<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended January 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 1-3876
HOLLY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1056913
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 871-3555
------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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
--- ---
8,253,514 shares of Common Stock, par value $.01 per share, were outstanding on
March 8, 1999.
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HOLLY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet -
January 31, 1999 (Unaudited) and July 31, 1998 3
Consolidated Statement of Income (Unaudited) -
Three Months and Six Months Ended January 31, 1999 and 1998 4
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended January 31, 1999 and 1998 5
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months and Six Months Ended January 31, 1999 and 1998 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
This Quarterly Report on Form 10-Q (including documents incorporated by
reference herein) contains statements with respect to the Company's
expectations or beliefs as to future events. These types of statements are
"forward-looking" and are subject to uncertainties. See "Factors Affecting
Forward-Looking Statements" on page 12.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Unaudited
January 31, July 31,
1999 1998
----------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,838 $ 2,602
Accounts receivable: Product 37,101 33,346
Crude oil resales 46,701 49,033
----------- ---------
83,802 82,379
Inventories: Crude oil and refined products 41,683 46,754
Materials and supplies 10,539 12,081
Reserve for lower of cost or market (8,755) (2,993)
----------- ---------
43,467 55,842
Income taxes receivable 1,302 653
Prepayments and other 14,259 12,911
----------- ---------
Total current assets 145,668 154,387
Properties, plants and equipment, at cost 335,799 325,993
Less accumulated depreciation, depletion and amortization (161,773) (152,696)
----------- ---------
174,026 173,297
Investments and advances to joint ventures 5,325 5,510
Other assets 14,168 16,663
----------- ---------
$ 339,187 $ 349,857
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 98,158 $ 109,139
Accrued liabilities 11,283 13,392
Income taxes payable 67 288
Current maturities of long-term debt 13,746 5,175
Borrowings under credit agreement -- 11,600
----------- ---------
Total current liabilities 123,254 139,594
Deferred income taxes 24,603 25,573
Long-term debt, less current maturities 61,762 70,341
Long-term borrowings under credit agreement 17,500 --
Commitments and contingencies
Stockholders' equity
Preferred stock, $1.00 par value - 1,000,000 shares authorized; none issued -- --
Common stock, $.01 par value - 20,000,000 shares authorized; 8,650,282 shares issued 87 87
Additional capital 6,132 6,132
Retained earnings 107,855 109,686
----------- ---------
114,074 115,905
Common stock held in treasury, at cost - 396,768 shares (569) (569)
Accumulated other comprehensive income - net unrealized loss on
securities available for sale (1,437) (987)
----------- ---------
Total stockholders' equity 112,068 114,349
----------- ---------
$ 339,187 $ 349,857
=========== =========
</TABLE>
See accompanying notes.
3
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Refined products $ 117,793 $ 134,661 $ 257,854 $ 300,767
Oil and gas 801 1,980 1,532 4,609
Miscellaneous 185 142 364 329
--------- --------- --------- ---------
118,779 136,783 259,750 305,705
Costs and expenses
Cost of refined products 103,208 126,484 226,390 276,217
Inventory market writedowns 4,371 -- 5,762 --
General and administrative 5,912 3,607 10,240 6,758
Depreciation, depletion and amortization 6,638 6,074 12,625 11,248
Exploration expenses, including dry holes 415 814 720 1,604
--------- --------- --------- ---------
120,544 136,979 255,737 295,827
--------- --------- --------- ---------
Income (loss) from operations (1,765) (196) 4,013 9,878
Other
Equity in earnings of joint ventures 742 558 1,136 909
Interest income 43 122 93 520
Interest expense (1,982) (2,118) (3,913) (4,262)
--------- --------- --------- ---------
(1,197) (1,438) (2,684) (2,833)
--------- --------- --------- ---------
Income (loss) before income taxes (2,962) (1,634) 1,329 7,045
Income tax provision (benefit)
Current 105 (2,981) 1,956 (1,273)
Deferred (1,260) 2,327 (1,438) 4,091
--------- --------- --------- ---------
(1,155) (654) 518 2,818
--------- --------- --------- ---------
Net income (loss) $ (1,807) $ (980) $ 811 $ 4,227
========= ========= ========= =========
Income (loss) per common share (basic
and diluted) $ (.22) $ (.12) $ .10 $ .51
Cash dividends paid per share $ .16 $ .15 $ .32 $ .30
Average number of shares of common
stock outstanding (in thousands) 8,254 8,254 8,254 8,254
</TABLE>
See accompanying notes.
4
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unaudited
Six Months Ended
----------------------
January 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 811 $ 4,227
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation, depletion and amortization 12,625 11,248
Deferred income taxes (1,438) 4,091
Equity in earnings of joint venture (1,136) (909)
Dry hole costs and leasehold impairment 47 421
Inventory market writedowns 5,762 --
(Increase) decrease in operating assets
Accounts receivable (1,423) 21,105
Inventories 6,613 4,812
Income taxes receivable (649) (500)
Prepayments and other (872) (473)
Increase (decrease) in operating liabilities
Accounts payable (10,981) (25,219)
Accrued liabilities (2,109) 111
Income taxes payable (221) (112)
Turnaround expenditures -- (18,685)
Other, net (1,502) 112
-------- --------
Net cash provided by operating activities 5,527 229
Cash flows from financing activities
Increase in borrowings under credit agreement 5,900 9,300
Payment of long-term debt (8) (8)
Debt issuance costs -- (547)
Cash dividends (2,642) (2,476)
-------- --------
Net cash provided by financing activities 3,250 6,269
Cash flows from investing activities
Additions to properties, plants and equipment (9,941) (23,363)
Distributions from joint venture 1,400 --
-------- --------
Net cash used for investing activities (8,541) (23,363)
-------- --------
Cash and cash equivalents
Increase (decrease) for the period 236 (16,865)
Beginning of year 2,602 20,042
-------- --------
End of period $ 2,838 $ 3,177
======== ========
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 3,671 $ 4,154
Income taxes $ 2,772 $ 360
</TABLE>
See accompanying notes
5
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Six Months Ended
January 31, January 31,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(1,807) $ (980) $ 811 $ 4,227
Other comprehensive income
Unrealized loss on securities available
for sale, net of $189 and $299 of
income tax benefits (285) -- (450) --
------- ------- ------- -------
Comprehensive income (loss) $(2,092) $ (980) $ 361 $ 4,227
======= ======= ======= =======
</TABLE>
See accompanying notes.
6
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HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants (except for
the consolidated balance sheet as of July 31, 1998), reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position as of January 31, 1999, the
consolidated results of operations and comprehensive income for the three months
and six months ended January 31, 1999 and 1998, and consolidated cash flows for
the six months ended January 31, 1999 and 1998.
Certain notes and other information have been condensed or omitted.
Therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
References herein to the "Company" are for convenience of presentation
and may include obligations, commitments or contingencies that pertain solely to
one or more affiliates of the Company. Results of operations for the first six
months of fiscal 1999 are not necessarily indicative of the results to be
expected for the full year.
Note B - Adoption of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." In February 1998, the
FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The Company is adopting all three statements in the
current fiscal year ending July 31, 1999.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In this Report, the Company has added a separate statement
of comprehensive income to conform with the new requirements of SFAS No. 130.
SFAS No. 131 establishes new standards for reporting information about
operating segments in annual financial statements and requires selected
operating segment information to be reported in interim financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
becomes effective for the Company's financial statements beginning with the
fiscal year ending July 31, 1999 at which time prior period segment information
presented for comparative purposes is required. Interim period information is
not required until the second year of application, at which time comparative
information is required. Because interim period information is not required
under this statement for the Company's current fiscal year, the
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HOLLY CORPORATION
requirements of this statement are not reflected in this Report. Because this
statement addresses how supplemental financial information is disclosed in
annual and interim reports, the adoption will have no impact on the Company's
financial condition or results of operations.
SFAS No. 132 standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer useful. This
statement becomes effective for the Company's financial statements beginning
with the fiscal year ending July 31, 1999 at which time restatement of prior
period disclosures presented for comparative purposes is required unless the
information is not readily available. Because interim period information is not
required under this statement, the requirements of this statement are not
reflected in this Report. Because this statement addresses how supplemental
financial information is disclosed in annual reports, the adoption will have no
impact on the Company's financial condition or results of operations.
Note C - Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for net income as required by SFAS
No. 128:
<TABLE>
<CAPTION>
Three Months Ended January 31, 1999
-------------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Income per common share - basic
Net income (loss) $ (1,807) 8,254 $ (.22)
Effect of dilutive stock options -- -- --
----------- ------------- ------
Income per common share -
assuming dilution
Net income (loss) $ (1,807) $ 8,254 $ (.22)
=========== ============= ======
</TABLE>
8
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HOLLY CORPORATION
<TABLE>
<CAPTION>
Three Months Ended January 31, 1998
-------------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Income per common share - basic
Net income (loss) $ (980) 8,254 $ .(12)
Effect of dilutive stock options -- -- --
----------- ------------- ------
Income per common share -
assuming dilution
Net income (loss) $ (980) 8,254 $ .(12)
=========== ============= ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended January 31, 1999
-------------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Income per common share - basic
Net income $ 811 8,254 $ .10
Effect of dilutive stock options -- -- --
----------- ------------- ------
Income per common share -
assuming dilution
Net income $ 811 8,254 $ .10
=========== ============= ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended January 31, 1998
-------------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Income per common share - basic
Net income $ 4,227 8,254 $ .51
Effect of dilutive stock options -- -- --
----------- ------------- ------
Income per common share -
assuming dilution
Net income $ 4,227 8,254 $ .51
=========== ============= ======
</TABLE>
9
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HOLLY CORPORATION
Note D - Debt
Beginning for the quarter ended January 31, 1999, the Company has
changed the classifications of borrowings under the Credit Agreement to
long-term. These borrowings are not required to be paid off until October 2000,
the termination date of the Credit Agreement.
Note E - Contingencies
In July 1993, the United States Department of Justice ("DOJ"), on behalf
of the United States Environmental Protection Agency ("EPA"), filed a suit
against the Company's subsidiary, Navajo Refining Company ("Navajo") alleging
that, beginning in September 1990, Navajo had violated and continued to violate
the Resource Conservation and Recovery Act ("RCRA") and implementing regulations
of the EPA by treating, storing and disposing of certain hazardous wastes in the
refinery's wastewater treatment system without compliance with regulatory
requirements. In December 1998, the Company completed the settlement of this
matter under an agreement among Navajo, the DOJ and the State of New Mexico.
Under the settlement agreement, the Company has paid a civil penalty of less
than $2 million, which was reserved for in fiscal 1993, and is required by
September 1999 to close the existing evaporation ponds of its wastewater
treatment system and to utilize an alternative wastewater treatment system at an
estimated total cost of approximately $5 million, of which approximately $2
million has already been incurred. The costs to implement the alternative
wastewater treatment system will be capitalized and amortized over the future
useful life of the resulting asset in accordance with generally accepted
accounting principles.
In August 1998, a lawsuit (the "Longhorn Suit") was filed in state
district court in El Paso, Texas against the Company, two of its subsidiaries
and an Austin, Texas law firm. The suit was filed by Longhorn Partners Pipeline,
L.P. ("Longhorn Partners"), a Delaware limited partnership composed of Longhorn
Partners GP, L.L.C. as general partner and affiliates of Exxon Pipeline Company,
Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy
Investment Fund, L.P. as well as Chisholm Holdings as limited partners. The suit
sought damages against the Company and the law firm alleged to total up to
$1,050,000,000 and injunctive relief based on claims of violations of the Texas
Free Enterprise and Antitrust Act, unlawful interference with contractual
relations, and conspiracy to abuse process. After having been removed by the
Company in September 1998 to the Federal Court in Austin, Texas, the suit was
remanded to the state district court in El Paso in January 1999. Following the
remand, Longhorn Partners filed in early March 1999 an amended petition that did
not include the Austin, Texas law firm as a defendant, did not include
injunctive relief as a requested remedy, and did not include the Environmental
Suit described below as a basis of the suit. As set forth in the amended
petition, the Longhorn Suit asserts claims of violations of the Texas Free
Enterprise and Antitrust Act, unlawful interference with existing and
prospective contractual relations, and conspiracy to abuse process based in part
on alleged support by the
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HOLLY CORPORATION
Company of lawsuits brought by ranchers in West Texas to challenge the use of
existing pipeline easements and rights-of-way for the pipeline transportation of
refined products. The Company believes that the Longhorn Suit is wholly without
merit and plans to defend itself vigorously. The Company also plans to pursue at
the appropriate time any affirmative remedies that may be available to it with
respect to the filing of the Longhorn Suit.
As originally filed, the Longhorn Suit related principally to the
alleged involvement of subsidiaries of the Company and the named law firm in a
federal lawsuit (the "Environmental Suit") in Austin, Texas filed by ranchers
and joined by the Barton Springs-Edwards Aquifer Conservation District, the City
of Austin and the Lower Colorado River Authority. The Environmental Suit
resulted in a preliminary injunction issued by the Federal Court in August 1998
requiring preparation of an environmental impact statement under the National
Environmental Policy Act before Longhorn Partners could use an existing crude
oil pipeline and a newly constructed pipeline to transport refined petroleum
products across Texas, including areas overlying the Edwards Aquifer in Central
Texas. Following lengthy negotiations, the parties to that suit entered into a
settlement agreement, which was approved by the Federal Court in March 1999,
under which an environmental assessment of the Longhorn Pipeline will be carried
out by the Environmental Protection Agency and the Department of Transportation
pursuant to an agreed procedure. Under this settlement, Longhorn Partners is
prohibited from using the pipeline to transport petroleum products while the
environmental assessment process specified in the settlement agreement is being
carried out. The agreement further provides that the injunction against use of
the Longhorn Pipeline shall be extended if the initial environmental assessment
process results in a determination that a full environmental impact statement
should be prepared with respect to the environmental consequences of the
pipeline.
11
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors Affecting Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts included
in this Form 10-Q, including without limitation statements in this Item 2 under
the headings "Results of Operations" and "Liquidity and Capital Resources"
(including "Risk Management" and "The Year 2000 Problem") are forward-looking
statements. Such statements are subject to risks and uncertainties, including
but not limited to risks and uncertainties with respect to the actions of actual
or potential competitive suppliers of refined petroleum products in the
Company's markets, the demand for and supply of crude oil and refined products,
the spread between market prices for refined products and crude oil, the
possibility of constraints on the transportation of refined products, the
possibility of inefficiencies or shutdowns in refinery operations, governmental
regulations and policies, the availability of financing to the Company on
favorable terms, the effectiveness of Company capital investments and marketing
strategies, the outcome of material litigation against the Company, the accuracy
of technical analysis and evaluations relating to the Year 2000 Problem, and the
abilities of third-party suppliers to the Company to avoid adverse effects of
the Year 2000 Problem on their capacities to supply the Company. Because of
these and other risks and uncertainties, actual results may vary materially from
those estimated, anticipated or projected. Although the Company believes that
the expectations reflected by the forward-looking statements contained in this
Quarterly Report are reasonable based on information currently available to the
Company, no assurances can be given that such expectations will prove to be
correct. This summary discussion of risks and uncertainties that may cause
actual results to differ from those indicated in forward-looking statements
should be read in conjunction with the discussion under the heading "Additional
Factors That May Affect Future Results" included in Item 7 of the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1998 and in
conjunction with the discussion below under the heading "Liquidity and Capital
Resources." All forward-looking statements included in this Form 10-Q and all
subsequent oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth above.
12
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations
The Company incurred a net loss for the second quarter ended January 31,
1999 of $1.8 million as compared to a net loss of $1.0 million for the second
quarter of the prior year. For the six months ended January 31, 1999, net income
was $.8 million as compared to net income of $4.2 million for the same period of
fiscal 1998. The reported results for the current year reflect significant
charges based on reductions in market values of crude oil and refined products
inventories. Without these inventory charges, net income would have been $.9
million for the second quarter and $4.3 million for the six months ended January
31, 1999.
Results in the second quarter of fiscal 1999 and the first six months
ended January 31, 1999, as compared to the prior year, were negatively affected
by current year after-tax charges of $2.7 million for the quarter and $3.5
million for the six-month period related to reductions in inventory values.
Increases in sales volumes to record levels for the second quarter and first six
months of the current fiscal year more than offset the downward effects of
decreased refinery margins from levels for the same periods of the prior year.
Volumes were up 23 percent for the second quarter and 21 percent for the first
six months of fiscal 1999 as compared to the same period of the prior year (when
volumes were reduced due to a planned turnaround). Earnings in the current year
were also favorably affected by the beginning of pipeline and terminalling
revenues resulting from the Company's alliance with FINA, Inc., which creates a
comprehensive supply network of refined products in the Company's markets, and
by transportation service income resulting from the West Texas crude oil
gathering system which the Company recently purchased.
Items negatively impacting earnings in both the second quarter and first
six months of the current year were lower oil and gas income due to decreased
prices for oil and gas and the reduction in scope of the Company's oil and gas
program, an increase in general and administrative expenses relating principally
to legal and administrative proceedings, and an increase in depreciation and
amortization expense in the current year resulting from the prior year's
turnaround expenditures. Revenues decreased in the three months and six months
ended January 31, 1999 from the prior year's comparable periods as a result of
reduced sales prices, partially offset by the increase in volumes.
13
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Liquidity and Capital Resources
This discussion should be read in conjunction with the discussion under
the heading "Additional Factors That May Affect Future Results" included in Item
7 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1998.
Cash and cash equivalents increased during the six months ended January
31, 1999 by only $.2 million, as cash flows required for investing activities
and dividends paid were approximately the same as cash flows generated from
operations and new borrowings under the Credit Agreement. Working capital
increased during the six months ended January 31, 1999 by $7.6 million to $22.4
million. The Company's long-term debt at January 31, 1999 represents 45.4% of
total capitalization as compared to 39.8% at July 31, 1998. At January 31, 1999,
the Company had $32.5 million of unused borrowing capacity available under the
Credit Agreement. The Company believes that these sources of funds, together
with future cash flows from operations, should provide sufficient resources,
financial strength and flexibility to enable the Company for the foreseeable
future to satisfy its liquidity needs, capital requirements, and debt service
obligations while continuing the payment of dividends.
Net cash provided by operating activities amounted to $5.5 million for
the first six months of fiscal 1999, as compared to $.2 million for the same
period of the prior year. The increase in cash provided by operating activities
in the current year was principally due to expenditures incurred in the prior
year relating to the Navajo Refinery turnaround in fiscal 1998, partially offset
by changes in working capital items along with the decrease in cash generated by
earnings for the first six months of fiscal 1999.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Cash flows provided by financing activities amounted to $3.3 million in
the first six months of fiscal 1999, as compared to $6.3 million in the same
period of the prior year. In October 1997, the Company entered into a new
three-year Credit Agreement. The Credit Agreement provides for a total facility
of $100 million, the full amount of which may be used to support letters of
credit and $50 million of which may be used for direct borrowings. The Company
increased its net borrowings under the Credit Agreement by $5.9 million during
the first six months of the current year to an outstanding balance of $17.5
million as of January 31, 1999. The next principal payment of $5.2 million on
the Company's Senior Notes is due in June 1999.
Cash flows used for investing activities were $8.5 million in the first
six months of fiscal 1999, as compared to $23.4 million in the same period of
the prior year. All amounts expended were on capital projects. The net negative
cash flow for investing activities was reduced in the first six months of fiscal
1999 by $1.4 million of distributions to the Company from the Rio Grande joint
venture. The Company has adopted capital budgets totalling $20 million for
fiscal 1999. The components of this budget are $7 million for various refinery
improvements and environmental and safety enhancements, $12 million for various
pipeline and transportation projects and $1 million for oil and gas exploration
and production activities. In addition to these projects, the Company plans to
expend in the 1999 fiscal year a total of $8 million on items that were approved
in previous capital budgets. These include projects at the Navajo Refinery,
certain environmental enhancements, and additional expenditures for connecting
pipelines and related product terminals to be used in conjunction with the
leased pipeline to northwest New Mexico described below.
The Company has leased from Mid-America Pipeline Company more than 300
miles of 8" pipeline running from Chavez County to San Juan County, New Mexico
(the "Leased Pipeline"). The Company has completed a 12" pipeline from the
Navajo Refinery to the Leased Pipeline and is in the process of completing
terminalling facilities in Bloomfield. Although portions of the construction
project have been completed, several alternatives are still being pursued to
address terminalling needs in the Albuquerque area. When the project, including
the Albuquerque portion, is completed, these facilities will allow the Company
to use the Leased Pipeline to transport petroleum products from the Navajo
Refinery to Albuquerque and markets in northwest New Mexico. The Leased Pipeline
and recently constructed facilities will be available during fiscal 1999 for the
transport of petroleum products to certain markets in northwest New Mexico. The
total estimated cost of this project is $17 million, of which $7 million remains
to be spent.
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The additional pipeline capacity that resulted from pipelines recently
completed in conjunction with the Rio Grande joint venture and that is expected
to result from the Leased Pipeline and completion of the planned related
pipeline and terminalling facilities should reduce pipeline operating expenses
at current throughputs. In addition, the new pipeline capacity would allow the
Company to increase volumes, through refinery expansion or otherwise, that are
shipped into existing and new markets and could allow the Company to shift
volumes among markets in response to any future increased competition in
particular markets.
The Company plans to construct for approximately $5 million, 65 miles of
new pipeline between Lovington and Artesia, NM, to permit the delivery of
isobutane (and/or other LPGs) to El Paso as well as increasing the Company's
ability to access additional raw materials.
Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), a partnership
composed of Longhorn Partners GP, L.L.C. as general partner and affiliates of
Exxon Pipeline Company, Amoco Pipeline Company, Williams Pipeline Company, and
The Beacon Group Energy Investment Fund, L.P. as well as Chisholm Holdings as
limited partners, is in the process of reversing an existing crude oil pipeline
and constructing a connecting pipeline for the transportation of petroleum
products from Gulf Coast refineries to a newly constructed terminal in El Paso.
It had been reported that Longhorn had planned to transport initially 72,000 BPD
of gasoline to the West Texas markets starting in October 1998 on the reversed
existing crude oil pipeline. It had also been reported that once fully
operational the pipeline would have the ultimate capacity to transport 225,000
BPD of refined products from Houston to terminals in Midland and El Paso. Use of
this pipeline is currently prohibited by an injunction issued by the Federal
District Court in Austin, Texas and by the terms of a settlement agreement
recently approved by that court in a lawsuit (the "Environmental Suit") that had
been brought to require a full environmental review of the Longhorn Pipeline
before it could be placed in operation. This new pipeline could significantly
increase the supply of products in the Company's principal markets.
In August 1998, a lawsuit (the "Longhorn Suit") was filed by Longhorn
Partners in state district court in El Paso, Texas against the Company and two
of its subsidiaries. The suit in its present form, after the filing by Longhorn
Partners of an amended petition, seeks damages against the Company alleged to
total up to $1,050,000,000 based on claims of violations of the Texas Free
Enterprise and Antitrust Act, unlawful interference with existing and
prospective contractual relations, and conspiracy to abuse process. Although the
original version of Longhorn Partners' claims in this case appeared to be based
principally on alleged Company involvement in the institution of the
Environmental Suit, the current version of the Longhorn Suit is not based on the
Environmental Suit but rather appears to be based in part on alleged Company
involvement in the filing of lawsuits brought by ranchers in West Texas to
challenge
16
<PAGE> 17
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
the use of existing pipeline easements and rights-of-way for the pipeline
transportation of refined products. The Company believes the Longhorn Suit is
wholly without merit and the Company plans to defend itself vigorously. The
Company also plans to pursue at the appropriate time any affirmative remedies
that may be available to it with respect to the filing of the Longhorn Suit.
In July 1993, the United States Department of Justice ("DOJ"), on behalf
of the United States Environmental Protection Agency ("EPA"), filed a suit
against the Company's subsidiary, Navajo Refining Company ("Navajo") alleging
that, beginning in September 1990, Navajo had violated and continued to violate
the Resource Conservation and Recovery Act ("RCRA") and implementing regulations
of the EPA by treating, storing and disposing of certain hazardous wastes in the
refinery's wastewater treatment system without compliance with regulatory
requirements. In December 1998, the Company completed the settlement of this
matter under an agreement among Navajo, the DOJ and the State of New Mexico.
Under the settlement agreement, the Company paid a civil penalty of less than $2
million, which was reserved for in fiscal 1993, and is required by September
1999 to close the existing evaporation ponds of its wastewater treatment system
and to utilize an alternative wastewater treatment system at an estimated total
cost of approximately $5 million, of which approximately $2 million has already
been incurred. The costs to implement the alternative wastewater treatment
system will be capitalized and amortized over the future useful life of the
resulting asset in accordance with generally accepted accounting principles.
Risk Management
The Company uses certain strategies to reduce some commodity price and
operational risks. The Company does not attempt to eliminate all market risk
exposures when the Company believes that the exposure relating to such risk
would not be significant to the Company's future earnings, financial position,
capital resources or liquidity or that the cost of eliminating the exposure
would outweigh the benefit.
The Company's profitability depends largely on the spread between market
prices for refined products and crude oil prices. A substantial or prolonged
decrease in this spread could have a significant negative effect on the
Company's earnings, financial condition and cash flows. At times, the Company
utilizes petroleum commodity futures contracts to minimize a portion of its
exposure to price fluctuations associated with crude oil and refined products.
Such contracts do not increase the market risks to which the Company is exposed
and are used solely to help manage the price risk inherent in purchasing crude
oil in advance of the delivery
17
<PAGE> 18
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
date and as a hedge for fixed-price sales contracts of refined products. Gains
and losses on contracts are deferred and recognized in cost of refined products
when the related inventory is sold or the hedged transaction is consummated.
The Company has outstanding unsecured debt of $75.5 million and
borrowings under the Credit Agreement of $17.5 million at January 31, 1999. The
Company does not have significant exposure to changing interest rates on its
unsecured debt because the interest rates are fixed and such debt now represents
less than 40% of the Company's total capitalization. Borrowings under the Credit
Agreement are based primarily on the bank's daily effective prime rate, thus the
interest rate market risk is very low. Additionally, the Company invests any
available cash only in investment grade, highly liquid investments with
maturities of three months or less. As a result, the interest rate market risk
implicit in these cash investments is low, as the investments mature within
three months. A ten percent change in the market interest rate over the next
year would not materially impact the Company's earnings or cash flow, as the
interest rates on the Company's long-term debt are fixed and the Company's
borrowings under the Credit Agreement and cash investments are at current market
rates, and such a change in interest rates would therefore not have a material
effect on the value of such debt or cash investments.
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company maintains
various insurance coverages, including business interruption insurance, subject
to certain deductibles. The Company is not fully insured against certain risks
because such risks are not fully insurable, coverage is unavailable or premium
costs, in the judgement of the Company, do not justify such expenditures.
18
<PAGE> 19
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The Year 2000 Problem
The Year 2000 Problem is the result of older computer systems using a
two-digit format rather than a four-digit format to define the applicable year
with the result that such computer systems may be unable to interpret properly
dates beyond the year 1999. This inability could lead to a failure of
information systems and disruptions of business and financial operations. Year
2000 risks exist both in information technology ("IT") systems that employ
computer hardware and software and in non-IT systems such as embedded computer
chips or microcontrollers that control the operation of the equipment in which
they are installed. Computer failures because of the Year 2000 problem could
affect the Company either because of failures of computers used in the Company's
operations and record-keeping or because of computer failures that adversely
affect third parties that are suppliers to or customers of the Company.
Partly with the assistance of outside consultants, the Company has taken
steps to identify key financial, informational and operational systems that may
be affected by the Year 2000 Problem. Based on certifications by third-party
suppliers of the Company's principal IT systems, the Company believes that its
principal IT systems either are now unaffected by the Year 2000 Problem or are
the subject of currently scheduled replacement or upgrading that will make these
systems free of Year 2000 issues. Under the Company's current plans, all IT
systems believed by the Company to have significance to the Company's operations
or financial condition will be free of Year 2000 issues by September 1999.
Because of the nature of non-IT systems embedded in equipment used in
the Company's operations, the Company has not yet fully assessed the extent to
which these non-IT systems could fail because of the Year 2000 Problem and
thereby cause significant problems for the Company's operations, financial
condition or liquidity. The Company has recently identified, based on
information and/or certifications from suppliers or other third parties, the
types of non-IT systems that appear to be significantly at risk of failure due
to the Year 2000 Problem; the Company is currently in the process of identifying
items of equipment possibly or certainly containing at-risk chips and ranking
such equipment in order of the consequences of a failure on the Company's
operations; the Company plans by September 1999 to have completed repairs or
replacements of those pieces of equipment that have been identified for which a
failure would be expected to create serious problems for Company operations.
Because of the nature of the non-IT systems, there can be no assurance that the
Company will correctly identify all non-IT systems that are subject to failure
because of the Year 2000 Problem or that all non-IT systems significant to the
Company's operations will be repaired or replaced as necessary prior to the end
of 1999.
19
<PAGE> 20
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
To the extent possible the Company plans to test or receive
certifications with respect to all significant IT and non-IT systems by
September 30, 1999.
The Company has begun to assess the possible effects of the Year 2000
Problem on third parties that are important to the Company's operations. The
Company plans to communicate regularly on this issue with critical third
parties, such as suppliers of power or telecommunications services to the
Company's operational facilities, third-party carriers of raw materials and
refined products, and major customers. As problems of third parties are
identified, the Company will take any steps available to reduce the impact on
the Company of a failure in a third party caused by the Year 2000 Problem.
The cost to the Company of dealing with the Year 2000 Problem is not
expected to be material. Although a portion of the time of IT personnel and
related management has been and will be employed in evaluating the problem,
taking corrective actions and preparing contingency plans, the Company does not
believe that other IT projects or operations have been or will be adversely
affected. Monetary costs expected to be involved in dealing with the Year 2000
Problem are not expected to be significant: all costs of review, analysis and
corrective action (excluding IT system upgrades that were scheduled to be
implemented without regard to the Year 2000 Problem) are expected to total less
than $750,000.
Based on the analysis performed to this point, the Company believes that
the most important risk of the Year 2000 Problem to the Company's results of
operations and financial condition is that third-party suppliers important to
the operations of the Company's principal operating asset, the Navajo refinery
at Artesia and Lovington, New Mexico, would for a period of time be unable to
perform their normal roles because of difficulties created by the Year 2000
Problem for the third parties and/or for persons supplying the third parties.
The greatest vulnerability is in the case of providers that are the Company's
principal or sole source for an essential input -- for example power to operate
the refinery. If such a provider were to be unable to continue supplying the
refinery because of the Year 2000 Problem, the Company would be forced to
suspend the affected operations until the provider could solve the problem or in
some cases until an alternative supply could be arranged. The Company has begun,
and intends to continue until the year 2000, regular contacts with critical
suppliers to determine their evaluations of their vulnerability to the Year 2000
Problem. In the event that a particular supplier appears to be vulnerable, the
Company will seek to obtain alternative supplies to the extent they are
available. However, in the case of some inputs, alternative supplies may not
realistically be available even if the supply problem is identified months in
advance. In other cases, an unexpected third-party failure could occur in spite
of extensive prior communications with key suppliers and the only feasible
remedy to the Company for a substantial period might be emergency corrective
action by the affected third party if the third party were capable of taking
such action.
20
<PAGE> 21
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The Company has begun contingency planning for actions to be taken in
the event its operations are adversely affected by the Year 2000 Problem. A
contingency plan is expected to be completed by July 1999.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
21
<PAGE> 22
HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 1993, the DOJ, acting on behalf of the EPA, filed a complaint in
the United States District Court for the District of New Mexico alleging that
Navajo, beginning in September 1990, had violated and continued to violate RCRA
and implementing regulations of the EPA by treating, storing and disposing of
certain hazardous wastes without necessary authorization and without compliance
with regulatory requirements. The complaint sought a court order directing
Navajo to comply with these regulatory standards and civil penalties for the
alleged non-compliance. As discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note E to the Consolidated
Financial Statements, an agreed settlement of this case has been completed.
In August 1998, a lawsuit was filed by Longhorn Partners Pipeline, L.P.
in state district court in El Paso, Texas against the Company and two of its
subsidiaries. The suit seeks damages against the Company alleged to total up to
$1,050,000,000 based on claims of violations of the Texas Free Enterprise and
Antitrust Act, unlawful interference with existing and prospective contractual
relations, and conspiracy to abuse process. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note E to the
Consolidated Financial Statements for a further discussion of this lawsuit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits on page 24.
(b) Reports on Form 8-K: None.
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLY CORPORATION
------------------------------
(Registrant)
Date: March 16, 1999 By /s/ Henry A. Teichholz
---------------- ----------------------------
Henry A. Teichholz
Vice President, Treasurer
and Controller
(Duly Authorized Principal
Financial and Accounting
Officer)
23
<PAGE> 24
HOLLY CORPORATION
INDEX TO EXHIBITS
(Exhibits are numbered to correspond to the
exhibit table in Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 2,838
<SECURITIES> 0
<RECEIVABLES> 83,802
<ALLOWANCES> 0
<INVENTORY> 43,467
<CURRENT-ASSETS> 145,668
<PP&E> 335,799
<DEPRECIATION> 161,773
<TOTAL-ASSETS> 339,187
<CURRENT-LIABILITIES> 123,254
<BONDS> 79,262
0
0
<COMMON> 87
<OTHER-SE> 111,981
<TOTAL-LIABILITY-AND-EQUITY> 339,187
<SALES> 259,386
<TOTAL-REVENUES> 259,750
<CGS> 226,390
<TOTAL-COSTS> 245,497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,913
<INCOME-PRETAX> 1,329
<INCOME-TAX> 518
<INCOME-CONTINUING> 811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 811
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
