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| FTO > SEC Filings for FTO > Form 10-K on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
Results of Operations To assist in understanding our operating results, please refer to the operating data at the end of this analysis which provides key operating information for our Refineries. Refinery operating data is also included in our quarterly reports on Form 10-Q and on our web site at http://www.frontieroil.com. We make our web site content available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K.
Overview
Our Refineries have a total annual average crude oil capacity of approximately
182,000 bpd. The four significant indicators of our profitability, which are
reflected and defined in the operating data at the end of this analysis, are the
gasoline crack spread, the diesel crack spread, the light/heavy crude oil
differential and the WTI/WTS crude oil differential. Other significant factors
that influence our financial results are refinery utilization, crude oil price
trends, asphalt and by-product margins and refinery operating expenses
(including natural gas and maintenance). Under our first-in, first-out ("FIFO")
inventory accounting method, crude oil price trends can cause significant
fluctuations in the inventory valuation of our crude oil, unfinished products
and finished products, thereby resulting in inventory gains (lowering "Raw
material, freight and other costs") when crude oil prices increase and inventory
losses (increasing "Raw material, freight and other costs") when crude oil
prices decrease during the reporting period. As crude prices rose during the
first seven months of 2008; we realized inventory gains; however, as crude
prices declined quickly during the latter part of the year and gasoline and
diesel margins contracted, we realized significant inventory losses resulting in
an overall inventory loss for the year. We typically do not use derivative
instruments to offset price risk on our base level of operating inventories. See
"Price Risk Management Activities" under Item 7A for a discussion of our
utilization of futures trading.
Crude oil market fundamentals, changes in the macro-economy and geopolitical
considerations have caused crude oil prices to be highly volatile. Our results
for the year ended December 31, 2008 were negatively impacted by several
factors, the primary ones being the rapid increase in crude oil prices during
the first seven months of 2008 followed by a rapid decline in crude oil prices
the remainder of the year and the weakening U.S. economy. These factors reduced
the demand for gasoline, causing a substantial drop in gasoline margins. In
addition, our margins on asphalt and other products declined substantially
during the first seven months of 2008 as sales prices for these products
increased only modestly compared to the significant increase in crude prices.
We had net income for the year ended December 31, 2008, of $80.2 million, or $0.77 per diluted share, compared to net income of $499.1 million, or $4.62 per diluted share, for the same period in 2007. Our operating income of $116.8 million for the year ended December 31, 2008 reflected a decrease of $639.0 million from the $755.8 million operating income for the comparable period in 2007. The average gasoline crack spread was significantly lower during 2008 ($4.75 per barrel) than in 2007 ($17.99 per barrel), and the light/heavy crude oil differentials decreased. The average diesel crack spread was higher during 2008 ($24.59 per barrel) than in 2007 ($22.19 per barrel).
Refined product revenues. Refined product revenues increased $1.07 billion, or
20%, from $5.27 billion to $6.34 billion for the year ended December 31, 2008
compared to 2007. This increase was due to an increase in average product sales
prices ($19.30 higher per sales barrel) partially offset by lower product sales
volumes in 2008 (3,776 fewer bpd). Sales prices increased primarily because of
higher average crude oil prices in 2008 compared to 2007.
Manufactured product yields. Manufactured product yields ("yields") are the
volumes of specific materials obtained through the distilling of crude oil and
the operations of other refinery process units. Yields decreased 5,139 bpd at
the El Dorado Refinery and increased 1,773 bpd at the Cheyenne Refinery for the
year ended December 31, 2008 compared to 2007. The decrease in yields at the El
Dorado Refinery was due to the planned major turnaround work on the crude unit,
the coker and the reformer during March and April of 2008.
Other revenues. Other revenues increased $237.6 million to a $156.6 million gain
for the year ended December 31, 2008 compared to an $80.9 million loss for 2007,
the primary source of which was $146.5 million in net realized and unrealized
gains from derivative contracts to hedge in-transit crude oil and excess
inventories during the year ended December 31, 2008 compared to $86.4 million in
net realized and unrealized losses from derivative contracts to hedge in-transit
crude oil and excess inventories in 2007. See "Price Risk Management Activities"
under Item 7A and Note 11 in the "Notes to Consolidated Financial Statements"
for a discussion of our utilization of commodity derivative contracts. We had
gasoline sulfur credit sales of $4.6 million in 2008 compared to $4.8 million in
2007 and $4.5 million of ethanol Renewable Identification Number ("RIN") sales
in 2008 (none in 2007). Ethanol RINs were created to assist in tracking the
compliance with national EPA regulations for blending of renewable fuels.
Raw material, freight and other costs. Raw material, freight and other costs
include crude oil and other raw materials used in the refining process,
purchased products and blendstocks, freight costs for FOB destination sales, as
well as the impact of changes in inventory. Raw material, freight and other
costs increased by $1.91 billion, or 47%, during the year ended December 31,
2008, from $4.04 billion in 2007 to $5.95 billion in 2008. The increase in raw
material, freight and other costs when compared to 2007 was due to higher
average crude prices, increased purchased products, lower light/heavy crude oil
differentials and inventory losses in 2008 compared to inventory gains in 2007,
partially offset by decreased overall crude oil charges during the year ended
December 31, 2008 compared to 2007. The average NYMEX WTI priced on the New York
Mercantile Exchange was $99.75 per barrel for the year ended December 31, 2008
compared to $72.39 per barrel for the year ended December 31, 2007. Average
crude oil charges were 142,938 bpd for the year ended December 31, 2008 compared
to 146,046 bpd in 2007. For the year ended December 31, 2008, we realized an
increase in raw material, freight and other costs as a result of net inventory
losses of approximately $157.4 million after tax ($254.7 million pretax,
comprised of a $184.5 million loss at the El Dorado Refinery and a $70.2 million
loss at the Cheyenne Refinery) due to decreasing crude oil and refined product
prices during the latter part of 2008. For the year ended December 31, 2007, we
realized a decrease in raw material, freight and other costs as a result of net
inventory gains of approximately $78.4 million after tax ($126.3 million pretax,
comprised of a $84.9 million gain at the El Dorado Refinery and a $41.4 million
gain at the Cheyenne Refinery) due to increasing crude oil and refined product
prices during 2007.
The Cheyenne Refinery raw material, freight and other costs of $92.58 per sales
barrel for the year ended December 31, 2008 increased from $62.08 per sales
barrel in the same period in 2007 due to higher average crude oil prices,
increased purchased products, lower light/heavy crude oil differentials and
inventory losses in 2008 compared to inventory gains in 2007. Average crude oil
charges of 43,590 bpd for the year ended December 31, 2008 were higher than the
41,778 bpd in 2007 because of a spring 2007 turnaround, a temporary shutdown of
the FCCU in the third quarter of 2007, and a December 2007 fire in the coker
unit at the Cheyenne Refinery. The heavy crude oil utilization rate at the
Cheyenne Refinery expressed as a percentage of the total crude oil charge
increased to 76% in the year ended December 31, 2008, from 72% in 2007. The
light/heavy crude oil differential for the Cheyenne Refinery averaged $17.15 per
barrel in the year ended December 31, 2008 compared to $18.95 per barrel in
2007.
The El Dorado Refinery raw material, freight and other costs of $99.94 per sales
barrel for the year ended December 31, 2008 increased from $66.25 per sales
barrel in the same period in 2007 due to higher average crude oil prices, lower
light/heavy differentials and inventory losses in 2008 compared to inventory
gains in 2007 partially offset by decreased overall crude oil charges. Average
crude oil charges were 99,347 bpd for the year ended December 31, 2008, compared
to 104,268 bpd in 2007. The decrease in average crude oil charges was due to the
planned major turnaround work on the crude unit, the coker and the reformer
during March and April of 2008. We realized a light/heavy crude oil differential
of $17.85 per barrel during 2008 compared to $21.00 per barrel in 2007. For the
year ended December 31, 2008, the heavy crude oil utilization rate at our El
Dorado Refinery expressed as a percentage of the total crude oil charge was
approximately 17%, compared to 15% in 2007. The WTI/WTS crude oil differential
decreased from an average of $5.02 per barrel in the year ended December 31,
2007 to an average of $3.92 per barrel in 2008.
Refinery operating expenses. Refinery operating expenses, excluding
depreciation, include both the variable costs (energy and utilities) and the
fixed costs (salaries, taxes, maintenance costs and other) of operating the
Refineries. Refinery operating expenses, excluding depreciation, increased $20.8
million, or 7%, to $321.4 million in the year ended December 31, 2008 from
$300.5 million in 2007.
The Cheyenne Refinery operating expenses, excluding depreciation, were $116.7
million in the year ended December 31, 2008 compared to $109.2 million in
2007. The increased expenses and the 2008 compared to 2007 variances included:
increased additives and chemicals costs ($4.4 million due to both price and
volume increases), higher turnaround amortization ($2.8 million due to
amortization of costs of 2007 turnarounds), higher electricity costs ($1.1
million due to both price and volume increases), increased natural gas costs
($819,000 due to increased prices partially offset by lower volumes), higher
property and other taxes ($720,000 due to refinery additions), demurrage
($443,000) and training ($397,000). These increases were partially offset by
decreased maintenance costs ($3.8 million) as 2007 maintenance costs included
$3.8 million of costs relating to repairs from the December 2007 coker unit
fire, and decreased environmental costs ($879,000).
The El Dorado Refinery operating expenses, excluding depreciation, were $204.7
million in the year ended December 31, 2008, increasing from $191.3 million for
the year ended December 31, 2007. The primary areas of increased costs and the
variance amounts for the 2008 period compared to the 2007 period were: increased
maintenance costs ($9.5 million, primarily related to demolition, catalyst and
repair costs incurred during the March 2008 turnaround), increased salaries and
benefits expenses ($3.0 million, mostly due to increased overtime in relation to
the March 2008 turnaround), higher electricity costs ($1.5 million), increased
operating supplies costs ($710,000) and higher turnaround amortization
($571,000). These increases were partially offset by decreased environmental
costs of $1.6 million because 2007 included $1.2 million in environmental
penalties and there were no penalties in 2008.
Selling and general expenses. Selling and general expenses, excluding
depreciation, decreased $11.2 million, or 20%, from $55.3 million for the year
ended December 31, 2007 to $44.2 million for the year ended December 31, 2008,
primarily due to the $6.3 million recognition of the loss on the Beverly Hills
settlement during the year ended December 31, 2007. In addition, salaries and
benefits expense (including stock-based compensation expense) during the year
ended December 31, 2008 decreased $3.8 million compared to the same period in
2007. See Note 9 under "Stock-based Compensation" in the "Notes to Consolidated
Financial Statements" for a detailed discussion of our stock-based
compensation. Stock-based compensation expense was $17.2 million for the year
ended December 31, 2008 compared to $20.0 million in 2007.
Depreciation, amortization and accretion. Depreciation, amortization and
accretion increased $12.7 million, or 24%, from $53.0 million for the year ended
December 31, 2007 to $65.8 million in 2008 because of increased capital
investments in our Refineries, including our El Dorado Refinery crude unit and
vacuum tower expansion project placed into service in the second quarter of
2008.
Net gains on sales of assets. The $44,000 gain on the sale of assets during the
year ended December 31, 2008 compares to a $15.2 million gain on sale of assets
in 2007. The 2007 gain resulted from a gain of $17.3 million from the sale of
our 34.72% interest in a crude oil pipeline in Wyoming and a 50% interest in two
crude oil tanks in Guernsey, Wyoming in September 2007, partially offset by the
buyout and sale of a leased aircraft.
Interest expense and other financing costs. Interest expense and other financing
costs of $15.1 million for the year ended December 31, 2008 increased $6.4
million, or 72%, from $8.8 million in 2007. The increase in interest expense
related to interest of $4.9 million on the new 8.5% Senior Notes offering,
$540,000 higher interest expense on the Utexam Master Crude Oil Purchase and
Sale Contract ("Utexam Arrangement") (see "Leases and Other Commitments" in Note
12 in the "Notes to Consolidated Financial Statement"), and $711,000 increased
interest and facility fees on our revolving credit facility. Capitalized
interest for the year ended December 31, 2008 was $6.6 million compared to $8.1
million in 2007. These increased expenses were partially offset by a $1.2
million reversal of prior years interest expenses for 2004 income tax
contingency interest accruals due to the statute of limitations
expiring. Average debt outstanding (excluding amounts payable under the Utexam
Arrangement) increased to $398.1 million during the year ended December 31, 2008
from $150.0 million for the same period in 2007.
Interest and investment income. Interest and investment income decreased $16.4
million, or 75%, from $21.9 million in the year ended December 31, 2007 to $5.4
million in the year ended December 31, 2008, due to lower cash balances during
the first eight months (prior to receiving the proceeds from our 8.5% Senior
Notes offering) of 2008 and lower interest rates on invested cash.
Provision for income taxes. The provision for income taxes for the year ended
December 31, 2008 was $26.8 million on pretax income of $107.0 million (or
25.0%) compared to $269.7 million on pretax income of $768.9 million (or 35.1%)
in 2007. The effective tax rate for the year ended December 31, 2008 was lower
than the effective tax rate in the comparable period in 2007 primarily from
recognizing the benefit from $23.3 million of Kansas income tax credits for
expansion projects at our El Dorado Refinery which reduced the effective tax
rate (net of federal tax impact) by approximately 14%. The American Jobs
Creation Act of 2004 ("the Act") created Internal Revenue Code Section 199
("Section 199"), which provides an income tax benefit to domestic
manufacturers. We recorded income tax benefits under Section 199 of
approximately $15.4 million and $5.7 million, in our 2007 and 2006 income tax
provisions, respectively. The effective tax rate in 2008 was increased by
approximately 2.9% due to reversing previously recognized 2007 and 2006
production activities deductions from filing an amended 2006 return in 2008 and
the planned carryback of the 2008 taxable loss. The Company did not recognize a
benefit from the production activities deduction in 2008, as it had a taxable
loss. The Act also benefited our 2006 current income taxes payable by allowing
us an accelerated depreciation deduction of 75% of qualified capital costs
incurred to achieve low sulfur diesel fuel requirements (See "Environmental"
under Note 12 in the "Notes to Consolidated Financial Statements"). The Act also
provided for a $0.05 per gallon federal income tax credit on compliant diesel
fuel up to an amount equal to the remaining 25% of these qualified capital
costs. The $0.05 per gallon federal income tax credit allowed us to realize an
$8.5 million federal income tax credit ($5.5 million excess tax benefit) and a
$22.4 million federal income tax credit ($14.5 million excess tax benefit) in
the years ended December 31, 2007 and 2006, respectively. This credit reduced
our 2007 and 2006 income taxes payable and reduced our overall effective income
tax rate for those years. The Energy Policy Act of 2005 added Section 179C to
the Internal Revenue Code which provides an accelerated deduction for qualified
capital costs incurred to expand an existing refinery. This accelerated
deduction allows an expense deduction of 50% of such costs in the year the
qualified projects are placed in service with the remaining costs depreciable
under regular tax depreciation rules. This Section 179C deduction has benefited
our cash flow for income taxes by reducing our taxable income for 2006 and 2007
and is a primary factor in our 2008 taxable loss. See "Income Taxes" in Note 8
in the "Notes to Consolidated Financial Statements" for more information on our
income taxes and detailed information on our deferred tax assets.
2007 Compared with 2006
We had net income for the year ended December 31, 2007, of $499.1 million, or $4.62 per diluted share, compared to net income of $379.3 million, or $3.37 per diluted share, in 2006. Our operating income of $755.8 million for the year ended December 31, 2007, reflected an increase of $181.6 million from the $574.2 million operating income for the comparable period in 2006. The average diesel crack spread was higher during 2007 ($22.19 per barrel) than in 2006 ($20.13 per barrel). The average gasoline crack spread was also higher during 2007 ($17.99 per barrel) than in 2006 ($12.82 per barrel), and the light/heavy crude oil differentials improved.
Refined product revenues. Refined product revenues increased $510.0 million, or
11%, from $4.8 billion to $5.3 billion for the year ended December 31, 2007
compared to 2006. This increase was due to an increase in average product sales
prices ($9.05 higher per sales barrel) partially offset by lower product sales
volumes in 2007 (1,890 fewer bpd). Sales prices increased primarily as a result
of increased crude oil prices and improvements in the gasoline and diesel crack
spreads.
Manufactured product yields. Yields decreased 1,826 bpd at the El Dorado
Refinery and 4,067 bpd at the Cheyenne Refinery for the year ended December 31,
2007 compared to 2006. Planned and unplanned shut downs at the Cheyenne Refinery
during 2007 caused yields to be lower during 2007 than 2006. At the El Dorado
Refinery, we processed more heavy crude oils during 2007 than in 2006, which
resulted in decreased yields.
Other revenues. Other revenues decreased $117.2 million to an $80.9 million loss
for the year ended December 31, 2007, compared to a $36.3 million gain in 2006,
the sources of which were $86.4 million in net losses from derivative contracts
in the year ended December 31, 2007 compared to net derivative gains of $34.6
million for the same period in 2006 offset by $4.8 million in gasoline sulfur
credit sales in 2007 ($1.5 million in 2006). See "Price Risk Management
Activities" under Item 7A and Note 11 in the "Notes to Consolidated Financial
Statements" for a discussion of our utilization of commodity derivative
contracts.
Raw material, freight and other costs. Raw material, freight and other costs
increased by $188.3 million, or 5%, during the year ended December 31, 2007,
from $3.9 billion in 2006 to $4.0 billion in 2007. The increase in raw material,
freight and other costs when compared to 2006 was due to higher average crude
prices, offset by lower crude oil charges and inventory gains in the year ended
December 31, 2007 compared to inventory losses in the year ended December 31,
2006. We benefited from improved light/heavy crude oil differentials during the
year ended December 31, 2007 compared to 2006. The average WTI crude oil priced
on the New York Mercantile Exchange was $72.39 for the year ended December 31,
2007 compared to $66.22 for the year ended December 31, 2006. Average crude oil
charges were 146,046 bpd for the year ended December 31, 2007, compared to
154,473 bpd in 2006. For the year ended December 31, 2007, we realized a
decrease in raw material, freight and other costs as a result of net inventory
gains of approximately $78.4 million after tax ($126.3 million pretax, comprised
of an $84.9 million gain at the El Dorado Refinery and a $41.4 million gain at
the Cheyenne Refinery) due to increasing crude oil and refined product prices
during 2007. For the year ended December 31, 2006, we realized an increase in
raw material, freight and other costs as a result of net inventory losses of
approximately $16.1 million after tax ($25.7 million pretax, comprised of a
$31.7 million loss at the El Dorado Refinery and a $6.0 million gain for the
Cheyenne Refinery) due to decreasing crude oil and refined product prices during
the latter part of 2006.
The Cheyenne Refinery raw material, freight and other costs of $62.08 per sales
barrel for the year ended December 31, 2007 increased from $57.07 per sales
barrel in 2006 due to higher crude oil prices, partially offset by an inventory
gain in 2007 compared to an inventory loss in 2006, fewer crude oil charges in
2007 and the benefit of an improved light/heavy crude oil differential in
2007. Average crude oil charges of 41,778 bpd for the year ended December 31,
2007 were lower than the 45,999 bpd in the comparable period in 2006 because of
a spring 2007 turnaround, a temporary shutdown of the FCCU in the third quarter,
and a December 2007 fire in the coker unit at the Cheyenne Refinery. The heavy
crude oil utilization rate at the Cheyenne Refinery expressed as a percentage of
the total crude oil charge decreased to 72% in the year ended December 31, 2007,
from 73% in 2006. The light/heavy crude oil differential for the Cheyenne
Refinery averaged $18.95 per barrel in the year ended December 31, 2007 compared
to $17.49 per barrel in 2006.
The El Dorado Refinery raw material, freight and other costs of $66.25 per sales
barrel for the year ended December 31, 2007 increased from $63.15 per sales
barrel in 2006 due to higher average crude oil prices partially offset by
inventory gains in 2007 compared to inventory losses in 2006 and lower crude oil
charges in 2007. Average crude oil charges were 104,268 bpd for the year ended
December 31, 2007, compared to 108,475 bpd in 2006. Due to the favorable
light/heavy differentials, we ran more heavy crude oil in 2007 which limited the
overall crude rate. We realized a light/heavy crude oil differential of $21.00
per barrel during 2007. In 2006, our El Dorado Refinery began charging Canadian
heavy crude oil and achieved a light/heavy crude oil differential of $19.48 per
barrel. For the year ended December 31, 2007, the heavy crude oil utilization
rate at our El Dorado Refinery expressed as a percentage of the total crude oil
charge was approximately 15%, compared to 11% in 2006. The WTI/WTS crude oil
differential decreased from an average of $5.22 per barrel in the year ended
December 31, 2006 to an average of $5.02 per barrel in 2007.
Refinery operating expenses. Refinery operating expenses, excluding
depreciation, increased $23.4 million, or 8%, to $300.5 million in the year
ended December 31, 2007 from $277.1 million in 2006.
The Cheyenne Refinery operating expenses, excluding depreciation, were $109.2
million in the year ended December 31, 2007, compared to $101.9 million in
2006. The increased expenses included higher maintenance costs ($5.6 million,
with $3.8 million of the costs relating to repair from a coker unit fire in
December 2007), higher salaries and benefits ($3.5 million, including $1.0
million in increased maintenance salaries and $1.1 million additional bonus
costs due to an increased number of employees), higher turnaround amortization
($1.5 million) and higher consulting and legal expenses ($1.4 million). These
increases were partially offset by decreased environmental costs ($3.2 million,
primarily related to an estimated waste water pond clean up accrual recorded in
2006 of $5.0 million offset by a $3.0 million increase in groundwater
remediation accrual in 2007), electricity costs ($1.6 million) and natural gas
costs ($1.0 million).
The El Dorado Refinery operating expenses, excluding depreciation, were $191.3
million in the year ended December 31, 2007, increasing from $175.3 million in
2006. The primary areas of increased costs were in higher property taxes ($6.0
million), increased chemicals and additives costs ($3.8 million), higher
salaries and benefits ($2.6 million, including $1.2 million in increased bonus
costs and $715,000 in increased stock-based compensation costs), higher
consulting and legal expenses ($1.7 million), higher natural gas costs ($1.3
million) and higher environmental expenses ($1.2 million).
Selling and general expenses. Selling and general expenses, excluding
depreciation, increased $2.9 million, or 5%, from $52.5 million for the year
ended December 31, 2006 to $55.3 million in 2007, primarily due to a $1.3
million increase in salaries and benefits expense, which resulted from $4.3
million in additional stock-based compensation expense and general salary
increases, offset by a $3.8 million reduction in cash bonus expense. See Note 9
under "Stock-based Compensation" in the "Notes to Consolidated Financial
Statements" for a detailed discussion of our stock-based
compensation. Stock-based compensation expense was $20.0 million for the year
ended December 31, 2007 compared to $15.8 million for the comparable period in
2006. Beverly Hills litigation costs also increased by $641,000 in the year
ended December 31, 2007, compared to the year ended December 31, 2006.
Depreciation, amortization and accretion. Depreciation, amortization and
accretion increased $11.8 million, or 29%, from $41.2 million for the year ended
December 31, 2006 to $53.0 million in 2007 because of increased capital
investment in our Refineries, including the ultra low sulfur diesel projects
placed into service in the middle of the second quarter of 2006 and our Cheyenne
Refinery coker expansion project placed into service in the second quarter of
2007. We also had higher depreciation expense during 2007 due to changes in the
estimated useful lives of certain assets that were retired in 2008 or are
expected to be retired in 2009 in connection with certain of our capital
projects.
Net gains on sales of assets. The $15.2 million gain on sale of assets during
the year ended December 31, 2007 resulted from a gain of $17.3 million from the
sale of our 34.72% interest in a crude oil pipeline in Wyoming and a 50%
interest in two crude oil tanks in Guernsey, Wyoming in September 2007,
partially offset by the buyout and sale of a leased aircraft.
Interest expense and other financing costs. Interest expense and other financing
costs of $8.8 million for the year ended December 31, 2007 decreased $3.4
million, or 28%, from $12.1 million in 2006. The decrease was due to $8.1
million of interest cost being capitalized in the year ended December 31, 2007,
compared to $3.8 million of interest cost being capitalized in the year ended
December 31, 2006, offset by $2.4 million in accrued interest expense for income
tax contingencies in 2007 ($1.5 million in 2006) and $2.2 million ($1.9 million
. . .
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