-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FnLJ29X4beNa3Vj1S/PCOPLdwAqX9g9zwOlg9MlTW/v1zzLBR0HBWoNOYPFlfvf0 s+woNlXRiJDDSNLIDxjUBA== 0000856465-05-000005.txt : 20050506 0000856465-05-000005.hdr.sgml : 20050506 20050506154205 ACCESSION NUMBER: 0000856465-05-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050506 DATE AS OF CHANGE: 20050506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIANT INDUSTRIES INC CENTRAL INDEX KEY: 0000856465 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 860642718 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10398 FILM NUMBER: 05807872 BUSINESS ADDRESS: STREET 1: 23733 N SCOTTSDALE RD CITY: SCOTTSDALE STATE: AZ ZIP: 85255 BUSINESS PHONE: 4805858888 MAIL ADDRESS: STREET 1: 23733 N SCOTTSDALE RD CITY: SCOTTSDALE STATE: AZ ZIP: 85255 10-Q 1 firstqtr2005-edgar.txt GIANT INDUSTRIES, INC. 2005 FIRST QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______ to _______. Commission File Number: 1-10398 GIANT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 86-0642718 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23733 North Scottsdale Road, Scottsdale, Arizona 85255 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (480) 585-8888 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Number of Common Shares outstanding at May 2, 2005: 13,390,347 shares. GIANT INDUSTRIES, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION....................................... 1 Item 1 - Financial Statements........................................ 1 Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 (Unaudited)........................... 1 Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2005 and 2004 (Unaudited)...... 2 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (Unaudited)...... 3 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 4-34 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............... 35-50 Item 3 - Quantitative and Qualitative Disclosures About Market Risk........................................... 51 Item 4 - Controls and Procedures..................................... 51 PART II - OTHER INFORMATION........................................... 52 Item 1 - Legal Proceedings........................................... 52 Item 4 - Submission of Matters to a Vote of Security Holders......... 52 Item 6 - Exhibits and Reports on Form 8-K............................ 53 SIGNATURE............................................................. 55 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except shares and per share data)
March 31, 2005 December 31, 2004 -------------- ----------------- ASSETS Current assets: Cash and cash equivalents............................. $ 38,880 $ 23,714 Restricted cash....................................... 21,883 - Receivables, net...................................... 136,982 101,692 Inventories........................................... 118,778 93,500 Prepaid expenses and other............................ 7,086 11,265 Deferred income taxes................................. 1,927 1,834 --------- --------- Total current assets................................ 325,536 232,005 --------- --------- Property, plant and equipment........................... 682,546 671,851 Less accumulated depreciation and amortization.......... (274,500) (265,475) --------- --------- 408,046 406,376 --------- --------- Goodwill................................................ 40,303 40,303 Assets held for sale.................................... 127 - Other assets............................................ 23,496 23,722 --------- --------- $ 797,508 $ 702,406 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt..................... $ 18,828 $ - Accounts payable...................................... 124,569 75,554 Accrued expenses...................................... 60,508 53,279 --------- --------- Total current liabilities........................... 203,905 128,833 --------- --------- Long-term debt, net of current portion.................. 274,055 292,759 Deferred income taxes................................... 46,549 41,039 Other liabilities and deferred income................... 24,117 23,336 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.01 per share, 10,000,000 shares authorized, none issued Common stock, par value $.01 per share, 50,000,000 shares authorized, 17,108,131 and 16,085,631 shares issued............................ 171 161 Additional paid-in capital............................ 157,789 135,407 Retained earnings..................................... 127,376 117,325 --------- --------- 285,336 252,893 Less common stock in treasury - at cost, 3,751,980 shares.................................... (36,454) (36,454) --------- --------- Total stockholders' equity.......................... 248,882 216,439 --------- --------- $ 797,508 $ 702,406 ========= ========= See accompanying notes to Condensed Consolidated Financial Statements. 1
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, except per share data)
Three Months Ended March 31, --------------------- 2005 2004 --------- --------- Net revenues.................................................. $ 711,726 $ 540,807 Cost of products sold (excluding depreciation and amortization)........................................... 625,790 460,767 --------- --------- Gross margin.................................................. 85,936 80,040 Operating expenses............................................ 46,244 44,196 Depreciation and amortization................................. 10,970 9,098 Selling, general and administrative expenses.................. 7,799 8,200 Net gain on the disposal/write-down of assets, including assets held for sale.............................. (13) (4) Gain from insurance settlement due to fire incident........... (3,492) - --------- --------- Operating income.............................................. 24,428 18,550 Interest expense.............................................. (6,993) (9,361) Amortization of financing costs............................... (504) (958) Interest and investment income................................ 120 40 --------- --------- Earnings from continuing operations before income taxes....... 17,051 8,271 Provision for income taxes.................................... 6,993 3,670 --------- --------- Earnings from continuing operations .......................... 10,058 4,601 Loss from discontinued operations, net of income tax benefit of $4 and $52............................................... (7) (84) --------- --------- Net earnings.................................................. $ 10,051 $ 4,517 ========= ========= Net earnings (loss) per common share: Basic Continuing operations..................................... $ 0.81 $ 0.52 Discontinued operations................................... - (0.01) --------- --------- $ 0.81 $ 0.51 ========= ========= Assuming dilution Continuing operations..................................... $ 0.80 $ 0.51 Discontinued operations................................... - (0.01) --------- --------- $ 0.80 $ 0.50 ========= ========= See accompanying notes to Condensed Consolidated Financial Statements. 2
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three Months Ended March 31, ----------------------- 2005 2004 --------- --------- Cash flows from operating activities: Net earnings.................................................... $ 10,051 $ 4,517 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization from continuing operations........ 10,970 9,098 Depreciation and amortization from discontinued operations...... - 47 Amortization of financing costs................................. 504 958 Deferred income taxes........................................... 5,417 2,477 Deferred crude oil purchase discounts........................... 306 750 Net gain on the disposal of assets from continuing operations, including assets held for sale................................ (13) (4) Net loss on the disposal of assets from discontinued operations, including assets held for sale................................ - 18 Gain from insurance settlement of fire incident................. (3,492) - Changes in operating assets and liabilities: (Increase) in receivables..................................... (35,291) (7,962) (Increase) decrease in inventories............................ (25,278) 25,801 Decrease in prepaid expenses.................................. 4,194 1,251 (Increase) in other assets.................................... (264) (353) Increase in accounts payable.................................. 47,866 11,999 Increase in accrued expenses.................................. 7,423 2,747 Increase in other liabilities................................. 622 467 --------- --------- Net cash provided by operating activities......................... 23,015 51,811 --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment....................... (12,826) (3,213) Proceeds from assets held for sale and discontinued operations.. - 419 Yorktown refinery acquisition contingent payment................ - (4,049) Proceeds from insurance settlement of fire incident............. 3,492 - Proceeds from sale of property, plant and equipment and other assets.................................................. 981 141 Increase in restricted cash..................................... (21,883) - --------- --------- Net cash used in investing activities............................. (30,236) (6,702) --------- --------- Cash flows from financing activities: Payments of long-term debt...................................... - (2,007) Proceeds from line of credit.................................... 15,000 - Payments on line of credit...................................... (15,000) - Net proceeds from issuance of common stock...................... 22,328 - Proceeds from exercise of stock options......................... 64 98 Deferred financing costs........................................ (5) (182) --------- --------- Net cash provided by (used in) financing activities............... 22,387 (2,091) --------- --------- Net increase in cash and cash equivalents......................... 15,166 43,018 Cash and cash equivalents: Beginning of period........................................... 23,714 27,263 --------- --------- End of period................................................. $ 38,880 $ 70,281 ========= ========= Significant Noncash Investing and Financing Activities. At March 31, 2005, approximately $2,525,000 of purchases of property, plant and equipment had not been paid and accordingly, were accrued in accounts payable and accrued liabilities. On February 25, 2004, we contributed 49,046 newly issued shares of our common stock, valued at $900,000, to our 401(k) plan as a discretionary contribution for the year 2003. See accompanying notes to Condensed Consolidated Financial Statements. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION, STOCK-BASED EMPLOYEE COMPENSATION AND CURRENT PRONOUNCEMENTS: Organization Giant Industries, Inc., through our subsidiary Giant Industries Arizona, Inc. and its subsidiaries, refines and sells petroleum products. Our operations are located: - on the East Coast - primarily in Virginia, Maryland, and North Carolina; and - in the Southwest - primarily in New Mexico, Arizona, and Colorado, with a concentration in the Four Corners area where these states meet. In addition, our Phoenix Fuel Co., Inc. subsidiary distributes commercial wholesale petroleum products primarily in Arizona. We have three business units: - our refining group; - our retail group; and - Phoenix Fuel. See Note 10 for a further discussion of our business segments. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, hereafter referred to as generally accepted accounting principles, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included. These adjustments and reclassifications are of a normal recurring nature, with the exception of discontinued operations (see Note 4). Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004. 4 We have made certain reclassifications to our 2004 financial statements and notes to conform to the financial statement classifications used in the current year. These reclassifications relate primarily to discontinued operations reporting (see Note 4). These reclassifications had no effect on reported earnings or stockholders' equity. Stock-Based Employee Compensation: We have a stock-based employee compensation plan that is more fully described in Note 10 to our Annual Report on Form 10-K for the year ended December 31, 2004. We account for this plan under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. We use the intrinsic value method to account for stock- based employee compensation. The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.
Three Months Ended March 31, ------------------ 2005 2004 ------- ------- (In thousands, except per share data) Net earnings, as reported....................... $10,051 $ 4,517 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect............. (17) (59) ------- ------- Pro forma net earnings.......................... $10,034 $ 4,458 ======= ======= Earnings per share: Basic - as reported........................... $ 0.81 $ 0.51 ======= ======= Basic - pro forma............................. $ 0.81 $ 0.51 ======= ======= Diluted - as reported......................... $ 0.80 $ 0.50 ======= ======= Diluted - pro forma........................... $ 0.80 $ 0.49 ======= =======
5 In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" that revised SFAS No. 123. This revision requires us to measure the cost of employee services received in exchange for stock options granted using the fair value method as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In April 2005, the Securities and Exchange Commission directed that SFAS 123R would not be required to be implemented by public companies until the beginning of the first fiscal year beginning after June 15, 2005. We do not expect this statement to have a material impact on our financial statements. Current Pronouncements The Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB), under issue No. 29, Accounting for Purchases and Sales of Inventory with the Same Counterparty, is currently considering the issue as to whether some or all of such buy/sell arrangements should be accounted for at historical cost pursuant to the guidance in paragraph 21(a) of APB Opinion No. 29, Accounting for Nonmonetary Transactions. Our buy/sell arrangements with a single counterparty are recorded at fair value and reported on a net basis. In November 2004, FASB issued SFAS 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4", which is effective for fiscal years beginning after June 15, 2005. This Statement requires that idle capacity expense, freight, handling costs, and wasted materials (spoilage), regardless of whether these costs are considered abnormal, be treated as current period charges. In addition, this Statement requires that allocation of fixed overhead to the costs of conversion be based on the normal capacity of the production facilities. We do not expect this Statement to have a material impact on our financial statements. 6 NOTE 2 - INVENTORIES: Our inventories consist of the following:
March 31, 2005 December 31, 2004 -------------- ----------------- (In thousands) First-in, first-out ("FIFO") method: Crude oil............................ $ 45,843 $ 44,435 Refined products..................... 105,792 68,863 Refinery and shop supplies........... 12,825 12,330 Merchandise.......................... 2,969 3,092 Retail method: Merchandise.......................... 9,130 9,419 -------- -------- Subtotal........................... 176,559 138,139 Adjustment for last-in, first-out ("LIFO") method............ (57,781) (44,639) -------- -------- Total.............................. $118,778 $ 93,500 ======== ========
The portion of inventories valued on a LIFO basis totaled $78,142,000 and $63,956,000 at March 31, 2005 and December 31, 2004, respectively. The information in the following paragraph will facilitate comparison with the operating results of companies using the FIFO method of inventory valuation. If inventories had been determined using the FIFO method at March 31, 2005 and 2004, net earnings and diluted earnings per share would have been higher as follows:
March 31, 2005 March 31, 2004 -------------- -------------- Net earnings........................... $7,752,000 $7,493,000 Diluted earnings per share............. $ 0.62 $ 0.82
For interim reporting purposes, inventory increments expected to be liquidated by year-end are valued at the most recent acquisition costs, and inventory liquidations that are expected to be reinstated by year end are ignored for LIFO inventory valuation calculations. The LIFO effects of inventory increments not expected to be liquidated by year-end, and the LIFO effects of inventory liquidations not expected to be reinstated by year-end, are recorded in the period such increments and liquidations occur. 7 In the first quarter of 2004, we liquidated certain lower cost refining crude oil LIFO inventory layers, which resulted in an increase in our net earnings and related diluted earnings per share as follows:
Net earnings........................... $538,000 Diluted earnings per share............. $ 0.06
The LIFO layers that were liquidated were deemed to be a permanent liquidation due to the terms of our agreement with Statoil regarding the ownership of crude oil under the agreement. There were no LIFO layers liquidated in the first quarter of 2005. 8 NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS: At March 31, 2005 and December 31, 2004, we had goodwill of $40,303,000. The goodwill balance consists of the following: (In thousands) Refining Group................. $21,153 Retail Group................... $4,414 Phoenix Fuel................... $14,736 ------- Total.......................... $40,303 ------- A summary of intangible assets that are included in "Other Assets" in the Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 are presented below:
March 31, 2005 December 31, 2004 ------------------------------------ ------------------------------------ Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Value Amortization Value Value Amortization Value -------- ------------ -------- -------- ------------ -------- (In thousands) Amortized intangible assets: Rights-of-way..................... $ 3,630 $ 2,748 $ 882 $ 3,630 $ 2,708 $ 922 Contracts......................... 1,376 1,139 237 1,367 1,109 258 Licenses and permits.............. 1,214 413 801 1,096 379 717 ------- ------- ------- ------- ------- ------- 6,220 4,300 1,920 6,093 4,196 1,897 ------- ------- ------- ------- ------- ------- Unamortized intangible assets: Liquor licenses................... 7,315 - 7,315 7,315 - 7,315 ------- ------- ------- ------- ------- ------- Total intangible assets............. $13,535 $ 4,300 $ 9,235 $13,408 $ 4,196 $ 9,212 ======= ======= ======= ======= ======= =======
Intangible asset amortization expense for each of the three months ended March 31, 2005 and 2004 was $109,000. Estimated amortization expense for the rest of this fiscal year and the next five fiscal years is as follows: (In thousands) 2005 Remainder.................... $325 2006.............................. 435 2007.............................. 286 2008.............................. 245 2009.............................. 243 2010.............................. 94 9 NOTE 4 - ASSETS HELD FOR SALE, DISCONTINUED OPERATIONS, AND ASSET DISPOSALS: The following table contains information regarding our discontinued operations, all of which are included in our retail group.
Three Months Ended March 31, ------------------ 2005 2004 -------- -------- (In thousands) Net revenues..................................... $ - $ 789 ------ ------ Net operating loss............................... $ (11) $ (118) Loss on disposal................................. $ - $ (18) ------ ------ Loss before income taxes......................... $ (11) $ (136) ------ ------- Net loss......................................... $ (7) $ (84)
Included in "Assets Held for Sale" in the accompanying Consolidated Balance Sheets are the following categories of assets.
March 31, December 31, 2005 2004 --------- ------------ (In thousands) Closed retail units...................... $ 127 $ - -------- ------- $ 127 $ - ======== =======
During the first quarter of 2005, we transferred a closed store from property, plant and equipment to assets held for sale. This store was sold in April, 2005. 10 NOTE 5 - ASSET RETIREMENT OBLIGATIONS: On January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an Asset Retirement Obligation ("ARO") be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated Asset Retirement Cost ("ARC") is capitalized as part of the carrying amount of the long-lived asset. Our legally restricted assets that are set aside for purposes of settling ARO liabilities are approximately $830,000 as of March 31, 2005. These assets are set aside to fund costs associated with the closure of certain solid waste management facilities. In March 2005, the FASB issued interpretation 47, "Accounting for Conditional Asset Retirement Obligations". This interpretation clarifies the term conditional asset retirement obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations. Conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Clarity is also provided regarding when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We are in the process of assessing the potential impact (if any) of this interpretation on our financial statements. We identified the following ARO's: 1. Landfills - pursuant to Virginia law, the two solid waste management facilities at our Yorktown refinery must satisfy closure and post-closure care and financial responsibility requirements. 2. Crude Pipelines - our right-of-way agreements generally require that pipeline properties be returned to their original condition when the agreements are no longer in effect. This means that the pipeline surface facilities must be dismantled and removed and certain site reclamation performed. We do not believe these right-of-way agreements will require us to remove the underground pipe upon taking the pipeline permanently out of service. Regulatory requirements, however, may mandate that such out-of- service underground pipe be purged. 3. Storage Tanks - we have a legal obligation under applicable law to remove certain underground and aboveground storage tanks, both on owned property and leased property, once they are taken out of service. Under some lease arrangements, we also have committed to restore the leased property to its original condition. 11 The following table reconciles the beginning and ending aggregate carrying amount of our ARO's for the three months ended March 31, 2005 and the year ended December 31, 2004.
March 31, December 31, 2005 2004 --------- ------------ (In thousands) Liability beginning of year........... $2,272 $2,223 Liabilities incurred.................. - 57 Liabilities settled................... (31) (259) Accretion expense..................... 46 251 ------ ------ Liability end of period............... $2,287 $2,272 ====== ======
Our ARO's are recorded in "Other Liabilities and Deferred Income" on our Condensed Consolidated Balance Sheets. 12 NOTE 6 - LONG-TERM DEBT: Our long-term debt consisted of the following:
March 31, 2005 December 31, 2004 -------------- ----------------- (In thousands) 11% senior subordinated notes, due 2012, net of unamortized discount of $3,554 and $3,635, interest payable semi-annually..................... $145,275 $145,194 8% senior subordinated notes, due 2014, net of unamortized discount of $2,392 and $2,435, interest payable semi-annually..................... 147,608 147,565 -------- -------- Subtotal........................................... 292,883 292,759 Less current portion............................... (18,828) - -------- -------- Total $274,055 $292,759 ======== ========
In March 2005, we issued 1,000,000 shares of our common stock and received approximately $22,328,000, net of expenses. Our use of $21,883,000 of this amount was restricted. On May 5, 2005, the restricted amount was used to redeem approximately $18,828,000 of the remaining portion of our outstanding 11% senior subordinated notes eligible to be redeemed pursuant to the provision of the indenture governing the notes that permits us to purchase up to 35% of the notes with the proceeds of an equity offering. The amount paid to redeem the notes included interest of $984,000 to the date of redemption (May 5, 2005) and a redemption premium of $2,071,000. Repayment of both the 11% and 8% senior subordinated notes (collectively, the "Notes") is jointly and severally guaranteed on an unconditional basis by our subsidiaries, subject to a limitation designed to ensure that such guarantees do not constitute a fraudulent conveyance. Except as otherwise specified in the indentures pursuant to which the Notes were issued, there are no restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances. General provisions of applicable state law, however, may limit the ability of any subsidiary to pay dividends or make distributions to us in certain circumstances. The indentures governing the notes contain restrictive covenants that, among other things, restrict our ability to: 13 - create liens; - incur or guarantee debt; - pay dividends; - repurchase shares of our common stock; - sell certain assets or subsidiary stock; - engage in certain mergers; - engage in certain transactions with affiliates; or - alter our current line of business. In addition, subject to certain conditions, we are obligated to offer to repurchase a portion of the notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase, with the net cash proceeds of certain sales or other dispositions of assets. Upon a change of control, we would be required to offer to repurchase all of the notes at 101% of the principal amount thereof, plus accrued interest, if any, to the date of purchase. At March 31, 2005, retained earnings available for dividends under the most restrictive terms of the indentures were approximately $31,538,000. Separate financial statements of our subsidiaries are not included herein because the aggregate assets, liabilities, earnings, and equity of the subsidiaries are substantially equivalent to our assets, liabilities, earnings, and equity on a consolidated basis; the subsidiaries are jointly and severally liable for the repayment of the Notes; and the separate financial statements and other disclosures concerning the subsidiaries are not deemed by us to be material to investors. We also have a three-year senior secured revolving credit facility (the "Credit Facility") with a group of banks. The Credit Facility is primarily a working capital and letter of credit facility. The availability of funds under this facility is the lesser of (i) $100,000,000, or (ii) the amount determined under a borrowing base calculation tied to the eligible accounts receivable and inventories. We have a one-time option to increase the size of the facility to up to $125,000,000. The interest rate applicable to the Credit Facility is based on various short-term indices. At March 31, 2005, this rate was approximately 5% per annum. We are required to pay a quarterly commitment fee of 0.50% per annum of the unused amount of the facility. At March 31, 2005, there were no direct borrowings outstanding under the Credit Facility. At March 31, 2005, there were, however, $13,566,000 of irrevocable letters of credit outstanding, primarily to crude oil suppliers, insurance companies, and regulatory agencies. At December 31, 2004, there were no direct borrowings and $12,068,000 of irrevocable letters of credit outstanding primarily to crude oil suppliers, insurance companies, and regulatory agencies. 14 The obligations under the Credit Facility are guaranteed by each of our principal subsidiaries and secured by a security interest in our personal property, including: - accounts receivable; - inventory; - contracts; - chattel paper; - trademarks; - copyrights; - patents; - license rights; - deposits; and - investment accounts and general intangibles. The Credit Facility contains negative covenants limiting, among other things, our ability to: - incur additional indebtedness; - create liens; - dispose of assets; - consolidate or merge; - make loans and investments; - enter into transactions with affiliates; - use loan proceeds for certain purposes; - guarantee obligations and incur contingent obligations; - enter into agreements restricting the ability of subsidiaries to pay dividends to us; - make distributions or stock repurchases; - make significant changes in accounting practices or change our fiscal year; and - prepay or modify subordinated indebtedness. The Credit Facility also requires us to meet certain financial covenants, including maintaining a minimum consolidated net worth, a minimum fixed charge coverage ratio, and a maximum consolidated funded indebtedness to total capitalization percentage. Our failure to satisfy any of the covenants in the Credit facility is an event of default under the Credit Facility. The Credit Facility also includes other customary events of default, including, among other things, a cross-default to our other material indebtedness and certain changes of control. 15 NOTE 7 - DERIVATIVE INSTRUMENTS: We are exposed to various market risks, including changes in certain commodity prices and interest rates. To manage these normal business exposures, from time to time, we may use commodity futures and options contracts to reduce price volatility, to fix margins in our refining and marketing operations and to protect against price declines associated with our crude oil and finished products inventories. There were no such transactions in the first quarter of 2005 and 2004, and there were no open crude oil futures contracts or other commodity derivative contracts at March 31, 2005. 16 NOTE 8 - PENSION AND POST-RETIREMENT BENEFITS: The components of the Net Periodic Benefit Cost are as follows:
Yorktown Yorktown Cash Balance Plan Retiree Medical Plan --------------------------- --------------------------- Three Months Ended March 31 Three Months Ended March 31 --------------------------- --------------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Service cost........................... $ 339,131 $ 345,005 $ 54,924 $ 51,893 Interest cost.......................... 167,780 134,294 55,166 48,673 Expected return on plan assets......... (69,345) (28,624) - - Amortization of prior service cost..... (26,618) - - - Amortization of net (gain)/loss........ 14,992 - 4,001 4,374 --------- --------- --------- --------- Net Periodic Benefit Cost.............. $ 425,940 $ 450,675 $ 114,091 $ 104,940 ========= ========= ========= =========
17 NOTE 9 - EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three Months Ended March 31, --------------------- 2005 2004 --------- --------- Numerator (In thousands) Earnings from continuing operations.............. $ 10,058 $ 4,601 Loss from discontinued operations................ (7) (84) --------- --------- Net earnings..................................... $ 10,051 $ 4,517 ========= =========
Three Months Ended March 31, --------------------- 2005 2004 --------- --------- Denominator Basic - weighted average shares outstanding...... 12,381,540 8,822,787 Effect of dilutive stock options................. 197,661 269,947 ---------- --------- Diluted - weighted average shares outstanding.... 12,579,201 9,092,734 ========== =========
Three Months Ended March 31, --------------------- 2005 2004 -------- --------- Basic Earnings (Loss) Per Share Earnings from continuing operations.............. $ 0.81 $ 0.52 Loss from discontinued operations................ - (0.01) --------- --------- Net earnings..................................... $ 0.81 $ 0.51 ========= =========
18
Three Months Ended March 31, --------------------- 2005 2004 --------- --------- Diluted Earnings (Loss) Per Share Earnings from continuing operations.............. $ 0.80 $ 0.51 Loss from discontinued operations................ - (0.01) --------- --------- Net earnings..................................... $ 0.80 $ 0.50 ========= =========
In March 2005, we issued 1,000,000 shares of common stock. See Note 6 for further information. In April 2005, we contributed 34,196 newly issued shares of our common stock, valued at $900,000, to our 401(k) plan as a discretionary contribution for the year 2004. 19 NOTE 10 - BUSINESS SEGMENTS: We are organized into three operating segments based on manufacturing and marketing criteria. These segments are the refining group, the retail group and Phoenix Fuel. A description of each segment and its principal products follows: REFINING GROUP Our refining group operates our Ciniza and Bloomfield refineries in the Four Corners area of New Mexico and the Yorktown refinery in Virginia. It also operates a crude oil gathering pipeline system in New Mexico, two finished products distribution terminals, and a fleet of crude oil and finished product trucks. Our three refineries make various grades of gasoline, diesel fuel, and other products from crude oil, other feedstocks, and blending components. We also acquire finished products through exchange agreements and from various suppliers. We sell these products through our service stations, independent wholesalers and retailers, commercial accounts, and sales and exchanges with major oil companies. We purchase crude oil, other feedstocks and blending components from various suppliers. RETAIL GROUP Our retail group operates service stations, which include convenience stores or kiosks. Our service stations sell various grades of gasoline, diesel fuel, general merchandise, including tobacco and alcoholic and nonalcoholic beverages, and food products to the general public. Our refining group or Phoenix Fuel supplies the gasoline and diesel fuel our retail group sells. We purchase general merchandise and food products from various suppliers. At March 31, 2005, we operated 125 service stations with convenience stores or kiosks. PHOENIX FUEL Phoenix Fuel distributes commercial wholesale petroleum products. It includes several lubricant and bulk petroleum distribution plants, an unmanned fleet fueling operation, a bulk lubricant terminal facility, and a fleet of finished product and lubricant delivery trucks. Phoenix Fuel purchases petroleum fuels and lubricants from suppliers and to a lesser extent from our refining group. OTHER Our operations that are not included in any of the three segments are included in the category "Other." These operations consist primarily of corporate staff operations. 20 Operating income for each segment consists of net revenues less cost of products sold, operating expenses, depreciation and amortization, and the segment's selling, general and administrative expenses. Cost of products sold reflects current costs adjusted, where appropriate, for LIFO and lower of cost or market inventory adjustments. The total assets of each segment consist primarily of net property, plant and equipment, inventories, accounts receivable and other assets directly associated with the segment's operations. Included in the total assets of the corporate staff operations are a majority of our cash and cash equivalents, and various accounts receivable, net property, plant and equipment, and other long-term assets. Disclosures regarding our reportable segments with a reconciliation to consolidated totals for the three months ended March 31, 2005 and 2004, are presented below. 21
For the Three Months March 31, 2005 ---------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated ---------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $120,874 Yorktown operations.................. 296,704 -------- Total.............................. $417,578 $ 61,810 $166,741 $ - $ - $ 646,129 Merchandise and lubricants............. - 31,287 9,022 - - 40,309 Other.................................. 20,773 3,829 588 98 - 25,288 -------- -------- -------- -------- -------- --------- Total.............................. 438,351 96,926 176,351 98 - 711,726 -------- -------- -------- -------- -------- --------- Intersegment net revenues: Finished products...................... 50,315 - 15,313 - (65,628) - Other.................................. 4,361 - - - (4,361) - -------- -------- -------- -------- -------- --------- Total.............................. 54,676 - 15,313 - (69,989) - -------- -------- -------- -------- -------- --------- Total net revenues....................... 493,027 96,926 191,664 98 (69,989) 711,726 Less net revenues of discontinued operations............................. - - - - - - -------- -------- -------- -------- -------- --------- Net revenues of continuing operations.... $493,027 $ 96,926 $191,664 $ 98 $(69,989) $ 711,726 ======== ======== ======== ======== ======== ========= Operating income (loss): Four Corners operations................ $ 6,285 Yorktown operations.................... 17,650 -------- Total operating income (loss) before corporate allocation...... $ 23,935 $ (1,679) $ 3,699 $ (5,043) $ 3,505 $ 24,417 Corporate allocation..................... (2,738) (1,564) (532) 4,834 - - -------- -------- -------- -------- -------- --------- Total operating income (loss) after corporate allocation................... 21,197 (3,243) 3,167 (209) 3,505 24,417 Discontinued operations loss............. - 11 - - - 11 -------- -------- -------- -------- -------- --------- Operating income (loss) from continuing operations................ $ 21,197 $ (3,232) $ 3,167 $ (209) $ 3,505 24,428 ======== ======== ======== ======== ======== Interest expense......................... (6,993) Amortization and write-offs of financing costs........................ (504) Interest and investment income........... 120 --------- Earnings from continuing operations before income taxes.................... $ 17,051 ========= Depreciation and amortization: Four Corners operations................ $ 4,070 Yorktown operations.................... 2,659 -------- Total.............................. $ 6,729 $ 3,547 $ 516 $ 178 $ - $ 10,970 Less discontinued operations........... - - - - - - -------- -------- -------- -------- -------- --------- Continuing operations.................. $ 6,729 $ 3,547 $ 516 $ 178 $ - $ 10,970 ======== ======== ======== ======== ======== ========= Total assets............................. $517,431 $105,485 $ 96,343 $ 78,249 $ - $ 797,508 Capital expenditures..................... $ 11,004 $ 780 $ 458 $ 584 $ - $ 12,826
22
For the Three Months March 31, 2004 ---------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated ---------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $ 86,029 Yorktown operations.................. 227,647 -------- Total.............................. $313,676 $ 47,829 $122,862 $ - $ - $ 484,367 Merchandise and lubricants............. - 30,844 7,336 - - 38,180 Other.................................. 14,526 3,846 397 280 - 19,049 -------- -------- -------- -------- -------- --------- Total.............................. 328,202 82,519 130,595 280 - 541,596 -------- -------- -------- -------- -------- --------- Intersegment net revenues: Finished products...................... 55,958 - 12,295 - (68,253) - Other.................................. 4,036 - - - (4,036) - -------- -------- -------- -------- -------- --------- Total.............................. 59,994 - 12,295 - (72,289) - -------- -------- -------- -------- -------- --------- Total net revenues....................... 388,196 82,519 142,890 280 (72,289) 541,596 Less net revenues of discontinued operations............................. - (789) - - - (789) -------- -------- -------- -------- -------- --------- Net revenues of continuing operations.... $388,196 $ 81,730 $142,890 $ 280 $(72,289) $ 540,807 ======== ======== ======== ======== ======== ========= Operating income (loss): Four Corners operations................ $ 6,161 Yorktown operations.................... 14,435 -------- Total operating income (loss) before corporate allocation...... $ 20,596 $ 988 $ 2,113 $ (5,269) $ (14) $ 18,414 Corporate allocation..................... (2,861) (1,634) (556) 5,051 - - -------- -------- -------- -------- -------- --------- Total operating income (loss) after corporate allocation................... 17,735 (646) 1,557 (218) (14) 18,414 Discontinued operations loss............. - 118 - - 18 136 -------- -------- -------- -------- -------- --------- Operating income (loss) from continuing operations................ $ 17,735 $ (528) $ 1,557 $ (218) $ 4 18,550 ======== ======== ======== ======== ======== Interest expense......................... (9,361) Amortization and write-offs of financing costs........................ (958) Interest and investment income........... 40 --------- Earnings from continuing operations before income taxes.................... $ 8,271 ========= Depreciation and amortization: Four Corners operations................ $ 3,979 Yorktown operations.................... 2,126 -------- Total.............................. $ 6,105 $ 2,403 $ 415 $ 222 $ - $ 9,145 Less discontinued operations........... - (47) - - - (47) -------- -------- -------- -------- -------- --------- Continuing operations.................. $ 6,105 $ 2,356 $ 415 $ 222 $ - $ 9,098 ======== ======== ======== ======== ======== ========= Total assets............................. $441,787 $112,956 $ 72,404 $ 93,232 $ - $ 720,379 Capital expenditures..................... $ 2,616 $ 258 $ 328 $ 11 $ - $ 3,213 Yorktown refinery acquisition contingent payment..................... $ 4,049 $ - $ - $ - $ - $ 4,049
23 NOTE 11 - COMMITMENTS AND CONTINGENCIES: We have various legal actions, claims, assessments and other contingencies arising in the normal course of our business, including those matters described below, pending against us. Some of these matters involve or may involve significant claims for compensatory, punitive or other damages. These matters are subject to many uncertainties, and it is possible that some of these matters could be ultimately decided, resolved or settled adversely. We have recorded accruals for losses related to those matters that we consider to be probable and that can be reasonably estimated. We currently believe that any amounts exceeding our recorded accruals should not materially affect our financial condition or liquidity. It is possible, however, that the ultimate resolution of these matters could result in a material adverse effect on our results of operations. Federal, state and local laws relating to the environment, health and safety affect nearly all of our operations. As is the case with all companies engaged in similar industries, we face significant exposure from actual or potential claims and lawsuits involving environmental matters. These matters include soil and water contamination, air pollution and personal injuries or property damage allegedly caused by substances made, handled, used, released or disposed of by us or by our predecessors. Future expenditures related to environmental, health and safety matters cannot be reasonably quantified in many circumstances for various reasons. These reasons include the speculative nature of remediation and clean-up cost estimates and methods, imprecise and conflicting data regarding the hazardous nature of various types of substances, the number of other potentially responsible parties involved, various defenses that may be available to us and changing environmental, health and safety laws, including changing interpretations of those laws. ENVIRONMENTAL AND LITIGATION ACCRUALS As of March 31, 2005 and December 31, 2004, we had environmental liability accruals of approximately $5,944,000 and $6,156,000, respectively, which are summarized below, and litigation accruals in the aggregate of $512,000 at March 31, 2005 and $525,000 at December 31, 2004. Environmental accruals are recorded in the current and long-term sections of our Condensed Consolidated Balance Sheets. 24
SUMMARY OF ACCRUED ENVIRONMENTAL CONTINGENCIES (In thousands) December 31, Increase March 31, 2004 (Decrease) Payments 2005 ------------ ---------- -------- ------------- Farmington Refinery....................... $ 570 $ - $ - $ 570 Ciniza - Land Treatment Facility.......... 186 - (8) 178 Bloomfield Tank Farm (Old Terminal)....... 53 - (4) 49 Ciniza - Solid Waste Management Units..... 274 - (10) 264 Bloomfield Refinery....................... 251 - - 251 Ciniza Well Closures...................... 109 (109) - - Retail Service Stations - Various......... 138 - (4) 134 East Outfall - Bloomfield................. - - - - West Outfall - Bloomfield................. 44 - (30) 14 Yorktown Refinery......................... 4,531 - (47) 4,484 ------- ------ ------ ------- Totals................................. $ 6,156 $ (109) $ (103) $ 5,944 ======= ====== ====== =======
Approximately $5,354,000 of this accrual is for the following projects discussed below: - the remediation of the hydrocarbon plume that appears to extend no more than 1,800 feet south of our inactive Farmington refinery; - environmental obligations assumed in connection with our acquisitions of the Yorktown refinery and the Bloomfield refinery; and - hydrocarbon contamination on and adjacent to the 5.5 acres that we own in Bloomfield, New Mexico. The remaining amount of the accrual relates to the following: - closure of certain solid waste management units at the Ciniza refinery, which is being conducted in accordance with the refinery's Resource Conservation and Recovery Act permit; - closure of the Ciniza refinery land treatment facility including post-closure expenses; and - amounts for smaller remediation projects. 25 YORKTOWN ENVIRONMENTAL LIABILITIES We assumed certain liabilities and obligations in connection with our purchase of the Yorktown refinery from BP Corporation North America Inc. and BP Products North America Inc. (collectively "BP"). BP agreed to reimburse us in specified amounts for some matters. Among other things, and subject to certain exceptions, we assumed responsibility for all costs, expenses, liabilities, and obligations under environmental, health and safety laws caused by, arising from, incurred in connection with or relating to the ownership of the refinery or its operation. We agreed to reimburse BP for losses incurred in connection with or related to liabilities and obligations assumed by us. Certain environmental matters relating to the Yorktown refinery are discussed below. YORKTOWN CONSENT DECREE Environmental obligations assumed by us include BP's responsibilities relating to the Yorktown refinery under a consent decree among various parties covering many locations (the "Consent Decree"). Parties to the Consent Decree include the United States, BP Exploration and Oil Co., Amoco Oil Company, and Atlantic Richfield Company. We assumed BP's responsibilities as of January 18, 2001, the date the Consent Decree was lodged with the court. As applicable to the Yorktown refinery, the Consent Decree requires, among other things, reduction of nitrous oxides, sulfur dioxide, and particulate matter emissions and upgrades to the refinery's leak detection and repair program. We estimate that we will incur capital expenditures of between $20,000,000 and $27,000,000 to comply with the Consent Decree through 2006, and have expended approximately $2,000,000 of this amount through the first quarter of 2005. In addition, we estimate that we will incur operating expenses associated with the requirements of the Consent Decree of between $1,600,000 and $2,600,000 per year. YORKTOWN 1991 ORDER In connection with the Yorktown acquisition, we also assumed BP's obligations under an administrative order issued in 1991 by EPA under the Resource Conservation and Recovery Act. The order requires an investigation of certain areas of the refinery and the development of measures to correct any releases of contaminants or hazardous substances found in these areas. A Resource Conservation and Recovery Act Facility Investigation was conducted and approved conditionally by EPA in 2002. Following the investigation, a Risk Assessment/Corrective Measures Study ("RA/CMS") was finalized in 2003, which summarized the remediation measures agreed upon by us, EPA, and the Virginia Department of Environmental Quality ("VDEQ"). The RA/CMS proposes investigation, sampling, monitoring, and cleanup measures, including the construction of an on-site corrective action management unit that would be used to consolidate hazardous solid materials associated with these measures. These proposed actions relate to soil, sludge, and remediation wastes relating to solid waste management units. Groundwater in the aquifers underlying the refinery, and surface water and sediment in a small pond and tidal salt marsh on the refinery property also are addressed in the RA/CMS. 26 Based on the RA/CMS, EPA issued a proposed cleanup plan for public comment in December 2003 setting forth preferred corrective measures for remediating soil, groundwater, sediment, and surface water contamination at the refinery. Following the public comment period, EPA issued its final remedy decision and response to comments in April 2004. EPA currently is developing the administrative consent order pursuant to which we will implement our cleanup plan. Our most current estimate of expenses associated with the order is between $24,000,000 and $26,000,000, and we anticipate that these expenses will be incurred over a period of approximately 35 years after EPA approves our cleanup plan. We believe that approximately $9,600,000 of this amount will be incurred over an initial four-year period, and additional expenditures of approximately $7,700,000 will be incurred over the following four-year period. We may not be responsible, however, for all of these expenditures due to the environmental reimbursement provisions included in our purchase agreement with BP, as more fully discussed below. Additionally, the facility's underground sewer system will be cleaned, inspected and repaired as needed. A portion of this sewer work is scheduled to begin during the construction of the corrective action management unit and related remediation work. We anticipate that the balance of the sewer work will cost from $1,500,000 to $3,500,000 over a period of three to five years, beginning around the time the construction of the corrective action management unit and related remediation work is nearing completion in the 2010 to 2012 timeframe. We have been informed by EPA that as part of the order approving our cleanup plan, they may require financial assurance of our ability to perform the plan. Options available to us for providing financial assurance include depositing funds into a trust or posting a letter of credit or performance bond. We, however, are not certain that financial assurance will be required. CLAIMS FOR REIMBURSEMENT FROM BP BP has agreed to reimburse us for all losses that are caused by or relate to property damage caused by, or any environmental remediation required due to, a violation of environmental health, and safety laws during BP's operation of the refinery. In order to have a claim against BP, however, the total of all our losses must exceed $5,000,000, in which event our claim only relates to the amount exceeding $5,000,000. After $5,000,000 is reached, our claim is limited to 50% of the amount by which our losses exceed $5,000,000 until the total of all our losses exceeds $10,000,000. After $10,000,000 is reached, our claim would be for 100% of the amount by which our losses exceed $10,000,000. In applying these provisions, losses amounting to a total of less than $250,000 arising out of the same event are not added to any other losses for purposes of determining whether and when the $5,000,000 or $10,000,000 has been 27 reached. After the $5,000,000 or $10,000,000 thresholds have been reached, BP has no obligation to reimburse us for any losses amounting to a total of less than $250,000 arising out of the same event. Except as specified in the refinery purchase agreement, in order to seek reimbursement from BP, we were required to notify BP of a claim within two years following the closing date. Further, BP's total liability for reimbursement under the refinery purchase agreement, including liability for environmental claims, is limited to $35,000,000. FARMINGTON REFINERY MATTERS In 1973, we constructed the Farmington refinery that we operated until 1982. In 1985, we became aware of soil and shallow groundwater contamination at this facility. Our environmental consulting firms identified several areas of contamination in the soils and shallow groundwater underlying the Farmington property. One of our consultants indicated that contamination attributable to past operations at the Farmington property has migrated off the refinery property, including a hydrocarbon plume that appears to extend no more than 1,800 feet south of the refinery property. Our remediation activities are ongoing under the supervision of the New Mexico Oil Conservation Division ("OCD"), although OCD has not issued a cleanup order. LEE ACRES LANDFILL The Farmington refinery property is located next to the Lee Acres Landfill, a closed landfill formerly operated by San Juan County. The landfill is situated on lands owned by the United States Bureau of Land Management (the "BLM"). Industrial and municipal wastes from numerous sources were disposed of in the landfill. While the landfill was operational, we used it to dispose of office trash, maintenance shop trash, used tires and water from the Farmington refinery's evaporation pond. The landfill was added to the National Priorities List as a Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") Superfund site in 1990. In connection with this listing, EPA defined the site as the landfill and the landfill's associated groundwater plume. EPA excluded any releases from the Farmington refinery itself from the definition of the site. In May 1991, EPA notified us that we may be a potentially responsible party under CERCLA for the release or threatened release of hazardous substances, pollutants or contaminants at the landfill. BLM made a proposed cleanup plan for the landfill available to the public in 1996. In September 2004, EPA and BLM issued a Record of Decision, which presents the cleanup plan selected for the landfill. The 28 selected remedy consists of placing a cap over a portion of the old landfill, together with a barrier to prevent contaminants from moving off the site, groundwater monitoring, and site usage limitations. We believe construction of the cap has been completed. The Record of Decision states that the total estimated cost of these actions is $2,200,000 in the near term, with the total future cost for remediation of the landfill not expected to exceed $3,500,000 over 30 years. If monitoring data indicated a long-term trend of significantly increasing pollution concentrations, then the selected remedy would be reevaluated, and appropriate corrective action would be taken, if needed. In 1989, one of our consultants estimated, based on various assumptions, that our share of potential liability could be approximately $1,200,000. This figure was based upon estimated landfill remediation costs significantly higher than the estimated costs reflected in the Record of Decision. The figure also was based on the consultant's evaluation of such factors as available clean-up technology, BLM's involvement at the site and the number of other entities that may have had involvement at the site, but did not include an analysis of all of our potential legal defenses and arguments, including possible setoff rights. Potentially responsible party liability is joint and several, which means that a responsible party may be liable for all of the clean-up costs at a site even though the party was responsible for only a small part of the contamination. Although it is possible that we may ultimately incur liability for clean-up costs associated with the landfill, a reasonable estimate of the amount of this liability, if any, cannot be made at this time for various reasons. These reasons include: - a number of entities had involvement at the site; - allocation of responsibility among potentially responsible parties has not yet been proposed or made; and - potentially applicable factual and legal issues have not been resolved. Accordingly, we have not recorded a liability in relation to BLM's selected plan because the amount of any potential liability is currently not determinable. BLM may assert claims against us and others for reimbursement of investigative, cleanup and other costs incurred by BLM in connection with the landfill and surrounding areas. We may assert claims against BLM in connection with contamination that may be originating from the landfill. Private parties and other governmental entities also may assert claims against us, BLM, and others for property damage, personal injury and other 29 damages allegedly arising out of any contamination originating from the landfill and the Farmington property. Parties also may request judicial determination of their rights and responsibilities, and the rights and responsibilities of others, in connection with the landfill and the Farmington property. Currently, however, there is no outstanding litigation against us by BLM or any other party. BLOOMFIELD REFINERY ENVIRONMENTAL OBLIGATIONS In connection with the acquisition of the Bloomfield refinery, we assumed certain environmental obligations including Bloomfield Refining Company's ("BRC") obligations under an administrative order issued by EPA in 1992 pursuant to the Resource Conservation and Recovery Act. The order required BRC to investigate and propose measures for correcting any releases of hazardous waste or hazardous constituents at or from the Bloomfield refinery. EPA has delegated its oversight authority over the order to NMED's Hazardous Waste Bureau ("HWB"). In December 2002, HWB and OCD approved a cleanup plan for the refinery, subject to various actions to be taken by us to implement the plan. We estimate that remaining remediation expenses associated with the cleanup plan will be approximately $251,000, and that these expenses will be incurred through approximately 2018. WESTERN OUTFALL - BLOOMFIELD REFINERY In August 2004, hydrocarbon discharges were discovered seeping into two small gullies, or draws, on the north side of the Bloomfield refinery site. We took immediate containment and other corrective actions, including removal of contaminated soils, construction of lined collection sumps, and further investigation and monitoring. In the third quarter of 2004, OCD indicated that it would be issuing a compliance order, including a possible penalty, in connection with these discharges, but we have not received any order to date. OCD also indicated that its preferred remedy is an underground barrier with a pollutant extraction and collection system. Construction of this barrier was completed in March 2005. Construction of the extraction and collection system began in April 2005 and should be completed in 2005. We currently estimate that the total cost of this remedy, including amounts previously expended, could be as much as $1,000,000, approximately $14,000 of which will be for non-capital items. We have spent approximately $550,000 to date. BLOOMFIELD TANK FARM (OLD TERMINAL) We have discovered hydrocarbon contamination adjacent to a 55,000 barrel crude oil storage tank that was located in Bloomfield, New Mexico. We believe that all or a portion of the tank and the 5.5 acres we own on which the tank was located may have been a part of a refinery, 30 owned by various other parties, that, to our knowledge, ceased operations in the early 1960s. We received approval to conduct a pilot bioventing project to address remaining contamination at the site, which was completed in 2001. Bioventing involves pumping air into the soil to stimulate bacterial activity which in turn consumes hydrocarbons. Based on the results of the pilot project, we submitted a remediation plan to OCD proposing the use of bioventing to address the remaining contamination. This remediation plan was approved by OCD in 2002. We anticipate that we will incur about $50,000 in expenses from 2005 through 2007 to continue remediation, including groundwater monitoring and testing, until natural attenuation has completed the process of groundwater remediation. NOTICES OF VIOLATION AT FOUR CORNERS REFINERIES In June 2002, we received a draft compliance order from the New Mexico Environment Department ("NMED") in connection with alleged violations of air quality regulations at the Ciniza refinery. These alleged violations relate to an inspection completed in April 2001. In August 2002, we received a compliance order from NMED in connection with alleged violations of air quality regulations at the Bloomfield refinery. These alleged violations relate to an inspection completed in September 2001. In the second quarter of 2003, the EPA informally told us that it also intended to allege air quality violations in connection with the 2001 inspections at both refineries. We have since participated in joint meetings with NMED and EPA. These discussions have included alleged violations through December 31, 2003, in addition to matters relating to the 2001 inspections. If no settlement is reached, we currently estimate that potential penalties could amount to between $4,000,000 and $6,000,000. We have accrued significantly less than these amounts because settlement discussions with NMED and EPA are ongoing. These discussions may result in reductions in the amount of potential penalties. In lieu of fines and as part of an administrative settlement, we expect that EPA and NMED may require us to undertake certain environmentally beneficial projects known as supplemental environmental projects. In the first quarter of 2004, EPA told us that any administrative settlement also must be consistent with the consent decrees EPA has entered with other refiners as part of its national refinery enforcement program. In these other settlements, EPA generally has required that the refiner: - implement controls to reduce emissions of nitrogen oxide, sulfur dioxide, and particulate matter from the largest emitting process units; 31 - upgrade leak detection and repair practices; - minimize the number and severity of flaring events; and - adopt strategies to ensure compliance with benzene waste requirements. We currently believe that we could satisfy the requirements of this national refinery initiative by making modifications to our Four Corners refineries that could cost up to approximately $20,000,000, and that it might be possible to spread the majority of these costs over a period of four to seven years following the date of any settlement. In addition, on- going annual operating costs associated with these modifications are currently estimated to be as much as approximately $2,000,000 per year. These costs could be subject to reduction in the event of the temporary, partial or permanent discontinuance of operations at one or both facilities. There is no assurance, however, that EPA will agree with our assessment of the national refinery initiative requirements. Accordingly, EPA might require us to incur additional national refinery initiative compliance costs as a part of any settlement. We are continuing joint settlement discussions with EPA and NMED. JET FUEL CLAIM In February 2003, we filed a complaint against the United States in the United States Court of Federal Claims related to military jet fuel that we sold to the Defense Energy Support Center ("DESC") from 1983 through 1994. We asserted that the federal government underpaid for the jet fuel by about $17,000,000. We requested that we be made whole in connection with payments that were less than the fair market value of the fuel, that we be reimbursed for the value of transporting the fuel in some contracts, and that we be reimbursed for certain additional costs of complying with the government's special requirements. The U.S. has said that it may counterclaim and assert, based on its interpretation of the contracts, that we owe additional amounts of between $2,100,000 and $4,900,000. In the first quarter of 2004, the United States Court of Appeals for the Federal Circuit agreed to hear appeals in other jet fuel cases. The judge in our case has halted any further action pending a decision by the Court of Appeals. On April 26, 2005, the Court of Appeals ruled in favor of the government. The refiners involved in the appellate case are evaluating whether to pursue further appeals. As a result of this decision, we are continuing to evaluate our claims and monitor further developments in the appellate case. Based on the current status of our claim, we have not recorded a receivable for these claims or a liability for any potential counterclaim. 32 MTBE LITIGATION Lawsuits have been filed in numerous states alleging that MTBE, a blendstock used by many refiners in producing specially formulated gasoline, has contaminated water supplies. MTBE contamination primarily results from leaking underground or aboveground storage tanks. The suits allege MTBE contamination of water supplies owned and operated by the plaintiffs, who are generally water providers or governmental entities. The plaintiffs assert that numerous refiners, distributors, or sellers of MTBE and/or gasoline containing MTBE are responsible for the contamination. The plaintiffs also claim that the defendants are jointly and severally liable for compensatory and punitive damages, costs, and interest. Joint and several liability means that each defendant may be liable for all of the damages even though that party was responsible for only a small part of the damages. We are a defendant in approximately 30 of these MTBE lawsuits pending in Virginia, Connecticut, Massachusetts, New Hampshire, New York, New Jersey, and Pennsylvania. We intend to vigorously defend these lawsuits. CINIZA REFINERY INCIDENT A fire occurred in the alkylation unit at our Ciniza refinery on April 8, 2004. This unit produces high octane blending stock for gasoline. Emergency personnel responded immediately and contained the fire to the alkylation unit, although there also was some damage to ancillary equipment and to two adjacent units. Four of our employees were injured and transported to an Albuquerque hospital. Presently, three have been released and one remains hospitalized. In October 2004, the Occupational Health and Safety Board of the New Mexico Environment Department ("OHSB") completed an investigation of matters relating to the fire. We have agreed to a settlement with OHSB, subject to public notice requirements, pursuant to which we would pay fines of $16,450. An investigation by the U.S. Chemical Safety and Hazard Investigation Board ("CSB") of matters relating to the fire is ongoing. CSB, however, does not have authority to issue any monetary fines. In March 2005, we agreed to fully resolve our property insurance claim for $10,300,000, net of our $1,000,000 deductible. We received approximately $6,600,000 of this amount in 2004 and $3,492,000 in the first quarter of 2005. We received the remaining reimbursement in April, 2005. We also have worker's compensation insurance to cover the physical injuries sustained by personnel. 33 NEW MEXICO CONVENIENCE STORE SAFETY REGULATIONS In May 2004, OHSB proposed regulations that require additional security measures in the convenience store industry in New Mexico. These requirements relate to, among other things, exterior lighting, late night security, employee training, door and window signage, and security surveillance systems and alarms. After public discussion, the New Mexico Environmental Improvement Board approved the regulations, which became enforceable in February 2005. The legality of these regulations, however, is the subject of a court challenge by, among others, the New Mexico Petroleum Marketers Association. We are complying with the late night security requirements by having two employees on duty between the hours of 11:00 p.m. and 5:00 a.m. We estimate that having two employees at all of our New Mexico stores during these late night hours will increase our payroll costs approximately $700,000 annually. 34 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPANY OVERVIEW We refine and sell petroleum products and operate service stations and convenience stores. Our operations are divided into three strategic business units, the refining group, the retail group and Phoenix Fuel. The refining group operates two refineries in the Four Corners area of New Mexico and one refinery in Yorktown, Virginia. The refining group sells its products to wholesale distributors and retail chains. Our retail group operated 125 service stations at March 31, 2005. The retail group sells its petroleum products and merchandise to consumers in New Mexico, Arizona and southern Colorado. Phoenix Fuel distributes commercial wholesale petroleum products primarily in Arizona. Our strategy is to maintain and improve our financial performance. To this end, we are focused on several critical and challenging objectives. We will be addressing these objectives in the short-term as well as over the next three to five years. In our view, the most important of these objectives are: - increasing margins through management of inventories and taking advantage of sales and purchasing opportunities; - minimizing or reducing operating expenses and capital expenditures; - increasing the available crude oil supply for our Four Corners refineries; - cost effectively complying with current environmental regulations as they apply to our refineries, including future clean air standards; - improving our overall financial health and flexibility by, among other things, reducing our debt and overall cost of capital, including our interest and financing costs, and maximizing our return on capital employed; and - evaluating opportunities for internal growth and growth by acquisition. CRITICAL ACCOUNTING POLICIES A critical step in the preparation of our financial statements is the selection and application of accounting principles, policies, and procedures that affect the amounts that we report. In order to apply these principles, policies, and procedures, we must make judgments, assumptions, and estimates based on the best available information at the time. Actual results may differ based on the accuracy of the information utilized and subsequent events, some of which we may have little or no control over. In 35 addition, the methods used in applying the above may result in amounts that differ considerably from those that would result from the application of other acceptable methods. The development and selection of these critical accounting policies, and the related disclosure below, have been reviewed with the audit committee of our board of directors. Our significant accounting policies, including revenue recognition, inventory valuation, and maintenance costs, are described in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004. The following accounting policies are considered critical due to the uncertainties, judgments, assumptions and estimates involved: - accounting for contingencies, including environmental remediation and litigation liabilities; - assessing the possible impairment of long-lived assets; - accounting for asset retirement obligations; - accounting for our pension and post-retirement benefit plans; and - accounting for inventories. There have been no changes to these policies in 2005. RESULTS OF OPERATIONS The following discussion of our Results of Operations should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in Part I, Item 1 and in our Annual Report on Form 10-K for the year ended December 31, 2004 in Item 8 and Note 11 to our Consolidated Financial Statements in Part I, Item 1. 36 Below is operating data for our operations:
Three Months Ended March 31, ---------------------- 2005 2004 -------- -------- Refining Group Operating Data: Four Corners Operations: Crude Oil/NGL Throughput (BPD).......... 28,810 28,280 Refinery Sourced Sales Barrels (BPD)..... 28,559 27,615 Average Crude Oil Costs ($/Bbl).......... $ 47.46 $ 32.61 Refining Margins ($/Bbl)................. $ 7.86 $ 8.35 Yorktown Operations: Crude Oil/NGL Throughput (BPD).......... 65,740 61,200 Refinery Sourced Sales Barrels (BPD)..... 62,726 63,824 Average Crude Oil Costs ($/Bbl).......... $ 44.96 $ 32.68 Refining Margins ($/Bbl)................. $ 6.78 $ 5.55 Retail Group Operating Data: (Continuing operations only) Fuel Gallons Sold (000's).................. 39,469 37,232 Fuel Margins ($/gal)....................... $ 0.11 $ 0.16 Merchandise Sales ($ in 000's)............. $ 31,287 $ 30,653 Merchandise Margins........................ 27% 27% Operating Retail Outlets at Period End..... 125 125 Phoenix Fuel Operating Data: Fuel Gallons Sold (000's).................. 120,865 112,844 Fuel Margins ($/gal)....................... $ 0.062 $ 0.053 Lubricant Sales ($ in 000's)............... $ 8,412 $ 6,875 Lubricant Margins.......................... 14% 13%
We believe the comparability of our continuing results of operations for the three months ended March 31, 2005 with the three months ended March 31, 2004 was affected by, among others, the following factors: - stronger net refining margins for our Yorktown refinery in 2005, due to, among other things: - increased sales in our Tier 1 market; - reduced imports of foreign gasoline, due to a reduction in gasoline sulfur limits; - elimination of MTBE in Connecticut and New York; - tight finished product supply in certain of our market areas; and 37 - the processing of lower priced acidic crude oils at our Yorktown refinery, including crude oil purchased under our supply agreement with Statoil that began deliveries in late February 2004. - stronger finished product sales volumes and margins for our Phoenix Fuel operations, due to, among other things: - increased finished product demand; - an expanded customer base; and - tight finished product supplies in our Phoenix market. - lower fuel margins per gallon for our retail group. EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Our earnings from continuing operations before income taxes increased $8,780,000 for the three months ended March 31, 2005, compared to the same period in 2004. This increase was primarily due to the following factors: - an increase in operating income before corporate allocations from our Yorktown refinery of $3,215,000 due to higher margins realized; - an increase in Phoenix Fuel's operating income before corporate allocations of $1,586,000 due to increased fuel margins per gallon and fuel volume sold; - a $2,368,000 or 25% decrease in interest expense as a result of our debt reduction strategy; - a $3,492,000 gain from insurance proceeds as a result of the fire incident at Ciniza in 2004. This increase was partially offset by, among other things, the following: - a $2,667,000 decrease in our retail group's operating income before corporate allocations as a result of a 31% decline in our retail group's fuel margin. YORKTOWN REFINERY Our Yorktown refinery operated at an average throughput rate of approximately 65,700 barrels per day in the first quarter of 2005, compared to 61,200 barrels per day in the first quarter of 2004. Refining margins for the first quarter of 2005 were $6.78 per barrel and were $5.55 for the first quarter of 2004. 38 Revenues for our Yorktown refinery increased in the first quarter of 2005 primarily due to higher finished product prices as a result of favorable market conditions. Cost of products sold for our Yorktown refinery increased in the first quarter of 2005 primarily due to higher crude oil prices, as a result of global economic conditions. In addition to the factors previously discussed, Yorktown's refining margin improved in the first quarter of 2005 due, in part, to a little more than a $2.00 per barrel improvement, as compared to the first quarter of 2004, in our delivered cost relative to West-Texas Intermediate crude oil. Operating expenses for our Yorktown refinery increased in the first quarter of 2005 due in part to the following: - higher purchased fuel costs to meet our processing needs; and - higher chemical and catalyst costs, primarily due to additional costs required to meet more stringent sulfur reduction requirements. Depreciation and amortization expense for our Yorktown refinery increased in the first quarter of 2005 due in part to the amortization of certain refinery turnaround costs incurred in 2004. FOUR CORNERS REFINERIES Our Four Corners refineries operated at an average throughput rate of approximately 28,800 barrels per day in the first quarter of 2005 and 28,300 barrels per day in the first quarter of 2004. Refining margins for the first quarter of 2005 were $7.86 per barrel and were $8.35 for the first quarter of 2004. Revenues for our Four Corners refineries increased in the first quarter of 2005 primarily due to an increase in finished product prices as a result of favorable market conditions and a slight increase in volumes sold. Cost of products sold for our Four Corners refineries increased in the first quarter of 2005 primarily due to higher average crude oil costs as a result of global market conditions and a slight increase in volumes sold. Our Four Corners refining margins decreased in the first quarter of 2005 due to higher average crude oil prices. Operating expenses for our Four Corners refineries decreased slightly in the first quarter of 2005, primarily due to lower maintenance costs. 39 Depreciation and amortization expense for our Four Corners refineries increased slightly in the first quarter of 2005. RETAIL GROUP Average fuel margins for our retail group were $0.11 per gallon for the first quarter of 2005 and were $0.16 per gallon for the first quarter of 2004. Fuel volumes sold for the first quarter of 2005 increased approximately 6%. The average merchandise margin for our retail group was 27% in the first quarter of 2005 and 2004. Revenues for our retail group increased in the first quarter of 2005 primarily due to an increase in finished product selling prices and finished product volumes sold. Cost of products sold for our retail group increased in the first quarter of 2005 primarily due to an increase in finished product purchase prices and finished product volumes sold. Our retail fuel margin per gallon decreased in the first quarter of 2005 due to higher finished product purchase prices that could not be passed on to our customers. Operating expenses for our retail group increased slightly in the first quarter of 2005 primarily due to higher bank credit card fees as a result of higher retail prices, partially offset by lower payroll and related costs. Depreciation expense for our retail group increased in the first quarter of 2005 primarily due to additional amortization for our leasehold improvements. PHOENIX FUEL Gasoline and diesel fuel volumes sold by Phoenix Fuel increased by 7% in the first quarter of 2005. Average gasoline and diesel fuel margins for Phoenix Fuel were $0.062 per gallon for the first quarter of 2005 and were $0.053 per gallon for the first quarter of 2004. Revenues for Phoenix Fuel increased in the first quarter of 2005 primarily due to favorable market conditions. Cost of products sold for Phoenix Fuel increased in the first quarter of 2005 due primarily to the increase in finished product volumes sold and an increase in finished product purchase prices. Phoenix Fuel's finished product margins increased during the first quarter of 2005 as a result of favorable market conditions. 40 Operating expenses for Phoenix Fuel increased in the first quarter of 2005 due primarily to higher transportation costs related to higher sales volumes. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) FROM CONTINUING OPERATIONS For the three months ended March 31, 2005, SG&A expenses decreased slightly due to lower legal expenses incurred in 2005. INTEREST EXPENSE FROM CONTINUING OPERATIONS For the three months ended March 31, 2005, interest expense decreased approximately $2,368,000 or 25%. The decrease was primarily due to a reduction in our long-term debt, which was part of our debt reduction strategy implemented in 2002. INCOME TAXES FROM CONTINUING OPERATIONS The effective tax rate for the three months ended March 31, 2005 and three months ended March 31, 2004 was approximately 41.0% and approximately 44.4%, respectively. The decrease in the effective rate is due to tax contingencies recorded in the first quarter of 2004 and anticipated benefits for qualified production income allowed under the American Jobs Creation Act recorded in the first quarter of 2005. DISCONTINUED OPERATIONS Discontinued operations include the operations of some of our retail service station/convenience stores. See Note 4 to our Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information relating to these operations. OUTLOOK We believe that our current refining fundamentals are comparable to the same time last year. Phoenix Fuel continues to provide consistent cash flow and growth in the markets that it serves. So far, in the second quarter, retail fuel margins have strengthened and fuel volumes and merchandise sales continue to grow relative to the same time last year. Our businesses are, however, very volatile and there can be no assurance that currently existing conditions will continue for any of our business segments. 41 LIQUIDITY AND CAPITAL RESOURCES CAPITAL STRUCTURE At March 31, 2005, we had long-term debt, net of current portion of $274,055,000. At December 31, 2004 we had long-term debt of $292,759,000. There was no current portion of long-term debt outstanding at December 31, 2004. The amount at March 31, 2005 includes: - $150,000,000 before discount of 8% Senior Subordinated Notes due 2014; and - $130,000,000 before discount of 11% Senior Subordinated Notes due 2012. The amount at December 31, 2004 includes: - $150,000,000 before discount of 8% Senior Subordinated Notes due 2014; and - $148,828,000 before discount of 11% Senior Subordinated Notes due 2012. We also have a $100,000,000 revolving credit facility. The credit facility is primarily a working capital and letter of credit facility. At March 31, 2005, we had no direct borrowings outstanding under this facility and $13,566,000 of letters of credit outstanding. At December 31, 2004, we had no direct borrowings outstanding under this facility and $12,068,000 of letters of credit outstanding. At March 31, 2005, our long-term debt, net of current portion, was 52.4% of total capital. At December 31, 2004, it was 57.5%. Our net debt (long-term debt, net of current portion, less cash and cash equivalents) to total net capitalization (long-term debt, net of current portion, less cash and cash equivalents plus total shareholders' equity) percentage at March 31, 2005, was 48.6%. At December 31, 2004, this percentage was 55.4%. The indentures governing our notes and our credit facility contain restrictive covenants and other terms and conditions that if not maintained, if violated, or if certain conditions are met, could result in default, affect our ability to borrow funds, make certain payments, or engage in certain activities. A default under any of the notes or the credit facility could cause such debt, and by reason of cross-default provisions, our other debt to become immediately due and payable. If we are unable to repay such amounts, the lenders under our credit facility could proceed against the collateral granted to them to secure that debt. 42 If those lenders accelerate the payment of the credit facility, we cannot provide assurance that our assets would be sufficient to pay that debt and other debt or that we would be able to refinance such debt or borrow more money on terms acceptable to us, if at all. Our ability to comply with the covenants, and other terms and conditions, of the indentures and the credit facility may be affected by many events beyond our control, and we cannot provide assurance that our operating results will be sufficient to allow us to comply with the covenants. We expect to be in compliance with the covenants going forward, and we do not believe that any presently contemplated activities will be constrained. A prolonged period of low refining margins, however, would have a negative impact on our ability to borrow funds and to make expenditures and would have an adverse impact on compliance with our debt covenants. We presently have senior subordinated ratings of "B3" from Moody's Investor Services and "B-" from Standard & Poor's. Moody's Investor Services recently confirmed its "B3" rating. Standard and Poor's also reaffirmed its ratings but revised the outlook to positive from negative. As discussed in Note 6 to our Condensed Consolidated Financial Statements included in Part I, Item 1, we completed a refinancing of a portion of our long-term debt. As part of the refinancing, we have sold 1,000,000 shares of our common stock. The proceeds from this transaction were used to reduce our long-term debt in the second quarter of 2005 through the redemption of a portion of our 11% senior subordinated notes. CASH FLOW FROM OPERATIONS Our operating cash flows decreased by $28,796,000 for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. This resulted primarily from a decrease in cash provided by working capital in the first quarter of 2005 as compared with the same period last year. WORKING CAPITAL We anticipate that working capital, including that necessary for capital expenditures and debt service, will be funded through existing cash balances, cash generated from operating activities, existing credit facilities, and, if necessary, future financing arrangements. Future liquidity, both short and long-term, will continue to be primarily dependent on producing or purchasing, and selling, sufficient quantities of refined products at margins sufficient to cover fixed and variable expenses. Based on the current operating environment for all of our operations, we believe that we will have sufficient working capital to meet our needs over the next 12-month period. 43 Working capital at March 31, 2005 consisted of current assets of $325,536,000 and current liabilities of $203,905,000, or a current ratio of 1.60:1. At December 31, 2004, the current ratio was 1.80:1, with current assets of $232,005,000 and current liabilities of $128,833,000. CAPITAL EXPENDITURES AND RESOURCES We have budgeted to spend up to approximately $99,000,000 for capital expenditures in 2005, excluding any potential acquisitions. Net cash used in investing activities for purchases of property, plant and equipment totaled approximately $12,826,000 for the three months ended March 31, 2005 and $3,213,000 for the three months ended March 31, 2004. Expenditures for 2005 primarily were for operational and environmental projects for the refineries, Phoenix Fuel and retail operations. We received proceeds of approximately $981,000 from the sale of property, plant and equipment and other assets in the first quarter of 2005 and $141,000 in the first quarter of 2004. We also received proceeds of $419,000 in 2004 from the sale of one closed service station/convenience store. We continue to monitor and evaluate our assets and may sell additional non-strategic or underperforming assets that we identify as circumstances allow. We also continue to evaluate potential acquisitions in our strategic markets, including lease arrangements. We continue to investigate other capital improvements to our existing facilities. The amount of capital projects that are actually undertaken in 2005 will depend on, among other things, general business conditions and results of operations. DIVIDENDS We currently do not pay dividends on our common stock. The board of directors will periodically review our policy regarding the payment of dividends. Any future dividends are subject to the results of our operations, declaration by the board of directors, and existing debt covenants. RISK MANAGEMENT We are exposed to various market risks, including changes in certain commodity prices and interest rates. To manage these normal business exposures, we may, from time to time, use commodity futures and options contracts to reduce price volatility, to fix margins in our refining and marketing operations, and to protect against price declines associated with our crude oil and finished products inventories. Our policies for the use of derivative financial instruments set limits on quantities, require various levels of approval and require review and reporting procedures. 44 Our credit facility is floating-rate debt tied to various short-term indices. As a result, our annual interest costs associated with this debt may fluctuate. At March 31, 2005, there were no direct borrowings outstanding under this facility. Our operations are subject to the normal hazards, including fire, explosion and weather-related perils. We maintain various insurance coverages, including business interruption insurance, subject to certain deductibles. We are not fully insured against some risks because some risks are not fully insurable, coverage is unavailable or premium costs, in our judgment, do not justify such expenditures. Credit risk with respect to customer receivables is concentrated in the geographic areas in which we operate and relates primarily to customers in the oil and gas industry. To minimize this risk, we perform ongoing credit evaluations of our customers' financial position and require collateral, such as letters of credit, in certain circumstances. ENVIRONMENTAL, HEALTH AND SAFETY Federal, state and local laws and regulations relating to health, safety and the environment affect nearly all of our operations. As is the case with other companies engaged in similar industries, we face significant exposure from actual or potential claims and lawsuits, brought by either governmental authorities or private parties, alleging non- compliance with environmental, health, and safety laws and regulations, or property damage or personal injury caused by the environmental, health, or safety impacts of current or historic operations. These matters include soil and water contamination, air pollution, and personal injuries or property damage allegedly caused by substances manufactured, handled, used, released, or disposed of by us or by our predecessors. Applicable laws and regulations govern the investigation and remediation of contamination at our current and former properties, as well as at third-party sites to which we sent wastes for disposal. We may be held liable for contamination existing at current or former properties, notwithstanding that a prior operator of the site, or other third party, caused the contamination. We may also be held responsible for costs associated with contamination clean up at third-party disposal sites, notwithstanding that the original disposal activities were in accordance with all applicable regulatory requirements at such time. We are currently engaged in a number of such remediation projects. Future expenditures related to compliance with environmental, health and safety laws and regulations, the investigation and remediation of contamination, and the defense or settlement of governmental or private party claims and lawsuits cannot be reasonably quantified in many 45 circumstances for various reasons. These reasons include the speculative nature of remediation and clean up cost estimates and methods, imprecise and conflicting data regarding the hazardous nature of various types of substances, the number of other potentially responsible parties involved, various defenses that may be available to us, and changing environmental, health and safety laws, regulations, and their respective interpretations. We cannot provide assurance that compliance with such laws or regulations, such investigations or cleanups, or such enforcement proceedings or private-party claims will not have a material adverse effect on our business, financial condition or results of operations. Rules and regulations implementing federal, state and local laws relating to the environment, health, and safety will continue to affect our operations. We cannot predict what new environmental, health, or safety legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or enforced with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could have an adverse effect on our financial position and the results of our operations and could require substantial expenditures by us for, among other things: - the installation and operation of refinery equipment, pollution control systems and other equipment not currently possessed by us; - the acquisition or modification of permits applicable to our activities; and - the initiation or modification of clean up activities. OTHER Our Ciniza and Bloomfield refineries continue to be affected by reduced crude oil production in the Four Corners area. The Four Corners basin is a mature production area and as a result is subject to a natural decline in production over time. This natural decline is being offset to some extent by new drilling, field workovers, and secondary recovery projects, which have resulted in additional production from existing reserves. As a result of the declining production of crude oil in the Four Corners area in recent years, we have not been able to cost-effectively obtain sufficient amounts of crude oil to operate our Four Corners refineries at full capacity. Crude oil utilization rates for our Four Corners refineries have declined from approximately 67% for 2003 to approximately 60% for the first three months of 2005. Our current projections of Four Corners crude oil production indicate that our crude oil demand will exceed the crude oil supply that is available from local 46 sources for the foreseeable future and that our crude oil capacity utilization rates at our Four Corners refineries will continue to decline. If additional crude oil or other refinery feedstocks become available in the future, we may increase production runs at our Four Corners refineries depending on the demand for finished products and the refining margins attainable. To that end, we continue to assess short-term and long-term options to address the continuing decline in Four Corners crude oil production. The options being considered include: - evaluating potentially economic sources of crude oil produced outside the Four Corners area, including ways to reduce raw material transportation costs to our refineries; - evaluating ways to encourage further production in the Four Corners area; - changes in operation/configuration of equipment at one or both refineries to further the integration of the two refineries, and reduce fixed costs; and - with sufficient further decline in raw material supply, the temporary, partial or permanent discontinuance of operations at one or both refineries. None of these options, however, may prove to be economically viable. We cannot assure you that the Four Corners crude oil supply for our Ciniza and Bloomfield refineries will continue to be available at all or on acceptable terms for the long term. Because large portions of the refineries' costs are fixed, any significant interruption or decline in the supply of crude oil or other feedstocks would have an adverse effect on our Four Corners refinery operations and on our overall operations. In October 2004, the President signed the American Jobs Creation Act of 2004 (the "Act"), which includes energy related tax provisions that are available to small refiners, including us. Under the Act, small refiners are allowed to deduct for tax purposes up to 75% of capital expenditures incurred to comply with the highway diesel low sulfur regulations adopted by the Environmental Protection Agency. The deduction is taken in the year the capital expenditure is made. Small refiners also are allowed to claim a credit against income tax of five cents on each gallon of low sulfur diesel fuel they produce, up to a maximum of 25% of the capital costs incurred to comply with the regulations. We may be able to take advantage of this credit by as early as late 2005. The United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, formerly the Paper, Allied - Industrial, Chemical and Energy Workers International Union, represents the hourly workforce at our Yorktown refinery. Our contract with the Union was scheduled to expire in 2006. In April 2005, this contract was extended until 2009. We do not anticipate that the terms of the new contract will have a material affect on our financial statements. 47 FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements are included throughout this report. These forward- looking statements are not historical facts, but only predictions, and generally can be identified by use of statements that include phrases such as "believe," "expect," "anticipate," "estimate," "could," "plan," "intend," "may," "project," "predict," "will" and terms and phrases of similar import. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate, and the forward-looking statements based on these assumptions could be incorrect. While we have made these forward-looking statements in good faith and they reflect our current judgment regarding such matters, actual results could vary materially from the forward- looking statements. The forward-looking statements included in this report are made only as of their respective dates and we undertake no obligation to publicly update these forward-looking statements to reflect new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events might or might not occur. Actual results and trends in the future may differ materially depending on a variety of important factors. These important factors include the following: - the availability of crude oil and the adequacy and costs of raw material supplies generally; - our ability to negotiate new crude oil supply contracts; - the risk that our long-term crude oil supply agreement with Statoil will not supply a significant portion of the crude oil needs of our Yorktown refinery over the term of the agreement, and will not reduce our crude oil costs, improve our high-value product output, contribute significantly to higher earnings, improve our competitiveness, or reduce the impact of crude oil markets' pricing volatility; - the risk that our actual delivered costs at the Yorktown refinery relative to the price of West-Texas Intermediate crude oil will not remain at first quarter 2005 levels; - our ability to successfully manage the liabilities, including environmental liabilities, that we assumed in the Yorktown acquisition; 48 - our ability to obtain anticipated levels of indemnification associated with prior acquisitions and sales of assets; - competitive pressures from existing competitors and new entrants, and other actions that may impact our markets; - volatility in the difference, or spread, between market prices for refined products and crude oil and other feedstocks; - the risk that our operations will not remain competitive and realize acceptable sales volumes and margins in those markets where they currently do so; - our ability to adequately control capital and operating expenses; - the risk that we will be unable to draw on our lines of credit, secure additional financing, access the public debt or equity markets or sell sufficient assets if we are unable to fund anticipated capital expenditures from cash flow generated by operations; - the risk of increased costs resulting from employee matters, including increased employee benefit costs; - the adoption of new state, federal or tribal legislation or regulations; changes to existing legislation or regulations or their interpretation by regulators or the courts; regulatory or judicial findings, including penalties; as well as other future governmental actions that may affect our operations, including the impact of any further changes to government-mandated specifications for gasoline, diesel fuel and other petroleum products; - unplanned or extended shutdowns in refinery operations; - the risk that we will not remain in compliance with covenants, and other terms and conditions, contained in our notes and credit facility; - the risk that we will not be able to post satisfactory letters of credit; - general economic factors affecting our operations, markets, products, services and prices; - unexpected environmental remediation costs; - weather conditions affecting our operations or the areas in which our products are refined or marketed; 49 - the risk we will be found to have substantial liability in connection with existing or pending litigation; - the occurrence of events that cause losses for which we are not fully insured; - the risk that costs associated with environmental projects will be higher than currently estimated (including costs associated with the resolution of outstanding environmental matters and costs associated with reducing the sulfur content of motor fuel) or that we will be unable to complete such projects (including motor fuel sulfur reduction projects) by applicable regulatory compliance deadlines; - the risk that we will be added as a defendant in additional MTBE lawsuits, and that we will incur substantial liabilities and substantial defense costs in connection with these suits; - the risk that tax authorities will challenge the positions we have taken in preparing our tax returns; - the risk that changes in manufacturer promotional programs may adversely impact our retail operations; and - other risks described elsewhere in this report or described from time to time in our other filings with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the previous statements. Forward-looking statements we make represent our judgment on the dates such statements are made. We assume no obligation to update any information contained in this report or to publicly release the results of any revisions to any forward-looking statements to reflect events or circumstances that occur, or that we become aware of, after the date of this report. 50 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is incorporated herein by reference to the section entitled "Risk Management" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2. ITEM 4. CONTROLS AND PROCEDURES a) Evaluation of Disclosure Controls and Procedures Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective as of the date of that evaluation. (b) Change in Internal Control Over Financial Reporting No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 51 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party to ordinary routine litigation incidental to our business. We also incorporate by reference the information regarding contingencies in Note 11 to the Condensed Consolidated Financial Statements set forth in Part I, Item 1, and the discussion of certain contingencies contained in Part I, Item 2, under the heading "Liquidity and Capital Resources - Environmental, Health and Safety." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual meeting of stockholders was held on April 27, 2005. Proxies for the meeting were solicited under Regulation 14A. There were no matters submitted to a vote of security holders other than the election of three directors and the ratification of our independent registered public accounting firm as specified in our Proxy Statement. There was no solicitation in opposition to management's nominees to the Board of Directors. Anthony J. Bernitsky was elected as a director of the Company. The vote was as follows: Shares Voted "For" Shares Voted "Withholding" - ------------------ -------------------------- 10,186,290 359,327 George M. Rapport was elected as a director of the Company. The vote was as follows: Shares Voted "For" Shares Voted "Withholding" - ------------------ -------------------------- 10,187,015 358,602 Donald M. Wilkinson was elected as a director of the Company. The vote was as follows: Shares Voted "For" Shares Voted "Withholding" - ------------------ -------------------------- 10,219,730 325,887 52 Deloitte & Touche LLP was ratified as our independent registered public accounting firm for the Company for the year ending December 31, 2005. The vote was as follows: Shares Voted "For" Shares Voted "Against" Shares Voted "Abstaining" - ------------------ ---------------------- ------------------------- 10,350,427 193,865 1,325 In addition to the three directors elected above, other members of our Board of Directors include Fred L. Holliger, Chairman, Larry L. DeRoin, Brooks J. Klimley and Richard T. Kalen. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.1* Addendum to Giant Industries, Inc. & Affiliated Companies 401(k) Basic Plan Document, effective March 28, 2005. 4.2* Fifth Amendment to the Giant Industries, Inc. & Affiliated Companies 401(k) Plan Adoption Agreement. 31.1* Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Filed herewith. (b) Reports on Form 8-K: We filed the following reports on Form 8-K during the quarter for which this report is being filed and subsequently: (i) On February 3, 2005, we filed a Form 8-K dated February 3, 2005, containing a press release providing earnings guidance for the quarter and year ended December 31, 2004. 53 (ii) On March 15, 2005, we filed a Form 8-K dated March 15, 2005, containing a press release detailing our earnings for the quarter and year ended December 31, 2004. (iii) On March 22, 2005, we filed a Form 8-K dated March 22, 2005, containing a press release announcing a public offering of our common stock. (vi) On May 5, 2005, we filed a Form 8-K dated May 5, 2005, containing a press release detailing our earnings for the quarter ended March 31, 2005. 54 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q for the quarter ended March 31, 2005 to be signed on its behalf by the undersigned thereunto duly authorized. GIANT INDUSTRIES, INC. /s/ MARK B. COX ------------------------------------------------- Mark B. Cox, Executive Vice President, Treasurer, Chief Financial Officer and Assistant Secretary, on behalf of the Registrant and as the Registrant's Principal Financial Officer Date: May 6, 2005 55 54 EX-4 2 exhibit04-1.txt GIANT INDUSTRIES, INC. EXHIBIT 4.1 EXHIBIT 4.1 The CORPORATEplan for RetirementSM ADDENDUM Re: Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") Automatic Rollover Amendments for Fidelity Basic Plan Document No. 02 PREAMBLE Adoption and Effective Date of Amendment. This amendment of the Plan is adopted to reflect the automatic rollover rules enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This amendment is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. This amendment shall be effective March 28, 2005. Supersession of Inconsistent Provisions. This amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this amendment. Section 13.02 is hereby amended by adding the following paragraph at the end thereof: In the event of a mandatory distribution greater than $1,000 in accordance with the provisions of this Section 13.02 if the Participant does not elect to have such distribution paid directly to an eligible retirement plan specified by the Participant in a direct rollover or to receive the distribution directly, then the Plan Administrator will pay the distribution in a direct rollover to an individual retirement plan designated by the Plan Administrator. Unless elected otherwise by the Employer in the Adoption Agreement, $1,000 is substituted for $5,000 each time it appears in this Section 13.02. EX-4 3 exhibit04-2.txt GIANT INDUSTRIES, INC. EXHIBIT 4.2 EXHIBIT 4.2 FIFTH AMENDMENT TO THE GIANT INDUSTRIES, INC. & AFFILIATED COMPANIES 401(k) PLAN WHEREAS, Giant Industries, Inc. (the "Corporation") has adopted and subsequently amended and restated the Giant Industries, Inc. & Affiliated Companies 401(k) Plan (the "Giant Plan"), in the form of The CORPORATEplan for RetirementSM Profit Sharing/401(k) Plan Fidelity Basic Plan Document No. 02 (a prototype plan sponsored by Fidelity Management and Research Corporation), by executing an Adoption Agreement; and WHEREAS, Giant Industries, Inc. (the "Corporation") has adopted and subsequently amended and restated the Giant Yorktown 401(k) Retirement Savings Plan (the "Yorktown Plan"), in the form of The CORPORATEplan for RetirementSM Profit Sharing/401(k) Plan Fidelity Basic Plan Document No. 02 (a prototype plan sponsored by Fidelity Management and Research Corporation), by executing an Adoption Agreement; and WHEREAS, Section 16.02 of The CORPORATEplan for RetirementSM Profit Sharing/401(k) Plan Fidelity Basic Plan Document No. 02 provides for the amendment of the Plan by the Employer; NOW, THEREFORE, 1. Effective January 1, 2004, Section 1.04 is amended as shown on pages 1-3 of the attachment. 2. Effective January 1, 2004, Section 1.10(a)(2) is amended by adding the following as the second paragraph: For the Plan Year Ending December 31, 2004, the Employer shall make an additional Matching Employer Contribution on behalf of each Participant, who is employed in the Giant Group on December 31, 2004, equal to the excess of (A) 50% of the Participant's total Deferral Contributions (to the extent the Deferral Contributions do not exceed 12% of Compensation) during the 2004 Plan Year, over (B) the Matching Employer Contribution otherwise made by the Employer with respect to the 2004 Plan Year. 3. Effective January 1, 2004, Section 1.15 is amended as shown on page 4 and 5 of the attachment. 4. Effective November 18, 2004, Section 1.23(c)(1) is amended by replacing the following at its conclusion: The Employer may direct the Trustee to invest any or all of any Nonelective Employer Contributions in the Employer stock fund. With respect to the remainder of the Nonelective Employer Contribution, if any, the Participant shall direct the Trustee regarding its investment. The Employer may direct the Trustee to invest in the Employer stock fund a portion of amounts transferred from the ESOP, and the Participant shall direct the Trustee regarding the vestment of the remainder of his Transfer Account. A Participant who has either (1) attached age 59 1/2 or (2) attached age 55 and has been credited with 10 years of Vesting Service may direct the Trustee regarding the investment of all or a portion of the Nonelective Employer Contribution and Transfer Account otherwise invested at the Employer's direction in the Employer Stock Fund (source line 06 - Employer Contribution Stock and source line 08 Transfer Assets Stock). 5. Effective November 18, 2004, the Addendum Re: Protected In-Service Withdrawals is amended by replacing the first sentence of paragraph (d) with the following: In-service withdrawal available at age 55 with 10 years of Vesting Service. 6. Effective January 1, 2004, the Vesting Addendum is amended as shown on page 7 of the attachment. IN WITNESS WHEREOF the Employer has caused this amendment to be executed this 7th day of April, 2005 by its duly authorized officer, effective as stated herein. GIANT INDUSTRIES, INC. By: /s/ NATALIE R. DOPP ---------------------------- Title: VP, Human Resources ---------------------------- EXECUTION PAGE (EMPLOYER'S COPY) This Agreement shall be effective upon execution by both parties. By executing this Agreement, the parties agree to terms and conditions contained in the Agreement and the following attached Appendices: Service Agreement Original Revision - ----------------- Effective Date(s) Date -------- ---------- Articles I and II 01/01/1996 Appendix A - Investment Schedule and Services Appendix B - Enrollment and Education Services Appendix C - Contribution Processing Services Appendix D - Loan and Withdrawal Services Appendix E - Compliance Services Appendix F - Miscellaneous Additional Services 01/01/2004 In witness whereof, the parties hereto have caused this Agreement to be executed by their duly authorized officers. Employer: Employer: /s/ NATALIE R. DOPP - -------------------------------- -------------------------------- (Signature) (Signature) /S/ NATALIE R. DOPP - -------------------------------- -------------------------------- (Print Name) (Print Name) VP, HUMAN RESOURCES - -------------------------------- -------------------------------- (Title) (Title) 4/1/05 - -------------------------------- -------------------------------- (Date) (Date) Note: Only one authorized signature is required to execute this Agreement unless the Employer's corporate policy mandates two authorized signatures. Fidelity Management Trust Company: - -------------------------------- (Signature) - -------------------------------- (Print Name) - -------------------------------- (Title) - -------------------------------- (Date) 1.04 COVERAGE All Employees who meet the conditions specified below shall be eligible to participate in the Plan: (a) Age Requirement (check one): (1) [X] no age requirement. (2) [ ] must have attained age: ___ (not to exceed 21). (b) Eligibility Service Requirement (1) Eligibility to Participate in Plan (check one): (A) [ ] no Eligibility Service requirement. (B) [ ] ____ (not to exceed 11) months of Eligibility Service requirement (no minimum number Hours of Service can be required). (C) [X] one year of Eligibility Service requirement (at least 1,000 Hours of Service are required during the Eligibility Computation Period). (D) [ ] two years of Eligibility Service requirement (at least 1,000 Hours of Service are required during each Eligibility Computation Period). (Do not select if Option 1.01(b)(1), 401(k) Only, is checked, unless a different Eligibility Service requirement applies to Deferral Contributions under Option 1.04(b)(2).) Note: If the Employer selects the two year Eligibility Service requirement, the contributions subject to such Eligibility Service requirement must be 100% vested when made. (2) [X] Special Eligibility Service requirement for Deferral Contributions and/or Matching Employer Contributions: (A) The special Eligibility Service requirement applies to (check the appropriate box(es)): (i) [X] Deferral Contributions. (ii) [X] Matching Employer Contributions. (B) The special Eligibility Service requirement is: (A) (Fill in (A), (B), or (C) from Subsection 1.04(b)(1) above). (c) Eligible Class of Employees (check one): Note: The Plan may not cover employees who are residents of Puerto Rico. These employees are automatically excluded from the eligible class, regardless of the Employer's selection under this Subsection 1.04(c). (1) [ ] includes all Employees of the Employer. (2) [X] includes all Employees of the Employer except for (check the appropriate box(es)): (A) [ ] employees covered by a collective bargaining agreement. (B) [ ] Highly Compensated Employees as defined in Code Section 414(q). (C) [X] Leased Employees as defined in Subsection 2.01(cc). (D) [X] nonresident aliens who do not receive any earned income from the Employer which constitutes United States source income. (E) [ ] other: _______________________________________ _______________________________________ Note: The Employer should exercise caution when excluding employees from participation in the Plan. Exclusion of employees may adversely affect the Plan's satisfaction of the minimum coverage requirements, as provided in Code Section 410(b). (d) The Entry Dates shall be (check one): (1) [ ] immediate upon meeting the eligibility requirements specified in Subsections 1.04(a), (b), and (c). (2) [X] the first day of each Plan Year and the first day of the seventh month of each Plan year. (3) [ ] the first day of each Plan Year and the first day of the fourth, seventh, and tenth months of each Plan year. (4) [ ] the first day of each month. (5) [ ] the first day of each Plan Year. (Do not select if there is an Eligibility Service requirement of more than six months in Subsection 1.04(b) or if there is an age requirement of more than 20 1/2 in Subsection 1.04(a).) (e) [X] Special Entry Date(s) - In addition to the Entry Dates specified in Subsection 1.04(d) above, the following special Entry Date(s) apply for Deferral and/or Matching Employer Contributions. (Special Entry Dates may only be selected if Option 1.04(b)(2), special Eligibility Service requirement, is checked. The same Entry Dates must be selected for contributions that are subject to the same Eligibility Service requirements.) (1) The special Entry Date(s) shall apply to (check the appropriate box(es)): (A) [X] Deferral Contributions. (B) [X] Matching Employer Contributions. (2) The special Entry Date(s) shall be: (1) (Fill in (1), (2), (3), (4), or (5) from Subsection 1.04(d) above). (f) Date of Initial Participation - An Employee shall become a Participant unless excluded by Subsection 1.04(c) above on the Entry Date immediately following the date the Employee completes the service and age requirement(s) in Subsections 1.04(a) and (b), if any, except (check one): (1) [X] no exceptions. (2) [ ] Employees employed on the Effective Date in Subsection 1.01(g)(1) or (2) shall become Participants on that date. (3) [ ] Employees who meet the age and service requirement(s) of Subsections 1.04(a) and (b) on the Effective Date in Subsection 1.01(g)(1) or (2) shall become Participants on that date. 1.15 VESTING A Participant's vested interest in Matching Employer Contributions and/or Nonelective Employer Contributions, other than Safe Harbor Matching Employer and/or Nonelective Employer Contributions elected in Subsection 1.10(a)(3) or 1.11(a)(3), shall be based upon his years of Vesting Service and the schedule(s) selected below, except as provided in Subsection 1.21(d) or in the Vesting Schedule Addendum to the Adoption Agreement. (a) [ ] Years of Vesting Service shall exclude: (1) [ ] for new plans, service prior to the Effective Date as defined in Subsection 1.01(g)(1). (2) [ ] for existing plans converting from another plan document, service prior to the original Effective Date as defined in Subsection 1.01(g)(2). (b) Vesting Schedule(s) Note: The vesting schedule selected below applies only to Nonelective Employer Contributions and Matching Employer Contributions other than safe harbor contributions under Option 1.11(a)(3) or Option 1.10(a)(3). Safe harbor contributions under Options 1.11(a)(3) and 1.10(a)(3) are always 100% vested immediately. (1) Nonelective Employer (2) Matching Employer Contributions (check one): Contributions (check one): (A) [ ] N/A - No Nonelective (A) [ ] N/A - No Matching Employer Contributions Employer Contributions (B) [X] 100% Vesting immediately (B) [ ] 100% Vesting immediately (C) [ ] 3 year cliff (C) [X] 3 year cliff (see C below) (see C below) (D) [ ] 5 year cliff (D) [ ] 5 year cliff (see D below) (see D below) (E) [ ] 6 year graduated (E) [ ] 6 year graduated (see E below) (see E below) (F) [ ] 7 year graduated (F) [ ] 7 year graduated (see F below) (see F below) (G) [ ] Other vesting (G) [ ] Other vesting (complete G1 below) (complete G2 below) Applicable Vesting Schedule(s) Years of ------------------------------------- Vesting Service C D E F G1 G2 - --------------- ------------------------------------- 0 0% 0% 0% 0% ___% ___% 1 0% 0% 0% 0% ___% ___% 2 0% 0% 20% 0% ___% ___% 3 100% 0% 40% 20% ___% ___% 4 100% 0% 60% 40% ___% ___% 5 100% 100% 80% 60% ___% ___% 6 100% 100% 100% 80% ___% ___% 7 or more 100% 100% 100% 100% 100% 100% Note: A schedule elected under G1 or G2 above must be at least as favorable as one of the schedules in C, D, E or F above. Note: If the Plan is being amended to provide a more restrictive vesting schedule, the more favorable vesting schedule shall continue to apply to Participants who are Active Participants immediately prior to the later of (1) the effective date of the amendment or (2) the date the amendment is adopted. (c) [X] A vesting schedule more favorable than the vesting schedule(s) selected above applies to certain Participants. Please complete the Vesting Schedule Addendum to the Adoption Agreement. (d) Application of Forfeitures - If a Participant forfeits any portion of his non-vested Account balance as provided in Sections 6.02, 6.04, 6.07, or 11.08, such forfeitures shall be (check one): (1) [ ] N/A - Either (A) no Matching Employer Contributions are made with respect to Deferral Contributions under the Plan and all other Employer Contributions are 100% vested when made or (B) there are no Employer Contributions under the Plan. (2) [X] applied to reduce Employer contributions. (3) [ ] allocated among the Accounts of eligible Participants in the manner provided in Section 1.11. (Only if Option 1.11(a) or (b) is checked.) AMENDMENT EXECUTION PAGE This page is to be completed in the event the Employer modifies any prior election(s) or makes a new election(s) in this Adoption Agreement. Attach the amended page(s) of the Adoption Agreement to this execution page. The following section(s) of the Plan are hereby amended effective as of the date(s) set forth below: Section Amended Page Effective Date --------------- ---- -------------- 1.04 01/01/2004 1.15 01/01/2004 Vesting Addendum 01/01/2004 IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed this 1st day of April, 2005. Employer: GIANT INDUSTRIES, INC. Employer: --------------------------- --------------------------- By: /s/ NATALIE R. DOPP By: --------------------------- --------------------------- Title: VP, HUMAN RESOURCES Title: --------------------------- --------------------------- Accepted by: Fidelity Management Trust Company, as Trustee By: Date: --------------------------- --------------------------- Title: --------------------------- ADDENDUM Re: VESTING SCHEDULE For Plan Name: Giant Industries, Inc. & Affiliated Companies 401(k) Plan (a) More Favorable Vesting Schedule (1) The following vesting schedule applies to the class of Participants described in (a)(2) below: Source: Discretionary Match Years of Service Vesting Percent ---------------- --------------- less than 1 100 1 100 (2) The vesting schedule specified in (a)(1) above applies to the following class of Participants: Employee hired prior to 1/1/2004 (b) [ ] Additional Vesting Schedule (1) The following vesting schedule applies to the class of Participants described in (b)(2) below: -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- (2) The vesting schedule specified in (b)(1) above applies to the following class of Participants: -------------------------------------------------------------- APPENDIX F - MISCELLANEOUS The provision(s) as identified in this Appendix F shall supercede the referenced provision(s) of this Agreement, subject to the terms and conditions contained herein. For provision(s) below identified as exceptions to the Plan (requiring an amendment to the CORPORATEplan for RetirementSM), the Employer hereby agrees to obtain a favorable determination letter on the Plan from the Internal Revenue Service. Title: Amendment to Compensation Description: The Employer will provide an amendment that excludes any amount realized from the exercise of qualified or nonqualified stock options and any Compensation for the portion of the Plan Year during which the employee is classified by the Employer as an employee of Giant Yorktown, Inc. from the definition of Compensation. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Amendment to Investment Direction Description: The Employer will provide an amendment that allows for Employer investment direction for one of the Non-Elective Employer Contribution account and Employee Investment direction from the other Non- Elective Employer Contribution account. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Amendment to Non-Elective Employer Contribution Description: The Employer will provide an amendment that allows it to decide upon funding of each contribution if the Employer or Employee will direct investment. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Amendment to Investment Direction Description: The Employer will provide an amendment that allows for employee investment direction in all restricted accounts upon attaining either age 55 and 10 years of service, or age 59.5. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Nonelective Employer Contributions Description: The Employer will provide an amendment that allows for a different Nonelective Employer Contribution for different groups of Participants. This provision may call for additional non-discrimination testing not included in Fidelity's Package Testing services for this plan. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Employer Matching Contribution Description: The Employer will provide an amendment that allows for different Matching Contributions for different groups of Participants. This provision may call for additional non-discrimination testing not included in Fidelity's Package Testing services for this Plan. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Matching Contribution on Employee After-tax Contributions Description: The Employer will provide an amendment that allows for Matching Employer Contributions to be made on Employee After-tax Contributions for specific groups of Participants as identified in their Amendment. This provision may call for additional non-discrimination testing not included in Fidelity's Package Testing services for the Plan. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Matching Contributions on Catch-up Contributions Description: The Employer will provide an amendment that allows for a Matching Employer Contribution to be made on Age 50 Catch-up Contributions for specific groups of Participants as identified in their Amendment. This provision may All for additional non-discrimination testing not included in Fidelity's Package Testing services for the Plan. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Change to Withdrawal Policy in Appendix D Description: Effective 4/14/04: Hardship availability will be amended as follows: Payment of funeral expenses for the Participant's spouse, children or dependents will be permitted. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: True Up Matching Calculation Description: Effective 1/1/2004: Giant Industries to provide an amendment for a true-up matching contribution for all plan participants who were employed on the last day of the plan year and who were not classified as employees of Giant Yorktown. Exception Fee: Fee Waived Fidelity hereby agrees to allow an amendment to the CORPORATEplan for RetirementSM to incorporate a Plan provision to accomplish the above stated purpose. Amending the Plan to add such a provision will make the Plan individually designed and the Employer hereby agrees to accept all consequences of such a designation (see attached). Title: Change to Loan Policy in Appendix D Description: Participant will be permitted to initiate up to two loans in a given plan year. While Fidelity will produce Participant communication materials and forms for use by the Employer, the Employer must provide any necessary language summarizing this provision as well as identify which materials and forms would use this language. Exception Fee: Fee Waived Title: Change to Loan Policy in Appendix D Description: Loan availability is to be computed based on the entire account balance except for the Non-Elective Employer Contribution Stock (EMPLOYER CONTRIB STOCK SOURCE) and the ESOP Transfer Stock (TRANSFER ASSETS STOCK SOURCE) accounts and is to be withdrawn from those same accounts. While Fidelity will produce Participant communication materials and forms for use by the Employer, the Employer must provide any necessary language summarizing this provision as well as identify which materials and forms would use this language. Exception Fee: Fee Waived Title: Charging Plan Expenses to the accounts of terminated participants Description: Effective 1/1/2005: Charging Plan Expenses to the Accounts of Terminated Participants. The Employer hereby directs Fidelity to deduct, on a per capita basis, the Per Participant fee described in Article I from the accounts of Participants who are no longer actively employed by the Employer (i.e., Participants with the following status codes on Fidelity's Participant Recordkeeping System (FPRS): R (Retired), T (Terminated), D (Deceased), or P (Disabled)) but not from the accounts of Participants who are actively employed by the Employer. The Employer hereby acknowledges that the Employer is responsible for ensuring that the proper status code for each Participant is reflected in FPRS at all times. The Employer hereby represents that it shall pay directly to Fidelity such fees on behalf of the actively employed Participants and/or direct Fidelity to deduct such fees from the Plan's forfeiture account. Solely for purposes of this direction, whether a Participant is actively employed or not actively employed shall be determined as of the date such amount is deducted. The Employer hereby acknowledges that Fidelity has advised it to consult with its legal counsel regarding this direction and represents that it has determined that the allocation of Plan expenses reflected in this direction: Is reasonable; Complies with all applicable ERISA requirements, including, but not limited to, those described in Department of Labor Field Assistance Bulletin 2003-3; and Is consistent with the status of the Plan as a plan qualified under Internal Revenue Code Section 401(a) and in all respects complies with the tax law requirements applicable to such plans, including, but not limited to, those described in Internal Revenue Service Revenue Ruling 2004-10. The Employer hereby further acknowledges that, to the extent any testing of this expense allocation is required under Internal Revenue Code Section 401(a)(4), the Employer shall be solely responsible for such testing, and Fidelity shall not provide any services related to such testing. The Employer hereby represents that, pursuant to ERISA, it has made appropriate and timely disclosure to Participants regarding the allocation of Plan expenses described herein. Exception Fee: Fee Waived Attachment to Appendix F of the CORPORATEplan for RetirementSM Service Agreement Article II, Section 2 of the CORPORATEplan for RetirementSM Service Agreement provides that the Employer may not add, delete, or modify the CORPORATEplan for RetirementSM prototype documents in any way without the written consent of Fidelity. In Appendix F of the CORPORATEplan for RetirementSM Service Agreement, Fidelity gave its written consent that this provision be waived solely for the purpose of allowing the company to make a certain amendment or amendments to the prototype plan. The Employer will be responsible for drafting each amendment to which reference is made in Appendix F. As a result of any such amendment, the Employer's Plan will not be able to rely on the opinion letter Fidelity received from the IRS for the CORPORATEplan for RetirementSM with respect to the Employer's Plan. The Employer's Plan will be individually designed, and the Employer will incur the 'user' fee for an individually designed plan instead of the fee for a prototype plan in filing for an IRS determination letter. The Employer will be responsible for the continuing qualification of the plan, including amending it to comply with the required Internal Revenue Service guidelines. Fidelity will provide the Employer with a copy of any model amendments or updates to the Fidelity Prototype plan. The Employer shall be responsible for amendments to retain the provision allowed by Appendix F (if so desired) in any restated version of the Fidelity Prototype Plan adopted by the Employer. The Employer understands that Fidelity will only produce a sample Summary Plan Description for the Employer's Plan which will not include language summarizing any amendment(s). Finally, the Employer must give Fidelity the opportunity to review any other amendment that the Employer proposes to the Plan, allowing Fidelity to approve or reject the amendment based upon its impact on the recordkeeping of the Plan as a qualified plan. EX-31 4 exhibit31-1.txt GIANT INDUSTRIES, INC. EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Fred L. Holliger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Giant Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 6, 2005. By: /s/ FRED L. HOLLIGER ------------------------------- Name: Fred L. Holliger Title: Chief Executive Officer EX-31 5 exhibit31-2.txt GIANT INDUSTRIES, INC. EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark B. Cox, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Giant Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 6, 2005. By: /s/ MARK B. COX ------------------------------- Name: Mark B. Cox Title: Chief Financial Officer EX-32 6 exhibit32-1.txt GIANT INDUSTRIES, INC. EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Giant Industries, Inc. ("Giant") on Form 10-Q for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Fred L. Holliger, Chief Executive Officer of Giant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Giant. By: /s/ FRED L. HOLLIGER ------------------------------- Name: Fred L. Holliger Title: Chief Executive Officer Date: May 6, 2005 EX-32 7 exhibit32-2.txt GIANT INDUSTRIES, INC. EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Giant Industries, Inc. ("Giant") on Form 10-Q for the quarter ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark B. Cox, Chief Financial Officer of Giant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Giant. By: /s/ MARK B. COX ------------------------------- Name: Mark B. Cox Title: Chief Financial Officer Date: May 6, 2005 -----END PRIVACY-ENHANCED MESSAGE-----