UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2002
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 001-11763
TRANSMONTAIGNE INC.
Delaware 06-1052062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2750 Republic Plaza, 370 Seventeenth Street
Denver, Colorado 80202
(Address, including zip code, of principal executive offices)
(303) 626-8200
(Telephone number, including area code)
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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of May 10, 2002 there were 32,170,924 shares of the Registrant's Common Stock
outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 2002 and June 30, 2001 ................................................. 4
Consolidated Statements of Operations
Three Months and Nine Months Ended March 31, 2002 and 2001 ....................... 5
Consolidated Statements of Stockholders' Equity
Year Ended June 30, 2001 and
Nine Months Ended March 31, 2002 ................................................. 6
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2002 and 2001 ........................................ 7
Notes to Consolidated Financial Statements ....................................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................................... 23
Item 3. Qualitative and Quantitative Disclosures about Market Risk ....................... 37
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................. 38
Signatures ....................................................................... 39
2
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of TransMontaigne Inc. are included
herein beginning on the following page. TransMontaigne Inc. is a holding company
with the following subsidiaries during the quarter ended March 31, 2002.
. TransMontaigne Product Services Inc. ("TPSI")
. TransMontaigne Holding Inc.
. TransMontaigne Transport Inc.
. Refined Solutions Inc.
Effective December 31, 2001, TransMontaigne Terminaling Inc. and
TransMontaigne Pipeline Inc. were merged into TPSI, which is now our primary
operating subsidiary.
We do not have any off balance sheet arrangements (other than operating
leases) or special purpose entities.
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TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2002 and June 30, 2001
(In thousands)
Assets March 31, June 30,
------ 2002 2001
------------------- ----------------
Current assets:
Cash and cash equivalents $ 42,908 17,330
Trade accounts receivable, net 149,956 79,050
Inventories - discretionary volumes 157,022 96,988
Unrealized gains on energy trading and risk management contracts 35,998 55,282
Receivable from sale of assets - 29,033
Prepaid expenses and other 3,209 4,130
------------------- ----------------
389,093 281,813
------------------- ----------------
Property, plant and equipment:
Land 13,939 15,181
Plant and equipment 288,378 343,076
Accumulated depreciation (56,327) (54,025)
------------------- ----------------
245,990 304,232
------------------- ----------------
Other assets:
Inventories - minimum volumes 45,298 58,261
Unrealized gains on energy trading and risk management contracts 13,947 9,875
Investments in petroleum related assets 11,808 47,760
Deferred tax assets 4,243 12,944
Deferred debt issuance costs, net 3,291 4,667
Other assets 4,595 2,977
------------------- ----------------
83,182 136,484
------------------- ----------------
$ 718,265 722,529
=================== ================
Liabilities and Stockholders' Equity
Current liabilities:
Commodity margin loan $ - 20,000
Trade accounts payable 92,255 73,749
Unrealized losses on energy trading and risk management contracts 53,021 32,822
Inventory due under exchange agreements, net 7,873 76,754
Excise taxes payable 64,032 32,025
Other accrued liabilities 16,269 12,591
------------------- ----------------
233,450 247,941
------------------- ----------------
Other liabilities:
Long-term debt 125,500 130,000
Unrealized losses on energy trading and risk management contracts 433 2,213
Stockholders' equity:
Series A Convertible Preferred stock, par value $1,000 per share,
authorized 2,000,000 shares, issued and outstanding 182,136 shares at
March 31, 2002, and 174,825 shares at June 30, 2001, liquidation
preference of $182,136 182,136 174,825
Common stock, par value $.01 per share, authorized
80,000,000 shares, issued and outstanding 32,116,194 shares at
March 31, 2002 and 31,834,669 shares at June 30, 2001 321 318
Capital in excess of par value 206,611 205,256
Unearned compensation (2,742) (2,465)
Accumulated deficit (27,444) (35,559)
------------------- ----------------
358,882 342,375
------------------- ----------------
$ 718,265 722,529
=================== ================
See accompanying notes to consolidated financial statements.
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TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months and Nine Months Ended March 31, 2002 and 2001
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- ------------------------
2002 2001 2002 2001
------------ ----------- --------- -----------
Revenues $ 1,316,864 1,278,387 4,024,108 3,782,830
Costs and expenses:
Product costs 1,280,993 1,245,523 3,929,182 3,696,391
Direct operating expenses 6,169 9,944 20,005 26,842
Selling, general and administrative 9,270 9,102 25,920 24,496
Depreciation and amortization 4,143 4,927 12,449 14,595
------------ ----------- --------- -----------
1,300,575 1,269,496 3,987,556 3,762,324
------------ ----------- --------- -----------
Operating income 16,289 8,891 36,552 20,506
Other income (expense):
Dividend income from and equity in earnings (loss) of
petroleum related investments (7) 766 1,450 2,505
Interest income 66 262 489 1,537
Interest expense (2,125) (4,376) (5,706) (13,647)
Other financing costs (613) (2,305) (2,071) (4,752)
Gain (loss) on disposition of assets, net - - (1,295) 8
Gain (loss) on interest rate swap 479 (2,490) (4,538) (2,164)
------------ ----------- --------- -----------
(2,200) (8,143) (11,671) (16,513)
------------ ----------- --------- -----------
Earnings before income taxes 14,089 748 24,881 3,993
Income tax expense (5,354) (284) (9,455) (1,517)
------------ ----------- --------- -----------
Net earnings 8,735 464 15,426 2,476
Preferred stock dividends (2,470) (2,339) (7,311) (6,592)
------------ ----------- --------- -----------
Net earnings (loss) attributable to
common stockholders $ 6,265 (1,875) 8,115 (4,116)
============ =========== ========= ===========
Earnings (loss) per common share
Basic $ 0.19 (0.06) 0.25 (0.13)
============ =========== ========= ===========
Diluted $ 0.19 (0.06) 0.25 (0.13)
============ =========== ========= ===========
Weighted average common shares outstanding:
Basic 32,131 31,743 32,031 31,342
============ =========== ========= ===========
Diluted 32,365 31,743 32,290 31,342
============ =========== ========= ===========
See accompanying notes to consolidated financial statements.
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TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year Ended June 30, 2001 and Nine Months Ended March 31, 2002
(In thousands)
Retained
Capital in earnings
Preferred Common excess of Unearned (accumulated
stock stock par value compensation deficit) Total
------------ ----------- ------------ ------------- -------------- ------------
Balance at June 30, 2000 $ 170,115 307 201,075 (1,465) (37,934) 332,098
Common stock issued for
options and warrants
exercised - 6 1,891 - - 1,897
Net tax benefit arising from
stock based compensation - - (5) - - (5)
Unearned compensation related
to restricted stock awards - 5 2,295 (2,300) - -
Amortization of unearned
compensation - - - 1,300 - 1,300
Preferred stock dividends,
including $4,710,000
paid-in-kind 4,710 - - - (8,963) (4,253)
Net earnings - - - - 11,338 11,338
-------- -------- -------- -------- -------- --------
Balance at June 30, 2001 $ 174,825 318 205,256 (2,465) (35,559) 342,375
-------- -------- -------- -------- -------- --------
Common stock issued for options
exercised - - 43 - - 43
Common stock repurchased from
employees for withholding taxes - - (96) - - (96)
Net tax benefit arising from stock
based compensation - - (14) - - (14)
Unearned compensation related to
restricted stock awards - 3 1,422 (1,425) - -
Amortization of unearned
compensation - - - 1,148 - 1,148
Preferred stock dividends
paid-in-kind 7,311 - - - (7,311) -
Net earnings - - - - 15,426 15,426
-------- -------- -------- -------- -------- --------
Balance at March 31, 2002 $ 182,136 321 206,611 (2,742) (27,444) 358,882
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2002 and 2001
(In thousands)
Nine Months Ended
March 31,
----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net earnings $ 15,426 2,476
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation and amortization 12,449 14,595
Deferred tax expense 8,701 1,417
Income tax benefit related to stock based compensation (14) -
Loss (gain) on disposition of assets 1,295 (8)
Amortization of unearned compensation 1,148 931
Amortization of deferred debt issuance costs 1,376 3,891
Provision for loss on transportation agreement 1,151 -
Unrealized loss on interest rate swap 1,327 3,491
Net change in unrealized gains/losses on long-term energy
trading and risk management contracts (5,852) (4,805)
Lower of cost or market write-down on inventories-minimum
volumes 12,963 8,821
Changes in operating assets and liabilities,
net of non-cash activities:
Trade accounts receivable (70,906) 3,696
Net change in inventories - discretionary volumes (60,034) 46,997
Prepaid expenses and other 921 (523)
Trade accounts payable 18,506 (35,750)
Net change in inventory due under exchange agreements (68,881) (52,683)
Net change in unrealized gains/losses on current
energy trading and risk management contracts 39,483 7,340
Excise taxes payable and other accrued liabilities 29,907 12,247
--------- ---------
Net cash provided (used) by operating activities (61,034) 12,133
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,461) (7,986)
Proceeds from sales of assets 117,244 1,184
Increase in other assets (1,618) (500)
--------- ---------
Net cash provided (used) by investing activities 111,165 (7,302)
--------- ---------
Cash flows from financing activities:
Repayments of long-term debt, net (4,500) (1,776)
Borrowing (repayment) of commodity margin loan (20,000) 20,000
Deferred debt issuance costs - (1,749)
Common stock issued 43 1,605
Common stock repurchased from employees for withholding taxes (96) -
Preferred stock dividends paid - (4,253)
--------- ---------
Net cash provided (used) by financing activities (24,553) 13,827
--------- ---------
Increase in cash and cash equivalents 25,578 18,658
Cash and cash equivalents at beginning of period 17,330 18,347
--------- ---------
Cash and cash equivalents at end of period $ 42,908 37,005
========= =========
See accompanying notes to consolidated financial statements
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TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Nine Months Ended March 31, 2002 and 2001
(In thousands)
Nine Months Ended
March 31,
--------------------
2002 2001
-------- --------
Supplemental disclosures of cash flow information:
Sale of Little Rock facilities on June 30, 2001:
Proceeds receivable $ 29,033 --
-------- --------
Cash received from sale $ 29,033 --
======== ========
Sale of West Shore shares on July 27, 2001 and October 29, 2001:
Investment in West Shore $ 35,952 --
Loss on disposition (9,896) --
-------- --------
Cash received from sale $ 26,056 --
======== ========
Sale of NORCO facilities on July 31, 2001:
Assets disposed $ 49,733 --
Liabilities recorded upon sale 3,416 --
Gain on disposition 8,601 --
-------- --------
Cash received from sale $ 61,750 --
======== ========
Other cash sales:
Cash received from sales $ 405 1,184
======== ========
See accompanying notes to consolidated financial statements.
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TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(1) Summary of Critical and Significant Accounting Policies
Nature of Business and Basis of Presentation
TransMontaigne Inc., a Delaware corporation ("TransMontaigne"), provides
a broad range of integrated supply, distribution, marketing, terminaling,
storage, and transportation services to refiners, distributors, marketers
and industrial/commercial end-users of petroleum refined products (e.g.
gasoline, heating oil, etc.), chemicals, crude oil and other bulk liquids
(collectively, referred to as "Product") in the midstream sector of the
petroleum and chemical industries. We are a holding company that conducts
our operations primarily in the Mid-Continent, Gulf Coast, Southeast,
Mid-Atlantic and Northeast regions of the United States.
Our commercial operations are divided into two main areas: Products
supply, distribution and marketing, and terminals and pipelines.
Principles of Consolidation and Use of Estimates
The consolidated financial statements included in this Form 10-Q have
been prepared by us without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, these statements
reflect adjustments (consisting only of normal recurring entries), which
are, in our opinion, necessary for a fair presentation of the financial
results for the interim periods. Certain information and notes normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although we believe that the disclosures are
adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes, together with our
discussion and analysis of financial condition and results of operations
included in our Annual Report on Form 10-K for the year ended June 30,
2001.
Our accounting and financial reporting policies conform to generally
accepted accounting principles and practices. The financial statements
include the accounts of TransMontaigne and its wholly-owned subsidiaries
on a consolidated basis. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires us 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 periods. Changes in these estimates and assumptions
will occur as a result of the passage of time and the occurrence of
future events, and actual results could differ from these estimates.
Reclassifications
Certain amounts in the prior year have been reclassified to conform to
the current year's presentation. We have classified inventories - minimum
volumes as a non-current asset in the accompanying consolidated financial
statements. We also have presented separately the current and non-current
unrealized gains/losses on open energy trading and risk management
contracts in the accompanying consolidated financial statements. At June
30, 2001, we previously presented our commodity margin loan as an offset
to cash and cash equivalents.
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Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(1) Summary of Critical and Significant Accounting Policies (continued)
Inventories - Discretionary Volumes
Our inventories - discretionary volumes consist of Products that are held
for sale or exchange. Our energy trading and risk management activities,
which include inventories - discretionary volumes and all energy trading
and risk management contracts, are accounted for in accordance with
Emerging Issues Task Force Consensus 98-10 ("EITF 98-10"), Accounting for
Contracts Involved in Energy Trading and Risk Management Activities. As
such, all energy trading and risk management contracts are
marked to market. The utilization of this mark-to-market method of
accounting requires that the effect of changes in prices related to our
discretionary physical inventory volumes, along with any energy trading
and risk management contracts, be included in net operating margins.
We maintain and hold for sale or exchange discretionary inventory that
has different quality grades but is interchangeable within these grades
(e.g., premium, mid-grade, regular unleaded gasoline). Our refined
petroleum products inventories are traded in futures markets; in large
fungible bulk markets (Pasadena, TX; New York Harbor; Chicago, IL; Tulsa,
OK refining area; and Los Angeles, CA); and in city specific wholesale
markets. Quoted market prices (New York Mercantile Exchange ("NYMEX"),
Platt's-Bulk, and OPIS-Wholesale) are readily available for these markets
and are used by us in determining our inventory valuations.
The valuation of our inventories - discretionary volumes is based on the
nearest quoted NYMEX futures contract price, plus quoted basis
(geographical) differentials to the various bulk market areas, plus
Federal Energy Regulatory Commission regulated transportation costs and
industry recognized handling charges to city specific wholesale markets.
Near term basis (geographical) differentials are quoted and traded in the
over-the-counter petroleum markets and are easily verified by the various
cash brokers that facilitate trading.
We utilize this valuation methodology for all inventories - discretionary
volumes held by us in storage, along with any valuation of a related
exchange imbalance with a trading partner. This methodology provides us a
consistent means of valuing discretionary inventory volumes at a spot
liquidation value and utilizes pricing components that are verifiable via
market price services and regulated pipeline tariffs.
Our Risk Management Committee reviews the discretionary inventory and
risk position on a regular basis in order to ensure compliance with our
inventory management policies, including risk management and trading
activities. We have adopted policies under which changes to our net risk
position, which is subject to price risk, requires the prior approval of
the Audit Committee of the Board of Directors.
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Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(1) Summary of Critical and Significant Accounting Policies (continued)
Accounting for Price Risk Management Activities
We enter into forward physical energy contracts in both our
marketing/logistics business and our commercial end user marketing
("energy services") business. Our contracted price agreed upon with a
third party is compared against the estimated price to replace the
Product at the delivery location of the contract. The difference between
these two values is discounted to present-day dollars and recorded as a
component of "Unrealized Gains (asset) or Losses (liability) on Energy
Trading and Risk Management Contracts" in the Consolidated Balance Sheet,
with an offsetting entry to Product Costs in the Consolidated Statements
of Operations. Our price risk management activities are energy-trading
activities as defined by EITF 98-10. As such, all financial instruments
utilized are marked to market.
Mark-to-market accounting assists us in evaluating positions and
controlling market risks. We record all positions at their daily net
realizable value (the cost to replace the positions at current values,
i.e. replacement costs), using a combination of published daily market
closes and estimates based on both market intelligence and historical
market conditions.
For market locations in which we have access to physical Products via our
equity owned terminals, controlled pipeline space, and/or a
throughput/exchange arrangement, replacement cost is determined by adding
the quoted near month NYMEX futures quote to the appropriate basis
(geographical) differential (depending on the market area that will
supply the contract location) and the transportation cost to deliver the
Products from the bulk trading location to the contract location.
For some of our contracts and contract locations, calculating replacement
cost relies on a degree of estimation in calculating the basis
(geographical) differentials for deferred trading months and locations
without an actively traded forward cash market. For these markets (in
which we cannot secure a forward traded basis (geographical) differential
quote from a broker), our mark-to-market model estimates the basis
(geographical) differentials based on a rolling historical average, which
is updated quarterly.
For market locations in which we do not have access to physical Products
via our equity owned terminals, controlled pipeline space, and/or a
throughput/exchange arrangement, we purchase Products on a spot basis
from approved vendors to satisfy our contractual obligations. In these
contracts, we are exposed to the differential between the bulk trading
locations and the city specific wholesale markets, as we do not control
the pipeline and terminal capacity to facilitate shipment of the physical
Products. Our mark-to-market model incorporates this basis (geographical)
differential to each specific city.
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Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(1) Summary of Critical and Significant Accounting Policies (continued)
Accounting for Price Risk Management Activities (continued)
We also mark to market our forward commitments under swap contracts. We
enter into various swap agreements with our trading partners and price
risk management customers that settle against a wide variety of wholesale
and retail pricing indices. The purpose of these arrangements is to hedge
forward price risk and garner a value added margin for price risk
management activities. In accordance with our risk management policy, we
utilize a combination of futures contracts and over-the-counter forward
contracts to manage the commodity price risk associated with these
contracts. Our methodology to calculate a forward replacement cost for
these instruments is consistent with our methodology used to value our
forward physical cash commitments. We use a rolling historical average
difference between the pricing index that the swap contract utilizes
(e.g. Department of Energy National and OPIS-Wholesale indices) and the
related NYMEX futures contract utilized to manage the commodity price
risk associated with the commitment.
Contractual commitments are subject to risks including market value
fluctuations, as well as counter party credit and liquidity risk. We have
established procedures to continually monitor these contracts in order to
minimize credit risk, including the establishment and review of credit
limits, margin requirements, master netting arrangements, letters of
credit, and other guarantees.
The cash flow impact of financial instruments and these risk management
activities are reflected in cash flows from operating activities in the
Consolidated Statements of Cash Flows.
Accounting for Terminal and Pipeline Activities
In connection with our terminal and pipeline operations, we utilize the
accrual method of accounting for revenue and expenses. As such, terminal
and pipeline revenue is recognized as the Product is delivered to the
customer.
Environmental Obligations
We accrue for environmental costs that relate to existing conditions
caused by past operations when estimable. Environmental costs include
initial site surveys and environmental studies of potentially
contaminated sites, costs for remediation and restoration of sites
determined to be contaminated and ongoing monitoring costs, as well as
fines, damages and other costs, including direct internal and legal
costs. Liabilities for environmental costs at a specific site are
initially recorded when it is probable that we will be liable for such
costs, and a reasonable estimate of the associated costs can be made
based on available information. Such an estimate includes our share of
the liability for each specific site and the sharing of the amounts
related to each site that will not be paid by other potentially
responsible parties, based on enacted laws and adopted/regulations and
policies. Adjustments to initial estimates are recorded, from time to
time, to reflect changing circumstances and estimates based upon
additional information developed in subsequent periods. Estimates of our
ultimate liabilities associated with environmental costs are particularly
difficult to make with certainty due to the number of variables involved,
including the early stage of investigation at certain sites, the lengthy
time frames required to complete remediation, technology changes,
alternatives available and the evolving nature of environmental laws and
regulations. At March 31, 2002, we had environmental reserves accrued of
approximately $2.7 million, representing our best estimate of our
remediation obligations. As of June 30, 2001, we had an environmental
reserve of approximately $0.7 million.
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Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(1) Summary of Critical and Significant Accounting Policies (continued)
Cash and Cash Equivalents
We consider all short-term investments with an original maturity of three
months or less at the date of purchase to be cash equivalents.
Property, Plant and Equipment
Depreciation is computed using the straight-line and double-declining
balance methods. Estimated useful lives are 20 to 25 years for plant,
which includes buildings, storage tanks, and pipelines, and 3 to 20 years
for equipment. All items of property, plant and equipment are carried at
cost. Expenditures that increase capacity, or extend useful lives are
capitalized. Routine repairs and maintenance are expensed. Computer
software costs are capitalized and amortized over their useful lives,
generally not to exceed 5 years. The costs of installing certain
enterprise wide information systems are amortized over periods not
exceeding 10 years.
Deferred Debt Issuance Costs
Deferred debt issuance costs relate to the Bank Credit Facility and the
senior promissory notes and are amortized on the interest method over the
term of the underlying debt instrument.
Income Taxes
We utilize the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply in the years in which
these temporary differences are expected to be recovered or settled.
Changes in tax rates are recognized in income in the period that includes
the enactment date.
Earnings Per Common Share
Basic earnings per common share have been calculated based on the
weighted average number of common shares outstanding during the period.
Diluted earnings per share assumes conversion of dilutive convertible
preferred stocks and the exercise of all stock options and warrants with
exercise prices less than the average market price of the common stock
during the period, using the treasury stock method.
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Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(1) Summary of Critical and Significant Accounting Policies (continued)
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS No. 141
also specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill, and establishes that any purchase price allocable to an
assembled workforce may not be accounted for separately. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
We have adopted provisions of SFAS No. 141 and we will adopt SFAS No. 142
effective July 1, 2002. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS No. 142. The adoption of SFAS No.
141 did not have any impact on our financial statements, and we do not
expect the adoption of SFAS No. 142 will have any impact on our financial
statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The standard
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or
normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset and
this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through
charges to operating expense. If the obligation is settled for other than
the carrying amount of the liability, a gain or loss is recognized on
settlement.
We are required and plan to adopt the provisions of SFAS No. 143
effective July 1, 2002. To accomplish this, we must identify all legal
obligations for asset retirement obligations, if any, and determine the
fair value of these obligations on the date of adoption. The
determination of fair value is complex and will require us to gather
market information and develop cash flow models. Additionally, we will be
required to develop processes to track and monitor these obligations.
Because of the effort necessary to comply with the adoption of SFAS No.
143, it is not practicable for us to estimate the impact of adopting this
statement at the date of this report.
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Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(1) Summary of Critical and Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 establishes
one accounting model to be used for long-lived assets to be disposed of
by sale and broadens the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 also provides guidance
that will eliminate inconsistencies in accounting for the impairment or
disposal of long-lived assets under existing accounting pronouncements.
The new rule retains many of the fundamental recognition and measurement
provisions provided for in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but
significantly changes the criteria for classifying an asset as
held for sale. We are currently evaluating the requirements and impact of
this statement on our consolidated results of operations and financial
position.
The FASB issued Statement No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, on April 30, 2002. Statement No. 145 rescinds Statement No.
4, which required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. Upon adoption of Statement No. 145, companies
will be required to apply the criteria in APB Opinion No. 30, Reporting
the Results of Operations - reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions in determining the classification of
gains and losses resulting from the extinguishments of debt.
Statement No. 145 is effective for fiscal years beginning after May 15,
2002. We are currently evaluating the requirements and impact of this
statement on our consolidated results of operations and financial
position.
(2) Dispositions
Effective June 30, 2001, we sold two petroleum distribution facilities in
Little Rock, Arkansas to Williams Energy Partners L.P. for $29.0 million.
The cash proceeds from the sales transactions were received on July 3,
2001. We recognized a net gain in June 2001 of approximately $22.1
million on the sale. The proceeds from the sale were used to repay
long-term debt and for working capital needs.
On July 27, 2001, we sold 861 shares of the common stock of West Shore
Pipeline Company ("West Shore"), thereby reducing our ownership interest
to 18.50%. The West Shore common stock was sold to Midwest Pipeline
Company, LLC for cash consideration of approximately $2.9 million. We
recognized a net loss of approximately $1.1 million on this sale. As a
result of this transaction, we also recognized a loss on our remaining
investment in West Shore of approximately $8.8 million. We sold our
remaining 18.50% interest on October 29, 2001 to Buckeye Partners L.P.
for cash consideration of approximately $23.1 million, which approximated
our adjusted book value. The cash proceeds from both sales were used to
repay long-term debt and for working capital needs.
On July 31, 2001, we sold the NORCO Pipeline system and related terminals
("NORCO") to Buckeye Partners L.P. for cash consideration of
approximately $62.0 million and recognized a net gain of approximately
$8.6 million on the sale. The proceeds from the sale were used to repay
long-term debt and for working capital needs.
15
TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(3) Inventories - Discretionary Volumes
Inventories - discretionary volumes at March 31, 2002 and June 30, 2001
are as follows:
March 31, 2002 June 30, 2001
-------------- --------------
(in thousands) (in thousands)
Refined petroleum products held for sale or
exchange $ 149,149 20,234
Refined petroleum products due under exchange
agreements, net 7,873 76,754
-------------- --------------
Inventories - discretionary volumes $ 157,022 96,988
============== ==============
Our inventories - discretionary volumes are held for sale or exchange in
the ordinary course of business and consist of refined petroleum
products, primarily gasoline and distillates. Our inventories -
discretionary volumes are an integral component of our overall energy
trading and risk management activities. We manage inventories -
discretionary volumes in combination with energy trading and risk
management contracts by utilizing risk and portfolio management
disciplines, including certain hedging strategies, forward purchases and
sales, swaps and other financial instruments to manage market exposure,
primarily commodity price risk. In managing these inventory balances, we
evaluate the market exposure from an overall portfolio basis that
considers both continuous movement of physical inventory balances and
related open positions in energy trading and risk management contracts
(see Note 5 - Unrealized Gains/Losses on Energy Trading and Risk
Management Contracts, Net).
Our inventories - discretionary volumes are presented in the accompanying
consolidated balance sheet as current assets and are carried at market
value. Changes in the market value of our inventories - discretionary
volumes are included in product costs and net margins attributable to
our Product supply, distribution and marketing segment.
(4) Inventories - Minimum Volumes
Inventories - minimum volumes at March 31, 2002 and June 30, 2001 are as
follows:
March 31, 2002 June 30, 2001
-------------- --------------
(in thousands) (in thousands)
Refined petroleum products:
At cost basis $ 76,579 76,579
Allowance for write-downs to lower of
cost or market (31,281) (18,318)
-------------- --------------
Inventories - minimum volumes $ 45,298 58,261
============== ==============
Prior to July 1, 2000, we carried our physical inventory volumes at market value
because they were a component of our trading and risk management activities.
Effective July 1, 2000, upon completion of a review of our inventory management
strategies and customer contracts, we designated 2.0 million barrels of refined
petroleum products as inventories - minimum volumes and we changed our risk
management strategy associated with this minimum inventory. In accordance with
our revised risk management strategy, we removed the hedging contracts on the
minimum inventory.
16
TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(4) Inventories - Minimum Volumes (continued)
Our inventories - minimum volumes, represented by tank bottoms and
pipeline linefill held by us in tanks and pipelines owned by us and by
third parties, are required to be held for operating balances in the
conduct of our overall operating activities. We do not intend to sell or
exchange these inventories in the ordinary course of business and,
therefore, we do not hedge the market risks associated with this minimum
inventory.
Our inventories - minimum volumes are presented in the accompanying
consolidated balance sheet as non-current assets and are carried at the
lower of cost or market. As of March 31, 2002 and June 30, 2001, the
level of our inventories - minimum volumes was 2.0 million barrels of
refined petroleum products. During the three months ended March 31, 2002
and 2001, we recognized an impairment loss of approximately $0.0 and $1.9
million, respectively, due to lower of cost or market write-downs on this
minimum inventory. During the nine months ended March 31, 2002 and 2001,
we recognized an impairment loss of approximately $13.0 million and $8.8
million, respectively, due to lower of cost or market write-downs on this
minimum inventory.
(5) Unrealized Gains/Losses on Energy Trading and Risk Management Contracts,
Net
Unrealized gains and losses on energy trading and risk management
contracts at March 31, 2002 and June 30, 2001 are as follows:
March 31, 2002 June 30, 2001
-------------------- --------------------
(in thousands) (in thousands)
Unrealized gains - current $ 35,998 55,282
Unrealized gains - long-term 13,947 9,875
-------------------- --------------------
Unrealized gains - asset 49,945 65,157
-------------------- --------------------
Unrealized losses - current (53,021) (32,822)
Unrealized losses - long-term (433) (2,213)
-------------------- --------------------
Unrealized losses - liability (53,454) (35,035)
-------------------- --------------------
Net asset (liability) position $ (3,509) 30,122
==================== ====================
Our energy trading contracts are primarily sales commitments to
commercial and industrial end users, logistical service contracts, and
basis (geographical) differentials versus published indices (referred to
as "swaps"). These commitments provide our customers both price risk
management and real time inventory management solutions via our web-based
information systems. We manage these commitments by utilizing risk and
portfolio disciplines, including certain hedging strategies. Our risk
management contracts include forward purchases and sales, swaps, and
other financial instruments to offset market exposure, primarily
commodity price risk, on our energy trading contracts and inventories -
discretionary volumes. In managing market risks on these contracts and
inventories, we evaluate the market exposure from an overall portfolio
basis that considers both the open position in the energy trading
contracts and the related movement of certain physical inventory balances
(see Note 3 - Inventories - Discretionary Volumes).
17
TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(6) Property, Plant and Equipment
Property, plant and equipment at March 31, 2002 and June 30, 2001 is as
follows:
March 31, 2002 June 30, 2001
-------------- --------------
(in thousands) (in thousands)
Land $ 13,939 15,181
Pipelines, rights of way
and equipment 11,842 36,776
Terminals and equipment 257,989 289,715
Other plant and equipment 18,547 16,585
-------------- --------------
302,317 358,257
Less accumulated depreciation 56,327 54,025
-------------- --------------
$ 245,990 304,232
============== ==============
(7) Investments in Petroleum Related Assets
Investments in petroleum related assets at March 31, 2002 and June 30,
2001 is as follows:
March 31, 2002 June 30, 2001
-------------- --------------
(in thousands) (in thousands)
Lion Oil Company $ 10,131 10,131
ST Oil Company 1,677 1,677
West Shore - 35,952
-------------- --------------
$ 11,808 47,760
============== ==============
We effectively own 18.04% of the common stock of Lion Oil Company
("Lion"), an Arkansas based refinery, through our 65% ownership of
TransMontaigne Holding Inc. We recorded dividend income of approximately
$0.8 million from Lion during the nine months ended March 31, 2002 and
$0.7 million during the nine months ended March 31, 2001.
In August 2000, we converted our note receivable and accrued interest
from ST Oil Company into a 30.02% equity ownership position. We recorded
less than $0.1 million of equity income during the nine months ended
March 31, 2002 and 2001.
Through our wholly-owned subsidiary, TransMontaigne Pipeline Inc., we
owned 20.38% of the common stock of West Shore. Although we owned 20.38%,
we did not have the ability to significantly influence the activities of
West Shore and, therefore, carried our investment at cost. On July 27,
2001, we sold 861 shares of the common stock of West Shore thereby
reducing our ownership interest to 18.50%. The West Shore common stock
was sold to Midwest Pipeline Company, LLC for cash consideration of
approximately $2.9 million. We recognized a net loss of approximately
$1.1 million on this sale. As a result of this transaction, we also
recognized a loss on our remaining investment in West Shore of
approximately $8.8 million. We sold our remaining 18.50% interest on
October 29, 2001 to Buckeye Partners L.P. for cash consideration of
approximately $23.1 million, which approximated our adjusted book value.
We recorded dividend income from West Shore of approximately $0.7 million
during the nine months ended March 31, 2002 and $1.7 million for the nine
months ended March 31, 2001.
18
TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(8) Other Assets
Other assets at March 31, 2002 and June 30, 2001 is as follows:
March 31, 2002 June 30, 2001
-------------- --------------
(in thousands) (in thousands)
Prepaid transportation $ 2,884 2,601
Commodity trading membership 1,500 -
Deposits and other assets 211 376
-------------- --------------
$ 4,595 2,977
============== ==============
Prepaid transportation relates to our contractual transportation and
deficiency agreements with three interstate refined petroleum pipelines
(see Note 13 - Commitments and Contingencies).
(9) Debt
Debt at March 31, 2002 and June 30, 2001 is as follows:
March 31, 2002 June 30, 2001
-------------- --------------
(in thousands) (in thousands)
Commodity margin loan $ - 20,000
Bank Credit Facility 100,500 80,000
Senior promissory notes 25,000 50,000
-------------- --------------
125,500 150,000
Less current debt - 20,000
-------------- --------------
Long-term debt $ 125,500 130,000
============== ==============
We currently have a commodity margin loan agreement with Salomon Smith
Barney that allows us to borrow up to $20.0 million to fund certain
initial and/or variation margin requirements in commodities accounts
maintained by us with Salomon Smith Barney. The entire unpaid principal
amount of the loan, together with accrued interest, is due and payable on
demand. Outstanding loans bear interest at the average 90-day Treasury
bill rate plus 1.75% (3.54% at March 31, 2002).
Our Bank Credit Facility consists of a $240 million revolving credit
facility and a $45 million letter of credit facility that is due December
31, 2003. Borrowings under the credit facility bear interest, based upon
our option, at either the lender's Alternate Base Rate plus a spread, or
LIBOR plus a spread, as in effect at the time of the borrowings and is
adjusted monthly, bimonthly, quarterly or semi-annually.
In April 1997, we entered into a Master Shelf Agreement (senior
promissory notes) with an institutional lender. On July 6, 2001, we
repaid and retired the outstanding $25 million of 7.85% Senior Notes with
a portion of the proceeds from the sale of the Little Rock terminal. The
remaining borrowings consist of 7.22% Senior Notes due October 17, 2004.
Each of the Bank Credit Facility and Master Shelf Agreement is secured by
certain current assets and fixed assets, and each also includes financial
tests relating to fixed charge coverage, current ratio, maximum leverage
ratio, consolidated tangible net worth, cash distributions and open
inventory positions. As of March 31, 2002, we were in compliance with all
such tests contained in the respective agreements.
19
TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
9) Debt (continued)
The average interest rate under the Bank Credit Facility was 4.7% at
March 31, 2002, and 6.6% at June 30, 2001. Cash payments for interest
were approximately $5.5 million and $14.5 million for nine months ended
March 31, 2002 and 2001, respectively.
Pursuant to our Bank Credit Facility, we had outstanding letters of
credit with third parties in the amount of $17.0 million and $12.3
million at March 31, 2002 and June 30, 2001, respectively. At March 31,
2002, all outstanding letters of credit expire within one year.
We have a $150 million notional value "periodic knock-out" swap agreement
with a money center bank to offset the exposure of an increase in
variable interest rates on our bank debt. This swap agreement expires in
August 2003. The swap settles monthly and contains a knock-out provision
that is activated when the one-month LIBOR is at or above 6.75%. The swap
agreement provides that we pay a fixed interest rate of 5.48% on the
notional amount in exchange for receiving a variable rate based on LIBOR
so long as the one-month LIBOR interest rate does not rise above 6.75%.
If the one-month LIBOR rate rises above 6.75%, the swap knocks out and no
payments will be received by us under the agreement until such time as
the one-month LIBOR rate declines below 6.75%. The one-month LIBOR rate
was 1.85% at March 31, 2002, and 4.08% at June 30, 2001.
As of March 31, 2002 and June 30, 2001, the fair market value of the swap
agreement was a liability of $4.4 million and $3.1 million respectively,
which was recorded in Other Accrued Liabilities. For the nine months
ended March 31, 2002, we recorded an unrealized loss on the interest rate
swap of $1.3 million and a realized loss of $3.2 million that we paid to
the swap counter party. We recorded an unrealized loss on the interest
rate swap of $3.5 million and a realized gain of $1.3 million that was
paid to us by our swap counter party, for the nine months ended March 31,
2001.
(10) Stockholders' Equity
On March 25, 1999 and March 30, 1999, we closed a private placement of
$170.1 million of $1,000 Series A Convertible Preferred Stock Units (the
"Units"). Each Unit consists of one share of 5% convertible preferred
stock (the "Preferred Stock"), convertible into common stock at $15 per
share, and 66.67 warrants, each warrant exercisable to purchase
six-tenths of a share of common stock at $14 per share. Dividends are
cumulative and payable quarterly. The dividends are payable in either
cash or additional preferred shares. If the dividends are paid-in-kind
with additional preferred shares, the number of additional preferred
shares issued in lieu of a cash payment is determined by multiplying the
cash dividend that would have been paid by 110%. For the nine months
ended March 31, 2002, paid-in-kind dividends were $7.3 million. For the
nine months ended March 31, 2001 cash dividend payments were $4.3 million
and paid-in-kind dividends were $2.3 million.
20
TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(10) Stockholders' Equity (continued)
We may redeem all, but not less than all, of the then outstanding shares
of the Preferred Stock on December 31, 2003 at the liquidation value of
$1,000 per share plus any accrued but unpaid dividends thereon through
the redemption date (the "Mandatory Redemption Price"). The Mandatory
Redemption Price shall be paid, at our election, in cash or shares of
common stock, or any combination thereof, subject to limitations on the
total number of common shares permitted to be used in the exchange and
issued to any shareholder. For purposes of calculating the number of
shares of common stock to be received, each such share of common stock
shall be valued at 90 percent of the average market price for the common
stock for the 20 consecutive business days prior to the redemption date.
If the Preferred Stock remains outstanding after December 31, 2003, the
dividend rate will increase to an annual rate of 16%. The Preferred Stock
is convertible any time and may be called for redemption by us after the
second year if the market price of the common stock is greater than 175%
of the conversion price at the date of the call.
(11) Restricted Stock
We have a restricted stock plan that provides for awards of common stock
to certain key employees, subject to forfeiture if employment terminates
prior to the vesting dates. The market value of shares awarded under the
plan is recorded in stockholders' equity as unearned compensation.
Amortization of unearned compensation of approximately $1.1 million and
$0.9 million is included in selling, general and administrative expense
for the nine months ended March 31, 2002 and 2001, respectively. As
provided for in the plan, during the nine months ended March 31, 2002,
17,265 shares were repurchased from employees to pay the withholding
taxes due when the restricted shares vested.
(12) Litigation
We have been named as a defendant in various lawsuits and a party to
various other legal proceedings, in the ordinary course of business, some
of which are covered in whole or in part by insurance. We believe that
the outcome of such lawsuits and other proceedings will not individually
or in the aggregate have a material adverse effect on our consolidated
financial condition, results of operations or cash flows.
21
TRANSMONTAIGNE INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------
(13) Commitments and Contingencies
In connection with our June 30, 2001 sale of the two petroleum
distribution facilities in Little Rock, Arkansas, we are potentially
liable for payments of up to $725,000 per year for a five-year period
through June 30, 2006. The amount that we are potentially liable for each
year is based on the actual throughput volumes of the facility for each
year as compared to the contractual thresholds, of 20,000 and 32,500
barrels per day ("BPD"). If actual volumes exceed 32,500 BPD, we will not
be obligated to pay any of the $725,000 for that given year. If actual
volumes are between the 20,000 and 32,500 BPD, we will be obligated to
pay a prorated portion of the $725,000. If actual volumes are less than
20,000 BPD, we are obligated to pay the entire $725,000. As of March 31,
2002, $0.3 million has been accrued for this obligation based on actual
volumes to date and expected volumes through June 30, 2002.
We also are subject to three transportation and deficiency agreements
("T&D's") with three separate refined petroleum product interstate
pipeline companies. Each agreement calls for guaranteed minimum shipping
volumes over the term of the agreements. If actual volumes shipped are
less than the guaranteed minimum volumes, we must make payment to the
counter party for any shortfall at the contracted pipeline tariff. Such
payments are accounted for as prepaid transportation, since we have a
contractual timeframe, after the end of the term of the T&D, to apply the
amounts to charges for using the interstate pipeline. We monitor the
actual volumes shipped against our obligations to determine if the T&D
payments made will ultimately be recouped. In order to do this, we have
to estimate our future shipping volumes.
As of March 31, 2002, we have estimated that future payments totaling
$2.7 million under one of the T&D agreements will not be recoverable and,
accordingly, we have established a liability in Other Accrued Liabilities
for this estimated future obligation.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following review of our financial condition and results of
operations should be read in conjunction with the accompanying Consolidated
Financial Statements. These Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and related notes,
together with our discussion and analysis of financial condition and results of
operations included in our Annual Report on Form 10-K for the year ended June
30, 2001.
Our commercial operations are divided into two main areas: Product
supply, distribution and marketing, and terminals and pipelines, which includes
terminaling, storage services, and pipeline transportation.
Commercial Operations
Product Supply, Distribution and Marketing
We provide Product supply, distribution, and marketing related
services, consisting of the bulk purchase and resale of Products, the wholesale
marketing of Products at terminal truck loading rack locations, and the sale of
Products to regional and national industrial end-users. In addition, we provide
risk management products and logistical services to gasoline and distillate
customers that minimize the customer's exposure to both commodity price
movements and basis (geographical) differentials. We provide these services to
customers for periods as short as one month to terms that span up to three
years. The type and length of contracts provided by us will vary based upon
market conditions, customer needs and the risk profile desired by the individual
customer. These risk-managing contracts are not entered into on a ratable basis
and can cause net operating margins to fluctuate from one period to the next.
The Product supply, distribution and marketing operations generally
utilize our terminal and pipeline assets to market and trade various Products
and provide specialized supply, logistical, and risk management services to our
customers. We purchase Products at prevailing prices from refiners and producers
at production points and common trading locations. These Products then are
shipped via barge, our pipelines or third party-owned pipelines to our terminals
or to third party terminal locations. We also can arrange for the movement of
Products through exchange agreements with third parties. From these terminal
locations, the Products are made available to our customers either through
contract sales, exchange agreements or daily priced rack sales.
Our margins are generated from bulk purchases and resales together with
exchanges of Products with major and large independent energy companies;
wholesale distribution and sales of Products to jobbers and retailers;
distribution and sales of Products to regional and national
commercial/industrial end-users; wholesale storage and marketing contracts of
Products; and tailored short and long-term fuel and risk management logistical
services arrangements to wholesale, retail and commercial/industrial end-users.
Product storage and forward sales transactions enable us to purchase Products
inventory; utilize proprietary and leased tankage, as well as line space
controlled by us in major common carrier pipelines; arbitrage basis
(geographical) differentials and transportation costs; store inventory; and,
depending upon market conditions, realize margins through sales in the future
cash market or by using NYMEX contracts. Wholesale distribution of Products is
conducted from proprietary and non-proprietary truck loading terminal, storage
and delivery locations. Fuel and risk management logistical services provide
both our large and small volume customers an assured, ratable and cost effective
delivered source of Products supply through proprietary pipelines and terminals,
as well as through non-proprietary pipeline, terminal, truck, rail and barge
distribution channels.
23
Product Supply, Distribution and Marketing (continued)
Generally, as we purchase discretionary inventory, we simultaneously
attempt to establish or "lock-in" a margin by selling the Product for physical
delivery to third party users or by entering into a future delivery obligation,
such as a futures contract on the NYMEX. We seek to maintain a balanced position
until we deliver or take delivery of the physical Product associated with each
transaction, thereby minimizing or eliminating exposure to commodity price
fluctuations occurring after the initial transactions. However, certain risks
(price relationships between delivery points (referred to as "basis
(geographical) differentials"), types of Product or delivery periods will
change) cannot be completely hedged or eliminated. It is our policy not to
acquire Products, futures contracts or other derivative products for the sole
purpose of speculating on the commodity price. Risk management policies have
been established by our risk management committee to monitor and control these
price risks. The risk management committee is comprised of senior executives of
TransMontaigne.
In addition, we provide "supply chain management" services to our
commercial and industrial customers. Through our "supply chain management"
arrangements, we provide services to our customers downstream of the Products
rack location. A customer of our "supply chain management" services receives the
benefits of our web-based technology systems enabling the customers to minimize
their total energy costs while meeting their volumetric needs. As a result of
this service, a customer can reduce the processing time associated with
dispatching Product to its physical locations, processing payments associated
with Product purchases at both bulk and retail locations, and obtain other costs
savings associated with procuring its Product demands. By aggregating the
demands of various customers, we are able to leverage the demand and build
relationships with other companies along the supply and distribution chain that
benefit all the parties through reductions in the "back office" processing costs
associated with buying and selling Products.
Terminals and Pipelines
We own and operate an extensive terminal infrastructure that handles
Products with transportation connections via pipelines, barges, rail cars and
trucks to our facilities or to third party facilities with an emphasis on
transportation connections primarily through the Colonial, Plantation, Texas
Eastern, Explorer and Williams pipeline systems. The terminal and pipeline
commercial operations depend in large part on the level of demand for Products
by end users in the geographic locations served by such facilities and the
ability and willingness of our customers to supply such demand by utilizing our
terminals and pipelines as opposed to the terminals and pipelines of other
companies. An objective of our Product supply, distribution and marketing
activities is to "direct" volumes to our terminals and pipelines whenever
possible.
The net margin for terminals and pipelines is calculated as terminal
revenue plus storage revenue plus pipeline revenue less direct operating costs.
Terminal revenues are based on the volume of Products handled at the facility's
loading racks, generally at a standard rate per gallon. Storage fees are
generally based on a per barrel rate or tankage capacity committed and will vary
with the duration of the arrangement, the Product stored and special handling
requirements, particularly when certain types of chemicals and other bulk
liquids are involved. Pipeline revenues are based on the volume of Products
transported and the distance from the origin point to the delivery point. The
operating expenses of the terminals and pipelines include the direct expenses
related to their operations such as wages and employee benefits, utilities,
communications, maintenance and repairs, property taxes, rent, vehicle expenses,
environmental compliance costs, materials and supplies. We cannot predict the
impact of future fuel conservation measures, alternate fuel requirements,
governmental regulation, technological advances in fuel economy, demographic
changes, weather conditions, crop prices, and energy-generation devices, all of
which could reduce the demand for Products in the areas served by us.
24
CRITICAL ACCOUNTING POLICIES
Our accounting policies for discretionary inventories, price risk management
activities, and environmental obligations, are considered to be critical to the
presentation of our consolidated financial statements. These policies, and the
underlying financial statement accounts, require the use of estimates,
management judgments, or valuation methods, which could fluctuate if different
assumptions or conditions were to prevail. In determining the carrying value of
our inventories - discretionary volumes, we must estimate basis (geographical)
differentials and/or transportation costs to be applied to quoted market prices
for the Products. Accounting for contracts associated with energy trading and
risk management activities requires us to select among acceptable valuation
models, select appropriate discount rates, and estimate basis (geographical)
differentials and/or transportation costs to be applied to quoted market prices.
Accounting for energy trading and risk management activities, requires that we
provide an estimate for losses in the event a counter party defaults on the
performance of its obligations.
25
RESULTS OF OPERATIONS
Selected financial data regarding our operating income is summarized below (in
thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net operating margins (1):
Product supply, distribution, and marketing $ 20,106 14,640 61,434 33,815
Terminals and pipelines 9,596 10,220 26,450 34,603
Lower of cost or market write-downs on
inventories - minimum volumes -- (1,940) (12,963) (8,821)
-------- -------- -------- --------
Total net operating margins 29,702 22,920 74,921 59,597
Selling, general and administrative expenses (9,270) (9,102) (25,920) (24,496)
Depreciation and amortization (4,143) (4,927) (12,449) (14,595)
-------- -------- -------- --------
Operating income $ 16,289 8,891 36,552 20,506
======== ======== ======== ========
(1) Net operating margins represent revenues less product costs and direct
operating expenses.
Selected volumetric data (Barrels Per Day):
Three Months Ended
--------------------------------------------------------- Nine month
September 30, 2001 December 31, 2001 March 31, 2002 Average
------------------ ----------------- -------------- -------------
Retained Facilities 484,353 499,955 509,005 497,771
Disposed Facilities 30,682 -- -- 10,227
------------------ ----------------- -------------- -------------
Current period volumes 515,035 499,955 509,005 501,998
================== ================= ============== =============
Three Months Ended
--------------------------------------------------------- Nine month
September 30, 2000 December 31, 2000 March 31, 2001 Average
------------------ ----------------- -------------- -------------
Retained Facilities 489,949 485,506 485,976 487,144
Disposed Facilities 128,974 116,412 123,400 122,928
------------------ ----------------- -------------- -------------
Prior period volumes 618,923 601,918 609,376 610,072
================== ================= ============== =============
26
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2001
We reported net earnings of $8.7 million for the three months ended
March 31, 2002, compared to net earnings of $0.5 million for the three months
ended March 31, 2001. After preferred stock dividends, the net earnings (loss)
attributable to common stockholders were $6.3 million and ($1.9) million for the
three months ended March 31, 2002 and 2001, respectively. Earnings per common
share were $.19 based on 32.1 million weighted average basic shares outstanding
compared to a loss of ($.06) per share based on 31.7 million weighted average
basic shares outstanding for the three months ended March 31, 2002 and 2001,
respectively.
Our net earnings increased in the current period, as compared to the
comparable period in the prior year, primarily due to higher margins realized in
our Product supply, distribution and marketing activities, decreased interest
and financing expense, offset by approximately $2.0 million in net operating
margins contributed by the divested facilities in the prior comparable period.
Product Supply, Distribution and Marketing
The net operating margin reported for the Product supply, distribution
and marketing segment includes margins realized on sales, exchanges and Product
arbitrage. During the three months ended March 31, 2002, we were able to
increase our net operating margins by taking advantage of the price volatility
in the gasoline market. That volatility created significant arbitrage
opportunities associated with basis (geographical) differentials. In addition,
we renegotiated and extended for an additional year, a fixed-price supply
contract with a large commercial customer. We recognized approximately $3.0
million in net operating margin associated with this contract extension.
During the first half of the current quarter, we continued to build our
discretionary inventory of distillate to capitalize on the "carry" or "contango"
market structure. During a "contango" market, we utilize our and third party
terminals to acquire and store Products to capture commodity price differentials
between current and future months. During the later half of the current quarter,
we began to liquidate our discretionary inventory of distillate by delivering
our physical product to settle our contractual obligations.
Mark-to-market accounting will create future volatility in our net
operating margins due to either the widening or narrowing of these pricing
spreads from the original spread relationship. If the spreads widen (narrow),
marking these storage volumes and the related forward contracts to market will
produce unrealized losses (gains) in interim reporting periods. These negative
(positive) results will reverse and the originally anticipated spread will be
recognized during the future periods when the physical Product inventory is
delivered against the short future position.
Our inventories - discretionary volumes are held for sale or exchange
in the ordinary course of business and consist of refined petroleum products,
primarily gasoline and distillates. Our inventories - discretionary volumes are
an integral component of our overall energy trading and risk management
activities. We evaluate the level of inventories - discretionary volumes in
combination with energy trading and risk management disciplines, (including
certain hedging strategies, forward purchases and sales, swaps and other
financial instruments) to manage market exposure, primarily commodity price
risk. We evaluate the market exposure from an overall portfolio basis that
considers both continuous movement of physical inventory balances and related
open positions in energy trading and risk management contracts. Our inventories
- discretionary volumes are carried at market value in the accompanying
consolidated financial statements. Changes in the market value of our
inventories - discretionary volumes are included in product costs and net
margins attributable to sales, exchanges, and product arbitrage in our product
supply, distribution and marketing segment.
Our inventories - minimum volumes, represented by tank bottoms and
pipeline linefill held by us in tanks and pipelines owned by us and by third
parties, are required to be held for operating balances in the conduct of our
overall operating activities. We do not intend to sell or exchange our
inventories - minimum volumes in the ordinary course of business and, therefore,
we do not hedge the market risks associated with this minimum inventory. Our
inventories - minimum volumes are carried at the lower of cost or market in the
accompanying consolidated financial statements.
27
Product Supply, Distribution and Marketing (continued)
During the three months ended June 30, 2000, we conducted a thorough
review of our inventory management strategies and customer contracts and,
effective July 1, 2000, we designated 2.0 million barrels of refined petroleum
products as inventories - minimum volumes and we changed our risk management
strategy associated with this minimum inventory. In accordance with our revised
risk management strategy, we removed the hedging contracts on the minimum
inventory. During the three months ended March 31, 2002 and 2001, we recognized
an impairment loss of $0.0 and $1.9 million, respectively, due to lower of cost
or market write-downs on this minimum inventory.
Terminals and Pipelines
The net operating margin from our terminal and pipeline operations for
the three months ended March 31, 2002 was $9.6 million, compared to $10.2
million for the three months ended March 31, 2001. Since we sold our Little Rock
terminal on June 30, 2001 and sold the NORCO system on July 31, 2001, we
realized no margins from either the Little Rock terminal or the NORCO system in
the three months ended March 31, 2002 compared to the prior period when net
operating margins were approximately $2.0 million. The loss of net operating
margins from the disposed facilities was mitigated by higher throughput volumes
on our retained facilities and increased margin from our Brownsville, Texas
facility due to continued expansion.
Selling, General, Administrative and Other
Selling, general and administrative expenses for the three months ended
March 31, 2002 were $9.3 million, compared to $9.1 million for the three months
ended March 31, 2001. There was a decrease in wages of $0.2 million, a decrease
of $0.1 million in communication costs, and a reduction in travel and
entertainment of $0.2 million during the current period. The decreased costs
were offset by an increase of $0.4 million in the amount of incentive-based
compensation expense recorded by us in the current period and an increase in
relocation expense of $0.3 million.
Depreciation and amortization for the three months ended March 31, 2002
was $4.1 million, compared to $4.9 million for the three months ended March 31,
2001. The reduction is due to the sale of the Little Rock terminal and the NORCO
system.
Dividend income from and equity in earnings (loss) of petroleum related
investments for the three months ended March 31, 2002 was $0.0 million compared
to $0.8 million for the three months ended March 31, 2001. The decrease in the
dividend income was due to the sale of our investment in the West Shore common
stock on October 29, 2001.
Interest income for the three months ended March 31, 2002 was $0.1
million, compared to $0.3 million for the three months ended March 31, 2001. The
decrease in interest income was due primarily to lower interest rates during the
current period.
Interest expense for the three months ended March 31, 2002 was $2.1
million, compared to $4.4 million during the three months ended March 31, 2001.
This reduction was primarily attributable to a reduction in the amount of our
outstanding debt as a result of the application of proceeds from asset
dispositions and a reduction in our borrowing rate under our Bank Credit
Facility due to declining LIBOR rates.
Other financing costs for the three months ended March 31, 2002 were
$0.6 million, compared to $2.3 million for the three months ended March 31,
2001. The reduction was attributable to a reduction in the amount of
amortization of deferred debt issuance costs during the current period. These
deferred fees were reduced in the three months ended June 30, 2001 as a result
of our paying off the bank term loan and a portion of the Master Shelf
Agreement.
For the three months ended March 31, 2002, we recorded an unrealized
gain on the interest rate swap of $1.9 million, which represents the change in
the fair market value of the interest rate swap from December 31, 2001 to March
31, 2002. We also realized a loss of $1.4 million on the interest rate swap,
which represented payments associated with the monthly settlements of the
interest rate swap for the three months ended March 31, 2002. In the three
months ended March 31, 2001, the realized gain on the interest rate swap was
$0.2 million and the unrealized loss was $2.7 million. The unrealized and
realized losses on the interest rate swap are a result of changes in LIBOR rates
during the periods.
28
Selling, General, Administrative and Other (continued)
Income tax expense was $5.4 and $0.3 million for the three months ended
March 31, 2002 and 2001, respectively, which represents an effective combined
federal and state income tax rate of 38.0%.
Dividends on the Preferred Stock were $2.5 million and $2.3 million for
the three months ended March 31, 2002 and 2001, respectively. The increase in
the current year dividend resulted from our election to settle the preferred
dividend requirements for the quarters ended March 31, 2002 and March 31, 2001
with additional shares of Preferred Stock. The payment of "in-kind" dividends
increases the number of shares outstanding for future distributions.
29
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO
NINE MONTHS ENDED MARCH 31, 2001
We reported net earnings of $15.4 million for the nine months ended
March 31, 2002, compared to $2.5 million for the nine months ended March 31,
2001. After preferred stock dividends, the net earnings (loss) attributable to
common stockholders were $8.1 million and ($4.1) million for the nine months
ended March 31, 2002 and 2001, respectively. Earnings per common share for the
nine months ended March 31, 2002 were $.25 based on 32.0 million weighted
average basic shares outstanding compared to a loss of ($.13) per share for the
nine months ended March 31, 2001 based upon 31.3 million weighted average basic
shares outstanding.
Our net earnings increased in the current period, as compared to the
comparable period in the prior year, primarily due to increased margins of $27.6
million from our Product supply, distribution and marketing activities, a
decrease of $7.9 million in interest expense, offset by approximately $7.5
million in net operating margins contributed by the divested facilities in the
prior comparable period, increased income taxes of $7.9 million, and a charge of
$2.7 million relating to a transportation and deficiency agreement with a
pipeline company.
Product Supply, Distribution and Marketing
The net operating margin reported for the Product supply, distribution
and marketing segment includes margins realized on sales, exchanges and Product
arbitrage. During the nine-month period, we were able to benefit from the market
volatility opportunities that were caused by a Chicago refinery disruption in
August, which significantly increased throughput on our Midwest (Mississippi
River) corridor terminals. This disruption fueled the price differentials (for
both gasoline and distillates) between the Gulf Coast, Chicago and Group
(Mid-Continent) regions and created significant basis arbitrage opportunities.
During the nine months ended March 31, 2002, we were able to increase our net
operating margins by taking advantage of the price volatility in the gasoline
market. That volatility created significant arbitrage opportunities associated
with basis (geographical) differentials. In addition, we renegotiated and
extended for an additional year, a fixed-price supply contract with a large
commercial customer. We recognized approximately $3.0 million in net operating
margin associated with this contract extension.
Also, during the current nine months, the "carry" or "contango" market
has enabled us the opportunity to utilize our terminal infrastructure to
purchase and store Products to capture the price differentials by selling the
Product in a later period at a higher price. During the nine months ended March
31, 2002, we purchased and stored Products to take advantage of this contango
market and the pricing spreads between current and future months. Mark-to-market
accounting will create future volatility in our net operating margins due to
either the widening or narrowing of these pricing spreads from the original
spread relationship. If the spreads widen (narrow) marking these storage volumes
and the related forward hedges to market will produce unrealized losses (gains)
in interim reporting periods. These negative (positive) results will reverse and
the originally anticipated spread will be recognized during the future periods
when the physical Products inventory is delivered against the short future
position.
During the nine months ended March 31, 2002 and 2001, we recognized an
impairment loss of $13.0 and $8.8 million, respectively, due to lower of cost or
market write-downs on our inventories - minimum volumes.
Terminals and Pipelines
The net operating margin from terminal and pipeline operations for the
nine months ended March 31, 2002 was $26.5 million, compared to $34.6 million
for the nine months ended March 31, 2001. Since we sold our Little Rock terminal
on June 30, 2001 and sold the NORCO system on July 31, 2001, we realized no
margins from the Little Rock terminal and only one month of earnings from the
NORCO system in the nine months ended March 31, 2002 compared to the prior
period. The impact from the asset sales was approximately $7.5 million reduction
in margin during the current period. We also experienced increased operating
costs in our terminal network, primarily from increased repair and maintenance
expenses of $1.1 million associated with additional security measures, which
reduced our margins in the current period.
30
Selling, General, Administrative and Other
Selling, general and administrative expenses for the nine months ended
March 31, 2002 were $25.9 million, compared to $24.5 million for the nine months
ended March 31, 2001. The increase is primarily attributable to an increase of
$1.2 million in consulting services used by us as we are undertaking a program
in the current year to enhance the capabilities of our web-based technology
systems associated with Product supply, distribution and marketing activities,
an increase of $1.4 million in incentive-based compensation expense, and an
increase in relocation costs of $0.5 million. The increased costs were partially
offset by a decrease of $1.1 million in wages and $0.6 million in travel and
entertainment during the current period.
Depreciation and amortization for the nine months ended March 31, 2002
was $12.4 million, compared to $14.6 million for the nine months ended March 31,
2001. The reduction is due to the sale of the Little Rock terminal and the NORCO
system.
Dividend income from and equity in earnings of petroleum related
investments for the nine months ended March 31, 2002 was $1.5 million compared
to $2.5 million for the nine months ended March 31, 2001. The decrease in the
dividend income was due to the sale of our investment in the West Shore common
stock on October 29, 2001.
Interest income for the nine months ended March 31, 2002 was $0.5
million, compared to $1.5 million for the nine months ended March 31, 2001. The
decrease in interest income was due primarily to lower interest rates during the
current period.
Interest expense for the nine months ended March 31, 2002 was $5.7
million, compared to $13.6 million during the nine months ended March 31, 2001.
This reduction was primarily attributable to a reduction in the amount of our
outstanding debt as a result of the application of proceeds from asset
dispositions and a reduction in our borrowing rate under our Bank Credit
Facility due to declining LIBOR rates.
Other financing costs for the nine months ended March 31, 2002 were
$2.1 million, compared to $4.8 million for the nine months ended March 31, 2001.
The reduction was attributable to a reduction in the amount of amortization of
deferred debt issuance costs during the current period. These deferred fees were
reduced in the three months ended June 30, 2001 as a result of our paying off
the bank term loan and a portion of the Master Shelf Agreement.
Loss on the disposition of assets was $1.3 million for the nine months
ended March 31, 2002, and less than $0.1 million of gains were recognized in the
comparable period ended March 31, 2001.
For the nine months ended March 31, 2002, we recorded an unrealized
loss on the interest rate swap of $1.3 million for the change in the fair market
value of the interest rate swap from June 30, 2001 to March 31, 2002. We also
realized a loss of $3.2 million on the interest rate swap, which represented
payments associated with the monthly settlement of the swap. In the nine months
ended March 31, 2001, the realized gain on the interest rate swap was $1.3
million and the unrealized loss was $3.5 million. The unrealized and realized
losses on the interest rate swap are a result of changes in the LIBOR rates
during the periods.
Income tax expense was $9.5 million and $1.5 million for the nine
months ended March 31, 2002 and 2001, respectively, which represents an
effective combined federal and state income tax rate of 38.0%.
Dividends on the Preferred Stock were $7.3 million and $6.6 million for
the nine months ended March 31, 2002 and 2001, respectively. The increase in the
current year dividend resulted from our election to settle the preferred
dividend requirements for the nine months ended March 31, 2002 with additional
shares of Preferred Stock. We issued only three months of "in-kind" dividends
for the nine months ended March 31, 2001. The payment of "in-kind" dividends
increases the number of shares outstanding for future distributions.
31
COMMODITY PRICE RISK, LIQUIDITY AND CAPITAL RESOURCES
The following summary reflects our comparative EBITDA, adjusted EBITDA
and net cash flows for the three months and nine months ended March 31, 2002 and
2001 (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ---------------------------
2002 2001 2002 2001
-------------- ------------ ------------ -------------
EBITDA (1) $ 20,425 14,584 50,451 37,606
Adjusted EBITDA (2) $ 20,425 16,524 63,414 46,427
Net cash provided (used) by operating activities $ 22,260 5,529 (61,034) 12,133
Net cash provided (used) by investing activities $ (3,336) (2,127) 111,165 (7,302)
Net cash provided (used) by financing activities $ (20,512) (7,339) (24,553) 13,827
Calculation of EBITDA and Adjusted EBITDA:
Net operating margins:
Product supply, distribution, and marketing $ 20,106 14,640 61,434 33,815
Terminals and pipelines 9,596 10,220 26,450 34,603
Lower of cost or market write-downs on
inventories - minimum volumes - (1,940) (12,963) (8,821)
-------------- ------------ ------------ -------------
Total net operating margins 29,702 22,920 74,921 59,597
Selling, general and administrative expenses (9,270) (9,102) (25,920) (24,496)
Dividend income (7) 766 1,450 2,505
-------------- ------------ ------------ -------------
EBITDA (1) 20,425 14,584 50,451 37,606
Plus write-downs on minimum inventory - 1,940 12,963 8,821
-------------- ------------ ------------ -------------
Adjusted EBITDA (2) $ 20,425 16,524 63,414 46,427
============== ============ ============ =============
(1) EBITDA is defined as total net operating margin, less selling,
general and administrative expenses, plus dividend income from
petroleum related investments. We believe that, in addition to
cash flow from operating activities and net earnings (loss),
EBITDA is a useful financial performance measurement for assessing
operating performance since it provides an additional basis to
evaluate our ability to incur and service debt and to fund capital
expenditures. In evaluating EBITDA, we believe that consideration
should be given, among other things, to the amount by which EBITDA
exceeds interest costs for the period; how EBITDA compares to
principal repayments on debt for the period; and how EBITDA
compares to capital expenditures for the period. To evaluate
EBITDA, the components of EBITDA such as revenue and direct
operating expenses and the variability of such components over
time, also should be considered. EBITDA should not be construed,
however, as an alternative to operating income (loss) (as
determined in accordance with GAAP) as an indicator of our
operating performance, or to cash flows from operating activities
(as determined in accordance with GAAP) as a measure of liquidity.
Our method of calculating EBITDA may differ from methods used by
other companies and, as a result, EBITDA measures disclosed herein
might not be comparable to other similarly titled measures used by
other companies.
(2) Adjusted EBITDA is defined as EBITDA plus lower of cost or market
write-downs on the inventories - minimum volumes. We believe that
Adjusted EBITDA is the most useful measure in evaluating our
performance because it eliminates the impact on operating results
from the impairment of our inventories - minimum volumes.
32
COMMODITY PRICE RISK, LIQUIDITY AND CAPITAL RESOURCES (continued)
We received approximately $117 million of cash from asset sales during
the nine-month period ended March 31, 2002. During this period, we used cash to
fund our increase in working capital by approximately $122 million, and repay
debt of approximately $24 million.
Inventories - discretionary volumes at March 31, 2002 and June 30, 2001
are as follows:
March 31, 2002 June 30, 2001
---------------------------- -----------------------------
(in thousands) (in thousands)
Amount Bbls Amount Bbls
-------------- ------------ ------------ -------------
Refined petroleum products held for sale or exchange $ 149,149 4,770 $ 20,234 468
Refined petroleum products due to others under
exchange agreements, net 7,873 289 76,754 2,778
-------------- ------------ ------------- -------------
Inventories - discretionary volumes $ 157,022 5,059 $ 96,988 3,246
============== ============ ============= =============
Relative month-end commodity prices from June 30, 2001 to March 31,
2002 (NYMEX close on the last day of the month) are as follows:
Heating
Crude Oil Gasoline
---------- ------------ ------------
6/30/01 $ 26.25 .709 .721
7/31/01 26.35 .697 .732
8/31/01 27.20 .766 .806
9/30/01 23.43 .664 .680
10/31/01 21.18 .598 .552
11/30/01 19.44 .532 .534
12/31/01 19.84 .551 .573
1/31/02 19.48 .523 .559
2/28/02 21.74 .563 .581
3/31/02 26.31 .669 .825
33
COMMODITY PRICE RISK, LIQUIDITY AND CAPITAL RESOURCES (continued)
The following table indicates the maturities of our energy trading and
risk management contracts, including the credit quality of our counter parties
to those contracts with unrealized gains at March 31, 2002.
Fair value of Contracts (in thousands)
-------------------------------------------------------------------------
Maturity Maturity
less than 1 Maturity Maturity in excess Total Fair
year 1-3 years 4-5 years of 5 years Value
-------------- ------------- ------------ ------------- ------------
Investment grade $ 23,850 4,940 - - 28,790
Non-investment grade 4,543 8,977 - - 13,520
No external rating 7,605 30 - - 7,635
------------ ---------- ---------- ---------- ----------
Unrealized gain position - asset 35,998 13,947 - - 49,945
------------ ---------- ---------- ---------- ----------
Unrealized loss position - liability (53,021) (433) - - (53,454)
------------ ---------- ---------- ---------- ----------
Net unrealized gain (loss) position $ (17,023) 13,514 - - (3,509)
============ ========== ========== ========== ==========
We do not acquire or sell Products, futures contracts, or other
financial instruments solely for the purpose of speculating on changes in
commodity prices. Our inventories - discretionary volumes, energy trading
contracts, and risk management contracts are the integral components of our
overall energy trading and risk management activities. We evaluate our market
risk exposure from an overall portfolio basis that considers changes in physical
inventories - discretionary volumes, open positions in energy trading contracts,
and open positions in risk management contracts. We have established risk
management policies and procedures to monitor and control our market risk
exposure. Our overall risk management objective is to minimize our exposure to
changes in commodity prices. We accomplish this objective by entering into risk
management contracts that offset the changes in the values of our inventories -
discretionary volumes and energy trading contracts when there are changes in
commodity prices. At March 31, 2002, our open positions in risk management
contracts includes forward contracts (purchases and sales), swaps, and other
financial instruments to manage market exposure, primarily commodity price risk.
We principally utilize exchange-traded risk management contracts to
manage our commodity price risk. These contracts require us to maintain initial
and variation margin deposits with a third party financial intermediary. At
March 31, 2002, we had $30.7 million on deposit to cover our margin requirements
on open risk management contracts. That total deposit consisted of an initial
margin deposit of $14.5 million and a variation margin deposit of $16.2 million.
At March 31, 2002, a $0.05 per gallon unfavorable change in commodity prices
would have required us to deposit approximately $9.0 million in additional
variation margin. Conversely, a $0.05 per gallon favorable change in commodity
prices would have permitted us to reduce the deposit in our margin account by
approximately $9.0 million.
We utilize our commodity margin loan, Bank Credit Facility, and
available cash to meet our obligations to cover our margin requirements. We also
have the contractual right to request that the counter parties to our energy
trading contracts post additional letters of credit or make additional cash
deposits with us to assist us in meeting our obligations to cover our margin
requirements.
For certain of our energy trading contracts and contract locations,
calculating replacement cost relies on a degree of estimation in calculating the
basis (geographical) differentials for deferred trading months and locations
without an actively traded forward cash market. For these markets (in which we
cannot secure a forward traded basis (geographical) differential quote from a
broker), our mark-to-market model estimates the basis (geographical)
differentials based on a rolling historical average. Currently it is not
practicable for us to estimate the effects on our financial condition, results
of operations, or cash flows from an unfavorable change in basis (geographical)
differentials.
34
COMMODITY PRICE RISK, LIQUIDITY AND CAPITAL RESOURCES (continued)
Our Bank Credit Facility consists of a $240 million revolving credit
facility due December 31, 2003. At March 31, 2002, we had borrowings of $100.5
million outstanding under the Bank Credit Facility at an average interest rate
of 4.7%. We also had working capital of $155.6 million, availability under our
Bank Credit Facility of approximately $139.5 million, and availability under our
letter of credit facility of $28.0 million. The availability under the Bank
Credit Facility is calculated weekly and is based upon our working capital. At
March 31, 2002, we had $25.0 million of 7.22% senior promissory notes due
October 17, 2004 outstanding under the Master Shelf Agreement.
Each of the Bank Credit Facility and Master Shelf Agreement is secured
by certain current assets and fixed assets, and each also includes financial
covenants relating to fixed charge coverage, current ratio, maximum leverage
ratio, consolidated tangible net worth, cash distributions and open inventory
positions. At March 31, 2002, we were in compliance with all such covenants.
We believe that our current working capital position; future cash
provided by operating activities; available borrowing capacity under the Bank
Credit Facility and the Master Shelf Agreement; and our relationship with
institutional lenders and equity investors should enable us to meet our planned
capital and liquidity requirements.
Capital expenditures anticipated for the remainder of the fiscal year
ending June 30, 2002 are estimated to be $1.5 million for terminal and pipeline
facilities, and assets to support these facilities. Future capital expenditures
will depend on numerous factors, including the availability, economics and cost
of appropriate acquisitions which we identify and evaluate; the economics, cost
and required regulatory approvals with respect to the expansion and enhancement
of existing systems and facilities; the customer demand for the services we
provide; local, state and federal governmental regulations; environmental
compliance requirements; and the availability of debt financing and equity
capital on acceptable terms.
During the three months ended March 31, 2002, we announced to our
employees that a significant portion of our Atlanta, Georgia operation would be
relocated to Denver, Colorado. During the three months ended March 31, 2002, we
accrued approximately $0.3 million for severance benefits payable to 25
employees that were not offered the opportunity to relocate to Denver, Colorado.
Approximately 75 employees were offered the opportunity to relocate to Denver,
Colorado. The offer was communicated to those employees on March 19, 2002 with a
response due to TransMontaigne from the employees no later than April 19, 2002.
The 37 employees that chose not to relocate to Denver, Colorado are
entitled to receive severance benefits provided they remain employed by us
through their termination date as determined by us. We estimate that we will
accrue approximately $1.2 million in severance benefits during the three months
ended June 30, 2002, for these employees.
The 38 employees that chose to relocate to Denver, Colorado are
entitled to receive a transition bonus and a relocation package payable upon
transfer to the Denver office. We estimate that we will incur approximately $2.7
million in transition bonuses and relocation costs over the next six months for
these employees.
35
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Although we believe that our
expectations are based on reasonable assumptions, we can give no assurance that
our goals will be achieved. Important factors, which could cause actual results
to differ materially from those in the forward-looking statements, include:
. that we will expand our business
. that we will generate net operating margins from high sales volumes
. that we will generate net operating margins affected by price
volatility of Products purchased and sold
. that we will enter into transactions with counter parties having
the ability to meet their financial commitments to us
. that we will incur unanticipated costs in complying with current
and future environmental regulations
. that we will capitalize on the trend by other companies in the oil
and gas industry to divest assets and outsource certain services
. that we will acquire strategically located operating facilities
from third parties
. that we will generate working capital internally, or have the
ability to access debt and equity resources, to meet our capital
requirements.
36
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in our Annual Report
on Form 10-K for the year ended June 30, 2001, in addition to the interim
consolidated financial statements and accompanying notes presented in Items 1
and 2 of this Form 10-Q.
There are no material changes in market risks faced by us from those
reported in our Annual Report on Form 10-K for the year ended June 30, 2001.
37
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
There are no exhibits.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended March 31,
2002.
38
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.
Dated: May 15, 2002 TRANSMONTAIGNE INC.
(Registrant)
/s/ DONALD H. ANDERSON
----------------------
Donald H. Anderson
President, Chief Executive and Chief
Operating Officer
/s/ RANDALL J. LARSON
----------------------
Randall J. Larson
Executive Vice President, Controller
and Chief Accounting Officer
39