UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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 1-1059
CROWN CENTRAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0550682
(State or other jurisdiction of(I.R.S. Employer Identification Number)
incorporation or organization)
One North Charles Street, Baltimore, Maryland 21201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-539-7400
Not Applicable
(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, and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
The number of shares outstanding at July 31, 1995 of the Registrant's
$5 par value Class A and Class B Common Stock was 4,817,392 shares and
5,135,506 shares, respectively.
-1-
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
Table of Contents
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
June 30, 1995 and December 31, 1994 3-4
Consolidated Condensed Statements of Operations
Three and six months ended June 30, 1995 and 1994 5
Consolidated Condensed Statements of Cash Flows
Six months ended June 30, 1995 and 1994 6
Notes to Unaudited Consolidated Condensed
Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 16
Exhibit 4(a) - Amendment effective as of June 30, 1995 to the
Credit Agreement dated as of
May 10, 1993
Exhibit 20 - Interim Report to Stockholders for the three and
six months ended June 30, 1995
Exhibit 27 - Financial Data Schedule
SIGNATURE 16
-2-
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
Crown Central Petroleum Corporation and Subsidiaries
(Thousands of dollars)
June 30 December 31
Assets 1995 1994
-------------------------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 35,125 $ 54,868
AAccounts receivable - net 98,496 128,984
Recoverable and current deferred income taxes 13,842 16,075
Inventories 121,500 94,933
Other current assets 1,702 1,264
------------------------
Total Current Assets 270,665 296,124
Investments and Deferred Charges 43,441 40,125
Property, Plant and Equipment 707,232 699,204
Less allowance for depreciation 341,820 331,377
-------------------------
Net Property, Plant and Equipment 365,412 367,827
-------------------------
$ 679,518 $ 704,076
======== ========
<FN>
See notes to unaudited consolidated condensed financial statements.
-3-
CONSOLIDATED CONDENSED BALANCE SHEETS
Crown Central Petroleum Corporation and Subsidiaries
(Thousands of dollars)
June 30 December 31
Liabilities and Stockholders' Equity 1995 1994
---------------------------------
(Unaudited)
Current Liabilities
Accounts payable:
Crude oil and refined products $ 112,810 $ 150,877
Other 25,014 29,988
Accrued liabilities 58,182 51,500
Current portion of long-term debt 1,912 10,062
--------------------------
Total Current Liabilities 197,918 242,427
Long-Term Debt 129,246 96,632
Deferred Income Taxes 64,640 73,402
Other Deferred Liabilities 30,415 31,154
Common Stockholders' Equity
Common stock, Class A - par value $5 per share:
Authorized shares--7,500,000; issued and
outstanding shares--4,817,392 in 1995 and 1994 24,087 24,087
Common stock, Class B - par value $5 per share:
Authorized shares--7,500,000; issued and
outstanding shares--5,135,506 in 1995 and
4,985,706 in 1994 25,678 24,929
Additional paid-in capital 92,379 90,549
Unearned restricted stock (3,862) (1,266)
Retained earnings 119,017 122,162
-------------------------
Total Common Stockholders' Equity 257,299 260,461
------------------------
$ 679,518 $ 704,076
======== =======
<FN>
See notes to unaudited consolidated condensed financial statements.
-4-
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Crown Central Petroleum Corporation and Subsidiaries
(Thousands of dollars, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
Revenues 1995 1994 1995 1994
----------------------------------------
- -------------
Sales and operating revenues (including excise taxes
of $103,187, $104,563, $203,778 and $198,119) $ 483,312$ 453,423
$ 928,736 $ 847,009
----------------------------------------
- -------------
Operating Costs and Expenses
Costs and operating expenses 440,674 434,144 862,838 777,559
Selling and administrative expenses 19,119 19,125 39,12441,185
Depreciation and amortization 9,492 10,438 18,984 21,069
Sales of property, plant and equipment (416) (22)
(173) (345)
---------------------------- -------------
- --------------
468,869 463,685 920,773
839,468
----------------------------------------
- -------------
Operating Income (Loss) 14,443 (10,262) 7,963 7,541
Interest and other income 844 476 1,592 869
Interest expense (3,861) (1,946) (7,336)
(3,857)
-----------------------------------------
- -------------
Income (Loss) Before Income Taxes 11,426 (11,732) 2,219 4,553
Income Tax Expense (Benefit) 4,396 (4,446) 2,107
3,179
---------------------------- -------------
- - -------------
Income (Loss) Before Extraordinary Item 7,030 (7,286) 1121,374
Extraordinary (Loss) from Early
Extingiushment of Debt (net of income
tax benefit of $2,039)
(3,257)
-------------------------- -------------
- -------------
Net Income (Loss) $ 7,030$ (7,286)$ (3,145)$
1,374
================ ======== ========
Net Income (Loss) Per Share:
Income (Loss) Before Extraordinary Item $ .72 $ (.74)
$ .01 $ .14
Extraordinary (Loss) from Early
Extingiushment of Debt
(.33)
------------- -------------------------
- - ------------
Net Income (Loss) Per Share $ .72 $ (.74)$
(.32) $ .14
======== ======== ================
<FN>
See notes to unaudited consolidated condensed financial statements.
-5-
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Crown Central Petroleum Corporation and Subsidiaries
(Thousands of dollars)
(Unaudited)
Six Months Ended June 30
1995 1994
------------------------
Net Cash Flows From Operating Activities
Net cash from operations before
changes in working capital $ 6,434 $ 18,558
Net changes in working capital items (30,643) (14,151)
-------------------------
Net Cash (Used in) Provided by
Operating Activities (24,209) 4,407
------------------------
Cash Flows From Investment Activities
Capital expenditures (14,773) (13,989)
Proceeds from sales of property, plant
and equipment 1,480 3,289
Deferred turnaround maintenance (1,150) (311)
Other charges to deferred assets (5,702) 595
-------------------------
Net Cash (Used in) Investment Activities (20,145) (10,416)
-------------------------
Cash Flows From Financing Activities
Proceeds from debt and credit agreement borrowings 143,088
1,228
(Repayments) of debt and credit agreement borrowings (118,640)
(611)
Net cash flows from long-term
notes receivable 163 (541)
Purchases of common stock (2,734)
---------------------------
Net Cash Provided by (Used in) Financing Activities 24,611
(2,658)
---------------------------
Net (Decrease) in Cash and Cash Equivalents $ (19,743) $ (8,667)
========= ========
<FN>
See notes to unaudited consolidated condensed financial statements.
-6-
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Crown Central Petroleum Corporation and Subsidiaries
June 30, 1995
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of Management, all adjustments considered necessary for a
fair and comparable presentation have been included. Operating
results for the three and six months ended June 30, 1995 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1995. The enclosed financial statements
should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1994.
Cash and Cash Equivalents - Cash in excess of daily requirements is
invested in marketable securities with maturities of three months or
less. Such investments are deemed to be cash equivalents for purposes
of the statements of cash flows.
Inventories - The Company's crude oil, refined products, and
convenience store merchandise and gasoline inventories are valued at
the lower of cost (last-in, first-out) or market with the exception of
crude oil inventory held for resale which is valued at the lower of
cost (first-in, first-out) or market. Materials and supplies
inventories are valued at cost. Incomplete exchanges of crude oil and
refined products due the Company or owing to other companies are
reflected in the inventory accounts.
At June 30, 1995, approximately 1,147,000 barrels of crude oil and
refined products, or approximately $23 million of inventory, were held
in excess of anticipated year-end quantities, excluding crude oil held
for resale, and were valued at the lower of cost (first-in, first-out)
or market. An actual valuation of inventory under the LIFO method can
be made only at the end of each year based on the inventory levels and
costs at that time. Accordingly, interim LIFO projections must be
based on Management's estimates of expected year-end inventory levels
and values.
Environmental Costs: The Company conducts environmental assessments
and remediation efforts at multiple locations, including operating
facilities, and previously owned or operated facilities. Estimated
closure and post-closure costs for active refinery and finished
product terminal facilities are not recognized until a decision for
closure is made. Estimated closure and post-closure costs for active
and operated retail marketing facilities and costs of environmental
matters related to ongoing refinery, terminal and retail marketing
operations are recognized as described below. Expenditures for
equipment necessary for environmental issues relating to ongoing
operations are capitalized. The Company accrues environmental and
clean-up related costs of a non-capital nature when it is both
probable that a liability has been incurred and that the amount can be
reasonably estimated. Accruals for losses from environmental
remediation obligations generally are recognized no later than
completion of the remediation feasibility study. Estimated costs,
which are based upon experience and assessments, are recorded at
undiscounted amounts without considering the impact of inflation, and
are adjusted periodically as additional or new information is
available.
Income Taxes - The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes." The income tax provision for the three and six
months ended June 30, 1995 has been computed based upon the Company's
estimated effective tax rate for the year, after recognizing permanent
tax differences.
Financial Instruments and Hedging Activities - The Company
periodically enters into interest rate swap agreements to effectively
manage the cost of borrowings. All interest rate swaps are subject to
market risk as interest rates fluctuate. Interest rate swaps are
designated to the Company's long-term debt and are accounted for as a
hedge, the net amounts payable or receivable from periodic settlements
under outstanding interest rate swaps are included in interest
expense. Realized gains and losses from terminated interest rate
swaps are deferred and amortized into interest expense over the
shorter of the term of the underlying debt or the remaining term of
the original swap agreement. Settlement of interest rate swaps
involves the receipt or payment of cash on a periodic basis during the
duration of the contract, or upon the Company's termination of the
contract, for the differential of the interest rates swapped over the
term of the contract.
-7-
Other instruments are used to minimize the exposure of the Company's
refining margins to crude oil and refined product price fluctuations.
Hedging strategies used to minimize this exposure include fixing a
future margin between crude oil and certain finished products and also
hedging fixed price purchase and sales commitments of crude oil and
refined products. Futures, forwards and exchange traded options
entered into with commodities brokers and other integrated oil and gas
companies are utilized to execute the Company's strategies. These
instruments generally allow for settlement at the end of their term in
either cash or product.
Net realized gains and losses from these hedging strategies are
recognized in costs and operating expenses when the associated refined
products are sold. Unrealized gains and losses represent the
difference between the market price of refined products and the price
of the derivative financial instrument, inclusive of refining costs.
Individual transaction unrealized gains and losses are deferred in
inventory and other current assets and liabilities to the extent that
the associated refined products have not been sold. A hedging
strategy position generating an overall net unrealized loss is
recognized in costs and operating expenses. While the Company's
hedging activities are intended to reduce volatility while providing
an acceptable profit margin on a portion of production, the use of
such a program can limit the Company's ability to participate in an
improvement in related refined product profit margins.
The Company is exposed to credit risk in the event of non-performance
by counterparties on interest rate swaps, and futures, forwards and
exchange traded options for crude and finished products, but the
Company does not anticipate non-performance by any of these
counterparties. The amount of such exposure is generally the
unrealized gains in such contracts.
Statements of Cash Flows - Net changes in working capital items
presented in the Unaudited Consolidated Condensed Statements of Cash
Flows reflects changes in all current assets and current liabilities
with the exception of cash and cash equivalents and the current
portion of long-term debt.
Note B - Inventories
Inventories consist of the following:
June 30 December 31
1995 1994
------------ --------------
(thousands of dollars)
Crude oil $ 66,403 $ 53,359
Refined products 90,920 74,299
------------ -----------
Total inventories at FIFO (approximates current cost) 157,323 127,658
LIFO allowance (47,485) (45,125)
------------ ------------
Total crude oil and refined products 109,838 82,533
------------ ------------
Merchandise inventory at FIFO (approximates current cost) 5,481 7,150
LIFO allowance (2,110 ) (2,110)
------------ ------------
Total merchandise 3,371 5,040
------------ ------------
Materials and supplies inventory at FIFO 8,291 7,360
------------ ------------
Total Inventory $121,500 $ 94,933
======= =======
Note C - Long-term Debt and Credit Arrangements
On January 24, 1995, the Company completed the sale of $125 million of
unsecured 10 7/8% Senior Notes due February 1, 2005 priced at 99.75%
(Notes). Approximately $55 million of the net proceeds from the sale
was used to retire the Company's outstanding 10.42% Senior Notes,
including a prepayment premium of $3.4 million, and $8 million was
used to reduce amounts outstanding under the Company's unsecured bank
lines. The remaining portion of the outstanding 10.42% Senior Notes
had been paid on January 3, 1995 as part of the regularly scheduled
debt service. The Notes were issued under an Indenture which includes
certain restrictions and limitations customary with senior
indebtedness of this type including, but not limited to, the payment
of dividends and the repurchase of capital stock. The retirement of
the Company's outstanding 10.42% Senior Notes resulted in a net
extraordinary loss in the first quarter of 1995 of $3.3 million.
-8-
Long-term debt consists of the following:
June 30 December 31
1995 1994
-------------------------------
(thousands of dollars)
Unsecured 10 7/8% Senior Notes $124,687
Unsecured 10.42% Senior Notes $ 60,000
Unsecured Credit Agreement 35,000
Purchase Money Lien 5,044 5,579
Other obligations 1,427 6,115
-----------------------
131,158 103,694
Less current portion 1,912 10,062
-----------------------
Long-Term Debt $129,246 $ 96,632
======= =======
Effective as of June 30, 1995, the Company executed an amendment to
the Credit Agreement dated as of May 10, 1993. This amendment , which
is included as Exhibit 4(a) of this filing, established a new
financial covenant which became necessary due to decreased refining
margins in the third and fourth quarters of 1994 and in early 1995.
At June 30, 1995, the Company was in compliance with all covenants and
provisions of the Credit Agreement, as amended. Meeting the covenants
imposed by the Credit Agreement is dependent, among other things, upon
the level of future earnings and the rate of capital spending. The
Company reasonably expects to continue to be in compliance with the
covenants imposed by the Credit agreement, or a successor agreement,
over the next twelve months.
Note D--Crude Oil and Refined Product Hedging Activities and Other
Derivative Financial Instruments
The net deferred loss from crude oil and refined product hedging
strategies at June 30, 1995 was $2.6 million. Included in these
hedging strategies are contracts maturing from August 1995 to May
1996. The Company is using these contracts to fix the purchase price
of approximately 6% of its crude requirements, and the purchase price
of approximately 2% of its refined products, for the aforementioned
period, at current related market prices. The Company is exposed to
credit risk to the extent of counterparty non-performance on forward
contracts. Management monitors this credit risk by evaluating
counterparties prior to and during their contractual obligation.
Management considers non-performance credit risk to be remote.
As of June 30, 1995, the Company has entered into interest rate swap
agreements to effectively convert $47.5 million of its fixed rate
debt to variable interest rate debt with maturities ranging from 1996
to 1998.
The following is a summary, by year of maturity, of the Company's
outstanding interest rate swap agreements:
Instruments Expected to Mature in
---------------------------------------------------
1996 1997 1998
------------------------------
(thousands of dollars)
Interest rate swaps $17,500 $15,000 $15,000
Average variable pay rates assuming current market conditions 6.07 %6.05 %
6.00 %
Average fixed rate 7.00% 6.81 % 6.81%
The variable interest rates to be paid by the Company are reset on
various predetermined dates which range from July 1995 to March 1998
and are based on the London Interbank Offered Rate (LIBOR).
The termination of existing interest rate swap agreements as of June
30, 1995 would result in a gain of approximately $1.4 million. The
Company is exposed to credit risk to the extent of nonperformance by
the counterparties to the interest rate swap agreements; however,
management considers the risk of default to be remote.
-9-
Note E - Calculation of Net (Loss) Income Per Common Share
Net income (loss) per common share for the three and six months ended
June 30, 1995 is based upon the weighted average of common shares
outstanding of 9,697,598. Net (loss) income per common share for the
three and six months ended June 30, 1994 is based upon the weighted
average of common shares outstanding of 9,796,298.
Note F--Long-Term Incentive Plan and Stock Option Plan
Under the terms of the 1994 Long-term Incentive Plan (Plan), the
Company may distribute to selected employees restricted shares of the
Company's Class B Common Stock and options to purchase Class B Common
Stock. Up to 1.1 million shares of Class B Common Stock may be
distributed under the Plan. The balance sheet caption "Unearned
restricted stock" is charged for the market value of restricted shares
at their grant date and changes in the market value of shares
outstanding until the vesting date, and is shown as a reduction of
stockholders' equity. The impact is further reflected within Class B
Common Stock and Additional paid-in-capital.
Performance Vested Restricted Stock (PVRS) awards are subject to the
attainment of performance goals and certain restrictions including the
receipt of dividends and transfers of ownership. As of July 31, 1995,
255,300 shares of PVRS have been registered in participants names and
are being held by the Company subject to the attainment of the related
performance goals.
Under the 1994 Long-term Incentive Plan, non-qualified stock options
are granted to participants at a price not less than 100% of the fair
market value of the stock on the date of grant. The exercise period
is ten years with the options vesting one-third per year over three
years after a one-year waiting period. As of July 31, 1995, grants of
non-qualified stock options have been awarded to participants to
purchase 505,000 shares of the Company's Class B Common Stock.
Under the terms of the 1995 Management Stock Option Plan, the Company
may award to participants non-qualified stock options to purchase
shares of the Company's Class B Common Stock at a price equal to 100%
of the fair market value of the stock at the date of grant. Up to
500,000 shares of Class B Common Stock may be distributed under the
Plan. The exercise period is ten years with the options vesting one-
third per year over three years after a one-year waiting period. As
of July 31, 1995, grants of non-qualified stock options have been
awarded to participants to purchase 460,420 shares of the Company's
Class B Common Stock.
Note G - Litigation and Contingencies
There have been no material changes in the status of litigation as
discussed in Note I of Notes to Consolidated Financial Statements in
the Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
The Company has received a Revenue Agent's Report relative to an
examination by the Internal Revenue Service of tax returns for fiscal
years 1988 and 1989. A written protest has been filed requesting an
appellate conference. The Company does not expect the resolution of
this matter to have a material adverse effect on the Company.
Like other petroleum refiners and marketers, the Company's operations
are subject to extensive and rapidly changing federal and state
environmental regulations governing air emissions, waste water
discharges, and solid and hazardous waste management activities. The
Company's policy is to accrue environmental and clean-up related costs
of a non-capital nature when it is both probable that a liability has
been incurred and the amount can be reasonably estimated. While it is
often extremely difficult to reasonably quantify future environmental
related expenditures, the Company anticipates that a substantial
capital investment will be required over the next several years to
comply with existing regulations. The Company had recorded a
liability of approximately $16.4 million as of June 30, 1995 relative
to the estimated costs of a non-capital nature related to compliance
with environmental regulations. This liability is anticipated to be
expended over the next five years and is included in the balance sheet
as a noncurrent liability. No amounts have been accrued as
receivables for potential reimbursement or recoveries to offset this
liability. Included in costs and operating expenses in the statements
of operations for the three and six months ended June 30, 1995 and
1994 were costs related to environmental remediation in the amount of
$.4 million, $.5 million, $1.1 million and $1.1 million, respectively.
-10-
Environmental liabilities are subject to considerable uncertainties
which affect the Company's ability to estimate its ultimate cost of
remediation efforts. These uncertainties include the exact nature and
extent of the contamination at each site, the extent of required
cleanup efforts, varying costs of alternative remediation strategies,
changes in environmental remediation requirements, the number and
strength of other potentially responsible parties at multi-party
sites, and the identification of new environmental sites. It is
possible that the ultimate cost, which cannot be determined at this
time, could exceed the Company's recorded liability. As a result,
charges to income for environmental liabilities could have a material
effect on the results of operations in a particular quarter or year as
assessments and remediation efforts proceed or as new claims arise.
However, management is not aware of any matters which would be
expected to have a material adverse effect on the Company.
Item 2 -Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company's Sales and operating revenues increased $29.9 million or
6.6% in the second quarter of 1995 and $81.7 million or 9.6% for the
six months ended June 30, 1995 from the comparable periods in 1994.
The Company's Sales and operating revenues and Costs and operating
expenses include all Federal and State excise and other similar taxes
which totalled $103.2 million and $104.6 million for the three months
ended June 30, 1995 and 1994, respectively; and $203.8 million and
$198.1 million for the six months ended June 30, 1995 and 1994,
respectively. The second quarter increase in Sales and operating
revenues was primarily attributable to a 17.4% increase in the average
sales price per gallon of petroleum products and a 3.5% or $.8 million
increase in merchandise sales. These increases were partially offset
by a 7.2% decrease in petroleum products sales volumes. The year to
date increase was a result primarily of a 13.6% increase in the
average sales price per gallon of petroleum products and a 13.6% or
$5.4 million increase in merchandise sales. Additionally, excise and
similar taxes increased $5.7 million as previously discussed. These
increases were partially offset by a 1.8% decrease in petroleum
products sales volumes.
As previously mentioned, merchandise sales increased 3.5% or $.8
million while merchandise gross profit increased $.6 million or 12.6%
for the three months ended June 30, 1995 compared to the same period
in 1994. Additionally, the 13.6% or $5.4 million increase in
merchandise sales contributed to a $1.2 million or 12.9% increase in
merchandise gross profit for the six months ended June 30, 1995
compared to the same period in 1994. These increases in merchandise
gross profit occurred despite a reduction in the number of operating
units during the period. Merchandise gross margin (merchandise gross
profit as a percent of merchandise sales) increased from 28.9% to
30.5% for the three months ended June 30, 1994 and 1995, respectively.
There was no significant change in merchandise gross profit for the
six months ended June 30, 1995 as compared to the same period in 1994.
The increase in gross margin in the second quarter of 1995 was due
primarily to the increase in merchandise sales previously mentioned.
Late in the first quarter of 1994, a new merchandise pricing program
was introduced which is designed to increase per unit customer traffic
and overall merchandise sales and gasoline volumes. A key element of
the program includes the reduction of prices on certain items such as
tobacco products and beverages. This marketing strategy has resulted
in average monthly gasoline sales volume and merchandise sales
increases on a same store basis of approximately 2% and 12.9%,
respectively, for the second quarter of 1995 compared to the second
quarter of 1994. Additionally, average monthly gasoline sales volume
and merchandise sales increases on a same store basis were
approximately 4.3% and 22.1%, respectively, for the six months ended
June 30, 1995 compared to the same 1994 period. These increases
contributed to the overall $.6 million and $1.2 million increases in
merchandise gross profit mentioned above by increasing aggregate
merchandise gross profit on a same store basis by 27.1% and 23.1%,
respectively for the three and six months ended June 30, 1995 as
compared to the same periods in 1994.
Costs and operating expenses increased $6.5 million or 1.5% in the
second quarter of 1995 compared to the same period in 1994. The
increase was due to a 13% increase in the average cost per barrel
consumed of crude oil and feedstocks and to increases in excise taxes
previously mentioned. Costs and operating expenses increased $85.3
million or 11% for the six months ended June 30, 1995 compared to the
same period in 1994. This increase was due to an 18.9% increase in
the average cost per barrel consumed of crude oil and feedstocks and
to increases in excise taxes previously mentioned. The results of
operations were affected by the Company's use of the LIFO method to
value inventory which decreased the Company's gross margin $.07 per
barrel ($1.0 million) and $.47 per barrel ($6.5 million) for the three
months ended June 30, 1995 and 1994, respectively. The use of the
LIFO method decreased the Company's gross margin $.08 per barrel ($2.4
million) and $.38 per barrel ($10.5 million) for the six months ended
June 30, 1995 and 1994, respectively.
-11-
Due to better gasoline margins compared to distillate margins, yields
of gasoline improved to 92,400 bpd (60.6%) for the second quarter of
1995 compared to 88,800 bpd (58.7%) in the second quarter of 1994.
Correspondingly, distillate production decreased from 49,100 bpd
(32.5%) in the second quarter of 1994 to 43,200 bpd (28.3%) for the
same period in 1995. Similarly, yields of gasoline improved to
94,700, bpd (62.1%) for the six months ended June 30, 1995 compared to
88,600 bpd (57.3%) for the same period in 1994 while distillate
production decreased from 51,500 bpd (33.3%) for the six months ended
June 30, 1994 to 43,000 bpd (28.2%) for the six months ended June 30,
1995.
A majority of the Company's total crude oil and related raw material
purchases are transacted on the spot market. The Company continues to
selectively enter into forward hedging contracts to minimize price
fluctuations for a portion of its crude oil and refined products.
Selling and administrative expenses decreased $2.1 million or 5% for
the six months ended June 30, 1995 as compared to the same period in
1994. The decrease is principally due to decreases in general
liability accruals and in accruals associated with the Company's
incentive plans in 1995 as compared to 1994.
Operating costs and expenses in the three and six months ended June
30, 1995 included $.5 million and $1.1 million, respectively, related
to environmental matters, and $.4 million and $1.1 million,
respectively related to retail units that have been closed. This
compares to $.5 million and $1.1 million, respectively related to
environmental matters, and $.5 million and $.8 million, respectively
related to retail units that have been closed, for the three and six
months ended June 30, 1994.
Depreciation and amortization decreased $.9 million or 9.1% in the second
quarter of 1995 and $2.1 million or 9.9% for the six months ended June 30,
1995 compared to the same 1994 periods. The decreases were primarily the
result of decreases in refinery turnaround amortization for the three and
six months ended June 30, 1995 as compared to the same 1994 periods. These
decreases in turnaround amortization are primarily the result of a $10.4
million decrease in the total underlying value of the Pasadena Refinery
Fluid Catalytic Cracking Unit (FCC) turnaround being amortized in 1995
compared to the total underlying value of the FCC turnaround that was
amortized in 1994.
Interest and other income increased $.4 million or 77.3% and $.7
million or 83.2% for the three and six months ended June 30, 1995 as
compared to the same 1994 periods. The 1995 increases were primarily
due to increases in the average daily rate on cash invested of 219 and
242 basis points for the three and six months ended June 30, 1995,
respectively as compared to the same 1994 periods.
Interest expense increased $1.9 million or 98.4% and $3.5 million or
90.2% for the three and six months ended June 30, 1995 compared to the
same 1994 periods. The increases were due to a $64 million increase
in the average daily cash borrowed for the second quarter of 1995 and
a $56.1 million increase in the average daily cash borrowed for the
six months ended June 30, 1995 as compared to the same 1994 periods.
At June 30, 1995, there were additional outstanding borrowings of
$63.9 million as compared to June 30, 1994. The additional
outstanding borrowings are due to the sale of $125 million of
unsecured 10 7/8% Senior Notes in January 1995 net of the repayment of
the outstanding balance of the 10.42% Senior Notes as previously
discussed.
On January 24, 1995, the Company completed the sale of $125 million of
unsecured 10 7/8% Senior Notes due February 1, 2005 priced at 99.75%
(Notes). Approximately $55 million of the net proceeds from the sale
was used to retire the Company's outstanding 10.42% Senior Notes,
including a prepayment premium of $3.4 million. The remaining portion
of the outstanding 10.42% Senior Notes had been paid on January 3,
1995 as part of the regularly scheduled debt service. In the first
quarter of 1995, the Company recorded an extraordinary loss of $3.3
million (net of income tax benefits of $2 million) consisting of
redemption related premiums and the write-off of deferred financing
costs associated with the 10.42% Senior Notes.
Liquidity and Capital Resources
Net cash used in operating activities (including changes in working
capital) totalled $24.2 million for the six months ended June 30, 1995
compared to cash provided by operating activities of $4.4 million for the
six months ended June 30, 1994. The 1995 outflows consist of $30.6 million
in cash outflows related to working capital requirements resulting from
increases in accounts receivable , increases in the current income tax
asset and decreases in crude oil, refined products and other payables.
These working capital outflows were partially offset by decreases in the
value of crude oil and finished product inventories, decreases in prepaid
operating expenses and increases in accrued liabilities. Partially
offsetting these cash outflows was cash provided by operations of $6.4
million before changes in working capital. The 1994 inflows consist of
$18.6 million in cash provided by operations which were partially offset by
cash outflows of $14.2 million related to working capital requirements
resulting from increases in the value of crude oil and finished product
inventories, receivables and prepaid operating expenses. The 1994 working
capital outflows were partially offset by increases in crude oil and
refined products payables and in accrued excise tax liabilities.
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Net cash outflows from investment activities were $20.1 million for
the six months ended June 30, 1995 compared to a net outflow of $10.4
million for the same 1994 period. The 1995 amount consists
principally of capital expenditures of $14.8 million (which includes
$7.9 million from refinery operations and $5.5 million relating to the
marketing area). Additionally, there were increases in other deferred
assets of $5.7 million, which consists primarily of $2.9 million in
loan placement fees related to the sale of $125 million of unsecured
10 7/8% Senior Notes in January 1995, and $1.3 million of deferred
charges associated with long-term corporate wide projects.
Additionally, there were refinery turnaround expenditures of $1.1
million. These cash outflows were partially offset by proceeds from
the sale of property, plant and equipment of $1.5 million. The 1994
activity relates primarily to $14 million of capital expenditures
(which includes $8.2 million relating to refinery operations and $4.2
million relating to the marketing area). The 1994 cash outflows were
partially offset by proceeds from the sale of property, plant and
equipment of $3.3 million.
Net cash provided by financing activities was $24.6 million for the
six months ended June 30, 1995 compared to cash used in financing
activities of $2.7 million for the six months ended June 30, 1994.
The 1995 cash inflows relate to $24.4 million in net proceeds received
from debt and credit agreement borrowings due primarily to the sale in
January 1995 of $125 million of unsecured 10 7/8% Senior Notes net of
amounts used to repay outstanding balances relating to the 10.42%
Senior Notes (including a prepayment premium) and credit agreement
borrowings. The 1994 cash outflows relate primarily to the acquisition
of 135,000 shares of Class B Common Stock for use in connection with
the awards of stock and options under the 1994 Long-Term Incentive
Plan.
Cash and cash equivalents at June 30, 1995 were $8.2 million lower than at
June 30, 1994. This decrease resulted primarily from cash used in
investment activities of $52.7 million for the period July 1, 1994 to June
30, 1995 which includes capital expenditures of $35.1 million, deferred
turnaround costs of $13.2 million, increases in deferred loan costs of $2.9
million, $1.3 million of capitalized costs associated with the Company's
long-term strategic projects and additions to other deferred assets of $3.2
million . Partially offsetting these cash outflows was $3.1 million of
proceeds received from the sale of property, plant and equipment. Cash
outflows from operating activities for the twelve month period ended June
30, 1995 totalled $20 million. These cash outflows were partially offset
by net cash provided by financing activities of $65.5 million relating
primarily to the sale in January 1995 of $125 million of unsecured 10 7/8%
Senior Notes as previously discussed.
The ratio of current assets to current liabilities at June 30, 1995
was 1.37:1 compared to 1.21:1 at June 30, 1994 and 1.22:1 at December
31, 1994. If FIFO values had been used for all inventories, assuming
an incremental effective income tax rate of 38.5%, the ratio of
current assets to current liabilities would have been 1.48:1 at June
30, 1995, 1.30:1 at June 30, 1994 and 1.32:1 at December 31, 1994.
Like other petroleum refiners and marketers, the Company's operations
are subject to extensive and rapidly changing federal and state
environmental regulations governing air emissions, waste water
discharges, and solid and hazardous waste management activities. The
Company's policy is to accrue environmental and clean-up related costs
of a non-capital nature when it is both probable that a liability has
been incurred and that the amount can be reasonably estimated. While
it is often extremely difficult to reasonably quantify future
environmental related expenditures, the Company anticipates that a
substantial capital investment will be required over the next several
years to comply with existing regulations. The Company believes that
cash provided from its operating activities, together with other
available sources of liquidity, including the remaining proceeds of
the $125 million of unsecured 10 7/8% Senior Notes and borrowings
under the Credit Facility, will be sufficient to fund these costs. The
Company had recorded a liability of approximately $16.4 million as of
June 30, 1995 to cover the estimated costs of compliance with
environmental regulations which are not anticipated to be of a capital
nature. The liability of $16.4 million includes accruals for issues
extending past 1996.
Environmental liabilities are subject to considerable uncertainties
which affect the Company's ability to estimate its ultimate cost of
remediation efforts. These uncertainties include the exact nature and
extent of the contamination at each site, the extent of required
cleanup efforts, varying costs of alternative remediation strategies,
changes in environmental remediation requirements, the number and
financial strength of other potentially responsible parties at multi-
party sites, and the identification of new environmental sites. As a
result, charges to income for environmental liabilities could have a
material effect on the results of operations in a particular quarter
or year as assessments and remediation efforts proceed or as new
claims arise. However, management is not aware of any matters which
would be expected to have a material adverse effect on the Company.
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During the years 1995-1997, the Company estimates environmental
expenditures at the Pasadena and Tyler refineries, of at least $4.3
million and $18.2 million, respectively. Of these expenditures, it is
anticipated that $3.2 million for Pasadena and $16.7 million for Tyler
will be of a capital nature, while $1.1 million and $1.5 million,
respectively, will be related to previously accrued non-capital
remediation efforts. At the Company's marketing facilities, capital
expenditures relating to environmental improvements are planned
totaling approximately $23 million through 1998.
As a result of a strong balance sheet and overall favorable credit
relationships, the Company has been able to maintain open lines of
credit with its major suppliers. Under the Revolving Credit Agreement
(Credit Agreement), effective as of May 10, 1993, the Company had
outstanding as of July 31, 1995, irrevocable standby letters of credit
in the principal amount of $19.9 million for purposes in the ordinary
course of business.
At the Company's option, up to $37.5 million of the unsecured 10 7/8%
Senior Notes (Notes) may be redeemed at 110.875% of the principal
amount at any time prior to February 1, 1998. After such date, they
may not be redeemed until February 1, 2000 when they are redeemable at
105.438% of the principal amount, and thereafter at an annually
declining premium over par until February 1, 2003 when they are
redeemable at par. The Notes were issued under an Indenture which
includes certain restrictions and limitations customary with senior
indebtedness of this type including, but not limited to, the payment
of dividends and the repurchase of capital stock. There are no
sinking fund requirements on the Notes.
As discussed in Note C of Notes to Unaudited Consolidated Condensed
Financial Statements, the Company has entered into interest rate swap
agreements to effectively convert $47.5 million of its fixed rate debt
to variable interest rate debt with maturities ranging from 1996 to
1998. According to the terms of these swap agreements, the variable
interest rates to be paid by the Company are reset on various
predetermined dates which range from July 1995 to March 1998. The
Company may utilize interest rate swaps in the future to manage the
cost of funds.
Also as discussed in Note C of Notes to Unaudited Consolidated
Condensed Financial Statements, effective as of June 30, 1995, the
Company executed an amendment to the Credit Agreement dated as of May
10, 1993. This amendment, which is included as Exhibit 4(a) of this
filing, established a new financial covenant which became necessary
due to decreased refining margins in the third and fourth quarters of
1994 and in early 1995.
At June 30, 1995, the Company was in compliance with all covenants and
provisions of the Credit Agreement, as amended. Meeting the covenants
imposed by the Credit Agreement is dependent, among other things, upon
the level of future earnings and the rate of capital spending. The
Company reasonably expects to continue to be in compliance with the
covenants imposed by the Credit agreement, or a successor agreement,
over the next twelve months.
The existing credit facility expires on May 10, 1996. The Company is
currently negotiating a new credit facility to meet its letter of
credit and working capital requirements and expects a new facility
effective late in the third quarter of 1995.
In support of Crown's strategy of obtaining a greater balance between
gasoline production and retail marketing, 15 Conoco units will be
purchased in North Carolina (13) and Georgia (2) effective August 1.
The high growth area of Greensboro, N.C. represents the largest
concentration of these with nine new locations bringing our presence
in the state to 74 units.
In March 1995, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" (SFAS No. 121). SFAS No. 121 requires an entity to
review long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Implementation of FAS No. 121 is required for financial
statements for fiscal years beginning after December 15, 1995. The
Company does not plan to adopt the provisions of SFAS No. 121 prior to
the effective date and does not believe at this time that there will
be any material impact from the future implementation of SFAS No. 121.
The Company's management is involved in a continual process of
evaluating growth opportunities in its core business as well as its
capital resource alternatives. The Company is prudently proceeding
with the most attractive projects and is likely to have total capital
expenditures of approximately $40 million in 1995. The Company
believes that cash provided from its operating activities, together
with other available sources of liquidity, including the remaining
proceeds of the $125 million of unsecured 10 7/8% Senior Notes (Notes)
and borrowings under the existing Credit Facility or a successor
agreement, will be sufficient over the next several years to make
required payments of principal and interest on its debt, including
interest payments due on the Notes, permit anticipated capital
expenditures and fund the Company's working capital requirements.
The Company places its temporary cash investments in high credit
quality financial instruments which are in accordance with the
covenants of the Company's financing agreements. These securities
mature within ninety days, and, therefore, bear minimal risk. The
Company has not experienced any losses on its investments.
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The Company faces intense competition in all of the business areas in
which it operates. Many of the Company's competitors are
substantially larger and therefore, the Company's earnings can be
affected by the marketing and pricing policies of its competitors, as
well as changes in raw material costs.
Merchandise sales and operating revenues from the Company's
convenience stores are seasonal in nature, generally producing higher
sales and net income in the summer months than at other times of the
year. Gasoline sales, both at the Crown multi-pumps and convenience
stores, are also somewhat seasonal in nature and, therefore, related
revenues may vary during the year. The seasonality does not, however,
negatively impact the Company's overall ability to sell its refined
products.
The Company maintains business interruption insurance to protect
itself against losses resulting from shutdowns to refinery operations
from fire, explosions and certain other insured casualties. Business
interruption coverage begins for such losses at the greater of $5
million or shutdowns for periods in excess of 25 days.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The settlement with the Texas Natural Resource Conservation Commission
(TNRCC) of outstanding proceedings related to air emissions at the
Pasadena refinery described in Item 3 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 was
completed. In addition, the Company was recently served an
Administrative Order from the Environmental Protection Agency (EPA),
regarding alleged exceedances of the Pasadena refinery's Clean Water
Act permit. The Order requires the implementation of corrective
measures to prevent further recurrences, and those corrective measures
have been completed. The Company anticipates that the EPA will seek a
penalty in connection with this Order but does not expect that
penalty to exceed $125,000. There have been no other material
changes in the status of legal proceedings as reported in Item 3.
The Company is involved in various matters of litigation, the ultimate
determination of which, in the opinion of management, is not expected
to have a material adverse effect on the Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit:
4 - (a) Amendment effective as of June 30, 1995 to the Credit
Agreement dated as of May 10, 1993.
20 - Interim Report to Stockholders for the three and six
months ended June 30, 1995
27 - Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed with the
Securities and Exchange Commission during the three months
ended June 30, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report on Form 10-Q for the
quarter ended June 30, 1995 to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN CENTRAL PETROLEUM CORPORATION
John E. Wheeler, Jr.
John E. Wheeler, Jr.,
Senior Vice President - Treasurer and
Controller,
Chief Accounting Officer
and Duly Authorized Officer
Date: August 11, 1995
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