<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- ------------------
Commission file number 1-8715
CRYSTAL OIL COMPANY
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-0163810
-------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
229 Milam Street, Shreveport, Louisiana 71101
---------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (318) 222-7791
--------------------
NONE
- ------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Common Stock outstanding on November 10, 1998 2,668,122
----------------------------------
<PAGE> 2
CRYSTAL OIL COMPANY
INDEX
Page No.
--------
Part I
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 4
Consolidated Condensed Statements of Stockholders' Equity -
Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
-2-
<PAGE> 3
CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30 December 31
ASSETS 1998 1997
------------ -----------
(Unaudited) (1)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 27,044 $ 11,550
Marketable securities 26,882 58,162
Accounts receivable - net 1,211 1,406
Prepaid expenses and other current assets 791 123
---------- ----------
TOTAL CURRENT ASSETS 55,928 71,241
MARKETABLE SECURITIES 5,418 76,648
PROPERTY, PLANT AND EQUIPMENT - net 144,010 107,346
OTHER ASSETS
Deferred tax assets 29,840 34,649
Restricted cash and marketable securities 1,864 1,901
Other 2,122 1,777
---------- ----------
33,826 38,327
---------- ----------
TOTAL ASSETS $ 239,182 $ 293,562
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term obligations $ 516 $ 517
Accounts payable 8,529 2,904
Other accrued expenses 712 462
---------- ----------
TOTAL CURRENT LIABILITIES 9,757 3,883
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION 38,080 38,528
DEFERRED REVENUE FROM SALE OF FUTURE CONTRACT
RECEIVABLES AND FORWARD SALES 50,244 110,931
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Senior preferred stock 148 148
Common stock 27 27
Additional paid-in capital 122,020 122,020
Retained earnings 18,906 18,025
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 141,101 140,220
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 239,182 $ 293,562
========== ==========
</TABLE>
(1) The balance sheet at December 31, 1997, has been taken from the audited
financial statements at that date, and condensed.
See accompanying notes to consolidated condensed financial statements.
-3-
<PAGE> 4
CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Shares and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
NET REVENUES
<S> <C> <C> <C> <C>
Gas storage fees $ 3,656 $ 2,949 $ 10,547 $ 9,290
Crude oil and natural gas 1,873 644 5,560 1,157
Interest, investment and
other income 1,027 1,067 3,996 2,870
----------- ----------- ----------- -----------
6,556 4,660 20,103 13,317
COSTS AND EXPENSES
Operating expense and taxes 1,011 617 3,150 1,624
General and administrative
expense 791 1,272 2,094 2,630
Interest and debt expense 817 832 2,456 2,442
Amortization of discount on
sale of future contract
receivables and forward sales 1,214 686 4,589 1,442
Exploration cost 5 - 1,305 -
Depreciation, depletion and
amortization 1,805 986 4,903 2,762
----------- ----------- ----------- -----------
5,643 4,393 18,497 10,900
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 913 267 1,606 2,417
PROVISION FOR INCOME TAXES 403 104 725 945
----------- ----------- ----------- -----------
NET INCOME $ 510 $ 163 $ 881 $ 1,472
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE $ .19 $ .06 $ .33 $ .55
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION $ .19 $ .06 $ .32 $ .54
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-4-
<PAGE> 5
CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------
1998 1997
---- ----
SENIOR PREFERRED STOCK
<S> <C> <C>
Balance at beginning and end of period $ 148 $ 148
--------- ---------
COMMON STOCK
Balance at beginning and end of period 27 27
--------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 122,020 97,156
Issuance of Common Stock - 14
Utilization of net operating loss carryforward
and recognition of deferred tax assets - 18,800
Recognition of environmental remediation
liability, net of tax - (660)
--------- ---------
Balance at end of period 122,020 115,310
--------- ---------
RETAINED EARNINGS
Balance at beginning of period 18,025 15,945
Net income 881 1,472
--------- ---------
Balance at end of period 18,906 17,417
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 141,101 $ 132,902
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-5-
<PAGE> 6
CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 881 $ 1,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred financing cost 234 220
Depreciation, depletion and amortization 4,903 2,762
Exploration cost 1,305 -
Deferred income tax provision (benefit) 545 (1,077)
Net loss on sale of property, plant and equipment 83 -
Net change in accrued interest income 1,343 578
Decrease (increase) in accounts receivable 593 (292)
Increase in prepaid expense and
other current assets (660) (104)
Increase in other assets (669) (151)
Increase (decrease)in accounts payable and
accrued expenses (48) 2,269
---------- ----------
Net cash provided by operating activities 8,510 5,677
---------- ----------
Cash flows from investing activities:
Acquisition of DeSoto properties - (12,353)
Acquisition of Petal Gas Storage Company,
net of cash received (29,141) -
Proceeds from sale of property, plant and equipment 669 -
Capital expenditures (10,303) (857)
Purchases of marketable securities (127,674) (132,762)
Maturity of marketable securities 228,841 76,755
Investment of restricted funds (4,478) -
Reduction of restricted funds 4,515 59
---------- ----------
Net cash provided by (used in) investing activities 62,429 (69,158)
---------- ----------
Cash flows from financing activities:
Reduction of long-term obligations (449) (928)
Reduction of deferred revenue from sale of future
contract receivables and forward sales (54,996) (3,444)
Proceeds from forward sales - 97,257
Payment of costs for forward sale contracts - (249)
Proceeds from issuance of common stock - 14
---------- ----------
Net cash provided by (used in) financing activities (55,445) 92,650
---------- ----------
Net increase in cash and cash equivalents 15,494 29,169
Cash and cash equivalents at beginning of period 11,550 11,576
---------- ----------
Cash and cash equivalents at end of period $ 27,044 $ 40,745
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-6-
<PAGE> 7
CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Continued)
($ in thousands)
(Unaudited)
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------
1998 1997
---- ----
Cash paid during the period for:
<S> <C> <C>
Interest $ 2,222 $ 2,222
========= =========
Amortization of discount on sale of
future contract receivables and
forward sales $ 4,589 $ 1,442
========= =========
Income taxes $ 248 $ 578
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-7-
<PAGE> 8
CRYSTAL OIL COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Consolidated Condensed Financial Statements
The consolidated condensed balance sheet of Crystal Oil Company and its
subsidiaries (the "Company") as of September 30, 1998, and the consolidated
condensed statements of operations for the three and nine months ended September
30, 1998 and 1997, and consolidated condensed statements of stockholders' equity
and cash flows for the nine months ended September 30, 1998 and 1997, have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows for
all periods presented have been made.
There have been no changes in the accounting policies from those set forth
in Note A of the Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure
about Segments of an Enterprise and Related Information". SFAS 131 established
standards for the disclosure of information about operating segments beginning
with the results for the year ending December 31, 1998, and for each period
thereafter, with restated comparative disclosures for earlier periods. SFAS 131
requires disclosures about an enterprise's components for which separate
financial information is available and regularly used by the chief operating
decision maker in allocating resources and assessing performance. Even though
the Company expects to provide additional descriptive information about its
operating segments, SFAS 131 is not expected to impact how the Company currently
reports its segment information.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." This statement established accounting and reporting standards for
derivative instruments and hedging activities. Effective January 1, 2000, it
will require the Company to recognize all derivatives as either assets or
liabilities and to measure those instruments at fair value in its Consolidated
Balance Sheet. A derivative meeting certain conditions may be designated as a
hedge of a specific exposure; accounting for changes in a derivative's fair
value will depend on the intended use of the derivative and the resulting
designation. Any transition adjustments resulting from adopting this statement
will be reported in net income or other comprehensive income, as appropriate, as
the cumulative effect of a change in accounting principle. The Company has not
yet determined the effects that SFAS 133 will have on its future consolidated
financial statements or the amount of the cumulative adjustment that will be
made upon adopting this new standard.
-8-
<PAGE> 9
Note 2. Commitments and Contingencies
The Company has been named as a potentially responsible party for
environmental remediation in two separate claims by agencies of the State of
Louisiana concerning properties operated by the Company in the 1920s and 1930s.
In the first claim from the State of Louisiana, the Bankruptcy Court barred the
State of Louisiana from asserting claims against the Company on the grounds that
such claims had accrued prior to the Company's 1986 bankruptcy proceedings. On
October 20, 1998, the United States Court of Appeals for the Fifth Circuit
affirmed the ruling of the Bankruptcy Court. In the second proceeding, the State
of Louisiana is seeking $4.5 million from all potentially responsible parties
and the Bankruptcy Court held that the claim against the Company was not barred
by the Bankruptcy Proceeding. Consequently, the State of Louisiana filed a
motion with the First Judicial District Court, Caddo Parish, Louisiana, that
included the Company as a defendant in the state court proceedings. Based on
information known to the Company, the Company does not believe that its ultimate
payment obligations with respect to these matters will have a material adverse
impact on the Company's financial position.
On May 15, 1998, the Bankruptcy Court approved a compromise between the
Company and the State of Indiana and barred other potentially responsible
parties from asserting related claims against the Company concerning an action
brought by an agency of the State of Indiana for the environmental remediation
of a site on which a refinery was owned in the 1970s by a now-dissolved
subsidiary of the Company. The order from the Bankruptcy Court is non-appealable
and the Company paid the settlement amount of $125 thousand after the dismissal
of the complaint for cost recovery in circuit court.
A subsidiary of the Company was named in a suit brought in 1979 alleging
breach of contract, breach of fiduciary duty, mismanagement and fraud in
connection with the operation of the Caloosa 1974 Limited Partnership, of which
the Company's subsidiary was general partner. In recent years, the suit has been
generally inactive. However, in 1996 the plaintiff amended its complaint and
added Crystal Oil Company as a defendant to the lawsuit. The Company and
plaintiff are currently in a mediation process. The Company does not believe
that a recovery by plaintiff of a material amount is likely.
The Company currently has outstanding $1.5 million in an irrevocable letter
of credit to support certain obligations with respect to the outstanding $36.5
million in Secured Guaranteed Notes Due 2005.
Note 3. Net Income Per Share
A reconciliation of the weighted-average shares outstanding for computation
of basic and diluted income per share for the three and nine month periods ended
September 30, 1998 and 1997, follows. No difference existed between net income
used in computing basic and diluted income per share for these periods.
-9-
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic method 2,668,122 2,666,022 2,668,122 2,665,755
Dilutive preferred stock 33,274 33,274 33,274 33,274
Dilutive stock options 39,843 28,959 39,843 28,987
--------- --------- --------- ---------
Assuming dilution 2,741,239 2,728,255 2,741,239 2,728,016
========= ========= ========= =========
</TABLE>
Note 4. Property Acquisition
On March 12, 1998, the Company consummated the acquisition of Petal Gas
Storage Company ("Petal Gas"), an indirect wholly-owned subsidiary of CMS Energy
Corp., for approximately $29 million, net of certain adjustments and inclusive
of acquisition costs of approximately $400 thousand. Petal Gas owns and operates
a high-deliverability natural gas storage facility near Hattiesburg,
Mississippi, with a working natural gas capacity of 3.2 billion cubic feet
("Bcf"). The facility is connected directly to two interstate pipelines,
Tennessee Gas Pipeline and Koch Gateway Pipeline, as well as Transcontinental
Gas Pipe Line and Associated Intrastate of Mississippi through a pipeline owned
by Hattiesburg Gas Storage Company, a subsidiary of the Company. The carrying
cost of the gas storage facility includes an additional $4.3 million in costs
associated with the deferred tax liability resulting from the difference between
the book and tax bases of the net assets acquired.
The acquisition has been accounted for in accordance with the "purchase
method" of accounting, and accordingly, the results of operations of Petal Gas
are included in the Company's consolidated condensed statements of operations
from the acquisition date.
Note 5. Dispositions
During the first quarter of 1998, the Company sold its interest in certain
non-strategic undeveloped crude oil and natural gas properties for cash
consideration of approximately $651 thousand and recognized a net loss on such
disposition of approximately $83 thousand.
Note 6. Deferred Revenue From Forward Sales
During 1997, the Company sold in a forward sale 32.7 Bcf of natural gas and
1.6 million barrels of crude oil for a total amount of approximately $97
million. The proceeds from these sales are reflected for financial accounting
purposes as "Deferred Revenues from Forward Sales" and are being recognized as
deliveries are made by the Company based on an undiscounted reference price for
the crude oil and natural gas sold. Current deliveries required under the
forward sales aggregate 5.3 Bcf of natural gas and 405 thousand barrels of crude
oil during the remainder of 1998 and 12 Bcf of natural gas through December
2002. The balance of deferred revenues from forward sales was reduced from
approximately $98 million as of December 31, 1997, to approximately $40.7
million as of September 30, 1998.
-10-
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following is provided to assist in a further understanding of the
Company's financial condition as of September 30, 1998, as well as changes in
the Company's operating results. The notes to the Company's Consolidated
Condensed Financial Statements included in this report, as well as the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, should be read
in conjunction with this discussion.
The Company currently owns and operates through wholly-owned subsidiaries,
First Reserve Gas Company ("FRGC") and Petal Gas Storage Company ("Petal Gas"),
two natural gas storage facilities located near Hattiesburg, Mississippi, and
holds various interests in crude oil and natural gas properties in Louisiana and
Mississippi.
Corporate Strategy
The Company's corporate strategy has consisted of the expansion of its
revenue generating asset base through the acquisition of income producing assets
and properties that would benefit from the Company's existing tax position and
present potential for capital appreciation. The Company has concentrated its
acquisitions in the energy industry with a focus in the natural gas storage and
transportation segment through the acquisition of FRGC in 1995 and Petal Gas in
1998 (as described below) and the natural gas and crude oil exploration and
production segment through the acquisition of proved producing and undeveloped
properties in the Bethany Longstreet and Holly Fields in DeSoto Parish,
Louisiana (the "DeSoto Properties") in 1997. Currently, the Company is focusing
on the expansion of its natural gas storage facilities and the continued
development of its DeSoto Properties with the objective of enhancing the value
of these properties.
On March 12, 1998, the Company consummated the acquisition of Petal Gas from
CMS Energy Corp. for approximately $29 million, net of certain adjustments and
inclusive of acquisition costs of approximately $400 thousand. Petal Gas owns
and operates a high-deliverability natural gas storage facility near
Hattiesburg, Mississippi, with a working natural gas capacity of 3.2 billion
cubic feet ("Bcf") (the "Petal Facility"). The Petal Facility is connected
directly to two interstate pipelines, Tennessee Gas Pipeline and Koch Gateway
Pipeline, as well as Transcontinental Gas Pipe Line and Associated Intrastate of
Mississippi through a pipeline owned by Hattiesburg Gas Storage Company, a
subsidiary of the Company.
The Company is currently planning an expansion of the Petal Facility through
the addition of a second natural gas storage cavern with 3.2 Bcf of working
natural gas capacity and pipeline facilities with interconnects to multiple
interstate pipelines. In conjunction with the proposed expansion, Petal Gas is
holding an "open season" to obtain bids from potential customers for the
utilization of the additional storage capacity.
The Company's exploration and development activities during the nine months
ended September 30, 1998, included the drilling or the participation in the
drilling of 11 gross (8.00 net) successful
-11-
<PAGE> 12
development wells, one gross (.05 net) successful exploratory well, and one
gross (.10 net) unsuccessful exploratory well. As of September 30, 1998, the
Company had five gross (2.24 net) development wells in progress. In addition,
the Company is continuing to review additional acquisition opportunities
primarily in the energy related sector with a focus on acquisitions that will
maximize the return on the Company's existing capital resources and benefit from
the availability of the Company's large net operating loss carryforwards and
other tax benefits. As of September 30, 1998, the Company's financial resources
included $37 million in cash, cash equivalents and marketable securities that
could be utilized for the expansion of its natural gas storage facilities and
future acquisitions. An additional $22 million in marketable securities are
dedicated to purchases of crude oil and natural gas that are necessary to
satisfy certain obligations under the forward sale transactions.
The Company's only material debt consists of the indebtedness directly
associated with the permanent financing for the acquisition of FRGC in 1995,
with the recourse primarily to FRGC and the assets and operations of the
Hattiesburg Facility. In management's opinion, the Company's existing financial
resources and expected net cash flow from operating activities will provide
sufficient funds to finance its anticipated capital expenditures, future debt
service obligations and other liquidity needs. However, additional financing
could be required in connection with future acquisitions and projects depending
upon the nature and size of such capital expenditures. The Company may also seek
to finance future acquisitions with additional equity, if desirable.
Results of Operations
General
The Company recorded net income of $510 thousand, or $.19 per basic share
($.19 per diluted share), and $881 thousand, or $.33 per basic share ($.32 per
diluted share), respectively, for the three and nine month periods ended
September 30, 1998, compared to net income of $163 thousand, or $.06 per basic
share ($.06 per diluted share), and $1.5 million or $.55 per basic share ($.54
per diluted share), respectively, for the comparative periods in 1997. The
results for the interim periods in 1998 included the effect of the expansion of
crude oil and natural gas activities through the acquisition of the DeSoto
Properties during the second quarter of 1997 and the development drilling
program of such properties, the acquisition of the Petal Facility during the
first quarter of 1998, the forward sales of crude oil and natural gas late in
the second and third quarters of 1997 and dry hole costs relating to the
drilling of an unsuccessful exploratory well in South Louisiana during the
second quarter of 1998.
The Company's operations for the three and nine month periods ended
September 30, 1998, reflected additional revenues of approximately $1.9 million
and $6.8 million, respectively, from the comparative periods in 1997 primarily
as a result of an increase in natural gas revenues following the acquisition and
development activities of the DeSoto Properties, additional natural gas storage
revenues from the acquisition of the Petal Facility and an increase in the year
to date interest and investment income from the investment of proceeds from the
forward sales of crude oil and natural gas. These increases were offset by
additional expenses of $1.3 million and $7.6 million, respectively, for the
three and
-12-
<PAGE> 13
nine month periods ended September 30, 1998, resulting from the acquisition of
natural gas storage operations, expansion of crude oil and natural gas
activities and the effect of the amortization of discount from forward sales of
crude oil and natural gas. The expenses for the nine month period ended
September 30, 1998, also reflected a dry hole charge of $1.3 million relating to
the drilling of an unsuccessful exploratory well during the second quarter of
1998. General and administrative expenses for the nine month period ended
September 30, 1997, included non-recurring expenses of $710 thousand relating to
an unsuccessful acquisition bid for certain crude oil and natural gas properties
during the third quarter of 1997.
Natural Gas Storage
The Company's natural gas storage activities for the three and nine month
periods ended September 30, 1998, provided revenues of $3.7 million and $10.5
million, respectively, and operating income of $2.2 million and $6.4 million,
respectively. For the three and nine month periods ended September 30, 1997,
natural gas storage activities contributed revenues of $2.9 million and $9.3
million, respectively, and operating income of $2.0 million and $6.3 million,
respectively. Natural gas storage revenues derived from firm long-term contracts
were $3.3 million and $9.5 million for the three and nine month periods ended
September 30, 1998, and $2.8 million and $8.3 million for the comparative
periods in 1997. The remaining natural gas storage revenues for the three and
nine month periods ended September 30, 1998 and 1997, were derived from
interruptible storage services, injection and withdrawal charges and other fees
relating to services provided in connection with the storage and delivery of
natural gas. Revenues for the three and nine month periods ended September 30,
1998, reflected approximately $751 thousand and $1.8 million, respectively, in
revenues from the Petal Facility which was partially offset by a lower demand
for interruptible and other storage services due to milder weather conditions.
The Company is actively marketing its interruptible storage services as well as
pursuing joint venture and other arrangements with third parties to increase the
utilization of its facilities beyond the use for firm storage services. In
addition, the Company is currently planning an expansion of the Petal Facility
through the addition of a second natural gas storage cavern with 3.2 Bcf of
working natural gas capacity and pipeline facilities with interconnects to
multiple interstate pipelines.
During the three and nine month periods ended September 30, 1998, the
Company's operating income from natural gas storage activities reflected
operational expenses of $532 thousand and $1.5 million, respectively, and
depreciation and amortization of $945 thousand and $2.6 million, respectively.
The Company's natural gas storage activities for the three and nine month
periods ended September 30, 1997, included operational expenses of $290 thousand
and $935 thousand, respectively, and depreciation and amortization of $690
thousand and $2.1 million, respectively. The expenses for the natural gas
storage segment reflected increases as a result of the Petal Gas acquisition.
Crude Oil and Natural Gas Exploration and Production
The Company's crude oil and natural gas exploration and production segment
for the three and nine month periods ended September 30, 1998, provided revenues
of $1.9 million and $5.6 million, respectively, and operating income of $714
thousand and $885 thousand, respectively. For
-13-
<PAGE> 14
the three and nine month periods ended September 30, 1997, the crude oil and
natural gas exploration and production segment contributed revenues of $644
thousand and $1.2 million, respectively, and operating income of $203 thousand
and $340 thousand, respectively. Operating results from crude oil and natural
gas production reflected the effect of (i) increased revenues and increased
operating expense and depletion expense from additional natural gas production
following the acquisition of the DeSoto Properties during the second quarter of
1997, (ii) the development drilling program of the DeSoto Properties and (iii) a
dry hole charge of $1.3 million relating to the drilling of an unsuccessful
exploratory well in South Louisiana during the second quarter of 1998.
Interest and Investment Income
The Company's interest and investment income for the three and nine month
periods ended September 30, 1998, was approximately $1.0 million and $4.0
million, respectively. For the three and nine month periods ended September 30,
1997, the Company's interest and investment income was approximately $1.0
million and $2.8 million, respectively. The levels of interest and investment
income reflected an average investment in debt securities of $98.8 million and
$66.7 million for the nine month periods ended September 30, 1998 and 1997,
respectively, and the effect of the proceeds derived from the forward sales late
in the second quarter and third quarters of 1997, net of the funds utilized to
satisfy forward sale obligations. The average interest rate received by the
Company was 5.4% and 5.6% for the nine month periods ended September 30, 1998
and 1997, respectively. The Company's liquid assets are primarily invested in
investment grade corporate and government obligations that are for terms of less
than two years.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased in the three and nine
month periods ended September 30, 1998, to $1.8 million and $4.9 million,
respectively, from $1.0 million and $2.8 million, respectively, for the
comparative periods in 1997. The increase was primarily attributable to
increases in the volumes of natural gas production following the acquisition and
development activities of the DeSoto Properties as well as the acquisition of
the Petal Facility.
Interest and Debt Expense
The Company's interest and debt expense for the three and nine month periods
ended September 30, 1998, was $817 thousand and $2.5 million, respectively, and
$832 thousand and $2.4 million, respectively, for the comparative periods in
1997. Such interest and debt expense related primarily to the $36.5 million of
long-term debt incurred to finance the acquisition of FRGC.
Amortization of Discount on Sale of Future Contract Receivables and
Forward Sales
For the three and nine month periods ended September 30, 1998, the Company's
amortization of discount on sale of future contract receivables and forward
sales was $1.2 million and $4.6 million, respectively, and $686 thousand and
$1.4 million, respectively, for the comparative periods in 1997. Such expense
reflected the amortization of discount on the Company's sale in November 1995 of
the contract receivables from firm gas
-14-
<PAGE> 15
storage services and the amortization of discount on two forward sale
transactions entered into late in the second and third quarters of 1997.
General and Administrative Expense
The Company's general and administrative expense for the three and nine
month periods ended September 30, 1998, was approximately $791 thousand and $2.1
million, respectively, compared to approximately $1.3 million and $2.6 million,
respectively, for the comparative period in 1997. The general and administrative
expense for the nine month period ended September 30, 1997, included
non-recurring expenses totaling $710 thousand relating to an unsuccessful bid
for certain crude oil and natural gas properties during the third quarter of
1997. The acquisition of the DeSoto Properties and the Petal Facility did not
add any significant corporate overhead and administrative expenses due to the
consolidation of the acquired operations with the Company's ongoing activities.
Provision for Income Taxes
The results for the three and nine month periods ended September 30, 1998,
included a provision for income taxes of approximately $403 thousand and $725
thousand, respectively. For the three and nine month periods ended September 30,
1997, the Company had a provision for income taxes of approximately $104
thousand and $945 thousand, respectively. The Company's provision for income
taxes included deferred tax expense and a corresponding reduction in deferred
tax assets of approximately $311 thousand and $545 thousand, respectively, for
the three and nine month periods ended September 30, 1998, and a deferred tax
benefit and corresponding increase in deferred tax assets of approximately $1.8
million and $1.1 million, respectively, as a result of previously existing
temporary differences and the utilization of the Company's tax net operating
loss carryforwards.
As of September 30, 1998, the Company had a net deferred tax asset of
approximately $30 million. In assessing the deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Based upon
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowance. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
Liquidity and Capital Resources
At September 30, 1998, the Company had marketable securities and cash and
cash equivalents of approximately $57 million compared to marketable securities
and cash and cash equivalents of $146 million at December 31, 1997. During the
nine months ended September 30, 1998, the Company utilized approximately $29
million for the acquisition of Petal Gas, approximately $50 million to satisfy
its obligations under the forward sale transactions entered into during 1997 and
approximately $10 million for development drilling activities at the DeSoto
Properties.
-15-
<PAGE> 16
As of September 30, 1998, approximately $22 million of the Company's investment
in marketable securities is dedicated to purchases of crude oil and natural gas
that are necessary to satisfy certain obligations under the forward sale
transactions. In addition, the Company had no material debt other than the debt
directly associated with and recourse primarily limited to FRGC and the
Hattiesburg Facility.
During 1997, the Company sold in a forward sale 32.7 Bcf of natural gas and
1.6 million barrels of crude oil for a total amount of approximately $97
million. The proceeds from these sales are reflected for financial accounting
purposes as "Deferred Revenues from Forward Sales" and are being recognized as
deliveries are made by the Company based on an undiscounted reference price for
the crude oil and natural gas sold. The imputed charge used in establishing the
sales price of the crude oil and natural gas sold is being amortized over the
life of the forward sale contract as the volumes of crude oil and natural gas
are delivered and is being recorded as amortization of discount on forward
sales. Current deliveries required under the forward sales aggregate 5.3 Bcf of
natural gas and 405 thousand barrels of crude oil during the remainder of 1998
and 12 Bcf of natural gas through December 2002. The balance of deferred
revenues from forward sales was approximately $40.7 million as of September 30,
1998.
The Company has entered into hedging arrangements for the purpose of hedging
against the volatility in prices of crude oil and natural gas in the event the
Company is unable to deliver enough volumes of natural gas from its existing
production or acquire producing crude oil and natural gas properties to fully
satisfy its obligations under the forward sale arrangements entered into during
1997 and is therefore required to purchase crude oil and natural gas to satisfy
these obligations. These hedges are designed to limit any potential losses that
the Company could incur on the purchase of crude oil and natural gas at prices
higher than the prices used in the forward sales to fulfill its obligations
under the contracts relating thereto to the extent its available production at
the scheduled delivery date is less than the amounts required to be delivered.
Under these hedging arrangements, the Company will either be entitled to receive
or be required to pay an amount of cash equal to the difference between a
scheduled price stated in the hedging contracts and a reference price per barrel
of crude oil or per MMbtu of natural gas multiplied by the schedule of volumes
hedged. These hedge contracts are derivative financial instruments and do not
require deliveries of the commodity hedged. The gains or losses on the Company's
hedge contracts will be recognized as deliveries are made by the Company. As of
September 30, 1998, the Company recorded an accounts payable of approximately
$5.8 million with respect to its obligations under the forward sale contracts
and commodity swap contracts.
During the second quarter of 1998, as a result of increased natural gas
production from the DeSoto Properties, the Company amended one of its commodity
swap contracts to reduce the volumes hedged during the remainder of 1998 for
consideration to the Company of approximately $501 thousand. Such gain will be
recognized over the scheduled delivery date of the original volumes hedged under
the commodity swap contract. Currently, the Company's hedging arrangements cover
purchases of up to 8.4 Bcf of natural gas at prices ranging from $1.89 to $2.55
per MMbtu and up to 405 thousand barrels of crude oil at prices ranging from
$20.26 to $20.40 per barrel.
-16-
<PAGE> 17
Risks associated with the Company's hedge contracts arise primarily from the
possible inability of a concentrated number of counterparties to meet their
obligations under these contracts. The Company's existing hedge contracts are
with a major investment grade financial institution or are secured by an
irrevocable letter of credit. The cash flows from future contracts are accounted
for as hedges for sales of production and are classified as operating activities
in the consolidated statements of cash flows.
As a part of the acquisition of the Hattiesburg Facility in 1995, the
Company sold to a trust the right to receive payment from the accounts
receivable generated by the Hattiesburg Facility's long-term contracts. The
receivables were sold without recourse to the Company or its subsidiaries, but
certain subsidiaries of the Company (the "FRGC Parties") have agreed to be
responsible in limited circumstances for failure to collect on the accounts
receivable and for certain force majeure events. The obligations of the FRGC
Parties are secured by substantially all of their assets, including the
Hattiesburg Facility. The net proceeds from the sale of future contract
receivables are being recognized over the period during which the receivables
are being generated and the balance of deferred revenue from such receivables
was approximately $9.5 million as of September 30, 1998.
Simultaneously with the sale of the Hattiesburg receivables, a subsidiary of
the Company issued approximately $36.5 million in 8.12% Secured Guaranteed Notes
Due 2005 (the "Notes"). The terms of the Notes provide for the payment of
interest only through June 30, 2000, at which time principal is to be amortized
over the remaining life of the Notes. The Notes, which are without recourse to
the Company, are secured by substantially all the assets of the FRGC Parties. In
addition, the Company currently has outstanding a $1.5 million irrevocable
letter of credit to support certain obligations with respect to the Notes.
The Company's working capital position decreased by approximately $21.2
million to $46.2 million at September 30, 1998, compared to $67.4 million at
December 31, 1997, primarily as a result of the utilization of existing funds
for the acquisition of Petal Gas during the first quarter of 1998. The Company
generated net cash from operating activities of approximately $8.5 million and
$5.7 million during the nine month periods ended September 30, 1998 and 1997,
respectively. During the nine month period ended September 30, 1998, the net
cash from operating activities benefitted primarily from the effect of the
acquisition of Petal Gas and the expansion of crude oil and natural gas
activities through the development drilling program of the DeSoto Properties.
Pending the redeployment of the Company's available funds, the Company is
investing its cash primarily in United States government and other investment
grade securities. The Company believes that these securities do not present any
material risks to the Company's liquidity, operations or financial position.
Other Matters
The Company is addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and the year
2000 and beyond. The Year 2000 issues are the result of computer programs and
other automated processes using two digits to identify a year, rather than four
digits. This issue impacts both Information
-17-
<PAGE> 18
Technology ("IT") systems and also non-IT systems, including systems
incorporating "embedded processors". The Company is currently in the process of
identifying and assessing the Year 2000 compliance of items determined to be
critical to its operations. Critical systems are those applications and systems,
including embedded processor technology, which, if not appropriately remediated,
may have a significant impact on natural gas delivery, revenue collection or the
safety of personnel or facilities. After the initial assessment of systems, the
Year 2000 implementation includes replacing or upgrading items that are
determined not to be Year 2000 compliant, testing such items and designing and
implementing a contingency and business continuation plans. In addition, the
Year 2000 compliance includes identifying and prioritizing critical suppliers
and customers and communicating with them about their plans and progress in
addressing the Year 2000 problem. Currently, the Company is obtaining upgrades
of application software from its vendors and the testing phase is ongoing as
hardware or system software is remediated, upgraded or replaced. The total cost
associated with required modifications to become Year 2000 compliant is not
expected to be material to the Company's financial position.
The Company's readiness and development of contingency plans are subject to
change depending upon the remediation and testing phases of the Company's
compliance effort and upon developments that may arise as the Company continues
to assess its computer-based systems and operations. The failure to correct a
critical Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations and could adversely affect the
Company's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
The Company is currently subject to various claims regarding environmental
matters, which will require the expenditure of funds for legal costs and could
require additional expenditure of funds for remediation if it is determined that
the Company is responsible for such remediation or otherwise agrees to
contribute to such remediation cost. It is the Company's policy to accrue for
environmental remediation costs if it is probable that a liability has been
incurred and an amount is reasonably estimable. The resolution of the known
environmental matters affecting the Company will be subject to various factors,
including the discovery of additional information with respect to the nature of
contamination at the known sites, the legal responsibility of various parties
for any cleanup obligations, the financial capability of responsible parties and
other actions by governmental agencies and private parties. As of September 30,
1998, the Company has an accrued liability of approximately $2.3 million for
defense and related costs resulting from such environmental claims against the
Company.
Forward Looking Statements
Statements in this Report other than historical facts are forward-looking
statements made in reliance upon the safe harbor of the Private Securities
Litigation Reform Act of 1995. As such, the involved risks and uncertainties are
subject to change at any time. The Company derives its forward-looking
statements from its operating budgets which
-18-
<PAGE> 19
are based on various assumptions, including matters regarding crude oil and
natural gas prices, demand and supply for crude oil and natural gas, changes in
the market for natural gas storage and transportation, the ultimate recovery and
realization of the estimated reserves from the proved producing and undeveloped
reserves in the DeSoto Properties, success of the Company's ability to market
interruptible service at the Hattiesburg Facility and the Petal Facility, the
use of the Company's existing net operating tax loss carryforwards, the
Company's successful execution of its acquisition strategy and internal
operating plans including the expansion of its natural gas storage facilities,
labor relations, regulatory uncertainties and legal proceedings, in particular
its pending litigation with the State of Louisiana regarding environmental
matters. Although the Company believes its assumptions are reasonable, it is
impossible to predict the impact of certain factors that could cause actual
results to differ materially from those currently anticipated. These factors are
discussed in the Company's filings with the Securities and Exchange Commission,
in particular its most recent Annual Report on Form 10-K.
-19-
<PAGE> 20
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*27 Financial Data Schedule
(b) Reports on Form 8-K
None
________________________
* Filed herein
-20-
<PAGE> 21
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, on the 10th day of November 1998.
CRYSTAL OIL COMPANY
BY: /S/ J. N. AVERETT, JR.
-----------------------------------------
J. N. Averett, Jr.
President
and Director
(Principal Executive Officer)
BY: /S/ J. A. BALLEW
-----------------------------------------
J. A. Ballew
Senior Vice President,
Treasurer, and
Chief Financial Officer
BY: /S/ PAUL E. HOLMES
-----------------------------------------
Paul E. Holmes
Vice President/Controller
(Principal Accounting Officer)
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 27,044
<SECURITIES> 26,882
<RECEIVABLES> 1,262
<ALLOWANCES> 51
<INVENTORY> 0
<CURRENT-ASSETS> 55,928
<PP&E> 158,119
<DEPRECIATION> 14,109
<TOTAL-ASSETS> 239,182
<CURRENT-LIABILITIES> 9,757
<BONDS> 50,244
0
148
<COMMON> 27
<OTHER-SE> 140,926
<TOTAL-LIABILITY-AND-EQUITY> 239,182
<SALES> 16,107
<TOTAL-REVENUES> 20,103
<CGS> 0
<TOTAL-COSTS> 6,549
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,456
<INCOME-PRETAX> 1,606
<INCOME-TAX> 725
<INCOME-CONTINUING> 881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 881
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS FINANCIAL DATA
SCHEDULE HAS BEEN RESTATED AS A RESULT OF THE IMPLEMENTATION OF FINANCIAL
ACCOUNTING STANDARDS NUMBER 128 AMENDING EARNING PER SHARE CALCULATIONS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 40,745
<SECURITIES> 36,765
<RECEIVABLES> 1,405
<ALLOWANCES> 71
<INVENTORY> 0
<CURRENT-ASSETS> 79,050
<PP&E> 111,764
<DEPRECIATION> 8,261
<TOTAL-ASSETS> 285,373
<CURRENT-LIABILITIES> 3,842
<BONDS> 148,629
0
148
<COMMON> 27
<OTHER-SE> 132,727
<TOTAL-LIABILITY-AND-EQUITY> 285,373
<SALES> 10,447
<TOTAL-REVENUES> 13,317
<CGS> 0
<TOTAL-COSTS> 4,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 2,442
<INCOME-PRETAX> 2,417
<INCOME-TAX> 945
<INCOME-CONTINUING> 1,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,472
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.54
</TABLE>
