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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
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Commission file number: 0-10990
CASTLE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0035225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Radnor Corporate Center
Suite 250, 100 Matsonford Road
Radnor, Pennsylvania 19087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (610) 995-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock-- $.50
par value and related Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
As of November 10, 1997, there were 4,713,546 shares of the
registrant's Common Stock ($.50 par value) outstanding. The aggregate market
value of voting stock held by non-affiliates of the registrant as of such date
was $58,677,682 (4,191,263 shares at $14.00 per share).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11, 12 and 13
CASTLE ENERGY CORPORATION
1997 FORM 10-K
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. and 2. Business and Properties................................... 1
3. Legal Proceedings......................................... 7
4. Submission of Matters to a Vote of Security Holders....... 10
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 11
6. Selected Financial Data................................... 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 14
8. Financial Statements and Supplementary Data............... 25
PART III
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 63
10. Directors and Executive Officers of the Registrant......... 63
11. Executive Compensation..................................... 63
12. Security Ownership of Certain Beneficial Owners and
Management................................................. 63
13. Certain Relationships and Related Transactions............. 63
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................ 64
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
Castle Energy Corporation (the "Company") is engaged in natural gas
marketing and oil and gas exploration and production in the United States.
During the period from 1989 through September 30, 1995, the Company, through
certain subsidiaries, was primarily engaged in petroleum refining. Indian
Refining I Limited Partnership (formerly Indian Refining Limited Partnership)
("IRLP"), an indirect wholly-owned subsidiary partnership of the Company, owned
the Indian Refinery, an 86,000 barrel per day (B/D) refinery located in
Lawrenceville, Illinois. Powerine Oil Company ("Powerine"), a former indirect
wholly-owned subsidiary of the Company, owned and operated a 49,500 B/D refinery
located in Santa Fe Springs, California. By September 30, 1995, the Company had
terminated and discontinued all of its refining operations.
The Company engages in natural gas marketing operations which provide
gas to Lone Star Gas Company ("Lone Star"), a division of Texas Utilities Mining
Company ("TUMCO"), pursuant to a take-or-pay contract for natural gas through
May 31, 1999 ("Lone Star Contract"). At September 30, 1997, approximately 28.5
billion cubic feet of natural gas remained to be sold to Lone Star. The Company
has fixed price gas purchase contracts in place for the supply of approximately
90% percent of the natural gas necessary to fulfill its commitments under the
Lone Star Contract and, accordingly, has fixed a substantial portion of its
gross margin with respect to its gas marketing operations. The Company delivers
natural gas to Lone Star through a 77-mile intrastate pipeline located in Rusk
County, Texas. The pipeline is owned by a subsidiary of Union Pacific Resources
Company ("UPRC") and the Company's gas marketing subsidiary has a gas
transportation contract with the UPRC subsidiary for the transportation of the
gas sales volumes remaining under the Lone Star Contract. The pipeline was
previously owned by the Company and was sold to UPRC on May 30, 1997.
In addition to its natural gas marketing operations, the Company,
through its subsidiaries, conducts oil and gas exploration and production
operations. The Company's exploration and production subsidiaries own interests
in approximately 300 producing oil and gas wells located in eight states. The
subsidiaries operate most of the 300 wells. At September 30, 1997, the Company's
exploration and production operations included proved reserves of 15.7 billion
cubic feet of natural gas and 206,000 barrels of oil.
During the period from September 1989 to October 14, 1994, a substantial
portion of the Company's stock was owned by Metallgesellschaft Corp. ("MG"), a
wholly-owned subsidiary of Metallgesellschaft A.G. ("MG AG"), a German
conglomerate. During this period, MG provided financing and crude supplies to
IRLP and Powerine and entered into processing and product offtake agreements
with them. In December 1993, it was reported that MG AG had incurred substantial
losses as a result of hedging and other related activities. Thereafter, MG
sought to terminate its on-going relationships with the Company. In October
1994, the Company and MG completed the restructuring of such relationships ("MG
Settlement"). As a result, substantially all of the Company's contractual
relationships with MG and its affiliates were amended or terminated. Subsequent
to the MG Settlement, the Company sought to dispose of its two refineries and to
expand its natural gas marketing and transmission and exploration and production
businesses. Operations at the Powerine Refinery ceased in July 1995 and
operations at the Indian Refinery ceased by September 30, 1995. On September 29,
1995, Powerine sold the Powerine Refinery to Kenyen Projects Limited ("Kenyen").
On January 16, 1996, Powerine merged into a subsidiary of Energy Merchant Corp.
("EMC"). On December 12, 1995, IRLP sold the Indian Refinery to American Western
Refining L.P. ("American Western"), a subsidiary of Gadgil Western Corporation
("Gadgil"). For accounting purposes, refining operations were classified as
discontinued operations in the Company's Consolidated Financial Statements as of
September 30, 1995 (see Note 3 to the consolidated financial statements included
in Item 8 to this Form 10-K).
See Note 21 to the Company's Consolidated Financial Statements for
information with respect to the Company's identifiable industry segments for the
years ended September 30, 1997, 1996 and 1995.
In July 1996, an owner of oil and gas interests in wells operated by one
of the Company's subsidiaries filed a suit against the Company and three of its
subsidiaries. The plaintiff claimed, among other things, that the subsidiaries
have underpaid nonoperating owners with respect to gas production from oil and
gas properties and attempted to bring a class action on behalf of all such
owners based upon various legal theories. The plaintiff subsequently amended its
pleadings reducing the exposures of the Company and its subsidiaries. (See Item
3 of Part I.)
-1-
On May 30, 1997, the Company consummated the sale of its Texas oil and
gas properties and pipeline to UPRC and its wholly-owned subsidiary, and Union
Pacific Intrastate Pipeline Company ("UPIPC"), respectively. The effective date
of the sale was May 1, 1997. The assets sold included approximately 8,150 net
acres, 115 producing oil and gas wells and a 77- mile pipeline which gathers gas
from the producing wells and delivers it to a pipeline owned by Lone Star. The
proved reserves associated with the oil and gas properties that were sold
comprised approximately 84% of the Company's proved reserves. The Company still
owns its non-Texas oil and gas properties and its gas sales contract with Lone
Star.
In October 1996 the Company commenced a program to repurchase shares of
its common stock at stock prices beneficial to the Company. At November 10,
1997, 2,085,100 shares had been repurchased and the Company's Board of Directors
had authorized the purchase of up to 414,900 additional shares.
NATURAL GAS MARKETING
General
On December 3, 1992, the Company, through three wholly-owned subsidiary
limited partnerships, CEC Gas Marketing Limited Partnership ("Marketing"),
Castle Texas Pipeline Limited Partnership ("Pipeline") and Castle Texas
Production Limited Partnership ("Production"), acquired from Atlantic Richfield
Company ("ARCO"), a gas contract with Lone Star, a 77-mile pipeline in Rusk
County, Texas (the "Castle Pipeline"), majority working interests in
approximately 100 producing oil and gas wells and several gas supply contracts
for an aggregate purchase price of approximately $103.7 million, including cash,
assumption of debt and certain transaction costs. Upon acquiring these assets,
the Company entered a new segment of the oil and gas business, natural gas
marketing and transmission.
Assets
Gas Contract
Pursuant to the terms of the Lone Star Contract, Marketing sells natural
gas to Lone Star at a fixed price per million British thermal units ("MMBtu"),
plus transportation and severance tax reimbursement. The Lone Star Contract,
which expires on May 31, 1999, provides for minimum average deliveries of 45
million cubic feet per day through May 31, 1999. The contract also includes a
take-or-pay provision whereby Lone Star must pay for 60% of the monthly contract
volume whether or not it takes such volume (although deficiencies in one month
may, subject to certain limitations, be taken in subsequent months without
additional payments). Pursuant to a gas purchase contract between Marketing and
MG Natural Gas Corp. ("MGNG"), a wholly-owned subsidiary of MG, MGNG is
supplying approximately 90% of the natural gas required to meet the requirements
of the Lone Star Contract at fixed prices. Marketing is purchasing the remaining
10% of its natural gas requirements from UPRC at spot (market) prices. None of
the Company's own gas production is supplied to the Lone Star Contract. All of
the gas sold to Lone Star is delivered through a 77-mile pipeline in Rusk
County, Texas. The pipeline is now owned by UPIPC. As part of the sale of the
pipeline to UPIPC (see above), Marketing entered into a gas transportation
contract whereby UPIPC agreed to transport all of the gas remaining to be
delivered under the Lone Star Contract. The transportation costs for such
transportation were prepaid as part of the sale to UPIPC.
The fixed price received by Marketing for gas sold to Lone Star has been
substantially in excess of the spot (market) price during virtually all of the
Lone Star Contract from December 3, 1992 (date acquired) through September 30,
1997 and through November 10, 1997. It also exceeds the fixed price of gas
purchased from MGNG for the Lone Star Contract. As a result, Marketing has
substantially locked in a gross margin equal to the excess of the price received
from Lone Star over the price paid to MGNG with respect to the 90% of its
natural gas requirement that it must purchase from MGNG. Such "locked up" gross
margins are, however, subject to the supply risk of MGNG, the credit risk of
Lone Star and other contractual risks in the Lone Star Contract.
In September 1993, one of the Company's subsidiaries entered into a
contract to sell 7,356,000 MMBtu's of gas to MGNG. The gas is to be provided to
MGNG ratably from June 1, 1996 through May 31, 1999 at a fixed price. The
subsidiary is buying the gas to be sold to MGNG on the spot market and, at
September 30, 1997, had hedged approximately 25% of the remaining gas to be sold
to MGNG. The subsidiary remains exposed to the difference between the fixed
sales price to MGNG and the price it will pay to purchase gas on the spot market
for the remaining 75% of gas to be sold to MGNG. In September and November 1997,
the fixed price received from MGNG was significantly less than the spot (market)
price.
-2-
OIL AND GAS EXPLORATION AND PRODUCTION
General
The Company's oil and gas exploration and production business is
currently conducted through Castle Exploration Company, Inc. ("CECI"), a
wholly-owned subsidiary, and Petroleum Reserve Corporation, a division of the
Company, and includes interests in approximately 300 producing oil and gas wells
located in eight states. From December 3, 1992 to May 30, 1997 Production, the
Company's other wholly-owned exploration and production subsidiary, owned and
operated approximately 115 oil and gas wells in Rusk County, Texas. On May 30,
1997, Production sold these wells and related undrilled acreage to UPRC. As a
result, production from these wells is included in the data below only through
May 30, 1997 and proved oil and gas reserves related to these wells and related
acreage is excluded from Company reserve and acreage data as of September 30,
1997.
Properties
Proved Oil and Gas Reserves
The following is a description of the Company's oil and gas reserves as
of September 30, 1997. All estimates of reserves are based upon engineering
evaluations prepared by Huntley & Huntley, independent petroleum reservoir
engineers, in accordance with the requirements of the Securities and Exchange
Commission. Such estimates include only proved reserves. The Company reports its
reserves annually to the Department of Energy. The Company's estimated reserves
as of September 30, 1997 are as follows:
Net MCF (1) of gas:
Proved developed producing......................... 10,383,000
Proved developed non-producing..................... 1,097,000
Proved undeveloped................................. 4,212,000
-----------
Total.............................................. 15,692,000
==========
Net barrels of oil:
Proved developed producing......................... 206,000
Proved developed non-producing.....................
Proved undeveloped.................................
Total..............................................
----------
206,000
==========
- ----------------
(1) Thousand cubic feet
Oil and Gas Production
The following table summarizes the net quantities of oil and gas
production of the Company for each of the three fiscal years in the period ended
September 30, 1997, including production from acquired properties since the date
of acquisition.
Fiscal Year Ended September 30,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
Oil -- Bbls (barrels).......... 36,000 46,000 50,000
Gas -- MCF..................... 2,454,000 3,349,000 3,721,000
-3-
Average Sales Price and Production Cost Per Unit
The following table sets forth the average sales price per barrel of oil
and MCF of gas produced by the Company and the average production cost (lifting
cost) per equivalent unit of production for the periods indicated. Production
costs include applicable operating costs and maintenance costs of support
equipment and facilities, labor, repairs, severance taxes, property taxes,
insurance, materials, supplies and fuel consumed in operating the wells and
related equipment and facilities.
Fiscal Year Ended September 30,
---------------------------------------
1997 1996 1995
--------- -------- --------
Average Sales Price per Barrel of Oil........... $19.94 $17.33 $15.59
Average Sales Price per MCF of Gas.............. $ 2.46 $ 2.38 $ 2.13
Average Production Cost per Equivalent MCF(1)... $ .73 $ 0.56 $ 0.59
- ----------
(1) For purposes of equivalency of units, a barrel of oil is assumed equal to
six MCF of gas, based upon relative energy content.
Approximately 55%, 75% and 74% of gas volumes sold during the fiscal
years ended September 30, 1997, 1996 and 1995, respectively, were sold to Lone
Star to partially provide the volumes needed for the Lone Star Contract. As a
result of the sale of the Texas oil and gas properties to UPRC in May 1997, none
of the Company's gas volumes are now being sold to Lone Star.
Productive Wells and Acreage
The following table presents the oil and gas properties in which the
Company held an interest as of September 30, 1997. The wells and acreage owned
by the Company and its subsidiaries are located primarily in Alabama,
California, Illinois, Louisiana, Mississippi, New Mexico, Oklahoma and
Pennsylvania.
As of
September 30, 1997
-------------------------
Gross(2) Net (3)
-------- -------
Productive Wells:(1)
Gas Wells....................................... 273 105
Oil Wells....................................... 35 8
Acreage:
Developed Acreage............................... 57,658 14,103
Undeveloped Acreage............................. 25,564 14,531
- ----------
(1) A "productive well" is a producing well or a well capable of production.
Fifty-five wells are dual wells producing oil and gas. Such wells are
classified according to the dominant mineral being produced.
(2) A gross well or acre is a well or acre in which a working interest is
owned. The number of gross wells is the total number of wells in which a
working interest is owned.
(3) A net well or acre is deemed to exist when the sum of fractional working
interests owned in gross wells or acres equals one. The number of net wells
or acres is the sum of the fractional working interests owned in gross
wells or acres.
Drilling Activity
The table below sets forth for each of the three fiscal years in the
period ended September 30, 1997 the number of gross and net productive and dry
developmental wells drilled including wells drilled on acquired properties since
the dates of acquisition. No exploratory wells were drilled during the periods
presented.
-4-
Fiscal Year Ended September 30,
----------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ----------------------
Productive Dry Productive Dry Productive Dry
---------- --- ---------- --- ---------- ---
Developmental:
Gross.................................. 3.0 -- -- -- -- --
Net.................................... 1.4 -- -- -- -- --
The Company is currently conducting a 10-13 well drilling program on its
undrilled Alabama coalbed methane acreage. It has also recently entered into a
joint venture to drill up to 100 wells in Pennsylvania over the next three to
four years.
REFINING
Until September 30, 1995 two of the Company's subsidiaries operated in
the refining segment of the petroleum business. The two subsidiaries owned and
operated refineries with a combined refining (distillation) capacity of 135,500
barrels per day. IRLP owned and operated the Indian Refinery in Lawrenceville,
Illinois and Powerine owned and operated the Powerine Refinery in Santa Fe
Springs, California. On September 29, 1995, Powerine sold the Powerine Refinery
to Kenyen. On December 12, 1995, IRLP sold the Indian Refinery to American
Western. In addition, Powerine merged into a subsidiary of EMC on January 16,
1996 and is no longer a subsidiary of the Company. The Company still owns IRLP,
which is inactive and owns no refining assets.
As a result of the foregoing, refining operations were classified as
discontinued operations in the Company's financial statements as of September
30, 1995 and retroactively.
REGULATIONS
Since the Company has disposed of its refineries and third parties have
assumed environmental liabilities associated with the refineries, the Company's
current activities are not subject to environmental regulations that generally
pertain to refineries, e.g., the generation, treatment, storage, transportation
and disposal of hazardous wastes, the discharge of pollutants into the air and
water and other environmental laws. Nevertheless, the Company has some
contingent environmental exposures. See Items 3 and 7 to this Form 10-K and Note
13 to the financial statements.
The oil and gas exploration and production operations of the Company are
subject to a number of local, state and federal environmental laws and
regulations. To date, compliance with such regulations by the Company's natural
gas marketing and transmission and exploration and production segments has not
resulted in material expenditures.
All states in which the Company conducts oil and gas exploration and
production activities have laws regulating the production and sale of oil and
gas. Such laws and regulations generally are intended to prevent waste of oil
and gas and to protect correlative rights and opportunities to produce oil and
gas as between owners of interests in a common reservoir. Some state regulatory
authorities also regulate the amount of oil and gas produced by assigning
allowable rates of production to each well or unit. Most states also have
regulations requiring permits for the drilling of wells, and regulations
governing the method of drilling, casing and operating wells, the surface use
and restoration of properties upon which wells are drilled and the plugging and
abandonment of wells. Recently there has been a significant increase in the
amount of state regulation, including increased bonding, plugging and
operational requirements. Such increased state regulation has resulted in, and
is anticipated to continue to result in, increased legal and compliance costs
being incurred by the Company. Based on past costs, even considering recent
increases, management of the Company does not believe such legal and compliance
costs will have a material adverse effect on the financial condition or results
of operations of the Company.
-5-
EMPLOYEES AND OFFICE FACILITIES
As of November 10, 1997, the Company, through its subsidiaries, employed
6 personnel. In addition, the Company out sources all of its administrative,
land and accounting functions and its well operations functions.
The Company leases certain offices as follows:
Office Location Function
- --------------- --------
Radnor, PA Corporate Headquarters
Mt. Pleasant, PA Oil and Gas Production Office
Pittsburgh, PA Drilling and Exploration Office
Tuscaloosa, Alabama Gas Production Office
-6-
ITEM 3. LEGAL PROCEEDINGS
Contingent Environmental Liabilities - Refining
Until September 30, 1995, the Company, through its subsidiaries,
operated in the refining segment of the petroleum business. As operators of
refineries, certain of the Company's subsidiaries were potentially liable for
environmental costs related to air emissions, ground and water contamination,
hazardous waste disposal and third party claims related to the foregoing.
Between September 29, 1995 and December 12, 1995 both of the refineries owned by
the Company's refining subsidiaries were sold to outside parties. In each case
the purchaser assumed all environmental liabilities. Furthermore, on January 16,
1996, Powerine, the subsidiary that previously owned the Powerine Refinery, was
effectively acquired by EMC, an outside unrelated party.
As of November 10, 1997, neither of the purchasers of the refineries had
restarted the refineries. In addition, the purchaser of the Indian Refinery,
American Western, had defaulted on its $5 million note to IRLP, filed a
voluntary petition for bankruptcy in the United States Bankruptcy Court in the
District of Delaware under Chapter 11 of the United States Bankruptcy Code and
recently sold the Indian Refinery to a new owner, an outside party. The new
owner of the Indian Refinery has not indicated whether or not it intends to
restart the refinery or any portion of it.
Although the environmental liabilities related to both of the Company's
Refineries have been assumed by others, there can be no assurance that the
Company or one or more of its subsidiaries will not be sued for matters related
to environmental liabilities of the refineries. The purchaser of the Powerine
Refinery is thinly capitalized and without significant financial resources. The
purchaser of the Indian Refinery, American Western, filed for bankruptcy and
sold the Indian Refinery to the highest bidder. If either Powerine or the new
owner of the Indian Refinery fails to operate its refinery and/or they or their
successors do not provide for related environmental liabilities, it is possible
that the Company or IRLP (still a subsidiary of the Company) could become a
party in related legal actions. Although the Company does not believe it has any
liabilities with respect to environmental liabilities of the refineries, a court
of competent jurisdiction may find otherwise and the Company may be required to
fund portions of such liabilities. In recent years, government and other
plaintiffs have often sought redress for environmental damage from the party
most capable of payment without regard to responsibility or fault. Whether or
not the Company is ultimately held liable in such a circumstance, should
litigation involving the Company and/or IRLP occur, the Company would probably
incur substantial legal fees and experience a diversion of management resources
from other operations.
General
Powerine Arbitration
On April 14, 1995, Powerine repaid all of the indebtedness owed by it to
MG Trade Finance Corp ("MGTFC"), a wholly-owned subsidiary of MG, including
$10.8 million of disputed amounts (the "Disputed Amount"). On the same day, the
Company and two of its subsidiaries and MG and two of its subsidiaries entered
into the Payoff Loan and Pledge Agreement ("Payoff Agreement"), which provided
the following:
a. MG released Powerine from all liens and claims.
b. MG loaned the Company $10 million.
c. Powerine transferred its claim with respect to the Disputed Amount
to the Company.
d. The claim with respect to the Disputed Amount was submitted to
binding arbitration (the "Powerine Arbitration").
e. MG could offset the $10 million loan to the Company against the $10
million note it issued to the Company as part of the MG Settlement, to the
extent the arbitrator decides the claim with respect to the Disputed Amount in
MG's favor.
The Disputed Amount relates primarily to disputes over the prices paid
by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's
subsidiary, MG Refining and Marketing, Inc. ("MGRM"), and nonpayment for refined
products that were processed after January 31, 1995 and that MGRM was obligated
to, but did not, lift and pay for. To the extent that the arbitrator decided in
favor of the Company, the Company's note to MG would be reduced and the net
amount
-7-
due to the Company from MG would be increased. If the arbitrator settled the
Disputed Amount entirely in the Company's favor, the Company's note to MG would
be cancelled and MG would still owe the Company its $10 million note (due
October 14, 1997). If the arbitrator settled the Disputed Amount entirely in
MG's favor, the Company's note from MG would be discharged.
In December 1996, the Company and MG presented oral arguments to the
arbitrator.
On May 29, 1997, the arbitrator issued a written opinion finding for the
Company on all liability issues and directing the parties to calculate the
amount due to the Company. Pursuant to the Payoff Agreement, the Arbitrator's
award is limited to $10.7 million. The amount awarded, plus accrued interest, is
first to be offset against the Company's Note to MG ($10 million), with any
remaining cash to be paid to the Company. In addition, MG owes the Company $10
million on the MG Note. In the aggregate the Company believes it is due
approximately $10.8 million after all offsetting and allowing for interest.
On October 14, 1997, MG paid the Company $8.7 million. The Company
believes it is entitled to an additional $2.1 million. The dispute concerns
interest related to the amount awarded. The arbitrator has taken the matter
under advisement and is expected to resolve the issue in the near future. Since
the Company continues to carry a net receivable of $10 million on its books at
September 30, 1997, the Company will record a gain if it ultimately collects
more than $10 million and a loss if it ultimately collects less than $10
million. To the extent that any resulting gain or loss relates to discontinued
refining operations, any impact will be considered with other items impacting
discontinued operations.
SWAP Agreement - MGNG
IRLP, the Company's inactive refining subsidiary, is involved in
litigation with MGNG. The litigation involves competing claims by both parties
concerning a terminated natural gas swap agreement between MGNG and IRLP. The
litigation is related to the Powerine Arbitration litigation (see above) and
IRLP expects this litigation to be settled shortly after the Powerine
Arbitration litigation is finally resolved. If IRLP prevails, it expects to
recover $703,000. If MGNG prevailed, IRLP would have been liable for up to
$653,000. The amount at stake was accordingly $1,356,000.
As a result of the favorable decision received in the Powerine
Arbitration (see above), IRLP expects to recover $703,000 and has accordingly
recorded a $703,000 receivable as of September 30, 1997. MGNG has claimed that
such amounts are not due until the Powerine Arbitration proceeds are paid by MG.
$8.7 million of such proceeds were paid by MG on October 13, 1997. IRLP believes
$703,000 plus interest is already due and is currently preparing legal
proceedings against MGNG to recover these amounts. Such recovery will be
recorded, however, when and if actual recovery occurs. Therefore, the amount at
which it is resolved will directly impact its discontinued operations. The
impact of resolution will be considered with other items, if any, impacting
discontinued operations.
Larry Long Litigation
In May 1996, Larry Long, representing himself and allegedly "others
similarly situated," filed suit against the Company, three of the Company's
natural gas marketing and transmission and exploration and production
subsidiaries, ARCO, B&A Pipeline Company (a former subsidiary of ARCO), and MGNG
in the Fourth Judicial District Court of Rusk County, Texas. The plaintiff
originally claimed, among other things, that the defendants underpaid
non-operating working interest owners, royalty interest owners, and overriding
royalty interest owners with respect to gas sold to Lone Star. Although no
amount of actual damages was specified in the plaintiff's initial pleadings, it
appeared that, based upon the volumes of gas sold to Lone Star, the plaintiff
may have been seeking actual damages in excess of $40 million.
After some initial discovery, the plaintiff's pleadings were
significantly amended. Another purported class representative, Travis Crim, was
added as a plaintiff, and ARCO, B&A Pipeline Company and MGNG were dropped as
defendants. Although it is not completely clear from the amended petition, the
plaintiffs have apparently now limited their proposed class of plaintiffs to
royalty owners and overriding royalty owners in leases owned by the Company's
exploration and production subsidiary limited partnership. In amending their
pleadings, the plaintiffs revised their basic claim to seeking royalties on
certain operating fees paid by Lone Star to the Company's natural gas marketing
subsidiary limited partnership. No hearing has been held on the plaintiffs'
request for class certification, however. Furthermore, no hearing is presently
scheduled, and additional discovery will need to be conducted before any class
certification hearing is held.
-8-
Based upon the revised pleadings, management of the Company determined
that the possible exposure of the Company and its subsidiary limited
partnerships for all gas sold to Lone Star in the past and in the future, were
they to lose the case, was less than $3 million. However, the Company recently
sold all of its Rusk County oil and gas properties to UPRC (see Note 4 to the
financial statements). The sale to UPRC effectively removed any possibility of
exposure by the Company or its subsidiary limited partnerships to claims for
additional royalties with respect to future production. Management continues to
believe that the plaintiffs' claims are without merit and intends to vigorously
fight the claims which have been asserted by the plaintiffs. Moreover,
management believes that the recent sale to UPRC has reduced the total exposure
of the Company and its subsidiary limited partnerships to less than $2 million
in actual damages if they were to lose the case.
Powerine Class Action Lawsuit
In July 1996, Powerine was served with a suit concerning operations of
the Powerine Refinery in the Superior Court of the State of California in Los
Angeles, California. The suit claims the Powerine Refinery is a public nuisance,
that it has released excessive toxic and noxious emissions and caused physical
and emotional distress and property damage to residents living nearby. The
Company was also named as a defendant in the suit. In March 1997, the Company
was served with the lawsuit.
In April 1997, the Company filed a notion to quash the plaintiffs'
summons based upon the lack of jurisdiction. On May 2, 1997, the court granted
the Company's motion. As a result, the Company is no longer a defendant in the
Powerine Class Action Lawsuit.
-9-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit
any matter to a vote of stockholders during the fourth quarter of fiscal 1997.
-10-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Principal Market
The Company's Common Stock is quoted on the Nasdaq National Market
("NNM") under the trading symbol "CECX".
Stock Price and Dividend Information
Stock Price:
The table below presents the high and low sales prices of the Company's
Common Stock as reported by the NNM for each of the quarters during the two
fiscal years ended September 30, 1997.
1997 1996
------------------------- --------------------
High Low High Low
---- --- ---- ---
First Quarter (December 31).................................. $11.50 $ 6.63 $ 9.00 $7.00
Second Quarter (March 31).................................... 13.75 10.25 9.38 7.38
Third Quarter (June 30)...................................... 13.75 10.50 12.25 8.75
Fourth Quarter (September 30)................................ 15.25 12.75 11.25 8.00
The final sale of the Company's Common Stock as reported by the NNM on
November 10, 1997 was at $14.00.
Dividends:
On June 30, 1997, the Company's Board of Directors adopted a policy of
paying regular quarterly cash dividends of $.15 per share on the Company's
common stock. The first two quarterly dividends under the policy, $.15 per share
each, each of which was declared in fiscal 1997, were paid on July 15, 1997 and
October 15, 1997 to holders of record as of July 11, 1997 and October 10, 1997,
respectively. As with any Company the declaration and payment of future
dividends are subject to the discretion of the Company's Board of Directors and
will depend on various factors.
Approximate Number of Holders of Common Stock
As of November 10, 1997, the Company's Common Stock was held by
approximately 3,100 stockholders.
-11-
ITEM 6. SELECTED FINANCIAL DATA
During the Company's five fiscal years ended September 30, 1997, the
Company consummated a number of transactions affecting the comparability of the
financial information set forth below. In August 1989, the Company acquired the
Indian Refinery. From April 1990 until November 1990, the Company performed
refurbishment work on the Indian Refinery and recommenced operations in November
1990. In February 1992, the Company entered into a product offtake agreement
with MGRM ("Indian Offtake Agreement") which was restructured and extended in
May 1993. In December 1992, the Company acquired certain oil and gas and
pipeline assets from ARCO. In June 1993, the Company sold its business of
administration of oil and gas partnerships. In October 1993, the Company
acquired the Powerine Refinery. During fiscal 1995, the Company reached a
settlement with MG and its affiliates and terminated most of its transactions
and relationships with MG. By September 1995, the Company had discontinued its
refining operations. In May 1997, the Company sold its Rusk County, Texas oil
and gas properties and pipeline to UPRC and one of its subsidiaries. See Item 7
- - "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 3 and 4 to the Company's Consolidated Financial Statements
included in Item 8 of this Form 10-K.
The following selected financial data have been derived from the
Consolidated Financial Statements of the Company for each of the five years
ended September 30, 1997 and all income statement information has been
reclassified to give effect to the discontinuance of refining operations. The
information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in Item 8 - "Financial Statements and
Supplementary Data" and Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
For the Fiscal Years Ended September 30,
------------------------------------------------------------------------
(in Thousands, except per share amounts)
1997 1996 1995 1994 1993
---------- ------------- -------- -------- --------
Revenues:
Natural gas marketing and transmission............. $64,606 $59,471 $70,402 $61,259 $ 56,676
Exploration and production......................... 7,113 9,224 9,197 8,552 10,124
Gross Margin:
Natural gas marketing and transmission............. 24,640 25,238 30,242 24,199 22,200
Exploration and production......................... 5,173 7,179 6,831 5,923 7,469
Earnings before interest, taxes, depreciation, and
amortization:
Natural gas marketing and transmission............. 23,054 23,162 28,252 22,003 20,361
Exploration and production......................... 4,036 5,944 5,761 4,494 5,940
Corporate general and administrative expenses.......... (3,370) (3,499) (4,995) (5,499) (2,191)
Depreciation, depletion and amortization............... (12,250) (13,717) (14,155) (13,452) (12,191)
Interest expense....................................... (1,038) (1,959) (4,046) (9,233) (9,117)
Interest income and other income (expense)............. 21,097 3,884 966 950 85
-------- --------- ---------- ----------- ------------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change
in accounting...................................... 31,529 13,815 11,783 (737) 2,887
Provision for (benefit of) income taxes related to
continuing operations.............................. 4,663 (11,259) 37,823 (17,077) (44,081)
--------- -------- -------- -------- --------
Income (loss) from continuing operations 26,866 25,074 (26,040) 16,340 46,968
Income from discontinued refining operations net of
applicable income taxes............................ 40,937 22,577 12,355
---------- ------------- -------- -------- --------
Income before cumulative effect of a change in
accounting principle............................... 26,866 25,074 14,897 38,917 59,323
Cumulative effect on prior years of change in
accounting principle - adoption of FAS 109......... 8,514
---------- ------------- ------------- ------------- ---------
Net income............................................. $26,866 $25,074 $14,897 $38,917 $67,837
======= ======= ======= ======= =======
Dividends.............................................. $ 1,446
========
Net income (loss) per share (fully diluted):
Continuing operations.............................. $ 4.64 $ 3.73 ($ 3.84) $ 1.44 $ 6.20
Discontinued operations............................ 6.04 1.99 1.64
Cumulative effect of a change in accounting........ 1.12
---------- ------------- ------------- ------------- ----------
$ 4.64 $ 3.73 $ 2.20 $ 3.43 $ 8.96
========= ========= ========= ========= =========
Dividends per share.................................... $ .30
==========
(continued on next page)
-12-
September 30,
(in Thousands)
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit)........................... $46,384 ($ 4,452) ($ 12,474) ($ 22,769) ($ 47,462)
Property, plant and equipment, net, including oil
and gas properties............................... 2,998 36,223 40,406 339,876 150,299
Total assets........................................ 82,717 101,230 116,904 646,491 392,738
Long-term debt, including current maturities........ 14,006 35,946 394,123 199,020
Stockholders' equity (deficit)...................... 67,765 66,711 41,637 37,920 (9,387)
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
("000's" Omitted Except Share Amounts)
--------------------------------------
RESULTS OF OPERATIONS
GENERAL
From August 1989 to September 30, 1995, several of the Company's
subsidiaries conducted refining operations. By December 12, 1995, the Company's
refining subsidiaries had sold all of their refining assets. In addition,
Powerine, one of the Company's refining subsidiaries, merged into a subsidiary
of EMC and was no longer a subsidiary of the Company. The Company's other
refining subsidiaries own no refining assets and are in the process of
liquidation. As a result, the Company has accounted for its refining operations
as discontinued operations in the Company's financial statements as of September
30, 1995 and retroactively. Accordingly, discussion of results of operations has
been confined to the results of continuing operations and the anticipated
impact, if any, of liquidation of the remaining inactive refining subsidiaries.
As noted above, the Company sold its Rusk County, Texas oil and gas
properties and pipeline to UPRC and one of its subsidiaries in May 1997. The oil
and gas reserves sold approximated 84% of the Company's oil and gas reserves at
the date of sale. As a result operations applicable to the assets sold only
impacted consolidated operations for eight months in fiscal 1997 versus twelve
months in fiscal 1996, 1995 and 1994.
Fiscal 1997 vs Fiscal 1996
Natural Gas Marketing and Transmission
Gas sales from natural gas marketing and transmission increased $5,128
or 8.6% from fiscal 1996 to 1997. The increase consists of the following:
September 30,
-------------------------
1997 1996
------- -------
Gas sales to Lone Star................. $59,695 $57,823
Gas sales to MGNG...................... 4,904 1,648
------- -------
$64,599 $59,471
======= =======
Lone Star Contact
Natural gas sales under the Lone Star Contract increased $1,872 or 3.2%
from fiscal 1996 to fiscal 1997. Under the Company's long-term gas sales
contract with Lone Star, the price received for gas is essentially fixed through
May 31, 1999. The variance in gas sales, therefore, is almost entirely
attributable to the volumes of gas delivered. Although the volumes sold to Lone
Star annually are essentially fixed (the Lone Star Contract has a take-or-pay
provision), the Lone Star Contract year is from February 1 to January 31 whereas
the Company's fiscal year is from October 1 to September 30. Furthermore,
although the volumes to be taken by Lone Star in a given contract year are
fixed, there is no provision requiring fixed monthly or daily volumes and
deliveries accordingly vary with Lone Star's seasonal and peak demands. Such
variances have been significant. As a result, Lone Star deliveries, although
fixed for a contract year, may be skewed and not proportional for the Company's
fiscal periods.
For fiscal 1997, deliveries and sales to Lone Star, including those
derived from the Company's own production, were approximately $220 less than
those which would have resulted if daily deliveries had been fixed and equal. At
September 30, 1997, the remaining volumes to be delivered under the Lone Star
Contract were approximately 4.2% greater than those that would be delivered to
Lone Star if daily deliveries were fixed and equal.
Gas sales to MGNG increased $3,256 or 197.6% from fiscal 1996 to fiscal
1997 because such sales commenced June 1, 1996. Since sales to MGNG are for
equal daily volumes at fixed prices the increase in gas sales is directly
proportional to the increase in the sales period.
-14-
Gas purchases increased $5,733 or 16.7% from fiscal 1996 to fiscal 1997.
The increase consists of the following:
September 30,
-------------------------
1997 1996
------- -------
Gas purchases - Lone Star Contract........ $34,686 $32,878
Gas purchases - MGNG Contract............. 5,280 1,355
--------- ---------
$39,966 $34,233
======= =======
Gas purchases for the Lone Star Contract increased $1,808 or 5.5% from
fiscal 1996 to fiscal 1997. For fiscal 1996 gas purchases comprised 56.9% of gas
sales versus 58.1% of gas sales for fiscal 1997. From 1996 to 1997 the gross
margin increased $64 or .3%. During the same periods the gross margin percentage
((gas sales - gas purchases) as a percentage of gas sales) decreased 1.2% from
43.1% for fiscal 1996 to 41.9% for fiscal 1997.
The increase in gas purchases as a percentage of gas sales and the
concomitant decrease in the gross margin percentage result from offsetting
factors. The cost of gas decreased because the Company replaced gas contracts
that expired in April 1997 with market price contracts. The expiring contracts
called for gas prices substantially in excess of market prices whereas the
replacement gas contracts are at market prices, resulting in the decreased costs
to the Company for a portion of the gas it supplies to Lone Star. This reduction
was offset by the higher gas prices that the Company had to pay for the 10% of
its gas that it supplies to Lone Star and that is not hedged and to a minor
degree by a $251 non-recurring favorable gas purchase adjustment in the first
quarter of fiscal 1996 which had no counterpart in fiscal 1997.
Gas purchases applicable to the MGNG Contract as a percentage of related
sales increased from 82.2% in fiscal 1996 to 107.7% in fiscal 1997. In fiscal
1996 the gross margin was $293 versus a deficit of $376 in fiscal 1997. The
increase in the cost of gas purchases and related decrease in the gross margin
were caused by increases in spot gas prices, net of hedging adjustments.
Operating costs decreased $373 or 44.1% from fiscal 1996 to fiscal 1997.
Most of the decrease is attributable to the sale of the Castle Pipeline to UPIPC
on May 30, 1997. Other factors accounting for the decrease include the
termination of two pipeline employees in January 1997, when the Company still
operated the Castle Pipeline and decreased insurance costs, property taxes and
compressor maintenance costs during the first eight months of fiscal 1997 versus
the first eight months of fiscal 1996.
General and administrative costs decreased $455 or 40% from fiscal 1996
to fiscal 1997. The primary factor causing the decrease was the sale of the
Castle Pipeline to UPIPC on May 30, 1997, resulting in only minor general and
administrative expense thereafter. Other factors causing the decrease were the
termination of management agreements with subsidiaries of MG in January 1997 and
the performance of their functions internally without additional costs and
decreased insurance cost. These were offset by an increase due to a $165
severance payment to the former President of the Company's natural gas marketing
subsidiary in January 1997.
Although the Company still markets natural gas, it no longer owns or
operates its Texas pipeline. Future natural gas marketing general and
administrative expenses are expected to be immaterial.
Transportation
Transportation expense increased from zero for fiscal 1996 to $338 for
fiscal 1997. All of the transportation expense for fiscal 1997 was incurred from
June 1, 1997 to September 30, 1997 and results from the amortization of the
prepaid transportation asset received from UPIPC in the sale of the Castle
Pipeline (see Note 4 to the financial statements). Prior to the sale to UPIPC,
the Company owned and operated the Castle Pipeline and intercompany
transportation charges were eliminated in consolidation. Commencing June 1,
1997, the Company commenced amortizing the $3,000 prepaid transportation asset
over the remaining term of the Lone Star Contract, which expires on May 31,
1999.
-15-
Depreciation and Amortization
Depreciation and amortization decreased $754 or 6.6% from fiscal 1996 to
fiscal 1997. The decrease results from the sale of the Castle Pipeline to UPIPC
on May 30, 1997. The decrease approximates the amount of depreciation and
depletion that would have been incurred had the Castle Pipeline not been sold.
Exploration and Production
Oil and gas sales decreased $2,042 or 23.3% from fiscal 1996 to fiscal
1997. The decrease results primarily from the sale of 84% of the Company's
proved reserves to UPRC on May 30, 1997 (see Note 4 to the financial
statements). In fiscal 1996 oil and gas sales applicable to such reserves were
for twelve months versus only eight months in fiscal 1997. In addition to the
sale of the properties to UPRC, two other offsetting factors are relevant. Oil
and gas sales decreased due to a decrease in production volumes. The decline in
production volumes results from the general maturing of the Company's reserves
since the Company has not made any significant reserve acquisitions and did not
conduct any significant drilling until July 1997. This decrease was offset by an
increase in oil and gas prices in fiscal 1997.
As a result of the sale to UPRC, the Company's oil and gas production is
expected to decrease by at least 60% - 65%. Nevertheless, the Company has
recently entered into a joint venture with another operator to drill up to 100
Appalachian wells over the next three to four years and is also in the process
of drilling approximately 10 - 13 coalbed methane wells in Alabama. In addition,
the Company is currently reviewing several possible acquisitions of oil and gas
assets. As a result the Company expects to replace some of the production and
reserves that it sold to UPRC.
Revenues from well operations decreased $69 or 15.6% from fiscal 1996 to
fiscal 1997. The decrease results primarily from operating revenues lost when
the Company sold its Rusk County, Texas oil and gas properties to UPRC in May
1997.
Oil and gas production expenses decreased $105 or 5.1% from fiscal 1996
to fiscal 1997. The decrease was caused by the sale of the Company's Rusk County
oil and gas properties to UPRC on May 30, 1997. In fiscal 1997 oil and gas
production expenses were 28.8% of oil and gas sales versus 23.3% of oil and gas
sales in fiscal 1996. The increase in production expenses as a percentage of oil
and gas sales results from the general maturing of the Company's oil and gas
properties, the lack of new drilling by the Company for most of the recent
fiscal year and the tendency for older depleting properties to carry a higher
production expense burden than recently drilled properties. As noted above, the
Company has commenced several drilling activities and the oil and gas production
expense ratio may improve in the future, although there can be no assurance such
will be the case.
General and administrative expenses decreased $98 or 7.9% from fiscal
1996 to fiscal 1997. The decrease results from offsetting factors. General and
administrative expenses decreased because the Company closed its Tulsa office in
June 1996 and because the Company sold its Rusk County, Texas oil and gas
properties to UPRC in May 1997. These decreases were offset, however, by
increased legal fees due to the Larry Long litigation which was filed in July
1996. (See Note 15 to the financial statements.)
Depreciation, depletion and amortization decreased $713 or 30.7% from
fiscal 1996 to fiscal 1997. The decrease was primarily caused by the sale of the
Company's Rusk County, Texas oil and gas properties to UPRC on May 30, 1997. Had
the properties not been sold to UPRC, depreciation, depletion and amortization
for fiscal 1997 would have been approximately $450 higher.
On May 30, 1997, the Company sold its Texas oil and gas properties and
pipeline (see Note 4 to the financial statements). The sale resulted in a
$19,667 non-recurring gain. There was no counterpart in fiscal 1996.
Interest income increased $524 or 54.5% primarily because of interest
earned from June 1, 1997 to September 30, 1997 on the unspent proceeds from the
sale of the Company's Texas oil and gas properties and pipeline (see Note 4 to
the financial statements).
Other income (expense) decreased $2,978 from $2,923 of other income for
fiscal 1996 to other expenses of $55 for fiscal 1997. Of the $2,923 of other
income in 1996, $2,725 represented recoveries from a plaintiff class escrow fund
related to stockholder litigation. The parties reached a settlement with respect
to the stockholder litigation in October 1994. The proceeds to the Company
represent unclaimed funds that were to revert to the Company pursuant to the
settlement order for the litigation.
-16-
Interest expense decreased $921 or 47.0% from fiscal 1996 to fiscal
1997. The net decrease in interest expense is attributable to offsetting
factors. Amortization of debt issuance costs, which is treated as interest
expense under generally accepted accounting principles, increased $169 from $174
for fiscal 1996 to $343 for fiscal 1997. The increase is attributable to debt
issuance costs incurred in connection with the Company's refinancing of its
senior debt. Interest expense, on the other hand, decreased $1,090 from $1,785
for fiscal 1996 to $695 for fiscal 1997 primarily because the average debt
outstanding during fiscal 1997 was less than that outstanding during fiscal
1996. On May 30, 1997, the Company repaid its debt. The Company does not
anticipate that it will need debt financing in the foreseeable future.
Tax Provision
As a result of the tax benefit recorded in fiscal 1996, the Company
expected to provide for income taxes at a 36% blended statutory rate for the
remainder of the Lone Star Contract for book purposes. During this period the
Company expected to pay income taxes, however, at a 2% effective rate,
consisting of Federal alternative minimum tax.
The Company's tax provision for fiscal 1997 consists of two components:
a. The tax provision on pre-tax accounting income, exclusive of the
$19,667 gain on the sale of assets, aggregates $4,270 and
essentially represents the amortization of the $7,716 deferred tax
asset recorded at September 30, 1996 at an effective rate of 36% of
earnings. If future events change the Company's estimate concerning
the probability of utilizing its tax assets, appropriate adjustments
will be made when such a conclusion is reached.
b. The tax provision on the $19,667 gain equals the Company's expected
tax liability for the income related to the sale and aggregates
$393. The tax rate used in such calculation was 2%, the Federal
alternative minimum tax rate. The Company is not subject to a higher
tax rate due to its carryforwards. A tax provision of 36% was not
provided for the gain because a related deferred tax asset was
previously reserved since the Company did not anticipate selling the
properties and had previously taken the properties off the market.
-17-
Fiscal 1996 vs Fiscal 1995
Revenues
Gas sales from natural gas marketing decreased $10,931 or 15.5% from
fiscal 1995 to fiscal 1996. The net decrease was caused by three factors one of
which increased gas sales and the other two of which decreased gas sales. Gas
sales increased $1,833 or 2.6% as a result of gas sales to MGNG commencing in
June of 1996 and other gas sales in the first half of fiscal 1996. In fiscal
1995 virtually all gas sales were to Lone Star. This increase was offset by a
5.7% scheduled reduction in contract volumes under the Lone Star Contract and a
12.4% reduction in volumes of gas otherwise delivered to Lone Star in fiscal
1996. Although the volumes sold to Lone Star annually are essentially fixed (the
Lone Star Contract has a take-or-pay provision), the Lone Star contract year is
from February 1 to January 31 whereas the Company's fiscal year is from October
1 to September 30. Furthermore, although the volumes to be taken by Lone Star in
a given contract year are fixed, there is no provision requiring fixed monthly
or daily volumes and deliveries accordingly vary with Lone Star's seasonal and
peak demands. Such variances have been significant. As a result, Lone Star
deliveries, although fixed for a contract year, may be skewed and not
proportional for the Company's fiscal year.
Oil and gas sales from the exploration and production segment increased
$62 or .7% as a result of offsetting factors. Production, expressed in
equivalent units of natural gas, decreased approximately 10% while the prices
received for oil and gas production increased approximately 11%. At the current
time gas prices are high although there can be no assurance this trend will
continue.
Expenses
Gas purchases decreased $5,937 or 14.8% from fiscal 1995 to fiscal 1996.
The decrease closely parallels the decrease in gas sales. In fiscal 1995 gas
purchases comprised 57% of gas sales versus 57.6% of gas sales in fiscal 1996.
Oil and gas production expenses decreased $321 or 13.6% from fiscal 1995
to fiscal 1996. The decrease results primarily from two factors: decreased ad
valorem (property) taxes and decreased well maintenance in the summer of 1996
when the Company expected to sell its oil and gas properties. As a result of
such deferral of maintenance, it is anticipated that oil and gas production
expenses will be slightly higher in fiscal 1997 now that the Company has
withdrawn its oil and gas properties from the market and expects to continue to
operate and produce them.
General and administrative expenses applicable to the exploration and
production segment increased $165 or 15.4% from fiscal 1995 to fiscal 1996. The
increase was caused by increased salaries, insurance and employee benefit costs
and increased legal fees.
Depreciation, depletion and amortization decreased $446 or 16.1%.
Approximately 10% of the decrease was caused by and parallels a 10% decrease in
oil and gas production. The remaining 6.1% decrease is attributable to changes
in estimates concerning proved reserves.
Corporate general and administrative expenses decreased $1,496 or 30%
from fiscal 1995 to fiscal 1996. The decrease was primarily attributable to
decreased legal fees, employee salaries and employee benefits.
Other income increased $2,642 or 940.2%. All of the increase is
attributable to recoveries from a plaintiff escrow fund related to shareholder
litigation. The amount recovered and recorded as other income in fiscal 1996 was
$2,725. There was no counterpart to this item in fiscal 1995.
Interest expense decreased $2,087 or 51.6% from fiscal 1995 to fiscal
1996. The decrease parallels the decrease in outstanding long-term debt. As a
result of the refinancing of the GECC loan on November 26, 1996 the Company
replaced a fixed 8.33% rate of interest with a floating interest rate equal to
the prime rate plus 1%. The prime rate is currently 8.25%. As a result of the
refinancing, changes in the prime rate will henceforth impact the Company's
interest expense and results of operations.
The income tax benefit has been determined pursuant to "Financial
Accounting Standards Number 109 - Accounting for Income Taxes (FAS 109)." The
tax benefit in fiscal 1996 results from changes in management's assessment of
the
-18-
probability of future taxable income. As a result of the tax benefit recorded in
fiscal 1996, the Company expects to provide for income taxes at a 36% blended
statutory rate for the remainder of the Lone Star Contract for book purposes.
During this period the Company expects to pay income taxes at a 2% effective
rate, consisting of Federal alternative minimum tax (see Note 19 to the
Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the Company generated $26,048 of cash flow from
operating activities, $50,184 from the sale of its Rusk County oil and gas
properties and pipeline to UPRC and UPIPC, respectively, and $797 from the
exercise of stock options, resulting in a total of $77,029 of cash flow
generated. Of this amount, $14,006 (net) was used to repay debt, $25,163 was
used to repurchase the Company's stock, $1,540 was invested in oil and gas
properties and $3,439 was spent for other investing/financing activities,
resulting in an increase in unrestricted cash of $32,881. At September 30, 1997,
the Company's working capital was $46,384 versus a deficit of $4,452 at
September 30, 1996. (Subsequent to September 30, 1997, the Company also received
an $8,700 payment from MG). Also at September 30, 1997, the Company was free of
long-term debt, having repaid its revolving credit facility with a portion of
the proceeds from the sale of its oil and gas properties and pipeline to UPRC
and UPIPC, respectively.
At September 30, 1996, the Company contemplated paying off its senior
debt and financing the drilling of its undrilled Texas acreage. As a result of
the sale to UPRC and the cash proceeds received, the Company's liquidity and
capital resource posture changed significantly. The Company, after repayment of
long-term debt, had approximately $40,000 of cash but had sold most of its oil
and gas assets. After lengthy consideration, the Company decided to continue
operations rather than to liquidate for the following reasons:
a. The Company's remaining oil and gas production was viable and
included undrilled acreage.
b. The Company's natural gas marketing contract with Lone Star would
not terminate until May 31, 1999 and the Company would have had to
sell this contract at a significant discount to liquidate.
c. Given current litigation and on-going contractual relationships,
liquidation would be cumbersome and expensive and several contingent
obligations would remain.
d. Management believes that there are several promising opportunities
for investment in the oil and gas business specifically and the
energy sector generally.
Nevertheless, the Company's Board of Directors authorized the Company to
repurchase up to 2,500,000 of the Company's outstanding shares to provide an
exit vehicle for investors who wanted to liquidate their investment in the
Company. As of September 30 and November 10, 1997, 2,085,100 shares had been
repurchased at a cost of $25,163 ($12.07 average price/share).
In conjunction with its intention to increase its oil and gas assets,
the Company is currently undertaking a 10-13 well drilling program on its
undrilled coalbed methane acreage in Alabama. It has also entered into a joint
venture to drill up to 100 wells in Appalachia over the next three to four
years. These drilling activities will require capital costs of approximately
$10,000 from the Company, including $4,000 through September 30, 1999. In
addition, subsequent to September 30, 1997, the Company invested $1,000 in a
promissory note to Penn Octane Corporation, a public company involved in the
liquid petroleum gas and compressed natural gas businesses (see Note 24 to the
financial statements). The Company is also currently evaluating other possible
acquisitions and investments in the exploration and production business.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in
this report are forward-looking statements. Forward-looking statements in this
report generally are accompanied by words such as "anticipate," "believe,"
"estimate," or "expect" or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements are disclosed in this
report, including without limitation in conjunction with the expected cash
receipts and expected cash obligations included below. All forward-looking
statements in this report are expressly qualified in their entirety by the
cautionary statements in this paragraph.
-19-
As a result of the sale of its oil and gas properties and pipeline and
the repayment of its revolving credit facility, the Company had $36,338 in
unrestricted cash and owed no long-term debt as of September 30, 1997. In
addition, the Company retains its gas sales contract with Lone Star and a
portion of its exploration and production business. An estimate of the Company's
expected cash resources and obligations from October 1, 1997 to September 30,
1999 is as follows:
Expected Cash Resources: ("000's" Omitted)
Cash on hand - October 1, 1997 ............................................... $ 36,338
Cash flow - gas marketing and remaining exploration and production operations 43,150
Repayment of Penn Octane Corporation note .................................... 1,000
Proceeds from Powerine Arbitration (received subsequent to September 30, 1997) 8,700
Additional proceeds from Powerine arbitration ................................ 2,140
Proceeds from platinum recovery - IRLP ....................................... 800
Proceeds from SWAP litigation - IRLP ......................................... 703
Proceeds from American Western note .......................................... 2,919
Interest ..................................................................... 5,715
--------
101,465
--------
Expected Cash Obligations:
Liquidation of working capital ............................................... 762
New drilling ................................................................. 4,000
Purchase of 414,900 additional shares of common stock of the Company ......... 5,808
Purchase of note of Penn Octane Corporation (paid subsequent to September 30,
1997) .................................................................... 1,000
Quarterly dividends (based on outstanding shares at November 10, 1997 less
additional purchases of 414,900 shares) .................................. 5,158
IRLP payment of vendors and funding of environmental reserves ................ 4,422
--------
21,150
--------
Excess of Expected Cash Resources Over Expected Cash Obligations ................ $ 80,315
========
The following apply to the Company's expected cash resources and
obligations:
a. Interest income on cash has been computed at 5%. If unanticipated
expenditures are made or interest rates decrease, interest income
will decrease.
b. The Company is currently evaluating several investments in the
energy sector but has not yet made any additional commitments. It
may, nevertheless, do so in the future. The above cash estimates
do not include any expenditures for such investments.
c. The Company's Board of Directors has authorized the purchase by
the Company of up to 2,500,000 shares of common stock in the open
market. To date, 2,085,100 shares have been repurchased. The
Company may or may not repurchase the remaining 414,900 shares
available, depending on market prices and other factors and such
repurchases may be at a different price than assumed in the above
estimates.
d. Although the Company's Board of Directors has adopted a quarterly
dividend policy of $.15 per quarter, the Board may elect to
change such policy at any time.
e. The Company has assumed certain cash returns from its recent
drilling activities. There can be no assurance that such drilling
activities will be successful or that the projected returns will
be achieved.
In addition to the foregoing, the above estimates assume that the
Company will not be adversely impacted by any of the following risk factors. If
such events occur, the Company's estimated cash flow will probably be adversely
affected and such effects may be material.
-20-
1. Contingent Environmental Liabilities:
Although the Company has never itself conducted refining operations and its
refining subsidiaries have exited the refining business and the Company does
not anticipate any required expenditures related to discontinued refining
operations, interested parties could seek redress from the Company for
environmental liabilities. In the past, government and other plaintiffs have
often named the most financially capable parties in such cases regardless of
the existence or extent of actual liability. As a result there exists the
possibility that the Company could be named for any environmental claims
related to discontinued refining operations of its present and former
refining subsidiaries.
The Company has recently been informed that the United States Environmental
Protection Agency is investigating offsite acid sludge waste found near the
Indian Refinery and is also remediating surface contamination in the Indian
Refinery property (recently sold by American Western - see below). Neither
the Company nor IRLP has been named with respect to these actions. Finally,
the bankruptcy court handling American Western's bankruptcy proceedings has
approved American Western's petition to sell the Indian Refinery to an
outside third party purchaser. If that outside purchaser dismantles and
salvages the Indian Refinery rather than operates it, the remediation of
related environmental contamination and claims against potentially
responsible parties may be accelerated. Although the Company does not
believe it has any liability with respect to environmental matters of its
current and former refining subsidiaries and would contest any claim, courts
might find otherwise and the cost and time to litigate such claims would be
material and adversely affect the estimated cash flow above. Any resulting
litigation could last several years and divert the Company's resources.
2. IRLP Vendor Liabilities:
IRLP owes its vendors approximately $6,100. Its only major asset is a $5,500
note due from the purchaser of the Indian Refinery, American Western. IRLP
believes that it can fully discharge its vendor liabilities if it receives
the entire $5,500 due from the American Western note. In November 1996,
American Western filed for bankruptcy and has recently sold the Indian
Refinery to an outside party. It appears that approximately $2,900 will be
available for creditors of American Western and environmental reserves from
the proceeds of the sale. Although IRLP holds a first mortgage on the Indian
Refinery, other creditors of American Western hold liens superior to that of
IRLP and creditors with inferior liens may attempt to circumvent IRLP's
first mortgage. It is, therefore, unlikely that IRLP's share of the proceeds
will be sufficient to settle its vendor liabilities. If IRLP cannot settle
its vendor liabilities, IRLP may file for bankruptcy since its only
significant asset is its note due from American Western. In addition, the
Illinois Department of Revenue recently filed to assess two present officers
of the Company and two former officers of the Company for certain tax
liabilities of IRLP. The Company has responded that its officers are not
liable for the taxes. Although the Company does not believe such
developments will affect its estimated cash flow, such may not be the case.
IRLP's vendors may attempt to hold the Company liable for IRLP's debts
and/or the Illinois Department of Revenue may prevail in its efforts to
assess officers of the Company for IRLP liabilities, in which case the
Company would have indemnification obligations to such officers. In either
case the Company's estimated cash flow may be adversely affected.
3. IOC Bankruptcy:
IOC, another wholly-owned subsidiary of the Company, filed for bankruptcy in
February 1997. IOC's only asset is a platinum catalyst worth approximately
$800 and IOC's primary creditor is IRLP. Although the Company does not
believe IOC's bankruptcy will affect the Company's estimated cash flow or
operations, such may not be the case.
4. Powerine Arbitration:
Although the arbitrator has ruled in the Company's favor in the Powerine
Arbitration (see Note 15 to the financial statements and Item 3 to this Form
10-K) and the Company believes that it is entitled to additional arbitration
proceeds of $2,140, MG is disputing the computation and amount of the
arbitration
-21-
award and there can be no assurance that the additional proceeds expected by
the Company will be received. The matter remains in arbitration.
5. Larry Long Litigation:
The above cash flow estimate does not assume the Company will have to pay
any claim related to the Larry Long litigation. Although the sale of the
Company's oil and gas properties has significantly reduced the Company's
exposure, there can be no assurance that the plaintiffs will not file new
lawsuits, having already amended their original claim three times. In such
case, the Company would be exposed to the continuing costs of defending the
amended petitions, and, if it is determined that settlement is in the
Company's best interest, the cost to settle the lawsuit. No such costs are
included in the above estimate of cash flow.
6. Credit Risk - Lone Star:
At the current time, approximately 88% of the Company's gas marketing
volumes are sold to a single customer, Lone Star, under a long-term gas sale
contract, which terminates on May 31, 1999. Although Lone Star has paid for
all gas purchased when such payments were due, any inability of Lone Star to
continue to pay for gas purchased would adversely affect the Company's cash
flow.
7. Supply Risk - MGNG:
The Company now purchases approximately 90% of its gas supplies for the
Lone Star Contract from MGNG at fixed prices. If spot gas prices increase
significantly and MGNG has not hedged its future commitment to supply gas to
the Company or if MGNG experiences financial problems, MGNG may be unable to
meet its gas supply commitments to the Company. If MGNG does not fulfill its
gas supply commitment to the Company, the Company may not be able to fulfill
its gas delivery commitment to Lone Star or to earn the gross margins
currently being earned. This would adversely impact the Company's cash flow.
Under such circumstances the Company may not be able to recover lost profits
and cash flow from MGNG despite contractual provisions providing for such
recovery.
8. Price Risk - Gas Supply:
The Company has not hedged or fixed the price on approximately 17% of the
gas that it must supply over the next 20 months under its two gas sales
contracts. If gas prices increase or remain high, the Company may incur
significant losses or reduced gross gas margins when it buys gas at market
prices to provide gas for its two gas sales contracts, thus reducing its
cash flow from that projected.
9. Gas Contract Litigation:
The Company's natural gas marketing subsidiaries and MGNG are parties to
several natural gas contracts. The provision of such contracts are very
complex and it is possible that the Company's subsidiaries and MGNG may
litigate several contractual issues of disagreement. The outcome of such
litigation may impact the above cash flow estimates.
10. Public Market for the Company's Stock:
Although there presently exists a market for the Company's stock, such
market is volatile and the Company's stock is thinly traded. In addition,
the Company's earnings history has been sporadic. Although the Company
believes that its earnings and cash flow will be more predictable in the
future, there can be no assurance that such will be the case. Such
volatility may adversely affect the market price and liquidity of the
Company's common stock.
In addition, the Company, through its stock repurchase program, has
effectively become the major market maker in the Company's stock. If the
Company ceases repurchasing shares the market value of the Company's stock
may be adversely affected.
-22-
11. Future of the Company:
As noted in Note 4 to the financial statements, the Company recently sold
84% of its proved oil and gas reserves and its Texas pipeline. The Company's
primary remaining asset is its gas sales contract with Lone Star, which
expires on May 31, 1999. Although the Company is seeking investments in the
energy sector, including oil and gas properties, the current market is a
seller's market and the Company may not be able to acquire such investments
at a favorable price. There are also many competitors with resources greater
than those of the Company. If the Company does not acquire additional
assets, its Board of Directors may decide to pursue other courses of action,
including but not limited to liquidation, sale of assets, merger or other
reorganization.
12. Year 2000
The Company has not undergone a comprehensive review of the potential impact
of the year 2000 change on its operations, financial and accounting systems;
however, while there can be no assurances, the Company is not aware of any
matters at this time that would result in material adverse consequences to
the Company.
13. Other:
In addition to the specific risks noted above, the Company is subject to
general business risks, including insurance claims in excess of insurance
coverage, tax liabilities resulting from tax audits, drilling risks that new
drilling will result in dry holes or marginal wells and the risks and costs
of unending litigation.
INFLATION AND CHANGING PRICES
Natural Gas Marketing
The Company's gas sales contract with Lone Star is essentially a fixed
price contract. It continues through May 1999. The Company's gas supply contract
with MGNG is also a fixed price contract. The result is that the Company's gross
margin is essentially "locked in" and does not change with inflation. The
Company's gas arrangement with UPRC is at spot prices. Such spot prices,
however, do not change with inflation but do change with the supply and demand
for natural gas which does not necessarily parallel inflation. Although there
are some operating costs applicable to the natural gas marketing segment, which
tend to increase or decrease with inflation, they are minor and inflation of
such costs without concomitant inflation in revenues does not significantly
impact operating profits.
Exploration and Production
Oil and gas sales are determined by markets locally and worldwide and
often move inversely to inflation. Whereas operating expenses related to oil and
gas sales may be expected to parallel inflation, such costs have often tended to
move more in response to oil and gas sales prices than in response to inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share," which establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock. SFAS 128 simplifies
the standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15, "Earnings Per Share," and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with a presentation
of basic EPS, and requires dual presentations of basic and diluted EPS on the
face of the income statement. SFAS 128 is effective for fiscal years ending
after December 15, 1997, and early adoption is not permitted. The Company will
adopt SFAS 128 for the fiscal year ending September 30, 1998.
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130") regarding reporting comprehensive income, which establishes
standards for reporting and display of comprehensive income and its components.
The components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and
-23-
unrealized gains and losses on certain investments in debt and equity
securities. SFAS 130 requires that all items recognized under accounting
standards as components of comprehensive income be reported in a financial
statement displayed in equal prominence with the other financial statements; the
total of other comprehensive income for a period is required to be transferred
to a component of equity that is separately displayed in a statement of
financial condition at the end of an accounting period. SFAS 130 is effective
for both interim and annual periods beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt SFAS 130 for the fiscal
year ending September 30, 1999.
In June 1997, FASB issued Financial Accounting Standards Board No. 131
("SFAS 131") regarding disclosures about segments of an enterprise and related
information. SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 131 is
effective for periods beginning after December 15, 1997. The Company will adopt
SFAS No. 131 for the fiscal year ending September 30, 1999.
The Company believes that adoption of these financial accounting
standards will not have a material effect on its financial condition or results
of operations.
RISK FACTORS
See above.
-24-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995................. 26
Consolidated Balance Sheets, as of September 30, 1997 and 1996.............................................. 28
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995................. 29
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1997, 1996
and 1995........................................................................................... 31
Notes to the Consolidated Financial Statements.............................................................. 32
REPORTS OF INDEPENDENT ACCOUNTANTS.......................................................................... 61
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
-25-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Per Share Amounts)
Year Ended September 30,
-------------------------------------------
1997 1996 1995
------- ------- -------
Revenues:
Natural gas marketing and transmission:
Gas sales .............................. $64,599 $59,471 $70,402
Transportation ......................... 7
------- ------- -------
64,606 59,471 70,402
------- ------- -------
Exploration and production:
Oil and gas sales ...................... 6,740 8,782 8,720
Well operations ........................ 373 442 477
------- ------- -------
7,113 9,224 9,197
------- ------- -------
71,719 68,695 79,599
------- ------- -------
Expenses:
Natural gas marketing and transmission:
Gas purchases .......................... 39,966 34,233 40,160
Operating costs ........................ 472 845 804
General and administrative ............. 776 1,231 1,186
Transportation ......................... 338
Depreciation and amortization .......... 10,639 11,393 11,385
------- ------- -------
52,191 47,702 53,535
------- ------- -------
Exploration and production:
Oil and gas production ................. 1,940 2,045 2,366
General and administrative ............. 1,137 1,235 1,070
Depreciation, depletion and amortization 1,611 2,324 2,770
------- ------- -------
4,688 5,604 6,206
------- ------- -------
Corporate general and administrative ..... 3,370 3,499 4,995
------- ------- -------
60,249 56,805 64,736
------- ------- -------
Operating income ............................. 11,470 11,890 14,863
------- ------- -------
(Continued on next page)
The accompanying notes are an integral part of these financial statements
-26-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Per Share Amounts)
(continued from previous page)
Year Ended September 30,
-----------------------------------------
1997 1996 1995
---- ---- ----
Other income (expense):
Gain on sale of assets ............................................... 19,667
Interest income ...................................................... 1,485 961 685
Other income (expense) ............................................... (55) 2,923 281
Interest expense ..................................................... (1,038) (1,959) (4,046)
----------- ----------- -----------
20,059 1,925 (3,080)
----------- ----------- -----------
Income from continuing operations before income taxes ................... 31,529 13,815 11,783
----------- ----------- -----------
Provision for (benefit of) income taxes related to continuing operations:
State ............................................................ 119 (309) 4,728
Federal .......................................................... 4,544 (10,950) 33,095
----------- ----------- -----------
4,663 (11,259) 37,823
----------- ----------- -----------
Income (loss) from continuing operations ................................. 26,866 25,074 (26,040)
Income from discontinued refining operations less applicable income
taxes of $19,850 in 1995 ............................................. 40,937
----------- ----------- -----------
Net income ............................................................... $ 26,866 $ 25,074 $ 14,897
=========== =========== ===========
Net income (loss) per share:
Income (loss) per share from continuing operations - primary ......... $ 4.64 $ 3.73 ($ 3.84)
=========== =========== ===========
- fully diluted ................................................ $ 4.61 $ 3.73 ($ 3.84)
=========== =========== ===========
Income per share from discontinued refining operations - primary ..... $ $ $ 6.04
=========== =========== ===========
- fully diluted ................................................ $ $ $ 6.04
=========== =========== ===========
Net income per share - primary ....................................... $ 4.64 $ 3.73 $ 2.20
=========== =========== ===========
- fully diluted ................................................ $ 4.61 $ 3.73 $ 2.20
=========== =========== ===========
Weighted average number of common and common equivalent shares
outstanding - primary ........................................ 5,786,000 6,719,000 6,778,000
=========== =========== ===========
- fully diluted ................................................ 5,827,000 6,719,000 6,778,000
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
-27-
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
September 30,
------------------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 36,338 $ 3,457
Restricted cash ............................................................ 497 1,743
Accounts receivable ........................................................ 5,868 10,217
Prepaid transportation, net ................................................ 1,500
Prepaid expenses and other current assets .................................. 452 73
Deferred income taxes ...................................................... 2,239 2,373
Note receivable ............................................................ 10,000
Estimated realizable value of discontinued net refining assets ............. 4,422 6,288
--------- ---------
Total current assets ..................................................... 61,316 24,151
Property, plant and equipment, net:
Natural gas transmission ................................................... 20,987
Furniture, fixtures and equipment .......................................... 180 222
Oil and gas properties, net (full cost method) ................................. 2,818 15,014
Gas contracts, net ............................................................. 15,747 25,142
Prepaid transportation, net .................................................... 1,162
Deferred income taxes .......................................................... 1,494 5,343
Other assets, net .............................................................. 371
Note receivable ................................................................ 10,000
--------- ---------
Total assets ............................................................. $ 82,717 $ 101,230
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................................... $ 8,172
Dividend payable ........................................................... $ 707
Accounts payable ........................................................... 5,615 3,817
Accrued expenses ........................................................... 1,257 1,875
Other liabilities .......................................................... 3,660
Net refining liabilities retained .......................................... 7,353 11,079
--------- ---------
Total current liabilities ................................................ 14,932 28,603
Long-term debt ................................................................. 5,834
Other long-term liabilities .................................................... 20 82
--------- ---------
Total liabilities ........................................................ 14,952 34,519
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series B participating preferred stock; par value - $1.00; 10,000,000 shares
authorized; no shares issued
Common stock; par value - $0.50; 25,000,000 shares authorized;
6,798,646 issued in 1997 and 6,693,646 issued and outstanding in 1996 .... 3,399 3,347
Additional paid-in capital ..................................................... 67,061 66,316
Retained earnings (deficit) .................................................... 22,468 (2,952)
--------- ---------
92,928 66,711
Treasury stock at cost - 2,085,100 shares in 1997 .............................. (25,163)
--------- ---------
Total stockholders' equity ............................................... 67,765 66,711
--------- ---------
Total liabilities and stockholders' equity ............................... $ 82,717 $ 101,230
========= =========
The accompanying notes are an integral part of these financial statements
-28-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted Except Share Amounts)
Year Ended September 30,
----------------------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income ........................................................... $ 26,866 $ 25,074 $ 14,897
--------- --------- ---------
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation, depletion and amortization .......................... 12,250 13,612 19,238
Amortization of deferred debt issue costs ......................... 343 356 2,732
Deferred income taxes ............................................. 3,983 (10,667) 55,799
Gain on MG Settlement ............................................. (396,166)
Gain on sale of assets ............................................ (19,667)
Provision for impairment loss ..................................... 323,078
Write-off of debt acquisition costs ............................... 161
Changes in assets and liabilities:
Decrease in restricted cash .................................... 1,246 5,942 4,750
Decrease in temporary investments .............................. 4,436
Decrease in accounts receivable ................................ 4,349 22,658 27,685
Decrease in inventory .......................................... 22,914 57,401
Decrease in prepaid transportation ............................. 338
(Increase) decrease in prepaid expenses and other current assets (379) 903 6,366
(Increase) decrease in other assets ............................ 371 (103) (1,793)
Increase (decrease) in accounts payable ........................ 1,798 (1,744) (29,660)
(Decrease) in accrued expenses ................................. (3,351) (28,105) (29,936)
Increase (decrease) in other current liabilities ............... (2,037) (329) 283
(Decrease) in other long-term liabilities ...................... (62) (23,265) (630)
(Decrease) in due to related parties ........................... (385) (9,014)
(Decrease) in deferred revenues ................................ (12,124)
--------- --------- ---------
Total adjustments .......................................... (818) 1,948 22,445
--------- --------- ---------
Net cash flow provided by operating activities ............. 26,048 27,022 37,342
--------- --------- ---------
Cash flows from investment activities:
Proceeds from sale of furniture, fixtures and equipment .............. 4,723
Proceeds from sale of oil and gas assets and pipeline ................ 50,184
Investment in refining plant ........................................ (35,355)
Realization from (liquidation of) discontinued net refining assets ... (1,860) 4,000
Investment in oil and gas properties ................................. (1,540) (34) (4,022)
Investment in pipelines .............................................. (59) (140) (47)
Purchase of furniture, fixtures and equipment ........................ (4) (1) (288)
Other ................................................................ (359)
--------- --------- ---------
Net cash provided by (used in) investing activities ........ 46,362 3,825 (34,989)
--------- --------- ---------
(continued on next page)
The accompanying notes are an integral part of these financial statements
-29-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted Except Share Amounts)
(continued from previous page)
Year Ended September 30,
---------------------------------------
1997 1996