<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______.
Commission File Number: 1-10398
GIANT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0642718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23733 North Scottsdale Road, Scottsdale, Arizona 85255
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(480) 585-8888
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 [ ]
Number of Common Shares outstanding at October 31, 2000: 9,016,208 shares.
<PAGE>
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets September 30, 2000
(Unaudited) and December 31, 1999
Condensed Consolidated Statements of Earnings for the Three and
Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
SIGNATUR
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-----------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,718 $ 32,945
Receivables, net 79,191 74,000
Note receivable 5,000 -
Inventories 64,849 58,240
Prepaid expenses and other 2,868 4,097
Deferred income taxes 2,702 2,702
-----------------------------------------------------------------------------
Total current assets 185,328 171,984
-----------------------------------------------------------------------------
Property, plant and equipment 499,836 485,181
Less accumulated depreciation and amortization (184,822) (161,983)
-----------------------------------------------------------------------------
315,014 323,198
-----------------------------------------------------------------------------
Goodwill, net 21,073 21,819
Other assets 21,635 29,798
-----------------------------------------------------------------------------
$ 543,050 $ 546,799
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 307 $ 297
Accounts payable 85,389 76,833
Accrued expenses 37,812 45,458
-----------------------------------------------------------------------------
Total current liabilities 123,508 122,588
-----------------------------------------------------------------------------
Long-term debt, net of current portion 258,101 258,272
Deferred income taxes 29,361 28,002
Other liabilities and deferred income 4,515 5,475
Commitments and contingencies (Notes 5 and 6)
Common stockholders' equity 127,565 132,462
-----------------------------------------------------------------------------
$ 543,050 $ 546,799
=============================================================================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $301,213 $214,503 $792,413 $564,706
Cost of products sold 240,792 160,064 629,215 397,090
-----------------------------------------------------------------------------------
Gross margin 60,421 54,439 163,198 167,616
Operating expenses 31,060 28,771 90,089 84,867
Depreciation and amortization 8,650 7,487 25,325 22,666
Selling, general and
administrative expenses 6,652 7,296 19,450 22,622
Loss on write-off of assets - - - 1,950
-----------------------------------------------------------------------------------
Operating income 14,059 10,885 28,334 35,511
Interest expense, net 5,603 5,205 17,119 16,308
-----------------------------------------------------------------------------------
Earnings before income taxes 8,456 5,680 11,215 19,203
Provision for income taxes 3,441 2,215 4,551 7,475
-----------------------------------------------------------------------------------
Net earnings $ 5,015 $ 3,465 $ 6,664 $ 11,728
===================================================================================
Net earnings per common share:
Basic $ 0.55 $ 0.32 $ 0.72 $ 1.09
===================================================================================
Assuming dilution $ 0.55 $ 0.32 $ 0.72 $ 1.08
===================================================================================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,664 $ 11,728
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 25,325 22,666
Deferred income taxes 1,359 3,210
Loss on disposal of assets 230 1,718
Other 157 (377)
Changes in operating assets and liabilities:
Increase in receivables (5,360) (26,369)
Increase in inventories (6,601) (11,485)
Decrease in prepaid expenses and other 1,269 3,141
Increase in accounts payable 8,556 34,459
(Decrease) increase in accrued expenses (2,293) 3,412
----------------------------------------------------------------------------------
Net cash provided by operating activities 29,306 42,103
----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment and other assets (18,830) (31,190)
Refinery acquisition contingent payment (5,442) (7,289)
Proceeds from sale of property, plant and equipment
and other assets 4,461 1,135
----------------------------------------------------------------------------------
Net cash used by investing activities (19,811) (37,344)
----------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of long-term debt 68,000 -
Payments of long-term debt (68,161) (24,944)
Purchase of treasury stock (11,670) (4,950)
Proceeds from exercise of stock options 109 96
Deferred financing costs - (50)
----------------------------------------------------------------------------------
Net cash used by financing activities (11,722) (29,848)
----------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,227) (25,089)
Cash and cash equivalents:
Beginning of period 32,945 55,697
----------------------------------------------------------------------------------
End of period $ 30,718 $ 30,608
==================================================================================
Non-cash Investing and Financing Activities. In the second quarter of 1999, the
Company received 87,036 shares of its own common stock valued at approximately
$975,000 from two officers of the Company as payment for the exercise of 108,857
common stock options. These shares were immediately cancelled.
See accompanying notes to condensed consolidated financial statements.
</TABLE
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Giant Industries, Inc., a Delaware corporation (together with its
subsidiaries, "Giant" or the "Company"), through its wholly-owned subsidiary
Giant Industries Arizona, Inc. and its subsidiaries ("Giant Arizona"), is
engaged in the refining and marketing of petroleum products in New Mexico,
Arizona, Colorado and Utah, with a concentration in the Four Corners where
these states adjoin. In addition, Phoenix Fuel Co., Inc. ("Phoenix Fuel"), a
wholly-owned subsidiary of Giant Arizona, operates an industrial/commercial
petroleum fuels and lubricants distribution operation. (See Note 2 for
further discussion of Company operations.)
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation have been
included and are of a normal recurring nature. Operating results for the nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. The enclosed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was originally to be
effective for the Company's financial statements as of January 1, 2000. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 by
one year in order to give companies more time to study, understand and
implement the provisions of SFAS No. 133 and to complete information system
modifications. In June 2000, the FASB issued SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment
to SFAS No. 133." SFAS No. 138 expands and clarifies certain provisions of
SFAS No. 133 and will be adopted by the Company concurrently with SFAS No.
133 on January 1, 2001.
SFAS No. 133, as amended, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that entities
record all derivatives as either assets or liabilities, measured at fair
value, with any change in fair value recognized in earnings or in other
comprehensive income, depending on the use of the derivative and whether it
qualifies for hedge accounting. If certain conditions are met, a derivative
may be specifically designated as a (a) hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk.
The Company has reviewed and continues to review its outstanding
contracts to determine if they qualify as derivatives or contain embedded
derivatives as defined in SFAS No. 133, as amended by SFAS No. 138. As of the
date of this filing, except as described below, the Company does not believe
the contracts that have been reviewed qualify as derivatives or contain
embedded derivatives as defined in SFAS No. 133, as amended by SFAS No. 138.
As of September 30, 2000, the Company had open futures contracts for the
purchase or sale of 115,000 barrels of heating oil or crude oil. These open
futures contracts relate to specific speculative strategies entered into with
the expectation of profiting from favorable price movements. These contracts
are marked-to-market monthly and any gains or losses recorded in cost of
sales. At September 30, 2000, a net loss of approximately $71,000 had been
recorded relating to these contracts.
In addition, at September 30, 2000, the Company had entered into
contracts for the purchase or sale of 75,000 barrels of diesel fuel for
delivery in October in Los Angeles. These contracts are part of the Company's
speculative wet barrel trading activities, and would be considered derivative
instruments under SFAS No. 133, as amended by SFAS No. 138. The contracts
were not reflected in the Company's records as of September 30, 2000. If
these contracts were in existence at December 31, 2000, transition
adjustments required by SFAS No. 133 of less than $100,000 would be recorded
as of January 1, 2001. The adjustments would be recorded as cumulative-
effect-type adjustments of net income, and corresponding adjustments would be
made to assets or liabilities in the Company's Consolidated Balance Sheet.
Subsequently, these contracts would be marked-to-market monthly and any gains
or losses recorded in earnings.
At September 30, 2000, the Company had no hedging strategies in place as
defined in SFAS No. 133, as amended by SFAS No. 138.
Certain reclassifications have been made to the 1999 financial
statements and notes to conform to the statement classifications used in
2000.
<PAGE>
NOTE 2 - COMPANY OPERATIONS
The Company is organized into three operating segments based on
manufacturing and marketing criteria. These segments are the Refining Group,
the Retail Group and Phoenix Fuel. A description of each segment and its
principal products and operations are as follows:
- Refining Group: The Refining Group consists of the Company's two
refineries, its fleet of crude oil and finished product truck transports, its
crude oil pipeline gathering operations and its finished product terminalling
operations. The Company's two refineries manufacture various grades of
gasoline, diesel fuel, jet fuel and other products from crude oil, other
feedstocks and blending components. These products are sold through company-
operated retail facilities, independent wholesalers and retailers,
industrial/commercial accounts, and sales and exchanges with major oil
companies. Crude oil, other feedstocks and blending components are purchased
from third party suppliers.
- Retail Group: The Retail Group consists of service station/convenience
stores and one travel center. These operations sell various grades of
gasoline, diesel fuel, general merchandise and food products to the general
public through retail locations. The petroleum fuels sold by the Retail Group
are supplied by the Refining Group or Phoenix Fuel. The Refining Group
manufactures these refined products or acquires them through exchange
arrangements, third party purchases or from Phoenix Fuel. Phoenix Fuel
acquires the petroleum products it supplies primarily from third parties.
General merchandise and food products are obtained from third party
suppliers.
- Phoenix Fuel: Phoenix Fuel is an industrial/commercial petroleum fuels
and lubricants distribution operation, which includes a number of bulk
distribution plants, an unattended fleet fueling ("cardlock") operation and a
fleet of finished product truck transports. The petroleum fuels and
lubricants sold are primarily obtained from third party suppliers and to a
lesser extent from the Refining Group.
Operations that are not included in any of the three segments are
included in the category "Other" and consist primarily of corporate staff
operations, including selling, general and administrative expenses of
approximately $4,533,000 and $5,797,000 for the three months ended September
30, 2000 and 1999, respectively, and $13,327,000 and $17,085,000 for the nine
months ended September 30, 2000 and 1999, respectively.
Operating income for each segment consists of net revenues less cost of
products sold, operating expenses, depreciation and amortization and the
segment's selling, general and administrative expenses. The sales between
segments are made at market prices. Cost of products sold reflect current
costs adjusted, where appropriate, for LIFO and lower of cost or market
inventory allowances.
The total assets of each segment consist primarily of net property,
plant and equipment, inventories, accounts receivable and other assets
directly associated with the segment's operations. Included in the total
assets of the corporate staff operations are a majority of the Company's cash
and cash equivalents, various accounts receivable, net property, plant and
equipment and other long-term assets.
<PAGE>
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals for the three months ended
September 30, 2000 and 1999, are presented below.
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 2000 (In 000s)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer net revenues............... $ 94,200 $107,890 $ 99,000 $ 123 $ - $301,213
Intersegment net revenues........... 51,813 - 24,944 - (76,757) -
-------- -------- -------- ------- -------- --------
Total net revenues.................. $146,013 $107,890 $123,944 $ 123 $(76,757) $301,213
-------- -------- -------- ------- -------- --------
Operating income.................... $ 14,693 $ 694 $ 3,423 $(4,751) $ - $ 14,059
Interest expense.................... (6,178)
Interest income..................... 575
--------
Earnings before income taxes........ $ 8,456
--------
Depreciation and amortization....... $ 4,523 $ 2,921 $ 649 $ 557 $ - $ 8,650
Capital expenditures................ $ 1,770 $ 3,574 $ 228 $ 563 $ - $ 6,135
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1999 (In 000s)
---------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer net revenues............... $ 57,280 $ 91,739 $ 65,385 $ 99 $ - $214,503
Intersegment net revenues........... 55,056 - 10,352 - (65,408) -
-------- -------- -------- ------- -------- --------
Total net revenues.................. $112,336 $ 91,739 $ 75,737 $ 99 $(65,408) $214,503
-------- -------- -------- ------- -------- --------
Operating income.................... $ 14,107 $ 1,310 $ 1,754 $(6,286) $ - $ 10,885
Interest expense.................... (5,944)
Interest income..................... 739
--------
Earnings before income taxes........ $ 5,680
--------
Depreciation and amortization....... $ 3,950 $ 2,175 $ 570 $ 792 $ - $ 7,487
Capital expenditures................ $ 1,035 $ 9,353 $ 775 $ 290 $ - $ 11,453
</TABLE>
<PAGE>
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals for the nine months ended
September 30, 2000 and 1999, are presented below.
<TABLE>
<CAPTION>
As of and for the Nine Months Ended September 30, 2000 (In 000s)
---------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer net revenues............... $210,945 $318,378 $262,798 $ 292 $ - $792,413
Intersegment net revenues........... 178,024 - 56,732 - (234,756) -
-------- -------- -------- -------- --------- --------
Total net revenues.................. $388,969 $318,378 $319,530 $ 292 $(234,756) $792,413
-------- -------- -------- -------- --------- --------
Operating income.................... $ 35,436 $ 1,780 $ 6,091 $(14,973) $ - $ 28,334
Interest expense.................... (18,433)
Interest income..................... 1,314
--------
Earnings before income taxes........ $ 11,215
--------
Depreciation and amortization....... $ 13,042 $ 8,557 $ 1,903 $ 1,823 $ - $ 25,325
Total assets........................ $239,315 $151,330 $ 99,610 $ 52,795 $ - $543,050
Capital expenditures................ $ 4,890 $ 12,205 $ 1,150 $ 585 $ - $ 18,830
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 (In 000s)
---------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer net revenues............... $143,706 $245,961 $174,835 $ 204 $ - $564,706
Intersegment net revenues........... 132,842 - 13,898 - (146,740) -
-------- -------- -------- -------- --------- --------
Total net revenues.................. $276,548 $245,961 $188,733 $ 204 $(146,740) $564,706
-------- -------- -------- -------- --------- --------
Operating income.................... $ 44,757 $ 5,900 $ 7,032 $(20,228) $ (1,950) $ 35,511
Interest expense.................... (18,112)
Interest income..................... 1,804
--------
Earnings before income taxes........ $ 19,203
--------
Depreciation and amortization....... $ 11,662 $ 6,531 $ 1,689 $ 2,784 $ - $ 22,666
Capital expenditures................ $ 6,342 $ 20,887 $ 1,341 $ 2,620 $ - $ 31,190
</TABLE>
<PAGE>
NOTE 3 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for net earnings:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common
share - basic
Net earnings............. $5,015,000 9,086,099 $0.55 $3,465,000 10,667,009 $0.32
Effect of dilutive
stock options.......... - 4,344 - - 70,840 -
---------- --------- ----- ---------- ---------- -----
Earnings per common
share - assuming dilution
Net earnings............. $5,015,000 9,090,443 $0.55 $3,465,000 10,737,849 $0.32
========== ========= ===== ========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common
share - basic
Net earnings............. $6,664,000 9,293,503 $0.72 $11,728,000 10,784,444 $1.09
Effect of dilutive
stock options.......... - 10,608 - - 46,400 -
---------- --------- ----- ----------- ---------- -----
Earnings per common
share - assuming dilution
Net earnings............. $6,664,000 9,304,111 $0.72 $11,728,000 10,830,844 $1.08
========== ========= ===== =========== ========== =====
</TABLE>
On December 21, 1999, the Company filed a Schedule 13E-4 Issuer Tender
Offer Statement with the Securities and Exchange Commission. The offer
expired on February 4, 2000, and the Company acquired 1,169,414 shares of its
common stock, which were properly tendered under the offer, on February 8,
2000. The repurchased shares are being treated as treasury shares.
During the third quarter of 2000, the Company purchased 129,466 shares
of its common stock from its Chairman and Chief Executive Officer under the
Company's stock repurchase program. These shares were repurchased at a
weighted average price of approximately $6.93 per share, which was the
approximate average closing price of the Company's common stock on the dates
of the Board of Directors resolutions authorizing the transactions.
At September 30, 2000, there were 9,016,208 shares of the Company's
common stock outstanding. There were no transactions subsequent to September
30, 2000, that if the transactions had occurred before September 30, 2000,
would materially change the number of common shares or potential common
shares outstanding as of September 30, 2000.
<PAGE>
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------------------------------------------------------------
(IN THOUSANDS) 2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
First-in, first-out ("FIFO") method:
Crude oil $ 12,920 $ 11,550
Refined products 38,956 26,632
Refinery and shop supplies 10,854 10,502
Merchandise 5,154 4,897
Retail method:
Merchandise 8,812 8,809
----------------------------------------------------------------------------
Subtotal 76,696 62,390
Allowance for last-in,
first-out ("LIFO") method (11,847) (4,150)
----------------------------------------------------------------------------
Total $ 64,849 $ 58,240
============================================================================
</TABLE>
The portion of inventories valued on a LIFO basis totaled $40,454,000
and $32,435,000 at September 30, 2000 and December 31, 1999, respectively.
The following data will facilitate comparison with the operating results of
companies using the FIFO method of inventory valuation.
If inventories had been determined using the FIFO method at September
30, 2000 and 1999, net earnings and diluted earnings per share for the three
months ended September 30, 2000 and 1999 would have been higher by $1,767,000
and $0.19 and $2,500,000 and $0.23, respectively, and net earnings and
diluted earnings per share for the nine months ended September 30, 2000 and
1999 would have been higher by $4,679,000 and $0.50 and $2,070,000 and $0.19,
respectively.
For interim reporting purposes, inventory increments expected to be
liquidated by year end are valued at the most recent acquisition costs and
inventory liquidations that are expected to be reinstated by year end are
ignored for LIFO inventory valuation calculations. The LIFO effects of
inventory increments not expected to be liquidated by year end, and the LIFO
effects of inventory liquidations not expected to be reinstated by year end,
are recorded in the period such increments and liquidations occur.
<PAGE>
NOTE 5 - LONG-TERM DEBT:
The Company has issued $150,000,000 of 9% senior subordinated notes due
2007 (the "9% Notes") and $100,000,000 of 9 3/4% senior subordinated notes
due 2003 (the "9 3/4% Notes", and collectively with the 9% Notes, the
"Notes"). The Indentures supporting the Notes contain restrictive covenants
that, among other things, restrict the ability of the Company and its
subsidiaries to create liens, to incur or guarantee debt, to pay dividends,
to repurchase shares of the Company's common stock, to sell certain assets or
subsidiary stock, to engage in certain mergers, to engage in certain
transactions with affiliates or to alter the Company's current line of
business. In addition, subject to certain conditions, the Company is
obligated to offer to purchase a portion of the Notes at a price equal to
100% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase, with the net cash proceeds of certain sales or
other dispositions of assets. Upon a change of control, the Company would be
required to offer to purchase all of the Notes at 101% of the principal
amount thereof, plus accrued interest, if any, to the date of purchase. At
September 30, 2000, the Company was in compliance with the restrictive
covenants relating to these Notes.
Repayment of the Notes is jointly and severally guaranteed on an
unconditional basis by the Company's direct and indirect wholly-owned
subsidiaries, subject to a limitation designed to ensure that such guarantees
do not constitute a fraudulent conveyance. Except as otherwise allowed in the
Indentures pursuant to which the Notes were issued, there are no restrictions
on the ability of such subsidiaries to transfer funds to the Company in the
form of cash dividends, loans or advances. General provisions of applicable
state law, however, may limit the ability of any subsidiary to pay dividends
or make distributions to the Company in certain circumstances.
Separate financial statements of the Company's subsidiaries are not
included herein because the aggregate assets, liabilities, earnings, and
equity of the subsidiaries are substantially equivalent to the assets,
liabilities, earnings, and equity of the Company on a consolidated basis; the
subsidiaries are jointly and severally liable for the repayment of the Notes;
and the separate financial statements and other disclosures concerning the
subsidiaries are not deemed material to investors.
The Company has a $65,000,000 secured Credit Agreement (the "Credit
Agreement") due December 23, 2001, with a group of banks. This Credit
Agreement, a revolving loan agreement, is primarily a working capital and
letter of credit facility and is secured by eligible accounts receivable and
inventories as defined in the Credit Agreement. In addition, the Company is
able to borrow up to $9,000,000 to exercise its purchase rights in connection
with certain service station/convenience stores that are currently subject to
capital lease obligations, and up to $10,000,000 for other acquisitions as
defined in the Credit Agreement. The availability of funds under this
facility is the lesser of (i) $65,000,000, or (ii) the amount determined
under a borrowing base calculation tied to the eligible accounts receivable
and inventories. At September 30, 2000, the availability of funds under the
Credit Agreement was $65,000,000. There were no direct borrowings outstanding
under this facility at September 30 or October 31, 2000, and there were
approximately $2,347,000 of irrevocable letters of credit outstanding on each
date. At December 31, 1999, there were no direct borrowings outstanding under
this facility.
The interest rate applicable to the Credit Agreement is tied to various
short-term indices. At September 30, 2000, this rate was approximately 8 1/2%
per annum. The Company is required to pay a quarterly commitment fee ranging
from 0.325% to 0.500% per annum of the unused amount of the facility. The
exact rate depends on meeting certain conditions in the Credit Agreement.
The Credit Agreement contains certain restrictive covenants which
require the Company to, among other things, maintain a minimum consolidated
net worth, a minimum interest coverage ratio and a maximum capitalization
ratio. It also places limits on investments, dispositions of assets,
prepayments of senior subordinated debt, guarantees, liens and restricted
payments. At September 30, 2000, the Company was in compliance with the
Credit Agreement's restrictive covenants. The Credit Agreement is guaranteed
by certain of the Company's direct and indirect wholly-owned subsidiaries.
The Company also had approximately $7,917,000 of capital lease
obligations outstanding at September 30, 2000, which require annual lease
payments of approximately $895,000, all of which are recorded as interest
expense. The Company intends to purchase the assets associated with these
lease obligations pursuant to options to purchase during the remaining lease
period of approximately seven years for approximately $7,917,000, of which
$2,000,000 has been paid in advance and is recorded in "Other Assets" in the
Company's Condensed Consolidated Balance Sheet.
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
Various legal actions, claims, assessments and other contingencies
arising in the normal course of the Company's business, including those
matters described below, are pending against the Company and certain of its
subsidiaries. Certain of these matters involve or may involve significant
claims for compensatory, punitive or other damages. These matters are subject
to many uncertainties, and it is possible that some of these matters could be
ultimately decided, resolved or settled adversely. The Company has recorded
accruals for losses related to those matters that it considers to be probable
and that can be reasonably estimated. Although the ultimate amount of
liability at September 30, 2000, which may result from those matters for
which the Company has recorded accruals is not ascertainable, the Company
believes that any amounts exceeding the recorded accruals should not
materially affect the Company's financial condition. It is possible, however,
that the ultimate resolution of these matters could result in a material
adverse effect on the Company's results of operations for a particular
reporting period.
Federal, state and local laws and regulations relating to health and the
environment affect nearly all of the operations of the Company. As is the
case with other companies engaged in similar industries, the Company faces
significant exposure from actual or potential claims and lawsuits involving
environmental matters. These matters include soil and water contamination,
air pollution and personal injuries or property damage allegedly caused by
substances manufactured, handled, used, released or disposed of by the
Company. Future expenditures related to health and environmental matters
cannot be reasonably quantified in many circumstances for various reasons,
including the speculative nature of remediation and clean-up cost estimates
and methods, imprecise and conflicting data regarding the hazardous nature of
various types of substances, the number of other potentially responsible
parties involved, various defenses which may be available to the Company and
changing environmental laws and interpretations of environmental laws.
On October 1, 1999, the State of New Mexico filed a lawsuit in the
United States District Court for the District of New Mexico, and a separate
lawsuit in the Second Judicial District Court, County of Bernalillo, State of
New Mexico, against numerous entities, including General Electric Company,
ACF Industries, Inc., Chevron Corporation, Texaco Refining and Marketing,
Inc., Phillips Petroleum Company, Ultramar Diamond Shamrock Corporation, the
United States Department of Energy, the United States Department of Defense,
the United States Air Force and the Company. The lawsuits relate to alleged
releases of pollutants at the South Valley Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") Superfund Site in
Albuquerque, New Mexico (the "South Valley Superfund Site"). The South Valley
Superfund Site includes contamination that allegedly originated from a number
of facilities, including a GE Aircraft Engines/U.S. Air Force facility and a
petroleum products terminal (the "Albuquerque Terminal"), which was acquired
by the Company in 1995 from Texaco Refining and Marketing, Inc. ("Texaco").
The lawsuits allege that the defendants released or threatened to release
hazardous substances into the environment, causing injury to surface water,
groundwater and soil at the South Valley Superfund Site, which are natural
resources of the state. In the federal court lawsuit, the state seeks
monetary damages under CERCLA for all past, present and future damages to
these natural resources, plus interest, costs and attorneys' fees. The state
court complaint contains state law claims for trespass, public nuisance,
interference with natural resources held in trust by the state, negligence,
strict liability, unjust enrichment and punitive damages. The state seeks
various monetary damages in connection with these claims, including natural
resources damages, loss of use of property and natural resources, loss of tax
revenues, lost profits, punitive damages and attorneys' fees and costs. Since
its original filing, the state court complaint has been removed to federal
court. The Company, along with certain other defendants, filed motions to
dismiss the state and federal claims. The motions to dismiss the federal
claims were subsequently denied, and the motions to dismiss the state claims
are pending. Although neither complaint calculates the amount of damages
being sought by the state, a preliminary assessment report on alleged damages
to natural resources, dated December 1998, issued by the New Mexico Office of
the Natural Resources Trustee estimated these damages at $260,000,000.
Liability for natural resource damages under CERCLA is joint and several such
that a responsible party may be liable for all natural resource damages at a
site even though it was responsible for only a small part of such damages.
Texaco agreed to defend, indemnify, reimburse and hold the Company
harmless from and against all claims and damages arising from, or caused by,
pre-closing contamination at the Albuquerque Terminal. Texaco has
acknowledged this obligation, subject to any evidence that alleged releases
resulted from the Company's operations. The Company believes that any damages
associated with the South Valley Superfund Site relate to releases that
predate the Company's acquisition of the Albuquerque Terminal and,
accordingly, does not believe that it needs to record a liability in
connection with the two lawsuits.
In 1973, the Company constructed the Farmington refinery, which was
operated until 1982. The Company became aware of soil and shallow groundwater
contamination at this facility in 1985. The Company hired environmental
consulting firms to investigate the contamination and undertake remedial
action. The consultants identified several areas of contamination in the
soils and shallow groundwater underlying the Farmington property. A
consultant to the Company has indicated that contamination attributable to
past operations at the Farmington property has migrated off the refinery
property, including a hydrocarbon plume that appears to extend no more than
1,800 feet south of the refinery property. Remediation activities are ongoing
by the Company under the supervision of the New Mexico Oil Conservation
Division ("OCD"), although no cleanup order has been received. The Company
has a reserve of approximately $550,000 for possible environmental
expenditures relating to its Farmington property.
The Farmington property is located adjacent to the Lee Acres Landfill
(the "Landfill"), a closed landfill formerly operated by San Juan County,
which is situated on lands owned by the United States Bureau of Land
Management (the "BLM"). Industrial and municipal wastes were disposed of in
the Landfill by numerous sources. During the period that it was operational,
the Company disposed of office trash, maintenance shop trash, used tires and
water from the Farmington refinery's evaporation pond at the Landfill.
The Landfill was added to the National Priorities List as a CERCLA
Superfund site in 1990. In connection with this listing, the Environmental
Protection Agency ("EPA") defined the site as the Landfill and the Landfill's
associated groundwater plume. EPA excluded any releases from the Farmington
refinery itself from the definition of the site. In May 1991, EPA notified
the Company that it may be a potentially responsible party under CERCLA for
the release or threatened release of hazardous substances, pollutants or
contaminants at the Landfill.
BLM made a proposed plan of action for the Landfill available to the
public in 1996. Remediation alternatives examined by BLM in connection with
the development of its proposed plan ranged in projected cost from no cost to
approximately $14,500,000. BLM proposed the adoption of a remedial action
alternative that it believed would cost approximately $3,900,000 to
implement.
BLM's $3,900,000 cost estimate is based on certain assumptions which may
or may not prove to be correct and is contingent on confirmation that the
remedial actions, once implemented, are adequately addressing Landfill
contamination. For example, if assumptions regarding groundwater mobility and
contamination levels are incorrect, BLM is proposing to take additional
remedial actions with an estimated cost of approximately $1,800,000.
BLM has received public comment on its proposed plan. The final remedy
for the site, however, has not yet been selected. It is anticipated that the
final remedy will be selected in 2000. In 1989, a consultant to the Company
estimated, based on various assumptions, that the Company's share of
potential liability could be approximately $1,200,000. This figure was based
upon estimated Landfill remediation costs significantly higher than those
being proposed by BLM. The figure was also based on the consultant's
evaluation of such factors as available clean-up technology, BLM's
involvement at the site and the number of other entities that may have had
involvement at the site, but did not include an analysis of all of the
Company's potential legal defenses and arguments, including possible setoff
rights.
Potentially responsible party liability is joint and several, such that
a responsible party may be liable for all of the clean-up costs at a site
even though the party was responsible for only a small part of such costs.
Although it is possible that the Company may ultimately incur liability for
clean-up costs associated with the Landfill, a reasonable estimate of the
amount of this liability, if any, cannot be made at this time because, among
other reasons, the final site remedy has not been selected, a number of
entities had involvement at the site, allocation of responsibility among
potentially responsible parties has not yet been made, and potentially-
applicable factual and legal issues have not been resolved. Based on current
information, the Company does not believe that it needs to record a liability
in relation to BLM's proposed plan.
BLM may assert claims against the Company and others for reimbursement
of investigative, cleanup and other costs incurred by BLM in connection with
the Landfill and surrounding areas. It is also possible that the Company will
assert claims against BLM in connection with contamination that may be
originating from the Landfill. Private parties and other governmental
entities may also assert claims against BLM, the Company and others for
property damage, personal injury and other damages allegedly arising out of
any contamination originating from the Landfill and the Farmington property.
Parties may also request judicial determination of their rights and
responsibilities, and the rights and responsibilities of others, in
connection with the Landfill and the Farmington property. Currently, however,
there is no outstanding litigation against the Company by BLM or any other
party.
In connection with the acquisition of the Company's Bloomfield refinery,
the Company assumed certain environmental obligations including Bloomfield
Refining Company's ("BRC") obligations under an Administrative Order issued
by EPA in 1992 pursuant to the Resources Conservation and Recovery Act (the
"Order"). The Order required BRC to investigate and propose measures for
correcting any releases of hazardous waste or hazardous constituents at or
from the Bloomfield refinery. The Company established an environmental
reserve of $2,250,000 in connection with this matter, of which approximately
$1,500,000 still remains. The Company has submitted, and hopes to receive
approval of, a remediation plan which would cost substantially less to
implement than initially anticipated. Accordingly, the Company will be
reevaluating its reserve.
The Company has discovered hydrocarbon contamination adjacent to a
55,000 barrel crude oil storage tank (the "Tank") that was located in
Bloomfield, New Mexico. The Company believes that all or a portion of the
Tank and the 5.5 acres owned by the Company on which the Tank was located may
have been a part of a refinery, owned by various other parties, that, to the
Company's knowledge, ceased operations in the early 1960s. The Company
submitted a work plan to define the extent of petroleum contamination in the
soil and groundwater, which was approved by OCD subject to certain
conditions. One of the conditions required the Company to submit a
comprehensive report on all site investigations to OCD by January 14, 2000.
The Company filed the required report on January 13, 2000, which included
proposed remedial activities at the site. Based upon the report, it appears
possible that contaminated groundwater is contained within the property
boundaries and does not extend offsite. It is anticipated that OCD will not
require remediation of offsite soil based upon the low contaminant levels
found there. On May 19, 2000, OCD approved the Company's report with certain
conditions. Those conditions required the Company to complete remedial
activities and submit a report to OCD by August 31, 2000. In the course of
conducting the remedial activities, it became apparent that the extent of the
contamination at the site was greater than anticipated. The Company has
received an extension of time to complete the remedial activities in order to
further assess the situation and propose a modified remedial plan. The
Company previously estimated cleanup costs at $250,000 and an environmental
reserve in that amount was created, of which approximately $222,000 remains.
The Company is reevaluating its reserve as a result of the remedial
activities conducted after OCD's approval of the January 13, 2000 site
investigation report.
The Company is in receipt of a Notice of Violation, dated February 9,
1993, from the New Mexico Environment Department ("NMED") alleging that the
Company failed to comply with certain notification requirements contained in
one of the permits applicable to the Ciniza refinery's land treatment
facility. As a result, the Company and NMED negotiated a plan for closure of
the land treatment facility. The costs associated with implementing the
closure plan are expected to be approximately $250,000, which the Company
anticipates will be spent over a number of years.
The Company has received a Notice of Violation and Settlement Offer
("NOV"), dated July 18, 2000, from NMED. The NOV alleges that the Company has
violated a number of air quality regulations, as well as a condition of an
air quality permit, at the Company's Bloomfield refinery. The NOV represents
that NMED is willing to settle this matter for approximately $146,000. The
Company has contested the NOV.
The Company has an environmental liability accrual of approximately
$2,300,000. Approximately $800,000 relates to ongoing environmental projects,
including the remediation of a hydrocarbon plume that appears to extend no
more than 1,800 feet south of the inactive Farmington refinery and
hydrocarbon contamination on and adjacent to the 5.5 acres the Company owns
in Bloomfield, New Mexico. The remainder, in the approximate amount of
$1,500,000, relates to certain environmental obligations assumed in the
acquisition of the Bloomfield refinery. The environmental accrual is recorded
in the current and long-term sections of the Company's Consolidated Balance
Sheets.
The Company has received several tax notifications and assessments from
the Navajo Tribe relating to Company operations outside the boundaries of the
Navajo Indian Reservation in an area of disputed jurisdiction, including a
$1,800,000 severance tax assessment (including interest and penalties through
the date of the assessment) issued in November 1991, and a $3,400,000
severance tax assessment (including interest and penalties through the date
of the assessment) issued in May 1999, both of which relate to crude oil
removed from properties located within this area. The Company has invoked its
appeal rights with the Tribe's Tax Commission in connection with the
assessments and intends to oppose the assessments. Although it is probable
that the Company will ultimately incur some liability in connection with tax
notifications and assessments from the Navajo Tribe relating to the area of
disputed jurisdiction, it is not possible to precisely estimate the amount of
any obligation for such taxes at this time because the Navajo Tribe's legal
authority to impose taxes throughout this area has not been legally
established and all potentially-applicable factual issues have not been
resolved. The Company has accrued a liability for assessments that it has
received from the Navajo Tribe for substantially less than the amount of the
assessments. It is possible that the Company's assessments will have to be
litigated by the Company before final resolution. In addition, the Company
may receive further tax assessments. The Company may potentially be able to
request reimbursement from certain third party oil lease interest owners in
connection with any severance tax amounts ultimately paid by the Company that
relate to purchases from the interest owners. The Company intends to continue
purchasing activities in the area of disputed jurisdiction.
The Company is subject to various federal and state programs relating to
the composition of motor fuels. The State of Arizona passed legislation in
April 2000 that requires refiners and suppliers of gasoline to phase out the
use of the gasoline additive methyl tertiary butyl ether ("MTBE") in Arizona
by July 2003, if feasible. The Company uses MTBE as an octane booster in its
fuels. A reasonable estimate of the financial impact, if any, of the phase
out of MTBE on the Company cannot be made at this time because, among other
reasons, the market price of alternative octane boosters may be more or less
than the price of MTBE at the time of the phase out and, depending upon the
alternative selected, modifications to the manner in which the Company's
refineries are operated may or may not be necessary.
In December 1999, EPA issued a rule which requires refiners to reduce
the sulfur content of gasoline to 30 parts per million ("ppm") by 2006 unless
they qualify for an extension of this deadline. The Company may be eligible
for an extension of up to one year under a provision pertaining to gasoline
produced or sold in certain designated geographic areas, including three
states in which the Company markets its gasoline. It is anticipated that the
Company will incur costs in the approximate amount of $3,500,000 to purchase
the equipment necessary to produce gasoline with a 30 ppm sulfur content at
its refineries.
The federal Clean Air Act requires the sale of reformulated gasoline
("RFG") in certain designated areas of the country. Motor fuels produced by
the Company's refineries are not sold in any such areas. Arizona, however,
has adopted a cleaner burning gasoline ("CBG") program. The Company does not
presently manufacture gasolines that satisfy Arizona CBG specifications. The
specifications are currently applicable to gasolines sold or used in Maricopa
County and a portion of Yavapai County, and are expected to become effective
in Pinal County by 2001. The Company operates approximately 25 service
stations in these areas, and also conducts wholesale marketing operations
there. The Company currently is examining the feasibility of producing CBG.
The capital costs associated with manufacturing large quantities of such
gasolines would be significant in amounts not determined by the Company. The
Company has the ability to purchase or exchange for these gasolines to supply
its operations in the CBG areas, including Pinal County. It is possible that
additional legislation or regulations affecting motor fuel specifications may
be adopted that would impact geographic areas in which the Company markets
its products.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
EARNINGS BEFORE INCOME TAXES
----------------------------
For the three months ended September 30, 2000, earnings before income
taxes were $8,456,000, an increase of $2,776,000 from earnings before income
taxes of $5,680,000 for the three months ended September 30, 1999. The
increase is primarily due a 19% increase in refinery margins; a 5% increase
in retail fuel margins; a 13% increase in Phoenix Fuel finished product
margins, along with a 16% increase in sales to third party customers; a 20%
increase in retail merchandise sales; and a reduction in selling, general and
administrative ("SG&A") expenses. These increases were offset in part by
increased operating expenses, including depreciation and amortization, and a
4% decline in refinery sourced finished product sales volumes, due in part to
competitive conditions.
For the nine months ended September 30, 2000, earnings before income
taxes were $11,215,000, a decrease of $7,988,000 from earnings before income
taxes of $19,203,000 for the nine months ended September 30, 1999. The
decrease was primarily due to increased operating expenses, including
depreciation and amortization; a 6% decline in refinery sourced finished
product sales volumes, due in part to competitive conditions and, in the
first quarter of 2000, to customers using inventory they had stored at the
end of 1999 in anticipation of potential Y2K problems; an 11% decline in
retail fuel margins; and a 17% decline in Phoenix Fuel finished product
margins. These decreases were offset in part by 18% increase in retail
merchandise sales, a reduction in SG&A expenses, a 2% increase in refinery
margins and a 7% increase in Phoenix Fuel third party customer sales.
In addition, 1999 year-to-date earnings were reduced as the result of
the write-off of $1,950,000 in net book value of assets that were either
demolished for new construction or replaced with new systems, and both the
1999 year-to-date and quarterly earnings were increased as the result of the
recording of a $1,400,000 reimbursement for lost earnings under the Company's
business interruption insurance policy.
REVENUES
--------
Revenues for the three months ended September 30, 2000, increased
approximately $86,710,000 or 40% to $301,213,000 from $214,503,000 in the
comparable 1999 period. Revenues for the nine months ended September 30,
2000, increased approximately $227,707,000 or 40% to $792,413,000 from
$564,706,000 in the comparable 1999 period. The increase in each period is
due to, among other things, increases in refinery weighted average selling
prices, a 39% increase for the quarter and a 54% increase for the nine
months; increases in Phoenix Fuel weighted average selling prices, a 33%
increase for the quarter and a 45% increase for the nine months, along with
increases in wholesale fuel volumes sold to third party customers, a 16%
increase for the quarter and a 7% increase for the nine months, due in part
to increased diesel demand related to allocations and disruptions of natural
gas supplies into Arizona; and a 20% and 18% increase in retail merchandise
sales for the quarter and nine months, respectively. This increase was
partially offset by a 4% and 6% decline in refinery sourced finished product
sales volumes for the quarter and nine month periods, respectively.
The volumes of refined products sold through the Company's retail units
decreased approximately 3% from 1999 levels for the quarter and increased
approximately 3% from 1999 levels for the nine months. The volume of finished
product sold from service station/convenience stores that were in operation
for a full year in each period decreased approximately 2% for the quarter and
increased approximately 1% for the nine months, while volumes sold from the
Company's travel center declined approximately 4% for the quarter and 7% for
the nine months. The majority of the 3% increase in refined products sold
from the Company's retail units for the nine months is due to the volumes
sold from five Company constructed and remodeled service station/convenience
stores, opened in 1999 and 2000, that exceeded the volumes lost from the sale
of ten units during the same period. For the quarter, there was only a slight
increase in such net volumes.
COST OF PRODUCTS SOLD
---------------------
For the three months ended September 30, 2000, cost of products sold
increased $80,728,000 or 50% to $240,792,000 from $160,064,000 in the
corresponding 1999 period. For the nine months ended September 30, 2000, cost
of products sold increased $232,125,000 or 58% to $629,215,000 from
$397,090,000 in the corresponding 1999 period. The increase is due in part to
a 53% increase in average crude oil costs for the quarter and an 80% increase
for the nine months; increases in the cost of finished product purchased by
Phoenix Fuel, a 34% increase for the quarter and a 50% increase for the nine
months, along with a 16% increase in wholesale fuel volumes sold to third
party customers for the quarter and a 7% increase for the nine months; and a
20% and 18% increase in retail merchandise sales for the quarter and nine
months, respectively. This increase was partially offset by a 4% decline in
refinery sourced finished product sales volumes for the quarter and a 6%
decline for the nine months.
In the second quarter of 1999 certain higher cost crude oil LIFO
inventory layers were liquidated which resulted in an increase in the cost of
products sold of approximately $1,600,000. There have been no similar
liquidations in 2000.
OPERATING EXPENSES
------------------
For the three months ended September 30, 2000, operating expenses
increased approximately $2,289,000 or 8% to $31,060,000 from $28,771,000 for
the three months ended September 30, 1999. For the nine months ended
September 30, 2000, operating expenses increased approximately $5,222,000 or
6% to $90,089,000 from $84,867,000 for the nine months ended September 30,
1999. The increase in each period is due to, among other things, increased
retail operating costs related to new service station/convenience stores
opened or acquired in 1999 and 2000, including wages and related costs, and
increased retail credit card processing fees due to an increase in the number
of transactions, as well as the average dollar amount of each transaction.
Also, in each period there were higher costs and increased volumes of
purchased fuel for the refineries, along with higher expenditures for
catalyst, chemicals and additives. In addition, the quarter reflects
increased accruals for incentive bonus plans. These increases were offset in
part in each period by lower lease expense due to the repurchase of 24
service station/convenience stores sold as part of a sale-leaseback
transaction between the Company and FFCA Capital Holding Corporation ("FFCA")
completed in December 1998. In addition, each 2000 period reflects reduced
retail advertising costs because of a change in advertising strategies as
well as reduced expenditures for other promotional programs.
DEPRECIATION AND AMORTIZATION
-----------------------------
For the three months ended September 30, 2000, depreciation and
amortization increased approximately $1,163,000 or 16% to $8,650,000 from
$7,487,000 in the same 1999 period. For the nine months ended September 30,
2000, depreciation and amortization increased approximately $2,659,000 or 12%
to $25,325,000 from $22,666,000 in the same 1999 period. The increase in each
period is primarily related to construction, remodeling and upgrades in
retail and refining operations during 1999 and 2000; the amortization of
refinery turnaround costs; and the repurchase of 24 service
station/convenience stores sold as part of a sale-leaseback transaction
between the Company and FFCA in December 1998. In addition, depreciation and
amortization in each 1999 period included the amortization of certain natural
gas properties and in the 1999 nine month period, the adjustment of the value
of certain real estate assets held for sale.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
For the three months ended September 30, 2000, SG&A decreased
approximately $644,000 or 9% to $6,652,000 from $7,296,000 in the
corresponding 1999 period. For the nine months ended September 30, 2000, SG&A
decreased approximately $3,172,000 or 14% to $19,450,000 from $22,622,000 in
the corresponding 1999 period. The decrease is primarily due to a larger than
normal contribution to the Company's Employee Stock Ownership Plan ("ESOP")
in 1999, higher expenses for the estimated costs of incentive bonuses and
accruals for other employee benefits made in 1999 as compared to 2000, higher
1999 workers' compensation expense and reduced costs related to a
reorganization and staff reduction program implemented in the first quarter
of 2000. The decrease was offset in part by higher wages and related costs in
each 2000 period; and for the nine months, certain strategic planning costs,
along with severance pay costs incurred in 2000 relating to the
reorganization and staff reduction program. In addition, insurance
reimbursements were received in the first quarter of 1999 relating to prior
workers' compensation claims that had been paid by the Company.
INTEREST EXPENSE, NET
---------------------
For the three months ended September 30, 2000, net interest expense
(interest expense less interest income) increased approximately $398,000 or
8% to $5,603,000 from $5,205,000 in the comparable 1999 period. For the nine
months ended September 30, 2000, net interest expense increased approximately
$811,000 or 5% to $17,119,000 from $16,308,000 in the comparable 1999 period.
The increase in each period is primarily due to a decline in interest and
investment income from the investment of funds in short-term instruments and
the capitalization of interest in the third quarter of 1999. In addition, the
nine month period includes additional interest expense related to borrowings
from the Company's revolving credit facility in the first six months of 2000.
INCOME TAXES
------------
The effective tax rate for the three and nine month periods ended
September 30, 2000, was approximately 40.6% and was approximately 39% for
each comparable 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
-------------------------
Operating cash flows decreased for the nine months ended September 30,
2000 compared to the nine months ended September 30, 1999, primarily as a
result of a decrease in cash flows related to changes in operating assets and
liabilities in each period and a decrease in net earnings. Net cash provided
by operating activities totaled $29,306,000 for the nine months ended
September 30, 2000, compared to net cash provided by operating activities of
$42,103,000 in the comparable 1999 period.
WORKING CAPITAL
---------------
Working capital at September 30, 2000 consisted of current assets of
$185,328,000 and current liabilities of $123,508,000, or a current ratio of
1.50:1. At December 31, 1999, the current ratio was 1.40:1 with current
assets of $171,984,000 and current liabilities of $122,588,000.
Current assets have increased since December 31, 1999, due to an
increase in accounts and note receivable, and inventories, offset in part by
a decrease in cash and cash equivalents, and prepaid expenses and other.
Accounts receivable have increased primarily due to an increase in finished
product selling prices, increased product trading activity and an increase in
Phoenix Fuel sales volumes. Note receivable increased due to the
reclassification of a note receivable from the Company's Chairman and Chief
Executive Officer from "Other Assets" to current "Note Receivable".
Inventories have increased primarily due to an increase in finished product
prices and Phoenix Fuel refined product volumes, offset in part by a decrease
in certain refining and retail refined product volumes. Prepaid expenses and
other have decreased primarily as a result of a reduction in prepaid
insurance.
Current liabilities have increased due to an increase in accounts
payable, offset in part by a decrease in accrued expenses. Accounts payable
have increased primarily as a result of an increase in the cost of certain
raw materials and finished products and increased Phoenix Fuel finished
product purchases. These increases were offset in part by a reduction in
certain refining raw material purchases. Accrued expenses have decreased
primarily as a result of the payment of an accrued contingent payment related
to the 1995 acquisition of the Company's Bloomfield refinery, the payment of
1999 accrued bonuses and 401(k) Company matching contributions, and the
payment of certain accrued interest balances. These decreases were offset in
part by accruals for 2000 bonuses and 401(k) Company matching contributions.
CAPITAL EXPENDITURES AND RESOURCES
----------------------------------
Net cash used in investing activities for the purchase of property,
plant and equipment totaled approximately $18,830,000 for the nine months
ended September 30, 2000. Expenditures included amounts for, among other
things, the assignment of certain leases/subleases to the Company associated
with 9 service station/convenience stores located on the Navajo and Zuni
Indian Reservations; the acquisition of an interest in 5 service station/
convenience stores located on the Navajo Indian Reservation; certain pipeline
right-of-way payments; certain refinery maintenance turnaround costs, and
operational and environmental projects for the refineries; construction,
remodeling and upgrade of retail operations; and construction costs related
to the remodeling of a cardlock location.
The Company received proceeds of approximately $4,461,000 from the sale
of property, plant and equipment and other assets in the first nine months of
2000, primarily from the sale of eight service station/convenience stores.
The Company has entered into a non-binding letter of intent with Western
Refining Company ("Western"), a Dallas, Texas based company, and RHC
Holdings, L.P. ("Holdings"), a Texas Limited Partnership, of which Western is
the General Partner. Western and Holdings recently acquired all of the issued
and outstanding limited partnership interest of Refinery Holding Company,
L.P. ("RHC"), a Delaware limited partnership, which owns certain refining
assets in El Paso, Texas. RHC is in negotiations with Chevron to purchase
Chevron's El Paso refining assets and certain related crude oil pipeline
assets. Pursuant to the letter of intent, the Company is working to acquire
an interest in both refineries or in the entity that may ultimately own or
operate them, and hopes to complete negotiations some time in the fourth
quarter.
The Company continues to investigate other strategic acquisitions as
well as capital improvements to its existing facilities. The Company is also
evaluating the possible sale or exchange of non-strategic or underperforming
assets.
The Company anticipates that working capital, including that necessary
for capital expenditures and debt service, will be funded through existing
cash balances, cash generated from operating activities, and, if necessary,
future borrowings. Future liquidity, both short and long-term, will continue
to be primarily dependent on producing or purchasing, and selling, sufficient
quantities of refined products at margins sufficient to cover fixed and
variable expenses.
CAPITAL STRUCTURE
-----------------
At September 30, 2000 and December 31, 1999, the Company's long-term
debt was 66.9% and 66.1% of total capital, respectively, and the Company's
net debt (long-term debt less cash and cash equivalents) to total
capitalization percentages were 64.1% and 63.0%, respectively.
The Company's capital structure includes $150,000,000 of 9% senior
subordinated notes due 2007 (the "9% Notes") and $100,000,000 of 9 3/4%
senior subordinated notes due 2003 (the "9 3/4% Notes", and collectively with
the 9% Notes, the "Notes"). The Indentures supporting the Notes contain
restrictive covenants that, among other things, restrict the ability of the
Company and its subsidiaries to create liens, to incur or guarantee debt, to
pay dividends, to repurchase shares of the Company's common stock, to sell
certain assets or subsidiary stock, to engage in certain mergers, to engage
in certain transactions with affiliates or to alter the Company's current
line of business. In addition, subject to certain conditions, the Company is
obligated to offer to purchase a portion of the Notes at a price equal to
100% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase, with the net cash proceeds of certain sales or
other dispositions of assets. Upon a change of control, the Company would be
required to offer to purchase all of the Notes at 101% of the principal
amount thereof, plus accrued interest, if any, to the date of purchase. At
September 30, 2000, the Company was in compliance with the restrictive
covenants relating to these Notes.
The Company has a $65,000,000 secured Credit Agreement (the "Credit
Agreement") due December 23, 2001, with a group of banks. This Credit
Agreement, a revolving loan agreement, is primarily a working capital and
letter of credit facility and is secured by eligible accounts receivable and
inventories as defined in the Credit Agreement. In addition, the Company is
able to borrow up to $9,000,000 to exercise its purchase rights in connection
with certain service station/convenience stores that are subject to capital
lease obligations, and up to $10,000,000 for other acquisitions as defined in
the Credit Agreement. The availability of funds under this facility is the
lesser of (i) $65,000,000, or (ii) the amount determined under a borrowing
base calculation tied to the eligible accounts receivable and inventories. At
September 30, 2000, the availability of funds under the Credit Agreement was
$65,000,000. There were no direct borrowings outstanding under this facility
at September 30 or October 31, 2000, and there were approximately $2,347,000
of irrevocable letters of credit outstanding on each date.
The interest rate applicable to the Credit Agreement is tied to various
short-term indices. At September 30, 2000, this rate was approximately 8 1/2%
per annum. The Company is required to pay a quarterly commitment fee ranging
from 0.325% to 0.500% per annum of the unused amount of the facility. The
exact rate depends on meeting certain conditions in the Credit Agreement.
The Credit Agreement contains certain restrictive covenants which
require the Company to, among other things, maintain a minimum consolidated
net worth, a minimum interest coverage ratio and a maximum capitalization
ratio. It also places limits on investments, dispositions of assets,
prepayments of senior subordinated debt, guarantees, liens and restricted
payments. At September 30, 2000, the Company was in compliance with the
Credit Agreement's restrictive covenants. The Credit Agreement is guaranteed
by certain of the Company's direct and indirect wholly-owned subsidiaries.
The Company's Board of Directors has authorized the repurchase of
2,500,000 shares of the Company's common stock. Purchases may be made from
time to time as conditions permit. Shares may be repurchased through
privately-negotiated transactions, block share purchases and open market
transactions. During the third quarter of 2000, the Company repurchased
134,366 shares of its common stock under this program. Of this amount,
129,466 shares were acquired from its Chairman and Chief Executive Officer at
a weighted average price of approximately $6.93 per share, which was the
approximate average closing price of the Company's common stock on the dates
of the Board of Directors resolutions authorizing the transactions. In
addition, another 4,900 shares were purchased on the open market for $7.00
per share. From the inception of the stock repurchase program through
September 30, 2000, the Company had repurchased 2,097,066 shares for
approximately $21,555,000, resulting in a weighted average cost of $10.28 per
share. The repurchased shares are treated as treasury shares.
Shares repurchased under the Company's program are available for a
number of corporate purposes. The number of shares actually repurchased will
be dependent upon market conditions and existing debt covenants, and there is
no guarantee as to the exact number of shares to be repurchased by the
Company. The Company may discontinue the program at any time without notice.
As previously disclosed in the Company's Annual Report on Form 10-K, the
Company filed a Schedule 13E-4 Issuer Tender Offer Statement with the
Securities and Exchange Commission on December 21, 1999, to acquire up to
1,333,333 shares of its common stock at a price of $9.00 per share, net to
the seller in cash. The offer expired on February 4, 2000, at which time
1,169,414 shares had been properly tendered to the Company. The Company
purchased all of these shares at the stated price, at a cost of approximately
$10,525,000 plus expenses of approximately $213,000 on February 8, 2000.
These repurchased shares are treated as treasury shares.
The Company's Board of Directors did not declare a cash dividend on
common stock for the first or second quarters of 2000. The payment of
dividends is subject to the results of the Company's operations, existing
debt covenants and declaration by the Company's Board of Directors. It is
anticipated that the Board of Directors will periodically review the
Company's policy regarding the payment of dividends.
OTHER
-----
The Company is exposed to various market risks, including changes in
certain commodity prices and interest rates. To manage the volatility
relating to these normal business exposures, the Company periodically uses
commodity futures and options contracts to reduce price volatility, to fix
margins in its refining and marketing operations and to protect against price
declines associated with its crude oil and finished products inventories.
The potential loss from a hypothetical 10% adverse change in commodity
prices on open commodity futures and options contracts held by the Company at
September 30, 2000, was approximately $386,000.
Additionally, the Company's $65,000,000 Credit Agreement is floating-
rate debt tied to various short-term indices. As a result, the Company's
annual interest costs associated with this debt will fluctuate. At September
30, 2000, there were no direct borrowings outstanding under this Credit
Agreement.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was originally to be
effective for the Company's financial statements as of January 1, 2000. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 by
one year in order to give companies more time to study, understand and
implement the provisions of SFAS No. 133 and to complete information system
modifications. In June 2000, the FASB issued SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment
to SFAS No. 133." SFAS No. 138 expands and clarifies certain provisions of
SFAS No. 133 and will be adopted by the Company concurrently with SFAS No.
133 on January 1, 2001.
SFAS No. 133, as amended, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that entities
record all derivatives as either assets or liabilities, measured at fair
value, with any change in fair value recognized in earnings or in other
comprehensive income, depending on the use of the derivative and whether it
qualifies for hedge accounting. If certain conditions are met, a derivative
may be specifically designated as a (a) hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk.
The Company has reviewed and continues to review its outstanding
contracts to determine if they qualify as derivatives or contain embedded
derivatives as defined in SFAS No. 133, as amended by SFAS No. 138. As of the
date of this filing, except as described below, the Company does not believe
the contracts that have been reviewed qualify as derivatives or contain
embedded derivatives as defined in SFAS No. 133, as amended by SFAS No. 138.
As of September 30, 2000, the Company had open futures contracts for the
purchase or sale of 115,000 barrels of heating oil or crude oil. These open
futures contracts relate to specific speculative strategies entered into with
the expectation of profiting from favorable price movements. These contracts
are marked-to-market monthly and any gains or losses recorded in cost of
sales. At September 30, 2000, a net loss of approximately $71,000 had been
recorded relating to these contracts.
In addition, at September 30, 2000, the Company had entered into
contracts for the purchase or sale of 75,000 barrels of diesel fuel for
delivery in October in Los Angeles. These contracts are part of the Company's
speculative wet barrel trading activities, and would be considered derivative
instruments under SFAS No. 133, as amended by SFAS No. 138. The contracts
were not reflected in the Company's records as of September 30, 2000. If
these contracts were in existence at December 31, 2000, transition
adjustments required by SFAS No. 133 of less than $100,000 would be recorded
as of January 1, 2001. The adjustments would be recorded as cumulative-
effect-type adjustments of net income, and corresponding adjustments would be
made to assets or liabilities in the Company's Consolidated Balance Sheet.
Subsequently, these contracts would be marked-to-market monthly and any gains
or losses recorded in earnings.
At September 30, 2000, the Company had no hedging strategies in place as
defined in SFAS No. 133, as amended by SFAS No. 138.
Federal, state and local laws and regulations relating to health and the
environment affect nearly all of the operations of the Company. As is the
case with other companies engaged in similar industries, the Company faces
significant exposure from actual or potential claims and lawsuits involving
environmental matters. These matters include soil and water contamination,
air pollution and personal injuries or property damage allegedly caused by
substances manufactured, handled, used, released or disposed of by the
Company. Future expenditures related to health and environmental matters
cannot be reasonably quantified in many circumstances for various reasons,
including the speculative nature of remediation and cleanup cost estimates
and methods, imprecise and conflicting data regarding the hazardous nature of
various types of substances, the number of other potentially responsible
parties involved, various defenses which may be available to the Company and
changing environmental laws and interpretations of environmental laws.
Rules and regulations implementing federal, state and local laws
relating to health and the environment will continue to affect the operations
of the Company. The Company cannot predict what health or 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
enforced with respect to products or activities of the Company. Compliance
with more stringent laws or regulations, as well as more vigorous enforcement
policies of the 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 refinery equipment, pollution control systems and other
equipment not currently possessed by the Company.
As previously discussed in the Company's Annual Report on Form 10-K for
the Company's fiscal year ended December 31, 1999 and in the Company's
Quarterly Reports on Form 10-Q for the first and second quarters of 2000, the
Company assumed certain environmental obligations in connection with the
acquisition of the Company's Bloomfield refinery, including Bloomfield
Refining Company's ("BRC") obligations under an Administrative Order issued
by EPA in 1992 pursuant to the Resources Conservation and Recovery Act (the
"Order"). The Order required BRC to investigate and propose measures for
correcting any releases of hazardous waste or hazardous constituents at or
from the Bloomfield refinery. The Company established an environmental
reserve of $2,250,000 in connection with this matter, of which approximately
$1,500,000 still remains. The Company has submitted, and hopes to receive
approval of, a remediation plan which would cost substantially less to
implement than initially anticipated. Accordingly, the Company will be
reevaluating its reserve.
As previously discussed in the Company's Annual Report on Form 10-K for
the Company's fiscal year ended December 31, 1999 and in the Company's
Quarterly Reports on Form 10-Q for the first and second quarters of 2000, the
Company has discovered hydrocarbon contamination adjacent to a 55,000 barrel
crude oil storage tank (the "Tank") that was located in Bloomfield, New
Mexico. The Company believes that all or a portion of the Tank and the 5.5
acres owned by the Company on which the Tank was located may have been a part
of a refinery, owned by various other parties, that, to the Company's
knowledge, ceased operations in the early 1960s. The Company submitted a work
plan to define the extent of petroleum contamination in the soil and
groundwater, which was approved by OCD subject to certain conditions. One of
the conditions required the Company to submit a comprehensive report on all
site investigations to OCD by January 14, 2000. The Company filed the
required report on January 13, 2000, which included proposed remedial
activities at the site. Based upon the report, it appears possible that
contaminated groundwater is contained within the property boundaries and does
not extend offsite. It is anticipated that OCD will not require remediation
of offsite soil based upon the low contaminant levels found there. On May 19,
2000, OCD approved the Company's report with certain conditions. Those
conditions required the Company to complete remedial activities and submit a
report to OCD by August 31, 2000. In the course of conducting the remedial
activities, it became apparent that the extent of the contamination at the
site was greater than anticipated. The Company has received an extension of
time to complete the remedial activities in order to further assess the
situation and propose a modified remedial plan. The Company previously
estimated cleanup costs at $250,000 and an environmental reserve in that
amount was created, of which approximately $222,000 remains. The Company is
reevaluating its reserve as a result of the remedial activities conducted
after OCD's approval of the January 13, 2000 site investigation report.
The Company's current receipts and projections of Four Corners crude oil
production indicate that the Company's crude oil demand may periodically
exceed the supply of crude oil that is available from local sources. The
Company has decreased, and may from time to time decrease, production runs at
its refineries from levels it would otherwise schedule as a result of
shortfalls in Four Corners crude oil production.
The Four Corners basin is a mature production area and, accordingly, is
subject to a natural decline in production over time. In the past, this
natural decline has been offset by new drilling, field workovers and
secondary recovery projects that resulted in additional production from
existing reserves. Many of these projects were cut back, however, when crude
oil prices declined dramatically in 1998. Based upon history and discussions
with local producers, the Company anticipates that additional projects will
be undertaken as a result of the recovery in crude oil prices which began in
the second quarter of 1999. Through the first nine months of 2000, the
Company has noticed an increase in certain Four Corners production, although
there has been an overall decrease in production during this period. The
Company had received indications that producers were considering projects
that, if undertaken, could result in increased production by the end of 2000
or early 2001. Although the Company believes that these projects are still
under consideration, the Company is unaware of any significant projects that
will be undertaken in this time frame.
The Company had estimated that, for the year 2000, its refinery
production runs would approximate 1999 levels. Based on current receipts and
projections of Four Corners crude oil production, the Company now estimates
that for the fourth quarter and the year 2000 its refinery production runs
will average approximately 6.0% and 5.5% lower than 1999 levels,
respectively. If additional crude oil or other refinery feedstocks were
available, the Company's earnings for these periods potentially could be
higher. The potential impact on earnings, however, is not capable of accurate
estimation due to factors such as the possible impact that additional
refinery production might have on refining margins and the demand for
finished products during such periods. The Company may increase its
production runs in the future depending on demand for finished products and
refining margins attainable, if additional crude oil or other refinery
feedstocks become available.
The Company supplements the Four Corners crude oil used at its
refineries with other feedstocks. These feedstocks currently include locally
produced natural gas liquids and other feedstocks produced outside of the
Four Corners area. The Company continues to evaluate supplemental feedstock
alternatives for its refineries on both a short-term and long-term basis.
These alternatives include, among other possibilities, the encouraging of new
exploration and production opportunities on tribal reservation lands. In
addition, the Company may evaluate a project to increase its production of
gasoline from abundantly available natural gas liquids. Whether or not
supplemental feedstocks are used at the Company's refineries depends on a
number of factors. These factors include, but are not limited to, the
availability of supplemental feedstocks, the cost involved, the quantities
required, the quality of the feedstocks, the demand for finished products,
and the selling prices of finished products.
There is no assurance that current or projected levels of Four Corners
crude oil supply for the Company's refineries will be maintained. Any
significant long-term interruption or decline in Four Corners crude oil
supply, due to prices or other factors, or any significant long-term
interruption of crude oil transportation systems, would have an adverse
effect on the Company's operations.
The Company is aware of a number of actions, proposals or industry
discussions regarding product pipeline projects that could impact portions of
its marketing areas. One of these projects is the potential conversion and
extension of the existing Texas-New Mexico crude oil pipeline to transport
refined products from West Texas to New Mexico, including Albuquerque and
potentially Bloomfield. Another potential project would take product on to
Salt Lake City, Utah. In addition, various actions have been undertaken to
increase the supply of refined products to El Paso, Texas, which is connected
by pipeline to the Albuquerque area to the north and the Phoenix and Tucson,
Arizona markets to the west. The completion of some or all of these projects
would result in increased competition by increasing the amount of refined
products potentially available in these markets, as well as improving
competitor access to these areas, and may result in new opportunities for the
Company, as the Company is a net purchaser of refined products in some of
these areas.
Separately, at the end of 1999, an existing natural gas liquids pipeline
had been converted to a refined products pipeline and began delivering
finished product from Southeastern New Mexico to the Albuquerque and Four
Corners areas. The Company has experienced increased competition for sales
volumes in these areas as a result of the completion of this project. A
proposed pipeline terminal expansion in Albuquerque associated with this
project also may result in increased competition.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: This report contains forward-looking statements that involve
known and unknown risks and uncertainties. Forward-looking statements are
identified by words or phrases such as "believes," "expects," "anticipates,"
"estimates," "could," "plans," "intends," variations of such words and
phrases and other similar expressions. While these forward-looking statements
are made in good faith, and reflect the Company's current judgment regarding
such matters, actual results could vary materially from the forward-looking
statements. Important factors that could cause actual results to differ from
forward-looking statements include, but are not limited to, economic,
competitive and governmental factors affecting the Company's operations,
markets, products, services and prices; risks associated with non-compliance
with certain debt covenants or the satisfaction of financial ratios contained
in such covenants; the adequacy of the Company's environmental and tax
reserves; the ultimate outcome of the two lawsuits filed against the Company
by the State of New Mexico and the Company's ultimate liability related
thereto; the availability of indemnification from third parties in connection
with various legal proceedings; the Company's ability to recover tax payments
from third parties; the Company's ability to resolve alleged legal violations
without the assessment of additional fines or penalties; the expansion of the
Company's refining, retail and Phoenix Fuel operations through acquisition
and construction; the risk that RHC will not complete the acquisition of
Chevron's refining assets in El Paso Texas; the risk that the Company will
not acquire an interest in RHC's and Chevron's refining assets in El Paso,
Texas or in the entity that may ultimately own or operate them; the adequacy
and cost of raw material supplies; the potential effects of various pipeline
projects as they relate to the Company's market area and future
profitability; the impact of the mandated use of gasolines satisfying
governmentally mandated specifications on the Company's operations; the
ability of the Company to reduce operating expenses and non-essential capital
expenditures; and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission. All subsequent written
and oral forward-looking statements attributable to the Company, or persons
acting on behalf of the Company, are expressly qualified in their entirety by
the foregoing. Forward-looking statements made by the Company represent its
judgement on the dates such statements are made. The Company assumes no
obligation to update any forward-looking statements to reflect new or changed
events or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The information required by this item is incorporated by reference to
the section entitled "Other" in the Company's Management's Discussion and
Analysis of Financial Condition and Results of Operations in Part I, Item 2.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation incidental to its
business. There is also hereby incorporated by reference the information
regarding contingencies in Note 6 to the Unaudited Condensed Consolidated
Financial Statements set forth in Item 1, Part I hereof and the discussion of
certain contingencies contained in Item 2, Part 1 hereof, under the heading
"Liquidity and Capital Resources - Other."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
27 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K for the
quarter ended September 30, 2000.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended
September 30, 2000 to be signed on its behalf by the undersigned thereunto
duly authorized.
GIANT INDUSTRIES, INC.
/s/ GARY R. DALKE
------------------------------------------
Gary R. Dalke, Vice President,
Controller, Accounting Officer
and Assistant Secretary
Date: November 3, 2000
