UNITED STATES 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, 1997
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 jurisdiction of (I.R.S. Employer Identification
Number)
incorporation or organization)
One North Charles Street, 21201
Baltimore, Maryland
(Address of principal executive (Zip Code)
offices)
410-539-7400
(Registrant's telephone number, including area code)
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 April 30, 1997 of the Registrant's $5 par
value Class A and Class B Common Stock was 4,817,394 shares and 5,084,086
shares, respectively.
1
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
Table of Contents
<C
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Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
March 31, 1997 and December 31, 1996 3-4
Consolidated Condensed Statements of
Operations
Three months ended March 31, 1997 and 1996 5
Consolidated Condensed Statements of Cash
Flows
Three months ended March 31, 1997 and 1996 6
Notes to Unaudited Condensed Financial 7-10
Statements
Item 2 - Management's Discussion and Analysis of
Financial
Condition and Results of Operations 10-15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 4 - Submission of Matters to a Vote of Security 15
Holders
Item 6 - Exhibits and Reports on Form 8-K 15
Exhibit 11 - Statement re: Computation of
Earnings Per Share
Exhibit 20 - Interim Report to Stockholders
for the three months ended March 31, 1997
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)
March 31 December
31
1997 1996
Assets (Unaudite
d)
Current Assets
Cash and cash equivalents $28,337 $ 3
6,031
Accounts receivable - net 104,318 113,447
Recoverable income taxes 4,898 4,820
Inventories 124,674 66,004
Other current assets 5,246 13,207
Total Current Assets 267,473 233,509
Investments and Deferred Charges 34,086 33,807
Property, Plant and Equipment 630,224 640,238
Less allowance for depreciation 331,710 342,321
Net Property, Plant and Equipment 298,514 297,917
$600,073 $ 5
65,233
<FN>
See notes to unaudited consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED BALANCE SHEETS
Crown Central Petroleum Corporation and Subsidiaries
(Thousands of dollars)
March 31 December
31
1997 1996
Liabilities and Stockholders' Equity (Unaudite
d)
Current Liabilities
Accounts Payable:
Crude oil and refined products $ 139,156$ 1
12,532
Other 13,594 17,130
Accrued Liabilities 45,083 49,594
Current portion of long-term debt 16,381 1,379
Total Current Liabilities 214,214 180,635
Long-Term Debt 126,862 127,196
Deferred Income Taxes 33,619 30,535
Other Deferred Liabilities 37,281 39,492
Common Stockholders' Equity
Common stock, Class A - par value $5 per
share:
Authorized shares -- 15,000,000;
issued and
outstanding shares -- 4,817,394 in 24,087 24,087
1997 and 1996
Common stock, Class B - par value $5 per
share:
Authorized shares -- 15,000,000;
issued and
outstanding shares -- 5,084,086 in
1997 and
5,165,786 in 1996 25,420 25,829
Additional paid-in capital 91,208 91,817
Unearned restricted stock (1,935) (2,951)
Retained earnings 49,317 48,593
Total Common Stockholders' Equity 188,097 187,375
$ 600,073$ 5
65,233
<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
March 31
1997 1996
Revenues
Sales and operating revenues $ 394,513$371,091
Operating Costs and Expenses
Costs and operating expenses 361,708 355,138
Selling and administrative 21,261 23,268
expenses
Depreciation and 7,775 7,977
amortization
Sales of property, plant and (556) 22
equipment
390,188 386,405
Operating Income (Loss) 4,325 (15,314)
Interest and other income 599 866
Interest expense (3,501) (3,562)
Income (Loss) Before Income 1,423 (18,010)
Taxes
Income Tax Expense (Benefit) 699 (5,000)
Net Income (Loss) $ 724$(13,010)
Net Income (Loss) Per Share $ .07$(1.34)
<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)
Three Months Ended
March 31
1997 1996
Net Cash Flows From Operating
Activities
Net cash from operations before
changes in assets and liabilities $ 6 $ (6,666)
,086
Net changes in assets and (20,094) (4,096)
liabilities
Net Cash (Used in) Operating (14,008) (10,762)
Activities
Cash Flows From Investment Activities
Capital Expenditures (7,145) (7,405)
Proceeds from sales of property,
plant
and equipment 878 142
Investments in Subsidiaries 300
Capitalization of software costs (945)
and related business processes
Deferred turnaround maintenance (1,792) (3,376)
Other charges to deferred assets (97) (1,381)
Net Cash (Used in) Investment (8,801) (12,020)
Activities
Cash Flows From Financing Activities
Proceeds from debt and credit 21,000
agreement borrowings
(Repayments) of debt and credit (6,341) (540)
agreement borrowings
Net cash flows from long-term notes 456 (558)
receivable
Issuance of common stock 93
Net Cash Provided by (Used in) 15,115 (1,005)
Financing Activities
Net (Decrease) in Cash and Cash $ ( $ (23,787)
Equivalents 7,694)
<FN>
See notes to unaudited consolidated condensed financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Crown Central Petroleum Corporation and Subsidiaries
March 31, 1997
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 months ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997. 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, 1996.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires Management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 March 31, 1997, approximately 2.9 million barrels of crude oil and refined
products inventory aggregating approximately $48 million were held in excess of
anticipated year-end quantities 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 operating retail marketing facilities and costs of
environmental matters related to ongoing refinery, terminal and retail marketing
operations are recognized as follows. 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 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.
7
Derivative Financial Instruments - Futures, forwards and exchange traded options
are used to minimize the exposure of the Company's refining margins to crude oil
and refined product price fluctuations. The Company also uses the futures
market to manage the price risk inherent in purchasing crude oil in advance of
the delivery date, and in maintaining the inventories contained within its
refinery and pipeline system. 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 other current assets and liabilities to the extent that the
associated refined products have not been sold. 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 effect
the Company's ability to participate in an improvement in related refined
product profit margins.
Credit Risk - The Company is potentially subjected to concentrations of credit
risk with accounts receivable and futures, forwards and exchange traded options
for crude oil and finished products. Because the Company has a large and
diverse customer base with no single customer accounting for a significant
percentage of accounts receivable, there was no material concentration of credit
risk in these accounts at March 31, 1997. The Company evaluates the credit
worthiness of the counterparties to futures, forwards and exchange traded
options and considers non-performance credit risk to be remote. The amount of
exposure with such counterparties is generally limited to unrealized gains on
outstanding contracts.
Stock Based Compensation - The Company has adopted the disclosure provisions
prescribed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation," which permit companies to continue to value their
stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 while providing proforma disclosures
of net income and earnings per share calculated using the fair value based
method.
Statements of Cash Flows - Net changes in assets and liabilities presented in
the Unaudited Consolidated Condensed Statements of Cash Flows is composed of the
following:
Three Months Ended
March 31
1997 1996
(thousands of
dollars)
Decrease (increase) in accounts receivable $ 9,129$ (
17,903)
(Increase) in inventories (58,670) (17,168)
Decrease (increase) in prepaid operating 7,961 (5,762)
expenses and other current assets
Increase in crude oil and refined products 26,624 49,085
payable
(Decrease) in other accounts payable (3,536) (7,552)
(Decrease) in accrued liabilities and other (4,095) (6,606)
deferred liabilities
Decrease in recoverable and deferred income 2,493 1,810
taxes
$(20,094) $ (
4,096)
8
Note B - Inventories
Inventories consist of the following:
March 31 December
31
1997 1996
(thousands of
dollars)
Crude oil $60,168 $ 2
2,150
Refined products 94,776 84,516
Total inventories at FIFO (approximates 154,944 106,666
current cost)
LIFO allowance (43,053) (52,988)
Total crude oil and refined products 111,891 53,678
Merchandise inventory at FIFO 6,115 6,001
(approximates current cost)
LIFO allowance (1,861) (
1,861)
Total merchandise 4,254 4,140
Materials and supplies inventory at FIFO 8,529 8,186
Total Inventory $124,674 $ 6
6,004
Note C - Long-term Debt and Credit Arrangements
Long-term debt consists of the following:
March 31 December
31
1997 1996
(thousands of
dollars)
Unsecured 10.875% Senior Notes $124,716 $ 124,748
Credit Agreement 15,000
Purchase Money Lien 3,067 3,330
Other obligations 460 497
143,243 128,575
Less current portion 16,381 1,379
Long-Term Debt $126,682 $ 127,196
As of March 31, 1997, under the terms of the Credit Agreement dated as of
September 25, 1995, as amended (Credit Agreement), the Company had outstanding
cash borrowings in the principal amount of $15 million, which is included in the
current portion of long-term debt, and outstanding irrevocable standby letters
of credit in the principal amount of $37.4 million. Unused commitments under
the terms of the Credit Agreement totaling $77.6 million were available for
future cash borrowings and issuance of letters of credit at March 31, 1997. As
of March 31, 1997, the Company was in compliance with all covenants and
provisions of the Credit Agreement, as amended, and forecasts that, but there
can be no assurance that, it will remain in compliance for the remainder of the
year. As discussed in the Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition, subsequent to March
31, 1997, the level of cash borrowings and letters of credit outstanding under
the Credit Agreement decreased significantly.
9
The $125 million unsecured 10.875% Senior Notes (Notes), which were issued in
January 1995 under an Indenture are used principally to finance the permanent
capital requirements of the Company. As of March 31, 1997, the Company was in
compliance with the terms of the Indenture. The Indenture includes certain
restrictions and limitations customary with senior indebtedness of this type,
including, but not limited to the amount of additional indebtedness the Company
may incur outside of the Credit Agreement, the payment of dividends and the
repurchase of capital stock . The Company has not paid a dividend on its shares
of common stock since the first quarter, 1992.
Note D - Crude Oil and Refined Product Hedging Activities
The net deferred gain from crude oil and refined product hedging strategies was
$.4 million at March 31, 1997. Included in these hedging strategies are
contracts maturing from May 1997 to December 1997. The Company is using these
contracts to defer the pricing of approximately 1% of its crude oil commitments
and to fix the margin on approximately 4% of its refined products, for the
aforementioned period.
Note E - Calculation of Net (Loss) Income Per Common Share
Net income (loss) per common share for the three months ended March 31, 1997 and
1996 is based on the weighted average of common shares outstanding of 9,733,480
and 9,700,083, respectively.
Note F - Litigation and Contingencies
As discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations, the Company had recorded a liability of approximately
$12.9 million as of March 31, 1997 to cover the estimated costs of compliance
with environmental regulations which are not anticipated to be of capital
nature.
Except as noted above, there have been no material changes in the status of
litigation and contingencies 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, 1996.
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 $23.4 million or 6.3% in
the first quarter of 1997 from the comparable period in 1996. The increase in
Sales and operating revenues was primarily attributable to a 16.3% increase in
the average sales price per gallon of petroleum products which was partially
offset by a 10.4% decrease in petroleum product sales volumes due principally to
the processing agreement with Statoil North America, Inc.which effectively
reduced the Company's refined product available for sale. Additionally, there
was a slight increase in merchandise sales of 3.2% for the three months ended
March 31, 1997 compared to the same 1996 period.
Merchandise gross margin (merchandise gross profit as a percent of merchandise
sales) increased from 27.1% to 30.8% for the first quarter of 1996 and 1997,
respectively. The increase in gross margin is a result of the Company's
merchandise pricing program which has selectively increased targeted merchandise
yet still maintains an everyday low pricing policy which is competitive with
major retail providers in the applicable market area. This marketing strategy
has resulted in average monthly merchandise sales increases, on a same store
basis, of approximately 1.9% for the three months ended March 31, 1997 compared
to the same 1996 period and has contributed to the $1.1 million or 17% increase
in merchandise gross profit. Aggregate year to date merchandise gross profit on
a same store basis increased by 22.8% in 1997 compared to the same 1996 period.
Additionally, gasoline gross margin (gasoline gross profit as a percent of
gasoline sales) at the Company's retail locations increased from $.081 per
gallon to $.116 per gallon, respectively, for the three months ended March 31,
1996 and 1997 due primarily to improved driving conditions which resulted in an
increase in retail gasoline prices driven by an increase in demand for gasoline.
10
Costs and operating expenses increased $6.6 million or 1.8% in the first quarter
of 1997 from the comparable period in 1996. The increase was due to a 19%
increase in the average cost per barrel consumed of crude oil and feedstocks.
These increases were partially offset by decreases in volumes sold as previously
discussed. The results of operations were significantly affected by the
Company's use of the LIFO method to value inventory, which in a period of
falling prises increased the Company's gross margin $.72 per barrel ($9.9
million) in 1997, and decreased gross margin $.57 per barrel ($7.8 million) in
1996 when prices were rising.
Yields of distillates increased slightly to 49,800 bpd (32.4%) for the first
quarter 1997 from 46,300 bpd (31%) for the same period in 1996 while gasoline
production decreased slightly from 85,500 bpd (57.3%) for the first quarter 1996
to 83,200 bpd (54.1%) for the first quarter 1997.
Selling and administrative expenses decreased $2 million or 8.6% for the three
months ended March 31, 1997 compared to the same period in 1996. The decrease
is principally due to the inclusion in 1996 of approximately $1 million in
corporate administrative expenses associated with a management reorganization.
Additionally, in the first quarter of 1997, the Company reduced other corporate
level administrative expenses by approximately $.7 million compared to the same
period in 1996.
Operating costs and expenses for the three months ended March 31, 1997 included
$2.5 million in reductions of accruals related to environmental matters and also
$.2 million of expenses for retail units that have been closed. This compares
to expenses of $.4 million and $.1 million, respectively, for the three months
ended March 31, 1996.
Depreciation and amortization in the first quarter of 1997 was comparable to the
same 1996 period.
Liquidity and Capital Resources
Net cash used in operating activities (including changes in assets and
liabilities) totaled $14 million for the three months ended March 31, 1997
compared to cash used in operating activities of $10.8 million for the three
months ended March 31, 1996. The 1997 outflows consist primarily of net cash
outflows of $20.1 million related primarily to working capital requirements
resulting from increases in the volume of crude oil and finished product
inventories and decreases in accrued interest payable related to the Company's
long-term obligations and decreases in other accounts payable. These working
capital outflows were partially offset by increases in crude oil and refined
products payables, decreases in accounts receivable and decreases in prepaid
operating expenses principally related to prepaid insurance premiums and
deferred losses on futures trading activity. Partially offsetting these cash
outflows was net cash provided by operations of $6.1 million before changes in
assets and liabilities. The 1996 outflows consist of net cash used in
operations before changes in assets and liabilities of $6.7 million and $4.1
million related primarily to working capital requirements resulting from
increases in accounts receivable and in the value of crude oil and finished
products inventories. Additionally, there were increases in prepaid operating
expenses, principally relating to insurance premiums and property taxes, and
decreases in other accounts payable and accrued income and excise tax
liabilities which were partially offset by increases in crude oil and refined
products payables and decreases in recoverable income taxes.
Net cash outflows from investment activities were $8.8 million for the three
months ended March 31, 1997 compared to a net outflow of $12 million for the
same 1996 period. The 1997 amount consists principally of capital expenditures
of $7.1 million (which includes $2.6 million for refinery operations and $2.4
million relating to the marketing area). Additionally, there were refinery
turnaround expenditures of $1.8 million and $.9 million in capitalized
expenditures related to corporate strategic projects. These cash outflows were
partially offset by proceeds from the sale of property, plant and equipment of
$.9 million and decreases in investments in unconsolidated subsidiaries of $.3
million. The 1996 activity relates primarily to $7.4 million of capital
expenditures (which includes $4.5 million relating to refinery operations and
$1.7 million relating to the marketing area). In addition, there were refinery
turnaround expenditures of $3.4 million and increases in other deferred assets
of $1.4 million.
11
Net cash provided by financing activities was $15.1 million for the three months
ended March 31, 1997 compared to cash used in financing activities of $1 million
for the three months ended March 31, 1996. The 1997 cash inflow consists
principally of $14.7 million in net proceeds received from debt and credit
agreement borrowings due primarily to net cash borrowings from the Company's
unsecured revolving Credit Agreement. Additionally, long-term notes receivable
decreased $.4 million. The 1996 cash outflows consist principally of $.5
million in repayments of the Company's debt and credit agreement borrowings and
increases of $.6 million in long-term notes receivable which were partially
offset by proceeds of $.1 million received from the issuance of the Company's
Class B Common Stock resulting from exercises of non-qualified stock options
granted to participants of the Long-Term Incentive Plan.
Cash and cash equivalents at March 31, 1997 were $10.1 million higher than at
March 31, 1996. This increase resulted primarily from cash provided by
operating activities of $24.5 million. Additionally, cash provided by financing
activities for the twelve month period ended March 31, 1997 totaled $14.9
million relating primarily to net borrowings from the Company's debt and credit
agreement facilities of $13.7 million, net proceeds from long-term notes
receivable of $.8 million and net proceeds from the issuance of the Company's
Class B Common Stock resulting from exercises of non-qualified stock options
granted to participants of the Long-Term Incentive Plan of $.4 million.
Partially offsetting these cash inflows was cash used in investment activities
of $29.3 million, which includes capital expenditures of $23.8 million, net of
$3.2 million of proceeds received from the sale of property, plant and
equipment. Additionally, cash outflows from investment activities included $7
million in capitalized expenditures related to corporate strategic projects and
deferred turnaround charges of $3.3 million. These cash outflows were partially
offset by an increase in cash of $1.3 million resulting from decreases in other
deferred assets and decreases in investments in unconsolidated subsidiaries of
$.3 million.
The ratio of current assets to current liabilities at March 31, 1997 was 1.25:1
compared to 1.11:1 at March 31, 1996 and 1.29:1 at December 31, 1996. 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 1.46:1 at March 31, 1997, 1.37:1 at March 31, 1996 and 1.60:1 at
December 31, 1996.
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. The Company believes, but provides no assurance, that
cash provided from its operating activities, together with other available
sources of liquidity will be sufficient to fund future environmental related
expenditures. The Company had recorded a liability of approximately $12.9
million as of March 31, 1997 to cover the estimated costs of compliance with
environmental regulations which are not anticipated to be of a capital nature.
The liability of $12.9 million includes accruals for issues extending past 1997.
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
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.
During the years 1997-1998, the Company estimates environmental expenditures at
the Pasadena and Tyler refineries of at least $3.8 million and $2 million,
respectively. Of these expenditures, it is anticipated that $2.8 million for
Pasadena and $1.5 million for Tyler will be of a capital nature, while $1
million and $.5 million, respectively, will be related to previously accrued
non-capital remediation efforts. At the Company's marketing facilities,
environmental expenditures relating to previously accrued non-capital
compliance efforts are planned totaling approximately $2.8 million through
1998.
The Company's principle purchases (crude oil and convenience store merchandise)
are transacted primarily under open lines of credit with its major suppliers.
The Company maintains two credit facilities to finance its business requirements
and supplement internally generated sources of cash.
12
Under the Revolving Credit Agreement effective September 25, 1995, as amended
(Credit Agreement), as of May 8, 1997, the Company had no cash borrowings and
outstanding irrevocable standby letters of credit in the principal amount of
$15.2 million for purposes in the ordinary course of business. At March 31,
1997, the Company was in compliance with all covenants and provisions of the
Credit Agreement. Meeting the covenants imposed by the Credit Agreement is
dependent, among other things, upon the level of future earnings. The Company
reasonably expects to continue to be in compliance with the covenants imposed by
the Credit Agreement or a successor agreement for the remainder of the year.
At the Company's option, up to $37.5 million of the Unsecured 10.875% 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.
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.
Total capital expenditures and deferred turnaround costs in 1997 are projected
to approximate $43 million. The capital expenditures relate primarily to
planned enhancements at the Company's refineries, retail unit improvements and
to company-wide environmental requirements. The Company believes that cash
provided from its operating activities, together with other available sources of
liquidity, including the Unsecured Credit Agreement or a successor agreement,
will be sufficient over the next several years to make required payments of
principal and interest on its debt, permit anticipated capital expenditures and
fund the Company's working capital requirements. The Unsecured Credit Agreement
expires on September 30, 1997 and the Company intends to renew or replace the
existing facility. Any major acquisition would likely require a combination of
additional debt and equity.
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.
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 in excess of $5 million.
The Company has disclosed in Item 3. Legal Proceedings of the Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, various contingencies
which involve litigation, environmental liabilities and examinations by the
Internal Revenue Service. Depending on the occurrence, amount and timing of an
unfavorable resolution of these contingencies, the outcome of which cannot
reasonably be determined at this time, it is possible that the Company's future
results of operations and cash flows could be materially affected in a
particular quarter or year. However, the Company has concluded, after
consultation with counsel, that there is no reasonable basis to believe that the
ultimate resolution of any of these contingencies will have a material adverse
effect on the Company. Additionally, as discussed in Item 3. Legal Proceedings
of the Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
the Company's collective bargaining agreement at its Pasadena refinery expired
on February 1, 1996, and on February 5, 1996, the Company invoked a lock-out of
employees in the collective bargaining unit. The Company has been operating the
Pasadena refinery without interruption since the lock-out with management and
supervisory personnel and intends to continue full operations until an agreement
is reached with the collective bargaining unit.
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Additional Factors That May Affect Future Results
The Company's operating results have been, and will continue to be, affected by
a wide variety of factors that could have an adverse effect on profitability
during any particular period, many of which are beyond the Company's control.
Among these are the demand for crude oil and refined products, which is largely
driven by the condition of local and worldwide economies, although seasonality
and weather patterns also play a significant part. Governmental regulations and
policies, particularly in the areas of energy and the environment, also have a
significant impact on the Company's activities. Operating results can be
affected by these industry factors, by competition in the particular geographic
markets that the Company serves and by Company-specific factors, such as the
success of particular marketing programs and refinery operations.
In addition, the Company's profitability depends largely on the difference
between market prices for refined petroleum products and crude oil prices. This
margin is continually changing and may significantly fluctuate from time to
time. Crude oil and refined products are commodities whose price levels are
determined by market forces beyond the control of the Company. Additionally,
due to the seasonality of refined products and refinery maintenance schedules,
results of operations for any particular quarter of a fiscal year are not
necessarily indicative of results for the full year. In general, prices for
refined products are significantly influenced by the price of crude oil.
Although an increase or decrease in the price for crude oil generally results in
a corresponding increase or decrease in prices for refined products, often there
is a lag time in the realization of the corresponding increase or decrease in
prices for refined products. The effect of changes in crude oil prices on
operating results therefore depends in part on how quickly refined product
prices adjust to reflect these changes. A substantial or prolonged increase in
crude oil prices without a corresponding increase in refined product prices, a
substantial or prolonged decrease in refined product prices without a
corresponding decrease in crude oil prices, or a substantial or prolonged
decrease in demand for refined products could have a significant negative effect
on the Company's earnings and cash flows.
The Company is dependent on refining and selling quantities of refined products
at margins sufficient to cover operating costs, including any future
inflationary pressures. The refining business is characterized by high fixed
costs resulting from the significant capital outlays associated with refineries,
terminals and related facilities. Furthermore, future regulatory requirements
or competitive pressures could result in additional capital expenditures, which
may or may not produce desired results. Such capital expenditures may require
significant financial resources that may be contingent on the Company's
continued access to capital markets and commercial bank financing on favorable
terms.
Purchases of crude oil supply are typically made pursuant to relatively short-
term, renewable contracts with numerous foreign and domestic major and
independent oil producers, generally containing market-responsive pricing
provisions. Futures, forwards and exchange traded options are used to minimize
the exposure of the Company's refining margins to crude oil and refined product
fluctuations. The Company also uses the futures market to help manage the price
risk inherent in purchasing crude oil in advance of the delivery date, and in
maintaining the inventories contained within its refinery and pipeline system.
Hedging strategies used to minimize this exposure include fixing a future margin
between crude and certain finished products and also hedging fixed price
purchase and sales commitments of crude oil and refined products. 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 effect the Company's ability to participate in an improvement in
related product profit margins. Although the Company's net sales and operating
revenues fluctuate significantly with movements in industry crude oil prices,
such prices do not have a direct relationship to net earnings, which are subject
to the impact of the Company's LIFO method of accounting discussed below. The
effect of changes in crude oil prices on the Company's operating results is
determined more by the rate at which the prices of refined products adjust to
reflect such changes.
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The Company conducts environmental assessments and remediation efforts at
multiple locations, including operating facilities and previously owned or
operated facilities. 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 the amount can be reasonably estimated. Accruals for losses from
environmental remediation obligations generally are recognized no later than
completion of the remedial 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. Expenditures for equipment necessary for
environmental issues relating to ongoing operations are capitalized.
The Company's crude oil, refined products and convenience store merchandise and
gasoline inventories are valued at the lower of cost (based on the last-in,
first-out or LIFO method of accounting) or market, with the exception of crude
oil inventory held for resale which is valued at the lower of cost (based on the
first-in first-out or FIFO method of accounting) or market. Under the LIFO
method, the effects of price increases and decreases in crude oil and other
feedstocks are charged directly to the cost of refined products sold in the
period that such price changes occur. In periods of rising prices, the LIFO
method may cause reported operating income to be lower than would otherwise
result from the use of the FIFO method. Conversely, in periods of falling
prices the LIFO method may cause reported operating income to be higher than
would otherwise result from the use of the FIFO method. In addition, the
Company's use of the LIFO method understates the value of inventories on the
Company's consolidated balance sheet as compared to the value of inventories
under the FIFO method.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
There has been no material change in the status of legal proceedings as reported
in Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
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:
11 - Statement re: Computation of Earnings Per Share
20 - Interim Report to Stockholders for the three months ended March 31,
1997
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 March 31, 1997.
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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 March
31, 1997 to be signed on its behalf by the undersigned thereunto duly
authorized.
CROWN CENTRAL PETROLEUM CORPORATION
Jan L. Ries
Controller
Chief Accounting Officer
and Duly Authorized Officer
Date: May 15, 1997
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