1998 Annual Report
Contents || Corporate ListingsLetter to Shareholders
Our Company had a very successful and eventful 1998 -- we completed our business restructuring, changed our name from Wainoco to Frontier, increased income from continuing operations almost threefold from last year and significantly strengthened our balance sheet in an environment that was not as good as past years for those in our industry. The Company finished the year in strong financial condition with almost $34 million in cash, a dramatically improved debt to total capitalization ratio of 50%, and for the second straight year our return on equity was the highest among the independent refiners.
For the year, net income from continuing operations was $18.8 million or $.65 per diluted share, up $11.0 million or more than 140% from last year's $7.8 million or $.28 per diluted share. Net income for the year was $15.8 million or $.55 per diluted share and included a $3.0 million extraordinary loss on the early retirement of debt. In 1997 net income was $19.1 million or $.69 per diluted share which included various nonrecurring gains and losses related to the sale of our Canadian E&P operations and retirement of debt. The Company's operating income before depreciation for 1998 was up $5.5 million to $36.4 million that included a new record for our refining subsidiary. Although the Company had a great year, it would have been better had crude oil and refined product prices not fallen so sharply during 1998. Not only did we experience a $4.4 million inventory loss, but also the dramatic fall in crude oil prices in 1998 led producers both regionally and in Canada to shut-in heavy crude oil production. This led to a narrowing of the light/heavy crude oil spread in the last six months of the year when compared to the first half of 1998. The widening of the light/heavy spread reduces the cost of our feedstock relative to product prices and therefore increases our margins. The opposite is true when the spread narrows. Because the Company had previously contracted for a significant percentage of our 1998 requirements at an attractive light/heavy spread of $4.80 per bbl, the overall spread for the year came in at $4.15 per bbl which was up $.61 per bbl compared to the average spread for 1997. However, in the last quarter of 1998, the light/heavy spread narrowed to $3.40 per bbl. When the price of crude oil increases from these historical low levels, more heavy crude oil will be produced and the light/heavy spread will widen thereby improving our economics.
We are fortunate to have several important factors in our favor as we go forward. First, the Rocky Mountain region remains one of the fastest growing markets in the United States and one of the best locations to have a refinery, and we have one of the best plants in the region. Second, our profits are sheltered from income taxes because we have net operating loss carryforwards (NOLs) totaling $125 million at year end. Third, the Company is financially strong and capital expenditures for 1999 will be modest -- roughly $9 million.
The challenge for the new Frontier is to enhance shareholder value and, one way or another, we will. Our strategy is simple. We will continue to improve our Frontier asset and pursue quality refining and related opportunities in the Rocky Mountains and northern tier of the United States. We believe the recent merger activity among several large oil and refining companies will shake out opportunities. But there is no guarantee. As I said in last year's report, our objectives for return on investment are high, our standards for assets are rigid; accordingly, we may be unable to acquire assets consistently. Absent growth, we will use our excess cash to reduce capitalization. Last year, we repurchased about 550,000 shares and thus far in 1999 under our continuing program, we have repurchased approximately 300,000 more.
James R. Gibbs
President and Chief Executive Officer
March 1, 1999