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EXCEL - IDEA: XBRL DOCUMENT - Western Refining, Inc. | Financial_Report.xls |
EX-10.2 - EX-10.2 - Western Refining, Inc. | d84961exv10w2.htm |
EX-31.1 - EX-31.1 - Western Refining, Inc. | d84961exv31w1.htm |
EX-31.2 - EX-31.2 - Western Refining, Inc. | d84961exv31w2.htm |
EX-32.1 - EX-32.1 - Western Refining, Inc. | d84961exv32w1.htm |
EX-32.2 - EX-32.2 - Western Refining, Inc. | d84961exv32w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
o | 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: 001-32721
WESTERN REFINING, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-3472415 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
123 W. Mills Ave., Suite 200 | 79901 | |
El Paso, Texas | (Zip Code) | |
(Address of principal executive offices) |
Registrants telephone number, including area code: (915) 534-1400
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of October 28, 2011, there were 90,814,773 shares outstanding, par value $0.01, of the
registrants common stock.
WESTERN REFINING, INC. AND SUBSIDIARIES
INDEX
INDEX
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2 | ||||||||
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4 | ||||||||
5 | ||||||||
28 | ||||||||
51 | ||||||||
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52 | ||||||||
52 | ||||||||
53 | ||||||||
54 | ||||||||
Exhibit 31.1 |
||||||||
Exhibit 31.2 |
||||||||
Exhibit 32.1 |
||||||||
Exhibit 32.2 |
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EX-10.2 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Table of Contents
Forward-Looking Statements
As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, certain statements included throughout this Quarterly Report on Form 10-Q, and in particular
under the sections entitled Part I Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations relating to matters that are not historical fact are
forward-looking statements that represent managements beliefs and assumptions based on currently
available information. These forward-looking statements relate to matters such as our industry,
our plans to recommence refining operations at our Yorktown refinery in 2013, our
expectations concerning crack spreads, diesel demand, the discount of WTI crude oil to Brent crude
oil and margins, price differentials between light and heavy crude oil,
deferred taxes, estimated capital expenditures, liquidity and capital
resources, our intention to prepay certain of our long-term debt, our working
capital requirements, our ability to improve our capital structure through asset sales and/or
through certain financings, and other financial and operating information. Forward-looking
statements also include those regarding the timing of completion of certain operational
improvements we are making at our refineries, timing of future
maintenance turnarounds, the Companys ongoing asset impairment
analysis, future
contributions related to pension and postretirement obligations, our
ability to manage our margins on future refinery production and our
inventory price exposure through commodity hedging instruments, the impact on our business of
existing and future state and federal regulatory requirements, environmental loss contingency
accruals, projected remediation costs or requirements, and the expected outcomes of legal
proceedings in which we are involved. We have used the words anticipate, assume, believe,
budget, continue, could, estimate, expect, intend, may, plan, potential,
predict, project, will, future, and similar terms and phrases to identify forward-looking
statements in this report.
Forward-looking statements reflect our current expectations regarding future events, results,
or outcomes. These expectations may or may not be realized. Some of these expectations may be based
upon assumptions or judgments that prove to be incorrect. In addition, our business and operations
involve numerous risks and uncertainties, many of which are beyond our control, which could result
in our expectations not being realized or otherwise materially affect our financial condition,
results of operations, and cash flows.
Actual events, results, and outcomes may differ materially from our expectations due to a
variety of factors. Although it is not possible to identify all of these factors, they include,
among others, the following:
| changes in the underlying demand for our refined products; | ||
| availability, costs, and price volatility of crude oil, other refinery feedstocks, and refined products; | ||
| instability and volatility in the financial markets, including as a result of U.S. government actions or inactions to deal with the U.S. government debt and deficit as well as potential disruptions caused by economic uncertanties in Europe; | ||
| a potential economic resession in the United States and/or abroad; | ||
| availability of renewable fuels for blending and Renewal Identification Numbers, or RIN, to meet Renewable Fuel Standards, or RFS, obligations; | ||
| changes in crack spreads; | ||
| changes in the spread between West Texas Intermediate, or WTI, crude oil and West Texas Sour, or WTS, crude oil, also known as the sweet/sour spread; | ||
| changes in the spread between WTI crude oil and Maya crude oil, also known as the light/heavy spread; | ||
| changes in the spread between WTI crude oil and Dated Brent crude oil; | ||
| adverse changes in the credit ratings assigned to our debt instruments; | ||
| construction of new, or expansion of existing product pipelines in the areas that we serve; | ||
| actions of customers and competitors; | ||
| changes in fuel and utility costs incurred by our refineries; | ||
| the effect of weather-related problems on our operations; | ||
| disruptions due to equipment interruption, pipeline disruptions, or failure at our or third-party facilities; | ||
| execution of planned capital projects, cost overruns relating to those projects, and failure to realize the expected benefits from those projects; | ||
| effects of, and costs relating to compliance with current and future local, state, and federal environmental, economic, climate change, safety, tax and other laws, policies and regulations, and enforcement initiatives; | ||
| rulings, judgments, or settlements in litigation, or other legal or regulatory matters, including unexpected environmental remediation costs in excess of any reserves or insurance coverage; |
i
Table of Contents
| the price, availability, and acceptance of alternative fuels and alternative fuel vehicles; | ||
| operating hazards, natural disasters, casualty losses, acts of terrorism, and other matters beyond our control; and | ||
| other factors discussed in more detail under Part I Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010, or 2010 10-K, which are incorporated herein by this reference. |
Any one of these factors or a combination of these factors could materially affect our results
of operations and could influence whether any forward-looking statements ultimately prove to be
accurate. You are urged to consider these factors carefully in evaluating any forward-looking
statements and are cautioned not to place undue reliance on these forward-looking statements.
Although we believe that our plans, intentions, and expectations reflected in or
suggested by the forward-looking statements we make in this report are reasonable, we can provide
no assurance that such plans, intentions, or expectations will be achieved. These statements are
based on assumptions made by us based on our experience and perception of historical trends,
current conditions, expected future developments, and other factors that we believe are appropriate
in the circumstances. Such statements are subject to a number of risks and uncertainties, many of
which are beyond our control. The forward-looking statements included herein are made only as of
the date of this report, and we are not required to update any information to reflect events or
circumstances that may occur after the date of this report, except as required by applicable law.
ii
Table of Contents
Part I
Financial Information
Financial Information
Item 1. Financial Statements |
WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Unaudited)
(In thousands, except share data)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 402,635 | $ | 59,912 | ||||
Accounts receivable, trade, net of a reserve
for doubtful accounts of $1,986 and $3,896,
respectively |
279,394 | 269,596 | ||||||
Inventories |
390,824 | 365,673 | ||||||
Prepaid expenses |
109,247 | 73,391 | ||||||
Other current assets |
97,294 | 57,131 | ||||||
Total current assets |
1,279,394 | 825,703 | ||||||
Property, plant, and equipment, net |
1,625,843 | 1,688,154 | ||||||
Intangible assets, net |
58,291 | 59,945 | ||||||
Other assets, net |
57,862 | 54,344 | ||||||
Total assets |
$ | 3,021,390 | $ | 2,628,146 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 329,929 | $ | 294,662 | ||||
Accrued liabilities |
257,487 | 136,362 | ||||||
Deferred income tax liability, net |
15,135 | 58,929 | ||||||
Current portion of long-term debt |
3,647 | 63,000 | ||||||
Total current liabilities |
606,198 | 552,953 | ||||||
Long-term liabilities: |
||||||||
Long-term debt, less current portion |
1,058,715 | 1,006,531 | ||||||
Deferred income tax liability, net |
444,366 | 361,292 | ||||||
Other liabilities |
29,141 | 31,777 | ||||||
Total long-term liabilities |
1,532,222 | 1,399,600 | ||||||
Commitments and contingencies (Note 18) |
||||||||
Stockholders equity: |
||||||||
Common stock, par value $0.01, 240,000,000
shares authorized; 89,982,417 and 89,025,010
shares issued, respectively |
900 | 890 | ||||||
Preferred stock, par value $0.01, 10,000,000
shares authorized; no shares issued or
outstanding |
| | ||||||
Additional paid-in capital |
597,591 | 588,215 | ||||||
Retained earnings |
307,095 | 109,871 | ||||||
Accumulated other comprehensive loss, net of tax |
(1,173 | ) | (1,940 | ) | ||||
Treasury stock, 698,006 shares at cost |
(21,443 | ) | (21,443 | ) | ||||
Total stockholders equity |
882,970 | 675,593 | ||||||
Total liabilities and stockholders equity |
$ | 3,021,390 | $ | 2,628,146 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
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WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
(In thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 2,397,139 | $ | 2,038,296 | $ | 6,794,611 | $ | 6,099,028 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of products sold (exclusive of
depreciation and amortization) |
2,053,409 | 1,807,411 | 5,854,320 | 5,479,813 | ||||||||||||
Direct operating expenses (exclusive of
depreciation and amortization) |
109,159 | 116,982 | 337,571 | 337,930 | ||||||||||||
Selling, general, and administrative expenses |
27,153 | 23,733 | 72,357 | 61,185 | ||||||||||||
Impairment losses |
| 3,963 | | 3,963 | ||||||||||||
Maintenance turnaround expense |
632 | | 1,336 | 23,286 | ||||||||||||
Depreciation and amortization |
35,581 | 35,253 | 105,301 | 104,294 | ||||||||||||
Total operating costs and expenses |
2,225,934 | 1,987,342 | 6,370,885 | 6,010,471 | ||||||||||||
Operating income |
171,205 | 50,954 | 423,726 | 88,557 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
114 | 151 | 345 | 317 | ||||||||||||
Interest expense and other financing costs |
(33,195 | ) | (37,099 | ) | (101,191 | ) | (111,168 | ) | ||||||||
Amortization of loan fees |
(2,295 | ) | (2,453 | ) | (6,869 | ) | (7,287 | ) | ||||||||
Loss on extinguishment of debt |
| | (4,641 | ) | | |||||||||||
Other, net |
(5,206 | ) | 414 | (4,038 | ) | 4,212 | ||||||||||
Income (loss) before income taxes |
130,623 | 11,967 | 307,332 | (25,369 | ) | |||||||||||
Provision for income taxes |
(45,695 | ) | (5,108 | ) | (110,108 | ) | 15,892 | |||||||||
Net income (loss) |
$ | 84,928 | $ | 6,859 | $ | 197,224 | $ | (9,477 | ) | |||||||
Net earnings (loss) per share: |
||||||||||||||||
Basic |
$ | 0.94 | $ | 0.08 | $ | 2.17 | $ | (0.11 | ) | |||||||
Diluted |
$ | 0.81 | $ | 0.08 | $ | 1.90 | $ | (0.11 | ) | |||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
89,176 | 88,280 | 88,878 | 88,170 | ||||||||||||
Diluted |
109,935 | 88,280 | 109,733 | 88,170 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
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WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 197,224 | $ | (9,477 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
105,301 | 104,294 | ||||||
Amortization of loan fees |
6,869 | 7,287 | ||||||
Amortization of original issue discount |
13,547 | 11,694 | ||||||
Provision for doubtful accounts |
182 | 1,689 | ||||||
Stock-based compensation |
6,168 | 4,273 | ||||||
Excess tax benefit from stock-based compensation |
3,218 | | ||||||
Loss on extinguishment of debt |
4,641 | | ||||||
Impairment losses |
| 3,963 | ||||||
Deferred income taxes |
39,280 | 6,659 | ||||||
Gain on disposal of assets |
(3,803 | ) | (418 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(9,980 | ) | 66,946 | |||||
Inventories |
(25,151 | ) | 87,374 | |||||
Prepaid expenses |
(35,856 | ) | (20,045 | ) | ||||
Other assets |
(44,108 | ) | (29,362 | ) | ||||
Accounts payable |
35,267 | (138,962 | ) | |||||
Accrued liabilities |
113,250 | 18,230 | ||||||
Other long-term liabilities |
(5,498 | ) | (20,664 | ) | ||||
Net cash provided by operating activities |
400,551 | 93,481 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(44,655 | ) | (56,741 | ) | ||||
Proceeds from the sale of assets |
11,610 | 642 | ||||||
Net cash used in investing activities |
(33,045 | ) | (56,099 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on long-term debt and capital lease obligations |
(26,685 | ) | (9,750 | ) | ||||
Revolving credit facility, net |
| (25,000 | ) | |||||
Proceeds from financing arrangement |
12,322 | | ||||||
Deferred financing costs |
(7,202 | ) | | |||||
Excess tax benefit from stock-based compensation |
(3,218 | ) | | |||||
Net cash used in financing activities |
(24,783 | ) | (34,750 | ) | ||||
Net increase in cash and cash equivalents |
342,723 | 2,632 | ||||||
Cash and cash equivalents at beginning of period |
59,912 | 74,890 | ||||||
Cash and cash equivalents at end of period |
$ | 402,635 | $ | 77,522 | ||||
Supplemental disclosures of cash flow information for: |
||||||||
Income taxes paid (refunded) |
$ | 40,803 | $ | (50,731 | ) | |||
Interest paid |
81,627 | 89,859 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Unaudited)
(In thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 84,928 | $ | 6,859 | $ | 197,224 | $ | (9,477 | ) | |||||||
Other comprehensive income (loss) items: |
||||||||||||||||
Defined benefit plans: |
||||||||||||||||
Reclassification of (gain) loss to income |
22 | (12 | ) | 64 | (7 | ) | ||||||||||
Recognition of pension plan settlements |
230 | | 1,290 | | ||||||||||||
Pension plan termination adjustment |
| | | 617 | ||||||||||||
Actuarial loss |
| (3,684 | ) | | (3,684 | ) | ||||||||||
Other comprehensive income (loss) before tax |
252 | (3,696 | ) | 1,354 | (3,074 | ) | ||||||||||
Income tax |
(111 | ) | 1,369 | (587 | ) | 1,170 | ||||||||||
Other comprehensive income (loss), net of tax |
141 | (2,327 | ) | 767 | (1,904 | ) | ||||||||||
Comprehensive income (loss) |
$ | 85,069 | $ | 4,532 | $ | 197,991 | $ | (11,381 | ) | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
The Company or Western may be used to refer to Western Refining, Inc. and, unless the
context otherwise requires, its subsidiaries. Any references to the Company as of a date prior to
September 16, 2005 (the date of Western Refining, Inc.s formation) are to Western Refining
Company, L.P. (Western Refining LP). On May 31, 2007, Giant Industries, Inc. (Giant) became a
wholly-owned subsidiary of the Company. Any references to the Company prior to this date exclude
the operations of Giant.
The Company is an independent crude oil refiner and marketer of refined products and also
operates service stations and convenience stores. Of the four refineries the Company owns, it
currently operates two: one in El Paso, Texas and one near Gallup in the Four Corners region of
Northern New Mexico. The Company indefinitely idled its refining facility near Bloomfield, New
Mexico during the latter part of 2009 and temporarily suspended the refining operations of its
Yorktown, Virginia facility in the latter part of 2010. Primarily, the Company operates in West
Texas, Arizona, New Mexico, Utah, Colorado, and the Mid-Atlantic region. In addition to the
refineries, the Company also owns and operates stand-alone refined product distribution terminals
in Bloomfield, New Mexico; Albuquerque, New Mexico; and Yorktown, Virginia, as well as asphalt
terminals in Phoenix and Tucson, Arizona; Albuquerque; and El Paso. As of September 30, 2011, the
Company also operated 172 retail service stations and convenience stores in Arizona, Colorado, and
New Mexico; a fleet of crude oil and finished product truck transports; and a wholesale petroleum
products distributor that operates in Arizona, California, Colorado, Nevada, New Mexico, Texas,
Utah, and Virginia.
The Companys operations include three business segments: the refining group, the wholesale
group, and the retail group. See Note 3, Segment Information, for further discussion of the
Companys business segments.
2. Basis of Presentation, Significant Accounting Policies, and Recent Accounting Pronouncements
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three
and nine months ended September 30, 2011, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2011, or for any other period.
The Condensed Consolidated Balance Sheet at December 31, 2010, has been derived from the
audited financial statements of the Company at that date but does not include all of the
information and footnotes required by GAAP for complete financial statements. The accompanying
condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2010 (2010 Form 10-K).
The condensed consolidated financial statements include the accounts of Western Refining, Inc.
and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents and Other Non-cash Activity
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be a cash equivalent. There were no cash equivalents at September 30,
2011 or December 31, 2010. The Company maintains its cash and cash equivalent accounts with
high-credit-quality financial institutions. Only a negligible portion of these deposits are
insured by the Federal Deposit Insurance Corporation.
Non-cash investing and financing activities for the nine months ended September 30, 2011
include an $8.2 million increase in debt, consisting of $3.7 million in other debt costs, an original issue
discount of $3.2 million, and a reduction of debt proceeds of $1.3 million to pay accrued
interest related to the March 2011 amendment and restatement of the Companys Term Loan Credit
Agreement. Other non-cash activities include $4.4 million of fixed and intangible assets acquired through a capital
lease obligation of $3.4 million and a promissory note of $1.0 million for the
nine months ended September 30, 2011, and $0.2 million in accrued capital expenditures for the
nine months ended September 30, 2010.
5
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Beginning in the second quarter of 2009, price differentials between sour and heavy crude oil
and light sweet crude oil narrowed significantly. Narrow heavy light crude oil differentials
negatively impacted the results of operations for the Yorktown refinery. Due to narrow heavy light
crude oil differentials and other continuing unfavorable economic conditions, the Company
temporarily suspended refining operations at the Yorktown facility in September 2010. The Company
continues to operate the Yorktown facility as a refined product distribution terminal, primarily
serving the Companys wholesale group. The Company performed an impairment analysis in connection
with the temporary suspension of the Yorktown refining operations. No impairment existed as a
result of that analysis. The Company routinely monitors refining
industry market data, including crack spread and heavy light crude oil
differential forecasts and other refining industry market data to
determine whether assumptions used
in its impairment analysis should be revised or updated. Management has considered the available
data and has concluded that revisions to its impairment analysis are not required and that no
impairment of the Yorktown long-lived assets exists as of
September 30, 2011. The market data used by the Company in
making these assumptions, however, has recently been extremely
volatile. Continued volatility with this market data could have an
impact on the Companys on going impairment analysis.
Due to the uncertainty of various assumptions used in the Companys impairment analysis, the
potential for future impairment remains. The longer the period of dormancy of the refining
equipment, the more problematic a restart of reliable refining operations can become. The Company
currently anticipates a six to nine month pre-restart maintenance period will be required before
the Yorktown refinery can be restarted, at an estimated cost of approximately $65.0 million, which
includes the cost of a maintenance turnaround. If it becomes apparent to management in the future
that the Company will not restart the refining operations during 2013 or if its future cash flow
forecasts change significantly, a potential impairment could exist at
that time. In addition, the Company is evaluating a potential sale of
the Yorktown terminal assets. If consummated, the sale could impact
the impairment analysis.
Impairments related to Yorktown could have a material impact on the Companys results of
operations. The carrying value of total long-lived and intangible assets at Yorktown as of
September 30, 2011 was $637.9 million, of which
$448.5 million was related to the temporarily idled Yorktown refining
assets.
Recent Accounting Pronouncements
The accounting
provisions covering the presentation of comprehensive income were amended to allow an
entity the option to present the total of comprehensive income (loss), the components of net income (loss),
and the components of other comprehensive income (loss) either in a single continuous statement or in
two separate but consecutive statements. Under either choice, the entity is required to present
reclassification adjustments on the face of the financial statement for items that are reclassified from other
comprehensive income (loss) to net income (loss) in the statement where those components are presented.
These provisions are effective for the first interim or annual period beginning after December 15, 2011,
and are to be applied retrospectively, with early adoption permitted. The adoption of this guidance
effective January 1, 2012 will not affect the Companys financial position or results of operations because
these requirements only affect disclosures.
The accounting
provisions covering fair value measurements and disclosures were amended to clarify the
application of existing fair value measurement requirements and to change certain fair value measurement
and disclosure requirements. Amendments that change measurement and disclosure requirements relate to
(i) fair value measurement of financial instruments that are managed within a portfolio, (ii) application of
premiums and discounts in a fair value measurement, and (iii) additional disclosures about fair value
measurements categorized within Level 3 of the fair value hierarchy. These provisions are effective for
the first interim or annual period beginning after December 15, 2011. The adoption of this guidance
effective January 1, 2012 will not affect the Companys financial position or results of operations, but
may result in additional disclosures.
Reclassifications
Prepaid expenses and other current assets include $1,456 and $12,845, respectively, previously
reported as accounts receivable, principally trade in the December 31, 2010 Consolidated Balance
Sheet. Accrued liabilities includes $13,984 previously reported as accounts payable in the December
31, 2010 Consolidated Balance Sheet. Items reclassified from accounts receivable included tax
refund receivables, prepaid income taxes, product rebate receivables, and other non-trade related
receivables. Items reclassified from accounts payable included accrued utilities and various
routine non-invoice related accrued expenses. These prior year reclassifications were made to
conform to the current presentation. Inclusion of these amounts in prepaid expenses, other current
assets, and accrued liabilities provides a better compilation of these assets and liabilities and
is consistent with the current eXtensible Business Reporting Language U.S. GAAP Taxonomy.
3. Segment Information
The Company is organized into three operating segments based on manufacturing and marketing
criteria and the nature of the respective segments products and services, production processes,
and types of customers. These segments are the refining group, the wholesale group, and the retail
group. A description of each segment and its principal products follows:
Refining Group. The Companys refining group currently operates two refineries: one in El
Paso, Texas (the El Paso refinery) and one near Gallup, New Mexico (the Gallup refinery). The
refining group also operates a crude oil transportation and gathering pipeline system in New
Mexico, an asphalt plant in El Paso, three stand-alone refined product distribution terminals, and
four asphalt terminals. The two refineries make various grades of gasoline, diesel fuel, and other
products from crude oil, other feedstocks, and blending components. The Company purchases crude
oil, other feedstocks, and blending components from various third-party suppliers. The Company also
acquires refined products through exchange agreements and
6
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
from various third-party suppliers. The
Company sells these products through its own service stations, its own wholesale channels,
independent wholesalers and retailers, commercial accounts, and sales and exchanges with major oil
companies.
Wholesale Group. The Companys wholesale group includes several lubricant and bulk petroleum
distribution plants, unmanned fleet fueling operations, a bulk lubricant terminal facility, and a
fleet of refined product and lubricant delivery trucks. The wholesale group distributes commercial
wholesale petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico, Texas,
Utah, and Virginia. The Companys wholesale group purchases petroleum fuels and lubricants from
third-party suppliers and from the refining group. As of
January 2011, wholesale operations include
the distribution of finished product through the Companys Yorktown terminal facility. For the
three months ended September 30, 2011, the wholesale group results included $385.2 million of net
sales and $7.6 million of operating income related to the Companys East Coast wholesale operations
through the Yorktown facility. For the nine months ended September 30, 2011, the wholesale group
results included $991.4 million of net sales and $11.9 million of operating income related to the
Companys East Coast wholesale operations through the Yorktown facility. The finished products sold
through the Yorktown facility are purchased from third parties.
Retail Group. The Companys retail group operates service stations that include convenience
stores or kiosks. The service stations sell various grades of gasoline, diesel fuel, general
merchandise, and beverage and food products to the general public. The Companys wholesale group
supplies the majority of the gasoline and diesel fuel that the retail group sells. The Company
purchases general merchandise and beverage and food products from
various third-party suppliers. At
September 30, 2011, the Companys retail group operated 172 service stations and convenience stores
or kiosks located in Arizona, Colorado, and New Mexico. During the second and third quarters of
2011, the retail group acquired two convenience stores for a net purchase price of $4.3 million,
entered into six individual convenience store leases, and entered into a master agreement to lease
14 additional convenience stores. For the three and nine months ended
September 30, 2011, the retail group results included $21.5 million and $24.5 million in net sales,
respectively, from the convenience stores added during the second and third quarters of 2011. The operations of
the additional convenience stores did not have a significant impact on the operating income of the retail group for
the three and nine months ended September 30, 2011.
Subsequent to September 30, 2011, the retail group entered into a master lease agreement to lease
34 additional convenience stores located in Texas and New Mexico.
Seasonality. Demand for gasoline is generally higher during the summer months than during the
winter months. In addition, higher volumes of ethanol are blended to the gasoline produced in the
Southwest region during the winter months, thereby increasing the supply of gasoline. This
combination of decreased demand and increased supply during the winter months can lower gasoline
prices. As a result, the Companys operating results for the first and fourth calendar quarters are
generally lower than those for the second and third calendar quarters of each year. The effects of
seasonal demand for gasoline are partially offset by increased demand during the winter months for
diesel fuel in the Southwest.
Segment Accounting Principles. Operating income for each segment consists of net revenues less
cost of products sold; direct operating expenses; selling, general, and administrative expenses;
maintenance turnaround expense; and depreciation and amortization. Cost of products sold reflects
current costs adjusted, where appropriate, for last-in, first-out (LIFO) and lower of cost or
market (LCM) inventory adjustments. Intersegment revenues are reported at prices that approximate
market.
Operations that are not included in any of the three segments mentioned above are included in
the category Other. These operations consist primarily of corporate staff operations and other
items not considered to be related to the normal business operations of the other segments. Other
items of income and expense not specifically related to the other segments, including income taxes,
are not allocated to operating segments.
The total assets of each segment consist primarily of cash and cash equivalents; net property,
plant, and equipment; inventories; net accounts receivable; and other assets directly associated
with the individual segments operations. Included in the total assets of the corporate operations
are cash and cash equivalents; various receivables, net of reserve for doubtful accounts; property,
plant, and equipment; and other long-term assets.
Disclosures regarding the Companys reportable segments with reconciliations to consolidated
totals for the three and nine months ended September 30, 2011 and 2010 are presented below:
7
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months Ended September 30, 2011 | ||||||||||||||||||||
Refining | Wholesale | Retail | ||||||||||||||||||
Group | Group | Group | Other | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales to external customers |
$ | 1,089,496 | $ | 1,056,128 | $ | 251,515 | $ | | $ | 2,397,139 | ||||||||||
Intersegment revenues (1) |
1,189,526 | 195,638 | 6,486 | | | |||||||||||||||
Operating income (loss) |
$ | 171,446 | $ | 12,707 | $ | 2,482 | $ | (15,430 | ) | $ | 171,205 | |||||||||
Other income (expense), net |
(40,582 | ) | ||||||||||||||||||
Income before income taxes |
$ | 130,623 | ||||||||||||||||||
Depreciation and amortization |
$ | 31,440 | $ | 1,033 | $ | 2,410 | $ | 698 | $ | 35,581 | ||||||||||
Capital expenditures |
15,392 | 193 | 2,851 | 217 | 18,653 |
(1) | Intersegment revenues of $1,391.7 million have been eliminated in consolidation. |
For the Nine Months Ended September 30, 2011 | ||||||||||||||||||||
Refining | Wholesale | Retail | ||||||||||||||||||
Group (2) | Group | Group | Other | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales to external customers |
$ | 3,119,809 | $ | 3,024,418 | $ | 650,384 | $ | | $ | 6,794,611 | ||||||||||
Intersegment revenues (1) |
3,128,556 | 529,369 | 19,779 | | | |||||||||||||||
Operating income (loss) |
$ | 431,671 | $ | 30,275 | $ | 6,689 | $ | (44,909 | ) | $ | 423,726 | |||||||||
Other income (expense), net |
(116,394 | ) | ||||||||||||||||||
Income before income taxes |
$ | 307,332 | ||||||||||||||||||
Depreciation and amortization |
$ | 92,633 | $ | 3,257 | $ | 7,232 | $ | 2,179 | $ | 105,301 | ||||||||||
Capital expenditures |
33,918 | 1,641 | 8,171 | 925 | 44,655 | |||||||||||||||
Total assets at September 30, 2011 |
2,118,314 | 285,176 | 165,960 | 451,940 | 3,021,390 |
(1) | Intersegment revenues of $1,391.7 and $3,677.7 million have been eliminated in consolidation for the three and nine months ended September 30, 2011. | |
(2) | Included in refining assets are $11.8 million in temporarily idled long-lived assets currently located at the Bloomfield facility that the Company intends to relocate and place into service at the Gallup refinery. The Company currently plans to place these assets in service during the scheduled 2012 Gallup maintenance turnaround. Also included in refining assets are $448.5 million in long-lived and intangible assets that the Company has temporarily idled at the Yorktown facility, which the Company plans to place back in service during 2013. Unforeseen circumstances could alter the Companys planned time lines or prevent full utilization of these assets in the future. As such, risk of partial or full impairment exists. |
8
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months Ended September 30, 2010 | ||||||||||||||||||||
Refining | Wholesale | Retail | ||||||||||||||||||
Group | Group | Group | Other | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales to external customers |
$ | 1,372,880 | $ | 476,707 | $ | 188,709 | $ | | $ | 2,038,296 | ||||||||||
Intersegment revenues (1) |
672,126 | 154,596 | 6,429 | | | |||||||||||||||
Operating income (loss) |
$ | 51,947 | $ | 5,449 | $ | 7,606 | $ | (14,048 | ) | $ | 50,954 | |||||||||
Other income (expense), net |
(38,987 | ) | ||||||||||||||||||
Income before income taxes |
$ | 11,967 | ||||||||||||||||||
Depreciation and amortization |
$ | 30,434 | $ | 1,210 | $ | 2,496 | $ | 1,113 | $ | 35,253 | ||||||||||
Capital expenditures |
18,041 | 63 | 1,385 | 171 | 19,660 |
For the Nine Months Ended September 30, 2010 | ||||||||||||||||||||
Refining | Wholesale | Retail | ||||||||||||||||||
Group | Group | Group | Other | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales to external customers |
$ | 4,182,086 | $ | 1,396,018 | $ | 520,924 | $ | | $ | 6,099,028 | ||||||||||
Intersegment revenues (1) |
1,913,798 | 386,171 | 17,006 | | | |||||||||||||||
Operating income (loss) |
$ | 96,505 | $ | 17,185 | $ | 13,883 | $ | (39,016 | ) | $ | 88,557 | |||||||||
Other income (expense), net |
(113,926 | ) | ||||||||||||||||||
Loss before income taxes |
$ | (25,369 | ) | |||||||||||||||||
Depreciation and amortization |
$ | 89,211 | $ | 3,914 | $ | 7,631 | $ | 3,538 | $ | 104,294 | ||||||||||
Capital expenditures |
52,527 | 470 | 3,503 | 241 | 56,741 | |||||||||||||||
Total assets at September 30, 2010 |
2,238,670 | 158,246 | 155,731 | 109,035 | 2,661,682 |
(1) | Intersegment revenues of $833.2 million and $2,317.0 million have been eliminated in consolidation for the three and nine months ended September 30, 2010, respectively. |
4. Fair Value Measurement
The Company utilizes the market approach when measuring fair value of its financial assets and
liabilities. The market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities.
The fair value hierarchy consists of the following three levels:
Level
|
1 | Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. | ||||
Level
|
2 | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data. | ||||
Level
|
3 | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable and cannot be corroborated by market data or other entity-specific inputs. |
9
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The carrying amounts of accounts receivable, accounts payable, and accrued liabilities
approximated their fair values at September 30, 2011 and December 31, 2010 due to their short-term
maturities. The following tables represent the Companys assets and liabilities measured at fair
value on a recurring basis as of September 30, 2011 and December 31, 2010, and the basis for that
measurement:
Fair Value Measurement at September 30, 2011 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | |||||||||||||||
for Identical | Other | Significant | ||||||||||||||
Assets or | Observable | Unobservable | ||||||||||||||
Liabilities | Inputs | Inputs | ||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Commodity hedging contracts |
$ 4,056 | $ | $ 4,056 | $ | ||||||||||||
Financial liabilities: |
||||||||||||||||
Commodity hedging contracts |
$ 120,142 | $ | 120,142 | $ |
Fair Value Measurement at December 31, 2010 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | |||||||||||||||
for Identical | Other | Significant | ||||||||||||||
Assets or | Observable | Unobservable | ||||||||||||||
Liabilities | Inputs | Inputs | ||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In thousands) | ||||||||||||||||
Financial liabilities: |
||||||||||||||||
Commodity hedging contracts |
$ 1,173 | $ | $ 1,173 | $ |
As of September 30, 2011 and December 31, 2010, the carrying amount and estimated fair value
of the Companys debt was as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Carrying amount |
$ | 1,062,362 | $ | 1,069,531 | ||||
Fair value |
1,250,536 | 1,261,704 |
The carrying amount of the Companys debt is the amount
reflected in the Condensed Consolidated Balance Sheets, including the current portion. The fair
value of the debt was determined using Level 2 inputs.
There have been no transfers between assets or liabilities whose fair value is determined
through the use of quoted prices in active markets (Level 1) and those determined through the use
of significant other observable inputs (Level 2).
5. Inventories
Inventories were as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Refined products (1) |
$ | 221,457 | $ | 189,994 | ||||
Crude oil and other raw materials |
140,970 | 152,155 | ||||||
Lubricants |
15,238 | 11,456 | ||||||
Convenience store merchandise |
13,159 | 12,068 | ||||||
Inventories |
$ | 390,824 | $ | 365,673 | ||||
(1) | Includes $83.2 million and $10.0 million of inventory valued using the first-in, first-out (FIFO) valuation method at September 30, 2011 and December 31, 2010, respectively. |
10
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company values its crude oil, other raw materials, and asphalt inventories at the lower of
cost or market under the LIFO valuation method. Other than refined products inventories held by the
Companys retail and wholesale groups, refined products inventories are valued under the LIFO
valuation method. Lubricants and convenience store merchandise are valued under the FIFO valuation
method.
As of September 30, 2011 and December 31, 2010, refined products and crude oil and other raw
materials totaled 5.0 million barrels and 5.7 million barrels, respectively. At September 30, 2011,
the excess of the current cost of these crude oil, refined product, and other feedstock and
blendstock inventories over LIFO cost was $180.5 million. At December 31, 2010, the excess of the
current cost of these crude oil, refined product, and other feedstock and blendstock inventories
over LIFO cost was $173.5 million.
During the three and nine months ended September 30, 2011, the Company recorded LIFO
liquidations caused by permanently decreased levels in inventory volumes that were consistent with
the Companys expectations of 2011 year-end inventory levels of certain refined products, crude
oil, and other raw materials. The effect of these liquidations increased gross profit by $1.3
million, net income by $0.9 million, and net earnings per diluted share by $0.01 for the three
months ended September 30, 2011. The effect of these liquidations increased gross profit by $1.3
million, net income by $0.8 million, and net earnings per diluted share by $0.01 for the nine
months ended September 30, 2011.
During the three and nine months ended September 30, 2010, the Company recorded LIFO
liquidations caused by permanent decreases in inventory levels that were consistent with the
Companys expectations of year-end 2010 inventory levels of crude oil, other raw materials, and
refined products at the Yorktown facility. The effect of these liquidations increased gross profit
by $8.9 million, net income by $5.1 million, and earnings per diluted share by $0.06 for the three
months ended September 30, 2010. The effect of these liquidations increased gross profit by $8.9
million, decreased net loss by $3.3 million, and decreased the loss per diluted share by $0.04 for
the nine months ended September 30, 2010.
Average LIFO cost per barrel of the Companys refined products and crude oil and other raw
materials inventories as of September 30, 2011 and December 31, 2010 was as follows:
September 30, | December 31, | |||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
LIFO | LIFO | |||||||||||||||||||||||
Cost Per | Cost Per | |||||||||||||||||||||||
Barrels | LIFO Cost | Barrel | Barrels | LIFO Cost | Barrel | |||||||||||||||||||
(In thousands, except cost per barrel) | ||||||||||||||||||||||||
Refined products |
2,108 | $ | 138,280 | $ | 65.60 | 2,574 | $ | 180,031 | $ | 69.94 | ||||||||||||||
Crude oil and other |
2,916 | 140,970 | 48.34 | 3,115 | 152,155 | 48.85 | ||||||||||||||||||
5,024 | $ | 279,250 | 55.58 | 5,689 | $ | 332,186 | 58.39 | |||||||||||||||||
6. Prepaid Expenses
Prepaid expenses were as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Prepaid crude oil and other raw materials inventories |
$ | 80,892 | $ | 56,257 | ||||
Prepaid insurance and other |
28,355 | 17,134 | ||||||
Prepaid expenses |
$ | 109,247 | $ | 73,391 | ||||
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Other Current Assets
Other current assets were as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Materials and chemicals inventories |
$ | 38,967 | $ | 38,591 | ||||
Commodity hedging activities receivable |
36,247 | 3,173 | ||||||
Excise and other taxes receivable |
15,421 | 10,945 | ||||||
Exchange and other receivables |
6,659 | 4,422 | ||||||
Other current assets |
$ | 97,294 | $ | 57,131 | ||||
8. Property, Plant, and Equipment, Net
Property, plant, and equipment, net was as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Refinery facilities and related equipment |
$ | 1,806,799 | $ | 1,733,803 | ||||
Pipelines, terminals, and transportation equipment |
92,923 | 91,149 | ||||||
Retail and wholesale facilities and related equipment |
195,654 | 185,359 | ||||||
Other |
21,822 | 20,856 | ||||||
Construction in progress |
44,212 | 94,894 | ||||||
2,161,410 | 2,126,061 | |||||||
Accumulated depreciation |
(535,567 | ) | (437,907 | ) | ||||
Property, plant, and equipment, net |
$ | 1,625,843 | $ | 1,688,154 | ||||
Depreciation expense was $34.4 million and $101.8 million for the three and nine months ended
September 30, 2011, and $34.2 million and $101.1 million for the three and nine months ended
September 30, 2010, respectively. Included in property, plant, and equipment, net, at September 30,
2011 were $460.3 million in idled assets related to the Companys temporarily idled Yorktown
($448.5 million) and indefinitely idled Bloomfield ($11.8 million) refineries. The majority of
these assets are included under refinery facilities and related equipment in the table above. All
idled assets continue to be depreciated over their respective estimated useful lives and are
subject to the same impairment considerations and periodic review of estimated useful lives as
productive assets.
12
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Intangible Assets, Net
Intangible assets, net were as follows:
Weighted | ||||||||||||||||||||||||||||
September 30, 2011 | December 31, 2010 | Average | ||||||||||||||||||||||||||
Gross | Net | Gross | Net | Amortization | ||||||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | Period | ||||||||||||||||||||||
Value | Amortization | Value | Value | Amortization | Value | (Years) | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Amortizable assets: |
||||||||||||||||||||||||||||
Licenses and permits |
$ | 39,516 | $ | (12,944 | ) | $ | 26,572 | $ | 39,151 | $ | (10,698 | ) | $ | 28,453 | 8.9 | |||||||||||||
Customer relationships |
7,300 | (1,628 | ) | 5,672 | 6,300 | (1,305 | ) | 4,995 | 10.9 | |||||||||||||||||||
Rights-of-way |
6,525 | (1,780 | ) | 4,745 | 6,525 | (1,267 | ) | 5,258 | 5.7 | |||||||||||||||||||
Other |
1,644 | (1,293 | ) | 351 | 1,360 | (670 | ) | 690 | 5.1 | |||||||||||||||||||
54,985 | (17,645 | ) | 37,340 | 53,336 | (13,940 | ) | 39,396 | |||||||||||||||||||||
Unamortizable assets: |
||||||||||||||||||||||||||||
Trademarks |
4,800 | | 4,800 | 4,800 | | 4,800 | ||||||||||||||||||||||
Liquor licenses |
16,151 | | 16,151 | 15,749 | | 15,749 | ||||||||||||||||||||||
Intangible assets, net |
$ | 75,936 | $ | (17,645 | ) | $ | 58,291 | $ | 73,885 | $ | (13,940 | ) | $ | 59,945 | ||||||||||||||
Intangible asset amortization expense for the three and nine months ended September 30, 2011
was $1.1 million and $3.2 million, respectively, based on estimated useful lives ranging from 6 to
20 years. Intangible asset amortization expense for the three and nine months ended September 30,
2010 was $1.0 million and $2.9 million, respectively, based on estimated useful lives ranging from
3 to 20 years. Estimated amortization expense for the indicated periods is as follows (in
thousands):
Remainder of 2011 |
$ | 1,191 | ||
2012 |
4,737 | |||
2013 |
4,453 | |||
2014 |
4,262 | |||
2015 |
3,784 | |||
2016 |
3,613 |
10. Other Assets, Net
Other assets, net were as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Unamortized loan fees |
$ | 38,273 | $ | 38,930 | ||||
Other |
19,589 | 15,414 | ||||||
Other assets, net |
$ | 57,862 | $ | 54,344 | ||||
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. Accrued and Other Long-Term Liabilities
Accrued liabilities were as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Fair value of open commodity hedging positions, net |
$ | 115,898 | $ | 1,173 | ||||
Excise taxes |
30,465 | 39,086 | ||||||
Payroll and related costs |
30,363 | 26,402 | ||||||
Income taxes |
27,308 | | ||||||
Interest |
15,795 | 3,672 | ||||||
Professional and other |
11,625 | 34,264 | ||||||
Banking fees and other financing |
10,747 | 2,793 | ||||||
Property taxes |
9,143 | 11,323 | ||||||
Environmental reserve |
3,287 | 10,565 | ||||||
Short-term pension obligation |
2,856 | 7,084 | ||||||
Accrued liabilities |
$ | 257,487 | $ | 136,362 | ||||
During the latter part of March 2010, the Company reversed $14.7 million related to its
accrued bonus estimate for 2009. This revision of the Companys 2009 bonus estimate reduced direct
operating expenses (exclusive of depreciation and amortization) and selling, general, and
administrative expenses reported in the Condensed Consolidated Statements of Operations for the
nine months ended September 30, 2010 by $8.5 million and $6.2 million, respectively.
Other long-term liabilities were as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Environmental reserve |
$ | 7,933 | $ | 7,689 | ||||
Asset retirement obligations |
5,772 | 5,485 | ||||||
Retiree plan obligations |
4,017 | 3,831 | ||||||
Long-term capital lease obligation |
3,344 | | ||||||
Other |
8,075 | 14,772 | ||||||
Other long-term liabilities |
$ | 29,141 | $ | 31,777 | ||||
As of September 30, 2011, the Company had environmental liability accruals of $11.2 million,
of which $3.3 million was in accrued liabilities. These liabilities have been recorded using an
inflation factor of 2.7% and a discount rate of 7.1%. Environmental liabilities of $1.7 million
accrued at September 30, 2011 have not been discounted. As of September 30, 2011, the unescalated,
undiscounted environmental reserve related to these liabilities totaled $14.3 million, leaving $4.8
million to be accreted over time.
The table below summarizes the Companys environmental liability accruals:
December 31, | Increase | September 30, | ||||||||||||||
2010 | (Decrease) | Payments | 2011 | |||||||||||||
(In thousands) | ||||||||||||||||
Discounted liabilities |
$ | 16,934 | $ | 2,708 | $ | (10,133 | ) | $ | 9,509 | |||||||
Undiscounted liabilities |
1,320 | 961 | (570 | ) | 1,711 | |||||||||||
Total environmental liabilities |
$ | 18,254 | $ | 3,669 | $ | (10,703 | ) | $ | 11,220 | |||||||
14
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. Long-Term Debt
Long-term debt was as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
11.25% Senior Secured Notes, due
2017, net of unamortized discount of
$22,669 and $24,618, respectively |
$ | 302,331 | $ | 300,382 | ||||
Floating Rate Senior Secured Notes, due
2014, net of unamortized discount of
$13,811 and $16,823, respectively, with
an interest rate of 10.75% at 2011 and
2010 |
261,189 | 258,177 | ||||||
5.75% Senior Convertible Notes, due 2014,
net of conversion feature of $37,931 and
$46,285, respectively |
177,519 | 169,165 | ||||||
Term Loan, due 2017, net of unamortized
discount of $3,018 in 2011 with average
interest rates of 8.56% and 10.75% for
the nine months ended September 30, 2011
and 2010, respectively |
320,357 | 341,807 | ||||||
5.50%
Promissory Note, due 2015 |
966 | | ||||||
Revolving Credit Agreement with an
average interest rate of 5.73% and 6.14%
for the nine months ended September 30,
2011 and 2010, respectively |
| | ||||||
Long-term debt |
1,062,362 | 1,069,531 | ||||||
Current portion of long-term debt |
(3,647 | ) | (63,000 | ) | ||||
Long-term debt, net of current portion |
$ | 1,058,715 | $ | 1,006,531 | ||||
Amounts outstanding under the Revolving Credit Agreement, if any, are included in the current
portion of long-term debt.
15
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interest expense and other financing costs were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Contractual interest: |
||||||||||||||||
11.25% Senior Secured Notes |
$ | 9,141 | $ | 9,141 | $ | 27,422 | $ | 27,422 | ||||||||
Floating Rate Senior Secured Notes |
7,555 | 7,555 | 22,418 | 22,418 | ||||||||||||
5.75% Senior Convertible Notes |
3,097 | 3,097 | 9,291 | 9,291 | ||||||||||||
Term Loan |
6,213 | 9,437 | 21,027 | 28,262 | ||||||||||||
Revolving Credit Agreement |
| 1,393 | 631 | 4,628 | ||||||||||||
26,006 | 30,623 | 80,789 | 92,021 | |||||||||||||
Amortization of original issuance discount: |
||||||||||||||||
11.25% Senior Secured Notes |
561 | 512 | 1,949 | 1,723 | ||||||||||||
Floating Rate Senior Secured Notes |
1,008 | 962 | 3,012 | 2,642 | ||||||||||||
5.75% Senior Convertible Notes |
2,899 | 2,537 | 8,354 | 7,329 | ||||||||||||
Term Loan |
116 | | 232 | | ||||||||||||
4,584 | 4,011 | 13,547 | 11,694 | |||||||||||||
Other interest expense |
2,726 | 3,641 | 8,520 | 10,269 | ||||||||||||
Capitalized interest |
(121 | ) | (1,176 | ) | (1,665 | ) | (2,816 | ) | ||||||||
Interest expense and other financing costs |
$ | 33,195 | $ | 37,099 | $ | 101,191 | $ | 111,168 | ||||||||
The Company amortizes original issue discounts using the effective interest method over the
respective term of the debt.
Senior Secured Notes. The Senior Secured Notes consist of $325.0 million in aggregate
principal amount of 11.25% Senior Secured Notes (the Fixed Rate Notes) and $275.0 million Senior
Secured Floating Rate Notes (the Floating Rate Notes, and together with the Fixed Rate Notes, the
Senior Secured Notes). The Fixed Rate Notes pay interest semi-annually in cash in arrears at a
rate of 11.25% per annum. The Fixed Rate Notes may be redeemed by the Company at the Companys
option beginning on June 15, 2013 through June 14, 2014 at a premium of 5.625%; from June 15, 2014
through June 14, 2015 at a premium of 2.813%; and at par thereafter. The Floating Rate Notes pay
interest quarterly at a per annum rate, reset quarterly, equal to three-month LIBOR (subject to a
LIBOR floor of 3.25%) plus 7.50%. The Floating Rate Notes may be redeemed by the Company at the
Companys option beginning on December 15, 2011 through June 14, 2012 at a premium of 5.0%; from
June 15, 2012 through June 14, 2013 at a premium of 3.0%; and at a premium of 1.0% thereafter. The
Senior Secured Notes are guaranteed by all of the Companys domestic restricted subsidiaries. The
Senior Secured Notes are also secured on a first priority basis, equally and ratably with the
Companys Term Loan and any future other pari passu obligations, by the collateral securing the
Term Loan, which consists of the Companys fixed assets, and on a second priority basis, equally
and ratably with the Term Loan and any future other pari passu secured obligation, by the
collateral securing the Revolving Credit Agreement, which consists of the Companys cash and cash
equivalents, trade accounts receivables, and inventory.
The Company may issue additional notes from time to time pursuant to the indenture governing
the Senior Secured Notes.
Convertible Senior Notes. The Convertible Senior Notes are unsecured and pay interest
semi-annually in arrears at a rate of 5.75% per year. The initial conversion rate for the
Convertible Senior Notes is 92.5926 shares of common stock per $1,000 principal amount of
Convertible Senior Notes (equivalent to an initial conversion price of approximately $10.80 per
share of common stock). The Company valued the conversion feature at June 30, 2009 using a
borrowing rate of 13.75% at $60.9 million and recorded additional paid-in capital of $36.3 million,
net of deferred income taxes of $22.6 million and transaction costs of $2.0 million, related to the
equity portion of this convertible debt. As of September 30, 2011, the if-converted value of the
Convertible Senior Notes exceeded its principal amount by $33.1 million.
The Convertible Senior Notes are presently convertible, at the option of the holder,
through and including, December 31, 2011. The Convertible Senior Notes will also be convertible in
any future calendar quarter (prior to maturity) whenever the last reported sale price of the
Companys common stock exceeds $14.04 for twenty days in the thirty consecutive trading day period
16
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ending on the last trading day of the immediately preceding calendar quarter. If any
Convertible Senior Notes are surrendered for conversion, the Company may elect to satisfy its
obligations upon conversion through the delivery of shares of its common stock, in cash or a
combination thereof.
Term Loan Credit Agreement. On March 29, 2011, the Company entered into an amended and
restated Term Loan Credit Agreement. Lenders under the Term Loan extended a $325.0 million term
loan at a discount of 1.00%, the proceeds of which were principally used to refinance the Companys
term loans outstanding under the Term Loan Credit Agreement prior to the amendment and restatement.
The Term Loan, together with the Senior Secured Notes and any future other pari passu secured
obligations, is secured on a first priority basis by the Companys fixed assets, and on a second
priority basis by the collateral securing the Revolving Credit Agreement, which consists of the
Companys cash and cash equivalents, trade accounts receivable, and inventory. The amended and
restated Term Loan Credit Agreement eliminated the financial maintenance covenants previously
contained in the Term Loan Credit Agreement. The Term Loan Credit Agreement provides for principal
payments on a quarterly basis of $0.8 million, with the remaining balance due on the maturity date.
The maturity date was extended to March 2017. To effect this amendment, the Company paid $3.7
million in amendment fees. As a result of this amendment, the Company recognized a $4.6 million
loss on extinguishment of debt.
As a result of the March 29, 2011 amendment and restatement, the Term Loan bears interest
equal to LIBOR (subject to a floor of 1.5%) plus 6.00%. Prior to the amendment and restatement, the
Term Loan bore interest equal to LIBOR (subject to a floor of 3.25%) plus 7.50%.
On September 23, 2011, the Company amended the Term Loan Credit Agreement to provide for
certain conforming changes made in the amended and restated Revolving Credit Agreement.
Revolving Credit Agreement. On September 22, 2011, the Company entered into an amended and
restated Revolving Credit Agreement. Lenders under the agreement extended $1.0 billion in
revolving line commitments, that mature on September 22, 2016,
and incorporate a
borrowing base tied to eligible accounts receivable and inventory. The agreement also provides for
letters of credit and swing line loans. The agreement provides for a quarterly commitment fee
ranging from 0.375% to 0.50% per annum subject to adjustment based upon the average utilization
ratio under the agreement and letter of credit fees ranging from
2.50% to 3.25% per annum, payable
quarterly, subject to adjustment based upon the average excess availability. Borrowings can be
either base rate loans plus a margin ranging from 1.50% to 2.25% or LIBOR loans plus a margin
ranging from 2.50% to 3.25% subject to adjustment based upon the average excess availability under
the Revolving Credit Agreement. The interest rate margins and letter of credit fees are to be
reduced by 0.25% upon the Companys achievement and maintenance of a certain fixed charge coverage
ratio. The Revolving Credit Agreement provides for a cash dominion requirement that is in effect
only if the excess availability under the Revolving Credit Agreement falls below 15.0% of the
Borrowing Base or $50.0 million. The Revolving Credit Agreement
is guaranted on a joint and several basis by the Subsidiaries of the
Company. The Revolving Credit Agreement is secured on a first priority
basis by the Companys cash and cash equivalents, trade accounts receivable, and inventory, and on
a second priority basis by the collateral securing the Term Loan, the Senior Secured Notes, and any
future other pari passu secured obligations, which consist of the Companys fixed assets. The
facility is used to fund general working capital needs and letter of
credit requirements. The Company paid $5.9 million in fees to
effect the September 22, 2011 amendment to the Revolving Credit
Agreement.
Prior to September 22, 2011 the Revolving Credit Agreement included commitments of $800.0
million composed of a $145.0 million tranche that matured on May 31, 2012 and $655.0 million
tranche that matured on January 1, 2015. Interest rates for the
$145.0 million tranche were based on the Companys consolidated
leverage ratio and ranged from 3.75% to 4.50% over LIBOR. Interest rates for the $655.0 million
tranche were based on the Companys borrowing base capacity under the Revolving Credit Agreement
and ranged from 3.00% to 3.75% over LIBOR.
As of September 30, 2011, the Company had gross availability under the Revolving Credit
Agreement of $650.2 million, of which $355.5 million was used for outstanding letters of credit.
13. Income Taxes
Compared to the federal statutory rate of 35%, the effective tax rate for both the three and
nine months ended September 30, 2011 was 35.0% and 35.8%, respectively. The effective tax rate for
the nine month period was slightly higher than the statutory rate, primarily due to state tax obligations.
Compared to the federal statutory rate of 35%, the effective tax rates for the three and nine
months ended September 30, 2010 were 42.7% and 62.6%, respectively. The effective tax rates for
both periods were higher than the statutory rate primarily due to the federal income tax credit
available to small business refiners related to the production of ultra low sulfur diesel fuel and
the Companys estimate of annual taxable income relative to the results of operations for the
period. The
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
federal income tax credits available to small business refiners for production of ultra low
sulfur diesel fuel were substantially exhausted during 2010.
The Company is currently under examination by the Internal Revenue Service (IRS) for tax
years ended December 31, 2007 and December 31, 2008. The Company will continue to work with the IRS
to expedite the completion of the 2007 and 2008 examinations. While the Company does not believe
the results of these examinations will have a material adverse effect on the Companys financial
position or results of operations, the timing and results of any final determination remain
uncertain.
The Company believes that it is more likely than not that the benefit from certain state net
operating loss (NOL) carryforwards related to the Yorktown refinery will not be realized.
Accordingly, the previous valuation allowance of $0.8 million against
the deferred tax assets relating to these NOL carryforwards was
increased to $3.0 million at September 30, 2011.
The Company classifies interest to be paid on an underpayment of income taxes and any related
penalties as income tax expense. The Company recognized no interest or penalties related to
uncertain tax positions for the periods ended September 30, 2011 and 2010.
14. Retirement Plans
The Company fully recognizes the obligations associated with single-employer defined benefit
pension, retiree healthcare, and other postretirement plans in their financial statements.
Pensions
Through September 30, 2011, the Company had distributed $19.5 million ($12.8 million in 2010
and $6.7 million in 2011) from plan assets to plan participants as a result of the temporary idling
of Yorktown refining operations and resultant termination of several participants of the Yorktown
pension plan. The Company contributed $4.4 million to its
Yorktown pension plan during September 2011. The Yorktown pension plan has been curtailed.
In connection with the negotiation of a collective bargaining agreement covering employees of
the El Paso refinery during the second quarter of 2009, the Company terminated the defined benefit
plan covering certain El Paso refinery employees. Regulatory approval of this termination was received
during the first quarter of 2010. No changes to the Companys proposed plan of termination were
required. Through September 2010, the Company had distributed $21.7 million ($4.2 million in 2010 and
$17.5 million in 2009) from plan assets to plan participants as a result of the termination agreement.
Distributions made were in accordance with the termination agreement. The termination resulted in
reductions to the related pension obligation of $5.2 million and to other comprehensive loss of $0.6
million in the nine months ended September 30, 2010.
The components of the net periodic benefit cost associated with the Companys pension plans
for certain employees at the El Paso and Yorktown refineries were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 (1) | 2011 | 2010 (1) | |||||||||||||
(In thousands) | ||||||||||||||||
Net periodic benefit cost includes: |
||||||||||||||||
Service cost |
$ | | $ | 462 | $ | | $ | 1,352 | ||||||||
Interest cost |
125 | 327 | 375 | 925 | ||||||||||||
Amortization of net loss |
25 | (9 | ) | 75 | 4 | |||||||||||
Expected return on assets |
(33 | ) | (471 | ) | (98 | ) | (1,078 | ) | ||||||||
Settlement expense |
230 | | 1,290 | 441 | ||||||||||||
Plan amendments |
(105 | ) | | (105 | ) | 809 | ||||||||||
Net periodic benefit cost |
$ | 242 | $ | 309 | $ | 1,537 | $ | 2,453 | ||||||||
(1) | The Company completed the termination of the defined benefit plan that covered certain El Paso refinery employees during the second quarter of 2010. |
Postretirement Obligations
The components of the net periodic benefit cost associated with the Companys postretirement
medical benefit plans covering certain employees at the El Paso and Yorktown refineries were as
follows:
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Net periodic benefit cost includes: |
||||||||||||||||
Service cost |
$ | 20 | $ | 105 | $ | 60 | $ | 371 | ||||||||
Interest cost |
56 | 124 | 169 | 374 | ||||||||||||
Amortization of net gain |
(3 | ) | (3 | ) | (11 | ) | (11 | ) | ||||||||
Net periodic benefit cost |
$ | 73 | $ | 226 | $ | 218 | $ | 734 | ||||||||
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Defined Contribution Plans and Deferred Compensation Plan
The Company sponsors a 401(k) defined contribution plan under which participants may
contribute a percentage of their eligible compensation to the plan and invest in various investment
options. The Company will match participant contributions to the plan subject to certain
limitations and a per participant maximum contribution. For each 1% of eligible compensation
contributed by the participant, the Company will match 1% up to a maximum of 4% of eligible
compensation, provided the participant has a minimum of one year of service with the Company. For
the three and nine months ended September 30, 2011 and 2010, the Company expensed $1.5 million,
$1.7 million, $4.3 million, and $4.6 million, respectively, in connection with this plan.
15. Crude Oil and Refined Product Risk Management
The Company enters into crude oil forward contracts to facilitate the supply of crude oil to
the refineries. During the nine months ended September 30, 2011, the Company entered into net
forward, fixed-price contracts to physically receive and deliver crude oil that qualify as normal
purchases and normal sales and are exempt from derivative reporting requirements.
The Company uses crude oil and refined products futures, swap contracts, or options to
mitigate the change in value for a portion of its LIFO inventory volumes subject to market price
fluctuations and swap contracts to fix the margin on a portion of its future gasoline and
distillate production. The physical volumes are not exchanged, and these contracts are net settled
with cash. For instruments used to mitigate the change in value of volumes subject to market
prices, the Company elected not to pursue hedge accounting treatment for financial accounting
purposes, generally because of the difficulty of establishing the required documentation that would
allow for hedge accounting at the date that the hedging instrument is entered into. The swap
contracts used to fix the margin on a portion of the Companys future gasoline and distillate
production do not qualify for hedge accounting treatment.
The
contract fair value is reflected in the Condensed Consolidated Balance Sheets and the
related net gain or loss is recorded within cost of products sold in the Condensed Consolidated
Statements of Operations. Quoted prices for similar assets or liabilities in active markets (Level
2) are considered to determine the fair values for the purpose of marking to market the hedging
instruments at each period end. At September 30, 2011, the Company had open commodity hedging
instruments consisting of crude oil futures on 650,000 barrels and finished products price and crack spread swaps on
33,657,500 barrels primarily to fix the margin on a portion of its future gasoline and distillate
production and to protect the value of certain crude oil, finished product, and blendstock
inventories. The fair value of the outstanding contracts at September 30, 2011 was a net unrealized
loss of $116.1 million comprised of both short-term and long-term realized and unrealized gains and losses. This net unrealized loss consists of
$3.2 million in other current assets, $13.0 million in other assets, $119.1 million in current liabilities, and $13.2 million in other long-term liabilities. At December 31, 2010, the Company had open commodity hedging instruments
consisting of crude oil futures and finished product price swaps on 1,023,000 barrels primarily to
protect the value of certain crude oil, finished product, and blendstock inventories.
The
Companys
commodity hedging activities are initiated within guidelines established by management
and approved by the Companys board of directors. Commodity hedging transactions are executed
centrally on behalf of all of the Companys operating segments to minimize transaction costs, monitor
consolidated net exposures, and to allow for increased responsiveness to changes in market factors. Due
to mark-to-market accounting during the term of the various commodity hedging contracts, significant
unrealized, non-cash gains and losses could be recorded in period results of operations. Additionally, the
Company may be required to collateralize any mark-to-market losses on outstanding commodity hedging
contracts.
As of September 30, 2011, we had the following outstanding crude oil and refined product
hedging instruments that were entered into as economic hedges. The information presents the
notional volume of outstanding contracts by type of instrument and year of maturity (volumes in
thousands of barrels):
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Notional Contract Volumes by Year of Maturity | ||||||||||||||||
2011 | 2012 | 2013 | 2014 | |||||||||||||
Inventory positions (futures and swaps): |
||||||||||||||||
Crude oil and refined products net short
positions |
650 | | | | ||||||||||||
Refined product positions (crack spread swaps): |
||||||||||||||||
Distillate net short positions |
1,850 | 9,600 | 8,958 | 1,800 | ||||||||||||
Unleaded gasoline net short positions |
3,125 | 8,325 | | |
The Company recognized $105.9 million and $173.3 million, within cost of products sold, of net
realized and unrealized losses from hedging activities during the three and nine months ended
September 30, 2011, respectively. The Company recognized $1.7 million and $4.8 million within cost
of products sold, of net realized and unrealized losses from hedging activities during the three
and nine months ended September 30, 2010, respectively.
16. Stock-Based Compensation
The Company has two share-based compensation plans, the Western Refining 2006 Long-Term
Incentive Plan (the 2006 LTIP) and the 2010 Incentive Plan of Western Refining (the 2010
Incentive Plan) which allow for restricted share awards and restricted share unit awards. As of
September 30, 2011, there were 39,896 and 3,432,653 shares of common stock reserved for future
grants under the 2006 LTIP and the 2010 Incentive Plan, respectively. Awards granted under both
plans generally vest over a three-year period and their market value at the date of the grant is
amortized over the restricted period on a straight-line basis.
Restricted Shares
Ownership of the shares does not transfer to the recipient until the shares have vested;
recipients have voting and nonforfeitable dividend rights on these shares from the date of the
grant. As of September 30, 2011, there were 1,530,362 restricted shares outstanding.
Restricted Share Units
Ownership of the units does not transfer to the recipient until the units have vested;
recipients do not have voting or dividend rights on these units. Upon vesting, the recipient will
be entitled to receive, at the Compensation Committees election, the number of shares underlying
the restricted share units, a cash payment equal to the share value at the vesting date, or a
combination of both. As of September 30, 2011, there were 307,672 unvested restricted share units
outstanding.
The Company recorded stock compensation expense of $2.0 million and $6.2 million for the three
and nine months ended September 30, 2011, respectively, of which $0.2 million and $0.8 million was
included in direct operating expenses and $1.8 million and $5.4 million in selling, general, and
administrative expenses, respectively. The excess tax benefit related to the shares that vested
during the three and nine months ended September 30, 2011 was $0.3 million and $3.1 million,
respectively using a statutory blended rate of 37.54%. The aggregate fair value at the grant date
of the shares that vested during the three and nine months ended September 30, 2011 was $0.9
million and $7.3 million, respectively. The related aggregate intrinsic value of these shares was
$1.7 million and $15.7 million, respectively at the vesting date.
The Company recorded stock compensation expense of $1.8 million and $4.3 million for the three
and nine months ended September 30, 2010, respectively, of which $0.3 million and $0.6 million was
included in direct operating expenses and $1.5 million and $3.7 million in selling, general, and
administrative expenses, respectively. The tax deficiency related to the
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
shares that vested during the three and nine months ended September 30, 2010 was $0.1 million and
$1.0 million, respectively, using a statutory blended rate of 37.17%. The aggregate fair value at
the grant date of the shares that vested during the three and nine months ended September 30, 2010
was $0.5 million and $4.5 million, respectively. The related aggregate intrinsic value of these
shares was $0.1 million and $1.6 million, respectively, at the vesting date.
As of September 30, 2011, the aggregate fair value at grant date of restricted shares and
restricted share units was $9.6 million and $5.0 million, respectively. The aggregate intrinsic
value of restricted shares and restricted share units was $19.1 million and $3.8 million,
respectively. The unrecognized compensation cost of nonvested restricted shares and restricted
share units was $7.6 million and $4.0 million, respectively. Unrecognized compensation costs for
restricted shares and restricted share units will be recognized over a weighted average period of
approximately 1.45 years and 2.21 years, respectively. The following table summarizes the Companys
restricted share activity for the three and nine months ended September 30, 2011:
Restricted Share Units | Restricted Shares | |||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||
Number | Grant Date | Number | Grant Date | |||||||||||||
of Units | Fair Value | of Shares | Fair Value | |||||||||||||
Nonvested at December 31, 2010 |
| $ | | 2,438,147 | $ | 6.73 | ||||||||||
Awards granted |
251,881 | 16.35 | 52,033 | 11.71 | ||||||||||||
Awards vested |
| (751,481 | ) | 7.58 | ||||||||||||
Awards forfeited |
| (160 | ) | 13.93 | ||||||||||||
Nonvested at March 31, 2011 |
251,881 | 16.35 | 1,738,539 | 6.50 | ||||||||||||
Awards granted |
42,085 | 15.78 | | |||||||||||||
Awards vested |
| (89,385 | ) | 7.94 | ||||||||||||
Awards forfeited |
| (904 | ) | 12.03 | ||||||||||||
Nonvested at June 30, 2011 |
293,966 | 16.27 | 1,648,250 | 6.42 | ||||||||||||
Awards granted |
13,706 | 14.02 | | |||||||||||||
Awards vested |
| (116,541 | ) | 7.98 | ||||||||||||
Awards forfeited |
| (1,347 | ) | 12.30 | ||||||||||||
Nonvested at September 30, 2011 |
307,672 | 16.17 | 1,530,362 | 6.30 | ||||||||||||
17. Earnings Per Share
As discussed in Note 16, Stock-Based Compensation, the Company has granted shares of
restricted stock to certain employees and outside directors of the Company. Although ownership of
these shares does not transfer to the recipients until the shares have vested, recipients have
voting and nonforfeitable dividend rights on these shares from the date of grant. Accordingly, the
Company applies the two-class method to determine its basic earnings per share.
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The computation of basic and diluted earnings per share under the two-class and treasury
methods was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Basic earnings (loss) per common share: |
||||||||||||||||
Allocation of earnings (losses): |
||||||||||||||||
Net income (loss) |
$ | 84,928 | $ | 6,859 | $ | 197,224 | $ | (9,477 | ) | |||||||
Distributed earnings |
| | | | ||||||||||||
Income allocated to participating securities |
(1,533 | ) | (173 | ) | (4,193 | ) | | |||||||||
Undistributed income (loss) available to common
shareholders |
$ | 83,395 | $ | 6,686 | $ | 193,031 | $ | (9,477 | ) | |||||||
Weighted-average number of common shares
outstanding: |
89,176 | 88,280 | 88,878 | 88,170 | ||||||||||||
Basic earnings (loss) per common share: |
||||||||||||||||
Distributed earnings per share |
$ | | $ | | $ | | $ | | ||||||||
Undistributed earnings (loss) per share |
0.94 | 0.08 | 2.17 | (0.11 | ) | |||||||||||
Basic earnings (loss) per common share |
$ | 0.94 | $ | 0.08 | $ | 2.17 | $ | (0.11 | ) | |||||||
Diluted earnings (loss) per common share: |
||||||||||||||||
Net income (loss) |
$ | 84,928 | $ | 6,859 | $ | 197,224 | $ | (9,477 | ) | |||||||
Tax effected interest related to convertible debt |
3,745 | | 11,021 | | ||||||||||||
Net income (loss) available to common
stockholders, assuming dilution |
$ | 88,673 | $ | 6,859 | $ | 208,245 | $ | (9,477 | ) | |||||||
Weighted-average diluted common shares outstanding: |
109,935 | 88,280 | 109,733 | 88,170 | ||||||||||||
Diluted earnings (loss) per common share: |
$ | 0.81 | $ | 0.08 | $ | 1.90 | $ | (0.11 | ) | |||||||
The following table reflects potentially dilutive securities that were excluded from the
diluted earnings (loss) per common share calculation as the effect of including such shares would
have been antidilutive:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Common
equivalent shares
from Convertible
Senior Notes |
| 19,949 | | 19,949 | ||||||||||||
Restricted stock |
| 9 | | 9 |
18. Contingencies
Liabilities for future remediation costs are recorded when environmental remedial efforts are probable and the costs can be
reasonably estimated, generally on an undiscounted basis. Environmental liabilities acquired in a
business combination may be discounted dependent upon specific circumstances related to each
environmental liability acquired. The timing and magnitude of these
accruals generally are based on the completion of investigations or other studies or a commitment
to a formal plan of action. Current regulations are applied in determining environmental
liabilities and are based on best estimates of probable undiscounted future costs over the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
estimated period of time expected to complete the remediation activities using currently available
technology as well as the Companys internal environmental policies. Environmental liabilities are
difficult to assess and estimate due to uncertainties related to the magnitude of possible
remediation and the timing of such remediation. Such estimates are subject to change due to many
factors, including the identification of new sites requiring remediation, changes in environmental
laws and regulations and their interpretation, additional information related to the extent and
nature of remediation efforts, and potential improvements in remediation technologies. Amounts
recorded for environmental liabilities are not reduced by possible recoveries from third parties.
El Paso Refinery
The groundwater and certain solid waste management units and other areas at and adjacent to
the El Paso refinery have been impacted by prior spills, releases, and discharges of petroleum or
hazardous substances and are currently undergoing remediation by the Company and Chevron Products
Company (Chevron) pursuant to certain agreed administrative orders with the Texas Commission on
Environmental Quality (the TCEQ). Pursuant to the Companys purchase of the north side of the El
Paso refinery from Chevron, Chevron retained responsibility to remediate their solid waste
management units in accordance with its Resource Conservation Recovery Act (RCRA) permit, which
Chevron has fulfilled. Chevron also retained liability for, and control of, certain groundwater
remediation responsibilities that are ongoing.
In May 2000, the Company entered into an Agreed Order with the Texas Natural Resources
Conservation Commission, now known as the TCEQ, for remediation of the south side of the El Paso
refinery property. In August 2000, the Company purchased a Pollution and Legal Liability and
Clean-Up Cost Cap Insurance policy at a cost of $10.3 million, which the Company expensed in 2000.
The policy is non-cancelable and covers environmental clean-up costs related to contamination that
occurred prior to December 31, 1999, including the costs of the Agreed Order activities. The
insurance provider assumed responsibility for all environmental clean-up costs related to the
Agreed Order up to $20.0 million. In addition, under a settlement agreement with the Company, a
subsidiary of Chevron is obligated to pay 60% of any Agreed Order environmental clean-up costs that
would otherwise have been covered under the policy but that exceed the $20.0 million threshold.
Under the policy, environmental costs outside the scope of the Agreed Order are covered up to $20.0
million and require payment by the Company of a deductible of $0.1 million per incident as well as
any costs that exceed the covered limits of the insurance policy.
On June 30, 2011, the U.S. Environmental Protection Agency (EPA) filed notice with the
federal district court in El Paso that the EPA and the Company had
entered into a proposed Consent
Decree under the Petroleum Refinery Enforcement Initiative (EPA Initiative). On September 2,
2011, the court entered the Consent Decree. Under the EPA Initiative, the EPA is
investigating industry-wide noncompliance with certain Clean Air Act rules. The EPA Initiative has
resulted in many refiners entering into similar consent decrees typically requiring penalties and
substantial capital expenditures for additional air pollution control
equipment. The Consent Decree
does not require any soil or groundwater remediation or clean-up.
Based
on the terms of the Consent Decree and current information, the Company estimates the
total capital expenditures necessary to address the Consent Decree issues would be approximately
$60.0 million, of which the Company has already expended $39.0 million, including $15.2 million
for the installation of a flare gas recovery system that was completed in 2007 and $23.8 million
for nitrogen oxides (NOx) emission controls on heaters and boilers through September 2011. The
Company estimates remaining expenditures of approximately $21.0 million for the NOx emission
controls on heaters and boilers during 2011 through 2013. This amount is included in the Companys
estimated capital expenditures for regulatory projects. Under the
terms of the Consent Decree, the
Company paid a civil penalty of $1.5 million in September 2011.
In March 2008, the TCEQ notified the Company that it would present the Company with a proposed
Agreed Order regarding six excess air emission incidents that occurred at the El Paso refinery
during 2007 and early 2008. While at this time it is not known precisely how or when the Agreed
Order may affect the Company, the Company may be required to implement corrective action under the
Agreed Order and may be assessed penalties. The Company does not expect any penalties or corrective
action requested to have a material adverse effect on its business, financial condition, or results
of operations or that any penalties assessed or increased costs associated with the corrective
action will be material.
In 2004 and 2005, the El Paso refinery applied for and was issued a Texas Flexible Permit by
the TCEQ Flexible Permits program, under which the refinery continues to operate. Established in
1994 under the Texas Clean Air Act, the program grants operational flexibility to industrial
facilities and permits the allocation of emissions on a facility-wide basis in exchange for
emissions reduction and controlling previously unregulated grandfathered emission sources. The
TCEQ submitted its Flexible Permits Program rules to the EPA for approval in 1994 and administered
the program for 16 years with the EPAs full knowledge. In May 2010, the El Paso refinery received
a request from the EPA, pursuant to Section 114 of the Clean Air Act,
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
seeking information about the refinerys air permits. The Company responded to the EPAs request in
June 2010. Also in June 2010, the EPA disapproved the TCEQ Flexible Permits Program. In July 2010,
the Texas Attorney General filed a legal challenge to the EPAs disapproval in a federal appeals
court asking for reconsideration. Although the Company believes its Texas Flexible Permit is
federally enforceable, the Company agreed in December 2010 to submit within one year an application
to TCEQ for a permit amendment to obtain a State Implementation Plan (SIP) approved state air
quality permit to address concerns raised by the EPA about all flexible permits. Sufficient time
has not elapsed for the Company to reasonably estimate any potential impact of these regulatory
developments in the Texas air permits program.
In September 2010, the Company received a notice of intent to sue under the Clean Air Act from
several environmental groups. While not entirely clear, the notice apparently contends that the
Companys El Paso refinery is not operating under a valid permit or permits because the EPA has
disapproved the TCEQ Flexible Permits program and that the Companys El Paso refinery may have
exceeded certain emission limitations under these same permits. The Company disputes these claims
and maintains its El Paso refinery is properly operating, and has not exceeded emissions
limitations, under the validly issued TCEQ permit. The Company intends to defend itself
accordingly.
Four Corners Refineries
Four Corners 2005 Consent Agreements. In July 2005, as part of the EPA Initiative, Giant
reached an administrative settlement with the New Mexico Environment Department (NMED) and the
EPA in the form of consent agreements that resolved certain alleged violations of air quality
regulations at the Gallup and Bloomfield refineries in the Four Corners area of New Mexico (the
2005 NMED Agreement). In January 2009, the Company and the NMED agreed to an amendment of the
2005 administrative settlement with the NMED (the 2009 NMED Amendment), which altered certain
deadlines and allowed for alternative air pollution controls.
In November 2009, the Company indefinitely suspended refining operations at the Bloomfield
refinery. The Company currently operates the site as a products distribution terminal and crude
storage facility. Bloomfield continues to use some of the refinery equipment to support the
terminal and to store crude for the Gallup refinery. The Company has begun negotiations with the
NMED to revise the 2009 NMED Amendment to reflect the indefinite suspension. During March 2011, the
Company filed a request for a second amendment to the NMED agreement. This amendment is intended to
revise the order with respect to the Companys idling the Bloomfield refinery and to delay NOx
controls on the Gallup refinerys carbon monoxide boiler. In September 2011, the NMED agreed to the
second amendment proposing a penalty of $0.4 million primarily for the delay of NOx controls on the
boiler and the Fluid Catalytic Cracking Unit (FCCU). The Company anticipates that the final penalty will be reduced through
negotiations with the NMED and has accrued $0.3 million for the penalty.
Based on current information and the 2009 NMED Amendment, the Company estimates $17.6 million
total remaining capital expenditures will be required pursuant to the 2009 NMED Amendment. The
Company has expended a total of $8.8 million through the third quarter of 2011, and expects to
spend the remaining $8.8 million throughout the remainder of 2011 and 2012. These capital
expenditures will primarily be for installation of emission controls on the heaters, boilers, and
FCCU, and for reducing sulfur in fuel gas to reduce emissions of sulfur dioxide, NOx, and
particulate matter from the refineries. The 2009 NMED Amendment also provided for a $2.4 million
penalty. The Company completed payment of the penalty between November 2009 and September 2010 to
fund Supplemental Environmental Projects (SEP). The Company does not expect implementation of the
requirements in the 2005 NMED Agreement and the associated 2009 NMED Amendment, or the second
amendment, will result in any soil or groundwater remediation or clean-up costs.
Bloomfield 2007 NMED Remediation Order. In July 2007, the Company received a final
administrative compliance order from the NMED alleging that releases of contaminants and hazardous
substances that have occurred at the Bloomfield refinery over the course of its operation prior to
June 1, 2007, have resulted in soil and groundwater contamination. Among other things, the order
requires the Company to:
| investigate and determine the nature and extent of such releases of contaminants and hazardous substances; | ||
| perform interim remediation measures, or continue interim measures already begun, to mitigate any potential threats to human health or the environment from such releases; | ||
| identify and evaluate alternatives for corrective measures to clean up any contaminants and hazardous substances released at the refinery and prevent or mitigate their migration at or from the site; | ||
| implement any corrective measures that may be approved by the NMED; | ||
| develop investigation work plans over a period of approximately four years; and |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| implement corrective measures pursuant to the investigation. |
The order recognizes that prior work satisfactorily completed may fulfill some of the
foregoing requirements. In that regard, the Company has already put in place some remediation
measures with the approval of the NMED and the New Mexico Oil Conservation Division. As of
September 30, 2011, the Company had expended $2.5 million and estimates a remaining cost of $3.1
million for implementing the investigation and interim measures of the order.
Gallup 2007 Resource Conservation Recovery Act (RCRA) Inspection. In September 2007, the
Gallup refinery was inspected jointly by the EPA and the NMED (the Gallup 2007 RCRA Inspection)
to determine compliance with the EPAs hazardous waste regulations promulgated pursuant to the
RCRA. The Company reached and paid a final settlement of $0.7 million with the agencies in 2009.
The Company does not expect implementation of the requirements in the final settlement will result
in any additional soil or groundwater remediation or clean-up costs. Based on current information,
the Company estimates capital expenditures of approximately $33.0 million to upgrade the wastewater
treatment plant at the Gallup refinery pursuant to the requirements of the final settlement.
Through September 30, 2011, the Company had expended $10.6 million on the upgrade of the wastewater
treatment plant and expects to spend the remaining $22.4 million through 2011 and 2012. In 2010,
the Company negotiated with the NMED and the EPA to modify the 2009 settlement and establish a May
2012 deadline to complete the start-up of the upgraded wastewater treatment plant.
Gallup 2010 NMED AQB Compliance Order. In October 2010, the NMED Air Quality Bureau (NMED AQB)
issued the Gallup refinery a Compliance Order alleging certain violations related to compressor
engines and demanded a penalty of $0.6 million. Although the Company believes no violations
occurred and the assessment of a penalty is not appropriate, the Company paid a $0.4 million
penalty in June 2011 to reach a settlement with the NMED AQB.
Yorktown Refinery
Yorktown 1991 and 2006 Orders. In August 2006, Giant agreed to the terms of the final
administrative consent order pursuant to which Giant would implement a clean-up plan for the
refinery. Following the acquisition of Giant, the Company completed the first phase of the soil
clean-up plan and negotiated revisions with the EPA for the remainder of the soil clean-up plan.
The Company anticipates completing the soil clean-up in 2011. The EPA issued an approval in January
2010 that allowed the Company to begin implementing its revised soil clean-up plan. The January
2010 EPA approval and a prior EPA approval in 2008 allowed adjustments to the cost estimates for
the groundwater monitoring plan and reductions to the Companys estimate of total remediation
expenditures.
The Company currently estimates that total remediation expenditures associated with the EPA
order are approximately $43.9 million. Through September 30, 2011, the Company has expended $32.5
million related to the EPA order. The Company currently anticipates further expenditures of $0.5
million during the fourth quarter of 2011 with the remainder over the next 29 years, ending in 2040.
Yorktown 2002 Amended Consent Decree. In May 2002, Giant acquired the Yorktown refinery and
assumed certain environmental obligations including responsibilities under a Consent Decree among
various parties covering many locations entered in August 2001 under the EPA
Initiative. Parties to the Consent Decree include the United States, BP Exploration and Oil Co.,
Amoco Oil Company, and Atlantic Richfield Company. As applicable to the Yorktown refinery, the
Consent Decree required, among other things, a reduction of NOx, sulfur dioxide, and particulate
matter emissions and upgrades to the refinerys leak detection and repair program. The Company does
not expect implementation of the Consent Decree requirements will result in any soil or groundwater
remediation or clean-up requirements. Pursuant to the Consent Decree and prior to May 31, 2007,
Giant had installed a new sour water stripper and sulfur recovery unit with a tail gas treating
unit and an electrostatic precipitator on the FCCU and had begun using sulfur dioxide emissions
reducing catalyst additives in the FCCU. The Company estimates additional capital expenditures of
approximately $5.0 million to complete implementation of the Consent Decree requirements. The
schedule for project implementation has not been defined. The Company does not expect completing
the requirements of the Consent Decree will result in material increased operating costs, nor does
it expect the completion of these requirements to have a material adverse effect on its business,
financial condition, or results of operations.
In August 2011, pursuant to the Consent Decree, the EPA reinstated a formal demand first
issued in March 2010 for stipulated penalties in the amount of $0.5 million for a flaring event
that occurred at the Yorktown refinery in October 2009. The Company responded in September 2011
offering to settle for $0.1 million, although the Company believes no stipulated penalties are due.
In October 2011, the EPA accepted the Companys offer. The Company does not expect any penalties, corrective action, or other associated settlement costs
related to this issue to have a material adverse effect on its business, financial condition, or
results of operations.
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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Legal Matters
Over the last several years, lawsuits have been filed in numerous states alleging that methyl
tertiary butyl ether (MTBE), a high octane blendstock used by many refiners in producing
specially formulated gasoline, has contaminated water supplies and/or damaged natural resources. A
subsidiary of the Company, Western Refining Yorktown, Inc. (Western Yorktown), is currently a
defendant in a lawsuit brought by the State of New Jersey alleging damage to the State of New
Jerseys natural resources. Western Yorktown denies these allegations and intends to defend itself
accordingly.
Owners of a small hotel in Aztec, New Mexico filed a lawsuit in San Juan County, New Mexico
alleging migration of underground gasoline onto their property from underground storage tanks
located on a convenience store property across the street, which is owned by a subsidiary of the
Company. Plaintiffs claim a component of the gasoline, MTBE, has contaminated their property as a
result of this release. The Trial Court granted summary judgment against Plaintiffs and dismissed
all claims related to the alleged 1992 release. On appeal by Plaintiffs to the New Mexico Court of
Appeals, the Court reversed and reinstated certain of its claims but only to the extent they relate
to releases that occurred after January 1, 1999. The Company disputes these claims and will defend
itself accordingly.
A lawsuit has been filed in the Federal District Court for the District of New Mexico by
certain Plaintiffs who allege the Bureau of Indian Affairs (BIA), acted improperly in approving
certain rights-of-way on land allotted to the individual Plaintiffs by the Navajo Nation, Arizona,
New Mexico, and Utah (Navajo Nation). The lawsuit names the Company and numerous other defendants
(Right-of-Way Defendants), and seeks imposition of a constructive trust and asserts these
Right-of-Way Defendants are in trespass on the Allottees lands. The Court dismissed Plaintiffs
claims in this matter. Plaintiffs then attempted to re-file these claims with the Department of
Interior, which also dismissed Plaintiffs claims. Plaintiffs are now attempting to appeal this
dismissal within the Department of Interior. The Company disputes these claims and will defend
itself accordingly.
The
lawsuit between subsidiaries of the Company, Western Refining
Pipeline, Co. and Western Refining Southwest, Inc.; and TEPPCO Crude Pipeline, LLC
and TEPPCO Crude Oil, LLC has been resolved. Other income (expense), net, in the condensed consolidated statement of operations for the three and nine months ended September 30, 2011 includes an amount related to the settlement as well as other items.
In January 2011, 13 current and former employees of the Companys Yorktown facility asserted
that the elimination of a temporary annuity supplement under the Companys Yorktown pension plan
was not permitted by the Employee Retirement Income Security Act (ERISA). These employees filed
an administrative claim with the administrator of the Companys cash balance plan, which was denied
by the administrator. A subsequent appeal to the administrator has now also been denied. These same
13 employees also filed a charge of discrimination with the Norfolk, Virginia Area Office of the
Equal Employment Opportunity Commission asserting that the above mentioned benefit changes to the
cash balance plan and the substitution of severance benefits in lieu of retiree medical benefits,
which the Company made prior to the shutdown of Yorktown facilities, violated the Age
Discrimination in Employment Act. The Company disputes these claims and will defend itself
accordingly.
On August 2, 2011, the Company was served with a bankruptcy avoidance action in the Eastern
District of Pennsylvania by a Bankruptcy Litigation Trustee for a former customer of the Company.
The avoidance action seeks the return of approximately $6.3 million alleged to be preferential or
otherwise avoidable payments that may have been made by the former customer to the Company. The
Company disputes these claims and will defend itself accordingly.
Regarding the claims asserted against the Company referenced above, potentially applicable
factual and legal issues have not been resolved, the Company has yet to determine if a liability is
probable and the Company cannot reasonably estimate the amount of any loss associated with these
matters. Accordingly, the Company has not recorded a liability for these pending lawsuits.
Other Matters
The Company successfully renegotiated collective bargaining agreements covering employees at
the Gallup and El Paso refineries that expire in 2014 and 2015, respectively. While all of the Companys
collective bargaining agreements contain no strike provisions, those provisions are not effective
in the event that an agreement expires. Accordingly, the Company may not be able to prevent a strike or work
stoppage in the future, and any such work stoppage could have a
material adverse affect on the Companys business, financial condition, and results of operations.
The Company is party to various other claims and legal actions arising in the normal course of
business. The Company believes that the resolution of these matters will not have a material
adverse effect on its financial condition, results of operations, or cash flows.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with the financial statements and the notes
thereto included elsewhere in this report. This discussion contains forward-looking statements that
are based on managements current expectations, estimates, and projections about our business and
operations. The cautionary statements made in this report should be read as applying to all related
forward-looking statements wherever they appear in this report. Our actual results may differ
materially from those currently anticipated and expressed in such forward-looking statements as a
result of a number of factors, including those we discuss under Part I, Item 1A. Risk Factors
included in our Annual Report on Form 10-K for the year ended December 31, 2010, or 2010 Form 10-K,
and elsewhere in this report. You should read such Risk Factors and Forward-Looking Statements
in this report. In this Item 2, all references to Western Refining, the Company, Western,
we, us, and our refer to Western Refining, Inc., or WNR, and the entities that became its
subsidiaries upon closing of our initial public offering (including Western Refining Company, L.P.,
or Western Refining LP), and Giant Industries, Inc., or Giant, and its subsidiaries, which became
wholly-owned subsidiaries on May 31, 2007, unless the context otherwise requires or where otherwise
indicated.
Company Overview
We are an independent crude oil refiner and marketer of refined products and also operate
service stations and convenience stores. We own and operate two refineries with a total crude oil
throughput capacity of approximately 151,000 barrels per day, or bpd. In addition to our 128,000
bpd refinery in El Paso, Texas, we own and operate a refinery near Gallup, New Mexico with a
throughput capacity of approximately 23,000 bpd. Until September 2010, we operated a 70,000 bpd
refinery on the East Coast of the United States near Yorktown, Virginia, and until November 2009,
we also operated a 17,000 bpd refinery near Bloomfield, New Mexico. We temporarily suspended
refining operations at our Yorktown facility in September 2010 and we indefinitely suspended
refining operations at the Bloomfield refinery in November 2009. We continue to operate Yorktown
and Bloomfield as product distribution terminals and supply refined products to those areas. Our
primary operating areas encompass West Texas, Arizona, New Mexico, Utah, Colorado, and the
Mid-Atlantic region. In addition to the refineries, we also own and operate stand-alone refined
product distribution terminals in Albuquerque, New Mexico; Yorktown; and Bloomfield; as well as
asphalt terminals in Phoenix and Tucson, Arizona; Albuquerque; and El Paso. As of September 30,
2011, we also operate 172 retail service stations and convenience stores in Arizona, Colorado, and
New Mexico; a fleet of crude oil and finished product truck transports; and a wholesale petroleum
products distributor, that operates in Arizona, California, Colorado, Nevada, New Mexico, Texas,
Utah, and Virginia.
We report our operating results in three business segments: the refining group, the wholesale
group, and the retail group. Our refining group currently operates the two refineries and related
refined product distribution terminals and asphalt terminals. At the refineries, we refine crude
oil and other feedstocks into finished products such as gasoline, diesel fuel, jet fuel, and
asphalt. Our refineries market finished products to a diverse customer base including wholesale
distributors and retail chains. Our wholesale group distributes gasoline, diesel fuel, and
lubricant products. Our retail group operates service stations and convenience stores and sells
gasoline, diesel fuel, and merchandise. See Note 3, Segment Information, in the Notes to Condensed
Consolidated Financial Statements included elsewhere in this quarterly report for detailed
information on our operating results by segment.
Major Influences on Results of Operations
Refining. Our net sales fluctuate significantly with movements in refined product prices and
the cost of crude oil and other feedstocks, all of which are commodities. The spread between crude
oil and refined product prices is the primary factor affecting our earnings and cash flows from
operations. The cost to acquire feedstocks and the price of the refined products that we ultimately
sell depends on numerous factors beyond our control. These factors include the supply of and demand
for crude oil, gasoline, and other refined products. Supply and demand for these products depend on
changes in domestic and foreign economies; weather conditions; domestic and foreign political
affairs; production levels; availability of imports; marketing of competitive fuels; price
differentials between heavy and sour crude oils and light sweet crude oils, known as the heavy
light crude oil differential; and government regulation. Another factor impacting our margins in
recent years is the narrowing of the heavy light crude oil differential. Since the second quarter
of 2009, the heavy light crude oil differential has narrowed significantly, particularly impacting
our Yorktown refinery. When operating, the Yorktown refinery can process up to 100% heavy crude
oil, and narrowing of the heavy light crude oil differential can have significant negative impact
on Yorktowns refining margins. During the first three quarters of 2011, a supply imbalance of WTI
crude oil in the Mid-Continent has resulted in lower prices for WTI crude oil relative to Brent
crude oil. Our refineries in El Paso and Gallup process primarily WTI based crude oil.
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Other factors that impact our overall refinery gross margins include the sale of lower value
products such as residuum, propane, and petroleum coke particularly when crude costs are higher.
Our refinery gross margin is further reduced because our refinery product yield is less than our
total refinery throughput volume. Also affecting refining margins within refinery cost of products
sold is the impact of our economic hedging activity entered into primarily to fix the margin on a
portion of our future gasoline and distillate production and to protect the value of certain crude
oil, finished product, and blendstock inventories. Our refining cost of products sold includes
$115.4 million and $179.5 million in economic hedging losses, respectively, for the three and nine
months ended September 30, 2011. Our results of operations are also significantly affected by our
refineries direct operating expenses, especially the cost of natural gas used for fuel and the
cost of electricity. Natural gas prices have historically been volatile. Typically, electricity
prices fluctuate with natural gas prices.
Demand for gasoline is generally higher during the summer months than during the winter
months. In addition, higher volumes of ethanol are blended with gasoline produced in the Southwest
region during the winter months, thereby increasing the supply of gasoline. This combination of
decreased demand and increased supply during the winter months can lower gasoline prices. As a
result, our operating results for the first and fourth calendar quarters are generally lower than
those for the second and third calendar quarters of each year. The effects of seasonal demand for
gasoline are partially offset by increased demand during the winter months for diesel fuel in the
Southwest. Refining margins remain volatile and our results of operations may not reflect these
historical seasonal trends.
Safety, reliability, and the environmental performance of our refineries operations are
critical to our financial performance. Unplanned downtime of our refineries generally results in
lost refinery gross margin opportunity, increased maintenance costs, and a temporary increase in
working capital investment and inventory. We attempt to mitigate the financial impact of planned
downtime, such as a turnaround or a major maintenance project, through a planning process that
considers product availability, margin environment, and the availability of resources to perform
the required maintenance.
Periodically we have planned maintenance turnarounds at our refineries, which are expensed as
incurred. We completed a scheduled turnaround at the south side of the El Paso refinery during the
first quarter of 2010. Our next scheduled maintenance turnarounds are during the fall of 2012 for
the Gallup refinery, the first quarter of 2013 for the El Paso refinery, and the first half of 2013
for the Yorktown refinery. The Yorktown 2013 turnaround will be performed in connection with our
intention to restart refining operations at our Yorktown refinery.
The nature of our business requires us to maintain substantial quantities of crude oil and
refined product inventories. Because crude oil and refined products are commodities, we have no
control over the changing market value of these inventories. Our inventory of crude oil and the
majority of our refined products are valued at the lower of cost or market, or LCM, under the
last-in, first-out, or LIFO, inventory valuation methodology. If the market values of our
inventories decline below our cost basis, we would record a write-down of our inventories resulting
in a non-cash charge to our cost of products sold. Under the LIFO inventory valuation method, this
write-down is subject to recovery in future periods to the extent the market values of our
inventories equal our cost basis relative to any LIFO inventory valuation write-downs previously
recorded. See Note 5, Inventories, in the Notes to Condensed Consolidated Financial Statements
included in this quarterly report for more information on the impact of LIFO inventory accounting.
Wholesale. Our earnings and cash flows from our wholesale business segment are primarily
affected by the sales volumes and margins of gasoline, diesel fuel, and lubricants sold. Margins
for gasoline, diesel fuel, and lubricant sales are equal to the sales price less cost of sales.
Margins are impacted by local supply, demand, competition, and price volatility associated with
changes in refined product prices primarily for sales in the Northeast.
Retail. Our earnings and cash flows from our retail business segment are primarily affected by
the sales volumes and margins of gasoline and diesel fuel sold, and by the sales and margins of
merchandise sold at our service stations and convenience stores. Margins for gasoline and diesel
fuel sales are equal to the sales price less the delivered cost of the fuel and motor fuel taxes,
and are measured on a cents per gallon, or cpg, basis. Fuel margins are impacted by local supply,
demand, and competition. Margins for retail merchandise sold are equal to retail merchandise sales
less the delivered cost of the merchandise, net of supplier discounts and rebates and inventory
shrinkage, and are measured as a percentage of merchandise sales. Merchandise sales are impacted by
convenience or location, branding, and competition. Our retail sales are seasonal. Our retail
business segment operating results for the first and fourth calendar quarters are generally lower
than those for the second and third calendar quarters of each year.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with U.S. generally accepted accounting
principles, or GAAP. In order to apply these principles, we must make judgments, assumptions, and
estimates based on the best available information at the time. Actual results may differ based on
the continuing development of the information utilized and subsequent events, some of which we may
have little or no control over. Our critical accounting policies could materially affect the
amounts recorded in our financial statements. Our critical accounting policies, estimates, and
recent accounting pronouncements that potentially impact
29
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us are discussed in detail under Part II, Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in our 2010 annual report on Form 10-K.
Recent Accounting Pronouncements. From time to time, new accounting pronouncements are issued
by the Financial Accounting Standards Board or other standard setting bodies that may have an
impact on our accounting and reporting. We believe that such recently issued accounting
pronouncements and other authoritative guidance for which the effective date is in the future
either will not have a significant impact on our accounting or reporting or that such impact will
not be material to our financial position, results of operations, and cash flows when implemented.
Results of Operations
The following tables summarize our consolidated and operating segment financial data and key
operating statistics for the three and nine months ended September 30, 2011 and 2010. The following
data should be read in conjunction with our Condensed Consolidated Financial Statements and the
notes thereto included elsewhere in this quarterly report.
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Table of Contents
Consolidated
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Statements of Operations Data |
||||||||||||||||
Net sales (1) |
$ | 2,397,139 | $ | 2,038,296 | $ | 6,794,611 | $ | 6,099,028 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of products sold (exclusive of
depreciation and amortization) (1) |
2,053,409 | 1,807,411 | 5,854,320 | 5,479,813 | ||||||||||||
Direct operating expenses (exclusive of
depreciation and amortization) (1) |
109,159 | 116,982 | 337,571 | 337,930 | ||||||||||||
Selling, general, and administrative expenses |
27,153 | 23,733 | 72,357 | 61,185 | ||||||||||||
Impairment losses |
| 3,963 | | 3,963 | ||||||||||||
Maintenance turnaround expense |
632 | | 1,336 | 23,286 | ||||||||||||
Depreciation and amortization |
35,581 | 35,253 | 105,301 | 104,294 | ||||||||||||
Total operating costs and expenses |
2,225,934 | 1,987,342 | 6,370,885 | 6,010,471 | ||||||||||||
Operating income |
171,205 | 50,954 | 423,726 | 88,557 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
114 | 151 | 345 | 317 | ||||||||||||
Interest expense |
(33,195 | ) | (37,099 | ) | (101,191 | ) | (111,168 | ) | ||||||||
Amortization of loan fees |
(2,295 | ) | (2,453 | ) | (6,869 | ) | (7,287 | ) | ||||||||
Loss on extinguishment of debt |
| | (4,641 | ) | | |||||||||||
Other, net |
(5,206 | ) | 414 | (4,038 | ) | 4,212 | ||||||||||
Income (loss) before income taxes |
130,623 | 11,967 | 307,332 | (25,369 | ) | |||||||||||
Provision for income taxes |
(45,695 | ) | (5,108 | ) | (110,108 | ) | 15,892 | |||||||||
Net income (loss) |
$ | 84,928 | $ | 6,859 | $ | 197,224 | $ | (9,477 | ) | |||||||
Basic earnings (loss) per share |
$ | 0.94 | $ | 0.08 | $ | 2.17 | $ | (0.11 | ) | |||||||
Diluted earnings (loss) per share (2) |
$ | 0.81 | $ | 0.08 | $ | 1.90 | $ | (0.11 | ) | |||||||
Weighted average basic shares outstanding |
89,176 | 88,280 | 88,878 | 88,170 | ||||||||||||
Weighted average dilutive shares outstanding |
109,935 | 88,280 | 109,733 | 88,170 | ||||||||||||
Cash Flow Data |
||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||
Operating activities |
$ | 255,789 | $ | 239,604 | $ | 400,551 | $ | 93,481 | ||||||||
Investing activities |
(18,678 | ) | (19,208 | ) | (33,045 | ) | (56,099 | ) | ||||||||
Financing activities |
(7,681 | ) | (163,250 | ) | (24,783 | ) | (34,750 | ) | ||||||||
Other Data |
||||||||||||||||
Adjusted EBITDA (3) |
$ | 202,326 | $ | 90,735 | $ | 526,670 | $ | 224,629 | ||||||||
Capital expenditures |
18,653 | 19,660 | 44,655 | 56,741 | ||||||||||||
Balance Sheet Data (at end of period) |
||||||||||||||||
Cash and cash equivalents |
$ | 402,635 | $ | 77,522 | ||||||||||||
Working capital |
673,196 | 354,727 | ||||||||||||||
Total assets |
3,021,390 | 2,661,682 | ||||||||||||||
Total debt |
1,062,362 | 1,093,608 | ||||||||||||||
Stockholders equity |
882,970 | 680,291 |
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(1) | Excludes $1,391.7 million, $833.2 million, $3,677.7 million, and $2,317.0 million of intercompany sales; $1,388.1 million, $3,668.8 million, $831.6 million, and $2,312.6 million of intercompany cost of products sold; and $3.6 million, $1.6 million, $8.9 million, and $4.4 million of intercompany direct operating expenses for the three and nine months ended September 30, 2011 and 2010, respectively. | |
(2) | Our computation of diluted earnings (loss) per share potentially includes our Convertible Senior Notes and our restricted shares and share units. If determined to be dilutive to period earnings, these securities are included in the denominator of our diluted earnings per share calculation. For purposes of the diluted earnings (loss) per share calculation, we assumed issuance of 0.8 million and 0.9 milliion restricted shares and share units for the three and nine months ended September 30, 2011, respectively, and assumed issuance of 19.9 million shares related to the Convertible Senior Notes, respectively for both periods. The Convertible Senior Notes and restricted shares and share units were determined to be anti-dilutive for the same periods in 2010 and as such were not included in our computation of diluted earnings (loss) per share for those periods. | |
(3) | Adjusted EBITDA represents earnings before interest expense, income tax expense, amortization of loan fees, depreciation, amortization, maintenance turnaround expense, and other non-cash income and expense items. However, Adjusted EBITDA is not a recognized measurement under GAAP. Our management believes that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. In addition, our management believes that Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of Adjusted EBITDA generally eliminates the effects of financings, income taxes, the accounting effects of significant turnaround activities (which many of our competitors capitalize and thereby exclude from their measures of EBITDA), and certain non-cash charges, which are items that may vary for different companies for reasons unrelated to overall operating performance. |
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in
isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these
limitations are:
| Adjusted EBITDA does not reflect our cash expenditures or future requirements for significant turnaround activities, capital expenditures, or contractual commitments; | |
| Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt; | |
| Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and | |
| our calculation of Adjusted EBITDA may differ from the Adjusted EBITDA calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered a measure of
discretionary cash available to us to invest in the growth of our business. We compensate for
these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only
supplementally. The following table reconciles net income (loss) to Adjusted EBITDA for the
periods presented:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income (loss) |
$ | 84,928 | $ | 6,859 | $ | 197,224 | $ | (9,477 | ) | |||||||
Interest expense |
33,195 | 37,099 | 101,191 | 111,168 | ||||||||||||
Provision for income taxes |
45,695 | 5,108 | 110,108 | (15,892 | ) | |||||||||||
Amortization of loan fees |
2,295 | 2,453 | 6,869 | 7,287 | ||||||||||||
Depreciation and amortization |
35,581 | 35,253 | 105,301 | 104,294 | ||||||||||||
Maintenance turnaround expense |
632 | | 1,336 | 23,286 | ||||||||||||
Loss on extinguishment of debt |
| | 4,641 | | ||||||||||||
Impairment losses |
| 3,963 | | 3,963 | ||||||||||||
Adjusted EBITDA |
$ | 202,326 | $ | 90,735 | $ | 526,670 | $ | 224,629 | ||||||||
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Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010
Net Sales. Net sales primarily consist of gross sales of refined products, lubricants, and
merchandise, net of customer rebates or discounts and excise taxes. Net sales for the three months
ended September 30, 2011 were $2,397.1 million compared to $2,038.3 million for the same period in
2010, an increase of $358.8 million, or 17.6%. This increase was the result of increased sales from
our wholesale and retail groups of $579.4 million and $62.8 million, respectively, and decreased
sales from our refining group of $283.4 million, net of intercompany transactions that eliminate in
consolidation. The average sales price per barrel of refined products for all operating segments
including intersegment revenues increased from $90.00 for the three months ended September 30, 2010
to $129.39 for the three months ended September 30, 2011. This increase was partially offset by a
decrease in sales volume. Our sales volume decreased from 30.6 million barrels to 28.6 million
barrels for the three months ended September 30, 2010 and 2011, respectively, a decrease of 2.0
million barrels, or 6.5%.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold
primarily includes cost of crude oil, other feedstocks and blendstocks, purchased refined products,
lubricants and merchandise for resale, and transportation and distribution costs. Cost of products
sold was $2,053.4 million for the three months ended September 30, 2011 compared to $1,807.4
million for the same period in 2010, an increase of $246.0 million, or 13.6%. This increase was
primarily the result of increased cost of products sold from our wholesale and retail groups of
$568.8 million and $63.5 million, respectively, and decreased cost of products sold from our
refining group of $386.3 million, net of intercompany transactions that eliminate in consolidation.
The average cost per barrel of crude oil, feedstocks, and refined products for all operating
segments increased from $82.94 to $117.49 for the three months ended September 30, 2010 and 2011,
respectively. Cost of products sold for the three months ended September 30, 2011 and 2010 includes
$105.9 million and $1.7 million, respectively, in realized and unrealized economic hedging losses.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating
expenses include direct costs of labor, maintenance materials and services, transportation
expenses, chemicals and catalysts, natural gas, utilities, insurance expense, property taxes, and
other direct operating expenses. Direct operating expenses were $109.2 million for the three months
ended September 30, 2011 compared to $117.0 million for the same period in 2010, a decrease of $7.8
million, or 6.7%. The decrease in direct operating expenses resulted from a decrease of $15.2
million from our refining group and increases of $3.5 million and $3.9 million in direct operating
expenses from our wholesale and retail groups, respectively, net of intercompany transactions that
eliminate in consolidation.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
consist primarily of corporate overhead, marketing expenses, public company costs, and stock-based
compensation. Selling, general, and administrative expenses were $27.2 million for the three months
ended September 30, 2011 compared to $23.7 million for the same period in 2010, an increase of $3.5
million, or 14.8%. The increase in selling, general, and administrative expenses resulted from
increased expenses in our refining group, retail group, and corporate overhead of $1.3 million,
$0.6 million, and $2.1 million, respectively, and a $0.5 million decrease in our wholesale group.
The increase of $2.1 million in corporate overhead was primarily the result of increased
incentive compensation and salary expenses of $1.2 million and $0.4 million, respectively.
Impairment Losses. As a result of our decision to permanently close our product distribution
terminal in Flagstaff, Arizona during the third quarter of 2010, we completed an impairment
analysis of the related long-lived assets. From this analysis, we determined that impairment
existed. Accordingly, we recorded an impairment charge of $4.0 million primarily related to the
Flagstaff long-lived assets during the three months ended September 30, 2010. No impairment
charges were recorded during the three months ended September 30, 2011.
Maintenance Turnaround Expense. Maintenance turnaround expense includes planned periodic
maintenance and repairs generally performed every two to six years, depending on the processing
units involved. During the three months ended September 30, 2011, we incurred turnaround expenses
of $0.6 million in connection with a planned 2012 turnaround at our Gallup refinery. During the
three months ended September 30, 2010, we did not incur turnaround-related costs at any of our
refineries.
Depreciation and Amortization. Depreciation and amortization for the three months ended
September 30, 2011 was $35.6 million compared to $35.3 million for the same period in 2010, an
increase of $0.3 million, or 0.8%.
Operating Income. Operating income was $171.2 million for the three months ended September 30,
2011, compared to $51.0 million for the same period in 2010, an increase of $120.2 million, or
235.7%.
Interest Income. Interest income for the three months ended September 30, 2011 and 2010
remained relatively unchanged.
Interest Expense. Interest expense for the three months ended September 30, 2011 was $33.2
million (net of capitalized interest of $0.1 million) compared to $37.1 million (net of capitalized
interest of $1.2 million) for the same period in 2010, a
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decrease of $3.9 million, or 10.5%. This decrease was primarily attributable to our lower
average cost of borrowing during the three months ended September 30, 2011 compared to the same
period in 2010.
Amortization of Loan Fees. Amortization of loan fees for the three months ended September 30,
2011 was $2.3 million compared to $2.5 million for the same period in 2010, a decrease of $0.2
million, or 8.0%.
Other, Net. Other income (expense), net for the three months ended September 30, 2011 was $5.2
million and includes amounts related to the settlement of a lawsuit during the period.
Provision for Income Taxes. We recorded income tax expense of $45.7 million and $5.1 million,
respectively, for the three months ended September 30, 2011 and 2010, using estimated effective tax
rates of 35.0% and 42.7%, respectively, as compared to the federal statutory rate of 35%. The
effective tax rate in 2010 was primarily higher due to the federal income tax credit available to
small business refiners related to the production of ultra low sulfur diesel fuel and our estimated
annual taxable loss relative to the current period results.
Net Income. We reported net income of $84.9 million for the three months ended September 30,
2011, representing $0.94 and $0.81 net income per share on weighted average basic and dilutive
shares outstanding of 89.2 million and 109.9 million, respectively. We reported net income of $6.9
million for the same period in 2010, representing $0.08 net income per share on both basic and
dilutive weighted average shares outstanding of 88.3 million.
Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010
Net Sales. Net sales for the nine months ended September 30, 2011 were $6,794.6 million
compared to $6,099.0 million for the same period in 2010, an increase of $695.6 million, or 11.4%.
This increase was the result of increased sales from our wholesale and retail groups of $1,628.4
million and $129.5 million, respectively, and decreased sales from our refining group of $1,062.3
million, net of intercompany transactions that eliminate in consolidation. The average sales price
per barrel of refined products for all operating segments increased from $90.05 to $128.67 for the
nine months ended September 30, 2010 and 2011, respectively. This increase was partially offset by
a decrease in sales volume. Our sales volume decreased from 89.6 million barrels to 79.4 million
barrels for the nine months ended September 30, 2010 and 2011, respectively, a decrease of 10.2
million barrels, or 11.4%.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold was
$5,854.3 million for the nine months ended September 30, 2011 compared to $5,479.8 million for the
same period in 2010, an increase of $374.5 million, or 6.8%. This increase was primarily the result
of increased cost of products sold from our wholesale and retail groups of $1,604.8 million and
$129.9 million, respectively, and decreased cost of products sold from our refining group of
$1,360.2 million, net of intercompany transactions that eliminate in consolidation. The average
cost per barrel of crude oil, feedstocks, and refined products for all operating segments increased
from $83.60 to $117.19 for the nine months ended September 30, 2010 and 2011, respectively. Cost of
products sold for the nine months ended September 30, 2011 and 2010 includes $173.3 million and
$4.8 million, respectively, in realized and unrealized economic hedging losses.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating
expenses were $337.6 million for the nine months ended September 30, 2011 compared to $337.9
million for the same period in 2010, a decrease of $0.3 million, or 0.1%. Direct operating
expenses for the nine months ended September 30, 2010 were reduced $8.5 million related to the
first quarter 2010 reversal of our December 2009 incentive bonus accrual. The decrease in direct
operating expenses resulted from a decrease of $17.3 million from our refining group and increases
of $11.5 million and $5.5 million in direct operating expenses from our wholesale and retail
groups, respectively, net of intercompany transactions that eliminate in consolidation.
In total, we reversed $14.7 million related to our December 2009 incentive bonus accrual
including the $6.2 million reversal discussed below under Selling, General, and Administrative
Expenses for the nine months ended September 30, 2010. We consider the awarding of a bonus for any
period to be discretionary and subject to not only the earnings during the bonus period, but also
to the economic conditions and refining industry environment at the time the bonus is to be paid.
Our first quarter 2010 results, coupled with our near-term forecasts of operating results and our
expectations for the economy, were such that we did not deem the pay-out of the previously accrued
2009 bonus prudent as such payment would not be in the best interests of the Company or our
shareholders. On March 29, 2010, we determined that 2009 bonuses would not be paid.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
were $72.4 million for the nine months ended September 30, 2011 compared to $61.2 million for the
same period in 2010, an increase of $11.2 million, or 18.3%. Selling, general, and administrative
expenses were reduced $6.2 million related to the reversal of our December 2009 incentive bonus
accrual during the first quarter of 2010. See Direct Operating Expenses (exclusive of depreciation
and amortization) for the nine months ended September 30, 2011 for additional discussion of the
bonus accrual reversal. The increase in selling, general, and administrative expenses resulted from
increased expenses in our refining and retail groups of $2.4 million and $1.6 million,
respectively, a $7.5 million increase in corporate overhead, and a $0.3 million decrease in our
wholesale group.
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The increase of $7.5 million in corporate overhead was primarily due to increased incentive
compensation ($6.0 million), the cost of various information technology initiatives ($1.2 million),
and stock-based compensation ($0.8 million). These increases were partially offset by a decrease in
pension and retiree medical benefits ($1.2 million).
Impairment Losses. As a result of our decision to permanently close our product distribution
terminal in Flagstaff, Arizona during the third quarter of 2010, we completed an impairment
analysis of the related long-lived assets. From this analysis, we determined that impairment
existed. Accordingly, we recorded an impairment charge of $4.0 million primarily related to the
Flagstaff long-lived assets during the nine months ended September 30, 2010. No impairment charges
were recorded during the nine months ended September 30, 2011.
Maintenance Turnaround Expense. During the nine months ended September 30, 2011, we incurred
turnaround expenses of $1.3 million in connection with a planned 2012 turnaround at our Gallup
refinery. During the nine months ended September 30, 2010, we incurred costs of $23.3 million in
connection with a turnaround at the El Paso refinery.
Depreciation and Amortization. Depreciation and amortization for the nine months ended
September 30, 2011 was $105.3 million compared to $104.3 million for the same period in 2010, an
increase of $1.0 million, or 1.0%.
Operating Income. Operating income was $423.7 million for the nine months ended September 30,
2011 compared to $88.6 million for the same period in 2010, an increase of $335.2 million. This
increase was primarily attributable to increased refinery gross margins, increased selling,
general, and administrative expenses, and increased depreciation and amortization expense offset by
decreased maintenance turnaround expense and decreased direct operating expenses.
Interest Income. Interest income for the nine months ended September 30, 2011 and 2010
remained relatively unchanged.
Interest Expense. Interest expense for the nine months ended September 30, 2011 was $101.2
million (net of capitalized interest of $1.7 million) compared to $111.2 million (net of
capitalized interest of $2.8 million) for the same period in 2010, a decrease of $10.0 million, or
9.0%. The decrease was primarily attributable to our lower average cost of borrowing during the
nine months ended September 30, 2011 compared to the same period in 2010.
Amortization of Loan Fees. Amortization of loan fees for the nine months ended September 30,
2011 was $6.9 million compared to $7.3 million for the same period in 2010, a decrease of $0.4
million, or 5.5%.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the nine months ended
September 30, 2011 was $4.6 million. No losses were recorded during the nine months ended
September 30, 2010. This increase was attributable to the amendment of our Term Loan Credit
Agreement.
Other, Net. Other expense, net, for the nine months ended September 30, 2011 was $4.0 million
compared to other income, net, of $4.2 million for the same period in 2010. Both periods include
amounts related to the settlement of lawsuits.
Provision for Income Taxes. We recorded income tax expense of $110.1 million for the nine
months ended September 30, 2011, using an estimated effective tax rate of 35.8% as compared to the
federal statutory rate of 35%.
We recorded a benefit for income taxes of $15.9 million for the nine months ended September
30, 2010, using an estimated effective tax rate of 62.6% as compared to the federal statutory rate
of 35%. The effective tax rate was higher primarily due to the federal income tax credit available
to small business refiners related to the production of ultra low sulfur diesel fuel and our
estimated annual taxable loss relative to the period net loss.
Net Income (Loss). We reported net income of $197.2 million for the nine months ended
September 30, 2011, representing $2.17 and $1.90 net income per share on weighted average basic and
dilutive shares outstanding of 88.9 million and 109.7 million, respectively. For the nine months
ended September 30, 2010, we reported net loss of $9.5 million representing $0.11 net loss per
share on both basic and dilutive weighted average shares outstanding of 88.2 million.
See additional analyses under the Refining Segment, Wholesale Segment, and Retail Segment.
35
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Refining Segment
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 (5) | 2011 | 2010 (5) | |||||||||||||
(In thousands, except per barrel data) | ||||||||||||||||
Net sales (including intersegment sales) |
$ | 2,279,022 | $ | 2,045,006 | $ | 6,248,365 | $ | 6,095,884 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of products sold (exclusive of
depreciation and amortization) |
1,993,683 | 1,864,165 | 5,464,555 | 5,611,868 | ||||||||||||
Direct operating expenses (exclusive of
depreciation and amortization) |
74,485 | 88,685 | 241,567 | 257,049 | ||||||||||||
Selling, general, and administrative expenses |
7,336 | 6,018 | 16,603 | 14,208 | ||||||||||||
Impairment losses |
| 3,757 | | 3,757 | ||||||||||||
Maintenance turnaround expense |
632 | | 1,336 | 23,286 | ||||||||||||
Depreciation and amortization |
31,440 | 30,434 | 92,633 | 89,211 | ||||||||||||
Total operating costs and expenses |
2,107,576 | 1,993,059 | 5,816,694 | 5,999,379 | ||||||||||||
Operating income |
$ | 171,446 | $ | 51,947 | $ | 431,671 | $ | 96,505 | ||||||||
Key Operating Statistics |
||||||||||||||||
Total sales volume (bpd) (1) |
201,382 | 256,741 | 186,141 | 257,135 | ||||||||||||
Total refinery production (bpd) |
147,491 | 209,337 | 139,344 | 205,689 | ||||||||||||
Total refinery throughput (bpd) (2) |
149,556 | 211,167 | 141,453 | 207,111 | ||||||||||||
Per barrel of throughput: |
||||||||||||||||
Refinery gross margin (3) |
$ | 20.74 | $ | 9.31 | $ | 20.30 | $ | 8.56 | ||||||||
Gross profit (3) |
18.45 | 7.74 | 17.90 | 6.98 | ||||||||||||
Direct operating expenses (4) |
5.41 | 4.56 | 6.26 | 4.55 |
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Table of Contents
Southwest Refineries (El Paso, Gallup, and Related Operations)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per barrel data) | ||||||||||||||||
Net sales (including intersegment sales) |
$ | 2,270,693 | $ | 1,578,185 | $ | 6,237,337 | $ | 4,630,412 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of products sold (exclusive of
depreciation and amortization) |
1,988,501 | 1,413,007 | 5,457,982 | 4,190,979 | ||||||||||||
Direct operating expenses (exclusive of
depreciation and amortization) |
62,753 | 59,879 | 208,891 | 176,849 | ||||||||||||
Selling, general, and administrative expenses |
7,089 | 5,681 | 19,797 | 13,418 | ||||||||||||
Impairment losses |
| 3,757 | | 3,757 | ||||||||||||
Maintenance turnaround expense |
632 | | 1,336 | 23,286 | ||||||||||||
Depreciation and amortization |
20,468 | 18,809 | 57,288 | 54,909 | ||||||||||||
Total operating costs and expenses |
2,079,443 | 1,501,133 | 5,745,294 | 4,463,198 | ||||||||||||
Operating income |
$ | 191,250 | $ | 77,052 | $ | 492,043 | $ | 167,214 | ||||||||
Key Operating Statistics |
||||||||||||||||
Total sales volume (bpd) (1) |
200,505 | 192,478 | 185,826 | 188,973 | ||||||||||||
Total refinery production (bpd) |
147,491 | 157,589 | 139,344 | 146,874 | ||||||||||||
Total refinery throughput (bpd) (2) |
149,556 | 160,404 | 141,453 | 149,347 | ||||||||||||
Per barrel of throughput: |
||||||||||||||||
Refinery gross margin (3) |
$ | 20.51 | $ | 11.19 | $ | 20.18 | $ | 10.78 | ||||||||
Gross profit (3) |
19.02 | 9.92 | 18.70 | 9.43 | ||||||||||||
Direct operating expenses (4) |
4.56 | 4.06 | 5.41 | 4.34 |
The following tables set forth our summary refining throughput and production data for the
periods and refineries presented:
All Refineries
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 (5) | 2011 | 2010 (5) | |||||||||||||
Key Operating Statistics |
||||||||||||||||
Refinery product yields (bpd): |
||||||||||||||||
Gasoline |
76,853 | 112,302 | 73,861 | 108,753 | ||||||||||||
Diesel and jet fuel |
61,234 | 79,320 | 56,865 | 78,279 | ||||||||||||
Residuum |
5,748 | 5,281 | 5,167 | 4,838 | ||||||||||||
Other |
3,656 | 7,578 | 3,451 | 8,172 | ||||||||||||
Liquid products |
147,491 | 204,481 | 139,344 | 200,042 | ||||||||||||
By-products (coke) |
| 4,856 | | 5,647 | ||||||||||||
Total refinery production (bpd) |
147,491 | 209,337 | 139,344 | 205,689 | ||||||||||||
Refinery throughput (bpd): |
||||||||||||||||
Sweet crude oil |
123,677 | 137,242 | 113,043 | 133,846 | ||||||||||||
Sour or heavy crude oil |
19,007 | 46,791 | 19,573 | 52,231 | ||||||||||||
Other feedstocks and blendstocks |
6,872 | 27,134 | 8,837 | 21,034 | ||||||||||||
Total refinery throughput (bpd) |
149,556 | 211,167 | 141,453 | 207,111 | ||||||||||||
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Southwest Refineries (El Paso and Gallup)
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||
Key Operating Statistics |
|||||||||||||||||
Refinery product yields (bpd): |
|||||||||||||||||
Gasoline |
76,853 | 86,534 | 73,861 | 80,710 | |||||||||||||
Diesel and jet fuel |
61,234 | 61,662 | 56,865 | 57,353 | |||||||||||||
Residuum |
5,748 | 5,281 | 5,167 | 4,838 | |||||||||||||
Other |
3,656 | 4,112 | 3,451 | 3,973 | |||||||||||||
Total refinery production (bpd) |
147,491 | 157,589 | 139,344 | 146,874 | |||||||||||||
Refinery throughput (bpd): |
|||||||||||||||||
Sweet crude oil |
123,677 | 131,815 | 113,043 | 126,133 | |||||||||||||
Sour or heavy crude oil |
19,007 | 13,677 | 19,573 | 11,957 | |||||||||||||
Other feedstocks and blendstocks |
6,872 | 14,912 | 8,837 | 11,257 | |||||||||||||
Total refinery throughput (bpd) |
149,556 | 160,404 | 141,453 | 149,347 | |||||||||||||
El Paso Refinery
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Key Operating Statistics |
||||||||||||||||
Refinery product yields (bpd): |
||||||||||||||||
Gasoline |
60,012 | 69,748 | 57,763 | 64,597 | ||||||||||||
Diesel and jet fuel |
54,016 | 54,572 | 50,037 | 51,065 | ||||||||||||
Residuum |
5,748 | 5,281 | 5,167 | 4,838 | ||||||||||||
Other |
2,879 | 3,420 | 2,679 | 3,194 | ||||||||||||
Total refinery production (bpd) |
122,655 | 133,021 | 115,646 | 123,694 | ||||||||||||
Refinery throughput (bpd): |
||||||||||||||||
Sweet crude oil |
101,797 | 110,136 | 91,221 | 105,267 | ||||||||||||
Sour crude oil |
19,007 | 13,677 | 19,573 | 11,957 | ||||||||||||
Other feedstocks and blendstocks |
3,473 | 11,277 | 6,437 | 8,358 | ||||||||||||
Total refinery throughput (bpd) |
124,277 | 135,090 | 117,231 | 125,582 | ||||||||||||
Total sales volume (bpd) (1) |
165,235 | 151,936 | 151,795 | 152,578 | ||||||||||||
Per barrel of throughput: |
||||||||||||||||
Refinery gross margin (3) |
$ | 27.48 | $ | 9.77 | $ | 24.05 | $ | 9.56 | ||||||||
Direct operating expenses (4) |
3.48 | 3.27 | 4.38 | 3.47 |
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Table of Contents
Gallup Refinery
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Key Operating Statistics |
||||||||||||||||
Refinery product yields (bpd): |
||||||||||||||||
Gasoline |
16,841 | 16,786 | 16,098 | 16,113 | ||||||||||||
Diesel and jet fuel |
7,218 | 7,090 | 6,828 | 6,288 | ||||||||||||
Other |
777 | 692 | 772 | 779 | ||||||||||||
Total refinery production (bpd) |
24,836 | 24,568 | 23,698 | 23,180 | ||||||||||||
Refinery throughput (bpd): |
||||||||||||||||
Sweet crude oil |
21,880 | 21,679 | 21,822 | 20,866 | ||||||||||||
Other feedstocks and blendstocks |
3,399 | 3,635 | 2,400 | 2,899 | ||||||||||||
Total refinery throughput (bpd) |
25,279 | 25,314 | 24,222 | 23,765 | ||||||||||||
Total sales volume (bpd) (1) |
35,270 | 40,542 | 34,031 | 36,395 | ||||||||||||
Per barrel of throughput: |
||||||||||||||||
Refinery gross margin (3) |
$ | 35.47 | $ | 19.44 | $ | 28.23 | $ | 17.78 | ||||||||
Direct operating expenses (4) |
7.68 | 6.21 | 8.27 | 6.60 |
Yorktown Refinery
Three Months Ended | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
2010 | 2010 | |||||||
Key Operating Statistics (5) |
||||||||
Refinery product yields (bpd): |
||||||||
Gasoline |
25,768 | 28,043 | ||||||
Diesel and jet fuel |
17,658 | 20,926 | ||||||
Other |
3,466 | 4,199 | ||||||
Liquid products |
46,892 | 53,168 | ||||||
By-products (coke) |
4,856 | 5,647 | ||||||
Total refinery production (bpd) |
51,748 | 58,815 | ||||||
Refinery throughput (bpd): |
||||||||
Sweet crude oil |
5,427 | 7,713 | ||||||
Heavy crude oil |
33,114 | 40,274 | ||||||
Other feedstocks and blendstocks |
12,222 | 9,777 | ||||||
Total refinery throughput (bpd) |
50,763 | 57,764 | ||||||
Total sales volume (bpd) (1) |
64,262 | 68,162 | ||||||
Per barrel of throughput: |
||||||||
Refinery gross margin (3) |
$ | 3.35 | $ | 2.83 | ||||
Direct operating expenses (4) |
6.17 | 5.09 |
(1) | Includes sales of refined products sourced primarily from our refinery production as well as some refined products purchased from third parties. | |
(2) | Total refinery throughput includes crude oil and other feedstocks and blendstocks. |
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Table of Contents
(3) | Refinery gross margin is a per barrel measurement calculated by dividing the difference between net sales and cost of products sold by our refineries total throughput volumes for the respective periods presented. Realized and unrealized economic hedging gains and losses included in the combined refining segment gross margin are not allocated to the individual refineries. Cost of products sold does not include any depreciation or amortization. Refinery gross margin is a non-GAAP performance measure that we believe is important to investors in evaluating our refinery performance as a general indication of the amount above our cost of products that we are able to sell refined products. Each of the components used in this calculation (net sales and cost of products sold) can be reconciled directly to our statement of operations. Our calculation of refinery gross margin may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure. |
The following table reconciles combined gross profit for all refineries to combined gross
margin for all refineries for the periods presented:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per barrel data) | ||||||||||||||||
Net sales (including intersegment sales) |
$ | 2,279,022 | $ | 2,045,006 | $ | 6,248,365 | $ | 6,095,884 | ||||||||
Cost of products sold (exclusive of depreciation
and amortization) |
1,993,683 | 1,864,165 | 5,464,555 | 5,611,868 | ||||||||||||
Depreciation and amortization |
31,440 | 30,434 | 92,633 | 89,211 | ||||||||||||
Gross profit |
253,899 | 150,407 | 691,177 | 394,805 | ||||||||||||
Plus depreciation and amortization |
31,440 | 30,434 | 92,633 | 89,211 | ||||||||||||
Refinery gross margin |
$ | 285,339 | $ | 180,841 | $ | 783,810 | $ | 484,016 | ||||||||
Refinery gross margin per refinery throughput barrel |
$ | 20.74 | $ | 9.31 | $ | 20.30 | $ | 8.56 | ||||||||
Gross profit per refinery throughput barrel |
$ | 18.45 | $ | 7.74 | $ | 17.90 | $ | 6.98 | ||||||||
The following table reconciles gross profit for our Southwest refineries to gross margin for
our Southwest refineries for the periods presented:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per barrel data) | ||||||||||||||||
Net sales (including intersegment sales) |
$ | 2,270,693 | $ | 1,578,185 | $ | 6,237,337 | $ | 4,630,412 | ||||||||
Cost of products sold (exclusive of depreciation
and amortization) |
1,988,501 | 1,413,007 | 5,457,982 | 4,190,979 | ||||||||||||
Depreciation and amortization |
20,468 | 18,809 | 57,288 | 54,909 | ||||||||||||
Gross profit |
261,724 | 146,369 | 722,067 | 384,524 | ||||||||||||
Plus depreciation and amortization |
20,468 | 18,809 | 57,288 | 54,909 | ||||||||||||
Refinery gross margin |
$ | 282,192 | $ | 165,178 | $ | 779,355 | $ | 439,433 | ||||||||
Refinery gross margin per refinery throughput barrel |
$ | 20.51 | $ | 11.19 | $ | 20.18 | $ | 10.78 | ||||||||
Gross profit per refinery throughput barrel |
$ | 19.02 | $ | 9.92 | $ | 18.70 | $ | 9.43 | ||||||||
(4) | Refinery direct operating expenses per throughput barrel is calculated by dividing direct operating expenses by total throughput volumes for the respective periods presented. Direct operating expenses do not include any depreciation or amortization. | |
(5) | In September 2010, we temporarily suspended refining operations at our Yorktown refinery. Refinery production data for our Southwest Refineries is equal to all refineries production data for the three and nine months ended September 30, 2011. As Yorktown did not operate as a refinery during the first three quarters of 2011, there is no production data presented for comparison to the first three quarters of 2010 for the Yorktown refinery. |
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Table of Contents
Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010
Net Sales. Net sales primarily consist of gross sales of refined petroleum products, net of
customer rebates, discounts, and excise taxes. Net sales for the three months ended September 30,
2011 were $2,279.0 million compared to $2,045.0 million for the same period in 2010, an increase of
$234.0 million, or 11.4%. This increase was primarily the result of higher sales prices for refined
products. The average sales price per barrel increased from $86.43 in the third quarter of 2010 to
$122.75 in the third quarter of 2011, an increase of 42.0%. During the third quarter of 2010, we
sold 23.6 million barrels (including 5.9 million barrels from the Yorktown refinery) of refined
products compared to 18.5 million barrels for the same period in 2011.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold
includes cost of crude oil, other feedstocks and blendstocks, purchased products for resale, and
transportation and distribution costs. Cost of products sold was $1,993.7 million for the three
months ended September 30, 2011 compared to $1,864.2 million for the same period in 2010, an
increase of $129.5 million, or 6.9%. This increase was primarily the result of increased third
party purchases at our Southwest refineries and higher crude prices, partially offset by decreased
crude purchase volumes. The average cost per barrel increased from $74.63 in the third quarter of
2010 to $88.70 in the third quarter of 2011, an increase of 18.9%. During the third quarter of
2010, we purchased 16.1 million barrels of crude oil (including 2.9 million barrels at the Yorktown
refinery without comparable activity during the current period) compared to 12.9 million barrels
for the same period in 2011. Refinery gross margin per throughput barrel increased from $9.31 in
the third quarter of 2010 to $20.74 in the third quarter of 2011. Gross profit per barrel, based on
the closest comparable GAAP measure to refinery gross margin, was $18.45 and $7.74 for the three
months ended September 30, 2011 and 2010, respectively. Cost of products sold for the three months
ended September 30, 2011 and 2010 includes $115.4 million and $1.7 million, respectively, in
realized and unrealized economic hedging losses.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating
expenses include costs associated with the operations of our refineries, such as energy and utility
costs, catalyst and chemical costs, routine maintenance, labor, insurance, property taxes, and
environmental compliance costs. Direct operating expenses were $74.5 million for the three months
ended September 30, 2011, compared to $88.7 million for the same period in 2010, a decrease of
$14.2 million, or 16.0%. This decrease primarily resulted from the temporary suspension of our
Yorktown refining operations ($17.1 million), decreased property taxes ($2.9 million), and
maintenance expenses at our southwest operations ($1.4 million) including a $4.8 million insurance recovery due to a weather-related outage during the first quarter of 2011. These decreases were partially offset by
increases from the Southwest refineries including employee expenses primarily related to incentive
compensation ($4.1 million), chemicals and catalyst ($1.6 million), utilities ($1.3 million), and
other fixed expenses ($1.3 million).
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
consist primarily of overhead and marketing expenses. Selling, general, and administrative expenses
were $7.3 million for the three months ended September 30, 2011 compared to $6.0 million for the
same period in 2010, an increase of $1.3 million, or 21.7%. This increase primarily resulted from
increased employee expenses primarily related to incentive compensation ($0.8 million) and
increases in maintenance and other support services ($0.8 million).
Impairment Losses. As a result of our decision to permanently close our product distribution
terminal in Flagstaff, Arizona during the third quarter of 2010, we completed an impairment
analysis of the related long-lived assets. From this analysis, we determined that impairment
existed. Accordingly, we recorded an impairment charge of $3.8 million related to the
Flagstaff long-lived assets. No impairment charges were recorded during the three months ended
September 30, 2011.
Maintenance Turnaround Expense. Maintenance turnaround expense includes planned periodic
maintenance and repairs generally performed every two to six years, depending on the processing
units involved. During the three months ended September 30, 2011, we incurred turnaround expenses
of $0.6 million in connection with a planned 2012 turnaround at our Gallup refinery. During the
three months ended September 30, 2010, we did not incur turnaround-related costs at any of our
refineries.
Depreciation and Amortization. Depreciation and amortization for the three months ended
September 30, 2011 was $31.4 million compared to $30.4 million for the same period in 2010.
Operating Income. Operating income was $171.4 million for the three months ended September 30,
2011 compared to $51.9 million for the same period in 2010, an increase of $119.5 million. This
increase was attributable primarily to increased refining margins in the third quarter of 2011
compared to the third quarter of 2010. Also contributing to the increase were lower direct
operating expenses in the current period and a 2010 impairment charge with no comparable activity
in 2011.
Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010
Net Sales. Net sales for the nine months ended September 30, 2011 were $6,248.4 million
compared to $6,095.9 million for the same period in 2010, an increase of $152.5 million, or 2.5%.
This increase was primarily the result of higher average sales prices of refined products. The
average sales price per barrel increased from $86.68 for the first nine months of 2010 to $122.67
for the same period in 2011, an increase of 41.5%. The impact of this increase was substantially
offset by lower sales
41
Table of Contents
volumes for refined products in part due to the weather-related outage at our El Paso refinery
during the first quarter of 2011. During the first nine months of 2011, we sold 50.8 million
barrels of refined products compared to 70.3 million barrels (including 18.7 million barrels sold
from the Yorktown refinery) for the same period in 2010.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold was
$5,464.6 million for the nine months ended September 30, 2011 compared to $5,611.9 million for the
same period in 2010, a decrease of $147.3 million, or 2.6%. This decrease was primarily the result
of lower crude volume purchases in part due to the weather-related outage at our El Paso refinery
during the first quarter of 2011. During the first nine months of 2010, we purchased 50.4 million
barrels of crude oil (including 12.2 million barrels at the Yorktown refinery without comparable
activity in the current period) compared to 36.0 million barrels for the same period in 2011. The
volume decrease was partially offset by an increase in the average cost of crude purchased at our
El Paso and Gallup refineries. Our average cost per barrel increased from $75.79 in the first nine
months of 2010 to $94.28 in the first nine months of 2011, an increase of 24.4%. Refinery gross
margin per throughput barrel increased from $8.56 in the first nine months of 2010 to $20.30 in the
first nine months of 2011, reflecting higher refining margins. Gross profit per barrel, based on
the closest comparable GAAP measure to refinery gross margin, was $17.90 and $6.98 for the nine
months ended September 30, 2011 and 2010, respectively. Cost of products sold for the nine months
ended September 30, 2011 and 2010 includes $179.5 million and $4.8 million, respectively, in
realized and unrealized economic hedging losses.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating
expenses were $241.6 million for the nine months ended September 30, 2011, compared to $257.0
million for the same period in 2010, a decrease of $15.4 million, or 6.0%. This decrease primarily
resulted from the temporary suspension of our Yorktown refining operations ($47.5 million), and
decreased property taxes ($5.0 million),
energy expenses ($1.3 million), and insurance expense
($0.5 million) in the Southwest. This decrease was offset by increases from the Southwest
refineries in maintenance expense related primarily to a weather
related outage and other unplanned
maintenance activities ($15.6 million) including a $4.8 million
insurance recovery based on the weather-related outage, employee expenses mainly related to incentive compensation
($12.0 million), other fixed expenses ($7.3 million), and chemical and catalyst expenses ($5.0
million).
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
were $16.6 million for the nine months ended September 30, 2011 compared to $14.2 million for the
same period in 2010, an increase of $2.4 million, or 16.9%. This increase primarily resulted from
increases in personnel costs ($5.3 million), primarily resulting from the difference between the
2010 reversal of the 2009 incentive bonus accrual and the accrual of an incentive bonus in the
third quarter of 2011, and increases in support services and professional fees ($1.0 million).
Partially offsetting these increases were decreased maintenance and other expenses ($3.7 million).
Impairment Losses. As a result of our decision to permanently close our product distribution
terminal in Flagstaff, Arizona during the third quarter of 2010, we completed an impairment
analysis of the related long-lived assets. From this analysis, we determined that impairment
existed. Accordingly, we recorded an impairment charge of $3.8 million related to the
Flagstaff long-lived assets. No impairment charges were recorded during the nine months ended
September 30, 2011.
Maintenance Turnaround Expense. During the nine months ended September 30, 2011, we incurred
costs of $1.3 million compared to $23.3 million in connection with maintenance turnaround costs
incurred during 2010 related to the scheduled fall 2012 Gallup turnaround while costs incurred
during 2010 relate to a turnaround at our El Paso refinery that was completed in the first quarter
of 2010.
Depreciation and Amortization. Depreciation and amortization for the nine months ended
September 30, 2011 was $92.6 million compared to $89.2 million for the nine months ended September
30, 2010.
Operating Income. Operating income was $431.7 million for the nine months ended September 30,
2011 compared to $96.5 million for the same period in 2010, an increase of $335.2 million. This
increase was attributable primarily to increased refining margins in the first nine months of 2011
compared to the first nine months of 2010, and decreased maintenance turnaround and direct
operating expenses.
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Table of Contents
Wholesale Segment
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 (3) | 2010 | 2011 (3) | 2010 | |||||||||||||
(In thousands, except per gallon data) | ||||||||||||||||
Statement of Operations Data: |
||||||||||||||||
Net sales (including intersegment sales) |
$ | 1,251,766 | $ | 631,303 | $ | 3,553,787 | $ | 1,782,189 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of products sold (exclusive of
depreciation and amortization) |
1,217,783 | 608,406 | 3,463,033 | 1,717,703 | ||||||||||||
Direct operating expenses (exclusive of
depreciation and amortization) |
17,168 | 12,713 | 49,230 | 35,107 | ||||||||||||
Selling, general, and administrative expenses |
3,075 | 3,525 | 7,992 | 8,280 | ||||||||||||
Depreciation and amortization |
1,033 | 1,210 | 3,257 | 3,914 | ||||||||||||
Total operating costs and expenses |
1,239,059 | 625,854 | 3,523,512 | 1,765,004 | ||||||||||||
Operating income |
$ | 12,707 | $ | 5,449 | $ | 30,275 | $ | 17,185 | ||||||||
Operating Data: |
||||||||||||||||
Fuel gallons sold (in thousands) |
400,277 | 259,446 | 1,141,867 | 735,510 | ||||||||||||
Fuel margin per gallon (1) |
$ | 0.07 | $ | 0.07 | $ | 0.06 | $ | 0.07 | ||||||||
Lubricant sales |
$ | 30,888 | $ | 28,015 | $ | 86,242 | $ | 77,477 | ||||||||
Lubricant margin (2) |
11.2 | % | 12.6 | % | 12.0 | % | 11.8 | % |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 (3) | 2010 | 2011 (3) | 2010 | |||||||||||||
(In thousands, except per gallon data) | ||||||||||||||||
Net Sales: |
||||||||||||||||
Fuel sales |
$ | 1,306,021 | $ | 656,888 | $ | 3,719,216 | $ | 1,863,682 | ||||||||
Excise taxes included in fuel sales |
(92,841 | ) | (61,377 | ) | (275,555 | ) | (181,378 | ) | ||||||||
Lubricant sales |
30,888 | 28,015 | 86,242 | 77,477 | ||||||||||||
Other sales |
7,698 | 7,777 | 23,884 | 22,408 | ||||||||||||
Net sales |
$ | 1,251,766 | $ | 631,303 | $ | 3,553,787 | $ | 1,782,189 | ||||||||
Cost of Products Sold: |
||||||||||||||||
Fuel cost of products sold |
$ | 1,280,306 | $ | 640,866 | $ | 3,653,258 | $ | 1,818,326 | ||||||||
Excise taxes included in fuel cost of products sold |
(92,841 | ) | (61,377 | ) | (275,555 | ) | (181,378 | ) | ||||||||
Lubricant cost of products sold |
27,426 | 24,494 | 75,850 | 68,321 | ||||||||||||
Other cost of products sold |
2,892 | 4,423 | 9,480 | 12,434 | ||||||||||||
Cost of products sold |
$ | 1,217,783 | $ | 608,406 | $ | 3,463,033 | $ | 1,717,703 | ||||||||
Fuel margin per gallon (1) |
$ | 0.07 | $ | 0.07 | $ | 0.06 | $ | 0.07 | ||||||||
(1) | Fuel margin per gallon is a measurement calculated by dividing the difference between fuel sales and cost of fuel sales for our wholesale segment by the number of gallons sold. Fuel margin per gallon is a measure frequently used in the petroleum products wholesale industry to measure operating results related to fuel sales. | |
(2) | Lubricant margin is a measurement calculated by dividing the difference between lubricant sales and lubricant cost of products sold by lubricant sales. Lubricant margin is a measure frequently used in the petroleum products wholesale industry to measure operating results related to lubricant sales. |
43
Table of Contents
(3) | Our wholesale segment began selling finished product through our Yorktown facility during January 2011. The finished products sold through our Yorktown facility were purchased from third parties. Net sales of $385.2 million and $991.4 million, cost of products sold of $375.6 million and $974.4 million, and direct operating costs of $1.9 million and $5.2 million for the three and nine months ended September 30, 2011, respectively, were from new wholesale activities through our Yorktown facility without comparable activity in the prior periods. Further discussion of the impact of this new wholesale activity is included in the period to period comparisons below. |
Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010
Net Sales. Net sales consist primarily of sales of refined products net of excise taxes,
lubricants, and freight. Net sales for the three months ended September 30, 2011 were $1,251.8
million compared to $631.3 million for the same period in 2010, an increase of $620.5 million, or
98.3%. Net sales of $385.2 million on 128.6 million gallons of fuel were from new wholesale
activities through our Yorktown facility without comparable activity in the prior period. The
remainder of the increase was primarily due to an increase in the average sales price of refined
products, increased fuel sales volume, and increased sales price of lubricants. The average sales
price per gallon of refined products, including excise taxes, increased from $2.53 in the third
quarter of 2010 to $3.29 in the third quarter of 2011. Fuel sales volume increased from 259.4
million gallons in the third quarter of 2010 to 271.7 million gallons for the same period in 2011.
Fuel sales volume for the three months ended September 30, 2011 included 36.1 million gallons sold
to our retail group compared to 36.3 million gallons for the same period during 2010. The average
sales price per gallon of lubricants increased from $9.79 in the third quarter of 2010 to $11.11 in
the third quarter of 2011.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold
includes costs of refined products net of excise taxes, lubricants, and delivery freight. Cost of
products sold was $1,217.8 million for the three months ended September 30, 2011 compared to $608.4
million for the same period in 2010, an increase of $609.4 million, or 100.2%. Cost of products
sold of $375.6 million was from new wholesale activities through our Yorktown facility without
comparable activity in the prior period. The remainder of the increase was primarily due to
increased costs of refined products and purchased fuel volume. The average cost per gallon of
refined products, including excise taxes, increased from $2.47 in the third quarter of 2010 to
$3.23 in the third quarter of 2011. Cost of products sold includes $9.5 million in realized and
unrealized economic hedging gains for the three months ended September 30, 2011.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating
expenses include costs associated with the operations of our wholesale division such as labor,
repairs and maintenance, rentals and leases, insurance, property taxes, and environmental
compliance costs. Direct operating expenses were $17.2 million for the three months ended September
30, 2011 compared to $12.7 million for the same period in 2010, an increase of $4.5 million, or
35.4%. Direct operating expenses of $1.9 million were for terminalling and storage fees at our
Yorktown facility for the three months ended September 30, 2011 without comparable activity in the
prior period. The remainder of the increase was partially due to increased personnel costs ($1.2
million), increased material and supplies costs ($0.8 million), and increased lease expenses ($0.4
million).
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
consist primarily of overhead and marketing expenses. Selling, general, and administrative expenses
were $3.1 million for the three months ended September 30, 2011 compared to $3.5 million for the
same period in 2010, a decrease of $0.4 million, or 11.4%.
Depreciation and Amortization. Depreciation and amortization for the three months ended
September 30, 2011 was $1.0 million compared to $1.2 million for the same period in 2010, a
decrease of $0.2 million, or 16.7%.
Operating Income. Operating income for the three months ended September 30, 2011 was $12.7
million compared to $5.4 million for the same period in 2010, an increase of $7.3 million, or
135.2%. The increase was primarily due to operating income from wholesale activity in the Northeast
without comparable activity in the prior period and increased margins from wholesale activity in
the Southwest. This increase was partially offset by an increase in direct operating expenses.
Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010
Net Sales. Net sales for the nine months ended September 30, 2011 were $3,553.8 million
compared to $1,782.2 million for the same period in 2010, an increase of $1,771.6 million, or
99.4%. Net sales of $991.4 million on 335.6 million gallons of fuel were from new wholesale
activities through our Yorktown facility without comparable activity in the prior period. The
remainder of the increase was primarily due to an increase in the average sales price of refined
products, increased fuel sales volume, and increased sales price of lubricants. The average sales
price per gallon of refined products, including excise taxes, increased from $2.53 in the first
nine months of 2010 to $3.29 in the first nine months of 2011. Fuel sales volume increased from
735.5 million gallons in the first nine months of 2010 to 806.3 million gallons for the same period
in 2011. Fuel sales volume for the nine months ended September 30, 2011 included 96.0 million
gallons sold to our retail group compared to
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80.6 million gallons for the same period during 2010. The average sales price per gallon of
lubricants increased from $9.58 in the first nine months of 2010 to $10.65 in the first nine months
of 2011.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold was
$3,463.0 million for the nine months ended September 30, 2011 compared to $1,717.7 million for the
same period in 2010, an increase of $1,745.3 million, or 101.6%. Cost of products sold of $974.4
million was from new wholesale activities through our Yorktown facility without comparable activity
in the prior period. The remainder of the increase was primarily due to increased costs of refined
products and purchased fuel volume. The average cost per gallon of refined products, including
excise taxes, increased from $2.47 in the first nine months of 2010 to $3.23 in the first nine
months of 2011. Cost of products sold includes $6.2 million in realized and unrealized economic
hedging gains for the nine months ended September 30, 2011.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating
expenses were $49.2 million for the nine months ended September 30, 2011 compared to $35.1 million
for the same period in 2010, an increase of $14.1 million, or 40.2%. Direct operating expenses of
$5.2 million were for terminalling and storage fees at our Yorktown facility for the nine months
ended September 30, 2011 without comparable activity in the prior period. The remainder of the
increase primarily resulted from increased personnel costs ($4.7 million), including the first
quarter 2010 reversal of the 2009 bonus accrual, increased material and supplies costs ($2.9
million), and increased lease expenses ($1.0 million). See consolidated direct operating expenses
(exclusive of depreciation and amortization) for the nine months ended September 30, 2010 for
additional discussion of the bonus accrual reversal.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
consist primarily of overhead and marketing expenses. Selling, general, and administrative expenses
were $8.0 million for the nine months ended September 30, 2011 compared to $8.3 million for the
same period in 2010, a decrease of $0.3 million, or 3.6%.
Depreciation and Amortization. Depreciation and amortization for the nine months ended
September 30, 2011 was $3.3 million compared to $3.9 million for the same period in 2010, a
decrease of $0.6 million, or 15.4%.
Operating Income. Operating income for the nine months ended September 30, 2011 was $30.3
million compared to $17.2 million for the same period in 2010, an increase of $13.1 million, or
76.2%. The increase was primarily due to operating income from wholesale activity in the Northeast
without comparable activity in the prior period and increased margins from wholesale activity in
the Southwest. This increase was partially offset by an increase in operating expenses.
Retail Segment
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per gallon data) | ||||||||||||||||
Statement of Operations Data: |
||||||||||||||||
Net sales (including intersegment sales) |
$ | 258,001 | $ | 195,138 | $ | 670,163 | $ | 537,930 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of products sold (exclusive of
depreciation and amortization) |
230,001 | 166,406 | 595,514 | 462,814 | ||||||||||||
Direct operating expenses (exclusive of
depreciation and amortization) |
21,098 | 17,169 | 55,696 | 50,177 | ||||||||||||
Selling, general, and administrative expenses |
2,010 | 1,461 | 5,032 | 3,425 | ||||||||||||
Depreciation and amortization |
2,410 | 2,496 | 7,232 | 7,631 | ||||||||||||
Total operating costs and expenses |
255,519 | 187,532 | 663,474 | 524,047 | ||||||||||||
Operating income |
$ | 2,482 | $ | 7,606 | $ | 6,689 | $ | 13,883 | ||||||||
Operating Data: |
||||||||||||||||
Fuel gallons sold (in thousands) |
62,170 | 56,583 | 160,133 | 155,831 | ||||||||||||
Fuel margin per gallon (1) |
$ | 0.18 | $ | 0.22 | $ | 0.18 | $ | 0.19 | ||||||||
Merchandise sales |
$ | 55,478 | $ | 52,439 | $ | 148,596 | $ | 144,440 | ||||||||
Merchandise margin (2) |
27.9 | % | 28.8 | % | 28.2 | % | 28.5 | % | ||||||||
Operating retail outlets at period end (3) |
172 | 150 | 172 | 150 |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per gallon data) | ||||||||||||||||
Net Sales: |
||||||||||||||||
Fuel sales |
$ | 218,261 | $ | 158,737 | $ | 562,692 | $ | 435,124 | ||||||||
Excise taxes included in fuel sales |
(22,092 | ) | (21,764 | ) | (59,757 | ) | (59,697 | ) | ||||||||
Merchandise sales |
55,478 | 52,439 | 148,596 | 144,440 | ||||||||||||
Other sales |
6,354 | 5,726 | 18,632 | 18,063 | ||||||||||||
Net sales |
$ | 258,001 | $ | 195,138 | $ | 670,163 | $ | 537,930 | ||||||||
Costs of Products Sold: |
||||||||||||||||
Fuel cost of products sold |
$ | 207,229 | $ | 146,465 | $ | 534,227 | $ | 405,333 | ||||||||
Excise taxes included in fuel cost of products sold |
(22,092 | ) | (21,764 | ) | (59,757 | ) | (59,697 | ) | ||||||||
Merchandise cost of products sold |
39,976 | 37,318 | 106,659 | 103,286 | ||||||||||||
Other cost of products sold |
4,888 | 4,387 | 14,385 | 13,892 | ||||||||||||
Cost of products sold |
$ | 230,001 | $ | 166,406 | $ | 595,514 | $ | 462,814 | ||||||||
Fuel margin per gallon (1) |
$ | 0.18 | $ | 0.22 | $ | 0.18 | $ | 0.19 | ||||||||
(1) | Fuel margin per gallon is a measurement calculated by dividing the difference between fuel sales and cost of fuel sales for our retail segment by the number of gallons sold. Fuel margin per gallon is a measure frequently used in the convenience store industry to measure operating results related to fuel sales. | |
(2) | Merchandise margin is a measurement calculated by dividing the difference between merchandise sales and merchandise cost of products sold by merchandise sales. Merchandise margin is a measure frequently used in the convenience store industry to measure operating results related to merchandise sales. | |
(3) | During the three and nine months ended September 30, 2011 we added 3 and 22 retail outlets, respectively. |
Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010
Net Sales. Net sales consist primarily of gross sales of gasoline and diesel fuel net of
excise taxes, general merchandise, and beverage and food products. Net sales for the three months
ended September 30, 2011 were $258.0 million compared to $195.1 million for the same period in
2010, an increase of $62.9 million, or 32.2%. This increase was primarily due to an increase in the
sales price of gasoline and diesel fuel and fuel sales volume. The new retail outlets added during
the second and third quarters of 2011 contributed $21.5 million of the increase in fuel sales
period over period. The average sales price per gallon including excise taxes increased from $2.81
in the third quarter of 2010 to $3.51 in the third quarter of 2011. Fuel sales volume increased
from 56.6 million gallons in the third quarter of 2010 to 62.2 million gallons in the third quarter
of 2011, of which 6.4 million gallons were due to the new retail outlets added during the second
and third quarters of 2011. Also contributing to this increase were higher merchandise sales, of
which $3.5 million was due to the new retail outlets added during the second and third quarters of
2011.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold
includes costs of gasoline and diesel fuel net of excise taxes, general merchandise, and beverage
and food products. Cost of products sold was $230.0 million for the three months ended September
30, 2011 compared to $166.4 million for the same period in 2010, an increase of $63.6 million, or
38.2%. This increase was primarily due to increased costs of gasoline and diesel fuel and purchased
fuel volume. Cost of products sold for the new retail outlets added during the second and third
quarters of 2011 was $20.6 million of the increase in fuel cost of sales period over period.
Average fuel cost per gallon including excise taxes increased from $2.59 in the third quarter of
2010 to $3.33 in the third quarter of 2011. Also contributing to this increase were higher
merchandise cost of sales, of which $2.6 million was due to the new retail outlets added during the
second and third quarters of 2011.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating
expenses include costs associated with the operations of our retail division such as labor, repairs
and maintenance, rentals and leases, insurance, property taxes, and environmental compliance costs.
Direct operating expenses were $21.1 million for the three months ended September 30, 2011 compared
to $17.2 million for the same period in 2010, an increase of $3.9 million, or 22.7%. Direct
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operating expenses for the new retail outlets added during the second and third quarters of 2011
was $3.0 million. This increase was primarily due to increased personnel costs ($1.3 million),
credit card fees ($1.0 million), rent expense ($0.7 million), utilities expense ($0.3 million), and
taxes, licenses, and fees ($0.2 million).
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
consist primarily of overhead and marketing expenses. Selling, general, and administrative expenses
were $2.0 million for the three months ended September 30, 2011 compared to $1.5 million for the
same period in 2010, an increase of $0.5 million, or 33.3%. The new retail outlets added during the
second and third quarters of 2011 increased selling, general, and administrative expenses by $0.3
million during the third quarter of 2011. The remainder of the increase was primarily due to changed
allocations between direct operating expenses and selling, general, and administrative expenses,
and increased personnel costs ($0.4 million).
Depreciation and Amortization. Depreciation and amortization for the three months ended
September 30, 2011 was $2.4 million compared to $2.5 million for the same period in 2010, a
decrease of $0.1 million, or 4.0%.
Operating Income. Operating income for the three months ended September 30, 2011 was $2.5
million compared to $7.6 million for the same period in 2010, a decrease of $5.1 million, or 67.1%.
This decrease was primarily due to increased direct operating expenses and selling, general, and
administrative expenses in the third quarter of 2011.
Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010
Net Sales. Net sales for the nine months ended September 30, 2011 were $670.2 million compared
to $537.9 million for the same period in 2010, an increase of $132.3 million, or 24.6%. This
increase was primarily due to an increase in the sales price of gasoline and diesel fuel and fuels
sales volume. The new retail outlets added during the second and third quarters of 2011 contributed
$24.5 million of the increase in fuel sales period over period. The average sales price per gallon
including excise taxes increased from $2.79 in the first nine months of 2010 to $3.51 in the first
nine months of 2011. Fuel sales volume increased from 155.8 million gallons in the first nine
months of 2010 to 160.1 million gallons in the first nine months of 2011, of which 7.2 million
gallons were due to the new retail outlets added during the second and third quarters of 2011.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold was
$595.5 million for the nine months ended September 30, 2011 compared to $462.8 million for the same
period in 2010, an increase of $132.7 million, or 28.7%. This increase was primarily due to
increased costs of gasoline and diesel fuel and purchased fuel volume. Cost of products sold for
the new retail outlets added during the second and third quarters of
2011 was $23.4 million of the
increase in fuel cost of sales period over period. Average fuel cost per gallon including excise
taxes increased from $2.60 in the first nine months of 2010 to $3.34 in the first nine months of 2011. Also contributing to this increase
were higher merchandise cost of sales.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating
expenses were $55.7 million for the nine months ended September 30, 2011 compared to $50.2 million
for the same period in 2010, an increase of $5.5 million, or 11.0%. Direct operating expenses for
the new retail outlets added during the second and third quarters of
2011 was $3.4 million. This
increase was primarily due to increased credit card fees ($2.1 million), personnel costs ($1.4
million), rent expense ($0.8 million), and maintenance expenses ($0.4 million).
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
were $5.0 million for the nine months ended September 30, 2011 compared to $3.4 million for the
same period in 2010, an increase of $1.6 million, or 47.1%. This increase was primarily due to
increased personnel costs including the first quarter 2010 reversal of the 2009 bonus accrual,
changed allocations between direct operating expenses and selling, general, and administrative
expenses, and the new retail outlets added during the second and third quarters of 2011 that
increased selling, general, and administrative expenses by $0.4 million during the nine months ended
September 30, 2011. See consolidated direct operating expenses (exclusive of depreciation and
amortization) for the nine months ended September 30, 2010 for additional discussion of the bonus
accrual reversal.
Depreciation and Amortization. Depreciation and amortization for the nine months ended
September 30, 2011 was $7.2 million compared to $7.6 million for the same period in 2010, a
decrease of $0.4 million, or 5.3%.
Operating Income. Operating income for the nine months ended September 30, 2011 was $6.7
million compared to $13.9 million for the same period in 2010, a decrease of $7.2 million, or
51.8%. This decrease was primarily due to increased direct operating expenses and selling, general,
and administrative expenses in the first nine months of 2011.
Outlook
The weak global economy over the past two years has resulted in decreased demand for refined
products. The decreased demand along with narrowing differentials between light and heavy crude oil
prices negatively impacted our refining margins
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through the first quarter of 2010. Beginning in the
second quarter of 2010, our refining margins in the Southwest improved due to increased demand,
primarily for diesel fuel. During the first three quarters of 2011, our refining margins continued
to strengthen. This strengthening is due to a combination of factors including increased gasoline
crack spreads, continued strong diesel demand, and the continued widening of the discount of WTI
crude oil to Brent crude during the second and third quarters of 2011. This is a positive
development for us as all of our crude oil purchases are based on pricing tied to WTI. In the near
term, these factors appear as if they will largely remain stable, which should result in continuing
strong margins. Nevertheless, our margins have shown significant volatility in recent periods and
this volatility could return for any number of reasons discussed elsewhere in this Form 10-Q and in
our 2010 10-K.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from our operating activities, existing
cash balances, and borrowings under our Revolving Credit Agreement. We ended the quarter with
$402.6 million of cash and cash equivalents and $294.7 million in available borrowing capacity
after $355.5 million in outstanding letters of credit. As of September 30, 2011, we had no direct
borrowings under the Revolving Credit Agreement.
We continually evaluate additional alternatives to further improve our capital structure by
increasing our cash balances and/or reducing or refinancing a portion of the remaining balance on
our long-term debt. These alternatives include various strategic initiatives and potential asset
sales as well as potential public or private equity or debt financings. We may also prepay certain
of our long-term debt, including our Senior Secured Floating Rate Notes. If additional funds are obtained by issuing equity securities, our existing
stockholders could be diluted. We can give no assurances that we will be able to sell any of our
assets or that we will be able to obtain additional financing on terms acceptable to us, or at all.
Cash Flows
The following table sets forth our cash flows for the periods indicated:
Nine Months Ended | |||||||||
September 30, | |||||||||
2011 | 2010 | ||||||||
(In thousands) | |||||||||
Cash flows provided by operating activities |
$ | 400,551 | $ | 93,481 | |||||
Cash flows used in investing activities |
(33,045 | ) | (56,099 | ) | |||||
Cash flows used in financing activities |
(24,783 | ) | (34,750 | ) | |||||
Net increase in cash and cash equivalents |
$ | 342,723 | $ | 2,632 | |||||
Net cash provided by operating activities for the nine months ended September 30, 2011 was
$400.6 million compared to $93.5 million for the same period in 2010. The increase in net cash from
operating activities was primarily due to the increase in period net income ($206.7 million),
increased deferred income taxes ($32.6 million), and decreases in uses of cash from our operating
assets and liabilities ($64.4 million). Net cash used in investing activities for the nine months
ended September 30, 2011 was $33.0 million compared to $56.1 million for the same period in 2010.
The decrease in net cash used in investing activities was due to a decrease in our capital
expenditures ($12.1 million) and proceeds from the disposal of assets that did not occur during
2010 ($11.0 million). Net cash used in financing activities for the nine months ended September
30, 2011 was $24.8 million compared to $34.8 million for the same period in 2010. The change
between periods was driven by proceeds from a financing arrangement in 2011 ($12.3 million) and net
borrowing decreases under our Revolving Credit Agreement during 2010 ($25.0 million). This
decrease was partially offset by payments made on long-term debt and capital lease obligations
during the nine months ended September 30, 2011 ($26.7 million) versus payments made on long-term
debt during the same period in 2010 ($9.8 million), deferred financing costs ($7.2 million), and
excess tax benefit from stock-based compensation ($3.2 million) during 2011.
Future Capital Expenditures
We currently expect to spend approximately $74.0 million (excluding capitalized interest) in
capital expenditures for all of 2011, an increase of $11.8 million over initial 2011 estimates
reported during the first quarter. The increase primarily relates to the addition of retail stores
during the second quarter and increased estimated regulatory spending. The total estimate includes
$31.3 million in regulatory spending, $26.8 million in maintenance spending, and $15.9 million in
discretionary spending. The regulatory spending includes $13.9 million in a new wastewater
treatment plant and equipment for reducing air emissions at our Gallup refinery and $14.8 million
in site relocation, tank maintenance, and air emissions reduction equipment at our El Paso
refinery.
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Indebtedness
Our capital structure at September 30, 2011 and 2010 was as follows:
September 30, | September 30, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Debt, including current maturities: |
||||||||
11.25% Senior Secured Notes, due 2017,
net of unamortized discount of $22,699
and $25,220, respectively |
$ | 302,331 | $ | 299,780 | ||||
Floating Rate Senior Secured Notes, due
2014, net of unamortized discount of
$13,811 and $17,825, respectively, with
an interest rate of 10.75% at September
30, 2011 and 2010 |
261,189 | 257,175 | ||||||
5.75% Senior Convertible Notes, due
2014, net of conversion feature of
$37,931 and $48,854, respectively |
177,519 | 166,596 | ||||||
Term Loan, due 2017, net of unamortized
discount of $3,018 in 2011, with
average interest rates of 8.56% and
10.75% for the nine months ended
September 30, 2011 and 2010,
respectively |
320,357 | 345,057 | ||||||
5.50% promissory note, due 2015 |
966 | | ||||||
Revolving Credit Agreement with an
average interest rate of 5.73% and
6.14% for the nine months ended
September 30, 2011 and 2010,
respectively |
| 25,000 | ||||||
Long-term debt |
1,062,362 | 1,093,608 | ||||||
Stockholders equity |
882,970 | 680,291 | ||||||
Total capitalization |
$ | 1,945,332 | $ | 1,773,899 | ||||
Our Senior Secured Floating Rate Notes pay interest at a rate equal to three-month LIBOR
(subject to a floor of 3.25%) plus 7.50% per annum and mature in June 2014. The interest rate on
our Senior Secured Floating Rate Notes was 10.75% at September 30, 2011. Our Senior Secured Fixed
Rate Notes pay interest at a rate of 11.25% per annum and mature in June 2017. We plan to redeem
all of the Senior Secured Floating Rate Notes when they become callable in December 2011 at 105% of
the face value plus accrued and unpaid interest.
The Convertible Senior Notes are unsecured and pay interest semi-annually in arrears at a rate
of 5.75% per annum. As of September 30, 2011, the if-converted value of the Convertible Senior
Notes exceeded its principal amount by $33.1 million. The Convertible Senior Notes are presently
convertible, at the option of the holder, through and including, December 31, 2011. The Convertible
Senior Notes will also be convertible in any future calendar quarter (prior to maturity) whenever
the last reported sale price of the Companys common stock exceeds $14.04 for twenty days in the
thirty consecutive trading day period ending on the last trading day of the immediately preceding
calendar quarter. If any Convertible Senior Notes are surrendered for conversion, the Company may
elect to satisfy its obligations upon conversion through the delivery of shares of its common
stock, in cash or a combination thereof.
On March 29, 2011, we entered into an amended and restated Term Loan Credit Agreement. Lenders
under the Term Loan Credit Agreement extended a $325.0 million Term Loan at a discount of 1.00%,
the proceeds of which were principally used to refinance the Companys term loans outstanding under
the Term Loan Credit Agreement prior to the amendment and restatement. The Term Loan matures in
March 2017. The amended and restated Term Loan Credit Agreement eliminated all financial
maintenance covenants previously contained in the Term Loan agreement. In addition, the Term Loan
under the amended and restated Credit Agreement is guaranteed and secured on the same basis as the
term loans under the Term Loan Credit Agreement prior to the amendment and restatement. The Term
Loan Credit Agreement provides for principal payments on a quarterly basis of $0.8 million, with
the remaining balance due on the maturity date. To effect this amendment, we paid $3.7 million in
amendment fees. As a result of this amendment, we recognized a $4.6 million loss on extinguishment
of debt. As a result of the amendment and restatement, the Term Loan bears interest equal to LIBOR
(subject to a floor of 1.5%) plus 6.00%. Prior to the amendment and restatement, the Term Loan bore
interest equal to LIBOR (subject to a floor of 3.25%) plus 7.50%.
On September 23, 2011, we amended our Term Loan Credit Agreement to provide for certain
conforming changes made in the amended and restated Revolving Credit Agreement.
On September 22, 2011, we entered into an amended and restated Revolving Credit Agreement.
Lenders under the agreement extended $1.0 billion in revolving line commitments that mature on
September 22, 2016 and incorporate a borrowing base tied to eligible accounts receivable and
inventory. The agreement also provides for letters of credit and swing line loans and provides for
a quarterly commitment fee ranging from 0.375% to 0.50% per annum subject to adjustment based upon
the
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average utilization ratio under the agreement and letter of credit fees ranging from 2.50% to
3.25% per annum, payable quarterly, subject to adjustment based upon the average excess
availability. Borrowings can be either base rate loans plus a margin ranging from 1.50% to 2.25% or
LIBOR loans plus a margin ranging from 2.50% to 3.25% subject to adjustment based upon the average
excess availability under the Revolving Credit Agreement. The interest rate margins and letter of
credit fees are to be reduced by 0.25% upon the Companys achievement and maintenance of a certain
fixed charge coverage ratio. Prior to September 22, 2011, the Revolving Credit Agreement included
commitments of $800.0 million composed of a $145.0 million tranche maturing on May 31, 2012 and a
$655.0 million tranche maturing on January 1, 2015. Interest rates ranged from 3.00% to 4.50% over
LIBOR. Our subsidiaries guarantee the Revolving Credit Agreement on a joint and several basis.
Contractual Obligations and Commercial Commitments
We entered into a number of operating leases during October 2011 related to our retail and
wholesale operations. These leases provide for average annual rents of $6.2 million over the next
20 years.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
Changes in commodity prices and interest rates are our primary sources of market risk.
Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined product
prices, as well as volatility in the price of natural gas used in our refinery operations. Our
financial results can be affected significantly by fluctuations in these prices, which depend on
many factors, including demand for crude oil, gasoline and other refined products; changes in the
economy; worldwide production levels; worldwide inventory levels; and governmental regulatory
initiatives. Our risk management strategy identifies circumstances in which we may utilize the
commodity futures market to manage risk associated with these price fluctuations or to fix sales
margins on future gasoline and distillate production.
In order to manage the uncertainty relating to inventory price volatility, we have generally
applied a policy of maintaining inventories at or below a targeted operating level. In the past,
circumstances have occurred, such as turnaround schedules or shifts in market demand, that have
resulted in variances between our actual inventory level and our desired target level. We may
utilize the commodity futures market to manage these anticipated inventory variances.
We maintain inventories of crude oil, other feedstocks and blendstocks, and refined products,
the values of which are subject to wide fluctuations in market prices driven by worldwide economic
conditions, regional and global inventory levels, and seasonal conditions. As of September 30,
2011, we held approximately 5.0 million barrels of crude oil, refined product, and other
inventories valued under the LIFO valuation method with an average cost of $55.58 per barrel. At
September 30, 2011, the excess of the current cost of our crude oil, refined products, and other
feedstock and blendstock inventories over aggregated LIFO costs was $180.5 million
All commodity futures contracts, price swaps, and options are recorded at fair value and any
changes in fair value between periods are recorded under cost of products sold in our Condensed
Consolidated Statements of Operations.
We selectively utilize commodity hedging instruments to manage our price exposure to our LIFO
inventory positions or to fix margins on certain future sales volumes. The commodity hedging
instruments may take the form of futures contracts, price and crack spread swaps, or options and
are entered into with counterparties that we believe to be creditworthy. We elected not to pursue
hedge accounting treatment for financial accounting purposes on instruments used to manage price
exposure to inventory positions. The financial instruments used to fix margins on future sales
volumes do not qualify for hedge accounting. Therefore, changes in the fair value of these hedging
instruments are included in income in the period of change. Net gains or losses associated with
these transactions are reflected in cost of products sold at the end of each period. For the three
and nine months ended September 30, 2011, we had $105.9 million and $173.3 million, respectively,
in net losses settled or accounted for using mark-to-market accounting. For the three and nine
months ended September 30, 2010, we had $1.7 million and $4.8 million, respectively, in net losses
settled or accounted for using mark-to-market accounting.
At September 30, 2011, we had open commodity hedging instruments consisting of crude oil
futures and finished product price swaps on a net 34,307,500 barrels primarily to fix the margin on
a portion of our future gasoline and distillate production, and to protect the value of certain
crude oil, finished product, and blendstock inventories. These open instruments had total
unrealized net losses at September 30, 2011, of $116.1 million comprised of both short-term and long-term realized and unrealized gains and losses.
This net unrealized loss consists of $3.2 million in other
current assets, $13.0 million in other assets, $119.1 million in current liabilities, and $13.2
million in other long-term liabilities.
During the nine months ended September 30, 2011 and 2010, we did not have any commodity based
instruments that were designated and accounted for as hedges.
Interest Rate Risk
As of September 30, 2011, $598.4 million of our outstanding debt, excluding unamortized
discount, was at floating interest rates based on LIBOR and prime rates. An increase in these base
rates of 1% would increase our interest expense by $6.0 million per year.
Item 4. Controls and Procedures
The Company, under the supervision and with the participation of its management, including the
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the
Companys disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as of September 30, 2011. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective as of September 30, 2011.
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There were no changes in the Companys internal control over financial reporting during the
quarter ended September 30, 2011 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
Part II
Item 1A. Risk Factors
A discussion of the risks we face can be found in our 2010 annual report on Form 10-K under
Part I, Item 1A. Risk Factors. In addition to the risks described therein, you should carefully
consider the following risk in evaluating us and our business.
Our hedging transactions may limit our gains and expose us to other risks.
We enter into hedges from time to time to manage our exposure to commodity price risks or to
fix sales margins on future gasoline and distillate production. These transactions limit our
potential gains if commodity prices rise above the levels established by our hedging instruments.
These transactions may also expose us to risks of financial losses, for example, if our production
is less than we anticipated at the time we entered into a hedge agreement or if a counterparty to
our hedge contracts fails to perform its obligations under the contracts. Some of our hedging
agreements may also require us to furnish cash collateral, letters of credit or other forms of
performance assurance in the event that mark-to-market calculations result in settlement
obligations by us to the counterparties, which would impact our liquidity and capital resources.
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Item 6. Exhibits
Number | Exhibit Title | |
10.1
|
Amended and Restated Revolving Credit Agreement dated as of September 22, 2011, among the Company, as Borrower, the lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 27, 2011) | |
10.2*
|
Amendment No. 1 to the Amended and Restated Term Loan Credit Agreement dated as of September 22, 2011, among the Company, as Borrower, the lenders party thereto and Bank of America, N.A., as Administrative Agent | |
31.1*
|
Certification Statement of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2*
|
Certification Statement of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1*
|
Certification Statement of Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2*
|
Certification Statement of Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101**
|
Interactive Data Files |
*
|
Filed herewith. | |
**
|
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WESTERN REFINING, INC.
Signature | Title | Date | ||
/s/ Gary R. Dalke
|
Chief Financial Officer | November 4, 2011 | ||
(Principal Financial Officer) |
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