UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from --------------- to -----------------
Commission File Number 1-3876
HOLLY CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1056913
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 871-3555
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
15,519,128 shares of Common Stock, par value $.01 per share, were outstanding on
March 3, 2003.
HOLLY CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Forward-Looking Statements 3
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited) -
January 31, 2003 and July 31, 2002 5
Consolidated Statement of Income (Unaudited) -
Three Months and Six Months Ended January 31, 2003 and 2002 6
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended January 31, 2003 and 2002 7
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months and Six Months Ended January 31, 2003 and 2002 8
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 30
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Certifications 35
Holly Corporation is filing this Amendment No. 2 to its Quarterly
Report on Form 10-Q for the quarter ended January 31, 2003, originally filed on
March 7, 2003 and amended on Form 10-Q/A on September 9, 2003, in response to
comments received from the Securities and Exchange Commission in order to comply
with Item 10(e) of Regulation S-K regarding the use of non-GAAP financial
measures. This Amendment No. 2 amends and restates in its entirety the original
Form 10-Q as amended, but continues to speak as of the date of the original
filing of the original Form 10-Q. Holly Corporation has not updated the
disclosure in this amendment to speak as of a later date. All information
contained in this Amendment No. 2 and the original Form 10-Q as amended, is
subject to updating and supplementing as provided in the periodic reports filed
subsequent to the original filing date with the Securities and Exchange
Commission.
PART I
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q/A contains certain "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts included
in this Form 10-Q/A, including without limitation those under "Results of
Operations," "Liquidity and Capital Resources" and "Additional Factors that May
Affect Future Results" (including "Risk Management") regarding the Company's
financial position and results of operations in Item 2 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Part I and
those in Item 1 "Legal Proceedings" in Part II, are forward-looking statements.
Such statements are subject to risks and uncertainties, including but not
limited to risks and uncertainties with respect to the actions of actual or
potential competitive suppliers of refined petroleum products in the Company's
markets, the demand for and supply of crude oil and refined products, the spread
between market prices for refined products and market prices for crude oil, the
possibility of constraints on the transportation of refined products, the
possibility of inefficiencies or shutdowns in refinery operations or pipelines,
effects of governmental regulations and policies, the availability and cost of
financing to the Company, the effectiveness of the Company's capital investments
and marketing strategies, the Company's efficiency in carrying out construction
projects, the successful acquisition and integration of the Woods Cross
refinery, the possibility of terrorist attacks and the consequences of any such
attacks, and general economic conditions. Should one or more of these risks or
uncertainties, among others as set forth in this Form 10-Q/A, materialize,
actual results may vary materially from those estimated, anticipated or
projected. Although the Company believes that the expectations reflected by such
forward-looking statements are reasonable based on information currently
available to the Company, no assurances can be given that such expectations will
prove to have been correct. Cautionary statements identifying important factors
that could cause actual results to differ materially from the Company's
expectations are set forth in this Form 10-Q/A, including without limitation in
conjunction with the forward-looking statements included in this Form 10-Q/A
that are referred to above. This summary discussion of risks and uncertainties
that may cause actual results to differ from those indicated in forward-looking
statements should be read in conjunction with the discussion under the heading
"Additional Factors That May Affect Future Results" included in Item 7 of the
Company's Annual Report on Form 10-K/A for the fiscal year ended July 31, 2002
and in conjunction with the discussion in this Form 10-Q/A in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the headings "Liquidity and Capital Resources" and "Additional Factors That May
Affect Future Results." All forward-looking statements included in this
Quarterly Report on Form 10-Q/A and all subsequent oral forward-looking
statements attributable to the Company or persons acting on its behalf are
3
expressly qualified in their entirety by the cautionary statements. The
forward-looking statements speak only as of the date made, other than as
required by law, and the Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
Unaudited
JANUARY 31, JULY 31,
2003 2002
----------- --------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 17,751 $ 71,630
Accounts receivable: Product...................................................... 52,723 46,929
Crude oil resales............................................ 110,682 88,466
----------- ---------
163,405 135,395
Inventories: Crude oil and refined products............................... 52,451 35,120
Materials and supplies....................................... 10,334 10,188
----------- ---------
62,785 45,308
Income taxes receivable........................................................... 4,323 8,699
Prepayments and other............................................................. 16,806 17,812
----------- ---------
TOTAL CURRENT ASSETS 265,070 278,844
Properties, plants and equipment, at cost.......................................... 439,126 410,987
Less accumulated depreciation, depletion and amortization.......................... (221,871) (211,526)
----------- ---------
217,255 199,461
Investments in and advances to joint ventures...................................... 15,888 15,732
Other assets: Prepaid transportation....................................... 25,000 -
Refinery acquisition deposit................................. 2,500 -
Other, net................................................... 4,730 8,269
----------- ---------
32,230 8,269
----------- ---------
TOTAL ASSETS................................................................... $ 530,443 $ 502,306
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................................. $ 224,847 $ 185,058
Accrued liabilities............................................................... 23,928 25,342
Current maturities of long-term debt.............................................. 8,571 8,571
----------- ---------
TOTAL CURRENT LIABILITIES...................................................... 257,346 218,971
Deferred income taxes.............................................................. 28,318 29,065
Long-term debt, less current maturities............................................ 17,143 25,714
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value - 1,000,000 shares authorized; none issued....... - -
Common stock, $.01 par value - 20,000,000 shares authorized;
16,853,696 and 16,759,396 shares issued as of January 31, 2003 and July 31, 2002. 168 168
Additional capital................................................................ 15,313 14,013
Retained earnings................................................................. 224,007 223,770
----------- ---------
239,488 237,951
Common stock held in treasury, at cost -
1,334,568 and 1,197,968 shares as of January 31, 2003 and July 31, 2002.......... (11,722) (9,395)
Accumulated other comprehensive loss.............................................. (130) -
----------- ---------
TOTAL STOCKHOLDERS' EQUITY..................................................... 227,636 228,556
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $ 530,443 $ 502,306
=========== =========
See accompanying notes.
5
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands, except per share data)
SALES AND OTHER REVENUES.......................................... $ 270,360 $ 166,754 $ 546,018 $ 424,701
OPERATING COSTS AND EXPENSES
Cost of products sold (exclusive of depreciation,depletion,
and amortization)............................................... 232,429 134,022 464,388 326,006
Operating expenses (exclusive of depreciation,depletion,
and amortization)............................................... 26,189 23,266 50,329 48,012
Selling, general and administrative expenses (exclusive of
depreciation,depletion, and amortization)....................... 5,337 5,228 10,540 10,658
Depreciation, depletion and amortization......................... 7,161 6,714 14,357 13,145
Exploration expenses, including dry holes........................ 261 243 478 542
---------- ---------- ---------- ----------
TOTAL OPERATING COSTS AND EXPENSES........................... 271,377 169,473 540,092 398,363
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS..................................... (1,017) (2,719) 5,926 26,338
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures............................. (1,378) 2,320 604 5,068
Interest income.................................................. 203 365 477 1,047
Interest expense................................................. (396) (758) (1,089) (1,698)
Gain on sale of equity securities................................ - - - 1,522
---------- ---------- ---------- ----------
(1,571) 1,927 (8) 5,939
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................................. (2,588) (792) 5,918 32,277
Income tax provision (benefit)
Current.......................................................... (659) (1,407) 2,934 11,290
Deferred......................................................... (333) 1,100 (667) 1,250
---------- ---------- ---------- ----------
(992) (307) 2,267 12,540
---------- ---------- ---------- ----------
NET INCOME (LOSS)................................................. $ (1,596) $ (485) $ 3,651 $ 19,737
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE - BASIC........................ $ (0.10) $ (0.03) $ 0.24 $ 1.27
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED...................... $ (0.10) $ (0.03) $ 0.23 $ 1.24
========== ========== ========== ==========
CASH DIVIDENDS DECLARED PER COMMON SHARE.......................... $ 0.11 $ 0.10 $ 0.22 $ 0.20
========== ========== ========== ==========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic............................................................ 15,513 15,559 15,517 15,533
Diluted.......................................................... 15,513 15,559 15,913 15,961
See accompanying notes.
6
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
SIX MONTHS ENDED
JANUARY 31,
------------------------
2003 2002
---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 3,651 $ 19,737
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization............... 14,357 13,145
Deferred income taxes.................................. (667) 1,250
Equity in earnings of joint ventures................... (604) (5,068)
(Increase) decrease in current assets
Accounts receivable................................... (28,010) 42,014
Inventories........................................... (17,477) (9,435)
Income taxes receivable............................... 4,376 (7,601)
Prepayments and other................................. 1,006 725
Increase (decrease) in current liabilities
Accounts payable...................................... 39,789 (40,947)
Accrued liabilities................................... (1,414) (430)
Income taxes payable.................................. - (4,661)
Turnaround expenditures................................ (288) (13,909)
Prepaid transportation................................. (25,000) -
Other, net............................................. (263) (1,292)
---------- ----------
NET CASH USED FOR OPERATING ACTIVITIES................ (10,544) (6,472)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt................................ (8,571) (8,572)
Debt issuance costs...................................... (635) -
Issuance of common stock upon exercise of options........ 1,300 1,506
Purchase of treasury stock............................... (2,327) (160)
Cash dividends........................................... (3,414) (3,105)
---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES................ (13,647) (10,331)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment............ (27,634) (12,683)
Refinery acquisition deposit............................. (2,500) -
Investments and advances to joint ventures............... (78) -
Distributions from joint ventures........................ 524 7,400
Proceeds from sale of marketable equity securities....... - 4,500
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES................ (29,688) (783)
---------- ----------
CASH AND CASH EQUIVALENTS
DECREASE FOR THE PERIOD.................................. (53,879) (17,586)
Beginning of year........................................ 71,630 65,840
---------- ----------
END OF PERIOD............................................ $ 17,751 $ 48,254
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest............................................... $ 1,858 $ 2,143
Income taxes........................................... $ 6,115 $ 11,919
See accompanying notes.
7
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------ ------------------
2003 2002 2003 2002
-------- ------- -------- -------
(In thousands)
NET INCOME (LOSS)......................................................... $ (1,596) $ (485) $ 3,651 $19,737
Other comprehensive income (loss)
Reclassification adjustment to net income on sale of equity securities.. - - - (1,522)
Derivative instruments qualifying as cash flow
hedging instruments
Change in fair value of derivative instruments......................... (210) (604) (210) (1,406)
Reclassification adjustment into net income............................ - 1,003 - 2,087
-------- ------- -------- -------
Total income (loss) on cash flow hedges................................. (210) 399 (210) 681
-------- ------- -------- -------
Other comprehensive income (loss) before income taxes................... (210) 399 (210) (841)
Income tax expense (benefit)............................................ (80) 170 (80) (325)
-------- ------- -------- -------
Other comprehensive income (loss)......................................... (130) 229 (130) (516)
-------- ------- -------- -------
TOTAL COMPREHENSIVE INCOME (LOSS)......................................... $ (1,726) $ (256) $ 3,521 $19,221
======== ======= ======== =======
See accompanying notes.
8
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's consolidated financial position as of January 31,
2003, the consolidated results of operations and comprehensive income for the
three months and six months ended January 31, 2003 and 2002, and consolidated
cash flows for the six months ended January 31, 2003 and 2002.
Certain notes and other information have been condensed or omitted,
therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K/A for the fiscal year ended July 31, 2002.
References herein to the "Company" are for convenience of presentation
and may include obligations, commitments or contingencies that pertain solely to
one or more affiliates of the Company. Results of operations for the first six
months of fiscal 2003 are not necessarily indicative of the results to be
expected for the full year.
Note B - New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" which changes how goodwill and other intangible assets are
accounted for subsequent to their initial recognition. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, with early adoption
permitted; however, all goodwill and intangible assets acquired after June 30,
2001, are immediately subject to the provisions of this statement. The Company
adopted the standard effective August 1, 2002 and there was no material effect
on its financial condition, results of operations, or cash flows.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" which requires that the fair value for an asset retirement
obligation be capitalized as part of the carrying amount of the long-lived asset
if a reasonable estimate of fair value can be made. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company adopted the standard effective August 1, 2002 and there was no
material effect on the Company's financial condition, results of operations, or
cash flows.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", but carries over the key guidance from SFAS No. 121 in
establishing the framework for the recognition and measurement of long-lived
assets to be disposed of by sale and addresses significant implementation
issues. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, with early adoption permitted. The Company adopted the standard effective
August 1, 2002 and there was no material effect on its financial condition,
results of operations, or cash flows.
9
HOLLY CORPORATION
In June 2002, FASB issued SFAS No. 146 "Accounting for Certain Costs
Associated with Exit or Disposal Activities" which nullifies Emerging Issues
Task Force ("EITF") 94-3 and requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
and establishes fair value as the objective for initial measurement of
liabilities. This differs from EITF 94-3 which stated that liabilities for exit
costs were to be recognized as of the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted SFAS No. 146 on January
1, 2003, and the standard has had no effect on its financial condition, results
of operations, or cash flows.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure", an amendment of SFAS No. 123. This
statement provides alternative methods of transition to SFAS 123's fair value
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to require disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. SFAS 148's amendment of the disclosure requirements is
effective for interim periods beginning after December 15, 2002. SFAS 148's
amendment of the transition and annual disclosure requirements of SFAS 123 are
effective for fiscal years ending after December 15, 2002.
The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, "Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. As of
January 31, 2003, the Company had approximately $10.4 million of deferred
maintenance costs, all relating to refinery turnarounds in prior periods, which
are being amortized over various benefit periods. The current monthly
amortization is $788,000. If this proposed Statement of Position had been
adopted in its current form, as of January 31, 2003, the Company would have been
required to expense $10.4 million of deferred maintenance costs and would be
required to expense all future turnaround costs as incurred.
Note C - Earnings Per Share
Basic income per share is calculated as net income divided by average
number of shares of common stock outstanding. Diluted income per share assumes,
when dilutive, issuance of the net incremental shares from stock options. In
2000 options to purchase 50,000 shares of common stock were not included in
computing diluted income per share because their effects were antidilutive. The
following is a reconciliation of the numerators and denominators of the basic
and diluted per share computations for net income:
10
HOLLY CORPORATION
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except per share data)
Net income (loss)............................................ $ (1,596) $ (485) $ 3,651 $ 19,737
Average number of shares of common stock outstanding......... 15,513 15,559 15,517 15,533
Effect of dilutive stock options............................. - - 396 428
-------- -------- -------- --------
Average number of shares of common stock
outstanding assuming dilution........................ 15,513 15,559 15,913 15,961
======== ======== ======== ========
Income (loss) per share - basic.............................. $ (0.10) $ (0.03) $ 0.24 $ 1.27
======== ======== ======== ========
Income (loss) per share - diluted............................ $ (0.10) $ (0.03) $ 0.23 $ 1.24
======== ======== ======== ========
Note D - Investments in Joint Ventures
The Company currently has a 49% interest in NK Partners, a joint
venture that manufactures and markets asphalt products from various terminals in
Arizona and New Mexico. The Company accounts for earnings using the equity
method. The Company's Navajo Refinery sells at market prices all of its produced
asphalt to the joint venture. Sales to the joint venture during the three months
ended January 31, 2003 and 2002 were $5.0 million and $2.6 million,
respectively. Sales to the joint venture during the six months ended January 31,
2003 and 2002 were $12.6 million and $10.0 million, respectively.
NK Asphalt Partners Joint Venture (Unaudited):
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands) (In thousands)
Sales (net) ..................... $ 11,763 $ 13,793 $ 37,933 $ 45,229
======== ======== ======== ========
Gross Profit .................... $ (689) $ 4,368 $ 5,533 $ 12,415
======== ======== ======== ========
Income (loss) from operations ... $ (2,987) $ 4,517 $ 684 $ 10,030
======== ======== ======== ========
Net income (loss) before taxes .. $ (3,421) $ 4,160 $ (192) $ 9,276
======== ======== ======== ========
11
HOLLY CORPORATION
Note E - Debt
In August 2002, the Company entered into an agreement with a group of
banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit
Agreement and reduce the commitment from $90 million to $75 million. Under the
terms of the Agreement, now that the Longhorn Partners Pipeline L.P. lawsuit has
been resolved, the expiration date of the Agreement is October 10, 2004, and
interest rate margins for borrowings and fees for letters of credit and bank
commitments have been reduced. Under the current agreement, the Company will
have access to $75 million of commitments for both revolving credit loans and
letters of credit. Up to $37.5 million of this facility may be used for
revolving credit loans. At January 31, 2003, the Company had letters of credit
outstanding under the facility of $15 million and had no borrowings outstanding.
Note F - Stockholders' Equity
On October 30, 2001, the Company announced plans to repurchase up to
$20 million of the Company's common stock. Such repurchases have been made from
time to time in open market purchases or privately negotiated transactions,
subject to price and availability. The repurchases have been financed with
currently available corporate funds. During the six months ended January 31,
2003, the Company repurchased 136,600 shares at a cost of approximately $2.3
million or an average of $17.04 per share. During the month of February 2003,
the Company repurchased an additional 37,300 shares at a cost of approximately
$777,000 or an average of $20.84 per share. From inception of the plan through
March 3, 2003, the Company has repurchased 272,400 shares at a cost of
approximately $4.7 million.
Note G - Derivative Instruments and Hedging Activities
In fiscal 2001, the Company entered into commodity price swaps and
collar options to help manage the exposure to price volatility relating to
forecasted purchases of natural gas from May 2001 through May 2002. These
transactions were designated as cash flow hedges of forecasted purchases. During
the six months ended January 31, 2002, the Company marked the value of the
outstanding hedges to fair value in accordance with SFAS No. 133 and included
$681,000 of income in comprehensive income. Gains (losses) on the natural gas
hedges were reclassified from comprehensive income to operating expenses through
May 2002 when the forecasted transactions impacted earnings.
12
HOLLY CORPORATION
The Company's profitability depends largely on the spread between
market prices for refined products and market prices for crude oil. A
substantial or prolonged reduction in this spread could have a significant
negative effect on the Company's earnings, financial condition and cash flows.
At times, the Company utilizes petroleum commodity futures contracts to minimize
a portion of its exposure to price fluctuations associated with crude oil and
refined products. In December 2002, the Company entered into cash flow hedges
relating to certain forecasted transactions to buy crude oil and sell gasoline
in March 2003. The purpose of the hedges is to help protect the Company from the
risk that the refined product margin would decline with respect to the hedged
crude oil and refined products. To effect the hedges, the Company entered into
gasoline and crude oil futures transactions. Gains and losses reported in
accumulated other comprehensive income will be reclassified into income when the
forecasted transactions affect income. During the quarter ended January 31,
2003, the Company marked the value of the outstanding hedges to fair value in
accordance with SFAS No. 133 and included $210,000 of loss in comprehensive
income. The ineffective portion of the hedges was a $31,000 gain and was
included in cost of sales for the quarter ended January 31, 2003.
Note H - Segment Information
The Company has two major business segments: Refining and Pipeline
Transportation. The Refining segment involves the refining of crude oil and
wholesale marketing of refined products, such as gasoline, diesel fuel and jet
fuel, and includes the Company's Navajo Refinery and Montana Refinery. The
petroleum products produced by the Refining segment are marketed in the
southwestern United States, Montana and northern Mexico. Certain pipelines and
terminals operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Refining segment also includes
the equity earnings from the Company's 49% interest in NK Asphalt Partners,
which manufactures and markets asphalt and asphalt products in Arizona and New
Mexico. The Pipeline Transportation segment includes approximately 1,000 miles
of the Company's pipeline assets in Texas and New Mexico. Revenues of the
Pipeline Transportation segment are earned through transactions with
unaffiliated parties for pipeline transportation, rental and terminalling
operations. Pipeline Transportation segment revenues do not include any amount
relating to pipeline transportation services provided for the Company's refining
operations. The Pipeline Transportation segment also includes the equity
earnings from the Company's 25% interest in Rio Grande Pipeline Company, which
provides petroleum products transportation. Operations of the Company that are
not included in the two reportable segments are included in Corporate and Other,
which includes costs of Holly Corporation, the parent company, consisting
primarily of general and administrative expenses and interest charges, as well
as a small-scale oil and gas exploration and production program, and a small
equity investment in retail gasoline stations and convenience stores.
The accounting policies for the segments are the same as those described
in the summary of significant accounting policies in the Company's Annual Report
on Form 10-K/A for the year ended July 31, 2002. The Company's reportable
segments are strategic business units that offer different products and
services.
13
HOLLY CORPORATION
TOTAL FOR
PIPELINE REPORTABLE CORPORATE CONSOLIDATED
REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL
--------- -------------- ----------- --------- ------------
(In thousands)
THREE MONTHS ENDED JANUARY 31, 2003
Sales and other revenues .............. $ 264,658 $ 5,206 $ 269,864 $ 496 $ 270,360
Depreciation and amortization ......... $ 6,285 $ 359 $ 6,644 $ 517 $ 7,161
Income (loss) from operations ......... $ (1,246) $ 3,020 $ 1,774 $(2,791) $ (1,017)
Income (loss) before income taxes ..... $ (3,323) $ 3,523 $ 200 $(2,788) $ (2,588)
THREE MONTHS ENDED JANUARY 31, 2002
Sales and other revenues .............. $ 161,863 $ 4,536 $ 166,399 $ 355 $ 166,754
Depreciation and amortization ......... $ 6,159 $ 361 $ 6,520 $ 194 $ 6,714
Income (loss) from operations ......... $ (3,028) $ 2,504 $ (524) $(2,195) $ (2,719)
Income (loss) before income taxes ..... $ (1,093) $ 2,850 $ 1,757 $(2,549) $ (792)
SIX MONTHS ENDED JANUARY 31, 2003
Sales and other revenues .............. $ 535,211 $ 10,000 $ 545,211 $ 807 $ 546,018
Depreciation and amortization ......... $ 12,607 $ 715 $ 13,322 $ 1,035 $ 14,357
Income (loss) from operations ......... $ 5,487 $ 5,826 $ 11,313 $(5,387) $ 5,926
Income (loss) before income taxes ..... $ 4,692 $ 6,845 $ 11,537 $(5,619) $ 5,918
SIX MONTHS ENDED JANUARY 31, 2002
Sales and other revenues .............. $ 414,675 $ 9,101 $ 423,776 $ 925 $ 424,701
Depreciation and amortization ......... $ 11,991 $ 710 $ 12,701 $ 444 $ 13,145
Income (loss) from operations ......... $ 25,737 $ 4,986 $ 30,723 $(4,385) $ 26,338
Income (loss) before income taxes ..... $ 30,003 $ 5,617 $ 35,620 $(3,343) $ 32,277
Note I - Contingencies
In November 2002, the Company settled by agreement litigation brought
in August 1998 by Longhorn Partners Pipeline, L.P. ("Longhorn Partners") against
the Company in a state court in El Paso, Texas and litigation brought in August
2002 by the Company against Longhorn Partners and related parties in a state
court in Carlsbad, New Mexico. Under the settlement agreement, which was
developed in voluntary mediation, in November 2002, the Company paid $25 million
to Longhorn Partners as a prepayment for the transportation of 7,000 barrels per
day of refined products from the Gulf Coast to El Paso for a period of up to 6
years from the date of the Longhorn Pipeline's start-up. Longhorn Partners has
also issued to the Company an unsecured $25 million promissory note,
subordinated to certain other indebtedness, that would become payable with
interest in the event that the Longhorn Pipeline does not begin operations by
July 1, 2004, or to the extent Longhorn Partners is unable to provide the
Company the full amount of the agreed transportation services. In the unaudited
consolidated balance sheet at January 31, 2003, the $25 million settlement is
reflected in Assets as "Other assets - Prepaid transportation."
In September 2002, the Federal Energy Regulatory Commission ("FERC")
issued an order in proceedings brought by the Company and other parties against
Kinder Morgan's SFPP, L.P. ("SFPP") relating to tariffs of common carrier
pipelines, which are owned and operated by SFPP, for shipments of refined
products in the period from 1993 through July 2000 from El Paso, Texas to Tucson
and Phoenix, Arizona and from points in California to points in Arizona. The
Company is one of several refiners that regularly utilize an SFPP pipeline to
ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona. The
September 2002 order
14
HOLLY CORPORATION
resolved most remaining issues relating to SFPP's tariffs on the pipelines to
points in Arizona from 1993 through July 2000. On January 29, 2003, the FERC
issued an order accepting most of the computations prepared by SFPP pursuant to
the September 2002 order and requiring a change in one item. Based on the
rulings made by the FERC on this matter in the September 2002 and January 2003
orders, the Company believes that under the final FERC decision for the years at
issue the Company would be entitled to a refund of approximately $15 million.
The final FERC decision on this matter is subject to judicial review by the
Court of Appeals for the District of Columbia Circuit. At the date of this
report, it is not possible to predict when amounts may be payable to the Company
under the final FERC decision on this matter, or what may be the result of
judicial review proceedings on this matter in the Court of Appeals for the
District of Columbia Circuit. No amount relating to this matter has been
included in the Company's financial statements for the six months ended January
31, 2003.
Note J - Refinery Acquisition
In December 2002, the Company announced a definitive agreement with
ConocoPhillips to acquire the Woods Cross refinery near Salt Lake City, Utah and
related assets. The total price for the assets is $25 million, subject to
reduction for certain pension obligations, plus the value of crude oil, refined
product and other inventories currently estimated to be approximately $45
million. The Woods Cross refinery has a crude oil capacity of 25,000 barrels per
day and has operated at close to capacity over the last three years. The
purchase will also include certain pipelines and other transportation assets
used in connection with the refinery, 25 retail service stations located in Utah
and Wyoming, and a 10-year exclusive license to market fuels under the Phillips
brand in the states of Utah, Wyoming, Idaho and Montana. The purchase is
expected to be financed by a combination of cash and debt. The acquisition is
subject to satisfaction of certain closing requirements, including approval of
the transaction by the Federal Trade Commission and certain States. The Company
expects that the acquisition will close in April or May 2003.
Note K - Subsequent Event
On March 3, 2003, the Company sold its Iatan crude oil gathering
pipeline system located in West Texas to Plains Marketing L.P. for a purchase
price of $24 million in cash. In connection with the transaction, the Company
and Plains entered into a six and one half year agreement which commits the
Company to transport any crude oil purchased by the Company in the relevant area
on the Iatan system at an agreed upon tariff. The sale will result in a pre-tax
gain for the Company of approximately $17 million.
15
HOLLY CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Item 2, including but not limited to the sections on "Liquidity
and Capital Resources" and "Additional Factors that May Affect Future Results,"
contains "forward-looking" statements. See "Forward-Looking Statements" at the
beginning of Part I.
RESULTS OF OPERATIONS
FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands, except per share data)
Sales and other revenues ..................................... $ 270,360 $ 166,754 $ 546,018 $ 424,701
Operating costs and expenses
Cost of products sold (exclusive of depreciation,depletion,
and amortization) ....................................... 232,429 134,022 464,388 326,006
Operating expenses (exclusive of depreciation,depletion,
and amortization) ....................................... 26,189 23,266 50,329 48,012
Selling, general and administrative expenses (exclusive of
depreciation,depletion, and amortization) ............... 5,337 5,228 10,540 10,658
Depreciation, depletion and amortization .................. 7,161 6,714 14,357 13,145
Exploration expenses, including dry holes ................. 261 243 478 542
--------- --------- --------- ---------
Total operating costs and expenses ................... 271,377 169,473 540,092 398,363
--------- --------- --------- ---------
Income (loss) from operations ................................ (1,017) (2,719) 5,926 26,338
Other income (expense)
Equity in earnings of joint ventures ...................... (1,378) 2,320 604 5,068
Interest expense, net ..................................... (193) (393) (612) (651)
Gain on sale of equity securities ......................... - - - 1,522
--------- --------- --------- ---------
(1,571) 1,927 (8) 5,939
--------- --------- --------- ---------
Income (loss) before income taxes ............................ (2,588) (792) 5,918 32,277
Income tax provision (benefit) ............................... (992) (307) 2,267 12,540
--------- --------- --------- ---------
Net income (loss) ............................................ $ (1,596) $ (485) $ 3,651 $ 19,737
========= ========= ========= =========
Net income (loss) per common share - basic ................... $ (0.10) $ (0.03) $ 0.24 $ 1.27
Net income (loss) per common share - diluted ................. $ (0.10) $ (0.03) $ 0.23 $ 1.24
Average number of common shares outstanding:
Basic ..................................................... 15,513 15,559 15,517 15,533
Diluted ................................................... 15,513 15,559 15,913 15,961
16
HOLLY CORPORATION
BALANCE SHEET DATA (UNAUDITED)
JANUARY 31, JULY 31,
2003 2002
------------ -------------
(In thousands, except ratio data)
Cash and cash equivalents ............................ $ 17,751 $ 71,630
Working capital ...................................... $ 7,724 $ 59,873
Total assets ......................................... $ 530,443 $ 502,306
Total long-term debt, including current maturities.... $ 25,714 $ 34,285
Stockholders' equity ................................. $ 227,636 $ 228,556
Total debt to capitalization ratio(1) ................ 10.1% 13.0%
(1) The total long-term debt to capitalization ratio is calculated by dividing
total long-term debt including current maturities by the sum of total long-term
debt including current maturities and stockholders' equity.
OTHER FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands) (In thousands)
Sales and other revenues (1)
Refining ............................ $ 264,658 $ 161,863 $ 535,211 $ 414,675
Pipeline Transportation ............. 5,206 4,536 10,000 9,101
Corporate and Other ................. 496 355 807 925
--------- --------- --------- ---------
Consolidated ........................ $ 270,360 $ 166,754 $ 546,018 $ 424,701
========= ========= ========= =========
Income (loss) from operations (1)
Refining ............................ $ (1,246) $ (3,028) $ 5,487 $ 25,737
Pipeline Transportation ............. 3,020 2,504 5,826 4,986
Corporate and Other ................. (2,791) (2,195) (5,387) (4,385)
--------- --------- --------- ---------
Consolidated ........................ $ (1,017) $ (2,719) $ 5,926 $ 26,338
========= ========= ========= =========
Net cash used by operating activities... $ (17,677) $ (30,876) $ (10,544) $ (6,472)
Net cash used by financing activities... $ (9,969) $ (9,348) $ (13,647) $ (10,331)
Net cash used by investing activities... $ (21,598) $ (49) $ (29,688) $ (783)
Capital expenditures ................... $ 19,057 $ 6,299 $ 27,634 $ 12,683
EBITDA (2) ............................. $ 4,766 $ 6,315 $ 20,887 $ 46,073
(1) The Refining segment includes the Company's principal refinery in Artesia,
New Mexico, which is operated in conjunction with refining facilities in
Lovington, New Mexico (collectively, the Navajo Refinery) and the Company's
refinery near Great Falls, Montana. Included in the Refining Segment are costs
relating to pipelines and terminals that operate in conjunction with the
Refining segment as part of the supply and distribution networks of the
refineries. The Pipeline Transportation segment includes approximately 1,000
miles of the Company's pipeline assets in Texas and New Mexico. Revenues of the
Pipeline Transportation segment are earned through transactions with
unaffiliated parties for pipeline transportation, rental and terminalling
operations.
17
HOLLY CORPORATION
(2) Earnings before interest, taxes, depreciation and amortization - EBITDA is
calculated as net income plus (i) interest expense net of interest income, (ii)
income tax provision, and (iii) depreciation, depletion and amortization. EBITDA
is not a calculation based upon generally accepted accounting principles:
however, the amounts included in the EBITDA calculation are derived from amounts
included in the consolidated financial statements of Holly. EBITDA should not be
considered as an alternative to net income or operating income, as an indication
of operating performance of Holly or as an alternative to operating cash flow as
a measure of liquidity. EBITDA is not necessarily comparable to similarly titled
measures of other companies. EBITDA is presented here because it enhances an
investor's understanding of Holly's ability to satisfy principal and interest
obligations with respect to Holly's indebtedness and to use cash for other
purposes, including capital expenditures. EBITDA is also used by Holly
management for internal analysis and as a basis for financial covenants. Our
EBITDA presented above is reconciled to net income as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands) (In thousands)
Net Income(loss) ...................... $ (1,596) $ (485) $ 3,651 $ 19,737
Add provision for income tax ....... (992) (307) 2,267 12,540
Add interest expense ............... 396 758 1,089 1,698
Subtract interest income ........... (203) (365) (477) (1,047)
Add depreciation and amortization... 7,161 6,714 14,357 13,145
-------- -------- -------- --------
EBITDA ................................ $ 4,766 $ 6,315 $ 20,887 $ 46,073
======== ======== ======== ========
REFINING SEGMENT OPERATING DATA (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Crude charge (BPD) (1) .................................... 67,600 52,400 64,700 56,100
Sales of refined products (BPD) (2) ....................... 82,000 68,600 82,200 73,500
Average sales price per sales barrel ...................... $ 35.10 $ 25.63 $ 35.36 $ 30.63
Sales of produced refined products (BPD) .................. 73,100 56,600 71,000 62,000
Average sales price per produced barrel ................... $ 34.95 $ 25.55 $ 35.12 $ 30.47
Reconciliation of Sales and other revenues in
Consolidated Financial Statements
(Also see Note H to Consolidated Financial
Statements)
Sales of refined product (BPD) ............................ 82,000 68,600 82,200 73,500
Average sales price per sales barrel ...................... $ 35.10 $ 25.63 $ 35.36 $ 30.63
Refinery segment sales and other revenues (3) ............. $264,658 $161,863 $535,211 $414,675
Pipeline transportation segment sales and other revenues... $ 5,206 $ 4,536 $ 10,000 $ 9,101
Corporate and Other sales and other revenues .............. $ 496 $ 355 $ 807 $ 925
-------- -------- -------- --------
Consolidated Sales and other revenues ..................... $270,360 $166,754 $546,018 $424,701
======== ======== ======== ========
(1) Crude charge represents the barrels per day of crude oil processed
through the crude units at the Company's refineries.
(2) Includes refined products purchased for resale representing 8,800 BPD,
12,000 BPD, 11,200 BPD, and 11,600 BPD, respectively.
(3) In addition to revenues from sales of refined products, the refining
segment includes other miscellaneous revenues amounting to $(136),
$107, $398, and $435, respectively.
18
HOLLY CORPORATION
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sales of produced refined products
Gasolines ...................... 59.4% 59.0 57.2% 55.5%
Diesel fuels ................... 22.4% 20.8 21.5% 21.1%
Jet fuels ...................... 9.2% 11.1 10.2% 10.6%
Asphalt ........................ 5.5% 5.8 7.6% 9.4%
LPG and other .................. 3.5% 3.3 3.5% 3.4%
-------- -------- -------- --------
Total ..................... 100.0% 100.0 100.0% 100.0%
======== ======== ======== ========
RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED JANUARY 31, 2003
COMPARED WITH THREE MONTHS AND SIX MONTHS ENDED JANUARY 31, 2002
Summary
The Company incurred a net loss for the three months ended January 31,
2003 of $1.6 million ($0.10 per basic and diluted share) compared to a net loss
of $485,000 ($0.03 per basic and diluted share) for the three months ended
January 31, 2002. For the first six months ended January 31, 2003, net income
was $3.7 million ($0.24 per basic share or $0.23 per diluted share) compared to
$19.7 million ($1.27 per basic share or $1.24 per diluted share) for the first
six months ended January 31, 2002. The larger fiscal second quarter loss and the
lower earnings for the first six months ended January 31, 2003, as compared to
the prior year periods, were principally the result of lower refined product
margins, which the Company defines as the difference between refined product
sales prices and the costs of crude oil and other feedstocks exclusive of
depreciation, depletion and amortization, and a loss rather than substantial
earnings at our asphalt joint venture, offset partially by increases in sales
volumes resulting from the absence of a maintenance turnaround in the second
quarter of fiscal 2003.
Three Months Ended January 31, 2003 Compared with Three Months Ended January 31,
2002
For the second quarter of fiscal 2003, the Company experienced a net
loss of $1.6 million as compared to a $485,000 net loss in the second quarter of
fiscal 2002. Refined product margins were poor during the second quarter of both
fiscal years and there were losses incurred by our asphalt joint venture in the
second quarter of fiscal 2003.
For the three months ended January 31, 2003, refined product margins
were slightly less than the refined product margins for the three months ended
January 31, 2002. Revenues from the sale of refined products increased to $264.7
million in the second quarter of fiscal 2003 from $161.9 million in the second
quarter of fiscal 2002 due principally to higher refined product sales prices.
Total product sales volumes for the second quarter ended January 31, 2003,
significantly increased from the quarter ended January 31, 2002. Production of
refined products in the quarter ended January 31, 2002 was reduced as the result
of an extended 29-day planned maintenance turnaround that involved a number of
process units at the Artesia and Lovington facilities.
Cost of sales for the second quarter of fiscal 2003 as compared to the
same quarter of fiscal 2002 increased significantly by $98.4 million to $232.4
million primarily reflecting substantially higher costs of crude oil and, to a
lesser extent, higher production volumes due to the absence of a maintenance
turnaround in the second quarter of fiscal 2003.
19
HOLLY CORPORATION
Operating expenses increased to $26.2 million in the second quarter of
fiscal 2003 from $23.3 million in fiscal 2002. The increase was primarily due to
higher natural gas prices and higher maintenance expenses.
Equity in earnings of joint ventures was a loss of $1.4 million for the
quarter ended January 31, 2003 as compared to income of $2.3 million in the
quarter ended January 31, 2002. The $3.7 million decrease is primarily due to a
loss incurred by our asphalt joint venture because of lower margins and an
inventory charge of $1.3 million, compared to substantial income of the asphalt
joint venture in the comparable quarter of fiscal 2002.
Six Months Ended January 31, 2003 Compared with Six Months Ended January 31,
2002
Net income for the first six months ended January 31, 2003 was $3.7
million compared to $19.7 million for the first six months ended January 31,
2002. Refined product margins were substantially lower in the first six months
of the current fiscal year as compared to the comparable period in fiscal 2002
and there were losses incurred by our asphalt joint venture in the first half of
fiscal 2003, compared to substantial income for the joint venture for the first
half of fiscal 2002.
For the six months ended January 31, 2003, refined product margins were
significantly less than the refined product margins for the six months ended
January 31, 2002. During the prior year's first quarter, the Company along with
the refining industry as a whole, was still experiencing very favorable refined
product margins, which have since declined. Revenues from the sale of refined
products increased to $535.2 million in the first six months of fiscal 2003 from
$414.7 million in the first six months of fiscal 2002 due principally to higher
refined product sales prices. Total product sales volumes for the six months
ended January 31, 2003 increased significantly from the first six months ended
January 31, 2002.
Cost of sales for the first six months ended January 31, 2003 increased
to $464.4 million from $326.0 million for the first six months ended January 31,
2002. The $138.4 million increase was primarily due to higher costs of crude oil
and, to a lesser extent, higher production volumes.
Equity in earnings of joint ventures declined substantially to $604,000
for the first six months ended January 31, 2003, from $5.1 million for the first
six months ended January 31, 2002. The $4.5 million decline resulted primarily
from a loss incurred by our asphalt joint venture because of lower margins for
the first half of fiscal 2003, compared to substantial income for the joint
venture in the first half of fiscal 2002, and an inventory charge of $1.3
million in the second quarter of 2003.
20
HOLLY CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $53.9 million during the first
six months ended January 31, 2003. The reduction in cash was due partially to
the net use of $10.5 million cash for operating activities that was largely a
result of a $25.0 million payment for prepaid transportation services as part of
a settlement by agreement of litigation with Longhorn Partners Pipeline, L.P.
The reduction in cash was also affected by $27.6 million in capital
expenditures, principally for the Navajo Refinery's gas oil hydrotreater and
refinery expansion projects, a $2.5 million deposit related to the acquisition
of the Woods Cross refinery, $8.6 million for scheduled principal payments of
long-term debt, $2.3 million paid for repurchase of treasury shares and $3.4
million for cash dividends.
On October 30, 2001, the Company announced plans to repurchase up to
$20 million of the Company's common stock. Such repurchases have been made from
time to time in open market purchases or privately negotiated transactions,
subject to price and availability. The repurchases have been financed with
currently available corporate funds. During the six months ended January 31,
2003, the Company repurchased 136,600 shares at a cost of approximately $2.3
million or an average of $17.04 per share. During the month of February 2003,
the Company repurchased an additional 37,300 shares at a cost of approximately
$777,000 or an average of $20.84 per share. From inception of the plan through
March 3, 2003, the Company has repurchased 272,400 shares at a cost of
approximately $4.7 million.
In December 2001, an agreement was reached among the Company, the
Environmental Protection Agency, the New Mexico Environment Department, and the
Montana Department of Environmental Quality with respect to a global settlement
of issues concerning the application of air quality requirements to past and
future operations of the Company's refineries. The Consent Decree implementing
this agreement requires investments by the Company expected to total between $15
million and $20 million over a number of years for the installation of certain
state of the art pollution control equipment at the Company's New Mexico and
Montana refineries.
In August 2002, the Company entered into an agreement with a group of
banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit
Agreement and reduce the commitment from $90 million to $75 million. Under the
terms of the Agreement, now that the Longhorn Partners Pipeline L.P. lawsuit has
been resolved, the expiration date of the Agreement is October 10, 2004 and
interest rate margins for borrowings and fees for letters of credit and bank
commitments have been reduced. Under the current agreement, the Company will
have access to $75 million of commitments for both revolving credit loans and
letters of credit. Up to $37.5 million of this facility may be used for
revolving credit loans. At January 31, 2003 the Company had letters of credit
outstanding under the facility of $15 million and had no borrowings outstanding.
In December 2002, the Company announced a definitive agreement with
ConocoPhillips to acquire the Woods Cross refinery near Salt Lake City, Utah and
related assets. The total price for the assets is $25 million subject to
reduction for certain pension obligations, plus the value of crude oil, refined
product and other inventories currently estimated to be approximately $45
million. The purchase is expected to be financed by a combination of cash and
debt. The acquisition is subject to satisfaction of certain closing
requirements, including approval of the transaction by the Federal Trade
Commission and certain States. The Company expects that the acquisition will
close in April or May 2003.
21
HOLLY CORPORATION
On March 3, 2003, the Company sold its Iatan crude oil gathering
pipeline system located in West Texas to Plains Marketing L.P. for a purchase
price of $24 million in cash. In connection with the transaction, the Company
and Plains entered into a six and one half year agreement which commits the
Company to transport any crude oil purchased by the Company in the relevant area
on the Iatan system at an agreed upon tariff. The sale will result in a pre-tax
gain for the Company of approximately $17 million.
The Company believes its internally generated cash flow together with
its Credit Agreement should provide adequate resources to fund planned capital
projects and acquisitions, scheduled repayments of the Senior Notes, continued
payment of dividends (although dividend payments must be approved by the Board
of Directors and cannot be guaranteed) and the Company's current liquidity
needs. However, in view of the increased estimated cost of the Company's planned
Navajo Refinery expansion, increased inventory investments resulting from higher
crude oil and product prices, and the planned acquisition of the Woods Cross
refinery, the Company intends to expand or replace its current Credit Agreement
to provide additional financial flexibility for the future.
Cash Flows from Operating Activities
Cash flows used by operating activities for the first six months of
fiscal 2003 were $10.5 million. For the comparable six month period of fiscal
2002, cash used by operating activities was $6.5 million. The $4.0 million
increase in cash used by operating activities for the first six months of fiscal
2003 as compared to the first six months of fiscal 2002 was due to an $11.6
million reduction in net income, including a net loss rather than net income
from joint ventures, and $25.0 million paid for prepaid transportation services
offset by $13.6 million in reduced turnaround expenditures as compared to the
first half of the 2002 fiscal year and changes in working capital items. In the
first six months of fiscal 2003, changes in working capital items used $1.7
million as compared to the first half of fiscal 2002 when changes in working
capital used $20.3 million.
Cash Flows from Financing Activities
Cash flows used for financing activities were $13.6 million for the
first six months ended January 31, 2003, as compared to $10.3 million in the
same period of the prior year. During the first six months of fiscal 2003, the
Company made a scheduled repayment of long-term debt for $8.6 million, incurred
$635,000 in debt issuance costs in connection with extending its $75 million
credit facility to October 2004, spent $2.3 million to repurchase 136,600 shares
of common stock, paid $3.4 million in dividends and received $1.3 million upon
the exercise of options to acquire 94,300 shares of common stock. During the
first six months of fiscal 2002, the Company made a scheduled repayment of
long-term debt for $8.6 million, spent $160,000 to repurchase 8,600 shares of
its common stock, paid $3.1 million in dividends and received $1.5 million upon
the exercise of options to acquire 108,500 shares of common stock.
22
HOLLY CORPORATION
Cash Flows Used for Investing Activities and Capital Projects
Cash flows used for investing activities were $29.7 million for the
first six months ended January 31, 2003, as compared to $800,000 for the same
period of the 2002 fiscal year. Cash expenditures for property, plant and
equipment for the first six months of the current and prior fiscal years were
$27.6 million and $12.7 million respectively. Also in the six months ended
January 31, 2003, the Company made a $2.5 million deposit in connection with the
acquisition of the Woods Cross refinery. Most of the increase is due to the
Navajo Refinery's gas oil hydrotreater and expansion projects. The Company's net
cash flow used for investing activities was reduced during the first six months
of fiscal 2003 by a $487,000 distribution to the Company from the Rio Grande
Pipeline joint venture. During the first six months of fiscal 2002, the
Company's net cash flow used by investing activities was reduced by a $1.9
million distribution to the Company from the Rio Grande Pipeline joint ventures,
a $5.5 million distribution to the Company from the asphalt joint venture and by
$4.5 million of proceeds from the sale of marketable equity securities held for
investment.
The Company's capital budget adopted for fiscal year 2003 totals $14.8
million - $6.5 million for additional costs relating to the hydrotreater project
and refinery expansion, $3.2 million for other refinery improvements, $3 million
for pipeline transportation projects, $.6 million for oil and gas exploration
and production, and $1.5 million for information technology and other. The 2003
capital budget includes authorizations for some expenditures that are expected
to be made after the close of the 2003 fiscal year. The Company expects to
expend approximately $40 million in fiscal 2003 for capital improvements, which
includes amounts authorized in previous fiscal years. This amount is expected to
be allocated approximately $30 million for the hydrotreater project and the
refinery expansion to an estimated 75,000 barrels per day ("BPD") as described
below, approximately $6 million for other refinery improvements, approximately
$2 million for pipeline and transportation projects, and approximately $2
million for other projects, including information technology projects and oil
and gas exploration and development. These expenditures include projects
authorized in the Company's 2003 capital budget as well as expenditures
authorized in prior capital budgets but expected to be carried out in fiscal
2003.
In November 1997, the Company purchased a hydrotreater unit for $5.1
million from a closed refinery. This purchase gave the Company the ability to
reconstruct the unit at the Navajo Refinery at an estimated savings of
approximately $20.0 million as compared to the purchase cost of a new unit.
During the last four years, the Company spent approximately $27.9 million on
relocation, engineering, equipment fabrication, and construction related to the
hydrotreater and expansion projects. The remaining costs to complete the
hydrotreater project and the expansion project are estimated to be approximately
$34.5 million. The Company expects that the hydrotreater project will be
completed by December 2003. The hydrotreater will enhance higher value light
product yields and expand the Company's ability to produce additional quantities
of gasolines meeting the present California Air Resources Board ("CARB")
standards, which have been adopted in the Company's Phoenix market for winter
months beginning in late 2000, and to meet the recently adopted EPA nationwide
Low-Sulfur Gasoline requirements scheduled to begin in 2004. In fiscal 2001 the
Company completed the construction of a new additional sulfur recovery unit,
which is currently utilized to enhance sour crude processing capabilities and
will provide sufficient capacity to recover the additional extracted sulfur that
will result from operation of the hydrotreater.
23
HOLLY CORPORATION
Contemporaneous with the hydrotreater project, the Navajo Refinery will
be making necessary modifications to several of the Artesia processing units for
the first phase of Navajo's expansion, which will increase crude oil refining
capacity from 60,000 BPD to approximately 75,000 BPD. The first phase of the
expansion is expected to be completed by December 2003. Additional air emission
permits will be required to implement needed modifications at Navajo's
Lovington, New Mexico refining facility which is operated in conjunction with
the Artesia facility. It is envisioned that these necessary modifications to the
Lovington facility would also be completed by December 2003. The permits
received by Navajo to date for the Artesia facility, subject to possible minor
modifications, should also permit a second phase expansion of Navajo's crude oil
capacity from an estimated 75,000 BPD to an estimated 80,000 BPD, but a schedule
for such additional expansion has not been determined. During the three months
ended January 31, 2003, engineering and planning for the projects has been
nearly completed and the Company's estimate of the total cost of the projects
has increased from approximately $56 million to approximately $67.5 million due
to the increased costs and scope of certain refinery infrastructure upgrades,
added capacity and sulfur recovery capabilities and the increased actual costs
of previously estimated portions of the projects.
In December 2002, the Company announced a definitive agreement with
ConocoPhillips to acquire the Woods Cross refinery near Salt Lake City, Utah and
related assets. The total price for the assets is $25 million, subject to
reduction for certain pension obligations, plus the value of crude oil, refined
product and other inventories currently estimated to be approximately $45
million. The Woods Cross refinery has a crude oil capacity of 25,000 barrels per
day and has operated at close to capacity over the last three years. The
purchase will also include certain pipelines and other transportation assets
used in connection with the refinery, 25 retail service stations located in Utah
and Wyoming, and a 10-year exclusive license to market fuels under the Phillips
brand in the states of Utah, Wyoming, Idaho and Montana. The purchase is
expected to be financed by a combination of cash and debt. The acquisition is
subject to satisfaction of certain closing requirements, including approval of
the transaction by the Federal Trade Commission and certain States. The Company
expects that the acquisition will close in April or May 2003.
The Company leases from Mid-America Pipeline Company more than 300
miles of 8" pipeline running from Chaves County to San Juan County, New Mexico
(the "Leased Pipeline"). The Company owns and operates a 12" pipeline from the
Navajo Refinery to the Leased Pipeline as well as terminalling facilities in
Bloomfield, New Mexico, which is located in the northwest corner of New Mexico
and in Moriarty, which is 40 miles east of Albuquerque. Transportation of
petroleum products to markets in northwest New Mexico and diesel fuels to
Moriarty began in the last months of calendar 1999. In December 2001, the
Company completed its expansion of the Moriarty terminal and its pumping
capacity on the Leased Pipeline. The terminal expansion included the addition of
gasoline and jet fuel to the existing diesel fuel delivery capabilities, thus
permitting the Company to provide a full slate of light products to the growing
Albuquerque and Santa Fe, New Mexico areas. The enhanced pumping capabilities on
the Company's leased pipeline extending from the Artesia refinery through
Moriarty to Bloomfield will permit the Company to deliver a total of over 45,000
BPD of light products to these locations. If needed, additional pump stations
could further increase the pipeline's capabilities.
24
HOLLY CORPORATION
Contractual Obligations and Commitments
The following table presents long-term contractual obligations of the
Company in total and by period due. These items include the Company's long-term
debt based on maturity dates and the Company's operating lease commitments. The
Company's operating leases contain renewal options that are not reflected in the
table below and that are likely to be exercised.
PAYMENTS DUE BY PERIOD
---------------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS OVER 5 YEARS
------------------------------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
Long-term debt (stated maturities).. $ 25,714 $ 8,571 $ 17,143 $ - $ -
Operating leases ................... $ 26,564 $ 6,091 $ 11,976 $ 8,210 $ 287
In July 2000, Navajo Western Asphalt Company ("Navajo Western"), a
wholly-owned subsidiary of the Company, and a subsidiary of Koch Materials
Company ("Koch") formed a joint venture, NK Asphalt Partners, to manufacture and
market asphalt and asphalt products in Arizona and New Mexico under the name
"Koch Asphalt Solutions - Southwest." Navajo Western contributed all of its
assets to NK Asphalt Partners and Koch contributed its New Mexico and Arizona
asphalt and manufacturing assets to NK Asphalt Partners. All asphalt produced at
the Navajo Refinery is sold at market prices to the joint venture under a supply
agreement. The Company is required to make additional contributions to the joint
venture of up to $3,250,000 for each of the next eight years contingent on the
earnings level of the joint venture. The Company expects to finance such
contributions from its share of cash flows of the joint venture. In the event
that Holly fails to make the required contributions, Holly may lose its voting
rights during such default and the other partner could cause the partnership to
bring a proceeding to collect the unpaid contributions plus interest at the
prime rate plus 2%.
As part of the Consent Decree filed December 2001 implementing an
agreement reached among the Company, the Environmental Protection Agency, the
New Mexico Environment Department, and the Montana Department of Environmental
Quality, the Company is required to make investments at the Company's New Mexico
and Montana refineries for the installation of certain state of the art
pollution control equipment expected to total between $15 million and $20
million over a period expected to end in 2009.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
This discussion should be read in conjunction with the discussion under
the heading "Additional Factors That May Affect Future Results" included in Item
7 of the Company's Annual Report on Form 10-K/A for the fiscal year ended July
31, 2002.
The proposed Longhorn Pipeline, which is owned by Longhorn Partners
Pipeline, L.P. ("Longhorn Partners"), is an additional potential source of
pipeline transportation from Gulf Coast refineries to El Paso. This pipeline is
proposed to run approximately 700 miles from the Houston area of the Gulf Coast
to El Paso, utilizing a direct route. Longhorn Partners has proposed to use the
pipeline initially to transport approximately 72,000 BPD of refined products
from the Gulf Coast to El Paso and markets served from El Paso, with an ultimate
maximum capacity of 225,000 BPD. Although most construction has been completed,
the Longhorn Pipeline will not begin operations until the completion of certain
agreed improvements and pre-start-up steps. Published reports indicate that
construction in preparation for start-up of the
25
HOLLY CORPORATION
Longhorn Pipeline continued until late July 2002, when the construction
activities were halted before completion of the project. The latest public
statements from Longhorn Partners indicate that Longhorn Partners is seeking
additional financing to complete the project and that the pipeline will not
begin operations prior to May 2003. The proposed operation of the Longhorn
Pipeline is also the subject of a pending appeal in the United States Court of
Appeals for the Fifth Circuit of a decision by the federal district court in
Austin, Texas that allows the Longhorn Pipeline to begin operations when agreed
improvements have been completed. This appeal seeks a ruling that would reverse
the federal district court's decision and require a full environmental impact
study before the Longhorn Pipeline is allowed to operate.
If the Longhorn Pipeline operates as currently proposed, lower
requirements for capital investment permitted by the direct route through
Austin, Texas and over the Edwards Aquifers could allow Longhorn Partners to
give its shippers a cost advantage through lower tariffs that could, at least
for a period, result in significant downward pressure on wholesale refined
products prices and refined products margins, which the Company defines as the
difference between refined product sales prices and the costs for crude oil and
other feedstocks exclusive of depreciation, depletion and amortization, in El
Paso and related markets. However, any effects on the Company's markets in
Tucson and Phoenix, Arizona and Albuquerque, New Mexico would be expected to be
limited in the next few years because current common carrier pipelines from El
Paso to these markets are now running at capacity and proration policies of
these pipelines allocate only limited capacity to new shippers. Although the
Company's results of operations might be adversely impacted and some current
suppliers in the market might not compete in such a climate, the Company's
analyses indicate that, because of location, recent capital improvements, and
enhancements to operational efficiency, the Company's position in El Paso and
markets served from El Paso could withstand a period of lower prices and refined
product margins that might result from operation of the Longhorn Pipeline as
currently proposed.
As a result of the Company's settlement in November 2002 of litigation
with Longhorn Partners as described in Part II, Item 1 "Legal Proceedings," on
November 26, 2002 the Company prepaid $25,000,000 to Longhorn Partners for the
shipment of 7,000 BPD of refined products from the Gulf Coast to El Paso in a
period of up to 6 years from the date the Longhorn Pipeline begins operations if
such operations begin by July 1, 2004. Under the agreement, the prepayment would
cover shipments of 7,000 BPD by the Company for approximately 4 1/2 years
assuming there were no curtailments of service once operations began. The
Company plans to make use of the prepaid transportation services to ship
purchased refined products on the Longhorn Pipeline to meet obligations of the
Company to deliver refined products to customers in El Paso. These
transportation services are expected to be of benefit to the Company because the
Company believes that most or all of such refined products shipped by the
Company on the Longhorn Pipeline would take the place of products that would
otherwise have been purchased by the Company from other suppliers.
At the date of this report, it is not possible to predict whether and,
if so, under what conditions, the Longhorn Pipeline will ultimately be operated,
nor is it possible to predict the overall impact on the Company if the Longhorn
Pipeline does not ultimately begin operations or begins operations at different
possible future dates. Under the terms of the November 2002 settlement agreement
that terminated litigation between the Company and Longhorn Partners, the
Company would have an unsecured claim for repayment of the Company's $25,000,000
prepayment to Longhorn Partners for transportation services in the event the
Longhorn Pipeline did not begin operations by July 1, 2004 or announced that it
would not begin operations by that date.
26
HOLLY CORPORATION
In November 2002, the Company settled by agreement litigation brought
in August 1998 by Longhorn Partners Pipeline, L.P. against the Company in a
state court in El Paso, Texas and litigation brought in August 2002 by the
Company against Longhorn Partners and related parties in a state court in
Carlsbad, New Mexico. For additional information on this settlement, see Part
II, Item 1 "Legal Proceedings."
Other legal proceedings that could affect future results are described
in Part II, Item 1 "Legal Proceedings."
RISK MANAGEMENT
The Company uses certain strategies to reduce some commodity price and
operational risks. The Company does not attempt to eliminate all market risk
exposures when the Company believes the exposure relating to such risk would not
be significant to the Company's future earnings, financial position, capital
resources or liquidity or that the cost of eliminating the exposure would
outweigh the benefit.
The Company's profitability depends largely on the spread between
market prices for refined products and market prices for crude oil. A
substantial or prolonged reduction in this spread could have a significant
negative effect on the Company's earnings, financial condition and cash flows.
At times, the Company utilizes petroleum commodity futures contracts to minimize
a portion of its exposure to price fluctuations associated with crude oil and
refined products. In December 2002, the Company entered into cash flow hedges
relating to certain forecasted transactions to buy crude oil and sell gasoline
in March 2003. The purpose of the hedges is to help protect the Company from the
risk that the refined product margin would decline with respect to the hedged
crude oil and refined products. To effect the hedges, the Company entered into
gasoline and crude oil futures transactions. Gains and losses reported in
accumulated other comprehensive income will be reclassified into income when the
forecasted transactions affect income. During the quarter ended January 31,
2003, the Company marked the value of the outstanding hedges to fair value in
accordance with SFAS No. 133 and included $210,000 of loss in comprehensive
income. The ineffective portion of the hedges was a $31,000 gain and was
included in cost of sales for the quarter ended January 31, 2003.
At January 31, 2003, the Company had outstanding unsecured debt of
$25.7 million and had no borrowings outstanding under its Credit Agreement. The
Company does not have significant exposure to changing interest rates on its
unsecured debt because the interest rates are fixed, the average maturity is
less than two years and such debt represents approximately 10% of the Company's
total capitalization. As the interest rates on the Company's bank borrowings are
reset frequently based on either the bank's daily effective prime rate, or the
LIBOR rate, interest rate market risk is very low. There have been no bank
borrowings in fiscal 2002, or thus far for fiscal 2003. Additionally, the
Company invests any available cash only in investment grade, highly liquid
investments with maturities of three months or less and hence the interest rate
market risk implicit in these cash investments is low. A one percent change in
the market interest rate over the next year would not materially impact the
Company's earnings or cash flow since the interest rates on the Company's
long-term debt are fixed and the Company's borrowings under the Credit
Agreement, if any, and cash investments are at short-term market rates and such
interest has historically not been significant as compared to the total
operations of the Company. A one percent change in the market interest rate over
the next year would not materially impact
27
HOLLY CORPORATION
the Company's financial condition since the average maturity of the Company's
long-term debt is less than two years, such debt represents approximately 10% of
the Company's total capitalization, and the Company's borrowings under the
Credit Agreement and cash investments are at short-term market rates.
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company maintains
various insurance coverages, including business interruption insurance, subject
to certain deductibles. The Company is not fully insured against certain risks
because such risks are not fully insurable, coverage is unavailable, or premium
costs, in the judgment of the Company, do not justify such expenditures. Shortly
after the events of September 11, 2001, the Company completed a security
assessment of its principal facilities. Several security measures identified in
the assessment have been implemented and others are in the process of being
implemented. Because of recent changes in insurance markets, insurance coverages
available to the Company are becoming more costly and in some cases less
available. So long as this current trend continues, the Company expects to incur
higher insurance costs and anticipates that, in some cases, it will be necessary
to reduce somewhat the extent of insurance coverages because of reduced
insurance availability at acceptable premium costs.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" which changes how goodwill and other intangible assets are
accounted for subsequent to their initial recognition. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, with early adoption
permitted; however, all goodwill and intangible assets acquired after June 30,
2001, are immediately subject to the provisions of this statement. The Company
adopted the standard effective August 1, 2002 and there was no material effect
on its financial condition, results of operations, or cash flows.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" which requires that the fair value for an asset retirement
obligation be capitalized as part of the carrying amount of the long-lived asset
if a reasonable estimate of fair value can be made. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company adopted the standard effective August 1, 2002 and there was no
material effect on the Company's financial condition, results of operations, or
cash flows.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", but carries over the key guidance from SFAS No. 121 in
establishing the framework for the recognition and measurement of long-lived
assets to be disposed of by sale and addresses significant implementation
issues. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, with early adoption permitted. The Company adopted the standard effective
August 1, 2002 and there was no material effect on its financial condition,
results of operations, or cash flows.
In June 2002, FASB issued SFAS No. 146 "Accounting for Certain Costs
Associated with Exit or Disposal Activities" which nullifies Emerging Issues
Task Force ("EITF") 94-3 and requires that a liability for a cost associated
with an exit or disposal activity be recognized when
28
HOLLY CORPORATION
the liability is incurred and establishes fair value as the objective for
initial measurement of liabilities. This differs from EITF 94-3 which stated
that liabilities for exit costs were to be recognized as of the date of an
entity's commitment to an exit plan. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
adopted SFAS No. 146 on January 1, 2003, and the standard has had no effect on
its financial condition, results of operations, or cash flows.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure", an amendment of SFAS No. 123. This
statement provides alternative methods of transition to SFAS 123's fair value
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to require disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. SFAS 148's amendment of the disclosure requirements is
effective for interim periods beginning after December 15, 2002. SFAS 148's
amendment of the transition and annual disclosure requirements of SFAS 123 are
effective for fiscal years ending after December 15, 2002.
The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, "Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. As of
January 31, 2003, the Company had approximately $10.4 million of deferred
maintenance costs, all relating to refinery turnarounds in prior periods, which
are being amortized over various benefit periods. The current monthly
amortization is $788,000. If this proposed Statement of Position had been
adopted in its current form, as of January 31, 2003, the Company would have been
required to expense, as of January 31, 2003, $10.4 million of deferred
maintenance costs and would be required to expense all future turnaround costs
as incurred.
29
HOLLY CORPORATION
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and principal financial
officer have evaluated the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this quarterly report on Form 10-Q/A.
Based on that evaluation, these officers concluded that the design and operation
of the Company's disclosure controls and procedures are effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in internal controls.
There have been no significant changes in the Company's internal
controls, or in other factors that could significantly affect internal controls,
subsequent to the date the principal executive officer and principal financial
officer of the Company completed their evaluation.
30
HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 2002, the Company settled by agreement litigation brought
in August 1998 by Longhorn Partners Pipeline, L.P. ("Longhorn Partners") against
the Company in a state court in El Paso, Texas and litigation brought in August
2002 by the Company against Longhorn Partners and related parties in a state
court in Carlsbad, New Mexico. A description of this litigation is included in
Item 3 "Legal Proceedings" of the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 2002. Under the settlement agreement, which was
developed in voluntary mediation, on November 26, 2002 the Company paid $25
million to Longhorn Partners as a prepayment for the transportation of 7,000 BPD
of refined products from the Gulf Coast to El Paso in a period of up to 6 years
from the date of the Longhorn Pipeline's start-up. Longhorn Partners has also
issued to the Company an unsecured $25 million promissory note, subordinated to
certain other indebtedness, that would become payable with interest in the event
that the Longhorn Pipeline does not begin operations by July 1, 2004 or to the
extent Longhorn Partners is unable to provide the Company the full amount of the
agreed transportation services. This settlement has resulted in a termination of
all litigation between the Company and Longhorn Partners and related parties. As
part of the settlement, the Company has terminated all support for opposition to
the Longhorn Pipeline except support for one family in two pending lawsuits
where an existing contractual obligation requires a continuation of such
support; the Company is seeking to enter into an agreement to terminate this
contractual obligation.
In November 2002, the Department of Defense issued final decisions
rejecting claims under the Contract Disputes Act, which were filed by the
Company in September 2002, asserting that additional amounts totaling
approximately $88 million are due to the Company with respect to jet fuel sales
to the Defense Fuel Supply Center in the years 1995 through 1999 (the "1995-99
Jet Fuel Claims"). Subsequent to these decisions, the Company in November 2002
filed an amended complaint in the United States Court of Federal Claims to add
the 1995-99 Jet Fuel Claims to the Company's pending suit which was filed in
September 2002 and related originally to claims for the years 1982 through 1995.
As a result of the amendment, the total amount sought in the Company's suit for
all years from 1982 through 1999 is approximately $298 million. In January 2003,
the Federal Government filed a motion for partial summary judgment in this suit,
and in February 2003, the Company filed a cross motion for partial summary
judgment. It is not possible at the date of this report to predict what amount,
if any, will ultimately be payable to the Company with respect to this lawsuit.
In September 2002, the Federal Energy Regulatory Commission ("FERC")
issued an order in proceedings brought by the Company and other parties against
Kinder Morgan's SFPP, L.P. ("SFPP") relating to tariffs of common carrier
pipelines, which are owned and operated by SFPP, for shipments of refined
products in the period from 1993 through July 2000 from El Paso, Texas to Tucson
and Phoenix, Arizona and from points in California to points in Arizona. The
Company is one of several refiners that regularly utilize an SFPP pipeline to
ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona. The
September 2002 order resolved most remaining issues relating to SFPP's tariffs
on the pipelines to points in Arizona from 1993 through July 2000. On January
29, 2003, the FERC issued an order accepting most of the computations prepared
by SFPP pursuant to the September 2002 order and requiring a change in one item.
Based on the rulings made by the FERC on this matter in the September
31
HOLLY CORPORATION
2002 and January 2003 orders, the Company believes that under the final FERC
decision for the years at issue the Company would be entitled to a refund of
approximately $15 million. SFPP has indicated in filings with the FERC that it
will pay refunds based on the FERC decision on this matter after the FERC
decision ceases to be subject to further proceedings in the FERC and that such
payment could be made as early as the middle of April 2003. The final FERC
decision on this matter is subject to judicial review by the Court of Appeals
for the District of Columbia Circuit. At the date of this report, it is not
possible to predict what may be the result of judicial review proceedings on
this matter in the Court of Appeals.
In October 2002, the Company filed a motion to intervene and protest
with the FERC with respect to a September 2002 petition for declaratory order
filed by SFPP. SFPP's filing concerns its proposal to expand the capacity of its
common carrier pipelines running from El Paso to Tucson and Phoenix by
approximately 54,000 BPD. The Company's protest asks the FERC to rule that the
costs of the proposed expansion should be reflected only in pipeline
transportation rates for use of the proposed additional capacity rather than in
rates for use of both the proposed additional capacity and the current capacity
of these pipelines. On January 29, 2003, the FERC issued an order that, along
with addressing other issues, ruled against the Company's position. In early
March 2003 the Company filed with the FERC a request for rehearing on this
matter.
32
HOLLY CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Asset purchase and sale agreement between Phillips
Petroleum Company, as Seller, and Holly Corporation,
as Buyer, dated as of December 20, 2002.
10.2* Holly Corporation - Supplemental Payment Agreement
for 2003 Service as Director
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer
* Constitute management contracts or compensatory
plans or arrangements.
(b) Reports on Form 8-K:
On November 18, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the settlement of
litigation by Longhorn Partners Pipeline, L.P. against the
Company brought in August 1998 and of litigation brought by
the Company against Longhorn Partners Pipeline, L.P. and
related parties in August 2002.
On December 12, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning the Company's earnings
release for the three months ended October 31, 2002.
On December 20, 2002, a Current Report on Form 8-K was filed
under Item 5 Other Events, concerning an announcement by the
Company of an agreement to acquire the Woods Cross Refinery
for $25 million plus inventories.
On March 4, 2003, a Current Report on Form 8-K was filed under
Item 5 Other Events, concerning an announcement by the Company
of the sale of its Iatan crude oil gathering system.
33
HOLLY CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HOLLY CORPORATION
-----------------------------------------
(Registrant)
Date: November 3, 2003 By s/ Kathryn H. Walker
---------------------------------------
Kathryn H. Walker
Vice President, Accounting
(Principal Accounting Officer)
By s/ Stephen J. McDonnell
--------------------------------------
Stephen J. McDonnell
Vice President and Chief Financial
Officer
(Principal Financial Officer)
34
CERTIFICATION
I, Lamar Norsworthy, Chairman of the Board and Chief Executive Officer of Holly
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Holly
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 3, 2003 s/ C. Lamar Norsworthy
-------------------------------------------------
C. Lamar Norsworthy
Chairman of the Board and Chief Executive Officer
35
CERTIFICATION
I, Stephen J. McDonnell, Vice President and Chief Financial Officer of Holly
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Holly
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 3, 2003 s/ Stephen J. McDonnell
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Stephen J. McDonnell
Vice President and Chief Financial Officer
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