-----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, O4sSap5iPFID12wzCxfmp+/VF8IsSWPZP5/o5OBJ23OncFfZ0mMC+teSg58L+Oeh Mie1abyin7Tdtx8RCOsKXQ== 0000856465-05-000012.txt : 20050805 0000856465-05-000012.hdr.sgml : 20050805 20050805153226 ACCESSION NUMBER: 0000856465-05-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050805 DATE AS OF CHANGE: 20050805 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: 051002653 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 secondqtr2005-edgar.txt GIANT INDUSTRIES, INC. SECOND QUARTER 2005 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 June 30, 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 July 29, 2005: 13,424,847 shares. GIANT INDUSTRIES, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION....................................... 1 Item 1 - Financial Statements........................................ 1 Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004 (Unaudited)........................... 1 Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2005 and 2004 (Unaudited)..... 2 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (Unaudited)............. 3-4 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 5-36 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............... 37-54 Item 3 - Quantitative and Qualitative Disclosures About Market Risk........................................... 55 Item 4 - Controls and Procedures..................................... 55 PART II - OTHER INFORMATION........................................... 56 Item 1 - Legal Proceedings........................................... 56 Item 4 - Submission of Matters to a Vote of Security Holders......... 56 Item 6 - Exhibits and Reports on Form 8-K............................ 57 SIGNATURE............................................................. 59 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)
June 30, 2005 December 31, 2004 ------------- ----------------- ASSETS Current assets: Cash and cash equivalents............................. $ 59,920 $ 23,714 Receivables, net...................................... 133,492 101,692 Inventories........................................... 125,167 93,500 Prepaid expenses and other............................ 4,652 11,265 Deferred income taxes................................. 1,731 1,834 --------- --------- Total current assets................................ 324,962 232,005 --------- --------- Property, plant and equipment........................... 697,616 671,851 Less accumulated depreciation and amortization.......... (283,645) (265,475) --------- --------- 413,971 406,376 --------- --------- Goodwill................................................ 40,303 40,303 Assets held for sale.................................... 33 - Other assets............................................ 23,538 23,722 --------- --------- $ 802,807 $ 702,406 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................... $ 120,557 $ 75,554 Accrued expenses...................................... 56,352 53,279 --------- --------- Total current liabilities........................... 176,909 128,833 --------- --------- Long-term debt.......................................... 274,622 292,759 Deferred income taxes................................... 55,624 41,039 Other liabilities and deferred income................... 24,752 23,336 Commitments and contingencies (Note 10) Stockholders' equity: Preferred stock, par value $.01 per share, 10,000,000 shares authorized, none issued Common stock, par value $.01 per share, 50,000,000 shares authorized, 17,176,827 and 16,085,631 shares issued............................ 172 161 Additional paid-in capital............................ 159,246 135,407 Retained earnings..................................... 147,936 117,325 --------- --------- 307,354 252,893 Less common stock in treasury - at cost, 3,751,980 shares.................................... (36,454) (36,454) --------- --------- Total stockholders' equity.......................... 270,900 216,439 --------- --------- $ 802,807 $ 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 Six Months Ended June 30, June 30, --------------------- ---------------------- 2005 2004 2005 2004 --------- --------- --------- ---------- Net revenues......................................... $ 863,357 $ 654,035 $1,575,084 $1,194,843 Cost of products sold (excluding depreciation and amortization).................................. 748,883 557,326 1,374,673 1,018,093 --------- --------- ---------- ---------- Gross margin......................................... 114,474 96,709 200,411 176,750 Operating expenses................................... 48,744 43,540 94,988 87,736 Depreciation and amortization........................ 9,492 9,220 20,463 18,318 Selling, general and administrative expenses......... 11,843 10,052 19,641 18,252 Net (gain)/loss on the disposal/write-down of assets, including assets held for sale............. (207) 566 (219) 562 Gain from insurance settlement due to fire incident.. (196) - (3,688) - --------- --------- ---------- ---------- Operating income..................................... 44,798 33,331 69,226 51,882 Interest expense..................................... (6,382) (8,688) (13,376) (18,049) Costs associated with early debt extinguishment...... (2,099) (10,875) (2,099) (10,875) Amortization of financing costs...................... (1,496) (5,857) (2,000) (6,815) Interest and investment income....................... 368 42 489 81 --------- --------- ---------- ---------- Earnings from continuing operations before income taxes....................................... 35,189 7,953 52,240 16,224 Provision for income taxes........................... 14,651 2,938 21,644 6,607 --------- --------- ---------- ---------- Earnings from continuing operations ................. 20,538 5,015 30,596 9,617 Earnings/(loss) from discontinued operations, net of income tax (provision)/benefit of ($13), $17, ($9) and $69........................... 22 (27) 15 (111) --------- --------- ---------- ---------- Net earnings......................................... $ 20,560 $ 4,988 $ 30,611 $ 9,506 ========= ========= ========== ========== Net earnings (loss) per common share: Basic Continuing operations............................ $ 1.53 $ 0.45 $ 2.37 $ 0.97 Discontinued operations.......................... - - - (0.01) --------- --------- ---------- ---------- $ 1.53 $ 0.45 $ 2.37 $ 0.96 ========= ========= ========== ========== Assuming dilution Continuing operations............................ $ 1.51 $ 0.44 $ 2.34 $ 0.94 Discontinued operations.......................... - - - (0.01) --------- --------- ---------- ---------- $ 1.51 $ 0.44 $ 2.34 $ 0.93 ========= ========= ========== ========== See accompanying notes to Condensed Consolidated Financial Statements. 2
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, ----------------------- 2005 2004 --------- --------- Cash flows from operating activities: Net earnings.................................................... $ 30,611 $ 9,506 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization from continuing operations........ 20,463 18,318 Depreciation and amortization from discontinued operations...... - 81 Amortization of financing costs................................. 2,000 6,815 Deferred income taxes........................................... 14,688 3,981 Deferred crude oil purchase discounts........................... 615 1,936 Net (gain)/loss on the disposal of assets from continuing operations, including assets held for sale.................... (219) 562 Net (gain)/loss on the disposal of assets from discontinued operations, including assets held for sale.................... (22) 1 Gain from insurance settlement of fire incident................. (3,688) - Income tax benefit from exercise of stock options............... 328 - Changes in operating assets and liabilities: (Increase) in receivables..................................... (31,800) (27,857) (Increase) decrease in inventories............................ (31,666) 15,797 Decrease in prepaid expenses.................................. 6,639 3,168 (Increase) in other assets.................................... (303) (586) Increase (decrease)in accounts payable........................ 44,900 (5,062) Increase (decrease) in accrued expenses....................... 1,008 (5,232) Increase in other liabilities................................. 1,090 2,681 --------- --------- Net cash provided by operating activities......................... 54,644 24,109 --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment....................... (27,697) (19,057) Proceeds from assets held for sale.............................. 1,866 6,553 Yorktown refinery acquisition contingent payment................ - (11,695) Proceeds from insurance settlement of fire incident............. 3,688 - Proceeds from sale of property, plant and equipment and other assets.................................................. 1,124 184 Funding of restricted cash escrow funds......................... (21,883) (235) Release of restricted cash escrow funds......................... 21,883 - --------- --------- Net cash used in investing activities............................. (21,019) (24,250) --------- --------- Cash flows from financing activities: Payments of long-term debt...................................... (18,828) (205,631) Proceeds from issuance of long-term debt........................ - 147,467 Long-term debt issuance costs................................... - (3,000) Proceeds from line of credit.................................... 36,000 - Payments on line of credit...................................... (36,000) - Net proceeds from issuance of common stock...................... 22,349 57,374 Proceeds from exercise of stock options......................... 202 303 Deferred financing costs........................................ (1,142) (2,259) --------- --------- Net cash provided by (used in) financing activities............... 2,581 (5,746) --------- --------- Net increase in cash and cash equivalents......................... 36,206 (5,887) Cash and cash equivalents: Beginning of period........................................... 23,714 27,263 --------- --------- End of period................................................. $ 59,920 $ 21,376 ========= ========= 3
Significant Noncash Investing and Financing Activities. In the first quarter of 2005, we transferred $118,000 of property, plant and equipment to other assets. In the second quarter of 2005, we contributed 34,196 newly issued shares of our common stock, valued at $972,000, to our 401(k) plan as a discretionary contribution for the year 2004. At June 30, 2005, approximately $4,710,000 of purchases of property, plant and equipment had not been paid and accordingly, were accrued in accounts payable and accrued liabilities. In the first quarter of 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. 4 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 segments: - our refining group; - our retail group; and - Phoenix Fuel. See Note 9 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 and six months ended June 30, 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. 5 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 Statements of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", to stock- based employee compensation.
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2005 2004 2005 2004 ------- ------- ------- ------- (In thousands, except per share data) Net earnings, as reported............. $20,560 $ 4,988 $30,611 $ 9,506 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect.......................... (7) (40) (24) (99) ------- ------- ------- ------- Pro forma net earnings................ $20,553 $ 4,948 $30,587 $ 9,407 ======= ======= ======= ======= Earnings per share: Basic - as reported................. $ 1.53 $ 0.45 $ 2.37 $ 0.96 ======= ======= ======= ======= Basic - pro forma................... $ 1.53 $ 0.45 $ 2.37 $ 0.95 ======= ======= ======= ======= Diluted - as reported............... $ 1.51 $ 0.44 $ 2.34 $ 0.93 ======= ======= ======= ======= Diluted - pro forma................. $ 1.51 $ 0.44 $ 2.34 $ 0.92 ======= ======= ======= =======
6 In December 2004, the Financial Accounting Standards Board ("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 December 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 FASB, under issue No. 04-13, 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 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. In June 2005, the EITF Task Force reached a consensus in Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements", that such improvements placed in service at the beginning of the lease term, should be amortized over the lesser of the useful life of the assets or the lease term, including renewals reasonably assured at the date the leasehold improvements are purchased. We do not expect this consensus to have a material impact on our financial statements. On July 14, 2005, FASB issued an exposure draft of a proposed interpretation, "Accounting for Uncertain Tax Positions-an Interpretation of FASB Statement 109". The proposed effective date is December 15, 2005. Under FASB's proposal, the initial recognition of uncertain tax benefits would be based on whether the underlying tax position is "probable" of being sustained under audit by the relevant taxing authority. The "probable" confidence threshold would be based on the definition of probable in FASB Statement No. 5, "Accounting for Contingencies". We will monitor the status of this exposure draft and evaluate the effects, if any, on our financial statements in the future. 7 NOTE 2 - INVENTORIES: Our inventories consist of the following:
June 30, 2005 December 31, 2004 ------------- ----------------- (In thousands) First-in, first-out ("FIFO") method: Crude oil............................ $ 62,003 $ 44,435 Refined products..................... 102,452 68,863 Refinery and shop supplies........... 13,353 12,330 Merchandise.......................... 3,493 3,092 Retail method: Merchandise.......................... 9,386 9,419 -------- -------- Subtotal........................... 190,687 138,139 Adjustment for last-in, first-out ("LIFO") method............ (65,520) (44,639) -------- -------- Total.............................. $125,167 $ 93,500 ======== ========
The portion of inventories valued on a LIFO basis totaled $86,505,784 and $63,956,000 at June 30, 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 June 30, 2005 and 2004, net earnings and diluted earnings per share would have been higher as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2005 2004 2005 2004 ------- ------- ------- ------- (In thousands, except per share data) Net earnings................... $4,533 $5,631 $12,186 $12,476 Diluted earnings per share..... $ 0.33 $ 0.50 $ 0.93 $ 1.23
8 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. 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 in the first quarter of 2004 were deemed to be a permanent liquidation. There were no LIFO layers liquidated in the first half of 2005. 9 NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS: At June 30, 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 June 30, 2005 and December 31, 2004 is presented below:
June 30, 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..................... $ 3,667 $ 2,789 $ 878 $ 3,630 $ 2,708 $ 922 Contracts......................... 1,376 1,168 208 1,367 1,109 258 Licenses and permits.............. 1,096 439 657 1,096 379 717 ------- ------- ------- ------- ------- ------- 6,139 4,396 1,743 6,093 4,196 1,897 ------- ------- ------- ------- ------- ------- Unamortized intangible assets: Liquor licenses................... 7,315 - 7,315 7,315 - 7,315 ------- ------- ------- ------- ------- ------- Total intangible assets............. $13,454 $ 4,396 $ 9,058 $13,408 $ 4,196 $ 9,212 ======= ======= ======= ======= ======= =======
Intangible asset amortization expense for the three and six months ended June 30, 2005 was approximately $100,000 and $200,000, respectively. Intangible asset amortization expense for the three and six months ended June 30, 2004 was $95,800 and $205,000, respectively. Estimated amortization expense for the rest of this fiscal year and the next five fiscal years is as follows: 2005 Remainder.................... $204,000 2006.............................. 411,000 2007.............................. 263,000 2008.............................. 221,000 2009.............................. 206,000 2010.............................. 75,000 10 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 Six Months Ended June 30, June 30, ------------------ ---------------- 2005 2004 2005 2004 ------ ------ ------ ------- (In thousands) Net revenues........................... $ - $ 490 $ - $ 1,278 ------ ------ ------ ------- Net operating income/(loss)............ $ 13 $ (61) $ 2 $ (179) Gain on disposal....................... $ 22 $ 389 $ 22 $ 371 Impairment and other write-downs....... $ - $ (372) $ - $ (372) ------ ------ ------ ------- Gain/(loss) before income taxes........ $ 35 $ (44) $ 24 $ (180) ------ ------ ------ ------- Net earnings/(loss).................... $ 22 $ (27) $ 15 $ (111)
Included in "Assets Held for Sale" in the accompanying Consolidated Balance Sheets are the following categories of assets.
June 30, December 31, 2005 2004 --------- ------------ (In thousands) Land..................................... $ 33 $ - -------- ------- $ 33 $ - ======== =======
During the first half of 2005, we sold a piece of vacant land for approximately $1,717,000 and a closed store for approximately $149,000. We recorded a gain on sale of the vacant land of approximately $121,000 and a gain on sale of the closed store of approximately $22,000. We also transferred $33,000 to assets held for sale. 11 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 $334,000 as of June 30, 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. 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 believe that this interpretation will not have a material impact 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 or close in place certain underground and aboveground storage tanks, both on owned property and leased property, once they are taken out of service. Under some lease arrangements, we also have committed to restore the leased property to its original condition. 12 The following table reconciles the beginning and ending aggregate carrying amount of our ARO's for the six months ended June 30, 2005 and the year ended December 31, 2004.
June 30, December 31, 2005 2004 --------- ------------ (In thousands) Liability beginning of year........... $2,272 $2,223 Liabilities incurred.................. - 57 Liabilities settled................... (82) (259) Accretion expense..................... 166 251 ------ ------ Liability end of period............... $2,356 $2,272 ====== ======
Our ARO's are recorded in "Other Liabilities and Deferred Income" on our Condensed Consolidated Balance Sheets. 13 NOTE 6 - LONG-TERM DEBT: Our long-term debt consisted of the following:
June 30, 2005 December 31, 2004 ------------- ----------------- (In thousands) 11% senior subordinated notes, due 2012, net of unamortized discount of $3,032 and $3,635, interest payable semi-annually..................... $126,969 $145,194 8% senior subordinated notes, due 2014, net of unamortized discount of $2,347 and $2,435, interest payable semi-annually..................... 147,653 147,565 -------- -------- Total $274,622 $292,759 ======== ========
In March 2005, we issued 1,000,000 shares of our common stock and received approximately $22,349,000, net of expenses. On May 5, 2005, we used $21,905,000 of these proceeds to redeem approximately $18,828,000 of our outstanding 11% senior subordinated notes. The amount paid to redeem the notes included interest of $978,000 to the date of redemption (May 5, 2005) and redemption costs of $2,099,000. 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: - 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. 14 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 June 30, 2005, retained earnings available for dividends under the most restrictive terms of the indentures were approximately $41,818,000. 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. On June 27, 2005, we amended and restated our revolving credit facility (the "Credit Facility"). The Credit Facility is a $175,000,000 revolving credit facility and is for, among other things, working capital, acquisitions, and other general corporate purposes. The interest rate applicable to the Credit Facility is based on various short-term indices. At June 30, 2005, this rate was approximately 5.12% per annum. We are required to pay a quarterly commitment fee of between .25% and .50% of the unused amount of the facility depending on our ratio of total debt to EBITDA (as defined in the Credit Facility). Under the new Credit Facility, our existing borrowing costs are reduced, certain of the covenants have been eased, and the term was extended to 2010. The availability of funds under this facility is the lesser of (i) $175,000,000, or (ii) the amount determined under a borrowing base calculation tied to eligible accounts receivable and inventories. We also have options to increase the size of the facility to up to $250,000,000. At June 30, 2005, there were no direct borrowings outstanding under the Credit Facility. At June 30, 2005, there were, however, $35,497,000 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. 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: 15 - 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 consolidated interest 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. 16 NOTE 7 - PENSION AND POST-RETIREMENT BENEFITS: The components of the Net Periodic Benefit Cost are as follows:
Yorktown Cash Balance Plan ----------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Service cost........................... $ 339,131 $ 345,005 $ 678,262 $ 690,010 Interest cost.......................... 167,780 134,294 335,560 268,588 Expected return on plan assets......... (69,345) (28,624) (138,690) (57,248) Amortization of prior service cost..... (26,618) - (53,236) - Amortization of net loss............... 14,992 - 29,984 - --------- --------- --------- --------- Net Periodic Benefit Cost.............. $ 425,940 $ 450,675 $ 851,880 $ 901,350 ========= ========= ========= =========
Yorktown Retiree Medical Plan ----------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Service cost........................... $ 54,924 $ 51,893 $ 109,848 $ 103,786 Interest cost.......................... 55,166 48,673 110,332 97,346 Expected return on plan assets......... - - - - Amortization of prior service costs.... - - - - Amortization of net loss............... 4,001 4,374 8,002 8,748 --------- --------- --------- --------- Net Periodic Benefit Cost.............. $ 114,091 $ 104,940 $ 228,182 $ 209,880 ========= ========= ========= =========
17 NOTE 8 - EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2005 2004 2005 2004 ---------- --------- ---------- --------- Numerator (In thousands) Earnings from continuing operations.............. $ 20,538 $ 5,015 $ 30,596 $ 9,617 Earnings/(loss) from discontinued operations..... 22 (27) 15 (111) ---------- --------- ---------- --------- Net earnings..................................... $ 20,560 $ 4,988 $ 30,611 $ 9,506 ========== ========= ========== =========
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2005 2004 2005 2004 ---------- --------- ---------- --------- Denominator Basic - weighted average shares outstanding...... 13,405,673 10,997,348 12,896,435 9,910,068 Effect of dilutive stock options................. 179,620 274,077 188,686 272,378 ---------- ---------- ---------- ---------- Diluted - weighted average shares outstanding.... 13,585,293 11,271,425 13,085,121 10,182,446 ========== ========== ========== ==========
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2005 2004 2005 2004 ---------- --------- ---------- --------- Basic Earnings (Loss) Per Share Earnings from continuing operations.............. $ 1.53 $ 0.45 $ 2.37 $ 0.97 Loss from discontinued operations................ - - - (0.01) ---------- --------- ---------- --------- Net earnings..................................... $ 1.53 $ 0.45 $ 2.37 $ 0.96 ========== ========= ========== =========
18
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2005 2004 2005 2004 ---------- --------- ---------- --------- Diluted Earnings (Loss) Per Share Earnings from continuing operations.............. $ 1.51 $ 0.44 $ 2.34 $ 0.94 Loss from discontinued operations................ - - - (0.01) ---------- --------- ---------- --------- Net earnings..................................... $ 1.51 $ 0.44 $ 2.34 $ 0.93 ========== ========= ========== =========
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 $972,000, to our 401(k) plan as a discretionary contribution for the year 2004. 19 NOTE 9 - BUSINESS SEGMENTS: We are organized into three operating segments based on manufacturing and marketing criteria. These segments are the refining group, the retail group and 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 June 30, 2005, we operated 124 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 and six months ended June 30, 2005 and 2004, are presented below. 21
As of and for the Three Months Ended June 30, 2005 ---------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated ---------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $149,277 Yorktown operations.................. 376,641 -------- Total.............................. $525,918 $ 78,318 $187,062 $ - $ - $ 791,298 Merchandise and lubricants............. - 36,325 9,627 - - 45,952 Other.................................. 21,162 4,230 502 213 - 26,107 -------- -------- -------- -------- -------- --------- Total.............................. 547,080 118,873 197,191 213 - 863,357 -------- -------- -------- -------- -------- --------- Intersegment net revenues: Finished products...................... 60,937 - 18,532 - (79,469) - Other.................................. 5,104 - - - (5,104) - -------- -------- -------- -------- -------- --------- Total.............................. 66,041 - 18,532 - (84,573) - -------- -------- -------- -------- -------- --------- Total net revenues....................... 613,121 118,873 215,723 213 (84,573) 863,357 Less net revenues of discontinued operations............................. - - - - - - -------- -------- -------- -------- -------- --------- Net revenues of continuing operations.... $613,121 $118,873 $215,723 $ 213 $(84,573) $ 863,357 ======== ======== ======== ======== ======== ========= Operating income (loss): Four Corners operations................ $ 19,724 Yorktown operations.................... 27,312 -------- Total operating income (loss) before corporate allocation...... $ 47,036 $ 3,114 $ 2,815 $ (8,557) $ 425 $ 44,833 Corporate allocation..................... (4,372) (2,535) (790) 7,697 - - -------- -------- -------- -------- -------- --------- Total operating income (loss) after corporate allocation................... 42,664 579 2,025 (860) 425 44,833 Discontinued operations (gain) loss...... - (13) - - (22) (35) -------- -------- -------- -------- -------- --------- Operating income (loss) from continuing operations................ $ 42,664 $ 566 $ 2,025 $ (860) $ 403 44,798 ======== ======== ======== ======== ======== Interest expense......................... (6,382) Costs associated with early debt extinguishment.................... (2,099) Amortization and write-offs of financing costs........................ (1,496) Interest and investment income........... 368 --------- Earnings from continuing operations before income taxes.................... $ 35,189 ========= Depreciation and amortization: Four Corners operations................ $ 4,101 Yorktown operations.................... 2,638 -------- Total.............................. $ 6,739 $ 2,190 $ 370 $ 193 $ - $ 9,492 Less discontinued operations........... - - - - - - -------- -------- -------- -------- -------- --------- Continuing operations.................. $ 6,739 $ 2,190 $ 370 $ 193 $ - $ 9,492 ======== ======== ======== ======== ======== ========= Total assets............................. $531,578 $106,279 $ 90,941 $ 74,009 $ - $ 802,807 Capital expenditures..................... $ 12,720 $ 1,230 $ 576 $ 345 $ - $ 14,871 22
As of and for the Three Months Ended June 30, 2004 ---------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated ---------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $103,724 Yorktown operations.................. 279,622 -------- Total................................ $383,346 $ 61,346 $154,855 $ - $ - $ 599,547 Merchandise and lubricants............. - 34,541 8,261 - - 42,802 Other.................................. 7,811 3,785 527 53 - 12,176 -------- -------- -------- -------- --------- ---------- Total................................ 391,157 99,672 163,643 53 - $ 654,525 -------- -------- -------- -------- --------- ---------- Intersegment net revenues: Finished products...................... 47,704 - 18,766 - (66,470) - Other.................................. 3,729 - - - (3,729) - -------- -------- -------- -------- --------- ---------- Total................................ 51,433 - 18,766 - (70,199) - -------- -------- -------- -------- --------- ---------- Total net revenues....................... 442,590 99,672 182,409 53 (70,199) 654,525 Less net revenues of discontinued operations............................. - (490) - - - (490) -------- -------- -------- -------- --------- ---------- Net revenues of continuing operations.... $442,590 $ 99,182 $182,409 $ 53 $ (70,199) $ 654,035 ======== ======== ======== ======== ========= ========== Operating income (loss): Four Corners operations................ $ 13,704 Yorktown operations.................... 21,811 -------- Total operating income (loss) before corporate allocation.................. $ 35,515 $ 2,614 $ 2,963 $ (7,256) $ (549) $ 33,287 Corporate allocation..................... (3,717) (2,152) (654) 6,523 - - -------- -------- -------- -------- --------- ---------- Total operating income (loss) after corporate allocation.................. 31,798 462 2,309 (733) (549) 33,287 Discontinued operations loss/(gain)...... - 61 - - (17) 44 -------- -------- -------- -------- --------- ---------- Operating income (loss) from continuing operations............. $ 31,798 $ 523 $ 2,309 $ (733) $ (566) 33,331 ======== ======== ======== ======== ========= Interest expense......................... (8,688) Costs associated with early debt extinguishment......................... (10,875) Amortization and write-offs of financing. costs.................................. (5,857) Interest income.......................... 42 ---------- Earnings from continuing operations before income taxes.................... $ 7,953 ========== Depreciation and amortization: Four Corners operations................ $ 4,096 Yorktown operations.................... 2,266 -------- Total................................ $ 6,362 $ 2,269 $ 409 $ 214 $ - $ 9,254 Less discontinued operations......... - (34) - - - (34) -------- -------- -------- -------- --------- ---------- Continuing operations................ $ 6,362 $ 2,235 $ 409 $ 214 $ - $ 9,220 ======== ======== ======== ======== ========= ========== Total assets............................. $482,863 $111,247 $ 79,404 $ 35,907 $ - $ 709,421 Capital expenditures..................... $ 14,832 $ 394 $ 505 $ 113 $ - $ 15,844 Yorktown refinery acquisition contingent payment..................... $ 7,646 $ - $ - $ - $ - $ 7,646 23
As of and for the Six Months Ended June 30, 2005 ------------------------------------------------------------------ Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated ------------------------------------------------------------------ (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $ 270,151 Yorktown operations.................. 673,345 ---------- Total.............................. $ 943,496 $140,128 $353,804 $ - $ - $1,437,428 Merchandise and lubricants............. - 67,612 18,649 - - 86,261 Other.................................. 41,934 8,059 1,089 313 - 51,395 ---------- -------- -------- -------- --------- ---------- Total.............................. 985,430 215,799 373,542 313 - 1,575,084 ---------- -------- -------- -------- --------- ---------- Intersegment net revenues: Finished products...................... 111,252 - 33,845 - (145,097) - Other.................................. 9,465 - - - (9,465) - ---------- -------- -------- -------- --------- ---------- Total.............................. 120,717 - 33,845 - (154,562) - ---------- -------- -------- -------- --------- ---------- Total net revenues....................... 1,106,147 215,799 407,387 313 (154,562) 1,575,084 Less net revenues of discontinued operations............................. - - - - - - ---------- -------- -------- -------- --------- ---------- Net revenues of continuing operations.... $1,106,147 $215,799 $407,387 $ 313 $(154,562) $1,575,084 ========== ======== ======== ======== ========= ========== Operating income (loss): Four Corners operations................ $ 26,010 Yorktown operations.................... 44,962 ---------- Total operating income (loss) before corporate allocation...... $ 70,972 $ 1,435 $ 6,515 $(13,601) $ 3,929 $ 69,250 Corporate allocation..................... (7,110) (4,099) (1,322) 12,531 - - ---------- -------- -------- -------- --------- ---------- Total operating income (loss) after corporate allocation................... 63,862 (2,664) 5,193 (1,070) 3,929 69,250 Discontinued operations loss............. - (2) - - (22) (24) ---------- -------- -------- -------- --------- ---------- Operating income (loss) from continuing operations................ $ 63,862 $ (2,666) $ 5,193 $ (1,070) $ 3,907 69,226 ========== ======== ======== ======== ========= Interest expense......................... (13,376) Costs associated with early debt extinguishment.................... (2,099) Amortization and write-offs of financing costs........................ (2,000) Interest and investment income........... 489 ---------- Earnings from continuing operations before income taxes.................... $ 52,240 ========== Depreciation and amortization: Four Corners operations................ $ 8,171 Yorktown operations.................... 5,296 ---------- Total.............................. $ 13,467 $ 5,737 $ 886 $ 373 $ - $ 20,463 Less discontinued operations........... - - - - - - ---------- -------- -------- -------- --------- ---------- Continuing operations.................. $ 13,467 $ 5,737 $ 886 $ 373 $ - $ 20,463 ========== ======== ======== ======== ========= ========== Total assets............................. $ 531,578 $106,279 $ 90,941 $ 74,009 $ - $ 802,807 Capital expenditures..................... $ 23,725 $ 2,010 $ 1,035 $ 927 $ - $ 27,697 24
As of and for the Six Months Ended June 30, 2004 ---------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated ---------------------------------------------------------------- (In thousands) Customer net revenues: Finished products: Four Corners operations.............. $189,752 Yorktown operations.................. 507,269 -------- Total.............................. $697,021 $109,175 $277,718 $ - $ - $1,083,914 Merchandise and lubricants............. - 65,385 15,597 - - 80,982 Other.................................. 22,338 7,631 924 332 - 31,225 -------- -------- -------- -------- --------- ---------- Total.............................. 719,359 182,191 294,239 332 - $1,196,121 -------- -------- -------- -------- --------- ---------- Intersegment net revenues: Finished products...................... 103,661 - 31,062 - (134,723) - Other.................................. 7,766 - - - (7,766) - -------- -------- -------- -------- --------- ---------- Total.............................. 111,427 - 31,062 - (142,489) - -------- -------- -------- -------- --------- ---------- Total net revenues....................... 830,786 182,191 325,301 332 (142,489) 1,196,121 Less net revenues of discontinued operations............................. - (1,278) - - - (1,278) -------- -------- -------- -------- --------- ---------- Net revenues of continuing operations.... $830,786 $180,913 $325,301 $ 332 $(142,489) $1,194,843 ======== ======== ======== ======== ========= ========== Operating income (loss): Four Corners operations................ $ 19,864 Yorktown operations.................... 36,246 -------- Total operating income (loss) before corporate allocation...... $ 56,110 $ 3,601 $ 5,076 $(12,522) $ (563) $ 51,702 Corporate allocation..................... (6,540) (3,786) (1,150) 11,476 - - -------- -------- -------- -------- --------- ---------- Total operating income (loss) after corporate allocation................... 49,570 (185) 3,926 (1,046) (563) 51,702 Discontinued operations loss............. - 179 - - 1 180 -------- -------- -------- -------- --------- ---------- Operating income (loss) from continuing operations................ $ 49,570 $ (6) $ 3,926 $ (1,046) $ (562) 51,882 ======== ======== ======== ======== ========= Interest expense......................... (18,049) Costs associated with early debt extinguishment......................... (10,875) Amortization and write-offs of financing costs........................ (6,815) Interest and investment income........... 81 ---------- Earnings from continuing operations before income taxes.................... $ 16,224 ========== Depreciation and amortization: Four Corners operations................ $ 8,074 Yorktown operations.................... 4,392 -------- Total.............................. $ 12,466 $ 4,673 $ 824 $ 436 $ - $ 18,399 Less discontinued operations........... - (81) - - - (81) -------- -------- -------- -------- --------- ---------- Continuing operations.................. $ 12,466 $ 4,592 $ 824 $ 436 $ - $ 18,318 ======== ======== ======== ======== ========= ========== Total assets............................. $482,863 $111,247 $ 79,404 $ 35,907 $ - $ 709,421 Capital expenditures..................... $ 17,448 $ 652 $ 833 $ 124 $ - $ 19,057 Yorktown Refinery acquisition contingent payment..................... $ 11,695 $ - $ - $ - $ - $ 11,695 25
NOTE 10 - 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 June 30, 2005 and December 31, 2004, we had environmental liability accruals of approximately $5,571,000 and $6,156,000, respectively, which are summarized below, and litigation accruals in the aggregate of $1,066,000 at June 30, 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. Litigation accruals are recorded in the current section of our Condensed Consolidated Balance Sheets. 26
SUMMARY OF ACCRUED ENVIRONMENTAL CONTINGENCIES (In thousands) December 31, Increase June 30, 2004 (Decrease) Payments 2005 ------------ ---------- -------- ------------- Yorktown Refinery......................... $ 4,531 $ 57 $ (460) $ 4,128 Farmington Refinery....................... 570 - - 570 Bloomfield Refinery....................... 251 - (4) 247 Bloomfield - West Outfall................. 44 - (44) - Bloomfield Tank Farm (Old Terminal)....... 53 - (6) 47 Ciniza - Land Treatment Facility.......... 186 - (8) 178 Ciniza - Solid Waste Management Units..... 274 - (10) 264 Ciniza Well Closures...................... 109 (109) - - Retail Service Stations - Various......... 138 18 (54) 102 Pipeline - East Line...................... - 111 (76) 35 ------- ------ ------ ------- Totals................................. $ 6,156 $ 77 $ (662) $ 5,571 ======= ====== ====== =======
Approximately $4,992,000 of our environmental 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; - hydrocarbon contamination on and adjacent to the 5.5 acres that we own in Bloomfield, New Mexico; and - remediation of hydrocarbon discharges that seeped into two small gullies, or draws, on the north side of the Bloomfield refinery site. 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. 27 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 $3,975,000 of this amount through the second 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 the Environmental Protection Agency ("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 clean-up measures, including the construction of an on-site corrective action management unit that would be used to consolidate hazardous solid materials associated with these 28 measures. These proposed actions relate to soil, sludge, and remediation wastes relating to solid waste management units. Groundwater in the aquifers underlying the refinery, and surface water and sediment in a small pond and tidal salt marsh on the refinery property also are addressed in the RA/CMS. Based on the RA/CMS, EPA issued a proposed clean-up 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 clean-up 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 clean-up 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. EPA may require financial assurance of our ability to perform the clean-up plan, such as depositing funds into a trust or posting a letter credit or performance bond. We may, however, be able to receive reimbursement for some of the expenditures associated with the plan 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. 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 29 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 clean-up 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 clean-up plan for the landfill available to the public in 1996. In September 2004, EPA and BLM issued a Record of Decision, which presents the clean-up plan selected for the landfill. The selected remedy consists of placing a cap over a portion of the old landfill, together with a barrier to prevent contaminants from moving off 30 the site, groundwater monitoring, and site usage limitations. 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. We believe that the major construction activities associated with the landfill clean- up plan have been completed. 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, clean-up 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 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. 31 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 New Mexico Environment Department's ("NMED") Hazardous Waste Bureau ("HWB"). In December 2002, HWB and OCD approved a clean-up 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 clean-up plan will be approximately $247,000, 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. To further remediate these discharges and prevent additional migration of contamination, with OCD approval, we completed construction of an underground barrier with a pollutant extraction and collection system in the second quarter of 2005 at a cost of approximately $790,000. BLOOMFIELD TANK FARM (OLD TERMINAL) We have discovered hydrocarbon contamination adjacent to a 55,000 barrel crude oil storage tank that was located in Bloomfield, New Mexico. We believe that all or a portion of the tank and the 5.5 acres we own on which the tank was located may have been a part of a refinery, owned by various other parties, that, to our knowledge, ceased operations in the early 1960s. We received approval to conduct a pilot bioventing project to address remaining contamination at the site, which was completed in 2001. 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 approximately $47,000 in expenses from 2005 through 2007 to continue remediation, including groundwater monitoring and testing, until natural attenuation has completed the process of groundwater remediation. 32 CONSENT AGREEMENTS AT FOUR CORNERS REFINERIES In June 2002, we received a draft compliance order from the 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, 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 and reached an administrative settlement, in the form of consent agreements, with both agencies in July 2005. The administrative settlement resolves all alleged violations related to the 2001 inspections. It requires us to pay fines of $100,000 to EPA and $150,000 to NMED. We must also undertake certain environmentally beneficial projects known as supplemental environmental projects at a cost of up to $600,000. In addition, the administrative settlement is consistent with the judicial consent decrees EPA has entered with other refiners as part of its national refinery enforcement program and requires that we do the following: - implement controls to reduce emissions of nitrogen oxide, sulfur dioxide, and particulate matter from the largest emitting process units; - upgrade leak detection and repair practices; - minimize the number and severity of flaring events; and - adopt strategies to ensure continued compliance with benzene waste requirements. We currently believe that we can satisfy the requirements of the settlement and the requirements of the national refinery enforcement program by making equipment modifications to our Four Corners refineries, which we estimate could cost approximately $20,000,000, spread over a period of four to seven years following the date of the settlement. We currently anticipate that the majority of these costs will be incurred in the latter portion of the four to seven year phase-in period. In addition, we estimate that on-going annual operating costs associated with these modifications could cost approximately $4,000,000 per year. These amounts are the currently estimated upper limits for both capital expenditures and annual operating costs. Undertaking the upper limit for one type of expenditure could result in our having to spend less than the upper limit 33 for the other. The costs associated with our settlement also could be subject to reduction in the event of the temporary, partial or permanent discontinuance of operations at one or both facilities. 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. In April 2005, a three judge panel of the Court of Appeals ruled in favor of the government. One refiner has asked the full Court of Appeals to reconsider the decision. Our case has been stayed pending final resolution of the appeal. 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. 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. Although it is possible that these lawsuits may ultimately be decided against us, or otherwise adversely affect us, a reasonable estimate of the amount of our potential liability, if any, cannot be made at this time for various reasons. These reasons include: 34 - we anticipate that numerous parties are potentially responsible for the MTBE contamination alleged in these lawsuits; and - potentially applicable factual and legal issues have not been resolved. 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. Since then, all employees have been released from the hospital. 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 finalized a settlement with OHSB in June 2005 pursuant to which we paid 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. 35 NOTE 11 - ACQUISITIONS: On August 1, 2005, we acquired an idle crude oil pipeline running from Jal, New Mexico to Bisti, New Mexico and related assets from Texas- New Mexico Pipe Line Company for $9,000,000. This pipeline is connected to our existing pipeline network that directly supplies crude oil to the Bloomfield and Ciniza refineries. Following the acquisition, we will test the pipeline and take other actions related to placing it in service. Unless currently unanticipated obstacles are encountered, we anticipate the pipeline will become operational in 12 to 18 months from the acquisition date. On July 12, 2005, we acquired 100% of the common shares of Dial Oil Company ("Dial"). We funded this acquisition with cash on hand. Dial is a wholesale distributor of gasoline, diesel and lubricants in the Four Corners area of the Southwest. Dial also owns and operates service stations/convenience stores. Dial's assets include bulk petroleum distribution plants, cardlock fueling locations, and a fleet of truck transports. We will allocate the purchase price, including direct costs incurred, to the assets and liabilities in the third quarter of 2005. 36 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 124 service stations at June 30, 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 addition, the methods used in applying the above may result in amounts that differ considerably from those that would result from the application 37 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. 38 Below is operating data for our operations:
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Refining Group Operating Data: Four Corners Operations: Crude Oil/NGL Throughput (BPD)........... 29,811 26,463 29,313 27,372 Refinery Sourced Sales Barrels (BPD)..... 29,344 25,175 28,954 26,395 Average Crude Oil Costs ($/Bbl).......... $ 51.64 $ 35.97 $ 49.63 $ 34.30 Refining Margins ($/Bbl)................. $ 13.48 $ 12.44 $ 10.72 $ 10.30 Yorktown Operations: Crude Oil/NGL Throughput (BPD).......... 68,449 67,639 67,102 64,420 Refinery Sourced Sales Barrels (BPD)..... 71,539 69,862 67,157 66,843 Average Crude Oil Costs ($/Bbl).......... $ 48.76 $ 35.53 $ 46.92 $ 34.11 Refining Margins ($/Bbl)................. $ 7.30 $ 6.20 $ 7.06 $ 5.89 Retail Group Operating Data: (Continuing operations only) Fuel Gallons Sold (000's).................. 41,410 38,188 80,879 75,420 Fuel Margins ($/gal)....................... $ 0.171 $ 0.211 $ 0.143 $ 0.187 Merchandise Sales ($ in 000's)............. $36,325 $34,449 $67,612 $65,102 Merchandise Margins........................ 27% 24% 27% 25% Operating Retail Outlets at Period End..... 124 124 124 124 Phoenix Fuel Operating Data: Fuel Gallons Sold (000's).................. 120,344 124,342 241,209 237,186 Fuel Margins ($/gal)....................... $ 0.058 $ 0.055 $ 0.060 $ 0.054 Lubricant Sales ($ in 000's)............... $ 9,027 $ 7,827 $17,439 $14,703 Lubricant Margins.......................... 10% 13% 12% 13%
We believe the comparability of our continuing results of operations for the three and six months ended June 30, 2005 with the same period in 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 and gasoline blendstocks early in 2005, 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 - 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. 39 - stronger fuel margins for our Phoenix Fuel operations, due to, among other things, tight finished product supply 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 $27,236,000 for the three months ended June 30, 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 refinery operations of $11,521,000 primarily due to higher volumes and margins realized; and - - an implementation of our debt reduction strategy that resulted in the following: - a $2,306,000 or 27% decrease in interest expense; - a decrease of $8,776,000 in non-recurring costs associated with early debt extinguishment; and - a reduction of $4,361,000 in financing costs amortization. Our earnings from continuing operations before income taxes increased $36,016,000 for the six months ended June 30, 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 refinery operations of $14,862,000 primarily due to higher volumes and margins realized; - an increase in Phoenix Fuel's operating income before corporate allocations of $1,439,000 primarily due to increased fuel margins per gallon sold; - a $3,688,000 gain from insurance proceeds as a result of the fire incident at Ciniza in 2004; and - - an implementation of our debt reduction strategy that resulted in the following: - a $4,673,000 or 26% decrease in interest expense; - a decrease of $8,776,000 in non-recurring costs associated with early debt extinguishment; and - a reduction of $4,815,000 in financing costs amortization. This increase was offset by, among other things, the following: - a $2,166,000 decrease in our retail group's operating income before corporate allocations as a result of a 23% decline in our retail group's fuel margin due to higher finished product purchase prices that could not be recovered in the market. 40 YORKTOWN REFINERY Our Yorktown refinery operated at an average throughput rate of approximately 68,449 barrels per day in the second quarter of 2005 compared to 67,639 barrels per day in the second quarter of 2004. For the six months ended June 30, 2005 and 2004, the average throughput rate was 67,102 and 64,420 barrels per day, respectively. Refining margins for the second quarter of 2005 were $7.30 per barrel and were $6.20 for the second quarter of 2004. Refining margins for the six months ended June 30, 2005 and 2004 were $7.06 and $5.89 per barrel, respectively. Revenues for our Yorktown refinery increased for the three and six months ended June 30, 2005 primarily due to higher finished product prices as a result of favorable market conditions. Cost of products sold for our Yorktown refinery increased for the three and six months ended June 30, 2005 primarily due to higher crude oil prices, as a result of global economic conditions. Operating expenses for our Yorktown refinery increased for the three months ended June 30, 2005 due in part to the following: - higher employee and maintenance 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. Operating expenses for our Yorktown refinery increased for the six months ended June 30, 2005 due in part to the following: - higher purchased 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 for the three and six months ended June 30, 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 29,811 barrels per day in the second quarter of 2005, compared to 26,463 barrels per day in the second quarter of 2004. For the six months ended June 30, 2005 and 2004, the average throughput rate was 29,313 and 27,372 barrels per day, respectively. 41 Refining margins for the second quarter of 2005 were $13.48 per barrel and were $12.44 for the second quarter of 2004. Refining margins for the six months ended June 30, 2005 and 2004 were $10.72 and $10.30 per barrel, respectively. Revenues for our Four Corners refineries increased for the three and six months ended June 30, 2005 primarily due to an increase in finished product prices as a result of favorable market conditions and an increase in volumes sold. Cost of products sold for our Four Corners refineries increased for the three and six months ended June 30, 2005 primarily due to higher average crude oil costs as a result of global market conditions and an increase in volumes sold. Operating expenses for our Four Corners refineries increased for the three and six months ended June 30, 2005 primarily due to higher employee, fuel, chemical, and catalyst costs. Depreciation and amortization expense for our Four Corners refineries remained unchanged for the three and six months ended June 30, 2005. RETAIL GROUP Average fuel margins were $0.171 per gallon for the three months ended June 30, 2005 as compared to $0.211 per gallon for the same period in 2004. Fuel volumes sold for the three months ended June 30, 2005 increased as compared to the same period a year ago due primarily to favorable travel conditions in areas of operations, and improved demand over the same period in 2004. Average merchandise margins were 27% for the three months ended June 30, 2005 as compared to 24% for the same period in 2003. The increase in merchandise margins was due to, among other factors, lower rebates in 2004. Average fuel margins were $0.143 per gallon for the six months ended June 30, 2005 as compared to $0.187 per gallon for the same period in 2003. Fuel volumes sold for the six months ended June 30, 2005 increased as compared to the same period a year ago due primarily to favorable travel conditions in areas of operations, and improved demand over the same period in 2004. Average merchandise margins were 27% for the six months ended June 30, 2005 as compared to 25% for the same period in 2004. The increase in merchandise margins was primarily due to, among other factors, lower rebates in 2004. Revenues for our retail group increased for the three and six months ended June 30, 2005, compared to the same periods in 2004 primarily due to an increase in fuel selling prices and an increase in fuel volumes sold. 42 Cost of products sold for our retail group increased for the three and six months ended June 30, 2005, compared to the same periods in 2004 primarily due to an increase in finished product purchase prices as a result of increased global demand and finished product volumes sold. Our retail fuel margin per gallon decreased for the three and six months ended June 30, 2005 due to higher finished product purchase prices as a result of increased global demand that could not be recovered in the market. Operating expenses decreased for the three and six months ended June 30, 2005 as compared with the same periods in 2004, primarily due to a reduction in payroll costs as a result of lower benefit costs experienced for the periods in 2005 as compared to 2004. Depreciation expense increased for the six months ended June 30, 2005 as compared to the same period in 2004 due to additional amortization for our leasehold improvements. PHOENIX FUEL Gasoline and diesel fuel volumes sold by Phoenix Fuel decreased in the second quarter of 2005 as compared to the same period in 2004. Average gasoline and diesel fuel margins for Phoenix Fuel were $0.058 per gallon for the second quarter of 2005 and were $0.055 per gallon for the second quarter of 2004. For the six months ended June 30, 2005, gasoline and fuel volumes increased as compared to the same period in 2004. Average gasoline and diesel fuel margins were $0.060 per gallon for the six months ended June 30, 2005 and were $0.054 per gallon for the same period in 2004 primarily due to favorable pricing conditions. Revenues for Phoenix Fuel increased for the three and six months ended June 30, 2005 primarily due to higher average price per gallons sold. Cost of products sold increased for the three and six months ended June 30, 2005 primarily due to an increase in finished product purchase prices. Phoenix Fuel's finished product margins increased for the three and six months ended June 30, 2005 primarily as a result of favorable market conditions. Operating expenses for Phoenix Fuel increased for the three and six months ended June 30, 2005 primarily due to higher transportation costs. 43 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) FROM CONTINUING OPERATIONS For the three and six months ended June 30, 2005, selling, general and administrative expenses increased by approximately $1,791,000 and $1,389,000, respectively, primarily due to higher accruals for management incentive bonuses associated with increased company financial performance, but were partially offset by a reimbursement of legal expenses incurred in previous periods. INTEREST EXPENSE FROM CONTINUING OPERATIONS For the three months ended June 30, 2005, interest expense decreased approximately $2,306,000 or 27%. For the six months ended June 30, 2005, interest expense decreased approximately $4,673,000 or 26%. These decreases were primarily due to a reduction in our long-term debt, which was part of our debt reduction strategy implemented beginning in 2002. INCOME TAXES FROM CONTINUING OPERATIONS The effective tax rates for the three months ended June 30, 2005 and 2004 were approximately 41.6% and 36.9%, respectively. The effective tax rates for the six months ended June 30, 2005 and 2004 were approximately 41.4% and 40.7%, respectively. The differences in the effective rates are primarily due to the non-deductibility of certain compensation. 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 Overall, we believe that our current refining fundamentals are more positive now as compared to the same time last year. Same store fuel volumes and merchandise sales for our retail group are above the prior year's levels, however, fuel margins are lower. Phoenix Fuel currently continues to see stronger margins and volumes are consistent with 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. 44 LIQUIDITY AND CAPITAL RESOURCES CAPITAL STRUCTURE At June 30, 2005, we had long-term debt of $274,622,000. At December 31, 2004 we had long-term debt of $292,759,000. There was no current portion of long-term debt outstanding at June 30, 2005 or at December 31, 2004. The amount at June 30, 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. On June 27, 2005, we amended and restated our revolving credit facility (the "Credit Facility"). The Credit Facility is a $175,000,000 revolving credit facility and is for, among other things, working capital, acquisitions, and other general corporate purposes. At June 30, 2005, our long-term debt was 50.3% of total capital. At December 31, 2004, it was 57.5%. Our net debt (long-term debt less cash and cash equivalents) to total net capitalization (long-term debt less cash and cash equivalents plus total shareholders' equity) percentage at June 30, 2005, was 44.2%. 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. 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. 45 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. 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 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. We also amended and restated our revolving credit facility (the "Credit Facility"). The Credit Facility is a $175,000,000 revolving credit facility and is for, among other things, working capital, acquisitions, and other general corporate purposes. Under the new Credit Facility, our existing borrowing costs are reduced, certain of the covenants have been eased, and the term was extended to 2010. The availability of funds under this facility is the lesser of (i) $175,000,000, or (ii) the amount determined under a borrowing base calculation tied to eligible accounts receivable and inventories. We also have options to increase the size of the facility to up to $250,000,000. CASH FLOW FROM OPERATIONS Our operating cash flow increased by $30,535,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. This resulted primarily from an increase in net earnings for the first half 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. 46 Working capital at June 30, 2005 consisted of current assets of $342,962,000 and current liabilities of $176,909,000 or a current ratio of 1.84:1. 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 During the third quarter of 2005, we increased our budget for capital expenditures in 2005, excluding any potential acquisitions, from approximately $99,000,000 to approximately $102,000,000. The increase is primarily related to increased costs associated with work to be done at the Four Corners refineries to comply with clean fuel regulations. Net cash used in investing activities for purchases of property, plant and equipment totaled approximately $27,697,000 for the six months ended June 30, 2005 and $19,057,000 for the six months ended June 30, 2004. Expenditures for 2005 primarily were for operational and environmental projects for the refineries, Phoenix Fuel, and retail operations. On August 1, 2005, we acquired an idle crude oil pipeline running from Jal, New Mexico to Bisti, New Mexico, and related assets from Texas- New Mexico Pipe Line Company. We estimate that we will spend approximately $2,500,000 to test the pipeline and otherwise determine how much it will cost to place it in service. We currently estimate that these costs will be approximately $15,000,000, including the previously mentioned $2,500,000. The actual cost, however, could be considerably different as our evaluation of the pipeline is at a very preliminary stage. Further, our estimated cost of placing the pipeline in service does not include the cost of crude oil that will be used to fill the pipeline, which is currently empty. We received proceeds of approximately $1,124,000 from the sale of property, plant and equipment and other assets in the first half of 2005 and $184,000 in the first half of 2004. We also received proceeds of $1,866,000 in 2005 from the sale of one closed service station/convenience store and a vacant piece of land. In the first half of 2004, we sold three stores and a piece of land and received $6,553,000 in proceeds from such sales. 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. 47 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. 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 June 30, 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. 48 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 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 clean-ups, 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. In July 2005, we entered into a settlement with the New Mexico Environment Department and the U.S. Environmental Protection Agency concerning alleged air quality violations at our Ciniza and Bloomfield refineries. The settlement is consistent with the judicial consent decrees 49 that EPA has entered into with other refiners under its national refinery enforcement program. For a further discussion of matters related to our settlement, see Note 10 to our Condensed Consolidated Financial Statements, captioned "Commitments and Contingencies". OTHER Our Ciniza and Bloomfield refineries continue to be affected by reduced crude oil production in the Four Corners area. The Four Corners basin is a mature production area and as a result is subject to a natural decline in production over time. This natural decline is being offset to some extent by new drilling, field workovers, and secondary recovery projects, which have resulted in additional production from existing reserves. As a result of the declining production of crude oil in the Four Corners area in recent years, we have not been able to cost-effectively obtain sufficient amounts of crude oil to operate our Four Corners refineries at full capacity. Crude oil utilization rates for our Four Corners refineries have declined from approximately 67% for 2003 to approximately 62% for the first six 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 sources for the foreseeable future and that our crude oil capacity utilization rates at our Four Corners refineries will continue to decline unless circumstances change. On August 1, 2005, we acquired an idle crude oil pipeline system that originates near Jal, New Mexico and is connected to a company-owned pipeline network that directly supplies crude oil to the Bloomfield and Ciniza refineries. When operational, the pipeline will have sufficient crude oil transportation capacity to allow us to again operate both refineries at maximum rates. Startup of the pipeline is subject to, among other things, a final engineering evaluation of the system. It currently is anticipated that the pipeline will become operational in twelve to eighteen months from closing. If additional crude oil or other refinery feedstocks become available in the future via the new pipeline or otherwise, we may increase production runs at our Four Corners refineries depending on the demand for finished products and the refining margins attainable. We continue to assess short- term and long-term options to address the continuing decline in Four Corners crude oil production. The options being considered include: - evaluating potentially economic sources of crude oil produced outside the Four Corners area, including ways to reduce raw material transportation costs to our refineries; - evaluating ways to encourage further production in the Four Corners area; 50 - 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, that the new pipeline will become operational, or that the additional crude oil supplies accessible via the new pipeline will be available on acceptable terms. Because large portions of the refineries' costs are fixed, any significant interruption or decline in the supply of crude oil or other feedstocks would have an adverse effect on our Four Corners refinery operations and on our overall operations. In October 2004, the President signed the American Jobs Creation Act of 2004 (the "Act"), which includes energy related tax provisions that are available to small refiners, including us. Under the Act, small refiners are allowed to deduct for tax purposes up to 75% of capital expenditures incurred to comply with the highway diesel 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 in 2006. 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. 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. 51 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; - our ability to successfully manage the liabilities, including environmental liabilities, that we assumed in the Yorktown acquisition; - our ability to obtain anticipated levels of indemnification associated with prior acquisitions and sales of assets; - competitive pressures from existing competitors and new entrants, and other actions that may impact our markets; - our ability to adequately control capital and operating expenses; - the risk that we will be unable to draw on our lines of credit, secure additional financing, access the public debt or equity markets or sell sufficient assets if we are unable to fund anticipated capital expenditures from cash flow generated by operations; - the risk of increased costs resulting from employee matters, including increased employee benefit costs; - 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; 52 - 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; - 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; - the risk that the cost of testing the crude oil pipeline that we purchased from Texas-New Mexico Pipe Line Company during the third quarter of 2005, and the cost of placing it in service, will be considerably more than our current estimates; - the risk that the timetable for placing the crude oil pipeline that we purchased in the third quarter of 2005 will be different than anticipated, or that it will not be possible to place the pipeline in service at all; 53 - the risk that it will not be possible to obtain additional crude oil at cost effective prices to either fill the crude oil pipeline that we purchased in the third quarter of 2005 or transport through the pipeline for processing at our Bloomfield and Ciniza refineries; 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. 54 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. 55 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 56 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: 3.1* Bylaws of Dial Oil Company. 4.1* Sixth Amendment to the Giant Industries, Inc. and Affiliated Companies 401(k) Plan Adoption Agreement, effective January 1, 2004. 10.1 Fourth Amended and Restated Credit Agreement, dated as of June 27, 2005, among Giant Industries, Inc., as Borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender, and as Issuing Bank, and the Lenders parties thereto. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 1, 2005, File No. 1-10398. 10.2* First Amendment to Fourth Amended and Restated Credit Agreement, dated as of August 4, 2005, among Giant Industries, Inc., as Borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender, and as Issuing Bank, and the Lenders parties thereto. 10.3* Purchase and Sale Agreement, dated as of June 21, 2005, between Texas-New Mexico Pipe Line Company and Giant Pipeline Company. 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. 57 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 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. (ii) On May 26, 2005, we filed a Form 8-K dated May 26, 2005, detailing the replacement of our chief accounting officer. (iii) On June 23, 2005, we filed a Form 8-K dated June 23, 2005, regarding the entry into an agreement to acquire a pipeline. (iv) On July 1, 2005, we filed a Form 8-K dated July 1, 2005, regarding the entry into an amended and restated credit facility. (v) On July 13, 2005, we filed a Form 8-K dated July 13, 2005, containing a press release regarding the acquisition of Dial Oil Company. (vi) On August 4, 2005, we filed a Form 8-K dated August 4, 2005, containing a press release detailing our earnings for the quarter ended June 30, 2005. 58 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 June 30, 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: August 5, 2005 59 54 EX-3 2 exhibit03-1.txt GIANT INDUSTRIES, INC. EXHIBIT 3.1 EXHIBIT 3.1 AMENDED AND RESTATED BY-LAWS OF DIAL OIL COMPANY ARTICLE I LOCATION OF OFFICE The principal office of the corporation in the State of New Mexico shall be located in the Town of Bloomfield, County of San Juan. The corporation may have such other offices, either within or without the State of New Mexico, as the business of the corporation may require from time to time. ARTICLE II SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held in the second quarter of each fiscal year for the purpose of electing Directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. In the event that such annual meeting is omitted by oversight or otherwise on the date herein provided for, the Board of Directors shall cause a meeting in lieu thereof to be held as soon thereafter as conveniently may be, and any business transacted or elections held at such meetings shall be as valid as if transacted or held at the annual meeting. Such subsequent meeting shall be called in the same manner as provided for the annual shareholders' meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be called by the President, the Secretary, by a majority of the Board of Directors or by the holders of not less than a majority of all the outstanding shares of the corporation. SECTION 3. PLACE OF MEETING. The President or Secretary may designate any place, either within or without the State of New Mexico, as the place of meeting for any annual meeting or for any special meeting. A waiver of notice signed by all shareholders also may designate any place, either within or without the State of New Mexico, as the place for the holding of such meeting. If no designation is made or if a special meeting be otherwise called, the place for the holding of such meeting shall be the principal office of the corporation in the State of New Mexico. SECTION 4. NOTICE OF SHAREHOLDERS' MEETINGS. Written notice of each shareholders' meeting stating the time and the place, and the objects for which such meetings are called, shall be given by the President, the Treasurer, the Secretary an Assistant Secretary or by any one or more shareholders entitled to call a special meeting of the shareholders personally or by mail not less than 10 nor more than 50 days prior to the date of the meeting, to each shareholder of record at the shareholder's address as it appears on the stock books of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notice intended for the shareholder be mailed to some other address, in which case it shall be mailed to the address designated in such request. SECTION 5. QUORUM OF SHAREHOLDERS. At any meeting of the shareholders, a majority in interest of all the capital stock issued and outstanding, represented by shareholders of record in person or by proxy, shall constitute a quorum, but a lesser interest may adjourn any meeting, and the meeting may be held as adjourned without further notice; provided, however, that Directors shall not be elected at meetings so adjourned. When a quorum is present at any meeting, a majority in interest of the stock represented thereat shall decide any question brought before such meeting, unless the question is one upon which by express provision of law or of the Articles of Incorporation or of these bylaws a larger or different vote is required, in which case such express provision shall govern and control the decision of such question. SECTION 6. VOTING. Voting of shares shall be in accordance with the Business Corporation Act of New Mexico (Sections 53-11-1 through 53-11-51), or other applicable statutes, as now existing or as hereafter amended. Unissued shares shall not be voted. There shall be no cumulative voting. SECTION 7. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by the shareholder's duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. SECTION 8. ACTION BY CONSENT. Any action required to be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof. Such consent shall have the effect of a unanimous vote. ARTICLE III STOCK SECTION 1. CERTIFICATES. Certificates of stock shall be in a form approved and adopted by the Board of Directors. They shall be signed by the Chairman or Vice-Chairman of the Board of Directors, the President, or any Vice President, and counter-signed by the Secretary. They shall be consecutively numbered and state upon their face the information required by law. The name and address of the person owning the shares with the number of shares and the date of issue shall be entered on the Corporation's books. SECTION 2. ASSIGNMENT AND CANCELLATION. All certificates of stock transferred by assignment shall be surrendered for cancellation and new certificates issued to the purchasers or assignees. SECTION 3. TRANSFER. Shares of stock shall be transferred on the books of the Corporation only by the holder thereof in person or by the holder's attorney-in-fact. ARTICLE IV DIRECTORS SECTION 1. GENERAL POWERS. The Board of Directors shall have the entire management of the business of the Corporation. In the management and control of the property, business, and affairs of the Corporation, the Board of Directors is hereby vested with all the powers possessed by the Corporation itself, so far as this delegation of authority is not inconsistent with laws of the State of New Mexico, with the Articles of Incorporation of the Corporation, or with these bylaws. The Board of Directors shall have the power to determine what constitutes net earnings, profits, and surplus, respectively, what amount shall be reserved for working capital and for any other purpose, and what amount shall be declared as dividends, and such determination by the Board of Directors shall be final and conclusive. SECTION 2. NUMBER, TENURE AND DISQUALIFICATIONS. The number of Directors of the Corporation shall be three. Each Director shall hold office for the term for which he is elected or until the Director's successor shall have been elected and qualified. Directors need not be residents of New Mexico nor shareholders of the Corporation. SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without other notice than this by-law, immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of New Mexico, for the holding of additional regular meetings without other notice than such resolution. SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the President or any one Director. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of New Mexico, as the place for holding any special meeting of the Board of Directors called by them. SECTION 5. NOTICE. Notice of any special meeting shall be given at least two days prior thereto by written notice delivered personally or mailed to each Director at the Director's business address, or by telephone, facsimile, e-mail or commercial mail services. Any Director may waive notice of any meeting. The attendance of a Director at any meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 6. QUORUM. A majority of the number of Directors fixed by these bylaws as constituting the Board of Directors shall constitute a quorum for the transaction of business, but a lesser number (not less than two) may adjourn any meeting and the meeting may be held as adjourned without further notice. When a quorum is present at any meeting, a majority of the members present thereat shall decide any question brought before such meeting, except as otherwise provided by law or by these bylaws. SECTION 7. MANNER OF ACTING. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 8. ACTION BY CONSENT. Any action required to be taken at a meeting of the Directors, or any other action which may be taken at a meeting of Directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Directors entitled to vote with respect to the subject matter thereof. Such consent shall have the effect of a unanimous vote and shall be equally valid as if said action were approved at a meeting. SECTION 9. PARTICIPATION BY TELEPHONE. Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. SECTION 10. VACANCIES. Any vacancy occurring in the Board of Directors or in a directorship to be filled by reason of any increase in the number of directors, may be filled by the Directors. A Director elected to fill a vacancy shall be elected for the unexpired term of the Director's predecessor in office. SECTION 11. COMPENSATION. Directors as such shall not receive any stated salaries for their services, but by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors; provided that nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE V OFFICERS SECTION 1. NUMBER. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary, a Treasurer and such other officers as may be elected in accordance with the provisions of this Article. The Board of Directors, by resolution, may create the offices of one or more Assistant Treasurers and Assistant Secretaries, all of whom shall be elected by the Board of Directors. Any two or more offices may be held by the same person, except the offices of President and Secretary. SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 3. REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. SECTION 5. PRESIDENT. The President shall be the chief executive officer of the corporation. The President, unless some other person is specifically authorized by vote of the Board of Directors, shall sign all certificates of stock, bonds, deeds, mortgages, extension agreements, modification of mortgage agreements, leases, and contracts of the corporation. He shall perform all the duties commonly incident to this office and shall perform such other duties as the Board of Directors shall designate. SECTION 6. VICE PRESIDENT. Except as specially limited by vote of the Board of Directors, any Vice president shall perform the duties and have the powers of the President during the absence or disability of the President and shall have the power to sign all certificates of stock, bonds, deeds, and contracts of the corporation. He shall perform such other duties and have such other powers as the Board of Directors shall designate. SECTION 7. TREASURER. The Treasurer, subject to the order of the Board of Directors, shall have the care and custody of the money, funds, valuable papers, and documents of the corporation and shall have and exercise, under the supervision of the Board of Directors, all the powers and duties commonly incident to his office. He shall deposit all funds of the corporation in such bank or banks as the directors shall designate. He may endorse for deposit or collection all checks and notes payable to the corporation or to its order, may accept drafts on behalf of the corporation, and together with the President or a Vice President may assign certificates of stock. He shall keep accurate books of account of the corporation's transactions which shall be the property of the corporation, and shall be subject at all times to the inspection and control of the Board of Directors. SECTION 8. SECRETARY. The Secretary shall keep accurate minutes of all meetings of the shareholders and the Board of Directors, and shall perform all the duties commonly incident to his office, and shall perform such other duties and have such other powers as the Board of Directors shall designate. The Secretary shall have power, together with the President or a Vice President, to sign certificates of stock of the corporation. In his absence at any meeting an Assistant Secretary or a Secretary Pro Tempore shall perform his duties thereat. SECTION 9. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The Assistant Treasurers and Assistant Secretaries, in general, shall perform such duties as shall be assigned to them by the Treasurer or the Secretary respectively, or by the President or the Board of Directors. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. SECTION 4. DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select. ARTICLE VII FISCAL YEAR The fiscal year of the corporation shall be the twelve-month period ending December 31 of each year. ARTICLE VIII DIVIDENDS SECTION 1. SOURCE AND FORM. Dividends may be declared in the form of cash, in the corporation's authorized but unissued shares, or in the property of the corporation. No dividends shall be declared or paid on the stock of the corporation if, were the dividends paid, either (1) the corporation would be unable to pay its debts as they become due in the usual course of its business; or (2) the corporation's total assets would be less than the sum of its total liabilities and the maximum amount that then would be payable, in any liquidation, in respect of all outstanding shares having preferential rights in liquidation. SECTION 2. DECLARATION. The date for the declaration of dividends shall be the date of the meeting of the Board of Directors at which the dividends shall be declared. The Board of Directors in its discretion shall declare what, if any, dividends shall be issued upon the stock of the corporation. Dividends may be declared at any meeting, regular or special, of the Board of Directors. The Board of Directors may fix in advance a record date for the determination of the shareholders entitled to a dividend distribution, which date shall not be less than three (3) days nor more than twenty (20) days from the date on which such Board took such action. The shareholders of record as of the record date shall be entitled to receive the dividends. ARTICLE IX SEAL The Board of Directors may provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation. ARTICLE X WAIVER OF NOTICE Whenever any notice whatever is required to be given under the provisions of these bylaws or under the provisions of the Articles of Incorporation or under the provisions of the law under which this corporation is organized, waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE XI INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation, by approval given to these bylaws, indemnifies each and every Director and officer and each person who may hereafter at any time serve at its request as a Director or officer of another corporation in which it owns shares of capital stock or of which it is a creditor, against expenses actually and reasonably incurred by each such Director and officer in connection with the settlement or defense of any action, suit or proceeding, civil or criminal, in which he is made a party by reason of being or having been such Director or officer, except in relation to matters as to which he shall be adjudged in such action, suit or proceeding to be liable for negligence or misconduct in the performance of duty to the corporation; and it specifically indemnifies each such Director and officer from payment of any judgment, levy, or demand that might be granted against any such Director or officer by virtue of his occupancy of said directorship or office growing out of any such action, suit, or proceeding. The indemnification described in this ARTICLE XI is in addition to, and not in lieu of, the indemnification of directors and officers described in NMSA 1978, S.S. 53-114.1 as the same may be amended from time to time. ARTICLE XII AMENDMENTS These bylaws may be altered, amended or repealed and new bylaws may be adopted at any annual meeting of the Board of Directors of the corporation or at any special meeting when the proposal to amend these bylaws has been stated in the notice of such special meeting, by a majority vote of the Directors represented at the meeting. EX-4 3 exhibit04-1.txt GIANT INDUSTRIES, INC. EXHIBIT 4.1 EXHIBIT 4.1 SIXTH 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. 2 (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; and NOW THEREFORE, 1. Effective January 1, 2004, Section 1.06 is amended as shown on the attachment. IN WITNESS WHEREOF the Employer has caused this amendment to be executed this 22nd day of June, 2005 by its duly authorized officer, effective as stated herein. GIANT INDUSTRIES, INC. By: /s/ NATALIE R. DOPP -------------------------------------- Natalie R. Dopp, V.P., Human Resources THE CORPORATEPLAN FOR RETIREMENTSM (PROFIT SHARING/401(K) PLAN) A FIDELITY PROTOTYPE PLAN Non-Standardized Adoption Agreement No. 001 For use With Fidelity Basic Plan Document No. 2 Plan Number: 40292 Non-Std PS Plan The CORPORATEplan for RetirementSM 10/09/2003 (c) 2003 FMR Corp. All rights reserved. 1.06 TESTING RULES (a) ADP/ACP Present Testing Method - The testing method for purposes of applying the "ADP" and "ACP" tests described in Sections 6.03 and 6.06 of the Plan shall be the (check one): (1) [X] Current Year Testing Method - The "ADP" or "ACP" of Highly Compensated Employees for the Plan Year shall be compared to the "ADP" or "ACP" of Non-Highly Compensated Employees for the same Plan Year. (Must choose if Option 1.10(a)(3), Safe Harbor Matching Employer Contributions, or Option 1.11(a)(3), Safe Harbor Formula, with respect to Nonelective Employer Contributions is checked.) (2) [ ] Prior Year Testing Method - The "ADP" or "ACP" of Highly Compensated Employees for the Plan Year shall be compared to the "ADP" or "ACP" of Non-Highly Compensated Employees for the immediately preceding Plan Year. (Do not choose if Option 1.10(a)(3), Safe Harbor Matching Employer Contributions, or Option 1.11(a)(3), Safe Harbor Formula, with respect to Nonelective Employer Contributions is checked.) (3) [ ] Not Applicable. (Only if Option 1.01(b)(3), Profit Sharing Only, is checked or Option 1.04(c)(2)(B), excluding all Highly Compensated Employees from the eligible class of Employees, is checked.) Note: Restrictions apply on elections to change testing methods that are made after the end of the GUST remedial amendment period. (b) First Year Testing Method - If the first Plan Year that the Plan, other than a successor plan, permits Deferral Contributions or provides for either Employee or Matching Employer contributions, occurs on or after the Effective Date specified in Subsection 1.01(g), the "ADP" and/or "ACP" test for such first Plan Year shall be applied using the actual "ADP" and/or "ACP" of Non-Highly Compensated Employees for such first Plan Year, unless otherwise provided below. Plan Number: 40292 Non-Std PS Plan The CORPORATEplan for RetirementSM 10/09/2003 (c) 2003 FMR Corp. All rights reserved. (1) [ ] The "ADP" and/or "ACP" test for the first Plan Year that the Plan permits Deferral Contributions or provides for either Employee or Matching Employer Contributions shall be applied assuming a 3% "ADP" and/or "ACP" for Non-Highly Compensated Employees. (Do not choose unless Plan uses prior year testing method described in Subsection 1.06(a)(2).) (c) HCE Determinations: Look Back Year - The look back year for purposes of determining which Employees are Highly Compensated Employees shall be the 12-consecutive-month period preceding the Plan Year, unless otherwise provided below. (1) [ ] Calendar Year Determination - The look back year shall be the calendar year beginning within the preceding Plan Year. (Do not choose if the Plan Year is the calendar year.) (d) HCE Determinations: Top Paid Group Election - All Employees with Compensation exceeding $80,000 (as indexed) shall be considered Highly Compensated Employees, unless Top Paid Group Election below is checked. (1) [ ] Top Paid Group Election - Employees with Compensation exceeding $80,000 (as indexed) shall be considered Highly Compensated Employees only if they are in the top paid group (the top 20% of Employees ranked by Compensation). Note: Effective for determination years beginning on or after January 1, 1998, if the Employer elects Option 1.06(c)(1) and/or 1.06(d)(1), such election(s) must apply consistently to all retirement plans of the Employer for determination years that begin with or within the same calendar year (except that Option 1.06(c)(1), Calendar Year Determination, shall not apply to calendar year plans). Plan Number: 40292 Non-Std PS Plan The CORPORATEplan for RetirementSM 10/09/2003 (c) 2003 FMR Corp. All rights reserved. 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 1.06 01/01/2004 IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed this 22 day of June, 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: /s/ GREGORY M. PERKINS Date: 06/28/2005 ------------------------------- ----------------------------- Title: Authorized Signatory ---------------------------- Plan Number: 40292 Non-Std PS Plan The CORPORATEplan for RetirementSM 10/09/2003 (c) 2003 FMR Corp. All rights reserved. EX-10 4 exhibit10-2.txt GIANT INDUSTRIES, INC. EXHIBIT 10.2 EXHIBIT 10.2 FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT This FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is entered into effective as of Augsut 4, 2005 (the "Amendment Effective Date"), among GIANT INDUSTRIES, INC., a Delaware corporation (the "Company"), the financial institutions from time to time parties to the Credit Agreement (collectively, the "Lenders"), and BANK OF AMERICA, N.A. as administrative agent (the "Administrative Agent") for the Lenders and as a Lender, Swing Line Lender and as Issuing Bank. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement referred to below shall have the meanings ascribed to them in the Credit Agreement. WHEREAS, the Company, the Administrative Agent and the Lenders are parties to that certain Fourth Amended and Restated Credit Agreement dated as of June 27, 2005, (the "Credit Agreement"); and WHEREAS, the Company desires to amend Section 8.05(d) of the Credit Agreement, and Lenders are willing to do so; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Amendment to Section 8.05(d) of the Credit Agreement (Limitations on Indebtednesss and Contingent Obligations). Section 8.05(d) of the Credit Agreement is hereby amended by deleting "$15,000,000" and inserting "$25,000,000". SECTION 2. Representations and Warranties. In order to induce the Administrative Agent and the Lenders to enter into this Amendment, the Company represents and warrants to the Administrative Agent and to each Lender that: (a) This Amendment, the Credit Agreement as amended hereby and each Loan Document have been duly authorized, executed and delivered by the Company and the applicable Loan Parties and constitute their legal, valid and binding obligations enforceable in accordance with their respective terms (subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting creditors' rights generally and to general principles of equity). (b) The representations and warranties set forth in Article VI of the Credit Agreement are true and correct in all material respects on and as of the Amendment Effective Date, after giving effect to, as if made on and as of the Amendment Effective Date. (c) As of the date hereof, at the time of and after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. (d) No approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution and delivery of this Amendment or the performance by the Company or any Loan Party of its obligations hereunder. This Amendment has been duly authorized by all necessary corporate action, and the execution, delivery and performance of this Amendment and the documents and transactions contemplated hereby does not and will not (a) contravene the terms of the Company's or any Loan Party's Organization Documents; (b) conflict with or result in any breach or contravention of, or result in or require the imposition or creation of any Lien under any document evidencing any other material Contractual Obligation to which the Company or any Loan Party is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or any Loan Party is subject; or (c) violate any Requirement of Law. SECTION 3. Conditions of Effectiveness. The amendment to the Credit Agreement set forth this Amendment shall be effective on the Amendment Effective Date, provided that the Administrative Agent shall have received: (a) counterparts of this Amendment duly executed by the Company, the Loan Parties, the Administrative Agent, and the Majority Lenders; (b) such other documents as the Administrative Agent may require in connection with the foregoing. SECTION 4. Costs. The Company agrees to pay on demand reasonable Attorney Costs of the Administrative Agent and all other costs and expenses of the Administrative Agent, in connection with the preparation, execution and delivery of this Amendment and any other documents executed in connection therewith. SECTION 5. Effect of Amendment. This Amendment (i) except as expressly provided herein, shall not be deemed to be a consent to the modification or waiver of any other term or condition of the Credit Agreement or of any of the instruments or agreements referred to therein and (ii) shall not prejudice any right or rights which the Administrative Agent, the Issuing Bank or the Lenders may now have under or in connection with the Credit Agreement, as amended by this Amendment. Except as otherwise expressly provided by this Amendment, all of the terms, conditions and provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment and such Credit Agreement shall be read and construed as one instrument. The Company and each of the other Loan Parties hereby confirm and agree that all Liens and other security now or hereafter held by the Administrative Agent for the benefit of the Lenders as security for payment of the Obligations are the legal, valid and binding obligations of the Company and the Loan Parties, remain in full force and effect, are unimpaired by this Amendment, and are hereby ratified and confirmed as security for payment of the Obligations. SECTION 6. Miscellaneous. This Amendment shall for all purposes be construed in accordance with and governed by the laws of the State of New York and applicable federal law. The captions in this Amendment are for convenience of reference only and shall not define or limit the provisions hereof. This Amendment may be executed in separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument. In proving this Amendment, it shall not be necessary to produce or account for more than one such counterpart. This Amendment may be delivered by facsimile transmission of the relevant signature pages hereof. THE CREDIT AGREEMENT (AS AMENDED BY THIS AMENDMENT) AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES BEGIN ON NEXT PAGE] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date and year first above written. GIANT INDUSTRIES, INC. By: /s/ MARK B. COX -------------------------------- Mark B. Cox Executive Vice President and Chief Financial Officer THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BANK OF AMERICA, N.A., as Administrative Agent By /s/ RENITA M. CUMMINGS --------------------------------- Renita M. Cummings Assistant Vice President BANK OF AMERICA, N.A., as a Lender, Issuing Bank and Swing Line Lender By /s/ ZEWDITU MENELIK --------------------------------- Zewditu Menelik Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BNP PARIBAS, as a Lender By /s/ MARK A. COX --------------------------------- Name: Mark A. Cox Title: Director By /s/ GREG SMOTHERS --------------------------------- Name: Greg Smothers Title: Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT UBS LOAN FINANCE LLC, as a Lender By /s/ --------------------------------- By /s/ --------------------------------- THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT WELLS FARGO BANK, N.A., as a Lender By /s/ TIM GREEN --------------------------------- Name: Tim Green Title: Portfolio Manager THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BANK OF SCOTLAND, as a Lender By /s/ AMENA NABI --------------------------------- Name: Amena Nabi Title: Assistant Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT COMERICA BANK, as a Lender By /s/ THOMAS CARTER WADDELL --------------------------------- Name: Thomas Carter Waddell Title: Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT FORTIS CAPITAL CORP., as a Lender By /s/ CASEY LOWARY --------------------------------- Name: Casey Lowary Title: Senior Vice President By /s/ DARRELL HOLLEY --------------------------------- Name: Darrell Holley Title: Managing Director THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT PNC BANK, NATIONAL ASSOCIATION, as a Lender By /s/ MARC MUEHLEMANN --------------------------------- Name: Marc Muehlemann Title: Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT RZB FINANCE LLC, as a Lender By /s/ JOHN A. VALISKA --------------------------------- Name: John A. Valiska Title: First Vice President By /s/ CHRISTOPH HOEDL --------------------------------- Name: Christoph Hoedl Title: Group Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT HIBERNIA NATIONAL BANK, as a Lender By /s/ CORWIN DUPREE --------------------------------- Name: Corwin Dupree Title: Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT NATEXIS BANQUES POPULAIRES, as a Lender By /s/ LOUIS P. LAVILLE, III --------------------------------- Name: Louis P. Laville, III Title: Vice President / Manager By /s/ DANIEL PAYER --------------------------------- Name: Daniel Payer Title: Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT U.S. BANK NATIONAL ASSOCIATION, as a Lender By /s/ KATHRYN A. GAITER --------------------------------- Name: Kathryn A. Gaiter Title: Vice President THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT RATIFICATION AND AGREEMENT Each of the undersigned Loan Parties hereby consents to and accepts the terms and conditions of the foregoing Amendment and the transactions contemplated thereby, agrees to be bound by the terms and conditions thereof, and ratifies and confirms that each of the Loan Documents to which it is a party is, and shall remain, in full force and effect after giving effect to the foregoing Amendment. GIANT INDUSTRIES ARIZONA, INC., GIANT FOUR CORNERS, INC., GIANT MID-CONTINENT, INC., GIANT STOP-N-GO OF NEW MEXICO, INC., SAN JUAN REFINING COMPANY, CINIZA PRODUCTION COMPANY, PHOENIX FUEL CO., INC., GIANT PIPELINE COMPANY, and as Loan Parties By: /s/ MARK COX ------------------------------ Name: Mark Cox in each case, as Executive Vice President and Chief Financial Officer THIS IS A SIGNATURE PAGE TO THE GIANT INDUSTRIES, INC. FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT EX-10 5 exhibit10-3.txt GIANT INDUSTRIES, INC. EXHIBIT 10.3 EXHIBIT 10.3 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (the "Agreement"), is entered into effective the 21st day of June, 2005, by and between Texas-New Mexico Pipe Line Company, a Delaware corporation ("Seller"), and Giant Pipeline Company, a New Mexico corporation ("Buyer"). Seller and Buyer are hereinafter sometimes referred to individually as a "Party" or collectively as the "Parties". Other definitions used in this Agreement are found in Annex A attached hereto and made a part hereof. For and in consideration of the mutual covenants, obligations and benefits made and contained herein, the Parties agree as follows: Article 1 Purchase and Sale A. Included Assets. Subject to the terms and conditions set forth below, Seller agrees to sell and Buyer agrees to purchase all of Seller's right, title and interest in and to the following real and personal property interests, other than the Excluded Assets (the "Property"): (1) the idle crude oil pipeline (the "Pipeline"), as shown on Exhibits "A" - Map and "A-1" - System Description, attached hereto and made a part hereof; (2) all fee interests in real property described and shown on Exhibit "B" attached hereto and made a part hereof ("Real Property"); (3) rights-of-way and permits appurtenant to or associated with the Pipeline, as further described on Exhibit "C", attached hereto and made a part hereof ("Rights-of-Way and Permits"); (4) the assigned contracts as further described on Exhibit "D" attached hereto and made a part hereof ("Assigned Contracts"); (5) any and all pipe, pumps, motors, valves, fittings, miscellaneous equipment and facilities, and buildings associated with the Pipeline as further described on Exhibit "E" attached hereto and made a part hereof ("Equipment"); and (6) the Books and Records. B. Signage. Buyer acknowledges that it shall have no rights with respect to the use of the names "Texas-New Mexico Pipe Line Company", "Shell Pipeline Company LP", or any and all variations and derivatives thereof, all trademarks, service marks and logos associated therewith, nor any "Goodwill" associated with any of the foregoing. Within sixty (60) days after the Effective Time, Buyer shall remove or cause to be removed, all such names, marks or logos from wherever they may appear on the Property, including the removal of all Texas New Mexico Pipeline Company line markers. Should Buyer fail to have such line markers removed within sixty (60) days of the Effective Time, then Buyer shall pay to Seller one hundred dollars ($100.00) per month for each of the line markers with Seller's or its Affiliates name on it still on the Property on or after the sixtieth (60th) day after the Effective Time. C. One-Call. Buyer will promptly, but in no event later than sixty (60) days after the Effective Time, contact every appropriate one-call agency in the vicinity of any of the Property and have the contact information for one-calls changed from Seller's name to Buyer's name. This obligation of Buyer shall include sending revised maps to the one- call agencies where appropriate or required. Buyer shall send Seller a letter, to the Notices address contained in Article 24 of this Agreement, when the one-call notification information has been changed. Should Buyer fail to have the one-call information and maps changed to Buyer's name within sixty (60) days of the Effective Time, then Buyer shall pay to Seller one hundred dollars ($100.00) for each one-call received by Seller for any of the Property on or after the sixtieth (60th) day after the Effective Time. Article 2 Purchase Price A. Price. The price to be paid by Buyer to Seller for the Property shall be Nine Million Dollars ($9,000,000.00) (the "Purchase Price") payable at Closing (as defined below) less the Earnest Money held by Seller, by wire transfer in immediately available funds to an account to be designated by Seller. Seller shall prepare a Closing Statement, substantially in the form attached hereto as Exhibit "F", detailing the items which are to be added to or subtracted from the Purchase Price as permitted under this Agreement in order to determine the amount of money to be included in the wire transfer. Buyer and Seller shall agree to the figures on the Closing Statement. The Purchase Price is subject to the following conditions. 1. Within two hundred seventy (270) days of the Closing Date, unless further delayed due to right-of-way issues, Buyer shall hydrotest the Pipeline and determine the Total Recommissioning Cost. If the Pipeline is unable to be recommissioned into crude service by Buyer due to: i) the cost or projected cost to make repairs to the Pipeline exceeds the Estimate of Repair Costs by $1 million, or ii) the Total Recommissioning Cost exceeds $11 million, or iii) community objections that prevent or significantly delay use of the Pipeline, and Buyer elects to not proceed, then, at Seller's sole discretion: (1) Seller may negotiate a mutually acceptable purchase price reduction with Buyer and Buyer will proceed with placing the Pipeline in service , or (2) Seller will refund $8 million to Buyer and Buyer will retain ownership of the Pipeline and honor all terms, conditions, representations, warranties, and indemnities, or (3) Seller will refund all monies, Buyer will reconvey ownership of the Pipeline and all liabilities to Seller and Seller will release Buyer from all obligations. 2. If Buyer notifies Seller that it is electing not to proceed placing the Pipeline in service because either the cost or projected cost to make repairs to the Pipeline exceed the Estimate of Repair Costs by $1 million or the Total Recommissioning Cost exceeds $11 million, then, at Seller's sole cost and expense, Seller shall have the right to conduct an audit of Buyer's records supporting the Estimate of Repair Costs or the Total Recommissioning Cost, as applicable. Seller shall have 15 business days from receipt of Buyer's notice to inform Buyer of its intention to conduct an audit. 3. If the Pipeline is ever made operational by Buyer, its Affiliates or assigns at any time after Seller shall have refunded monies to Buyer, then Buyer will pay to Seller an amount equal to the monies previously refunded to Buyer by Seller. B. Earnest Money. As evidence of Buyer's ability to perform this Agreement and good faith intent to comply with the terms hereof, Buyer has deposited with Seller an amount equal to five percent (5%) of the Purchase Price as earnest money (hereinafter "Earnest Money"). The Earnest Money shall accrue interest at a per annum rate calculated on a daily basis using the three month treasury bill rate published by Bloomberg Financial Services for any applicable day (with the rate for any day for which a rate is not published being the rate most recently published). All references to Earnest Money shall include interest on the Earnest Money as calculated in accordance with the preceding sentence. C. Distribution of the Earnest Money. The Earnest Money shall be distributed as follows: (1) If the Closing occurs, then the Earnest Money shall be applied to and credited against the Purchase Price at Closing. (2) In the event the transaction fails to close because any of the conditions to Closing contained in Article 3A. are not satisfied through no fault of either Party and this Agreement is terminated, Seller will refund the Earnest Money to Buyer and Buyer and Seller shall each be relieved of all liability hereunder. (3) In the event the transaction fails to close because any of the conditions to Closing in Article 3A. are not satisfied because Buyer has violated the terms of this Agreement, Seller shall be entitled to retain the Earnest Money, as liquidated damages and not as a penalty, and Buyer and Seller shall each be relieved of all further liability hereunder. Article 3 Closing Closing shall take place on August 1, 2005, at Seller's offices in Houston, Texas ("Closing"), or at such other time and place as agreed to in writing by the Parties. Control of operations, risk of loss, and transfer of title to the Property from Seller to Buyer shall be effective as of 7:00 a.m. local time on the Closing Date. A. Conditions to Closing. Except as expressly waived by the Parties, the obligations of the Parties to close this transaction are subject to the satisfaction, at or prior to Closing, of each of the following conditions, which conditions the Parties intend to be conditions precedent to Seller's obligation to convey the Property and to Buyer's obligation to pay the Purchase Price: (1) All representations and warranties of the Parties set forth in this Agreement shall be true in all material respects as of the Closing Date as if made on the Closing Date, and the Parties shall have performed all covenants and conditions required by this Agreement to be performed at or prior to Closing and shall have taken all other actions reasonably necessary to close this transaction. (2) No Law shall exist or shall have been enacted restricting or substantially delaying this transaction. (3) Neither Party shall have exercised any right it may have to terminate this Agreement under the express terms hereof. (4) The transaction described in this Agreement shall have been approved by the Board of Directors of each of Seller, Buyer and Giant Industries, Inc., the ultimate parent corporation of Buyer. (5) If applicable, each Party shall have complied with the requirements of federal and state securities Laws. (6) No Casualty Loss shall have occurred between the date of Buyer's notification to Seller that it has completed its pre-acquisition review and Closing. The term "Casualty Loss" shall mean any single event of loss or damage to the Property or any portion thereof which causes a Material Adverse Environmental Condition or a Material Defect. (7) Each Party shall have received a certificate, dated as of the Closing Date, signed by the other Party's Secretary or Assistant Secretary certifying the incumbency of the officers executing this Agreement, and any documents to be executed and delivered by it at the Closing, on behalf of such Party. (8) Seller shall have executed and delivered to Buyer the Conveyance Documents, which are attached to this Agreement as Exhibits "G", "H", "I", and "J". (9) Seller's portion of the property Tax owed in accordance with Article 6B shall have been deducted from the Purchase Price on the Closing Statement. (10) Seller shall have received from Buyer, or its Affiliate who has been financially qualified by Seller, a guarantee of the performance, in substantially the form attached hereto as Exhibit "K", of any Affiliate of Buyer who has not been financially qualified by Seller to whom assets are to be conveyed under this Agreement. (11) Buyer shall provide an environmental insurance policy in favor of Seller and satisfactory to Seller at Closing. B. Termination. If any condition or obligation of a Party has not been satisfied or waived, and Closing has not occurred by the close of business on the Closing Date, the Party to whom said obligation is owed may terminate this Agreement immediately upon the giving of written notice thereof to the Party owing such obligation. Buyer shall promptly return all records, maps, files, papers, and other property of Seller then in its possession, and neither Party shall hereafter have any liability under this Agreement. This provision shall not, however, apply to limit the liability of a Party who has willfully caused termination hereof by any act or failure to act in violation of the terms and provisions of this Agreement. Article 4 Allocation of Proceeds and Purchase Price A. Proceeds from Operations. All proceeds attributable to the operation, ownership, use or maintenance of or otherwise relating to the Property prior to the Effective Time shall be the property of Seller and to the extent received by Buyer or its Affiliates, Buyer shall promptly and fully disclose, account for and transmit same to Seller. All proceeds attributable to the operation, ownership, use, or maintenance of or otherwise relating to the Property on and after the Effective Time shall be the property of Buyer and to the extent received by Seller or its Affiliates, Seller shall promptly and fully disclose, account for and transmit same to Buyer. B. Purchase Price Allocation. Buyer and Seller shall, prior to or at Closing, agree to allocate the Purchase Price among the Property in substantially the same form attached hereto as Exhibit "L" which will represent a reasonable determination in good faith of the fair market value of the Property. Seller and Buyer agree (i) to report the federal, state and local income and other Tax consequences of the transactions contemplated herein, and in particular to report the information required by Section 1060(b) of the Code on Form 8594 in a manner consistent with such allocation and (ii) not to take any position inconsistent therewith upon examination of any Tax return, in any refund claim, in any litigation, investigation or otherwise, unless required by applicable Laws or with the consent of the other Party. Article 5 Responsibility For Contractual Payments and Obligations A. Contractual Payments. Seller shall be responsible for all costs and expenses, arising in the ordinary course of business with respect to the ownership, operation, use or maintenance of the Property prior to the Effective Time. Buyer shall be responsible for all such costs and expenses arising in the ordinary course of business with respect to the ownership, operation, use or maintenance of the Property on and after the Effective Time. B. Assumption of Liabilities and Obligations Relating to the Property. On and after the Effective Time, but subject to Seller's indemnities set forth in Article 11, Buyer shall assume all liabilities and perform all obligations of Seller relating to the Property (whether such obligations are to a grantor, a Governmental Authority or any other Person) and whether such liabilities or obligations are attributable to periods of time prior to or after the Effective Time, including, but not limited to, any obligations arising with respect to the abandonment or removal (as the case may be) of any existing facilities, Pipeline, appurtenant or associated Equipment or other personal property located on and included in the Property. C. Adjustments Regarding Utilities. To the extent utilities have not been placed in Buyer's name as of the Effective Time, charges and credits for water, electricity, sewage, gas and all other utilities shall be adjusted and apportioned between Seller and Buyer through the Effective Time. If Buyer receives invoices for utilities for any period of time prior to the Effective Time, Buyer will promptly forward the invoices to Seller for payment. Likewise, if Seller receives invoices for utilities for any period of time on or after the Effective Time, Seller will promptly forward the invoices to Buyer for payment. If new utility connections or meters are required for Buyer's assumption of utility services, the cost shall be borne by Buyer. After Closing, Buyer shall promptly place in its own name all utilities associated with the Property. Article 6 Taxes and Related Matters A. Cooperation. Buyer and Seller agree to furnish, or cause to be furnished, to each other, upon request, as promptly as practicable, such information and assistance relating to the Property as is reasonably necessary for the filing of all Tax matters, the preparation for any audit by any taxing authority, and the prosecution or defense of any Proceeding relating to any Tax matter. Seller and Buyer shall cooperate with each other in the conduct of any audit or other Proceeding related to Taxes involving the Property and each shall execute and deliver such documents as are necessary to carry out the intent of this article. B. Property Taxes. All real estate, ad valorem and personal property taxes shall be prorated between Buyer and Seller as of the Closing Date based upon the number of days during the applicable tax period each Party owned the Property subject to such tax. For purposes of this Agreement, general property Taxes in respect to the ownership or use of the Property for the calendar year in which the Effective Time occurs shall be prorated between Buyer and Seller as of the Effective Time regardless of when such general property Taxes are actually billed and payable. At Closing, Seller's portion of such general property Taxes attributable to the period prior to the Effective Time shall be deducted from the Purchase Price to be paid to Seller. Buyer shall actually pay to the taxing authority all general property Taxes for the year of Closing which are payable after the Closing. Notwithstanding anything in this Agreement to the contrary, no further adjustment shall be made for such general property Taxes due for the Tax year in which the Closing occurs and which are payable after the Closing, and Buyer hereby agrees to assume the payment of all such general property Taxes effective upon Closing. C. Documentary Transfer Taxes. Buyer shall pay and bear all documentary transfer Taxes, realty transfer Taxes and charges or fees with respect to the transfer of Real Property or to the recordation of the documents necessary for the transfer of Real Property that may be required for the transfer of the Property from Seller to Buyer. D. Other Transfer Taxes. Buyer shall pay and be responsible for any other applicable transfer Taxes incurred in connection with the purchase and sale of the Property, including, without limitation, any federal, state or local sales, use, or excise Taxes, whether levied on Seller or Buyer. Buyer shall be responsible for, and will file all necessary Tax returns and other documentation with respect to all such Taxes and remit, upon the request of Seller, copies of the portions of such returns relevant to this Agreement and any necessary documentation to Seller. E. Confidential Tax Information. Notwithstanding anything to the contrary in this Agreement, neither Party shall be required at any time to disclose to the other Party, or to any other Person, absent legal constraint, any Tax return or other confidential Tax information. F. Deferred Like-Kind Exchange Cooperation. If so requested by a Party, the other Party shall, at no cost or obligation to such other Party, cooperate in structuring and completing all or a portion of this transaction so as to effect a disposition of "relinquished property" in connection with a multiple party deferred like-kind exchange pursuant to Section 1031 of the Code. In particular, Buyer hereby consents to the assignment of an interest in the Property to a "qualified intermediary" prior to the Closing hereunder and the assignment by Seller to such "qualified intermediary" of Seller's right to receive the Purchase Price hereunder. The terms "qualified intermediary", and "relinquished property" as used herein shall have the meanings ascribed to them in Treasury Regulations Section 1.1031(k)-1. The requesting Party agrees to indemnify and hold harmless the other Party from any costs, expenses and claims relating to its cooperation arising out of a like-kind exchange of the requesting Party, which indemnity shall survive Closing. Nothing in this Article 6F is intended to relieve any Party from its obligations hereunder. G. Certification of Non-Foreign Status. On the Closing Date, Seller shall deliver to the Buyer a certificate in the form attached hereto as Exhibit "M" (Certification of Non-Foreign Status) signed under penalty of perjury (i) stating that it is not a foreign corporation, foreign partnership, foreign trust or foreign estate, (ii) providing its U.S. Employer Identification Number, and (iii) providing its address, all pursuant to Section 1445 of the Code. Article 7 Seller's Representations Seller represents and warrants to Buyer the following: A. No Brokers. Seller has not incurred any obligation or liability, contingent or otherwise, nor made any agreement with respect to any broker or finder's fees arising out of or in any way related to the transaction contemplated by this Agreement for which Buyer will be in any way liable. B. Organization. Texas New Mexico Pipeline Company is a corporation duly formed, validly existing and in good standing under the Laws of the State of Delaware and duly qualified to carry on business in the states in which its business requires it to be qualified. C. Power and Authority. Seller has the power and authority necessary to enter into and perform this Agreement and the transaction contemplated hereby, and the execution, delivery and performance of this Agreement by Seller, will not, with the passage of time or the giving of notice or both: (1) violate any provision of the formation documents of Seller, (2) materially violate any agreement or instrument to which Seller is a party or by which Seller is bound, (3) materially violate any judgment, order, ruling or decree applicable to Seller as a party in interest, (4) materially violate any Law applicable to Seller or to this Agreement or (5) result in the creation or imposition of any material Lien on any of the Property. D. Authorization and Enforceability. The execution, delivery, and performance by Seller of this Agreement and the consummation of the transaction contemplated hereby have been duly authorized by all requisite action on the part of Seller. This Agreement has been duly executed and delivered on behalf of Seller, and, at the Closing, all documents and instruments required hereunder to be executed and delivered by Seller shall have been duly executed and delivered by Seller. This Agreement does, and such documents and instruments shall, constitute legal, valid and binding obligations of Seller enforceable in accordance with their terms, subject, however, to the effect of bankruptcy, insolvency, reorganization, moratorium and similar Laws from time to time in effect relating to the rights and remedies of creditors, as well as to general principles of equity (regardless of whether such enforceability is considered in a Proceeding in equity or at law). E. Investment Company Act; PUCHA. Seller is not (1) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended or (2) a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended or (3) a "foreign person" within the meaning of Section 1445 of the Code. F. Violations of Law. Except as set forth in the Disclosure Schedule, to Seller's knowledge, Seller is not in material violation of any Law in connection with its ownership and/or operation of the Property. G. Taxes. Except as set forth in the Disclosure Schedule, to Seller's knowledge, Seller has filed in a timely manner all required federal, state, tribal, and local income, sales, use, property, and franchise Tax returns related to the Property, and has paid (except amounts being diligently contested in good faith by appropriate Proceedings and disclosed in Section 7G of the Disclosure Schedule) all required Tax or similar assessments arising from or related to the Property, including any interest, penalties or additions attributable thereto shown as due on all such filings. Taxes which Seller was required by Law to withhold or collect in respect to the Property have been withheld or collected and have been paid over to the proper Governmental Authorities or are properly held by Seller for such payment when due and payable. H. No Proceedings. Except as set forth in the Disclosure Schedule, to Seller's knowledge, (1) there is no Proceeding directly affecting the Property or Seller's ownership or operation thereof on the date hereof that is still pending or threatened, and that, if adversely determined, would impair or prohibit the consummation of the transaction contemplated hereby and (2) there are no material orders, writs, judgments, stipulations, injunctions, decrees, determinations, awards or other decisions of any Governmental Authority, or any arbitrator or mediator, outstanding against Seller pertaining to any portion of the Property. I. Disclosure Schedule Updates. Seller will update the Disclosure Schedule between the signing of this Agreement and Closing in order to make these representations true as stated at Closing. Article 8 Buyer's Representations Buyer represents and warrants to Seller the following: A. Independent Investigation. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES OF SELLER EXPRESSLY SET FORTH IN ARTICLE 7 HEREOF, BUYER ACKNOWLEDGES THAT (1) SELLER IS SELLING AND BUYER IS ACQUIRING THE PROPERTY ON AN "AS IS", "WHERE IS" BASIS, WITHOUT ANY REPRESENTATIONS AND WARRANTIES CONCERNING THE PROPERTY (EXPRESS, IMPLIED OR STATUTORY), (2) SELLER HAS NOT MADE AND IS NOT MAKING ANY REPRESENTATION OR WARRANTY OF TITLE, FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR OTHERWISE WITH REGARD TO THE PROPERTY AND SELLER HAS EXPRESSLY DISCLAIMED ANY WARRANTIES (EXPRESS, IMPLIED OR STATUTORY), AND (3) SELLER HAS NOT AND DOES NOT WARRANT DESCRIPTION, VALUE, QUALITY, OR CONDITION OF ANY OF THE PROPERTY (INCLUDING THE PIPELINES, TANKS, TERMINALS, APPURTENANT OR ASSOCIATED EQUIPMENT OR OTHER REAL OR PERSONAL PROPERTY LOCATED ON OR INCLUDED IN THE PROPERTY). BUYER FURTHER ACKNOWLEDGES THAT SELLER HAS NOT MADE AND IS NOT MAKING ANY REPRESENTATION OR WARRANTY CONCERNING THE PRESENT OR FUTURE VALUE OF THE POSSIBLE INCOME, COSTS OR PROFITS IF ANY, TO BE DERIVED FROM THE PROPERTY. BUYER HAS MADE INDEPENDENT INSPECTIONS, ESTIMATES, COMPUTATIONS, REPORTS, STUDIES, AND EVALUATIONS OF THE PROPERTY AND HAS SATISFIED OR WILL SATISFY ITSELF PRIOR TO THE EXPIRATION OF THE REVIEW PERIOD WITH RESPECT TO THE CONDITION OF THE PROPERTY. FURTHER, BUYER ACKNOWLEDGES THAT THE PROPERTY HAS BEEN USED FOR THE TRANSPORTATION OF REFINED PETROLEUM PRODUCTS OR CRUDE OIL AND MAY HAVE BEEN THE SUBJECT OF ONE OR MORE RELEASES OF REFINED PETROLEUM PRODUCTS OR CRUDE OIL AS A RESULT OF ITS USE. B. Investment. Buyer is acquiring the Property for its own benefit and account and not with the intent of distributing fractional undivided interests thereof as would be subject to regulation by federal or state securities Laws. C. Evaluation by Buyer. By reason of Buyer's knowledge and experience in the evaluation, acquisition and operation of similar properties, Buyer has evaluated the merits and risks of purchasing the Property and has formed an opinion based solely upon Buyer's knowledge and experience and not upon any representations or warranties by Seller or any of its representatives other than Seller's representations set forth in Article 7 hereof. D. Transfer Restrictions. Buyer assumes the risk of any transfer restrictions or renegotiation requirements associated with, or the expiration of, any Rights-of-Way, Permits, franchises, Assigned Contracts or other agreements applicable to the Property. E. Compliance with Laws. Buyer shall comply with all applicable Laws and shall promptly obtain, or have transferred to its name, and maintain all Permits or consents required by public or private parties in connection with the Property purchased. F. Organization. Buyer is a corporation duly formed, validly existing and in good standing under the Laws of the State of New Mexico and is duly qualified to carry on business in the states in which the ownership of the Property requires it to be qualified. G. No Brokers. Buyer has not incurred any obligation or liability, contingent or otherwise, nor has it made any agreement with respect to any broker or finder's fees arising out of or in any way related to the transaction contemplated by this Agreement for which Seller will be in any way liable. H. Power and Authority. Buyer has the power and authority necessary to enter into and perform this Agreement and the transaction contemplated hereby, the execution, delivery and performance of this Agreement by Buyer will not (1) violate any provision of the formation documents of Buyer, (2) materially violate any agreement or instrument to which Buyer is a party or by which Buyer is bound, (3) materially violate any judgment, order, ruling or decree applicable to Buyer as a party in interest or (4) materially violate any Law applicable to Buyer. I. Authorization and Enforceability. The execution, delivery, and performance by Buyer of this Agreement and the consummation of the transaction contemplated hereby have been duly authorized by all requisite action on the part of Buyer. This Agreement has been duly executed and delivered on behalf of Buyer, and, at the Closing, all documents and instruments required hereunder to be executed and delivered by Buyer shall have been duly executed and delivered by Buyer. This Agreement does, and such documents and instruments shall, constitute legal, valid and binding obligations of Buyer enforceable in accordance with their terms, subject, however, to the effect of bankruptcy, insolvency, reorganization, moratorium and similar Laws from time to time in effect relating to the rights and remedies of creditors, as well as to general principles of equity (regardless of whether such enforceability is considered in a Proceeding in equity or at law). J. Investment Company Act and PUCHA. Buyer is not (1) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended or (2) a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended or (3) a "foreign person" within the meaning of Section 1445 of the Code. K. No Knowledge. Buyer's management responsible for the consummation of this transaction has no knowledge that there exists any wrong or inaccurate information, omissions, misrepresentations or mistakes on the Disclosure Schedule. Article 9 Pre-Acquisition Review A. Review Period. During the period commencing on the date of this Agreement and ending forty-five (45) days after the date of this Agreement (the "Review Period"), Buyer and TEPPCO Crude Pipeline, LP., and their Affiliates and the employees, agents and consultants of either shall have the right to do the following, at Buyer's expense and with the cooperation and assistance of Seller, subject to Buyer's executed confidentiality agreement ("Confidentiality Agreement"), and also subject to Buyer supplying to Seller, prior to the end of the Review Period, copies of any reports and/or assessments prepared by Buyer or its Affiliates or the consultants of either, concerning the condition of the Property which are relied upon as the basis of Buyer's termination option under Article 9E, and allowing Seller to discuss the reports or assessments with the Person who prepared them: 1. Enter all or part of the Property with Seller's representative, including all or any easements, to view the Pipeline, facilities, Equipment, and other operations conducted thereon, and to conduct a surface only inspection and assessment, inventory, study and examination of the same, independently of any documents, data or information furnished by Seller hereunder; and 2. Inspect and review the Books and Records. Buyer acknowledges that it shall not have access to (a) Seller's Pipeline Manuals used in the operation of the Pipelines or (b) the process used by Seller for integrity assessments, which are considered by Seller to be proprietary property. B. No Sampling. Buyer shall not have the right to perform any sampling of any kind in connection with any site assessment, including, but not limited to, any phase II site assessment on any portion of the Property. C. Information is Confidential. Except as required by Law, all information acquired by Buyer in any inspection, inventory, study, or examination of the Property, and the results of any analysis thereof, shall be kept confidential by Buyer from anyone other than Seller in accordance with Buyer's executed Confidentiality Agreement. Should Buyer be required by any Law to disclose any information concerning the Property, Buyer shall notify Seller at least five (5) days (or as soon as practical if five (5) days is not available) prior to Buyer's disclosure of such information. D. Indemnity. Buyer shall indemnify, defend and hold harmless Seller and its Affiliates and their respective owners, officers, directors, employees, attorneys, and agents from any and all Losses, liabilities, attorneys' fees, court costs, liens, or encumbrances for labor or materials, claims and causes of action arising out of any injury to or death of any Persons or damage to property occurring to or on the Property as a result of the exercise of Buyer's rights under this article, except to the extent the indemnified event or occurrence arises from or is caused by the sole negligence or fault of Seller. Seller shall have the right at all times to participate in the preparation for and conducting of any hearing or trial related to this indemnification provision, as well as the right to appear on its own behalf or to retain separate counsel to represent itself at any such hearing or trial. E. Termination Option. Except as hereinafter provided, Buyer shall have the option of terminating this Agreement by providing written notice to Seller on or before the last day of the Review Period, in the event Buyer determines, during the Review Period, that the Property is subject to any: (1) Material Adverse Environmental Condition or (2) Material Defect. To be effective, any such notice shall specifically identify and describe the basis for such termination, and shall include substantial evidence of the Material Defect or Material Adverse Environmental Condition leading to the termination notice. Neither (i) a minor deviation in the location of a Pipeline, relative to a defined Right-of- Way in an easement, (ii) a gap in the Right-of-Way nor (iii) a minor encroachment onto a Right-of-Way shall be deemed to constitute a Material Defect for purposes of this Agreement. F. Seller's Remedy. Notwithstanding the delivery of a notice of termination by Buyer to Seller, this Agreement shall not be terminated if, within thirty (30) days after Seller's receipt of such notice: (1) Seller remedies or agrees to remedy, to a degree which is mutually agreed during the referenced thirty (30) day period, such Material Adverse Environmental Condition or Material Defect; or (2) Seller and Buyer mutually agree on an adjustment to the Purchase Price. G. Buyer's Termination. Notwithstanding the above, if Buyer can provide substantial evidence that the Property is subject to Material Adverse Environmental Conditions or Material Defects that, when totaled together would expose Buyer to costs to remedy or cure, or the potential for exposure for claims, damages, penalties, assessments or costs in excess of ten percent (10%) of the Purchase Price, Buyer, in its sole discretion, may terminate this Agreement. H. Negotiation with Agencies. If Seller agrees to remedy any specific Material Adverse Environmental Condition or Material Defect in the Property, then all negotiations and contacts with Governmental Agencies for approval and review of such remedial action shall be made by Seller, and Buyer shall make no independent contacts with any of the Governmental Agencies relative to such remedial action. Buyer shall receive copies of all correspondence between Seller and any Governmental Agencies regarding such remedial action. I. Notice of End of Review Period. When the Review Period had ended, or prior to that time if Buyer has completed its pre-acquisition review, Buyer shall send Seller a notice, to the address provided in Article 24, that it has completed its pre-acquisition review. J. Transition. When Buyer notifies Seller, in writing, that its pre- acquisition review is complete, then Buyer and Seller shall enter into a period of transition. During the transition period, Buyer's representatives shall be allowed to "job-shadow" and/or consult with the appropriate Seller employees for an agreed upon period of time. Seller shall also make available to Buyer those of Seller's employees who are interested in discussing employment with Buyer. Article 10 Title A. Conveyances. At Closing, Seller shall transfer to Buyer title to the Property by means of the Conveyance Documents. In the case of the Real Property and except as otherwise described in Article 10D. below, it shall be free and clear at Closing of any lawful claims of any third party claiming by, through or under Seller, but not otherwise, and transfer shall be by means of a Special Warranty Deed in substantially the form attached hereto as Exhibit "H". B. Title Examination. During the period commencing on the date of this Agreement and ending forty-five (45) days after the date of this Agreement ("Title Examination Period"), Buyer and its Affiliates and their employees, agents and contractors shall have full access to and the right (subject to the executed Confidentiality Agreement) to examine all of Seller's title records relating to the Property, including but not limited to, those listed on Exhibits "B" and "C" attached hereto. C. Notice of Significant Title Defect. On or before the last day of the Title Examination Period, Buyer shall give Seller written notice of the land and property interests included in the Property, if any, which have a Significant Title Defect. None of the following shall be deemed to constitute a Significant Title Defect for purposes of this Agreement (i) a minor deviation in the location of a Pipeline, relative to a defined Right-of-Way in an easement, (ii) a gap in a Right-of-Way or (iii) a minor encroachment onto a Right-of-Way. If any Significant Title Defect cannot be or is not cured by Seller prior to the Effective Time, Buyer may, at its election, in writing: (1) terminate this Agreement without further obligation or liability by giving written notice of termination to Seller at any time prior to Closing; (2) offer to acquire the Property, including the portion affected by the Significant Title Defect, subject to the terms of this Agreement, but at a reduced Purchase Price, which offer Seller may accept or reject in its sole discretion; or (3) acquire the Property, including the portion affected by the Significant Title Defect, without adjustment to the Purchase Price. D. The Property is subject to senior and subordinated mortgages granted in favor of Shell Pipeline Company LP. The mortgages are filed of record in each of the counties where the Property is located. At Closing, Seller will provide to Buyer fully executed Releases of Lien to be filed by Buyer in substantially the form attached hereto as Exhibit "N". Article 11 Seller's Responsibility for Claims Relating to the Property A. Seller's Environmental Responsibilities shall be as follows: (1) Ongoing Remedial Work. (a) Unless otherwise agreed, Seller shall retain full responsibility for all costs, including capital, operating and maintenance costs, incurred in connection with (i) any investigation and monitoring of Environmental Conditions or (ii) any clean-up, remedial, removal or restoration work of those Environmental Conditions, either of which is ongoing on the Closing Date and that is required by any Governmental Authority with applicable jurisdiction because of the presence, suspected presence, release or suspected release of a Hazardous Substance in the air, soil, surface water, or groundwater on or emanating from the Property (hereinafter the "Ongoing Remedial Work"). The Ongoing Remedial Work is listed on the Disclosure Schedule. Any equipment associated with the Ongoing Remedial Work will remain the property of Seller. The performance of Ongoing Remedial Work will be by the Seller, in the name of the Seller. The Seller will obtain all necessary licenses, manifests, permits and approvals to perform such work. All Ongoing Remedial Work and the disposal of all waste generated by the Ongoing Remedial Work will be performed in accordance with all applicable Laws. (b) Buyer grants to Seller, at no cost to Seller, ingress, egress, access to the Property and use of the lands (including land farming activities) and utilities, including, but not limited to, electricity and water, as needed by Seller to complete any of the Ongoing Remedial Work described in this Article 11A.(1).(a). Seller's responsibility for any Ongoing Remedial Work shall terminate upon Seller's receipt from the applicable Governmental Authority of one of the following: (i) concurrence in any form that remediation efforts are complete and the site may be closed; (ii) No Further Action Required Letter or a similar document issued by a Governmental Authority exercising jurisdiction over the Ongoing Remedial Work; (iii) concurrence with the results of Seller's risk based corrective action plan; or (iv) regulatory concurrence that active remediation may be discontinued subject only to periodic monitoring. Seller will conduct all communications concerning Seller's remediation activities with all Governmental Authorities having jurisdiction. Seller will provide Buyer with copies of all correspondence with the applicable Governmental Authorities concerning Seller's Ongoing Remedial Work, but Buyer shall not communicate with the Governmental Authorities concerning Seller's Ongoing Remedial Work. (c) Buyer shall notify Seller within seventy-two (72) hours of any release within 500 feet of any of Seller's Ongoing Remedial Work. If such a release occurs, Seller shall, at Seller's sole discretion and expense, have the right to be present during Buyer's release cleanup activities, take photographs, take notes or take soil samples. (d) Should Buyer have a reportable release that directly impacts or affects Seller's Ongoing Remedial Work at a site, then Seller will transfer to Buyer the net present value of the amount of money Seller's remediation consultants or personnel determine is reasonably required for the completion of such Ongoing Remedial Work at the site where Buyer's release occurred. Buyer shall thereupon assume full responsibility for the Ongoing Remedial Work at the specific site along with the remediation of Buyer's own release. (2) Post Closing Assessment. Buyer, and it Affiliates and transferees, are prohibited from conducting post Closing environmental assessments, except in those cases (i) where a reasonably prudent pipeline operator, not afforded the indemnities provided in this Agreement, would conduct such assessments in the ordinary course of business, (ii) where required or directed by a Governmental Authority having jurisdiction or (iii) due to any legal or contractual requirements related to the Property. Notwithstanding anything to the contrary herein, should Buyer, or its Affiliates or transferees, conduct a post Closing environmental assessment which is neither (i) of a type which a reasonably prudent pipeline operator, not afforded the indemnities provided in this Agreement, would conduct in the ordinary course of business or (ii) required or directed by a Governmental Authority having jurisdiction or (iii) due to any legal or contractual requirements related to the Property, then Buyer, or its Affiliates or transferees, shall indemnify, defend and hold harmless Seller Indemnitees from any and all Claims (including Claims for personal injury, death and/or property damage) arising out of or resulting from such post Closing environmental assessment. (3) Seller shall not have any obligation to Buyer regarding any environmental matter other than those obligations described in Article 11A.(1) above and is providing no environmental indemnity to Buyer under this Agreement. B. Seller is providing no general indemnity to Buyer under this Agreement. Article 12 Buyer's Responsibility for Claims Relating to the Property A. Buyer's Environmental Responsibility shall be as follows: (1) Future Remediation Sites. Regardless of when the release causing the Environmental Condition occurred, Buyer agrees to accept full responsibility for all costs, including capital, operating and maintenance costs, incurred in connection with (i) any investigation or monitoring of Environmental Conditions or (ii) any clean-up, remedial, removal or restoration work of those Environmental Conditions, if any, either of which may be necessary on or after the Effective Time and required by any Governmental Authority with applicable jurisdiction because of the presence, suspected presence, release or suspected release of Hazardous Substances in the air, soil, surface water, or groundwater on or emanating from the Property (hereinafter the "Future Remedial Work"); provided however, that as long as Seller's Environmental Indemnity of Buyer is in place, such indemnity shall apply to any Environmental Condition which would be included under that indemnity. The performance of any Future Remedial Work will be by the Buyer, in the name of Buyer. The Buyer will obtain all necessary licenses, manifests, permits and approvals to perform such work. All Future Remedial Work and the disposal of all waste generated by the Future Remedial Work will be in accordance with all applicable Laws. It is expressly understood that Buyer, under this Article, does not assume any responsibility for Ongoing Remedial Work as that work is set out in Article 11A.(1) above. (2) Monitoring of Wells. At such time as testing of Monitoring Wells is the only work left with regard to a site on which Ongoing Remedial Work was being done at the Effective Time, Buyer assumes the obligation to continue any required testing of any Monitoring Wells on the Property for Environmental Conditions. Buyer will promptly file any required reports and send a copy of same to Seller. In addition, Buyer assumes, as of the Effective Time all responsibility, including all costs and expenses, for the testing of and reporting related to any other Monitoring Wells associated with the Property and shown on the Monitoring Well List attached to the Disclosure Schedule. Buyer will conduct these monitoring activities until site closure is obtained as outlined in Article 11A.(1)(b). (3) ENVIRONMENTAL INDEMNITY. BUYER HEREBY AGREES TO INDEMNIFY, DEFEND AND HOLD SELLER AND ITS AFFILIATES AND THE DIRECTORS, OFFICERS, SHAREHOLDERS, PARTNERS, OWNERS, EMPLOYEES, TENANTS, CONTRACTORS, ATTORNEYS, AGENTS, SUCCESSORS AND ASSIGNS OF ANY OF THEM ("SELLER INDEMNITEES") HARMLESS FROM ANY CLAIMS (INCLUDING WITHOUT LIMITATION THIRD PARTY CLAIMS FOR PERSONAL INJURY OR DEATH, INCLUDING EXPOSURE, OR REAL OR PERSONAL PROPERTY DAMAGE), ACTIONS, ADMINISTRATIVE PROCEEDINGS (INCLUDING INFORMAL PROCEEDINGS), JUDGMENTS, DAMAGES, PENALTIES, FINES, COSTS, LIABILITIES (INCLUDING SUMS PAID IN SETTLEMENT OF CLAIMS), INTEREST OR LOSSES, CONSULTANT FEES, ATTORNEYS' FEES AND EXPERT FEES THAT ARISE DIRECTLY OR INDIRECTLY FROM OR AS A RESULT OF (i) THE EXISTENCE OF ENVIRONMENTAL CONDITIONS WHETHER FROM THE OPERATION OF THE PIPELINE OR EQUIPMENT PRIOR TO, ON OR AFTER THE EFFECTIVE TIME OR (ii) VIOLATION OF APPLICABLE ENVIRONMENTAL LAW IN CONNECTION WITH THE OPERATION OF THE PIPELINE OR EQUIPMENT PRIOR TO, ON OR AFTER THE EFFECTIVE TIME. THIS ARTICLE 12A.(3) SHALL SURVIVE IN PERPETUITY FROM AND AFTER THE EFFECTIVE TIME. B. PUNITIVE DAMAGES. THE FOREGOING INDEMNITIES BY BUYER UNDER THIS ARTICLE 12 SHALL NOT COVER OR INCLUDE ANY PUNITIVE OR EXEMPLARY DAMAGES. C. Environmental Insurance. Buyer shall provide an environmental insurance policy in favor of Seller and satisfactory to Seller at Closing. D. BUYER'S GENERAL INDEMNITY OF SELLER. TO THE FULLEST EXTENT PERMITTED BY LAW, BUT NO FURTHER, BUYER SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS SELLER INDEMNITEES FROM ANY AND ALL LOSSES, LIABILITIES, LIENS, ENCUMBRANCES, DAMAGES, JUDGMENTS, DEMANDS, SUITS, CLAIMS, ASSESSMENTS, CHARGES, FINES, PENALITES OR EXPENSES (INCLUDING ATTORNEYS' FEES AND OTHER COSTS OF LITIGATION), WHICH RESULT FROM INJURIES TO OR DEATH OF ANY PERSONS, OR DAMAGES TO PROPERTY OF ANY KIND OR CHARACTER WHICH OCCUR PRIOR TO, ON OR AFTER THE EFFECTIVE TIME AND WHICH ARISE OUT OF, IN CONNECTION WITH, OR RESULT FROM: (1) THE OWNERSHIP, POSSESSION, OPERATION, USE OR MAINTENANCE OF THE PROPERTY PRIOR TO, ON AND AFTER THE EFFECTIVE TIME; OR (2) THE MATERIAL BREACH BY BUYER OF ANY OF ITS OBLIGATIONS OR REPRESENTATIONS HEREUNDER. SUCH INDEMNIFICATION SHALL APPLY EVEN THOUGH THE INDEMNIFIED EVENT OR OCCURRENCE ARISES FROM OR IS CAUSED BY THE SOLE, CONCURRENT OR CONTRIBUTORY NEGLIGENCE, OR BOTH (WHETHER ACTIVE OR PASSIVE OR OF ANY KIND OR NATURE) OR FAULT OF SELLER, BUT SUCH INDEMNIFICATION SHALL NOT APPLY IF CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLER. THIS PARAGRAPH SHALL NOT APPLY TO ENVIRONMENTAL LIABILITIES AS SET OUT IN ARTICLE 12A.(3). THIS ARTICLE 12D. SHALL SURVIVE IN PERPETUITY FROM AND AFTER THE EFFECTIVE TIME. Article 13 Exclusive Remedy AS BETWEEN THE BUYER AND THE SELLER AFTER CLOSING, THE INDEMNIFICATION PROVISIONS SET FORTH IN THIS AGREEMENT AND THE SPECIAL WARRANTY OF TITLE SET FORTH IN THE SPECIAL WARRANTY DEED WILL BE THE SOLE AND EXCLUSIVE RIGHTS, OBLIGATIONS AND REMEDIES OF THE PARTIES WITH RESPECT TO THIS AGREEMENT, THE EVENTS GIVING RISE TO THIS AGREEMENT, AND THE TRANSACTIONS CONTEMPLATED HEREBY. IF THE CLOSING OCCURS, NEITHER PARTY NOR ANY OF ITS RESPECTIVE SUCCESSORS OR ASSIGNS SHALL HAVE ANY RIGHTS AGAINST THE OTHER PARTY OR ITS AFFILIATES AFTER THE CLOSING DATE OTHER THAN AS IS EXPRESSLY PROVIDED IN THIS AGREEMENT OR WITH RESPECT TO THE SPECIAL WARRANTY OF TITLE SET FORTH IN THE SPECIAL WARRANTY DEED. Article 14 Incidental Contamination and NORM Buyer acknowledges that the Property may contain inter alia asbestos in piping coating, undisplaced petroleum hydrocarbon products in pipelines, coats of lead-based paints, PCB's in transformers or rectifiers, mercury in electrical switches, and Naturally Occurring Radioactive Material ("NORM") in various potential forms. Buyer also expressly understands that special procedures may be required for the remediation, removal, transportation and disposal of these affixed or attached substances from the inside or outside of the piping, Equipment or the Property. Notwithstanding any contrary provision or definition contained herein, in connection with these substances affixed to the inside or outside of the piping, Equipment or the Property, Buyer expressly assumes all liability for or in connection with the future abandonment and removal of the Pipelines, tanks, Equipment and other personal property included in the Property and the assessment, remediation, removal, transportation and disposal of any such Pipelines, Equipment and personal property and associated activities in accordance with all relevant rules, regulation and requirements of Governmental Authorities. Article 15 Cooperation The Parties shall execute and deliver such additional documents and shall use all Reasonable Efforts to take or cause to be taken all such actions as may be necessary or advisable to close and make effective this transaction. It shall be Buyer's responsibility to obtain all governmental and Third Person consents and approvals necessary for the issuance, reissuance or transfer of environmental and land use permits, applications, Rights-of-Way, authorities to construct, Permits to operate, authorizations and licenses used or held by Seller or otherwise required in connection with the ownership, operation, use and maintenance of the Property. Upon the request of Buyer, after Closing, Seller shall assist, with no out of pocket expense to Seller, in obtaining consents from Third Persons which are necessary or appropriate to transfer any portion of the Property. After Closing, each Party, at the request of the other Party, and without additional consideration, shall execute and deliver, from time to time, such additional documents of conveyance and transfer as may be necessary to accomplish the orderly transfer of the Property to Buyer in the manner contemplated in this Agreement. Article 16 Survival of Provisions All representations and warranties, covenants of the Parties and the indemnification obligations of the Parties set forth in this Agreement shall survive in accordance with the provisions of this Agreement. Article 17 Costs and Expenses Each Party shall bear and pay its own costs and expenses, including but not limited to attorneys' fees, incurred in connection with this transaction. Article 18 Risk of Loss The risk of damage, destruction, or other casualty loss to or of the Property shall remain with Seller from and after the execution of this Agreement until the Effective Time, at which time Seller shall place Buyer in possession of the Property; and from and after the Effective Time, all risks of damage, destruction, or other casualty loss to or of the Property shall be borne solely by Buyer. Article 19 Joint Venture, Partnership and Agency Nothing contained in this Agreement shall be deemed to create a joint venture, partnership, Tax partnership or agency relationship between the Parties. Article 20 Books and Records A. Delivery of Books and Records. Not later than ninety (90) calendar days after Closing, Seller shall deliver to Buyer the Books and Records. Buyer understands that there may be certain voluminous documents included within the Books and Records, especially data from Seller's control center. Seller will retain the control center data, on behalf of Buyer, for the applicable Department of Transportation ("DOT") required record retention period and will deliver it to Buyer in a timely manner when Buyer requests the data for a DOT audit. Buyer will give Seller reasonable notice of its need for the data. If this transaction is not closed as to any portion of the Property, all of the Books and Records obtained from Seller in connection with the exercise of Buyer's pre- acquisition review, and related solely to that portion of the Property not transferred as contemplated herein, shall be returned to Seller within five (5) calendar days after Closing. B. Retention of Books and Records. Notwithstanding the inclusion of the Books and Records in the Property under Article 1, Seller shall have the right to copy and retain any copies of any of the Books and Records relating to the Property for which it has, or may have, any business, technical or legal need. To the extent that those Books and Records made available to Buyer before or after the Closing contain proprietary business or technical information of Seller or its Affiliates, Buyer agrees to hold such Books and Records in confidence and limit their use to the Property. Buyer shall not destroy or otherwise dispose of any of the Books and Records acquired hereunder for a period of three (3) years following the Closing (except as to Tax records for which the period shall be the applicable statute of limitations) except upon thirty (30) days prior written notice to Seller. During such periods, Buyer shall make such Books and Records, available to Seller or its authorized representatives for any business, legal or technical need in a manner which does not unreasonably interfere with Buyer's business operations. Article 21 Publicity Seller and Buyer shall, and each shall use its Reasonable Efforts to cause its Affiliates to, cooperate in the development and distribution of all news releases and other public disclosures, irrespective of the form of communication, relating to the proposed transaction described in this Agreement, and to ensure that no such releases or disclosures are made without prior notice to, and the consent of, the other Party; provided, however, no news release or other disclosure whatsoever may disclose the terms of this Agreement unless both Parties agree to the form and content of such disclosure, including electronic communications, each being under no obligation to agree and having the right to withhold agreement for any reason; provided, however, that either Party may make all disclosures which, in the written opinion of counsel, are required under applicable Law, including, but not limited to, regulations of the Securities and Exchange Commission, with the Party making the disclosure giving the other Party as much advance notice thereof as is feasible. Article 22 Recording and Filing Except as may be required by Law, this Agreement shall not be recorded or filed by either Party, or their successors or assigns, in or with any Governmental Authority without the prior written consent of the other Party. Article 23 Confidentiality Seller and Buyer (and their respective Affiliates) each acknowledge that this Agreement and the transactions contemplated hereby are subject to the Confidentiality Agreement. Buyer and Seller do not intend for any obligations of confidentiality contained herein to limit disclosure of the transaction in any way that would cause it to be treated as a "confidential transaction" under Treasury Regulation 1.6011-4(b)(3). Article 24 Notices All notices and consents required or authorized hereunder shall be in writing and shall be deemed to have been duly given by one Party if delivered personally, faxed with receipt acknowledged, mailed by registered or certified mail, delivered by a recognized commercial courier or otherwise actually received by the other Party at the address set forth below, or such other address as one Party shall have designated by ten (10) calendar days prior written notice to the other Party: Buyer's Address: Seller's Address: Giant Pipeline Company Shell Pipeline Company LP 23733 N. Scottsdale Road 777 Walker Street Scottsdale, Arizona 85255 Houston, Texas 77002 Attn: Vice President, Special Projects Attn: Portfolio Manager Telephone: (480) 585-8829 Telephone: (713) 241-2122 Fax: (480) 585-8892 Fax: (713) 423-0471 Article 25 Time of Performance Time is of the essence in the performance of all covenants and obligations under this Agreement. Article 26 Entire Agreement This Agreement constitutes the entire agreement between the Parties with respect to this transaction and supersedes all prior negotiations, statements, representations, discussions, correspondence, offers, agreements, and understandings relating to this transaction. This Agreement may be modified, amended or supplemented only upon the prior written agreement of the Parties. Article 27 Assignment Buyer may not sell, assign, transfer, convey, option, mortgage, pledge or hypothecate its rights and obligations hereunder to any Third Person without the prior written consent of Seller, which consent shall not be unreasonably withheld. Upon any authorized sale, assignment, transfer, conveyance, option, mortgage, pledge or hypothecation hereunder, all of the terms, covenants and conditions of this Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of Buyer, to the extent assignment is allowed under this Agreement, but Buyer shall remain jointly liable for the performance of the Buyer's obligations hereunder. Article 28 Applicable Law THIS AGREEMENT, OTHER DOCUMENTS EXECUTED AND DELIVERED PURSUANT HERETO, AND THE LEGAL RELATIONS BETWEEN THE PARTIES WITH RESPECT TO THIS AGREEMENT, SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO RULES CONCERNING CONFLICTS OF LAWS. THIS AGREEMENT SHALL BE PERFORMED IN HARRIS COUNTY, TEXAS. Article 29 Headings The headings used in this Agreement are inserted for convenience only and shall be disregarded in construing it. Article 30 Dispute Resolution Any dispute, controversy or claim ("Dispute"), whether based on contract, tort, statute or other legal or equitable theory (including, but not limited to, any Dispute concerning any question of validity or effect of this Agreement, including this Article) arising out of or related to this Agreement, (including any amendments or extensions), the breach or termination hereof or thereof, the subject matter of this Agreement, the Property, and the relationship and dealings of the Parties with respect to these matters, shall be settled by arbitration in accordance with the then current CPR Institute for Dispute Resolution Rules for Non- Administered Arbitration of Business Disputes and this provision The arbitration shall be governed by the United States Arbitration Act 9 U.S.C. 1-16 to the exclusion of any provision of state law inconsistent therewith or which would produce a different result and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction. Buyer further covenants not to sue Seller or its Affiliates and agrees that this Article 30 Dispute Resolution shall be Buyer's sole and exclusive remedy for any and all Disputes or Claims related in any manner to the transaction contemplated under this Agreement or the Property, including, but not limited to, claims of fraud in the inducement of this Agreement. Article 31 No Third Person Beneficiaries Except to the extent a Third Person is expressly given rights herein, any agreement contained, expressed or implied in this Agreement shall be only for the benefit of the Parties hereto and their respective legal representatives, successors and permitted assigns, and such agreements shall not inure to the benefit of the obligees of any indebtedness of either Party hereto, it being the intention of the Parties hereto that no Person shall be deemed a Third Person beneficiary of this Agreement, except to the extent a Third Person is expressly given rights herein. Notwithstanding anything herein to the contrary, nothing herein shall be deemed to create any rights with respect to any employee of either Party or any employee of any Affiliate of a Party. Article 32 Counterparts and Facsimiles This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. A facsimile transmission of a signed copy of this Agreement shall be deemed an original and shall have the same valid and binding affect thereof. Article 33 Covenants Through the Closing Date, Seller covenants to continue doing the following activities in the same manner as it currently conducts the activities: (1) One-Call Service for the Pipeline. (2) Aerial surveillance of the Pipeline. (3) Cathodic protection for the Pipeline. (4) Maintain all Permits and Rights-of-Way applicable to the Property. Article 34 Exhibits The Exhibits, Annex, and Schedule listed below are attached to this Agreement and by this reference are fully incorporated herein: Annex A Definitions Exhibit "A" and "A-1" Maps and System Descriptions Exhibit "B" Real Property Exhibit "C" Rights-of-Way and Permits Exhibit "D" Assigned Contracts Exhibit "E" Equipment Exhibit "F" Closing Statement Exhibit "G" Assignment [Partial Assignment] Exhibit "H" Special Warranty Deed Exhibit "I" Bill of Sale Exhibit "J" Assignment of Contracts Exhibit "K" Performance Guarantee Exhibit "L" Purchase Price Allocation Exhibit "M" Certification of Non-Foreign Status Exhibit "N" Release of Lien Disclosure Schedule IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. TEXAS-NEW MEXICO PIPE LINE COMPANY By: /s/ ROBERT M. HEISLER ------------------------------ Name: Robert M. Heisler ------------------------------ Title: President ------------------------------ GIANT PIPELINE COMPANY By: /s/ LUKE K. WETHERS ------------------------------ Name: Luke K. Wethers ------------------------------ Title: VP, Special Projects ------------------------------ ANNEX A Attached to and Made Part of Purchase and Sale Agreement Dated June 21, 2005 between Texas-New Mexico Pipe Line Company and Giant Pipeline Company Definitions As used herein and in the Agreement, the following terms shall have the meanings defined below: Accounting Records shall include detail of property accounting records, including records required to comply with Federal Energy Regulatory Commission requirements, and up to two (2) years of shipper and customer revenue invoices, subject to any objection from shippers or customers. For a legal entity, the accounting records shall include current month and prior year-end general ledger detail (property records, store stock inventory, account receivable, trial balances,) account reconciliations, two (2) years of bank statements, annual financial statements, property tax records, shipper and customer invoices, subject to any objections from shippers or customers, and three (3) years of income and excise tax returns. Affiliate shall mean, when used with respect to a specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with the specified Person as of the time or for the time periods during which such determination is made. For purposes of this definition "control", when used with respect to any specified Person, means the power to direct the management and policies of the Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have the meanings correlative to the foregoing. Agreement shall mean this Purchase and Sale Agreement, including this Annex, the Exhibits and the Disclosure Schedule attached hereto, as amended, modified and supplemented from time to time. Assigned Contracts shall mean those contracts that are a part of the Property and are described on Exhibit "D", as the same have been amended, modified and supplemented prior to the Closing. Books and Records shall mean all non-privileged original files, records and data (excluding any legal opinions) relating to the Property, including, but not limited to, lease, land, and title records (including abstracts of title, title opinions and title curative documents); contracts; communications to and from any Governmental Authorities; Tax and Accounting Records; permitting files; health, safety and environmental records; and engineering and operating records relating to the Pipeline. In the event that Seller claims that a document is privileged, Seller shall notify Buyer of that fact in writing prior to Closing. Unless related to obligations assumed by Buyer and Buyer is required by Law to have original documentation, files relating to litigation concerning the Property, shall not be considered to be Books and Records. In addition, Pipeline Manuals used in the operation and maintenance of the Pipeline and the process used by Seller for integrity assessments also shall not be considered to be Books and Records. Casualty Loss shall have the meaning set forth in Article 3A.(6). Chemical Substance shall mean any chemical substance, including, but not limited to, any sort of pollutants, contaminants, chemicals, raw materials, intermediates, products, industrial or solid substances, materials, wastes, or petroleum products, including crude oil or any component or refraction hereof. Claim shall mean any demand, claim, notice of noncompliance or violation, loss, cost (including investigatory costs and attorneys' fees), damage, expense, action, suit, Proceeding, judgment, or liability of any nature whatsoever. Closing shall mean the Closing of the purchase and sale of the Property as contemplated by this Agreement. Closing Date shall mean the date set for the Closing in accordance with Article 3. Closing Statement shall have the meaning set forth in Article 2. Code shall mean the Internal Revenue Code of 1986, as amended. Confidentiality Agreement shall mean the agreement executed by Seller and Buyer on October 31, 2003. Conveyance Documents shall mean all deeds, bills of sale, assignments and other good and sufficient instruments of transfer, conveyance and assignment, in such form as attached to this Agreement as Exhibits "G", "H", "I", and "J. Disclosure Schedule shall mean the disclosure schedule of even date with this Agreement prepared, and delivered to Buyer, by Seller, as the same is updated between the date of this Agreement and Closing. Dispute shall have the meaning set forth in Article 30. DOT shall have the meaning set forth in Article 20. Earnest Money shall have the meaning set forth in Article 2B. Effective Time shall mean 7:00 a.m. (local time), on the Closing Date. Environmental Condition shall mean any Hazardous Substance or Chemical Substance which is on or affects the Property or which is released, emitted, or discharged from the Property. Environmental Law shall include, but shall not be limited to, CERCLA, RCRA, the Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq., the Clean Air Act, 42 U.S.C., 8401, et seq., and the regulations thereunder, and any other local, state, and/or federal Laws or regulations, whether currently in effect, or promulgated or amended in the future, that govern: - - The existence, cleanup and/or remedy of contamination on the Property; - - The protection of the environment from spilled, deposited or otherwise emplaced contamination; - - The control of hazardous wastes; or - - The use, generation, transport, treatment, disposal, removal or recovery of Hazardous Substances or Chemical Substances, including building materials. Estimate of Repair Costs equal $1,000,000.00 and includes the cost or projected costs to be incurred by Buyer to make repairs to the Pipeline arising from conditions identified on the Disclosure Schedule or discovered as a result of the hydrotest. Equipment shall have the meaning set forth in Article 1A.(5). Governmental Authority shall mean any entity of or pertaining to government, including any federal, state, tribal, local, foreign, other governmental or administrative authority, agency, court, tribunal, arbitrator, commission, board or bureau. Hazardous Substance shall mean any substance which at any time shall be listed as "hazardous" or "toxic" in the regulations implementing the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") 43 U.S.C. 6901 et seq., the Resource Conservation and Recovery Act ("RCRA) 42 U.S.C.A. 6901 et. seq., the Toxic Substances Control Act (TSCA) 15 U.S.C.A. 2601 et. seq., or the Emergency Planning and Community Right to Know Act ("EPCRA") 42 U.S.C.A. 11001 et seq. or which has been or shall be determined at any time by any agency or court to be a hazardous or toxic substance and/or a threat to human health and/or the environment and regulated under applicable Law. The term "Hazardous Substance" shall also include, for purposes of this Agreement, without limitation, the products of any manufacturing or other activities on the subject Property. Law shall mean all applicable local, state, tribal, federal and foreign laws and rules, regulations, codes, and ordinances promulgated thereunder, as well as case law, judgments, orders, consent orders, or decrees. Lien shall mean any lien, mortgage, pledge, security interest or options other than Permitted Encumbrances. Losses shall mean any and all damages, losses, liabilities, payments, obligations, penalties, assessments, costs, disbursements or expenses (including interest, awards, judgments, settlements, fines, costs of redemption, diminutions in value, fees, disbursements and expenses of attorneys, accountants and other professional advisors and of expert witnesses and costs of investigation and preparation of any kind or nature whatsoever) and court costs. Material Adverse Environmental Condition shall mean a single Environmental Condition which is not disclosed on the Disclosure Schedule dated as of the execution date of this Agreement and requiring the expenditure of in excess of ten percent (10%) of the Purchase Price to cure or remedy. Material Defect shall mean a single defect in the Property (other than a title defect) which: (1) will significantly impair the operating functions, safety, conversion, or use of the Property; (2) would cost in excess of ten percent (10%) of the Purchase Price to cure or remedy and (3) is not disclosed on the Disclosure Schedule dated as of the execution date of this Agreement. Monitoring Well shall mean a properly installed and completed well which allows for the collection of groundwater information including, but not limited to, both physical and chemical characteristics. Ongoing Remedial Work shall have the meaning set forth in Article 11A.(1)(a). Party and Parties shall have the meaning set forth in the preamble. Permit shall mean any license, permit, concession, franchise, authority, consent or approval granted by any Governmental Authority. Permitted Encumbrances shall mean (a) the Liens described in Section 7K of the Disclosure Schedule, and (b) Liens for current Taxes which are not yet due and payable or which Seller is contesting in good faith. Person shall mean any individual, corporation, partnership, joint venture, association, joint stock company, limited partnership, trust, unincorporated organization or Governmental Authority. Pipeline Manuals shall mean the manuals developed by Seller, or its predecessors, and used in the operation and maintenance of its pipeline systems. Pipeline shall have the meaning set forth in Article 1A.l. Proceeding shall mean any action, suit, claim, investigation, review or other proceeding, at law or in equity, before any Governmental Authority or any arbitrator, board of arbitration or similar entity. Property shall have the meaning set forth in Article 1A. of the Agreement. Purchase Price shall have the meaning set forth in Article 2. Real Property shall have the meaning set forth in Article 1A.(2). Reasonable Efforts shall mean efforts in accordance with reasonable commercial practice and without the incurrence of unreasonable expense. Review Period shall have the meaning set forth in Article 9A. Right-of-Way shall mean any right-of-way, easement, license or prescriptive right that is listed on Exhibit "C". Seller Indemnitees shall have the meaning set forth in Article 12A.(3). Significant Title Defect as used in this Agreement, includes, but is not limited to, any single reservation, exception, limitation, restriction, lien, encumbrance, or other defect which is not disclosed on the Disclosure Schedule and which results in or could result in Buyer having to expend in excess of ten percent (10%) of the Purchase Price to cure or remedy. Neither (i) a minor deviation in the location of a Pipeline, relative to a defined Right-of-Way in an easement, (ii) a gap in a Right- of-Way nor (iii) a minor encroachment onto a Right-of-Way shall be deemed to constitute a Significant Title Defect for purposes of this Agreement. Tax shall mean, as relating to any of the Property, any federal, state, tribal, or local income tax, ad valorem tax, excise tax, sales tax, use tax, franchise tax, real or personal property tax, transfer tax, gross receipts tax, or other tax, assessment, duty, fee, levy or other governmental charge, together with and including, without limitation, any and all interest, fines, penalties, assessments and additions to tax resulting from, relating to, or incurred in connection with any such tax or any contest or dispute thereof. Third Person shall mean any Person other than Seller or Buyer or their Affiliates. Title Examination Period shall have the meaning set forth in Article 10B. Total Recommissioning Costs includes the cost or projected costs to be incurred by Buyer for all work necessary to place the Pipeline in crude oil service for the transportation of crude oil between Jal and Bisti, New Mexico. Other Terms. Other terms may be defined elsewhere in the text of the Agreement and shall have the meaning indicated throughout the Agreement. Other Definitional Provisions 1. The words "hereof", "herein", and "hereunder" and words of similar import, when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. 2. The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. 3. Whenever a statement is qualified by the term "knowledge", or similar term or phrase, it is intended to indicate actual knowledge, or the possession of information, data or documents that would give actual knowledge, on the part of a Person or its officers, directors or employees with direct responsibility for the matter. 4. Whenever the Parties have agreed that any approval or consent shall not be "unreasonably withheld", such phrase shall also include the Parties' agreement that the approval or consent shall not be unreasonably delayed or conditioned. EX-31 6 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: August 5, 2005. By: /s/ FRED L. HOLLIGER ------------------------------- Name: Fred L. Holliger Title: Chief Executive Officer EX-31 7 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: August 5, 2005. By: /s/ MARK B. COX ------------------------------- Name: Mark B. Cox Title: Chief Financial Officer EX-32 8 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 June 30, 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: August 5, 2005 EX-32 9 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 June 30, 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: August 5, 2005 -----END PRIVACY-ENHANCED MESSAGE-----