10-Q 1 0001.txt FORM 10-Q FOR QUARTER ENDED APRIL 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the quarterly period ended April 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 1-3876 ------ 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 --- --- 7,550,814 shares of Common Stock, par value $.01 per share, were outstanding on June 9, 2000. 2
HOLLY CORPORATION INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet - (Unaudited) April 30, 2000 and July 31, 1999 3 Consolidated Statement of Income (Unaudited) - Three Months and Nine Months Ended April 30, 2000 and 1999 4 Consolidated Statement of Cash Flows (Unaudited) - Nine Months Ended April 30, 2000 and 1999 5 Consolidated Statement of Comprehensive Income (Unaudited) - Three Months and Nine Months Ended April 30, 2000 and 1999 6 Notes to Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 20
This Quarterly Report on Form 10-Q (including documents incorporated by reference herein) contains statements with respect to the Company's expectations or beliefs as to future events. These types of statements are "forward-looking" and are subject to uncertainties. See "Factors Affecting Forward-Looking Statements" on page 10. 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HOLLY CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in Thousands, Except Per Share Amounts) Unaudited
April 30, July 31, 2000 1999 --------- ---------- ASSETS Current assets Cash and cash equivalents $ 4,619 $ 4,194 Accounts receivable: Product 53,453 47,832 Crude oil resales 98,992 75,670 --------- ---------- 152,445 123,502 Inventories: Crude oil and refined products 57,064 47,364 Materials and supplies 10,462 10,553 Reserve for lower of cost or market (2,921) (2,993) --------- ---------- 64,605 54,924 Prepayments and other 14,492 12,158 --------- ---------- Total current assets 236,161 194,778 Properties, plants and equipment, at cost 364,458 352,179 Less accumulated depreciation, depletion and amortization (182,237) (171,285) --------- ---------- 182,221 180,894 Investments and advances to joint ventures 2,913 4,035 Other assets 10,567 11,275 --------- ---------- Total assets $ 431,862 $ 390,982 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 189,497 $ 144,287 Accrued liabilities 19,241 14,688 Income taxes payable 615 8,206 Current maturities of long-term debt 13,738 13,746 --------- ---------- Total current liabilities 223,091 180,927 Deferred income taxes 25,629 24,580 Long-term debt, less current maturities 48,024 56,595 Long-term borrowings under credit agreement 10,000 - Commitments and contingencies Stockholders' equity Preferred stock, $1.00 par value - 1,000,000 shares authorized; none issued - - Common stock, $.01 par value - 20,000,000 shares authorized; 8,650,282 shares issued 87 87 Additional capital 6,132 6,132 Retained earnings 126,626 124,341 --------- ---------- 132,845 130,560 Common stock held in treasury, at cost - 1,099,468 shares (7,793) (569) Accumulated other comprehensive income - net unrealized gain (loss) on securities available for sale 66 (1,111) --------- ---------- Total stockholders' equity 125,118 128,880 --------- ---------- Total liabilities and stockholders equity $ 431,862 $ 390,982 ========= ==========
See accompanying notes. 3 4 HOLLY CORPORATION CONSOLIDATED STATEMENT OF INCOME (Dollars in Thousands, Except Per Share Amounts) Unaudited
Three Months Ended Nine Months Ended April 30, April 30, ---------------------- ---------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Sales and other revenues $ 256,940 $ 143,375 $ 675,995 $ 407,054 Operating costs and expenses Cost of products sold 208,386 97,927 558,908 288,775 Recovery of inventory market writedowns -- (5,762) -- -- Operating expenses 21,172 20,789 66,296 60,260 Selling, general and administrative expenses 6,120 6,491 16,275 16,731 Depreciation, depletion and amortization 6,608 7,045 19,981 19,670 Exploration expenses, including dry holes 292 425 894 1,145 --------- --------- --------- --------- 242,578 126,915 662,354 386,581 --------- --------- --------- --------- Income from operations 14,362 16,460 13,641 20,473 Other Equity in earnings of joint ventures 320 200 878 1,336 Interest income 165 43 588 136 Interest expense (1,402) (2,035) (4,421) (5,948) --------- --------- --------- --------- (917) (1,792) (2,955) (4,476) --------- --------- --------- --------- Income before income taxes 13,445 14,668 10,686 15,997 Income tax provision (benefit) Current 5,523 4,715 4,938 6,671 Deferred (249) 1,166 (746) (272) --------- --------- --------- --------- 5,274 5,881 4,192 6,399 --------- --------- --------- --------- Net income $ 8,171 $ 8,787 $ 6,494 $ 9,598 ========= ========= ========= ========= Income per common share (basic and diluted) $ 1.00 $ 1.06 $ .79 $ 1.16 Cash dividends paid per share $ .17 $ .16 $ .51 $ .48 Average number of shares of common stock outstanding (in thousands) (basic and diluted) 8,207 8,254 8,238 8,254
See accompanying notes. 4 5 HOLLY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Thousands) Unaudited
Nine Months Ended April 30, --------------------- 2000 1999 ---------- --------- Cash flows from operating activities Net income $ 6,494 $ 9,598 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 19,981 19,670 Deferred income taxes (746) (272) Equity in earnings of joint ventures (878) (1,336) Dry hole costs and leasehold impairment 50 256 (Increase) decrease in operating assets Accounts receivable (28,943) (27,773) Inventories (9,681) (2,878) Income taxes receivable -- 653 Prepayments and other (906) (1,650) Increase (decrease) in operating liabilities Accounts payable 45,210 17,329 Accrued liabilities 4,553 914 Income taxes payable (7,591) 2,532 Turnaround expenditures (2,466) -- Other, net (424) (2,179) -------- -------- Net cash provided by operating activities 24,653 14,864 Cash flows from financing activities Increase in borrowings under credit agreement 10,000 5,700 Payment of long-term debt (8,579) (8) Debt issuance costs (744) -- Purchase of treasury stock (7,224) -- Cash dividends (4,209) (3,962) -------- -------- Net cash provided by (used for) financing activities (10,756) 1,730 Cash flows from investing activities Additions to properties, plants and equipment (15,472) (17,913) Distributions from joint venture 2,000 2,175 -------- -------- Net cash used for investing activities (13,472) (15,738) -------- -------- Cash and cash equivalents Increase for the period 425 856 Beginning of year 4,194 2,602 -------- -------- End of period $ 4,619 $ 3,458 ======== ======== Supplemental disclosure of cash flow information Cash paid during period for Interest $ 3,536 $ 4,336 Income taxes $ 12,458 $ 3,408
See accompanying notes. 5 6 HOLLY CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Dollars in thousands) Unaudited
Three Months Ended Nine Months Ended April 30, April 30, ------------------ ------------------ 2000 1999 2000 1999 -------- -------- -------- ------- Net income $ 8,171 $ 8,787 $ 6,494 $ 9,598 Other comprehensive income Unrealized gain (loss) on securities available for sale 644 374 1,956 (375) Income tax provision (benefit) 253 149 779 (150) ------- ------- ------- ------- 391 225 1,177 (225) ------- ------- ------- ------- Total comprehensive income $ 8,562 $ 9,012 $ 7,671 $ 9,373 ======= ======= ======= =======
See accompanying notes. 6 7 HOLLY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A - Presentation of Financial Statements In the opinion of the Company, the accompanying consolidated financial statements, which have not been audited by independent accountants reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's consolidated financial position as of April 30, 2000, the consolidated results of operations and comprehensive income for the three months and nine months ended April 30, 2000 and 1999, and consolidated cash flows for the nine months ended April 30, 2000 and 1999. Certain notes and other information have been condensed or omitted. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1999. References herein to the "Company" are for convenience of presentation and may include obligations, commitments or contingencies that pertain solely to one or more affiliates of the Company. Results of operations for the first nine months of fiscal 2000 are not necessarily indicative of the results to be expected for the full year. Note B - Debt In April 2000, the Company entered into an agreement with a group of banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit Agreement until October 10, 2001. Under the extension agreement, the Company will have access to $80 million of commitments for both revolving credit loans and letters of credit. Up to $40 million of this facility may be used for revolving credit loans. Note C - Segment Information The Company has two major business segments: Refining and Pipeline Transportation. The Refining segment is engaged in the refining of crude oil and wholesale marketing of refined products, such as gasoline, diesel fuel and jet fuel, and includes the Company's Navajo Refinery and Montana Refinery. The petroleum products produced by the Refining segment are marketed in the southwestern United States, Montana and northern Mexico. Certain pipelines and terminals operate in conjunction with the Refining segment as part of the supply and distribution networks of the refineries. The Pipeline Transportation segment includes approximately 900 miles of the Company's pipeline assets in Texas and New Mexico. Revenues from the Pipeline Transportation segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations. The Pipeline Transportation segment also includes the equity earnings from the Company's 25% investment in Rio Grande Pipeline Company, which provides petroleum products transportation. Operations of the Company that are not included in the two 7 8 HOLLY CORPORATION reportable segments are included in Corporate and other, which includes costs of Holly Corporation, the parent company, consisting primarily of general and administrative expenses and interest charges, as well as a small-scale oil and gas exploration and production program and a small equity investment in retail gasoline stations and convenience stores. The accounting policies for the segments are the same as those described in the summary of significant accounting policies in the Company's 10-K for the year ended July 31, 1999. The Company's reportable segments are strategic business units that offer different products and services.
Total for Pipeline Reportable Corporate Consolidated Refining Transportation Segments & Other Total -------- -------------- ---------- ----------- ------------ ($ in thousands) Three Months Ended April 30, 2000 Sales and other operating revenues........ $ 252,212 $ 3,807 $ 256,019 $ 921 $ 256,940 EBITDA(1)................................. $ 20,395 $ 2,704 $ 23,099 $ (1,809) $ 21,290 Income (loss) from operations............. $ 14,432 $ 2,075 $ 16,507 $ (2,145) $ 14,362 Income (loss) before income taxes......... $ 14,025 $ 2,416 $ 16,441 $ (2,996) $ 13,445 Three Months Ended April 30, 1999 Sales and other operating revenues........ $ 139,637 $ 2,868 $ 142,505 $ 870 $ 143,375 EBITDA(1)................................. $ 22,716 $ 2,266 $ 24,982 $ (1,277) $ 23,705 Income (loss) from operations............. $ 16,869 $ 1,520 $ 18,389 $ (1,929) $ 16,460 Income (loss) before income taxes......... $ 16,784 $ 2,007 $ 18,791 $ (4,123) $ 14,668 Nine Months Ended April 30, 2000 Sales and other operating revenues........ $ 661,747 $ 11,141 $ 672,888 $ 3,107 $ 675,995 EBITDA(1)................................. $ 29,846 $ 7,947 $ 37,793 $ (3,293) $ 34,500 Income (loss) from operations............. $ 12,044 $ 6,083 $ 18,127 $ (4,486) $ 13,641 Income (loss) before income taxes......... $ 11,497 $ 7,077 $ 18,574 $ (7,888) $ 10,686 Nine Months Ended April 30, 1999 Sales and other operating revenues........ $ 395,491 $ 8,887 $ 404,378 $ 2,676 $ 407,054 EBITDA(1)................................. $ 37,759 $ 7,336 $ 45,095 $ (3,616) $ 41,479 Income (loss) from operations............. $ 21,436 $ 4,917 $ 26,353 $ (5,880) $ 20,473 Income (loss) before income taxes......... $ 21,189 $ 6,574 $ 27,763 $ (11,766) $ 15,997
(1) Earnings Before Interest, Taxes, Depreciation and Amortization 8 9 HOLLY CORPORATION Note D - Contingencies In August 1998, a lawsuit (the "Longhorn Suit") was filed in state district court in El Paso, Texas against the Company and two of its subsidiaries (along with an Austin, Texas law firm which was subsequently dropped from the case). The suit was filed by Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), a Delaware limited partnership composed of Longhorn Partners GP, L.L.C. as general partner and affiliates of Exxon Pipeline Company, Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. as well as Chisholm Holdings as limited partners. The suit, as amended by Longhorn Partners in March and November 1999 and in March 2000, seeks damages alleged to total up to $1,050,000,000 (after trebling) based on claims of violations of the Texas Free Enterprise and Antitrust Act, unlawful interference with existing and prospective contractual relations, and conspiracy to abuse process. The specific actions of the Company complained of in the Longhorn Suit, as currently amended, are alleged solicitation of and support for allegedly baseless lawsuits brought by Texas ranchers in federal and state courts to challenge the proposed Longhorn Pipeline project, support of allegedly fraudulent public relations activities against the proposed Longhorn Pipeline project, entry into contracts with Fina Oil and Chemical Company and with ARCO Products Company, and alleged interference with the federal court settlement agreement that provided for an environmental assessment of the Longhorn Pipeline. The Company believes that the Longhorn Suit is wholly without merit and plans to continue to defend itself vigorously. In February 2000, the Company filed a motion for summary judgment seeking a court ruling that would terminate this litigation. In response to a request by Longhorn Partners, the court ruled that the date for a hearing on this motion should be postponed until after September 1, 2000. In May 2000, the Company filed a motion to transfer the venue for trial of the case from the El Paso court to another Texas court. The Company plans to pursue at the appropriate time any affirmative remedies that may be available to it relating to the Longhorn Suit. 9 10 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FACTORS AFFECTING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts included in this Form 10-Q, including without limitation those under "Results of Operations," "Liquidity and Capital Resources" and "Additional Factors that May Affect Future Results" (including "Risk Management" and "Year 2000 Issue") under this Item 2 regarding the Company's financial position and results of operations, are forward-looking statements. Such statements are subject to risks and uncertainties, including but not limited to risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in the Company's markets, the demand for and supply of crude oil and refined products, the spread between market prices for refined products and crude oil, the possibility of constraints on the transportation of refined products, the possibility of inefficiencies or shutdowns in refinery operations or pipelines, governmental regulations and policies, the availability and cost of financing to the Company, the effectiveness of capital investments and marketing strategies by the Company, and the costs of defense and the risk of an adverse decision in the Longhorn Pipeline litigation. Because of these and other risks and uncertainties, actual results may vary materially from those estimated, anticipated or projected. Although the Company believes that the expectations reflected by the forward-looking statements contained in this Quarterly Report are reasonable based on information currently available to the Company, no assurances can be given that such expectations will prove to be correct. This summary discussion of risks and uncertainties that may cause actual results to differ from those indicated in forward-looking statements should be read in conjunction with the discussion under the heading "Additional Factors That May Affect Future Results" included in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1999 and in conjunction with the discussion below under the headings "Liquidity and Capital Resources" and "Additional Factors That May Affect Future Results." All forward-looking statements included in this Form 10-Q and all subsequent oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth above. 10 11 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) RESULTS OF OPERATIONS FINANCIAL DATA (Unaudited)
Three Months Ended Nine Months Ended (in thousands, except per share data)(1) April 30, April 30, ---------------------- ---------------------- 2000 1999 2000 1999 --------- --------- --=------ --------- Sales and other revenues $ 256,940 $ 143,375 $ 675,995 $ 407,054 Costs and expenses Cost of products sold 208,386 97,927 558,908 288,775 Recovery of inventory market writedowns -- (5,762) -- -- Operating expenses 21,172 20,789 66,296 60,260 Selling, general and administrative expenses 6,120 6,491 16,275 16,731 Depreciation, depletion and amortization 6,608 7,045 19,981 19,670 Exploration expenses, including dry holes 292 425 894 1,145 --------- --------- --------- --------- 242,578 126,915 662,354 386,581 --------- --------- --------- --------- Income from operations 14,362 16,460 13,641 20,473 Other Equity in earnings of joint ventures 320 200 878 1,336 Interest expense, net (1,237) (1,992) (3,833) (5,812) --------- --------- --------- --------- (917) (1,792) (2,955) (4,476) --------- --------- --------- --------- Income before income taxes 13,445 14,668 10,686 15,997 Income tax provision 5,274 5,881 4,192 6,399 --------- --------- --------- --------- Net income $ 8,171 $ 8,787 $ 6,494 $ 9,598 ========= ========= ========= ========= Income per common share (basic and diluted) $ 1.00 $ 1.06 $ .79 $ 1.16 Sales and other revenues(2) Refining $ 252,212 $ 139,637 $ 661,747 $ 395,491 Pipeline Transportation 3,807 2,868 11,141 8,887 Corporate and other 921 870 3,107 2,676 --------- --------- --------- --------- Consolidated $ 256,940 $ 143,375 $ 675,995 $ 407,054 ========= ========= ========= ========= Income (loss) from operations(2) Refining $ 14,432 $ 16,869 $ 12,044 $ 21,436 Pipeline Transportation 2,075 1,520 6,083 4,917 Corporate and other (2,145) (1,929) (4,486) (5,880) --------- --------- --------- --------- Consolidated $ 14,362 $ 16,460 $ 13,641 $ 20,473 ========= ========= ========= =========
11 12 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 1) Certain reclassifications have been made to prior reported amounts to conform to current classifications. 2) The Refining segment includes the Company's principal refinery in Artesia, New Mexico, which is operated in conjunction with refining facilities in Lovington, New Mexico (collectively, the Navajo Refinery) and the Company's refinery near Great Falls, Montana. Certain pipelines and terminals operate in conjunction with the Refining segment as part of the supply and distribution networks of the refineries, which costs are included in the Refining segment. The Pipeline Transportation segment includes approximately 900 miles of the Company's pipeline assets in Texas and New Mexico. Revenues from the Pipeline Transportation segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations. REFINING SEGMENT OPERATING DATA (Unaudited)
Three Months Ended Nine Months Ended April 30, April 30, -------------------- ------------------- 2000 1999 2000 1999 -------- -------- ------- ------ Crude charge (BPD)(1) 66,500 66,000 64,700 65,900 Refinery production (BPD)(2) 70,300 69,200 70,200 70,100 Sales of produced refined products (BPD) 68,800 67,900 68,700 69,300 Sales of refined products (BPD)(3) 76,700 72,800 75,800 74,100 Refinery utilization (4) 99.2% 98.6% 96.6% 98.3% Average per barrel (5) Net sales $36.76 $21.78 $32.05 $19.65 Raw material costs 29.83 15.00 26.71 14.06 ------ ------ ------- ------- Refinery margin 6.93 6.78 5.34 5.59 Cash operating costs (6) 3.76 4.08 3.85 3.63 ------- ------- -------- -------- Net cash operating margin $ 3.17 $ 2.70 $ 1.49 $ 1.96 ======= ====== ======== ======== Sales of produced refined products Gasolines 58.4% 59.2% 58.4% 57.5% Diesel fuels 22.5 21.2 21.3 21.2 Jet fuels 11.3 10.9 10.3 10.6 Asphalt 4.1 4.7 6.4 6.7 LPG and other 3.7 4.0 3.6 4.0 ------- ------ ------ ------ Total 100.0% 100.0% 100.0% 100.0% ======= ====== ====== ======
---------- (1) Barrels per day of crude oil processed. (2) Barrels per day of refined products produced from crude oil and other feed and blending stocks. (3) Includes refined products purchased for resale representing 7,900, 4,900, 7,100 and 4,800 BPD respectively. (4) Crude charge divided by total crude capacity of 67,000 BPD. (5) Represents average per barrel amounts for produced refined products sold. (6) Includes operating costs and selling, general and administrative expenses of refineries, as well as pipeline expenses that are part of refinery operations. 12 13 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) THIRD QUARTER OF FISCAL 2000 COMPARED TO THIRD QUARTER OF FISCAL 1999 For the three months ended April 30, 2000 (the fiscal 2000 third quarter), the Company reported net income of $8.2 million ($1.00 per share) as compared to net income of $8.8 million ($1.06 per share) for the third quarter of fiscal 1999. The results for the 1999 third quarter reflected a $3.5 million ($.42 per share) credit for reversal of prior charges to earnings for reductions in market values of inventories in the first two quarters of fiscal 1999. Without this credit in the fiscal 1999 third quarter, net income for that quarter would have been $5.3 million ($.64 per share). Comparing the third quarter of 2000 to the third quarter of 1999, both revenues and cost of products sold were higher in the third quarter of 2000 due principally to the increased cost of purchased crude oil; refining income was favorably affected by slightly higher production volume and refinery gross margins. Results for the third quarter of 2000 compared to the comparable quarter of 1999 were also favorably affected by higher income from the pipeline transportation segment and lower selling, general and administrative expenses, depreciation, depletion and amortization, and net interest expense. FIRST NINE MONTHS OF FISCAL 2000 COMPARED TO FIRST NINE MONTHS OF FISCAL 1999 For the first nine months of fiscal 2000, net income was $6.5 million ($.79 per share) as compared to net income of $9.6 million ($1.16 per share) for the first nine months of fiscal 1999. Because of generally higher crude oil prices in fiscal 2000, both revenues and cost of products sold were higher for the first three quarters of fiscal 2000 than for the first three quarters of fiscal 1999. The lower level of net income for the first three quarters of fiscal 2000 as compared to the same period in fiscal 1999 was due to lower refinery gross margins and increases in operating expenses for fiscal 2000 attributable principally to increased fuel costs. Interest expense, net of interest income, was lower for the first nine months of fiscal 2000 because of reduced borrowings and increased short-term investments of excess cash in the current fiscal year. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased slightly during the nine months ended April 30, 2000 by $.4 million as cash flows generated from operations and borrowings under the Company's Revolving Credit Agreement slightly exceeded cash flows required for investing activities, payments on long term fixed rate debt, dividends paid and treasury stock purchased. Working capital decreased during the nine months ended April 30, 2000 by $.8 million to $13.1 million. In April 2000, the Company entered into an agreement with a group of banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit Agreement until October 10, 2001. Under the extension agreement, the Company will have access to $80 million of commitments for 13 14 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) both revolving credit loans and letters of credit. Up to $40 million of this facility may be used for revolving credit loans. At April 30, 2000, the Company had $10.0 million of outstanding borrowings and outstanding letters of credit totaling $36.9 million. The unused commitment under the Revolving Credit Agreement at April 30, 2000 was $33.1 million, of which up to $30.0 million may be used for additional direct borrowings. The Company believes that these sources of funds, together with future cash flows from operations, should provide sufficient resources to enable the Company to satisfy its liquidity needs, capital requirements and debt service obligations while continuing the payment of dividends when authorized by the Board of Directors. Net cash provided by operating activities amounted to $24.7 million for the first nine months of fiscal 2000, as compared to $14.9 million for the same period of the prior year. The increase was primarily due to increased crude acquisition payables, as the Company receives payment on its receivables more quickly than it pays for its acquisitions of crude oil. This increase was partially reduced by lower cash flows from operations, as refinery margins were lower during the first nine months of fiscal 2000 than in the prior fiscal year, increases in crude oil and refined products inventory and payments made for income taxes. Cash flows used for financing activities amounted to $10.8 million for the first nine months of fiscal 2000 as compared to $1.7 million that was provided during the first nine months of fiscal 1999. The Company repaid $8.6 million of its fixed rate term debt during the nine months ended April 30, 2000, while the next principal payment of $5.2 million is due in June 2000. The Company made net borrowings under its Revolving Credit Agreement of $10.0 during the first nine months of fiscal 2000, as compared to $5.7 million for the comparable period of the prior year. On April 18, 2000, the Company repurchased 702,700 shares, 8.5% of its outstanding common stock, for $7,224,000, or approximately $10.28 per share. The repurchase, which was made from an institutional shareholder, was funded from existing working capital. Cash flows used for investing activities were $13.5 million for the current year as compared to $15.7 million for the same period of the 1999 fiscal year. All amounts expended were on capital projects. The Company's net negative cash flow for investing activities was reduced by distributions to the Company from the Rio Grande Pipeline Company joint venture of $2.0 million for the first three quarters of fiscal 2000 and $2.2 million for the comparable period of the prior year. 14 15 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company has approved a capital budget of $23 million for fiscal 2000. The components of this budget are $9 million for various refinery improvements, $9 million for costs relating to a gasoil hydrotreater project, as described below, $4 million for various pipeline and transportation projects and $1 million for oil and gas exploration and production activities. In addition to these projects, the Company plans to expend during fiscal 2000 a total of $8 million on items that were approved in previous capital budgets, primarily relating to pipeline and terminalling activities. In November 1997, the Company purchased a hydrotreater unit for $5 million from an inactive refinery. This purchase should give the Company the ability to reconstruct the unit at the Navajo Refinery at a substantial savings relative to the purchase cost of a new unit. The hydrotreater will enhance higher value, light product yields and expand the Company's current ability to meet the present California Air Resources Board ("CARB") standards, which have been adopted for winter months in the Company's Phoenix market beginning in the latter part of 2000 and to meet the recently proposed EPA nationwide Low-Sulfur Gasoline requirements that will begin in 2004. Included in the fiscal 2000 capital budget are items totalling $9 million related to the hydrotreater, which include costs to relocate the purchased unit to the Navajo Refinery in the second quarter of fiscal 2000, to construct a sulfur recovery unit, which will be immediately utilized and work in conjunction with the hydrotreater when it is completed, and to purchase certain long-lead-time pieces of equipment. The Company, subject to obtaining necessary permitting in a timely manner, expects to complete the hydrotreater during fiscal 2002. Remaining costs to complete the hydrotreater are estimated to be approximately $20 million, in addition to the current $9 million budgeted amount. Based on the current configuration of the Navajo Refinery, the Company produces sufficient quantities which meet the new CARB standards to meet its current sales volume into the Phoenix market prior to completion of the hydrotreater. The Company has leased from Mid-America Pipeline Company more than 300 miles of 8" pipeline running from Chavez County to San Juan County, New Mexico (the "Leased Pipeline"). The Company has also completed a 12" pipeline from the Navajo Refinery to the Leased Pipeline as well as terminalling facilities in Bloomfield in northwestern New Mexico. The Company has completed the construction of a diesel fuel terminal 40 miles east of Albuquerque in Moriarty. Transportation of petroleum products to markets in northwest New Mexico and diesel fuels to Moriarty, New Mexico, near Albuquerque, began in the latter part of calendar year 1999. The Company, in addition, is considering different alternatives to expand its delivery capabilities in the Albuquerque-area. When this project is completed, such proposed facilities will allow the Company to expand the use of the Leased Pipeline to transport additional volume of petroleum products from the Navajo Refinery to the Albuquerque and Northern New Mexico markets. 15 16 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) In March 2000, the Company's subsidiary, Navajo Refining Company, entered into a non-binding letter of intent with Koch Materials Company, a subsidiary of Koch Industries, Inc., to establish a joint venture to manufacture and market asphalt products from various terminals in Arizona and New Mexico. In May 2000, the Company announced a cost reduction and production efficiency program that is expected to yield annual pre-tax improvement of more than $20 million. The program is anticipated to be implemented over the next two years. The cost reduction and production efficiency program will include productivity enhancements and a reduction in workforce. As part of the implementation of these reductions, Holly has offered a voluntary early retirement program to eligible employees. It is estimated that capital expenditures of approximately $9 million will be required to effectuate some of the production improvements. The cost of the voluntary early retirement program, which will be determined after the level of employee participation in the program is known, is expected to be reflected in Holly's reported earnings for the quarter ended July 31, 2000. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS This discussion should be read in conjunction with the discussion under the heading "Additional Factors That May Affect Future Results" included in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1999. The Longhorn Pipeline is a potential source of additional supplies of refined products to El Paso and markets served from El Paso that are also served by the Company's Navajo Refinery. This pipeline is proposed to run approximately 700 miles from the Houston area of the Gulf Coast to El Paso, utilizing a direct route. The owner of the Longhorn Pipeline, Longhorn Partners Pipeline, L.P., a Delaware limited partnership that includes affiliates of Exxon Pipeline Company, Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy Investment Fund, L.P. and Chisholm Holdings as limited partners ("Longhorn Partners"), has proposed to use the pipeline initially to transport approximately 72,000 barrels per day ("BPD") of refined products from the Gulf Coast to El Paso and markets served from El Paso, with an ultimate maximum capacity of 225,000 BPD. A critical feature of this proposed petroleum products pipeline is that it would utilize, for approximately 450 miles (including areas overlying the environmentally sensitive Edwards Aquifer and Edwards-Trinity Aquifer and densely populated areas in the southern part of Austin, Texas) an existing pipeline (previously owned by Exxon Pipeline Company) that was constructed in about 1950 for the shipment of crude oil from West Texas to the Houston area. 16 17 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Longhorn Pipeline is not currently operating because of a federal court injunction in August 1998 and a settlement agreement in March 1999 entered into by Longhorn Partners, the United States Environmental Protection Agency ("EPA") and Department of Transportation ("DOT"), and the other parties to the federal lawsuit that had resulted in the injunction and settlement. The March 1999 settlement agreement required the preparation of an Environmental Assessment under the authority of the EPA and the DOT while the federal court retained jurisdiction. A draft Environmental Assessment (the "Draft EA") on the Longhorn Pipeline was released on October 22, 1999. The Draft EA proposes a preliminary Finding of No Significant Impact with respect to the Longhorn Pipeline provided that Longhorn Partners carries out a proposed mitigation plan developed by Longhorn Partners which contains 34 elements. Some elements of the proposed mitigation plan are required to be completed before the Longhorn Pipeline is allowed to operate, with the remainder required to be completed later or to be implemented for as long as operations continue. The EPA and DOT have conducted a series of public meetings in Texas and have received public comments relating to the determination as to whether the proposed findings of the Draft EA should be made final, revised or reversed by the EPA and the DOT. The Company has provided financial support for the preparation of expert analyses of the Draft EA and for certain groups and individuals who have wished to express their concerns about the Longhorn Pipeline. A final determination by the EPA and DOT with respect to the matters considered in the Draft EA has not yet been issued and it is not possible for the Company to predict when such a determination will be made. In August 1998, a lawsuit (the "Longhorn Suit") was filed by Longhorn Partners in state district court in El Paso, Texas against the Company and two of its subsidiaries (along with an Austin, Texas law firm which was subsequently dropped from the case). The suit, as amended by Longhorn Partners in March and November 1999 and in March 2000, seeks damages alleged to total up to $1,050,000,000 (after trebling) based on claims of violations of the Texas Free Enterprise and Antitrust Act, unlawful interference with existing and prospective contractual relations, and conspiracy to abuse process. The specific actions of the Company complained of in the Longhorn Suit, as currently amended, are alleged solicitation of and support for allegedly baseless lawsuits brought by Texas ranchers in federal and state courts to challenge the proposed Longhorn Pipeline project, support of allegedly fraudulent public relations activities against the proposed Longhorn Pipeline project, entry into contracts with Fina Oil and Chemical Company and with ARCO Products Company, and alleged interference with the federal court settlement agreement that provided for an environmental assessment of the Longhorn Pipeline. The Company believes that the Longhorn Suit is wholly without merit and plans to continue to defend itself vigorously. In February 2000, the Company filed a motion for summary judgment seeking a court ruling that would terminate this litigation. In response to a request by Longhorn Partners, the court ruled that the date for a hearing on this motion should be postponed until after 17 18 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) September 1, 2000. In May 2000, the Company filed a motion to transfer the venue for trial of the case from the El Paso court to another Texas court. The Company plans to pursue at the appropriate time any affirmative remedies that may be available to it relating to the Longhorn Suit. For additional information on the Longhorn Suit, see Part II "Other Information," Item 1, "Legal Proceedings". RISK MANAGEMENT The Company uses certain strategies to reduce some commodity price and operational risks. The Company does not attempt to eliminate all market risk exposures when the Company believes the exposure relating to such risk would not be significant to the Company's future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit. The Company's profitability depends largely on the spread between market prices for refined products and crude oil. A substantial or prolonged decrease in this spread could have a significant negative effect on the Company's earnings, financial condition and cash flows. At times, the Company utilizes petroleum commodity futures contracts to minimize a portion of its exposure to price fluctuations associated with crude oil and refined products. Such contracts are used solely to help manage the price risk inherent in purchasing crude oil in advance of the delivery date and as a hedge for fixed-price sales contracts of refined products and do not increase the market risks to which the Company is exposed. Gains and losses on contracts are deferred and recognized in cost of refined products when the related inventory is sold or the hedged transaction is consummated. No such contracts were outstanding at April 30, 2000. At April 30, 2000, the Company had outstanding unsecured debt of $61.8 million and had $10.0 million of borrowings outstanding under its Credit Agreement. The Company does not have significant exposure to changing interest rates on its unsecured debt because the interest rates are fixed, the average maturity is less than three years and such debt represents less than 40% of the Company's total capitalization. As the interest rates on the Company's bank borrowings under its Credit Agreement are reset frequently based on either the bank's daily effective prime rate or the LIBOR rate, interest rate market risk is very low. Additionally, the Company invests any available cash only in investment grade, highly liquid investments with maturities of three months or less. As a result, the interest rate market risk implicit in these cash investments is low, as the investments mature within three months. A ten percent change in the market interest rate over the next year would also not materially impact the Company's earnings or cash flow, as the interest rates on the Company's long-term debt are fixed, and the Company's borrowings under the Credit 18 19 HOLLY CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Agreement and cash investments are at short-term market rates and such interest has historically not been significant as compared to the total operations of the Company. A ten percent change in the market interest rate over the next year would also not materially impact the Company's financial condition, as the average maturity of the Company's long-term debt is less than three years and such debt represents less than 40% of the Company's total capitalization, and the Company's borrowings under the Credit Agreement and cash investments are at short-term market rates. The Company's operations are subject to normal hazards of operations, including fire, explosion and weather-related perils. The Company maintains various insurance coverages, including business interruption insurance, subject to certain deductibles. The Company is not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable or premium costs, in the judgement of the Company, do not justify such expenditures. YEAR 2000 ISSUE In prior years, the Company discussed the nature and progress of its plans to become year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the year 2000 date change. The costs associated with remediating any year 2000 problems have not been material to date. The Company is not aware of any material problems resulting from year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. Item 3. Quantitative and Qualitative Disclosures About Market Risk See "Risk Management" under "Management's Discussion and Analysis of Financial Condition and Results of Operations." 19 20 HOLLY CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings In August 1998, a lawsuit was filed by Longhorn Partners Pipeline, L.P. ("Longhorn Partners") in state district court in El Paso, Texas against the Company and two of its subsidiaries. The suit seeks damages against the Company alleged to total up to $1,050,000,000 (after trebling) based on claims of violations of the Texas Free Enterprise and Antitrust Act, unlawful interference with existing and prospective contractual relations, and conspiracy to abuse process. See Note D to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further description of this lawsuit. In February 2000, the Company filed a motion for summary judgment seeking a court ruling that would terminate this litigation. In response to a request by Longhorn Partners, the court ruled that the date for a hearing on this motion should be postponed until after September 1, 2000. Longhorn Partners withdrew in late March 2000 an application for temporary injunction that Longhorn Partners had filed in January 2000 in the El Paso, Texas state district court seeking to bar the Company from continuing to provide assistance to parties in pending proceedings against Longhorn Partners in state and federal courts in Texas and from providing funds for advertisements or public messages concerning the Longhorn Pipeline that do not identify the Company as the sponsor. In May 2000, the Company filed a motion to transfer the venue for trial of the case from the El Paso court to another Texas court. See Part II, Item 1 of the Company's Quarterly Reports on Form 10-Q for the quarters ended October 31, 1999 and January 31, 2000 for prior reports in the current fiscal year on the Longhorn Partners litigation. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: See Index to Exhibits on page 22. (b) Reports on Form 8-K: None. 20 21 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOLLY CORPORATION ----------------------- (Registrant) Date: June 14, 2000 By /s/ Kathryn H. Walker --------------- -------------------------------- Kathryn H. Walker Vice President, Accounting (Principal Accounting Officer) By /s/ Scott C. Surplus -------------------------------- Scott C. Surplus Vice President, Treasury and Tax 22 HOLLY CORPORATION INDEX TO EXHIBITS (Exhibits are numbered to correspond to the exhibit table in Item 601 of Regulation S-K)
Exhibit Number Description ------ ----------- 4 - Amended and Restated Credit and Reimbursement Agreement, dated as of April 14, 2000 27 - Financial Data Schedule