UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from --------------- to ----------------
Commission File Number 1-3876
HOLLY CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1056913
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 871-3555
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
15,513,828 shares of Common Stock, par value $.01 per share, were outstanding on
December 6, 2002.
HOLLY CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Forward-Looking Statements 3
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited)
October 31, 2002 and July 31, 2002 5
Consolidated Statement of Income (Unaudited) -
Three Months Ended October 31, 2002 and 2001 6
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended October 31, 2002 and 2001 7
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months Ended October 31, 2002 and 2001 8
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Certifications 33
Holly Corporation is filing this Amendment No. 2 to its Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002, originally filed on
December 12, 2002 and amended on Form 10-Q/A on September 9, 2003, in response
to comments received from the Securities and Exchange Commission in order to
comply with Item 10(e) of Regulation S-K regarding the use of non-GAAP financial
measures. This Amendment No. 2 amends and restates in its entirety the original
Form 10-Q as amended, but continues to speak as of the date of the original
filing of the original Form 10-Q. Holly Corporation has not updated the
disclosure in this amendment to speak as of a later date. All information
contained in this Amendment No. 2 and the original Form 10-Q as amended is
subject to updating and supplementing as provided in the periodic reports filed
subsequent to the original filing date with the Securities and Exchange
Commission.
PART I
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q/A contains certain "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts included
in this Form 10-Q/A, including without limitation those under "Results of
Operations," "Liquidity and Capital Resources" and "Additional Factors that May
Affect Future Results" (including "Risk Management") regarding the Company's
financial position and results of operations in Item 2 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Part I and
those in Item 1 "Legal Proceedings" in Part II, are forward-looking statements.
Such statements are subject to risks and uncertainties, including but not
limited to risks and uncertainties with respect to the actions of actual or
potential competitive suppliers of refined petroleum products in the Company's
markets, the demand for and supply of crude oil and refined products, the spread
between market prices for refined products and market prices for crude oil, the
possibility of constraints on the transportation of refined products, the
possibility of inefficiencies or shutdowns in refinery operations or pipelines,
effects of governmental regulations and policies, the availability and cost of
financing to the Company, the effectiveness of the Company's capital investments
and marketing strategies, the Company's efficiency in carrying out construction
projects, the possibility of terrorist attacks and the consequences of any such
attacks, and general economic conditions. Should one or more of these risks or
uncertainties, among others as set forth in this Form 10-Q/A, materialize,
actual results may vary materially from those estimated, anticipated or
projected. Although the Company believes that the expectations reflected by such
forward-looking statements are reasonable based on information currently
available to the Company, no assurances can be given that such expectations will
prove to have been correct. Cautionary statements identifying important factors
that could cause actual results to differ materially from the Company's
expectations are set forth in this Form 10-Q/A, including without limitation in
conjunction with the forward-looking statements included in this Form 10-Q/A
that are referred to above. This summary discussion of risks and uncertainties
that may cause actual results to differ from those indicated in forward-looking
statements should be read in conjunction with the discussion under the heading
"Additional Factors That May Affect Future Results" included in Item 7 of the
Company's Annual Report on Form 10-K/A for the fiscal year ended July 31, 2002
and in conjunction with the discussion in this Form 10-Q/A in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the headings "Liquidity and Capital Resources" and "Additional Factors That May
Affect Future Results." All
3
forward-looking statements included in this Quarterly Report on Form 10-Q/A and
all subsequent oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements. The forward-looking statements speak only as of the date
made, other than as required by law, and the Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
Unaudited
OCTOBER 31, JULY 31,
2002 2002
---------- ---------
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 66,995 $ 71,630
Accounts receivable: Product.................................................... 52,733 46,929
Crude oil resales.......................................... 92,113 88,466
--------- ---------
144,846 135,395
Inventories: Crude oil and refined product.............................. 45,578 35,120
Materials and supplies..................................... 10,081 10,188
--------- ---------
55,659 45,308
Income taxes receivable........................................................... - 8,699
Prepayments and other............................................................. 17,403 17,812
--------- ---------
TOTAL CURRENT ASSETS......................................................... 284,903 278,844
Properties, plants and equipment, at cost ........................................... 420,093 410,987
Less accumulated depreciation, depletion and amortization ........................... (216,650) (211,526)
--------- ---------
203,443 199,461
Investments in and advances to joint ventures........................................ 17,227 15,732
Other assets: Prepaid transportation..................................... 25,000 -
Other, net................................................. 6,662 8,269
--------- ---------
31,662 8,269
--------- ---------
TOTAL ASSETS................................................................. $ 537,235 $ 502,306
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................................. $ 192,414 $ 185,058
Accrued liabilities............................................................... 23,945 25,342
Prepaid transportation liability.................................................. 25,000 -
Income taxes payable.............................................................. 2,099 -
Current maturities of long-term debt.............................................. 8,571 8,571
--------- ---------
TOTAL CURRENT LIABILITIES.................................................... 252,029 218,971
Deferred income taxes................................................................ 28,731 29,065
Long-term debt, less current maturities.............................................. 25,714 25,714
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value - 1,000,000 shares authorized; none issued....... - -
Common stock, $.01 par value - 20,000,000 shares authorized;
16,806,396 and 16,759,396 shares issued as of October 31, 2002 and
July 31, 2002................................................................... 168 168
Additional capital................................................................ 14,623 14,013
Retained earnings................................................................. 227,310 223,770
--------- ---------
242,101 237,951
Common stock held in treasury, at cost -
1,313,968 and 1,197,968 shares as of October 31, 2002 and July 31, 2002......... (11,340) (9,395)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY................................................... 230,761 228,556
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 537,235 $ 502,306
========= =========
See accompanying notes.
5
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
THREE MONTHS ENDED
OCTOBER 31,
------------------------------------
2002 2001
--------- ---------
(In thousands, except per share data)
SALES AND OTHER REVENUES.............................................................. $ 275,658 $ 257,947
OPERATING COSTS AND EXPENSES
Cost of products sold (exclusive of depreciation,depletion and amortization)....... 231,959 191,984
Operating expenses (exclusive of depreciation,depletion and amortization).......... 24,140 24,746
Selling, general and administrative expenses (exclusive of depreciation,
depletion, and amortization)..................................................... 5,203 5,430
Depreciation, depletion and amortization........................................... 7,196 6,431
Exploration expenses, including dry holes.......................................... 217 299
--------- ---------
TOTAL OPERATING COSTS AND EXPENSES............................................ 268,715 228,890
--------- ---------
INCOME FROM OPERATIONS................................................................ 6,943 29,057
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures............................................... 1,983 2,748
Interest income.................................................................... 274 682
Interest expense................................................................... (694) (940)
Gain on sale of equity securities.................................................. - 1,522
--------- ---------
1,563 4,012
--------- ---------
INCOME BEFORE INCOME TAXES............................................................ 8,506 33,069
Income tax provision (benefit)
Current............................................................................ 3,593 12,697
Deferred........................................................................... (334) 150
--------- ---------
3,259 12,847
--------- ---------
NET INCOME............................................................................ $ 5,247 $ 20,222
========= =========
NET INCOME PER COMMON SHARE - BASIC................................................... $ 0.34 $ 1.30
========= =========
NET INCOME PER COMMON SHARE - DILUTED................................................. $ 0.33 $ 1.27
========= =========
CASH DIVIDENDS DECLARED PER COMMON SHARE.............................................. $ 0.11 $ 0.10
========= =========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic.............................................................................. 15,522 15,508
Diluted............................................................................ 15,877 15,944
See accompanying notes.
6
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
THREE MONTHS ENDED
OCTOBER 31,
---------------------------
2002 2001
-------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 5,247 $ 20,222
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization.......................... 7,196 6,431
Deferred income taxes............................................. (334) 150
Equity in earnings of joint ventures.............................. (1,983) (2,748)
(Increase) decrease in current assets
Accounts receivable............................................. (9,451) 38,206
Inventories..................................................... (10,351) (9,868)
Income taxes receivable......................................... 8,699 3,514
Prepayments and other........................................... 409 81
Increase (decrease) in current liabilities
Accounts payable................................................ 7,356 (34,156)
Accrued liabilities............................................. (1,923) (214)
Income taxes payable............................................ 2,099 6,050
Turnaround expenditures........................................... (33) (1,840)
Other, net........................................................ 202 (1,424)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 7,133 24,404
CASH FLOWS FROM FINANCING ACTIVITIES
Debt issuance costs................................................... (635) -
Issuance of common stock upon exercise of options..................... 610 659
Purchase of treasury stock............................................ (1,945) (92)
Cash dividends........................................................ (1,708) (1,550)
-------- ---------
NET CASH USED FOR FINANCING ACTIVITIES........................... (3,678) (983)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment....................... (8,577) (6,384)
Distributions from joint ventures..................................... 487 1,150
Proceeds from sale of marketable equity securities........ - 4,500
-------- ---------
NET CASH USED FOR INVESTING ACTIVITIES........................... (8,090) (734)
-------- ---------
CASH AND CASH EQUIVALENTS
INCREASE (DECREASE) FOR THE PERIOD.................................... (4,635) 22,687
Beginning of year..................................................... 71,630 65,840
-------- ---------
END OF PERIOD......................................................... $ 66,995 $ 88,527
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest......................................................... $ 220 $ 242
Income taxes..................................................... $ 130 $ 2,958
7
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
THREE MONTHS ENDED
OCTOBER 31,
--------------------------
2002 2001
-------- ---------
(In thousands)
NET INCOME................................................................. $ 5,247 $ 20,222
Other comprehensive income (loss)
Reclassification adjustment to net income on sale of equity securities.. - (1,522)
Derivative instruments qualifying as cash flow
hedging instruments
Change in fair value of derivative instruments....................... - (802)
Reclassification adjustment into net income.......................... - 1,084
-------- ---------
Total income on cash flow hedges........................................ - 282
-------- ---------
Other comprehensive income before income taxes........................... - (1,240)
Income tax benefit....................................................... - (495)
-------- ---------
Other comprehensive loss................................................... - (745)
-------- ---------
TOTAL COMPREHENSIVE INCOME................................................. $ 5,247 $ 19,477
======== =========
See accompanying notes.
8
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's consolidated financial position as of October 31,
2002, the consolidated results of operations and comprehensive income for the
three months ended October 31, 2002 and 2001, and consolidated cash flows for
the three months ended October 31, 2002 and 2001.
Certain notes and other information have been condensed or omitted,
therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K/A for the fiscal year ended July 31, 2002.
References herein to the "Company" are for convenience of presentation
and may include obligations, commitments or contingencies that pertain solely to
one or more affiliates of the Company. Results of operations for the first three
months of fiscal 2003 are not necessarily indicative of the results to be
expected for the full year.
Note B - New Accounting Pronouncements
SFAS No. 142 "Goodwill and Other Intangible Assets" - In June 2001, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
This statement changes how goodwill and other intangible assets are accounted
for subsequent to their initial recognition. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001, with early adoption permitted;
however, all goodwill and intangible assets acquired after June 30, 2001, are
immediately subject to the provisions of this statement. The Company adopted the
standard effective August 1, 2002 and there was no material effect on its
financial condition, results of operations, or cash flows.
SFAS No. 143 "Accounting for Asset Retirement Obligations" - In June
2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
This statement requires that the fair value for an asset retirement obligation
be capitalized as part of the carrying amount of the long-lived asset if a
reasonable estimate of fair value can be made. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002, with early adoption permitted. The
Company adopted the standard effective August 1, 2002 and there was no material
effect on the Company's financial condition, results of operations, or cash
flows.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" - In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", but carries over the key guidance from SFAS No. 121
in establishing the framework for the recognition and measurement of long-lived
assets to be disposed of by sale and addresses significant implementation
issues. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, with early adoption permitted. The Company adopted the standard effective
August 1,
9
HOLLY CORPORATION
2002 and there was no material effect on its financial condition, results of
operations, or cash flows.
SFAS No. 146 "Accounting for Certain Costs Associated with Exit or
Disposal Activities" - In June 2002, FASB issued SFAS No. 146, "Accounting for
Certain Costs Associated with Exit or Disposal Activities" which nullifies
Emerging Issues Task Force ("EITF") 94-3 and requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred and establishes fair value as the objective for initial
measurement of liabilities. This differs from EITF 94-3 which stated that
liabilities for exit costs were to be recognized as of the date of an entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, though early adoption is
permitted. The Company does not believe the adoption of this standard will have
a material effect on its financial condition, results of operations, or cash
flows upon adoption.
The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, "Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. As of
October 31, 2002, the Company had approximately $11.6 million of deferred
maintenance costs, all relating to refinery turnarounds in prior periods, which
are being amortized at a rate of approximately $691,000 per month. If this
proposed Statement of Position had been adopted in its current form, as of
October 31, 2002, the Company would have been required to expense, as of October
31, 2002, $11.6 million of deferred maintenance costs and would be required to
expense all future turnaround costs as incurred.
Note C - Earnings Per Share
Basic income per share is calculated as net income divided by average
number of shares of common stock outstanding. Diluted income per share assumes,
when dilutive, issuance of the net incremental shares from stock options. In
2000 options to purchase 50,000 shares of common stock were not included in
computing diluted income per share because their effects were antidilutive. The
following is a reconciliation of the numerators and denominators of the basic
and diluted per share computations for net income:
THREE MONTHS ENDED
OCTOBER 31,
-----------------------------
2002 2001
---------- --------
(In thousands, except per share data)
Net income.................................................... $ 5,247 $ 20,222
Average number of shares of common stock outstanding.......... 15,522 15,508
Effect of dilutive stock options.............................. 355 436
---------- --------
Average number of shares of common stock
outstanding assuming dilution.............................. 15,877 15,944
========== ========
Income per share - basic...................................... $ 0.34 $ 1.30
========== ========
Income per share - diluted.................................... $ 0.33 $ 1.27
========== ========
10
HOLLY CORPORATION
Note D - Investments in Joint Ventures
The Company currently has a 49% interest in NK Partners, a joint
venture that manufactures and markets asphalt products from various terminals in
Arizona and New Mexico. The Company accounts for earnings using the equity
method. The Company's Navajo Refinery sells at market prices all of its produced
asphalt to the joint venture. Sales to the joint venture during the quarters
ended October 31, 2002 and October 31, 2001 were $7.6 million and $7.4 million,
respectively.
NK Asphalt Partners Joint Venture (Unaudited):
THREE MONTHS ENDED
OCTOBER 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
Sales (net) .......................................................... $ 26,170 $ 31,436
========== ==========
Gross Profit ......................................................... $ 6,222 $ 8,047
========== ==========
Income from operations ............................................... $ 3,671 $ 5,513
========== ==========
Net income before taxes .............................................. $ 3,229 $ 5,116
========== ==========
Note E - Debt
In August 2002, the Company entered into an agreement with a group of
banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit
Agreement and reduce the commitment from $90 million to $75 million. Under the
terms of the Agreement, now that the Longhorn Partners Pipeline L.P. lawsuit has
been resolved, the expiration date of the Agreement is October 10, 2004, and
interest rate margins for borrowings and fees for letters of credit and bank
commitments have been reduced. Under the current agreement, the Company will
have access to $75 million of commitments for both revolving credit loans and
letters of credit. Up to $37.5 million of this facility may be used for
revolving credit loans. At October 31, 2002 the Company had letters of credit
outstanding under the facility of $20.4 million and had no borrowings
outstanding.
Note F - Stockholders' Equity
On October 30, 2001, the Company announced plans to repurchase up to
$20 million of the Company's common stock. Such repurchases have been made from
time to time in open market purchases or privately negotiated transactions,
subject to price and availability. The repurchases have been financed with
currently available corporate funds. During the three months ended October 31,
2002, the Company repurchased 116,000 shares at a cost of approximately
$1,945,000 or an average of $16.77 per share. During the month of November 2002,
the Company repurchased an additional 14,900 shares at a cost of approximately
$265,000
11
HOLLY CORPORATION
or an average of $17.78 per share. No shares were purchased from December 1
through December 11, 2002. From inception of the plan through December 11, 2002,
the Company has repurchased 229,400 shares at a cost of approximately
$3,812,000.
Note G - Derivative Instruments and Hedging Activities
In fiscal 2001, the Company entered into commodity price swaps and
collar options to help manage the exposure to price volatility relating to
forecasted purchases of natural gas from May 2001 through May 2002. These
transactions were designated as cash flow hedges of forecasted purchases. During
the quarter ended October 31, 2001, the Company marked the value of the
outstanding hedges to fair value in accordance with SFAS No. 133 and included
$282,000 of income in comprehensive income. During the quarter ended October 31,
2002, there were no commodity price swaps or collar options outstanding.
Note H - Segment Information
The Company has two major business segments: Refining and Pipeline
Transportation. The Refining segment involves the refining of crude oil and
wholesale marketing of refined products, such as gasoline, diesel fuel and jet
fuel, and includes the Company's Navajo Refinery and Montana Refinery. The
petroleum products produced by the Refining segment are marketed in the
southwestern United States, Montana and northern Mexico. Certain pipelines and
terminals operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Refining segment also includes
the equity earnings from the Company's 49% interest in NK Asphalt Partners,
which manufactures and markets asphalt and asphalt products in Arizona and New
Mexico. The Pipeline Transportation segment includes approximately 1,000 miles
of the Company's pipeline assets in Texas and New Mexico. Revenues of the
Pipeline Transportation segment are earned through transactions with
unaffiliated parties for pipeline transportation, rental and terminalling
operations. Pipeline Transportation segment revenues do not include any amount
relating to pipeline transportation services provided for the Company's refining
operations. The Pipeline Transportation segment also includes the equity
earnings from the Company's 25% interest in Rio Grande Pipeline Company, which
provides petroleum products transportation. Operations of the Company that are
not included in the two reportable segments are included in Corporate and Other,
which includes costs of Holly Corporation, the parent company, consisting
primarily of general and administrative expenses and interest charges, as well
as a small-scale oil and gas exploration and production program, and a small
equity investment in retail gasoline stations and convenience stores.
The accounting policies for the segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K/A for the year ended July 31, 2002. The Company's
reportable segments are strategic business units that offer different products
and services.
12
HOLLY CORPORATION
TOTAL FOR
PIPELINE REPORTABLE CORPORATE CONSOLIDATED
REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL
-------- --------------- ---------- --------- ------------
(In thousands)
THREE MONTHS ENDED OCTOBER 31, 2002
Sales and other revenues ............. $ 270,553 $ 4,794 $ 275,347 $ 311 $ 275,658
Depreciation and amortization ........ $ 6,322 $ 356 $ 6,678 $ 518 $ 7,196
Income (loss) from operations ........ $ 6,733 $ 2,806 $ 9,539 $ (2,596) $ 6,943
Income (loss) before income taxes .... $ 8,015 $ 3,322 $ 11,337 $ (2,831) $ 8,506
THREE MONTHS ENDED OCTOBER 31, 2001
Sales and other revenues ............. $ 252,812 $ 4,565 $ 257,377 $ 570 $ 257,947
Depreciation and amortization ........ $ 5,832 $ 349 $ 6,181 $ 250 $ 6,431
Income (loss) from operations ........ $ 28,765 $ 2,482 $ 31,247 $ (2,190) $ 29,057
Income (loss) before income taxes .... $ 31,096 $ 2,767 $ 33,863 $ (794) $ 33,069
Note I - Contingencies
In November 2002, the Company settled by agreement litigation brought
in August 1998 by Longhorn Partners Pipeline, L.P. ("Longhorn Partners") against
the Company in a state court in El Paso, Texas and litigation brought in August
2002 by the Company against Longhorn Partners and related parties in a state
court in Carlsbad, New Mexico. Under the settlement agreement, which was
developed in voluntary mediation, on November 26, 2002 the Company paid $25
million to Longhorn Partners as a prepayment for the transportation of 7,000
barrels per day of refined products from the Gulf Coast to El Paso for a period
of up to 6 years from the date of the Longhorn Pipeline's start-up. Longhorn
Partners has also issued to the Company an unsecured $25 million promissory
note, subordinated to certain other indebtedness, that would become payable with
interest in the event that the Longhorn Pipeline does not begin operations by
July 1, 2004 or to the extent Longhorn Partners is unable to provide the Company
the full amount of the agreed transportation services. In the unaudited
consolidated balance sheet at October 31, 2002, the $25,000,000 settlement is
reflected in Assets as "Other assets - Prepaid transportation" and in
Liabilities as "Current liabilities - Prepaid transportation liability."
In September 2002, the Federal Energy Regulatory Commission ("FERC")
issued an order (the "Order") in proceedings brought by the Company and other
parties against Kinder Morgan's SFPP, L.P. ("SFPP") relating to tariffs of
common carrier pipelines, which are owned and operated by SFPP, for shipments of
refined products in the period from 1993 through July 2000 from El Paso, Texas
to Tucson and Phoenix, Arizona and from points in California to points in
Arizona. The Company is one of several refiners that regularly utilize an SFPP
pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix,
Arizona. The Order appears to resolve most remaining issues relating to SFPP's
tariffs on the pipelines to points in Arizona from 1993 through July 2000 and is
expected to be followed by a final FERC ruling after completion of proceedings
relating to computations based on the guidance provided by the Order. Based on
the rulings made in the Order and SFPP's proposed computations, the Company
expects that the final FERC ruling for the years at issue would result in a
refund to the Company of approximately $15 million. The final FERC decision on
this matter will be subject to judicial review by the Court of Appeals for the
District of Columbia Circuit. At the date of this report, it is not possible to
predict when amounts may be payable to the Company under the final FERC decision
on this matter, whether a final settlement may be reached with SFPP based on the
Order, or what may be the result of judicial review proceedings on this matter
in the Court
13
HOLLY CORPORATION
of Appeals for the District of Columbia Circuit. No amount relating to this
matter has been included in the Company's financial statements for the quarter
ended October 31, 2002.
14
HOLLY CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Item 2, including but not limited to the sections on "Liquidity
and Capital Resources" and "Additional Factors that May Affect Future Results,"
contains "forward-looking" statements. See "Forward-Looking Statements" at the
beginning of Part I.
RESULTS OF OPERATIONS
FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
OCTOBER 31,
----------------------------------
2002 2001
----------- ----------
(In thousands, except per share
and ratio data)
Sales and other revenues ................................................................. $ 275,658 $ 257,947
Operating costs and expenses
Cost of products sold (exclusive of depreciation,depletion and amortization) .......... 231,959 191,984
Operating expenses (exclusive of depreciation,depletion and amortization) ............. 24,140 24,746
Selling, general and administrative expenses (exclusive of depreciation,
depletion, and amortization) ........................................................ 5,203 5,430
Depreciation, depletion and amortization .............................................. 7,196 6,431
Exploration expenses, including dry holes ............................................. 217 299
----------- ----------
Total operating costs and expenses ............................................... 268,715 228,890
----------- ----------
Income from operations ................................................................... 6,943 29,057
Other income (expense)
Equity in earnings of joint ventures .................................................. 1,983 2,748
Interest expense, net ................................................................. (420) (258)
Gain on sale of equity securities ..................................................... - 1,522
----------- ----------
1,563 4,012
----------- ----------
Income before income taxes ............................................................... 8,506 33,069
Income tax provision ..................................................................... 3,259 12,847
----------- ----------
Net income ............................................................................... $ 5,247 $ 20,222
=========== ==========
Net income per common share - basic ...................................................... $ 0.34 $ 1.30
Net income per common share - diluted .................................................... $ 0.33 $ 1.27
Weighted average number of common shares outstanding:
Basic .................................................................................. 15,522 15,508
Diluted ................................................................................ 15,877 15,944
15
HOLLY CORPORATION
BALANCE SHEET DATA (UNAUDITED)
OCTOBER 31, JULY 31,
2002 2002
----------- ----------
(In thousands, except ratio data)
Cash and cash equivalents ................................................................ $ 66,995 $ 71,630
Working capital .......................................................................... $ 32,874 $ 59,873
Total assets ............................................................................. $ 537,235 $ 502,306
Total long-term debt, including current maturities ....................................... $ 34,285 $ 34,285
Stockholders' equity ..................................................................... $ 230,761 $ 228,556
Total debt to capitalization ratio(1) .................................................... 12.9% 13.0%
(1) The total long-term debt to capitalization ratio is calculated by dividing
total long-term debt including current maturities by the sum of total long-term
debt including current maturities and stockholders' equity.
OTHER FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
OCTOBER 31,
---------- ----------
2002 2001
---------- ----------
(In thousands)
Sales and other revenues (1)
Refining .............................................................................. $ 270,553 $ 252,812
Pipeline Transportation ............................................................... 4,794 4,565
Corporate and Other ................................................................... 311 570
---------- ----------
Consolidated .......................................................................... $ 275,658 $ 257,947
========== ==========
Income (loss) from operations (1)
Refining .............................................................................. $ 6,733 $ 28,765
Pipeline Transportation ............................................................... 2,806 2,482
Corporate and Other ................................................................... (2,596) (2,190)
---------- ----------
Consolidated .......................................................................... $ 6,943 $ 29,057
========== ==========
Net cash provided by operating activities ................................................ $ 7,133 $ 24,404
Net cash used by financing activities .................................................... $ (3,678) $ (983)
Net cash used by investing activities .................................................... $ (8,090) $ (734)
Capital expenditures ..................................................................... $ 8,577 $ 6,384
EBITDA (2)................................................................................ $ 16,122 $ 39,758
(1) The Refining segment includes the Company's principal refinery in Artesia,
New Mexico, which is operated in conjunction with refining facilities in
Lovington, New Mexico (collectively, the Navajo Refinery) and the Company's
refinery near Great Falls, Montana. Included in the Refining Segment are costs
relating to pipelines and terminals that operate in conjunction with the
Refining segment as part of the supply and distribution networks of the
refineries. The Pipeline Transportation segment includes approximately 1,000
miles of the Company's pipeline assets in Texas and New Mexico. Revenues of the
Pipeline Transportation segment are earned through transactions with
unaffiliated parties for pipeline transportation, rental and terminalling
operations.
16
HOLLY CORPORATION
(2) Earnings before interest, taxes, depreciation and amortization - EBITDA is
calculated as net income plus (i) interest expense net of interest income, (ii)
income tax provision, and (iii) depreciation, depletion and amortization. EBITDA
is not a calculation based upon generally accepted accounting principles:
however, the amounts included in the EBITDA calculation are derived from amounts
included in the consolidated financial statements of Holly. EBITDA should not be
considered as an alternative to net income or operating income, as an indication
of operating performance of Holly or as an alternative to operating cash flow as
a measure of liquidity. EBITDA is not necessarily comparable to similarly titled
measures of other companies. EBITDA is presented here because it enhances an
investor's understanding of Holly's ability to satisfy principal and interest
obligations with respect to Holly's indebtedness and to use cash for other
purposes, including capital expenditures. EBITDA is also used by Holly
management for internal analysis and as a basis for financial covenants. Our
EBITDA presented above is reconciled to net income as follows:
THREE MONTHS ENDED
OCTOBER 31,
------------------------
2002 2001
---------- ----------
(In thousands )
Net Income ............................................................................... $ 5,247 $ 20,222
Add provision for income tax .......................................................... 3,259 12,847
Add interest expense .................................................................. 694 940
Subtract interest income .............................................................. (274) (682)
Add depreciation and amortization ..................................................... 7,196 6,431
---------- ----------
EBITDA ................................................................................... $ 16,122 $ 39,758
========== ==========
REFINING SEGMENT OPERATING DATA (Unaudited)
THREE MONTHS ENDED
OCTOBER 31,
------------------------
2002 2001
---------- ----------
Crude charge (BPD) (1).................................................................... 61,800 59,800
Sales of refined products (BPD) (2)....................................................... 82,500 78,500
Average sales price per sales barrel ..................................................... $ 35.62 $ 35.00
Sales of produced refined products (BPD) ................................................. 68,800 67,400
Average sales price per produced barrel .................................................. $ 35.30 $ 34.60
Reconciliation of Sales and other revenues in
Consolidated Financial Statements
(Also see Note H to Consolidated Financial
Statements)
Sales of refined product (BPD) ........................................................... 82,500 78,500
Average sales price per sales barrel ..................................................... $ 35.62 $ 35.00
Refinery segment sales and other revenues (3)............................................. $ 270,553 $ 252,812
Pipeline transportation segment sales and other revenues ................................. $ 4,794 $ 4,565
Corporate and Other sales and other revenues ............................................. $ 311 $ 570
---------- ----------
Consolidated Sales and other revenues .................................................... $ 275,658 $ 257,947
========== ==========
(1) Crude charge represents the barrels per day of crude oil processed through
the crude units at the Company's refineries.
(2) Includes refined products purchased for resale representing 13,700 BPD and
11,100 BPD, respectively.
(3) In addition to revenues from sales of refined products, the refining
segment includes other miscellaneous revenues amounting to $197 and $42,
respectively.
17
HOLLY CORPORATION
THREE MONTHS ENDED
OCTOBER 31,
------------------------
2002 2001
---------- ----------
Sales of produced refined products
Gasolines .............................................................................. 54.9% 52.6%
Diesel fuels ........................................................................... 20.6% 21.3%
Jet fuels .............................................................................. 11.2% 10.2%
Asphalt ................................................................................ 9.8% 12.4%
LPG and other .......................................................................... 3.5% 3.5%
---------- ----------
Total ............................................................................. 100.0% 100.0%
========== ==========
THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
2001
Net income for the three months ended October 31, 2002 was $5.2 million
($.34 per basic and $.33 per diluted share) compared to net income of $20.2
million ($1.30 per basic and $1.27 per diluted share) for the three months ended
October 31, 2001. The $15 million reduction in income between the periods is
principally a result of lower refined product margins which the Company defines
as the difference between refined product sales prices and the costs for crude
oil and other feedstocks exclusive of depreciation, depletion and amortization.
For the Company's first quarter ended October 31, 2002, refined product
margins were well below the refined product margins for the quarter ended
October 31, 2001. During the prior year's first quarter, the Company, along with
the refining industry as a whole, was still experiencing very favorable refined
product margins, which have since declined. During much of the first quarter
ended October 31, 2002, increases in crude oil and other feedstock costs were
not matched by refined product increases. The Company's revenues and cost of
products sold were higher in the first quarter of fiscal 2003, as compared to
the fiscal 2002 first quarter, due to a 5% increase in sales volumes, higher
refined product sales prices and higher costs of purchased crude oil.
Operating expenses and selling, general and administrative expenses for
the three months ended October 31, 2002 were slightly lower compared to the
three months ended October 31, 2001 principally due to lower utility costs and
decreased costs associated with legal proceedings.
Interest expense was lower for the three months ended October 31, 2002
compared to the three months ended October 31, 2001 primarily due to reduced
interest costs as the Company has made required principal payments on term debt.
The reduction in interest expense was partially offset by a $400,000 decrease in
interest income for the three months ended October 31, 2002 as compared to the
three months ended October 31, 2001, primarily the result of lower interest
rates on invested funds.
The Company had income of $2 million in the three months ended October
31, 2002 as compared to $2.7 million in the three months ended October 31, 2001
from the Company's investments in joint ventures, principally NK Asphalt
Partners, an asphalt joint venture. In the
18
HOLLY CORPORATION
first three months ended October 31, 2001, the Company realized a $1.5 million
gain from the sale of marketable securities.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $4.6 million to $67 million
during the three months ended October 31, 2002. The cash flow generated from
operations of $7.1 million was less than the cash required for investing
activities, repurchases of Company stock and dividends paid. Working capital
decreased during the three months ended October 31, 2002 by $27 million to $32.9
million primarily as a result of an increase in current liabilities of $25
million related to the settlement by agreement of the Longhorn Partners
Pipeline, L.P. litigation.
On October 30, 2001, the Company announced plans to repurchase up to
$20 million of the Company's common stock. Such repurchases have been made from
time to time in open market purchases or privately negotiated transactions,
subject to price and availability. In the three months ended October 31, 2002,
the Company repurchased 116,000 shares for approximately $1,945,000 or an
average of $16.77 per share. During the month of November 2002, the Company
repurchased an additional 14,900 shares for approximately $265,000 or an average
of $17.78 per share. No shares were purchased from December 1 through December
11, 2002. From inception of the plan through December 11, 2002, the Company has
repurchased 229,400 shares for approximately $3,812,000.
In December 2001, an agreement was reached among the Company, the
Environmental Protection Agency, the New Mexico Environment Department, and the
Montana Department of Environmental Quality with respect to a global settlement
of issues concerning the application of air quality requirements to past and
future operations of the Company's refineries. The Consent Decree implementing
this agreement requires investments by the Company expected to total between $15
million and $20 million over a number of years for the installation of certain
state of the art pollution control equipment at the Company's New Mexico and
Montana refineries.
In August 2002, the Company entered into an agreement with a group of
banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit
Agreement and reduce the commitment from $90 million to $75 million. Under the
terms of the Agreement, now that the Longhorn Partners Pipeline L.P. lawsuit has
been resolved, the expiration date of the Agreement is October 10, 2004 and
interest rate margins for borrowings and fees for letters of credit and bank
commitments have been reduced. Under the current agreement, the Company will
have access to $75 million of commitments for both revolving credit loans and
letters of credit. Up to $37.5 million of this facility may be used for
revolving credit loans. At October 31, 2002 the Company had letters of credit
outstanding under the facility of $20.4 million and had no borrowings
outstanding.
The Company believes its internally generated cash flow together with
its Credit Agreement provide sufficient resources to fund planned capital
projects, scheduled repayments of the Senior Notes, planned stock repurchases,
continued payment of dividends (although dividend payments must be approved by
the Board of Directors and cannot be guaranteed) and the Company's liquidity
needs.
19
HOLLY CORPORATION
Cash Flows from Operating Activities
Cash flows provided by operating activities for the first three months
of fiscal 2003 were $7.1 million. For the comparable three month period of
fiscal 2002, cash provided by operating activities was $24.4 million. The $17.3
million decrease in cash provided by operations for the first three months of
fiscal 2003 as compared to the first three months of fiscal 2002 was primarily
the result of the $15 million decrease in net income and changes in working
capital items. In the first three months of fiscal 2003, changes in working
capital used $3.2 million as compared to fiscal 2002 when changes in working
capital provided $3.6 million.
Cash Flows from Financing Activities
Cash flows used for financing activities were $3.7 million in the three
months ended October 31, 2002, as compared to $1 million in the same period of
the prior year. Cash flows used for financing activities in the first three
months of fiscal 2003 and fiscal 2002 consisted principally of $1.7 million and
$1.6 million respectively of dividends paid to shareholders and $1.9 million
(for 116,000 shares) and $92,000 (for 5,000 shares) respectively for the
repurchase of Company stock. In the first three months of fiscal 2003 and fiscal
2002, the Company received cash of $610,000 (for 47,000 shares) and $659,000
(for 48,500 shares) respectively from the issuance of common stock upon exercise
of options. The Company has not made any bank borrowings during the current
fiscal year. The next principal payment of $8.6 million on the Company's Senior
Notes is due in December 2002.
Cash Flows Used for Investing Activities and Capital Projects
Cash flows used for investing activities were $8.1 million for the
first three months of fiscal 2003, as compared to $734,000 for the same period
of the 2002 fiscal year. Cash expenditures on capital projects in the first
three months of the current and prior fiscal years were $8.6 million and $6.4
million respectively. The Company's net cash flow used for investing activities
was reduced during the first three months of fiscal 2003 by a $487,000
distribution from the Rio Grande Pipeline joint venture. During the first three
months of fiscal 2002, net cash flow used for investing activities was reduced
by a $1.2 million distribution from the Rio Grande Pipeline joint venture and
$4.5 million of proceeds from the sale of marketable equity securities held for
investment.
The Company's capital budget adopted for fiscal year 2003 totals $14.8
million - $6.5 million for additional costs relating to the hydrotreater project
and refinery expansion, $3.2 million for other refinery improvements, $3 million
for pipeline transportation projects, $.6 million for oil and gas exploration
and production, and $1.5 million for information technology and other. The 2003
capital budget includes authorizations for some expenditures that are expected
to be made after the close of the 2003 fiscal year. The Company expects to
expend approximately $40 million in fiscal 2003 for capital improvements, which
includes amounts authorized in previous fiscal years. This amount is expected to
be allocated approximately $30 million for the hydrotreater project and the
refinery expansion to an estimated 70,000 barrels per day ("BPD") as described
below, approximately $6 million for other refinery improvements, approximately
$2 million for pipeline and transportation projects, and approximately $2
million for other projects, including information technology projects and oil
and gas exploration and development. These expenditures include projects
authorized in the Company's 2003 capital budget as well as expenditures
authorized in prior capital budgets but expected to be carried out in fiscal
2003.
20
HOLLY CORPORATION
In November 1997, the Company purchased a hydrotreater unit for $5.1
million from a closed refinery. This purchase gave the Company the ability to
reconstruct the unit at the Navajo Refinery at an estimated savings of
approximately $20.0 million as compared to the purchase cost of a new unit.
During the last four years, the Company spent approximately $18.6 million on
relocation, engineering and equipment fabrication related to the hydrotreater
project. The remaining costs to complete the hydrotreater project and the
expansion project are estimated to be approximately $32.3 million. The Company
expects that the hydrotreater project will be completed by December 2003.The
hydrotreater will enhance higher value light product yields and expand the
Company's ability to produce additional quantities of gasolines meeting the
present California Air Resources Board ("CARB") standards, which have been
adopted in the Company's Phoenix market for winter months beginning in late
2000, and to meet the recently adopted EPA nationwide Low-Sulfur Gasoline
requirements scheduled to begin in 2004. In fiscal 2001 the Company completed
the construction of a new additional sulfur recovery unit, which is currently
utilized to enhance sour crude processing capabilities and will provide
sufficient capacity to recover the additional extracted sulfur that will result
from operation of the hydrotreater.
Contemporaneous with the hydrotreater project, the Navajo Refinery will
be making necessary modifications to several of the Artesia processing units for
the first phase of Navajo's expansion, which will increase crude oil refining
capacity from 60,000 BPD to an estimated 70,000 BPD. The first phase of the
expansion is expected to be completed by December 2003. Additional air emission
permits will be required to implement needed modifications at Navajo's
Lovington, New Mexico refining facility which is operated in conjunction with
the Artesia facility. It is envisioned that these necessary modifications to the
Lovington facility would also be completed by December 2003. The permits
received by Navajo to date for the Artesia facility, subject to possible minor
modifications, should also permit a second phase expansion of Navajo's crude oil
capacity from an estimated 70,000 BPD to an estimated 80,000 BPD, but a schedule
for such additional expansion has not been determined. The total cost of the
hydrotreater and expansion project to an estimated 70,000 BPD is expected to be
approximately $56 million.
The Company leases from Mid-America Pipeline Company more than 300
miles of 8" pipeline running from Chaves County to San Juan County, New Mexico
(the "Leased Pipeline"). The Company owns and operates a 12" pipeline from the
Navajo Refinery to the Leased Pipeline as well as terminalling facilities in
Bloomfield, New Mexico, which is located in the northwest corner of New Mexico
and in Moriarty, which is 40 miles east of Albuquerque. Transportation of
petroleum products to markets in northwest New Mexico and diesel fuels to
Moriarty began in the last months of calendar 1999. In December 2001, the
Company completed its expansion of the Moriarty terminal and its pumping
capacity on the Leased Pipeline. The terminal expansion included the addition of
gasoline and jet fuel to the existing diesel fuel delivery capabilities, thus
permitting the Company to provide a full slate of light products to the growing
Albuquerque and Santa Fe, New Mexico areas. The enhanced pumping capabilities on
the Company's leased pipeline extending from the Artesia refinery through
Moriarty to Bloomfield will permit the Company to deliver a total of over 45,000
BPD of light products to these locations. If needed, additional pump stations
could further increase the pipeline's capabilities.
21
HOLLY CORPORATION
Contractual Obligations and Commitments
The following table presents long-term contractual obligations of the
Company in total and by period due. These items include the Company's long-term
debt based on maturity dates and the Company's operating lease commitments. The
Company's operating leases contain renewal options that are not reflected in the
table below and that are likely to be exercised.
PAYMENTS DUE BY PERIOD
--------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS OVER 5 YEARS
----------------------- -------- ------- --------- --------- ------------
(In thousands)
Long-term debt (stated maturities) ............................. $ 34,285 $ 8,571 $ 25,714 $ - $ -
Operating leases ............................................... $ 27,792 $ 6,091 $ 11,976 $ 9,438 $ 287
In July 2000, Navajo Western Asphalt Company ("Navajo Western"), a
wholly-owned subsidiary of the Company, and a subsidiary of Koch Materials
Company ("Koch") formed a joint venture, NK Asphalt Partners, to manufacture and
market asphalt and asphalt products in Arizona and New Mexico under the name
"Koch Asphalt Solutions - Southwest." Navajo Western contributed all of its
assets to NK Asphalt Partners and Koch contributed its New Mexico and Arizona
asphalt and manufacturing assets to NK Asphalt Partners. All asphalt produced at
the Navajo Refinery is sold at market prices to the joint venture under a supply
agreement. The Company is required to make additional contributions to the joint
venture of up to $3,250,000 for each of the next eight years contingent on the
earnings level of the joint venture. The Company expects to finance such
contributions from its share of cash flows of the joint venture. In the event
that Holly fails to make the required contributions, Holly may lose its voting
rights during such default and the other partner could cause the partnership to
bring a proceeding to collect the unpaid contributions plus interest at the
prime rate being plus 2%.
As part of the Consent Decree filed December 2001 implementing an
agreement reached among the Company, the Environmental Protection Agency, the
New Mexico Environment Department, and the Montana Department of Environmental
Quality, the Company is required to make investments at the Company's New Mexico
and Montana refineries for the installation of certain state of the art
pollution control equipment expected to total between $15 million and $20
million over a period expected to end in 2009.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
This discussion should be read in conjunction with the discussion under
the heading "Additional Factors That May Affect Future Results" included in Item
7 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
2002.
The proposed Longhorn Pipeline, which is owned by Longhorn Partners
Pipeline, L.P. ("Longhorn Partners"), is an additional potential source of
pipeline transportation from Gulf Coast refineries to El Paso. This pipeline is
proposed to run approximately 700 miles from the Houston area of the Gulf Coast
to El Paso, utilizing a direct route. Longhorn Partners has proposed to use the
pipeline initially to transport approximately 72,000 BPD of refined products
from the Gulf Coast to El Paso and markets served from El Paso, with an ultimate
maximum capacity of 225,000 BPD. Although most construction has been completed,
the Longhorn Pipeline will not begin operations until the completion of certain
agreed improvements and pre-
22
HOLLY CORPORATION
start-up steps. Published reports indicate that construction in preparation for
start-up of the Longhorn Pipeline continued until late July 2002, when the
construction activities were halted before completion of the project. The latest
public statements from Longhorn Partners indicate that Longhorn Partners is
seeking additional financing to complete the project and that the pipeline will
not begin operations prior to May 2003. The proposed operation of the Longhorn
Pipeline is also the subject of a pending appeal in the United States Court of
Appeals for the Fifth Circuit of a decision by the federal district court in
Austin, Texas that allows the Longhorn Pipeline to begin operations when agreed
improvements have been completed. This appeal seeks a ruling that would reverse
the federal district court's decision and require a full environmental impact
study before the Longhorn Pipeline is allowed to operate.
If the Longhorn Pipeline operates as currently proposed, the lower
requirement for capital investment permitted by the direct route through Austin,
Texas and over the Edwards Aquifers would permit Longhorn Partners to give its
shippers a cost advantage through lower tariffs that could, at least for a
period, result in significant downward pressure on wholesale refined products
prices and refined products margins, which the Company defines as the difference
between refined product sales prices and the costs for crude oil and other
feedstocks exclusive of depreciation, depletion and amortization, in El Paso and
related markets. However, any effects on the Company's markets in Tucson and
Phoenix, Arizona and Albuquerque, New Mexico would be expected to be limited in
the next few years because current common carrier pipelines from El Paso to
these markets are now running at capacity and proration policies of these
pipelines allocate only limited capacity to new shippers. Although the Company's
results of operations might be adversely impacted and some current suppliers in
the market might not compete in such a climate, the Company's analyses indicate
that, because of location, recent capital improvements, and enhancements to
operational efficiency, the Company's position in El Paso and markets served
from El Paso could withstand a period of lower prices and refined product
margins that might result from operation of the Longhorn Pipeline as currently
proposed.
As a result of the Company's settlement in November 2002 of litigation
with Longhorn Partners as described in Part II, Item 1 "Legal Proceedings," on
November 26, 2002 the Company prepaid $25,000,000 to Longhorn Partners for the
shipment of 7,000 BPD of refined products from the Gulf Coast to El Paso in a
period of up to 6 years from the date the Longhorn Pipeline begins operations if
such operations begin by July 1, 2004. Under the agreement, the prepayment would
cover shipments of 7,000 BPD by the Company for approximately 4 1/2 years
assuming there were no curtailments of service once operations began. The
Company plans to make use of the prepaid transportation services to ship
purchased refined products on the Longhorn Pipeline to meet obligations of the
Company to deliver refined products to customers in El Paso. These
transportation services are expected to be of benefit to the Company because the
Company believes that most or all of such refined products shipped by the
Company on the Longhorn Pipeline would take the place of products that would
otherwise have been purchased by the Company from other suppliers.
At the date of this report, it is not possible to predict whether and,
if so, under what conditions, the Longhorn Pipeline will ultimately be operated,
nor is it possible to predict the overall impact on the Company if the Longhorn
Pipeline does not ultimately begin operations or begins operations at different
possible future dates. Under the terms of the November 2002 settlement agreement
that terminated litigation between the Company and Longhorn Partners, the
Company would have an unsecured claim for repayment of the Company's $25,000,000
prepayment to Longhorn Partners for transportation services in the event the
Longhorn Pipeline did not begin operations by July 1, 2004 or announced that it
would not begin operations by that
23
HOLLY CORPORATION
date.
In November 2002, the Company settled by agreement litigation brought
in August 1998 by Longhorn Partners Pipeline, L.P. against the Company in a
state court in El Paso, Texas and litigation brought in August 2002 by the
Company against Longhorn Partners and related parties in a state court in
Carlsbad, New Mexico. For additional information on this settlement, see Part
II, Item 1 "Legal Proceedings."
Other legal proceedings that could affect future results are described
in Part II, Item 1 "Legal Proceedings."
RISK MANAGEMENT
The Company uses certain strategies to reduce some commodity price and
operational risks. The Company does not attempt to eliminate all market risk
exposures when the Company believes the exposure relating to such risk would not
be significant to the Company's future earnings, financial position, capital
resources or liquidity or that the cost of eliminating the exposure would
outweigh the benefit.
The Company's profitability depends largely on the spread between
market prices for refined products and market prices for crude oil. A
substantial or prolonged reduction in this spread could have a significant
negative effect on the Company's earnings, financial condition and cash flows.
At times, the Company utilizes petroleum commodity futures contracts to minimize
a portion of its exposure to price fluctuations associated with crude oil and
refined products. No such future contracts have been entered into since fiscal
2001.
During fiscal 2001, the Company entered into commodity price swaps and
collar options to help manage the exposure to price volatility relating to
forecasted purchases of natural gas in March 2001 and from May 2001 to May 2002.
These transactions were designated as cash flow hedges related to the purchase
of 1.2 million MMBtu, approximately 50% of the forecasted natural gas purchases
for the Navajo Refinery. The price swaps and collar options effectively
established minimum and maximum prices to be paid for the portion of natural gas
hedged of $5.29 and $5.63 per MMBtu, respectively. At October 31, 2002, there
were no commodity price swaps or collar options outstanding.
At July 31, 2002, the Company had outstanding unsecured debt of $34.3
million and had no borrowings outstanding under its Credit Agreement. The
Company does not have significant exposure to changing interest rates on its
unsecured debt because the interest rates are fixed, the average maturity is
less than two years and such debt represents less than 15% of the Company's
total capitalization. As the interest rates on the Company's bank borrowings are
reset frequently based on either the bank's daily effective prime rate, or the
LIBOR rate, interest rate market risk is very low. There were no bank borrowings
during fiscal 2002 or fiscal 2001. Additionally, the Company invests any
available cash only in investment grade, highly liquid investments with
maturities of three months or less and hence the interest rate market risk
implicit in these cash investments is low. A ten percent change in the market
interest rate over the next year would not materially impact the Company's
earnings or cash flow since the interest rates on the Company's long-term debt
are fixed and the Company's borrowings under the Credit Agreement, if any, and
cash investments are at short-term market rates and such interest has
historically not been significant as compared to the total operations of the
Company. A ten percent change in the market interest rate over the next year
would not materially impact the Company's financial
24
HOLLY CORPORATION
condition since the average maturity of the Company's long-term debt is less
than two years, such debt represents less than 15% of the Company's total
capitalization, and the Company's borrowings under the Credit Agreement and cash
investments are at short-term market rates.
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company maintains
various insurance coverages, including business interruption insurance, subject
to certain deductibles. The Company is not fully insured against certain risks
because such risks are not fully insurable, coverage is unavailable, or premium
costs, in the judgment of the Company, do not justify such expenditures. Shortly
after the events of September 11, 2001, the Company completed a security
assessment of its principal facilities. Several security measures identified in
the assessment have been implemented and others are in the process of being
implemented. Because of recent changes in insurance markets, insurance coverages
available to the Company are becoming more costly and in some cases less
available. So long as this current trend continues, the Company expects to incur
higher insurance costs and anticipates that, in some cases, it will be necessary
to reduce somewhat the extent of insurance coverages because of reduced
insurance availability at acceptable premium costs.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 142 "Goodwill and Other Intangible Assets" - In June 2001, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
This statement changes how goodwill and other intangible assets are accounted
for subsequent to their initial recognition. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001, with early adoption permitted;
however, all goodwill and intangible assets acquired after June 30, 2001, are
immediately subject to the provisions of this statement. The Company adopted the
standard effective August 1, 2002 and there was no material effect on its
financial condition, results of operations, or cash flows.
SFAS No. 143 "Accounting for Asset Retirement Obligations" - In June
2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
This statement requires that the fair value for an asset retirement obligation
be capitalized as part of the carrying amount of the long-lived asset if a
reasonable estimate of fair value can be made. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002, with early adoption permitted. The
Company adopted the standard effective August 1, 2002 and there was no material
effect on the Company's financial condition, results of operations, or cash
flows.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" - In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", but carries over the key guidance from SFAS No. 121
in establishing the framework for the recognition and measurement of long-lived
assets to be disposed of by sale and addresses significant implementation
issues. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, with early adoption permitted. The Company adopted the standard effective
August 1, 2002 and there was no material effect on its financial condition,
results of operations, or cash flows.
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HOLLY CORPORATION
SFAS No. 146 "Accounting for Certain Costs Associated with Exit or
Disposal Activities" - In June 2002, FASB issued SFAS No. 146, "Accounting for
Certain Costs Associated with Exit or Disposal Activities" which nullifies
Emerging Issues Task Force ("EITF") 94-3 and requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred and establishes fair value as the objective for initial
measurement of liabilities. This differs from EITF 94-3 which stated that
liabilities for exit costs were to be recognized as of the date of an entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, though early adoption is
permitted. The Company does not believe the adoption of this standard will have
a material effect on its financial condition, results of operations, or cash
flows upon adoption.
The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, "Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. As of
October 31, 2002, the Company had approximately $11.6 million of deferred
maintenance costs, all relating to refinery turnarounds in prior periods, which
are being amortized at a rate of approximately $691,000 per month. If this
proposed Statement of Position had been adopted in its current form, as of
October 31, 2002, the Company would have been required to expense, as of October
31, 2002, $11.6 million of deferred maintenance costs and would be required to
expense all future turnaround costs as incurred.
26
HOLLY CORPORATION
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and principal financial
officer have evaluated the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this quarterly report on Form 10-Q/A.
Based on that evaluation, these officers concluded that the design and operation
of the Company's disclosure controls and procedures are effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in internal controls.
There have been no significant changes in the Company's internal
controls, or in other factors that could significantly affect internal controls,
subsequent to the date the principal executive officer and principal financial
officer of the Company completed their evaluation.
27
HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 2002, the Company settled by agreement litigation brought
in August 1998 by Longhorn Partners Pipeline, L.P. ("Longhorn Partners") against
the Company in a state court in El Paso, Texas and litigation brought in August
2002 by the Company against Longhorn Partners and related parties in a state
court in Carlsbad, New Mexico. A description of this litigation is included in
Item 3 "Legal Proceedings" of the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 2002. Under the settlement agreement, which was
developed in voluntary mediation, on November 26, 2002 the Company paid $25
million to Longhorn Partners as a prepayment for the transportation of 7,000 BPD
of refined products from the Gulf Coast to El Paso in a period of up to 6 years
from the date of the Longhorn Pipeline's start-up. Longhorn Partners has also
issued to the Company an unsecured $25 million promissory note, subordinated to
certain other indebtedness, that would become payable with interest in the event
that the Longhorn Pipeline does not begin operations by July 1, 2004 or to the
extent Longhorn Partners is unable to provide the Company the full amount of the
agreed transportation services. This settlement has resulted in a termination of
all litigation between the Company and Longhorn Partners and related parties. As
part of the settlement, the Company has terminated all support for opposition to
the Longhorn Pipeline except support for one family in two pending lawsuits
where an existing contractual obligation requires a continuation of such
support; the Company is seeking to enter into an agreement to terminate this
contractual obligation.
In November 2002, the Department of Defense issued final decisions
rejecting claims under the Contract Disputes Act, which were filed by the
Company in September 2002, asserting that additional amounts totaling
approximately $88 million are due to the Company with respect to jet fuel sales
to the Defense Fuel Supply Center in the years 1995 through 1999 (the "1995-99
Jet Fuel Claims"). Subsequent to these decisions, the Company in November 2002
filed an amended complaint in the United States Court of Federal Claims to add
the 1995-99 Jet Fuel Claims to the Company's pending suit which was filed in
September 2002 and related originally to claims for the years 1982 through 1995.
As a result of the amendment, the total amount sought in the Company's suit for
all years from 1982 through 1999 is approximately $298 million. It is not
possible at the date of this report to predict what amount, if any, will
ultimately be payable to the Company with respect to this lawsuit.
In September 2002, the Federal Energy Regulatory Commission ("FERC")
issued an order (the "Order") in proceedings brought by the Company and other
parties against Kinder Morgan's SFPP, L.P. ("SFPP") relating to tariffs of
common carrier pipelines, which are owned and operated by SFPP, for shipments of
refined products in the period from 1993 through July 2000 from El Paso, Texas
to Tucson and Phoenix, Arizona and from points in California to points in
Arizona. The Company is one of several refiners that regularly utilize an SFPP
pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix,
Arizona. The Order appears to resolve most remaining issues relating to SFPP's
tariffs on the pipelines to points in Arizona from 1993 through July 2000 and is
expected to be followed by a final FERC ruling after completion of proceedings
relating to computations based on the guidance provided by the Order. Based on
the rulings made in the Order and SFPP's proposed computations, the Company
expects that the final FERC ruling for the years at issue would result in a
refund to the Company of approximately $15 million. The final FERC decision on
this matter will be subject to judicial review by the Court of Appeals for the
District of Columbia Circuit. At the date of
28
HOLLY CORPORATION
this report, it is not possible to predict when amounts may be payable to the
Company under the final FERC decision on this matter, whether a final settlement
may be reached with SFPP based on the Order, or what may be the result of
judicial review proceedings on this matter in the Court of Appeals for the
District of Columbia Circuit.
In October 2002, the Company filed a motion to intervene and protest
with the FERC with respect to a September 2002 petition for declaratory order
filed by SFPP. SFPP's filing concerns its proposal to expand the capacity of its
common carrier pipelines running from El Paso to Tucson and Phoenix by
approximately 54,000 BPD. The Company's protest asks the FERC to rule that the
costs of the proposed expansion should be reflected in pipeline transportation
rates for use of the proposed additional capacity rather than in rates for use
of both the proposed additional capacity and the current capacity of these
pipelines. At the date of this report, the FERC has not acted with respect to
the issue raised by the Company's protest.
29
HOLLY CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders on December 12, 2002, all nine of
the nominees for directors as listed in the proxy statement were elected.
ELECTION OF DIRECTORS
Total Votes Total Votes
"For" "Withheld"
----- ----------
Matthew P. Clifton 11,767,466 3,045,200
W. John Glancy 12,389,690 2,422,976
William J. Gray 13,532,380 1,280,286
Marcus R. Hickerson 13,520,415 1,292,251
Thomas K. Matthews, II 13,525,395 1,287,271
Robert G. McKenzie 11,653,882 3,158,784
Lamar Norsworthy 12,238,838 2,573,828
Jack P. Reid 13,532,766 1,279,900
Paul T. Stoffel 11,666,738 3,145,928
At the annual meeting of stockholders on December 12, 2002, the
stockholders approved amending and restating the Holly Corporation 2000 Stock
Option Plan as the Holly Corporation Long-Term Incentive Compensation Plan to
authorize additional forms of long-term incentive compensation without
increasing the maximum number of shares of the Company's Common Stock that can
be issued under the Plan.
Votes For 11,357,158
Votes Against 3,428,193
Abstentions 27,315
Broker Non-Votes -
30
HOLLY CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Mediation Settlement Agreement made and entered into
as of November 15, 2002, by, between and among:
Longhorn Partners Pipeline, L.P.; and Holly
Corporation, Navajo Refining Company, L.P., and Black
Eagle, Inc.
10.2 Holly Corporation Long-Term Incentive Compensation
Plan, As Amended and Restated (Formerly designated
the Holly Corporation 2000 Stock Option Plan) - As
adopted at the Annual Meeting of Stockholders of
Holly Corporation on December 12, 2002.
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K:
On August 13, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the extension of the
Company's Credit and Reimbursement Agreement with a group of
banks headed by the Canadian Imperial Bank of Commerce.
On August 23, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the denial of the
Company's motion for summary judgment by the state appeals
court in El Paso, Texas in the pending lawsuit brought by
Longhorn Partners Pipeline, L.P. against the Company.
On August 26, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the filing of a lawsuit
in New Mexico state court against Longhorn Partners Pipeline,
L.P. and related parties.
On September 25, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning reported results for the
Company's fiscal year ended July 31, 2002.
On September 25, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the award to the
Company's wholly owned subsidiary, Navajo Refining Company, of
a contract to provide up to 8, 500 barrels per day of JP-8 jet
fuel to the Department of Defense.
On November 18, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning to the settlement of
litigation by Longhorn Partners Pipeline, L.P. against the
Company brought in August 1998 and of litigation brought by
the Company against Longhorn Partners Pipeline, L.P. and
related parties in August 2002.
31
HOLLY CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLY CORPORATION
----------------------------------------------
(Registrant)
Date: November 3, 2003 By /s/ Kathryn H. Walker
--------------------------------------------
Kathryn H. Walker
Vice President, Accounting
(Principal Accounting Officer)
By /s/ Stephen J. McDonnell
--------------------------------------------
Stephen J. McDonnell
Vice President and Chief Financial
Officer
(Principal Financial Officer)
32
CERTIFICATION
I, Lamar Norsworthy, Chairman of the Board and Chief Executive Officer of Holly
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Holly
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 3, 2003 /s/ C. Lamar Norsworthy
-------------------------------------------------
C. Lamar Norsworthy
Chairman of the Board and Chief Executive Officer
33
CERTIFICATION
I, Stephen J. McDonnell, Vice President and Chief Financial Officer of Holly
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Holly
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 3, 2003 /s/ Stephen J. McDonnell
------------------------------------------
Stephen J. McDonnell
Vice President and Chief Financial Officer
34