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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934:
FOR THE FISCAL YEAR ENDED JULY 31, 2000
COMMISSION FILE NUMBER 1-3876
HOLLY CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
I.R.S. EMPLOYER IDENTIFICATION NO. 75-1056913
100 CRESCENT COURT, SUITE 1600
DALLAS, TEXAS 75201-6927
TELEPHONE NUMBER: (214) 871-3555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $0.01 par value registered on the American Stock Exchange.
SECURITIES REGISTERED PURSUANT TO 12(g) OF THE ACT:
None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months 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, 2000, the aggregate market value of the Common Stock, par value
$.01 per share, held by non-affiliates of the registrant was approximately
$53,000,000. (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.)
7,550,814 shares of Common Stock, par value $.01 per share, were outstanding on
October 20, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its annual meeting of
stockholders in December 2000, which proxy statement will be filed with the
Securities and Exchange Commission within 120 days after July 31, 2000, are
incorporated by reference in Part III.
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TABLE OF CONTENTS
<TABLE>
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ITEM PAGE
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<S> <C> <C>
PART I
1 & 2. Business and properties........................................ 3
3. Legal proceedings.............................................. 15
4. Submission of matters to a vote of security stockholders....... 16
PART II
5. Market for the Registrant's common equity and related
stockholder matters......................................... 17
6. Selected financial data........................................ 18
7. Management's discussion and analysis of financial condition
and results of operations................................... 19
7a. Quantitative and qualitative disclosures about market risk..... 29
8. Financial statements and supplementary data.................... 29
9. Changes in and disagreements with accountants on accounting
and financial disclosure.................................... 52
PART III
10. Directors and executive officers of the Registrant............. 52
11. Executive compensation......................................... 52
12. Security ownership of certain beneficial owners
and management.............................................. 52
13. Certain relationships and related transactions................. 52
PART IV
14. Exhibits, financial statement schedules and reports on
Form 8-K..................................................... 53
Signatures............................................................... 54
Index to exhibits........................................................ 56
</TABLE>
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 19.
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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 information contained on the website does not constitute
part of this Annual Report on Form 10-K. 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 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 the refining operations, the Company
operates approximately 1,700 miles of pipelines as part of its supply and
distribution network for the Company's refineries.
In recent years, the Company has made an effort to develop and expand a pipeline
transportation business generating revenues from unaffiliated parties. The
pipeline transportation business segment operations include approximately 1,300
miles of pipelines, of which approximately 800 miles are also used as part of
the supply and distribution network of the Navajo Refinery. Additionally, the
Company owns a 25% interest in Rio Grande Pipeline Company, which provides
transportation of liquid petroleum gases ("LPG") to northern Mexico, and a 50%
interest in NK Asphalt Partners, which manufactures and markets asphalt and
asphalt products in Arizona and New 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 conducting 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:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Crude charge (BPD)(1) ........................................... 65,300 66,200 59,400(2)
Refinery production (BPD)(3) .................................... 70,800 70,700 61,800(2)
Sales of produced refined products (BPD) ........................ 70,400 70,400 63,100(2)
Sales of refined products (BPD)(4) .............................. 77,600 75,400 67,700(2)
Refinery utilization(5) ......................................... 97.5% 98.8% 88.7%(2)
Average per barrel(6)
Net sales ..................................................... $ 33.52 $ 21.29 $ 23.48
Raw material costs ............................................ 27.89 15.38 17.39
---------- ---------- ----------
Refinery margin ............................................... 5.63 5.91 6.09
Cash operating costs(7) ....................................... 3.72 3.49 3.68
---------- ---------- ----------
Net cash operating margin ..................................... $ 1.91 $ 2.42 $ 2.41
========== ========== ==========
Sales of produced refined products (BPD)
Gasolines ..................................................... 57.1% 57.0% 55.5%
Diesel fuels .................................................. 21.8 21.2 21.6
Jet fuels ..................................................... 10.3 10.4 10.5
Asphalt ....................................................... 7.3 7.6 8.2
LPG and other ................................................. 3.5 3.8 4.2
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
</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 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 7,200 BPD,
5,000 BPD and 4,600 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.
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
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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 2000, gasoline, diesel fuel and jet fuel (excluding volumes
purchased for resale) represented 58.4%, 22.0%, and 10.6%, 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:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C> <C>
Crude charge (BPD)(1) ....................... 59,400 59,700 53,100(2)
Refinery production (BPD)(3) ................ 64,600 63,800 55,300(2)
Sales of produced refined products (BPD) .... 64,400 63,700 56,400(2)
Sales of refined products (BPD)(4) .......... 71,000 68,300 60,900(2)
Refinery utilization(5) ..................... 99.0% 99.4% 88.5%(2)
Average per barrel(6)
Net sales ................................. $ 33.62 $ 21.09 $ 23.35
Raw material costs ........................ 28.13 15.46 17.59
---------- ---------- ----------
Refinery margin ........................... $ 5.49 $ 5.63 $ 5.76
========== ========== ==========
</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 6,700 BPD,
4,600 BPD, and 4,500 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.
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 two Company-owned pipelines, and which are
then upgraded into finished products at the Artesia facility.
The Company has approximately 500 miles of crude gathering pipelines
transporting crude oil 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 over 350,000 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. In addition, the Company began in late 1999 use of a
leased pipeline to transport petroleum products to markets in northwest New
Mexico and to transport diesel
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fuels to Moriarty, New Mexico, near Albuquerque. The Company has product storage
at terminals in El Paso, Texas, Tucson, Arizona, and Albuquerque, Artesia,
Moriarty and Bloomfield, New Mexico.
Prior to July 2000, Navajo Western Asphalt Company ("Navajo Western"), a
wholly-owned subsidiary of the Company, owned and operated an asphalt terminal,
blending and modification facility near Phoenix. Navajo Western marketed asphalt
produced at the Navajo Refinery and asphalt produced by third parties. In July
2000, Navajo Western and a subsidiary of Koch Materials Company ("Koch") formed
a joint venture, NK Asphalt Partners, to manufacture and market asphalt and
asphalt products in Arizona and New Mexico under the name "Koch Asphalt
Solutions - Southwest." Navajo Western contributed all of its assets to NK
Asphalt Partners and Koch contributed its New Mexico and Arizona asphalt
manufacturing and marketing assets to NK Asphalt Partners. Each company owns a
50% interest in the joint venture. All asphalt produced at the Navajo Refinery
will be sold to the joint venture under a supply agreement.
MARKETS AND COMPETITION
The Navajo Refinery primarily serves the growing southwestern United States
market, including El Paso, Albuquerque, Bloomfield, 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. In
addition, the Company began in late 1999 transportation of petroleum products to
markets in Northwest New Mexico and diesel fuels to Moriarty, New Mexico, near
Albuquerque via a pipeline from Chavez County to San Juan County, New Mexico
leased by the Company from Mid-America Pipeline Company.
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 and distribution and marketing systems.
The Company competes with independent refiners as well. Competition in
particular geographic areas is affected primarily by the amounts of refined
products produced by refineries located in such areas and by the availability of
refined products and the cost of transportation to such areas from refineries
located outside those areas.
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 (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 Alon USA LP ("Alon"),
formerly Fina, Inc., to transport refined products from the Alon refinery in Big
Spring, Texas to El Paso.
The El Paso market for refined products is currently 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. UDS recently announced it is studying a potential
expansion of this pipeline to 80,000 BPD.
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.
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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 shut down in 1998). 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. ("Longhorn Partners"), a Delaware limited
partnership that includes affiliates of Exxon Pipeline Company, 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 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 and settlement. Additionally, the
Longhorn Pipeline is not operating because it lacks valid easements from the
Texas General Land Office for crossing certain stream and river beds and
state-owned lands; the Texas Land Commissioner has indicated that these
easements will not be granted until he is satisfied that the pipeline meets
safety and other standards.
The March 1999 settlement agreement in the federal lawsuit that resulted in the
injunction against operation of the Longhorn Pipeline requires the preparation
of an Environmental Assessment under the authority of the EPA and the DOT while
the federal court retains jurisdiction. A draft Environmental Assessment (the
"Draft EA") on the Longhorn Pipeline was released in October 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
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. In the
last months of 1999 and January 2000, the EPA and DOT conducted a series of
public meetings in Texas and received public comments relating to the
determination as to whether the proposed findings of the Draft EA should be made
final, revised or reversed by the EPA and the DOT. In early September 2000, the
Council on Environmental Quality, a White House coordinating agency on
environmental matters, issued a recommendation that, subject to the satisfaction
of certain further requirements, a final Finding of No Significant Impact should
be issued by the EPA and DOT in October 2000 provided that Longhorn Partners
agrees to implement certain mitigation measures in addition to those required in
the Draft EA. As of the date of this report, no final ruling has been issued by
the EPA and the DOT with respect to the Draft EA and it is not possible for the
Company to predict what the final determination by the two agencies will be or
when such a determination will be made.
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 required an Environmental
Assessment. In addition, the Company has provided financial support for the
preparation of expert analyses of the Draft EA and for certain groups and
individuals who have wished to express their concerns about the Longhorn
Pipeline. 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
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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 permitted by the direct
route through Austin, Texas and over the Edwards Aquifers 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, recent
capital improvements, and on-going enhancements to operational efficiency, 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 most recently amended by Longhorn Partners
in September 2000, 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 actions of the Company
complained of in the Longhorn Suit, as currently amended, are alleged
solicitation of and support for allegedly baseless lawsuits brought by Texas
ranchers in federal and state courts to challenge the proposed Longhorn Pipeline
project, support of allegedly fraudulent public relations activities against the
proposed Longhorn Pipeline project, entry into a contractual "alliance" with
Fina Oil and Chemical Company, threatening litigation against certain partners
in Longhorn Partners, and alleged interference with the federal court settlement
agreement that provided for the Environmental Assessment of the Longhorn
Pipeline. The Company believes that the Longhorn Suit is wholly without merit
and plans to continue to defend itself vigorously. However, because of the size
of the damages claimed and in spite of the apparent lack of merit in the claims
asserted, the Longhorn Suit has created increasing problems for the Company,
including the exclusion of the Company from the possibility of certain types of
major corporate transactions, an adverse impact on the cost of debt financing
for Company operations, and what appears to be a continuing adverse effect on
the market price of the Company's common stock. The Company 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 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 common carrier pipeline 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 a diesel fuel terminal 40 miles east of Albuquerque in Moriarty.
The Company is expanding its terminal in Moriarty to include gasoline and jet
fuel, and the expanded terminal is expected to be operational by the spring of
2001. Completion of this project would allow the Company to transport additional
products directly to the Albuquerque area 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.
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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
expansion this year of the pipeline from the West Coast to Phoenix. If 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 these markets.
In March 2000, Equilon Pipeline Company LLC announced a 500-mile pipeline,
called the "New Mexico Products Pipeline System" to carry gasoline and other
refined fuels from the Odessa, Texas area to Bloomfield, New Mexico. It was
announced that the pipeline would have a capacity of 40,000 BPD and that
shipments would begin in 2001. In addition to the pipeline, a product terminal
would be built in Moriarty, New Mexico. This system would have access to
products manufactured at Gulf Coast refineries and could result in an increase
in the supply of products to some of the Company's markets. This project may be
delayed because of the requirement announced in August 2000 that an
environmental impact study be completed on the proposed project.
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 and
from major oil companies. 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 the purchase in 1998 of the West
Texas gathering system, Navajo gained the ability to purchase crude oil at the
lease in additional areas in West Texas, and this capability should add to the
continued stability of the Navajo Refinery's crude oil supply. In addition, in
1999 the Company completed a new 65 mile pipeline between Lovington and Artesia,
New Mexico and acquired certain pipeline transportation and storage assets
located in West Texas and New Mexico in an asset exchange with ARCO Pipeline
Company, both transactions increase 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:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
BPD % BPD % BPD %
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Sales of produced refined products (1)
Gasolines ............................ 37,600 58.4% 37,400 58.7% 32,200 57.1%
Diesel fuels ......................... 14,200 22.0 13,400 21.0 12,200 21.6
Jet fuels ............................ 6,800 10.6 6,900 10.9 6,300 11.2
Asphalt .............................. 3,600 5.6 3,600 5.6 3,300 5.9
LPG and other ........................ 2,200 3.4 2,400 3.8 2,400 4.2
------ ------ ------ ------ ------ ------
Total ............................. 64,400 100.0% 63,700 100.0% 56,400 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
(1) Excludes refined products purchased for resale.
-9-
<PAGE> 10
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 refinery 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, Bloomfield, 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 Energy Support Center (the "DESC") under a series of
one-year contracts that can vary significantly from year to year. Navajo sold
approximately 6,800 BPD of jet fuel to the DESC in its 2000 fiscal year and has
a contract to supply 8,500 BPD to the DESC for the year ending September 30,
2001. Prior to the formation of NK Asphalt Partners in July 2000, asphalt was
sold to contractors and government authorities for highway construction and
maintenance. Since the formation of NK Asphalt Partners, all asphalt is sold to
NK Asphalt Partners. Carbon black oil is sold for further processing and LPGs
are sold to petrochemical plants and are used as fuel in refinery operations.
Approximately 10% of the Company's revenues for fiscal 2000 resulted from the
sale for export of gasoline and diesel fuel to an affiliate of PEMEX.
Approximately 9% of the Company's revenues for fiscal 2000 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 31 years. The loss of the Company's supply agreement with the United
States Government 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. Arco Products Company is
a purchaser of gasoline for resale to retail customers and accounted for
approximately 15% of the Company's revenues in fiscal 2000. Tosco Corporation
and affiliates is a purchaser of gasoline and diesel fuel for resale to retail
customers and accounted for approximately 11% of the Company's revenues in
fiscal 2000. The Company believes that a loss of, or reduction in amounts
purchased by, major current 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.
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 2001 fiscal year, the capital budget of Navajo Refinery,
including its supply and distribution network, totals approximately $18 million.
The components of this budget are $11 million for refinery improvements, $1
million for engineering costs relating to a purchased hydrotreater, as described
below, and $6 million for refinery related pipeline and transportation projects.
In addition to these projects, the Company plans to expend in the 2001 fiscal
year approximately $10 million on projects that were approved in previous
capital budgets, including a sulfur recovery unit at the Navajo Refinery and a
product terminal 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 in recent
years 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 fiscal 1998, improves the yield of
high value products from the FCC unit by incorporating certain state-of-the-art
upgrades.
In November 1997, the Company purchased a hydrotreater unit for $5 million from
a closed refinery. 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 would enhance higher value,
light product yields and expand the Company's ability to meet the present
California Air Resources Board ("CARB") standards, which have
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<PAGE> 11
been adopted in the Company's Phoenix market for winter months beginning in the
latter part of 2000, and to meet the recently proposed EPA nationwide Low-Sulfur
Gasoline requirements scheduled to begin in 2004. During fiscal 2000, the
Company relocated the purchased hydrotreater equipment to the Navajo Refinery
and purchased certain long-lead-time pieces of equipment for the hydrotreater.
Included in the fiscal 2001 capital budget are commitments of approximately $1
million for engineering costs related to the hydrotreater project. Additionally,
the Company is in the process of constructing the sulfur recovery extraction
unit, scheduled for completion in early 2001, which will be immediately utilized
to enhance sour crude processing capabilities and will recover additional
extracted sulfur when the hydrotreater is completed. The sulfur recovery unit
was approved as part of the fiscal 2000 capital budget and remaining costs of
the unit are expected to be approximately $5 million. The Company, subject to
obtaining necessary permitting in a timely manner, currently expects that the
hydrotreater project could be completed by the end of the 2002 fiscal year.
Remaining costs to complete the hydrotreater project are estimated to be
approximately $20 million, in addition to the engineering and remaining sulfur
recovery unit costs mentioned above. 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
and a diesel fuel terminal 40 miles east of Albuquerque in Moriarty.
Transportation of petroleum products to markets in northwest New Mexico and
diesel fuels to Moriarty began in the latter part of 1999. The Company is
expanding its terminal in Moriarty to include gasoline and jet fuel, and the
expanded terminal is expected to be operational by the spring of 2001. When the
Moriarty terminal expansion is completed, the Company will be in a position to
expand the transport of petroleum products from the Navajo Refinery to the
Albuquerque area.
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.
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%.
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<PAGE> 12
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,
------------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Crude charge (BPD)(1) ........................... 5,900(2) 6,600 6,300
Refinery production (BPD)(3) .................... 6,200(2) 6,900 6,500
Sales of produced refined products (BPD) ........ 6,100(2) 6,700 6,700
Sales of refined products (BPD)(4) .............. 6,600(2) 7,100 7,100
Refinery utilization(5) ......................... 84.3%(2) 93.7% 90.4%
Average per barrel(6)
Net sales ..................................... $ 32.40 $ 23.13 $ 24.51
Raw material costs ............................ 25.34 14.63 15.69
--------- --------- ---------
Refinery margin ............................... $ 7.06 $ 8.50 $ 8.82
========= ========= =========
</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 500 BPD,
400 BPD and 400 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 oil primarily from
suppliers in Canada via a 93-mile Company-owned pipeline, which runs from the
Canadian border to the refinery, as well as from a common carrier pipeline. The
Montana Refinery's principal markets include Great Falls, Helena, Bozeman and
Billings, Montana. MRC competes principally with three other Montana refineries.
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,
---------------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
BPD % BPD % BPD %
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Sales of produced refined products(1)
Gasolines .......................... 2,600 42.6% 2,800 41.8% 2,800 41.8%
Diesel fuels ....................... 1,200 19.7 1,500 22.4 1,500 22.4
Jet fuels .......................... 500 8.2 400 6.0 300 4.4
Asphalt ............................ 1,500 24.6 1,700 25.3 1,800 26.9
LPG and other ...................... 300 4.9 300 4.5 300 4.5
----- ----- ----- ----- ----- -----
Total ........................... 6,100 100.0% 6,700 100.0% 6,700 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
(1) Excludes refined products purchased for resale.
For the 2001 fiscal year, MRC's capital budget totals $750,000, most of which is
for various improvements at the Montana Refinery.
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<PAGE> 13
PIPELINE TRANSPORTATION OPERATIONS
PIPELINE TRANSPORTATION BUSINESS
In recent years, the Company developed and expanded a pipeline transportation
business generating revenues from unaffiliated parties. The pipeline
transportation operations include approximately 1,300 miles of pipelines, of
which approximately 800 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, described below. For fiscal 2001, the Company did not
budget any significant amount for capital expenditures that will be used for the
pipeline transportation business.
The Company has a 25% interest in Rio Grande Pipeline Company ("Rio Grande"), a
pipeline joint venture 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 that 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 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 August 2000, Alon USA
LP, a subsidiary of an Israeli petroleum refining and marketing company,
succeeded to FINA's interest in this alliance.
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 2000. 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 a new 65 mile 10
inch 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.
In the second quarter of fiscal 2000, the Company acquired certain pipeline
transportation and storage assets located in West Texas and New Mexico in an
asset exchange with ARCO Pipeline Company. The acquired assets allow the Company
to transport crude oil for unaffiliated companies as well as to increase the
Company's ability to access additional crude oil 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 2001, the Company has budgeted under $1 million for capital
expenditures related to oil and gas exploration activities.
-13-
<PAGE> 14
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
$800,000 related to the collectability of advances and related accrued interest
to this joint venture.
EMPLOYEES AND LABOR RELATIONS
As of September 30, 2000, the Company had approximately 550 employees. Of its
employees, 225 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. As part of the Company's cost reduction and production efficiency program
initiated in the fourth quarter of fiscal 2000, a voluntary early retirement
package was offered to eligible employees. A total of 55 employees have elected
to retire under this program, most of which are with the Navajo Refinery. Of
these 55 employees, approximately 35 remained employed with the Company at
September 30, 2000 and are scheduled to retire prior to July 31, 2001.
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,
the recently proposed EPA Nationwide Low-Sulfur Gasoline requirements that will
begin in 2004, 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, would help the Company to meet expected future 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 the Company's future products and activities. 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 possessed by the Company.
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<PAGE> 15
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.
COST REDUCTION AND PRODUCTION EFFICIENCY PROGRAM
In May 2000, the Company announced a cost reduction and production efficiency
program that is expected to yield annual pre-tax improvement of approximately
$20 million. The program is currently being implemented and should be completed
by July 2002. The cost reduction and production efficiency program includes
productivity enhancements and a reduction in workforce. As part of the
implementation of cost reductions, The Company offered a voluntary early
retirement program to eligible employees, under which 55 employees who elected
to participate are scheduled to retire in fiscal 2001, most of whom by December
31, 2000. The pre-tax cost of the voluntary early retirement program was $6.8
million and was reflected in the Company's earnings for the quarter ended July
31, 2000. It is estimated that capital expenditures of approximately $9 million
will be required to effectuate some of the production improvements, of which
expenditures totaling approximately $5 million are included in the fiscal 2001
capital budget.
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, BP/Amoco Pipeline Company,
Williams Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. and
Chisholm Holdings as limited partners. The suit, as most recently amended by
Longhorn Partners in September 2000, 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
actions of the Company complained of in the Longhorn Suit, as currently amended,
are alleged solicitation of and support for allegedly baseless lawsuits brought
by Texas ranchers in federal and state courts to challenge the proposed Longhorn
Pipeline project, support of allegedly fraudulent public relations activities
against the proposed Longhorn Pipeline project, entry into a contractual
"alliance" with Fina Oil and Chemical Company, threatening litigation against
certain partners in Longhorn Partners, and alleged interference with the federal
court settlement agreement that provided for an Environmental Assessment of the
Longhorn Pipeline. In early October 2000, the Company filed an amended motion
for summary judgment, amending a motion for summary judgment originally filed in
February 2000, seeking a court ruling that would terminate this litigation. A
hearing on the Company's amended motion for summary judgment is currently
scheduled for early January 2001. A motion filed by the Company to transfer the
venue for trial of the case from the El Paso court to another Texas court has
been pending since May 2000, and no hearing on this motion is currently
scheduled. The Company believes that the Longhorn Suit is wholly without merit
and plans to continue 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 has recently become aware that the New Mexico Environmental
Department ("NMED") proposes to assert penalties that may total in excess of
$100,000 with respect to NMED's allegation that stricter air emission limits
should apply for a certain unit at the Navajo Refinery. No specific penalty
amount has been asserted by the NMED. Although the Company does not agree with
this assertion, it is in negotiations with the NMED with respect to a settlement
agreement that could involve an acceleration of the timing of certain
substantial capital investments to lower air emissions from the subject unit at
the Navajo Refinery as well as payment of a monetary penalty.
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, results of operations or cash flows.
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<PAGE> 16
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 2000 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 20, 2000 are as
follows:
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
<S> <C> <C> <C>
Lamar Norsworthy 54 Chairman of the Board 1971
and Chief Executive Officer
Matthew P. Clifton 49 President and Director 1988
W. John Glancy 58 Senior Vice President, General 1998
Counsel, Secretary and Director
David G. Blair 42 Vice President, Marketing 1994
Asphalt and LPG
Leland J. M. Griffin 52 Vice President, Montana 1999
Operations
Randall R. Howes 43 Vice President, Refining 1997
John A. Knorr 50 Vice President, Crude Oil 1988
Supply and Trading
Stephen J. McDonnell 49 Vice President, Finance 2000
and Corporate Development
Mike Mirbagheri 61 Vice President, International 1982
Crude Oil and Refined
Products
Scott C. Surplus 41 Vice President, Treasury and Tax 2000
Henry A. Teichholz 57 Vice President 1984
James G. Townsend 45 Vice President, Pipelines
and Terminals 1997
Kathryn H. Walker 50 Vice President, Accounting 1999
Gregory A. White 43 Vice President, Marketing 1994
Light Oils
</TABLE>
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.
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
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<PAGE> 17
MRC and serves as the General Manager of MRC. Mr. Howes served as Manager of
Technical Services of Navajo from 1991 to 1997, as Vice President, Technical
Services from September 1997 to December 1998, and as Vice President,
Engineering and Economics from December 1998 through March 2000, when he was
elected to his current position. Mr. Townsend has served in his current position
since September 1997; he served as Manager of Transportation of Navajo from 1995
to 1997, and previously held various transportation/pipeline positions. Mr.
Griffin and Ms. Walker have served in their respective positions since 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. Mr.
McDonnell has served in his current position since August 2000. Mr. McDonnell
was with Central and South West Corporation as a Vice President in the mergers
and acquisitions area from 1996 to June 2000 and as Treasurer from 1989 to 1996.
Mr. Surplus has served in his current position since June 2000. Mr. Surplus
previously served as Assistant Treasurer of the Company from 1990 to March 2000.
From April 2000 to June 2000, Mr. Surplus was not with the Company and was a
Vice President, Finance of three small companies.
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>
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
2000
First Quarter ........... $ 15 3/8 $ 13 1/2 $ .17 619,700
Second Quarter .......... 14 3/4 12 5/8 .17 670,200
Third Quarter ........... 14 10 .17 1,196,200
Fourth Quarter .......... 13 1/2 9 1/4 .17 702,100
</TABLE>
As of July 31, 2000, the Company had approximately 1,700 stockholders of record.
On September 22, 2000, the Company's Board of Directors declared a regular
quarterly dividend in the amount of $.18 per share payable on October 6, 2000.
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> 18
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>
YEARS ENDED JULY 31, 2000 1999 1998 1997 1996
-------------------- -------- -------- -------- -------- --------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
For the year
Sales and other revenues ........................ $965,946 $597,986 $590,299 $721,346 $676,290
Income before income taxes ...................... $ 18,634 $ 33,159 $ 24,866 $ 21,819 $ 31,788
Income tax provision ............................ 7,189 13,222 9,699 8,732 12,554
-------- -------- -------- -------- --------
Net income ...................................... $ 11,445 $ 19,937 $ 15,167 $ 13,087 $ 19,234
======== ======== ======== ======== ========
Net income per common
share (basic and diluted) ..................... $ 1.42 $ 2.42 $ 1.84 $ 1.59 $ 2.33
Cash dividends per common
share ......................................... $ 0.68 $ 0.64 $ 0.60 $ 0.51 $ 0.42
Average number of shares of
common stock outstanding ...................... 8,065 8,254 8,254 8,254 8,254
Net cash provided by
operating activities .......................... $ 46,804 $ 47,628 $ 38,193 $ 5,457 $ 44,452
At end of year
Working capital ................................. $ 363 $ 13,851 $ 14,793 $ 45,241 $ 66,649
Total assets .................................... $464,362 $390,982 $349,857 $349,803 $351,271
Long-term debt (including current portion) ...... $ 56,595 $ 70,341 $ 75,516 $ 86,291 $ 97,065
Stockholders' equity ............................ $129,581 $128,880 $114,349 $105,121 $ 96,243
</TABLE>
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<PAGE> 19
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 "Business and Properties" under
Items 1 and 2, "Legal Proceedings" under Item 3 and "Liquidity and Capital
Resources" and "Additional Factors that May Affect Future Results" 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 and the costs of defense and the risk of an
adverse decision in the Longhorn Pipeline litigation. 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.
-19-
<PAGE> 20
RESULTS OF OPERATIONS
FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
(In thousands, except share data)
<S> <C> <C> <C>
Sales and other revenues .............................. $ 965,946 $ 597,986 $ 590,299
Operating costs and expenses
Cost of products sold .............................. 800,663 428,472 440,042
Operating expenses ................................. 88,550 80,654 76,420
Selling, general and administrative expenses ....... 20,724 22,159 13,714
Depreciation, depletion and amortization ........... 27,496 26,358 24,379
Exploration expenses, including dry holes .......... 1,729 1,370 2,979
Voluntary early retirement costs ................... 6,783 -- --
--------- --------- ---------
Total operating costs and expenses ............ 945,945 559,013 557,534
--------- --------- ---------
Income from operations ................................ 20,001 38,973 32,765
Other income (expense)
Equity in earnings of joint ventures ............... 1,586 1,965 1,766
Interest expense, net .............................. (5,153) (7,779) (7,725)
Other income (expense) ............................. 2,200 -- (1,940)
--------- --------- ---------
(1,367) (5,814) (7,899)
--------- --------- ---------
Income before income taxes ............................ 18,634 33,159 24,866
Income tax provision .................................. 7,189 13,222 9,699
--------- --------- ---------
Net income ............................................ $ 11,445 $ 19,937 $ 15,167
========= ========= =========
Net income per common share (basic and diluted) ....... $ 1.42 $ 2.42 $ 1.84
Sales and other revenues(1)
Refining ........................................... $ 947,317 $ 582,172 $ 582,277
Pipeline Transportation ............................ 14,861 11,936 695
Corporate and other ................................ 3,768 3,878 7,327
--------- --------- ---------
Consolidated ....................................... $ 965,946 $ 597,986 $ 590,299
========= ========= =========
Income (loss) from operations(1)
Refining ........................................... $ 25,480 $ 42,118 $ 38,290
Pipeline Transportation ............................ 7,859 6,552 302
Corporate and other ................................ (13,338) (9,697) (5,827)
--------- --------- ---------
Consolidated ....................................... $ 20,001 $ 38,973 $ 32,765
========= ========= =========
</TABLE>
(1) 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 the Refining segment are marketed in the southwestern United
States, Montana and northern Mexico. Costs associated with pipelines and
terminals operated in conjunction with the Refining segment as part of the
supply and distribution networks of the refineries are included in the
Refining segment. The Pipeline Transportation segment includes
approximately 1,300 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 charge for the voluntary early
retirement program is included in Corporate and other.
-20-
<PAGE> 21
OPERATING DATA
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Refinery Production (BPD) ........................ 70,800 70,700 61,800
Sales of Refined Products (BPD) (1) .............. 77,600 75,400 67,700
Refinery Margins (per produced barrel sold) ...... $ 5.63 $ 5.91 $ 6.09
</TABLE>
(1) Includes refined products purchased for resale of 7,200 BPD, 5,000 BPD and
4,600 BPD, respectively, for the years shown in the above table.
2000 COMPARED TO 1999
Net income for the year ended July 31, 2000 was $11.4 million ($1.42 per share),
as compared to $19.9 million ($2.42 per share) for fiscal 1999. The results for
fiscal 2000 reflected a one-time $6.8 million pre-tax charge for voluntary early
retirement costs associated with the recently initiated cost reduction and
efficiency program. Without this charge in the fiscal 2000 year, net income for
fiscal 2000 would have been $15.5 million ($1.92 per share).
The decrease in net income for fiscal 2000, as compared to fiscal 1999, was
primarily attributable to the charge of $6.8 million for the voluntary early
retirement program, reduced refinery margins partially offset by increased sales
volumes and increases in operating expenses for fiscal 2000 attributable
principally to increased utility costs. Because of generally higher crude oil
prices in fiscal 2000, both revenues and cost of products sold were higher for
fiscal 2000 than fiscal 1999. Refinery margins decreased 4.7% during fiscal 2000
compared to the prior year, as crude prices increased at a slightly greater rate
than product prices. Since July 2000, refining margins have remained very strong
as product prices increased at a greater rate than crude prices in the refined
products markets served by the Company's Navajo Refinery. Refining income was
favorably affected by a 2.9% increase in sales volume in fiscal 2000, as
compared to fiscal 1999, enabling the Company to reach a record annual sales
volume level.
Favorable factors impacting earnings in the 2000 fiscal year, as compared to the
prior year, were increased pipeline transportation income, lower net interest
expense due to reduced borrowings and increased short-term investments in the
current fiscal year, income of $2.2 million resulting from the termination of a
long-term sulfur recovery agreement with a third party, and a decrease in
general and administrative expenses relating principally to non-recurring
compensation expense in fiscal 1999.
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. 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
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<PAGE> 22
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $.6 million to $3.6 million during the
year ended July 31, 2000 as cash flows generated from operations were slightly
less than cash flows required for investing activities, payments on long term
fixed rate debt, dividends paid and treasury stock purchased. Working capital
decreased during the year ended July 31, 2000 by $13.5 million to $.4 million.
In April 2000, the Company entered into an agreement with a group of banks led
by Canadian Imperial Bank of Commerce to extend its Revolving Credit Agreement
until October 10, 2001. Under the extension agreement, as subsequently amended,
the Company will have access to $90 million of commitments for both revolving
credit loans and letters of credit. Up to $45 million of this facility may be
used for revolving credit loans. At July 31, 2000 the Company had letters of
credit outstanding under the facility of $67.0 and no borrowings outstanding.
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.
In May 2000, the Company announced a cost reduction and production efficiency
program that is expected to yield annual pre-tax improvements totaling
approximately $20 million. The program is currently being implemented and should
be completed by July 2002. The cost reduction and production efficiency program
includes productivity enhancements and a reduction in workforce. As part of the
implementation of cost reductions, the Company offered a voluntary early
retirement program to eligible employees, under which 55 employees are scheduled
to retire in fiscal 2001, most of whom will retire by December 31, 2000. The
pre-tax cost of the voluntary early retirement program was $6.8 million and was
reflected in the Company's earnings for the quarter ended July 31, 2000. It is
estimated that capital expenditures of approximately $9 million will be required
to effectuate some of the production improvements included in the program, of
which expenditures totaling approximately $5 million are included in the fiscal
2001 capital budget.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities amounted to $46.8 million in fiscal
2000, compared to $47.6 million in fiscal 1999 and $38.2 million in fiscal 1998.
Comparing fiscal 2000 to fiscal 1999, the small decrease in cash provided from
operating activities was principally due to lower cash flows from operations, as
refinery margins were lower in fiscal 2000 as compared to the prior fiscal year,
and payments made for income taxes, offset by the favorable effect on cash flow
from higher crude and product prices in fiscal 2000. Crude acquisition payables
increased at a greater rate than product receivables, as the Company receives
payment on its receivables more quickly than it pays for its acquisitions of
crude oil. Comparing fiscal 1999 to 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.
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<PAGE> 23
CASH FLOWS FOR FINANCING ACTIVITIES
Cash flows used for financing activities amounted to $27.2 million in fiscal
2000, compared to $22.1 million in fiscal 1999 and $4.7 million in fiscal 1998.
During fiscal 2000, the Company repaid $13.7 million of its fixed rate term
debt, repurchased 8.5% of its outstanding common stock (702,700 shares) and paid
$5.5 million in dividends. On April 18, 2000, the Company repurchased 702,700
shares of its outstanding common stock for $7,224,000, or approximately $10.28
per share. The repurchase, which was made from an institutional shareholder, was
funded from existing working capital. 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 at fiscal year end of $11.6 million under the Credit Agreement. In
fiscal 2001, $13.7 million of fixed rate term debt becomes due.
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 $95.1 million over the last
three years, $20.1 million in 2000, $24.0 million in 1999 and $51.0 million in
1998. All of these amounts were expended on capital projects except for $3.3
million invested during fiscal 2000 in a joint venture created to manufacture
and market asphalt products, $2.0 million invested during fiscal 1998 in a joint
venture to operate retail gasoline stations and convenience stores in Montana
and $3.0 million invested during fiscal 1998 in shares of common stock of a
publicly traded company. The net negative cash flow for investing activities was
offset by distributions to the Company from the Rio Grande joint venture of $2.4
million in fiscal 2000, $2.9 million in fiscal 1999 and $3.7 million in fiscal
1998.
The Company has adopted a capital budget of $20 million for fiscal 2001. The
components of this budget are $12 million for refinery improvements, $1 million
for engineering costs relating to a purchased hydrotreater, as described below,
$6 million for 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 in the 2001 fiscal year approximately $10 million on
capital projects that were approved in previous capital budgets, including a
sulfur recovery unit at the Navajo Refinery and a product terminal to be used in
conjunction with the leased pipeline to northwest New Mexico described below.
In November 1997, the Company purchased a hydrotreater unit for $5 million from
a closed refinery. 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 would enhance higher value,
light product yields and expand 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, and to meet the recently proposed EPA nationwide Low-Sulfur Gasoline
requirements scheduled to begin in 2004. During fiscal 2000, the Company
relocated the purchased hydrotreater equipment to the Navajo Refinery and
purchased certain long-lead-time pieces of equipment for the hydrotreater.
Included in the fiscal 2001 capital budget are commitments of approximately $1
million for engineering costs related to the hydrotreater project. Additionally,
the Company is in the process of constructing a sulfur recovery unit, scheduled
for completion in early 2001, which will be immediately utilized to enhance sour
crude processing capabilities and will recover additional extracted sulfur when
the hydrotreater is completed. The sulfur recovery unit was approved as part of
the fiscal 2000 capital budget and remaining costs of the unit are expected to
be approximately $5 million. The Company, subject to obtaining necessary
permitting in a timely manner, currently expects that the hydrotreater project
could be completed by the end of the 2002 fiscal year. Remaining costs to
complete the hydrotreater project are estimated to be approximately $20 million,
in addition to the engineering and remaining sulfur recovery unit costs
mentioned above. 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.
-23-
<PAGE> 24
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
and a diesel fuel terminal 40 miles east of Albuquerque in Moriarty.
Transportation of petroleum products to markets in northwest New Mexico and
diesel fuels to Moriarty began in the latter part of 1999. The Company is
expanding its terminal in Moriarty to include gasoline and jet fuel, and the
expanded terminal is expected to be operational by the spring of 2001. When the
Moriarty terminal expansion is completed, the Company will be positioned to
expand the transport of petroleum products from the Navajo Refinery to the
Albuquerque area.
In July 2000, Navajo Western Asphalt Company ("Navajo Western"), a wholly-owned
subsidiary of the Company, and a subsidiary of Koch Materials Company ("Koch")
formed a joint venture, NK Asphalt Partners, to manufacture and market asphalt
and asphalt products in Arizona and New Mexico under the name "Koch Asphalt
Solutions - Southwest." Navajo Western contributed all of its assets to NK
Asphalt Partners and Koch contributed its New Mexico and Arizona asphalt and
manufacturing assets to NK Asphalt Partners. Each Company owns a 50% interest in
the joint venture. All asphalt produced at the Navajo Refinery will be sold to
the joint venture under a supply agreement. The Company is required to make
additional contributions to the joint venture for each of the next ten years of
up to $3,250,000 per year, contingent on the earnings level of the joint
venture. The Company expects to finance such contributions from its share of
cash flows of the joint venture.
During the fourth quarter of fiscal 1999, the Company completed 65 miles of new
pipeline between Lovington and Artesia, New Mexico, 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.
As part of its efforts to improve operating efficiencies, the Company upgraded
the FCC unit at the Navajo Refinery in fiscal 1998. The upgrade, 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 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. 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.
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 is 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 areas 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 fluctuate significantly 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
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<PAGE> 25
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 access to capital markets and
commercial bank loans. Additionally, other matters, such as regulatory
requirements or legal actions, may restrict the Company's access to funds for
capital expenditures.
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 shut down in 1998). 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. ("Longhorn Partners"), 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 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 and settlement. Additionally, the
Longhorn Pipeline is not operating because it lacks valid easements from the
Texas General Land Office for crossing certain stream and river beds and
state-owned lands; the Texas Land Commissioner has indicated that these
easements will not be granted until he is satisfied that the pipeline meets
safety and other standards.
The March 1999 settlement agreement in the federal lawsuit that resulted in the
injunction against operation of the Longhorn Pipeline requires the preparation
of an Environmental Assessment under the authority of the EPA and the DOT while
the federal court retains jurisdiction. A draft Environmental Assessment (the
"Draft EA") on the Longhorn Pipeline was released in October 1999. The Draft EA
proposed 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
elements of the proposed mitigation plan
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<PAGE> 26
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. In the last months of 1999 and January 2000, the
EPA and DOT conducted a series of public meetings in Texas and received public
comments relating to the determination as to whether the proposed findings of
the Draft EA should be made final, revised or reversed by the EPA and the DOT.
The Company has provided financial support for the preparation of expert
analyses of the Draft EA and for certain groups and individuals who have wished
to express their concerns about the Longhorn Pipeline. In early September 2000,
the Council on Environmental Quality, a White House coordinating agency on
environmental matters, issued a recommendation that, subject to the satisfaction
of certain further requirements, a final Finding of No Significant Impact should
be issued by the EPA and DOT in October 2000 provided that Longhorn Partners
agrees to implement certain mitigation measures in addition to those required in
the Draft EA. As of the date of this report, no final ruling has been issued by
the EPA and the DOT with respect to the Draft EA and it is not possible for the
Company to predict what the final determination by the two agencies will be or
when such a determination will be made.
If the Longhorn Pipeline is allowed to operate as currently proposed, the
substantially lower requirement for capital investment permitted by the direct
route through Austin, Texas and over the Edwards Aquifers 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, recent
capital improvements, and on-going enhancements to operational efficiency, 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 most recently amended by Longhorn Partners
in September 2000, 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 actions of the Company
complained of in the Longhorn Suit, as currently amended, are alleged
solicitation of and support for allegedly baseless lawsuits brought by Texas
ranchers in federal and state courts to challenge the proposed Longhorn Pipeline
project, support of allegedly fraudulent public relations activities against the
proposed Longhorn Pipeline project, entry into a contractual "alliance" with
Fina Oil and Chemical Company, threatening litigation against certain partners
in Longhorn Partners, and alleged interference with the federal court settlement
agreement that provided for the Environmental Assessment of the Longhorn
Pipeline. The Company believes that the Longhorn Suit is wholly without merit
and plans to continue to defend itself vigorously. However, because of the size
of the damages claimed and in spite of the apparent lack of merit in the claims
asserted, the Longhorn Suit has created increasing problems for the Company,
including the exclusion of the Company from the possibility of certain types of
major corporate transactions, an adverse impact on the cost of debt financing
for Company operations, and what appears to be a continuing adverse effect on
the market price of the Company's common stock. The Company plans to pursue at
the appropriate time any affirmative remedies that may be available to it
relating to the Longhorn Suit.
In March 2000, Equilon Pipeline Company LLC announced a 500-mile pipeline,
called the "New Mexico Products Pipeline System" to carry gasoline and other
refined fuels from the Odessa, Texas area to Bloomfield, New Mexico. It was
announced that the pipeline would have a capacity of 40,000 BPD and shipments
will begin in 2001. In addition to the pipeline, a product terminal would be
built in Moriarty, New Mexico. This system will have access to products
manufactured at Gulf Coast refineries and could result in an increase in the
supply of products to some of the Company's markets. This project may be delayed
because of the requirement announced in August 2000 that an environmental impact
study be completed on the proposed project.
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
expansion this year of the pipeline from the West Coast to Phoenix. If refined
products become available on the West Coast in excess of demand in that market,
additional products may
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<PAGE> 27
be shipped into the Company's Arizona markets with resulting possible downward
pressure on refined product prices in these 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 common carrier pipeline 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 with
Mid-America Pipeline Company for a pipeline running from near the Navajo
Refinery to the Albuquerque vicinity and Bloomfield, New Mexico. The Company has
completed a refined products terminal in Bloomfield and a diesel fuel terminal
east of Albuquerque. The Company is expanding its terminal in Moriarty to
include gasoline and jet fuel, and the expanded terminal is expected to be
operational by the spring of 2001. Completion of this project at Moriarty will
allow the Company to transport gasoline and jet fuel directly to the Albuquerque
area 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.
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. Completion of the
hydrotreater project, discussed above, would enhance higher value, light product
yields and expand the Company's ability to produce more gasoline which meet the
present CARB standards in the Company's Phoenix market and to meet the recently
proposed EPA nationwide Low-Sulfur Gasoline requirements that will begin in
2004. These new requirements, 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.
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
-27-
<PAGE> 28
products when the related inventory is sold or the hedged transaction is
consummated. No such contracts were outstanding at July 31, 2000.
At July 31, 2000, the Company had outstanding unsecured debt of $56.6 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 two
years and such debt represents approximately 30% of the Company's total
capitalization. During much of fiscal 2000, the Company had outstanding
borrowings under the Credit Agreement. As the interest rates on the Company's
bank 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 and hence the
interest rate market risk implicit in these cash investments is low. A ten
percent change in the market interest rate over the next year would not
materially impact the Company's earnings or cash flow since 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
since the average maturity of the Company's long-term debt is approximately two
years and such debt represents approximately 30% of 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
In late 1999, the Company completed its remediation and testing of systems to
become year 2000 ready. As a result of these planning and implementation
efforts, the Company experienced no significant disruptions in mission-critical
information technology and non-information technology systems and believes those
systems successfully responded to the year 2000 date change. The costs
associated with remediating any year 2000 problems have not been material to
date. The Company is not aware of any material problems resulting from year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its
mission-critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent year 2000 matters that may
arise are addressed promptly.
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, SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000 with early adoption permitted. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities an amendment of FASB Statement No.
133," which amended certain accounting and reporting standards of FASB 133.
Effective as of August 1, 2000, the Company adopted SFAS No. 133. As of July 31,
2000, the Company did not hold any derivative instruments that would be covered
under SFAS No. 133.
-28-
<PAGE> 29
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.................... 30
Consolidated Balance Sheet at July 31,
2000 and 1999................................. 31
Consolidated Statement of Income for the
years ended July 31, 2000, 1999 and 1998...... 32
Consolidated Statement of Cash Flows
for the years ended July 31,
2000, 1999 and 1998........................... 33
Consolidated Statement of Stockholders' Equity
for the years ended July 31, 2000, 1999
and 1998...................................... 34
Consolidated Statement of Comprehensive
Income for the years ended
July 31, 2000, 1999, and 1998................. 35
Notes to Consolidated Financial
Statements.................................... 36
</TABLE>
-29-
<PAGE> 30
REPORT OF 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, 2000 and 1999, 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, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Holly
Corporation at July 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas
September 21, 2000
-30-
<PAGE> 31
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31,
-----------------------
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 3,628 $ 4,194
Accounts receivable (Notes 3 and 6) ...................................... 189,966 123,502
Inventories (Notes 4 and 6) .............................................. 56,599 54,924
Prepayments and other .................................................... 16,911 12,158
--------- ---------
TOTAL CURRENT ASSETS ................................................ 267,104 194,778
Properties, plants and equipment, net (Note 5) .............................. 175,309 180,894
Investments in and advances to joint ventures ............................... 11,749 4,035
Other assets ................................................................ 10,200 11,275
--------- ---------
TOTAL ASSETS ........................................................ $ 464,362 $ 390,982
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 3) ................................................ $ 223,870 $ 144,287
Accrued liabilities (Notes 9 and 11) ..................................... 22,956 14,688
Income taxes payable ..................................................... 6,177 8,206
Current maturities of long-term debt (Note 6) ............................ 13,738 13,746
--------- ---------
TOTAL CURRENT LIABILITIES ........................................... 266,741 180,927
Deferred income taxes (Note 7) .............................................. 25,183 24,580
Long-term debt, less current maturities (Note 6) ............................ 42,857 56,595
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 ........................................................ 130,293 124,341
--------- ---------
136,512 130,560
Common stock held in treasury, at cost - 1,099,468 and 396,768 shares (7,793) (569)
Other comprehensive income (loss) ........................................ 862 (1,111)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY .......................................... 129,581 128,880
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 464,362 $ 390,982
========= =========
</TABLE>
See accompanying notes.
-31-
<PAGE> 32
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C>
SALES AND OTHER REVENUES (NOTE 13) ............................. $ 965,946 $ 597,986 $ 590,299
OPERATING COSTS AND EXPENSES
Cost of products sold ....................................... 800,663 428,472 440,042
Operating expenses .......................................... 88,550 80,654 76,420
Selling, general and administrative expenses ................ 20,724 22,159 13,714
Depreciation, depletion and amortization .................... 27,496 26,358 24,379
Exploration expenses, including dry holes ................... 1,729 1,370 2,979
Voluntary early retirement costs (Note 9) ............ ...... 6,783 -- --
--------- --------- ---------
TOTAL OPERATING COSTS AND EXPENSES ..................... 945,945 559,013 557,534
--------- --------- ---------
INCOME FROM OPERATIONS ......................................... 20,001 38,973 32,765
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures ........................ 1,586 1,965 1,766
Interest income ............................................. 761 11 646
Interest expense (Note 6) ................................... (5,914) (7,790) (8,371)
Other income (expense) (Note 14) ............................ 2,200 -- (1,940)
--------- --------- ---------
(1,367) (5,814) (7,899)
--------- --------- ---------
INCOME BEFORE INCOME TAXES ..................................... 18,634 33,159 24,866
Income tax provision (benefit) (Note 7)
Current ..................................................... 11,319 13,489 3,121
Deferred .................................................... (4,130) (267) 6,578
--------- --------- ---------
7,189 13,222 9,699
--------- --------- ---------
NET INCOME ..................................................... $ 11,445 $ 19,937 $ 15,167
========= ========= =========
NET INCOME PER COMMON SHARE (basic and diluted) ................ $ 1.42 $ 2.42 $ 1.84
========= ========= =========
CASH DIVIDENDS PAID PER COMMON SHARE ........................... $ 0.68 $ 0.64 $ 0.60
========= ========= =========
AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ........... 8,065 8,254 8,254
========= ========= =========
</TABLE>
See accompanying notes.
-32-
<PAGE> 33
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 11,445 $ 19,937 $ 15,167
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization ................ 27,496 26,358 24,379
Deferred income taxes ................................... (4,130) (267) 6,578
Equity in earnings of joint ventures .................... (1,586) (1,965) (1,766)
Dry hole costs and leasehold impairment ................. 663 256 1,190
(Increase) decrease in current assets
Accounts receivable ................................... (66,464) (41,123) 23,442
Inventories ........................................... (2,603) 918 2,431
Income taxes receivable ............................... -- 653 666
Prepayments and other ................................. 72 (44) 746
Increase (decrease) in current liabilities
Accounts payable ...................................... 79,583 35,148 (15,446)
Accrued liabilities ................................... 8,268 1,296 (338)
Income taxes payable .................................. (2,029) 7,918 (109)
Turnaround expenditures ................................. (3,289) -- (18,771)
Other, net .............................................. (622) (1,457) 24
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 46,804 47,628 38,193
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in borrowings under credit agreement .... -- (11,600) 11,600
Payment of long-term debt ................................... (13,746) (5,175) (10,775)
Debt issuance costs ......................................... (764) -- (547)
Purchase of treasury stock .................................. (7,224) -- --
Cash dividends .............................................. (5,493) (5,282) (4,952)
-------- -------- --------
NET CASH USED FOR FINANCING ACTIVITIES ................. (27,227) (22,057) (4,674)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment ............... (19,261) (26,903) (49,715)
Investments and advances to joint ventures .................. (3,282) -- (2,000)
Distributions from joint venture ............................ 2,400 2,924 3,734
Investment in equity securities ............................. -- -- (2,978)
-------- -------- --------
NET CASH USED FOR INVESTING ACTIVITIES ................. (20,143) (23,979) (50,959)
-------- -------- --------
CASH AND CASH EQUIVALENTS
INCREASE (DECREASE) FOR THE YEAR ............................ (566) 1,592 (17,440)
Beginning of year ........................................... 4,194 2,602 20,042
-------- -------- --------
END OF YEAR ................................................. $ 3,628 $ 4,194 $ 2,602
======== ======== ========
</TABLE>
See accompanying notes.
-33-
<PAGE> 34
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE TOTAL
COMMON ADDITIONAL RETAINED TREASURY INCOME STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK (LOSS) EQUITY
--------- ---------- ---------- ---------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
Net income ........................... -- -- 11,445 -- -- 11,445
Dividends paid ....................... -- -- (5,493) -- -- (5,493)
Net unrealized gain on securities
available for sale ................. -- -- -- -- 1,973 1,973
Purchase of treasury stock ........... -- -- -- (7,224) -- (7,224)
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 2000 ............. $ 87 $ 6,132 $ 130,293 $ (7,793) $ 862 $ 129,581
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
-34-
<PAGE> 35
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
NET INCOME ...................................................... $ 11,445 $ 19,937 $ 15,167
Other comprehensive income
Unrealized income (loss) on securities available for sale .... 3,281 (206) (1,641)
Income tax provision (benefit) ............................... 1,308 (82) (654)
-------- -------- --------
1,973 (124) (987)
-------- -------- --------
TOTAL COMPREHENSIVE INCOME ...................................... $ 13,418 $ 19,813 $ 14,180
======== ======== ========
</TABLE>
See accompanying notes.
-35-
<PAGE> 36
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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
1,700 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. The pipeline transportation operations include
approximately 1,300 miles of pipelines, of which approximately 800 miles are
also used as part of the supply and distribution network of the Navajo Refinery.
Additionally, the Company has a 25% interest in Rio Grande Pipeline Company,
which provides transportation of liquid petroleum gases ("LPG") to northern
Mexico, and a 50% interest in NK Asphalt Partners, which manufactures and
markets asphalt and asphalt products in Arizona and New 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.
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 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 $800,000 related
to the collectability of advances of $1,755,000 associated with this joint
venture.
In July 2000, the Company entered into a joint venture to manufacture and market
asphalt products from various terminals in Arizona and New Mexico. The Company
has a 50% interest in the joint venture and accounts for earnings using the
equity method. In addition to the cash investment and advances made of
$3,282,000, the company contributed inventories with a net book value of
$928,000 and properties with a net book value of $4,311,000. The Company is
required to make additional contributions to the joint venture for each of the
next ten years of up to $3,250,000 per year, contingent on the earnings level of
the joint venture.
-36-
<PAGE> 37
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 2000, 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.
STOCK-BASED COMPENSATION: Statement of Financial Accounting Standards ("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.
-37-
<PAGE> 38
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVE INSTRUMENTS: The Company periodically utilizes petroleum commodity
futures contracts to reduce its exposure to the price fluctuations associated
with crude oil and refined products. Such contracts historically have been 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. No such contracts were outstanding at July 31, 2000.
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. SFAS No.
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000 with early adoption permitted. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities an amendment of FASB Statement No. 133," which amended certain
accounting and reporting standards of FASB 133. Effective August 1, 2000, the
Company adopted SFAS No. 133. As of July 31, 2000, the Company did not hold any
derivative instruments that would be covered under SFAS No. 133.
RECLASSIFICATIONS: Certain reclassifications have been made to the prior years'
financial statements to conform to the current presentation.
-38-
<PAGE> 39
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: EARNINGS PER SHARE
Basic income per share is calculated as net income divided by average number of
shares of common stock outstanding. Diluted income per share assumes, when
dilutive, issuance of the net incremental shares from stock options. The
following is a reconciliation of the numerators and denominators of the basic
and diluted per share computations for income:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income ............................... $11,445 $19,937 $15,167
Average number of shares of common
stock outstanding ...................... 8,065 8,254 8,254
Effect of dilutive stock options ......... -- -- 4
------- ------- -------
Average number of shares of common
stock outstanding assuming dilution .... 8,065 8,254 8,258
======= ======= =======
Income per share - basic ................. $ 1.42 $ 2.42 $ 1.84
======= ======= =======
Income per share - diluted ............... $ 1.42 $ 2.42 $ 1.84
======= ======= =======
</TABLE>
There were no transactions subsequent to July 31, 2000, which, had the
transactions occurred before July 31, 2000, would materially change the number
of common shares or potential common shares outstanding as of July 31, 2000.
NOTE 3: ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
JULY 31,
-----------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
Product and transportation .... $ 65,988 $ 47,832
Crude oil resales ............. 123,978 75,670
-------- --------
$189,966 $123,502
======== ========
</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 are due 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.
Credit losses are charged to income when accounts are deemed uncollectible and
consistently have been minimal.
-39-
<PAGE> 40
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
JULY 31,
--------------------------
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Crude oil and refined products ............................ $ 49,340 $ 47,364
Materials and supplies .................................... 10,193 10,553
--------- ---------
59,533 57,917
Reserve for lower of cost or market ....................... (2,934) (2,993)
--------- ---------
$ 56,599 $ 54,924
========= =========
</TABLE>
The excess of current cost over the LIFO value of inventory was $42,862,000 at
July 31, 2000 and $11,416,000 at July 31, 1999.
NOTE 5: PROPERTIES, PLANTS AND EQUIPMENT
<TABLE>
<CAPTION>
JULY 31,
--------------------------
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Land, buildings and improvements .......................... $ 14,957 $ 15,334
Refining facilities ....................................... 196,952 195,202
Pipelines and terminals ................................... 100,070 89,481
Transportation vehicles ................................... 11,605 12,648
Oil and gas exploration and development ................... 21,243 21,689
Other fixed assets ........................................ 6,381 5,481
Construction in progress .................................. 8,729 12,344
--------- ---------
359,937 352,179
Accumulated depreciation, depletion and amortization ...... (184,628) (171,285)
--------- ---------
$ 175,309 $ 180,894
========= =========
</TABLE>
NOTE 6: DEBT
<TABLE>
<CAPTION>
JULY 31,
--------------------------
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Senior Notes
Series B ................................................ $ 5,166 $ 10,333
Series C ................................................ 33,429 39,000
Series D ................................................ 18,000 21,000
Other ..................................................... -- 8
--------- ---------
56,595 70,341
Current maturities of long-term debt ...................... (13,738) (13,746)
--------- ---------
$ 42,857 $ 56,595
========= =========
</TABLE>
-40-
<PAGE> 41
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 8.275% as
of July 31, 2000. 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 with a group of banks. In April 2000, a new credit
agreement ("Credit Agreement") was entered into which effectively extended the
expiration date of the previous agreement until October 2001 and made some
modifications to the terms and conditions of the previous agreement. As of July
31, 2000, commitments under the Credit Agreement provided an $80 million
facility for letters of credit or for direct borrowings of up to $40 million. In
August 2000, another bank entered into the Credit Agreement that increased the
amount available for letters of credit to $90 million and the amount available
for direct borrowings to $45 million. Interest on borrowings is based upon, at
the Company's option, (i) the higher of the agent bank's prime rate plus a
margin ranging from .25% to 1% or the Federal funds rate plus .50% per annum; or
(ii) the London interbank offered rate ("LIBOR") plus a margin ranging from
1.25% to 2.5%. A fee ranging from 1.25% to 2.5% per annum is payable on the
outstanding balance of all letters of credit and a commitment fee ranging from
.30% to .50% per annum is payable on the unused portion of the facility. Such
interest rate margins and fees are determined based on a quarterly calculation
of the ratio of cash flow to debt of the Company. Until there is a satisfactory
resolution of the Longhorn Suit (see Note 11), the minimum interest rate margins
and fees will be near the highest amounts indicated. The borrowing base, which
secures the facility, consists of accounts receivable and inventory, and at the
option of the Company, cash and cash equivalents. 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.
At July 31, 2000, the Company had outstanding letters of credit totalling
$67,046,000, and no borrowings outstanding. The unused commitment under the
Credit Agreement at July 31, 2000 was $12,954,000, which may be used for letters
of credit or 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>
YEARS ENDED JULY 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Average amount outstanding ........... $ 784 $10,028 $ 2,455
Maximum balance ...................... $11,000 $26,000 $23,700
Effective average interest rate ...... 9.5% 7.9% 8.5%
</TABLE>
-41-
<PAGE> 42
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Senior Notes and Credit Agreement restrict investments and distributions,
including dividends. Under the most restrictive of these covenants, at July 31,
2000 approximately $11.6 million was available for the payment of dividends,
subject to a maximum of $7 million per fiscal year.
Maturities of long-term debt for the next five fiscal years are as follows: 2001
-- $13,738,000; 2002 -- $8,571,000; 2003 -- $8,571,000; 2004 -- $8,571,000 and
2005 -- $8,571,000.
The Company made interest payments of $6,192,000 in 2000, $7,555,000 in 1999 and
$8,239,000 in 1998.
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 $54.0 million at July 31, 2000.
NOTE 7: INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current
Federal ............... $ 9,166 $ 10,928 $ 2,589
State ................. 2,153 2,561 532
Deferred
Federal ............... (3,302) (223) 5,268
State ................. (828) (44) 1,310
-------- -------- --------
$ 7,189 $ 13,222 $ 9,699
======== ======== ========
</TABLE>
The statutory federal income tax rate applied to pre-tax book income reconciles
to income tax expense as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Tax computed at statutory rate ..................... $ 6,522 $ 11,606 $ 8,703
State income taxes, net of federal tax benefit ..... 908 1,617 1,212
Other .............................................. (241) (1) (216)
-------- -------- --------
$ 7,189 $ 13,222 $ 9,699
======== ======== ========
</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, 2000, approximately $3,200,000 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.
-42-
<PAGE> 43
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
JULY 31, 2000
----------------------------------------
ASSETS LIABILITIES TOTAL
-------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
Deferred taxes
Accrued employee benefits ........................... $ 1,572 $ -- $ 1,572
Accrued postretirement benefits ..................... 4,037 -- 4,037
Inventory valuation reserve ......................... 1,170 -- 1,170
Deferred turnaround costs ........................... -- (2,699) (2,699)
Pipeline lease ...................................... 929 -- 929
Prepayments and other ............................... 288 (1,598) (1,310)
-------- -------- --------
Total current ......................................... 7,996 (4,297) 3,699
Properties, plants and equipment (due primarily to
tax in excess of book depreciation) ............... -- (23,224) (23,224)
Deferred oil and gas costs .......................... 1,249 -- 1,249
Deferred turnaround costs ........................... -- (1,097) (1,097)
Investments in equity securities .................... -- (572) (572)
Investments in joint ventures ....................... -- (1,098) (1,098)
Other ............................................... 452 (893) (441)
-------- -------- --------
Total noncurrent ...................................... 1,701 (26,884) (25,183)
-------- -------- --------
Total ................................................. $ 9,697 $(31,181) $(21,484)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1999
----------------------------------------
ASSETS LIABILITIES TOTAL
-------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
Deferred taxes
Accrued employee benefits ............................. $ 1,393 $ -- $ 1,393
Accrued postretirement benefits ....................... 1,180 -- 1,180
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)
Deferred oil and gas costs ............................ 1,134 -- 1,134
Deferred turnaround costs ............................. -- (2,917) (2,917)
Investments in equity securities ...................... 736 -- 736
Investments in joint ventures ......................... -- (1,104) (1,104)
Other ................................................. 407 (777) (370)
-------- -------- --------
Total noncurrent ........................................ 2,277 (26,857) (24,580)
-------- -------- --------
Total ................................................... $ 6,991 $(31,297) $(24,306)
======== ======== ========
</TABLE>
-43-
<PAGE> 44
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company made income tax payments of $13,301,000 in 2000, $4,816,000 in 1999
and $646,000 in 1998.
NOTE 8: STOCKHOLDERS' EQUITY
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 and vesting
for all options issued subsequent to July 31, 1999 of 20% in each of the five
years after the grant date. At July 31, 2000 and 1999, 751,500 shares of common
stock were reserved for issuance under the stock option plan. Subsequent to July
31, 2000, the Company reserved for issuance under the stock option plan an
additional 750,000 shares, subject to stockholders' approval.
The following summarizes stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
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
Granted ............................................. 395,000 13.90
Forfeited ........................................... (52,000) 18.17
-------- ------
Balance at July 31, 2000 ............................ 683,000 $19.97
======== ======
Options exercisable at July 31,
2000 .............................................. 195,000 $26.75
1999 .............................................. 136,000 $26.75
1998 .............................................. 76,333 $26.61
</TABLE>
The following summarizes information about stock options outstanding at July 31,
2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
Range of Exercise Price OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$10.125 - $14.00 ...... 360,000 9.2 $13.90 -- $ --
$26.75 ................ 323,000 7.6 26.75 195,000 26.75
------- ------ ------ ------- ------
$10.125 - $26.75 ...... 683,000 8.5 $19.97 195,000 $26.75
======= ====== ====== ======= ======
</TABLE>
-44-
<PAGE> 45
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As required by SFAS No. 123, the Company has determined 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 was $3.72 in
2000 and $6.02 in 1998. The Black-Scholes option pricing model was used to
estimate the fair value of options at the respective grant date with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------
2000 1999 1998
------- ------ -------
<S> <C> <C> <C>
Risk-free interest rates ................................. 6.0% -- 5.7%
Dividend yield ........................................... 3.0% -- 2.2%
Expected common stock market price voliatility factor .... 27.0% -- 17%
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>
YEARS ENDED JULY 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except share data)
<S> <C> <C> <C>
Net income
As reported ............................... $ 11,445 $ 19,937 $ 15,167
Pro forma ................................. $ 11,001 $ 19,638 $ 14,991
Net income per share (basic and diluted)
As reported ............................... $ 1.42 $ 2.42 $ 1.84
Pro forma ................................. $ 1.36 $ 2.38 $ 1.82
</TABLE>
COMMON STOCK REPURCHASE: On April 18, 2000, the Company repurchased 702,700
shares of its outstanding common stock, for $7,224,000, or approximately $10.28
per share. The repurchase, which was made from an institutional shareholder, was
funded from existing working capital.
-45-
<PAGE> 46
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: RETIREMENT PLANS
VOLUNTARY EARLY RETIREMENT PROGRAM: As part of the Company's cost reduction and
production efficiency program initiated in the fourth quarter of fiscal 2000, a
voluntary early retirement package was offered to eligible employees. Prior to
July 31, 2000, a total of 55 employees elected to retire under this program.
Most of the employees are at Navajo, which is the Company's largest operating
subsidiary. The Company has recorded a charge of $6,783,000 as of July 31, 2000
relating to the voluntary early retirement program. The charge was based on
estimates of the cost for the early retirement program, consisting of an
enhancement to the Company's Retirement Plan and the Company's agreement to
allow employees retiring under the program to continue coverage at a reduced
cost under Company group medical plans until normal retirement age. The
termination date for each of the employees, is to be determined by the Company
and will be prior to July 31, 2001.
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, 2000 and
1999:
<TABLE>
<CAPTION>
JULY 31,
-------------------------
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Change in plan's benefit obligation
Pension plan's benefit obligation - beginning of year ..... $ 33,961 $ 33,867
Service cost .............................................. 1,544 1,605
Interest cost ............................................. 2,469 2,343
Benefits paid ............................................. (1,831) (1,337)
Actuarial (gain) loss ..................................... (1,720) (2,517)
Special early retirement charge ........................... 3,923 --
-------- --------
Pension plan's benefit obligation - end of year ........... 38,346 33,961
Change in pension plan assets
Fair value of plan assets - beginning of year ............. 40,388 37,818
Actual return (loss) on plan assets ....................... (4,288) 3,907
Benefits paid ............................................. (1,831) (1,337)
Employer contributions .................................... -- --
-------- --------
Fair value of plan assets - end of year ................... 34,269 40,388
Reconciliation of funded status
Funded status ............................................. (4,077) 6,427
Unrecognized net gain ..................................... (1,445) (7,654)
Unrecognized transition net asset ......................... (158) (371)
-------- --------
Accrued pension liability recognized on the
consolidated balance sheet .............................. $ (5,680) $ (1,598)
======== ========
</TABLE>
-46-
<PAGE> 47
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic pension expense consisted of the following components:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost - benefit earned during the year ...... $ 1,544 $ 1,605 $ 1,257
Interest cost on projected benefit obligations ..... 2,469 2,343 2,267
Expected return on plan assets ..................... (3,377) (3,164) (2,996)
Recognized actuarial gain .......................... (265) (29) (290)
Amortization of transition asset ................... (213) (213) (213)
------- ------- -------
Net periodic pension expense ....................... $ 158 $ 542 $ 25
======= ======= =======
</TABLE>
The principal actuarial assumptions as of July 31 were:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Discount rate.................................................. 7.75% 7.50% 7.00%
Rate of future compensation increases.......................... 5.00% 5.00% 5.00%
Expected long-term rate of return on assets.................... 8.50% 8.50% 8.50%
</TABLE>
Pension costs are determined using 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, 2000, approximately 66% of plan assets is invested in equity
securities and 34% 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 will be maintained at the
levels provided in the retirement plan before the application of Internal
Revenue Code limitations. The Company expensed $311,000 in 2000, $320,000 in
1999 and $297,000 in 1998 in connection with this plan. The accrued liability
recognized in the consolidated balance sheet was $1,722,000 at July 31, 2000 and
$1,555,000 at July 31, 1999.
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 $1,224,000 in 2000, $1,160,000 in 1999 and $1,058,000 in 1998 in
connection with these plans.
POSTRETIREMENT MEDICAL PLAN: The Company has adopted an unfunded postretirement
medical plan as part of the voluntary early retirement program offered to
eligible employees. As part of the early retirement program, the Company agreed
to allow retiring employees to continue coverage at a reduced cost under Company
group medical plans until normal retirement age. At July 31, 2000, the Company
recorded a charge of $2,860,000 in connection with this plan.
-47-
<PAGE> 48
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: LEASE COMMITMENTS
The Company leases certain facilities, pipelines and equipment under operating
leases, most of which contain renewal options. At July 31, 2000, the minimum
future rental commitments under operating leases having noncancellable lease
terms in excess of one year total in the aggregate $38,025,000, of which the
following amounts are payable over the next five years: 2001 -- $5,579,000; 2002
-- $5,636,000; 2003 -- $5,475,000; 2004 -- $5,469,000 and 2005 -- $5,413,000.
Rental expense charged to operations was $7,131,000 in 2000, $7,165,000 in 1999
and $7,165,000 in 1998.
NOTE 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, BP/Amoco Pipeline Company,
Williams Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. and
Chisholm Holdings as limited partners. The suit, as most recently amended by
Longhorn Partners in September 2000, 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
actions of the Company complained of in the Longhorn Suit, as currently amended,
are alleged solicitation of and support for allegedly baseless lawsuits brought
by Texas ranchers in federal and state courts to challenge the proposed Longhorn
Pipeline project, support of allegedly fraudulent public relations activities
against the proposed Longhorn Pipeline project, entry into a contractual
"alliance" with Fina Oil and Chemical Company, threatening litigation against
certain partners in Longhorn Partners, and alleged interference with the federal
court settlement agreement that provided for an Environmental Assessment of the
Longhorn Pipeline. In early October 2000, the Company filed an amended motion
for summary judgment, amending a motion for summary judgment originally filed in
February 2000, seeking a court ruling that would terminate this litigation. A
hearing on the Company's amended motion for summary judgment is currently
scheduled for early January 2001. A motion filed by the Company to transfer the
venue for trial of the case from the El Paso court to another Texas court has
been pending since May 2000, and no hearing on this motion is currently
scheduled. 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 the Company's financial condition, results of operations or cash flows.
NOTE 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 Refining segment also includes
the equity earnings from the Company's 50% interest in NK Asphalt Partners,
which manufacturers and markets asphalt and asphalt products in Arizona and New
Mexico. The Pipeline Transportation segment includes approximately 1,300 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% interest 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
-48-
<PAGE> 49
exploration and production program, a small equity investment in retail gasoline
stations and convenience stores and the voluntary early retirement charge in
fiscal 2000.
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.
<TABLE>
<CAPTION>
TOTAL FOR
PIPELINE REPORTABLE CORPORATE CONSOLIDATED
REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL
-------- -------------- ---------- --------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 2000
Sales and other revenues .............. $947,317 $ 14,861 $962,178 $ 3,768 $965,946
EBITDA ................................ $ 52,544 $ 10,461 $ 63,005 $(11,722) $ 51,283
Income (loss) from operations ......... $ 25,480 $ 7,859 $ 33,339 $(13,338) $ 20,001
Income (loss) before income taxes ..... $ 27,487 $ 9,210 $ 36,697 $(18,063) $ 18,634
Total assets .......................... $426,394 $ 20,941 $447,335 $ 17,027 $464,362
YEAR ENDED JULY 31, 1999
Sales and other 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
YEAR ENDED JULY 31, 1998
Sales and other 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
</TABLE>
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<PAGE> 50
NOTE 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 $100,000,000 (10%) of the Company's revenues for fiscal 2000,
$57,000,000 (10%) of revenues for fiscal 1999 and $53,000,000 (9%) of revenues
for fiscal 1998. Sales of military jet fuel to the United States Government by
the Refining segment accounted for approximately $90,000,000 (9%) of the
Company's revenues for fiscal 2000, $56,000,000 (9%) of revenues for fiscal 1999
and $56,000,000 (10%) of revenues for fiscal 1998. 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
$143,000,000 (15%) of the Company's revenues in fiscal 2000 and $76,000,000
(13%) of revenues in fiscal 1999, and the other accounted for $109,000,000 (11%)
of the Company's revenues in fiscal 2000, $92,000,000 (15%) of revenues for
fiscal 1999 and $102,000,000 (17%) of revenues in fiscal 1998. The Company
believes that a loss of, or reduction in amounts purchased by, major current
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.
NOTE 14: OTHER INCOME (EXPENSE)
The Company agreed in fiscal 2000 to terminate a long-term sulfur recovery
agreement with an unaffiliated party. As compensation for the termination of the
agreement, the Company will be paid $2,200,000, which was recorded as income in
fiscal 2000.
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.
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<PAGE> 51
NOTE 15: QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
--------- ---------- --------- --------- ---------
(In thousands, except share and barrel data)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
YEAR ENDED JULY 31, 2000
Sales and other revenues .............. $ 200,631 $ 218,424 $ 256,940 $ 289,951 $ 965,946
Operating costs and expenses .......... $ 194,656 $ 225,120 $ 242,578 $ 283,591 $ 945,945
Income (loss) from operations ......... $ 5,975 $ (6,696) $ 14,362 $ 6,360 $ 20,001
Income (loss) before income taxes ..... $ 5,309 $ (8,068) $ 13,445 $ 7,948 $ 18,634
Net income (loss) ..................... $ 3,226 $ (4,903) $ 8,171 $ 4,951 $ 11,445
Net income (loss) per common
share (basic and diluted) ........... $ 0.39 $ (0.59) $ 1.00 $ 0.66 $ 1.42
Dividends per common share ............ $ 0.17 $ 0.17 $ 0.17 $ 0.17 $ 0.68
Average number of shares of
common stock outstanding ............ 8,254 8,254 8,207 7,551 8,065
YEAR ENDED JULY 31, 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) ........... $ 0.32 $ (0.22) $ 1.06 $ 1.26 $ 2.42
Dividends per common share ............ $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.64
Average number of shares of
common stock outstanding ............ 8,254 8,254 8,254 8,254 8,254
OPERATING DATA (BARRELS-PER-DAY)
YEAR ENDED JULY 31, 2000
Sales of refined products.............. 74,600 76,100 76,700 82,900 77,600
Refinery production.................... 67,500 72,700 70,300 72,700 70,800
YEAR ENDED JULY 31, 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
</TABLE>
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<PAGE> 52
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 2000 which will be filed within 120 days of
July 31, 2000 (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.
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<PAGE> 53
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 ......................................... 30
Consolidated Balance Sheet at
July 31, 2000 and 1999 ............................................... 31
Consolidated Statement of Income for
the years ended July 31, 2000,
1999, and 1998 ....................................................... 32
Consolidated Statement of Cash Flows
for the years ended July 31, 2000,
1999, and 1998 ....................................................... 33
Consolidated Statement of Stockholders'
Equity for the years ended July 31,
2000, 1999 and 1998 .................................................. 34
Consolidated Statement of Comprehensive
Income for the years ended July 31,
2000, 1999 and 1998 .................................................. 35
Notes to Consolidated Financial
Statements ........................................................... 36
</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 56 to 58.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Company's fourth quarter that
ended July 31, 2000.
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<PAGE> 54
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 26, 2000
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND AS OF THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Lamar Norsworthy Chairman of Board of Directors October 26, 2000
--------------------------- and Chief Executive Officer
Lamar Norsworthy of the Company
/s/ Matthew P. Clifton President and Director October 26, 2000
---------------------------
Matthew P. Clifton
/s/ Kathryn H. Walker Vice President, Accounting October 26, 2000
--------------------------- (Principal Accounting Officer)
Kathryn H. Walker
/s/ Stephen J. McDonnell Vice President, Finance October 26, 2000
--------------------------- and Corporate Development
Stephen J. McDonnell (Principal Financial Officer)
/s/ Scott C. Surplus Vice President, Treasury and Tax October 26, 2000
---------------------------
Scott C. Surplus
</TABLE>
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<PAGE> 55
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ W. John Glancy Vice President, General Counsel, October 26, 2000
--------------------------- Secretary and Director
W. John Glancy
s/ William J. Gray Director October 26, 2000
---------------------------
William J. Gray
/s/ Marcus R. Hickerson Director October 26, 2000
---------------------------
Marcus R. Hickerson
/s/ A. J. Losee Director October 26, 2000
---------------------------
A. J. Losee
/s/ Robert G. McKenzie Director October 26, 2000
---------------------------
Robert G. McKenzie
/s/ Thomas K. Matthews, II Director October 26, 2000
---------------------------
Thomas K. Matthews, II
/s/ Jack P. Reid Director October 26, 2000
---------------------------
Jack P. Reid
</TABLE>
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<PAGE> 56
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>
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 By-Laws 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).
3.3 Section 5, Article II of the By-Laws of the Registrant (as amended September 22, 2000).
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).
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).
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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).
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>
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<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.12 $100,000,000 Amended and Restated Credit and Reimbursement Agreement, dated as of April 14, 2000,
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, Fleet
National Bank, as Collateral Monitor and Documentation Agent and CIBC World Markets Corp., as sole
Lead Arranger and Bookrunner, with schedules and exhibits (incorporated by reference to Exhibit 4 of
Registrant's Quarterly Report on Form 10-Q for its quarterly period ended April 30, 2000, File No.
1-3876).
4.13 Amendment No. 1 dated as of July 14, 2000, of Amended and Restated Credit Agreement dated as of April
14, 2000.
4.14 Agreement of Increased Commitment as of August 2, 2000, of Amended and Restated Credit Agreement dated
as of April 14, 2000.
4.15 Letter Agreement as of August 2, 2000, with respect to the Amended and Restated Credit Agreement dated
as of April 14, 2000.
4.16 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 Consulting Agreement and Release, effective as of October 1, 1999, between William J. Gray and Holly
Corporation (incorporated by reference to Exhibit 10.4 of Registrant's Quarterly Report on Form 10-K
for its fiscal year ended July 31, 1999, File No. 1-3876).
10.4 Consulting Agreement and Release, effective as of August 1, 1999 between Jack P. Reid and Holly
Corporation (incorporated by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q
for its quarterly period ended October 31, 1999, File No. 1-3876).
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
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