UNITED STATES 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 December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-8704
HOWELL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1223027
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 FANNIN, SUITE 1500, HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 658-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
........... ..............
Common Stock, $1 par value New York Stock Exchange
$3.50 Convertible Preferred Stock, National Association of Securities
Series A, Dealers, Inc.
$1 par value Automated Quotation System
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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.
[X]
The market value of all shares of Common Stock on March 1, 1997 was
approximately $74.9 million. The aggregate market value of the shares held by
nonaffiliates on that date was approximately $55.3 million. As of March 1, 1997,
there were 4,994,726 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Howell Corporation proxy statement to be filed in connection with the 1997
Annual Shareholders' Meeting (to the extent set forth in Part III of this Form
10-K).
HOWELL CORPORATION
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.................................................. 1
ITEM 2. PROPERTIES................................................ 5
ITEM 3. LEGAL PROCEEDINGS......................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS ............................................... 13
ITEM 6. SELECTED FINANCIAL DATA................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................... 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 19
ITEM 11. EXECUTIVE COMPENSATION.................................... 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K................................... 20
PART I
ITEM 1. BUSINESS
A. GENERAL
Howell Corporation and its subsidiaries (the "Company") are primarily engaged
in the exploration, production, acquisition and development of oil and gas
properties. The Company is also involved in technical fuels and chemical
processing, and crude oil marketing and transportation. These operations are
conducted in the United States. A description of each of the Company's principal
business segments and the markets in which they operate is summarized below. For
information relating to industry segments, reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto.
OIL AND GAS EXPLORATION AND PRODUCTION
The Company's oil and gas exploration and production activities are
conducted entirely within the United States by Howell Petroleum Corporation
("HPC") and are concentrated along the Gulf Coast, both offshore and onshore and
in Wyoming. At December 31, 1996, the Company's estimated proved oil reserves
were 7,959 MBbl and estimated proved natural gas reserves were 60,254 MMcf. The
Company's three major producing properties, Main Pass Block 64 ("Main Pass"),
the LaBarge Project and the North Frisco City Field together represented 5,054
MBbl and 48,105 MMcf of the Company's estimated proved reserves of oil and
natural gas, respectively, at December 31, 1996. The Company's interest in the
LaBarge Project is also the source of all of the Company's proved reserves of
carbon dioxide and helium (113,397 MMcf and 2,290 MMcf, respectively, at
December 31, 1996). In addition, the Company owns fee mineral interests in
876,000 net acres in Mississippi, Alabama and Louisiana. Substantially all of
the Company's oil and natural gas production is sold on the spot market or
pursuant to contracts priced according to the spot market. HPC has 47 employees.
The oil and gas industry is highly competitive. Major oil and gas
companies, independent operators, drilling and production purchase programs, and
individual producers and operators are active bidders for desirable oil and gas
properties, as well as the equipment and labor required to operate those
properties. Many competitors have financial resources substantially greater, and
staffs and facilities substantially larger, than those of the Company. The
availability of a ready market for the oil and gas production of the Company
depends in part on the cost and availability of alternative fuels, the level of
consumer demand, the extent of other domestic production of oil and gas, the
extent of importation of foreign oil and gas, the cost of and proximity to
pipelines and other transportation facilities, the regulations by state and
federal authorities, and the cost of complying with applicable environmental
regulations.
TECHNICAL FUELS AND CHEMICAL PROCESSING
The Company develops, manufactures and markets hydrocarbons-based research
and reference fuels and provides chemical toll processing services through its
wholly owned subsidiary Howell Hydrocarbons & Chemicals, Inc. ("HHC"), which has
54 employees. The Company conducts its research and reference fuels operations
and its chemical processing operations at its modern 50-acre facility in
Channelview, Texas. Extensive construction at the facility since 1988 has
expanded the available office, laboratory and warehouse space to 24,500 square
feet. The Company now has available for technical fuels operations an 1,800 BPD
sweet crude unit and a 400 BPD sour crude unit, as well as extensive laboratory
blending and dedicated storage facilities, including leased storage near its
major customers in Detroit, Michigan. For the chemical processing operations,
the facility includes three large-diameter stainless steel distillation columns
for batch or continuous processing and extensive stainless steel and carbon
steel tankage. In the second half of 1993, the Company constructed a synthesis
reaction unit that became operational in 1994. The modern facilities afforded
the Company the ability to obtain expanded air permits that enhance its
competitive position.
The technical fuels business involves the processing of crude oil and
blending of petroleum products and additives to create specialty fuels used for
testing such things as lubricants and engine emissions. HHC's customer base for
its technical fuels products includes the U.S. Government and automobile
manufacturers worldwide. HHC has relatively few competitors in the technical
fuels market; however, each is substantially larger and has greater financial
resources than HHC. Environmental and other governmental regulations
relating to combustion product emissions, mileage criteria and equipment design
continue to increase. As a result, the Company continues to develop new products
to meet customer requirements and serve the demand for technical fuels.
HHC has conducted chemical toll processing and product terminalling
activities at the Channelview facility for eight years. In 1994 the toll
processing campaign was short-term in nature and consisted primarily of
reprocessing customers' chemicals that did not meet product specifications and
standby processing when the customer's own plant was unable to handle the
processing.
In 1995 and 1996, HHC obtained contracts that are longer term and involve
the use of the synthesis reaction unit. The Company has concentrated its
marketing efforts on customers who are manufacturers of acetates and esters for
the paint and coatings industry. Additionally, in 1995, HHC recognized income in
conjunction with the cancellation by a customer of a long-term contract. The
customer determined that demand for the product to be processed by HHC was not
sufficient to warrant production and released the Company from further
requirements under the contract.
HHC has competition for long-term toll manufacturing contracts from
numerous companies offering similar services in the Houston area and worldwide.
HHC believes its modern computer process control equipment and its access to
rail and water transportation give it an advantage over some of its competitors.
In May 1996 the Company signed a letter of intent to begin negotiations to
sell HHC to Schenectady International, Inc. ("Schenectady"). Subsequent to
signing the letter of intent, negotiations between the Company and Schenectady
were terminated. The Company continues to receive and evaluate inquiries about
the sale of HHC.
PURCHASE & SALE AND CONTRIBUTION & CONVEYANCE OF CRUDE OIL GATHERING AND
MARKETING OPERATIONS AND PIPELINE OPERATIONS
On December 1, 1996, Genesis Crude Oil, L.P., a Delaware limited
partnership ("Buyer"), Genesis Energy, L.P., a Delaware limited partnership
("MLP"), and Genesis Energy, L.L.C., a Delaware limited liability company
("LLC"), entered into a Purchase & Sale and Contribution & Conveyance Agreement
("Agreement") with Howell Corporation and certain of its subsidiaries ("Howell")
and Basis Petroleum, Inc. ("Basis"), a subsidiary of Salomon Inc. ("Salomon").
Pursuant to the Agreement, Howell agreed to sell and convey certain of its
assets to Buyer. These assets consisted of the crude oil gathering and marketing
operations and pipeline operations of Howell (referred to hereafter as the
"Business").
Buyer was formed by MLP and LLC to acquire the Business from Howell and
similar assets from Basis. MLP is owned 98% by limited partners and 2% by LLC,
which is the general partner. LLC is owned 46% by Howell and 54% by Basis. As a
result of this transaction Howell owns a subordinated limited partner interest
in Buyer of 9.01%, a direct general partner interest in Buyer of 0.18% and a
general partner interest through MLP of 0.74% of Buyer.
In accordance with the Agreement, Howell received cash of approximately
$74.0 million and 991,300 subordinated limited partner units in Buyer in
exchange for its sale and conveyance of the Business and recognized a gain in
the amount of $13.8 million. Except as specifically provided in the Agreement,
Howell retained all liabilities related to the Business arising from the
operations, activities and transactions of the Business up through the closing
date, including various environmental related liabilities. Howell made various
representations and warranties as to itself and the Business and has agreed to
indemnify Buyer for any breaches thereof. Claims for breaches of such
representations and warranties must be brought before December 3, 2001. Howell
has also agreed to perform, and retain the liability for, the cleaning of
certain tanks used in the pipeline operations.
On the closing date, Howell entered into various agreements with Buyer, MLP
and LLC pursuant to the Agreement, including (a) a non competition agreement
prohibiting Howell from competing with the Business for a period of ten years;
(b) an agreement relating to the purchase of crude oil by Howell for use in its
technical fuels business and the sale of crude oil by Howell from its oil and
gas exploration and production business; (c) an agreement whereby Howell will
provide certain transitional services to Buyer; (d) an agreement whereby MLP
will sell additional limited partner units to the public and use the proceeds to
redeem the subordinated
2
limited partner units in Buyer owned by Howell after certain conditions are met;
and (e) an agreement whereby one-half of the subordinated limited partner units
owned by Howell are pledged to secure Howell's indemnification of Buyer for
environmental liabilities.
Also at closing, Howell entered into an agreement with Salomon which
provides (a) an unconditional obligation of Howell to buy its 46% share of
additional limited partner interests ("APIs") from Salomon if Howell (as a
member of LLC) has approved an acquisition by Buyer and (b) to the extent APIs
are outstanding, an obligation by Howell to purchase 46% of such outstanding
APIs, but only to the extent of any distribution made to Howell by Buyer on
Howell's subordinated limited partner units.
MLP ("Genesis") is a Delaware limited partnership recently formed to
acquire, own and operate the crude oil gathering and marketing operations of
Basis and the crude oil gathering, marketing and pipeline operations of Howell.
Upon completion of the transactions, the partnership is one of the largest
independent gatherers and marketers of crude oil in North America. Genesis'
operations are concentrated in Texas, Louisiana, Alabama, Florida, Mississippi,
New Mexico, Kansas and Oklahoma. In its gathering and marketing business,
Genesis is principally engaged in the purchase and aggregation of crude oil at
the wellhead and the bulk purchase of crude oil at pipeline and terminal
facilities for resale at various points along the crude oil distribution chain,
which extends from the wellhead to aggregation and terminal stations, refineries
and other end markets (the "Distribution Chain"). The partnership's gathering
and marketing margins are generated by buying crude oil at competitive prices,
efficiently transporting or exchanging the crude oil along the Distribution
Chain and marketing the crude oil to refineries or other customers at favorable
prices. In addition to its gathering and marketing business, Genesis' operations
include transportation of crude oil for itself and for others at regulated
published tariffs on its four common carrier pipeline systems. On a pro forma
basis, in 1995 the gathering and marketing operations contributed approximately
65% of the partnership's total gross margin and the pipeline operations
contributed the remaining 35%.
SALE OF HOWELL TRANSPORTATION SERVICES, INC., TO LODESTAR LOGISTICS, INC.
On December 31, 1996, the Company sold 100% of the outstanding common stock
of Howell Transportation Services, Inc. (HTS) following the transfer of all
assets and liabilities associated with crude oil gathering to Genesis. The
former president of HTS purchased HTS at a value the Company believes was
equivalent to an arms length transaction. The remaining assets of HTS
specifically included approximately 64 tank trailers, approximately 40 leased
truck tractors, real property and contracts for transportation services.
The purchase price was the net book value of HTS on the closing date. The
Company received $2.6 million, consisting of $1.8 million in cash, a $0.5
million note receivable and a $0.3 million receivable in the form of services
from HTS. The $0.5 million note receivable has a term of no less than 84 months
and a rate of interest equal to prime as published in THE WALL STREET JOURNAL.
The Company will supply certain transition services as available, and as
needed, for a period of not more than 12 months.
In addition, the Company will provide, via cash advance or guarantee, for
deposits or collateral required to obtain initial insurance coverage as
required.
B. GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS
GOVERNMENTAL REGULATIONS
Domestic development, production and sale of oil and gas are extensively
regulated at both the federal and state levels. Legislation affecting the oil
and gas industry is under constant review for amendment or expansion, frequently
increasing the regulatory burden. Also, numerous departments and agencies, both
federal and state, have issued rules and regulations binding on the oil and gas
industry and its individual members, compliance with which is often difficult
and costly and some of which carry substantial penalties for failure to comply.
State statutes and regulations require permits for drilling operations, drilling
bonds and reports concerning wells. Texas and other states in which the Company
conducts operations also have statutes and regulations governing conservation
matters, including the unitization or pooling of oil and gas properties and
establishment of maximum rates of production from oil and gas wells. The
existing statutes or regulations currently limit the rate at which oil and gas
is produced from wells in which the Company owns an interest.
3
The Company's other business segments also operate under strict governmental
regulations. The refining and processing of fuels and chemicals is subject to
state and federal regulations regarding air and water emissions and the disposal
of wastes.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to extensive and developing federal,
state and local laws and regulations relating to environmental, health and
safety matters; petroleum; chemical products and materials; and waste
management. Permits, registrations or other authorizations are required for the
operation of certain of the Company's facilities and for its oil and gas
exploration, production, processing and chemical toll processing activities.
These permits, registrations or authorizations are subject to revocation,
modification and renewal. The Company has determined that the federal wastewater
discharge permit at its Channelview facility may have expired prior to the
transfer of the permit to the Company. The Company has taken steps to resolve
this matter. In addition, the Company has been penalized for the failure to
properly handle and dispose of some wastes at the facility it formerly owned in
San Antonio, Texas. See Note 10 of Notes to Consolidated Financial Statements.
Governmental authorities have the power to enforce compliance with these
regulatory requirements, the provisions of required permits, registrations or
other authorizations, and lease conditions, and violators are subject to civil
and criminal penalties, including fines, injunctions or both. Failure to obtain
or maintain a required permit may also result in the imposition of civil and
criminal penalties. Third parties may have the right to sue to enforce
compliance. The cost of environmental compliance has not had a materially
adverse effect on the Company's operations or financial condition in the past.
However, violations of applicable regulatory requirements, environment-related
lease conditions, or required environmental permits, registrations or other
authorizations can result in substantial civil and criminal penalties as well as
potential court injunctions curtailing operations.
Some risk of costs and liabilities related to environmental, health and
safety matters is inherent in the Company's operations, as it is with other
companies engaged in similar businesses, and there can be no assurance that
material costs or liabilities will not be incurred. In addition, it is possible
that future developments, such as stricter requirements of environmental or
health and safety laws and regulations affecting the Company's business or more
stringent interpretations of, or enforcement policies with respect to, such laws
and regulations, could adversely affect the Company. To meet changing permitting
and operational standards, the Company may be required, over time, to make site
or operational modifications at the Company's facilities, some of which might be
significant and could involve substantial expenditures. In particular, federal
regulatory programs focusing on the increased regulation of storm water runoff,
oil spill prevention and response and air emissions (especially those that may
be considered toxic) are currently being implemented. There can be no assurance
that material costs or liabilities will not arise from these or additional
environmental matters that may be discovered or otherwise may arise from future
requirements of law.
The Company has made a commitment to comply with environmental regulations.
Personnel with training and experience in safety, health and environmental
matters are responsible for compliance activities. Senior management personnel
are involved in the planning and review of environmental matters.
C. EMPLOYMENT RELATIONS
In addition to the employees of the two main business segments, the Company
has 20 other employees, for a total of 121 employees. The Company's employees
are not represented by a union for collective bargaining purposes. The Company
has experienced no work stoppages or strikes as a result of labor disputes and
considers relations with its employees to be good. The Company maintains group
life, medical, dental, long-term disability and accidental death and
dismemberment insurance plans for its employees. In addition, the Company
provides its employees with a Company stock purchase plan, a thrift plan and a
Simplified Employee Pension Plan.
4
ITEM 2. PROPERTIES
A. SUPPLEMENTARY OIL AND GAS PRODUCING INFORMATION (UNAUDITED)
The oil and gas producing activities of the Company are summarized below.
Substantially all of the Company's producing properties are subject to a lien
held by a bank. See Note 6 of Notes to Consolidated Financial Statements.
OIL AND GAS WELLS
As of December 31, 1996, the Company owned interests in productive oil and
gas wells (including producing wells and wells capable of production) as
follows:
PRODUCTIVE WELLS
GROSS(1) NET
Oil wells...................................... 290 81
Gas wells...................................... 85 13
----- -----
Total..................................... 375 94
===== =====
- -----------------
(1) One or more completions in the same well are counted as one well; none of
the wells have multiple completions.
RESERVES
The Company's net proved reserves of crude oil, condensate and natural gas
liquids (referred to herein collectively as "oil") and its net proved reserves
of gas have been estimated by the Company's engineers in accordance with
guidelines established by the Securities and Exchange Commission. The reserve
estimates at December 31, 1996, 1995 and 1994 have been audited by independent
petroleum consultants, H. J. Gruy and Associates, Inc. The estimates for the
prior years were audited by L. A. Martin & Associates, Inc. These estimates were
used in the computation of depreciation, depletion and amortization included in
the Company's consolidated financial statements and for other reporting
purposes. The Company has not filed any estimates of reserves with any federal
authority or agency during the past year other than estimates contained in its
last annual report on Form 10-K. Set forth on the next page are estimates of the
Company's net proved oil and gas reserves, all located in the United States.
5
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
OIL GAS
(BBLS) (MCF)
As of December 31, 1993.................... 7,270,921 70,693,980
Revisions of previous estimates............ (37,261) (1,656,466)
Extensions, discoveries & other additions.. 1,523,356 5,327,274
Production.................................(1,336,937) (3,208,139)
Sales of minerals in place................. (204,323) (218,059)
--------- ----------
As of December 31, 1994.................... 7,215,756 70,938,590
Revisions of previous estimates............ (555,469) (11,578,149)
Extensions, discoveries & other additions.. 2,523,526 3,893,092
Purchases of minerals in place............. 961,025 1,025,383
Production.................................(1,383,881) (3,526,803)
Sales of minerals in place................. (160,921) (171,313)
--------- ----------
As of December 31, 1995.................... 8,600,036 60,580,800
Revisions of previous estimates............ 459,820 1,007,250
Extensions, discoveries & other additions.. 122,081 2,424,077
Production.................................(1,207,906) (3,273,257)
Sales of minerals in place................. (14,858) (484,520)
--------- ----------
As of December 31, 1996.................... 7,959,173 60,254,350
========= ==========
Proved developed reserves:
December 31, 1993.......................... 6,782,015 63,618,243
December 31, 1994.......................... 6,201,176 63,677,432
December 31, 1995.......................... 7,662,263 60,125,223
December 31, 1996.......................... 6,995,835 58,444,115
Proved oil reserves at December 31, 1996 include 341,896 barrels of
natural gas liquids.
The reserves as of December 31, 1996, shown in the table above, include
379,575 barrels of oil and 2,723,335 Mcf of gas attributable to the Company's
producing fee mineral interests.
In addition to the oil and gas reserves shown above, HPC, through its
participation in the LaBarge Project in southwestern Wyoming, had proved carbon
dioxide reserves of 113,396,600 Mcf and proved helium reserves of 2,289,710 Mcf
at December 31, 1996.
OIL AND GAS LEASEHOLDS
The table on the following page sets forth the Company's ownership interest
in leaseholds as of December 31, 1996. The oil and gas leases in which the
Company has an interest are for varying primary terms, and many require the
payment of delay rentals to continue the primary term. The leases may be
surrendered by the Company at any time by notice to the lessors, by the
cessation of production or by failure to make timely payment of delay rentals.
6
DEVELOPED(1) UNDEVELOPED
--------------- --------------------
GROSS NET GROSS NET
ACRES ACRES ACRES ACRES
----- ----- ------ ------
Alabama............................. 6,583 2,378 5,039 1,591
Louisiana........................... 1,851 382 240 39
Mississippi......................... 3,803 1,150 17,962 5,522
Texas............................... 11,340 5,141 16,197 5,175
Wyoming............................. 17,499 2,501 19,199 3,225
All other states combined........... 2,522 470 1,862 511
Offshore............................ 7,025 5,589 - -
----- ----- ------ ------
Total........................... 50,623 17,611 60,499 16,063
====== ====== ====== ======
In addition to the acreage under leaseholds as shown above, the Company
owns the fee mineral acreage shown in the table below:
DEVELOPED(1) UNDEVELOPED
--------------- --------------------
GROSS NET GROSS NET
ACRES ACRES ACRES ACRES
Alabama............................. 2,829 1,414 618,656 308,949
Louisiana........................... 6,381 907 9,520 4,531
Mississippi......................... 20,282 10,153 1,117,130 550,413
------ ------ --------- -------
Total........................... 29,492 12,474 1,745,306 863,893
====== ====== ========= =======
- -----------------
(1) Acres spaced or assignable to productive wells.
DRILLING ACTIVITY
The following table shows the Company's net productive and dry exploratory
and development wells drilled in the United States:
EXPLORATORY DEVELOPMENT
------------------- -----------------
NET NET NET NET
PRODUCTIVE DRY PRODUCTIVE DRY
YEAR WELLS HOLES WELLS HOLES
---- ------- ----- ----- -----
1996 .16 1.45 - -
==== ==== ==== ==== ====
1995 1.64 1.08 0.72 1.95
==== ==== ==== ==== ====
1994 0.53 2.17 2.03 -
==== ==== ==== ==== ====
The table above reflects only the drilling activity in which the Company
had a working interest participation. In addition, in 1996, 1995 and 1994, 22,
14 and 18 gross productive wells, respectively, were drilled on the Company's
fee mineral acreage.
SALES PRICES AND PRODUCTION COSTS
The following table sets forth the average prices received by the Company
for its production, the average production (lifting) costs and amortization per
equivalent barrel of production:
UNITED STATES
---------------------
1996 1995 1994
---- ---- ----
Average sales prices:
Oil and NGL (per Bbl)............................ $17.52 $15.67 $14.40
Natural gas (per Mcf)............................ $ 2.06 $ 1.47 $ 1.70
Production (lifting) costs (per equivalent
barrel of production................................ $ 5.23 4.47 $ 4.23
Amortization (per equivalent barrel of production).. $ 5.37 $ 5.20 $ 4.96
7
Natural gas production is converted to barrels using its estimated energy
equivalent of six Mcf per barrel.
OIL AND GAS PRODUCING ACTIVITIES
CAPITALIZED COSTS. The following table presents the Company's aggregate
capitalized costs relating to oil and gas producing activities, all located in
the United States, and the aggregate amount of related depreciation, depletion
and amortization:
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(In thousands)
Capitalized Costs:
Oil and gas producing properties,
all being amortized................... $280,766 $278,505
Fee mineral interests, unproven..... 18,180 18,188
------- -------
Total............................. 298,946 296,693
======= =======
Accumulated depreciation, depletion
and amortization.................. $195,883 $188,972
======== ========
COSTS INCURRED. The following table presents costs incurred by the
Company, all in the United States, in oil and gas property acquisition,
exploration and development activities:
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Property acquisition:
Unproved fee mineral interests...... $ - $ - $ 3
Unproved leaseholds................. 1,665 790 792
Proved properties................... - 6,218 -
Exploration........................... 3,526 2,830 3,252
Development........................... 384 5,111 5,559
------ ------- ------
$5,575 $14,949 $9,606
====== ======= ======
In 1996, 1995 and 1994, $8,000, $12,000 and $63,000 of costs of unproved
mineral interests, respectively, were transferred to the full-cost pool,
representing the costs of mineral properties that were drilled and evaluated
during the periods. These transfers of costs are not reflected in the table
above.
RESULTS OF OPERATIONS. The following table sets forth the results of
operations of the Company's oil and gas producing activities, all in the United
States. The table does not include activities associated with carbon dioxide,
helium and sulfur produced from the LaBarge Project or with activities
associated with leasing the Company's fee mineral interests. The table does
include the revenues and costs associated with the Company's production from its
fee mineral interests.
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Revenues.............................. $28,162 $27,011 $24,608
Production (lifting) costs............ 9,174 8,810 7,914
Depreciation, depletion and
amortization........................... 9,416 10,259 9,282
------ ------ ------
9,572 7,942 7,412
Income tax expense.................... 3,318 2,396 2,283
------ ------ ------
Results of operations (excluding
corporate overhead and interest cost). $6,254 $5,546 $5,129
====== ====== ======
8
Included in the 1996, 1995 and 1994 amounts above are $2,301,000,
$1,992,000 and $1,908,000 of revenues and $181,000, $146,000 and $141,000 of
production costs, respectively, from the production of the Company's producing
fee mineral interests.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
OIL AND GAS RESERVES. The accompanying table presents a standardized measure of
discounted future net cash flows relating to the production of the Company's
estimated proved oil and gas reserves at the end of 1996 and 1995. The method of
calculating the standardized measure of discounted future net cash flows is as
follows:
(1) Future cash inflows are computed by applying year-end prices of oil and
gas to the Company's year-end quantities of proved oil and gas reserves.
Future price changes are considered only to the extent provided by
contractual arrangements in existence at year-end.
(2) Future development and production costs are estimates of expenditures
to be incurred in developing and producing the proved oil and gas reserves
at year-end, based on year-end costs and assuming continuation of existing
economic conditions.
(3) Future income tax expenses are calculated by applying the applicable
statutory federal income tax rate to future pretax net cash flows. Future
income tax expenses reflect the permanent differences, tax credits and
allowances related to the Company's oil and gas producing activities
included in the Company's consolidated income tax expense.
(4) The discount, calculated at ten percent per year, reflects an estimate
of the timing of future net cash flows to give effect to the time value of
money.
DECEMBER 31, DECEMBER 31,
1996 1995
(In thousands)
Future cash inflows..................................... $398,711 $253,239
Future production costs................................. 178,157 97,093
Future development costs................................ 10,583 9,963
Future income tax expenses.............................. 55,675 32,531
--------- -------
Future net cash flows................................... 154,296 113,652
10% annual discount for estimated timing of cash flows.. 50,241 31,505
--------- -------
Standardized measure of discounted future net cash flows relating to proved
oil and gas reserves................................ $104,055 $82,147
======== =======
The standardized measure is not intended to represent the market value of
reserves and, in view of the uncertainties involved in the reserve estimation
process, including the instability of energy markets as evidenced by recent
declines in both natural gas and crude oil prices, may be subject to material
future revisions.
9
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS. The
table below presents a reconciliation of the aggregate change in standardized
measure of discounted future net cash flows:
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Sales and transfers, net of production costs. $(18,988) $(18,201) $(16,693)
Net changes in prices and production costs... 58,036 15,492 7,354
Extensions and discoveries, net of future
production and development costs............. 5,382 24,475 17,850
Purchases of minerals in place............... - 7,248 -
Sales of minerals in place................... (494) (1,319) (1,546)
Previously estimated development costs
incurred during the period................... - (1,079) (446)
Revisions of quantity estimates.............. 4,844 (13,690) (1,453)
Accretion of discount........................ 8,215 6,844 6,426
Net change in income taxes................... (13,930) (1,706) (994)
Changes in production rates
(timing) and other........................... (21,157) (4,352) (6,324)
-------- -------- --------
Net change............................... $21,908 $13,712 $4,174
======== ======== ========
DESCRIPTION OF SIGNIFICANT PROPERTIES
The three producing properties of major significance to the Company are
Main Pass Block 64, located in federal waters offshore Louisiana, the North
Frisco City Field in Alabama and the LaBarge Project located in southwestern
Wyoming. These properties represent, in total, 5,090 MBbl and 48,149 MMcf of the
Company's estimated proved reserves of oil and natural gas, respectively, at
December 31, 1996. In addition, the Company owns fee mineral interests in
876,000 net acres in Mississippi, Alabama and Louisiana. The following sets
forth certain information with respect to the Company's interest in its most
significant properties.
MAIN PASS BLOCK 64. Main Pass is located in federal waters offshore
Louisiana about 70 miles southeast of New Orleans. The Company, as operator,
discovered oil and gas upon drilling a test well in 1982. By August 1983, the
Company had completed nine producing wells and one gas injection well and
designed, constructed and placed online a production platform and oil pipeline
facilities. Since then, the Company has completed eight more wells, tied into an
interstate natural gas pipeline system, converted the gas injection well to a
producing well and increased its working interest from 52% to almost 80%. In
1989, the Company acquired an 80% working interest in an adjacent block with
five wells, a production platform and oil and gas pipelines. The Company
subsequently unitized portions of these two blocks covering the then known
limits of the main pay sand (the "7,300' Sand Unit") and then designed,
constructed and placed on-line a waterflood project intended to repressure the
7,300' Sand Unit. Gross cumulative production from the field over almost 14
years has totaled 9,795 MBbl of oil and 25,169 MMcf of natural gas. During 1996,
net production averaged 964 BOPD and 418 Mcfpd of natural gas.
Under a farm-out arrangement from the Company, a third party drilled,
completed and tested a deep test well in 1993. During 1994, the Company and its
partners in the 7300' Sand Unit acquired the deep well from the third party. The
consideration for this acquisition was the Company's acceptance of liability to
plug the deep well when it is abandoned. In December 1994 the Company connected
this well to the existing platform, and production began in January 1995.
The Company currently has a working interest which averages approximately
80% in 24 gross (19.1 net) wells, five of which are water injection wells. All
of the water injection wells are located on the adjacent block, utilizing the
production platform as a water injection facility.
Proved reserves attributable to Main Pass at December 31, 1996 were 3,188
MBbl of oil and 2,710 MMcf of natural gas, representing 40% and 5%,
respectively, of the Company's proved oil and natural gas reserves.
10
NORTH FRISCO CITY FIELD. The North Frisco City Field ("Unit"), located in
Monroe County, Alabama, was discovered in March 1991. After the discovery well
was completed, the structural complexity of this find led the Company and its
partners to run a 3-D seismic program over the potential field area. Based on
this data, five successful development wells were completed during 1992, two in
1993 and three in 1994. Only one dry hole has been drilled to date, thereby
establishing an eastern limit to the field. In the fourth quarter of 1994, the
field was unitized. The Company currently has a 24.1% working interest in nine
gross (2.2 net) producing wells in the Unit, each of which produces from the
Frisco City sand member of the Haynesville formation at a depth of about 12,000
feet. In addition, the Company has interests in two wells not included in the
Unit. Aggregate net production from this field averaged 1,024 BOPD of crude oil,
195 BPD of natural gas liquids and 1,195 Mcfpd of natural gas during the fourth
quarter of 1996.
The Company's estimated proved reserves from its working interest in the
Unit at December 31, 1996 were 1,866 MBbl of oil and 2,324 MMcf of natural gas,
representing approximately 24% and 4%, respectively, of the Company's total
proved oil and natural gas reserves. The Company also owns a royalty interest in
this field through its ownership of the fee mineral properties discussed below.
FEE MINERAL PROPERTIES. In August 1993 the Company acquired all of the fee
mineral properties of the Federal Intermediate Credit Bank of Jackson,
Mississippi ("FICBJ"). The Company paid FICBJ $24.1 million for these properties
and expended an additional $0.2 million for costs related to the acquisition.
The properties consist of 876,000 net acres of fee mineral interests
located in Mississippi (64%), Alabama (35%) and Louisiana (1%). The purchase
price was allocated $6.1 million to producing acreage and $18.2 million to
non-producing acreage. The value assigned to the producing acreage is included
in the full cost pool being amortized as described in Note 1 of Notes to the
Consolidated Financial Statements.
Proved reserves attributable to the producing acreage at December 31, 1996,
were 380 MBbl of oil and 2,723 MMcf of natural gas.
The non-producing fee mineral properties generate lease bonus and delay
rental revenues. During 1996, 1995 and 1994, revenues of $0.6 million, $0.2
million and $0.5 million, respectively, were generated from these types of
activities.
LABARGE PROJECT. The LaBarge Project, located in southwestern Wyoming,
consists of three federal units, 17 producing wells, a field gathering system, a
dehydration plant, a 32-mile dehydrated raw gas pipeline, a gas processing plant
with a capacity for processing up to 600,000 MCFD of raw gas into natural gas,
carbon dioxide, helium and sulfur, and marketing facilities for the sale of the
plant products. The Company has a 4.8% working interest in one of the units, the
Fogarty Creek Unit. The Company has an interest in 12 gross (0.6 net) wells
producing from depths between 14,500 feet to 17,000 feet in the Fogarty Creek
Unit. Exxon Company USA ("Exxon USA") holds a 92% interest in the Fogarty Creek
Unit and a 100% interest in each of the other two units, the plants and the
marketing facilities.
The Company's raw gas is processed pursuant to an agreement with Exxon USA
which provided for an initial processing fee equal to 65% of the sales value of
the plant products through August 1991, increasing to 75% from that date forward
until the sooner of payout of the gas processing plant or September 2021, at
which time it will adjust to a cost-plus fee, not to exceed 50% of the sales
value of the products. The processing agreement also provides for Exxon to
market all of the Company's products from the LaBarge Project.
The Company has significant production and reserves of carbon dioxide and
helium and small amounts of production and reserves of sulfur from its interest
in the LaBarge Project, which are not included in its production and proved
reserves of oil and natural gas discussed elsewhere in Item 2. The table on the
next page presents information on the Company's net production of natural gas,
carbon dioxide and helium attributable to the Company's interest in the LaBarge
Project. The natural gas data from the LaBarge Project is also included in the
other tables set forth elsewhere in Item 2.
11
LABARGE PRODUCTION
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(IN THOUSANDS, EXCEPT UNIT PRICES)
Production data (net):
Natural gas (Mcf)............... 1,222 1,261 1,141
Carbon dioxide (Mcf)(1)......... 603 659 843
Helium (Mcf).................... 27 31 34
Average sales price per unit:
Natural gas (Mcf)............... $ 1.71 $ 1.41 $1.53
Carbon dioxide (Mcf)............ $ 0.30 $ 0.39 $0.56
Helium (Mcf).................... $ 43.68 $49.44 $51.61
Financial data:
Revenues........................ $ 3,558 $3,819 $3,975
Processing costs................ 2,825 3,024 3,141
------- ------ ------
Net cash flows.................. $ 733 $ 795 $ 834
======= ====== ======
- -----------------
(1) Because of a lack of market, approximately 81%, 80% and 74% of the volume
produced in 1996, 1995 and 1994, respectively, was vented and not sold.
Amounts included in the table reflect only volumes sold.
B. OTHER PROPERTIES
In addition to the oil and gas properties described above, the Company and
its subsidiaries lease approximately 52,900 square feet. for use as corporate
and administrative offices in Houston, Texas. The Company's technical fuels and
chemical processing operations are conducted at a 50 acre facility owned by the
Company. The facility, located in Channelview, Texas, includes buildings
covering 24,500 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company, through its subsidiaries, is involved from time to time in
various claims, lawsuits and administrative proceedings incidental to its
business. In the opinion of management, the ultimate liability thereunder, if
any, will not have a materially adverse effect on the financial condition or
results of operations of the Company. See Note 9 of Notes to Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Howell Corporation common stock is traded on the New York Stock
Exchange. Symbol: HWL
CASH
PRICE DIVIDENDS
FOR QUARTER ENDED HIGH LOW $
------------------ ---- --- ----
March 31, 1995......................... 13 3/4 10 3/8 0.04
June 30, 1995.......................... 14 7/8 12 7/8 0.04
September 30, 1995..................... 16 3/8 13 7/8 0.04
December 31, 1995...................... 14 3/8 11 13/16 0.04
March 31, 1996......................... 14 5/8 13 1/2 0.04
June 30, 1996.......................... 15 1/8 13 3/8 0.04
September 30, 1996..................... 15 3/8 12 1/2 0.04
December 31, 1996...................... 16 13 1/2 0.04
Approximate number of equity shareholders as of December 31, 1996:
1,800.
It is the current intention of the Company to continue to pay quarterly cash
dividends on its common stock. No assurance can be given, however, as to the
timing and amount of any future dividends which necessarily will depend on the
earnings and financial needs of the Company, legal restraints, and other
considerations that the Company's Board of Directors deems relevant. The ability
of the Company to pay dividends on its common stock is currently subject to
certain restrictions contained in its bank loan agreement. See Item 7,
"Management's Discussion and Analysis of Financial Condition - Liquidity and
Capital Resources."
In addition, the Company has 690,000 shares of convertible preferred stock
outstanding. These shares were issued in April 1993. The $3.50 convertible
preferred stock is traded on the National Association of Securities Dealers,
Inc. Automated Quotation System ("NASDAQ") under the symbol HWLLP. See Note 7 of
Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The information below is presented in order to highlight significant trends
in the Company's results from continuing operations and financial condition. See
Consolidated Financial Statements and notes thereto.
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 (1) 1995 (1) 1994 1993 1992
----- ----- ---- ---- ----
(In thousands, except per share amounts)
Revenues...................... $712,391 $673,537 $448,952 $411,736 $461,316
-------- -------- -------- -------- --------
Net earnings from operations.. $ 14,077 $ 5,326 $ 2,883 $ 2,527 $ 431
-------- -------- -------- -------- --------
Primary net earnings per common
share from operations........... $ 2.31 $ .59 $ .10 $ .18 $ .09
-------- -------- -------- -------- --------
Property, plant and
equipment, net................ $117,656 $195,341 $124,773 $125,113 $98,552
-------- -------- -------- -------- --------
Total assets.................. $158,524 $273,326 $182,440 $164,542 $158,181
-------- -------- -------- -------- --------
Long-term debt................ $20,581 $96,205 $33,098 $35,879 $42,491
-------- -------- -------- -------- --------
Shareholders' equity.......... $90,048 $79,020 $75,919 $76,225 $43,089
-------- -------- -------- -------- --------
Cash dividends per common
share......................... $ .16 $ .16 $ .16 $ .16 $ .16
-------- -------- -------- -------- --------
- -----------------
(1)See Note 2 of Notes to Consolidated Financial Statements regarding the 1996
purchase and sale, contribution and conveyance of crude oil gathering and
marketing, pipeline, and transportation operations to Genesis, and the 1995
purchase of three pipeline systems from Exxon.
13
Summarized below are the Company's unaudited quarterly financial data for
1996 and 1995.
1996 QUARTERS
---------------------------------------
FIRST SECOND THIRD FOURTH (1)
----- ------ ----- ----------
(In thousands, except per share amounts)
Revenues............................. $166,257 $180,180 $208,521 $157,433
======== ======== ======== ========
Earnings before income taxes......... $ 1,841 $ 2,502 $ 2,706 $ 15,290
======== ======== ======== ========
Net earnings......................... $ 1,195 $ 1,549 $ 1,690 $ 9,643
======== ======== ======== ========
Primary net earnings per
common share......................... $ .12 $ .19 $ .21 $ 1.79
======== ======== ======== ========
- -----------------
(1) See Note 2 of Notes to Consolidated Financial Statements regarding the 1996
purchase and sale, contribution and conveyance of crude oil gathering and
marketing, pipeline, and transportation operations to Genesis.
1995 QUARTERS
---------------------------------------
FIRST SECOND THIRD FOURTH
(In thousands, except per share amounts)
Revenues............................. $151,516 $169,768 $172,972 $179,281
======== ======== ======== ========
Earnings before income taxes......... $ 1,249 $ 2,756 $ 1,712 $ 2,670
======== ======== ======== ========
Net earnings......................... $ 832 $ 1,757 $ 1,085 $ 1,652
======== ======== ======== ========
Primary net earnings per
common share......................... $ .05 $ .23 $ .10 $ .21
======== ======== ======== ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition, results
of operations, capital resources and liquidity. This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto. Management's review includes certain
forward-looking statements reflecting the Company's expectations in the near
future; however, many factors which may affect the actual results, especially
commodity prices and changing regulations, are difficult to predict.
Accordingly, there is no assurance that the Company's expectations will be
realized.
14
RESULTS OF OPERATIONS
The Company's principal business segments are oil and gas production, crude
oil marketing and transportation, and technical fuels and chemical processing.
Results of operations by segment for the three years ended December 31, 1996 are
discussed below. The table below for each segment's revenues does not reflect
the elimination of intercompany revenues. See Note 8 of Notes to Consolidated
Financial Statements.
OIL AND GAS PRODUCTION
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
Revenues (in thousands):
Sales of oil and natural gas................. $ 28,162 $27,011 $24,608
Sales of LaBarge other products.............. 1,493 1,990 2,227
Gas marketing................................ 3,553 2,196 1,560
Minerals leasing and other................... 660 304 523
------- ------ ------
Total revenues.......................... $ 33,868 $31,501 $28,918
======= ======= =======
Operating profit (in thousands).............. $ 8,682 $6,977 $6,224
======= ====== ======
Operating information:
Average net daily production:
Oil and NGL (Bbls)....................... 3,300 3,791 3,663
Natural gas (Mcf)........................ 8,943 9,662 8,789
Average sales prices:
Oil and NGL (per Bbl).................... $17.52 $15.67 $14.40
Natural gas (per Mcf).................... $ 2.06 $1.47 $1.70
REVENUES
Gas marketing revenues increased 62% in 1996 due to increased gas prices.
Revenues from sales of oil and natural gas increased in 1996 when compared to
1995 as a result of an increase in the Company's average sales price of the oil
offset by a decrease in the average daily production. Average oil sales prices
increased 12% and were partially offset as daily oil production decreased 13%.
The positive effects of an increase in the average gas sales price of 40% was
partially offset by a 7% decline in daily gas production.
The Company has a revenue interest in 11 successful horizontal wells in
central Texas. Horizontal wells have short lives, typically producing half of
their reserves in the first six months. In 1996, oil and gas production from
horizontal wells averaged 149 barrels and 215 Mcf per day. In 1995, horizontal
well production contributed 192 barrels and 306 Mcf per day.
The effect on the annual average daily oil production of the Company's
mineral fee properties in 1996 and 1995 was 181 and 208 barrels, respectively.
Revenues from the sales of the LaBarge other products are attributable to
sales of carbon dioxide, helium and sulfur. The production level of helium was
relatively stable in 1996 and 1995; however, carbon dioxide sales volumes
declined due to a lack of market. The Company was also affected by a decline in
helium and carbon dioxide per unit sales prices. Sulfur sales revenues in both
years were insignificant.
Total revenues increased in 1995 when compared to 1994, primarily due to
the acquisition of certain properties from Norcen Explorer, Inc., and an
increase in oil prices of 9%. The increase was partially offset by a decrease in
gas prices of 14% and a decrease in production from the Main Pass Field as a
result of being shut-in for 19 days due to Hurricane Opal. Revenues from the
sales of the LaBarge other products in 1995 decreased from 1994 levels due to
declines in carbon dioxide sold.
15
OPERATING PROFIT
In 1996, the operating profit of this segment increased $1.7 million when
compared to 1995. The average higher gas and oil sales prices were the largest
factors in this increase in operating profit. The increase in gas marketing
revenues was offset by an increase in gas marketing costs of 64%.
Partially offsetting these improvements was an increased production cost
per equivalent barrel of production from $4.47 in 1995 to $5.23 in 1996. This
was primarily due to increased workover expense on an offshore gas supply well.
Also reducing operating profit was an increase in depreciation, depletion and
amortization ("DD&A") per equivalent barrel of production from $5.20 in 1995 to
$5.37 in 1996. An increase in general and administrative costs from $1.6 million
in 1995 to $1.9 million in 1996 also partially offset the improvements.
The increase in operating profit in 1995 when compared to 1994 was $0.8
million. Higher average oil sales prices combined with higher oil production
were the largest factors in this increase. Also contributing to the increase was
a decrease in general and administrative costs from $2.0 million in 1994 to $1.6
million in 1995. Partially offsetting these factors was an increase in DD&A per
equivalent barrel of production from $4.96 in 1994 to $5.20 in 1995.
In 1997, the Company expects to use seismic data to identify prospects to
drill in its core areas of emphasis. These areas are Texas, Louisiana,
Mississippi and Alabama. The Company has also signed an agreement to work with
an exploration company to assist in prospect generation. The Company continues
to evaluate the potential of developmental drilling in Mississippi on acreage
that it acquired in 1995 from Norcen.
CRUDE OIL MARKETING & TRANSPORTATION
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(In thousands)
Revenues..................................... $666,086 $629,918 $407,530
======== ======== ========
Operating profit............................. $9,610 $9,235 $3,374
======== ====== ======
Revenues increased 6% in 1996 from $629.9 million in 1995 to $666.1 million
in 1996, and operating profit increased 4% in 1996 from $9.2 million in 1995 to
$9.6 million in 1996. The increase can be attributed to the Company's pipeline
activities. Also contributing to the increase in operating profit was a decrease
in general and administrative costs of $0.6 million from 1995 to 1996. The crude
oil marketing activities accounted for an increase in operating profit of $1.1
million offset by a decrease in operating profit for transportation activities
of $0.7 million.
Effective December 3, 1996, the Purchase & Sale and Contribution &
Conveyance of Howell Crude Oil and Howell Transportation's assets and
liabilities associated with crude oil gathering resulted in a pre-tax gain of
$13,841,000.
Revenues increased 55% in 1995 as compared to 1994 due to a 42% increase in
barrels sold per day and higher average crude oil prices. In 1994 the Company
sold 67,174 barrels per day of crude oil. In 1995 that average daily sales
quantity increased to 95,384 barrels. Also increasing revenues were the crude
oil pipeline transmission activities of the segment. On March 31, 1995, the
Company acquired three crude oil pipelines from Exxon. During the nine months
the Company owned these pipelines, an average of 90,375 barrels per day were
transported, generating revenues of $13.4 million. These revenues also include
$1.0 million received from Exxon, representing nine months of rent under the
terms of a one-year lease, of the 1.2 million barrels of tank space the Company
owned in Northwest Houston. Transportation activities increased revenues by $2.6
million in 1995 as compared to 1994 due to a contract with Lyondell
Petrochemical, to provide substantially all of its outbound truck transportation
needs. This contract was in effect for the latter half of 1994 and all of 1995.
Operating profits of the crude oil marketing and transportation segment
increased 174% from $3.4 million in 1994 to $9.2 million in 1995. This increase
can be attributed to the Company's pipeline activities.
16
TECHNICAL FUELS AND CHEMICAL PROCESSING
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(In thousands)
Revenues..................................... $30,527 $30,951 $29,580
======= ======= =======
Operating profit (loss)...................... $ 1,064 $2,479 $ 579
======= ====== ======
The technical fuels and chemical processing segment experienced a 1% decrease
in revenues and a 57% decrease in operating profit when comparing 1996 to 1995.
Revenues from chemical sales and toll processing rose significantly in 1996
resulting from a focus on acetate and ester manufacturers for the paint and
coatings industry. Revenues from sales of research and reference fuels declined
$1.8 million in 1996. Volumes sold decreased by 4%. These decreases are
attributable to a focus by lubricant manufacturers and laboratories on product
certification rather than testing to develop and certify products to meet new
standards. Development is expected to increase again in 1997 in order to prepare
to meet 1998 performance standards.
The $1.4 million reduction in operating profit from 1995 to 1996 was
primarily due to $1.1 million recognized from the cancellation of the chemical
contract in 1995 referred to below. The remaining $0.3 million was due to
decline in research and reference fuels offset by a significant improvement in
chemicals.
In 1995, the technical fuels and chemical processing segment experienced a 5%
increase in revenues and a 328% increase in operating profit when compared to
1994. Revenues from chemical sales and toll processing rose slightly in 1995
resulting from a focus on acetate and ester manufacturers for the paint and
coatings industry. Revenues from sales of research and reference fuels declined
$2.4 million in 1995. Volumes sold decreased by 11%. Also contributing to higher
revenues and to the improved operating results was the revenue recognized upon
the cancellation of a long-term contract to process for a customer. The revenue
and operating profit recognized by this contract cancellation was $1.1 million.
NET INTEREST EXPENSE
Interest expense in 1996 rose $0.4 million over the 1995 level. The primary
reason for this increase was funds borrowed by the Company in March 1995 to
finance the acquisitions of three crude oil pipelines from Exxon and certain oil
and gas properties from Norcen. Long-term debt decreased from $104.3 million at
December 31, 1995 to $26.4 million at December 31, 1996 due primarily to the
repayment of the term loan and pay down of the revolving credit agreement with
proceeds received from the conveyance of the Company's crude operations to
Genesis. See Notes 5 and 6 of Notes to Consolidated Financial Statements.
Additionally, the increase in interest expense from higher average
outstanding balances in 1996 was slightly offset by decreasing market interest
rates. Market interest rates ranged from 8.25% to 8.5% throughout 1996, while in
1995 the rates fluctuated from 8.5% to 9%. Because substantially all of the
Company's debt is subject to market rates, the lower 1996 rates contributed to
an offset of the increase in 1996 interest expense. The rise in rates in 1995
led to the increase in interest expense in 1995 over 1994. Additionally, in 1995
the Company had a higher level of average debt outstanding than in 1994.
PROVISION FOR INCOME TAXES
In 1996 the Company's effective tax rate of 37% reflects the statutory
federal rate and state income taxes less the effect of statutory depletion
deductions in excess of cost basis. As the Company's pretax income increased,
the effect of these deductions on the tax rate was less pronounced than in 1995
and 1994. In 1994, these deductions contributed to an effective tax rate that
was less than the statutory federal rate.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1995, the Company replaced its existing revolving credit/term
loan agreement and letter of credit facility with two new credit facilities, the
HPC Credit Facility and the HCO Credit Facility as discussed below. The
revolving credit/term loan agreement was replaced with a new credit facility
between Howell Petroleum Corporation and Bank One, Texas, N.A., Bank of
Montreal, Compass Bank - Houston and Den norske Bank AS (the "HPC Credit
Facility"). The borrowing base under the HPC Credit Facility was $40.5
17
million at December 31, 1996 and declines monthly by $1.0 million until such
time as it is redetermined. In addition, on January 1, 1997, the borrowing base
declined an additional $2.0 million. The borrowing base is reviewed
semi-annually by the banks with mandatory payments if the borrowing base, as
determined solely by the banks based on the Company's interest in proved oil and
gas reserves, is less than the outstanding balance on the loan. The Company has
assumed that although the borrowing base will decrease in 1997, the decrease
would not result in a mandatory repayment under the terms of the HPC Credit
Facility, and therefore none of the debt is reflected as a current obligation.
The HPC Credit Facility provides for a revolving period until September 1, 1998,
with interest to be paid monthly at the rate selected by the Company of either
(1) a Floating Base Rate (as defined in the HPC Credit Facility) that is
generally the prevailing prime rate or (2) a rate based on the London Interbank
Offered Rate ("LIBOR"). A LIBOR-based rate of 7.6675% was applicable to $18.0
million of the outstanding balance under the HPC Credit Facility at December 31,
1996. The remainder of the outstanding balance of $22.5 million was subject to
the Commitment Fee Rate of 3/8%. At the end of the revolving period, the
revolving loan converts automatically to a four-year term loan, with principal
payments to be made in 16 quarterly installments along with accrued interest on
the unpaid principal balance. The HPC Credit Facility also provides for the
issuance of letters of credit in an amount up to $5.0 million. The amount of
letters of credit outstanding reduces the amount of the available commitment.
The HPC Credit Facility is collateralized by mortgages on substantially all
of the Company's producing oil and gas properties, the common stock of HPC, the
common stock of Howell Crude Oil Company ("HCO"), which holds the Genesis
investment and the guarantee of the Company. There is no compensating balance
requirement, and the HPC Credit Facility carries a commitment fee of 3/8% on the
available portion of the commitment. The HPC Credit Facility limits the ability
of the Company, without the banks' prior approval, to (i) declare or pay
dividends on shares of any class of its capital stock any time a default or
event of default (as defined in the HPC Credit Facility) exists or will result
from such declaration or payment; (ii) enter into certain extraordinary
corporate transactions, including a merger, consolidation, liquidation or
dissolution; or (iii) during any 12-month period, dispose of assets having an
aggregate book value of more than five percent of the Company's net worth.
Material covenants and restrictions include requirements to maintain a ratio of
current assets plus the available portion of the commitment to current
liabilities of at least 1:1, to maintain tangible net worth, as defined in the
HPC Credit Facility, of a floating amount that was $75.7 million at December 31,
1996, and to prohibit certain defined types of additional indebtedness and the
granting of certain liens on the Company's assets without the banks' approval.
Based on the terms of the HPC Credit Facility, at December 31, 1996, $14.3
million of the Company's retained earnings was unrestricted as to the payment of
common and preferred dividends. This amount varies based on changes in the
shareholders' equity of the Company.
The letter of credit facility was replaced with a new credit facility between
Howell Crude Oil Company, Bank One, Texas, N.A., Bank of Montreal, Compass Bank
- - Houston and Den norske Bank AS (the "HCO Credit Facility"). The funds
generated as a result of the Purchase & Sale and Contribution & Conveyance of
Howell Crude Oil and Howell Transportation's assets and liabilities associated
with crude oil gathering were partially used to repay the HCO Credit Facility in
full during 1996. The remainder of the funds were used to pay down the HPC
Credit Facility.
In 1993 the Company issued 690,000 shares of $3.50 convertible preferred
stock. The net proceeds from the sale were $32.9 million. Dividends on the
convertible preferred stock are to be paid quarterly. Such dividends accrue and
are cumulative. The Company has paid all dividends on time.
At December 31, 1996, the Company had negative working capital of $6.6
million. In 1996 it generated cash flow from operating activities of $27.2
million. The technical fuels and chemical processing segment is expected by the
Company to continue to positively impact 1997 operating cash flow. The Company
also expects a positive impact in 1997 due to lower interest expense from a
decrease in debt levels.
The Company currently anticipates spending approximately $0.6 million during
fiscal years 1997 and 1998 at various of its facilities for capital and
operating costs associated with ongoing environmental compliance and will
continue to have expenditures in connection with environmental matters beyond
fiscal year 1998. The Company's Channelview facility, most of which has been
constructed since 1988, was designed and engineered to comply with the more
stringent current regulations. The Company has determined that the federal
wastewater discharge permit at its Channelview facility may have expired prior
to the transfer of the permit to
18
the Company. The Company is taking steps to resolve this matter. See Note 10 of
Notes to Consolidated Financial Statements.
The Company believes that its cash flow from operations and amounts available
under the HPC Credit Facility will be sufficient to satisfy its current
liquidity requirements. At December 31, 1996, the Company had $22.5 million
available to it under the HPC Credit Facility. A significant decline in the
value of the Company's proved reserves could result in the bank reducing the
borrowing base, causing mandatory payments under the HPC Credit Facility. While
the Company does not expect this to happen in 1997, such payments would
adversely affect the Company's ability to carry out its capital expenditure
program.
In order to guarantee the Company a specific minimum sales price for its
crude oil, the Company purchased a put option and sold a call option covering
approximately 3,300 barrels per day of crude oil production for an 18-month
period beginning March 1, 1995. The option strike prices are based on the
average price of crude oil on the organized exchange with monthly settlement.
The strike prices are $17 per barrel for the put option and $20 per barrel for
the call option. During 1995, the monthly average sales price of crude oil on
the organized exchange was between $17 and $20 per barrel; therefore, no options
were exercised during the period.
During 1996, the monthly average sales price of crude oil on the organized
exchange was between $17 and $20 per barrel for January and February; therefore,
no options were exercised during the two months. The monthly average sales price
for the remainder of the March 1, 1995 call option period, March 1996 through
August 1996, was above the $20 ceiling. This resulted in collar payments of $0.9
million, excluding the premium amortization.
Upon the expiration of the 18-month option period, the Company purchased a
$16.50 per barrel put option and sold a $21.10 per barrel call option covering
100,000 barrels of oil per month for a six-month period ending February 28,
1997. For September through December 1996, the monthly average sales price
exceeded the ceiling price. This resulted in collar payments for the four-month
period of $1.3 million.
In May 1996 the Company signed a letter of intent to begin negotiations to
sell HHC to Schenectady. Subsequent to signing the letter of intent,
negotiations between the Company and Schenectady were terminated. The Company
continues to receive and evaluate inquiries about the sale of HHC.
In 1995 the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Nos. 121 and 123 entitled "Accounting for
the Impairment of Long-Lived Assets and Assets to Be Disposed Of" and
"Accounting for Stock-Based Compensation," respectively. Statement No. 121
contains provisions for recording impairment of long-lived assets that are
not expected to produce net cash flows in the future to fully recover the
remaining cost of the related assets. The Company adopted Statement No.
121 in 1996 and did not record impairment on any of its assets.
Statement No. 123 permits, but does not require, a fair value-based method of
accounting for employee stock option plans which results in compensation expense
being recognized in the results of operations when stock options are granted.
The Company plans to continue the use of its current intrinsic value-based
method of accounting for such plans where no compensation expense is recognized.
However, as required by Statement 123, the Company has provided pro forma
disclosure of net income and earnings per share in the Notes to the Consolidated
Financial Statements as if the fair value-based method of accounting had been
applied.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report
(see page 23).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Regarding Directors, the information appearing under the caption "Election of
Directors" set forth in the Company's definitive proxy statement, to be filed
within 120 days after the close of the fiscal year in connection
19
with the 1997 Annual Shareholders' Meeting, is incorporated herein by reference.
Regarding executive officers, information is set forth below.
The executive officers are elected annually.
NAME AGE POSITION
Paul N. Howell............ 78 President and Chief Executive Officer
J. Richard Lisenby........ 53 Vice President and Chief Financial Officer
Robert T. Moffett......... 45 Vice President, General Counsel and Secretary
Mr. Paul N. Howell is President and Chief Executive Officer of the
Company. He has been Chief Executive Officer since 1955. He was elected
President in September 1995. Prior to that time he served as Chief
Executive Officer and Chairman of the Board.
Mr. J. Richard Lisenby was elected Vice President and Chief Financial
Officer of the Company in December 1996. Prior to that time, Mr. Lisenby
served as Treasurer of Columbia Gas Development, a subsidiary of Columbia
Gas System.
Mr. Robert T. Moffett was elected Vice President and General Counsel of
the Company in January 1994. He had served as General Counsel of the
Company since September 1992. Prior to that time, Mr. Moffett was
associated with the firm of Moffett & Brewster.
Regarding delinquent filers pursuant to Item 405 of Regulation S-K, the
information appearing under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" set forth in the Company's definitive proxy
statement, to be filed within 120 days after the close of the fiscal year in
connection with the 1997 Annual Shareholders' Meeting, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Compensation of Executive
Officers" and "Certain Transactions" set forth in the Company's definitive proxy
statement, to be filed within 120 days after the close of the fiscal year in
connection with the 1997 Annual Shareholders' Meeting, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Security Ownership of Management
and Certain Beneficial Owners" set forth in the Company's definitive proxy
statement, to be filed within 120 days after the close of the fiscal year in
connection with the 1997 Annual Shareholders' Meeting, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Transactions" set forth
in the Company's definitive proxy statement, to be filed within 120 days after
the close of the fiscal year in connection with the 1997 Annual Shareholders'
Meeting, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report (see page 23).
(a)(3) and (c). The response to this portion of Item 14 is submitted as a
separate section of this report (see page 41).
(b). Reports on Form 8-K.
A report on Form 8-K was filed October 4, 1996 to disclose the
termination of sale negotiations with Schenectady International, Inc.,
for the sale of the registrant's technical fuels and chemical
processing assets.
20
A report on Form 8-K was filed December 18, 1996 to disclose the
conveyance and sale of the registrant's crude oil gathering, marketing
and transportation assets to Genesis Energy, L.P.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOWELL CORPORATION
(Registrant)
By /s/ J. RICHARD LISENBY
................................
J. Richard Lisenby
Vice President and
Chief Financial Officer
Principal Financial and Accounting Officer
Date: February 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
---------- ----- ----
Principal Executive
/s/ PAUL N. HOWELL Officer and Director February 27, 1997
....................................
Paul N. Howell
President
and
Chief Executive Officer
/s/ RONALD E. HALL Director February 27, 1997
....................................
Ronald E. Hall
Chairman of the Board
/s/ JACK T. TROTTER Director February 27, 1997
....................................
Jack T. Trotter
/s/ ROBERT M. AYRES, JR. Director February 27, 1997
....................................
Robert M. Ayres, Jr.
/s/ WALTER M. MISCHER, SR. Director February 27, 1997
....................................
Walter M. Mischer, Sr.
HOWELL CORPORATION AND SUBSIDIARIES
FORM 10-K
ITEMS 8, 14(A) (1) AND (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the registrant and its
subsidiaries required to be included in Items 8 and 14(a)(1) are listed below:
PAGE
Independent Auditors' Report.......................................... 24
Consolidated Financial Statements:
Consolidated Balance Sheets........................................ 25
Consolidated Statements of Earnings................................ 26
Consolidated Statements of Changes in Shareholders' Equity......... 27
Consolidated Statements of Cash Flows.............................. 28
Notes to Consolidated Financial Statements......................... 29
The financial statement schedules are omitted because they are not
applicable, are not required or because the required information is included in
the Consolidated Financial Statements or notes thereto.
23
INDEPENDENT AUDITORS' REPORT
To Howell Corporation:
We have audited the accompanying consolidated balance sheets of Howell
Corporation and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Howell Corporation and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 27, 1997
24
HOWELL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
DECEMBER 31,
------------------
1996 1995
---- ----
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents....................... $ 3,257 $ 3,742
Trade accounts receivable, less allowance for
doubtful accounts of $267,000 in 1996 and
$239,000 in 1995................................ 9,805 65,288
Inventories..................................... 2,530 5,428
Other current assets............................ 1,294 1,712
------ ------
Total current assets......................... 16,886 76,170
------ ------
Property, plant and equipment:
Oil and gas properties, utilizing the
full-cost method of accounting.................. 280,766 278,505
Fee mineral interests, unproven................. 18,180 18,188
Other........................................... 30,735 107,735
Less accumulated depreciation, depletion
and amortization................................... (212,025) (209,087)
------- --------
Net property, plant and equipment............ 117,656 195,341
------ ------
Investments in investees........................... 21,802 -
Other assets....................................... 2,180 1,815
------ ------
Total assets................................. $158,524 $273,326
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............ $ 5,868 $ 8,068
Accounts payable................................ 5,037 61,771
Accrued liabilities............................. 10,289 7,141
Income tax payable.............................. 2,340 -
------ ------
Total current liabilities.................... 23,534 76,980
------ ------
Deferred income taxes.............................. 23,850 20,971
------ ------
Other liabilities.................................. 511 150
------ ------
Long-term debt and capital lease obligation........ 20,581 96,205
------ ------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1 par value; 690,000 shares issued
and outstanding; liquidation value of $34,500,000 690 690
Common stock, $1 par value; 4,947,196 shares
issued and outstanding in 1996; 4,933,446 shares
issued and outstanding in 1995............. 4,947 4,933
Additional paid-in capital...................... 34,532 34,390
Retained earnings............................... 49,879 39,007
------ ------
Total shareholders' equity................... 90,048 79,020
------ ------
Total liabilities and shareholders' equity... $158,524 $273,326
======== ========
See accompanying Notes to Consolidated Financial Statements.
25
HOWELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(In thousands, except per share amounts)
Revenues..................................... $712,391 $673,537 $448,952
-------- -------- --------
Costs and expenses:
Products including operating expenses..... 685,201 646,676 431,783
Selling, general and administrative
expenses.................................. 11,427 11,748 10,992
------- ------- -------
696,628 658,424 442,775
------- ------- -------
Other income (expense):
Interest expense.......................... (7,492) (7,109) (2,237)
Interest income........................... 110 229 131
Equity in net earnings of investees....... 181 - -
Gain on conveyance of assets.............. 13,841 - -
Other, net................................ (64) 154 180
------- ------- -------
6,576 (6,726) (1,926)
------- ------- -------
Earnings from operations before income taxes. 22,339 8,387 4,251
Provision for income taxes................... 8,262 3,061 1,368
------- ------- -------
Net earnings................................. $14,077 $5,326 $2,883
====== ====== ======
Primary net earnings per common share........ $2.31 $0.59 $0.10
====== ====== ======
Fully diluted earnings per common share...... $1.97 - -
====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
26
HOWELL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
PREFERRED STOCK COMMON STOCK
--------------- ------------
PAID-IN RETAINED
SHARES $ SHARES $ CAPITAL EARNINGS TOTAL
------ --- ------ --- -------- -------- ------
(In thousands, except number of shares)
Balances, December 31, 1993 .................. 690,000 $690 4,836,876 $4,837 $33,518 $37,180 $76,225
Net earnings - 1994 ....................... -- -- -- -- - 2,883 2,883
Cash dividends - $.16 per
common share .......................... -- -- -- -- -- (774) (774)
Cash dividends - $3.50 per
preferred share ....................... -- -- -- -- -- (2,415) (2,415)
------ --- ------ --- -------- -------- ------
Balances, December 31, 1994 .................. 690,000 690 4,836,876 4,837 33,518 36,874 75,919
Net earnings - 1995 ....................... -- -- -- -- -- 5,326 5,326
Cash dividends - $.16 per
common share .......................... -- -- -- -- -- (778) (778)
Cash dividends - $3.50 per
preferred share ....................... -- -- -- -- -- (2,415) (2,415)
Common stock issued to
employees and directors upon
exercise of stock options ............. -- -- 96,570 96 872 -- 968
------ --- ------ --- -------- -------- ------
Balances, December 31, 1995 .................. 690,000 690 4,933,446 4,933 34,390 39,007 79,020
Net earnings - 1996 ....................... -- -- -- -- -- 14,077 14,077
Cash dividends - $.16 per
common share .......................... -- -- -- -- -- (790) (790)
Cash dividends - $3.50 per
preferred share ....................... -- -- -- -- -- (2,415) (2,415)
Common stock issued to employees
upon exercise of stock options ........ -- -- 13,750 14 142 -- 156
------ ---- --------- --- ------ ------ ------
Balances, December 31, 1996 .................. 690,000 $690 4,947,196 $4,947 $34,53 49,879 $90,048
======= ==== ========= ====== ====== ====== ========
See accompanying Notes to Consolidated Financial Statements.
27
HOWELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
OPERATING ACTIVITIES:
Net earnings ............................................................. $ 14,077 $ 5,326 $ 2,883
Adjustments to reconcile net earnings to
cash provided by operations:
Depreciation, depletion and amortization ............................. 16,015 16,404 12,323
Deferred income taxes and income tax payable ......................... 5,219 1,698 1,057
Equity in net earnings of investees .................................. (181) -- --
Gain on sale(s) of asset(s) .......................................... (13,883) (34) (25)
Decrease (increase) in accounts receivable ........................... 55,847 (16,856) (18,080)
Decrease (increase) in inventories ................................... 2,898 (2,773) (82)
Decrease (increase) in other current assets .......................... 418 (192) 478
(Decrease) increase in accounts payable .............................. (56,734) 15,593 18,657
Increase in accrued and other liabilities ............................ 3,509 1,989 656
Cash provided by operating activities ........................................ 27,185 21,155 17,867
INVESTING ACTIVITIES:
Proceeds from the disposition of assets .................................. 1,804 1,629 1,450
Investment in investees .................................................. (1,556) -- --
Proceeds from sale of assets to MLP ...................................... 68,717 -- --
Additions to property, plant and equipment ............................... (12,378) (88,282) (13,408)
Other, net ............................................................... 66 (380) (551)
Cash provided by (utilized in) investing activities .......................... 56,653 (87,033) (12,509)
FINANCING ACTIVITIES:
Long-term debt:
(Repayments) borrowings under revolving credit
agreement, net ..................................................... (24,250) 18,050 (300)
(Repayments) borrowings under term loan
agreement, net .................................................. (54,625) 54,625 --
Payments to Department of Energy ..................................... (2,266) (2,122) (1,047)
Other repayments ..................................................... (133) (2,048) (819)
Cash dividends:
Common shareholders .................................................. (790) (778) (774)
Preferred shareholders ............................................... (2,415) (2,415) (2,415)
Exercise of stock options .................................................... 156 968 --
Cash (utilized in) provided by financing activities .................. (84,323) 66,280 (5,355)
NET (DECREASE) INCREASE IN CASH BALANCE ...................................... (485) 402 3
CASH, BEGINNING OF YEAR ...................................................... 3,742 3,340 3,337
CASH, END OF YEAR ............................................................ $ 3,257 $ 3,742 $ 3,340
See accompanying Notes to Consolidated Financial Statements.
28
HOWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Howell
Corporation and its subsidiaries (the "Company"). The Company accounts for its
investment in less than 50% owned investees using the equity method of
accounting when it has the ability to exercise significant influence over
operating and financial policies of the investee. All significant intercompany
accounts and transactions have been eliminated.
NATURE OF OPERATIONS
The Company is primarily engaged in the exploration, production,
acquisition and development of oil and gas properties. The Company is also
involved in technical fuels and chemical processing and crude oil marketing and
transportation. These operations are conducted in the United States. Information
on the relative importance of the segments can be found in Note 8.
INVENTORIES
Inventories of refined products and crude oil are stated at the lower of
market value or monthly weighted average cost. Other inventories are stated at
the lower of average cost or market value.
PROPERTY, DEPRECIATION, DEPLETION AND AMORTIZATION
The Company follows the full-cost method of accounting for its oil and gas
exploration and production activities, which are conducted solely in the United
States. Consequently, all costs pertaining to the acquisition, exploration and
development of oil and gas reserves are capitalized and amortized using the
unit-of-production method as the remaining proved oil and gas reserves are
produced. The Company's net investment in oil and gas properties is subject to a
quarterly ceiling limitation calculation that is based on the present value of
future net revenues from estimated production of proved oil and gas reserves
valued at current prices. Costs in excess of the ceiling limitation are
currently charged to expense. Gains or losses upon the disposition of a
property, normally treated as an adjustment to capitalized costs, are recognized
currently in the event of a sale of a significant portion (normally in excess of
25%) of oil and gas reserves.
The costs allocated to the unproven fee mineral interests of the Company
are excluded from amortization using the full-cost method of accounting
described above. These costs are reviewed periodically for impairment. This
impairment will generally be based on geographic or geologic data. At the time
of any impairment, the related costs will be added to the costs being amortized
under the full-cost method of accounting. Due to the perpetual nature of the
Company's ownership of these mineral interests, the drilling of a well, whether
successful or unsuccessful, may not represent a complete test of all depths of
interest. Therefore, at the time that a well is drilled only a portion of the
costs allocated to the acreage drilled may be added to the costs being
amortized.
Other property and equipment are carried at cost. Depreciation is provided
principally using the straight-line method over the estimated useful lives of
the assets, primarily 10 to 15 years for technical fuels and chemical processing
and terminalling facilities and improvements, 20 years for pipelines and related
assets, 20 to 25 years for buildings, and 2 to 5 years for transportation and
operating equipment.
Maintenance and repairs are charged to expense as incurred, while renewals
and betterments are capitalized.
INCOME TAXES
The Company utilizes a balance sheet (liability) approach in the
calculation of the deferred tax balance at each financial statement date by
applying the provisions of enacted tax laws to measure the deferred tax
29
consequences of the differences in the tax and financial (book) bases of assets
and liabilities as they result in net taxable or deductible amounts in future
years. The net taxable or deductible amounts in future years are adjusted for
the effect of utilizing the carryback/carryforward attributes of any net losses
generated and available tax credits.
EARNINGS PER COMMON SHARE
Primary earnings per common share have been computed by dividing net
earnings, after reduction for preferred stock dividends, by the weighted average
number of common shares and common share equivalents outstanding. Shares
issuable in connection with stock options are included in the per share
computations. The weighted average number of common shares and common share
equivalents outstanding used in calculating primary earnings per share for 1996,
1995 and 1994 are 5,038,000, 4,976,000 and 4,893,000, respectively. Fully
diluted earnings per share have been computed by dividing net earnings, after
adjusting for the preferred stock dividends, by the weighted average number of
common shares and common share equivalents outstanding and assuming conversion
of the preferred stock. The weighted average number of common shares and common
share equivalents used in calculating fully diluted earnings per share for 1996,
1995 and 1994 are 7,135,000, 7,086,000 and 6,984,000 respectively. Fully diluted
earnings per share are not shown for 1995 and 1994 since the assumed conversion
of the preferred stock was anti-dilutive.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Included in the statements of cash flows are cash equivalents defined as
short-term, highly liquid investments that are readily convertible to cash and
so near to maturity that their value would not change significantly because of
changes in interest rates. The Company made cash payments for interest of
$7,793,000, $6,435,000 and $2,179,000 in 1996, 1995 and 1994, respectively. In
1996, 1995 and 1994, cash payments for income taxes totaled $2,974,000,
$1,158,000 and $126,000, respectively.
SUPPLEMENTARY OIL AND GAS PRODUCING INFORMATION (UNAUDITED)
The supplementary oil and gas producing information required by Statement
of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas
Producing Activities," is included in Item 2 Properties in this
annual report on Form 10-K.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amount of its cash and cash
equivalents and accounts receivable and payable as reflected in its balance
sheet approximates fair value.
Information on the fair value of the Company's long-term debt can be found
in Note 6.
ENVIRONMENTAL LIABILITIES
The Company provides for the estimated costs of environmental contingencies
when liabilities are likely to occur and reasonable estimates can be made. In
accordance with full cost accounting rules, the Company provides for future
environmental clean-up costs associated with oil and gas activities as a
component of its depreciation, depletion and amortization expense. Information
regarding environmental liabilities can be found in Note 10. Ongoing
environmental compliance costs, including maintenance and monitoring costs, are
charged to expense as incurred.
DERIVATIVES
Crude oil future contracts and options were used as a hedging tool in a
limited program of hedging crude oil inventories and fixed purchase price
commitments. Product costs of the crude oil marketing and transportation segment
were reduced by $0.1 million in 1996, 1995 and 1994 from the effects of futures
and options.
In addition, for the second half of 1994, the Company purchased a put
option for its crude oil production to guarantee the Company a specific minimum
sales price for the volume of production hedged. Because market prices were
higher than the option strike price, the option was not exercised.
30
In 1995 the Company purchased a put option and sold a call option covering
3,300 barrels per day of oil production for an 18-month period beginning March
1, 1995. The option strike prices were based on the average price of crude oil
on the organized exchange, with monthly settlement. The strike prices were $17
per barrel for the put option and $20 per barrel for the call option. The
premiums for the options were amortized over the period. Upon expiration of the
18-month option period, the Company purchased a put option and sold a call
option covering 100,000 barrels of oil per month for a six-month period ended
February 28, 1997. The strike prices are $16.50 per barrel for the put option
and $21.10 per barrel for the call option. There was no premium associated with
these options.
During 1996, the monthly average price of crude oil on the organized
exchange exceeded the strike price for the call option in ten months. The
payments required in 1996 under the call options and the premium amortized in
1996 total $2.5 million and were recorded as a reduction of revenue. During
1995, the monthly average price of crude oil on the organized exchange was
between $17 and $20 per barrel; therefore, none of the options were exercised
during this period. Premiums amortized during 1995 totaled $0.4 million and were
recorded as a reduction of revenue. In 1994 premiums amortized reduced revenues
by $0.1 million.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1995 Statement of Financial Accounting Standards No. 121 ("Statement
121"), "Accounting for the Impairment of Long-Lived Assets and Assets to Be
Disposed Of" was issued. Statement 121 contains provisions for recording the
impairment of long-lived assets that are not expected to produce net cash flows
in the future to fully recover the remaining cost of the related assets. The
Company adopted Statement 121 in 1996. The Company did not record impairment on
any of its assets.
STOCK-BASED COMPENSATION
In 1995, Statement of Financial Accounting Standards No. 123 ("Statement
123"), "Accounting for Stock-Based Compensation," was issued. Statement 123
permits, but does not require, a fair value-based method of accounting for
employee stock option plans which results in compensation expense being
recognized in the results of operations when stock options are granted. The
Company plans to continue the use of its current intrinsic value-based method of
accounting for such plans where no compensation expense is recognized. See Note
7.
NOTE 2. ACQUISITIONS & DISPOSITIONS
1996
On December 31, 1996, the Company sold 100% of the outstanding common stock
of Howell Transportation Services, Inc. (HTS) to Lodestar Logistics, Inc.
("Lodestar") for $2.6 million, consisting of $1.8 million in cash, a $0.5
million note receivable and a $0.3 million receivable in the form of services to
be rendered by HTS, for Howell Hydrocarbons & Chemicals, Inc. Lodestar is owned
by the former president of HTS, and the Company believes the sale price was
equivalent to an arms-length transaction.
The $0.5 million non-revolving note bears interest at the Prime Rate (as
defined below) based on a year of 360 days for the actual number of days
elapsed. Prime Rate shall mean a fluctuating interest rate per annum as shall be
in effect on the first day of each calendar quarter equal to the rate of
interest published by THE WALL STREET JOURNAL as such day as the prime rate,
principal amount of the loan during each calendar quarter shall be determined as
of the opening of business on the first day of such calendar quarter. The term
of the note shall be no longer than 84 months.
The note receivable and the receivable for future services are non-cash
transactions and are not reflected in the statement of cash flows for the year
ended December 31, 1996.
31
1995
On March 31, 1995, the Company's crude oil marketing and transportation
segment acquired from Exxon Pipeline Company ("Exxon") two interstate crude oil
pipeline systems and one intrastate crude oil pipeline system. The interstate
pipeline systems were located in Florida/Alabama ("Jay System") and
Mississippi/Louisiana ("MS System"). The intrastate system was located in Texas
("Texas System"). Collectively, the purchase of these pipelines and related
assets comprise the "Exxon Transaction."
The Texas System consisted of a 555-mile pipeline system extending from
Groesbeck, Texas, south to Texas City, Texas, and tanks for crude oil storage
with a total capacity of approximately 1.9 million barrels. The Jay System
consists of a 90-mile pipeline system that extends west from Santa Rosa County,
Florida to Mobile County, Alabama, and included tanks with approximately 0.2
million barrels of storage capacity. The MS system consisted of a 230-mile
pipeline system extending from Jones County, Mississippi, to Baton Rouge,
Louisiana, and included storage capacity of approximately 0.2 million barrels.
The total negotiated purchase price paid to Exxon for the Exxon Transaction
was $63.5 million. The Exxon Transaction was financed through borrowings from
banks.
On April 21, 1992, the Company sold its San Antonio, Texas, refinery for a
sales price of $2.2 million. The Company received a downpayment of $0.4 million
and a note requiring monthly principal and interest payments for three years. In
1993, the time period for repayment was extended one additional year. The
interest rate for the note was 10%. Due to the uncertainty about the ultimate
collection of the note receivable, the Company did not recognize gain on the
sale or interest income on the note as payments were not made. In 1995 the
Company agreed to accept $0.5 million in settlement of the balance remaining
under the note. This settlement resulted in $0.4 million of income for the
Company that is included in other income (expense) in the Consolidated Statement
of Earnings for 1995.
NOTE 3. INVENTORIES
The major classes of inventory at December 31, 1996 and 1995 were as
follows:
1996 1995
---- ----
(In thousands)
Refined products........................................ $1,781 $1,494
Crude oil............................................... 151 2,140
Chemicals............................................... 560 1,695
Other materials and supplies............................ 38 99
------ ------
$2,530 $5,428
====== ======
NOTE 4. INCOME TAXES
A summary of the provision (credit) for income taxes included in the
consolidated statements of earnings is as follows:
YEAR ENDED DECEMBER 31
------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Current:
Federal........................................ $5,479 $ 356 $ -
State.......................................... 475 438 161
Deferred........................................... 2,308 2,267 1,207
------ ------ ------
$8,262 $3,061 $1,368
====== ====== ======
Deferred income taxes are provided on all temporary differences between
financial and taxable income. The approximate tax effects of each significant
type of temporary difference and carryforward were as follows:
32
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
(In thousands)
Accrual of costs not deductible for tax............... $ 2,146 $ 864
Statutory depletion carryforwards..................... - 1,274
Minimum tax credit carryforwards...................... - 418
Net operating loss carryforwards...................... - 2,507
Other................................................. - 44
------ -------
Total deferred tax assets............................. 2,146 5,107
------ -------
Differences between book and tax bases of property,
plant and equipment.................................. (25,991) (26,078)
Other................................................. (5) -
------ -------
Total deferred tax liabilities........................ (25,996) ( 26,078)
------ -------
Net deferred income taxes....................... $(23,850) $(20,971)
======= =======
The following table accounts for the difference between the actual tax
provision and the amounts obtained by applying the applicable statutory U.S.
federal income tax rate to the earnings before income taxes:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Provision for income taxes at the statutory rate... $7,819 $2,852 $1,445
Statutory depletion in excess of cost basis........ (292) (327) (237)
State income taxes................................. 475 438 161
Other.............................................. 260 98 (1)
------ ------ ------
$8,262 $3,061 $1,368
====== ====== ======
NOTE 5. INVESTMENT IN INVESTEES
On December 1, 1996, Genesis Crude Oil, L.P., a Delaware limited
partnership ("Buyer"), Genesis Energy, L.P., a Delaware limited partnership
("MLP") and Genesis Energy, L.L.C., a Delaware limited liability company
("LLC"), entered into a Purchase & Sale and Contribution & Conveyance Agreement
("Agreement") with Howell Corporation and certain of its subsidiaries ("Howell")
and Basis Petroleum, Inc. ("Basis"), a subsidiary of Salomon Inc. ("Salomon").
Pursuant to the Agreement, Howell agreed to sell and convey certain of its
assets to Buyer. These assets consisted of the crude oil gathering and marketing
operations and pipeline operations of Howell (referred to hereafter as the
"Business").
Buyer was formed by MLP and LLC to acquire the Business from Howell and
similar assets from Basis. MLP is owned 98% by limited partners and 2% by LLC,
which is the general partner. LLC is owned 46% by Howell and 54% by Basis. As a
result of this transaction, Howell owns a subordinated limited partner interest
in Buyer of 9.01%, a direct general partner interest in Buyer of 0.18% and a
general partner interest through MLP of 0.74% of Buyer.
In accordance with the Agreement, Howell received cash of approximately
$74.0 million and 991,300 subordinated limited partner units in Buyer in
exchange for its sale and conveyance of the Business and recognized a gain in
the amount of approximately $13.8 million. The receipt of units is a non-cash
transaction which reduced property, plant and equipment and increased investment
in investees. Since this was non-cash, it is not reflected in the statement of
cash flows for the year ended December 31, 1996. Except as specifically provided
in the Agreement, Howell retained all liabilities related to the Business
arising from the operations, activities and transactions of the Business up
through the closing date, including various environmental-related liabilities.
Howell made various representations and warranties as to itself and the Business
and has agreed to indemnify Buyer for any breaches thereof. Claims for breaches
of such representations and warranties must be
33
brought before December 3, 2001. Howell has also agreed to perform, and retain
the liability for, the cleaning of certain tanks used in the pipeline
operations.
On the closing date, Howell entered into various agreements with Buyer, MLP
and LLC pursuant to the Agreement, including (a) a non-competition agreement
prohibiting Howell from competing with the Business for a period of ten years;
(b) an agreement relating to the purchase of crude oil by Howell for use in its
technical fuels business and the sale of crude oil by Howell from its oil and
gas exploration and production business; (c) an agreement whereby Howell will
provide certain transitional services to Buyer; (d) an agreement whereby MLP
will sell additional limited partner units to the public and use the proceeds to
redeem the subordinated limited partner units in Buyer owned by Howell after
certain conditions are met; and (e) an agreement whereby one-half of the
subordinated limited partner units owned by Howell are pledged to secure
Howell's indemnification of Buyer for environmental liabilities.
Also at closing, Howell entered into an agreement with Salomon which
provides (a) an unconditional obligation of Howell to buy its 46% share of
additional limited partner interests ("APIs") from Salomon if Howell (as a
member of LLC) has approved an acquisition by Buyer and (b) to the extent APIs
are outstanding, an obligation by Howell to purchase 46% of such outstanding
APIs, but only to the extent of any distribution made to Howell by Buyer on
Howell's subordinated limited partner units.
Summarized financial information for the Buyer for the period ended December 31,
1996 is as follows:
(In thousands)
Revenues.........................................$ 371,985
Net income....................................... 1,684
Current assets................................... 410,603
Property & equipment, net........................ 88,937
Current liabilities.............................. 398,794
Partners' capital................................ 111,338
At December 31, 1996, the amount of investment in the Buyer includes goodwill in
the amount of $4.9 million which is being amortized over a period of 20 years.
NOTE 6. DEBT AND AVAILABLE CREDIT FACILITIES
Long-term debt and the capital lease obligation of the Company as of December
31, 1996 and 1995 were as follows:
1996 1995
---- ----
(In thousands)
Note payable to Genesis LLC............................. $ 3,450 $ -
Note payable under a $40.5 million revolving
credit/term loan agreement.............................. 18,000 42,250
Note payable under a term loan agreement................ - 54,625
Note payable to Department of Energy (DOE).............. 4,999 7,265
Capital lease obligation for transportation equipment... - 133
------ -------
26,449 104,273
Less: Current maturities............................... 5,868 8,068
------ -------
$20,581 $96,205
======= =======
34
Maturities of long-term debt for the five years subsequent to December 31,
1996 are as follows (in thousands):
TOTAL
1997.............................. $5,868
1998.............................. 4,831
1999.............................. 4,500
2000.............................. 4,500
2001.............................. 4,500
Thereafter........................ 2,250
-------
$26,449
=======
REVOLVING CREDIT/TERM LOAN AGREEMENT
On March 31, 1995, the Company replaced its existing revolving credit/term
loan agreement with a new credit facility. The revolving credit/term loan
agreement was replaced with a new credit facility between Howell Petroleum
Corporation and Bank One, Texas, N.A., Bank of Montreal, Compass Bank - Houston
and Den norske Bank AS (the "HPC Credit Facility"). The borrowing base under the
HPC Credit Facility was $40.5 million at December 31, 1996 and declines monthly
by $1.0 million until such time as it is redetermined. In addition, on January
1, 1997, the borrowing base declined an additional $2.0 million. The borrowing
base is reviewed semi-annually by the banks with mandatory payments if the
borrowing base, as determined solely by the banks based on the Company's
interest in proved oil and gas reserves, is less than the outstanding balance on
the loan. The Company has assumed that although the borrowing base will decrease
in 1997, the decrease would not result in a mandatory repayment under the terms
of the HPC Credit Facility, and therefore none of the debt is reflected as a
current obligation. The HPC Credit Facility provides for a revolving period
until September 1, 1998, with interest to be paid monthly at the rate selected
by the Company of either (1) a Floating Base Rate (as defined in the HPC Credit
Facility) that is generally the prevailing prime rate or (2) a rate based on
LIBOR. A LIBOR-based rate of 7.6675% was applicable to $18.0 million of the
outstanding balance under the HPC Credit Facility at December 31, 1996. The
remainder of the outstanding balance of $22.5 million was subject to the
commitment fee rate of 3/8%. At the end of the revolving period, the revolving
loan converts automatically to a four-year term loan, with principal payments to
be made in sixteen quarterly installments along with accrued interest on the
unpaid principal balance. The HPC Credit Facility also provides for the issuance
of letters of credit in an amount up to $5.0 million. The amount of letters of
credit outstanding reduces the amount of the available commitment.
The HPC Credit Facility is collateralized by mortgages on substantially all
of the Company's producing oil and gas properties, the common stock of Howell
Petroleum Corporation ("HPC"), the common stock of Howell Crude Oil Company
("HCO") which holds the Genesis investment and the guarantee of the Company.
There is no compensating balance requirement, and the HPC Credit Facility
carries a commitment fee of 3/8% on the available portion of the commitment. The
HPC Credit Facility limits the ability of the Company, without the banks' prior
approval, to (i) declare or pay dividends on shares of any class of its capital
stock any time a default or event of default (as defined in the HPC Credit
Facility) exists or will result from such declaration or payment; (ii) enter
into certain extraordinary corporate transactions, including a merger,
consolidation, liquidation or dissolution; or (iii) during any 12-month period,
dispose of assets having an aggregate book value of more than five percent of
the Company's net worth. Material covenants and restrictions include
requirements to maintain a ratio of current assets plus the available portion of
the commitment to current liabilities of at least 1:1, to maintain tangible net
worth, as defined in the HPC Credit Facility, of a floating amount that was
$75.7 million at December 31, 1996, and to prohibit certain defined types of
additional indebtedness and the granting of certain liens on the Company's
assets without the banks' approval. Based on the terms of the HPC Credit
Facility, at December 31, 1996, $14.3 million of the Company's retained earnings
was unrestricted as to the payment of common and preferred dividends. This
amount varies based on changes in the shareholders' equity of the Company.
35
TERM LOAN AGREEMENT
From March 31, 1995, to December 31, 1996, the Company had a term loan
agreement outstanding that was collateralized primarily by the Company's
pipeline assets. The loan was repaid with the proceeds from the sale and
conveyance referred to in Note 5.
DEPARTMENT OF ENERGY
As a result of an agreement settling allegations by the DOE against the
Company related to crude oil pricing and allocation regulation violations in the
1970s, the Company agreed in 1989 to pay $19.4 million to the DOE. The remaining
balance owed at December 31, 1996 was $5.0 million. The obligation bears
interest at a trailing average prime rate.
At December 31, 1996, that rate was 8.25%.
The payments required by the agreement may be accelerated at the Company's
discretion or pursuant to a formula based on proceeds from any significant sale
of assets by the Company or its affiliates. Asset sales in 1990 through 1995,
based on the formula contained in the final order, did not result in an
acceleration of principal payments. The sale of the Company's assets to Genesis
in December 1996 resulted in an additional payment being due in January 1997.
There is a provision in the agreement for securing the installment payments due
the DOE, but only under certain conditions which are applicable in the event the
Company's current secured lender releases its security. Other than the financial
obligations discussed above, the agreement does not impose any restrictions or
limitations on the manner in which the Company may conduct its business in the
future.
OTHER
In July 1992 the Company entered into a capital lease for transportation
equipment. The obligation was repaid in 1996.
FAIR VALUE OF LONG-TERM DEBT
The fair value of the Company's long-term debt at December 31, 1996 was
estimated to be the same as its carrying value in the balance sheet since as all
significant debt obligations bear interest at floating market rates.
NOTE 7. SHAREHOLDERS' EQUITY
PREFERRED STOCK
At December 31, 1996 and 1995, the Company had 3,000,000 shares of
preferred stock authorized.
In April 1993 the Company completed a public offering of 690,000 shares of
$3.50 convertible preferred stock. The offering was priced at $50 per share to
yield 7%. The convertible preferred stock is convertible into common stock of
the Company at the option of the holder, at any time, at a conversion rate equal
to, approximately, 3.03 common shares for each preferred share, with fractional
shares paid in cash. The Company has the option to redeem the convertible
preferred stock at a declining premium redemption price beginning in 1996.
Dividends on the convertible preferred stock are to be paid quarterly. Such
dividends accrue and are cumulative. Holders of the preferred stock have no
voting rights except on matters affecting the rights of preferred shareholders.
If at any time the equivalent of six quarterly dividends payable on the
preferred stock are accrued and unpaid, the preferred shareholders will be
entitled to elect two additional directors to the Company's Board of Directors.
The Company is current in the payment of preferred dividends.
COMMON STOCK
At December 31, 1996 and 1995, the Company had 10,000,000 shares of common
stock authorized.
Under the Company's 1988 Stock Option Plan, options to purchase 750,000
shares may be granted. At December 31, 1995, 182,670 options were exercisable at
an average price of $10.32 per share. At December 31, 1996, 311,914 options were
exercisable at an average price of $10.84 per share.
36
Stock option activity for the Company during 1996, 1995, and 1994 are as
follows:
1996 1995 1994
------------------------ ---------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- ------- --------- ------- --------- -------
Stock options outstanding,
beginning of year ..................... 466,217 $ 10.96 443,173 $ 10.56 304,253 $ 10.39
Granted .......................... 90,900 $ 14.51 209,760 $ 11.44 149,050 $ 10.98
Exercised ........................ (13,750) $ 10.53 (96,570) $ 10.03 -- $ --
Expired .......................... (10,908) (7,476) (5,930)
Forfeited ........................ (100,545) (82,670) (4,200)
--------- -------- --------
Stock options outstanding,
end of year ........................... 431,914 $ 11.24 466,217 $ 10.96 443,173 $ 10.56
======= ======= =======
The Company accounts for the 1988 Plan in accordance with Accounting
Principles Board Opinion No. 25 and related Interpretations, under which no
compensation cost has been recognized for stock option awards. Had compensation
cost for the 1988 Plan been determined consistent with Statement 123, the
Company's pro forma net income would have been $13,970,000, pro forma primary
net earnings per share would have been $2.29 and pro forma earnings per common
share assuming full dilution would have been $1.96. The fair value of options
granted under the Company's fixed stock option plans during 1996 was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used: 1% dividend yield, expected
volatility of 36.20%, risk-free interest rate of 8.00%, and expected lives of
ten years. Because the Statement No. 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of what is to be expected in future
years.
37
NOTE 8. SEGMENT INFORMATION
Financial information about the Company's continuing operations for each of
the years ended December 31, 1996, 1995 and 1994 is summarized as follows:
CRUDE OIL TECHNICAL
MARKETING FUELS
& & INTER-
OIL & GAS TRANSPORT- CHEMICAL SEGMENT
PRODUCTION ATION PROCESSING OTHER SALES TOTAL
(In thousands)
DECEMBER 31, 1996
Revenues................................ $ 33,868 $666,086 $30,527 $ - $(18,090) $712,391
........ ....... ....... ........ ........ .........
Operating profit (loss)................. $ 8,682 $ 9,610 $ 1,064 $ (136) $ 19,220
.........
General corporate expense............... $ (3,457)
Equity in net earnings of investees..... $ 181
Other income (expense), net............. $ (7,446)
Gain on conveyance of assets............ $ 13,841
.........
Earnings from operations
before income taxes................ $ 22,339
.........
Identifiable assets..................... $106,989 $20,095 $20,850 $10,590 $158,524
........ ....... ....... ........ ........ ........
........ ....... ....... ........ ........ $ 12,378
Depreciation, depletion
and amortization.................... $ 9,416 $ 4,123 $ 2,198 $ 278 $ 16,015
........ ....... ....... ........ ........ .........
DECEMBER 31, 1995
Revenues................................ $ 31,501 $629,918 $30,951 $ - $(18,833) $673,537
........ ....... ....... ........ ........ .........
Operating profit (loss)................. $ 6,977 $ 9,235 $ 2,479 $ (157) $ 18,534
........ ....... ....... ........ .........
General corporate expense............... $ (3,421)
Other income (expense), net............. $ (6,726)
.........
Earnings from operations
before income taxes................. $ 8,387
.........
Identifiable assets..................... $109,755 $129,505 $23,275 $10,791 $273,326
........ ....... ....... ........ ........ .........
Capital expenditures.................... $ 14,949 $72,190 $ 1,052 $ 91 $ 88,282
........ ....... ....... ........ ........ .........
Depreciation, depletion and
amortization........................ $ 10,259 $ 3,683 $ 2,152 $ 310 $ 16,404
........ ....... ....... ........ ........ .........
DECEMBER 31, 1994
Revenues................................ $ 28,918 $407,530 $29,580 $ 16 $(17,092) $448,952
........ ....... ....... ........ ........ .........
Operating profit (loss)................. $ 6,224 $ 3,374 $ 579 $ (342) $ 9,835
........ ....... ....... ........ .........
General corporate expense............... $ (3,658)
Other income (expense), net............. $ (1,926)
.........
Earnings from operations
before income taxes................. $ 4,251
.........
Identifiable assets..................... $105,806 $45,688 $22,377 $ 8,569 $182,440
........ ....... ....... ........ ........ .........
Capital expenditures.................... $ 9,606 $ 2,172 $ 1,345 $ 285 $ 13,408
........ ....... ....... ........ ........ .........
Depreciation, depletion and
amortization........................ $ 9,282 $ 690 $ 2,024 $ 327 $ 12,323
........ ....... ....... ........ ........ .........
38
In addition to the results of the Company's oil and gas exploration and
production activities, the oil and gas production segment information includes
the gas marketing activities of the Company and the results of production of
carbon dioxide, helium and sulfur from the LaBarge Project.
Intersegment sales by the oil and gas production segment to the crude oil
marketing and transportation segment were $15,438,000, $16,399,000 and
$14,258,000 in 1996, 1995 and 1994, respectively. Intersegment sales by the
crude oil marketing and transportation segment to the technical fuels and
chemical processing segment in 1996, 1995 and 1994 were $1,607,000, $1,697,000
and $2,066,000, respectively. Intersegment sales by the oil and gas production
segment to the technical fuels and chemical processing segment in 1996, 1995 and
1994 were $1,045,000, $737,000 and $768,000, respectively. These amounts have
been eliminated in consolidation.
Marathon Oil Company, a customer of the crude oil marketing and
transportation segment, accounted for approximately 18%, 12% and 18% of
consolidated revenues in 1996, 1995 and 1994, respectively.
As a result of the sale and conveyance in 1996, referred to in Note 5,
segment data for 1995 and 1994 have been reclassified to conform to the 1996
presentation.
NOTE 9. LITIGATION
DONNA REFINERY PARTNERS, LTD. V. HOWELL CRUDE OIL COMPANY AND HOWELL
CORPORATION; Texas District Court; No. 89-033634. In December 1993 a jury
verdict of $1.9 million was rendered against the Company which was subsequently
reduced by the judge to approximately $675,000. The Company believes the
judgment is in error. The Company filed a motion for a new trial that was
denied, so the Company appealed the decision. The plaintiff has filed an appeal
to increase the recovery by $1.25 million. On June 6, 1996, the Fourteenth Court
of Appeals affirmed the judgment of the lower court. The Company has appealed
this case to the Texas Supreme Court. The Company does not believe that the
ultimate resolution of this matter will have a materially adverse effect on the
financial position, results of operations or cash flows of the Company.
On July 11, 1995 the Company received a demand letter from several working
interest owners in the North Frisco City Field and in the North Rome Field
indicating the Company had not paid according to the terms of a "call on
production." The Company was granted a call on a portion of this production but
has never exercised the call. Accordingly, the Company has filed petitions for
declaratory judgment to that effect in cases styled HOWELL PETROLEUM
CORPORATION, ET AL, VS. SHORE OIL COMPANY, ET AL, District Court of Harris
County, Texas; No. 95-037480 and HOWELL PETROLEUM CORPORATION, ET AL, VS.
TENEXCO, INC., ET AL, District Court of Harris County, Texas; No. 95-037970. The
defendants in this action have counterclaimed against the Company. These claims
are similar in nature to the Alabama and Mississippi royalty litigation. One of
the defendants, John Faulkinberry, has filed a counterclaim against the Company
seeking actual damages of $75,000 and punitive damages of $100,000,000.
Related to this matter, several royalty owners have filed lawsuits against
the Company in Alabama and Mississippi concerning pricing in the North Frisco
City Field. The lawsuits allege the Company violated its contracts with the
plaintiffs by not paying the plaintiffs ". . . the highest available price for
oil." Damages claimed by the plaintiffs include approximately $3.8 million and
are based on numerous damage theories including, but not limited to, allegations
of breach of contract and fraud. The complaints also seek unspecified punitive
damages in the Alabama lawsuits and $7 million punitive damages in the
Mississippi lawsuit. The Company filed answers denying all charges. The Company
does not believe that the ultimate resolution of these matters will have a
materially adverse effect on the financial position, results of operations or
cash flows of the Company.
There are various other lawsuits and claims against the Company, none of
which, in the opinion of management, will have a materially adverse effect on
the Company.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is subject to various environmental regulations and laws.
Procedures exist within the Company to monitor compliance and assess the
potential environmental exposure of the Company. The Company believes that such
exposure is not material to its financial position, results of operations or
cash flows.
39
The Company has indemnified Exxon for certain environmental claims that may
be made in the future attributable to the time when Exxon owned the crude oil
pipelines that the Company acquired from Exxon. Management does not believe the
indemnification of Exxon for these environmental liabilities will have a
material financial impact on the financial position, results of operations or
cash flows of the Company.
In January 1995 an Agreed Order with the Texas Natural Resource Conservation
Commission was signed by the Company with respect to alleged violations of rules
regarding the permitting and storage of hazardous wastes at a facility that was
previously owned by the Company. Penalties totaling $26,000 were assessed and
paid by the Company. During 1996, 1995 and 1994, the Company incurred costs of
$0, $28,000 and $213,000, respectively, related to remediation and disposal of
the hazardous wastes. Additional testing and monitoring of the groundwater and
formal approval of the remediation work are still required. The Company has
completed the remediation work related to hazardous waste storage rule
violations. The new owner of the facility accepted responsibility for the first
$100,000 of costs related to additional testing, monitoring and remediation, if
necessary, of the groundwater. Since the costs for these activities have
exceeded $100,000, the Company is responsible for the balance of the additional
costs. The Company does not believe that this matter will have a material
adverse effect on the financial condition or results of operations of the
Company.
The Channelview facility is discharging wastewater pursuant to a state
wastewater discharge permit. Industries located in the state of Texas are
required to obtain wastewater discharge permits from the state and from the
Environmental Protection Agency ("EPA"). When the Company purchased the
Channelview facility in 1988, it requested and obtained a transfer of these
permits. In 1990, the Company applied for a renewal of both the federal and the
state wastewater permits. The state permit was reissued in 1992. During 1993,
the Company determined that the federal wastewater discharge permit may have
expired prior to the EPA's transfer of the permit to the Company. The EPA has
been contacted to resolve this issue, and the Company will be negotiating to
obtain a renewed permit. Penalties may potentially be imposed upon the Company
as a result of this matter; however, until this matter is resolved, the amount
of such penalties, if any, cannot be quantified. While penalties may be material
and the actions of regulatory bodies are not subject to accurate prediction,
based on information currently available to the Company and on the circumstances
present at its Channelview facility (including the existence of the state
permit, the Company's compliance with the more stringent state permit and the
ability, if required, to operate the Channelview facility utilizing holding
tanks and offsite third party treatment facilities in the absence of a permit),
the Company does not believe that this matter will have a materially adverse
effect on the financial condition or results of operations of the Company.
The Company occupies office and operational facilities and uses equipment
under operating lease arrangements. Expense of these arrangements amounted to
$2,765,000 in 1996, $2,201,000 in 1995 and $2,078,000 in 1994. At December 31,
1996, long-term commitments for lease of facilities and equipment totaled
approximately $5,469,000, consisting of $678,000, $578,000, $655,000, $674,000
and $672,000 for the years 1997 through 2001, respectively, and $2,212,000
thereafter.
40
HOWELL CORPORATION AND SUBSIDIARIES
Form 10-K
Index to Exhibits
Exhibits not incorporated herein by reference to a prior filing are designated
by an asterisk (*) and are filed herewith. Exhibits designated by two asterisks
(**) are incorporated herein by reference to the Company's Form S-1 Registration
Statement, registration No. 33-59338, filed on March 10, 1993.
EXHIBIT
NUMBER DESCRIPTION
3.1 ** Certificate of Incorporation, as amended, of the Company.
3.1(a) Certificate of Amendment to the Certificate of Incorporation of
the Company (filed as an exhibit to the Company's Report on Form
10-Q for the quarterly period ended June 30, 1994).
3.2 ** By-laws of the Company.
10.1 ** Howell Corporation 1988 Stock Option Plan.
10.2 ** First Amendment to the Howell Corporation 1988 Stock Option Plan.
10.3 ** Second Amendment to the Howell Corporation 1988 Stock Option Plan.
10.4 ** Form of Stock Option Agreement.
10.5 Third Amendment to the Howell Corporation Stock Option Plan (filed
as an Exhibit to the Company's Report on Form 10-Q for the quarterly
period ended June 30, 1994).
10.6** Form of Indemnity Agreement by and between the Company and each
of its directors and executive officers.
10.7 Credit Agreement Among Howell Petroleum Corporation, as Borrower,
Bank One, Texas, N.A. as Agent and as a Lender, Bank of Montreal, as
a Lender, Compass Bank - Houston as a Lender and Den norske Bank AS,
as a Lender, dated as of March 31, 1995 (filed as an Exhibit to the
Company's Report on Form 10-Q for the quarterly period ended March
31, 1995).
10.8 Guaranty by Howell Corporation in Favor of Bank One, Texas, National
Association, as Agent, dated as of March 31, 1995 Credit Facility to
Howell Petroleum Corporation (filed as an Exhibit to the Company's
Report on Form 10-Q for the quarterly period ended March 31, 1995).
10.13 ** Split Dollar Life Insurance Agreement dated January 27, 1990
between the Company, Steven K. Howell, Douglas W. Howell, David
L. Howell, Bradley N. Howell and Charles W. Hall, Trustee of
the Howell 1990 Children's Trusts.
10.14 ** Deferred Compensation and Salary Continuation Agreement dated
January 23, 1990 by and between the Company and Paul N. Howell.
10.15 ** United States of America Department of Energy Economic Regulatory
Administration Consent Order with the Company dated as of
February 23, 1989.
10.16** Letter from the Department of Energy to the Company dated
September 10, 1992 modifying the terms of the Consent Order.
10.19** United States Department of the Interior Bureau of Land
Management Oil and Gas Lease of Submerged Lands under the Outer
Continental Shelf Land Act by and between the United States of
America and Howell Petroleum Corporation effective as of December 1,
1981.
10.20** United States Department of the Interior Minerals Management
Service Oil and Gas Lease of Submerged Lands under the Outer
Continental Shelf Lands Act by and between the United States of
America and Total Petroleum, Inc., effective as of July 1, 1983.
10.21** Assignment, Bill of Sale and conveyance by Total Petroleum, Inc.,
as assignor, to Oil Acquisitions, Inc., dated January 19, 1989.
41
EXHIBIT
NUMBER DESCRIPTION
10.22** Unit Operating Agreement 7300' Sand Unit, Blocks 64 and 65 Main
Pass Area, Offshore Plaquemines Parish, Louisiana, by and among
Howell Petroleum Corporation, Oil Acquisitions, Inc., Woods
Petroleum Corporation, BHP Petroleum (Americas) Inc. and Challenger
Minerals, Inc., dated as of March 1, 1990.
10.23** Unit Agreement for Outer Continental Shelf Development and
Production Operations on the 7300' Sand Unit, Blocks 64 and 65, Main
Pass Area, Offshore Plaquemines Parish, Louisiana, by and among
Howell Petroleum Corporation, Oil Acquisitions, Inc., Woods
Petroleum Corporation, BHP Petroleum (Americas) Inc. and Challenger
Minerals, Inc., dated as of April 19, 1990.
10.24** Processing Agreement by and between Howell Petroleum Corporation
and Exxon Company, U.S.A., effective as of August 1, 1988.
10.25 Purchase and Sale Agreement between Federal Intermediate Credit Bank
of Jackson and Howell Petroleum Corporation (filed as an exhibit to
the Company's Report on Form 10-Q for the quarterly period ended
June 30, 1993).
10.26 Lease Agreement by and between Texas Commerce Bank National
Association and Howell Corporation dated as of December 13, 1993
(filed as an exhibit to the Company's Report on Form 10-K for the
year ended December 31, 1993).
10.27 First Amendment to Lease Agreement by and between Texas Commerce
Bank National Association and Howell Corporation effective as of
October 5, 1995 (filed as an exhibit to the Company's Report on Form
10-K for the year ended December 31, 1995).
10.28 Second Amendment to Lease Agreement by and between Texas Commerce
Bank National Association and Howell Corporation effective as of
November 21, 1995 (filed as an exhibit to the Company's Report on
Form 10-K for the year ended December 31, 1995).
11 * Computation of Earnings per Share.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
27 * Financial Data Schedule.
42