<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 March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8715
CRYSTAL OIL COMPANY
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (318) 222-7791
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NOT APPLICABLE
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(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
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Common Stock outstanding on May 13, 1999 2,668,122
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CRYSTAL OIL COMPANY
INDEX
Page No.
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Part I
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998 3
Consolidated Condensed Statements of Operations -
Three Months Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 1999 and 1998 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 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
Part II
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in Thousands)
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1999 1998
----------- -----------
(Unaudited) (1)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 16,822 $ 13,855
Marketable securities 10,907 20,643
Accounts receivable - net 947 1,952
Prepaid expenses and other current assets 101 129
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TOTAL CURRENT ASSETS 28,777 36,579
PROPERTY, PLANT AND EQUIPMENT - net 142,369 143,028
OTHER ASSETS
Deferred tax assets 29,663 29,947
Restricted cash and marketable securities 1,834 1,863
Others 1,298 1,366
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32,795 33,176
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TOTAL ASSETS $ 203,941 $ 212,783
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term obligations $ 518 $ 516
Accounts payable 2,496 8,740
Other accrued expenses 723 650
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TOTAL CURRENT LIABILITIES 3,737 9,906
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION 37,775 37,784
DEFERRED REVENUE FROM SALE OF FUTURE CONTRACT
RECEIVABLES AND FORWARD SALES 26,008 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 19,398 18,939
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TOTAL STOCKHOLDERS' EQUITY 136,421 135,962
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 203,941 $ 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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CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
($ in Thousands Except Shares and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET REVENUES
Gas storage fees $ 3,591 $ 3,201
Crude oil and natural gas 1,936 1,771
Interest, investment and other income 403 1,710
----------- -----------
5,930 6,682
COSTS AND EXPENSES
Operating expense and taxes 1,051 974
General and administrative expense 704 578
Interest and debt expense 814 821
Amortization of discount on sale of future
contract receivables and forward sales 583 1,830
Depreciation, depletion and amortization 1,944 1,421
----------- -----------
5,096 5,624
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INCOME BEFORE PROVISION FOR INCOME TAXES 834 1,058
PROVISION FOR INCOME TAXES 375 463
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NET INCOME $ 459 $ 595
=========== ===========
NET INCOME PER COMMON SHARE $ .17 $ .22
=========== ===========
NET INCOME PER COMMON SHARE-
ASSUMING DILUTION $ .17 $ .22
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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CRYSTAL OIL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
1999 1998
--------- ---------
<S> <C> <C>
SENIOR PREFERRED STOCK
Balance at beginning and end of period $ 74 $ 148
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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
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RETAINED EARNINGS
Balance at beginning of period 18,939 18,025
Net income 459 595
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Balance at end of period 19,398 18,620
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TOTAL STOCKHOLDERS' EQUITY $ 136,421 $ 140,815
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 459 $ 595
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred financing cost 70 80
Depreciation, depletion and amortization 1,944 1,421
Deferred income taxes 284 360
Net loss on sale of property, plant and equipment - 91
Net change in accrued interest income 176 820
Decrease (increase) in accounts receivable 1,005 (109)
Decrease (increase) in prepaid expense and
other current assets 28 (185)
Increase in other assets (32) (724)
Increase (decrease) in accounts payable and
accrued expenses 243 (512)
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Net cash provided by operating activities 4,177 1,837
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Cash flows from investing activities:
Proceeds from sale of property, plant and equipment - 669
Acquisition of Petal Gas Storage Company,
net of cash received - (29,141)
Capital expenditures (1,255) (4,179)
Purchases of marketable securities (9,205) (103,882)
Maturity of marketable securities 18,765 157,011
Investment of restricted funds - (2,127)
Reduction of restricted funds 29 37
----------- -----------
Net cash provided by investing activities 8,334 18,388
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Cash flows from financing activities:
Reduction of long-term obligations (7) (158)
Reduction of deferred revenue from sale of
future contract receivables and
settlement of forward sales (9,537) (14,863)
----------- -----------
Net cash used in financing activities (9,544) (15,021)
----------- -----------
Net increase in cash and cash equivalents 2,967 5,204
Cash and cash equivalents at beginning of period 13,855 11,550
----------- -----------
Cash and cash equivalents at end of period $ 16,822 $ 16,754
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Continued)
($ in Thousands)
(Unaudited)
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
1999 1998
------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 744 $ 741
========= =========
Amortization of discount on sale of future
contract receivables and forward sales $ 583 $ 1,830
========= =========
Income taxes $ 25 $ 50
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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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 March 31, 1999, and the consolidated
condensed statements of operations, stockholders' equity and cash flows for the
three months ended March 31, 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, 2000,
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, Georgia Power
Company, Gulf Power Company and Savannah Electric and Power Company. The
agreement with
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<PAGE> 9
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
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. 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 month periods ended
March 31, 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 March 31
----------------------------
(Weighted-average shares outstanding) 1999 1998
------------- -------------
<S> <C> <C>
Basic method 2,668,122 2,668,122
Dilutive preferred stock 16,562 33,274
Dilutive stock options 30,990 40,408
------------- ------------
Assuming dilution 2,715,674 2,741,804
============= ============
</TABLE>
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Note 4. 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)
Three month period ended
March 31, 1999
<S> <C> <C> <C> <C>
Segment income (loss) before
income taxes $ 1,302 $ 257 $ (725) $ 834
Revenues from external customers 3,591 1,936 - 5,527
Intersegment revenues - - - -
Three month period ended
March 31, 1998
Segment income (loss) before
income taxes $ 1,092 $ 196 $ (230) $ 1,058
Revenues from external customers 3,201 1,771 - 4,972
Intersegment revenues - - - -
</TABLE>
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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 March 31, 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, and
holds various interests in natural gas properties primarily in Louisiana.
Corporate Strategy
The Company's corporate strategy is primarily focus 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 planning
an expansion of the Petal Facility through the addition of a second natural gas
storage cavern with approximately the same capacity as the first cavern and
pipeline facilities with interconnects to multiple interstate pipelines. In
conjunction with the proposed expansion, Petal Gas held an "open season" and
obtained bids from potential customers for the utilization of the additional
storage capacity.
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 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.
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<PAGE> 12
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 March 31, 1999, the Company's financial resources included
approximately $28 million in cash, cash equivalents and marketable securities
that could be utilized for the expansion of its natural gas storage facilities
and future acquisitions.
The Company's only material debt consists 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 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 $459 thousand, or $.17 per basic share
($.17 per diluted share), for the three month period ended March 31, 1999,
compared to net income of $595 thousand, or $.22 per basic share ($.22 per
diluted share), for the comparative period in 1998. The results for the interim
period in 1999 included increases in revenues from natural gas storage and
natural gas production as well as increases in operating expenses and
depreciation and depletion as a result of the acquisition of the Petal Facility
late in the first quarter of 1998 and the development drilling program of the
Bethany-Longstreet and Holly Fields in DeSoto Parish, Louisiana (the "DeSoto
Properties"). In addition, the utilization of existing funds to satisfy certain
obligations under the Company's forward sales that expired in 1998 resulted in
decreases in interest and investment income as well as amortization of discount
on forward sales.
Natural Gas Storage
The Company's natural gas storage activities for the three month period
ended March 31, 1999, provided revenues of $3.6 million and operating income of
$2.2 million. For the three month period ended March 31, 1998, natural gas
storage activities contributed revenues of $3.2 million and operating income of
$2.1 million. Natural gas storage revenues derived from firm long-term contracts
were $3.3 million for the three month period ended March 31, 1999, and
$2.9 million for the comparative period in 1998. The remaining natural gas
storage revenues for the three month period ended March 31, 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 three month periods ended
March 31, 1999 and 1998, reflected approximately $701 thousand and
$190 thousand, respectively, in revenues from the Petal Facility which was
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<PAGE> 13
acquired late in the first quarter of 1998. 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 and pipeline facilities with interconnects to
multiple interstate pipelines.
During the three month period ended March 31, 1999, the Company's operating
income from natural gas storage activities reflected operational expenses of
$480 thousand and depreciation and amortization of $946 thousand. The Company's
natural gas storage activities for the three month period ended March 31, 1998,
included operational expenses of $380 thousand and depreciation and amortization
of $727 thousand. The expenses for the natural gas storage segment reflected
increases as a result of the Petal Gas acquisition late in the first quarter of
1998.
Natural Gas Exploration and Production
The Company's natural gas exploration and production segment for the three
month period ended March 31, 1999, provided revenues of $1.9 million and
operating income of $552 thousand. For the three month period ended
March 31, 1998, the natural gas exploration and production segment contributed
revenues of $1.8 million and operating income of $644 thousand. Operating
results from natural gas production reflected the effect of increased revenues
and increased depletion expense from additional natural gas production following
the development drilling program of the DeSoto Properties.
Interest and Investment Income
The Company's interest and investment income for the three month period
ended March 31, 1999, was approximately $378 thousand compared to approximately
$1.8 million for the comparative period in 1998. The levels of interest and
investment income reflected an average investment in debt securities of
$30 million and $132 million for the three month periods ended March 31, 1999
and 1998, respectively, and the effect of the funds utilized to satisfy forward
sale obligations and to acquire Petal Gas. The average interest rate received by
the Company was 5.0% and 5.4% for the three month periods ended March 31, 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 month
period ended March 31, 1999, to $1.9 million from $1.4 million for the
comparative period in 1998. This increase was attributable to increases in the
volumes of natural gas production following 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 was $814 thousand and $821 thousand
for the three month periods ended March 31, 1999 and 1998, respectively. Such
interest and debt expense related primarily to the
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<PAGE> 14
$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 month period ended March 31, 1999, the Company's amortization
of discount on sale of future contract receivables and forward sales was
$583 thousand compared to $1.8 million for the comparative period 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 a forward sale transactions entered in 1997. The
amortization of discount on forward sales decreased during the first quarter of
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 month period
ended March 31, 1999, was approximately $704 thousand compared to approximately
$578 thousand for the comparative period in 1998. The increase in general and
administrative expense for the three month period ended March 31, 1999, resulted
primarily from expenditures relating to the review of potential acquisition
opportunities.
Provision for Income Taxes
The results for the three month periods ended March 31, 1999 and 1998,
included a provision for income taxes of approximately $375 thousand and
$463 thousand, respectively. As of March 31, 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 March 31, 1999, the Company had marketable securities and cash and cash
equivalents of approximately $28 million compared to marketable securities and
cash and cash equivalents of $34 million at December 31, 1998. During the three
months ended March 31, 1999, the Company utilized approximately $6.4 million to
satisfy its obligations under the forward sale transactions entered into during
1997. In addition, the Company had no material debt at March 31, 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.
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<PAGE> 15
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 3.1 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 $19.1 million as of March 31, 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. This hedge is designed to limit any potential losses that the
Company could incur on the purchase of natural gas at prices higher than the
prices used in the forward sale to the extent its available production at the
scheduled delivery date is less than the amounts required to be delivered. Under
this hedging arrangement, the Company is either entitled to receive or required
to pay an amount of cash equal to the difference between a scheduled price
stated in the hedging contract and a reference price per MMbtu of natural gas
multiplied by the schedule of volumes hedged. This hedge contract is a
derivative financial instrument and does not require deliveries of the commodity
hedged.
The Company's derivative financial instruments are held for purposes other
than trading, and accordingly, the gains or losses on the Company hedge
contracts are recognized as deliveries are made by the Company. 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 result of increased 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 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 $6.9 million as of
March 31, 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
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<PAGE> 16
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
$4.2 million and $1.8 million during the three month periods ended
March 31, 1999 and 1998, respectively. During the three month period ended
March 31, 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 expansion of natural gas activities through the development drilling program
of the DeSoto Properties. The Company's working capital position decreased by
approximately $1.7 million to $25.0 million at March 31, 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 and to satisfy its obligations from the sale of future contract
receivables.
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 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. 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. In addition, the Company is currently communicating with third
parties with which it has significant relationship to assess third party risks.
The Company anticipates the completion of the remediation and testing phases
during the second quarter of 1999. The total cost associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position.
-16-
<PAGE> 17
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 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 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
March 31, 1999, the Company has 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, 2000, 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 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
-17-
<PAGE> 18
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.
-18-
<PAGE> 19
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
-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 13th day of May 1999.
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
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 MARCH 31, 1998 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 16,822
<SECURITIES> 10,907
<RECEIVABLES> 989
<ALLOWANCES> 42
<INVENTORY> 0
<CURRENT-ASSETS> 28,777
<PP&E> 160,768
<DEPRECIATION> 18,399
<TOTAL-ASSETS> 203,941
<CURRENT-LIABILITIES> 3,737
<BONDS> 63,783
27
0
<COMMON> 74
<OTHER-SE> 136,320
<TOTAL-LIABILITY-AND-EQUITY> 203,941
<SALES> 5,527
<TOTAL-REVENUES> 5,930
<CGS> 0
<TOTAL-COSTS> 2,995
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 814
<INCOME-PRETAX> 834
<INCOME-TAX> 375
<INCOME-CONTINUING> 459
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<EXTRAORDINARY> 0
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<NET-INCOME> 459
<EPS-PRIMARY> 0.17
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