-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WjoNcZXT1mfETh9GZRoyyWOZocppvpMk2/9ymm5XQc9/T8V/5X05WKJa197sY9+5 JM8UhJb4z/EsIaKbHE8yfg== 0000856465-06-000014.txt : 20061114 0000856465-06-000014.hdr.sgml : 20061114 20061114165915 ACCESSION NUMBER: 0000856465-06-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061114 DATE AS OF CHANGE: 20061114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIANT INDUSTRIES INC CENTRAL INDEX KEY: 0000856465 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 860642718 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10398 FILM NUMBER: 061216345 BUSINESS ADDRESS: STREET 1: 23733 N SCOTTSDALE RD CITY: SCOTTSDALE STATE: AZ ZIP: 85255 BUSINESS PHONE: 4805858888 MAIL ADDRESS: STREET 1: 23733 N SCOTTSDALE RD CITY: SCOTTSDALE STATE: AZ ZIP: 85255 10-Q 1 thirdqtr2006-edgarfinal.txt GIANT INDUSTRIES, INC. 2006 THIRD QUARTER 10-Q 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 SEPTEMBER 30, 2006 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER: 1-10398 GIANT INDUSTRIES, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 86-0642718 (State of Incorporation) (I.R.S. Employer Identification No.) 23733 North Scottsdale Road, Scottsdale, Arizona 85255 (Address of principal executive offices) (Zip code) (480) 585-8888 (Registrant's telephone number, including area code) _____________________________ (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 the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of Common Shares outstanding at November 1, 2006: 14,639,312 shares. GIANT INDUSTRIES, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION...................................... 1 Item 1 - Financial Statements....................................... 1 Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005 (Unaudited)....... 1 Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2006 and 2005 (Unaudited)................................................ 2 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005(Unaudited)... 3-4 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................ 5-38 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 39-66 Item 3 - Quantitative and Qualitative Disclosures About Market Risk.......................................... 66 Item 4 - Controls and Procedures.................................... 66 PART II - OTHER INFORMATION.......................................... 67 Item 1 - Legal Proceedings.......................................... 67 Item 1A - Risk Factors............................................... 67-74 Item 6 - Exhibits and Reports on Form 8-K........................... 75-76 SIGNATURE............................................................ 77 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except shares and per share data)
September 30, December 31, 2006 2005 ------------- ------------ ASSETS Current assets: Cash and cash equivalents............................. $ 51,895 $ 164,280 Receivables, net...................................... 200,267 142,125 Inventories........................................... 151,135 124,105 Prepaid expenses and other............................ 5,103 10,449 Deferred income taxes................................. 1,882 1,396 ---------- --------- Total current assets................................ 410,282 442,355 ---------- --------- Property, plant and equipment........................... 951,574 764,788 Less accumulated depreciation and amortization.......... (318,127) (297,962) ---------- --------- 633,447 466,826 ---------- --------- Goodwill................................................ 50,432 50,607 Other assets............................................ 29,698 24,684 ---------- --------- $1,123,859 $ 984,472 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................... $ 149,023 $ 139,710 Accrued expenses...................................... 77,120 68,798 ---------- --------- Total current liabilities........................... 226,143 208,508 ---------- --------- Long-term debt.......................................... 275,251 274,864 Deferred income taxes................................... 114,306 76,834 Other liabilities....................................... 25,628 24,430 Commitments and contingencies (Note 10) Stockholders' equity: Preferred stock, par value $.01 per share, 10,000,000 shares authorized, none issued Common stock, par value $.01 per share, 50,000,000 shares authorized, 18,391,292 and 18,366,077 shares issued............................ 184 184 Additional paid-in capital............................ 218,296 216,917 Retained earnings..................................... 302,134 221,203 Unearned compensation related to restricted stock..... (1,629) (2,014) ---------- --------- 518,985 436,290 Less common stock in treasury - at cost, 3,751,980 shares.................................... (36,454) (36,454) ---------- --------- Total stockholders' equity.......................... 482,531 399,836 ---------- --------- $1,123,859 $ 984,472 ========== ========= See accompanying notes to Condensed Consolidated Financial Statements. 1
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2006 2005 2006 2005 ---------- ---------- ---------- ---------- Net revenues......................................... $1,165,948 $1,085,225 $3,174,252 $2,660,309 ---------- ---------- ---------- ---------- Cost of products sold (excluding depreciation and amortization).................................. 1,052,131 920,408 2,879,390 2,295,082 Operating expenses................................... 60,609 53,901 168,619 148,889 Depreciation and amortization........................ 11,972 9,973 32,508 30,435 Selling, general and administrative expenses......... 12,836 15,431 36,047 35,072 Net (gain)/loss on disposal/write-down of assets..... (450) 1,055 (1,041) 835 Gain from insurance settlement due to fire........... (46,050) - (82,003) (3,688) ---------- ---------- ---------- ---------- Operating income..................................... 74,900 84,457 140,732 153,684 Interest expense..................................... (5,153) (5,783) (14,014) (19,159) Costs associated with early debt extinguishment...... - 17 - (2,082) Amortization of financing costs...................... (399) (398) (1,197) (2,398) Investment and other income.......................... 1,156 479 3,838 967 ---------- ---------- ---------- ---------- Earnings from continuing operations before income taxes................................ 70,504 78,772 129,359 131,012 Provision for income taxes........................... 26,461 32,132 48,428 53,776 ---------- ---------- ---------- ---------- Earnings from continuing operations.................. 44,043 46,640 80,931 77,236 Earnings from discontinued operations, net of income tax provision of $9......................... - - - 15 ---------- ---------- ---------- ---------- Net earnings......................................... $ 44,043 $ 46,640 $ 80,931 $ 77,251 ========== ========== ========== ========== Net earnings per common share: Basic Continuing operations............................ $ 3.02 $ 3.43 $ 5.55 $ 5.88 Discontinued operations.......................... - - - - ---------- ---------- ---------- ---------- $ 3.02 $ 3.43 $ 5.55 $ 5.88 ========== ========== ========== ========== Assuming dilution Continuing operations........................... $ 3.00 $ 3.38 $ 5.51 $ 5.80 Discontinued operations......................... - - - - ---------- ---------- ---------- ---------- $ 3.00 $ 3.38 $ 5.51 $ 5.80 ========== ========== ========== ========== See accompanying notes to Condensed Consolidated Financial Statements. 2
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine Months Ended September 30, ----------------------- 2006 2005 --------- --------- Cash flows from operating activities: Net earnings.......................................................... $ 80,931 $ 77,251 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization from continuing operations.............. 32,508 30,435 Amortization of financing costs....................................... 1,197 2,398 Compensation expense related to restricted stock awards............... 291 - Deferred income taxes................................................. 36,996 27,566 Deferred crude oil purchase discounts................................. 789 925 Payments to deferred compensation plan................................ (1,597) - Net (gain)/loss on the disposal of assets from continuing operations.. (1,041) 835 Net gain on the disposal of assets from discontinuing operations, including assets held for sale...................................... - (22) Gain from insurance settlement due to fire incident................... (82,003) (3,688) Proceeds from insurance settlement for business interruption due to fire incident................................... 48,940 - Income tax benefit from exercise of stock options..................... - 838 Cash balance pension plan contribution................................ (3,078) (2,039) Changes in operating assets and liabilities: (Increase) in receivables........................................... (46,579) (98,408) (Increase) in inventories........................................... (23,585) (31,810) Decrease in prepaid expenses........................................ 5,315 8,341 (Increase) in other assets.......................................... (3,346) (170) Increase in accounts payable........................................ 9,052 68,022 Increase in accrued expenses........................................ 3,964 20,938 Increase in other liabilities....................................... 3,564 1,521 --------- --------- Net cash provided by operating activities............................... 62,318 102,933 --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment............................. (181,562) (48,390) Acquisition activity.................................................. (22,907) (39,405) Proceeds from assets held for sale.................................... - 1,948 Proceeds from insurance settlement for property damage due to fire incident......................................... 26,800 3,688 Proceeds from sale of property, plant and equipment and other assets.. 2,957 2,213 Funding of restricted cash escrow funds............................... - (21,883) Release of restricted cash escrow funds............................... - 21,883 --------- --------- Net cash used in investing activities................................... (174,712) (79,946) --------- --------- Cash flows from financing activities: Payments of long-term debt............................................ - (18,828) Proceeds from line of credit.......................................... 10,000 51,245 Payments on line of credit............................................ (10,000) (53,959) Net proceeds from issuance of common stock............................ - 74,406 Proceeds from exercise of stock options............................... 9 564 Deferred financing costs.............................................. - (1,167) --------- --------- Net cash provided by financing activities............................... 9 52,261 --------- --------- Net (decrease)/increase in cash and cash equivalents.................... (112,385) 75,248 Cash and cash equivalents: Beginning of period................................................. 164,280 23,714 --------- --------- End of period....................................................... $ 51,895 $ 98,962 ========= ========= 3
Significant Noncash Investing and Financing Activities. In March 2006, we contributed 25,115 newly issued shares of our common stock, valued at $1,465,000, to our 401(k) plan as a discretionary contribution for the year 2005. We also capitalized approximately $4,648,000 of interest as part of construction in progress. At September 30, 2006, approximately $16,188,000 of purchases of property, plant and equipment had not been paid and, accordingly, were recorded in accounts payable and accrued liabilities. We also recorded a gain of $13,260,000 in connection with the receipt of the final payments from our insurance carriers related to the fire that occurred at our Yorktown refinery in 2005. These payments were received in October 2006. In the first quarter of 2005, we transferred $118,000 of property, plant and equipment to other assets. In the second quarter of 2005, we contributed 34,196 newly issued shares of our common stock, valued at $972,000, to our 401(k) plan as a discretionary contribution for the year 2004. In connection with our acquisition activity in the third quarter of 2005, we assumed approximately $18,362,000 of liabilities. At September 30, 2005, approximately $5,810,000 of purchases of property, plant and equipment had not been paid and accordingly, were accrued in accounts payable and accrued liabilities. See accompanying notes to Condensed Consolidated Financial Statements. 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION, STOCK-BASED EMPLOYEE COMPENSATION AND CURRENT PRONOUNCEMENTS: Organization Giant Industries, Inc., through our subsidiary Giant Industries Arizona, Inc. and its subsidiaries, refines and sells petroleum products. Our operations are located: - on the East Coast - primarily in Virginia, Maryland, and North Carolina; and - in the Southwest - primarily in New Mexico, Arizona, and Colorado, with a concentration in the Four Corners area where these states meet. In addition, our wholesale group distributes commercial wholesale petroleum products primarily in Arizona and New Mexico. We have three business segments: - our refining group; - our retail group; and - our wholesale group. See Note 9 for a further discussion of our business segments. On August 26, 2006, we entered into an Agreement and Plan of Merger (the "Plan of Merger") with Western Refining, Inc. ("Western") and New Acquisition Corporation ("Merger Sub"). On November 12, 2006, we entered into an Amendment No. 1 to Agreement and Plan of Merger (the "Amendment") with Western and Merger Sub. The Plan of Merger and Amendment are collectively referred to as the "Agreement". If the transaction closes, Western will acquire all of our outstanding shares of common stock for $77.00 per share and we will be merged with Merger Sub and became a wholly-owned subsidiary of Western. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, hereafter referred to as generally accepted accounting principles ("GAAP"), for interim financial information and with the instructions to Form 10-Q and Rule 10- 01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included. These adjustments and reclassifications are of a normal recurring nature. 5 Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005. Stock-Based Employee Compensation: We have a stock-based employee compensation plan that is more fully described in Note 10 to our Annual Report on Form 10-K for the year ended December 31, 2005. On January 1, 2006, we adopted Statement of Financial Accounting Standard ("SFAS") 123R, "Share-Based Payment", that requires us to measure the cost of employee services received in exchange for stock options granted using the fair value method and amortize such costs over the vesting period of such arrangements. The adoption of SFAS 123R did not have a material impact on our financial statements for the three and nine months ended September 30, 2006. In prior years, we accounted for this plan under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related Interpretations, as permitted by SFAS No. 123, "Accounting for Stock- Based Compensation". We used the intrinsic value method to account for stock-based employee compensation. The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three and nine months ended September 30, 2005.
Three Months Ended Nine Months Ended September 30, 2005 September 30, 2005 ------------------ ------------------ (In thousands, except per share data) Net earnings, as reported................... $46,640 $77,251 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect................................ - (24) ------- ------- Pro forma net earnings...................... $46,640 $77,227 ======= ======= Earnings per share: Basic - as reported....................... $ 3.43 $ 5.88 ======= ======= Basic - pro forma......................... $ 3.43 $ 5.88 ======= ======= Diluted - as reported..................... $ 3.38 $ 5.80 ======= ======= Diluted - pro forma....................... $ 3.38 $ 5.80 ======= =======
6 Current Pronouncements In November 2004, Financial Accounting Standards Board ("FASB") issued SFAS 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4", which is effective for fiscal years beginning after June 15, 2005. This Statement requires that idle capacity expense, freight, handling costs, and wasted materials (spoilage), regardless of whether these costs are considered abnormal, be treated as current period charges. In addition, this statement requires that allocation of fixed overhead to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS 151 on January 1, 2006 did not have a material impact on our financial statements for the three and nine months ended September 30, 2006. In March 2006, the Emerging Issues Task Force ("EITF") reached a tentative conclusion in EITF Issue No. 06-3, "How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross Versus Net Presentation)", that the presentation of taxes on either a gross or net basis within the scope of this EITF Issue is an accounting policy decision requiring disclosure pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies". If a reporting entity reports revenue on a gross basis, then the amount of taxes included must be disclosed. This EITF Issue applies to financial reports for interim and annual reporting periods beginning after December 15, 2006. We currently report consolidated revenues and cost of products sold on a net basis and, as such, no further disclosures are necessary in our financial statements. In June 2006, FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of SFAS 109" ("FIN 48"), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is "more likely than not" that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact of FIN 48 on our financial statements. In September 2006, FASB issued FASB Staff Position ("FSP") No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities", that disallowed the accrue-in-advance method for planned major maintenance activities. Our scheduled turnaround activities are considered planned major maintenance activities. Since we do not use the accrue-in-advance method of accounting for our turnaround activities, this FSP has no impact on our financial statements. In September 2006, FASB issued SFAS 157, "Fair Value Measurements", which defines fair value, establishes a frame work for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. This statement is applied in conjunction with other accounting pronouncements that require or permit 7 fair value measurements and, accordingly, this statement does not require any new fair value measurements. Therefore, the adoption of this SFAS 157 is not expected to have a material impact on our financial statements. In September 2006, FASB issued SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans", which requires an employer to recognize the overfunded or underfunded position of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or a liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. With limited exceptions, this statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. This statement is effective for fiscal years ending after December 15, 2006. We anticipate that the provisions of SFAS 158 will require us to recognize an additional $1,540,000 in long-term pension liability with a corresponding charge to accumulated other comprehensive income. 8 NOTE 2 - INVENTORIES: Our inventories consist of the following:
September 30, December 31, 2006 2005 ------------- ------------ (In thousands) First-in, first-out ("FIFO") method: Crude oil............................ $ 74,806 $ 77,188 Refined products..................... 145,785 97,150 Refinery and shop supplies........... 14,732 13,790 Merchandise.......................... 9,871 7,259 Retail method: Merchandise.......................... 9,063 8,982 -------- -------- Subtotal........................... 254,257 204,369 Adjustment for last-in, first-out ("LIFO") method............ (103,122) (80,264) -------- -------- Total.............................. $151,135 $124,105 ======== ========
The portion of inventories valued on a LIFO basis totaled $97,693,000 and $76,299,000 at September 30, 2006 and December 31, 2005, respectively. The information in the following paragraph will facilitate comparison with the operating results of companies using the FIFO method of inventory valuation. If inventories had been determined using the FIFO method at September 30, 2006 and 2005, net earnings and diluted earnings per share would have been (lower)/higher as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2006 2005 2006 2005 ------- ------- ------- ------- (In thousands, except per share data) Net earnings................... $(7,419) $14,285 $14,289 $26,531 Diluted earnings per share..... $ (0.51) $ 1.04 $ 0.97 $ 1.99
9 For interim reporting purposes, inventory increments expected to be liquidated by year-end are valued at the most recent acquisition costs, and inventory liquidations that are expected to be reinstated by year-end are ignored for LIFO inventory valuation calculations. The LIFO effects of inventory increments not expected to be liquidated by year-end, and the LIFO effects of inventory liquidations not expected to be reinstated by year-end, are recorded in the period such increments and liquidations occur. 10 NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS: At September 30, 2006 and December 31, 2005, we had goodwill of $50,432,000 and $50,607,000, respectively. The changes in the carrying amount of goodwill for the nine months ended September 30, 2006 are as follows:
Refining Group Retail Group Wholesale Group Total ------------------ ------------ --------------- ------- Four Yorktown Corners -------- ------- (In thousands) Balance as of January 1, 2006.......... $ 21,028 $ 125 $ 4,414 $ 25,040 $ 50,607 Goodwill written off related to the sale of retail unit.................. - - (77) - (77) Goodwill associated with purchase of lubricating business*.... - - - 500 500 Goodwill reduction associated with Dial Oil purchase**............. - - - (598) (598) -------- ------- ------- -------- -------- Balance as of September 30, 2006....... $ 21,028 $ 125 $ 4,337 $ 24,942 $ 50,432 ======== ======= ======= ======== ======== * See Note 11, "Acquisitions", for additional information regarding the lubricating business purchase. ** Reduction to goodwill for Dial Oil Co. ("Dial Oil") was recorded at the conclusion of the allocation period provided for by SFAS 141, "Business Combinations".
A summary of the intangible assets that are included in "Other Assets" in the Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005 is presented below: 11
September 30, 2006 December 31, 2005 ------------------------------------ ------------------------------------ Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Value Amortization Value Value Amortization Value -------- ------------ -------- -------- ------------ -------- (In thousands) Amortized intangible assets: Rights-of-way..................... $ 3,748 $ 2,890 $ 858 $ 3,729 $ 2,870 $ 859 Contracts......................... 1,376 1,317 59 1,376 1,227 149 Licenses and permits.............. 1,096 597 499 1,096 503 593 ------- ------- ------- ------- ------- ------- 6,220 4,804 1,416 6,201 4,600 1,601 ------- ------- ------- ------- ------- ------- Unamortized intangible assets: Liquor licenses................... 9,617 - 9,617 8,335 - 8,335 ------- ------- ------- ------- ------- ------- Total intangible assets............. $15,837 $ 4,804 $11,033 $14,536 $ 4,600 $ 9,936 ======= ======= ======= ======= ======= =======
Intangible asset amortization expense for the three and nine months ended September 30, 2006 was approximately $101,000 and $309,000, respectively. Intangible asset amortization expense for the three and nine months ended September 30, 2005 was approximately $121,000 and $320,000, respectively. Estimated amortization expense for the rest of this fiscal year and the next five fiscal years is as follows: 2006 Remainder.................... $ 101,000 2007.............................. 263,000 2008.............................. 221,000 2009.............................. 219,000 2010.............................. 94,000 2011.............................. 45,000 12 NOTE 4 - DISCONTINUED OPERATIONS AND ASSET DISPOSALS: The following table contains information regarding our discontinued operations, all of which are included in our retail group.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2006 2005 2006 2005 ------- ------- ------- ------- (In thousands) Net revenues..................... $ - $ - $ - $ - ------- ------- ------- ------- Net operating income............. $ - $ - $ - $ 2 Gain on disposal................. - - - 22 ------- ------- ------- ------- Earnings before income taxes..... $ - $ - $ - $ 24 ------- ------- ------- ------- Net earnings..................... $ - $ - $ - $ 15 ------- ------- ------- -------
13 NOTE 5 - ASSET RETIREMENT OBLIGATIONS: SFAS No. 143, "Accounting for Asset Retirement Obligations", addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation ("ARO") be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement cost ("ARC") is capitalized as part of the carrying amount of the long-lived asset. Our legally restricted assets that are set aside for purposes of settling ARO liabilities are approximately $367,000 as of September 30, 2006 and are included in "Other Assets" on our Condensed Consolidated Balance Sheets. These assets are set aside to fund costs associated with the closure of certain solid waste management facilities. In March 2005, FASB issued Interpretation 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"). This interpretation clarifies the term conditional ARO as used in SFAS No. 143. Conditional ARO refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional ARO if the fair value of the liability can be reasonably estimated. Clarity is also provided regarding when an entity would have sufficient information to reasonably estimate the fair value of an ARO. We applied FIN 47 as of December 31, 2005. We identified the following ARO's: 1. Landfills -- pursuant to Virginia law, the two solid waste management facilities at our Yorktown refinery must satisfy closure and post-closure care and financial responsibility requirements. 2. Crude Pipelines -- our right-of-way agreements generally require that pipeline properties be returned to their original condition when the agreements are no longer in effect. This means that the pipeline surface facilities must be dismantled and removed and certain site reclamation performed. We do not believe these right-of-way agreements will require us to remove the underground pipe upon taking the pipeline permanently out of service. Regulatory requirements, however, may mandate that such out-of-service underground pipe be purged. 3. Storage Tanks -- we have a legal obligation under applicable law to remove or close in place certain underground and aboveground storage tanks, both on owned property and leased property, once they are taken out of service. Under some lease arrangements, we also have committed to restore the leased property to its original condition. We identified the following conditional ARO: 14 1. Refinery Piping and Heaters -- we have a legal obligation to properly remove or dispose of materials that contain asbestos which surround certain refinery piping and heaters. The following table reconciles the beginning and ending aggregate carrying amount of our ARO's for the nine months ended September 30, 2006 and the year ended December 31, 2005.
September 30, December 31, 2006 2005 ------------- ------------ (In thousands) Liability beginning of year........... $2,625 $2,272 Liabilities incurred.................. 176 322 Liabilities settled................... (54) (150) Accretion expense..................... 12 181 ------ ------ Liability end of period............... $2,759 $2,625 ====== ======
Our ARO's are recorded in "Other Liabilities" on our Condensed Consolidated Balance Sheets. 15 NOTE 6 - LONG-TERM DEBT: Our long-term debt consists of the following:
September 30, December 31, 2006 2005 ------------- ------------ (In thousands) 11% senior subordinated notes, due 2012, net of unamortized discount of $2,640 and $2,882, interest payable semi-annually................... $127,361 $127,119 8% senior subordinated notes, due 2014, net of unamortized discount of $2,110 and $2,255, interest payable semi-annually................... 147,890 147,745 -------- -------- Total $275,251 $274,864 ======== ========
Repayment of both the 11% and 8% senior subordinated notes (collectively, the "notes") is jointly and severally guaranteed on an unconditional basis by our subsidiaries, subject to a limitation designed to ensure that such guarantees do not constitute a fraudulent conveyance. Except as otherwise specified in the indentures pursuant to which the notes were issued, there are no restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances. General provisions of applicable state law, however, may limit the ability of any subsidiary to pay dividends or make distributions to us in certain circumstances. The indentures governing the notes contain restrictive covenants that, among other things, restrict our ability to: - create liens; - incur or guarantee debt; - pay dividends; - repurchase shares of our common stock; - sell certain assets or subsidiary stock; - engage in certain mergers; - engage in certain transactions with affiliates; or - alter our current line of business. In addition, subject to certain conditions, we are obligated to offer to repurchase a portion of the notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase, with the net cash proceeds of certain sales or other dispositions of assets. Upon a change of control, we would be required to offer to repurchase all of the notes at 101% of the principal 16 amount thereof, plus accrued interest, if any, to the date of purchase. As discussed in Note 1, "Organization, Basis of Presentation, Stock-based Employee Compensation and Current Pronouncements", we have entered into a merger Agreement with Western. We believe that the closing of the transaction contemplated by the Agreement will constitute a change in control under the indentures. In addition, pursuant to the agreement, Western may require us to tender for the notes. The terms of such a tender could be different than the terms of an offer to repurchase pursuant to the notes. At September 30, 2006, retained earnings available for dividends under the most restrictive terms of the indentures were approximately $118,917,000. We are, however, prohibited by the terms of the Agreement with Western from paying dividends without the consent of Western. Separate financial statements of our subsidiaries are not included herein because the aggregate assets, liabilities, earnings, and equity of the subsidiaries are substantially equivalent to our assets, liabilities, earnings, and equity on a consolidated basis; the subsidiaries are jointly and severally liable for the repayment of the notes; and the separate financial statements and other disclosures concerning the subsidiaries are not deemed by us to be material to investors. We also have a senior secured revolving facility (the "Credit Facility") with a group of banks. The term of the Credit Facility expires in June 2010. The Credit Facility is primarily a working capital and letter of credit facility. The availability of funds under this facility is the lesser of (i) $175,000,000, or (ii) the amount determined under a borrowing base calculation tied to eligible accounts receivable and inventories. We also have options to increase the size of the facility to up to $250,000,000. The interest rate applicable to the Credit Facility is based on various short-term indices. At September 30, 2006, this rate was approximately 6.7% per annum. We are required to pay a quarterly commitment fee of .25% per annum of the unused amount of the facility. At September 30, 2006, there were no direct borrowings outstanding under the Credit Facility. At September 30, 2006, there were, however, $45,024,000 of irrevocable letters of credit outstanding, primarily to crude oil suppliers, insurance companies, and regulatory agencies. At December 31, 2005, there were no direct borrowings and $66,771,000 of irrevocable letters of credit outstanding primarily to crude oil suppliers, insurance companies, and regulatory agencies. The obligations under the Credit Facility are guaranteed by each of our principal subsidiaries and secured by a security interest in our personal property, including: - accounts receivable; - inventory; - contracts; 17 - chattel paper; - trademarks; - copyrights; - patents; - license rights; - deposits; and - investment accounts and general intangibles. The Credit Facility contains negative covenants limiting, among other things, our ability to: - incur additional indebtedness; - create liens; - dispose of assets; - consolidate or merge; - make loans and investments; - enter into transactions with affiliates; - use loan proceeds for certain purposes; - guarantee obligations and incur contingent obligations; - enter into agreements restricting the ability of subsidiaries to pay dividends to us; - make distributions or stock repurchases; - make significant changes in accounting practices or change our fiscal year; and - prepay or modify subordinated indebtedness. The Credit Facility also requires us to meet certain financial covenants, including maintaining a minimum consolidated net worth, a minimum consolidated interest coverage ratio, and a maximum consolidated funded indebtedness to total capitalization percentage, each as defined in the Credit Facility. Our failure to satisfy any of the covenants in the Credit Facility is an event of default under the Credit Facility. The Credit Facility also includes other customary events of default, including, among other things, a cross-default to our other material indebtedness and certain changes of control. We do not anticipate that any of the terms of the Credit Facility will prevent us from completing the transaction with Western described in Note 1, "Organization, Basis of Presentation, Stock- based Employee Compensation and Current Pronouncements". 18 NOTE 7 - PENSION AND POST-RETIREMENT BENEFITS: The components of the net periodic benefit cost are as follows:
Yorktown Cash Balance Plan ---------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, -------------------- ---------------------- 2006 2005 2006 2005 -------- -------- -------- ---------- Service cost........................ $376,000 $339,000 $1,129,000 $1,017,000 Interest cost....................... 173,000 168,000 519,000 504,000 Expected return on plan assets...... (114,000) (69,000) (342,000) (208,000) Amortization of prior service cost.. - (27,000) - (80,000) Amortization of net loss............ - 15,000 - 45,000 -------- -------- ---------- ---------- Net periodic benefit cost........... $435,000 $426,000 $1,306,000 $1,278,000 ======== ======== ========== ==========
Yorktown Retiree Medical Plan -------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 2006 2005 2006 2005 -------- -------- -------- -------- Service cost........................ $ 79,000 $ 55,000 $ 236,000 $165,000 Interest cost....................... 75,000 55,000 225,000 165,000 Amortization of net loss............ 25,000 4,000 75,000 12,000 -------- -------- --------- -------- Net periodic benefit cost........... $179,000 $114,000 $ 536,000 $342,000 ======== ======== ========= ========
In September 2006, we made a cash contribution of $3,078,000 to the Cash Balance Plan for the 2005 plan year. In September 2006, FASB issued SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans". See Note 1, "Organization, Basis of Presentation, Stock-Based Employee Compensation and Current Pronouncements", for a further discussion of this new pronouncement. 19 NOTE 8 - EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2006 2005 2006 2005 ---------- --------- ---------- --------- Numerator (In thousands) Earnings from continuing operations.............. $ 44,043 $ 46,640 $ 80,931 $ 77,236 Earnings from discontinued operations............ - - - 15 ---------- --------- ---------- --------- Net earnings..................................... $ 44,043 $ 46,640 $ 80,931 $ 77,251 ========== ========= ========== =========
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 2006 2005 2006 2005 ---------- --------- ---------- ---------- Denominator Basic - weighted average shares outstanding...... 14,601,212 13,611,847 14,594,953 13,137,526 Effect of dilutive stock options................. 73,589 174,937 73,203 187,160 Effect of dilutive restricted stock grants....... 11,518 - 9,749 - ---------- ---------- ---------- ---------- Diluted - weighted average shares outstanding.... 14,686,319 13,786,784 14,677,905 13,324,686 ========== ========== ========== ==========
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2006 2005 2006 2005 ---------- --------- ---------- --------- Basic earnings per share Earnings from continuing operations.............. $ 3.02 $ 3.43 $ 5.55 $ 5.88 Earnings from discontinued operations............ - - - - ---------- --------- ---------- --------- Net earnings..................................... $ 3.02 $ 3.43 $ 5.55 $ 5.88 ========== ========= ========== =========
20
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2006 2005 2006 2005 ---------- --------- ---------- --------- Diluted earnings per share Earnings from continuing operations.............. $ 3.00 $ 3.38 $ 5.51 $ 5.80 Earnings from discontinued operations............ - - - - ---------- --------- ---------- --------- Net earnings..................................... $ 3.00 $ 3.38 $ 5.51 $ 5.80 ========== ========= ========== =========
In March 2006, we contributed 25,115 newly issued shares of our common stock, valued at $1,465,000, to our 401(k) plan as a discretionary contribution for the year 2005. In March 2005, we issued 1,000,000 shares of common stock in an underwritten public offering and received proceeds of approximately $22,349,000, net of expenses. In April 2005, we contributed 34,196 newly issued shares of our common stock, valued at $972,000, to our 401(k) plan as a discretionary contribution for the year 2004. In September 2005, we issued 1,000,000 shares of our common stock and received approximately $52,057,000, net of expenses. 21 NOTE 9 - BUSINESS SEGMENTS: We are organized into three operating segments based on manufacturing and marketing criteria. These segments are the refining group, the retail group and the wholesale group (formerly known as Phoenix Fuel). A description of each segment and its principal products follows: REFINING GROUP Our refining group operates our Ciniza and Bloomfield refineries in the Four Corners area of New Mexico and the Yorktown refinery in Virginia. It also operates a crude oil gathering pipeline system in New Mexico, two finished products distribution terminals, and a fleet of crude oil and finished product trucks. Our three refineries make various grades of gasoline, diesel fuel, and other products from crude oil, other feedstocks, and blending components. We also acquire finished products through exchange agreements and from various suppliers. We sell these products through our service stations, independent wholesalers and retailers, commercial accounts, and sales and exchanges with major oil companies. We purchase crude oil, other feedstocks, and blending components from various suppliers. RETAIL GROUP Our retail group operates service stations, which include convenience stores or kiosks. Our service stations sell various grades of gasoline, diesel fuel, general merchandise, including tobacco and alcoholic and nonalcoholic beverages, and food products to the general public. Our refining group or our wholesale group supplies the gasoline and diesel fuel that our retail group sells. We purchase general merchandise and food products from various suppliers. At September 30, 2006, our retail group operated 153 service stations with convenience stores or kiosks. These service stations include 12 service stations acquired in the 2005 acquisition of Dial Oil and 21 operating service stations acquired from Amigo Petroleum Company ("Amigo") in August 2006. See Note 11, "Acquisitions", for further discussion of this acquisition. WHOLESALE GROUP Our wholesale group consists of Phoenix Fuel, Dial Oil (which was acquired on July 12, 2005), and two bulk petroleum distribution plants acquired from Amigo in August 2006. See Note 11, "Acquisitions", for further discussion of this acquisition. Our wholesale group primarily distributes commercial wholesale petroleum products. Our wholesale group includes several lubricant and bulk petroleum distribution plants, unmanned fleet fueling operations, a bulk lubricant terminal facility, and a fleet of finished product and lubricant delivery trucks. In the second quarter of 2006, 12 service stations acquired in the Dial Oil transaction were transferred for reporting purposes from the wholesale group to our retail group. We purchase petroleum fuels and lubricants from suppliers and to a lesser extent from our refining group. 22 OTHER Our operations that are not included in any of the three segments are included in the category "Other". These operations consist primarily of corporate staff operations. Operating income for each segment consists of net revenues less cost of products sold, operating expenses, depreciation and amortization, and the segment's selling, general and administrative expenses. Cost of products sold reflects current costs adjusted, where appropriate, for LIFO and lower of cost or market inventory adjustments. The total assets of each segment consist primarily of net property, plant and equipment, inventories, accounts receivable, and other assets directly associated with the segment's operations. Included in the total assets of the corporate staff operations are a majority of our cash and cash equivalents, and various accounts receivable, net property, plant and equipment, and other long-term assets. Disclosures regarding our reportable segments with a reconciliation to consolidated totals for the three and nine months ended September 30, 2006 and 2005, are presented below. The tables pertaining to the three and nine months ended September 30, 2006 include the results of Dial Oil, which was acquired on July 12, 2005, and Amigo, the assets of which were acquired in August 2006. See Note 11, "Acquisitions", for further disclosures. The tables pertaining to the three and nine months ended September 30, 2005 include the results of Dial Oil, which was acquired on July 12, 2005, but do not include the results of Amigo, the assets of which were acquired in August 2006. See Note 11, "Acquisitions", for further disclosures. We have also reclassed the tables pertaining to the three and nine months ended September 30, 2005 to conform to the current year presentation because the results of 12 service stations that were part of the Dial Oil acquisition are currently reported in the results of operations pertaining to our retail segment but were previously reported in our wholesale segment. These reclassifications had no affect on our results of operations. 23
As of and for the Three Months Ended September 30, 2006 ------------------------------------------------------------------- Refining Retail Wholesale Reconciling Group Group** Group*** Other Items Consolidated ------------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $ 170,452 Yorktown operations.................. 505,436 ---------- Total.............................. $ 675,888 $131,723 $284,942 $ - $ - $1,092,553 Merchandise and lubricants............. - 43,175 20,416 - - 63,591 Other.................................. 3,232 5,387 1,095 90 - 9,804 ---------- -------- -------- -------- --------- ---------- Total.............................. 679,120 180,285 306,453 90 - 1,165,948 ---------- -------- -------- -------- --------- ---------- Inter-segment net revenues: Finished products...................... 130,180 - 41,906 - (172,086) - Merchandise and lubricants............. - - 41 - (41) - Other.................................. 5,302 - 155 - (5,457) - ---------- -------- -------- -------- --------- ---------- Total.............................. 135,482 - 42,102 - (177,584) - ---------- -------- -------- -------- --------- ---------- Total net revenues from continuing operations.................. $ 814,602 $180,285 $348,555 $ 90 $(177,584) $1,165,948 ========== ======== ======== ======== ========= ========== Operating income/(loss): Four Corners operations................ $ 24,572 Yorktown operations*................... (802) ---------- Total operating (loss)/income before corporate allocation...... $ 23,770 $ 8,212 $ 5,202 $ (8,784) $ 46,500 $ 74,900 Corporate allocation..................... (4,076) (2,719) (1,091) 7,886 - - ---------- -------- -------- -------- --------- ---------- Operating income/(loss) from continuing operations................ $ 19,694 $ 5,493 $ 4,111 $ (898) $ 46,500 74,900 ========== ======== ======== ======== ========= Interest expense......................... (5,153) Amortization of financing costs.......... (399) Investment and other income.............. 1,156 ---------- Earnings from continuing operations before income taxes.................... $ 70,504 ========== Depreciation and amortization: Four Corners operations................ $ 4,229 Yorktown operations.................... 4,644 ---------- Total from continuing operations... $ 8,873 $ 1,944 $ 844 $ 311 $ - $ 11,972 ========== ======== ======== ======== ======== ========== Total assets............................. $ 768,471 $136,413 $162,110 $ 56,865 $ - $1,123,859 Capital expenditures..................... $ 49,141 $ 2,663 $ 744 $ 395 $ - $ 52,943 *Excludes $46,050,000 gain from insurance settlement due to fire. **Includes the results of 12 convenience stores acquired in the Dial Oil acquisition and 21 operating convenience stores that were acquired from Amigo in August 2006. ***Includes the results of two bulk petroleum distribution plants that were acquired from Amigo in August 2006.
24
As of and for the Three Months Ended September 30, 2005 (Reclassed) ---------------------------------------------------------------- Refining Retail Wholesale Reconciling Group Group* Group Other Items Consolidated ---------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $158,251 Yorktown operations.................. 483,941 -------- Total.............................. $642,192 $108,276 $270,449 $ - $ - $1,020,917 Merchandise and lubricants............. - 40,527 15,135 - - 55,662 Other.................................. 3,520 4,050 1,009 67 - 8,646 -------- -------- -------- -------- --------- ---------- Total.............................. 645,712 152,853 286,593 67 - 1,085,225 -------- -------- -------- -------- --------- ---------- Intersegment net revenues: Finished products...................... 95,704 - 21,978 - (117,682) - Merchandise and lubricants............. - - 14 - (14) - Other.................................. 5,026 - 127 - (5,153) - -------- -------- -------- -------- --------- ---------- Total.............................. 100,730 - 22,119 - (122,849) - -------- -------- -------- -------- --------- ---------- Total net revenues from continuing operations.................. $746,442 $152,853 $308,712 $ 67 $(122,849) $1,085,225 ======== ======== ======== ======== ========= ========== Operating income (loss): Four Corners operations................ $ 32,968 Yorktown operations.................... 52,288 -------- Total operating income (loss) before corporate allocation...... $ 85,256 $ 4,377 $ 7,577 $(11,698) $ (1,055) $ 84,457 Corporate allocation..................... (6,073) (3,820) (1,304) 11,197 - - -------- -------- -------- -------- --------- ---------- Operating income (loss) from continuing operations................ $ 79,183 $ 557 $ 6,273 $ (501) $ (1,055) 84,457 ======== ======== ======== ======== ========= Interest expense......................... (5,783) Costs associated with early debt extinguishment.................... 17 Amortization of financing costs.......... (398) Investment and other income.............. 479 ---------- Earnings from continuing operations before income taxes.................... $ 78,772 ========== Depreciation and amortization: Four Corners operations................ $ 4,267 Yorktown operations.................... 2,653 -------- Total from continuing operations... $ 6,920 $ 2,155 $ 696 $ 202 $ - $ 9,973 ======== ======== ======== ======== ========= ========== Total assets............................. $585,563 $104,302 $173,983 $110,597 $ - $ 974,445 Capital expenditures..................... $ 27,692 $ 1,221 $ 528 $ 252 $ - $ 29,693 *Includes the results of 12 convenience stores acquired in the Dial Oil acquisition.
25
As of and for the Nine Months Ended September 30, 2006 ------------------------------------------------------------------- Refining Retail Wholesale Reconciling Group Group** Group*** Other Items Consolidated ------------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $ 485,409 Yorktown operations.................. 1,290,186 ---------- Total.............................. $1,775,595 $350,020 $835,398 $ - $ - $2,961,013 Merchandise and lubricants............. - 119,677 58,001 - - 177,678 Other.................................. 17,043 15,073 3,221 224 - 35,561 ---------- -------- -------- -------- --------- ---------- Total.............................. 1,792,638 484,770 896,620 224 - 3,174,252 ---------- -------- -------- -------- --------- ---------- Inter-segment net revenues: Finished products...................... 343,762 - 98,643 - (442,405) - Merchandise and lubricants............. - - 59 - (59) - Other.................................. 16,410 - 601 - (17,011) - ---------- -------- -------- -------- --------- ---------- Total.............................. 360,172 - 99,303 - (459,475) - ---------- -------- -------- -------- --------- ---------- Total net revenues from continuing operations.................. $2,152,810 $484,770 $995,923 $ 224 $(459,475) $3,174,252 ========== ======== ======== ======== ========= ========== Operating income/(loss): Four Corners operations................ $ 71,180 Yorktown operations*................... (17,018) ---------- Total operating (loss)/income before corporate allocation...... $ 54,162 $ 13,901 $ 12,904 $(23,279) $ 83,044 $ 140,732 Corporate allocation..................... (10,542) (7,399) (2,997) 20,938 - - ---------- -------- -------- -------- --------- ---------- Operating income/(loss) from continuing operations................ $ 43,620 $ 6,502 $ 9,907 $ (2,341) $ 83,044 140,732 ========== ======== ======== ======== ========= Interest expense......................... (14,014) Amortization of financing costs.......... (1,197) Investment and other income.............. 3,838 ---------- Earnings from continuing operations before income taxes.................... $ 129,359 ========== Depreciation and amortization: Four Corners operations................ $ 12,186 Yorktown operations.................... 11,060 ---------- Total from continuing operations... $ 23,246 $ 6,070 $ 2,396 $ 796 $ - $ 32,508 ========== ======== ======== ======== ======== ========== Total assets............................. $ 768,471 $136,413 $162,110 $ 56,865 $ - $1,123,859 Capital expenditures..................... $ 173,202 $ 4,474 $ 2,988 $ 898 $ - $ 181,562 *Excludes $82,003,000 gain from insurance settlement due to fire. **Includes the results of 12 convenience stores acquired in the Dial Oil acquisition and 21 operating convenience stores that were acquired from Amigo in August 2006. ***Includes the results of two bulk petroleum distribution plants that were acquired from Amigo in August 2006.
26
As of and for the Nine Months Ended September 30, 2005 (Reclassed) ---------------------------------------------------------------- Refining Retail Wholesale Reconciling Group Group* Group Other Items Consolidated ---------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $ 428,402 Yorktown operations.................. 1,193,325 ---------- Total.............................. $1,621,727 $248,404 $624,253 $ - $ - $2,494,384 Merchandise and lubricants............. - 108,139 33,785 - - 141,924 Other.................................. 9,415 12,109 2,099 378 - 24,001 ---------- -------- -------- -------- --------- ---------- Total.............................. 1,631,142 368,652 660,137 378 - 2,660,309 ---------- -------- -------- -------- --------- ---------- Intersegment net revenues: Finished products...................... 206,956 - 55,823 - (262,779) - Merchandise and lubricants............. - - 14 - (14) - Other.................................. 14,491 - 127 - (14,618) - ---------- -------- -------- -------- --------- ---------- Total.............................. 221,447 - 55,964 - (277,411) - ---------- -------- -------- -------- --------- ---------- Total net revenues from continuing operations.................. $1,852,589 $368,652 $716,101 $ 378 $(277,411) $2,660,309 ========== ======== ======== ======== ========= ========== Operating income (loss): Four Corners operations................ $ 58,978 Yorktown operations.................... 97,250 ---------- Total operating income (loss) before corporate allocation...... $ 156,228 $ 5,812 $ 14,091 $(25,298) $ 2,875 $ 153,708 Corporate allocation..................... (13,184) (7,918) (2,626) 23,728 - - ---------- -------- -------- -------- --------- ---------- Total operating income (loss) after corporate allocation................... 143,044 (2,106) 11,465 (1,570) 2,875 153,708 Discontinued operations (gain)........... - (2) - - (22) (24) ---------- -------- -------- -------- --------- ---------- Operating income (loss) from continuing operations................ $ 143,044 $ (2,108) $ 11,465 $ (1,570) $ 2,853 153,684 ========== ======== ======== ======== ========= Interest expense......................... (19,159) Costs associated with early debt extinguishment.................... (2,082) Amortization of financing costs.......... (2,398) Investment and other income.............. 967 ---------- Earnings from continuing operations before income taxes.................... $ 131,012 ========== Depreciation and amortization: Four Corners operations................ $ 12,438 Yorktown operations.................... 7,949 ---------- Total from continuing operations... $ 20,387 $ 7,892 $ 1,582 $ 574 $ - $ 30,435 ========== ======== ======== ======== ========= ========== Total assets............................. $ 585,563 $104,302 $173,983 $110,597 $ - $ 974,445 Capital expenditures..................... $ 51,416 $ 3,231 $ 1,562 $ 1,181 $ - $ 57,390 *Includes the results of 12 convenience stores acquired in the Dial Oil acquisition.
27 NOTE 10 - COMMITMENTS AND CONTINGENCIES: We have pending against us various legal actions, claims, assessments and other contingencies arising in the normal course of our business, including those matters described below. Some of these matters involve or may involve significant claims for compensatory, punitive, or other damages. These matters are subject to many uncertainties, and it is possible that some of these matters could be ultimately decided, resolved, or settled adversely. As explained more fully below, we have recorded accruals for losses related to those matters that we consider to be probable and that can be reasonably estimated. We currently believe that any amounts exceeding our recorded accruals should not materially affect our financial condition or liquidity. It is possible, however, that the ultimate resolution of these matters could result in a material adverse effect on our results of operations. Federal, state and local laws relating to the environment, health and safety affect nearly all of our operations. As is the case with all companies engaged in similar industries, we face significant exposure from actual or potential claims and lawsuits involving environmental, health and safety matters. These matters include soil and water contamination, air pollution, and personal injuries or property damage allegedly caused by substances made, handled, used, released, or disposed of by us or by our predecessors. Future expenditures related to environmental, health, and safety matters cannot be reasonably quantified in many circumstances for various reasons. These reasons include the uncertain nature of remediation and cleanup cost estimates and methods, imprecise and conflicting data regarding the hazardous nature of various types of substances, the number of other potentially responsible parties involved, defenses that may be available to us, and changing environmental, health, and safety laws, including changing interpretations of these laws. ENVIRONMENTAL AND LITIGATION ACCRUALS We expense or capitalize environmental expenditures depending on the circumstances: - expenditures that relate to an existing environmental condition caused by past operations, and which do not result in an asset with an economic life greater than one year, are expensed; and - expenditures that relate to an existing environmental condition caused by past operations, and which result in an asset with an economic life greater than one year, are capitalized in the period incurred and depreciated over their useful life. Under circumstances in which environmental expenditures, or losses associated with litigation, are anticipated and related to past events, we accrue for the liability if cleanup expenditures, administrative penalties, adverse judgments, or other liabilities are probable and the costs can be reasonably estimated. 28 We do not accrue for future environmental expenditures associated with: - our compliance with clean air, clean water, and similar regulatory programs, including programs relating to the composition of motor fuels, that do not require us to undertake soil removal or similar cleanup activities; - our compliance with settlements, consent decrees, and other agreements with governmental authorities that do not require us to undertake soil removal or similar cleanup activities; - groundwater monitoring; or - capital projects. Expenditures for these matters are capitalized or expensed when incurred. We do not discount our environmental and litigation liabilities, and record these liabilities without consideration of potential recoveries from third parties, except that we do take into account amounts that others are contractually obligated to pay us. Subsequent adjustments to estimates, which may be significant, may be made as more information becomes available or as circumstances change. As of September 30, 2006 and December 31, 2005, we had environmental liability accruals of approximately $4,432,000 and $4,941,000, respectively, which are summarized below, and litigation accruals in the aggregate of approximately $265,000 and $990,000, respectively. Environmental accruals are recorded in the current and long-term sections of our Condensed Consolidated Balance Sheets. Litigation accruals are recorded in the current section of our Consolidated Balance Sheets.
SUMMARY OF ACCRUED ENVIRONMENTAL CONTINGENCIES (In thousands) December 31, Increase September 30, 2005 (Decrease) Payments 2006 ------------ ---------- -------- ------------- Yorktown Refinery........................... $ 3,540 $ - $ (461) $ 3,079 Bloomfield Refinery......................... 229 - - 229 Farmington Refinery......................... 570 - - 570 Bloomfield Tank Farm (Old Terminal)......... 42 - (10) 32 Bloomfield - River Terrace.................. 46 (5) (41) - Other Projects.............................. 514 138 (130) 522 ------- ------ ------ ------- Totals.................................. $ 4,941 $ 133 $ (642) $ 4,432 ======= ====== ====== =======
29 Approximately $3,910,000 of our environmental accrual is for the following projects discussed below: - $3,079,000 and $229,000, respectively, for environmental obligations assumed in connection with our acquisitions of the Yorktown refinery and the Bloomfield refinery; - $570,000 for the remediation of the hydrocarbon plume that appears to extend no more than 1,800 feet south of our inactive Farmington refinery; and - $32,000 for remediation of hydrocarbon contamination on and adjacent to the 5.5 acres that we own in Bloomfield, New Mexico. The remaining $522,000 of the accrual relates to: - closure of certain solid waste management units at the Ciniza refinery; - closure of the Ciniza refinery land treatment facility, including post-closure expenses; and - miscellaneous remediation projects. YORKTOWN ENVIRONMENTAL LIABILITIES We assumed certain liabilities and obligations in connection with our purchase of the Yorktown refinery from BP Corporation North America Inc. and BP Products North America Inc. (collectively "BP"). BP, however, agreed to reimburse us for all losses that are caused by or relate to property damage caused by, or any environmental remediation required due to, a violation of environmental, health, and safety laws during BP's operation of the refinery, subject to certain limitations. For a further discussion of this matter, refer to Note 17, "Commitments and Contingencies", in our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. Certain environmental matters relating to the Yorktown refinery are discussed below. YORKTOWN 1991 ORDER In connection with the Yorktown acquisition, we assumed BP's obligations under an administrative order issued in 1991 by the Environmental Protection Agency ("EPA") under the Resource Conservation and Recovery Act("RCRA"). The order requires an investigation of certain areas of the refinery and the development of measures to correct any releases of contaminants or hazardous substances found in these areas. A RCRA Facility Investigation was conducted and approved conditionally by 30 EPA in 2002. Following the investigation, a Risk Assessment/Corrective Measures Study ("RA/CMS") was finalized in 2003, which summarized the remediation measures agreed upon by us, EPA, and the Virginia Department of Environmental Quality ("VDEQ"). The RA/CMS proposes investigation, sampling, monitoring, and cleanup measures, including the construction of an on-site corrective action management unit that would be used to consolidate hazardous solid materials associated with these measures. These proposed actions relate to soil, sludge, and remediation wastes relating to solid waste management units. Groundwater in the aquifers underlying the refinery, and surface water and sediment in a small pond and tidal salt marsh on the refinery property, also are addressed in the RA/CMS. Based on the RA/CMS, EPA issued a proposed cleanup plan for public comment in December 2003 setting forth preferred corrective measures for remediating soil, groundwater, sediment, and surface water contamination at the refinery. Following the public comment period, EPA issued its final remedy decision and response to comments in April 2004. In August 2006, we agreed with EPA on the terms of the final administrative consent order, pursuant to which we will implement our cleanup plan. Our most current estimate of expenses associated with the consent order is between approximately $30,000,000 ($22,500,000 of which we believe is subject to reimbursement by BP) and $40,000,000 ($32,500,000 of which we believe is subject to reimbursement by BP). We anticipate that these expenses will be incurred over a period of approximately 35 years from August 2006. We believe that between approximately $12,000,000 and $16,000,000 of this amount will be incurred over an initial four-year period, and additional expenditures of between approximately $12,000,000 and $16,000,000 will be incurred over the following four-year period, with the remainder thereafter. These estimates assume that EPA will agree with the design and specifications of our cleanup plan. These estimates also could change as a result of factors such as changes in costs of labor and materials. We currently have $3,079,000 recorded as an environmental liability for this project, which reflects our belief that BP is responsible for reimbursing us for expenditures on this project that exceed this amount and also reflects expenditures previously incurred in connection with this matter. BP's total liability for reimbursement under the refinery purchase agreement, including liability for environmental claims, is limited to $35,000,000. As part of the consent order cleanup plan, the facility's underground sewer system will be cleaned, inspected, and repaired as needed. This sewer work is scheduled to begin during the construction of the corrective action management unit and related remediation work and is included in our associated cost estimate. We anticipate that construction of the corrective action management unit and related remediation work, as well as sewer system inspection and repair, will be completed approximately seven to eight years after EPA approves our clean-up plan and authorizes its implementation. 31 BLOOMFIELD REFINERY ENVIRONMENTAL OBLIGATIONS In connection with the acquisition of the Bloomfield refinery, we assumed certain environmental obligations including the seller's obligations under an administrative order issued by EPA in 1992 pursuant to RCRA. We believe some of the requirements of the draft New Mexico Environment Department ("NMED") order discussed below under the caption "Bloomfield Refinery - NMED Draft Order" may duplicate some of the requirements of the 1992 order. We anticipate that discussions will be held with EPA and NMED concerning their respective requirements for investigation and remediation at the Bloomfield refinery. As of September 30, 2006, we had $229,000 recorded as an environmental liability for this project. For a further discussion of this matter, refer to Note 17, "Commitments and Contingencies", in our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. FARMINGTON REFINERY MATTERS In 1973, we constructed the Farmington refinery, which we operated until 1982. In 1985, we became aware of soil and shallow groundwater contamination at this property. Our environmental consulting firms identified several areas of contamination in the soils and shallow groundwater underlying the Farmington property. One of our consultants indicated that contamination attributable to past operations at the Farmington property has migrated off the refinery property, including a hydrocarbon plume that appears to extend no more than 1,800 feet south of the refinery property. Our remediation activities are ongoing under the supervision of the New Mexico Oil Conservation Division ("OCD"), although OCD has not issued a cleanup order. As of September 30, 2006, we had $570,000 recorded as an environmental liability for this project. BLOOMFIELD TANK FARM (OLD TERMINAL) We have discovered hydrocarbon contamination adjacent to a 55,000 barrel crude oil storage tank that was located in Bloomfield, New Mexico. We believe that all or a portion of the tank and the 5.5 acres we own on which the tank was located may have been a part of a refinery owned by various other parties, that to our knowledge, ceased operations in the early 1960s. We received approval to conduct a pilot bioventing project to address remaining contamination at the site, which was completed in 2001. Based on the results of the pilot project, we submitted a remediation plan to OCD proposing the use of bioventing to address the remaining contamination. This remediation plan was approved by OCD in 2002. We will continue remediation until natural attenuation has completed the process of groundwater remediation. As of September 30, 2006, we had $32,000 recorded as an environmental liability for this project. 32 YORKTOWN CONSENT DECREE In connection with the acquisition of the Yorktown refinery, we assumed BP's responsibilities related to the Yorktown refinery under a consent decree among various parties covering many locations (the "Consent Decree"). We have substantially completed the modifications required by the Consent Decree, and have expended approximately $24,000,000 in connection with this matter through the third quarter of 2006. We expect to spend approximately $1,000,000 through 2008 in connection with our remaining obligations under the Consent Decree. Since our expenditures for this matter do not involve soil removal or similar cleanup activities, we have not recorded an environmental liability for this project and will capitalize or expense expenditures when incurred. For a further discussion of this matter, refer to Note 17, "Commitments and Contingencies", in our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. BLOOMFIELD REFINERY - NMED DRAFT ORDER On June 21, 2006, we received a draft administrative compliance order from NMED alleging that releases of contaminants and hazardous substances that have occurred at the Bloomfield refinery over the course of its operation have resulted in soil and groundwater contamination. Among other things, the draft order requires that we: - investigate and determine the nature and extent of such releases of contaminants and hazardous substances; - perform interim remediation measures, or continue interim measures already begun, to mitigate any potential threats to human health or the environment from such releases; - identify and evaluate alternatives for corrective measures to clean up any contaminants and hazardous substances released at the refinery and prevent or mitigate their migration at or from the site; - implement any corrective measures that may be approved by NMED; and - develop and implement work plans and corrective measures over a period of approximately four years. The draft order recognizes that prior work we have satisfactorily completed may fulfill some of the foregoing requirements. In that regard, we have already put in place some remediation measures with the approval of NMED or OCD. The draft order was open for public comments for 60 days. We submitted comments during the public comment period. NMED will issue a response to all written comments but has not yet done so. We anticipate 33 further discussions with NMED prior to issuance of a final order. We currently do not know the nature and extent of any cleanup actions that may be required under the final order and, accordingly, have not recorded a liability for this matter. BLOOMFIELD REFINERY - OCD COMPLIANCE ORDER On September 19, 2005, we received an Administrative Compliance Order from OCD alleging that: (1) we had failed to notify OCD of hydrocarbon discharges discovered seeping into two small gullies, or draws, on the refinery site; (2) we had allowed contaminants to enter the San Juan River from the refinery's river terrace area; and (3) we had failed to comply with certain conditions of the refinery's groundwater discharge plan. In March 2006, we reached a settlement with OCD in the form of a consent order and paid a civil penalty of $30,000. The settlement requires that we apply for a discharge plan modification. The discharge plan modification must include a comprehensive action plan for the investigation and remediation of contaminated soil and groundwater at the refinery. Until this plan is completed and a remediation plan is approved by the two agencies with regulatory oversight, OCD and NMED, we cannot reasonably estimate the cost of any associated remediation activities. We believe the requirements of this settlement may duplicate some of the requirements of the draft NMED order discussed above under the caption "Bloomfield Refinery - NMED Draft Order". We anticipate further discussions with OCD and NMED concerning their respective requirements for investigation and remediation at the Bloomfield refinery. FOUR CORNERS REFINERIES - SETTLEMENT AGREEMENTS In July 2005, we reached an administrative settlement with NMED and EPA in the form of consent agreements that resolved certain alleged violations of air quality regulations at our Ciniza and Bloomfield refineries. Our settlement does not require us to undertake soil removal or similar cleanup activities and, accordingly, we have not recorded an environmental liability for this matter and will capitalize or expense expenditures when incurred. For a further discussion of this matter, refer to Note 17, "Commitments and Contingencies", in our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005 (the "Form 10-K"). The estimated compliance costs contained in the Form 10-K were the best estimates available at that time. The costs that we actually incur, however, may be substantially different from the estimates due to, among other things, changes in costs of labor, materials, and chemical additives, and changes in cost efficiencies of technology. In light of these factors, we believe more accurate estimates of compliance costs will not be available until we are closer in time to implementation of the required projects and have further considered all operational options. 34 BLOOMFIELD REFINERY - EPA COMPLIANCE ORDER On October 12, 2005, we received an Administrative Compliance Order from EPA in connection with a compliance evaluation inspection at the Bloomfield refinery in 2000 and a follow-up inspection in early 2001. We send waste water from the refinery's process units through an oil-water separator, a series of aeration ponds that continue the treatment and processing of oily water, and a series of evaporation ponds, before the water is injected into a permitted deep well. EPA alleged that benzene levels in the aeration ponds exceed permissible RCRA levels. EPA also alleged that we failed to make a RCRA hazardous waste determination in connection with waste water going into the aeration ponds. In May 2006, we reached a settlement with EPA in the form of a consent agreement and paid a civil penalty of $75,000. The settlement requires that we make equipment modifications to reduce benzene levels in the waste water coming from the refinery's process units. We currently estimate that we will incur capital expenditures of approximately $3,400,000 to comply with the settlement, the majority of which will be incurred in 2007. Since the settlement does not require us to undertake any cleanup activities, we have not recorded an environmental liability for this matter. MTBE LITIGATION Lawsuits have been filed in numerous states alleging that MTBE, a blendstock used by many refiners in producing specially formulated gasoline, has contaminated water supplies. MTBE contamination primarily results from leaking underground or aboveground storage tanks. The suits allege MTBE contamination of water supplies owned and operated by the plaintiffs, who are generally water providers or governmental entities. The plaintiffs assert that numerous refiners, distributors, or sellers of MTBE and/or gasoline containing MTBE are responsible for the contamination. The plaintiffs also claim that the defendants are jointly and severally liable for compensatory and punitive damages, costs, and interest. Joint and several liability means that each defendant may be liable for all of the damages even though that party was responsible for only a small part of the damages. We are a defendant in approximately 30 of these MTBE lawsuits pending in Virginia, Connecticut, Massachusetts, New Hampshire, New York, New Jersey, Pennsylvania, and New Mexico. Due to our historical operations in New Mexico, including retail sites, we potentially have greater risk in connection with the New Mexico litigation than in the litigation in the Eastern states where we have only operated since 2002 and have no retail operations. We intend to vigorously defend these lawsuits. Since we have yet to determine if a liability is probable, and we cannot reasonably estimate the amount of any loss associated with these matters, we have not recorded a liability for these lawsuits. YORKTOWN REFINERY FIRE INCIDENT (2005) As previously discussed in our Annual Report on Form 10-K for 2005 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006, a fire occurred at our Yorktown refinery on November 25, 2005. Repairs related to this fire were completed in April 2006. 35 Our property insurance covered a significant portion of the costs of repairing the Yorktown refinery and our business interruption insurance reimbursed us for a portion of the financial impact of the fire. As of September 30, 2006, we had received $75,740,000 of insurance proceeds consisting of $26,800,000 for property claims and $49,840,000 for business interruption claims. For the nine months ended September 30, 2006, we recorded a gain of $82,003,000 as a result of insurance recoveries received related to the fire. Included in this gain was a $13,260,000 receivable due from the insurance carriers which was received in October 2006. The total amount received in connection with the Yorktown fire was $89,000,000. No more proceeds will be received as all of our claims have been resolved with our insurance carriers. YORKTOWN REFINERY FIRE INCIDENT (2006) On September 30, 2006, a fire occurred at our Yorktown refinery in the processing unit required to produce ultra low sulfur diesel fuel. The affected unit remains shut down, although the rest of the refinery is operating at normal levels. We currently estimate that repairs to the unit will cost approximately $20 million and should be completed by mid- February 2007. Until the unit is repaired, we will sell more heating oil than otherwise would be the case, which is currently a less profitable product than ultra low sulfur diesel. We have property insurance coverage with a $1,000,000 deductible that should cover a significant portion of the costs of repairing the ultra low sulfur diesel unit. We also have business interruption insurance coverage that should cover a significant portion of the financial impact of the fire after the policy's 45-day waiting period is exceeded. As of September 30, 2006, we wrote-off approximately $5,000,000 of property, plant and equipment to accounts receivable in connection with the fire. 36 NOTE 11 - ACQUISITIONS: In July 2005, we acquired 100% of the common shares of Dial Oil. In accordance with the conclusion of the allocation period for this acquisition provided for by SFAS 141, "Business Combinations", we recorded a $598,000 reduction in goodwill with a corresponding increase of $180,000 in intangible assets, $139,000 in fixed assets and $279,000 in other miscellaneous assets and liabilities. In May 2006, we acquired a lubricating business in El Paso, Texas. We funded this acquisition with cash on hand. The assets acquired primarily include lubricants inventory, fixed assets, and miscellaneous receivables. The acquisition has been accounted for using the purchase method of accounting whereby the total purchase price has been preliminarily allocated to tangible and intangible assets acquired based on the fair market values on the date of acquisition. The pro forma effect of the acquisition on Giant's results of operations is immaterial. In August 2006, we acquired certain assets from Amigo. We funded this acquisition with cash on hand. These acquired assets include twenty- five convenience stores, two bulk petroleum distribution plants, and a transportation fleet. The acquisition is accounted for using the purchase method of accounting whereby the total purchase price is preliminarily allocated to tangible and intangible assets acquired based on the fair market values on the date of acquisition. The pro forma effect of the acquisition on Giant's results of operations is immaterial. 37 NOTE 12 - SUBSEQUENT EVENT: On October 5, 2006, a pump failure in the alkylation unit at our Ciniza refinery resulted in a fire at the refinery. The fire caused damage to the alkylation unit and an associated unit. The alkylation unit produces high octane blending stock for gasoline. We currently estimate that repairs to the affected units will cost approximately $9 million and should be completed by mid-December of 2006. We have property insurance coverage with a $1,000,000 deductible that should cover a significant portion of the costs of repairing the unit. As a result of the fire, all of the refinery's units were shut down for safety reasons. During the restart of the other units at the refinery, the fluid catalytic cracker ("FCC") was damaged. The FCC is a unit that alters the molecular composition of materials sent into the unit in order to produce gasoline, diesel, fuel oil, heating oil, and other products. We currently estimate that the repairs to the FCC will cost less than $1,000,000 and are expected to be completed shortly. We anticipate returning the refinery to normal operations, other than the alkylation unit, by next week. 38 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPANY OVERVIEW We refine and sell petroleum products and operate service stations and convenience stores. Our operations are divided into three strategic business units: the refining group, the retail group, and the wholesale group. The refining group operates two refineries in the Four Corners area of New Mexico and one refinery in Yorktown, Virginia. The refining group sells its products to wholesale distributors and retail chains. Our retail group operated 153 service stations as of September 30, 2006. This includes 12 service stations acquired in the Dial Oil Co. ("Dial Oil") transaction on July 12, 2005, whose results of operations had previously been included in the wholesale group from the date of the acquisition, and 21 operating convenience stores acquired from Amigo Petroleum Company ("Amigo") in August 2006. Our retail group sells its petroleum products and merchandise to consumers in New Mexico, Arizona and Southern Colorado. Our wholesale group distributes commercial wholesale petroleum products primarily in Arizona and New Mexico. In order to maintain and improve our financial performance, we are focused on several critical and challenging objectives. Subject to the provisions of the agreement with Western Refining, Inc. ("Western") discussed below, we will be addressing these objectives in the short-term as well as over the next three to five years. In our view, the most important of these objectives are: - increasing margins through management of inventories and taking advantage of sales and purchasing opportunities; - minimizing operating expenses and capital expenditures; - increasing the available crude oil supply for our Four Corners refineries; - cost effectively complying with current environmental regulations as they apply to our refineries, including future clean air standards; - improving our overall financial health and flexibility by, among other things, reducing our debt and overall costs of capital, including our interest and financing costs, and maximizing our return on capital employed; and - evaluating opportunities for internal growth and growth by acquisition. On August 26, 2006, we entered into an Agreement and Plan of Merger (the "Plan of Merger") with Western and New Acquisition Corporation ("Merger Sub"). On November 12, 2006, we entered into an Amendment No. 1 39 to Agreement and Plan of Merger (the "Amendment") with Western and Merger Sub. The Plan of Merger and Amendment are collectively referred to as the "Agreement". If the transaction closes, Western will acquire all of our outstanding shares of common stock for $77.00 per share and we will be merged with Merger Sub and become a wholly-owned subsidiary of Western. The transaction has been approved by our Board of Directors and the Board of Directors of Western. The closing of the transaction is subject to various conditions, including compliance with the pre-merger notification requirements of the Hart-Scott-Rodino Act, and approval by our stockholders. The transaction is not subject to any financing conditions. In connection with the transaction, the parties received a request from the Federal Trade Commission ("FTC") for additional information. The parties are working cooperatively with the FTC staff and intend to respond to the request in a timely manner. The transaction is currently expected to close in the first quarter of 2007. Pursuant to the Agreement, we are required to conduct our business in the ordinary course, subject to certain covenants. Among other things, we agreed to take reasonable steps to preserve intact our business organization and goodwill, certain limitations on making capital expenditures, and certain limitations on acquiring new assets and disposing of existing assets. As a result, our pursuit of the above objectives is subject to compliance with the terms of the Agreement. CRITICAL ACCOUNTING POLICIES A critical step in the preparation of our financial statements is the selection and application of accounting principles, policies, and procedures that affect the amounts that are reported. In order to apply these principles, policies, and procedures, we must make judgments, assumptions, and estimates based on the best available information at the time. Actual results may differ based on the accuracy of the information utilized and subsequent events, some of which we may have little or no control over. In addition, the methods used in applying the above may result in amounts that differ considerably from those that would result from the application of other acceptable methods. The development and selection of these critical accounting policies, and the related disclosure below, have been reviewed with the audit committee of our Board of Directors. Our significant accounting policies, including revenue recognition, inventory valuation, and maintenance costs, are described in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. The following accounting policies are considered critical due to the uncertainties, judgments, assumptions and estimates involved: - accounting for contingencies, including environmental remediation and litigation liabilities; 40 - assessing the possible impairment of long-lived assets; - accounting for asset retirement obligations; - accounting for our pension and post-retirement benefit plans; and - accounting for inventories. There have been no changes to these policies in 2006. 41 RESULTS OF OPERATIONS The following discussion of our Results of Operations should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in Part I, Item 1 in this Form 10-Q, and in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2005. Below is operating data for our operations:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2006 2005 2006 2005 --------- --------- --------- --------- Refining Group Operating Data: Four Corners Operations: Crude Oil/NGL Throughput (BPD).............. 26,572 29,867 28,108 29,500 Refinery Sourced Sales Barrels (BPD)........ 27,102 29,096 27,547 29,002 Average Crude Oil Costs ($/Bbl)............. $ 70.50 $ 60.59 $ 66.87 $ 53.30 Refining Margins ($/Bbl).................... $ 18.31 $ 18.08 $ 16.97 $ 13.21 Yorktown Operations: Crude Oil/NGL Throughput (BPD).............. 70,751 68,201 56,367 67,472 Refinery Sourced Sales Barrels (BPD)........ 68,360 70,936 54,626 68,430 Average Crude Oil Costs ($/Bbl)............. $ 68.92 $ 58.05 $ 66.65 $ 50.75 Refining Margins ($/Bbl).................... $ 3.81 $ 11.25 $ 3.40 $ 8.52 Retail Group Operating Data:(1)(2) (Continuing operations only) Fuel Gallons Sold (000's)..................... 52,426 48,210 147,709 129,090 Fuel Margins ($/gal).......................... $ 0.25 $ 0.20 $ 0.19 $ 0.16 Merchandise Sales ($ in 000's)................ $ 43,175 $ 40,527 $119,677 $108,139 Merchandise Margins........................... 27% 27% 27% 27% Operating Retail Outlets at Period End........ 153 136 153 136 Wholesale Group Operating Data: Fuel Gallons Sold (000's)................... 150,278 138,126 440,256 379,336 Fuel Margins ($/gal)........................ $ 0.07 $ 0.08 $ 0.06 $ 0.07 Lubricant Sales ($ in 000's)................ $ 18,388 $ 14,081 $ 51,802 $ 31,520 Lubricant Margins........................... 14% 21% 14% 16% (1) Includes statistics for 12 retail stores acquired in the Dial Oil transaction on July 12, 2005. (2) Includes 21 operating stores acquired from Amigo in August 2006 for the three and nine months ended September 30, 2006.
42 RECONCILIATIONS TO AMOUNTS REPORTED UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES REFINING GROUP - -------------- Refining Margin - --------------- Refining margin is the difference between average net sales prices and average cost of products produced per refinery sourced sales barrel of refined product. Refining margins for each of our refineries and all of our refineries on a consolidated basis are calculated as shown below.
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2006 2005 2006 2005 --------- --------- --------- --------- AVERAGE PER BARREL - ------------------ Four Corners Operation Net sales........................................... $ 92.44 $ 83.48 $ 87.89 $ 70.60 Less cost of products............................... 74.13 65.40 70.92 57.39 --------- --------- --------- --------- Refining margin..................................... $ 18.31 $ 18.08 $ 16.97 $ 13.21 ========= ========= ========= ========= Yorktown Operation Net sales........................................... $ 75.24 $ 72.52 $ 73.87 $ 61.42 Less cost of products............................... 71.43 61.27 70.47 52.90 --------- --------- --------- --------- Refining margin..................................... $ 3.81 $ 11.25 $ 3.40 $ 8.52 ========= ========= ========= ========= Consolidated Net sales........................................... $ 80.12 $ 75.71 $ 78.57 $ 64.15 Less cost of products............................... 72.20 62.47 70.62 54.24 --------- --------- --------- --------- Refining margin..................................... $ 7.92 $ 13.24 $ 7.95 $ 9.91 ========= ========= ========= =========
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Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 2006 2005 2006 2005 --------- --------- ---------- --------- Reconciliations of refined product sales from produced products sold per barrel to net revenues Four Corners Operations Average sales price per produced barrel sold.......... $ 92.44 $ 83.48 $ 87.89 $ 70.60 Times refinery sourced sales barrels per day.......... 27,102 29,096 27,547 29,002 Times number of days in period........................ 92 92 273 273 --------- --------- ---------- ---------- Refined product sales from produced products sold* (000's)....................................... $ 230,488 $ 223,462 $ 660,962 $ 558,979 ========= ========= ========== ========== Yorktown Operations Average sales price per produced barrel sold.......... $ 75.24 $ 72.52 $ 73.87 $ 61.42 Times refinery sourced sales barrels per day.......... 68,360 70,936 54,626 68,430 Times number of days in period........................ 92 92 273 273 --------- --------- ---------- ---------- Refined product sales from produced products sold* (000's)....................................... $ 473,193 $ 473,274 $1,101,616 $1,147,411 ========= ========= ========== ========== Consolidated (000's) Sum of refined product sales from produced products sold*...................................... $ 703,681 $ 696,736 $1,762,578 $1,706,390 Purchased product, transportation and other revenues.. 110,921 49,706 390,232 146,199 --------- --------- ---------- ---------- Net revenues.......................................... $ 814,602 $ 746,442 $2,152,810 $1,852,589 ========= ========= ========== ========== *Includes inter-segment net revenues.
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Three Months Ended Nine Months Ended September 30, September 30, --------------------- ----------------------- 2006 2005 2006 2005 --------- --------- ---------- ---------- Reconciliation of average cost of products per produced barrel sold to total cost of products sold (excluding depreciation and amortization) Four Corners Operations Average cost of products per produced barrel sold... $ 74.13 $ 65.40 $ 70.92 $ 57.39 Times refinery sourced sales barrels per day........ 27,102 29,096 27,547 29,002 Times number of days in period...................... 92 92 273 273 --------- --------- ---------- ---------- Cost of products for produced products sold (000's)...................................... $ 184,835 $ 175,065 $ 533,342 $ 454,388 ========= ========= ========== ========== Yorktown Operations Average cost of products per produced barrel sold... $ 71.43 $ 61.27 $ 70.47 $ 52.90 Times refinery sourced sales barrels per day........ 68,360 70,936 54,626 68,430 Times number of days in period...................... 92 92 273 273 --------- --------- ---------- ---------- Cost of products for produced products sold (000's)...................................... $ 449,232 $ 399,855 $1,050,912 $ 988,246 ========= ========= ========== ========== Consolidated (000's) Sum of refined cost of produced products sold....... $ 634,067 $ 574,920 $1,584,254 $1,442,634 Purchased product, transportation and other cost of products sold............................. 103,507 41,174 366,710 121,835 --------- --------- ---------- ---------- Total cost of products sold (excluding depreciation and amortization).................... $ 737,574 $ 616,094 $1,950,964 $1,564,469 ========= ========= ========== ==========
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RETAIL GROUP (1)(2) - ------------ Fuel Margin - ----------- Fuel margin is the difference between fuel sales less cost of fuel sales divided by number of gallons sold. Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2006 2005 2006 2005 --------- --------- --------- --------- (in 000's except fuel margin per gallon) Fuel sales........................................ $ 151,969 $ 123,916 $ 403,045 $ 294,410 Less cost of fuel sold............................ 138,815 114,179 374,960 273,134 --------- --------- --------- --------- Fuel margin....................................... $ 13,154 $ 9,737 $ 28,085 $ 21,276 Number of gallons sold............................ 52,426 48,210 147,709 129,090 Fuel margin per gallon............................ $ 0.25 $ 0.20 $ 0.19 $ 0.16 Reconciliation of fuel sales to net revenues (000's) Fuel sales........................................ $ 151,969 $ 123,916 $ 403,045 $ 294,410 Excise taxes included in sales.................... (20,246) (15,640) (53,025) (46,006) --------- --------- --------- --------- Fuel sales, net of excise taxes................... 131,723 108,276 350,020 248,404 Merchandise sales................................. 43,175 40,527 119,677 108,139 Other sales....................................... 5,387 4,050 15,073 12,109 --------- --------- --------- --------- Net revenues...................................... $ 180,285 $ 152,853 $ 484,770 $ 368,652 ========= ========= ========= ========= Reconciliation of fuel cost of products sold to total cost of products sold (excluding depreciation and amortization) (000's) Fuel cost of products sold........................ $ 138,815 $ 114,179 $ 374,960 $ 273,134 Excise taxes included in cost of products sold.... (20,246) (15,640) (53,025) (46,006) --------- --------- --------- --------- Fuel cost of products sold, net of excise taxes... 118,569 98,539 321,935 227,128 Merchandise cost of products sold................. 31,320 29,535 86,849 78,817 Other cost of products sold....................... 4,163 3,065 11,588 9,494 --------- --------- --------- --------- Total cost of products sold (excluding depreciation and amortization).................. $ 154,052 $ 131,139 $ 420,372 $ 315,439 ========= ========= ========= ========= (1) Includes 12 retail stores acquired in the Dial Oil transaction on July 12, 2005. (2) Includes 21 operating stores acquired from Amigo in August 2006 for the three and nine months ended September 30, 2006.
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WHOLESALE GROUP (1)(2) - --------------- Fuel Margin - ----------- Fuel margin is the difference between fuel sales less cost of fuel sales divided by number of gallons sold. Three Months Ended Nine Months Ended September 30, September 30, --------------------- ----------------------- 2006 2005 2006 2005 --------- --------- ---------- ---------- (in 000's except fuel margin per gallon) Fuel sales........................................ $ 375,004 $ 325,784 $1,075,755 $ 799,579 Less cost of fuel sold............................ 364,420 314,182 1,047,400 773,571 --------- --------- ---------- ---------- Fuel margin....................................... $ 10,584 $ 11,602 $ 28,355 $ 26,008 Number of gallons sold............................ 150,278 138,126 440,256 379,336 Fuel margin per gallon............................ $ 0.07 $ 0.08 $ 0.06 $ 0.07 Reconciliation of fuel sales to net revenues (000's) Fuel sales........................................ $ 375,004 $ 325,784 $1,075,755 $ 799,579 Excise taxes included in sales.................... (48,156) (33,357) (141,714) (119,503) --------- --------- ---------- ---------- Fuel sales, net of excise taxes................... 326,848 292,427 934,041 680,076 Lubricant sales................................... 18,389 14,081 51,802 31,520 Other sales....................................... 3,318 2,204 10,080 4,505 --------- --------- ---------- ---------- Net revenues...................................... $ 348,555 $ 308,712 $ 995,923 $ 716,101 ========= ========= ========== ========== Reconciliation of fuel cost of products sold to total cost of products sold (excluding depreciation and amortization) (000's) Fuel cost of products sold........................ $ 364,420 $ 314,182 $1,047,400 $ 773,571 Excise taxes included in cost of products sold.... (48,156) (33,357) (141,714) (119,503) --------- --------- ---------- ---------- Fuel cost of products sold, net of excise taxes... 316,264 280,825 905,686 654,068 Lubricant cost of products sold................... 15,796 11,461 44,748 26,787 Other cost of products sold....................... 1,089 259 3,637 724 --------- --------- ---------- ---------- Total cost of products sold (excluding depreciation and amortization).................. $ 333,149 $ 292,545 $ 954,071 $ 681,579 ========= ========= ========== ========== (1) Includes Phoenix Fuel and wholesale component of Dial Oil. (2) Dial Oil presents sales and cost of sales, net of excise taxes.
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Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- 2006 2005 2006 2005 ---------- ---------- ---------- ---------- Consolidated - ------------ Reconciliation to net revenues reported in Condensed Consolidated Statements of Operations (000's) Net revenues - Refinery Group..................... $ 814,602 $ 746,442 $2,152,810 $1,852,589 Net revenues - Retail Group....................... 180,285 152,853 484,770 368,652 Net revenues - Wholesale Group.................... 348,555 308,712 995,923 716,101 Net revenues - Other.............................. 90 67 224 378 Eliminations...................................... (177,584) (122,849) (459,475) (277,411) ---------- ---------- ---------- ---------- Total net revenues reported in Condensed Consolidated Statements of Operation............ $1,165,948 $1,085,225 $3,174,252 $2,660,309 ========== ========== ========== ========== Reconciliation to cost of products sold (excluding depreciation and amortization) in Condensed Consolidated Statements of Operations (000's) Cost of products sold - Refinery Group (excluding depreciation and amortization)....... $ 737,574 $ 616,094 $1,950,964 $1,564,469 Cost of products sold - Retail Group (excluding depreciation and amortization)....... 154,052 131,139 420,372 315,439 Cost of products sold - Wholesale Group (excluding depreciation and amortization)....... 333,149 292,545 954,071 681,579 Eliminations...................................... (177,584) (122,849) (459,475) (277,411) Other............................................. 4,940 3,479 13,458 11,006 ---------- ---------- ---------- ---------- Total cost of products sold (excluding depreciation and amortization) reported in Condensed Consolidated Statements of Operations. $1,052,131 $ 920,408 $2,879,390 $2,295,082 ========== ========== ========== ==========
Our refining margin per barrel is calculated by subtracting cost of products from net sales and dividing the result by the number of barrels sold for the period. Our fuel margin per gallon is calculated by subtracting cost of fuel sold from fuel sales and dividing the result by the number of gallons sold for the period. We use refining margin per barrel and fuel margin per gallon to evaluate performance, and allocate resources. These measures may not be comparable to similarly titled measures used by other companies. Investors and analysts use these 48 financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered as alternatives to segment operating income, revenues, costs of sales and operating expenses or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America. We believe the comparability of our continuing results of operations for the three months ended September 30, 2006 with the same period in 2005 was affected by, among others, the following factor: - weaker net refining margins for our Yorktown refinery in 2006 due primarily to the following: - - the processing of relatively high cost feedstocks in a declining crude oil and finished products market, particularly late in the quarter; - the purchase of relatively higher priced crude oil because a supplier had a disruption in its operations; - relatively higher costs that began in the late spring for a blending component; and - delays in putting the ultra low sulfur diesel ("ULSD") unit into operation. This factor was partially offset by the following positive factors: - stronger net refining margins for our Four Corners refineries for the three months ended in September 2006, due to, among other things: - increased sales in our Tier 1 market; and - favorable margins due to tight finished product supply in certain of our market areas; and - a recorded pre-tax gain of $46,050,000 as a result of insurance proceeds received related to the fire at our Yorktown refinery in 2005. We believe the comparability of our continuing results of operations for the nine months ended September 30, 2006 with the same period in 2005 was affected by, among others, the following factor: - weaker net refining margins for our Yorktown refinery in 2006, due primarily to the following: - the Yorktown fire in the fourth quarter of 2005, which resulted in: 49 - a complete shutdown of refinery operations from November 25, 2005 to mid-January, 2006, and a partial shutdown from mid-January, 2006 to late April, 2006; - the need to sell feedstocks for the unit damaged in the fire at a lower margin as compared to sales of finished products while the refinery was operating at less than full capacity; - - the processing of relatively high cost feedstocks in a declining crude oil and finished products market, particularly late in the period; - the purchase of relatively higher priced crude oil because a supplier had a disruption in its operations; - relatively higher costs that began in the late spring for a blending component; and - delays in putting the ULSD unit into operation. This factor was partially offset by the following positive factors: - stronger net refining margins for our Four Corners refineries for the nine months ended September 2006, due to, among other things: - increased sales in our Tier 1 market; and - favorable margins due to tight finished product supply in certain of our market areas; and - a recorded pre-tax gain of $82,003,000 as a result of insurance proceeds received related to the fire at our Yorktown refinery in 2005. EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Our earnings from continuing operations before income taxes decreased $8,268,000 and $1,653,000 for the three and nine months ended September 30, 2006, respectively, compared to the same periods in 2005. As noted above, this decrease was primarily due to an operating loss recorded by our Yorktown refinery operations, partially offset by a gain from insurance proceeds received related to the 2005 Yorktown fire. YORKTOWN REFINERY Our Yorktown refinery operated at an average throughput rate of approximately 70,751 barrels per day in the third quarter of 2006 compared to 68,201 barrels per day in the third quarter of 2005. For the nine months ended September 30, 2006 and 2005, the average throughput rate was 56,367 and 67,472 barrels per day, respectively. 50 Refining margins for the third quarter of 2006 were $3.81 per barrel and were $11.25 per barrel for the third quarter of 2005. This decrease in refining margins was due primarily to the following: - the processing of relatively high cost feedstocks in a declining crude oil and finished products market, particularly late in the quarter; - the purchase of relatively higher priced crude oil because a supplier had a disruption in its operations; - relatively higher costs that began in the late spring for a blending component; and - delays in putting the ULSD unit into operation. Refining margins for the nine months ended September 30, 2006 and 2005 were $3.40 per barrel and $8.52 per barrel, respectively. This decrease in refining margins was due primarily to the following: - the Yorktown fire in the fourth quarter of 2005, which resulted in: - a complete shutdown of refinery operations from November 25, 2005 to mid-January, 2006, and a partial shutdown from mid-January, 2006 to late April, 2006; - the need to sell feedstocks for the unit damaged in the fire at a lower margin as compared to sales of finished products while the refinery was operating at less than full capacity; - the processing of relatively high cost feedstocks in a declining crude oil and finished products market, particularly late in the period; - the purchase of relatively higher priced crude oil because a supplier had a disruption in its operations; - relatively higher costs that began in the late spring for a blending component; and - delays in putting the ULSD unit into operation. Revenues for our Yorktown refinery increased for the three and nine months ended September 30, 2006 primarily due to an increase in finished product prices. Operating expenses for our Yorktown refinery increased for the three and nine months ended September 30, 2006 due to higher outside services and purchased fuel costs, partially offset by decreases in utilities, chemical and catalyst costs. 51 Depreciation and amortization expense for our Yorktown refinery increased for the three and nine months ended September 30, 2006 due to depreciation of additional assets that were put into service during the first nine months of 2006. FOUR CORNERS REFINERIES Our Four Corners refineries operated at an average throughput rate of approximately 26,572 barrels per day in the third quarter of 2006, compared to 29,867 barrels per day in the third quarter of 2005. For the nine months ended September 30, 2006 and 2005, the average throughput rate was 28,108 and 29,500 barrels per day, respectively. Refining margins for the third quarter of 2006 were $18.31 per barrel and were $18.08 per barrel for the third quarter of 2005. Refining margins for the nine months ended September 30, 2006 and 2005 were $16.97 per barrel and $13.21 per barrel, respectively. Revenues for our Four Corners refineries increased for the three and nine months ended September 30, 2006 primarily due to an increase in finished product prices. Operating expenses for our Four Corners refineries increased for the three and nine months ended September 30, 2006 primarily due to higher employee costs, higher costs associated with purchased fuels, catalysts and chemicals, and additional outside services used in connection with our operations. Depreciation and amortization expense for our Four Corners refineries decreased slightly for the three and nine months ended September 30, 2006 as compared to the same period in 2005 due to certain assets being fully depreciated in 2006. RETAIL GROUP Our retail group currently includes 12 convenience stores acquired in the Dial Oil acquisition in July 2005, and 21 operating convenience stores acquired from Amigo in August 2006. Since the Amigo stores were acquired in the third quarter of 2006, the comparative statistics for the three and nine months ended September 30, 2005 do not include Amigo's 21 operating convenience stores. Average fuel margins were $0.25 per gallon for the three months ended September 30, 2006 as compared to $0.20 per gallon for the same period in 2005. Average fuel margins were $0.19 per gallon for the nine months ended September 30, 2006 as compared to $0.16 per gallon for the same period in 2005. Our retail fuel margin per gallon increased slightly for the three and nine months ended September 30, 2006 due to higher finished product sales prices as a result of increased demand. Fuel volumes sold for the three and nine months ended September 30, 2006 increased as compared to the same period a year ago due primarily to 52 favorable market conditions, improved demand over the same period in 2005, and the addition of Amigo's 21 convenience stores that were acquired in August 2006. Average merchandise margins were 27% for the three and nine months ended September 30, 2006 and September 30, 2005. Revenues for our retail group increased for the three and nine months ended September 30, 2006, compared to the same periods in 2005, primarily due to an increase in fuel selling prices, an increase in fuel volumes sold, and the addition of Amigo's 21 convenience stores that were acquired in August 2006. Operating expenses increased for the three and nine months ended September 30, 2006 as compared with the same periods in 2005, primarily due to the addition of Amigo's 21 operating convenience stores that were acquired in August 2006 and higher bank charges as a result of higher fuel volumes and prices. Depreciation and amortization expense decreased for the three months ended September 30, 2006 as compared to the same period in 2005 due to certain assets being fully depreciated in 2006. Depreciation and amortization expense decreased for the nine months ended September 30, 2006 as compared to the same period in 2005 due to a reduction in amortization for our leasehold improvements and due to certain assets being fully depreciated in 2006. WHOLESALE GROUP Our wholesale group includes Phoenix Fuel, Dial Oil's wholesale business, and two bulk petroleum plants that were acquired from Amigo in August 2006. Since the Amigo plants were acquired in the third quarter of 2006, the comparative statistics for the three and nine months ended September 30, 2005 do not include the results of these plants. Average gasoline and diesel fuel margins for our wholesale group were $0.07 per gallon for the three months ended September 30, 2006 as compared to $0.08 for the same period in 2005. Average gasoline and diesel fuel margins for our wholesale group were $0.06 per gallon for the nine months ended September 30, 2006 as compared to $0.07 for the same period in 2005. The decrease in average gasoline and diesel fuel margins for the three and nine months ended September 30, 2006 was due primarily to less favorable market conditions. Fuel volumes for the three and nine months ended September 30, 2006 increased as compared to the same period in 2005 primarily due to the addition of Dial Oil's and Amigo's business to our operations and favorable market conditions. Revenues for our wholesale group increased for the three and nine months ended September 30, 2006 primarily due to higher price per gallon sold, the addition of Dial Oil's business and Amigo's assets to our operations, and favorable market conditions. 53 Operating expenses for our wholesale group increased for the three and nine months ended September 30, 2006 primarily due to higher fuel costs, higher employee payroll and benefit costs, and the addition of Dial Oil's business and Amigo's assets to our operations. Depreciation and amortization expense for our wholesale group increased for the three months and nine ended September 30, 2006 primarily due to the addition of Dial Oil's and Amigo's business to our operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) FROM CONTINUING OPERATIONS For the three months ended September 30, 2006, selling, general and administrative expenses decreased by approximately $2,595,000 as compared to the same period in 2005 due primarily to lower management incentive bonus accruals and lower supplemental retirement benefit accruals in the period. For the nine months ended September 30, 2006, selling, general and administrative expenses increased by approximately $975,000 as compared to the same period in 2005 due primarily to higher employee and outside services costs and the addition of Dial Oil's operations to our business, partially offset by lower management incentive bonus accruals. INTEREST EXPENSE FROM CONTINUING OPERATIONS For the three and nine months ended September 30, 2006, interest expense decreased approximately $630,000 and $5,145,000, respectively, as compared to the same period in 2005. These decreases were primarily due to an increase in interest capitalized to our long-term construction projects, and a reduction in our long-term debt, which was part of our debt reduction strategy implemented beginning in 2002. INCOME TAXES FROM CONTINUING OPERATIONS The effective tax rates for the three months ended September 30, 2006 and 2005 were approximately 37.5% and 40.8%, respectively. The effective tax rates for the nine months ended September 30, 2006 and 2005 were approximately 37.4% and 41.0%, respectively. The decrease was primarily due to our use of tax credits generated in accordance with the American Jobs Creation Act of 2004. Small refiners also are allowed to claim a credit against income tax of five cents on each gallon of ultra low sulfur diesel fuel they produce, up to a maximum of 25% of the capital costs incurred to comply with the regulations. We are producing ultra low sulfur diesel that qualifies for the credit and began benefiting from this credit starting in 2006. DISCONTINUED OPERATIONS Discontinued operations include the operations of some of our retail service station/convenience stores. See Note 4 to our Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information relating to these operations. 54 OUTLOOK We currently believe that our refining fundamentals, overall, are weaker now as compared to the same time last year due, in part, to the narrowing of crack spreads from the post hurricane period of a year ago. Further, we believe that our refining operations will be negatively impacted as a result of the recent fires until our units become fully operational. Same store fuel volumes for our retail group currently are above the prior year's levels, however, fuel margins are lower. In addition, same store merchandise sales for our retail group are above the prior year's level, while same store merchandise margins have remained stable. The wholesale group currently is experiencing stable margins and volumes as compared to the same time last year. Our businesses are, however, very volatile and there can be no assurance that currently existing conditions will continue for any of our business segments. LIQUIDITY AND CAPITAL RESOURCES CAPITAL STRUCTURE At September 30, 2006, we had long-term debt of $275,251,000. At December 31, 2005, we had long-term debt of $274,864,000. There was no current portion of long-term debt outstanding at September 30, 2006 or at December 31, 2005. The amounts at September 30, 2006 and December 31, 2005 include: - $150,000,000 before discount of 8% senior subordinated notes due 2014; and - $130,001,000 before discount of 11% senior subordinated notes due 2012. At September 30, 2006, we had a $175,000,000 revolving credit facility. The availability of funds under this facility is the lesser of (i) $175,000,000, or (ii) the amount determined under a borrowing base calculation tied to eligible accounts receivable and inventories. We also have options to increase the size of the facility to up to $250,000,000. At September 30, 2006, our long-term debt was 36.3% of total capital. At December 31, 2005, it was 40.7%. Our net debt (long-term debt less cash and cash equivalents) to total net capitalization (long-term debt less cash and cash equivalents plus total stockholders' equity) percentage at September 30, 2006, was 31.6%. At December 31, 2005, this percentage was 21.7%. The indentures governing our notes and our credit facility contain restrictive covenants and other terms and conditions that if not maintained, if violated, or if certain conditions are met, could result in default, affect our ability to borrow funds, make certain payments, or 55 engage in certain activities. A default under any of the notes or the credit facility could cause such debt, and by reason of cross-default provisions, our other debt to become immediately due and payable. If we are unable to repay such amounts, the lenders under our credit facility could proceed against the collateral granted to them to secure that debt. If those lenders accelerate the payment of the credit facility, we cannot provide assurance that our assets would be sufficient to pay that debt and other debt or that we would be able to refinance such debt or borrow more money on terms acceptable to us, if at all. Our ability to comply with the covenants, and other terms and conditions, of the indentures and the credit facility may be affected by many events beyond our control, and we cannot provide assurance that our operating results will be sufficient to allow us to comply with the covenants. We expect to be in compliance with the covenants going forward, and we do not believe that any presently contemplated activities will be constrained. A prolonged period of low refining margins, however, would have a negative impact on our ability to borrow funds and to make expenditures and would have an adverse impact on compliance with our debt covenants. In addition, we believe that the closing of the transaction contemplated by the Agreement with Western will constitute a change of control under the indentures. Furthermore, pursuant to the Agreement with Western, Western may require us to tender for the notes. We presently have senior subordinated ratings of "B3" from Moody's Investor Services and "B-" from Standard & Poor's. CASH FLOW FROM OPERATIONS Our operating cash flow decreased by $40,615,000 for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. This decrease primarily resulted from a decrease in our operating income as a result of the 2005 Yorktown fire. Our 2006 operating income includes an $82,000,000 gain from our settlement of claims with our insurance carriers in connection with the fire, of which $26,800,000 pertains to proceeds received for property damage, which is included in "investing activities". WORKING CAPITAL We anticipate that working capital, including that necessary for capital expenditures and debt service, will be funded through existing cash balances, cash generated from operating activities, existing credit facilities, and, if necessary, future financing arrangements. Future liquidity, both short- and long-term, will continue to be primarily dependent on producing or purchasing, and selling, sufficient quantities of refined products at margins sufficient to cover fixed and variable expenses. Based on the current operating environment for all of our operations, we believe that we will have sufficient working capital to meet our needs over the next 12-month period. As noted above, however, the transaction with Western is expected to close in the first quarter of 2007. 56 Working capital at September 30, 2006 consisted of current assets of $410,282,000 and current liabilities of $226,143,000 or a current ratio of 1.81:1. At December 31, 2005, the current ratio was 2.12:1, with current assets of $442,355,000 and current liabilities of $208,508,000. CAPITAL EXPENDITURES AND RESOURCES During 2006, we currently expect to spend $230,800,000 on capital expenditures, excluding any acquisitions. Net cash used in investing activities for purchases of property, plant and equipment totaled approximately $181,562,000 for the nine months ended September 30, 2006 and $48,390,000 for the nine months ended September 30, 2005. Expenditures made in 2006 primarily were for operational and environmental projects for the refineries. We received proceeds of approximately $2,957,000 from the sale of property, plant and equipment and other assets in the first nine months of 2006 and $2,213,000 for the same period in 2005. In addition, we received $26,800,000 of insurance proceeds for property claims filed as a result of the fire at our Yorktown refinery that occurred in the fourth quarter of 2005. We also have received $48,940,000 of insurance proceeds for claims filed under our business interruption insurance coverage in connection with the fire. In October 2006, we received an additional $13,260,000 of insurance proceeds for property and business interruption claims. The total amount received in connection with the Yorktown fire was $89,000,000. No more proceeds will be received in connection with the 2005 fire at our Yorktown refinery as all of our claims have been resolved with our insurance carriers. We continue to monitor and evaluate our assets and may sell additional non-strategic or underperforming assets that we identify as circumstances allow and to the extent permitted under the Western agreement. We also continue to evaluate potential acquisitions in our strategic markets, including lease arrangements, as well as projects that enhance the efficiency and safety of our operations. In addition, we continue to investigate other capital improvements to our existing facilities. The amount of capital projects that are actually undertaken in 2006, and in future years, will depend on, among other things, general business conditions and results of operations, and the limits imposed by the Western Agreement. DIVIDENDS We currently do not pay dividends on our common stock. The Board of Directors will periodically review our policy regarding the payment of dividends. Any future dividends are subject to the results of our operations, declaration by the Board of Directors, existing debt covenants, and the terms of the Western Agreement. The Western Agreement prohibits us from paying dividends without the consent of Western. 57 RISK MANAGEMENT We are exposed to various market risks, including changes in certain commodity prices and interest rates. To manage these normal business exposures, we may, from time to time, use commodity futures and options contracts to reduce price volatility, to fix margins in our refining and marketing operations, and to protect against price declines associated with our crude oil and finished products inventories. Our policies for the use of derivative financial instruments set limits on quantities, require various levels of approval, and require review and reporting procedures. We do not have any open positions related to this matter at September 30, 2006. We also are prohibited from using derivative financial instruments by the terms of the Western Agreement. Our credit facility is floating-rate debt tied to various short-term indices. As a result, our annual interest costs associated with this debt may fluctuate. At September 30, 2006, there were no direct borrowings outstanding under this facility. Our operations are subject to normal hazards of operations, including fire, explosion, and weather-related perils. We maintain various insurance coverages, including business interruption insurance, subject to certain deductibles. We are not fully insured against some risks because some risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures. We recently renewed our property insurance coverage and our business interruption insurance coverage. Due primarily to the fires experienced at our refineries in 2005 and 2006, the cost of such coverage increased by approximately $12,000,000. In addition, our deductibles were increased and the waiting period for business interruption coverage was lengthened. We also agreed with our insurance carriers that the maximum amount that we can recover for the fires that occurred at Yorktown and Ciniza in 2006 is an aggregate of $30,000,000 unless we agree to an additional increase in our recently revised insurance premiums. Credit risk with respect to customer receivables is concentrated in the geographic areas in which we operate and relates primarily to customers in the oil and gas industry. To minimize this risk, we perform ongoing credit evaluations of our customers' financial positions and require collateral, such as letters of credit, in certain circumstances. ENVIRONMENTAL, HEALTH AND SAFETY Federal, state and local laws and regulations relating to health, safety and the environment affect nearly all of our operations. As is the case with other companies engaged in similar industries, we face significant exposure from actual or potential claims and lawsuits, brought by either governmental authorities or private parties, alleging non-compliance with environmental, health, and safety laws and 58 regulations, or property damage or personal injury caused by the environmental, health, or safety impacts of current or historic operations. These matters include soil and water contamination, air pollution, and personal injuries or property damage allegedly caused by substances manufactured, distributed, sold, handled, used, released, or disposed of by us or by our predecessors. Applicable laws and regulations govern the investigation and remediation of contamination at our current and former properties, as well as at third-party sites to which we sent wastes for disposal. We may be held liable for contamination existing at current or former properties, notwithstanding that a prior operator of the site, or other third party, caused the contamination. We also may be held responsible for costs associated with contamination cleanup at third-party disposal sites, notwithstanding that the original disposal activities were in accordance with all applicable regulatory requirements at such time. We currently are engaged in a number of such remediation projects. Future expenditures related to compliance with environmental, health, and safety laws and regulations, the investigation and remediation of contamination, and the defense or settlement of governmental or private party claims and lawsuits cannot be reasonably quantified in many circumstances for various reasons. These reasons include the uncertain nature of remediation and cleanup cost estimates and methods, imprecise and conflicting data regarding the hazardous nature of various types of substances, the number of other potentially responsible parties involved, various defenses that may be available to us, and changing environmental, health, and safety laws and regulations, and their respective interpretations. We cannot give assurance that compliance with such laws or regulations, such investigations or cleanups, or such enforcement proceedings or private-party claims will not have a material adverse effect on our business, financial condition or results of operations. Rules and regulations implementing federal, state, and local laws relating to the environment, health, and safety will continue to affect our operations. We cannot predict what new environmental, health, or safety legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or enforced with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could have an adverse effect on our financial position and the results of our operations and could require substantial expenditures by us for, among other things: - the installation and operation of refinery equipment, pollution control systems, and other equipment not currently possessed by us; 59 - the acquisition or modification of permits applicable to our activities; and - the initiation or modification of cleanup activities. In May 2006, we entered into a consent order with the Environmental Protection Agency and paid a civil penalty of $75,000 to settle an Administrative Compliance Order related to our Bloomfield refinery. For a further discussion of this settlement, see Note 10 to our Condensed Consolidated Financial Statements, captioned "Commitments and Contingencies". In August 2006, we entered into a final administrative consent order with EPA, pursuant to which we will implement the agreed-upon corrective action measures to address certain contaminants at our Yorktown refinery. For a further discussion of this matter, see Note 10 to our Condensed Consolidated Financial Statements, captioned "Commitments and Contingencies". OTHER Our Ciniza and Bloomfield refineries continue to be affected by reduced crude oil production in the Four Corners area. The Four Corners basin is a mature production area and as a result is subject to a natural decline in production over time. This natural decline is being offset to some extent by new drilling, field workovers, and secondary recovery projects, which have resulted in additional production from existing reserves. As a result of the declining production of crude oil in the Four Corners area in recent years, we have not been able to cost-effectively obtain sufficient amounts of crude oil to operate our Four Corners refineries at full capacity. Crude oil utilization rates for our Four Corners refineries have declined from approximately 67% for 2003 to approximately 61% for the first nine months of 2006. Our current projections of Four Corners crude oil production indicate that our crude oil demand will exceed the crude oil supply that is available from local sources for the foreseeable future and that our crude oil capacity utilization rates at our Four Corners refineries will continue to decline unless circumstances change. On August 1, 2005, we acquired an idle crude oil pipeline system that originates near Jal, New Mexico and is connected to a company-owned pipeline network that directly supplies crude oil to the Bloomfield and Ciniza refineries. When operational, the pipeline will have sufficient crude oil transportation capacity to allow us to again operate both refineries at maximum rates. In order to operate the pipeline, we will have to obtain approximately 750,000 barrels of linefill. Startup of the pipeline is subject to, among other things, a final engineering evaluation of the system. The hydrotesting of the pipeline 60 was completed in July 2006, and we currently are continuing to do the work necessary to re-commission the line. As a result of project delays, it currently is anticipated that the pipeline will become operational in February 2007 with new crude oil at the refineries by the end of the first quarter. If additional crude oil or other refinery feedstocks become available in the future via the new pipeline or otherwise, we may increase production runs at our Four Corners refineries depending on the demand for finished products and the refining margins attainable. We continue to assess short-term and long-term options to address the continuing decline in Four Corners crude oil production. The options being considered include: - evaluating potentially economic sources of crude oil produced outside the Four Corners area, including ways to reduce raw material transportation costs to our refineries; - evaluating ways to encourage further production in the Four Corners area; - changes in operation/configuration of equipment at one or both refineries to further the integration of the two refineries, and reduce fixed costs; and - with sufficient further decline in raw material supply, the temporary, partial or permanent discontinuance of operations at one or both refineries. None of these options, however, may prove to be economically viable and all are subject to the terms of the Western Agreement. We cannot assure you that the Four Corners crude oil supply for our Ciniza and Bloomfield refineries will continue to be available at all or on acceptable terms for the long term, that the new pipeline will become operational, or that the additional crude oil supplies accessible via the new pipeline will be available on acceptable terms. Because large portions of the refineries' costs are fixed, any significant interruption or decline in the supply of crude oil or other feedstocks would have an adverse effect on our Four Corners refinery operations and on our overall operations. In October 2004, the President signed the American Jobs Creation Act of 2004 (the "Act"), which includes energy related tax provisions that are available to small refiners, including us. Under the Act, small refiners are allowed to deduct for tax purposes up to 75% of capital expenditures incurred to comply with the highway diesel ultra low sulfur regulations adopted by EPA. The deduction is taken in the year the capital expenditure is made. Small refiners also are allowed to claim a credit against income tax of five cents on each gallon of ultra low sulfur diesel fuel they produce, up to a maximum of 25% of the capital costs incurred to comply with the regulations. We are producing ultra low sulfur diesel that qualifies for the credit and began benefiting from this credit starting in 2006. 61 EPA has issued rules pursuant to the Clean Air Act that require refiners to reduce the sulfur content of gasoline and diesel fuel. Some refiners began producing gasoline that satisfies low sulfur gasoline standards in 2004, with most refiners required to be in full compliance for all production in 2006. Most refiners also were required to begin producing highway diesel fuel that satisfies ultra low sulfur diesel standards by June 2006. All refiners and importers must be in full compliance with the new standards by the end of 2010. Our Yorktown and Ciniza refineries did not begin producing ultra low sulfur diesel fuel by the June 2006 start date. In May 2006, however, we received temporary relief from EPA that allowed us, subject to certain conditions, to remain in compliance with the low sulfur diesel standards. We subsequently determined that we could comply with the ultra low sulfur standards applicable to our Ciniza refinery without the temporary relief granted by EPA. We also determined that we did not need the relief that EPA had previously granted to our Ciniza and Bloomfield refineries under the geographic phase-in area provisions of the agency's low sulfur gasoline regulations. In September 2006, EPA approved our requests to vacate both the temporary relief granted to our Ciniza refinery under the ultra low sulfur diesel program and the relief that our Ciniza and Bloomfield refineries had received under the geographic phase-in area provisions of the low sulfur gasoline program. For a further discussion of matters relating to our production of gasoline and diesel fuel in relation to EPA's low sulfur standards, refer to the discussion under Risk Factors in Item 1A in Part II of this Report on Form 10-Q. In August 2006, Congress passed the Pension Protection Act of 2006 (the "Pension Act"), which was signed into law by the President. We currently believe the Pension Act will have minimal impact on our benefit programs. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements are included throughout this report. These forward- looking statements are not historical facts, but only predictions, and generally can be identified by use of statements that include phrases such as "believe," "expect," "anticipate," "estimate," "could," "plan," "intend," "may," "project," "predict," "will" and terms and phrases of similar import. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate, and the forward-looking statements based on these assumptions could be incorrect. While we have made these forward-looking statements in good faith and they reflect our current judgment regarding such matters, actual results could vary materially from the forward- looking statements. The forward-looking statements included in this report are made only as of their respective dates and we undertake no 62 obligation to publicly update these forward-looking statements to reflect new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events might or might not occur. Actual results and trends in the future may differ materially depending on a variety of important factors. These important factors include the following: - the risk that the Western transaction will not close on schedule or at all; - the availability of crude oil and the adequacy and costs of raw material supplies generally; - our ability to negotiate new crude oil supply contracts; - our ability to successfully manage the liabilities, including environmental liabilities, that we assumed in the Yorktown acquisition; - our ability to obtain anticipated levels of indemnification associated with prior acquisitions and sales of assets; - competitive pressures from existing competitors and new entrants, and other actions that may impact our markets; - our ability to adequately control capital and operating expenses; - the risk that we will be unable to draw on our lines of credit, secure additional financing, access the public debt or equity markets or sell sufficient assets if we are unable to fund anticipated capital expenditures from cash flow generated by operations; - the risk of increased costs resulting from employee matters, including increased employee benefit costs; - continuing shortages of qualified personnel and contractors, including engineers and truck drivers; - the adoption of new state, federal or tribal legislation or regulations; changes to existing legislation or regulations or their interpretation by regulators or the courts; regulatory or judicial findings, including penalties; as well as other future governmental actions that may affect our operations, including the impact of any further changes to government-mandated specifications for gasoline, diesel fuel and other petroleum products (such as the proposed federal regulations relating to the benzene content of gasoline), and the impact of any windfall profit, price gouging, or other legislation that may be adopted in reaction to the current price of motor fuel at the retail level; 63 - unplanned or extended shutdowns in refinery operations; - the risk that future changes in operations to address issues raised by threatened or pending litigation, customer preferences, or other factors, including those related to the use of MTBE as a motor fuel additive, may have an adverse impact on our results of operations; - the risk that we will not remain in compliance with covenants, and other terms and conditions, contained in our notes and credit facility; - the risk that we will not be able to post satisfactory letters of credit; - general economic factors affecting our operations, markets, products, services and prices; - unexpected environmental remediation costs; - weather conditions affecting our operations or the areas in which our products are refined or marketed; - the risk we will be found to have substantial liability in connection with existing or pending litigation; - the occurrence of events that cause losses for which we are not fully insured; - the risk that we will not be able to obtain insurance coverage in future years at affordable premiums, or under reasonable terms, or at all; - the risk that costs associated with environmental projects and other ongoing projects will be higher than currently estimated (including costs associated with the resolution of outstanding environmental matters and costs associated with reducing the sulfur content of motor fuel) or that we will be unable to complete such projects (including motor fuel sulfur reduction projects) by applicable regulatory compliance deadlines; - the risk that our current plans for the production of low sulfur fuels at our refineries (including the possible use of catalyst) may not work as anticipated, requiring us to spend more money to produce these fuels than currently anticipated; - the risk that we will not qualify to produce diesel credits under EPA's low sulfur program; - the risk that EPA will deny our request to utilize gasoline credits generated in 2006 at our Ciniza and Bloomfield refineries; 64 - the risk that the value of the diesel credits that we expect to generate at our Ciniza and Bloomfield refineries will not exceed the cost of purchasing the gasoline credits we may need as a result of vacating the election by our Ciniza and Bloomfield refineries under EPA's geographic phase-in area regulations (the "GPA Election"); - the risk that we will need to purchase more diesel credits for our Yorktown refinery than currently anticipated; - the risk that the cost of diesel credits needed for our Yorktown refinery will be greater than anticipated; - the risk that we will not produce sufficient quantities of ultra low sulfur diesel to comply with our Yorktown compliance plan, or to comply with requirements applicable to our other refineries; - the risk that we will need to sell more high sulfur heating oil at a lower margin as a result of EPA's ultra low sulfur diesel program; - the risk that we will be added as a defendant in additional MTBE lawsuits, and that we will incur substantial liabilities and substantial defense costs in connection with these suits; - the risk that tax authorities will challenge the positions we have taken in preparing our tax returns; - the risk that changes in manufacturer promotional programs may adversely impact our retail operations; - the risk that we will not be able to renew leases, including service station and tank leases, required in connection with our operations on affordable terms or at all; - the risk that the cost of placing into service the crude oil pipeline that we purchased from Texas-New Mexico Pipe Line Company during the third quarter of 2005 (the "Pipeline") will be considerably more than our current estimates; - the risk that the timetable for placing the Pipeline in service will be different than anticipated, or that it will not be possible to place the Pipeline in service at all; - the risk that it will not be possible to obtain additional crude oil at cost effective prices to either fill the Pipeline or transport through the Pipeline for processing at our Bloomfield and Ciniza refineries; - the risk that the quality of crude oil purchased for transportation through the pipeline to our Four Corners refineries will be different than anticipated and will adversely affect our refinery operations; 65 - the risk that repairs to the units at our Yorktown and Ciniza refineries damaged by fire in 2006 will cost more to repair than currently estimated or take longer than currently estimated; - the risk that we will not receive anticipated amounts of insurance proceeds related to the 2006 fires; - the risk that we will be required or choose to undertake additional projects to enhance the safety of our operations; - the risk that the Pension Protection Act of 2006 will have a significant impact on us; and - other risks described elsewhere in this report or described from time to time in our other filings with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the previous statements. Forward-looking statements we make represent our judgment on the dates such statements are made. We assume no obligation to update any information contained in this report or to publicly release the results of any revisions to any forward-looking statements to reflect events or circumstances that occur, or that we become aware of, after the date of this report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to the section entitled "Risk Management" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective as of the date of that evaluation. (b) Change in Internal Control Over Financial Reporting No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 66 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party to ordinary routine litigation incidental to our business. We also incorporate by reference the information regarding contingencies in Note 10 to the Condensed Consolidated Financial Statements set forth in Part I, Item 1, the discussion of legal matters contained in Part I, Item 2, under the headings "Liquidity and Capital Resources - Environmental, Health and Safety" and "Liquidity and Capital Resources - Other", and the discussion of legal matters contained in Part II, Item 1A. ITEM 1A. RISK FACTORS An investment in our common shares involves risk. A discussion of these risks can be found in our Annual Report on Form 10-K for the year ended December 31, 2005 (the "Form 10-K") and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006 (collectively, the "Forms 10-Q"). Set forth below are material changes that have occurred to the risk factors disclosed in the Form 10-K and the Forms 10-Q. Before investing in our shares, you should carefully consider the specific factors described below and in the Form 10-K and the Forms 10-Q, together with the cautionary statements under the caption "Forward- Looking Statements" in Item 2 of this Report, and the other information included in this report. The risks described below and in the Form 10-K and the Forms 10-Q are not the only ones that we face. Additional risks that are not yet known to us or that we currently think are immaterial could also impair our business, financial condition, or results of operations. If any of the risks actually occurs, our business, financial condition, or results of operations could be adversely affected. In such case, the trading price of our common shares could decline, and you may lose all or part of your investment. WE ASSUMED LIABILITIES IN CONNECTION WITH THE ACQUISITION OF OUR YORKTOWN REFINERY We assumed certain liabilities and obligations in connection with our purchase of the Yorktown refinery in 2002 from BP Corporation North America Inc. and BP Products North America Inc. (collectively "BP"). Among other things, and subject to certain exceptions, we assumed responsibility for all costs, expenses, liabilities and obligations under environmental, health, and safety laws caused by, arising from, incurred in connection with, or relating to the ownership of the Yorktown refinery or its operation. We agreed to indemnify BP for losses incurred in connection with or related to the liabilities and obligations we have assumed. We only have limited indemnification rights against BP. 67 Environmental obligations assumed by us include BP's responsibilities related to the Yorktown refinery under a consent decree among various parties covering many locations (the "Consent Decree"). As applicable to the Yorktown refinery, the Consent Decree requires, among other things, a reduction of nitrous oxides, sulfur dioxide, and particulate matter emissions and upgrades to the refinery's leak detection and repair program. We have substantially completed the modifications required by the Consent Decree, and have expended approximately $24,000,000 through the third quarter of 2006. We expect to expend approximately $1,000,000 through 2008 for the remaining equipment modifications. We do not anticipate any significant increase in current operating expenses when all equipment modifications required by the Consent Decree are completed. In connection with the Yorktown acquisition, we also assumed BP's obligations under an administrative order issued in 1991 by EPA under RCRA. The order requires an investigation of certain areas of the refinery and the development of measures to correct any releases of contaminants or hazardous substances found in these areas. A Resource Conservation and Recovery Act Facility Investigation was conducted and approved conditionally by EPA in 2002. Following the investigation, a Risk Assessment/Corrective Measures Study ("RA/CMS") was finalized in 2003, which summarized the remediation measures agreed upon by us, EPA, and the Virginia Department of Environmental Quality ("VDEQ"). The RA/CMS proposes investigation, sampling, monitoring, and cleanup measures, including the construction of an on-site corrective action management unit that would be used to consolidate hazardous solid materials associated with these measures. These proposed actions relate to soil, sludge, and remediation wastes relating to solid waste management units. Groundwater in the aquifers underlying the refinery, and surface water and sediment in a small pond and tidal salt marsh on the refinery property, also are addressed in the RA/CMS. Based on the RA/CMS, EPA issued a proposed cleanup plan for public comment in December 2003 setting forth preferred corrective measures for remediating soil, groundwater, sediment, and surface water contamination at the refinery. Following the public comment period, EPA issued its final remedy decision and response to comments in April 2004. In August 2006, we agreed to the terms of an administrative consent order with EPA, pursuant to which we will implement our cleanup plan. Our most current estimate of expenses associated with the order is between approximately $30,000,000 ($22,500,000 of which we believe is subject to reimbursement by BP) and $40,000,000 ($32,500,000 of which we believe is subject to reimbursement by BP). We anticipate that these expenses will be incurred over a period of approximately 35 years from August 2006. We believe that between approximately $12,000,000 and $16,000,000 of this amount will be incurred over an initial four-year period, and additional expenditures of between approximately $12,000,000 and $16,000,000 will be incurred over the following four-year period, with the remainder thereafter. These estimates assume that EPA will agree with the design and specifications of our cleanup plan. These estimates also could change as a result of factors such as 68 changes in costs of labor and materials. We may be able to receive reimbursement for some of the expenditures associated with the plan due to the environmental reimbursement provisions included in the purchase agreement for the refinery. As part of the consent order cleanup plan, the facility's underground sewer system will be cleaned, inspected and repaired as needed. This sewer work is scheduled to begin during the construction of the corrective action management unit and related remediation work and is included in our associated cost estimate. We anticipate that construction of the corrective action management unit and related remediation work, as well as sewer system inspection and repair, will be completed approximately seven to eight years after EPA approves our clean-up plan and authorizes its implementation. ANY SIGNIFICANT INTERRUPTIONS IN THE OPERATIONS OF ANY OF OUR REFINERIES COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS Our refining activities are conducted at our two refinery locations in New Mexico and the Yorktown refinery in Virginia. The refineries constitute a significant portion of our operating assets, and our two New Mexico refineries supply a significant portion of our retail operations. As a result, our operations would be subject to significant interruption if any of the refineries were to experience a major accident, be damaged by severe weather or other natural disaster, or otherwise be forced to shut down. If any of the refineries were to experience an interruption in supply or operations, our business, financial condition and operating results could be materially and adversely affected. As previously mentioned in our Annual Report on Form 10-K for the year ended December 31, 2005 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006, a fire occurred at our Yorktown refinery on November 25, 2005. Repairs related to this fire were completed in April 2006. Our property insurance covered a significant portion of the costs of repairing the Yorktown refinery and our business interruption insurance reimbursed us for a portion of the financial impact of the fire. As of September 30, 2006, we had received $75,740,000 of insurance proceeds consisting of $26,800,000 for property claims and $49,840,000 for business interruption claims. For the nine months ended September 30, 2006, we recorded a gain of $82,003,000 as a result of insurance recoveries received related to the fire. Included in this gain was $13,260,000 of receivable from the insurance carriers. The $13,260,000 proceeds were received in October 2006. No more proceeds will be received in connection with the 2005 fire at our Yorktown refinery as all of our claims have been resolved with our insurance carriers. On September 30, 2006, a fire occurred at our Yorktown refinery in the processing unit required to produce ultra low sulfur diesel fuel. The affected unit remains shut down, although the rest of the refinery is operating at normal levels. We currently estimate that repairs to the 69 unit will cost approximately $20 million and should be complete by mid- February 2007. Until the unit is repaired, we will sell more heating oil than otherwise would be the case, which is currently a less profitable product than ultra low sulfur diesel. We have property insurance coverage with a $1,000,000 deductible that should cover a significant portion of the costs of repairing the ultra low sulfur diesel unit. We also have business interruption insurance coverage that should cover a significant portion of the financial impact of the fire after the policy's 45-day waiting period is exceeded. As of September 30, 2006, we wrote-off $5,000,000 of property, plant and equipment to accounts receivable in connection with the fire. On October 5, 2006, a pump failure in the alkylation unit at our Ciniza refinery resulted in a fire at the refinery. The fire caused damage to the alkylation unit and an associated unit. The alkylation unit produces high octane blending stock for gasoline. We currently estimate that repairs to the affected units will cost approximately $9 million and should be completed by mid-December of 2006. We have property insurance coverage with a $1,000,000 deductible that should cover a significant portion of the costs of repairing the unit. As a result of the fire, all of the refineries' units were shut down for safety reasons. During the restart of the other units, the fluid catalytic cracker ("FCC") was damaged. The FCC is a unit that alters the molecular composition of materials sent into the unit in order to produce gasoline, diesel, fuel oil, heating oil, and other products. We currently estimate that the repairs to the FCC will cost less than $1,000,000 and are expected to be completed shortly. We anticipate returning the refinery to normal operations, other than the alkylation unit, by next week. COMPLIANCE WITH VARIOUS REGULATORY AND ENVIRONMENTAL LAWS AND REGULATIONS WILL INCREASE THE COST OF OPERATING OUR BUSINESS Our operations are subject to a variety of federal, state, and local environmental, health, and safety laws and regulations governing the discharge of pollutants into the soil, air and water, product specifications, the generation, treatment, storage, transportation and disposal of solid and hazardous waste and materials, and employee health and safety. Violations of such laws and regulations can lead to substantial fines and penalties. Also, these laws and regulations have become, and are becoming, increasingly stringent. Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for, among other things, the installation and operation of refinery equipment, pollution control systems and other equipment we do not currently possess, or the acquisition or modification of permits applicable to our activities. 70 EPA has issued rules pursuant to the Clean Air Act that require refiners to reduce the sulfur content of gasoline and highway diesel fuel. Some refiners began producing gasoline that satisfies low sulfur gasoline standards in 2004, with most refiners required to be in full compliance for all production in 2006. Most refiners also were required to begin producing highway diesel fuel that satisfies ultra low sulfur diesel standards by June 2006. All refiners and importers must be in full compliance with the new standards by the end of 2010. We currently anticipate that we will spend between approximately $190,000,000 to $220,000,000 to comply with EPA's low sulfur standards at our Yorktown refinery. Through September 30, 2006, we have spent approximately $91,000,000 at Yorktown for equipment modifications to comply with these low sulfur standards. There are a number of factors that could affect our cost of compliance with the low sulfur standards. In particular, engineering and construction companies are busy and are charging a premium for their services. Additionally, costs of materials, such as steel and concrete, have increased as a result of demand. These factors could continue to impact our compliance costs. In our Form 10-Q for the period ending June 30, 2006, we estimated that we would spend between approximately $40,000,000 to $55,000,000 to comply with EPA's low sulfur standards at our Four Corners refineries, with the exception of costs associated with the production of diesel fuel sold for certain non-highway purposes. Through September 30, 2006, we have spent approximately $38,000,000 at our Four Corners refineries. There are a number of factors that could affect our cost of compliance with the low sulfur standards. In particular, the quality and quantity of the additional crude oil we will be obtaining when the 16-inch pipeline is operational may impact these costs. As a result of this factor alone, the costs that we actually incur to comply with the low sulfur standards at our Four Corners refineries may be substantially different from our estimates. Furthermore, engineering and construction companies are busy and are charging a premium for their services. Additionally, costs of materials, such as steel and concrete, have increased as a result of demand. These factors could continue to impact our compliance costs. The ultra low sulfur diesel units at our Ciniza and Yorktown refineries have been completed, and we believe insurance proceeds, less our $1,000,000 deductible, will cover the repairs necessary at our Yorktown refinery following the September 2006 fire in the Yorktown ultra low sulfur diesel unit. We are making ultra low sulfur diesel at our Bloomfield refinery, but may make additional modifications related to the production of this fuel in the future. In addition, we are planning to make additional modifications at all of our refineries to produce low sulfur gasoline. Diesel fuel sold for certain non-highway purposes must comply with the ultra low sulfur diesel standards beginning in June 2010. We have already made, are in the process of making, or will make the equipment modifications at our Yorktown and Ciniza refineries that should enable us to satisfy this requirement. Additional equipment modifications, however, will be necessary at our Bloomfield refinery. Our planning has not progressed to the point where an accurate estimate of these Bloomfield costs can be made. 71 In March 2003, EPA approved a compliance plan for our Yorktown refinery that provided us with temporary relief from the low sulfur gasoline standards at this refinery. The compliance plan allowed us to postpone certain capital expenditures for up to three years from the date when they otherwise would have been made. Under the original compliance plan, we were to be in full compliance with the ultra low diesel sulfur standards by June 1, 2006, and the gasoline sulfur standards by January 1, 2008. Although the project timetable is tight, we believe that we are on schedule to produce low sulfur gasoline at Yorktown by that date. The Yorktown compliance plan requires us to provide EPA with reports on our adherence to the compliance plan and on our progress in meeting the low sulfur standards. If we fail to comply with the conditions set by EPA, the compliance plan could be modified or revoked. Further, EPA reserved the right to modify or revoke the compliance plan for other reasons. EPA must, however, provide us with reasonable notice of any anticipated changes in the plan and reasonable lead time to implement any modifications due to changes in the compliance plan. Modifications to or revocation of the compliance plan could increase the quantity of high sulfur products, including product components, that do not meet the new standards. This would likely reduce our Yorktown refining earnings. With respect to our Ciniza and Bloomfield refineries, we previously applied for and received approval under EPA's geographic phase-in area ("GPA") regulations for a two-year extension, through 2008, of the time in which we can sell gasoline that does not satisfy low sulfur standards in most of the geographic area served by these refineries (the "GPA Election"). In return, we agreed that 95% of the highway diesel fuel produced at the Ciniza and Bloomfield refineries would satisfy the ultra low sulfur diesel standards beginning June 1, 2006. In the absence of this extension, we would have become subject to the low sulfur gasoline standards in the GPA area in 2007, and would only have had to produce 80% ultra low sulfur highway diesel at our Ciniza and Bloomfield refineries by the June 1, 2006 deadline. Our Yorktown refinery was not able to meet the June 1, 2006 date specified in the compliance plan for the production of 100% ultra low sulfur diesel for highway use as a result of: (1) the combined effects of Hurricanes Katrina and Rita on the availability of contractors and hardware as well as other similar effects; and (2) the time and effort required to repair damage resulting from the 2005 fire. We were concerned that our Ciniza refinery also would not be able to satisfy the GPA Election ultra low sulfur diesel production requirements that became effective on June 1, 2006 as a result of the availability of contractors and hardware as well as similar effects resulting from the combined effects of Hurricanes Katrina and Rita. Accordingly, we applied for temporary relief from the ultra low sulfur diesel standards at both our Yorktown and Ciniza refineries, which EPA granted. EPA imposed a number of conditions on us in return for relieving us from the June 1, 2006 deadline. These conditions include a requirement that 72 we must produce specified volumes of ultra low sulfur highway diesel at each refinery. Additionally, in order to satisfy a Yorktown condition, we have been purchasing diesel credits in connection with diesel fuel production that does not satisfy the ultra low sulfur diesel standards. We have spent approximately $1,000,000 on credits to date. Although we began producing ultra low sulfur diesel fuel at our Yorktown refinery in early August, on September 30, 2006, a fire occurred in the Yorktown ultra low sulfur diesel processing unit. The affected unit has been shut down, and the rest of the refinery continues to operate at normal levels. This temporary closure of the ultra low sulfur diesel processing unit will affect our ability to satisfy the EPA condition that we produce specified volumes of ultra low sulfur diesel fuel, which could require that we purchase more diesel credits for use at Yorktown in the future. At this time we cannot estimate whether we will be required by EPA to purchase additional diesel credits or whether EPA will impose any new or modified conditions. We may sell more high sulfur heating oil and less diesel fuel at Yorktown than otherwise would be the case as a result of the Yorktown compliance plan, including the additional conditions imposed on us by EPA as a result of our failing to meet the June 1, 2006 ultra low sulfur diesel requirements. We also are selling more high sulfur heating oil and less diesel fuel at Yorktown than otherwise would be the case as a result of the temporary closure of the ultra low sulfur diesel processing unit. At most times, high sulfur heating oil sells for a lower margin than ultra low sulfur diesel fuel. This may have an impact on our results of operation. Our Ciniza refinery began producing ultra low sulfur diesel fuel in mid-June. Our Bloomfield refinery began producing ultra low sulfur diesel prior to June 1, 2006. After evaluating our operations at the Ciniza and Bloomfield refineries, in August 2006, we asked EPA to vacate our GPA Election, as well as the associated temporary relief from the June 1, 2006 deadline that we received for our Ciniza refinery. In September 2006 EPA granted our requests to vacate. We believe that, as a result of the granting of our requests, we will have additional operational flexibility at our Ciniza and Bloomfield refineries, as well as the potential to generate diesel credits. In general, diesel credits can be generated, and sold to others, if more ultra low sulfur diesel fuel is produced at a refinery than is required by the applicable standards. We believe we should be able to generate diesel credits at Ciniza and Bloomfield through 2009. We will, however, need to use gasoline credits at our Ciniza and Bloomfield refineries to satisfy the low sulfur gasoline standards that, as a result of vacating our GPA Election, will apply to our GPA sales beginning in 2007. We will need to use gasoline credits until refinery modifications are completed at both refineries that would enable all of their gasoline 73 production to satisfy the low sulfur standards. These modifications are currently planned to be completed in 2007. If our planned refinery modifications do not reduce gasoline sulfur levels to the required standards, it is possible that some third party gasoline credits would have to be purchased even after such modifications are completed. Both our Ciniza and Bloomfield refineries have generated gasoline credits in connection with 2005 operations. We may be able to use these 2005 credits to satisfy the low sulfur gasoline standards until the planned refinery modifications are completed. If these credits are insufficient, we would need to purchase gasoline credits from third parties. We have also petitioned EPA to recognize that we generated additional credits in 2006. We do not know whether they will grant our request. We anticipate that the potential value of the diesel credits that we expect to generate at Ciniza and Bloomfield as a result of vacating our GPA Election will exceed the cost of purchasing gasoline credits. There can be no assurance, however, that we will qualify to produce diesel credits, or that EPA will agree that we have generated 2006 gasoline credits. There can also be no assurance that the value of any diesel credits that we generate will exceed the cost of any gasoline credits that we may need to purchase as, among other things, we expect the market price of gasoline and diesel credits to fluctuate. It is possible that the net effect of these purchases and sales could have a material positive or negative effect on our operations. 74 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 2.1 Agreement and Plan of Merger, dated August 26, 2006, among Giant Industries, Inc., Western Refining, Inc. and New Acquisition Corporation. Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated August 30, 2006. 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated November 12, 2006, among Giant Industries, Inc., Western Refining, Inc. and New Acquisition Corporation. Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated November 13, 2006. 10.1 Consulting and Non-Competition Agreement, dated August 26, 2006, between Fred L. Holliger and Western Refining, Inc. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 30, 2006. 10.2 Amendment No. 2 to Consulting Agreement, dated November 12, 2006, between Fred L. Holliger and Western Refining, Inc. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated November 13, 2006. 10.3* First Amendment to the Giant Industries, Inc. and Affiliated Companies Deferred Compensation Plan, dated November 13, 2006. 31.1* Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Filed herewith. (b) Reports on Form 8-K: We filed the following reports on Form 8-K during the quarter for which this report is being filed and subsequently: (i) On August 8, 2006, we filed a Form 8-K dated August 8, 2006, containing a press release detailing our earnings for the quarter ended June 30, 2006. 75 (ii) On August 30, 2006, we filed a Form 8-K dated August 30, 2006, relating to the acquisition of us by Western Refining, Inc. ("Western"). (iii) On October 12, 2006, we filed a Form 8-K dated October 12, 2006, containing a press release relating to the Western transaction. (iv) On November 13, 2006, we filed a Form 8-K dated November 13, 2006, regarding the amendment of the terms of the Western transaction. (v) On November 14, 2006, we filed a Form 8-K dated November 14, 2006, containing a press release detailing our earnings for the quarter ended September 30, 2006. 76 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q for the quarter ended September 30, 2006 to be signed on its behalf by the undersigned thereunto duly authorized. GIANT INDUSTRIES, INC. /s/ MARK B. COX ------------------------------------------------- Mark B. Cox, Executive Vice President, Treasurer, Chief Financial Officer and Assistant Secretary, on behalf of the Registrant and as the Registrant's Principal Financial Officer Date: November 14, 2006 77 48 EX-10 2 exhibit10-3.txt GIANT INDUSTRIES, INC. EXHIBIT 10.3 EXHIBIT 10.3 FIRST AMENDMENT TO THE GIANT INDUSTRIES, INC. AND AFFILIATED COMPANIES DEFERRED COMPENSATION PLAN WHEREAS, Giant Industries, Inc. (the "Employer") maintains the Giant Industries, Inc. and Affiliated Companies Deferred Compensation Plan (the "Plan") effective October 31, 2005; and WHEREAS the Employer desires to amend the plan to permit a one-time change in distribution elections under transition rules under applicable regulations; and WHEREAS the Board of Directors has authorized the Administrative Committee to amend the Plan, to facilitate the Plan's administration of its design if the modifications do not significantly increase the cost of the Plan. NOW, THEREFORE, the Plan is amended by adding Section 6.13 as follows: "6.13 TRANSITION ELECTION A Participant may make an election to change the distribution date with respect to amounts deferred for 2005 under Section 6.4; the distribution form with respect to distributions under Section 6.1; and the distribution date under Section 6.7, as long as (1) the election is made by December 31, 2006, (2) the election change is not made with respect to payments that would otherwise be made in 2006, and (3) the election change does not cause payments to be made in 2006." Adopted as of November 13, 2006. Administrative Committee of the Giant Industries, Inc. and Affiliated Companies Deferred Compensation Plan By: /s/ NATALIE R. DOPP ------------------------------------------------- Committee Member: Natalie R. Dopp ----------------------------------- EX-31 3 exhibit31-1.txt GIANT INDUSTRIES, INC. EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Fred L. Holliger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Giant Industries, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2006. By: /s/ FRED L. HOLLIGER ------------------------------- Name: Fred L. Holliger Title: Chief Executive Officer EX-31 4 exhibit31-2.txt GIANT INDUSTRIES, INC. EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark B. Cox, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Giant Industries, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2006. By: /s/ MARK B. COX ------------------------------- Name: Mark B. Cox Title: Chief Financial Officer EX-31 5 exhibit32-1.txt GIANT INDUSTRIES, INC. EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Giant Industries, Inc. ("Giant") on Form 10-Q for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Fred L. Holliger, Chief Executive Officer of Giant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Giant. By: /s/ FRED L. HOLLIGER ------------------------------- Name: Fred L. Holliger Title: Chief Executive Officer Date: November 14, 2006 EX-31 6 exhibit32-2.txt GIANT INDUSTRIES, INC. EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Giant Industries, Inc. ("Giant") on Form 10-Q for the quarter ending September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark B. Cox, Chief Financial Officer of Giant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Giant. By: /s/ MARK B. COX ------------------------------- Name: Mark B. Cox Title: Chief Financial Officer Date: November 14, 2006 -----END PRIVACY-ENHANCED MESSAGE-----