UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
COMMISSION FILE NUMBER 1-1059
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, BALTIMORE, MARYLAND 21201
(Address of principal executive offices) (Zip Code)
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 July 31, 1999 of the Registrant's
$5 par value Class A and Class B Common Stock was 4,817,394 shares and
5,197,144 shares, respectively.
Page 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, 1999 and December 31, 1998 3-4
Consolidated Condensed Statements of Operations
Three months ended June 30, 1999 and 1998 5
Consolidated Condensed Statements of Cash Flows
Three months ended June 30, 1999 and 1998 6
Notes to Unaudited Consolidated Condensed
Financial Statements 7-12
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 20-21
Exhibit 10 - First Amendment to Crude Oil
Processing Agreement between
Statoil Marketing and Trading
(U.S.) Inc. and Crown Central
Petroleum Corporation 1998-2000
Exhibit 20 - Interim Report to Stockholders
for the six months ended
June 30, 1999
Exhibit 27 (a) - Financial Data Schedule
for the six months ended
June 30, 1999
Exhibit 27 (b) - Financial Data Schedule
for the six months ended
June 30, 1998 - revised
SIGNATURE 21
Page 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
1999 1998
-------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,509 $ 14,470
Restricted cash - 12,000
Accounts receivable - net 96,296 60,227
Recoverable income taxes 766 616
Inventories 90,213 80,104
Other current assets 4,645 1,411
-------- --------
TOTAL CURRENT ASSETS 204,429 168,828
INVESTMENTS AND DEFERRED CHARGES 46,183 47,044
PROPERTY, PLANT AND EQUIPMENT 674,977 664,822
Less allowance for depreciation (373,381) (362,684)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 301,596 302,138
-------- --------
$552,208 $518,010
======== ========
<FN>
See notes to unaudited consolidated condensed financial statements.
</FN>
Page 3
CONSOLIDATED CONDENSED BALANCE SHEETS
Crown Central Petroleum Corporation and Subsidiaries
(Thousands of dollars)
June 30 December 31
1999 1998
-------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable:
Crude oil and refined products $91,414 $48,466
Other 28,187 36,750
Accrued Liabilities 64,363 53,730
Short-term borrowings 34,756 10,000
Current portion of long-term debt 619 1,307
-------- --------
TOTAL CURRENT LIABILITIES 219,339 150,253
LONG-TERM DEBT 129,521 129,899
DEFERRED INCOME TAXES 10,529 23,947
OTHER DEFERRED LIABILITIES 36,678 35,138
COMMON STOCKHOLDERS' EQUITY
Common stock, Class A - par value $5
per share:
Authorized shares -- 7,500,000; issued
and outstanding shares -- 4,817,394 in
1999 and 1998 24,087 24,087
Common stock, Class B - par value $5
per share:
Authorized shares -- 7,500,000; issued
and outstanding shares -- 5,197,144
in 1999 and 5,236,217 in 1998 25,986 26,181
Additional paid-in capital 92,316 91,466
Unearned restricted stock (1,928) (1,500)
Retained earnings 15,680 38,539
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY 156,141 178,773
-------- --------
$552,208 $518,010
======== ========
<FN>
See notes to unaudited consolidated condensed financial statements.
</FN>
Page 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
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES
Sales and operating revenues $281,413 $339,154 $506,578 $666,793
OPERATING COSTS AND EXPENSES
Costs and operating expenses 260,448 302,246 465,016 616,741
Selling expenses 21,342 22,012 43,926 42,142
Administrative expenses 5,145 5,384 10,707 10,509
Depreciation and amortization 9,091 8,454 17,880 16,618
Sales and abandonments of property,
plant and equipment, net (754) (231) (391) (251)
-------- -------- -------- --------
295,272 337,865 537,138 685,759
-------- -------- -------- --------
OPERATING (LOSS) INCOME (13,859) 1,289 (30,560) (18,966)
Interest and other income 201 177 2,493 1,770
Interest expense (3,613) (3,641) (7,554) (7,171)
-------- -------- -------- --------
(LOSS) BEFORE INCOME TAXES (17,271) (2,175) (35,621) (24,367)
INCOME TAX (BENEFIT) (6,242) (24) (12,762) (8,473)
-------- -------- --------- ---------
NET (LOSS) $(11,029) $ (2,151) $ (22,859) $ (15,894)
======== ======== ========= =========
NET (LOSS) PER SHARE:
Basic and Diluted $ (1.12) $ (.22) $ (2.32) $ (1.62)
======== ======== ========= =========
<FN>
See notes to unaudited consolidated condensed financial statements.
</FN>
Page 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Crown Central Petroleum Corporation and Subsidiaries
(Thousands of dollars)
(Unaudited)
Six Months Ended June 30
1999 1998
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net cash from operations before
changes in assets and liabilities $(13,996) $ (7,384)
Net changes in assets and liabilities 5,255 (11,745)
-------- --------
NET CASH (USED IN) OPERATING ACTIVITIES (8,741) (19,129)
-------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Capital expenditures (12,910) (16,734)
Proceeds from sales of property, plant
and equipment 1,194 485
Investments in Subsidiaries - 164
Capitalization of software costs (1,214) (1,789)
Deferred turnaround maintenance (5,513) (2,276)
Other charges to deferred assets 1,017 (15)
-------- --------
NET CASH (USED IN) INVESTMENT ACTIVITIES (17,426) (20,165)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt and credit agreement borrowings 254,014 64,745
(Repayments) of debt and credit agreement borrowings (230,340) (38,818)
Net cash flows from long-term notes receivable 532 48
Issuance of common stock - 597
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,206 26,572
-------- --------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS $ (1,961) $(12,722)
======== ========
<FN>
See notes to unaudited consolidated condensed financial statements.
</FN>
Page 6
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------
Crown Central Petroleum Corporation and Subsidiaries
June 30, 1999
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, 1999 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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, 1998.
The following summarizes the significant accounting policies and
practices followed by the Company:
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of Crown Central Petroleum
Corporation and all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The
Company's investments in unconsolidated affiliates are accounted
for under the equity method.
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.
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 owed to other
companies are reflected in the inventory accounts.
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.
RECLASSIFICATIONS: The Company has reclassified certain prior year
balance in the Unaudited Consolidated Condensed Balance Sheet to
conform to the current year presentation.
[This space was intentionally left blank]
Page 7
NOTE B - SUPPLEMENTARY CASH FLOW INFORMATION
Net changes in assets and liabilities presented in the Unaudited
Consolidated Condensed Statements of Cash Flows are comprised of
the following:
Six Months Ended
June 30
1999 1998
-------- --------
(thousands of dollars)
Decrease in restricted cash $ 12,000 $ -
(Increase) decrease in accounts
receivable - net (36,069) 24,210
(Increase) in inventories (10,109) (21,185)
(Increase) in other current assets (3,234) (1,566)
Increase (decrease) in crude oil
and refined products payable 42,948 (5,140)
(Decrease) increase in other
accounts payable (8,563) 425
Increase (decrease) in accrued
liabilities and other deferred liabilities 8,712 (7,983)
(Increase) in recoverable and deferred
income taxes (430) (506)
------- --------
$ 5,255 $(11,745)
======= ========
NOTE C - INVENTORIES
Inventories consist of the following:
June 30 December 31
1999 1998
-------- ----------
(thousands of dollars)
Crude oil $ 29,636 $ 26,489
Refined products 68,449 39,776
-------- --------
Total inventories at FIFO
(approximates current cost) 98,085 66,265
LIFO allowance (21,641) (184)
-------- --------
Total crude oil and refined products 76,444 66,081
-------- --------
Merchandise inventory at FIFO
(approximates current cost) 7,659 7,950
LIFO allowance (2,515) (2,515)
-------- --------
Total merchandise 5,144 5,435
-------- --------
Materials and supplies inventory at FIFO 8,625 8,588
-------- --------
TOTAL INVENTORY $ 90,213 $80,104
======== ========
<FN>
Due to the increase in refined products prices, the reserve of
approximately $7.1 million recorded as of December 31, 1998 to
reflect valuing inventories at lower of cost or market was
reversed during the first quarter of 1999.
</FN>
[This space was intentionally left blank]
Page 8
NOTE D - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
June 30 December 31
1999 1998
-------- --------
(thousands of dollars)
10 7/8% Senior Notes due 2005 $124,826 $124,810
Purchase Money Liens 5,136 6,159
Other obligations 178 237
-------- --------
130,140 131,206
Less current portion (619) (1,307)
-------- --------
LONG-TERM DEBT $129,521 $129,899
======== ========
The 10 7/8% Senior Notes due 2005 (Notes) were issued under an
Indenture, which includes certain restrictions and limitations,
including the payment of dividends, repurchase of capital stock and the
incurrence of additional debt. As of June 30, 1999, the Indenture
substantially restricted the Company's ability to borrow outside of the
Loan and Security Agreement, as amended (Secured Credit Facility), and
precluded the payment of dividends.
The Secured Credit Facility, provides for up to $125 million
availability for cash borrowing and letter of credit needs. The Secured
Credit Facility, which has a three-year term beginning on December 10,
1998 and is secured by certain current assets of the Company, is
intended for general corporate and working capital requirements. It
includes limitations on additional indebtedness and cash dividends and
requires compliance with certain financial covenants including minimum
levels of working capital and net worth. Up to $75 million of the
Secured Credit Facility is subject to the availability of eligible
collateral while the remaining $50 million, which is provided through a
related party of the Company, is not subject to such eligibility
limitations. This additional availability is provided to the Company
under terms and conditions that are not less favorable than the Company
could obtain from independent third parties, as was evidenced by a
fairness opinion the Company obtained from an independent investment
banking firm of national reputation. At June 30, 1999, eligible
collateral totaled $81.7 million, exceeding the eligible collateral
threshold provided by the Secured Credit Facility. Borrowings under
the Secured Credit Facility bear interest based on the prime rate or
LIBOR-based rates. In addition, the Company pays commitment fees on
the unused portion of the Secured Credit Facility.
As of June 30, 1999, the Company had cash borrowings of $34.8 million
bearing an annual interest rate of 8.5% and an outstanding letter of
credit for $13.2 million. The unused commitments at June 30, 1999 were
$77.0 million. The Company had cash borrowings of $10.0 million
bearing an annual interest rate of 8.0% and an outstanding letter of
credit for $13.2 million under the Secured Credit Facility at December
31, 1998. As of August 9, 1999, there were no outstanding letters of
credit, cash borrowings were $12.6 million and unused commitments were
$112.4 million.
NOTE E - CRUDE OIL AND REFINED PRODUCT HEDGING ACTIVITIES
The net deferred loss from futures contracts included in crude oil and
refined product hedging strategies was approximately $0.3 million at
June 30, 1999. Included in these hedging strategies are futures
contracts maturing in July and September 1999. The Company is using
these contracts to defer the pricing of less than 1% of its crude oil
commitments for the aforementioned period.
NOTE F - CALCULATION OF NET (LOSS) PER COMMON SHARE
The average outstanding and equivalent shares excludes 175,252 and
231,750 shares of Performance Vested Restricted Stock (PVRS) registered
to participants in the 1994 Long-Term Incentive Plan (Plan) at June 30,
1999 and 1998, respectively. The PVRS shares are not considered
outstanding for earnings per share calculations until the shares are
released to the Plan participants.
Page 9
The following tables provide a reconciliation of the basic and diluted
earnings per share calculations:
Three Months Ended June 30
--------------------------
1999 1998
-------- --------
(dollars in thousands, except per share data)
(LOSS) INCOME APPLICABLE TO COMMON SHARES
- -----------------------------------------
Net (loss) $ (11,029) $ (2,151)
=========== ==========
Common shares outstanding at
April 1, 1999 and 1998, respectively 10,053,611 9,984,048
Restricted shares held by the Company at April 1,
1999 and 1998, respectively (182,180) (147,300)
Weighted average effect of shares of common stock
issued for stock option exercises - 2,167
----------- ----------
Weighted average number of common shares outstanding,
as adjusted at June 30, 1999 and 1998, respectively:
Basic and Diluted 9,871,431 9,838,915
=========== ==========
EARNINGS PER SHARE:
- ------------------
Net (loss) - basic and diluted $ (1.12) $ (.22)
=========== ==========
Six Months Ended June 30
--------------------------
1999 1998
-------- --------
(dollars in thousands, except per share data)
(LOSS) INCOME APPLICABLE TO COMMON SHARES
- -----------------------------------------
Net (loss) $ (22,859) $ (15,894)
=========== ===========
Common shares outstanding at
January 1, 1999 and 1998, respectively 10,053,611 10,058,168
Restricted shares held by the Company at
January 1, 1999 and 1998, respectively (182,180) (260,700)
Weighted average effect of shares of common stock
issued for stock option exercises - 27,844
----------- -----------
Weighted average number of common shares outstanding,
as adjusted at June 30, 1999 and 1998, respectively:
Basic and Diluted 9,871,431 9,825,312
=========== ===========
EARNINGS PER SHARE:
- ------------------
Net (loss) - basic and diluted $ (2.32) $ (1.62)
=========== ===========
NOTE G - LITIGATION AND CONTINGENCIES
Motions for Partial Summary Judgement have now been filed with respect to
all of the individual claims of the eight named plaintiffs in the BURRELL
case. There has been no other material change 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, 1998.
Page 10
NOTE H - SEGMENT INFORMATION
The Company has two reportable segments: refinery operations and retail
marketing. The Company's refinery operations segment consists of two high-
conversion petroleum refineries, one located in Pasadena, Texas and the
other located in Tyler, Texas. The Pasadena and Tyler refineries sell
petroleum products directly to other oil companies, jobbers, and independent
marketers. In addition, the Pasadena refinery sells directly into the Gulf
Coast spot market as well as to an independent network of dealer-operated
retail units that sell Crown-branded petroleum products and to the Company's
own retail segment. The Company's retail segment sells petroleum products
and convenience store merchandise directly to retail customers.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, interest income or expense, and
corporate expenses. The accounting policies of the reportable segments are
the same as those disclosed in the summary of accounting policies described
in Note A of Notes to Consolidated Financial Statements in the Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
Intersegment sales and transfers are recorded at market prices. Income or
losses on intersegment sales are eliminated in consolidation.
The Company's reportable segments are business divisions that offer
different operating and gross margin characteristics and different
distribution methods. The reportable segments are each managed separately
due to their distinct operating characteristics.
Six months ended June 30, 1999:
Refinery Retail
Operations Marketing Totals
---------- --------- --------
(thousands of dollars)
Revenues from external customers $ 300,305 $206,914 $507,219
Intersegment revenues 167,255 - 167,255
(Loss) income (18,023) 2,332 (15,691)
Capital expenditures 5,962 5,814 11,776
Six months ended June 30, 1998:
Refinery Retail
Operations Marketing Totals
---------- --------- --------
(thousands of dollars)
Revenues from external customers $448,505 $218,233 $666,738
Intersegment revenues 120,797 - 120,797
(Loss) income (11,670) 3,518 (8,152)
Capital expenditures 5,402 10,695 16,097
Sales and operating revenues reconciliation:
Six months ended June 30
1999 1998
-------- --------
(thousands of dollars)
Total external revenues for reportable segments $507,219 $666,738
Intersegment revenues for reportable segments 167,255 120,797
Other adjustments (641) 55
Elimination of intersegment revenues (167,255) (120,797)
-------- --------
Sales and operating revenues $506,578 $666,793
======== ========
Page 11
Other adjustments include items that are reported as a component of
Sales and operating revenues for management reporting purposes but are
reported as a component of operating expenses in accordance with
generally accepted accounting principles.
(Loss) income reconciliation:
Six months ended June 30
1999 1998
-------- ---------
(thousands of dollars)
Total (loss) for reportable segments $(15,691) $ (8,152)
Other (loss) income (781) 1,557
Unallocated amounts:
Corporate (expenses) (12,270) (11,657)
Net interest (expense) (6,879) (6,113)
-------- --------
(Loss) before income taxes $(35,621) $(24,367)
======== ========
Capital expenditure reconciliation:
Six months ended June 30
1999 1998
-------- --------
(thousands of dollars)
Total capital expenditures for reportable Segments $ 11,776 $ 16,097
Corporate and other capital expenditures 1,134 637
-------- --------
Total $ 12,910 $ 16,734
======== ========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's Sales and operating revenues decreased $57.7 million or
17.0% in the second quarter of 1999 from the comparable period in 1998.
The decrease in Sales and operating revenues was primarily attributable
to a 27.4% decrease in petroleum product sales volume, which was
partially offset by a 7.4% increase in the average sales price per
gallon of petroleum products. Sales and operating revenues decreased
$160.2 million or 24.0% for the six months ended June 30, 1999 compared
to the six months ended June 30, 1998. The year-to-date decrease was
primarily attributable to a 24.6% decrease in petroleum product sales
volumes as well as 6.7% decrease in the average sales price per gallon
of petroleum products. The decreases in sales volume for the three and
six months ended June 30, 1999 are primarily due to the Company's crude
oil based processing agreement executed in the fourth quarter of 1998
(Processing Agreement) with Statoil Marketing and Trading (US) Inc.
(Statoil). The Company processes an average of 35,000 barrels per day
(bpd) of crude oil supplied and owned by Statoil and returns to Statoil
an average of 35,000 bpd of refined petroleum products, which
effectively decreased the Company's refined products available for
sale. Volumes were also adversely impacted in the second quarter of
1999 by refinery downtime as discussed below and also scheduled
refining production decreases in response to low refining industry
margins. The decreases in Sales and operating revenues from petroleum
products were partially offset by increases of $2.8 million or 9.0% and
$6.5 million or 11.4% in merchandise sales for the three and six months
ended June 30, 1999 compared to the same periods last year.
Merchandise sales increased primarily due to the increases in the
selling price of tobacco-related products, beer and wine, and to some
extent more accurate pricing as a result of the implementation of the
price book module of the retail point of sale (POS) system.
Costs and operating expenses decreased $41.8 million or 13.8% in the
second quarter of 1999 from the comparable period in 1998. The
decrease was primarily due to the decrease in petroleum product volumes
sold as previously discussed. The decrease in volumes was partially
offset by increases in the average cost per barrel consumed of crude
oil and feedstocks from $15.09 for the second quarter of 1998 to $16.52
for the second quarter of 1999. Costs and
Page 12
operating expenses decreased $151.7 million or 24.6% for the six months
ended June 30, 1999 from the comparable period in 1998 due primarily to
a decrease in the average cost per barrel consumed of crude oil and
feedstocks as well as a 14.1% decrease in refining sales volumes as
discussed in the previous paragraph. In addition, the Company's
results of operations were significantly affected by its use of the
LIFO method to value inventory, which in a period of rising prices,
decreased the Company's gross margin by $12.3 million and $21.5 million
for the three and six months ended June 30, 1999, respectively, whereas
the Company's gross margin increased $0.7 million and $15.7 million in
its respective comparable periods in 1998 when prices were falling.
Due to the increases in refined product prices, the reserve of
approximately $7.1 million recorded as of December 31, 1998 to reflect
valuing inventory at the lower of cost or market was reversed in the
first quarter of 1999 which favorably impacted the Company's Operating
(loss) and Net (loss) for the six months ended June 30, 1999. Cost and
operating expenses were also favorably impacted by cost reduction
initiatives at the refineries resulting in savings of $2.1 million for
the three months ended and $4.8 million for six months ended June 30,
1999 compared to the same periods ended June 30, 1998. These refinery
operating cost savings were partially offset by an increase in legal
expenses of approximately $2.0 million and by the weather related
refinery downtime as discussed below of approximately $4.0 million for
the six months ended June 30, 1999.
The aforementioned decrease in Sales and operating revenues coupled
with the decrease in Costs and operating expenses resulted in an
overall decrease in gross margin of $15.9 million for the second
quarter of 1999 compared to the same 1998 period. The gross margin for
the six months ended June 30, 1999 decreased $8.5 million for the six
months ended June 30, 1999 compared to the same 1998 period. The
decrease in average gross margin per gallon of petroleum products
reflected similar industry-wide decreases due to excess supply of crude
oil and refined petroleum products. Additionally, increases in the
cost of the Company's crude oil and purchased feedstocks reflect
industry-wide increases in prices of these products, which prevailed
for most of the quarter. With OPEC's announced reduction late in the
first quarter of crude oil production, WTI crude oil prices increased
from $16.63 per barrel at the beginning of the second quarter to $19.32
per barrel by the end of the quarter. This increase in price
significantly impacted the LIFO inventory provision for the second
quarter of 1999.
Refinery gasoline production decreased to 81,400 bpd (59.1%) for the
second quarter of 1999 from 92,200 bpd (55.4%) for the second quarter
of 1998, while distillate production decreased to 40,500 bpd (29.4%)
for the second quarter of 1999 from 52,700 bpd (31.7%) for the same
period in 1998. Yields of gasoline decreased to 76,300 bpd (56.2%) for
the six months ended June 30, 1999 from 87,800 (55.6%) for the same
period in 1998. While distillate production decreased to 40,200
(29.6%) from 49,600 (31.4%) for the same periods ended June 30, 1999
and 1998, respectively. These decreases in refinery production volumes
and yields are due primarily to the planned reduction in refinery
production volumes as a result of poor industry-wide refining margins
during the period. Refinery operations at Pasadena were impacted
significantly by weather related incidents in the second quarter. High
winds damaged the main cooling tower, resulting in substantially
reduced throughputs in May and an electrical storm in June damaged the
FCC unit, resulting in a two week shut down. The Tyler refinery
operated at optimum capacity during the quarter while achieving
reductions in operating costs. Both refineries are currently operating
at high efficiency levels.
Gasoline gross margin (gasoline net sales less cost of sales) at the
Company's retail locations increased slightly from $.090 per gallon to
$.092 per gallon, respectively, for the six months ended June 30, 1998
and 1999. For the second quarter ended June 30, 1999, gasoline gross
margin increased significantly to $.098 from $.074 per gallon compared
to the same period of 1998. These increases were due primarily to a
more aggressive gasoline pricing strategy carried out during the second
quarter of 1999. Aggregate gasoline gross margin percentage (gasoline
gross margin as a percentage of sales) on a same store basis decreased
2.2% for the six months ended June 30, 1999 from the comparable period
in 1998 due primarily to a decrease of 4.6% in gallons sold measured on
a same store basis. This decrease in volume is principally the result
of a more aggressive pricing strategy coupled with increased
competition. Aggregate gasoline gross margin percentage for the second
quarter increased 23% from the comparable period in 1998 due primarily
to the aforementioned pricing strategy.
Merchandise gross margin (merchandise gross profit as a percent of
merchandise sales) increased slightly from 29.9% for the second quarter
1998 to 30.8% for the second quarter of 1999. Merchandise gross margin
also increased slightly from 30.5% for the six months ended June 30,
1998 to 30.7% for the same period of 1999. The increases in gross
margin are a result of the merchandise price increases and more
accurate pricing as a result of the implementation of the POS price
book module previously noted. On a same store basis, merchandise gross
margin increased approximately 13.3% for the three months ended June
30, 1999 compared to the same 1998 period and resulted in a $1.0
million increase in merchandise gross profit. Aggregate year to date
merchandise gross profit on a same store basis increased by 11.8% in
1999 compared to the same period in 1998.
Page 13
Selling expenses increased $1.8 million or 4.2% for the six months
ended June 30, 1999 compared to the same period in 1998. The increase
is principally due to increases in labor costs and environmental and
maintenance costs at the Company's retail sites. Selling expenses
decreased $0.7 million or 3.1% for the three months ended June 30, 1999
due to a slight reduction in marketing promotional related expenses
compared to the same period in 1998.
Administrative expenses for the six months ended June 30, 1999
increased $0.2 million or 1.9% compared to the six months ended June
30, 1998 due primarily to increases in technology related expenses.
For the three months ended June 30, 1999 compared to the same period in
1998, Administrative expenses decreased $0.2 million or 4.4% due to a
slight decrease in rent expense and labor costs at the Company's
administrative offices.
Depreciation and amortization in the second quarter of 1999 increased
$0.6 million or 7.5% from the comparable 1998 period. Similarly,
Depreciation and amortization expenses increased $1.3 million or 7.6%
for the six months ended June 30, 1999 from the comparable 1998 period.
This increase is primarily attributable to increases in the
depreciable base of the Company's computer systems related to the
company-wide computer upgrade projects.
Earnings Before Interest, Taxes, Depreciation, Amortization,
Abandonments of Property, Plant and Equipment, and LIFO inventory
adjustments (EBITDAAL), which measures the Company's cash flow on a
FIFO inventory basis increased dramatically from a cash flow deficit of
$17.6 million for the six months ended June 30, 1998 to a positive cash
flow of $10.2 million for the six months ended June 30, 1999. The
increase principally reflects the Company's demonstrated performance of
realizing available industry margins.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities (including net changes in assets
and liabilities) totaled $8.7 million for the six months ended June 30,
1999 compared to cash used in operating activities of $19.1 million for
the six months ended June 30, 1998. The 1999 outflows consist
primarily of net cash used in operations before changes in assets and
liabilities totaling $14.0 million. Partially offsetting these cash
outflows were cash inflows from changes in assets and liabilities of
$5.3 million. These cash inflows were due primarily to increases in
crude oil and finished product payables due to increases in the
purchase prices of crude oil and refined products, as well as increases
in tax accruals. These working capital inflows were partially offset
by increases in accounts receivable (due to market pricing and timing
of cash receipts), increases in the LIFO carrying value of crude oil
and finished product inventories, and decreases in other accounts
payable. The 1998 outflows consist primarily of cash outflows from
changes in assets and liabilities of $11.7 million due primarily to
increases in the volume of crude oil and finished product inventories,
decreases in federal excise and refinery operating tax accruals and
decreases in incentive plan accruals. Additionally, there were
decreases in crude oil and refined products payables, as well as
increases in prepaid operating expenses. These working capital
outflows were partially offset by decreases in accounts receivable and
increases in other accounts payable. Cash used in operations before
changes in assets and liabilities totaled $7.4 million for the six
months ended June 30, 1998.
Net cash outflows from investment activities totaled $17.4 million for
the six months ended June 30, 1999 compared to a net outflow of $20.1
million for the same 1998 period. The 1999 amount consists principally
of capital expenditures of $12.9 million (which includes $6.4 million
for refinery operations, $5.5 million relating to the marketing area
and $1.0 million for corporate projects). Additionally, there were
refinery turnaround expenditures of $5.5 million and $1.2 million in
capitalized software costs. These cash outflows were partially offset
by proceeds from the sale of property, plant and equipment of $1.2
million and decreases in other charges due to cash receipts from a
litigation settlement of $1.7 million. The 1998 outflows consist
primarily of capital expenditures of $16.7 million (which includes
$10.4 million relating to the marketing area and $6.3 million for
refinery operations). Additionally, there were $2.3 million in
refinery deferred turnaround expenditures and $1.8 million in
capitalized software costs. These cash outflows were partially offset
by proceeds from the sale of property, plant and equipment of $0.5
million.
Net cash provided by financing activities was $24.2 million for the six
months ended June 30, 1999 compared to cash provided by financing
activities of $26.6 million for the six months ended June 30, 1998.
The 1999 cash inflow consists principally of $23.7 million in net
proceeds ($254.0 million in borrowings and $230.3 million in
repayments) received from debt and credit agreement borrowings due
primarily to net cash borrowings from the Company's Secured Credit
Facility. The 1998 cash inflow consists primarily of $25.9 million in
net proceeds ($64.7 million in borrowings and $38.8 million in
repayments) received from debt and credit agreement borrowings due
primarily to net cash
Page 14
borrowings from the Company's prior unsecured revolving Credit
Agreement. Additionally, 1998 cash inflows include $0.6 million
received from the issuance of the Company's Class B Common Stock
resulting from exercises of non-qualified stock options granted to
participants in the Company's Long-Term Incentive Plans.
The ratio of current assets to current liabilities at June 30, 1999
was 0.93:1 compared to 1.30:1 at June 30, 1998 and 1.12:1 at December
31, 1998. 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 1.04:1 at June
30, 1999, 1.36:1 at June 30, 1998 and 1.14:1 at December 31, 1998.
The reduction in the current ratio at June 30, 1999 compared to
December 31, 1998 and June 30, 1998 is primarily due to an increase in
the LIFO provision of $21.5 million and $37.2 million, respectively
and the increase in short-term borrowings as noted below. The
increase in the LIFO provision is primarily the result of crude oil
and petroleum product price increases at June 30, 1999 compared to
prices at December 31, 1998 and June 30, 1998. Further, the Company
has increased the use of its Secured Credit Facility to help meet its
general corporate and working capital requirements. The Company's
Short-term borrowings increased from $10.0 million at December 31,
1998 to $34.6 million at June 30, 1999. There were no Short-term
borrowings outstanding at June 30, 1998. As of August 9, 1999, the
Company has reduced its Short-term borrowings to $12.6 million.
Furthermore, the Company is in the process of negotiating with other
companies to sell approximately 14 of its non-strategic operating
retail locations and auctioning off approximately 20 of its closed
retail facilities. The Company expects to realize in excess of $10
million from these sales by the end of the year. The anticipated net
realizable value is in excess of the carrying value of these stores
and, therefore, is expected to result in a favorable impact on net
income.
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
$6.8 million as of June 30, 1999 to cover the estimated costs of
compliance with environmental regulations that are not anticipated to
be of a capital nature. The liability of $6.8 million includes
accruals for issues extending past 1999.
Environmental liabilities are subject to considerable uncertainties
that 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 that would be
expected to have a material adverse effect on the Company.
During 1999, the Company estimates environmental expenditures at the
Pasadena and Tyler refineries of at least $5.3 million and $1.5
million, respectively. Of these expenditures, it is anticipated that
$4.3 million for Pasadena and $1.0 million for Tyler will be of a
capital nature, while $1.0 million and $0.5 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 $1.6 million during 1999.
The Company's principal purchases (crude oil and convenience store
merchandise) are transacted primarily under open lines of credit with
its major suppliers. The Company maintains a credit facility to
finance its working capital requirements and supplement internally
generated sources of cash.
The Secured Credit Facility, provides for up to $125 million of credit
availability for cash borrowing and letter of credit needs. The Secured
Credit Facility, which has a three-year term and is secured by certain
current assets of the Company, is intended for general corporate and
working capital requirements. It includes limitations on additional
indebtedness, payments of cash dividends, and requires compliance with
certain financial covenants including minimum levels of working capital
and net worth. Up to $75 million of the Secured Credit Facility is
subject to the availability of eligible collateral while the remaining
$50 million is provided through a related party of the Company.
Page 15
See the Company's Proxy Statement for Annual Meeting of Stockholders
dated March 26, 1999. At June 30, 1999, eligible collateral totaled
$81.7 million, exceeding the eligible collateral threshold provided by
the Secured Credit Facility. The increase in eligible collateral as of
June 30, 1999 compared to March 31, 1999 is due to an increase in
inventory levels and to increases in crude oil and refined products
prices. The Company expects December 31, 1999 inventory levels to be
consistent with the levels held at December 31, 1998. Borrowings under
the Secured Credit Facility bear interest based on the prime rate or
LIBOR-based rates. In addition, the Company pays commitment fees on
the unused portion of the Secured Credit Facility.
As of June 30, 1999, the Company had cash borrowings of $34.8 million
bearing an annual interest rate of 8.5% and an outstanding letter of
credit for $13.2 million. The unused commitments at June 30, 1999 were
$77.0 million. As of August 9, 1999, there were no outstanding letters
of credit, cash borrowings were $12.6 million and unused commitments
were $112.4 million.
The 10 7/8% Senior Notes due 2005 (Notes) were issued under an
Indenture which includes certain restrictions and limitations,
including the payment of dividends, repurchase of capital stock and the
incurrence of additional debt. As of June 30, 1999, the Indenture
substantially restricted the Company's ability to borrow outside of the
Secured Credit Facility and precluded the payment of dividends. The
Company has not paid a dividend on its shares of common stock since the
first quarter of 1992.
The purchase money liens outstanding as of June 30, 1999 primarily
include the financing of land, buildings and equipment at certain
service station and convenience store locations. These borrowings are
generally repayable over 60 to 72 months and bear a fixed rate of
interest. The purchase money liens are secured by assets having a cost
basis of $7.1 million. The remaining principal balance is payable
monthly through May 2004.
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's estimate of planned total
capital expenditures and deferred turnaround costs in 1999 has
decreased from $42 million to a projected estimate of approximately $35
million. The revised estimate includes amounts necessary for
enhancements at the Company's refineries and retail units, and for
environmental requirements. The Company believes, but there can be no
assurance, that cash provided from its operating activities, together
with other available sources of liquidity, including the Secured Credit
Facility, or a successor agreement, will be sufficient over the next
several quarters to make required payments of principal and interest on
its debt, permit anticipated capital expenditures and fund the
Company's working capital requirements. The Secured Credit Facility
expires on December 10, 2001 but may be extended for additional one-
year periods upon agreement between the Company and the Agent.
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 temporary cash
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 $2 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, 1998,
various contingencies which involve litigation and environmental
liabilities. 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
Page 16
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, 1998, 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.
Since that time, the union to which the collective bargaining unit
belongs has waged an orchestrated corporate campaign including
sponsoring a boycott of the Company's retail facilities and supporting
various lawsuits against the Company. (Also, see Item 3. Legal
Proceedings as previously discussed in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.) The Company
has been operating the Pasadena refinery since the lock-out and intends
to continue to do so during the negotiation period with the collective
bargaining unit. Management does not believe that the corporate
campaign has had a material adverse impact on the Company's operations.
However, it is possible that the corporate campaign could have a
material adverse impact on the Company's future results of operations.
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
fluctuate significantly 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 oil 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
Page 17
relationship to net earnings, which are subject to the impact of the
Company's LIFO method of accounting. 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.
The following table estimates the impact on future earnings before
taxes of the Company's outstanding derivative commodity instruments
held at June 30, 1999 based on crude oil and refined products market
prices at June 30, 1999 (market prices) and the sensitivity of those
instruments to a 10% increase or decrease in market prices:
ANTICIPATED GAIN (LOSS)
------------------------------------------------
10% Increase in 10% Decrease in
At Market Prices Market Prices Market Prices
---------------- ------------- -------------
(in thousands)
Commodity futures $(402) $(1,686) $881
Commodity forwards 133 432 (166)
----- ------- ----
Total $(269) $(1,254) $715
===== ======= ====
Cash borrowings under the Secured Credit Facility bear interest
based on the prime rate or LIBOR based rates. As such, changes in
these rates could significantly impact the level of earnings in
future periods.
As previously disclosed in Item 14, Exhibit 13(a) of the Company's
Form 10-K for the fiscal year ended December 31, 1998, the Company
has engaged Credit Suisse First Boston (CSFB) to act as financial
advisor. CSFB will provide the Company with financial advice and
assistance in evaluating strategic alternatives to maximize the
Company's assets in both the refining and retail businesses. The
primary objective is to assure that Crown pursues those
opportunities which best enhance shareholder value. CSFB is
actively engaged in the project.
IMPACT OF YEAR 2000
The Company uses software and related information technologies
and other equipment throughout its businesses that may be
affected by the year 2000 issue.
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define a particular
year. These computer programs include both information technology
(IT) systems such as software programs and non-information
technology (non-IT) systems such as embedded microcontrollers in
electronic equipment. Any of the Company's computer programs that
have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, manufacture products, send invoices, or
engage in similar normal business activities. The Company
initially commenced its year 2000 readiness program in early 1995.
The Company began a long-term project that encompassed an in-depth
evaluation of all current business processes and the redesign of
any of these processes where significant opportunity for
improvement was identified. One of the results of this project was
the decision to purchase and implement an enterprise-wide state-
of-the-art fully integrated software package (SAP R/3 Trademark)
which was selected in connection with re-designing business
practices to further enhance operating and record keeping
efficiencies. This software is year 2000 compliant. Due to the
enterprise-wide scale of the project, many of the Company's year
2000 issues relating to IT systems should be resolved as an added
benefit of this software implementation. The conversion process
to the new software has been underway for several years, with
eight of ten business process applications now operational. As of
June 30, 1999, it is anticipated that the conversion of the two
remaining business process applications will be completed by
October, 1999. The following paragraphs address those computer
systems that are not encompassed within the SAP R/3 Trademark
system.
The evaluation of the Company's state of readiness relating to its
year 2000 issues is a continual process emphasizing a constant
awareness of computer systems and business relationships that may
be sensitive to year 2000 issues. Management has categorized the
activities necessary to solve the year 2000 issues into the
identification and assessment phase, the remediation phase, and
the testing and contingency planning phase. The identification and
assessment phase includes conducting a comprehensive inventory and
evaluation of all of the Company's IT systems and non-IT
Page 18
electronic equipment (collectively referred to as computer
programs) to identify those computer programs that contain date
sensitive features. Those computer programs that contain such
features are then further evaluated and categorized as either
mission critical or non-mission critical based upon their relative
importance to the uninterrupted continuation of the Company's
daily operations. Mission critical computer programs gain top
priority when allocating the available resources to solve year
2000 issues.
As of January 31, 1999, with the exception of the non-IT
electronic equipment at the Company's two refineries, the Company
had completed the identification and assessment of all of its IT
systems and non-IT electronic equipment, both mission critical and
non-mission critical. A consulting group was engaged to assist
with the identification and assessment of the non-IT electronic
equipment at the Pasadena refinery and similar efforts were
undertaken by Company employees at the Tyler refinery. As of June
30, 1999, all of the assessment work at the Pasadena refinery had
been completed, and the Tyler refinery assessment was nearing
completion. The Company expects to complete the remaining
assessment activities at the Tyler refinery early in the third
quarter of 1999.
The assessment phase also includes the identification of and
communication with hardware and software vendors with whom the
Company transacts business, third parties with whom the Company
exchanges information electronically, major or sole source
suppliers, government agencies, and major customers. The focus of
these communications is to determine the state of readiness of
each of these third parties with respect to their own year 2000
issues and how their progress may impact the Company. The
majority of responses received to third party inquiries indicate
that they are working on their year 2000 issues, but the responses
do not provide specific details. Follow-up action related to
material third party inquiries and responses is expected to
continue in 1999 as these material third parties progress in their
own year 2000 readiness projects. The Company has no means of
ensuring that third parties with whom it deals will be year 2000
compliant or that the information obtained from such third parties
regarding year 2000 compliance will prove to be accurate.
The remediation phase includes the repair, upgrade or replacement
of all computer programs identified as non-compliant in the
assessment phase. These activities will include all computer
programs that have not been scheduled to be repaired, upgraded or
replaced as well as those that had been scheduled but whose timing
of repair, upgrading or replacement was accelerated to resolve the
Company's year 2000 issues. The Company's primary strategy for
correcting year 2000 issues is to replace all non-compliant
technology with newly purchased technology that in addition to
being year 2000 compliant, also provides enhanced business
functionality and capabilities. This phase has been on going
since 1995 and is expected to be substantially completed by
October 31, 1999. All of the necessary remediation or replacement
of non-compliant components identified by the assessments at the
Company's two refineries is expected to be completed by the end of
September, 1999.
The total cost associated with required modifications and
replacement of the Company's systems in response to the year 2000
issue is not expected to materially affect the Company's financial
condition or results of operations. The estimated total cost of
the year 2000 effort is approximately $1.4 million. This estimate
does not include costs to replace or upgrade systems that were
previously planned and not accelerated due to the year 2000 issue.
The total amount expended through June 1999 was approximately $1.1
million. The future cost is estimated to be approximately $.3
million. The Company's year 2000 efforts are funded primarily from
existing IT and business unit budgets.
The testing and contingency planning phase includes testing the
computer programs worked on in the remediation phase for accuracy
as well as concurrently developing contingency plans that may be
put into effect in the event that significant deficiencies are
identified. Contingency planning also encompasses developing
alternative sources of supply in the event of failure by material
third parties to remedy their own year 2000 issues. Testing of
computer programs is expected to be completed as remediation or
replacement of individual programs is completed. Due to the
number of computer programs utilized by the Company and the need
to begin remediation, replacement, and testing of mission critical
programs in a timely manner, any or all of the phases identified
may be performed concurrently. Testing of implemented
technologies will be a continual process with the expectation that
all of the Company's mission critical systems will be tested by
the end of the third quarter of 1999. Contingency plans for
mission critical systems are expected to be completed in late
1999.
While the Company's management anticipates that all mission
critical computer programs will be assessed, remedied and tested
by the dates set forth in the preceding paragraphs, there can be
no assurance that all will be completely error free and that such
programs will be compliant by such dates. We rely on third party
software, equipment and services to conduct our business. While
the Company believes it has made reasonable efforts to address
this issue, it has no means
Page 19
of ensuring that third parties with whom it deals will be year
2000 compliant or that the information obtained from such third
parties regarding year 2000 compliance will prove to be accurate.
The Company believes the most reasonably likely worst case year
2000 scenarios would be failure of the control systems at the
Company's refineries, or the failure of key customers or suppliers
(e.g., utility providers) to achieve year 2000 compliance. Either
of these scenarios could result in lost sales or lost production
due to the forced shutdown for an indefinite period at one or both
refineries. In order to mitigate the affect of any such
disruption, the Company may increase inventory levels prior to
year-end 1999 based on assessments made closer to the end of 1999.
In the event that only one refinery is affected by year 2000
failures, the Company has the flexibility of shifting feedstock
between facilities, or procuring petroleum products via sale,
trade or exchange agreements in order to meet any contractual
requirements.
The failure to correct a material year 2000 problem or the
inability of any key customer, key supplier or a governmental
agency to make the necessary computer system changes on a timely
basis, the inaccuracy of responses received from these third
parties, and the potential shortage of skilled human resources to
install and test upgraded software and equipment could result in
interruptions to Company operations or business activities. Such
interruptions could have a material adverse impact on the
Company's results of operations, liquidity or financial condition.
Due to the general uncertainty inherent in the year 2000 issue,
particularly as it relates to the readiness of the Company's key
customers and suppliers, and of governmental agencies, the Company
cannot ascertain at this time whether the consequences of the year
2000 failures will have a material impact on the Company's results
of operations, liquidity or financial condition. Insurance
coverage available at this time is limited to business
interruption resulting from fire, explosion, or related perils
which are caused by a year 2000 system failure.
The foregoing year 2000 discussion constitutes a "forward-looking"
statement within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. It is based on management's
current expectations, estimates and projections, which could
ultimately prove to be inaccurate.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company's market risk disclosures relating to outstanding
derivative commodity instruments are discussed in Item 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) on page 18 of this report. The
Company's market risk disclosures relating to outstanding cash
borrowings under the Secured Credit Facility are also discussed in
MD&A on page 18 of this report.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Motions for Partial Summary Judgement have now been filed with
respect to all of the individual claims of the eight named
plaintiffs in the BURRELL case. There has been no other 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, 1998.
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) Exhibits:
10 - First Amendment to Crude Oil Processing Agreement
between Statoil Marketing and Trading (U.S.) Inc.
and Crown Central Petroleum Corporation 1998 - 2000.
20 - Interim Report to Stockholders for the three
and six months ended June 30, 1999.
27 (a)- Financial Data Schedule for the six months
ended June 30, 1999.
27 (b)- Financial Data Schedule for the six months
ended June 30, 1998 - revised.
Page 20
(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, 1999.
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, 1999 to be signed on its behalf by
the undersigned thereunto duly authorized.
CROWN CENTRAL PETROLEUM CORPORATION
/s/--Jan L. Ries
Jan L. Ries
Controller
Chief Accounting Officer
and Duly Authorized Officer
Date: August 11, 1999
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