<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 1-3876
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HOLLY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-1056913
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 871-3555
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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7,550,814 shares of Common Stock, par value $.01 per share, were outstanding on
June 9, 2000.
<PAGE> 2
<TABLE>
<CAPTION>
HOLLY CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited)
April 30, 2000 and July 31, 1999 3
Consolidated Statement of Income (Unaudited) -
Three Months and Nine Months Ended April 30, 2000 and 1999 4
Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended April 30, 2000 and 1999 5
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months and Nine Months Ended April 30, 2000 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
This Quarterly Report on Form 10-Q (including documents incorporated by
reference herein) contains statements with respect to the Company's
expectations or beliefs as to future events. These types of statements are
"forward-looking" and are subject to uncertainties. See "Factors Affecting
Forward-Looking Statements" on page 10.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
--------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,619 $ 4,194
Accounts receivable: Product 53,453 47,832
Crude oil resales 98,992 75,670
--------- ----------
152,445 123,502
Inventories: Crude oil and refined products 57,064 47,364
Materials and supplies 10,462 10,553
Reserve for lower of cost or market (2,921) (2,993)
--------- ----------
64,605 54,924
Prepayments and other 14,492 12,158
--------- ----------
Total current assets 236,161 194,778
Properties, plants and equipment, at cost 364,458 352,179
Less accumulated depreciation, depletion and amortization (182,237) (171,285)
--------- ----------
182,221 180,894
Investments and advances to joint ventures 2,913 4,035
Other assets 10,567 11,275
--------- ----------
Total assets $ 431,862 $ 390,982
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 189,497 $ 144,287
Accrued liabilities 19,241 14,688
Income taxes payable 615 8,206
Current maturities of long-term debt 13,738 13,746
--------- ----------
Total current liabilities 223,091 180,927
Deferred income taxes 25,629 24,580
Long-term debt, less current maturities 48,024 56,595
Long-term borrowings under credit agreement 10,000 -
Commitments and contingencies
Stockholders' equity
Preferred stock, $1.00 par value - 1,000,000 shares authorized; none issued - -
Common stock, $.01 par value - 20,000,000 shares authorized; 8,650,282 shares issued 87 87
Additional capital 6,132 6,132
Retained earnings 126,626 124,341
--------- ----------
132,845 130,560
Common stock held in treasury, at cost - 1,099,468 shares (7,793) (569)
Accumulated other comprehensive income - net unrealized gain (loss)
on securities available for sale 66 (1,111)
--------- ----------
Total stockholders' equity 125,118 128,880
--------- ----------
Total liabilities and stockholders equity $ 431,862 $ 390,982
========= ==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales and other revenues $ 256,940 $ 143,375 $ 675,995 $ 407,054
Operating costs and expenses
Cost of products sold 208,386 97,927 558,908 288,775
Recovery of inventory market writedowns -- (5,762) -- --
Operating expenses 21,172 20,789 66,296 60,260
Selling, general and administrative expenses 6,120 6,491 16,275 16,731
Depreciation, depletion and amortization 6,608 7,045 19,981 19,670
Exploration expenses, including dry holes 292 425 894 1,145
--------- --------- --------- ---------
242,578 126,915 662,354 386,581
--------- --------- --------- ---------
Income from operations 14,362 16,460 13,641 20,473
Other
Equity in earnings of joint ventures 320 200 878 1,336
Interest income 165 43 588 136
Interest expense (1,402) (2,035) (4,421) (5,948)
--------- --------- --------- ---------
(917) (1,792) (2,955) (4,476)
--------- --------- --------- ---------
Income before income taxes 13,445 14,668 10,686 15,997
Income tax provision (benefit)
Current 5,523 4,715 4,938 6,671
Deferred (249) 1,166 (746) (272)
--------- --------- --------- ---------
5,274 5,881 4,192 6,399
--------- --------- --------- ---------
Net income $ 8,171 $ 8,787 $ 6,494 $ 9,598
========= ========= ========= =========
Income per common share (basic
and diluted) $ 1.00 $ 1.06 $ .79 $ 1.16
Cash dividends paid per share $ .17 $ .16 $ .51 $ .48
Average number of shares of common stock
outstanding (in thousands) (basic and diluted) 8,207 8,254 8,238 8,254
</TABLE>
See accompanying notes.
4
<PAGE> 5
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
---------------------
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,494 $ 9,598
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation, depletion and amortization 19,981 19,670
Deferred income taxes (746) (272)
Equity in earnings of joint ventures (878) (1,336)
Dry hole costs and leasehold impairment 50 256
(Increase) decrease in operating assets
Accounts receivable (28,943) (27,773)
Inventories (9,681) (2,878)
Income taxes receivable -- 653
Prepayments and other (906) (1,650)
Increase (decrease) in operating liabilities
Accounts payable 45,210 17,329
Accrued liabilities 4,553 914
Income taxes payable (7,591) 2,532
Turnaround expenditures (2,466) --
Other, net (424) (2,179)
-------- --------
Net cash provided by operating activities 24,653 14,864
Cash flows from financing activities
Increase in borrowings under credit agreement 10,000 5,700
Payment of long-term debt (8,579) (8)
Debt issuance costs (744) --
Purchase of treasury stock (7,224) --
Cash dividends (4,209) (3,962)
-------- --------
Net cash provided by (used for) financing activities (10,756) 1,730
Cash flows from investing activities
Additions to properties, plants and equipment (15,472) (17,913)
Distributions from joint venture 2,000 2,175
-------- --------
Net cash used for investing activities (13,472) (15,738)
-------- --------
Cash and cash equivalents
Increase for the period 425 856
Beginning of year 4,194 2,602
-------- --------
End of period $ 4,619 $ 3,458
======== ========
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 3,536 $ 4,336
Income taxes $ 12,458 $ 3,408
</TABLE>
See accompanying notes.
5
<PAGE> 6
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net income $ 8,171 $ 8,787 $ 6,494 $ 9,598
Other comprehensive income
Unrealized gain (loss) on securities available
for sale 644 374 1,956 (375)
Income tax provision (benefit) 253 149 779 (150)
------- ------- ------- -------
391 225 1,177 (225)
------- ------- ------- -------
Total comprehensive income $ 8,562 $ 9,012 $ 7,671 $ 9,373
======= ======= ======= =======
</TABLE>
See accompanying notes.
6
<PAGE> 7
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's consolidated financial position as of April 30,
2000, the consolidated results of operations and comprehensive income for the
three months and nine months ended April 30, 2000 and 1999, and consolidated
cash flows for the nine months ended April 30, 2000 and 1999.
Certain notes and other information have been condensed or omitted.
Therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1999.
References herein to the "Company" are for convenience of presentation and
may include obligations, commitments or contingencies that pertain solely to one
or more affiliates of the Company. Results of operations for the first nine
months of fiscal 2000 are not necessarily indicative of the results to be
expected for the full year.
Note B - Debt
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, the Company
will have access to $80 million of commitments for both revolving credit loans
and letters of credit. Up to $40 million of this facility may be used for
revolving credit loans.
Note C - Segment Information
The Company has two major business segments: Refining and Pipeline
Transportation. The Refining segment is engaged in the refining of crude oil and
wholesale marketing of refined products, such as gasoline, diesel fuel and jet
fuel, and includes the Company's Navajo Refinery and Montana Refinery. The
petroleum products produced by the Refining segment are marketed in the
southwestern United States, Montana and northern Mexico. Certain pipelines and
terminals operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Pipeline Transportation segment
includes approximately 900 miles of the Company's pipeline assets in Texas and
New Mexico. Revenues from the Pipeline Transportation segment are earned through
transactions with unaffiliated parties for pipeline transportation, rental and
terminalling operations. The Pipeline Transportation segment also includes the
equity earnings from the Company's 25% investment in Rio Grande Pipeline
Company, which provides petroleum products transportation. Operations of the
Company that are not included in the two
7
<PAGE> 8
HOLLY CORPORATION
reportable segments are included in Corporate and other, which includes costs of
Holly Corporation, the parent company, consisting primarily of general and
administrative expenses and interest charges, as well as a small-scale oil and
gas exploration and production program and a small equity investment in retail
gasoline stations and convenience stores.
The accounting policies for the segments are the same as those described in
the summary of significant accounting policies in the Company's 10-K for the
year ended July 31, 1999. 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>
Three Months Ended April 30, 2000
Sales and other operating revenues........ $ 252,212 $ 3,807 $ 256,019 $ 921 $ 256,940
EBITDA(1)................................. $ 20,395 $ 2,704 $ 23,099 $ (1,809) $ 21,290
Income (loss) from operations............. $ 14,432 $ 2,075 $ 16,507 $ (2,145) $ 14,362
Income (loss) before income taxes......... $ 14,025 $ 2,416 $ 16,441 $ (2,996) $ 13,445
Three Months Ended April 30, 1999
Sales and other operating revenues........ $ 139,637 $ 2,868 $ 142,505 $ 870 $ 143,375
EBITDA(1)................................. $ 22,716 $ 2,266 $ 24,982 $ (1,277) $ 23,705
Income (loss) from operations............. $ 16,869 $ 1,520 $ 18,389 $ (1,929) $ 16,460
Income (loss) before income taxes......... $ 16,784 $ 2,007 $ 18,791 $ (4,123) $ 14,668
Nine Months Ended April 30, 2000
Sales and other operating revenues........ $ 661,747 $ 11,141 $ 672,888 $ 3,107 $ 675,995
EBITDA(1)................................. $ 29,846 $ 7,947 $ 37,793 $ (3,293) $ 34,500
Income (loss) from operations............. $ 12,044 $ 6,083 $ 18,127 $ (4,486) $ 13,641
Income (loss) before income taxes......... $ 11,497 $ 7,077 $ 18,574 $ (7,888) $ 10,686
Nine Months Ended April 30, 1999
Sales and other operating revenues........ $ 395,491 $ 8,887 $ 404,378 $ 2,676 $ 407,054
EBITDA(1)................................. $ 37,759 $ 7,336 $ 45,095 $ (3,616) $ 41,479
Income (loss) from operations............. $ 21,436 $ 4,917 $ 26,353 $ (5,880) $ 20,473
Income (loss) before income taxes......... $ 21,189 $ 6,574 $ 27,763 $ (11,766) $ 15,997
</TABLE>
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
8
<PAGE> 9
HOLLY CORPORATION
Note D - Contingencies
In August 1998, a lawsuit (the "Longhorn Suit") was filed in state district
court in El Paso, Texas against the Company and two of its subsidiaries (along
with an Austin, Texas law firm which was subsequently dropped from the case).
The suit was filed by Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), a
Delaware limited partnership composed of Longhorn Partners GP, L.L.C. as general
partner and affiliates of Exxon Pipeline Company, Amoco Pipeline Company,
Williams Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. as
well as Chisholm Holdings as limited partners. The suit, as amended by Longhorn
Partners in March and November 1999 and in March 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 contracts with Fina
Oil and Chemical Company and with ARCO Products Company, and alleged
interference with the federal court settlement agreement that provided for an
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. In February 2000, the Company filed a motion for summary judgment
seeking a court ruling that would terminate this litigation. In response to a
request by Longhorn Partners, the court ruled that the date for a hearing on
this motion should be postponed until after September 1, 2000. In May 2000, the
Company filed a motion to transfer the venue for trial of the case from the El
Paso court to another Texas court. The Company plans to pursue at the
appropriate time any affirmative remedies that may be available to it relating
to the Longhorn Suit.
9
<PAGE> 10
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts included
in this Form 10-Q, including without limitation those under "Results of
Operations," "Liquidity and Capital Resources" and "Additional Factors that May
Affect Future Results" (including "Risk Management" and "Year 2000 Issue") under
this Item 2 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. Because of these and other
risks and uncertainties, actual results may vary materially from those
estimated, anticipated or projected. Although the Company believes that the
expectations reflected by the forward-looking statements contained in this
Quarterly Report are reasonable based on information currently available to the
Company, no assurances can be given that such expectations will prove to be
correct. This summary discussion of risks and uncertainties that may cause
actual results to differ from those indicated in forward-looking statements
should be read in conjunction with the discussion under the heading "Additional
Factors That May Affect Future Results" included in Item 7 of the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1999 and in
conjunction with the discussion below under the headings "Liquidity and Capital
Resources" and "Additional Factors That May Affect Future Results." All
forward-looking statements included in this Form 10-Q and all subsequent oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the cautionary statements
set forth above.
10
<PAGE> 11
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
RESULTS OF OPERATIONS
FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands, except per share data)(1) April 30, April 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --=------ ---------
<S> <C> <C> <C> <C>
Sales and other revenues $ 256,940 $ 143,375 $ 675,995 $ 407,054
Costs and expenses
Cost of products sold 208,386 97,927 558,908 288,775
Recovery of inventory market writedowns -- (5,762) -- --
Operating expenses 21,172 20,789 66,296 60,260
Selling, general and administrative expenses 6,120 6,491 16,275 16,731
Depreciation, depletion and amortization 6,608 7,045 19,981 19,670
Exploration expenses, including dry holes 292 425 894 1,145
--------- --------- --------- ---------
242,578 126,915 662,354 386,581
--------- --------- --------- ---------
Income from operations 14,362 16,460 13,641 20,473
Other
Equity in earnings of joint ventures 320 200 878 1,336
Interest expense, net (1,237) (1,992) (3,833) (5,812)
--------- --------- --------- ---------
(917) (1,792) (2,955) (4,476)
--------- --------- --------- ---------
Income before income taxes 13,445 14,668 10,686 15,997
Income tax provision 5,274 5,881 4,192 6,399
--------- --------- --------- ---------
Net income $ 8,171 $ 8,787 $ 6,494 $ 9,598
========= ========= ========= =========
Income per common share (basic and diluted) $ 1.00 $ 1.06 $ .79 $ 1.16
Sales and other revenues(2)
Refining $ 252,212 $ 139,637 $ 661,747 $ 395,491
Pipeline Transportation 3,807 2,868 11,141 8,887
Corporate and other 921 870 3,107 2,676
--------- --------- --------- ---------
Consolidated $ 256,940 $ 143,375 $ 675,995 $ 407,054
========= ========= ========= =========
Income (loss) from operations(2)
Refining $ 14,432 $ 16,869 $ 12,044 $ 21,436
Pipeline Transportation 2,075 1,520 6,083 4,917
Corporate and other (2,145) (1,929) (4,486) (5,880)
--------- --------- --------- ---------
Consolidated $ 14,362 $ 16,460 $ 13,641 $ 20,473
========= ========= ========= =========
</TABLE>
11
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
1) Certain reclassifications have been made to prior reported amounts to
conform to current classifications.
2) The Refining segment includes the Company's principal refinery in Artesia,
New Mexico, which is operated in conjunction with refining facilities in
Lovington, New Mexico (collectively, the Navajo Refinery) and the Company's
refinery near Great Falls, Montana. Certain pipelines and terminals operate
in conjunction with the Refining segment as part of the supply and
distribution networks of the refineries, which costs are included in the
Refining segment. The Pipeline Transportation segment includes
approximately 900 miles of the Company's pipeline assets in Texas and New
Mexico. Revenues from the Pipeline Transportation segment are earned
through transactions with unaffiliated parties for pipeline transportation,
rental and terminalling operations.
REFINING SEGMENT OPERATING DATA (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Crude charge (BPD)(1) 66,500 66,000 64,700 65,900
Refinery production (BPD)(2) 70,300 69,200 70,200 70,100
Sales of produced refined products (BPD) 68,800 67,900 68,700 69,300
Sales of refined products (BPD)(3) 76,700 72,800 75,800 74,100
Refinery utilization (4) 99.2% 98.6% 96.6% 98.3%
Average per barrel (5)
Net sales $36.76 $21.78 $32.05 $19.65
Raw material costs 29.83 15.00 26.71 14.06
------ ------ ------- -------
Refinery margin 6.93 6.78 5.34 5.59
Cash operating costs (6) 3.76 4.08 3.85 3.63
------- ------- -------- --------
Net cash operating margin $ 3.17 $ 2.70 $ 1.49 $ 1.96
======= ====== ======== ========
Sales of produced refined products
Gasolines 58.4% 59.2% 58.4% 57.5%
Diesel fuels 22.5 21.2 21.3 21.2
Jet fuels 11.3 10.9 10.3 10.6
Asphalt 4.1 4.7 6.4 6.7
LPG and other 3.7 4.0 3.6 4.0
------- ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
======= ====== ====== ======
</TABLE>
----------
(1) Barrels per day of crude oil processed.
(2) Barrels per day of refined products produced from crude oil and other
feed and blending stocks.
(3) Includes refined products purchased for resale representing 7,900,
4,900, 7,100 and 4,800 BPD respectively.
(4) Crude charge divided by total crude capacity of 67,000 BPD.
(5) Represents average per barrel amounts for produced refined products
sold.
(6) Includes operating costs and selling, general and administrative
expenses of refineries, as well as pipeline expenses that are part of
refinery operations.
12
<PAGE> 13
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
THIRD QUARTER OF FISCAL 2000 COMPARED TO THIRD QUARTER OF FISCAL 1999
For the three months ended April 30, 2000 (the fiscal 2000 third quarter),
the Company reported net income of $8.2 million ($1.00 per share) as compared to
net income of $8.8 million ($1.06 per share) for the third quarter of fiscal
1999. The results for the 1999 third quarter reflected a $3.5 million ($.42 per
share) credit for reversal of prior charges to earnings for reductions in market
values of inventories in the first two quarters of fiscal 1999. Without this
credit in the fiscal 1999 third quarter, net income for that quarter would have
been $5.3 million ($.64 per share). Comparing the third quarter of 2000 to the
third quarter of 1999, both revenues and cost of products sold were higher in
the third quarter of 2000 due principally to the increased cost of purchased
crude oil; refining income was favorably affected by slightly higher production
volume and refinery gross margins. Results for the third quarter of 2000
compared to the comparable quarter of 1999 were also favorably affected by
higher income from the pipeline transportation segment and lower selling,
general and administrative expenses, depreciation, depletion and amortization,
and net interest expense.
FIRST NINE MONTHS OF FISCAL 2000 COMPARED TO FIRST NINE MONTHS OF FISCAL 1999
For the first nine months of fiscal 2000, net income was $6.5 million ($.79
per share) as compared to net income of $9.6 million ($1.16 per share) for the
first nine months of fiscal 1999. Because of generally higher crude oil prices
in fiscal 2000, both revenues and cost of products sold were higher for the
first three quarters of fiscal 2000 than for the first three quarters of fiscal
1999. The lower level of net income for the first three quarters of fiscal 2000
as compared to the same period in fiscal 1999 was due to lower refinery gross
margins and increases in operating expenses for fiscal 2000 attributable
principally to increased fuel costs. Interest expense, net of interest income,
was lower for the first nine months of fiscal 2000 because of reduced borrowings
and increased short-term investments of excess cash in the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased slightly during the nine months ended
April 30, 2000 by $.4 million as cash flows generated from operations and
borrowings under the Company's Revolving Credit Agreement slightly exceeded cash
flows required for investing activities, payments on long term fixed rate debt,
dividends paid and treasury stock purchased. Working capital decreased during
the nine months ended April 30, 2000 by $.8 million to $13.1 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, the Company will have
access to $80 million of commitments for
13
<PAGE> 14
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
both revolving credit loans and letters of credit. Up to $40 million of this
facility may be used for revolving credit loans. At April 30, 2000, the Company
had $10.0 million of outstanding borrowings and outstanding letters of credit
totaling $36.9 million. The unused commitment under the Revolving Credit
Agreement at April 30, 2000 was $33.1 million, of which up to $30.0 million may
be used for additional direct borrowings.
The Company believes that these sources of funds, together with future cash
flows from operations, should provide sufficient resources to enable the Company
to satisfy its liquidity needs, capital requirements and debt service
obligations while continuing the payment of dividends when authorized by the
Board of Directors.
Net cash provided by operating activities amounted to $24.7 million for the
first nine months of fiscal 2000, as compared to $14.9 million for the same
period of the prior year. The increase was primarily due to increased crude
acquisition payables, as the Company receives payment on its receivables more
quickly than it pays for its acquisitions of crude oil. This increase was
partially reduced by lower cash flows from operations, as refinery margins were
lower during the first nine months of fiscal 2000 than in the prior fiscal year,
increases in crude oil and refined products inventory and payments made for
income taxes.
Cash flows used for financing activities amounted to $10.8 million for the
first nine months of fiscal 2000 as compared to $1.7 million that was provided
during the first nine months of fiscal 1999. The Company repaid $8.6 million of
its fixed rate term debt during the nine months ended April 30, 2000, while the
next principal payment of $5.2 million is due in June 2000. The Company made net
borrowings under its Revolving Credit Agreement of $10.0 during the first nine
months of fiscal 2000, as compared to $5.7 million for the comparable period of
the prior year. On April 18, 2000, the Company repurchased 702,700 shares, 8.5%
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.
Cash flows used for investing activities were $13.5 million for the current
year as compared to $15.7 million for the same period of the 1999 fiscal year.
All amounts expended were on capital projects. The Company's net negative cash
flow for investing activities was reduced by distributions to the Company from
the Rio Grande Pipeline Company joint venture of $2.0 million for the first
three quarters of fiscal 2000 and $2.2 million for the comparable period of the
prior year.
14
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company has approved a capital budget of $23 million for fiscal 2000.
The components of this budget are $9 million for various refinery improvements,
$9 million for costs relating to a gasoil hydrotreater project, as described
below, $4 million for various pipeline and transportation projects and $1
million for oil and gas exploration and production activities. In addition to
these projects, the Company plans to expend during fiscal 2000 a total of $8
million on items that were approved in previous capital budgets, primarily
relating to pipeline and terminalling activities.
In November 1997, the Company purchased a hydrotreater unit for $5 million
from an inactive 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 will enhance higher value,
light product yields and expand the Company's current ability to meet the
present California Air Resources Board ("CARB") standards, which have been
adopted for winter months in the Company's Phoenix market beginning in the
latter part of 2000 and to meet the recently proposed EPA nationwide Low-Sulfur
Gasoline requirements that will begin in 2004.
Included in the fiscal 2000 capital budget are items totalling $9 million
related to the hydrotreater, which include costs to relocate the purchased unit
to the Navajo Refinery in the second quarter of fiscal 2000, to construct a
sulfur recovery unit, which will be immediately utilized and work in conjunction
with the hydrotreater when it is completed, and to purchase certain
long-lead-time pieces of equipment. The Company, subject to obtaining necessary
permitting in a timely manner, expects to complete the hydrotreater during
fiscal 2002. Remaining costs to complete the hydrotreater are estimated to be
approximately $20 million, in addition to the current $9 million budgeted
amount. Based on the current configuration of the Navajo Refinery, the Company
produces sufficient quantities which meet the new CARB standards to meet its
current sales volume into the Phoenix market 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 also completed a 12" pipeline from the
Navajo Refinery to the Leased Pipeline as well as terminalling facilities in
Bloomfield in northwestern New Mexico. The Company has completed the
construction of 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, New Mexico, near Albuquerque, began in the latter part
of calendar year 1999. The Company, in addition, is considering different
alternatives to expand its delivery capabilities in the Albuquerque-area. When
this project is completed, such proposed facilities will allow the Company to
expand the use of the Leased Pipeline to transport additional volume of
petroleum products from the Navajo Refinery to the Albuquerque and Northern New
Mexico markets.
15
<PAGE> 16
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
In March 2000, the Company's subsidiary, Navajo Refining Company, entered
into a non-binding letter of intent with Koch Materials Company, a subsidiary of
Koch Industries, Inc., to establish a joint venture to manufacture and market
asphalt products from various terminals in Arizona and New Mexico.
In May 2000, the Company announced a cost reduction and production
efficiency program that is expected to yield annual pre-tax improvement of more
than $20 million. The program is anticipated to be implemented over the next two
years. The cost reduction and production efficiency program will include
productivity enhancements and a reduction in workforce. As part of the
implementation of these reductions, Holly has offered a voluntary early
retirement program to eligible employees. It is estimated that capital
expenditures of approximately $9 million will be required to effectuate some of
the production improvements. The cost of the voluntary early retirement program,
which will be determined after the level of employee participation in the
program is known, is expected to be reflected in Holly's reported earnings for
the quarter ended July 31, 2000.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
This discussion should be read in conjunction with the discussion under the
heading "Additional Factors That May Affect Future Results" included in Item 7
of the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1999.
The Longhorn Pipeline is a potential source of additional supplies of
refined products to El Paso and markets served from El Paso that are also served
by the Company's Navajo Refinery. This pipeline is proposed to run approximately
700 miles from the Houston area of the Gulf Coast to El Paso, utilizing a direct
route. The owner of the Longhorn Pipeline, Longhorn Partners Pipeline, L.P., a
Delaware limited partnership that includes affiliates of Exxon Pipeline Company,
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 barrels per day ("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 densely 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.
16
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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. The March 1999
settlement agreement required the preparation of an Environmental Assessment
under the authority of the EPA and the DOT while the federal court retained
jurisdiction. A draft Environmental Assessment (the "Draft EA") on the Longhorn
Pipeline was released on October 22, 1999. The Draft EA proposes a preliminary
Finding of No Significant Impact with respect to the Longhorn Pipeline provided
that Longhorn Partners carries out a proposed mitigation plan developed by
Longhorn Partners which contains 34 elements. Some 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. The EPA and DOT have conducted a
series of public meetings in Texas and have 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. A final determination by the EPA and DOT with respect to
the matters considered in the Draft EA has not yet been issued and it is not
possible for the Company to predict when such a determination will be made.
In August 1998, a lawsuit (the "Longhorn Suit") was filed by Longhorn
Partners in state district court in El Paso, Texas against the Company and two
of its subsidiaries (along with an Austin, Texas law firm which was subsequently
dropped from the case). The suit, as amended by Longhorn Partners in March and
November 1999 and in March 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 contracts with Fina
Oil and Chemical Company and with ARCO Products Company, and alleged
interference with the federal court settlement agreement that provided for an
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. In February 2000, the Company filed a motion for summary judgment
seeking a court ruling that would terminate this litigation. In response to a
request by Longhorn Partners, the court ruled that the date for a hearing on
this motion should be postponed until after
17
<PAGE> 18
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
September 1, 2000. In May 2000, the Company filed a motion to transfer the venue
for trial of the case from the El Paso court to another Texas court. The Company
plans to pursue at the appropriate time any affirmative remedies that may be
available to it relating to the Longhorn Suit. For additional information on the
Longhorn Suit, see Part II "Other Information," Item 1, "Legal Proceedings".
RISK MANAGEMENT
The Company uses certain strategies to reduce some commodity price and
operational risks. The Company does not attempt to eliminate all market risk
exposures when the Company believes the exposure relating to such risk would not
be significant to the Company's future earnings, financial position, capital
resources or liquidity or that the cost of eliminating the exposure would
outweigh the benefit.
The Company's profitability depends largely on the spread between market
prices for refined products and crude oil. A substantial or prolonged decrease
in this spread could have a significant negative effect on the Company's
earnings, financial condition and cash flows. At times, the Company utilizes
petroleum commodity futures contracts to minimize a portion of its exposure to
price fluctuations associated with crude oil and refined products. Such
contracts are used solely to help manage the price risk inherent in purchasing
crude oil in advance of the delivery date and as a hedge for fixed-price sales
contracts of refined products and do not increase the market risks to which the
Company is exposed. Gains and losses on contracts are deferred and recognized in
cost of refined products when the related inventory is sold or the hedged
transaction is consummated. No such contracts were outstanding at April 30,
2000.
At April 30, 2000, the Company had outstanding unsecured debt of $61.8
million and had $10.0 million of 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 less than three years and such debt represents less than 40% of the
Company's total capitalization. As the interest rates on the Company's bank
borrowings under its Credit Agreement are reset frequently based on either the
bank's daily effective prime rate or the LIBOR rate, interest rate market risk
is very low. Additionally, the Company invests any available cash only in
investment grade, highly liquid investments with maturities of three months or
less. As a result, the interest rate market risk implicit in these cash
investments is low, as the investments mature within three months. A ten percent
change in the market interest rate over the next year would also not materially
impact the Company's earnings or cash flow, as the interest rates on the
Company's long-term debt are fixed, and the Company's borrowings under the
Credit
18
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 also not materially impact the Company's financial condition, as the
average maturity of the Company's long-term debt is less than three years and
such debt represents less than 40% 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.
YEAR 2000 ISSUE
In prior years, the Company discussed the nature and progress of its plans
to become year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
19
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HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1998, a lawsuit was filed by Longhorn Partners Pipeline, L.P.
("Longhorn Partners") in state district court in El Paso, Texas against the
Company and two of its subsidiaries. The suit seeks damages against the Company
alleged to total up to $1,050,000,000 (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. See Note D to the Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
further description of this lawsuit. In February 2000, the Company filed a
motion for summary judgment seeking a court ruling that would terminate this
litigation. In response to a request by Longhorn Partners, the court ruled that
the date for a hearing on this motion should be postponed until after September
1, 2000. Longhorn Partners withdrew in late March 2000 an application for
temporary injunction that Longhorn Partners had filed in January 2000 in the El
Paso, Texas state district court seeking to bar the Company from continuing to
provide assistance to parties in pending proceedings against Longhorn Partners
in state and federal courts in Texas and from providing funds for advertisements
or public messages concerning the Longhorn Pipeline that do not identify the
Company as the sponsor. In May 2000, the Company filed a motion to transfer the
venue for trial of the case from the El Paso court to another Texas court. See
Part II, Item 1 of the Company's Quarterly Reports on Form 10-Q for the quarters
ended October 31, 1999 and January 31, 2000 for prior reports in the current
fiscal year on the Longhorn Partners litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits on page 22.
(b) Reports on Form 8-K: None.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLY CORPORATION
-----------------------
(Registrant)
Date: June 14, 2000 By /s/ Kathryn H. Walker
--------------- --------------------------------
Kathryn H. Walker
Vice President, Accounting
(Principal Accounting Officer)
By /s/ Scott C. Surplus
--------------------------------
Scott C. Surplus
Vice President, Treasury and Tax
<PAGE> 22
HOLLY CORPORATION
INDEX TO EXHIBITS
(Exhibits are numbered to correspond to the
exhibit table in Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
4 - Amended and Restated Credit and Reimbursement
Agreement, dated as of April 14, 2000
27 - Financial Data Schedule
</TABLE>
