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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 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)
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DELAWARE 75-1056913
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
100 CRESCENT COURT 75201-6927
SUITE 1600 (Zip Code)
DALLAS, TEXAS
(Address of principal executive offices)
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Registrant's telephone number, including area code: (214) 871-3555
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 Par Value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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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 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 Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On October 20, 1999, the aggregate market value of the Common Stock, par
value $.01 per share, held by non-affiliates of the registrant was approximately
$70,000,000. (This is not to be deemed an admission that any person whose shares
were not included in the computation of the amount set forth in the preceding
sentence necessarily is an "affiliate" of the registrant.)
8,253,514 shares of Common Stock, par value $.01 per share, were
outstanding on October 20, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's proxy statement for its annual meeting of
stockholders in December 1999, which proxy statement will be filed with the
Securities and Exchange Commission within 120 days after July 31, 1999, are
incorporated by reference in Part III.
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TABLE OF CONTENTS
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Item Page
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PART I
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1 & 2. Business and properties..................................................... 3
3. Legal proceedings........................................................... 17
4. Submission of matters to a vote of security stockholders.................... 18
PART II
5. Market for the Registrant's common equity and related
stockholder matters...................................................... 20
6. Selected financial data..................................................... 21
7. Management's discussion and analysis of financial condition
and results of operations................................................ 22
7a. Quantitative and qualitative disclosures about market risk.................. 35
8. Financial statements and supplementary data................................. 35
9. Changes in and disagreements with accountants on accounting
and financial disclosure................................................. 62
PART III
10. Directors and executive officers of the Registrant.......................... 62
11. Executive compensation...................................................... 62
12. Security ownership of certain beneficial owners
and management........................................................... 62
13. Certain relationships and related transactions.............................. 62
PART IV
14. Exhibits, financial statement schedules and reports on
Form 8-K.................................................................. 63
Signatures................................................................................ 64
Index to exhibits......................................................................... 66
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This Annual Report on Form 10-K (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 22.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Holly Corporation, including its consolidated and wholly-owned
subsidiaries, herein referred to as the "Company" unless the context otherwise
indicates, is principally an independent petroleum refiner, which produces high
value light products such as gasoline, diesel fuel and jet fuel. The Company was
incorporated in Delaware in 1947 and maintains its principal corporate offices
at 100 Crescent Court, Suite 1600, Dallas, Texas 75201-6927. The telephone
number of the Company is 214-871-3555, and its internet website address is
www.hollycorp.com. The company also maintains executive offices in Artesia, New
Mexico.
Navajo Refining Company ("Navajo"), one of the Company's wholly-owned
subsidiaries, owns a high-conversion petroleum refinery in Artesia, New Mexico,
which Navajo operates in conjunction with crude, vacuum distillation and other
facilities situated 65 miles away in Lovington, New Mexico (collectively, the
"Navajo Refinery"). The Navajo Refinery has a crude capacity of 60,000
barrels-per-day ("BPD"), can process a variety of high sulphur (sour) crude oils
and serves markets in the southwestern United States and northern Mexico. The
Company also owns Montana Refining Company, a Partnership ("MRC"), which owns a
7,000 BPD petroleum refinery near Great Falls, Montana ("Montana Refinery"),
which can process a variety of high sulfur crude oils and which primarily serves
markets in Montana. In conjunction with the refining operations, the Company
operates approximately 1,300 miles of pipelines as part of its supply and
distribution network of the Company's refineries.
In recent years, the Company has made an effort to develop and expand a
pipeline transportation business that would generate revenues from unaffiliated
parties. During the fiscal year ended July 31, 1999, the Company realized
significant earnings from these operations. The pipeline transportation business
segment operations includes approximately 900 miles of pipelines, of which
approximately 400 miles are also used as part of the supply and distribution
network of the Navajo Refinery. Additionally, the Company has a 25% investment
in Rio Grande Pipeline Company, which provides transportation of liquid
petroleum gases ("LPG") to northern Mexico. In addition to its refining and
pipeline transportation operations, the Company also conducts a small-scale oil
and gas exploration and production program and has a small investment in a joint
venture retail gasoline station and convenience store business in Montana.
The Company's operations are currently organized into two business
divisions, which are Refining, including the Navajo Refinery and the Montana
Refinery, and Pipeline Transportation. Operations of the Company that are not
included in either the Refining or Pipeline Transportation business divisions
include the operations of Holly Corporation, the parent company, as well as the
oil and gas operations and the retail gasoline stations investment. The
accompanying discussion of the Company's business and properties reflects this
organizational structure.
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REFINERY OPERATIONS
The Company's refinery operations include the Navajo Refinery and the
Montana Refinery.
The following table sets forth certain information about the combined
refinery operations of the Company during the last three fiscal years:
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Years Ended July 31,
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1999 1998 1997
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Crude charge (BPD)(1) ....................... 66,200 59,400(2) 65,600
Refinery production (BPD)(3) ................ 70,700 61,800(2) 68,600
Sales of produced refined products (BPD) .... 70,400 63,100(2) 67,100
Sales of refined products (BPD)(4) .......... 75,400 67,700(2) 69,300
Refinery utilization(5) ..................... 98.8% 88.7%(2) 97.9%
Average per barrel(6)
Net sales ................................. $ 21.29 $ 23.48 $ 28.37
Raw material costs ........................ 15.38 17.39 23.19
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Refinery margin ........................... 5.91 6.09 5.18
Cash operating costs(7) ................... 3.49 3.68 3.20
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Net cash operating margin ................. $ 2.42 $ 2.41 $ 1.98
========== ========== ==========
Sales of produced refined products (BPD)
Gasolines ................................. 57.0% 55.5% 55.8%
Diesel fuels .............................. 21.2 21.6 23.0
Jet fuels ................................. 10.4 10.5 9.7
Asphalt ................................... 7.6 8.2 7.2
LPG and other ............................. 3.8 4.2 4.3
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Total ................................. 100.0% 100.0% 100.0%
========== ========== ==========
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(1) Barrels per day of crude oil processed.
(2) Crude charge, refinery production, sales of produced refined products and
utilization rates were reduced as a result of a scheduled turnaround for
major maintenance at the Navajo Refinery.
(3) Barrels per day of refined products produced from crude oil and other feed
and blending stocks.
(4) Includes refined products purchased for resale representing 5,000 BPD,
4,600 BPD and 2,200 BPD respectively.
(5) Crude charge divided by total crude capacity of 67,000 BPD.
(6) Represents average per barrel amounts for produced refined products sold.
(7) Includes operating costs and selling, general and administrative expenses
of refineries, as well as pipeline expenses that are part of refinery
operations.
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NAVAJO REFINERY
FACILITIES
The Navajo Refinery's crude capacity is 60,000 BPD and it has the
ability to process a variety of sour crude oils into high value light products
(such as gasoline, diesel fuel and jet fuel).
For the last three fiscal years, sour crude oils have represented
approximately 85% of the crude oils processed by the Navajo Refinery. The Navajo
Refinery's processing capabilities enable management to vary its crude supply
mix to take advantage of changes in raw material prices and to respond to
fluctuations in the availability of crude oil supplies. The Navajo Refinery
converts approximately 90% of its raw materials throughput into high value light
products. For fiscal 1999, gasoline, diesel fuel and jet fuel (excluding volumes
purchased for resale) represented 58.7%, 21.0%, and 10.9%, respectively, of
Navajo's sales volume.
The following table sets forth certain information about the operations of
the Navajo Refinery during the last three fiscal years:
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Years Ended July 31,
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1999 1998 1997
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Crude charge (BPD)(1) ....................... 59,700 53,100(2) 59,500
Refinery production (BPD)(3) ................ 63,800 55,300(2) 62,300
Sales of produced refined products (BPD) .... 63,700 56,400(2) 61,000
Sales of refined products (BPD)(4) .......... 68,300 60,900(2) 62,400
Refinery utilization(5) ..................... 99.4% 88.5%(2) 99.2%
Average per barrel(6)
Net sales ................................. $ 21.09 $ 23.35 $ 28.26
Raw material costs ........................ 15.46 17.59 23.39
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Refinery margin ........................... $ 5.63 $ 5.76 $ 4.87
========== ========== ==========
</TABLE>
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(1) Barrels per day of crude oil processed.
(2) Crude charge, refinery production, sales of produced refined products and
utilization rates were reduced as a result of a scheduled turnaround for
major maintenance.
(3) Barrels per day of refined products produced from crude oil and other feed
and blending stocks.
(4) Includes refined products purchased for resale representing 4,600 BPD,
4,500 BPD and 1,400 BPD respectively.
(5) Crude charge divided by total crude capacity of 60,000 BPD.
(6) Represents average per barrel amounts for produced refined products sold.
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Navajo's Artesia facility is located on a 300-acre site and has fully
integrated crude, fluid catalytic cracking ("FCC"), vacuum distillation,
alkylation, hydrodesulfurization, isomerization and reforming units, and
approximately 1.5 million barrels of feedstock and product tank storage, as well
as other supporting units and office buildings at the site. The Artesia
facilities are operated in conjunction with integrated refining facilities
located in Lovington, New Mexico, approximately 65 miles east of Artesia. The
principal equipment at Lovington consists of a crude unit and an associated
vacuum unit. The Lovington facility processes crude oil into intermediate
products, which are transported to Artesia by means of a Company-owned
eight-inch pipeline which are then upgraded into finished product at the Artesia
facility.
The Company has approximately 500 miles of crude gathering pipelines
leading to the Artesia and Lovington facilities from various points in
southeastern New Mexico. In addition, during the fourth quarter of fiscal 1998
the Company acquired from Fina Oil and Chemical Company a crude oil gathering
system in West Texas. This system includes approximately 500 miles of pipelines
and 400,000 barrels of tankage and is being used to provide crude oil
transportation services to third parties as well as to transport West Texas
crude oil that may be exchanged for crude oil used in the Navajo Refinery.
The Company distributes refined products from the Navajo Refinery to its
principal markets primarily through two Company-owned pipelines which extend
from Artesia to El Paso. The Company has product storage at terminals in Tucson,
Albuquerque, Artesia and El Paso.
Navajo Western Asphalt Company, a wholly-owned subsidiary of the
Company, owns and operates an asphalt terminal, blending and modification
facility near Phoenix. In addition to marketing asphalt produced at the Navajo
Refinery, Navajo Western markets asphalt produced by third parties.
MARKETS AND COMPETITION
The Navajo Refinery primarily serves the growing southwestern United
States market, including El Paso, Albuquerque, Phoenix and Tucson, and the
northern Mexico market. The Company's products are shipped by pipeline from El
Paso to Albuquerque and from El Paso to Mexico via products pipeline systems
owned by Chevron Pipeline Company and from El Paso to Tucson and Phoenix via a
products pipeline system owned by Kinder Morgan's Santa Fe Pacific Pipeline.
The petroleum refining business is highly competitive. Among the
Company's competitors are some of the world's largest integrated petroleum
companies, which have their own crude oil supplies, distribution and marketing
systems. The Company competes with independent refiners as well. Competition in
particular geographic markets is affected primarily by the amounts of refined
products produced by refineries located in such markets and by the availability
of refined products and the cost of transportation to such markets from
refineries located outside those markets.
THE EL PASO MARKET
Most of the light products of the Company's Navajo Refinery (i.e.
products other than asphalt, LPGs and carbon black oil) are currently shipped to
El Paso on pipelines owned and operated by the Company. Of the products shipped
to El Paso, most are subsequently shipped
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(either by the Company or by purchasers of the products from the Company) via
common carrier pipeline (and to a minor degree by common carrier trucks) to
Tucson and Phoenix, Arizona, Albuquerque, New Mexico and markets in northern
Mexico; the remaining products shipped to El Paso are sold to wholesale
customers primarily for ultimate retail sale in the El Paso area. The Company
expanded its capacity to supply El Paso in 1996 when the Company replaced an
8-inch pipeline from Orla to El Paso, Texas with a new 12-inch line, a portion
of which has been leased to FINA, Inc. ("FINA") to transport refined products
from the FINA refinery in Big Spring, Texas to El Paso.
The El Paso market for refined products is supplied by a number of
refiners located either in El Paso or within a radius of several hundred miles.
The Company accounts for approximately 15% of the refined products consumed in
the El Paso market. Since 1995, the volume of refined products transported by
various suppliers via pipeline to El Paso has substantially expanded, in part as
a result of the Company's new 12-inch pipeline described above and primarily as
a result of the completion in November 1995 of the Ultramar Diamond Shamrock
Corporation ("UDS") 10-inch pipeline running 408 miles from the UDS refinery
near Dumas, Texas to El Paso. The capacity of this pipeline (in which Phillips
Petroleum Company now has a 1/3 interest) is currently 60,000 BPD after an
expansion completed in 1999.
Until 1998, the El Paso market and markets served from El Paso were
generally not supplied by refined products produced by the large refineries on
the Texas Gulf Coast. While wholesale prices of refined products on the Gulf
Coast have historically been lower than prices in El Paso, distances from the
Gulf Coast to El Paso (more than 700 miles if the most direct route is used)
have made transportation by truck unfeasible and have discouraged the
substantial investment required for development of refined products pipelines
from the Gulf Coast to El Paso.
In 1998, a Texaco, Inc. subsidiary completed a 16-inch refined products
pipeline running from the Gulf Coast to Midland, Texas along a northern route
(through Corsicana, Texas). This pipeline, now owned by Equilon Enterprises LLC
("Equilon"), is linked to a 6-inch pipeline, also owned by Equilon, that is
currently being used to transport to El Paso approximately 18,000 BPD of refined
products that are produced on the Texas Gulf Coast (this volume replaces a
similar volume produced in the Shell Oil Company refinery in Odessa, Texas,
which was recently shut down). The Equilon line from the Gulf Coast to Midland
has the potential to be linked to existing or new pipelines running from the
Midland, Texas area to El Paso with the result that substantial additional
volumes of refined products could be transported from the Gulf Coast to El Paso.
THE PROPOSED LONGHORN PIPELINE
An additional potential source of pipeline transportation from Gulf
Coast refineries to El Paso is the proposed Longhorn Pipeline. This pipeline is
proposed to run approximately 700 miles from the Houston area of the Gulf Coast
to El Paso, utilizing a direct route. The owner of the Longhorn Pipeline,
Longhorn Partners Pipeline, L.P., a Delaware limited partnership that includes
affiliates of Exxon Pipeline Company, BP/Amoco Pipeline Company, Williams
Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. and Chisholm
Holdings as limited partners ("Longhorn Partners"), has proposed to use the
pipeline initially to transport approximately 72,000 BPD of refined products
from the Gulf Coast to El Paso and markets served from El Paso, with an ultimate
maximum capacity of 225,000 BPD. A critical feature of this proposed petroleum
products pipeline is that it would utilize, for approximately 450 miles
(including areas overlying the
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environmentally sensitive Edwards Aquifer and Edwards-Trinity Aquifer and
heavily populated areas in the southern part of Austin, Texas) an existing
pipeline (previously owned by Exxon Pipeline Company) that was constructed in
about 1950 for the shipment of crude oil from West Texas to the Houston area.
The Longhorn Pipeline is not currently operating because of a federal
court injunction in August 1998 and a settlement agreement in March 1999 entered
into by Longhorn Partners, the United States Environmental Protection Agency
("EPA") and Department of Transportation ("DOT"), and the other parties to the
federal lawsuit that had resulted in the injunction. The March 1999 settlement
agreement required the preparation of an Environmental Assessment under the
authority of the EPA and the DOT. A draft Environmental Assessment (the "Draft
EA") on the Longhorn Pipeline was released on October 22, 1999. The Draft EA
proposes a preliminary Finding of No Significant Impact with respect to the
Longhorn Pipeline provided that Longhorn Partners carries out a proposed
mitigation plan developed by Longhorn Partners which contains 34 elements. Some
of elements of the proposed mitigation plan are required to be completed before
the Longhorn Pipeline is allowed to operate, with the remainder required to be
completed later or to be implemented for as long as operations continue. Public
comments on the Draft EA may be submitted to the EPA and DOT until the end of
November 1999 and in November 1999 there will be a series of five public
meetings on the Draft EA at specified locations in Texas. The Company believes
that public comments will raise questions concerning certain elements of the
Draft EA. A final determination by the EPA and DOT with respect to the matters
considered in the Draft EA could be issued as early as 30 days following the end
of the public comment period.
The Company supported the initial plaintiffs in the lawsuit that
resulted first in the federal court injunction against operation of the Longhorn
Pipeline and subsequently in the settlement agreement that requires an
Environmental Assessment. In addition, the Company supported the preparation of
submissions on technical matters to the contractor that conducted the
Environmental Assessment. The Company believes that the Longhorn Pipeline, as
originally proposed to operate beginning in the fall of 1998, would have
improperly avoided the substantial capital expenditures required to comply with
environmental and safety standards that are normally imposed on major pipeline
projects involving environmentally sensitive areas. The Company's belief in this
regard was based in part on the fact that, in 1987, a proposed new crude oil
pipeline (the All American Pipeline) over essentially the proposed route for the
Longhorn Pipeline was found unacceptable, after an environmental impact study,
because of serious potential dangers to the environmentally sensitive aquifers
over which that proposed pipeline would have operated.
If the Longhorn Pipeline is allowed to operate as currently proposed,
the substantially lower requirement for capital investment would permit Longhorn
Partners to give its shippers a cost advantage through lower tariffs that could,
at least for a period, result in significant downward pressure on wholesale
refined products prices and refined products margins in El Paso and related
markets. Although some current suppliers in the market might not compete in such
a climate, the Company's analyses indicate that, because of location and recent
capital improvements, the Company's position in El Paso and markets served from
El Paso could withstand such a period of lower prices and margins. However, the
Company's results of operations could be adversely impacted if the Longhorn
Pipeline were allowed to operate as currently proposed. It is not possible to
predict whether and, if so, under what conditions, the Longhorn Pipeline
ultimately will be allowed to operate, nor is it possible to predict the
consequences for the Company of Longhorn Pipeline's operations if they occur.
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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 (along with an Austin, Texas law firm which was subsequently
dropped from the case). The suit, as amended by Longhorn Partners in March 1999,
seeks damages alleged to total up to $1,050,000,000 (after trebling) 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. The specific action of the Company complained of in the
Longhorn Lawsuit is the support of lawsuits brought by ranchers in West Texas to
challenge the proposed use by the Longhorn Pipeline of easements and
rights-of-way that were granted over 50 years ago for the Exxon crude oil
pipeline. 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 relating
to the Longhorn Suit.
ARIZONA AND ALBUQUERQUE MARKETS
The common carrier pipelines used by the Company to serve the Arizona
and Albuquerque markets are currently operated at or near capacity and are
subject to proration. As a result, the volumes of refined products that the
Company and other shippers have been able to deliver to these markets have been
limited. The flow of additional products into El Paso for shipments to Arizona,
either as a result of the Longhorn Pipeline or otherwise, could further
exacerbate such constraints on deliveries to Arizona. No assurances can be given
that the Company will not experience future constraints on its ability to
deliver its products through the pipelines to Arizona. In the case of the
Albuquerque market, the common carrier pipeline used by the Company to serve
this market currently operates at or near capacity with resulting limitations on
the amount of refined products that the Company and other shippers can deliver.
As discussed below (see "Capital Improvement Projects"), the Company has entered
into a Lease Agreement (the "Lease Agreement") for a pipeline between Artesia
and the Albuquerque vicinity and Bloomfield, New Mexico with Mid-America
Pipeline Company. The Company has completed a refined products terminal in
Bloomfield and is completing construction of a diesel fuel terminal east of
Albuquerque. The Company is also in the process of pursuing different
alternatives to address terminalling needs in Albuquerque. While the Company is
proceeding as expeditiously as possible on the Albuquerque project, it is not
possible at present to determine when the project will be completed. Completion
of this project would allow the Company to transport products directly to
Albuquerque on the leased pipeline, thereby eliminating third party tariff
expenses and the risk of future pipeline constraints on shipments to
Albuquerque. Any future constraints on the Company's ability to transport its
refined products to Arizona or Albuquerque could, if sustained, adversely affect
the Company's results of operations and financial condition.
An additional factor that could affect the Company's market is excess
pipeline capacity from the West Coast into the Company's Arizona markets after
the pipeline's expansion this year. If additional refined products become
available on the West Coast in excess of demand in that market, additional
products may be shipped into the Company's Arizona markets with resulting
possible downward pressure on refined product prices in the Company's markets.
In April 1999, the Williams Companies and Equilon Enterprises LLC (a
joint venture of Texaco Inc. and the Royal Dutch/Shell Group) announced a
1,010-mile pipeline, called the "Aspen Pipeline," to carry gasoline and other
refined fuels from Texas to Utah. It was announced that the
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pipeline would have a capacity of 65,000 BPD and shipments will begin in late
2000. In addition to the pipeline, product terminals would be built, including a
terminal in Albuquerque, New Mexico. This venture could result in an increase in
the supply of products to some of the Company's markets.
OTHER DEVELOPMENTS AFFECTING MARKETS AND COMPETITION
In addition to the projects described above, other projects have been
explored from time to time by refiners and other entities, which projects, if
consummated, could result in a further increase in the supply of products to
some or all of the Company's markets.
In recent years, there have been several refining and marketing
consolidations or acquisitions between entities competing in the Company's
geographic market. While these transactions could increase the competitive
pressures on the Company, the specific ramifications of these or other potential
consolidations cannot presently be determined.
CRUDE OIL AND FEEDSTOCK SUPPLIES
The Navajo Refinery is situated near the Permian Basin in an area which
historically has had abundant supplies of crude oil available both for regional
users, such as the Company, and for export to other areas. The Company purchases
crude oil from producers in nearby southeastern New Mexico and west Texas, from
major oil companies and on the spot market. Crude oil is gathered both through
the Company's pipelines and tank trucks and through third party crude oil
pipeline systems. Crude oil acquired in locations distant from the refinery is
exchanged for crude oil that is transportable to the refinery. With its recent
purchase of the West Texas gathering system, Navajo will have the ability to
purchase crude oil at the lease in additional areas in West Texas, which should
add to the continued stability of the Navajo Refinery crude oil supply. In
addition the Company completed a 65 mile pipeline between Lovington and Artesia,
New Mexico which increases the Company's ability to access additional raw
materials for the Navajo Refinery.
PRINCIPAL PRODUCTS AND MARKETS
The Navajo Refinery converts approximately 90% of its raw materials
throughput into high value light products. Set forth below is certain
information regarding the principal products of Navajo during the last three
fiscal years:
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Years ended July 31,
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1999 1998 1997
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BPD % BPD % BPD %
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Sales of produced refined
products(1)
Gasolines 37,400 58.7% 32,200 57.1% 34,700 56.9%
Diesel fuel 13,400 21.0 12,200 21.6 14,300 23.4
Jet fuels 6,900 10.9 6,300 11.2 6,000 9.8
Asphalt 3,600 5.6 3,300 5.9 3,400 5.6
LPG and other 2,400 3.8 2,400 4.2 2,600 4.3
------ ----- ------ ----- ------ -----
Total 63,700 100.0% 56,400 100.0% 61,000 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
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(1) Excludes refined products purchased for resale.
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Light products are shipped by product pipelines or are made available at
distant points by exchanges with others. Light products are also made available
to customers through truck loading facilities at the refineries and at
terminals. The demand for the Company's gasoline and asphalt products has
historically been stronger from March through October, which are the peak
"driving" and road construction months, than during the rest of the year.
Navajo's principal customers for gasoline include other refiners,
convenience store chains, independent marketers, an affiliate of PEMEX (the
government-owned energy company of Mexico) and retailers. Navajo's gasoline is
marketed in the southwestern United States, including the metropolitan areas of
El Paso, Phoenix, Albuquerque, and Tucson, and in portions of northern Mexico.
Diesel fuel is sold to other refiners, wholesalers, independent dealers and
railroads. Jet fuel is sold primarily for military use. Military jet fuel is
sold to the Defense Fuel Supply Center (the "DFSC") of the Defense Logistics
Agency under a series of one-year contracts that can vary significantly from
year to year. Navajo sold approximately 6,900 BPD of jet fuel to the DFSC in its
1999 fiscal year and has a contract to supply 7,000 BPD to the DFSC for the year
ending September 30, 2000. Asphalt is sold to contractors and government
authorities for highway construction and maintenance. Carbon black oil is sold
for further processing and LPGs are sold to petrochemical plants and are used as
fuel in refinery operations.
Approximately 9% of the Company's revenues for fiscal 1999 resulted from
the sale of military jet fuel to the United States government. Although there
can be no assurance that the Company will be awarded such contracts in the
future, the Company has had a supply contract with the United States government
for each of the last 30 years. Approximately 10% of the Company's revenues for
fiscal 1999 resulted from the sale for export of gasoline and diesel fuel to an
affiliate of PEMEX. Those sales were made under contracts that expire December
1999. The loss of the Company's supply contract with the United States
government or with PEMEX could have a material adverse effect on the Company's
results of operations. In addition to the United States Government and PEMEX,
other significant sales were made to two petroleum companies. Tosco Corporation
and affiliates are a purchaser of gasoline and diesel fuel for resale to retail
customers and accounted for approximately 15% of the Company's revenues in
fiscal 1999. Arco Products Company is a purchaser of gasoline for resale to
retail customers and accounted for approximately 13% of the Company's revenues
in fiscal 1999. The Company believes a loss of, or reduction in amounts
purchased by, major purchasers that resell to retail customers would not have a
material adverse effect on the Company, since the Company's sales volumes with
respect to products whose end-users are retail customers appear to have been
historically more dependent on general retail demand and product supply in the
Company's primary markets than on sales to any specific purchaser and therefore
the impact of such a loss on the Company's results of operations should be
limited.
CAPITAL IMPROVEMENT PROJECTS
The Company has invested significant amounts in capital expenditures in
recent years to enhance the Navajo Refinery and expand its supply and
distribution network. For the 2000 fiscal year, the capital budget of Navajo
Refinery, including its supply and distribution network, totals approximately
$20 million. The components of this budget are $8 million for various refinery
improvements, $9 million for required costs relating to a purchased
hydrotreater, as described below, and $3 million for various pipeline and
transportation projects. In addition to these projects, the
-11-
<PAGE> 12
Company plans to expend in the 2000 fiscal year a total of $8 million on items
that were approved in previous capital budgets, including projects at the Navajo
Refinery 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.
As part of its efforts to improve operating efficiencies, the Company
constructed an isomerization unit and upgraded the FCC unit at the Navajo
Refinery. The isomerization unit, which was completed in February 1997,
increases the refinery's internal octane generating capabilities, thereby
improving light product yields and increasing the refinery's ability to upgrade
additional amounts of lower priced purchased natural gasoline into finished
gasoline. The upgrade of the refinery's FCC unit, which was implemented during
the Navajo Refinery's scheduled turnaround in the first quarter and early part
of the second quarter of fiscal 1998, improves the yield of high value products
from the FCC unit by incorporating certain state-of-the-art upgrades.
In addition to the above projects, the Company purchased a hydrotreater
unit for $5 million from a closed refinery in November 1997. This purchase
should give the Company the ability to reconstruct the unit at the Navajo
Refinery at a substantial savings relative to the purchase cost of a new unit.
The hydrotreater will enhance higher value, light product yields and facilitate
the Company's ability to meet the present California Air Resources Board
("CARB") standards, which have been adopted in the Company's Phoenix market for
winter months beginning in the latter part of 2000. Part of the fiscal 2000
capital budget are commitments related to the hydrotreater of $9 million, which
include costs to relocate the unit to the Navajo Refinery and construct a sulfur
recovery unit, which will be immediately utilized and work in conjunction with
the hydrotreater when completed, and certain long-lead-time pieces of equipment
of the hydrotreater. The Company, subject to obtaining necessary permitting in a
timely manner, expects to complete the hydrotreater in the latter part of 2001.
Remaining costs to complete the hydrotreater are estimated to be approximately
$20 million, in addition to the current $9 million budgeted amount. Based on the
current configuration at the Navajo Refinery, the Company can supply current
sales volumes into the Phoenix market under the CARB standards prior to
completion of the hydrotreater.
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 as well as terminalling facilities in
Bloomfield. The Company is in the process of completing the construction of a
diesel fuel terminal 40 miles east of Albuquerque in Moriarty and is considering
different alternatives regarding its terminalling needs in Albuquerque. 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.
Transportation of petroleum products to markets in northwest New Mexico and
diesel fuels to Moriarty, New Mexico, near Albuquerque, are planned to begin in
late 1999.
The additional pipeline capacity resulting from the new pipelines
constructed in conjunction with the Rio Grande joint venture (discussed under
"Pipeline Transportation") and from the Leased Pipeline should reduce pipeline
operating expenses at existing throughputs. In addition, the new pipeline
capacity will 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.
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<PAGE> 13
MONTANA REFINERY
MRC owns a 7,000 BPD petroleum refinery near Great Falls, Montana, which
can process a wide range of crude oils and primarily serves markets in Montana.
For the last three fiscal years, excluding downtime for scheduled maintenance
and turnarounds, the Montana Refinery has operated at an average annual crude
capacity utilization rate of approximately 92%.
The following table sets forth certain information about the operations
of Montana Refinery during the last three fiscal years:
<TABLE>
<CAPTION>
Years Ended July 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Crude charge (BPD)(1) ....................... 6,600 6,300 6,100(2)
Refinery production (BPD)(3) ................ 6,900 6,500 6,300(2)
Sales of produced refined products (BPD) .... 6,700 6,700 6,100(2)
Sales of refined products (BPD)(4) .......... 7,100 7,100 6,900(2)
Refinery utilization(5) ..................... 93.7% 90.4% 87.1%(2)
Average per barrel(6)
Net sales ................................. $ 23.13 $ 24.51 $ 29.47
Raw material costs ........................ 14.63 15.69 21.25
--------- --------- ---------
Refinery margin ........................... $ 8.50 $ 8.82 $ 8.22
========= ========= =========
</TABLE>
- ----------
(1) Barrels per day of crude oil processed.
(2) Crude charge, refinery production, sales of produced refined products and
utilization rates were reduced as a result of a scheduled turnaround for
major maintenance.
(3) Barrels per day of refined products produced from crude oil and other feed
and blending stocks.
(4) Includes refined products purchased for resale representing 400 BPD, 400
BPD and 800 BPD respectively.
(5) Crude charge divided by total crude capacity of 7,000 BPD.
(6) Represents average per barrel amounts for produced refined products sold.
The Montana Refinery currently obtains its supply of crude oils
primarily from suppliers in Canada via a 93-mile Company-owned pipeline, which
runs from the Canadian border to the refinery. The Montana Refinery's principal
markets include Great Falls, Helena, Bozeman and Billings, Montana. MRC competes
principally with three other Montana refineries.
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<PAGE> 14
Set forth below is certain information regarding the principal products
of Montana Refinery during the last three fiscal years:
<TABLE>
<CAPTION>
Years ended July 31,
--------------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
BPD % BPD % BPD %
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Sales of produced refined
products(1)
Gasolines 2,800 41.8% 2,800 41.8% 2,700 44.3%
Diesel fuels 1,500 22.4 1,500 22.4 1,200 19.7
Jet fuels 400 6.0 300 4.4 500 8.2
Asphalt 1,700 25.3 1,800 26.9 1,400 22.9
LPG and other 300 4.5 300 4.5 300 4.9
----- ----- ----- ----- ----- -----
Total 6,700 100.0% 6,700 100.0% 6,100 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
- ----------
(1) Excludes refined products purchased for resale.
For the 2000 fiscal year, MRC's capital budget totals $750,000, most of
which is for various improvements at the Montana Refinery.
PIPELINE TRANSPORTATION OPERATIONS
PIPELINE TRANSPORTATION BUSINESS
In recent years, the Company has made an effort to develop and expand a
pipeline transportation business generating revenues from unaffiliated parties.
During the fiscal year ended July 31, 1999, the Company realized significant
earnings from these operations. The pipeline transportation operations include
approximately 900 miles of pipelines, of which approximately 400 miles are part
of the supply and distribution network of the Navajo Refinery. Additionally, the
Company has a 25% investment in Rio Grande Pipeline Company, which provides
petroleum products transportation. For fiscal 2000, the Company has budgeted
approximately $1 million for capital expenditures for the pipeline
transportation business.
The Company has a 25% interest in a pipeline joint venture ("Rio
Grande") with Mid-America Pipeline Company and Amoco Pipeline Company to
transport liquid petroleum gases to Mexico. Deliveries by the joint venture
began in April 1997. In October 1996, the Company completed a new 12" refined
products pipeline from Orla to El Paso, Texas, which replaced a portion of an 8"
pipeline previously used by Navajo, which was transferred to Rio Grande.
The Company has implemented an alliance with FINA, Inc. ("FINA") to
create a comprehensive supply network that can increase substantially the
supplies of gasoline and diesel fuel in the West Texas, New Mexico, and Arizona
markets to meet expected increasing demand in the future. FINA constructed a
50-mile pipeline which connected an existing FINA pipeline system to the
Company's 12" pipeline between Orla, Texas and El Paso, Texas pursuant to a
long-term lease of certain capacity of the Company's 12" pipeline. In August
1998, FINA began transporting to El Paso gasoline and diesel fuel from its Big
Spring, Texas refinery. Pursuant to this long-term lease
-14-
<PAGE> 15
agreement, FINA will ultimately have the right to transport up to 20,000 BPD to
El Paso on this interconnected system. In August 1998, the Company began to
realize pipeline rental and terminalling revenues from FINA under these
agreements.
In the fourth quarter of fiscal 1998, the Company purchased from Fina
Oil and Chemical Company a crude oil gathering system in West Texas. The assets
purchased include approximately 500 miles of pipelines and over 350,000 barrels
of tankage. Approximately 23,000 barrels per day of crude oil were gathered on
these systems in fiscal 1999. The Company believes that these assets should
generate a stable source of transportation service income, and will give Navajo
the ability to purchase crude oil at the lease in new areas, thus potentially
enhancing the stability of crude oil supply and refined product margins for the
Navajo Refinery.
During the fourth quarter of fiscal 1999, the Company completed 65 miles
of new pipeline between Lovington and Artesia, NM, to permit the delivery of
isobutane (and/or other LPGs) to another refinery in El Paso as well as to
increase the Company's ability to access additional raw materials for the Navajo
Refinery.
ADDITIONAL OPERATIONS AND OTHER INFORMATION
CORPORATE OFFICES
The Company leases its principal corporate offices in Dallas, Texas. The
operations of Holly Corporation, the parent company, are performed at this
location. Functions performed by the parent company include overall corporate
management, planning and strategy, legal support, treasury management and
financial reporting.
EXPLORATION AND PRODUCTION
The Company conducts a small-scale oil and gas exploration and
production program. For fiscal 2000, the Company has budgeted under $1 million
for capital expenditures related to oil and gas exploration activities.
JET FUEL TERMINAL
The Company owns and operates a 120,000 barrel capacity jet fuel
terminal near Mountain Home, Idaho, which serves as a terminalling facility for
jet fuel sold by unaffiliated producers to the Mountain Home United States Air
Force Base.
OTHER INVESTMENTS
In fiscal 1998, the Company invested and advanced a total of $2 million
to a joint venture operating retail service stations and convenience stores in
Montana. The Company has a 49% interest in the joint venture and accounts for
earnings using the equity method. The Company has reserved approximately
$700,000 related to the collectability of advances and related accrued interest
to this joint venture.
-15-
<PAGE> 16
EMPLOYEES AND LABOR RELATIONS
The Company currently has approximately 614 employees. Of its
employees, 253 are covered by collective bargaining agreements ("covered
employees"). Contracts relating to the covered employees at all facilities will
expire during 2001 and 2002. The Company considers its employee relations to be
good.
REGULATION
Refinery and pipeline operations are subject to federal, state and
local laws regulating the discharge of matter into the environment or otherwise
relating to the protection of the environment. Over the years, there have been
and continue to be ongoing communications, including notices of violations, and
discussions about environmental matters between the Company and federal and
state authorities, some of which have resulted or will result in changes of
operating procedures and in capital expenditures by the Company. Compliance with
applicable environmental laws and regulations will continue to have an impact on
the Company's operations, results of operations and capital requirements.
Effective January 1, 1995, certain cities in the country were required
to use only reformulated gasoline ("RFG"), a cleaner burning fuel. Phoenix is
the only principal market of the Company that currently requires RFG although
this requirement could be implemented in other markets over time. Phoenix has
adopted even more rigorous California Air Resources Board ("CARB") fuel
specifications for winter months beginning in the latter part of 2000. This new
requirement, other requirements of the federal Clean Air Act or other presently
existing or future environmental regulations could cause the Company to expend
substantial amounts to permit the Company's refineries to produce products that
meet applicable requirements. Completion of the hydrotreater, discussed above,
will help the Company to meet these requirements.
The Company is and has been the subject of various state, federal and
private proceedings relating to environmental regulations, conditions and
inquiries. Current and future environmental regulations inevitably will require
expenditures, including remediation, at the New Mexico and Montana refineries.
The extent of any such expenditures cannot presently be determined.
The Company's operations are also subject to various laws and
regulations relating to occupational health and safety. The Company maintains
safety, training and maintenance programs as part of its ongoing efforts to
ensure compliance with applicable laws and regulations. Moreover, recently
enacted comprehensive health and safety legislation has required and continues
to require substantial expenditures.
The Company cannot predict what additional health and environmental
legislation or regulations will be enacted or become effective in the future or
how existing or future laws or regulations will be administered or interpreted
with respect to products or activities to which they have not been previously
applied. Compliance with more stringent laws or regulations, as well as more
vigorous enforcement policies of regulatory agencies, could have an adverse
effect on the financial position and the results of operations of the Company
and could require substantial expenditures by the Company for the installation
and operation of pollution control systems and equipment not currently processed
by the Company.
-16-
<PAGE> 17
INSURANCE
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 judgment of the Company, do not justify such expenditures.
ITEM 3. LEGAL PROCEEDINGS
In August 1998, a lawsuit (the "Longhorn Suit") was filed in state
district court in El Paso, Texas against the Company and two of its subsidiaries
(along with an Austin, Texas law firm which was subsequently dropped from the
case). 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, as amended by Longhorn Partners in March 1999, seeks damages alleged to
total up to $1,050,000,000 (after trebling) 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; the specific
action of the Company complained of in the Longhorn Suit is the support of
lawsuits brought by ranchers in West Texas to challenge the proposed refined
products pipeline's use of easements and rights-of-way that were granted over 50
years ago for a crude oil pipeline. In mid-July 1999, the state district court
in El Paso denied a motion filed by the Company to transfer the venue of the
suit to a state district court in Dallas, Texas. 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 relating to the Longhorn Suit.
The Company is a party to various other litigation and proceedings
which it believes, based on advice of counsel, will not have a materially
adverse impact on its financial condition or results of operations.
-17-
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's 1999 fiscal year.
Executive Officers of Registrant (per instruction 3 to Item 401(b) of
Regulation S-K)
The executive officers of the Company as of October 21, 1999 are as
follows:
<TABLE>
<CAPTION>
Executive
Name Age Position Officer Since
---- --- -------- -------------
<S> <C> <C> <C>
Lamar Norsworthy 53 Chairman of the Board 1971
and Chief Executive Officer
Matthew P. Clifton 48 President and Director 1988
W. John Glancy 57 Senior Vice President, General 1998
Counsel, Secretary and Director
David F. Chavenson 47 Vice President and 1999
Chief Financial Officer
David G. Blair 41 Vice President, Marketing 1994
Asphalt and LPG
Leland J. M. Griffin 51 Vice President, Montana 1999
Operations
Randall R. Howes 42 Vice President, Engineering 1997
and Economics
John A. Knorr 49 Vice President, Crude Oil 1988
Supply and Trading
Virgil R. Langford 54 Vice President, Refining 1989
Mike Mirbagheri 60 Vice President, International 1982
Crude Oil and Refined
Products
Henry A. Teichholz 56 Vice President 1984
James G. Townsend 44 Vice President, Pipelines
and Terminals 1997
Kathryn H. Walker 49 Vice President, Accounting 1999
Gregory A. White 42 Vice President, Marketing 1994
Light Oils
</TABLE>
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<PAGE> 19
All officers of the Company are elected annually to serve until their
successors have been elected. Mr. Norsworthy occupied the additional office of
President from 1988 to 1995. Mr. Clifton previously served as Senior Vice
President from 1991 to 1995. Mr. Glancy held the office of Senior Vice
President, Legal from December 1998 through September 1999, when his title was
changed to Senior Vice President and General Counsel; he has held the additional
office of Secretary since April 1999; prior to December 1998, Mr. Glancy had
been outside counsel to the Company on various matters for over 10 years. Mr.
Chavenson has served in his respective position since April 1999. Mr. Chavenson
was Vice President and Chief Financial Officer and Secretary of Rutherford-Moran
Oil Corporation from 1996 to March 1999 and was Treasurer of Oryx Energy Company
from 1993 to 1996. Mr. Teichholz occupied the additional office of Controller
from 1984 to April 1999 and Treasurer from 1989 to April 1999. Mr. Knorr is also
President of one of the partners of MRC and serves as the General Manager of
MRC. Messrs. Howes and Townsend have served in their respective positions since
September 1997. Mr. Howes previously served as Manager of Technical Services of
Navajo from 1991 to 1997. Mr. Townsend previously served as Manager of
Transportation of Navajo from 1995 to 1997, and previously held various
transportation/pipeline positions. Mr. Griffin and Ms. Walker were elected to
their respective positions in September 1999. Mr. Griffin has served as the
Refinery Manager of the Montana Refinery since 1989. Ms. Walker has served as
the Controller of Navajo since 1993.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's common stock is traded on the American Stock Exchange
under the symbol "HOC". The following table sets forth the range of the daily
high and low sales prices per share of common stock, dividends paid per share
and the trading volume of common stock for the periods indicated:
<TABLE>
<CAPTION>
Total
Fiscal years ended July 31 High Low Dividends Volume
- -------------------------- ---- --- --------- ------
<S> <C> <C> <C> <C>
1998
First Quarter................ $28 13/16 $25 13/16 $ .15 721,200
Second Quarter............... 28 24 7/8 .15 416,900
Third Quarter................ 33 3/8 25 5/8 .15 871,500
Fourth Quarter............... 31 3/4 24 1/8 .15 648,600
1999
First Quarter................ $26 1/8 $14 3/8 $ .16 1,053,500
Second Quarter............... 17 3/8 14 .16 712,200
Third Quarter................ 15 5/8 12 1/4 .16 1,043,700
Fourth Quarter............... 15 3/4 12 5/8 .16 1,425,900
</TABLE>
As of July 31, 1999, the Company had approximately 1,800 stockholders of
record.
On September 24, 1999, the Company's Board of Directors declared a
regular quarterly dividend in the amount of $.17 per share payable on October 8,
1999. The Company intends to consider the declaration of a dividend on a
quarterly basis, although there is no assurance as to future dividends since
they are dependent upon future earnings, capital requirements, the financial
condition of the Company and other factors. The Senior Notes and Credit
Agreement limit the payment of dividends. See Note 6 to the Consolidated
Financial Statements.
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<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following table shows selected financial information for the Company as of
the dates or for the periods indicated. This table should be read in conjunction
with the consolidated financial statements of the Company and related notes
thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
($ in thousands, except per share amounts)
Years ended July 31, 1999 1998 1997 1996 1995
- ----------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
For the year
Sales and other revenues ............ $ 597,986 $ 590,299 $ 721,346 $ 676,290 $ 614,830
Income before income taxes and
cumulative effect of
accounting change ................. $ 33,159 $ 24,866 $ 21,819 $ 31,788 $ 20,147
Income tax provision ................ 13,222 9,699 8,732 12,554 7,730
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of accounting change ............. 19,937 15,167 13,087 19,234 12,417
Cumulative effect of
accounting change ................ -- -- -- -- 5,703
---------- ---------- ---------- ---------- ----------
Net income .......................... $ 19,937 $ 15,167 $ 13,087 $ 19,234 $ 18,120
========== ========== ========== ========== ==========
Income per common share
Income before cumulative
effect of accounting
change (basic and diluted) .... $ 2.42 $ 1.84 $ 1.59 $ 2.33 $ 1.51
Cumulative effect of
accounting change ............. -- -- -- -- .69
---------- ---------- ---------- ---------- ----------
Net income
(basic and diluted) ........... $ 2.42 $ 1.84 $ 1.59 $ 2.33 $ 2.20
========== ========== ========== ========== ==========
Cash dividends per common
share ............................ $ .64 $ .60 $ .51 $ .42 $ .40
Average number of shares of
common stock outstanding ......... 8,254,000 8,254,000 8,254,000 8,254,000 8,254,000
Net cash provided by
operating activities ........... $ 47,628 $ 38,193 $ 5,457 $ 44,452 $ 34,241
At end of year
Working capital ..................... $ 13,851 $ 14,793 $ 45,241 $ 66,649 $ 17,740
Total assets ........................ $ 390,982 $ 349,857 $ 349,803 $ 351,271 $ 287,384
Long-term debt (including
current portion) ................. $ 70,341 $ 75,516 $ 86,291 $ 97,065 $ 68,840
Stockholders' equity ................ $ 128,880 $ 114,349 $ 105,121 $ 96,243 $ 80,043
</TABLE>
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<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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-K, including without limitation those under "Markets and
Competition" under Items 1 and 2, "Legal Proceedings" under Item 3 and
"Liquidity and Capital Resources" and "Additional Factors that May Affect Future
Results" (including "Risk Management" and "The Year 2000 Problem") under this
Item 7 regarding the Company's financial position and results of operations, 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
or pipelines, governmental regulations and policies, the availability and cost
of financing to the Company, the effectiveness of capital investments and
marketing strategies by the Company, the costs of defense and the risk of an
adverse decision in the Longhorn Pipeline litigation, 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. Should one or more of these
risks or uncertainties, among others as set forth in this Form 10-K,
materialize, actual results may vary materially from those estimated,
anticipated or projected. Although the Company believes that the expectations
reflected by such forward-looking statements are reasonable based on information
currently available to the Company, no assurances can be given that such
expectations will prove to have been correct. Cautionary statements identifying
important factors that could cause actual results to differ materially from the
Company's expectations are set forth in this Form 10-K, including without
limitation in conjunction with the forward-looking statements included in this
Form 10-K that are referred to above. All forward-looking statements included in
this Form 10-K and all subsequent written or oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by these cautionary statements.
-22-
<PAGE> 23
RESULTS OF OPERATIONS
FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share data)(1) Years Ended July 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales and other revenues $ 597,986 $ 590,299 $ 721,346
Costs and expenses
Cost of products sold 428,472 440,042 586,604
Operating expenses 80,654 76,420 70,009
Selling, general and administrative expenses 22,159 13,714 13,348
Depreciation, depletion and amortization 26,358 24,379 20,153
Exploration expenses, including dry holes 1,370 2,979 3,732
--------- --------- ---------
559,013 557,534 693,846
--------- --------- ---------
Income from operations 38,973 32,765 27,500
Other
Equity in earnings of joint ventures 1,965 1,766 414
Interest expense, net (7,779) (7,725) (6,095)
Transaction costs of terminated merger -- (1,940) --
--------- --------- ---------
(5,814) (7,899) (5,681)
--------- --------- ---------
Income before income taxes 33,159 24,866 21,819
Income tax provision 13,222 9,699 8,732
--------- --------- ---------
Net income $ 19,937 $ 15,167 $ 13,087
========= ========= =========
Income per common share (basic and diluted) $ 2.42 $ 1.84 $ 1.59
Sales and other revenues (2)
Refining $ 582,172 $ 582,277 $ 715,023
Pipeline Transportation 11,936 695 --
Corporate and other 3,878 7,327 6,323
--------- --------- ---------
Consolidated $ 597,986 $ 590,299 $ 721,346
========= ========= =========
Income (loss) from operations (2)
Refining $ 42,118 $ 38,290 $ 33,877
Pipeline Transportation 6,552 302 --
Corporate and other (9,697) (5,827) (6,377)
--------- --------- ---------
Consolidated $ 38,973 $ 32,765 $ 27,500
========= ========= =========
</TABLE>
(1) Certain reclassifications have been made to prior reported amounts to
conform to current classifications.
(2) The Refining segment includes the Company's principal refinery in Artesia,
New Mexico, which is operated in conjunction with refining facilities in
Lovington, New Mexico (collectively, the Navajo Refinery) and the
Company's refinery near Great Falls, Montana. The petroleum products
produced by Refining segments are marketed in the southwestern United
States, Montana and northern Mexico. Certain pipelines and terminals
operate in conjunction with the refining segment as part of the supply and
distribution networks of the refineries, which costs are included in the
Refining segment. The Pipeline Transportation segment includes
approximately 900 miles of the Company's pipeline assets in Texas and New
Mexico. Revenues from the Pipeline Transportation segment are earned
through transactions with unaffiliated parties for pipeline
transportation, rental and terminalling operations. Included in Corporate
and other are costs associated with Holly Corporation, the parent company,
consisting primarily of general and administrative expenses and interest
charges, as well as a small-scale oil and gas exploration and production
program and a small equity investment in retail gasoline stations and
convenience stores. Insignificant amounts of intersegment sales were
eliminated in consolidation.
-23-
<PAGE> 24
OPERATING DATA
<TABLE>
<CAPTION>
Years Ended July 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Refinery Production (BPD) 70,700 61,800 68,600
Sales of Refined Products (BPD) (1) 75,400 67,700 69,300
Refinery Margins (per produced barrel sold) $ 5.91 $ 6.09 $ 5.18
</TABLE>
(1) Includes refined products purchased for resale of 5,000 BPD, 4,600 BPD and
2,200 BPD, respectively, for the years shown in the above table.
1999 COMPARED TO 1998
For the year ended July 31, 1999, net income was $19.9 million ($2.42 per
share), as compared to $15.2 million ($1.84 per share) for fiscal 1998. The
increase in net income for fiscal 1999 was primarily attributable to increased
refined product sales volumes and increased pipeline transportation income,
partially offset by lower refinery margins and increased selling, general and
administrative expenses.
Refinery margins decreased 3.0% during fiscal 1999 compared to the prior
year, as product prices decreased at a slightly greater rate than crude prices.
However, the Company experienced higher refinery margins in April through July
1999 as product prices increased at a greater rate than crude prices in the
California refined products market, which impacts product pricing for the
Company's Navajo Refinery in New Mexico. Such margins have declined since that
time. Increased production volumes of 14.4% for fiscal 1999 more than offset the
reduced margins, compared to fiscal 1998, when such volumes were reduced due to
a turnaround at the Navajo Refinery. Refined product revenues did not change
significantly as the decrease in product prices was offset by the increase in
sales volumes, due principally to the increased production at the Navajo
Refinery. Refining operating expenses were relatively constant from
year-to-year.
Pipeline Transportation revenues increased significantly as the result of
the initiation of pipeline and terminalling related revenues under agreements
with FINA, Inc. and from operation of a West Texas crude oil gathering system
the Company purchased in June 1998. Additionally, the Company began generating
transportation revenues in June 1999 from deliveries of isobutane to another
refinery. Most of the increase in operating expenses for the Company results
from the increased pipeline transportation operations.
Earnings were negatively impacted in the 1999 fiscal year, as compared to
the prior year, by an increase in general and administrative expenses relating
principally to legal proceedings and non-recurring compensation expense,
partially offset by charges in fiscal 1998 in connection with the terminated
merger with Giant Industries, Inc. Additionally, earnings were impacted during
fiscal 1999 relative to fiscal 1998 by lower oil and gas income due to decreased
prices for oil and gas and a reduction in scope of the Company's oil and gas
program, and increases in depreciation and amortization expenses resulting
primarily from the prior year's turnaround expenditures and the increase in
pipeline transportation operations.
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1998 COMPARED TO 1997
For the 1998 fiscal year, net income was $15.2 million ($1.84 per share)
as compared to $13.1 ($1.59 per share) million for fiscal 1997. Transaction
costs associated with the planned merger with Giant Industries, Inc., which was
terminated, reduced earnings by $1.2 million ($.14 per share) for the 1998
fiscal year.
The increase in income in the 1998 fiscal year compared to 1997 was
principally due to increased refinery margins of 17.6%. Refined product revenues
decreased in the year ended July 31, 1998 from the prior year as a result of
reduced sales prices and reduced overall sales volumes for the 1998 fiscal year,
due principally to decreased production at the Navajo Refinery. Refinery margins
increased significantly during the fourth quarter of fiscal 1998 as crude oil
prices decreased at a faster rate than refined product prices in the Company's
markets. However, a 9.9% reduction in production of refined products partially
offset the year-over-year refinery margin increases.
The reduced production for the 1998 fiscal year resulted from a planned
maintenance shutdown (a "turnaround") at the Company's Navajo Refinery. The
turnaround, which is scheduled approximately every four years, was conducted in
the first quarter and early part of the second quarter of fiscal 1998. This
turnaround included an upgrade of the fluid catalytic cracking unit ("FCC") to
more efficient technology. The effects of this upgrade, combined with the
effects of the isomerization unit which became operational at the end of the
prior fiscal year have substantially improved the high value product yields of
the Navajo facility. The increase in these yields contributed favorably to
refinery margins beginning in the second quarter of fiscal 1998. Earnings in
fiscal 1998 were adversely impacted by an increase in depreciation, depletion
and amortization resulting from the amortization of higher turnaround costs
beginning in the second quarter. Additionally impacting earnings for the 1998
fiscal year was the inclusion in operating expenses of costs associated with the
lease of 300 miles of 8" pipeline which began late in the fourth quarter of
fiscal 1997. The Company plans to utilize this pipeline to transport petroleum
products from the Navajo Refinery to markets in Albuquerque and northwest New
Mexico during the 2000 fiscal year. Earnings for fiscal 1998 were also impacted
by a decrease in interest income due to a lower level of cash investments in
fiscal 1998 as compared to fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased during the year ended July 31, 1999
by $1.6 million to $4.2 million, as cash flows from operations were greater than
capital expenditures, principal repayments, including the repayment of $11.6
million represents all outstanding borrowings under the Credit Agreement, and
dividend payments. Subsequent to July 31, 1999, the Company has generated cash
balances in excess of its ongoing liquidity requirements. The Company believes
that this cash, in conjunction with its Credit Agreement, which can be used for
direct borrowings of up to $50 million and which will expire in October 2000
unless extended, together with future cash flows from operations, should provide
sufficient resources to enable the Company to satisfy its liquidity needs,
capital requirements, and debt service obligations while continuing the payment
of dividends for at least the next twelve months.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities amounted to $47.6 million in
fiscal 1999, compared to $38.2 million in fiscal 1998 and $5.5 million in fiscal
1997. Comparing fiscal 1999 to
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fiscal 1998, the increase in cash provided from operating activities was
principally due to expenditures of $18.8 million incurred in fiscal 1998
relating to the Navajo turnaround, offset partially by changes in working
capital items. Comparing fiscal 1998 to fiscal 1997, cash provided from
operating activities was significantly higher. The increase was principally due
to an increase in cash generated by earnings, offset partially by higher
expenditures incurred in fiscal 1998 relating to the Navajo turnaround compared
to similar but smaller advance expenditures in the latter part of fiscal 1997
and offset by a $19.6 million increase in inventories during 1997, primarily
related to preparation for the turnaround in fiscal 1998. A significant portion
of this inventory increase was liquidated in fiscal 1998; however the impact of
this inventory liquidation was reduced because of an increase in inventory
caused by the Company's purchase of the West Texas crude gathering system.
CASH FLOWS FOR FINANCING ACTIVITIES
Cash flows used for financing activities amounted to $22.1 million in
fiscal 1999, compared to $4.7 million in fiscal 1998 and $15.0 million in fiscal
1997.
During 1999, increased cash flows from operating activities and lower
capital expenditures relative to 1998 enabled the Company to retire its
outstanding bank debt, make scheduled amortization payments on the Senior Notes
and pay $5.3 million in dividends. In 1998, higher capital expenditure
requirements and dividend payments of $5.0 million more than offset higher cash
flow from operating activities, resulting in an outstanding balance of $11.6
million under the Credit Agreement.
The Company believes its internally generated cash flow, along with its
Credit Agreement, provides sufficient resources to fund capital projects,
scheduled repayments of the Senior Notes, continued payment of dividends
(although dividend payments must be approved by the Board of Directors and
cannot be guaranteed) and the Company's liquidity needs for at least the next
twelve months. The Company's Credit Agreement expires in October 2000, and the
Company has recently initiated discussions with its banks on an extension of the
Credit Agreement. While the Company expects such negotiations to result in the
extension of the Credit Agreement, there can be no assurance that such
negotiations will be successful.
See Note 6 to the Consolidated Financial Statements for a summary of the
terms and conditions of the Senior Notes and of the Credit Agreement.
CASH FLOWS FOR INVESTING ACTIVITIES AND CAPITAL PROJECTS
Cash flows used for investing activities totalled $109.3 million over
the last three years, $24.0 million in 1999, $51.0 million in 1998 and $34.4
million in 1997. All of these amounts were expended on capital projects with the
exceptions of $2.0 million during fiscal 1998 invested in a joint venture to
operate retail gasoline stations and convenience stores in Montana, $3.0 million
invested during 1998 in shares of common stock of a publicly traded company and
$4.1 million invested during 1997 in the Rio Grande joint venture described
below. The net negative cash flow for investing activities was offset by
distributions to the Company from the Rio Grande joint venture of $2.9 million
in fiscal 1999 and $3.7 million in fiscal 1998.
The Company has adopted a capital budget of $23 million for fiscal 2000.
The components of this budget are $9 million for various refinery improvements,
$9 million for costs relating to the
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purchase of a gasoil hydrotreater, as described below, $4 million for various
pipeline and transportation projects and under $1 million for oil and gas
exploration and production activities. In addition to these projects, the
Company plans to expend during 2000 a total of $8 million on items that were
approved in previous capital budgets primarily relating to pipeline and
terminalling activities.
As part of its efforts to improve operating efficiencies, the Company
constructed an isomerization unit and upgraded the FCC unit at the Navajo
Refinery. The isomerization unit, which was completed in February 1997,
increases the refinery's internal octane generating capabilities, thereby
improving light product yields and increasing the refinery's ability to upgrade
additional amounts of lower priced purchased natural gasoline into finished
gasoline. The upgrade of the refinery's FCC unit, which was implemented during
the Navajo Refinery's scheduled turnaround in the first quarter and early part
of the second quarter of fiscal 1998, improves the yield of high value products
from the FCC unit by incorporating certain state-of-the-art upgrades.
In addition to the above projects, the Company purchased a hydrotreater
unit for $5 million from a closed refinery in November 1997. This purchase
should give the Company the ability to reconstruct the unit at the Navajo
Refinery at a substantial savings relative to the purchase cost of a new unit.
The hydrotreater will enhance higher value, light product yields and facilitate
the Company's ability to meet the present California Air Resources Board
("CARB") standards, which have been adopted in the Company's Phoenix market for
winter months beginning in the latter part of 2000. Included in the fiscal 2000
capital budget are commitments related to the hydrotreater of $9 million, which
include costs to relocate the unit to the Navajo Refinery and construct a sulfur
recovery unit, which will be immediately utilized and work in conjunction with
the hydrotreater when completed, and certain long-lead-time pieces of equipment.
The Company, subject to obtaining necessary permitting in a timely manner,
expects to complete the hydrotreater in the latter part of 2001. Remaining costs
to complete the hydrotreater are estimated to be approximately $20 million, in
addition to the current $9 million budgeted amount. Based on the current
configuration at the Navajo Refinery, the Company believes it can supply current
sales volumes into the Phoenix market under the CARB standards prior to
completion of the hydrotreater.
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 as well as terminalling facilities in
Bloomfield. The Company is in the process of completing the construction of a
diesel fuel terminal 40 miles east of Albuquerque in Moriarty and is considering
different alternatives regarding its terminalling needs in Albuquerque. 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.
Transportation of petroleum products to markets in northwest New Mexico and
diesel fuels to Moriarty, New Mexico, near Albuquerque, are planned to begin in
late 1999.
The Company has a 25% interest in a pipeline joint venture ("Rio
Grande") with Mid-America Pipeline Company and Amoco Pipeline Company to
transport liquid petroleum gases to Mexico. Deliveries by the joint venture
began in April 1997. In October 1996, the Company completed a new 12" refined
products pipeline from Orla to El Paso, Texas, which replaced a
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portion of an 8" pipeline previously used by Navajo that was transferred to Rio
Grande. Discussions regarding expansion of this line are currently underway.
The additional pipeline capacity resulting from the new pipelines
constructed in conjunction with the Rio Grande joint venture and from the Leased
Pipeline should reduce pipeline operating expenses at existing throughputs. In
addition, the new pipeline capacity will 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.
In the fourth quarter of fiscal 1998, the Company purchased from Fina
Oil and Chemical Company a crude oil gathering system in West Texas. The assets
purchased include approximately 500 miles of pipelines and over 350,000 barrels
of tankage. Approximately 23,000 barrels per day of crude oil were gathered on
these systems in fiscal 1999. The Company believes that these assets should
generate a stable source of transportation service income, and will give Navajo
the ability to purchase crude oil at the lease in new areas, thus potentially
enhancing the stability of crude oil supply and refined product margins for the
Navajo Refinery.
During the fourth quarter of fiscal 1999, the Company completed 65 miles
of new pipeline between Lovington and Artesia, NM, to permit the delivery of
isobutane (and/or other LPGs) to an unrelated refiner in El Paso as well as to
increase the Company's ability to access additional raw materials.
The Company announced in February 1997 the formation of an alliance with
FINA, Inc. ("FINA") to create a comprehensive supply network that can increase
substantially the supplies of gasoline and diesel fuel in the West Texas, New
Mexico, and Arizona markets to meet expected increasing demand in the future.
FINA constructed a 50-mile pipeline which connected an existing FINA pipeline
system to the Company's 12" pipeline between Orla, Texas and El Paso, Texas
pursuant to a long-term lease of certain capacity of the Company's 12" pipeline.
In August 1998, FINA began transporting to El Paso gasoline and diesel fuel from
its Big Spring, Texas refinery. Pursuant to a long-term lease agreement, FINA
will ultimately have the right to transport up to 20,000 BPD to El Paso on this
interconnected system. In August 1998, the Company began to realize pipeline
rental and terminalling revenues from FINA under these agreements.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's operating results have been, and will continue to be,
affected by a wide variety of factors, many of which are beyond the Company's
control, that could have adverse effects on profitability during any particular
period. Among these factors are the demand for crude oil and refined products,
which is largely driven by the conditions of local and worldwide economies as
well as by weather patterns and the taxation of these products relative to other
energy sources. Governmental regulations and policies, particularly in the areas
of taxation, energy and the environment, also have a significant impact on the
Company's activities. Operating results can be affected by these industry
factors, by competition in the particular geographic markets that the Company
serves and by factors that are specific to the Company, such as the success of
particular marketing programs and the efficiency of the Company's refinery
operations.
In addition, the Company's profitability depends largely on the spread
between market prices for refined petroleum products and crude oil prices. This
margin is continually changing and may
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significantly fluctuate from time to time. Crude oil and refined products are
commodities whose price levels are determined by market forces beyond the
control of the Company. Additionally, due to the seasonality of refined products
markets and refinery maintenance schedules, results of operations for any
particular quarter of a fiscal year are not necessarily indicative of results
for the full year. In general, prices for refined products are significantly
influenced by the price of crude oil. Although an increase or decrease in the
price for crude oil generally results in a similar increase or decrease in
prices for refined products, there is normally a time lag in the realization of
the similar increase or decrease in prices for refined products. The effect of
changes in crude oil prices on operating results therefore depends in part on
how quickly refined product prices adjust to reflect these changes. A
substantial or prolonged increase in crude oil prices without a corresponding
increase in refined product prices, a substantial or prolonged decrease in
refined product prices without a corresponding decrease in crude oil prices, or
a substantial or prolonged decrease in demand for refined products could have a
significant negative effect on the Company's earnings and cash flows.
The Company is dependent on the production and sale of quantities of
refined products at margins sufficient to cover operating costs, including any
increases in costs resulting from future inflationary pressures. The refining
business is characterized by high fixed costs resulting from the significant
capital outlays associated with refineries, terminals, pipelines and related
facilities. Furthermore, future regulatory requirements or competitive pressures
could result in additional capital expenditures, which may or may not produce
the results intended. Such capital expenditures may require significant
financial resources that may be contingent on the Company's continued access to
capital markets and commercial bank markets. Additionally, other matters, such
as regulatory requirements or legal actions may restrict the Company's continued
access.
Until 1998, the El Paso market and markets served from El Paso were
generally not supplied by refined products produced by the large refineries on
the Texas Gulf Coast. While wholesale prices of refined products on the Gulf
Coast have historically been lower than prices in El Paso, distances from the
Gulf Coast to El Paso (more than 700 miles if the most direct route is used)
have made transportation by truck unfeasible and have discouraged the
substantial investment required for development of refined products pipelines
from the Gulf Coast to El Paso.
In 1998, a Texaco, Inc. subsidiary completed a 16-inch refined products
pipeline running from the Gulf Coast to Midland, Texas along a northern route
(through Corsicana, Texas). This pipeline, now owned by Equilon Enterprises LLC
("Equilon"), is linked to a 6-inch pipeline, also owned by Equilon, that is
currently being used to transport to El Paso approximately 18,000 BPD of refined
products that are produced on the Texas Gulf Coast (this volume replaces a
similar volume produced in the Shell Oil Company refinery in Odessa, Texas,
which was recently shut down). The Equilon line from the Gulf Coast to Midland
has the potential to be linked to existing or new pipelines running from the
Midland, Texas area to El Paso with the result that substantial additional
volumes of refined products could be transported from the Gulf Coast to El Paso.
An additional potential source of pipeline transportation from Gulf
Coast refineries to El Paso is the proposed Longhorn Pipeline. This pipeline is
proposed to run approximately 700 miles from the Houston area of the Gulf Coast
to El Paso, utilizing a direct route. The owner of the Longhorn Pipeline,
Longhorn Partners Pipeline, L.P., a Delaware limited partnership that includes
affiliates of Exxon Pipeline Company, BP/Amoco Pipeline Company, Williams
Pipeline
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Company, and the Beacon Group Energy Investment Fund, L.P. and Chisholm Holdings
as limited partners ("Longhorn Partners"), has proposed to use the pipeline
initially to transport approximately 72,000 BPD of refined products from the
Gulf Coast to El Paso and markets served from El Paso, with an ultimate maximum
capacity of 225,000 BPD. A critical feature of this proposed petroleum products
pipeline is that it would utilize, for approximately 450 miles (including areas
overlying the environmentally sensitive Edwards Aquifer and Edwards-Trinity
Aquifer and heavily populated areas in the southern part of Austin, Texas) an
existing pipeline (previously owned by Exxon Pipeline Company) that was
constructed in about 1950 for the shipment of crude oil from West Texas to the
Houston area.
The Longhorn Pipeline is not currently operating because of a federal
court injunction in August 1998 and a settlement agreement in March 1999 entered
into by Longhorn Partners, the United States Environmental Protection Agency
("EPA") and Department of Transportation ("DOT"), and the other parties to the
federal lawsuit that had resulted in the injunction. The March 1999 settlement
agreement required the preparation of an Environmental Assessment under the
authority of the EPA and the DOT. A draft Environmental Assessment (the "Draft
EA") on the Longhorn Pipeline was released on October 22, 1999. The Draft EA
proposes a preliminary Finding of No Significant Impact with respect to the
Longhorn Pipeline provided that Longhorn Partners carries out a proposed
mitigation plan developed by Longhorn Partners which contains 34 elements. Some
of elements of the proposed mitigation plan are required to be completed before
the Longhorn Pipeline is allowed to operate, with the remainder required to be
completed later or to be implemented for as long as operations continue. Public
comments on the Draft EA may be submitted to the EPA and DOT until the end of
November 1999 and in November 1999 there will be a series of five public
meetings on the Draft EA at specified locations in Texas. The Company believes
that public comments will raise questions concerning certain elements of the
Draft EA. A final determination by the EPA and DOT with respect to the matters
considered in the Draft EA could be issued as early as 30 days following the end
of the public comment period.
If the Longhorn Pipeline is allowed to operate as currently proposed,
the substantially lower requirement for capital investment would permit Longhorn
Partners to give its shippers a cost advantage through lower tariffs that could,
at least for a period, result in significant downward pressure on wholesale
refined products prices and refined products margins in El Paso and related
markets. Although some current suppliers in the market might not compete in such
a climate, the Company's analyses indicate that, because of location and recent
capital improvements, the Company's position in El Paso and markets served from
El Paso could withstand such a period of lower prices and margins. However, the
Company's results of operations could be adversely impacted if the Longhorn
Pipeline were allowed to operate as currently proposed. It is not possible to
predict whether and, if so, under what conditions, the Longhorn Pipeline
ultimately will be allowed to operate, nor is it possible to predict the
consequences for the Company of Longhorn Pipeline's operations if they occur.
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 (along with an Austin, Texas law firm which was subsequently
dropped from the case). The suit, as amended by Longhorn Partners in March 1999,
seeks damages alleged to total up to $1,050,000,000 (after trebling) 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. The specific action of the Company complained of in the
Longhorn Lawsuit is the support of
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lawsuits brought by ranchers in West Texas to challenge the proposed use by the
Longhorn Pipeline of easements and rights-of-way that were granted over 50 years
ago for the Exxon crude oil pipeline. 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 relating to the Longhorn Suit.
In April 1999, the Williams Companies and Equilon Enterprises LLC (a
joint venture of Texaco Inc. and the Royal Dutch/Shell Group) announced a
1,010-mile pipeline, called the "Aspen Pipeline," to carry gasoline and other
refined fuels from Texas to Utah. It was announced that the pipeline would have
a capacity of 65,000 BPD and shipments will begin in late 2000. In addition to
the pipeline, product terminals would be built, including a terminal in
Albuquerque, New Mexico. This venture could result in an increase in the supply
of products to some of the Company's markets.
An additional factor that could affect the Company's market is excess
pipeline capacity from the West Coast into the Company's Arizona markets after
the pipeline's expansion this year. If additional refined products become
available on the West Coast in excess of demand in that market, additional
products may be shipped into the Company's Arizona markets with resulting
possible downward pressure on refined product prices in the Company's markets.
In addition to the projects described above, other projects have been
explored from time to time by refiners and other entities, which projects, if
consummated, could result in a further increase in the supply of products to
some or all of the Company's markets.
In recent years there have been several refining and marketing
consolidations or acquisitions between entities competing in the Company's
geographic market. While these transactions could increase the competitive
pressures on the Company, the specific ramifications of these or other potential
consolidations cannot presently be determined.
The common carrier pipelines used by the Company to serve the Arizona
and Albuquerque markets are currently operated at or near capacity and are
subject to proration. As a result, the volumes of refined products that the
Company and other shippers have been able to deliver to these markets have been
limited. The flow of additional products into El Paso for shipment to Arizona,
either as a result of the Longhorn Pipeline or otherwise, could further
exacerbate such constraints on deliveries to Arizona. No assurances can be given
that the Company will not experience future constraints on its ability to
deliver its products through the pipelines to Arizona. In the case of the
Albuquerque market, the common carrier pipeline used by the Company to serve
this market currently operates at or near capacity with resulting limitations on
the amount of refined products that the Company and other shippers can deliver.
As previously discussed, the Company has entered into a Lease Agreement for a
pipeline between Artesia and the Albuquerque vicinity and Bloomfield, New Mexico
with Mid-America Pipeline Company. The Company has completed a refined products
terminal in Bloomfield and is completing construction of a diesel fuel terminal
east of Albuquerque. The Company is also in the process of pursuing different
alternatives to address terminalling needs in Albuquerque. While the Company is
proceeding as expeditiously as possible on the Albuquerque project, it is not
possible at present to determine when the project will be completed. Completion
of this project would allow the Company to transport products directly to
Albuquerque on the leased pipeline, thereby eliminating third party tariff
expenses and the risk of future pipeline constraints on shipments to
Albuquerque. Any future constraints on the
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Company's ability to transport its refined products to Arizona or Albuquerque
could, if sustained, adversely affect the Company's results of operations and
financial condition.
Effective January 1, 1995, certain cities in the country were required
to use only reformulated gasoline ("RFG"), a cleaner burning fuel. Phoenix is
the only principal market of the Company that currently requires RFG although
this requirement could be implemented in other markets over time. Phoenix has
adopted even more rigorous California Air Resources Board ("CARB") fuel
specifications for winter months beginning in the latter part of 2000. This new
requirement, other requirements of the federal Clean Air Act or other presently
existing or future environmental regulations could cause the Company to expend
substantial amounts to permit the Company's refineries to produce products that
meet applicable requirements. Completion of the hydrotreater, discussed above,
will help the Company to meet these requirements.
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 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. 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 are used solely to help manage the price risk inherent in
purchasing crude oil in advance of the delivery date and as a hedge for
fixed-price sales contracts of refined products and do not increase the market
risks to which the Company is exposed. 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. No such contracts were
outstanding at July 31, 1999.
At July 31, 1999, the Company had outstanding unsecured debt of $70.3
million and had no borrowings outstanding under its Credit Agreement. The
Company does not have significant exposure to changing interest rates on its
unsecured debt because the interest rates are fixed, the average maturity is
approximately three years and such debt represents less than 40% of the
Company's total capitalization. During much of fiscal 1999, the Company had
outstanding borrowings under the Credit Agreement. Since interest rates on
borrowings are reset frequently based on either the bank's daily effective prime
rate, or the LIBOR rate, 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
short-term market rates and such interest has historically not been significant
as compared to the total operations of the Company. A ten percent change in the
market interest rate over the next year would not materially impact the
Company's financial condition, as the average maturity of the Company's
long-term debt is approximately three years and such debt represents less than
40% of
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the Company's total capitalization, and the Company's borrowings under the
Credit Agreement and cash investments are at short-term market rates.
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.
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 have been upgraded to make these systems free of Year 2000
issues.
The Company has made an inventory of non-IT systems embedded in
equipment used in the Company's operations and has 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 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 believes that it has remediated all items of equipment
containing at-risk chips. Because of the nature of the non-IT systems, there can
be no assurance that the Company has correctly identified all non-IT systems
that are subject to failure because of the Year 2000 Problem. Any failure of
non-IT systems because of the year 2000 problem could reduce production levels
or potentially shut down the refinery operations of the Company.
To the extent possible, the Company has either tested or received
certifications with respect to all significant IT and non-IT systems.
The Company has also initiated contingency planning to respond to the
possible effects of the Year 2000 Problem on third parties that are important to
the Company's operations. The Company is communicating 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 during the preparation of the contingency plan, the
Company will take any steps
-33-
<PAGE> 34
available to mitigate the impact on the Company of a failure in a third party
caused by the Year 2000 Problem. While the Company believes that it has made
adequate arrangements to deal with these contingencies, it continues to update
such plans as additional information becomes available.
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 to the Company 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 be
slightly less than $1 million, most of which have been incurred.
Based on the analysis performed to this point, the Company believes
that the most important Year 2000 risk 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 assets, the Navajo refinery at
Artesia and Lovington, New Mexico and the Montana refinery near Great Falls,
Montana, 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 Company believes that its
most significant risk would be in the case of the Company's principal or sole
sources for essential inputs -- 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 could 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 intends to continue until the
year 2000 regular contacts with critical suppliers to determine their
evaluations of 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position and that those instruments be measured at fair value. SFAS
No. 133 also prescribes the accounting treatment for changes in the fair value
of derivatives which depends on the intended use of the derivative and the
resulting designation. Designations include hedges of the exposure to changes in
the fair value of a recognized asset or liability, hedges of the exposure to
variable cash flows of a forecasted transaction, hedges of the exposure to
foreign currency translations, and derivatives not designated as hedging
instruments. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." Under SFAS No. 137, SFAS No. 133 becomes effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000 with
early adoption permitted. The Company has not completed evaluating the effects
this statement will have on its financial reporting and disclosures.
-34-
<PAGE> 35
ITEM 7a. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C>
Report of Independent Auditors...................... 36
Consolidated Balance Sheet at July 31,
1999 and 1998.................................... 37
Consolidated Statement of Income for the
years ended July 31, 1999, 1998 and 1997......... 38
Consolidated Statement of Cash Flows for
the years ended July 31,
1999, 1998 and 1997.............................. 39
Consolidated Statement of Stockholders' Equity
for the years ended July 31, 1999, 1998
and 1997......................................... 40
Consolidated Statement of Comprehensive
Income for the years ended
July 31, 1999, 1998, and 1997.................... 41
Notes to Consolidated Financial
Statements....................................... 42
</TABLE>
-35-
<PAGE> 36
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
The Board of Directors
and Stockholders of Holly Corporation
We have audited the accompanying consolidated balance sheet of Holly
Corporation at July 31, 1999 and 1998, and the related consolidated statements
of income, cash flows, stockholders' equity and comprehensive income for each of
the three years in the period ended July 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Holly Corporation at July 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 1999, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 22, 1999
-36-
<PAGE> 37
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
($ in thousands, except per share amounts) July 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 4,194 $ 2,602
Accounts receivable (Notes 3 and 6) ...................................... 123,502 82,379
Inventories (Notes 4 and 6) .............................................. 54,924 55,842
Income taxes receivable .................................................. -- 653
Prepayments and other .................................................... 12,158 12,911
--------- ---------
TOTAL CURRENT ASSETS ............................................. 194,778 154,387
Properties, plants and equipment, net (Note 5) ................................. 180,894 173,297
Investments in and advances to joint ventures .................................. 4,035 5,510
Other assets ................................................................... 11,275 16,663
--------- ---------
TOTAL ASSETS ..................................................... $ 390,982 $ 349,857
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 3) ................................................ $ 144,287 $ 109,139
Accrued liabilities (Notes 9 and 11) ..................................... 14,688 13,392
Income taxes payable ..................................................... 8,206 288
Current maturities of long-term debt (Note 6) ............................ 13,746 5,175
Borrowings under credit agreement (Note 6) ............................... -- 11,600
--------- ---------
TOTAL CURRENT LIABILITIES ........................................ 180,927 139,594
Deferred income taxes (Note 7) ................................................. 24,580 25,573
Long-term debt, less current maturities (Note 6) ............................... 56,595 70,341
Commitments and contingencies (Notes 10 and 11)
STOCKHOLDERS' EQUITY (Notes 6 and 8)
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 ........................................................ 124,341 109,686
--------- ---------
130,560 115,905
Common stock held in treasury, at cost - 396,768 shares .................. (569) (569)
Other comprehensive loss ................................................. (1,111) (987)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ....................................... 128,880 114,349
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 390,982 $ 349,857
========= =========
</TABLE>
See accompanying notes.
-37-
<PAGE> 38
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
($ in thousands, except per share amounts) Years ended July 31,
--------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES AND OTHER REVENUES (Note 13) ................... $ 597,986 $ 590,299 $ 721,346
OPERATING COSTS AND EXPENSES
Cost of products sold ............................. 428,472 440,042 586,604
Operating expenses ................................ 80,654 76,420 70,009
Selling, general and administrative expenses ...... 22,159 13,714 13,348
Depreciation, depletion and amortization .......... 26,358 24,379 20,153
Exploration expenses, including dry holes ......... 1,370 2,979 3,732
--------- --------- ---------
TOTAL OPERATING COSTS AND EXPENSES ............. 559,013 557,534 693,846
--------- --------- ---------
INCOME FROM OPERATIONS ............................... 38,973 32,765 27,500
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures .............. 1,965 1,766 414
Interest income ................................... 11 646 3,244
Interest expense (Note 6) ......................... (7,790) (8,371) (9,339)
Transaction costs of terminated merger (Note 14)... -- (1,940) --
--------- --------- ---------
(5,814) (7,899) (5,681)
--------- --------- ---------
INCOME BEFORE INCOME TAXES ........................... 33,159 24,866 21,819
Income tax provision (benefit) (Note 7)
Current ........................................... 13,489 3,121 7,251
Deferred .......................................... (267) 6,578 1,481
--------- --------- ---------
13,222 9,699 8,732
--------- --------- ---------
NET INCOME ........................................... $ 19,937 $ 15,167 $ 13,087
========= ========= =========
NET INCOME PER COMMON SHARE
(basic and diluted) ................................ $ 2.42 $ 1.84 $ 1.59
========= ========= =========
CASH DIVIDENDS PAID PER COMMON SHARE ................. $ .64 $ .60 $ .51
========= ========= =========
AVERAGE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING (in thousands) .................. 8,254 8,254 8,254
========= ========= =========
</TABLE>
See accompanying notes.
-38-
<PAGE> 39
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
($ in thousands)
($ in thousands, except per share amounts) Years ended July 31,
--------------------
1999 1998 1997
- ------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 19,937 $ 15,167 $ 13,087
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization ............... 26,358 24,379 20,153
Deferred income taxes .................................. (267) 6,578 1,481
Equity in earnings of joint ventures ................... (1,965) (1,766) (414)
Dry hole costs and leasehold impairment ................ 256 1,190 1,760
(Increase) decrease in current assets
Accounts receivable .................................. (41,123) 23,442 (1,435)
Inventories .......................................... 918 2,431 (19,600)
Income taxes receivable .............................. 653 666 (1,319)
Prepayments and other ................................ (44) 746 (360)
Increase (decrease) in current liabilities
Accounts payable ..................................... 35,148 (15,446) 2,164
Accrued liabilities .................................. 1,296 (338) 1,277
Income taxes payable ................................. 7,918 (109) (4,331)
Turnaround expenditures ................................ -- (18,771) (7,147)
Other, net ............................................. (1,457) 24 141
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......... 47,628 38,193 5,457
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in borrowings under credit agreement.... (11,600) 11,600 --
Payment of long-term debt .................................. (5,175) (10,775) (10,774)
Debt issuance costs ........................................ -- (547) --
Cash dividends ............................................. (5,282) (4,952) (4,209)
-------- -------- --------
NET CASH USED FOR FINANCING ACTIVITIES ............. (22,057) (4,674) (14,983)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment .............. (26,903) (49,715) (30,304)
Investments and advances to joint ventures ................. -- (2,000) (4,087)
Distributions from joint venture ........................... 2,924 3,734 --
Investment in equity securities ............................ -- (2,978) --
-------- -------- --------
NET CASH USED FOR INVESTING ACTIVITIES ............. (23,979) (50,959) (34,391)
-------- -------- --------
CASH AND CASH EQUIVALENTS
INCREASE (DECREASE) FOR THE YEAR ........................... 1,592 (17,440) (43,917)
Beginning of year .......................................... 2,602 20,042 63,959
-------- -------- --------
END OF YEAR ................................................ $ 4,194 $ 2,602 $ 20,042
======== ======== ========
</TABLE>
See accompanying notes.
-39-
<PAGE> 40
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($ in thousands)
<TABLE>
<CAPTION>
Common Additional Retained Treasury hensive holders'
stock capital earnings stock loss equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996 ........ $ 87 $ 6,132 $ 90,593 $ (569) $ -- $ 96,243
Net income ...................... -- -- 13,087 -- -- 13,087
Dividends paid .................. -- -- (4,209) -- -- (4,209)
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1997 ........ 87 6,132 99,471 (569) -- 105,121
Net income ...................... -- -- 15,167 -- -- 15,167
Dividends paid .................. -- -- (4,952) -- -- (4,952)
Net unrealized loss on securities
available for sale ........... -- -- -- -- (987) (987)
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1998 ........ 87 6,132 109,686 (569) (987) 114,349
Net income ...................... -- -- 19,937 -- -- 19,937
Dividends paid .................. -- -- (5,282) -- -- (5,282)
Net unrealized loss on securities
available for sale ............ -- -- -- -- (124) (124)
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1999 ........ $ 87 $ 6,132 $ 124,341 $ (569) $ (1,111) $ 128,880
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
-40-
<PAGE> 41
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended July 31,
--------------------------------
($ in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME ............................... $ 19,937 $ 15,167 $ 13,087
Other comprehensive income
Unrealized loss on securities available
for sale ............................ (206) (1,641) --
Income tax benefit .................... (82) (654) --
-------- -------- --------
(124) (987) --
-------- -------- --------
TOTAL COMPREHENSIVE INCOME ............... $ 19,813 $ 14,180 $ 13,087
======== ======== ========
</TABLE>
See accompanying notes.
-41-
<PAGE> 42
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Holly Corporation, and its consolidated subsidiaries, herein referred
to as the "Company" unless the context otherwise indicates, is principally an
independent petroleum refiner, which produces high value refined products such
as gasoline, diesel fuel and jet fuel. Navajo Refining Company ("Navajo"), one
of the Company's wholly-owned subsidiaries, owns a high-conversion petroleum
refinery in Artesia, New Mexico, which Navajo operates in conjunction with
crude, vacuum distillation and other facilities situated 65 miles away in
Lovington, New Mexico (collectively, the "Navajo Refinery"). The Navajo Refinery
has a crude capacity of 60,000 barrels-per-day ("BPD"), can process a variety of
high sulfur (sour) crude oils and serves markets in the southwestern United
States and northern Mexico. The Company also owns Montana Refining Company, a
Partnership ("MRC"), which owns a 7,000 BPD petroleum refinery near Great Falls,
Montana ("Montana Refinery"), which can process a variety of high sulfur crude
oils and which primarily serves markets in Montana. In conjunction with its
refining operations, the Company operates approximately 1,300 miles of pipelines
as part of its supply and distribution network of the refineries. In recent
years, the Company has made an effort to develop and expand a pipeline
transportation segment which generates revenues from unaffiliated parties.
During the fiscal year ended July 31, 1999, the Company realized significant
earnings from these transportation operations. The pipeline transportation
operations include approximately 900 miles of pipelines, of which approximately
400 miles are also used as part of the supply and distribution network of the
Navajo Refinery. Additionally, the Company has a 25% investment in Rio Grande
Pipeline Company, which provides petroleum products transportation to northern
Mexico. The Company also conducts a small-scale oil and gas exploration and
production program and has a small investment in a joint venture operating
retail gasoline stations and convenience stores in Montana.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its subsidiaries and MRC. All significant intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
-42-
<PAGE> 43
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost, using the last-in,
first-out ("LIFO") method for crude oil and refined products and the average
cost method for materials and supplies, or market.
INVESTMENTS IN JOINT VENTURES
In fiscal 1996, the Company entered into a joint venture to transport
liquid petroleum gas to Mexico. The Company has a 25% interest in the joint
venture and accounts for earnings using the equity method. In addition to the
cash investment made in fiscal 1997, the Company contributed properties to the
joint venture which had a net book value of $734,000 in fiscal 1996 and $227,000
in fiscal 1998.
In fiscal 1998, the Company invested in a joint venture (a limited
liability company) to operate retail service stations and convenience stores in
Montana. The Company has a 49% interest in the joint venture and accounts for
earnings using the equity method. The Company has reserved approximately
$700,000 related to the collectability of advances, and related accrued
interest, associated with this joint venture.
INVESTMENTS IN EQUITY SECURITIES
Investments in equity securities are classified as available-for-sale
and are reported at fair value with unrealized gains or losses, net of tax,
recorded as other comprehensive income.
REVENUE RECOGNITION
Refined product sales and related cost of sales are recognized when
products are shipped to customers. Pipeline transportation revenues are
recognized as products are shipped through Company operated pipelines. Crude oil
buy/sell exchanges are customarily used in association with operation of the
pipelines, with only the net differential of such transactions reflected as
revenues. Additional pipeline transportation revenues result from the lease of
an interest in the capacity of a Company operated pipeline, which is recognized
over the term of the lease. All revenues are reported exclusive of excise taxes.
Intercompany sales are eliminated in consolidation and were insignificant during
fiscal 1997-1999.
-43-
<PAGE> 44
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
DEPRECIATION
Depreciation is provided by the straight-line method over the estimated
useful lives of the assets, primarily 10 to 16 years for refining and pipeline
facilities and 3 to 10 years for corporate and other assets.
TURNAROUND COSTS
Turnarounds consist of preventive maintenance on major processing units
as well as the shutdown and restart of all units, and generally are scheduled at
three to five year intervals. Turnaround costs are deferred and amortized over
the period until the next scheduled turnaround.
ENVIRONMENTAL COSTS
Environmental costs are expensed if they relate to an existing
condition caused by past operations and do not contribute to current or future
revenue generation. Liabilities are recorded when site restoration and
environmental remediation and cleanup obligations are either known or considered
probable and can be reasonably estimated. Recoveries of environmental costs
through insurance, indemnification arrangements or other sources are included in
other assets to the extent such recoveries are considered probable.
OIL AND GAS EXPLORATION AND DEVELOPMENT
The Company accounts for the acquisition, exploration, development and
production costs of its oil and gas activities using the successful efforts
method of accounting. Lease acquisition costs are capitalized; undeveloped
leases are written down when determined to be impaired and written off upon
expiration or surrender. Geological and geophysical costs and delay rentals are
expensed as incurred. Exploratory well costs are initially capitalized, but if
the effort is unsuccessful, the costs are charged against earnings. Development
costs, whether or not successful, are capitalized. Productive properties are
stated at the lower of amortized cost or estimated realizable value of
underlying proved oil and gas reserves. Depreciation, depletion and amortization
of such properties is computed by the units-of-production method. At July 31,
1999, the Company did not own a material amount of proven reserves.
INCOME TAXES
Provisions for income taxes include deferred taxes resulting from
temporary differences in income for financial and tax purposes, using the
liability method of accounting for income taxes. The liability method requires
the effect of tax rate changes on current and accumulated deferred income taxes
to be reflected in the period in which the rate change was enacted. The
liability method also requires that deferred tax assets be reduced by a
valuation allowance unless it is more likely than not that the assets will be
realized.
-44-
<PAGE> 45
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages
companies to adopt a fair value approach to valuing stock options that would
require compensation cost to be recognized based on the fair value of stock
options granted. The Company has elected, as permitted by the standard, to
continue to follow its intrinsic value based method of accounting for stock
options consistent with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock issued to Employees." Under the intrinsic value method,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the measurement date over the
exercise price.
DERIVATIVE INSTRUMENTS
The Company periodically utilizes petroleum commodity future contracts
to reduce its exposure to the price fluctuations associated with crude oil and
refined products. Such contracts are used principally to help manage the price
risk inherent in purchasing crude oil in advance of the delivery 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. No such
contracts were outstanding at July 31, 1999.
COMPREHENSIVE INCOME
Effective for the fiscal year ended July 31, 1999, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting comprehensive income and its components in a full set of general
purpose financial statements. A separate consolidated statement of comprehensive
income is now included in the accompanying consolidated financial statements.
Certain amounts from prior periods have been reclassified to conform with the
new requirements of SFAS No. 130.
SEGMENT DISCLOSURES
Effective for the fiscal year ended July 31, 1999, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
new standards for reporting information about operating segments in annual
financial statements and selected information about operating segments in
interim financial statements issued to stockholders. It also established
standards for related disclosures about products and services, geographic areas,
and major customers. The Company has identified its segments as "Refining" and
"Pipeline Transportation."
-45-
<PAGE> 46
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
PENSIONS AND OTHER POSTRETIREMENT BENEFITS DISCLOSURES
Effective for the fiscal year ended July 31, 1999, the Company adopted
SFAS No. 132, "Employers' Disclosures about Pensions and Postretirement
Benefits." This statement standardizes the disclosure requirements for pension
plans and other postretirements benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair value of
plan assets and eliminates certain disclosures under previous standards. Certain
amounts from prior periods have been reclassified to conform with the new
requirements of SFAS No. 132 and additional information for prior periods has
been added.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and that those instruments be
measured at fair value. SFAS No. 133 also prescribes the accounting treatment
for changes in the fair value of derivatives which depends on the intended use
of the derivative and the resulting designation. Designations include hedges of
the exposure to changes in the fair value of a recognized asset or liability,
hedges of the exposure to variable cash flows of a forecasted transaction,
hedges of the exposure to foreign currency translations, and derivatives not
designated as hedging instruments. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". Under SFAS No. 137, SFAS No. 133
becomes effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000 with early adoption permitted. The Company has not completed
evaluating the effects this statement will have on its financial reporting and
disclosures.
-46-
<PAGE> 47
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
2. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for income.
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1999 1998 1997
--------- ------- -------
<S> <C> <C> <C>
Net income $ 19,937 $15,167 $13,087
========= ======= =======
Average number of shares of common
stock outstanding 8,254 8,254 8,254
Effect of dilutive stock options -- 4 --
--------- ------- -------
Average number of shares of common
stock outstanding assuming dilution 8,254 8,258 8,254
========= ======= =======
Income per share - basic $ 2.42 $ 1.84 $ 1.59
========= ======= =======
Income per share - diluted $ 2.42 $ 1.84 $ 1.59
========= ======= =======
</TABLE>
There were no transactions subsequent to July 31, 1999, which, had the
transactions occurred before July 31, 1999, would materially change the number
of common shares or potential common shares outstanding as of July 31, 1999.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
($ in thousands) 1999 1998
-------- --------
<S> <C> <C>
Product and transportation .... $ 47,832 $ 33,346
Crude oil resales ............. 75,670 49,033
-------- --------
$123,502 $ 82,379
======== ========
</TABLE>
Crude oil resales accounts receivable represent the sell side of
reciprocal crude oil buy/sell exchange arrangements, with an approximate like
amount reflected in accounts payable. The net differential of these crude oil
buy/sell exchanges involved in supplying crude oil to the refineries is
reflected in cost of sales, and results principally from crude oil type and
location differences. The net differential of crude oil buy/sell exchanges
involved in pipeline transportation is reflected in revenue, as the exchanges
were entered into as a means to effect pipeline transportation fees.
The majority of the amounts due are from companies in the petroleum
industry. Credit is extended based on evaluation of the customer's financial
condition and, in certain circumstances, collateral, such as letters of credit
or guaranties, is required.
-47-
<PAGE> 48
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
Credit losses are charged to income when accounts are deemed
uncollectible and consistently have been minimal.
4. INVENTORIES
<TABLE>
<CAPTION>
($ in thousands) 1999 1998
------- -------
<S> <C> <C>
Crude oil and refined products ...... $47,364 $46,754
Materials and supplies .............. 10,553 12,081
------- -------
57,917 58,835
Reserve for lower of cost or market.. 2,993 2,993
------- -------
$54,924 $55,842
======= =======
</TABLE>
The excess of current cost over the LIFO value of inventory was
$11,416,000 at July 31, 1999. Current cost approximated the LIFO value of
inventory at July 31, 1998.
5. PROPERTIES, PLANTS AND EQUIPMENT
<TABLE>
<CAPTION>
($ in thousands) 1999 1998
-------- --------
<S> <C> <C>
Land, buildings and improvements ........ $ 15,334 $ 11,353
Refining facilities ..................... 195,202 188,033
Pipelines and terminals ................. 89,481 71,130
Transportation vehicles ................. 12,648 11,391
Oil and gas exploration and development.. 21,689 21,749
Other fixed assets ...................... 5,481 5,033
Construction in progress ................ 12,344 17,304
-------- --------
352,179 325,993
Accumulated depreciation, depletion and
amortization ......................... 171,285 152,696
-------- --------
$180,894 $173,297
======== ========
</TABLE>
-48-
<PAGE> 49
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
6. DEBT
<TABLE>
<CAPTION>
($ in thousands) 1999 1998
------- -------
<S> <C> <C>
Senior Notes
Series B .................... $10,333 $15,500
Series C .................... 39,000 39,000
Series D .................... 21,000 21,000
Other .......................... 8 16
------- -------
70,341 75,516
Less current maturities of long-
term debt ................... 13,746 5,175
------- -------
$56,595 $70,341
======= =======
</TABLE>
SENIOR NOTES
In June 1991, the Company sold $80 million of Senior Notes to a group
of insurance companies. The Series A Notes, which were issued in the principal
amount of $28 million, were paid off in full in fiscal 1998. The Series B Notes,
which were issued in the principal amount of $52 million, have a 10-year life,
require equal annual principal payments beginning June 15, 1996 and bear
interest at 10.16%. In November 1995, the Company completed the funding from a
group of insurance companies of a new private placement of Senior Notes in the
amount of $39 million and the extension of $21 million of previously outstanding
Senior Notes. The $39 million Series C Notes have a 10-year life, require equal
annual principal payments beginning December 15, 1999, and bear interest at
7.62%. The $21 million Series D Notes, for which previously issued Series B
Notes were exchanged, have a 10-year life, require equal annual principal
payments beginning December 15, 1999, and bear interest at an initial rate of
10.16%, with reductions to 7.82% for the periods subsequent to the original
maturity dates of the exchanged Series B Notes; such rate was 8.60% as of July
31, 1999. The Senior Notes are unsecured and the note agreements impose certain
restrictive covenants, including limitations on liens, additional indebtedness,
sales of assets, investments, business combinations and dividends, which
collectively are less restrictive than the terms of the bank Credit Agreement.
CREDIT AGREEMENT
In October 1997, the Company and its subsidiaries entered into a
three-year credit agreement ("Credit Agreement") with a group of banks. The
Credit Agreement provides a $100 million facility for letters of credit or for
direct borrowings of up to $50 million. Interest on borrowings is based upon, at
the Company's option, (i) the higher of the agent bank's prime rate or the
Federal funds rate plus .50% per annum; or (ii) a spread over various
Euro-dollar related rates. A fee ranging from 1% to 1.5% per annum is payable on
the outstanding balance of all letters of credit
-49-
<PAGE> 50
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
and a commitment fee ranging from .20% to .35% per annum is payable on the
unused portion of the facility. Such fees are determined based on a quarterly
calculation of the ratio of cash flow to debt of the Company. The borrowing
base, which secures the facility, consists of cash, accounts receivable and
inventory. The Credit Agreement imposes certain requirements, including: (i) a
prohibition of other indebtedness in excess of $5 million with exceptions for,
among other things, indebtedness under the Company's Senior Notes; (ii)
maintenance of certain levels of net worth, working capital and a
cash-flow-to-debt ratio; (iii) limitations on investments, capital expenditures
and dividends; and (iv) a prohibition of changes in controlling ownership and
material changes in senior management.
At July 31, 1999, the Company had outstanding letters of credit
totalling $18,110,000, and no borrowings outstanding. The unused commitment
under the Credit Agreement at July 31, 1999 was $81,890,000, of which up to
$50,000,000 may be used for additional direct borrowings.
The average and maximum amounts outstanding and the effective average
interest rate for borrowings under the Company's current and prior credit
agreements were as follows:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998
------- -------
<S> <C> <C>
Average amount outstanding $10,028 $ 2,455
Maximum balance $26,000 $23,700
Effective average interest rate 7.9% 8.5%
</TABLE>
No borrowings under the Company's previous Credit Agreement were
outstanding during fiscal 1997.
The Senior Notes and Credit Agreement restrict investments and
distributions, including dividends. Under the most restrictive of these
covenants, at July 31, 1999 approximately $10.6 million was available for the
payment of dividends, subject to a maximum of $6 million per fiscal year.
Maturities of long-term debt for the next five fiscal years are as
follows: 2000 -- $13,746,000; 2001 -- $13,738,000; 2002 -- $8,571,000; 2003 --
$8,571,000 and 2004 -- $8,571,000.
The Company made interest payments of $7,555,000 in 1999, $8,239,000 in
1998 and $9,209,000 in 1997.
Based on the borrowing rates that the Company believes would be
available for replacement loans with similar terms and maturities of the debt of
the Company now outstanding, the Company estimates fair value of long-term debt
including current maturities to be $69.3 million at July 31, 1999.
-50-
<PAGE> 51
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Federal................. $ 10,928 $ 2,589 $ 5,838
State................... 2,561 532 1,413
Deferred .................
Federal ................ (223) 5,268 1,244
State................... (44) 1,310 237
-------- -------- --------
$ 13,222 $ 9,699 $ 8,732
======== ======== ========
</TABLE>
The statutory federal income tax rate applied to pre-tax book income
reconciles to income tax expense as follows:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax computed at
statutory rate............................... $11,606 $ 8,703 $ 7,637
State income taxes, net of federal
tax benefit ........................................ 1,617 1,212 1,064
Other ................................................ (1) (216) 31
-------- -------- --------
$ 13,222 $ 9,699 $ 8,732
======== ======== ========
</TABLE>
Prior to the acquisition of MRC by the Company, operations of the
corporation that was the sole limited partner of MRC resulted in unused net
operating loss carryforwards of approximately $9,000,000, which are expected to
be available to the Company to a limited extent each year through 2006 based on
the income of MRC. As of July 31, 1999, approximately $3,700,000 of these net
operating loss carryforwards remain available to offset future income. For
financial reporting purposes, the benefit of these net operating loss
carryforwards is being offset against contingent future payments of up to
$95,000 per year through 2005 relating to the acquisition of such corporation.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. The Company's
deferred income tax assets and liabilities as of July 31, 1999 and 1998 are as
follows:
-51-
<PAGE> 52
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
<TABLE>
<CAPTION>
($ in thousands)
1999
Assets Liabilities Total
-------- ----------- --------
<S> <C> <C> <C>
Deferred taxes
Accrued employee benefits .................................................. $ 2,573 $ -- $ 2,573
Inventory valuation reserve ................................................ 1,193 -- 1,193
Deferred turnaround costs .................................................. -- (2,532) (2,532)
Pipeline lease ............................................................. 779 -- 779
Prepayments and other ...................................................... 169 (1,908) (1,739)
-------- -------- --------
Total current ................................................................ 4,714 (4,440) 274
Properties, plants and equipment
(due primarily to tax in excess
of book depreciation) ..................................................... -- (22,059) (22,059)
Intangible drilling costs .................................................. -- (232) (232)
Deferred oil and gas costs ................................................. 1,134 -- 1,134
Deferred turnaround costs .................................................. -- (2,917) (2,917)
Investments in equity securities ........................................... 736 -- 736
Earnings of joint ventures ................................................. -- (1,104) (1,104)
Other ...................................................................... 407 (545) (138)
-------- -------- --------
Total noncurrent ............................................................. 2,277 (26,857) (24,580)
-------- -------- --------
Total ........................................................................ $ 6,991 $(31,297) $(24,306)
======== ======== ========
1998
Assets Liabilities Total
-------- ----------- --------
Deferred taxes
Accrued employee benefits .................................................. $ 1,836 $ -- $ 1,836
Inventory valuation reserve ................................................ 1,193 -- 1,193
Deferred turnaround costs .................................................. -- (2,594) (2,594)
Pipeline lease ............................................................. 470 -- 470
Prepayments and other ...................................................... 1,886 (1,873) 13
-------- -------- --------
Total current ................................................................ 5,385 (4,467) 918
Properties, plants and equipment
(due primarily to tax in excess
of book depreciation) ..................................................... -- (20,784) (20,784)
Intangible drilling costs .................................................. -- (720) (720)
Deferred oil and gas costs ................................................. 1,590 -- 1,590
Deferred turnaround costs .................................................. -- (5,509) (5,509)
Investments in equity securities ........................................... 654 -- 654
Earnings of joint ventures ................................................. -- (559) (559)
Other ...................................................................... 151 (396) (245)
-------- -------- --------
Total noncurrent ............................................................. 2,395 (27,968) (25,573)
-------- -------- --------
Total ........................................................................ $ 7,780 $(32,435) $(24,655)
======== ======== ========
</TABLE>
-52-
<PAGE> 53
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
The Company made income tax payments of $4,816,000 in 1999, $646,000 in
1998 and $9,679,000 in 1997.
8. STOCK OPTION PLAN
The Company has a stock option plan under which certain officers and
employees have been granted options. All of the options have been granted at
prices equal to the market value of the shares at the time of grant and expire
on the tenth anniversary of the grant date. The options are subject to
forfeiture with vesting for all options outstanding at July 31, 1999 of 20% at
the time of grant and 20% in each of the four years thereafter. At July 31, 1999
and 1998, 751,500 shares of common stock were reserved for issuance under the
stock option plan.
The following summarizes stock option transactions:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
-------- --------
<S> <C> <C>
Balance at July 31, 1996 ............................ -- $ --
Granted ............................................. 25,000 25.50
-------- --------
Balance at July 31, 1997 ............................ 25,000 25.50
Granted ............................................. 340,000 26.75
-------- --------
Balance at July 31, 1998 ............................ 365,000 26.67
Forfeited ........................................... (25,000) 25.50
-------- --------
Balance at July 31, 1999 ............................ 340,000 $ 26.75
======== ========
Options exercisable at July 31:
1999 ............................................. 136,000 $ 26.75
1998 ............................................. 76,333 $ 26.61
1997 ............................................. -- $ --
</TABLE>
-53-
<PAGE> 54
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
The following summarizes information about stock options outstanding at
July 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
----------- ---------- --------
<S> <C> <C>
340,000 8.6 $26.75
</TABLE>
As required by SFAS No. 123, the Company has determined the pro-forma
information as if it had accounted for stock options granted under the fair
value method of SFAS No. 123. The weighted-average fair value of options granted
in fiscal 1998 and 1997 was $6.02 and $6.80 per share, respectively. The
Black-Scholes option pricing model was used to estimate the fair value of the
options at the respective grant date with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Risk-free interest rates .................... 5.7% 6.4%
Dividend yield .............................. 2.2% 1.9%
Expected common stock market
price volatility factor .................. 17.2% 18.9%
Weighted-average expected
life of options......................... 6 years 6 years
</TABLE>
The pro-forma effect of these options on net income and basic and diluted
income per share is as follows:
<TABLE>
<CAPTION>
($ in thousands, except per share amounts) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net income
As reported ............................... $19,937 $15,167 $13,087
Pro forma ................................. $19,638 $14,991 $13,069
Net income per share (basic and diluted)
As reported ............................... $ 2.42 $ 1.84 $ 1.59
Pro forma ................................. $ 2.38 $ 1.82 $ 1.58
</TABLE>
-54-
<PAGE> 55
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
9. RETIREMENT PLANS
RETIREMENT PLAN
The Company has a non-contributory defined benefit retirement plan that
covers substantially all employees. The Company's policy is to make
contributions annually of not less than the minimum funding requirements of the
Employee Retirement Income Security Act of 1974. Benefits are based on the
employee's years of service and compensation.
The following table sets forth the changes in the benefit obligation and
plan assets of the Company's retirement plan for the years ended July 31, 1999
and 1998:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998
-------- --------
<S> <C> <C>
Change in plan's benefit obligation
Pension plan's benefit obligation -
beginning of year .................... $ 33,867 $ 29,355
Service cost ........................... 1,605 1,257
Interest cost .......................... 2,343 2,267
Benefits paid .......................... (1,337) (1,714)
Actuarial (gain) loss .................. (2,517) 2,702
-------- --------
Pension plan's benefit obligation -
end of year .......................... 33,961 33,867
-------- --------
Change in pension plan assets
Fair value of plan assets -
beginning of year ................... 37,818 35,807
Actual return on plan assets ........... 3,907 2,186
Benefits paid .......................... (1,337) (1,714)
Employer contribution .................. -- 1,539
-------- --------
Fair value of plan assets -
end of year .......................... 40,388 37,818
-------- --------
</TABLE>
-55-
<PAGE> 56
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
<TABLE>
<CAPTION>
Reconciliation of funded status
<S> <C> <C>
Funded status .................................. 6,427 3,951
Unrecognized net gain .......................... (7,654) (4,424)
Unrecognized transition net asset .............. (371) (584)
-------- --------
Accrued pension liability recognized on the
consolidated balance sheet ................... $ (1,598) $ (1,057)
======== ========
</TABLE>
Net periodic pension expense consisted of the following components:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefit earned
during the year .............................. $ 1,605 $ 1,257 $ 1,170
Interest cost on projected
benefit obligations .......................... 2,343 2,267 2,087
Expected return on plan assets ................. (3,164) (2,996) (2,415)
Amortization of prior service costs ............ -- -- 36
Recognized actuarial gain ...................... (29) (290) --
Amortization of transition asset ............... (213) (213) (213)
---------- ---------- ----------
Net periodic pension expense .......... $ 542 $ 25 $ 665
========== ========== ==========
</TABLE>
The principal actuarial assumptions as of July 31 were:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate .............................. 7.5% 7% 7.5%
Rate of future compensation
increases ................................ 5% 5% 5%
Expected long-term rate of return
on assets ................................ 8.5% 8.5% 8.5%
</TABLE>
Pension costs are determined using the assumptions as of the beginning of
the year. The funded status is determined using the assumptions as of the end of
the year.
At July 31, 1999, approximately 68% of plan assets is invested in equity
securities and 32% is invested in fixed income securities and other instruments.
RETIREMENT RESTORATION PLAN
The Company has adopted an unfunded retirement restoration plan that
provides for additional payments from the Company so that total retirement plan
benefits for certain executives
-56-
<PAGE> 57
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
will be maintained at the levels provided in the retirement plan before the
application of Internal Revenue Code limitations. The Company accrued $320,000
in 1999, $297,000 in 1998 and $265,000 in 1997 in connection with this plan. The
accrued liability recognized in the consolidated balance sheet was $1,555,000 at
July 31, 1999 and $1,330,000 at July 31, 1998.
DEFINED CONTRIBUTION PLANS
The Company has defined contribution ("401(k)") plans that cover
substantially all employees. Company contributions are based on employee's
compensation and partially match employee contributions. The Company has
expensed $1,160,000 in 1999, $1,058,000 in 1998 and $1,058,000 in 1997 in
connection with these plans.
10. LEASE COMMITMENTS
The Company leases certain facilities, pipelines and equipment under
operating leases, most of which contain renewal options. At July 31, 1999, the
minimum future rental commitments under operating leases having noncancellable
lease terms in excess of one year total in the aggregate $45,784,000, of which
the following amounts are payable over the next five years: 2000 -- $6,129,000;
2001 -- $6,283,000; 2002 -- $6,151,000; 2003 -- $5,866,000 and 2004 --
$5,499,000. Rental expense charged to operations was $7,165,000 in fiscal 1999,
$7,165,000 in fiscal 1998 and was not significant in fiscal 1997.
11. CONTINGENCIES
In August 1998, a lawsuit (the "Longhorn Suit") was filed in state district
court in El Paso, Texas against the Company and two of its subsidiaries (along
with an Austin, Texas law firm which was subsequently dropped from the case).
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, as amended by Longhorn
Partners in March 1999, seeks damages alleged to total up to $1,050,000,000
(after trebling) 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. The specific action of the Company
complained of in the Longhorn Suit is the support of lawsuits brought by
ranchers in West Texas to challenge the proposed refined products pipeline's use
of easements and rights-of-way that were granted over 50 years ago for a crude
oil pipeline. In mid-July 1999, the state district court in El Paso denied a
motion filed by the Company to transfer the venue of the suit to a state
district court in Dallas, Texas. 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 relating to the Longhorn Suit.
-57-
<PAGE> 58
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
In December 1998, the Company completed the settlement of a suit filed in
July 1993 by the United States Department of Justice ("DOJ"), on behalf of the
United States Environmental Protection Agency ("EPA"), against the Company's
subsidiary, Navajo Refining Company ("Navajo") alleging wastewater violations at
the Navajo Refinery. Under the settlement agreement among Navajo, the DOJ and
the State of New Mexico, the Company has paid a civil penalty in December 1998
of less than $2 million, which was reserved for in fiscal 1993, and was required
by September 1999 to cease discharge to the existing evaporation ponds of its
wastewater treatment system and to utilize an alternative wastewater treatment
system. The alternate wastewater system is now being used and closure of the
ponds will commence upon approval of the Company's closure plan.
The Company is a party to various other litigation and proceedings which it
believes, based on advice of counsel, will not have a materially adverse impact
on the Company's financial condition or results of operations.
12. SEGMENT INFORMATION
The Company has two major business segments: Refining and Pipeline
Transportation. The Refining segment is engaged in the refining of crude oil and
wholesale marketing of refined products, such as gasoline, diesel fuel and jet
fuel, and includes the Company's Navajo Refinery and Montana Refinery. The
petroleum products produced by the Refining segment are marketed in the
southwestern United States, Montana and northern Mexico. Certain pipelines and
terminals operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Pipeline Transportation segment
includes approximately 900 miles of the Company's pipeline assets in Texas and
New Mexico. Revenues from the Pipeline Transportation segment are earned through
transactions with unaffiliated parties for pipeline transportation, rental and
terminalling operations. The Pipeline Transportation segment also includes the
equity earnings from the Company's 25% investment in Rio Grande Pipeline
Company, which provides petroleum products transportation. Operations of the
Company that are not included in the two reportable segments are included in
Corporate and Other, which includes costs of Holly Corporation, the parent
company, consisting primarily of general and administrative expenses and
interest charges, as well as a small-scale oil and gas exploration and
production program and a small equity investment in retail gasoline stations and
convenience stores.
The accounting policies for the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on earnings before interest, taxes and depreciation and
amortization (EBITDA). The Company's reportable segments are strategic business
units that offer different products and services.
-58-
<PAGE> 59
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
<TABLE>
<CAPTION>
Total for
Pipeline Reportable Corporate Consolidated
Refining Transportation Segments & Other Total
--------- -------------- ---------- ---------- --------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
1999
Sales and other operating revenues .... $ 582,172 $ 11,936 $ 594,108 $ 3,878 $ 597,986
EBITDA ................................ $ 63,685 $ 9,881 $ 73,566 $ (6,270) $ 67,296
Income (loss) from operations ......... $ 42,118 $ 6,552 $ 48,670 $ (9,697) $ 38,973
Income (loss) before income taxes ..... $ 41,760 $ 8,859 $ 50,619 $ (17,460) $ 33,159
Total assets .......................... $ 360,111 $ 21,559 $ 381,670 $ 9,312 $ 390,982
1998
Sales and other operating revenues .... $ 582,277 $ 695 $ 582,972 $ 7,327 $ 590,299
EBITDA ................................ $ 56,973 $ 2,140 $ 59,113 $ (2,143) $ 56,970
Income (loss) from operations ......... $ 38,290 $ 302 $ 38,592 $ (5,827) $ 32,765
Income (loss) before income taxes ..... $ 37,872 $ 2,068 $ 39,940 $ (15,074) $ 24,866
Total assets .......................... $ 318,825 $ 16,386 $ 335,211 $ 14,646 $ 349,857
1997
Sales and other operating revenues .... $ 715,023 $ -- $ 715,023 $ 6,323 $ 721,346
EBITDA ................................ $ 49,078 $ 414 $ 49,492 $ (1,425) $ 48,067
Income (loss) from operations ......... $ 33,877 $ -- $ 33,877 $ (6,377) $ 27,500
Income (loss) before income taxes ..... $ 33,315 $ 414 $ 33,729 $ (11,910) $ 21,819
Total assets .......................... $ 315,677 $ 5,235 $ 320,912 $ 28,891 $ 349,803
</TABLE>
-59-
<PAGE> 60
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
13. SIGNIFICANT CUSTOMERS
All revenues were domestic revenues, except for sales of gasoline and
diesel fuel for export into Mexico by the Refining segment. The export sales
were to an affiliate of PEMEX (the government-owned energy company of Mexico)
and accounted for approximately $57,000,000 (10%) of the Company's revenues for
fiscal 1999, $53,000,000 (9%) of revenues for fiscal 1998 and $71,000,000 (10%)
of revenues for fiscal 1997. Sales of military jet fuel to the United States
Government by the Refining segment accounted for approximately $56,000,000 (9%)
of the Company's revenues for fiscal 1999, $56,000,000 (10%) of revenues for
fiscal 1998 and $74,000,000 (10%) of revenues for fiscal 1997. In addition to
the United States Government and PEMEX, other significant sales by the Refining
segment were made to two petroleum companies, one of which accounted for
approximately $92,000,000 (15%) of the Company's revenues in fiscal 1999,
$102,000,000 (17%) of the revenues for fiscal 1998 and $156,000,000 (22%) of the
revenues in fiscal 1997, and the other accounted for $76,000,000 (13%) of the
Company's revenues in fiscal 1999. The Company believes a loss of, or reduction
in amounts purchased by, major purchasers that resell to retail customers would
not have a material adverse effect on the Company, since the Company's sales
volumes with respect to products whose end-users are retail customers appear to
have been historically more dependent on general retail demand and product
supply in the Company's primary markets than on sales to any specific purchaser
and therefore the impact of such a loss on the Company's results of operations
should be limited.
14. TRANSACTION COSTS OF TERMINATED MERGER
On September 1, 1998, the Company and Giant Industries, Inc. mutually agreed
to terminate their proposed merger, which had been approved by the stockholders
of both companies in late June 1998. The decision to terminate the merger was
made as a result of the filing of the Longhorn Suit, and as a result of
continuing delays and uncertainties in negotiations with the Federal Trade
Commission and the State of New Mexico Attorney General's Office concerning
federal and state approval of the merger. Merger related transaction costs of
$1,940,000 were charged to expense in fiscal 1998.
-60-
<PAGE> 61
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
15. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ---------
Financial Data ($ in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1999
Sales and other revenues ............. $ 142,995 $ 120,684 $ 143,375 $ 190,932 $ 597,986
Operating costs and expenses ......... $ 137,217 $ 122,449 $ 126,915 $ 172,432 $ 559,013
Income (loss) from operations ........ $ 5,778 $ (1,765) $ 16,460 $ 18,500 $ 38,973
Income (loss) before income taxes .... $ 4,291 $ (2,962) $ 14,668 $ 17,162 $ 33,159
Net income (loss) .................... $ 2,618 $ (1,807) $ 8,787 $ 10,339 $ 19,937
Net income (loss) per common
share (basic and diluted) ......... $ .32 $ (.22) $ 1.06 $ 1.26 $ 2.42
Dividends per common share ........... $ .16 $ .16 $ .16 $ .16 $ .64
Average number of shares of
common stock outstanding
(in thousands) .................... 8,254 8,254 8,254 8,254 8,254
1998
Sales and other revenues ............. $ 168,922 $ 136,783 $ 134,208 $ 150,386 $ 590,299
Operating costs and expenses ......... $ 158,848 $ 136,979 $ 126,584 $ 135,123 $ 557,534
Income (loss) from operations ........ $ 10,074 $ (196) $ 7,624 $ 15,263 $ 32,765
Income (loss) before income taxes .... $ 8,679 $ (1,634) $ 5,250 $ 12,571 $ 24,866
Net income (loss) .................... $ 5,207 $ (980) $ 2,973 $ 7,967 $ 15,167
Net income (loss) per common
share (basic and diluted) ......... $ .63 $ (.12) $ .36 $ .97 $ 1.84
Dividends per common share ........... $ .15 $ .15 $ .15 $ .15 $ .60
Average number of shares of
common stock outstanding
(in thousands) .................... 8,254 8,254 8,254 8,254 8,254
Operating Data (barrels-per-day)
1999
Sales of refined products ............ 77,200 72,300 72,800 79,000 75,400
Refinery production .................. 71,200 70,000 69,200 72,300 70,700
1998
Sales of refined products ............ 65,000 59,000 70,100 76,700 67,700
Refinery production .................. 50,200 58,400 68,600 70,400 61,800
</TABLE>
-61-
<PAGE> 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no change in, or disagreement with, its independent
certified public accountants on matters involving accounting and financial
disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding the directors of the Company is
incorporated herein by this reference to information set forth under the caption
"Election of Directors" in the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held in December 1999 which will be filed within 120 days
of July 31, 1999 (the "Proxy Statement").
The required information regarding the executive officers of the
Company is included herein in Part I, Item 4.
Required information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by this reference to
information set forth under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
this reference to information set forth under the captions "Executive
Compensation and Other Information" and "Compensation Committee Report on
Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is incorporated herein by this reference to information set forth
under the captions "Principal Stockholders" and "Election of Directors" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by this reference to information set forth under the caption
"Election of Directors" in the Proxy Statement.
-62-
<PAGE> 63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Report of Independent Auditors................................................. 36
Consolidated Balance Sheet at July 31, 1999 and 1998........................... 37
Consolidated Statement of Income for the years ended July 31, 1999,
1998, and 1997............................................................... 38
Consolidated Statement of Cash Flows
for the years ended July 31, 1999, 1998, and 1997............................ 39
Consolidated Statement of Stockholders'
Equity for the years ended July 31, 1999, 1998 and 1997...................... 40
Consolidate Statement of Comprehensive
Income for the years ended July 31, 1999, 1998 and 1997...................... 41
Notes to Consolidated Financial
Statements................................................................... 42
</TABLE>
(2) Index to Consolidated Financial Statement Schedules
All schedules are omitted since the required information is not present
or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or notes thereto.
(3) Exhibits
See Index to Exhibits on pages 66 to 69.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Company's fourth quarter
that ended July 31, 1999.
-63-
<PAGE> 64
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.
HOLLY CORPORATION
(Registrant)
/s/ Lamar Norsworthy
--------------------------------------------
Lamar Norsworthy
Chairman of the Board
and Chief Executive Officer
Date: October 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Lamar Norsworthy Chairman of Board of Directors October 28, 1999
- ----------------------------- and Chief Executive Officer
Lamar Norsworthy of the Company
/s/ Matthew P. Clifton President and Director October 28, 1999
- ----------------------------
Matthew P. Clifton
/s/ David F. Chavenson Vice President and October 28, 1999
- ---------------------------- Chief Financial Officer
David F. Chavenson
</TABLE>
-64-
<PAGE> 65
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ W. John Glancy Vice President, General Counsel, October 28, 1999
- ---------------------------- Secretary and Director
W. John Glancy
/s/ William J. Gray Director October 28, 1999
- ----------------------------
William J. Gray
/s/ Marcus R. Hickerson Director October 28, 1999
- ----------------------------
Marcus R. Hickerson
/s/ A. J. Losee Director October 28, 1999
- ----------------------------
A. J. Losee
/s/ Robert G. McKenzie Director October 28, 1999
- ----------------------------
Robert G. McKenzie
/s/ Thomas K. Matthews, II Director October 28, 1999
- ----------------------------
Thomas K. Matthews, II
/s/ Jack P. Reid Director October 28, 1999
- ----------------------------
Jack P. Reid
</TABLE>
-65-
<PAGE> 66
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>
3.1 - Restated Certificate of Incorporation of the Registrant, as
amended (incorporated by reference to Exhibit 3(a), of
Amendment No. 1 dated December 13, 1988 to Registrant's
Annual Report on Form 10-K for its fiscal year ended July
31, 1988, File No. 1-3876).
3.2 - Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3(b) of Registrant's Annual Report on
Form 10-K for its fiscal year ended July 31, 1993, File No.
1-3876).
4.1 - 10.16% Series B Senior Note of Holly Corporation, dated as
of June 26, 1991, to New York Life Insurance Company with
schedule attached thereto of seven other substantially
identical Notes which differ only in the respects set forth
in such schedule (incorporated by reference to Exhibit 4.2
of Registrant's Form 8-K dated June 26, 1991, File No.
1-3876).
4.2 - 7.62% Series C Senior Note of Holly Corporation, dated as of
November 21, 1995, to John Hancock Mutual Life Insurance
Company, with schedule attached thereto of five other
substantially identical Notes which differ only in the
respects set forth in such schedule (incorporated by
reference to Exhibit 4.4 of Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1995,
File No. 1-3876).
4.3 - Series D Senior Note of Holly Corporation, dated as of
November 21, 1995, to John Hancock Mutual Life Insurance
Company, with schedule attached thereto of three other
substantially identical Notes which differ only in the
respects set forth in such schedule (incorporated by
reference to Exhibit 4.5 of Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1995,
File No. 1-3876).
</TABLE>
-66-
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
4.4 - Note Agreement of Holly Corporation, dated as of June 15,
1991, to John Hancock Mutual Life Insurance Company, with
schedule attached thereto of eleven other substantially
identical Note Agreements which differ only in the respects
set forth in such schedule (incorporated by reference to
Exhibit 4.8 of Registrant's Form 8-K dated June 26, 1991,
File No. 1-3876).
4.5 - Note Agreement of Holly Corporation, dated as of November
15, 1995, to John Hancock Mutual Life Insurance Company,
with schedule attached thereto of five other substantially
identical Note Agreements which differ only in the respects
set forth in such schedule (incorporated by reference to
Exhibit 4.6 of Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended October 31, 1995, File No.
1-3876).
4.6 - Guaranty, dated as of June 15, 1991, of Navajo Refining
Company, Navajo Pipeline Co., Midland-Lea, Inc., and Lea
Refining Company in favor of Kentucky Central Life Insurance
Company, Pan-American Life Insurance Company, American
International Life Assurance Company of New York, Safeco
Life Insurance Company, The Manhattan Life Insurance
Company, The Union Central Life Insurance Company, The Penn
Insurance and Annuity Company, The Penn Mutual Life
Insurance Company, Confederation Life Insurance Company,
John Hancock Mutual Life Insurance Company, John Hancock
Variable Life Insurance Company, and New York Life Insurance
Company (incorporated by reference to Exhibit 4.3 of
Registrant's Form 8-K dated June 26, 1991, File No. 1-3876).
4.7 - Guaranty, dated as of November 1, 1995, of Navajo Crude Oil
Marketing and Navajo Western Asphalt Company in favor of New
York Life Insurance, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company,
Confederation Life Insurance Company, The Penn Insurance and
Annuity Company, The Penn Mutual Life Insurance Company, The
Manhattan Life Insurance Company, The Union Central Life
Insurance Company, Safeco Life Insurance Company, American
International Life Assurance Company of New York,
Pan-American Life Insurance Company and Jefferson-Pilot Life
Insurance Company (incorporated by reference to Exhibit 4.2
of Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended October 31, 1995, File No. 1-3876).
</TABLE>
-67-
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
4.8 - Guaranty, dated as of November 15, 1995, of Navajo Refining
Company, Navajo Pipeline Company, Lea Refining Company,
Navajo Holdings, Inc., Navajo Western Asphalt Company and
Navajo Crude Oil Marketing Company in favor of John Hancock
Mutual Life Insurance Company, John Hancock Variable Life
Insurance Company, Alexander Hamilton Life Insurance Company
of America, The Penn Mutual Life Insurance Company, AIG Life
Insurance Company and Pan-American Life Insurance Company
(incorporated by reference to Exhibit 4.7 of Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1995, File No. 1-3876).
4.9 - Guaranty, dated as of October 10, 1997, of Navajo Corp.,
Navajo Southern, Inc., Navajo Crude Oil Purchasing, Inc. and
Lorefco, Inc in favor of the Holders to the Note Agreements
dated as of June 15, 1991 (incorporated by reference to
Exhibit 4.28 of Registrant's Annual Report on Form 10-K for
its fiscal year ended July 31, 1997, File No. 1-3876).
4.10 - Guaranty, dated as of October 10, 1997, of Navajo Corp.,
Navajo Southern, Inc., Navajo Crude Oil Purchasing, Inc. and
Lorefco, Inc in favor of the Holders to the Note Agreements
dated as of November 15, 1995 (incorporated by reference to
Exhibit 4.29 of Registrant's Annual Report on Form 10-K for
its fiscal year ended July 31, 1997, File No. 1-3876).
4.11 - Letter of Consent, Waiver and Amendment, dated as of
November 15, 1995, among Holly Corporation, and New York
Life Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company,
Confederation Life Insurance Company, The Penn Insurance and
Annuity Company, The Penn Mutual Life Insurance Company, The
Manhattan Life Insurance Company, The Union Central Life
Insurance Company, Safeco Life Insurance Company, American
International Life Assurance Company of New York,
Pan-American Life Insurance Company and Jefferson-Pilot Life
Insurance Company (incorporated by reference to Exhibit 4.3
of Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended October 31, 1995, File No. 1-3876).
</TABLE>
-68-
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
4.12 - $100,000,000 Credit and Reimbursement Agreement, dated as of
October 14, 1997, among Holly Corporation, Navajo Refining
Company, Black Eagle, Inc., Navajo Corp., Navajo Southern,
Inc., Navajo Northern, Inc., Lorefco, Inc., Navajo Crude Oil
Purchasing, Inc., Navajo Holdings, Inc., Holly Petroleum,
Inc., Navajo Pipeline Co., Lea Refining Company, Navajo
Western Asphalt Company and Montana Refining Company, A
Partnership, as Borrowers and Guarantors, the Banks listed
herein, Canadian Imperial Bank of Commerce, as
Administrative Agent, CIBC Inc., as Collateral Agent and
Morgan Guaranty Trust Company of New York, as Documentation
Agent, with schedules and exhibits (incorporated by
reference to Exhibit 4.27 of Registrant's Annual Report on
Form 10-K for its fiscal year ended July 31, 1997, File No.
1-3876).
4.13 - Holly Corporation Stock Option Plan - As adopted at the
Annual Meeting of Stockholders of Holly Corporation on
December 13, 1990 (incorporated by reference to Exhibit 4(i)
of Registrant's Annual Report on Form 10-K for its fiscal
year ended July 31, 1991, File No. 1-3876).
10.1 - Supplemental Payment Agreement, dated as of July 8, 1993,
between Lamar Norsworthy and Holly Corporation (incorporated
by reference to Exhibit 10(a) of Registrant's Annual Report
on Form 10-K for its fiscal year ended July 31, 1993, File
No. 1-3876).
10.2 - Supplemental Payment Agreement, dated as of July 8, 1993,
between Jack P. Reid and Holly Corporation (incorporated by
reference to Exhibit 10(b) of Registrant's Annual Report on
Form 10-K for its fiscal year ended July 31, 1993, File No.
1-3876).
10.3 - Employment Agreement, effective as of April 1, 1999, between
David F. Chavenson and Holly Corporation (incorporated by
reference to Exhibit 10-1 of Registrant's Quarterly Report
on Form 10-Q for its quarterly period ended April 30, 1999,
File No. 1-3876).
10.4 - Consulting Agreement and Release, effective as of October 1,
1999, between William J. Gray and Holly Corporation.
</TABLE>
-69-
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
21 - Subsidiaries of Registrant
23 - Consent of Independent Auditors
27 - Financial Data Schedule
</TABLE>
-70-
<PAGE> 1
EXHIBIT 10.4
CONSULTING AGREEMENT AND RELEASE
THIS CONSULTING AGREEMENT AND RELEASE (the "Agreement") is entered into
on the 16 day of August, 1999, by and between William J. Gray (the
"Consultant"), and the Holly Corporation, its subsidiaries, affiliates and
related entities (the "Company").
RECITALS
A. The Consultant has been employed by the Company in the position of
Senior Vice President of the Company. Consultant now seeks to transition to
retirement status.
B. The Company seeks to assist this transition while maintaining the
ability to utilize the Consultant's expertise.
C. The parties seek to provide for an orderly transition and establish
the duties and relationship between them.
IT IS THEREFORE AGREED:
1. CONSIDERATION. The parties acknowledge the adequacy of consideration
as expressed by the recitations and mutual covenants in this Agreement.
2. PAYMENTS TO AND/OR ON BEHALF OF CONSULTANT. In consideration for
the covenants and promises contained in this Agreement, the Company agrees to
provide the Consultant the following consideration:
(a) SALARY. Beginning on October 1, 1999, the Company will pay
to the Consultant a Monthly Consulting Fee of Fifteen Thousand Seven Hundred
Dollars ($15,700.00) on the first business day of each month during the term of
this Agreement.
(b) EXPENSES. The Company will reimburse the Consultant for
all necessary and normal expenses incurred by the Consultant in the course of
his provision of services, provided such expenses are pre-approved by the
Company or part of a standardized expense list to be provided to the Consultant.
(c) RETIREMENT PLAN ADJUSTMENTS. Solely for purposes of
determining the amount of Consultant's benefit payments under the Holly
Corporation Retirement Restoration Plan (the "Non-qualified Plan"), the Company
will treat Consultant as if his hypothetical pension under the Holly Retirement
Plan (the "Qualified Plan") without regard to the limitations of sections
401(a)(17) or 415 of the Internal Revenue Code were calculated by increasing his
age and his years of Credited Service (as defined in the Qualified Plan) by five
years. Nothing in this Agreement shall affect the calculation of Consultant's
actual pension benefit from the Qualified Plan. Consultant shall be treated as a
retired employee as of October 1, 1999 for purposes of
Consulting Agreement and Release Page 1
<PAGE> 2
entitlement to receive benefits from the Qualified Plan, the Non-qualified Plan,
and other benefit plans of the Company.
(d) MEDICAL COVERAGE. Consultant will have the right to
continue coverage under the Company's medical benefit plan under the terms
applicable for eligible retired employees of the Company.
(e) INDEMNITY. Consultant will continue to be indemnified by
Holly in the same manner under Holly's by-laws as a Consultant as if he were
still an employee. Nothing in this Agreement terminates, expands or alters
Holly's obligations to indemnify the Consultant with respect to any litigation
or other consequences related to his prior actions as an employee, to the extent
such conduct is covered by Holly's corporate indemnification policy and/or
by-laws.
3. COVENANTS OF CONSULTANT. In consideration for the covenants and
promises of the Company contained in this Agreement, the Consultant agrees to
perform consulting services. In regard to these services, the Consultant makes
the following promises and covenants:
(a) TALENT. The Consultant will perform consulting services
related to his areas of expertise and regarding the areas of service he has
provided to the Company over the past 30 years.
(b) TIME. The Consultant further agrees he will make himself
available to the Company for the provision of consulting services as reasonably
requested by the Company (1) to timely respond to and use sufficient research
and analysis to fully address specific Company questions, research and business
needs on specific issues, concerns and/or matters as to which the Consultant has
knowledge or expertise and (2) to assist the Company's directors, officers,
executives or attorneys in the furtherance of these consulting duties.
(c) CONFIDENCES. The Consultant acknowledges that he has had
access and may continue to have access to certain Confidential Information and
that Confidential Information has come into the Consultant's possession as an
employee of the Company and may come into the Consultant's possession as a
result of the services provided pursuant to this Agreement. The Consultant
agrees to treat all such information as confidential, take all necessary
precautions to protect the confidentiality of such information, and not disclose
the information to any person without the written consent of the Company.
"Confidential Information" is defined in Section 6 of this Agreement. The
Consultant acknowledges that this Confidential Information is confidential, and
that it is a special, unique, and valuable asset of the Company.
4. DURATION OF AGREEMENT. The term of this Agreement begins on October
1, 1999 and continues until September 30, 2001, except as further detailed in
Section 9(g). In the case of the Consultant's death or disability, payments
under this Agreement will continue to the consultant, or his estate, heirs or
assigns for the duration of the Agreement. Disability, for the purpose of this
Agreement, means the inability to perform the essential functions of the
Consulting Agreement and Release Page 2
<PAGE> 3
Consultant's duties under this Agreement, with or without accommodation, because
of a physical or mental impairment.
5. PROPERTY RIGHTS. All documents or other tangible property relating
in any way to the business of the Company which are or have been conceived or
generated by the Consultant or which have come into the Consultant's possession
during his employment or the term of this Agreement shall be and remain the
property of the Company. The Consultant will return all such documents and
tangible property to the Company on the expiration of this Agreement or at such
earlier time as the Company may request. The Consultant further agrees that all
non-confidential property or equipment provided by the Company to the Consultant
during the term of his prior employment or this Agreement will remain the
property of the Company and the Consultant agrees to return such property upon
the expiration of this Agreement.
6. CONFIDENTIAL INFORMATION. The term "Confidential Information" as
used in this Agreement includes all business files, ideas, materials,
information, data, methods, business programs, development strategies, technical
improvements, software, inventions, patents, copyrights, customer lists,
marketing strategies, or plans developed, used or employed by the Company that
are disclosed to or developed by the Company as a consequence of or through the
disclosures made by the Company and not generally known to or by competing
businesses about the Company or its customers. "Confidential Information" also
includes all information regarding the Company's financial affairs, marketing,
business strategies, pricing, products, properties, processes, services,
customer lists, employees' names, addresses, employment histories, compensation,
placements, or any other customer or employee information contained in the
Company's records; "Confidential Information" also includes all items protected
by the attorney-client privilege or other legal privileges; provided, however,
that Confidential Information shall not include any data or information which
has been disclosed to or has become generally known by the public.
7. NONCOMPETITION AGREEMENT. The Consultant agrees that during the term
of this Agreement, the Consultant, on his own behalf or on behalf of any other
person or entity, will not directly or indirectly compete against the Company.
This noncompetition agreement includes any action of the Consultant whether
acting for himself, or as a partner, officer, principal, director, stockholder,
holder of any equity security, consultant, employer, agent, or in any other
individual or representative capacity. This noncompetition agreement includes
direct competition or competing indirectly by giving or performing professional
services in any field related to the business of the Company, including
petroleum drilling, refining, distribution, marketing, or other petroleum
related industries. This noncompetition agreement includes engaging in, or
giving any business advice, consulting or professional services to any person,
firm, partnership, association, corporation or other entity that directly or
indirectly competes with the Company in the provision of petroleum and petroleum
related products and services developed or in development during the
Consultant's employment with, or the period of providing consulting services to,
the Company. Conduct contrary to the terms of this noncompetition agreement,
remaining uncured after 30 days notice, will constitute a voluntary waiver of
all remaining consideration under Sections 2 (a) and (b) of this Agreement.
Consulting Agreement and Release Page 3
<PAGE> 4
8. MUTUAL RELEASES AND WAIVERS OF CLAIMS.
(a) CONSULTANT'S RELEASE OF HOLLY: The Consultant, for himself
and on behalf of his attorneys, heirs, assigns, successors, executors and
administrators, irrevocably and unconditionally releases, acquits, waives, and
forever discharges the Company and its current and former parent, subsidiaries,
affiliated and related corporations, firms, associations, partnerships and
entities, their successors, assigns, current and former owners, shareholders,
partners, directors, officers, employees, agents, attorneys, representatives and
insurers (hereinafter collectively referred to as "releasees"), from or
regarding any and all claims, complaints, liabilities, obligations, damages, and
causes of action. This release applies to all claims, including, but not limited
to claims of negligence, gross negligence, tort, contract, or statute, including
claims under the Age Discrimination in Employment Act, 29 U.S.C. Section 621,
et seq., the Texas Commission on Human Rights Act, the Texas Payday Act, and any
other municipal, local, state or federal statutory law, regulatory law or common
law for any actions or omissions, whether known or unknown, and whether
connected with the employment of the Consultant by the Company or not, which
exist or may have existed prior to, or contemporaneously with, the execution of
this Agreement. The release does not cover future conduct or waive any rights
arising under this Agreement.
(b) HOLLY'S RELEASE OF CONSULTANT: In further consideration of
the promises made in this Agreement, Holly releases, acquits, and forever
discharges Consultant from any and all causes of actions, claims, damages,
including attorney's fees Holly may have against Consultant which could have
arisen out of Consultant's employment or separation from employment, whether
known or unknown, presently asserted or otherwise. The release does not cover
future conduct or waive any rights arising under this Agreement.
(c) WARRANTIES REGARDING RELEASE: Both parties warrant and
represent that neither currently is actually aware of any claim that the other
may have against it.
9. MISCELLANEOUS.
(a) SEVERABILITY. In the event that any provision of this
Agreement shall be held invalid or illegal for any reason, any illegality or
invalidity shall not affect the remaining parts of this Agreement, but this
Agreement shall be construed and enforced as if the illegal or invalid provision
had never been inserted. Furthermore, in lieu of each illegal, invalid, or
unenforceable provision, there shall be added automatically as part of this
Agreement another provision or term as similar to the illegal, invalid, or
unenforceable provision as may be possible and still be legal, valid, and
enforceable.
(b) CHOICE OF LAWS AND VENUE. This Agreement shall be governed
and construed in accordance with the laws of the State of Texas. In the event
that any judicial proceedings are instituted concerning the interpretation or
enforcement of this Agreement,
Consulting Agreement and Release Page 4
<PAGE> 5
exclusive venue over such proceedings shall be vested in the courts sitting in
Dallas County, Texas.
(c) MERGER - NO OTHER AGREEMENTS. This Agreement constitutes
the entire Agreement between the parties with respect to the transactions
contemplated in this Agreement and there are no understandings or agreements
relating to this Agreement that are not fully expressed in this Agreement. Save
and except retirement and medical benefit plans and the continuation of the
Consultant to provide employee services until October 1, 1999, under his prior
employment arrangement, this Agreement supersedes all prior agreements, written
or oral, with respect to the subject matter of this Agreement, provided however,
that nothing contained in this agreement (save and except the actual transition
to retirement/consulting status) shall be held to limit or otherwise prevent or
interfere with the Consultant's retirement or health benefits which he may or
may not have otherwise been eligible for under the Company's retirement or
benefit plans. No representations, oral or written, are being relied upon by
either party in executing this Agreement, other than the express representations
in this Agreement.
(d) WRITTEN MODIFICATION ONLY. This Agreement may be amended,
superseded, canceled, renewed, or modified, and the terms hereof may be waived,
only by a written instrument signed by the parties, or in the case of a waiver,
by the party waiving compliance. No delay on the part of any party in exercising
the right, power or privilege under this Agreement shall constitute a waiver
thereof.
(e) PERSONAL SERVICES NOT ASSIGNABLE. This is an Agreement for
personal services and obligations, and neither this Agreement nor any other
rights, interests, or obligations under this Agreement shall be assigned by any
of the parties hereto without the prior written consent of the other parties.
This Agreement shall be binding upon and inure to the benefit of the parties and
the respective successors and permitted assigns and legal representatives.
(f) MULTIPLE ORIGINALS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument.
(g) SURVIVAL. Paragraphs 2(c), 2(d), and 2(e) shall survive
and be unaffected by the expiration or termination of this Agreement. Paragraphs
5, 6, and 8 of this Agreement shall survive the expiration or termination of
this Agreement and shall remain in full force and effect until the year 2025.
(h) PARAGRAPH HEADINGS. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement.
(i) VERB TENSE USAGE. Except where the context otherwise
clearly limits the tense of the verbs used in this Agreement, whenever the use
of the future tense of a verb or sentence is used, it includes both the present
tense and the past tense.
Consulting Agreement and Release Page 5
<PAGE> 6
(j) INSURANCE COVERAGE. Nothing in this Agreement alters,
expands, retracts or affects any coverage which the Consultant may or may not be
afforded or of which Consultant may or may not be a beneficiary under the
Company's general liability or errors and omissions insurance policies, as is
provided by the terms of any such policies, as the case may or may not be.
(k) RIGHTS OF THE CONSULTANT. It is generally agreed and
understood by the Company and the Consultant that this Agreement contains a
general release. The Consultant has knowingly and voluntarily waived any
existing rights he may have pursuant to the Age Discrimination in Employment Act
of 1967 and the Older Workers Benefit Protection Act. Further, the Consultant
acknowledges the receipt of good and valuable consideration set forth in this
Agreement in exchange for this waiver of actual or potential claims. It is
expressly understood by the Consultant that this waiver does not impact any
claims under the Age Discrimination in Employment Act or the Older Workers
Benefit Protection Act which may arise for acts or omissions of the Company
occurring after the execution of this release and waiver. The Company has
advised the Consultant he has the right to seek the advise of legal counsel
prior to signing this Agreement, and the Consultant represents that he has had
the opportunity to seek such advise prior to signing this Agreement. The parties
acknowledge, warrant and represent that (1) they have relied solely on their own
judgment and that of their own attorneys and representatives regarding the
consideration for, and the terms of this Agreement (2) they have been given a
reasonable period to consider this Agreement, (3) they have read and understood
the Agreement, (4) they understand that it includes a general release of all
claims, known or unknown, and (5) no statements made by the other have in any
way coerced or unduly influenced the execution of this Agreement.
Furthermore, the Consultant acknowledges that in accordance with the
Age Discrimination in Employment Act and the Older Workers Benefit Protection
Act, he has been given at least 21 days to review this Agreement. The Company
further advises the Consultant that in accordance with the Age Discrimination in
Employment Act and the Older Workers Benefit Protection Act, he has seven days
after the signing of this Agreement to revoke the Agreement.
8/16/99 /s/ WILLIAM J. GRAY
- ------------- -------------------------------------
DATE Consultant
8/16/99 /s/ MATTHEW P. CLIFTON
- ------------- -------------------------------------
DATE Holly Corporation
By: MATTHEW P. CLIFTON
----------------------------------
Its: President
----------------------------------
Consulting Agreement and Release Page 6
<PAGE> 1
EXHIBIT 21
HOLLY CORPORATION
SUBSIDIARIES OF REGISTRANT
Holly Corporation owns 100% of the capital stock of the following
subsidiaries (state of respective incorporation shown in parentheses):
Navajo Corp. (Del.)
Navajo Holdings, Inc. (N.M.)
Holly Petroleum, Inc. (Del.)
Black Eagle, Inc. (Del.)
Holly Corporation owns 57.5% and Navajo Corp. owns 42.5% of the capital
stock of Navajo Refining Company (Del.).
Navajo Refining Company owns 100% of the stock of Navajo Northern, Inc.
(Nev.), Lorefco, Inc. (Del.), and Navajo Western Asphalt Company (N.M.).
Navajo Holdings, Inc. owns 100% of the stock of Navajo Pipeline Co.
(Del.).
Navajo Pipeline Co. owns 100% of the stock of Navajo Southern, Inc.
(Del.).
Lorefco, Inc. owns 100% of the stock of Lea Refining Company (Del.).
Navajo Northern, Inc. owns 100% of the stock of Montana Retail
Corporation (Del.).
Black Eagle, Inc. and Navajo Northern, Inc. are the general partners of
Montana Refining Company, a Partnership.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 2-74856) pertaining to the Holly Corporation Incentive
Stock Option Plan, Holly Corporation Stock Option Plan, and Holly Corporation
Stock Appreciation Rights Plan and in the related Prospectus of our report dated
September 22, 1999 with respect to the consolidated financial statements of
Holly Corporation included in this Annual Report (Form 10-K) for the year ended
July 31, 1999.
ERNST & YOUNG LLP
Dallas, Texas
October 25, 1999
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