted by past operational
activities. Based upon the results of the investigation, additional remedial
action could be required by a subsequent administrative order or permit.
On March 21, 1995, we entered into an administrative consent order with the
WDEQ that generally parallels the federal order and replaces the earlier Wyoming
consent decree. Accordingly, the earlier consent decree was dismissed in an
order entered March 21, 1995. The new consent decree eliminates some of the
earlier consent decree's requirements, unifies state and federal regulatory
expectations regarding site investigation and remediation and, consequently,
helps to streamline certain of our current environmental obligations. The EPA
withdrew the above- referenced September 24, 1990 federal order on March 19,
1997 in recognition of Wyoming's assumption of RCRA corrective action authority.
In 1999, a scope of work for the site investigation was agreed upon with the
WDEQ and work was initiated to determine the existence and extent of any
historic soils contamination. At the same time, an understanding was reached
with the WDEQ that any non-safety related on-site remedial activities identified
could be scheduled subsequent to eventual facility closure. The ultimate cost
of any environmental remediation projects that may be identified by the site
investigation required by the new consent order cannot be reasonably estimated
at this time.
We received two notices of violation in December 1998 and June 1999 from the
Air Quality Division of the WDEQ alleging violations of air quality standards
and regulations at the Cheyenne refinery, including air emissions, record
keeping, reporting and monitoring requirements. The WDEQ has referred the
matters to the Wyoming state attorney general's office for action to recover
penalties, and we are currently engaged in settlement negotiations. We do not
believe any payments that may be required will have a material adverse effect on
our financial condition, results of operations or business.
El Dorado Refinery. The El Dorado refinery is subject to a 1988 consent
order with the Kansas Department of Health and the Environment (KDHE). This
order, including various subsequent modifications, requires the refinery to
continue the implementation of a groundwater management program with oversight
provided by the KDHE Bureau of Environmental Remediation. More specifically,
the refinery must continue to operate the hydrocarbon recovery well systems and
containment barriers at the site and conduct sampling from monitoring wells and
surface water stations. Quarterly and annual reports must also be submitted to
the KDHE. The order requires that remediation activities continue until
KDHE-established groundwater criteria or other criteria agreed to by the KDHE
and the refinery are met. Subject to the terms of the purchase and sale
agreement, Equilon will be responsible for the costs of continued compliance
with this order.
The most recent National Pollutant Discharge Elimination System (NDES) permit
issued to the El Dorado refinery requires, in part, the preparation and
submittal of an engineering report identifying certain refinery wastewater
treatment plant upgrades necessary to allow routine compliance with applicable
discharge permit limits. In accordance with the provisions of the purchased and
sale agreement, Equilon will be responsible for the first $2 million of any
required wastewater treatment system upgrades. If required system upgrade costs
exceed this amount, Equilon and
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<PAGE>
Frontier will share, based on a sliding scale percentage, up to another $3
million in upgrade costs. We have obtained a ten-year insurance policy with $25
million coverage for environmental liabilities, with a $500,000 deductible.
This insurance will reimburse us for losses related to some known and unknown
preexisting conditions. Equilon and Frontier will share equally the initial
premium costs of this policy. Subject to the terms of the purchase and sale
agreement, Equilon will be responsible for up to $5 million in costs, in
addition to Equilon's obligation for the wastewater treatment system upgrade,
relating to safety, health and environmental conditions after closing arising
from Equilon's operation of the El Dorado refinery that are not covered under
the ten-year insurance policy.
The EPA's National Enforcement Investigation Center (NEIC) conducted a
multimedia environmental audit at the El Dorado refinery in 1996, with
subsequent requests for additional information. As a result of this audit, the
EPA recently advised Equilon of certain alleged violations of various regulatory
requirements. In advance of instituting formal enforcement action against
Equilon, the EPA has indicated a willingness to enter into a administrative
settlement with Equilon. Equilon is currently negotiating with the EPA
concerning settlement of this matter, and under the terms of the purchase and
sale agreement, Equilon will be solely responsible for any fines, penalties or
requirements resulting from the investigation or subsequent enforcement matters
related to this investigation.
Centennial Pipeline Regulation. We have a 34.72% undivided ownership
interest in the Centennial pipeline. Conoco Pipe Line Company is the sole
operator of the Centennial pipeline as well as the holder of the remaining
ownership interest. The Centennial pipeline runs approximately 88 miles from
Guernsey to Cheyenne, Wyoming. The Cheyenne refinery receives up to 25,000
barrels per day of crude oil feedstock 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 us on a combined basis, based on our throughput and our ownership interest.
The Centennial pipeline is subject to numerous federal, state and local laws and
regulations relating to the protection of health, safety and the environment.
We believe that the Centennial pipeline is operated in accordance with all
applicable laws and regulations. We are not aware of any material pending legal
proceedings to which the Centennial pipeline is a party.
Employees
At December 31, 1999, we employed 708 full-time employees in the refining
operations, 48 at the Houston and Denver offices, 263 at the Cheyenne refinery,
and 397 at the El Dorado refinery. The Cheyenne refinery employees include 86
administrative and technical personnel and 177 union members. The El Dorado
refinery employees include 123 administrative and technical personnel and 274
union members. The union members at our refineries are represented by seven
bargaining units, the largest being the Paper, Allied-Industrial, Chemical and
Energy Workers International Union (PACE) and the others being affiliated with
the AFL-CIO . At the Cheyenne refinery, our current contract with PACE expires
in July 2002 while our current contract with the AFL-CIO affiliated unions
expires in June 2005. At the El Dorado refinery, our current contract with PACE
expires in January 2002.
RISK FACTORS
We have significant indebtedness that may affect our ability to operate our
business.
As of December 31, 1999, we are highly leveraged. We have $283 million
principal amount of total consolidated debt, and we may incur other indebtedness
in the future, including additional borrowing under our $175 million credit
facility. Our pro forma ratio of earnings to fixed charges for the year ended
December 31, 1999 is 1.2:1.0.
Our high level of indebtedness could have important consequences, such as:
- limiting our ability to obtain additional financing to fund our working
capital, expenditures, debt service requirements or for other purposes;
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
service debt;
- limiting our ability to complete with other companies who are not as
highly leveraged; and
- limiting our ability to react to changing market conditions, in our
industry and in our customers' industries and economic downturns.
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<PAGE>
Our ability to satisfy our debt obligations will depend upon our future
operating performance. Prevailing economic conditions and financial, business
and other factors, many of which are beyond our control, will affect our ability
to make payments on our debt obligations. If we cannot generate sufficient cash
from operations to meet our other obligations, we may need to refinance or sell
assets. We cannot assure you that our business will generate sufficient cash
flow, or that we will be able to obtain sufficient funding, to make the payments
required by all of our debt.
We depend upon our subsidiaries for cash to meet our debt obligations. Our
ability to obtain cash from our subsidiaries may be restricted by our banks.
We are a holding company. Our subsidiaries conduct all of our consolidated
operations and own substantially all of our consolidated assets. Consequently,
our cash flow and our ability to meet our debt service obligations depend upon
the cash flow of our subsidiaries and the payment of funds by our subsidiaries
to us in the form of dividends, tax sharing payments or otherwise. Their
ability to make any payments will depend on their earnings, the terms of their
indebtedness, tax considerations and legal restrictions.
Specifically, our subsidiaries are prohibited from transferring cash in the
form of dividends, loans or advances when there are any cash advances
outstanding under the credit facility or when there is a default or event of
default under the credit facility. The credit facility includes certain
financial covenant requirements relating to our working capital, tangible net
worth and earnings before interest, taxes, depreciation and amortization.
Borrowing under the credit facility also must be reduced to zero for at least
five consecutive business days during each calendar year. If we do not do this,
an event of default occurs under our credit facility. Accordingly, the
existence of borrowing or a default or event of default under our credit
facility could adversely affect our ability to have sufficient cash to pay our
obligations.
We cannot assure you that we will be able to manage successfully our increased
scope of operations resulting from the acquisition of the El Dorado refinery.
We cannot assure you that the due diligence we conducted identified all of the
material matters associated with the acquisition.
We closed the acquisition of the El Dorado refinery on November 16, 1999, and
as a consequence, we do not have a long operating history with respect to the El
Dorado refinery. We expect the acquisition of the El Dorado refinery to triple
our annual revenues. However, we cannot assure you that our management will be
able to integrate the operations of the El Dorado refinery with our existing
operations and manage them successfully on an ongoing basis. We retained all of
the existing employees at the El Dorado refinery, but we can make no assurances
that these employees will remain at the refinery.
Additionally, although we conducted a due diligence investigation in
connection with the acquisition, the scope of the investigation, particularly in
light of the environmental and other matters investigated, was necessarily
limited. The acquisition agreement provides for indemnification with respect to
breaches of representations and warranties made therein and for additional
indemnification, subject to certain terms, conditions and limitations, with
respect to other matters. However, we cannot assure you that other material
matters, not identified or fully determined in due diligence, will not
subsequently be identified or that the matters identified will not prove to be
more significant than currently expected, or that the indemnification provisions
and monetary limits thereon associated with the acquisition will be sufficient
to compensate us fully for any environmental or other losses resulting in the
future.
Crude oil prices and refining margins significantly impact our cash flow and
have fluctuated significantly in the past.
Our cash flow from operations is primarily dependent upon producing and
selling quantities of refined products at margins that are high enough to cover
our fixed and variable expenses. In recent years, crude oil costs and crack
spreads have fluctuated substantially. Factors that may affect crude oil costs
and refined product prices include:
- overall demand for crude oil and refined products;
- general economic conditions;
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<PAGE>
- the level of foreign and domestic production of crude oil and refined
products;
- the availability of imports of crude oil and refined products;
- the marketing of alternative and competing fuels; and
- the extent of government regulation.
Crude oil supply contracts are generally short-term contracts with price
terms that change as market prices change. Our crude oil requirements are
supplied from sources that include:
- major oil companies;
- crude oil marketing companies;
- large independent producers; and
- smaller local producers.
The prices we receive for our refined products are affected by:
- global market dynamics;
- product pipeline capacity;
- local market conditions, and
- the level of operations of other refineries in the Plains States and the
Rocky Mountain region.
The price at which we can sell gasoline and other refined products is
strongly influenced by the commodity price of crude oil. Generally, an increase
or decrease in the price of crude oil results in a corresponding increase or
decrease in the price of gasoline and other refined products. However, if crude
oil prices increase significantly, our operating margins would fall unless we
could pass along these price increases to our customers. From time to time, we
purchase forward crude oil supply contracts, but we generally have not hedged
our refined product prices. However, we may in the future hedge refined product
prices in some of the new markets served by the El Dorado refinery.
In addition, our refineries maintain inventories of crude oil, intermediate
products and refined products, the value of each of which is subject to rapid
fluctuations in market prices. We acquired a substantial amount of crude oil,
intermediate product and refined product inventory in connection with the
acquisition of the El Dorado refinery. We record our inventories at the lower
cost (as determined on a FIFO basis) or market price. As a result, a rapid and
significant increase or decrease in the market prices for crude oil or refined
products could have a significant short-term impact on our earnings and cash
flow.
Our profitability is linked to the light/heavy crude oil price spread, which has
recently declined and may continue to decline.
Our profitability, particularly at the Cheyenne refinery, is linked to the
price spread between light and heavy crude oil. We prefer to refine heavy crude
oil because it provides a wider refining margin than does light crude.
Accordingly, any tightening of the light/heavy spread will reduce our
profitability. While the light/heavy spread widened from 1996 to early 1998, it
has fallen since then. Beginning in early 1998, there was a substantial drop in
crude oil prices, which depresses the spread by making it uneconomical for some
production companies to produce heavy crude oil, which sells at a discount to
light crude. Although crude oil prices increased during 1999, the light/heavy
spread has been slow to widen. We cannot assure you that crude oil prices will
remain at their current levels or that the light/heavy spread will increase.
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<PAGE>
Our refineries face operating hazards.
All of our refining activities currently are conducted at the Cheyenne and El
Dorado refineries, which are our principal assets. As a result, our operations
are subject to significant interruption and our profitability impacted if
either refinery experiences a major accident or fire, is damaged by severe
weather or other natural disaster, or otherwise is forced to curtail its
operation or shut down. If the Centennial pipeline, which runs from the
Guernsey Station to the Cheyenne refinery or the Osage pipeline, which runs from
the Cushing, Oklahoma hub to the El Dorado refinery, becomes inoperative, crude
oil would have to be supplied to these refineries through an alternative
pipeline of from additional tank trucks, which could hurt our business and
profitability. In addition, despite our safety procedures, a major accident,
fire or other event could damage either refinery or the environment or cause
personal injuries. Although we maintain business interruption, property and
other insurance against these risks in amounts that we believe are economically
prudent, if either refinery experiences a major accident or fire or an
interruption in supply or operations, our business could be materially adversely
affected. In addition, our refineries consist of many processing units, a
number of which have been in operation for a long time. Although we schedule
down time for repair or "turnaround," for each unit every one to five years, we
cannot assure you that one or more of the units will not require additional,
unscheduled turnarounds for unanticipated maintenance or repairs.
As our commitment to Equiva under the refined product offtake agreement
declines, we will have to find new customers for the gasoline and diesel fuel
produced at the El Dorado refinery. We may not be able to do this successfully.
We have entered into a 15-year refined product offtake agreement with Equiva.
Under this agreement, Equiva will purchase most of the gasoline and diesel
production of the of the El Dorado refinery at market-based prices. Initially,
Equiva will purchase substantially all of the El Dorado refinery's production of
these products. Beginning in 2000, we will retain and market a portion of the
refinery's gasoline and diesel production. This portion will increase by 5,000
barrels per day each year for ten years, beginning at 5,000 barrels per day in
2000, rising to 50,000 barrels per day by 2009 and remaining at this level
through the term of this agreement. Equiva will purchase substantially all
gasoline and diesel production in excess of these amounts. Since we will have
to market an increasing portion of the El Dorado refinery's gasoline and diesel
production over the next ten years, we will have to find new customers for these
refined products. These customers may be in markets that we have not previously
sold to, and it may be difficult for us to find customers for these products.
If we can not find customers in locations convenient to the El Dorado refinery,
our revenues and profits may be reduced.
Raw material supplies are uncertain.
While we believe that an adequate supply of crude oil and other feedstocks
will be available to our refineries to sustain our operations at current levels,
we cannot assure you that this situation will continue. If additional
supplemental crude oil becomes necessary, we may require the consent or
cooperation of third parties and be subject to other conditions beyond our
control. See "Business-Refining Operations-Crude Oil Supply."
We face substantial competition from other refining and pipeline companies.
The refining industry is highly competitive. Many of our competitors are
large, integrated, major or independent oil companies that, because of their
more diverse operations, larger refineries and stronger capitalization, may be
better than we are to withstand volatile industry conditions, including
shortages or excesses of crude oil or refined products or intense price
competition at the wholesale level. Many of these competitors have financial
and other resource substantially greater than ours. In addition, we are aware
of several proposals or industry discussions regarding new or expanded refined
product pipelines that if completed could impact portions of our marketing
areas. The completion of any of these projects would increase competition by
increasing the available capacity to transport refined products to the Plains
States and Rocky Mountain region. See "Business-Refining
Operations-Competition."
Our operating results are seasonal and generally are lower in the first and
fourth quarters of the year.
Demand for gasoline and asphalt products is higher during the summer months
than during the winter months due to seasonal increases in highway traffic and
road construction work. As a result, our operating results for the first and
fourth calender quarters are generally lower than for those for the second and
third quarters. Diesel demand has
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<PAGE>
historically been more stable because two major east-west truck routes and two
major railroads cross one of our principal marketing areas. However, reduced
road construction and agricultural work during the winter months does somewhat
depress demand for diesel in the winter months.
Our operations involve environmental risks that may require us to make
substantial capital expenditures to remain in compliance or that could give rise
to material liabilities.
Our operations are subject to a variety of federal, state and local
environmental laws and regulations governing the discharge of pollutants into
the air and water, product specifications and the generation, treatment,
storage, transportation and disposal of solid and hazardous waste and materials.
Environmental laws and regulations that affect our operations, processes and
margins have become, and are becoming, increasingly stringent. Examples are the
Clean Air Act Amendments of 1990 and the additional environmental regulations
adopted by the United States Environmental Protection Agency (EPA) and state and
local environmental agencies to implement the Clean Air Act Amendments. We
cannot predict the nature, scope or effect of legislation or regulatory
requirements that could be imposed in the future or how existing or future laws
or regulations will be administered or interrupted with respect to products or
activities to which they have not been previously applied. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies of
the regulatory agencies, could adversely affect our financial position and
results of operations and could require us to make substantial expenditures.
See "Business-Government Regulation- Environmental Matters."
Our business is inherently subject to accidental spills, discharges or other
releases of petroleum or hazardous substances that may give rise to liability to
governmental entities or private parties under federal, state or local
environmental laws, as well as under common law. We cannot assure you that
accidental discharges will not occur in the future, that future action will not
be taken in connection with past discharges, that governmental agencies will
assess penalties against us in connection with any past or future contamination,
or that third parties will not assert claims against us for damages allegedly
arising out of any past or future contamination. See "Business-Government
Regulation-Environmental Matters."
We may have labor relations issues as some of our employees are represented by
unions.
The terms of our acquisition of the El Dorado refinery require us to offer
employees at the El Dorado refinery benefits which are reasonably comparable to
those they received from Equilon. If these employees do not believe that the
benefits which we have offered them are reasonably comparable to Equilon's, we
could experience labor relations problems, which could disrupt operations at the
El Dorado refinery. We believe that our current relations with our employees
are good. However, we cannot assure you that our employees will not strike at
some time in the future or that such a strike would not adversely affect our
operations. See "Business - Employees."
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<PAGE>
ITEM 2. PROPERTIES
Refining Operations
We own the 125 acre site of the Cheyenne refinery in Cheyenne, Wyoming and
the 1,100 acre site of the El Dorado refinery in El Dorado, Kansas. The
following tables sets forth each refinery's charges and yields since 1997:
<TABLE>
<CAPTION>
Cheyenne Refinery:
Year Ended December 31, 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Charges (bpd)
Light crude 4,678 2,174 3,162
Heavy crude 32,223 32,303 31,967
Other feed and blend stocks 5,676 5,909 6,154
-------- -------- --------
Total 42,577 40,386 41,283
Manufactured product yields (bpd)
Gasoline 16,889 15,738 17,060
Diesel 12,670 13,097 12,856
Asphalt and other 11,842 10,236 10,200
-------- -------- --------
Total 41,401 39,071 40,116
Total product sales (bpd)
Gasoline 21,976 21,421 20,499
Diesel 12,689 12,484 12,110
Asphalt and other 9,894 8,797 7,949
-------- -------- --------
Total 44,559 42,702 40,558
Operating margin information (per sales bbl) (1)
Average sales price $ 22.73 $ 19.10 $ 25.27
Raw material, freight and other costs
(FIFO inventory accounting) 18.27 13.33 19.74
-------- -------- --------
Product spread 4.46 5.77 5.53
Refinery operating expenses excluding
depreciation 2.77 3.02 3.05
Depreciation .71 .68 .61
-------- -------- --------
Operating margin $ .98 $ 2.07 $ 1.87
Light/heavy crude spread (per bbl) $ 2.17 $ 4.15 $ 3.54
Average sales price (per sales bbl)
Gasoline $ 26.12 $ 21.52 $ 28.83
Diesel 24.78 19.90 27.22
Asphalts and other 12.55 12.07 13.13
</TABLE>
(1) Prior year data restated to conform to current year presentation.
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<PAGE>
<TABLE>
<CAPTION>
El Dorado Refinery (Including preacquisition data):
Year Ended December 31, 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Charges (bpd)
Light crude 27,192 26,132 42,132
Heavy and intermediate crude 76,408 70,441 51,583
Other feed and blend stocks 11,664 12,334 10,795
-------- -------- --------
Total 115,264 108,907 104,510
Manufactured product yields (bpd)
Gasoline 62,620 58,666 54,641
Diesel and jet fuel 38,946 36,652 36,047
Chemicals 1,886 1,959 1,909
Asphalt and other 9,163 9,303 10,258
-------- -------- --------
Total 112,615 106,580 102,855
Total product sales (bpd)
Gasoline 63,040 58,295 54,439
Diesel and jet fuel 33,422 36,789 35,860
Chemicals 1,792 1,970 1,911
Asphalt and other 9,659 9,359 9,749
-------- -------- --------
Total 107,913 106,413 101,959
Operating margin information (per sales bbl)
Average sales price $ 23.52 $ 18.35
Raw material, freight and other costs
(FIFO inventory accounting) 18.63 13.75
-------- --------
Product spread 4.89 4.60
Refinery operating expenses excluding
depreciation 3.65 3.80
Depreciation, Frontier basis .26 .25
-------- --------
Operating margin $ .98 $ .55
Average sales price (per sales bbl)
Gasoline $ 23.86 $ 18.84
Diesel and jet fuel 26.00 17.63
Chemicals 53.20 73.97
Asphalts and other 7.25 6.47
</TABLE>
Other Properties
We lease approximately 6,500 square feet of office space in Houston for its
corporate headquarters under a six and one half year lease expiring in October
2004 and approximately 18,000 square feet in Englewood, Colorado for its
refining operations headquarters under a seven-year lease expiring in July 2002.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings. We are a party
to ordinary routine litigation incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information in the 1999 Annual Report to Shareholders under the heading
"Common Stock" is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information in the 1999 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 1999 Annual Report to Shareholders under the heading
"Management's Discussion and Analysis" is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information in the 1999 Annual Report to Shareholders under the heading
"Market Risks" in incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the data contained in the 1999 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 16
Consolidated Balance Sheets 17
Consolidated Statements of Cash Flows 18
Consolidated Statements of Changes in Shareholders' Equity 19
Notes to Consolidated Financial Statements 20
Report of Independent Public Accountants 28
Selected Quarterly Financial Data 13
*Reference to pages in the 1999 Annual Report to Shareholders (as published),
which portions thereof are incorporated herein by reference.
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<PAGE>
(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).
* 4.2 - Indenture dated as of November 12, 1999, among the Company and Chase
Bank of Texas, National Association, as Trustee relating to the
Company's 11-3/4% Senior Notes due 2009 (filed as Exhibit 4.1 to
Form 8-K dated November 19, 1999).
* 10.1 - Asset Purchase and Sale Agreement among Frontier El Dorado Refining
Company, as buyer, Frontier Oil Corporation, as Guarantor and
Equilon Enterprises LLC, as seller, dated as of October 19, 1999
(filed as Exhibit 10.1 to Form 8-K dated December 1, 1999).
* 10.2 - Revolving Credit Agreement dated as of November 16, 1999 among
Frontier Oil and Refining Company, as borrower, the lenders named
therein, Union Bank of California, N.A., as administrative agent,
documentation agent and lead arranger, and Paribas, as syndication
agent and lead arranger (filed as Exhibit 10.2 to Form 8-K dated
December 1, 1999).
* 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 - Frontier Oil Corporation 1999 Stock Plan (filed as Exhibit 99.1 to
Registration Statement No 333-83971 dated July 29, 1999).
*+ 10.5 - The 1968 Incentive Stock Option Plan as amended and restated (filed
as Exhibit 10.1 to Form 10-K dated December 31, 1987).
*+ 10.6 - The 1977 Stock Option Plan as amended and restated (filed as Exhibit
10.2 to Form 10-K dated December 31, 1989).
*+ 10.7 - 1995 Stock Grant Plan for Non-employee Directors (filed as Exhibit
10.14 to Form 10-Q dated June 30, 1995). *+ 10.8 - Wainoco
Deferred Compensation Plan dated October 29, 1993 (filed as Exhibit
10.19 to Form 10-K dated December 31, 1994).
*+ 10.9 - Wainoco Deferred Compensation Plan for Directors dated May 1, 1994
(filed as Exhibit 10.20 to Form 10-K dated December 31, 1994).
*+ 10.10 - Executive Employment Agreement dated February 25, 1999 between the
Company and James R. Gibbs (filed as Exhibit 10.01 to Form 10-Q
dated March 31, 1999).
*+ 10.11 - Executive Employment Agreement dated February 25, 1999 between the
Company and Julie H. Edwards (filed as Exhibit 10.02 to Form 10-Q
dated March 31, 1999).
*+ 10.12 - Executive Employment Agreement dated February 25, 1999 between the
Company and S. Clark Johnson (filed as Exhibit 10.03 to Form 10-Q
dated March 31, 1999).
*+ 10.13 - Executive Employment Agreement dated February 25, 1999 between the
Company and J. Currie Bechtol (filed as Exhibit 10.04 to Form 10-Q
dated March 31, 1999).
*+ 10.14 - Executive Employment Agreement dated February 25, 1999 between the
Company and Gerald B. Faudel (filed as Exhibit 10.05 to Form 10-Q
dated March 31, 1999).
*+ 10.15 - Executive Employment Agreement dated February 25, 1999 between the
Company and Jon D. Galvin (filed as Exhibit 10.06 to Form 10-Q dated
March 31, 1999). 12.1 - Computation of Ratio of Earnings to Fixed
Charges.
13.1 - Portions of the Company's 1999 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.
(b) Reports on Form 8-K
A report on Form 8-K was filed on November 12, 1999. This report included
Item 5 for the reporting of Other Events.
A report on Form 8-K was filed on November 19, 1999. This report included
Item 5 for the reporting of Other Events.
A report on From 8-K was filed on December 1, 1999. This report included
Item 2 for the reporting of Acquisition or Disposition of Assets.
(c) Exhibits
The Company's 1999 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
- 18 -
<PAGE>
(d) Schedules
Report of Independent Public Accountants on Financial Statement Schedules:
To Frontier Oil Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, 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 14, 2000. 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 14, 2000
- 19 -
<PAGE>
<TABLE>
<CAPTION>
Frontier Oil Corporation
Condensed Financial Information of Registrant
Balance Sheets
As of December 31, Schedule I
(in thousands)
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 37,733 $ 33,234
Receivables 1,037 248
Other current assets 384 51
--------- ---------
Total current assets 39,154 33,533
--------- ---------
Property, Plant and Equipment, at cost -
Furniture, fixtures and other 1,759 502
Less - Accumulated depreciation (431) (324)
--------- ---------
1,328 178
Investment in Subsidiaries 304,675 140,503
Other Assets 11,681 4,577
--------- ---------
$ 356,838 $ 178,791
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 61 $ 454
Other accrued liabilities 7,593 3,162
--------- ---------
Total current liabilities 7,654 3,616
--------- ---------
Deferred Income Taxes 2,694 421
Deferred Revenues and Other 3,001 1,830
Payable to Affiliated Companies 35,522 32,571
Long-Term Debt 257,286 70,000
Shareholders' Equity 50,681 70,353
--------- ---------
$ 356,838 $ 178,791
========= =========
</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.
- 20 -
<PAGE>
<TABLE>
<CAPTION>
Frontier Oil Corporation
Condensed Financial Information of Registrant
Statements of Operations
For the three years ended December 31, Schedule I
(in thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Equity in earnings (loss) of subsidiaries $ (3,322) $ 27,655 $ 22,707
Other income 622 (43) 645
--------- --------- ---------
(2,700) 27,612 23,352
--------- --------- ---------
Costs and Expenses:
Selling and general expenses 3,637 2,433 2,472
Depreciation, depletion and amortization 108 79 71
--------- --------- ---------
3,745 2,512 2,543
--------- --------- ---------
Operating Income (Loss) (6,445) 25,100 20,809
Interest Expense, net 8,751 6,132 12,997
--------- --------- ---------
Income (Loss) from Continuing
Operations Before Income Taxes (15,196) 18,968 7,812
Provision (Benefit) for Income Taxes 1,865 150 -
--------- --------- ---------
Income (Loss) From Continuing Operations (17,061) 18,818 7,812
--------- --------- ---------
Discontinued Operations:
Income from oil and gas operations, net of taxes - - 1,721
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 (17,061) 18,818 22,792
Extraordinary Loss on Retirement of Debt, net of taxes - 3,013 3,917
--------- --------- ---------
Net Income (Loss) $ (17,061) $ 15,805 $ 19,055
========= ========= =========
</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.
- 21 -
<PAGE>
<TABLE>
<CAPTION>
Frontier Oil Corporation
Condensed Financial Information of Registrant
Statements of Cash Flow
For the three years ended December 31, Schedule I
(in thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ (17,061) $ 15,805 $ 19,055
Equity in loss (earnings) of subsidiaries 3,322 (27,655) (22,707)
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 108 79 3,919
Deferred income taxes 1,915 (419) (878)
Other 2,996 2,480 (3,232)
--------- --------- ---------
Net cash used by operating activities (8,720) (6,697) (13,365)
--------- --------- ---------
Investing Activities
Additions to property, plant and equipment (1,258) (34) (3,333)
Investment in subsidiaries (172,627) - -
Sale of Canadian oil and gas properties - - 91,307
Other - - (590)
--------- --------- ---------
Net cash provided by (used by) investing activities (173,885) (34) 87,384
--------- --------- ---------
Financing Activities
Long-term borrowings:
11-3/4% Senior Notes 187,268 - -
9-1/8% Senior Notes - 70,000 -
12% Senior Notes - - 2,000
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 (6,260) (2,575) -
Issuance of common stock 739 816 3,109
Purchase of treasury stock (3,361) (2,933) -
Change in intercompany balances, net 2,951 (162) (53)
Dividends paid to Parent 5,756 25,930 21,122
Other 11 - -
--------- --------- ---------
Net cash provided by (used by) financing activities 187,104 19,682 (56,254)
Effect of exchange rate changes on cash - - (10)
--------- --------- ---------
Increase in cash and cash equivalents 4,499 12,951 17,755
Cash and cash equivalents, beginning of period 33,234 20,283 2,528
--------- --------- ---------
Cash and cash equivalents, end of period $ 37,733 $ 33,234 $ 20,283
========= ========= =========
</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.
- 22 -
<PAGE>
Frontier Oil Corporation
Notes to Condensed Financial Information of Registrant
December 31, 1999 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
1999 Annual Report to Shareholders.
(2) Sale of oil and gas properties
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.
Operating results for the Company's oil and gas operations are presented as
discontinued operations.
(3) Canadian tax assessment
Prior to the sale of our Canadian oil and gas operations in June 1997, we
conducted business in Canada. As a result of an audit in 1999 of our Canadian
tax returns for the years 1995, 1996 and 1997 conducted by the Canada Customs
and Revenue Agency (formerly Revenue Canada), we were assessed for approximately
C$27 million of additional taxes. More than C$20 million of this assessment
relates to certain foreign exploration and development expenditure deductions.
The Department of Finance in Canada has drafted and released proposed
legislation that would eliminate this portion of the assessment. Approximately
C$5 million of the assessment relates to the deductibility of certain interest
costs in 1995, which were not challenged by the Canada Customs and Revenue
Agency in its audits of previous periods. Other deductions of approximately C$2
million comprise the balance of the assessment. We have filed a Notice of
Objection to portions of the assessment totaling approximately C$25 million and
additionally, are awaiting, as is the Canada Customs and Revenue Agency, the
passing of legislation that will resolve the foreign exploration and development
expenditure deduction portion of the assessment, before arguing the remaining
assessment. We intend to vigorously contest the tax assessment and believe that
we will be successful in our appeal, either at the regulatory level or before
the Courts. While we acknowledge the uncertainties associated with tax
disputes, management currently believes that this matter will be resolved
without a material effect on our financial position or results of operations.
(4) Long-term debt
The components (in thousands) of long-term debt are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
11-3/4% Senior Notes, net of unamortized discount $ 187,286 $ -
9-1/8% Senior Notes 70,000 70,000
--------- ---------
$ 257,286 $ 70,000
========= =========
</TABLE>
(5) Five-year maturities of long-term debt
The 9-1/8% Senior Notes are due 2006 and the 11-3/4% Senior Notes are due
2009, until then there are no maturities of long-term debt.
- 23 -
<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
Chairman of the Board, President and
Chief Executive Officer
(chief executive officer)
Date: February 28, 2000
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/ G. Clyde Buck
- ------------------------------------ -------------------------------
James R. Gibbs G. Clyde Buck
Chairman of the Board, President and Director
Chief Executive Officer and Director
(chief executive officer)
/s/ Julie H. Edwards /s/ Paul B. Loyd, Jr.
- ------------------------------------ -------------------------------
Julie H. Edwards Paul B. Loyd, Jr.
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 28, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The terms "Frontier" and "we" refer to Frontier Oil Corporation and its
subsidiaries. On November 16, 1999, we acquired the 110,000 barrels per day
crude oil refinery located in El Dorado, Kansas from Equilon Enterprises LLC
("Equilon"). Operating results for this refinery have been included in our
financial information from November 17, 1999.
We experience stronger demand for our refined products, particularly
gasoline and asphalt, during the summer months due to seasonal increases in
highway traffic and road construction work. As a result, our 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 our business,
we invest in working capital during the first half of the year and recover
working capital investment in the second half of the year.
Result of Operations
1999 Compared with 1998. We had a net loss for the year ended December 31,
1999 of $17.1 million, or $.62 per share, compared to net income from continuing
operations of $18.8 million, or $.65 per diluted share for 1998. Net income for
the year ended December 31, 1998 was $15.8 million, or $.55 per diluted share.
The results for the year ended December 31, 1998 included a $3.0 million
extraordinary loss on early retirement of debt.
Operating income decreased $30.9 million in 1999 versus 1998 due to a
decrease in the refined product spread (revenues less material, freight and
other costs) of $17.6 million, increases in refinery operating expenses of $10.2
million, depreciation of $2.3 million, and selling and general costs of $1.2
million, offset by an increase in other income of $456,000.
The refined product spread was $3.42 per barrel for the year ended December
31, 1999 compared to $5.77 per barrel in 1998. This decrease was due to
significantly lower light product margins, a significant decrease in the
light/heavy crude spread and lower by-product margins due to higher crude oil
prices, offset by inventory profits. High nationwide levels of gasoline and
diesel inventories kept margins at their lowest levels since 1995 during the
first six months of 1999. Although margins improved during the third quarter of
1999, they again turned downward in the fourth quarter. An industry publication
reported that refining margins may prove to be the worst of the decade. High
crude oil prices and weak weather-related product demand have caused extremely
low to negative fourth quarter margins.
The light/heavy crude spread for the Cheyenne refinery was $2.17 per barrel
for the year ended December 31, 1999, the lowest ever experienced by Frontier
for such a lengthy period. In comparison, the light/heavy spread for 1998 was
$4.15 per barrel. The tightening spread was caused by low crude oil prices
during 1998 and the resulting reduced supply of heavy crude oil as certain heavy
crude oil was uneconomic to produce. Although crude oil prices began to
increase in the second quarter of 1999, the light/heavy spread has been slow to
widen. The heavy crude oil spread for the Cheyenne refinery is directly linked
to pricing of Canadian heavy crude oil. Late in the fourth quarter, the
Canadian heavy crude oil price spread began to widen due to seasonal declines in
asphalt needs. However, demand for Canadian heavy crude oil remains strong into
2000 as it is attractively priced versus other foreign supplies. We expect that
for 2000, the heavy crude oil spread for the Cheyenne refinery will widen, but
whether it will widen to more historical pricing relationships based on current
crude oil prices will depend on Canadian and other worldwide heavy crude oil
supplies.
The price of crude oil reached its low point in December 1998, when crude
closed at below $10.75 per barrel on the New York Mercantile Exchange and stayed
at or below $13.00 per barrel during January and February 1999. Commencing in
March 1999, with the announcement of OPEC production cuts, the price of crude
oil increased and ended December at $25.60 per barrel. For the year ended
December 31, 1999, we realized a benefit to the refined product spread for the
Cheyenne refinery for inventory profits of approximately $13.2 million because
of increasing crude oil prices. For the year ended December 31, 1998, we
realized a reduction to the refined product spread of approximately $5.0 million
because of declines in crude oil prices. Inventories are recorded at the lower
of cost on a first in, first out (FIFO) basis or market.
- 9 -
<PAGE>
Refined product revenues increased $203.8 million or 68% for the year ended
December 31, 1999 compared to 1998 due to increased sales prices and increased
sales volumes from the El Dorado refinery acquisition. Average gasoline prices
increased $5.09 per barrel, average diesel prices increased $6.02 per barrel and
there was a 36% overall increase in sales volumes. Yields of gasoline increased
58% while yields of diesel increased 32% in 1999 compared to 1998.
Other income increased $456,000 to $2.2 million for the year ended December
31, 1999 compared to the same period in 1998 due to a $516,000 legal settlement
received in 1999.
Refining operating costs increased $231.6 million or 91% for the year ended
December 31, 1999 compared to 1998 due to the El Dorado refinery acquisition and
increases in material, freight and other costs and refinery operating expenses.
Material, freight and other costs were $20.31 per barrel in 1999 compared to
$13.33 per barrel in 1998 primarily due to higher crude oil prices, the use of a
lower percentage of less expensive heavy crude oil and a lower light/heavy
spread. Expressed as a percentage of the total crude oil charge, the Cheyenne
refinery heavy crude oil utilization rate decreased to 87% in the year ended
December 31, 1999 from 94% in 1998. The light/heavy spread for the Cheyenne
refinery decreased 48% to average $2.17 per barrel for 1999. Refinery operating
expenses averaged $2.71 per barrel consisting of $2.52 per barrel at the El
Dorado refinery (including chemical operations) and $2.77 per barrel for the
Cheyenne refinery. The Cheyenne refinery operating expense per barrel decreased
$.25 per barrel to $2.77 per barrel in 1999 due to higher thruput, lower
chemical usage and lower maintenance costs.
Selling and general expenses increased $1.2 million or 15% for the year
ended December 31, 1999 because of increased staffing needs and other costs
resulting from the El Dorado refinery acquisition and increases in salaries and
benefits.
Depreciation increased $2.3 million or 22% for the year ended December 31,
1999 as compared to 1998 because of the El Dorado acquisition and increases in
capital investment. The 1998 depreciation provision also included a write-off
of certain equipment replaced in connection with turnaround work.
The interest expense increase of $3.2 million or 48% for the year ended
December 31, 1999 was attributable to higher debt levels used to purchase the El
Dorado refinery and the crude oil, intermediate and finished product inventory
of the El Dorado refinery. Average debt increased to $108.1 million for the
year ended December 31, 1999 from $79.2 million for the year ended December 31,
1998.
Income tax expense of $1.9 million for the year ended December 31, 1999 was
for deferred state income taxes. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", deferred taxes are
provided for the tax effect of cumulative to date net taxable book-tax
differences, offset by available net operating losses. While we have
substantial net operating losses available to offset federal income taxes, the
El Dorado refinery acquisition will result in a significant portion of future
taxable income being apportioned to Kansas for state income tax purposes.
1998 Compared with 1997. We 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 sale
of the Canadian oil and gas operations closed on June 16, 1997, thus the 1997
operating results for the Company's oil and gas exploration and production
segment have been presented as discontinued operations in the accompanying
financial statements.
Operating income increased $4.0 million in 1998 as compared to 1997 due to
an increase in the refined product spread (revenues less material, freight and
other costs) of $8.2 million offset by a decrease in other income of $621,000
and increases in refinery operating expenses of $1.8 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 $5.77 per
- 10 -
<PAGE>
bbl compared to $5.53 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 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, freight and
other costs offset by an increase in refinery operating expenses. Material,
freight and other costs per bbl decreased 32% or $6.41 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
$1.9 million in 1998 as compared to 1997, and refinery operating expense per bbl
decreased $.03 per bbl to $3.02 per bbl in 1998. The increase in refinery
operating expenses during 1998 was due to higher natural gas usage during the
turnaround and increased chemical usage due to unit operating problems which
were corrected during the turnaround.
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 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 were major factors contributing to the decline in the
light/heavy spread during 1998. 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.
Liquidity and Capital Resources
On November 5, 1999, we issued $190 million principal amount of 11-3/4%
Senior Notes due 2009. The Notes were issued at a price of 98.562%. Net
proceeds of the offering were approximately $181.0 million. We used the net
proceeds to fund the $170 million purchase price of the El Dorado refinery and
for general corporate purposes. We also purchased the crude oil, intermediate
product and the refined product inventory of the
- 11 -
<PAGE>
El Dorado refinery at closing for $53.1 million. We borrowed under the credit
facility to help finance the inventory purchases.
On February 9, 1998, we 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 were repurchased by the
Company for $651,000.
On September 1, 1998, we announced that the Board of Directors had approved
a stock repurchase program of up to three million shares of common stock. In
1998, 469,700 shares of common stock were purchased for $2.3 million. In 1999,
an additional 627,700 shares of common stock were purchased for $3.4 million.
Net cash used by operating activities was $11.3 million for the year ended
December 31, 1999 while $31.3 million cash was provided by operating activities
for the year ended December 31, 1998. Working capital changes required $9.7
million of cash flows in 1999 while providing $1.7 million of cash flows in
1998. The 1999 use reflects the purchase of crude oil, intermediate product and
finished product inventory of the El Dorado refinery.
At December 31, 1999, we had $38.3 million of cash and $45.7 million
available under the revolving credit facility line of credit. We had working
capital of $24.8 million at December 31, 1999. Under revolving credit facility
conditions, we are required to maintain $25 million in cash through March 31,
2001. However, if EBITDA (earnings before interest, taxes, depreciation and
amortization) for the six months ended June 30, 2000 is at least $40 million,
the requirement will be reduced to $12.5 million, and if EBITDA for the nine
months ended September 30, 2000 is at least $50 million, the requirement will be
eliminated.
Capital expenditures for 1999 were $171.6 million for the El Dorado
refinery acquisition and $9.2 million for other capital expenditures. Capital
expenditures for 1998 were $16.8 million. Capital expenditures of approximately
$13.2 million are planned for 2000.
We are highly leveraged. As of December 31, 1999, we have $283 million of
total consolidated debt and shareholders' equity of $50.7 million. It is
anticipated that cash generated from operating activities will be sufficient to
meet our 2000 investment and debt obligations. If we cannot generate sufficient
cash from operating activities to meet our obligations we may reduce capital
expenditures, sell assets, raise capital or refinance our debt obligations. We
anticipate first quarter 2000 cash flows from operating activities will be
negative. We believe we have sufficient cash and available borrowing capacity
under the revolving credit facility to meet our obligations until seasonal and
industry improvements begin.
Under certain conditions, the revolving credit facility restricts the
transfer of cash in the form of dividends, loans or advances to the Company from
its subsidiaries. We do not believe these restrictions limit our current
operating plans.
Market Risks
Impact of Changing Prices. Our 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 refineries' inventory.
Hedging Activities. At times, we engage in futures transactions in our
refining operations for the purpose of hedging our refining position. We
accomplish this by purchasing forward crude oil supply contracts, but we
generally have not hedged refined product prices. However, we may in the future
hedge refined product prices in some of the new markets served by the El Dorado
refinery. To date, the use of futures transactions has been limited to protect
against price declines for excess inventory volumes and foreign crude oil
purchases. No futures transactions were entered into during 1999 to hedge
excess inventories. Since the El Dorado refinery acquisition we use futures
transactions to price foreign crude oil at the price when the crude oil is
processed by the El Dorado refinery instead of when purchased. Foreign crude
- 12 -
<PAGE>
oil delivery times can exceed one month from when the purchase is made. In
addition, we, at times, engage in futures transactions for the purchase of
natural gas at fixed prices. The refineries consume natural gas 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. Futures contracts and options may also, in the future, be used to
fix margins in our refining and marketing operations. In 1999, we recognized
losses on futures transactions to purchase foreign crude oil of $3.6 million and
from forward purchases of natural gas of $62,000. As of December 31, 1999 we
had entered into futures contracts for the purchase of foreign crude oil and
purchase of natural gas. We had sold approximately 1.5 million barrels of crude
oil on the New York Mercantile Exchange at an average price of $25.86 for
repurchase through March 2000. We had also purchased an average 7,000 mcf per
day of natural gas through March 2000 at $2.13 per mcf. The estimated fair
value of our open crude oil futures contracts and natural gas futures contracts
at December 31, 1999 were $456,000 and $122,000, respectively.
Interest Rate Risk. Borrowings under our revolving credit facility bear a
current market rate of interest. Our $70.0 million of 9-1/8% Senior Notes, due
2006, have a fixed interest rate, and we have no current plans to redeem these
notes. Our $190.0 million of 11-3/4% Senior Notes, due 2009, also have a fixed
interest rate. Accordingly, our 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, 1999 was $63 million and the estimated fair
value of the 11-3/4% Senior Notes was $187.2 million.
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL AND OPERATING DATA
(unaudited, dollars in thousands except per share)
1999 1998
-------------------------------------------- ------------------------------------------
Fourth (1) Third Second First Fourth Third Second First
----------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $240,673 $116,444 $ 90,266 $ 56,217 $ 64,555 $ 80,863 $ 84,259 $ 69,691
Operating income (loss) (18,028) 10,247 5,674 (3,142) 2,581 11,015 10,973 1,131
Income (loss) from continuing operations (24,487) 8,358 3,914 (4,846) 1,004 9,448 9,205 (839)
Income (loss) before extraordinary item (24,487) 8,358 3,914 (4,846) 1,004 9,448 9,205 (839)
Extraordinary loss, net of taxes - - - - - - - 3,013
Net income (loss) (24,487) 8,358 3,914 (4,846) 1,004 9,448 9,205 (3,852)
Basic earnings (loss) per share:
Continuing operations ($0.90) $0.31 $0.14 ($0.18) $0.04 $0.34 $0.33 ($0.03)
Net income (loss) ($0.90) $0.31 $0.14 ($0.18) $0.04 $0.34 $0.33 ($0.14)
Diluted earnings (loss) per share:
Continuing operations ($0.90) $0.30 $0.14 ($0.18) $0.04 $0.33 $0.32 ($0.03)
Net income (loss) ($0.90) $0.30 $0.14 ($0.18) $0.04 $0.33 $0.32 ($0.14)
EBITDA (2) (13,686) 13,218 8,568 (301) 5,365 13,743 13,795 3,507
Net cash provided by (used in) operating
activities (19,335) 12,729 7,915 (12,641) 8,009 17,241 11,975 (5,962)
Refining operations
Total charges (bpd) 100,785 45,773 45,100 36,378 40,450 41,782 37,953 41,355
Gasoline yields (bpd) 49,002 17,437 17,600 15,366 16,092 16,233 13,368 17,268
Diesel yields (bpd) 31,964 13,115 13,212 10,886 13,975 11,951 12,248 14,228
Total product sales (bpd) 97,494 48,984 45,976 38,565 40,993 45,010 44,479 40,293
Average light/heavy spread based on
delivered crude costs for the Cheyenne
refinery(per bbl) $2.63 $1.89 $2.21 $1.94 $3.40 $3.66 $4.81 $4.72
</TABLE>
(1) Includes El Dorado refinery financial and operating data from November 17,
1999.
(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. In addition, EBITDA should not be
considered as an alternative to net income or operating income, as an
indication of operating performance or as an alternative to operating cash
flow as a measure of liquidity.
- 13 -
<PAGE>
Environmental
Numerous local, state and federal laws, rules and regulations relating to
the environment are applicable to our operations. As a result, we fall under
the jurisdiction of numerous state and federal agencies for administration and
are exposed to the possibility of judicial or administrative actions for
remediation and/or penalties brought by those agencies. The Cheyenne refinery
is party to one consent decree requiring the investigation and, in certain
instances, mitigation of environmental impacts resulting from past operational
activities. The El Dorado refinery is party to a consent decree regarding the
implementation of a groundwater management program. Equilon will be responsible
for the cost of continued compliance with this order. We have obtained a
ten-year insurance policy with $25 million coverage for environmental
liabilities, with a $500,000 deductible. This insurance will reimburse us for
losses related to some known and some unknown pre-existing conditions at the El
Dorado refinery. Equilon and Frontier will share the premium costs of this
policy. In addition, Equilon will be responsible for up to $5 million in costs
(including insurance premiums) relating to safety, health and environmental
conditions that are not covered under the ten-year insurance policy. 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.
Canadian Tax Assessment
Prior to the sale of our Canadian oil and gas operations in June 1997, we
conducted business in Canada. As a result of an audit in 1999 of our Canadian
tax returns for the years 1995, 1996 and 1997 conducted by the Canada Customs
and Revenue Agency (formerly Revenue Canada), we were assessed for approximately
C$27 million of additional taxes. More than C$20 million of this assessment
relates to certain foreign exploration and development expenditure deductions.
The Department of Finance in Canada has drafted and released proposed
legislation that would eliminate this portion of the assessment. Approximately
C$5 million of the assessment relates to the deductibility of certain interest
costs in 1995, which were not challenged by the Canada Customs and Revenue
Agency in its audits of previous periods. Other deductions of approximately C$2
million comprise the balance of the assessment. We have filed a Notice of
Objection to portions of the assessment totaling approximately C$25 million and
additionally, are awaiting, as is the Canada Customs and Revenue Agency, the
passing of legislation that will resolve the foreign exploration and development
expenditure deduction portion of the assessment, before arguing the remaining
assessment. We intend to vigorously contest the tax assessment and believe that
we will be successful in our appeal, either at the regulatory level or before
the Courts. While we acknowledge the uncertainties associated with tax
disputes, management currently believes that this matter will be resolved
without a material effect on our financial position or results of operations.
<TABLE>
<CAPTION>
FIVE YEAR FINANCIAL DATA
(in thousands except per share)
1999 (1) 1998 1997 1996 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $503,600 $299,368 $376,418 $383,373 $331,832
Operating income (loss) (5,249) 25,700 21,703 5,585 (1,106)
Income (loss) from continuing operations (17,061) 18,818 7,812 (11,644) (19,336)
Income (loss) from discontinued operations, net of taxes (2) - - 15,160 4,752 211
Income (loss) before extraordinary item (17,061) 18,818 22,972 (6,892) (19,125)
Extraordinary loss, net of taxes - 3,013 3,917 - -
Net income (loss) (17,061) 15,805 19,055 (6,892) (19,125)
Basic earnings (loss) per share:
Continuing operations ($0.62) $0.67 $0.28 ($0.43) ($0.71)
Net income (loss) ($0.62) $0.56 $0.69 ($0.25) ($0.70)
Diluted earnings (loss) per share:
Continuing operations ($0.62) $0.65 $0.28 ($0.43) ($0.71)
Net income (loss) ($0.62) $0.55 $0.69 ($0.25) ($0.70)
EBITDA (3) 7,799 36,410 30,873 14,603 7,365
Net cash (used by) provided by operating activities (11,332) 31,263 12,498 8,465 9,878
Working capital (deficit) 24,832 30,125 20,928 (3,752) (2,485)
Total assets 521,493 182,026 177,915 239,865 238,382
Long-term debt 257,286 70,000 70,572 145,928 145,377
Shareholders' equity 50,681 70,353 55,934 25,269 32,464
Capital expenditures from continuing operations 181,703 16,763 5,675 4,760 5,217
Dividends declared - - - - -
</TABLE>
(1) Includes El Dorado refinery financial data from November 17, 1999.
(2) Discontinued operations reflected in the above periods represent the
Company's oil and gas operating segment, comprising the Canadian and United
States oil and gas properties. On June 16, 1997, the Company completed the
Canadian Disposition. The Company completed the U.S. dispositon during 1995.
(3) 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>
Year 2000
Many of the computer systems used by us today were designed and developed
using two digits, rather than four, to specify the year. At January 1, 2000, it
was anticipated this could cause many computer applications to fail completely
or to create erroneous results unless corrective measures were taken. The Year
2000 issue has caused no disruption to our operations and only minor disruption
to our computer applications, the cost of which has been insignificant. There
may be Year 2000 related problems that may yet occur, but we believe they will
not have a material effect on our operations and will not create material costs.
<TABLE>
<CAPTION>
FIVE YEAR OPERATING DATA
1999 (1) 1998 1997 1996 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Charges (bpd)
Light crude 10,250 2,174 3,162 4,322 8,098
Heavy crude (2) 39,315 32,303 31,967 31,677 27,174
Other feed and blend stocks 7,589 5,909 6,154 5,192 5,072
--------- -------- -------- -------- --------
Total charges 57,154 40,386 41,283 41,191 40,344
Manufactured product yields (bpd)
Gasoline 24,923 15,738 17,060 16,825 17,263
Diesel and jet fuel 17,340 13,097 12,856 13,712 13,744
Chemicals 232 - - - -
Asphalt and other 12,982 10,236 10,200 9,215 7,951
--------- -------- -------- -------- --------
Total manufactured product yields 55,477 39,071 40,116 39,752 38,958
Product sales (bpd)
Gasoline 29,728 21,421 20,499 20,311 20,767
Diesel and jet fuel 17,156 12,484 12,110 12,561 13,265
Chemicals 44 - - - -
Asphalt and other 10,965 8,797 7,949 7,306 6,781
--------- -------- -------- -------- --------
Total product sales 57,893 42,702 40,558 40,178 40,813
Average sales price (per bbl)
Gasoline $26.61 $21.52 $28.83 $28.78 $24.68
Diesel and jet fuel 25.92 19.90 27.22 28.89 23.48
Chemicals 57.50 - - - -
Asphalt and other 12.36 12.07 13.13 13.21 11.73
Operating margin information
(per sales bbl) (3)
Average sales price $23.73 $19.10 $25.27 $25.98 $22.14
Material, freight and other costs 20.31 13.33 19.74 21.79 18.42
--------- -------- -------- -------- --------
Product spread 3.42 5.77 5.53 4.19 3.72
Operating expenses excluding depreciation 2.71 3.02 3.05 2.86 2.88
Depreciation 0.61 0.68 0.61 0.59 0.55
--------- -------- -------- -------- --------
Operating margin 0.10 2.07 1.87 0.74 0.29
Average light/heavy spread based on
delivered crude costs for the Cheyenne
refinery (per bbl) 2.17 4.15 3.54 2.56 2.94
</TABLE>
(1) Includes El Dorado refinery operating data from November 17, 1999.
(2) Includes intermediate varieties of crude oil used by the El Dorado refinery.
(3) Prior year data restated to conform to current year presentation.
- 15 -
<PAGE>
<TABLE>
<CAPTION>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Year Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Refined products $ 501,438 $ 297,662 $ 374,091
Other 2,162 1,706 2,327
--------- --------- ---------
503,600 299,368 376,418
--------- --------- ---------
Costs and Expenses:
Refining operating costs 486,329 254,733 337,495
Selling and general expenses 9,472 8,225 8,050
Depreciation 13,048 10,710 9,170
--------- --------- ---------
508,849 273,668 354,715
--------- --------- ---------
Operating Income (Loss) (5,249) 25,700 21,703
Interest Expense, net 9,947 6,732 13,891
--------- --------- ---------
Income (Loss) From Continuing
Operations Before Income Taxes (15,196) 18,968 7,812
Provision for Income Taxes 1,865 150 -
Income (Loss) From Continuing Operations (17,061) 18,818 7,812
Discontinued Operations:
Income from oil and gas operations, net of taxes - - 1,721
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 (17,061) 18,818 22,972
Extraordinary Loss on Retirement of Debt, net of taxes - 3,013 3,917
--------- --------- ---------
Net Income (Loss) $ (17,061) $ 15,805 $ 19,055
========= ========= =========
Basic Earnings (Loss) Per Share of Common Stock:
Continuing Operations $ (.62) $ .67 $ .28
Discontinued Operations - - .55
Extraordinary Loss - (.11) (.14)
--------- --------- ---------
Net Income (Loss) $ (.62) $ .56 $ .69
========= ========= =========
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing Operations $ (.62) $ .65 $ .28
Discontinued Operations - - .55
Extraordinary Loss - (.10) (.14)
--------- --------- ---------
Net Income (Loss) $ (.62) $ .55 $ .69
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 16 -
<PAGE>
<TABLE>
<CAPTION>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
December 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash, including cash equivalents of $35,771 and $31,781
at December 31, 1999 and 1998, respectively $ 38,345 $ 33,589
Trade receivables, less allowance for doubtful accounts
of $500 at December 31, 1999 and 1998 38,563 9,986
Other receivables 14,512 1,035
Inventory of crude oil, products and other 100,359 20,269
Other current assets 1,211 560
--------- ---------
Total current assets 192,990 65,439
--------- ---------
Property, Plant and Equipment, at cost:
Refineries and pipeline 377,613 164,664
Furniture, fixtures and other equipment 4,956 3,426
--------- ---------
382,569 168,090
Less - Accumulated depreciation 69,261 56,217
--------- ---------
313,308 111,873
Other Assets 15,195 4,714
--------- ---------
$ 521,493 $ 182,026
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 121,385 $ 23,492
Revolving credit facility 26,000 3,800
Accrued turnaround cost 8,763 1,339
Accrued liabilities and other 6,554 4,280
Accrued interest 5,456 2,403
--------- ---------
Total current liabilities 168,158 35,314
Long-Term Debt 257,286 70,000
Long-Term Accrued Turnaround Cost 20,685 2,346
Post-Retirement Employee Liabilities 17,287 -
Deferred Credits and Other 4,002 2,892
Deferred Income Taxes 3,394 1,121
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,
28,542,330 shares and 28,385,584 shares
issued in 1999 and 1998, respectively 57,294 57,278
Paid-in capital 87,028 86,305
Retained earnings (deficit) (87,122) (70,061)
Treasury stock, 1,230,900 shares and 605,700 shares
at December 31, 1999 and 1998, respectively (6,519) (3,169)
--------- ---------
Total shareholders' equity 50,681 70,353
--------- ---------
$ 521,493 $ 182,026
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 17 -
<PAGE>
<TABLE>
<CAPTION>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (loss) $ (17,061) $ 15,805 $ 19,055
Extraordinary loss on retirement of debt - 3,013 3,917
Depreciation, depletion and amortization 13,048 10,710 13,018
Deferred income taxes 1,915 (419) (878)
Gain on disposal of Canadian oil and gas properties - - (23,301)
Recognition of cumulative translation adjustment - - 9,862
Other 511 439 676
Changes in components of working capital from operations:
(Increase) decrease in receivables (42,054) 6,183 905
(Increase) decrease in inventory (73,233) 7,397 1,856
(Increase) decrease in other current assets (293) 831 (642)
Increase (decrease) in accounts payable 97,382 (9,196) (8,617)
Increase (decrease) in accrued liabilities and other 8,453 (3,500) (3,353)
--------- --------- ---------
Net cash (used in) provided by operating activities (11,332) 31,263 12,498
INVESTING ACTIVITIES:
Acquisition of El Dorado refinery (171,627) - -
Additions to property, plant and equipment:
Continuing operations (9,215) (16,763) (5,675)
Discontinued operations - - (3,298)
Sales of oil and gas and other properties - - 91,307
Other (861) - (590)
--------- --------- ---------
Net cash (used in) provided by
investing activities (181,703) (16,763) 81,744
FINANCING ACTIVITIES:
Borrowings:
11-3/4% Senior notes 187,268 - -
9-1/8% Senior notes - 70,000 -
Revolving credit facility 22,200 3,800 -
12% Senior notes - - 2,000
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 (8,953) (2,575) -
Issuance of common stock 739 816 3,109
Purchase of treasury stock (3,361) (2,933) -
Other (102) (360) (357)
--------- --------- ---------
Net cash provided by (used in)
financing activities 197,791 (2,646) (77,680)
Effect of exchange rate changes on cash - - (10)
--------- --------- ---------
Increase in cash and cash equivalents 4,756 11,854 16,552
Cash and cash equivalents, beginning of period 33,589 21,735 5,183
--------- --------- ---------
Cash and cash equivalents, end of period $ 38,345 $ 33,589 $ 21,735
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands except shares)
Common Stock
---------------------- Accumulated
Number Other Retained
of Shares Treasury Paid-In Comprehensive Earnings Comprehensive
Issued Amount Stock Capital Income (Deficit) Total Income (Loss)
----------- --------- --------- --------- ------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Comprehensive income (loss)
Net loss -- -- -- -- -- (17,061) (17,061) $ (17,061)
---------
Comprehensive income (loss) $ (17,061)
Shares issued under: =========
Stock option plan 131,746 13 -- 565 -- -- 578
Directors' stock plan -- -- 11 -- -- -- 11
Other stock issuances 25,000 3 -- 158 -- -- 161
Shares purchased under stock
repurchase plans (1) -- -- (3,361) -- -- -- (3,361)
----------- --------- --------- --------- ------------- ---------- ---------
DECEMBER 31, 1999 28,542,330 $ 57,294 $ (6,519) $ 87,028 $ -- $ (87,122) $ 50,681
=========== ========= ========= ========= ============= ========== =========
</TABLE>
(1) Shares purchased under stock repurchase plans during the years ended
December 31, 1999 and 1998 were 627,700 shares and 553,200 shares,
respectively.
The accompanying notes are an integral part of these financial statements.
- 19 -
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Nature of Operations
The financial statements include the accounts of Frontier Oil Corporation, a
Wyoming corporation, and its wholly-owned subsidiaries, including Frontier
Holdings Inc., collectively referred to as Frontier or the Company. The Company
is an independent energy company engaged in crude oil refining and wholesale
marketing of refined petroleum products business (the "refining operations").
The Company operates refineries ("the Refineries") in Cheyenne, Wyoming and
El Dorado, Kansas with a total crude oil capacity of over 150,000 barrels per
day. The Company focuses its marketing efforts in the Rocky Mountain and Plains
States regions of the United States. The Company purchases the crude oil to be
refined and markets the refined petroleum products produced, including various
grades of gasoline, diesel fuel, jet fuel, asphalt, chemicals and petroleum
coke.
Prior to the third quarter of 1997, the Company also explored for and
produced oil and gas in Canada. Operating results for the Company's oil and gas
operations are presented as discontinued operations in the accompanying
statements of operations.
2. Significant Accounting Policies
Property, Plant and Equipment
Property, plant and equipment is depreciated based on the straight-line
method over the 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. The costs for turnarounds
(scheduled and required shutdown of refinery operating units for significant
overhaul and refurbishment) 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.
<TABLE>
<CAPTION>
Schedule of Components of Inventory
(in thousands)
December 31,
1999 1998
--------- ---------
<S> <C> <C>
Crude oil $ 24,852 $ 1,407
Unfinished products 24,779 2,577
Finished products 35,582 8,669
Process chemicals 2,088 1,333
Repairs and maintenance supplies and other 13,058 6,283
--------- ---------
$ 100,359 $ 20,269
========= =========
</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.
Derivative Instruments and Hedging Activities
The Company, at times, enters into commodity derivative contracts to manage
its price exposure to its inventory positions, purchases of foreign crude oil
and consumption of natural gas in the refining process. The commodity
derivative contracts used by the Company may take the form of futures contracts
or price swaps and are entered into with reputable counterparties. The Company
believes there is minimal credit risk with respect to its counterparties. The
Company accounts for its commodity derivative contracts under the hedge (or
deferral) method of accounting.
- 20 -
<PAGE>
As such, gains or losses on commodity derivative contracts are recognized in
refining operating costs when the associated transactions are consummated.
Interest
Interest is reported net of interest income and interest capitalized.
Interest income of $1.5 million, $1.5 million and $2.0 million was recorded in
the years ended December 31, 1999, 1998 and 1997, respectively. During 1998,
the Company capitalized interest of $101,000. The Company capitalizes interest
on debt incurred to fund the construction 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, 1999, 1998 and 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 establishes 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, as amended, is effective for fiscal years beginning after June
15, 2000. 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 is currently evaluating the provisions of Statement 133, but has
not yet determined the impact it will have on its financial statements.
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
1999, 1998 and 1997 were $7 million, $6.3 million and $18.4 million,
respectively. Cash payments for income taxes during 1999, 1998 and 1997 were
$406,000, $582,000 and $930,000, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. El Dorado Refinery Acquisition
On November 16, 1999, Frontier acquired the 110,000 barrels per day crude oil
refinery located in El Dorado, Kansas from Equilon Enterprises LLC ("Equilon").
The Company also purchased the crude oil, intermediate product and finished
product inventories at the refinery at closing.
Total consideration for the acquisition of the refinery consisted of $170
million cash. In addition, the Company will make contingent earn-out payments
for the next eight years equal to one-half of the excess over $60 million per
year of the El Dorado refinery's revenues less its material costs and operating
costs, other than depreciation. The total amount of these contingent payments
is capped at $40 million, with an annual cap
- 21 -
<PAGE>
of $7.5 million. Any contingency payment will be recorded when determinable.
Such contingency payment, if any, will be recorded as additional acquisition
cost. Total consideration for the acquisition of the inventory at closing
consisted of approximately $53.1 million cash. The purchase was paid for from
the proceeds of $190 million 11-3/4% Senior Notes due 2009 issued by the Company
on November 5, 1999 and a new revolving credit facility.
The acquisition is accounted for under the purchase method of accounting. The
purchase price allocation is expected to be finalized during 2000 based on
further evaluation of the acquired assets and assumed liabilities.
Operating results for the El Dorado refinery have been included in the
statement of operations and cash flows from November 17, 1999. The following is
the unaudited pro forma financial information giving effect to the El Dorado
refinery as if it had occurred at the beginning of 1998.
<TABLE>
<CAPTION>
Unaudited Pro Forma Information
(in thousands except per share amounts)
Year Ended December 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues $1,298,243 $1,012,278
Depreciation 22,005 20,927
Operating income 41,129 40,452
Income before extraordinary item 3,726 5,574
Net income 3,726 2,561
Basic earnings per share:
Income before extraordinary item .14 .20
Net income .14 .09
Diluted earnings per share:
Income before extraordinary item .13 .19
Net income .13 .09
</TABLE>
4. Debt
<TABLE>
<CAPTION>
Schedule of Long-Term Debt
(in thousands)
December 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
11-3/4% Senior Notes, net of unamortized discount $ 187,286 $ --
9-1/8% Senior Notes 70,000 70,000
---------- ----------
$ 257,286 $ 70,000
========== ==========
</TABLE>
Senior Notes
On November 5, 1999, the Company issued $190 million principal amount of
11-3/4% Senior Notes due 2009. The 11-3/4% Notes were issued at a price of
98.562%. The 11-3/4% Notes are redeemable, at the option of the Company, at
105.875% after November 15, 2004, declining to 100% in 2007. Prior to November
15, 2004, the Company may at its option redeem the 11-3/4% Notes at a defined
make-whole amount, plus accrued and unpaid interest. In addition, prior to
November 15, 2002, the Company may redeem up to 35% of the principal amount of
the 11-3/4% Notes with proceeds from an equity offering at a redemption price of
111-3/4% of the principal amount of the 11-3/4% Notes. Interest is paid
semiannually. The net proceeds were utilized to acquire the El Dorado refinery.
On February 9, 1998, the Company issued $70 million of 9-1/8% Senior Notes
due 2006. The 9-1/8% Notes are redeemable, at the option of the Company, at
104.563% after February 15, 2002, declining to 100% in 2005. Prior to February
15, 2002, the Company may at its option redeem the 9-1/8% Notes at a defined
make-whole amount, plus accrued and unpaid interest. In addition, prior to
February 4, 2001, the Company may redeem up to 35% of the principal amount of
the 9-1/8% Notes with proceeds from an equity offering at a redemption price of
109-1/8% of the principle amount of the 9-1/8% Notes. Interest is paid
semiannually.
Early Retirement of Debt
Based on early debt redemptions during 1998, the Company recognized an
extraordinary loss of approximately $3.0 million, net of taxes, due to the
redemption premiums on retired issues of senior notes and convertible debentures
and the write-off of 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.
Revolving Credit Facility
The refining operations have a working capital credit facility with a group
of ten banks which expires on November 16, 2002. The facility is a
collateral-based facility with total capacity of up to $175 million, of which
maximum cash borrowings are $100 million. Any unutilized capacity after cash
borrowings is available for letters of credit. Short-term debt outstanding was
$26 million and $3.8 million, respectively at December 31, 1999 and 1998.
Standby letters of credit outstanding were $39.6 million and $7.7 million at
December 31, 1999 and 1998, respectively.
The facility provides working capital financing for operations, generally the
financing of crude and product supply. It is generally secured by the
Refineries' current assets. The agreement provides for a quarterly commitment
fee of .375 of 1% to .500 of 1% per annum. Interest rates are based, at the
Company's option, on the agent bank's prime rate plus .25% to 1%, the prevailing
Federal Funds Rate plus
- 22 -
<PAGE>
2% to 2.75%, or the reserve-adjusted LIBOR plus 1.5% to 2.25%. Standby letters
of credit issued bear a fee of 1.125% to 1.875% annually, plus standard issuance
and renewal fees. In all cases, the rate and fees discussed above increase from
the lower to higher levels as the ratio of funded debt to earnings, as defined,
increases. The agreement includes certain financial covenant requirements
relating to the Refineries' working capital, cash earnings and tangible net
worth. In addition, the Company is required to maintain $25 million in cash
through March 31, 2001. However, if EBITDA (earnings before interest, taxes,
depreciation and amortization) for the six months ended June 30, 2000 is at
least $40 million, the requirement will be reduced to $12.5 million, and if
EBITDA for the nine months ended September 30, 2000 is at least $50 million, the
requirement will be eliminated.
Restrictions on Loans, Transfer of Funds and Payment of Dividends
The revolving credit facility restricts the Refineries 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. The Company is currently in compliance with the
provisions of its credit agreement.
Five-year Maturities
The 9-1/8% Senior Notes are due 2006 and the 11-3/4% Senior Notes are due
2009; until then there are no maturities of long-term debt.
5. Income Taxes
The following is the provision (benefit) for income taxes for the three years
ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Provision (Benefit) for Income Taxes
(in thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current $ (50) $ 569 $ 194
Deferred 1,915 (419) (194)
--------- --------- ---------
$ 1,865 $ 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Reconciliation of Tax Provision
(in thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Provision (benefit) based on statutory rates $ (5,319) $ 6,639 $ 2,656
Increase (decrease) resulting from:
Net operating loss carryforwards 5,319 (6,639) (2,656)
State income taxes 1,865 150 --
--------- --------- ---------
Provision as reported $ 1,865 $ 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, 1999 and 1998.
<TABLE>
<CAPTION>
Components of Federal Deferred Taxes
(in thousands)
December 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment due to differences
in depreciation $ 27,924 $ 17,731
Other 4,118 697
--------- ---------
Deferred tax liabilities 32,042 18,428
--------- ---------
Deferred tax assets:
Tax loss carryforwards 47,285 43,820
Depletion carryforwards 3,045 3,045
Alternative minimum tax carryforward 1,271 1,297
Accrued liabilities and other 18,042 1,828
--------- ---------
69,643 49,990
--------- ---------
Less-valuation allowance 38,748 32,683
--------- ---------
Net deferred tax assets 30,895 17,307
--------- ---------
Net deferred federal tax liabilities $ 1,147 $ 1,121
========= =========
</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, 1999, the Company had regular net operating loss ("NOL")
carryforwards for United States tax reporting purposes of $135.1 million
available to reduce future federal taxable income. The regular NOL
carryforwards will expire as follows: $13.6 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
- 23 -
<PAGE>
in 2010, $4.4 million in 2011 and $8.1 million in 2019. The Company also has
$8.7 million tax depletion carryforwards which are indefinitely available to
reduce future federal taxable income.
Also, at December 31, 1999, the Company had alternative minimum tax net
operating loss ("AMT NOL") carryforwards for United States tax reporting of
$87.5 million to reduce future taxable income. The AMT NOL carryforwards will
expire as follows: $26.5 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, $2.7
million in 2011, and $6.8 million in 2019.
The Company has alternative minimum tax carryforwards of $1.3 million which
are indefinitely available to reduce future United States income taxes payable.
The Company has no remaining state net operating losses to reduce future
state taxable income. A state deferred tax liability of $1.9 million wasis
provided at December 31, 1999 reflecting the estimated state tax effect of
temporary differences, primarily for differences in depreciation for property,
plant and equipment.
Canadian Tax Assessment
Prior to the sale of our Canadian oil and gas operations in June 1997, we
conducted business in Canada. As a result of an audit in 1999 of our Canadian
tax returns for the years 1995, 1996 and 1997 conducted by the Canada Customs
and Revenue Agency (formerly Revenue Canada), we were assessed for approximately
C$27 million of additional taxes. More than C$20 million of this assessment
relates to certain foreign exploration and development expenditure deductions.
The Department of Finance in Canada has drafted and released proposed
legislation that would eliminate this portion of the assessment. Approximately
C$5 million of the assessment relates to the deductibility of certain interest
costs in 1995, which were not challenged by the Canada Customs and Revenue
Agency in its audits of previous periods. Other deductions of approximately C$2
million comprise the balance of the assessment. We have filed a Notice of
Objection to portions of the assessment totaling approximately C$25 million and
additionally, are awaiting, as is the Canada Customs and Revenue Agency, the
passing of legislation that will resolve the foreign exploration and development
expenditure deduction portion of the assessment, before arguing the remaining
assessment. We intend to vigorously contest the tax assessment and believe that
we will be successful in our appeal, either at the regulatory level or before
the Courts. While we acknowledge the uncertainties associated with tax
disputes, management currently believes that this matter will be resolved
without a material effect on our financial position or results of operations.
6. Common Stock
Earnings per Share
The following is a reconciliation of the numerators and denominators used in
the calculation of basic and diluted earnings per share ("EPS") for income
(loss) from continuing operations for the years ended December 31, 1999, 1998,
and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------- ----------------------------------- -----------------------------------
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 $ (17,061) 27,373 $ (.62) $ 18,818 28,124 $ .67 $ 7,812 27,457 $ .28
======== ======== ========
Dilutive Securities:
Stock options -- -- -- 622 -- 494
----------- ------------- ----------- ------------- ----------- -------------
Diluted EPS:
Income (loss) from
continuing operations $ (17,061) 27,373 $ (.62) $ 18,818 28,746 $ .65 $ 7,812 27,951 $ .28
=========== ============= ======== =========== ============= ========= =========== ============= =========
</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 1999 and 1997.
- 24 -
<PAGE>
Stock Option Plans
The Company has stock option plans which authorize the granting of restricted
stock and options to purchase shares. The plans through December 31, 1999 have
reserved for issuance a total of 5,959,355 shares of common stock of which
2,687,181 shares were granted and exercised, 2,115,884 shares were granted and
were outstanding and 1,156,290 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, 1999, 1998
and 1997, and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
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 1,318,250 $ 3.95 1,526,340 $ 4.06 2,331,904 $ 3.81
Granted 935,000 5.68 -- -- 612,800 4.09
Exercised (131,746) 4.39 (190,760) 3.81 (797,787) 3.89
Expired (5,620) 5.35 (17,330) 5.18 (620,577) 3.48
--------- --------- ---------
Outstanding at end of year 2,115,884 4.68 1,318,250 3.95 1,526,340 4.06
========= ========= =========
Exercisable at end of year 1,332,324 4.22 1,060,320 4.45 914,850 4.03
========= ========= =========
Available for grant at end of year 1,156,290 85,670 69,390
========= ========= =========
Weighted-average fair value of
options granted during the year 2.27 -- 1.51
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<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 2,115,884 2.73 $ 4.68 1,332,324 $ 4.22
</TABLE>
Had compensation costs been determined based on the fair value at the grant
dates for awards made in 1999 and 1997 (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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(In thousands except per share amounts)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported $ (17,061) $ 15,805 $ 19,055
Pro forma (18,228) 15,281 18,578
Basic EPS:
As reported $ (.62) $ .56 $ .69
Pro forma (.66) .54 .67
Diluted EPS:
As reported $ (.62) $ .55 $ .69
Pro forma (.66) .53 .67
</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 5.21% and 5.91%, expected
volatilities of 46.64%, and 41.07%, expected lives of 3.50 and 2.32 years and no
dividend yield in 1999 and 1997, respectively.
7. Employee Benefit Plans
Contribution Plans
The Company sponsors defined contribution plans for its employees. All
employees may participate by contributing a portion of their annual earnings to
the plans. The Company makes basic and/or matching contributions on behalf of
participating employees. The cost of the plans for the three years ended
December 31, 1999, 1998 and 1997 was $2.0 million, $1.4 million and $1.3
million, respectively.
- 25 -
<PAGE>
Pension Plan
The Company is establishing a defined cash balance pension plan, effective
January 1, 2000, for eligible El Dorado employees to supplement retirement
benefits those employees would lose upon the sale of the El Dorado refinery to
Frontier. No other current or future employees will be eligible to participate
in the plan. The projected benefit obligation for the plan as of December 31,
1999 is $9.6 million. The principal assumptions used in the calculation were a
discount rate of 7.5% and compensation increases of 3.5%.
Postretirement Health Care
The Company provides postretirement health care to certain employees of the
El Dorado refinery. Eligible employees are employees hired on or before January
1, 1991 by the refinery and who satisfy certain age and service requirements.
The Company is currently in negotiation with its union employees as to the
eligibility for this benefit. As a result, changes to the retirement health
care may be made upon completion of the negotiations.
As of December 31, 1999, the Company has accrued $7.7 million for accumulated
postretirement obligations for the covered active employees. The postretirement
healthcare costs for 1999 totaled $115,000, consisting of service cost of
$47,000 and interest cost of $68,000. The principal assumptions used in the
computation were a discount rate of 7.75% and an assumed health care cost trend
rate of 6.5% for 1999, decreasing by 1/2% per year to an ultimate rate of 5.0%.
Increasing or decreasing the assumed health care cost trend by 1% would increase
(decrease) the accumulated postretirement benefit obligation as of December 31,
1999 by approximately $1.8 million and ($1.5 million), respectively.
8. Commitments and Contingencies
Lease and Other Commitments
In connection with the acquisition of the El Dorado refinery, the Company
entered into an operating sublease agreement with Equilon for the use of the
cogeneration facility at the El Dorado refinery. The noncancellable operating
sublease expires in 2016 with the Company having the option to renew the
sublease for an additional eight years. At the end of the renewal sublease term
the Company has the option to purchase the cogeneration facility for the greater
of fair value or $22.3 million. The Company also has building, equipment and
vehicle operating leases that expire from 2000 through 2005. Operating lease
rental expense was $2.7 million, $2.6 million and $2.6 million for the three
years ended December 31, 1999, 1998 and 1997, respectively. The approximate
future minimum lease payments as of December 31, 1999 are $10.4 million for
2000, $10.2 million for 2001, $8.9 million for 2002, $8.4 million for 2003, $8.2
million for 2004 and $77.7 million thereafter.
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 Cheyenne refinery. The Company's share of operating costs for
the crude oil pipeline are recorded as refining operating costs. The Company
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 refineries' throughput
requirements. The Company has also entered into a one-year foreign crude supply
agreement with Equiva Trading Company ("Equiva"), an affiliate of Equilon.
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 Company
sells its Cheyenne products exclusively at wholesale, principally to independent
retailers and major oil companies located primarily in the Denver, western
Nebraska and eastern Wyoming regions. The Company sells its El Dorado gasoline,
diesel and jet fuel to Equiva, under a 15-year offtake agreement. These products
are sold to Equiva at market prices. Beginning in 2000, the Company will retain
and market a portion of the El Dorado refinery's gasoline and diesel production.
This portion will increase 5,000 barrels per day each year for ten years
beginning at 5,000 barrels per day in 2000, rising to 50,000 barrels in 2009 and
remaining at that level through the term of the agreement. Equiva will purchase
all jet fuel production for the first five years.
The Company extends credit to its customers based on ongoing credit
evaluations. An allowance for doubtful accounts is provided based
- 26 -
<PAGE>
on the current evaluation of each customer's credit risk, past experience and
other factors. During 1999, the Company made sales to Equiva and CITGO Petroleum
Products of approximately $125 million and $62 million, respectively, which
accounted for 25% and 12%, respectively, of consolidated revenues.
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 Cheyenne refinery is party to one consent decree requiring the
investigation and, in certain instances, mitigation of environmental impacts
resulting from past operational activities. The El Dorado refinery is a party
to a consent decree regarding the implementation of a groundwater management
program. Equilon will be responsible for the cost of continued compliance with
this order. The Company has obtained a ten-year insurance policy with $25
million coverage for environmental liabilities, with a $500,000 deductible.
This insurance will reimburse the Company for losses related to some known and
unknown pre-existing conditions at the El Dorado refinery. Equilon and Frontier
will share the premium costs of this policy. In addition, Equilon will be
responsible for up to $5 million in costs (including insurance premiums)
relating to safety, health and environmental conditions that are not covered
under the ten-year insurance policy.
Except as discussed above, 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 units 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 Cheyenne craft workers. At the Cheyenne refinery, the current
contract with PACE expires in July 2002, while the current contract with the
AFL-CIO affiliated unions expires in June 2005. At the El Dorado refinery, the
current contract with PACE expires in January 2002. The union employees
represent approximately 64% of the Company's work force at December 31, 1999.
9. Fair Value of Financial Instruments
The fair value of the Company's Senior Notes 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, 1999 and 1998, the carrying amounts of long-term debt
instruments were $257.3 million and $70.0 million, respectively, and the
estimated fair values were $250.2 million and $65.1 million.
The Company, at times, enters into commodity derivative contracts in its
refining operations for the purpose of managing its refining costs. Since the
acquisition of the El Dorado refinery, the Company has used derivative contracts
to change fixed pricing to floating pricing in order to manage its price
exposure from the date foreign crude oil is purchased to the date it is
processed at the El Dorado refinery. Delivery of the Company's foreign crude
oil can exceed one month. In addition, from time to time, the Company enters
into natural gas futures contracts to hedge its cost of natural gas consumed in
the refining process. For the three years ended December 31, 1999, 1998 and
1997, the Company recognized gains (losses) from commodity derivative contracts
of ($3.7 million), ($644,000) and $801,000, respectively. As of December 31,
1999, the Company had entered into commodity derivative contracts for the
purchase of
- 27 -
<PAGE>
foreign crude oil and purchase of natural gas. The Company had sold
approximately 1.5 million barrels of crude oil on the New York Mercantile
Exchange at an average price of $25.86 for repurchase through March 2000. The
Company had also purchased an average 7,000 mcf per day of natural gas through
March 2000 at $2.13 per mcf. The estimated fair value of the Company's open
crude oil futures contracts and natural gas futures contracts at December 31,
1999 were $456,000 and $122,000, respectively.
10. 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 were estimated to be payable due
to available oil and gas deductions and net operating loss carryforwards. For
U.S. federal income taxes, available net operating loss carryforwards were
utilized to offset the gain; however, alternative minimum taxes of approximately
$800,000 were 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 (a Wyoming Corporation) and subsidiaries as of December 31, 1999
and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Houston, Texas
February 14, 2000
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated February 14, 2000, incorporated by reference in the Annual
Report of Frontier Oil Corporation on Form 10-K for the year ended December 31,
1999 into Frontier Oil Corporation previously filed Registration Statement file
No. 33-15598 on Form S-8.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 2000
- 28 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 38,345
<SECURITIES> 0
<RECEIVABLES> 53,075
<ALLOWANCES> 0
<INVENTORY> 100,359
<CURRENT-ASSETS> 192,990
<PP&E> 382,569
<DEPRECIATION> 69,261
<TOTAL-ASSETS> 521,493
<CURRENT-LIABILITIES> 168,158
<BONDS> 257,286
0
0
<COMMON> 57,294
<OTHER-SE> (6,613)
<TOTAL-LIABILITY-AND-EQUITY> 521,493
<SALES> 501,438
<TOTAL-REVENUES> 503,600
<CGS> 499,377
<TOTAL-COSTS> 499,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,947
<INCOME-PRETAX> (15,196)
<INCOME-TAX> 1,865
<INCOME-CONTINUING> (17,061)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,061)
<EPS-BASIC> (0.62)
<EPS-DILUTED> (0.62)
</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.
Frontier El Dorado Refining Company (incorporated in Delaware),
a subsidiary of Frontier Refining & Marketing Inc.
Frontier Oil Corporation
Ratio of Earnings to Fixed Charges
(Dollar in thousands)
1999 1998 1997
-------- -------- --------
Income (loss) from continuing operations $(15,196) $ 18,968 $ 7,812
Add:
Interest 11,481 8,320 15,895
Less: Interest capitalized 0 101 0
-------- -------- --------
Earnings as defined (3,715) 27,187 23,707
Interest expense (net) 9,947 6,732 13,891
Interest income 1,534 1,487 2,004
Interest capitalized 0 101 0
-------- -------- --------
Fixed charges as defined $ 11,481 $ 8,320 $ 15,895
Ratio of earnings to fixed charges N/A 3.3 1.5
Amount of deficiency $ 15,196 N/A N/A
