<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 June 30, 1999
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 GAS STORAGE, INC.
-------------------------------------------------------------
(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
--------------------
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 August 11, 1999 2,688,122
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<PAGE> 2
CRYSTAL GAS STORAGE, INC.
INDEX
Page No.
--------
Part I
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 1999 (Unaudited) and December 31, 1998 3
Consolidated Condensed Statements of Operations -
Three and Six Months Ended June 30, 1999 and 1998 (Unaudited) 4
Consolidated Condensed Statements of Stockholders' Equity -
Six Months Ended June 30, 1999 and 1998 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 (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
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Part II
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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CRYSTAL GAS STORAGE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in Thousands)
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1999 1998
----------- -----------
(Unaudited) (1)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10,737 $ 13,855
Marketable securities 4,410 20,643
Accounts receivable - net 840 1,952
Prepaid expenses and other current assets 389 129
----------- -----------
TOTAL CURRENT ASSETS 16,376 36,579
PROPERTY, PLANT AND EQUIPMENT - net 152,845 143,028
OTHER ASSETS
Deferred tax assets 29,547 29,947
Restricted cash and marketable securities 1,835 1,863
Other 1,312 1,366
----------- -----------
32,694 33,176
----------- -----------
TOTAL ASSETS $ 201,915 $ 212,783
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term obligations $ 518 $ 516
Accounts payable 3,296 8,740
Other accrued expenses 851 650
----------- -----------
TOTAL CURRENT LIABILITIES 4,665 9,906
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION 37,765 37,784
DEFERRED REVENUE FROM SALE OF FUTURE CONTRACT
RECEIVABLES AND FORWARD SALES 22,855 29,131
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Senior preferred stock 74 74
Common stock 27 27
Additional paid-in capital 116,922 116,922
Retained earnings 19,607 18,939
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 136,630 135,962
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 201,915 $ 212,783
=========== ===========
</TABLE>
(1) The balance sheet at December 31, 1998, has been taken from the audited
financial statements of the Company at that date, and condensed.
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 4
CRYSTAL GAS STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
($ in Thousands Except Shares and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES
Gas storage fees $ 3,435 $ 3,690 $ 7,026 $ 6,891
Crude oil and natural gas 1,694 1,916 3,630 3,687
Interest, investment and
other income 319 1,259 722 2,969
-------- -------- -------- --------
5,448 6,865 11,378 13,547
COSTS AND EXPENSES
Operating expense and taxes 1,110 1,165 2,161 2,139
General and administrative
expense 758 725 1,462 1,303
Interest and debt expense 807 818 1,621 1,639
Amortization of discount on
sale of future contract
receivables and forward
sales 496 1,545 1,079 3,375
Exploration cost -- 1,300 -- 1,300
Depreciation, depletion and
amortization 1,935 1,677 3,879 3,098
-------- -------- -------- --------
5,106 7,230 10,202 12,854
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 342 (365) 1,176 693
PROVISION FOR INCOME
TAXES (BENEFIT) 133 (141) 508 322
-------- -------- -------- --------
NET INCOME (LOSS) $ 209 $ (224) $ 668 $ 371
======== ======== ======== ========
NET INCOME (LOSS) PER
COMMON SHARE $ .08 $ (.08) $ .25 $ .14
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON
SHARE - ASSUMING DILUTION $ .08 $ (.08) $ .25 $ .14
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 5
CRYSTAL GAS STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
1999 1998
--------- ---------
<S> <C> <C>
SENIOR PREFERRED STOCK
Balance at beginning and end of period $ 74 $ 148
--------- ---------
COMMON STOCK
Balance at beginning and end of period 27 27
--------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning and end of period 116,922 122,020
--------- ---------
RETAINED EARNINGS
Balance at beginning of period 18,939 18,025
Net income 668 371
--------- ---------
Balance at end of period 19,607 18,396
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 136,630 $ 140,591
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 6
CRYSTAL GAS STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 668 $ 371
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred financing cost 137 158
Depreciation, depletion and amortization 3,879 3,098
Exploration cost -- 1,300
Deferred income taxes 400 234
Net loss on sale of property, plant and equipment -- 91
Net change in accrued interest income 214 615
Decrease in accounts receivable 1,112 570
Increase in prepaid expense and other current assets (260) (808)
Increase in other assets (143) (381)
Increase in accounts payable and accrued expenses 1,171 400
--------- ---------
Net cash provided by operating activities 7,178 5,648
--------- ---------
Cash flows from investing activities:
Acquisition of Fouke Property (7,356) --
Acquisition of Petal Gas Storage Company,
net of cash received -- (29,141)
Proceeds from sale of property, plant and equipment -- 669
Capital expenditures (6,280) (7,042)
Purchases of marketable securities (12,360) (113,092)
Maturity of marketable securities 28,379 189,661
Investment of restricted funds -- (4,478)
Reduction of restricted funds 28 4,515
--------- ---------
Net cash provided by investing activities 2,411 41,092
--------- ---------
Cash flows from financing activities:
Reduction of long-term obligations (17) (357)
Reduction of deferred revenue from sale of future
contract receivables and forward sales (12,690) (34,939)
--------- ---------
Net cash used in financing activities (12,707) (35,296)
--------- ---------
Net increase (decrease) in cash and cash equivalents (3,118) 11,444
Cash and cash equivalents at beginning of period 13,855 11,550
--------- ---------
Cash and cash equivalents at end of period $ 10,737 $ 22,994
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 7
CRYSTAL GAS STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Continued)
($ in Thousands)
(Unaudited)
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash paid during the period for:
Interest, net of amounts capitalized $ 1,485 $ 1,482
========= =========
Amortization of discount on sale of
future contract receivables and
natural gas forward sale $ 1,079 $ 3,375
========= =========
Income taxes $ 200 $ 50
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 8
CRYSTAL GAS STORAGE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Consolidated Condensed Financial Statements
The consolidated condensed balance sheet of Crystal Gas Storage, Inc.
(formerly named Crystal Oil Company) and its subsidiaries (the "Company") as of
June 30, 1999, the consolidated condensed statements of operations for the three
and six months ended June 30, 1999 and 1998, and the consolidated condensed
statements of stockholders' equity and cash flows for the six months ended June
30, 1999 and 1998, 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, 1998.
In June 1998, 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, 2001, SFAS
133 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, if any, that
will be made upon adopting this new standard. The Company does not anticipate
the early adoption of SFAS 133.
Note 2. Commitments and Contingencies
The Company has been named as a potentially responsible party for
environmental remediation in a claim by an agency of the State of Louisiana.
Under such claim, the State of Louisiana is seeking $4.5 million from all
potentially responsible parties. 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 this matter will have a material adverse impact on
the Company's financial position, results of operations or liquidity.
The Company has entered into an agreement with Southern Company Services,
Inc. ("Southern") as agent for its affiliated operating electric utility
companies - Mississippi Power Company, Alabama Power Company,
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<PAGE> 9
Georgia Power Company, Gulf Power Company and Savannah Electric and Power
Company. The agreement with Southern includes all of the capacity that was
subject to the Company's "open season" held September 1998. The agreement
provides for salt cavern peaking firm storage with up to 700,000 MMBTU per day
of withdrawal capacity and up to 350,000 MMBTU per day of injection capacity
with receipt and delivery points on Transcontinental Gas Pipeline, Southern
Natural Gas Pipeline, Koch Gateway Pipeline and Destin Pipeline. The 20 year
agreement is subject to certain conditions precedent including Federal Energy
Regulatory Commission approval, construction of certain facilities and
satisfactory financing for the project. The pricing for the storage service was
negotiated based on market based rates.
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 of a subsidiary of the Company.
Such letter of credit expires on November 21, 2000.
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 six month periods ended
June 30, 1999 and 1998, follows. No difference existed between net income used
in computing basic and diluted income per share for these periods.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted-average shares
outstanding
Basic method 2,668,122 2,668,122 2,668,122 2,668,122
Dilutive preferred stock 16,562 33,274 16,562 33,274
Dilutive stock options 25,349 39,979 25,349 39,979
--------- --------- --------- ---------
Assuming dilution 2,710,033 2,741,375 2,710,033 2,741,375
========= ========= ========= =========
</TABLE>
Note 4. Acquisitions
On June 15, 1999, the Company consummated the acquisition of various proved
producing reserves in the Fouke Field in Miller County, Arkansas (the "Fouke
Property") for a total cash purchase price of approximately $7.4 million, net of
adjustments of approximately $440 thousand. At January 1, 1999, the Fouke
Property had estimated net proved reserves of approximately 10.8 billion
equivalent cubic feet of natural gas and 398 thousand barrels of condensate. In
August 1999, the Company acquired an additional interest in the Fouke Property
for approximately $232 thousand.
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<PAGE> 10
Note 5. Segment Information
The Company has two reportable segments: the natural gas storage and
transportation segment and the exploration and production segment. The Company
evaluates the performance of the segments based on profit from operations before
income taxes. The basis of segmentation and measurement of segment profits are
the same as those described in the Company's 1998 Annual Report.
<TABLE>
<CAPTION>
Natural Gas Exploration
Storage and and
Segment Information Transportation Production Corporate Consolidated
- -------------------------------- -------------- ----------- --------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Six month period ended
June 30, 1999
Segment income (loss) before
income taxes $ 2,489 $ 248 $ (1,561) $ 1,176
Revenues from external customers 7,026 3,630 -- 10,656
Total Assets at June 30, 1999 129,148 63,148 9,619 201,915
Six month period ended
June 30, 1998
Segment income (loss) before
income taxes $ 2,240 $ (728) $ (819) $ 693
Revenues from external customers 6,891 3,687 -- 10,578
Three month period ended
June 30, 1999
Segment income (loss) before
income taxes $ 1,187 $ (9) $ (836) $ 342
Revenues from external customers 3,435 1,694 -- 5,129
Three month period ended
June 30, 1998
Segment income (loss) before
income taxes $ 1,148 $ (924) $ (589) $ (365)
Revenues from external customers 3,690 1,916 -- 5,606
</TABLE>
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<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
financial condition of Crystal Gas Storage, Inc. and its subsidiaries (the
"Company") as of June 30, 1999, 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, 1998, 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. The
Company also owns and operates various natural gas properties located primarily
in Arkansas and Louisiana.
Corporate Strategy
The Company's corporate strategy is primarily focused on the expansion of
its natural gas storage and transportation operations with the objective of
enhancing the value of its natural gas storage properties. The Company intends
to capitalize on the strategic location, pipeline access and operating
flexibility of its natural gas storage facilities. The Company's focus also
includes the expansion of its revenue asset base through the acquisition of
income producing assets and properties within the energy industry that would
benefit from the Company's existing tax position and present potential for
capital appreciation.
The Company's natural gas storage and transportation operations consist of
the ownership and operation of two natural gas storage facilities with working
gas capacity of approximately 3.5 billion cubic feet ("Bcf") (the "Hattiesburg
Facility") and 3.2 Bcf (the "Petal Facility"). The Company is currently
expanding the Petal Facility through the addition of a second natural gas
storage cavern with approximately the same capacity as the first cavern.
The Company has entered into an agreement with Southern Company Services,
Inc. ("Southern") as agent for its affiliated operating electric utility
companies - Mississippi Power Company, Alabama Power Company, Georgia Power
Company, Gulf Power Company and Savannah Electric and Power Company. The
agreement with Southern includes all of the capacity that was subject to the
Company's "open season" held September 1998. The agreement provides for salt
cavern firm peaking storage with up to 700,000 MMBTU per day of withdrawal
capacity and up to 350,000 MMBTU per day of injection capacity with receipt and
delivery points on Transcontinental Gas Pipeline, Southern Natural Gas Pipeline,
Koch Gateway Pipeline and Destin Pipeline. The 20 year agreement is subject to
certain conditions precedent including Federal Energy Regulatory Commission
approval, construction of certain facilities and satisfactory financing for the
project. The pricing for the storage service was negotiated based on market
based rates.
On June 15, 1999, the Company consummated the acquisition of various proved
producing reserves in the Fouke Field in Miller County, Arkansas (the "Fouke
Property") for a total cash purchase price of approximately
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<PAGE> 12
$7.4 million, net of adjustments of approximately $440 thousand. At January 1,
1999, the Fouke Property had estimated net proved reserves of approximately 10.8
billion equivalent cubic feet of natural gas. In August 1999, the Company
acquired an additional interest in the Fouke Property for approximately $232
thousand. The Company is continuing to review additional acquisition
opportunities 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 June 30, 1999, the Company's financial resources included
approximately $15.1 million in cash, cash equivalents and marketable securities
and the Company's only material debt consisted of the indebtedness directly
associated with the permanent financing for the acquisition of the Hattiesburg
Facility in 1995, with the recourse primarily limited to certain subsidiaries of
the Company and the assets and operations of the Hattiesburg Facility. In
management's opinion, the Company's existing financial resources, expected net
cash flow from operating activities and expected additional financing associated
with its Petal Facility expansion 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 $668 thousand, or $.25 per basic share
($.25 per diluted share), for the six month period ended June 30, 1999, compared
to net income of $371 thousand, or $.14 per basic share ($.14 per diluted
share), for the comparative period in 1998. The Company recorded net income of
$209 thousand, or $.08 per basic share ($.08 per diluted share), for the three
months ended June 30, 1999, and realized a net loss of approximately $224
thousand, or $.08 per basic share ($.08 per diluted share), for the three months
ended June 30, 1998. In comparison to the three and six month periods ended June
30, 1998, the Company's operations for the three and six month periods ended
June 30, 1999, reflected a reduction in revenues of approximately $1.4 million
and $2.2 million, respectively, as well as a decrease in expenses of
approximately $2.1 million and $2.7 million, respectively. The results for the
interim periods in 1999 reflected decreases in interest and investment income as
well as amortization of discount on forward sales of crude oil and natural gas
as a result of the utilization of existing funds to satisfy certain obligations
under the Company's forward sales that expired in 1998. The Company's operations
for the three months ended June 30, 1999, also reflected decreases in revenues
from natural gas sales and natural gas storage as a result of a decline in the
net price received from its forward sales of natural gas and the Company's
decision to limit the availability of interruptible storage services during the
construction project at the Petal Facility. Operating results for the three and
six month periods ended June 30, 1998, included a dry hole charge of $1.3
million relating to the drilling of an unsuccessful exploratory well.
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<PAGE> 13
Natural Gas Storage
The Company's natural gas storage activities for the three month and six
month periods ended June 30, 1999, provided revenues of $3.4 million and $7.0
million, respectively, and operating income of $2.0 million and $4.2 million,
respectively. For the three month and six month periods ended June 30, 1998,
natural gas storage activities contributed revenues of $3.7 million and $6.9
million, respectively, and operating income of $2.1 million and $4.2 million,
respectively. Natural gas storage revenues derived from firm long-term contracts
were $3.4 million and $6.7 million, respectively, for the three and six month
periods ended June 30, 1999, and $3.5 million and $6.4 million, respectively,
for the comparative periods in 1998. The remaining natural gas storage revenues
for the three and six month periods ended June 30, 1999 and 1998, 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 six month periods ended June 30, 1999 and 1998,
reflected approximately $1.3 million and $1.0 million, respectively, in revenues
from the Petal Facility which was acquired late in the first quarter of 1998.
The Company is currently expanding the natural gas storage capacity of the Petal
Facility through the addition of a second natural gas storage cavern. Currently,
the Company has opted to limit its ability to offer interruptible storage
services as a result of the construction project at the Petal Facility.
During the three and six month periods ended June 30, 1999, the Company's
operating income from natural gas storage activities reflected operational
expenses of $472 thousand and $952 thousand, respectively, and depreciation and
amortization of $946 thousand and $1.9 million, respectively. The Company's
natural gas storage activities for the three and six month periods ended June
30, 1998, included operational expenses of $624 thousand and $1.0 million,
respectively, and depreciation and amortization of $949 thousand and $1.7
million, respectively.
Natural Gas Exploration and Production
The Company's natural gas exploration and production segment for the three
and six month periods ended June 30, 1999, provided revenues of $1.7 million and
$3.6 million, respectively, and operating income of $255 thousand and $807
thousand, respectively. For the three and six month periods ended June 30, 1998,
the natural gas exploration and production segment contributed revenues of $1.9
million and $3.7 million, respectively, and an operating loss of $473 thousand
and operating income of $171 thousand, respectively. Operating results from
natural gas production reflected the effect of a decrease in revenues during the
second quarter of 1999 as a result of a decline in the net price received from
its forward sales of natural gas. The Company expects increased revenues in
future periods as a result of its acquisition of the Fouke Property late in the
second quarter of 1999 and the continuation of the drilling program of the
Bethany Longstreet and Holly Fields in DeSoto Parish, Louisiana (the "DeSoto
Properties"). Operating results also reflected the effect of a dry hole charge
of $1.3 million during the second quarter of 1998.
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<PAGE> 14
Interest and Investment Income
The Company's interest and investment income for the three and six month
periods ended June 30, 1999, was approximately $308 thousand and $686 thousand,
respectively, compared to approximately $1.3 million and $3.0 million,
respectively, for the comparative periods in 1998. The levels of interest and
investment income reflected an average investment in debt securities of $27
million and $104 million for the six month periods ended June 30, 1999 and 1998,
respectively, and the effect of the funds utilized to satisfy forward sale
obligations, capital expenditures and the acquisition of the Fouke Property. The
average interest rate received by the Company was 5.0% and 5.7% for the six
month periods ended June 30, 1999 and 1998, 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 six
month periods ended June 30, 1999, to $1.9 million and $3.9 million,
respectively, from $1.7 million and $3.1 million, respectively, for the
comparative periods in 1998. This increase was attributable to an increase in
the depletion rate per equivalent Mcf of natural gas as well as the acquisition
of the Petal Facility late in the first quarter of 1998.
Interest and Debt Expense
The Company's interest and debt expense for the three and six month periods
ended June 30, 1999, was $807 thousand and $1.6 million, respectively, and $818
thousand and $1.6 million, respectively, for the comparative periods in 1998.
Such interest and debt expense related primarily to the $36.5 million of
long-term debt incurred to finance the acquisition of the Hattiesburg Facility.
Amortization of Discount on Sale of Future Contract Receivables and
Forward Sales
For the three and six month periods ended June 30, 1999, the Company's
amortization of discount on sale of future contract receivables and forward
sales was $496 thousand and $1.1 million, respectively, compared to $1.5 million
and $3.4 million, respectively, for the comparative periods in 1998. Such
expense reflected the amortization of discount on the Company's sale in November
1995 of the contract receivables from firm gas storage services and the
amortization of discount on forward sale transaction entered in 1997. The
amortization of discount on forward sales decreased during the interim periods
in 1999 as a result of the expiration of a forward sale transaction in 1998.
General and Administrative Expense
The Company's general and administrative expense for the three and six month
periods ended June 30, 1999, was approximately $758 thousand and $1.5 million,
respectively, compared to approximately $725 thousand and $1.3 million,
respectively, for the comparative periods in 1998. The increase in general and
administrative expense for the six month period ended June 30, 1999, resulted
primarily from expenditures relating to the review of potential acquisition
opportunities.
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<PAGE> 15
Provision for Income Taxes
The results for the three and six month periods ended June 30, 1999,
included a provision for income taxes of approximately $133 thousand and $508
thousand, respectively. The results for the three month period ended June 30,
1998, included an income tax benefit of approximately $141 thousand and for the
six month period ended June 30, 1998, included a provision for income taxes of
$322 thousand. As of June 30, 1999, 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 for 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 June 30, 1999, the Company had marketable securities and cash and cash
equivalents of approximately $15.1 million compared to marketable securities and
cash and cash equivalents of $34.5 million at December 31, 1998. During the six
months ended June 30, 1999, the Company utilized approximately $12.7 million to
satisfy its obligations under the sale of future contract receivables and the
forward sale transactions and $7.4 million for the acquisition of the Fouke
Property. In addition, the Company had no material debt at June 30, 1999, other
than the debt directly associated with the acquisition of the Hattiesburg
Facility. Recourse on such a debt is primarily limited to the assets of certain
subsidiaries of the Company with obligations under the agreements associated
with such debt.
The Company entered into a forward sale of natural gas in 1997 and recorded
for financial accounting purposes the proceeds from the sale as "Deferred
Revenues from Forward Sales". Such proceeds are recognized as deliveries are
made by the Company based on an undiscounted reference price for the natural gas
sold. The imputed charge used in establishing the sales price of the natural gas
sold is amortized over the life of the forward sale contract as the volumes of
natural gas are delivered and such charge is recorded as amortization of
discount on forward sales. Current deliveries required under the forward sales
are 1.9 Bcf of natural gas during the remainder of 1999 and thereafter 7.8 Bcf
of natural gas through December 2002. The balance of deferred revenues from
forward sales was approximately $17.3 million as of June 30, 1999.
The Company entered into a hedging arrangement for the purpose of hedging
against the volatility in prices of natural gas in the event that the Company
was required to purchase such volumes to satisfy its obligations with respect to
the forward sale. As a result of the expected level of natural gas production
from the DeSoto Properties, the Company agreed to terminate its commodity swap
contracts covering the volumes hedged during the remaining period of 1999
through 2002 for consideration to the Company of approximately $400 thousand.
Such gain is recognized
-15-
<PAGE> 16
over the scheduled delivery date of the original volumes hedged under the
commodity swap contract.
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 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 such subsidiaries are secured by
substantially all of their assets, including the Hattiesburg Facility. The net
proceeds from the sale of future contract receivables are recognized over the
period during which the receivables are generated and the balance of deferred
revenue from such receivables was approximately $5.6 million as of June 30,
1999.
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 certain subsidiaries
of the Company. 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 generated net cash from operating activities of approximately
$7.2 million and $5.6 million during the six month periods ended June 30, 1999
and 1998, respectively. During the six month period ended June 30, 1999, the net
cash from operating activities benefitted primarily from the effect of the
acquisition of Petal Gas late in the first quarter of 1998 and the development
drilling program of the DeSoto Properties. The Company's working capital
position decreased by approximately $15.0 million to $11.7 million at June 30,
1999, compared to $26.7 million at December 31, 1998, primarily as a result of
the utilization of existing funds and net cash provided by operating activities
for capital expenditures, to satisfy its obligations from the sale of future
contract receivables and forward sales and the acquisition of the Fouke
Property.
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 ("Year 2000"). 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 Technology ("IT")
systems and also non-IT systems, including systems incorporating "embedded
processors". The Company has identified and assessed 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
-16-
<PAGE> 17
remediated, may have a significant impact on natural gas delivery, revenue
collection or the safety of personnel or facilities. After the 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 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. The Company has obtained upgrades of
application software from its vendors and has performed the testing phase of the
hardware or system software previously remediated, upgraded or replaced. In
addition, the Company has communicated with third parties with which it has
significant relationship to assess third party risks. The Company anticipates
the completion of the assessment of third party risk and the development of the
contingency plan during the third quarter of 1999.
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 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 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 costs. 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 June 30, 1999,
the Company had an accrued liability of approximately $1.8 million for defense
and related costs resulting from such environmental claims against the Company.
In June 1998, the Financial Accounting Standards Board (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, 2001, SFAS 133 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
-17-
<PAGE> 18
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.
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 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 ability to become Year 2000 compliant,
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, including 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of the Company's participation in the acquisition of energy
related assets, the Company has entered into certain acquisition financial
transactions that currently limit its level of exposure to market risks
associated with interest rates and prices of natural gas. In respect to the
market risk associated with natural gas prices, the Company has entered into a
forward sale contract for hedging purposes, effectively reducing its exposure to
price volatility in the physical markets. Accordingly, the Company's current and
expected natural gas production from the DeSoto Properties is primarily
committed for delivery through the year 2002 under a forward sale contract at a
weighted average price of $2.01. In respect to the production from the
acquisition of the Fouke Property, the Company is currently exposed to
fluctuations in the prices of natural gas and crude oil.
The Company is subject to interest rate risk from the utilization of
financial instruments such as term debt for acquisition funding. The fair market
value of long-term debt with fixed-interest rate is subject to interest rate
risk. Generally, the fair value of fixed-interest rate debt will increase as
interest rates fall and will decrease as interest rates rise. At June 30. 1999,
the estimated fair values of the Company's long-term debt, including current
maturities, was $37 million. A one percentage-point increase in prevailing
interest rates would result in a decrease in the estimated fair value of
long-term debt of $1.2 million.
-18-
<PAGE> 19
Initial fair values were determined using the current rates at which the Company
could enter into comparable financial instruments with similar remaining
maturities. The earnings and cash flows impact during 1999 resulting from an
increase in interest rates would be limited as the Company's debt carries a
fixed rate through the year 2005.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on May 20, 1999, in New York,
New York. Two proposals were submitted to shareholders as described in the
Company's Proxy Statement dated April 14, 1999, and were voted upon and approved
by shareholders at the meeting. The table below briefly describes the proposals
and results of the shareholder votes.
<TABLE>
<CAPTION>
Votes in Votes
Favor Withheld/Against
--------- ----------------
<S> <C> <C>
Election of six directors:
J. N. Averett, Jr. 2,624,245 6,764
George P. Giard, Jr. 2,624,245 6,764
Gary S. Gladstein 2,624,245 6,764
Donald G. Housley 2,624,245 6,764
Neal Moszkowski 2,624,245 6,764
Lief D. Rosenblatt 2,624,245 6,764
Votes in Votes
Favor Against Abstain
--------- ------- -------
Proposal for ratification of
appointment of independent auditors 2,627,090 3,636 283
</TABLE>
There were no broker non votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated June 14, 1999, regarding change of
the Company's name from "Crystal Oil Company" to "Crystal Gas
Storage, Inc."
- ---------------------
* Filed herein
-19-
<PAGE> 20
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 11th day of August 1999.
CRYSTAL GAS STORAGE, INC.
BY: /S/ J. N. AVERETT, JR.
-------------------------------
J. N. Averett, Jr.
President
and Director
(Principal Executive Officer)
BY: /S/ J. A. BALLEW
-------------------------------
J. A. Ballew
Executive Vice President,
Treasurer and
Secretary
(Chief Financial Officer)
BY: /S/ PAUL E. HOLMES
-------------------------------
Paul E. Holmes
Vice President/Controller
(Principal Accounting Officer)
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at June 30, 1999 and the consolidated statement of
income for the six months ended June 30, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,737
<SECURITIES> 4,410
<RECEIVABLES> 882
<ALLOWANCES> 42
<INVENTORY> 0
<CURRENT-ASSETS> 16,376
<PP&E> 173,112
<DEPRECIATION> 20,627
<TOTAL-ASSETS> 201,915
<CURRENT-LIABILITIES> 4,665
<BONDS> 60,620
0
74
<COMMON> 27
<OTHER-SE> 136,630
<TOTAL-LIABILITY-AND-EQUITY> 201,915
<SALES> 10,656
<TOTAL-REVENUES> 11,378
<CGS> 0
<TOTAL-COSTS> 6,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,621
<INCOME-PRETAX> 1,176
<INCOME-TAX> 508
<INCOME-CONTINUING> 668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 668
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
</TABLE>
