1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended
---------------------------------------------
Commission file number: 0-10990
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CASTLE ENERGY CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0035225
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Radnor Corporate Center, Suite 250, 100 Matsonford Road,
Radnor, Pennsylvania 19087
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 995-9400
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check /X/ 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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 6,668,646 shares of
Common Stock, $.50 par value.
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CASTLE ENERGY CORPORATION
INDEX
Page #
------
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1995
(Unaudited) and September 30, 1994................ 1
Consolidated Statements of Operations -
Three Months Ended March 31, 1995 and 1994
(Unaudited)....................................... 2
Consolidated Statements of Operations -
Six Months Ended March 31, 1995 and 1994
(Unaudited)....................................... 3
Consolidated Statements of Cash Flows - Six Months
Ended March 31, 1995 and 1994 (Unaudited)......... 4
Consolidated Statements of Stockholders' Equity -
Year Ended September 30, 1994 and Six Months
Ended March 31, 1995 (Unaudited).................. 5
Notes to the Consolidated Financial Statements
(Unaudited)....................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 12
Part II. Other Information
Item 1. Legal Proceedings................................. 23
Item 3. Defaults Upon Senior Securities................... 24
Item 6. Exhibits and Reports on Form 8-K.................. 24
Signatures.................................................................. 25
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
March September
31, 30,
1995 1994
----- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 22,346 $ 18,118
Restricted cash ................................................ 4,738 12,525
Temporary investments .......................................... 990 4,436
Accounts receivable ............................................ 52,327 22,413
Accounts receivable - related party ............................ 19,941
Inventories .................................................... 107,113 83,711
Prepaid expenses and other current assets ...................... 5,973 7,341
Deferred income taxes .......................................... 99,885 68,088
-------- --------
Total current assets ........................................... 293,372 236,573
Property, plant and equipment, net:
Refining ....................................................... 292,612
Natural gas transmission ....................................... 23,608 24,535
Furniture, fixtures and equipment .............................. 303 3,245
Oil and gas properties .............................................. 18,732 16,146
Gas contracts, net .................................................. 39,202 43,889
Goodwill ............................................................ 5,413
Other assets, net ................................................... 21,314 24,078
-------- --------
Total assets ................................................... $396,531 $646,491
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................. $ 84,469 $ 84,297
Current portion of long-term debt - related party .............. 9,974
Accounts payable ............................................... 33,505 53,999
Accrued expenses ............................................... 50,308 27,169
Due to related parties ......................................... 17,663
Deferred revenue ............................................... 62,333
Income taxes payable ........................................... 99,885 136
Other liabilities .............................................. 3,333 3,771
-------- --------
Total current liabilities ...................................... 271,500 259,342
Long-term debt ...................................................... 46,732 51,361
Long-term debt - related party ...................................... 250 248,491
Other long-term liabilities ......................................... 30,803 34,191
Deferred income taxes ............................................... 6,530 15,186
-------- --------
Total liabilities .............................................. 355,815 608,571
-------- --------
4
Commitments and contingencies .......................................
Stockholders' equity:
Series B participating preferred stock; par value - $1.00;
10,000,000 shares authorized; no shares issued
Common stock; par value - $0.50; 25,000,000 shares authorized;
6,668,646 shares and 7,627,646 issued and outstanding at
March 31, 1995 and September 30, 1994, respectively ............ 3,334 3,814
Additional paid-in capital .......................................... 62,646 73,490
Retained earnings (accumulated deficit) ............................. (25,264) (39,384)
------- -------
40,716 37,920
-------- --------
Total liabilities and stockholders' equity .......................... $396,531 $646,491
======== ========
The accompanying notes are an integral part of these financial statements
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CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
----------------------------
1995 1994
---- ----
Revenues:
Refining ................................................................ $202,949 $172,354
Natural gas transmission and marketing .................................. 21,134 18,566
Exploration and production .............................................. 1,781 2,102
--------- ----------
225,864 193,022
--------- ----------
Expenses:
Refining ................................................................ 206,311 158,243
Natural gas transmission and marketing .................................. 15,526 14,402
Exploration and production .............................................. 1,208 1,445
Corporate ............................................................... 928 1,039
Provision for loss on assets to be disposed of .......................... 1,098
Gain on MG Settlement ................................................... (4)
--------- ----------
225,067 175,129
--------- ----------
Operating income ............................................................. 797 17,893
--------- ----------
Other income (expenses):
Interest income ......................................................... 638 426
Other income ............................................................ 304 118
Interest expense ........................................................ (1,722) (7,215)
--------- ----------
(780) (6,671)
--------- ----------
Income before provision for (recovery of) income taxes ....................... 17 11,222
--------- ----------
Provision for (recovery of )income taxes:
Federal ................................................................. 3,957
State ................................................................... (19) 566
--------- ----------
(19) 4,523
--------- ----------
Net income ................................................................... $ 36 $ 6,699
========= ==========
Net income per share ......................................................... $ .01 $ .56
========= ==========
Weighted average number of common and common equivalent
shares outstanding .......................................................... 6,712,000 12,071,000
========= ==========
The accompanying notes are an integral part of these financial statements
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CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Six Months Ended March 31,
--------------------------
1995 1994
---- ----
Revenues:
Refining ................................................................. $493,615 $375,814
Natural gas transmission and marketing ................................... 41,189 34,664
Exploration and production ............................................... 4,140 4,580
--------- ----------
538,944 415,058
--------- ----------
Expenses:
Refining ................................................................. 471,290 343,632
Natural gas transmission and marketing ................................... 30,231 27,631
Exploration and production ............................................... 2,839 3,056
Corporate ................................................................ 2,222 1,912
Provision for loss on assets to be disposed of ........................... 346,106
Gain on MG Settlement .................................................... (391,143)
--------- ----------
461,545 376,231
--------- ----------
Operating income ............................................................. 77,399 38,827
--------- ----------
Other income (expenses):
Interest income .......................................................... 1,193 591
Other income ............................................................. 463 268
Interest expense ......................................................... (5,291) (14,535)
--------- ----------
(3,635) (13,676)
--------- ----------
Income before provision for income taxes ..................................... 73,764 25,151
--------- ----------
Provision for income taxes:
Federal .................................................................. 51,981 8,810
State .................................................................... 7,663 1,259
--------- ----------
59,644 10,069
--------- ----------
Net income ................................................................... $14,120 $15,082
========= ==========
Net income per share ......................................................... $ 2.04 $ 1.37
========= ==========
Weighted average number of common and common equivalent
shares outstanding .......................................................... 6,917,000 11,096,000
========= ==========
The accompanying notes are an integral part of these financial statements
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CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended March 31,
--------------------------
1995 1994
---- ----
Cash Flows From Operating Activities:
Net income ............................................................. $ 14,120 $ 15,082
--------- ---------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation, depletion and amortization ............................... 10,304 27,560
Deferred taxes ......................................................... (40,453) 10,056
Gain on MG Settlement .................................................. (396,166)
Provision for loss on assets to be disposed of ......................... 346,106
(Increase) decrease in restricted cash ................................. 7,787 (185)
(Increase) decrease in temporary investments ........................... 3,446
(Increase) in accounts receivable ...................................... (16,867) (14,863)
(Increase) in inventories .............................................. (23,402) (17,567)
(Increase) decrease in prepaid assets .................................. 1,368 (6,261)
(Increase) in other assets ............................................. (1,426) (952)
Increase (decrease) in accounts payable ................................ (20,494) (2,967)
Increase (decrease) in accrued expenses, including income taxes ........ 107,471 (3,245)
(Decrease) in amounts due to related parties ........................... (17,663) (6,899)
(Decrease) in other current liabilities ................................ (439) (651)
(Decrease) in deferred revenues ........................................ (12,124) (14,019)
Increase (decrease) in other long-term liabilities ..................... (287) 1,231
--------- ---------
Total adjustments ................................................... (52,839) (28,762)
--------- ---------
Net cash (used in) operating activities ............................. (38,719) (13,680)
--------- ---------
Cash Flows From Investing Activities:
Purchase of oil and gas properties ..................................... (4,028) (438)
Purchase of furniture, fixtures and equipment .......................... (241) (1,498)
Investment in refining plant ........................................... (28,817) (28,062)
Purchase of pipeline ................................................... (4)
Business acquisition, net of cash acquired ............................. (8,230)
--------- ---------
Net cash provided by (used in) investing activities ................. (33,090) (38,228)
--------- ---------
Cash Flows From Financing Activities:
Repayment of long-term debt ............................................ (33,504) (22,575)
Proceeds of long-term debt - revolving credit facility ................. 109,483 12,114
Proceeds from issuance of common stock, net ............................ 48,207
Proceeds from exercise of stock options ................................ 58
Proceeds of related party debt, net..................................... 33,609
Other .................................................................. 29
--------- ---------
Net cash provided by financing activities ........................... 76,037 71,384
--------- ---------
Net increase (decrease) in cash and cash equivalents ....................... 4,228 19,476
Cash and cash equivalents - beginning of period ............................ 18,118 4,304
--------- ---------
Cash and cash equivalents - end of period .................................. $ 22,346 $ 23,780
========= =========
8
Supplemental disclosures of cash flow information are as follows:
Cash paid during the period for:
Interest ............................................................ $ 7,628 $ 9,885
========= =========
Income taxes ........................................................ $ 69 $ 5,215
========= =========
Interest capitalized during the period .............................. 710
=========
Supplemental schedule of noncash investing and financing activities:
Purchase of Powerine Oil Company:
Basis in assets acquired ............................................ $ 188,082
Cash paid for capital stock and transaction costs ................... (8,230)
---------
Basis in liabilities assumed ........................................ $ 179,852
=========
Treasury Stock retired ................................................. $ 364
=========
The accompanying notes are an integral part of these financial statements
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CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Retained
Common Stock Additional Earnings Treasury Stock
-------------------- Paid-In (Accumulated -----------------
Shares Amount Capital Deficit) Shares Amount Total
------ ------ ------- -------- ------ ------ -----
Balance - September 30, 1993 ...... 7,782,506 $ 3,891 $ 65,387 ($ 78,301) 59,860 ($ 364) ($ 9,387)
Stock issuance .................... 3,500,000 1,750 46,428 48,178
Treasury stock retired ............ (59,860) (30) (334) (59,860) 364
Options exercised ................. 5,000 3 26 29
Shares repurchased with cash
participations .................. (3,600,000) (1,800) (38,017) (39,817)
Net income ........................ 38,917 38,917
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - September 30, 1994 ...... 7,627,646 3,814 73,490 (39,384) 0 0 37,920
Stock surrendered ................. (969,000) (485) (10,897) (11,382)
Stock options exercised ........... 10,000 5 53 58
Net income ........................ 14,120 14,120
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - March 31, 1995 .......... 6,668,646 $ 3,334 $ 62,646 ($ 25,264) 0 0 $ 40,716
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements
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CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Preparation
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating
results for the three and six month periods ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 1995. These unaudited consolidated financial
statements should be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1994, as amended. Reference should be
made to such Form 10-K for capitalized (defined) terms used herein.
In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the
results for the three and six month periods ended March 31, 1995 and 1994.
Note 2 - September 30, 1994 Balance Sheet
The amounts presented in the balance sheet as of September 30, 1994
were derived from the Company's audited consolidated financial statements
which were included in its Annual Report on Form 10-K for the fiscal year
ended September 30, 1994, as amended.
Note 3 - Accounting Matters
Gain from MG Settlement
The MG Settlement is described in detail in Note 26 to the September
30, 1994 financial statements of the Company. Such financial statements are
included as Item 8 in Form 10-K of the Company for the year ended September
30, 1994, which has been filed with the Securities and Exchange Commission.
As MG is no longer a stockholder of the Company, items in the financial
statements related to MG subsequent to October 14, 1994 have been
reclassified as those of an unrelated party.
Provision for Loss on Assets to be Disposed of
In the first quarter of fiscal 1995, the Company decided to dispose of
its refining business.
On December 5, 1994 the Company entered into an agreement to sell all
of its refining assets and operations to CORE Refining Corporation ("CORE")
(previously SIPAC Inc). In February of 1995, CORE informed the Company that
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CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
it was unable to raise the financing needed to purchase the refining assets
and operations. Thereafter, the Company sought to sell the assets and/or
operations of both of its Refineries - combined or separately to several
outside parties or CORE. A description of the CORE Agreement and
negotiations conducted by the Company is found in Note 26 to the September
30, 1994 financial statements of the Company (which is included in Item 8 of
Form 10-K for the fiscal year ended September 30, 1994) and in the Company's
definitive proxy which was filed with the Securities and Exchange Commission
on May 11, 1995.
As of May 12, 1995, the situation with respect to the sale of the
Company's refining assets/refining subsidiaries was as follows:
Powerine Refinery:
Three outside offers to purchase the refinery assets have been
received. The Company is currently negotiating with two of those making
offers.
Two additional outside parties have expressed an interest in purchasing
the stock of the Powerine subsidiaries but no definitive offer has been
received, however, a preliminary offer has been received from one party. The
Company is currently negotiating with both parties.
The Company expects to enter into a definitive agreement to sell either
the Refinery assets or the stock of the Powerine refining subsidiaries in the
next two months but there can be no assurance the Company will be able to do
so.
Indian Refinery:
The Company and the management of CORE continue to negotiate a possible
purchase by CORE of the Indian Refinery, and CORE is currently seeking
financing and equity participants for such a purchase.
In addition to CORE, one outside party has made an offer for the
Refinery assets. Another outside party is interested in acquiring the
refining assets or the stock of the Indian subsidiaries but has not yet made
an offer.
Since the Company had decided to dispose of the Refineries but had not
closed a transaction to sell one or both Refineries, it made the following
adjustments to the refining assets and liabilities as of December 31, 1994:
a. A loss provision of $325,351 was recorded reducing the book value of
the refining property, plant and equipment, furniture and fixtures and
acquired goodwill to zero.
b. An additional net loss provision of $19,657 relating to anticipated
severance and closing costs of the Refineries was recorded as of December 31,
1994. The provision was net of an offer received from a third party to
purchase the refining plant of the Powerine Refinery.
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CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
An additional loss provision of $1,098 relating to the refining plant
was recorded at March 31, 1995.
The provision for losses is provided pursuant to paragraphs 15 and 16
of Statement of Financial Accounting Standards #121 - "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
The loss was not accounted for as a discontinued operation because a) the
Company is still uncertain as to the expected method of disposal of the
refinery assets, i.e., by sale of stock, sale of assets or abandonment and b)
the estimated loss on the disposal can be expected to vary materially
depending on the method of disposition ultimately utilized.
In addition to the $19,657 of accrued closing costs, the Company had
accrued approximately $32,000 for environmental liabilities. Both accruals
remain as of March 31, 1995.
The above loss provision of $346,106 on assets to be disposed of is
based upon management's best estimate of the loss that would be realized if
the refining assets were sold and the Refineries were closed. In calculating
the loss provision, proceeds assumed to be realized from the sale of the
refining property, plant and equipment were offset against the estimated
costs to close the Refineries, including employee severance, employee
benefits, plant closing costs, plant security costs and losses on the assumed
sale of feedstocks and tank bottoms. The resulting loss provision reflects
the minimum provision and the ultimate loss may be greater than the amount
provided. Conversely, if the Company is able to sell the Refineries as going
concerns rather than selling the refining assets and closing the Refineries,
most of the estimated plant closing costs may be avoided and some or all
estimated environmental liabilities may be assumed by the purchaser. As a
result, the ultimate loss upon disposition of the Refineries may be less than
that recorded.
Note 4 - Inventories
The Company's inventories consist of the following:
March 31, September 30,
1995 1994
---- ----
(Unaudited)
Crude oil ...................... $ 44,550 $ 49,029
Unfinished products ............ 28,448 19,549
Finished products .............. 30,753 4,458
Materials and supplies ......... 10,952 10,675
-------- --------
114,703 83,711
Provision to reduce inventory to
market value ................... (7,590)
-------- --------
$ 107,113 $ 83,711
========= =========
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CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 5 - Stockholders' Equity
On December 2, 1993, the Company consummated a public offering of its
common stock. Pursuant to the terms of the offering, the Company sold
2,800,000 shares of common stock to the public and 700,000 shares of common
stock to MG at a gross offering price of $15.00 per share.
On September 9, 1994, the Company acquired and cancelled 3,600,000
shares of its common stock from MG. On October 14, 1994, 969,000 shares of
common stock were tendered by MG as part of the MG Settlement and cancelled
by the Company, reducing MG's ownership of the Company's common stock to
zero. In addition, a convertible debenture held by MG and certain warrants
held by employees of MG were surrendered. See Note 26 to the Company's
consolidated financial statements included in Item 8 of Form 10-K for the
year ended September 30, 1994, as amended.
Note 6 - Earnings Per Share
Earnings per share are computed based upon the weighted average number
of shares of common stock and equivalents outstanding during each period.
Common stock equivalents are attributed primarily to outstanding stock
options, warrants and a convertible debenture in 1994 and stock options and
warrants in 1995.
Note 7 - Acquisitions
ARCO Royalty
In October 1994, one of the Company's exploration and production
subsidiaries purchased certain royalty interests held by ARCO in wells
purchased by another of the Company's exploration and production subsidiaries
from ARCO in December 1992. The purchase price was $3,822.
Powerine Oil Company
As of October 1, 1993, the Company acquired from MG an option to
acquire Powerine Oil Company, the owner of a 49,500 barrel per day refinery
located in Santa Fe Springs, California. The results of Powerine Oil Company
are included in the Company's operating results effective October 1, 1993.
Note 8 - Contingencies
See Item 1, in Part II.
Note 9 - Subsequent Events
On March 31, 1995, two of the Company's refining subsidiaries, IRLP
and Powerine, did not pay MGTFC under their respective revolving credit
facilities with MGTFC. The repayment of such indebtedness is guaranteed by
the Company. On April 3, 1995, MGTFC filed a complaint against the Company
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CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
to collect $105,011, plus interest. MGTFC claimed that this was the total
amount due to MGTFC from IRLP and Powerine under their revolving credit
facilities as of March 31, 1995. MGTFC thereafter filed individual actions
to recover $24,289 from Powerine and $80,722 from IRLP.
On April 14, 1995, Powerine repaid all of the indebtedness owed by it
to MGTFC, including $10,828 of disputed amounts (the "Disputed Amount"). On
the same day, the Company and two of its subsidiaries and MG and two of its
subsidiaries, entered into the Payoff Loan and Pledge Agreement ("Payoff
Agreement"), which provided the following:
a. MG released Powerine from all liens and claims.
b. MG loaned the Company $10,000.
c. Powerine transferred its claim with respect to the Disputed Amount
to the Company.
d. The claim with respect to the Disputed Amount is to be submitted to
binding arbitration.
e. MG can offset the $10,000 loan to the Company against the $10,000
note it issued to the Company as part of the MG Settlement, to the
extent the arbitrator decides the claim with respect to the Disputed
Amount in MG's favor.
The Disputed Amount relates primarily to disputes over the prices paid
by subsidiaries of MG for 388,500 barrels of refined products listed by MG
subsidiary, MGR&M, and overpayment for refined products that were processed
after January 31, 1995 but for which the related crude and feedstocks were
purchased prior to February 1, 1995. At the present time, the $10,000 MG
note to the Company is offset by the $10,000 note of the Company to MG. To
the extent that the arbitrator decides in favor of the Company, the Company's
note to MG will be reduced and the net amount due to the Company from MG will
be increased. If the arbitrator settles the Disputed Amount entirely in the
Company's favor, the Company's note to MG will be cancelled, MG will still
owe the Company its $10,000 note (due October 14, 1997) and MG will owe the
Company $828. If the arbitrator settles the Disputed Amount entirely in MG's
favor, the Company's note to MG will be offset against MG's note to the
Company and the Company will owe MG $828. The Company's management believes
that the claim will be settled in favor of the Company and the Company has
recorded the related refinery revenues assuming the Company's position will
be upheld. To the extent it is not upheld, pretax earnings will be adversely
affected.
Powerine obtained the funds to repay MGTFC by selling its inventories
and petroleum products to Wickland Oil Corporation ("Wickland"), an unrelated
party, for $22,328, subject to certain post closing adjustments.
Concurrently, Powerine entered into a feedstock, supply and processing
agreement with Wickland. For the term of the feedstock, supply and
processing agreement, Powerine will purchase certain crude oil, intermediate
products, and feedstocks exclusively from Wickland, for purchase prices equal
to either (i) in the case of such commodities which Wickland acquired from
Powerine, Wickland's purchase price therefor plus a fixed premium plus an
amount representing interest or (ii) in the case of other quantities of such
commodities, amounts determined by reference to certain market indices (or,
for certain crude oil, Wickland's purchase price from third-parties) plus
fixed premiums plus an amount representing interest. At the end of the term
of the agreement, Powerine has the option to purchase Wickland's inventories
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15
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
of such commodities; provided, that, at the later of May 23, 1995 or the date
that Powerine obtains $15 million of financing (the "Product Purchase Date"),
Powerine will be required to purchase all of Wickland's inventories of such
intermediate products and feedstocks and will have the option to purchase
Wickland's inventories of crude oil. In such case, Powerine will continue to
purchase crude oil and will have the option to continue to purchase
feedstocks from Wickland for the remainder of the term of the agreement. If
Powerine does not purchase all of Wickland's inventories of such commodities,
either at the end of the term or at the Product Purchase Date, Powerine will
reimburse Wickland for costs of removing the remainder of such commodities
from Powerine's facilities and for all losses Wickland suffers in reselling
such commodities to third parties. In addition, until the Product Purchase
Date, Wickland has the exclusive right to purchase Powerine's output of
certain blend stocks and refined products for prices determined by reference
to certain market indices less certain agreed-upon discounts. The agreement
will terminate on July 1, 1995 or earlier upon 15 days' notice given by
either party at any time after May 14, 1995. To secure its obligations to
Wickland under the agreement, Powerine has granted Wickland a security
interest in all of Powerine's assets and has provided Wickland with a $3
million letter of credit. The Company has guaranteed Powerine's obligations
to Wickland. Powerine is currently negotiating to replace its agreements
with Wickland with other interim financing.
At May 12, 1995, IRLP owed MGTFC approximately $25,700 under its
revolving credit facility, subject to certain defenses the Company and IRLP
have raised. (See Item 1 of Part II) IRLP is currently seeking to obtain
interim financing.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(Dollars in thousands, except per share and per barrel amounts)
GENERAL
The Company is currently engaged in three segments of the oil and gas
industry - refining, natural gas marketing and exploration and production.
Until October 1994, a large percentage of the Company's common stock was
owned by MG and the Company had entered into a large number of material
transactions with MG and its subsidiaries. In December 1993, the
international financial press reported that MG's parent, MGAG, incurred
losses in excess of $1,000,000 primarily as a result of the crude oil trading
losses of MG. In January 1994, the international financial press reported
that MGAG's lending banks had provided additional loans to avoid MGAG's
filing for bankruptcy.
On August 31, 1994, the Company entered into two agreements with MG and
certain of its affiliates, comprising the MG Settlement, pursuant to which
the parties thereto agreed to amend or terminate a number of contractual
relationships among them. In the first step of the MG Settlement, which
closed on September 9, 1994, MG transferred 3,600,000 shares of the Company's
Common Stock to the Company in exchange for approximately $39,800 of
participations the Company held in debt obligations of the Company and its
subsidiaries to MGTFC.
In the second step of the MG Settlement, which closed on October 14,
1994, MG (a) cancelled certain debt obligations owed to MGTFC by the Company
and its affiliates and assumed IRLP's obligations to repay $73,041 under its
senior facility with Societe Generale (the "Senior Facility"), together
totaling approximately $322,000, (b) transferred back to the Company the
remaining 969,000 shares of Common Stock of the Company that it had, (c)
issued the Company a $10,000 note payable in three years, (d) terminated all
of its equity interests in the Company's natural gas operations, (e) agreed
to supply all crude oil necessary for the Company to meet its delivery
obligations under a forward sale contract with a third party entered into in
September 1993 and (f) cancelled $5,500 of convertible debentures. In
exchange for the foregoing, IRLP and Powerine (i) amended the Offtake
Agreements to terminate on February 1, 1995 for IRLP and for Powerine on a
date when all crude and feedstocks in inventory at January 31, 1995 had been
processed and sold, (ii) amended their working capital facilities to
terminate on March 31, 1995, and (iii) transferred to MG certain of the
Company's participations in debt obligations of the Company and its
affiliates to MGTFC. In connection with the MG Settlement, IRLP and MGNG,
another MG subsidiary, also entered into a four-year natural gas swap
agreement.
The completion of the transactions contemplated by the MG Settlement
has, among others, three consequences for the Company. First, the Offtake
Agreements terminated in February and March 1995 and the Company is now
responsible for marketing its own products and, therefore, is subject to
market risks. Second, effective March 31, 1995, the working capital
facilities provided by MGTFC terminated. Third, for Federal and state income
tax purposes, the Company recognized income of $391,143. Federal and state
income taxes of $99,885 were accrued as of March 31, 1995 on this gain and
other taxable income earned during the period October 1, 1994 to March 31,
1995.
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The Company began to explore its options for dealing with these
consequences before and during the negotiation of the MG Settlement. The
Company considered a number of alternatives, ranging from continuing its
Refinery operations on substantially the same basis as prior to the MG
Settlement, but obtaining new working capital financing and a new customer
base, to selling or closing the Refineries. The Company believed, however,
that it would need to raise substantial new equity for the payment of its
income taxes, in addition to raising the working capital financing for the
Refineries, if it decided to continue the Refinery operations. Further,
continuing the Refinery operations would require the Company to add
significant marketing personnel, expertise and expense. On the other hand,
closing the Refineries would result in substantial shut-down costs, including
severance obligations to employees and potential environmental clean-up
costs, although it would allow the Company to write-off the costs of its
Refineries to substantially reduce its taxes. The Company believed that the
working capital of the Refineries would be adequate to provide for such
severance obligations and environmental costs. Based upon these factors, the
Company early on determined to focus its efforts on seeking to sell the
Refinery operations.
On December 5, 1994, the Company entered into an agreement pursuant to
which it agreed to sell certain assets, including the assets of IRLP and the
capital stock of Powerine, to CORE, a newly formed corporation organized by
William S. Sudhaus, President and Chief Operating Officer of the Company. As
of February 16, 1995, CORE had been unable to raise the financing necessary
to purchase both Refineries and the agreement with CORE was terminated.
Subsequent to February 16, 1995, the Company sought to sell the
refining assets and/or stock of the Powerine and Indian Refineries
separately. The Company has received three outside offers to purchase the
refining assets of the Powerine Refinery and is also currently negotiating
the sale of the stock of the Powerine refining subsidiaries with two outside
parties. The Company is also negotiating the sale of the Indian Refinery and
related refining subsidiaries to CORE subject to CORE's ability to raise the
necessary financing. An outside party has also expressed an interest in
acquiring the Indian Refinery and is currently conducting due diligence but
has not as yet made an offer.
The factors contributing to the variances associated with the results
of operations for the current three and six months are similar unless
otherwise noted.
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RESULTS OF OPERATIONS
The Company has three business segments - refining, natural gas
marketing, and oil and gas exploration and production. The following
represents the disaggregated operating income with respect to each segment:
(Dollars in Thousands)
Increase
Income (Loss) (Decrease)
For Six Months Ended In Net
March 31, Income
-------------------------- ----------
1995 1994
---- ----
(Unaudited)
Revenues:
....................................................................
Refining ............................................................. $ 493,615 $ 375,814 $ 117,801
Natural gas marketing ................................................ 41,189 34,664 6,525
Exploration and production ........................................... 4,140 4,580 (440)
--------- --------- ---------
Total ............................................................ 538,944 415,058 123,886
--------- --------- ---------
Operating Expenses:
Refining:
Costs of materials sold ............................................ 401,128 256,329 (144,799)
Operating costs .................................................... 60,324 63,216 2,892
Selling, general and administrative ................................ 8,017 9,527 1,510
Depreciation and amortization ...................................... 1,821 14,560 12,739
Gain on MG Settlement .............................................. (391,143) 391,143
Provision for loss on assets to be disposed of ..................... 346,106 (346,106)
Natural gas transmission and marketing:
Gas purchases ...................................................... 23,580 20,884 (2,696)
Operating costs .................................................... 483 621 138
General and administrative ......................................... 476 456 (20)
Depreciation and amortization ...................................... 5,692 5,670 (22)
Exploration and Production:
Oil and gas production ............................................. 1,245 1,337 92
General and administrative ......................................... 146 489 343
Depreciation, depletion and amortization ........................... 1,448 1,230 (218)
Corporate:
General and administrative ......................................... 2,182 1,912 (270)
Depreciation ....................................................... 40 (40)
--------- --------- ---------
Total ............................................................ 461,545 376,231 (85,314)
--------- --------- ---------
Operating Income ....................................................... 77,399 38,827 38,572
Other income (expense):
Interest income ...................................................... 1,193 591 602
Interest expense ..................................................... (5,291) (14,535) 9,244
Other income, net .................................................... 463 268 195
--------- --------- ---------
Income before provision for income taxes ............................... 73,764 25,151 48,613
Provision for income taxes ............................................. (59,644) (10,069) (49,575)
--------- --------- ---------
Net income ............................................................. $ 14,120 $ 15,082 ($ 962)
========= ========= =========
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Revenues
Refining
Revenues from refining operations increased $117,801 or 31% during the
six month period ended March 31, 1995 versus the corresponding period in
1994. The increase was primarily attributable to three factors as follows:
(i) contract sales to third parties in 1995 with no corresponding sales in
the prior period, (ii) increased throughputs at the Indian Refinery due to
increased capacity and the fact that IRLP operated at less than full capacity
at the direction of MGR&M during the quarter ended December 31, 1993 in
accordance with the Indian Offtake Agreement and (iii) six monthly deliveries
during fiscal 1994 under the Company's forward sale contract with a third
party versus one monthly sale in the corresponding prior period. These
increases were offset by the following factors: (i) the Company ceased
operating under the Offtake Agreements as of January 31, 1995 at IRLP and in
March at Powerine and sales under alternative marketing arrangements were
less than they would have been under the Offtake Agreements and, (ii) IRLP
and Powerine reduced production in February and March given low refining
margins and in anticipation of potential plant closings.
Of the total refining revenues of $493,615 for the first six months of
fiscal 1995, $474,917 or 96% represented sales of refined products to MG
under the Offtake Agreements.
Natural Gas Marketing
Revenues from natural gas marketing increased by $6,525 or 19% for the
six months ended March 31, 1995, when compared with the same period in 1994.
The reason for the increase was increased average daily quantities sold to
Lone Star under the Lone Star Contract, a take-or-pay contract with a
February 1 - January 31 contract year. Under the Lone Star Contract, Lone
Star is required to take a fixed volume of gas each contract year but such
takes are not required evenly throughout each contract year. As the
Company's sales to Lone Star are at a fixed price, sales are not affected by
changes in natural gas prices but are directly proportional to the gas
volumes sold to Lone Star. If Lone Star had taken the annual gas volumes
required under the Lone Star contract ratably rather than on an accelerated
basis for the period October 1, 1994 to March 31, 1995, gas sales would
approximate $31,500, which is roughly one-half of the expected annual sales
in a given gas contract year.
Exploration and Production
Exploration and production revenues decreased $440 or 10% for the six
months ended March 31, 1995 as compared to the corresponding prior year
period. The decrease was attributable to lower gas prices and declining
production but was offset to a large extent by increased production resulting
from the purchase of royalty interests from ARCO in October 1994. Although
the average prices received for natural gas have declined 20% to 30% in the
last year, such prices have recently increased. Although decreases in the
price received for natural gas adversely impact the Company's exploration and
production revenues, the impact is partially offset by lower gas purchase
costs in the Company's natural gas marketing segment.
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Expenses
Refining
The cost of materials sold increased from 68% of refining revenues
during the first six months of fiscal 1994 to 81% of refining revenues during
the first six months of fiscal 1995. The increase in the cost of materials
sold is attributable to (i) the increased absorption of operating costs into
cost of material sold rather than operating expenses at IRLP ($4,261) since
IRLP did not previously own any material amount of refined product
inventories (since all refined products sold to MGR&M were sold at IRLP's
tanks) and at Powerine ($671), (ii) a market write-down of $7,590 at March
31, 1995 for which there was no counterpart at March 31, 1994 and (iii)
extremely low refining margins on refined products sold by IRLP and, to a
lesser extent, by Powerine in February and March 1995 at market rather than
Offtake Agreement prices. The market write-down occurred because the book
value of inventories exceeded the market prices. Under the Offtake
Agreements, similar write-downs did not occur because IRLP and Powerine were
able to process and sell their inventories at an operating profit even when
feedstock and crude inventories had a book value less than market. Without
the Offtake Agreements such a presumption cannot yet be made.
As a result of the termination of the Offtake Agreements, neither IRLP
nor Powerine remain insulated from fluctuations in refining margins but are
now subject to the results of such fluctuations as are most other independent
refiners.
Operating costs decreased $2,892 or 5% from 1994 to 1995 and selling,
general and administrative costs decreased $1,510 or 16% over the same
period. The decrease in operating costs is primarily due to the absorption
of approximately $4,261 of operating costs into refined products cost of
material and inventories in 1995 for which there was no counterpart in 1994.
Without such operating cost absorption into cost of materials and
inventories, operating costs would have increased $1,369. Selling, general
and administrative costs decreased because of a $2,200 charge for stock
appreciation rights in the first half of 1994 that has no counterpart in the
first half of 1995. Without such charge, selling, general and administrative
costs would have increased $831.
Subsequent to March 31, 1995, IRLP and Powerine laid off a total of
approximately 110 employees. In addition, wage reductions were implemented
by both IRLP and Powerine.
Gain on MG Settlement
The gain on the MG Settlement results from the Company's agreement to
terminate the Offtake Agreements in exchange for MG's cancellation of the
Company's debt to it, MG's assumption of the Company's debt to other parties
and cancellation of MG's equity interests in the Company. The gain on the MG
Settlement essentially represents the negotiated future value of the Offtake
Agreements. No similar transactions occurred in the prior year.
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The $12,739 or 87% decrease in depreciation and amortization is
primarily attributable to the Company's decision to write-down and reclassify
the refining property, plant and equipment as assets held for sale effective
October 14, 1994 at which time the Company began depreciating the assets at a
reduced value. On October 14, 1994, the Company reduced the book value of
the refining property, plant and equipment to $66,750, the expected value
under the initial CORE (SIPAC) transaction, and recorded depreciation and
amortization thereafter based upon the reduced book value. On December 31,
1994, the Company reduced the refinery property, plant and equipment,
furniture and fixtures and acquired goodwill to zero and ceased recording
depreciation thereon. Accordingly, for the quarter ended March 31, 1995, the
Company recorded no depreciation on refining property, plant and equipment.
The provision for loss on assets to be disposed of consists of the
following:
Refining, property, plant and equipment ................ $318,250
Refining furniture and fixtures ........................ 2,898
Acquired goodwill ...................................... 5,301
--------
326,449
Provision for severance and closing costs,
net of offer by third party for
refining plant of Powerine ............................. 19,657
--------
$346,106
========
The refining, property, plant and equipment, furniture and fixtures and
acquired goodwill were written down to zero because the Company has not yet
been able to sell the Refineries. The loss provision of $19,657 represents
anticipated closing and severance costs related to abandoning the Refineries
and selling related crude oil and refined product inventories and supplies
assuming the Refineries are closed rather than sold. Since management
intends to dispose of the refining assets by sale or abandonment and has not
yet sold the Refineries as going concerns, the above loss provision was
recorded assuming the Refineries will be closed. The provision reflects the
minimum loss assuming both Refineries are closed rather than sold as going
concerns. As noted previously, management is pursuing the sale of one or
both Refineries to several parties and it is possible that one or both
Refineries will ultimately be sold as going concerns and not closed, and that
the loss on the sale will be less than that recorded. There can, however,
be no assurance that such will be the case or that losses in excess of those
provided will not ultimately be incurred.
Natural Gas Marketing
Gas purchases increased $2,696 or 13% in the first half of 1995 versus
the same period in 1994. In fiscal 1995, gas purchases were 57% of gas sales
versus 60% in fiscal 1994. The decrease results primarily from the
termination of the Net Cash Flow Agreement as part of the MG Settlement on
October 14, 1994. The effect of such cancellation is that the Company's cost
of gas decreased approximately 7%. This decrease was offset by higher prices
for natural gas not purchased from MG. Since most of the Company's gas
purchases are from MGNG under a fixed price contract, increases or decreases
in the prices of natural gas do not significantly impact gas purchase costs.
Operating and general and administrative expenses decreased $118 or 11%
from 1994 to 1995 primarily because of decreased legal and insurance costs.
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Exploration and Production
The Company's exploration and production segment incurred operating and
general and administrative expenses of $1,391 for the six months ended March
31, 1995 versus $1,826 for the same period in 1994. The decrease results
primarily from decreased well operating costs, legal fees and insurance
costs.
Corporate
Corporate general and administrative expenses increased $270 or 14 %
primarily as a result of an increase in legal fees and other professional
fees ($1,040) offset by a charge related to stock appreciation rights in 1994
with no corresponding charge in 1995 ($770).
Other Income (Expense)
Interest Income and Expense
Interest expense decreased approximately $9,244 or 64% during the first
six months of fiscal 1995 as compared with the first six months of fiscal
1994. This decrease was primarily attributable to the elimination of
interest expense on debt exchanged in conjunction with the MG Settlement and
a decrease in amortization expense on deferred debt issuance costs related to
those loans which were discharged on October 14, 1994.
Interest income increased by $602 primarily as a result of $366 of
interest earned on the $10,000 note received from MG on October 14, 1994 and
an increase in interest earned on invested cash balances during the six
months ended March 31, 1995 versus interest earned on invested cash balances
during the same period in 1994. The increased average cash balance was
primarily attributable to cash held in reserve accounts by the refining
segment for either cash-backed letters or credit or reserves under the Senior
Facility. Such reserves were released to the Company in conjunction with the
MG Settlement.
Provision for Income Taxes
The combined state and Federal tax provision for the first two quarters
of fiscal 1994 approximated the expected blended statutory rate of 40%. The
combined state and Federal tax provision for the first two quarters of fiscal
1995 consists of primarily two components as follows:
$ Rate
-- ----
State and Federal provision ...................... $27,715 38%
Valuation reserve for state and
Federal deferred taxes ....................... 31,929 N/A
-------
$59,644
=======
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The valuation reserve for state and Federal taxes resulted primarily
because the loss recorded on the assumed closing of the Refineries is greater
than the loss on the then anticipated sale of the Refineries to CORE. At
September 30, 1994, the Company assumed the Refineries would be sold for
$38,750 in notes and assumption of environmental liabilities and provided
deferred tax assets on the entire amount of net operating loss carryforwards
and depletion carryforwards in anticipation of using such tax carryforwards
to offset taxable income from the MG Settlement. At December 31, 1994 and
March 31, 1995, the Company assumed the Refineries would be closed. The
result was that the Company did not utilize all of its tax carryforwards but
instead retained a net operating loss of approximately $36,000. In addition,
the Company has previously accrued approximately $32,000 of environmental
liabilities for book purposes which have not yet been deducted for tax
purposes.
Anticipated Discontinuance of Refining Operations
As noted, the Company intends to sell or close its Refineries not later
than September 30, 1995. The planned disposition of the Refineries has not
been accounted for as discontinued operations because management has not yet
decided on the method of disposition, i.e., by sale of the stock of the
refining subsidiaries or by sale of the refining assets and closing of the
Refineries. As soon as management is able to determine the method of
disposition, the loss on disposition, including anticipated future operating
losses prior to disposition, if any, will be estimated. To the extent such
loss exceeds the loss provision recorded through March 31, 1995, additional
losses will be provided. To the extent the loss provision recorded through
March 31, 1995 exceeds the estimated loss on disposition, such recovery will
be recorded as a reduction of the loss provision recorded through March 31,
1995.
Once the Company has disposed of the Refineries, its operations will be
materially reduced and will be limited to those of its natural gas marketing
and exploration and production segments and its corporate headquarters. The
appropriate effects of the anticipated decrease in its operations are as
follows:
Before After
Disposition Disposition
------------ -----------
Annual revenues ............................. $1,000,000 $75,000
Number of employees ......................... 850 30
Offices ..................................... 9 5
Property, plant and equipment and gas
contracts .................................. $ 400,000 $70,000
Management has provided pro forma financial statements reflecting the
financial condition and operations of the Company assuming the Refineries had
been sold on specific terms as of October 1, 1993 and 1994. Such pro forma
financial statements are included in the Company's 1995 definitive proxy
statement, which has been filed with the Securities and Exchange Commission
but which is not incorporated herein by reference.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
$38,719 of cash was used in operating activities during the six months
ended March 31, 1995 compared to $28,762 of cash used in operating activities
for the comparable period in the prior year.
In addition to operating activities, the Company also had cash
requirements for capital expenditures related to improvements at the Indian
Refinery and the Powerine Refinery. Such expenditures were $28,817 for both
Refineries during the six months ended March 31, 1995 compared with $28,062 for
the same period in the prior year. Of such amount, $21,492 related to
environmental expenditures with the remainder relating to sustaining and other
capital expenditures. Also, the Company acquired Powerine during the first
quarter of fiscal 1994 and acquired a royalty interest from ARCO during the
first quarter of fiscal 1995. (Cash paid for these acquisitions was $8,230 and
$3,822, respectively.)
To provide the cash needed to fund refinery operations and capital
expenditures, the Company renegotiated its working capital and letter of
credit facility arrangements (in conjunction with the MG Settlement) pursuant
to which MGTFC agreed to provide an aggregate of up to $130,000 to Indian and
$100,000 to Powerine through March 31, 1995. These facilities also allowed
the Company to borrow up to $32,000 through January 31, 1995 to fund capital
expenditures, all of which was utilized.
The Company anticipates that it will limit future capital expenditures
to sustaining capital expenditures until the Refineries are sold or closed
and abandoned. Such funds are expected to be generated from working capital.
Debt Service
As of March 31, 1995, the Company's debt service requirements,
excluding working capital loans, were as follows: $3,103 for the remainder of
fiscal 1995, $18,756 and $28,226 in fiscal 1996 and 1997, respectively. Of
the total debt service requirement of $50,085, $47,335 is due to General
Electric Credit ("GECC"), the natural gas marketing lender, and the remaining
$2,750 is due to a stockholder and a former stockholder of the Company in
June 1996. Although the Company expects its natural gas marketing segment to
generate cash flow of approximately $25,000 annually, and although the
Company has reduced the GECC principal approximately $10,000 below the
minimum required principal, essentially all cash flow from natural gas
marketing operations is dedicated to the GECC loan and cannot be used for
other purposes, including the repayment of the stockholder loans, until the
GECC loan is repaid. The Company expects to repay the stockholder and former
stockholder loans from the proceeds of the sale of the Refineries. If the
Refineries are not sold, the Company anticipates repaying the stockholder and
former stockholder loans in installments commencing in September 1995 and
ending in June 1996.
As noted previously, IRLP did not pay its revolving credit facility to
MGTFC when such facility matured on March 31, 1995. Although IRLP intends to
refinance such facility, there can be no assurance such refinancing will be
obtained. In such a case, and, if IRLP is unsuccessful in asserting defenses
to MGTFC's claims, IRLP could be forced to liquidate its crude feedstock and
finished product inventories to repay MGTFC, effectively closing the Indian
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Refinery in so doing. If such were the case, management believes the
proceeds from the sale of the inventories would exceed the loan owed to
MGTFC. There can be no assurance, however, that such will be the case. (See
"Legal Proceedings" under Item 1 to Part II of this Form 10-Q.)
Significant Considerations
The following are significant considerations of the Company affecting
cash flow, liquidity and capital resources as of May 12, 1995. The
discussion of such items is by business segment rather than on a consolidated
basis because of the Company's decision to dispose of its Refineries and
certain restrictions on the movement of cash from one business segment to
another.
Refining
The Company is currently trying to sell both of the Refineries as
operating businesses. The Company believes that the sale of either Refinery
as an operating business would be more beneficial to the Company because the
purchaser may be required to assume environmental liabilities and the Company
will avoid the costs associated with closing, e.g., employee severance, shut-
down costs, plant security, etc. As previously announced, the Company
intends to dispose of the Refineries not later than September 30, 1995 so
that it is entitled to resulting tax deductions which will offset the
$391,143 gain it realized on the MG Settlement. Without such tax deductions,
the Company would owe $91,000 to $95,000 of Federal and state income taxes
after offset for the Company's existing Federal and state net operating loss
carryforwards and other tax carryforwards. In addition, the Company will
bear any cash losses before the ultimate sale or closing of the Refineries.
If the Company is unable to sell the Refineries, any cash losses during the
interim until the Refineries are closed will adversely affect the Company's
financial condition.
Indian Refinery
At May 12, 1995, IRLP, the balance of IRLP's revolving credit facility
from MGTFC was $25,700. In addition, IRLP had approximately $2,000 of
unrestricted cash to fund its operations. Furthermore, other Company cash is
effectively not available to IRLP because such cash is either committed to
another lender or, in the case of cash from the exploration and production
segment, is needed to fund the corporate operations. The practical
consequences are that IRLP has sufficient funds to continue operations until
the end of May. If additional financing is not obtained, it is likely that
the Company will take steps to close the Indian Refinery. Although the
management of IRLP believes that the value of IRLP's crude, feedstock and
refined products inventories would be sufficient to repay the MGTFC revolving
credit facility and the non-environmental closing costs associated with the
Indian Refinery, the management of IRLP believes it can obtain interim
financing that will enable it to continue to operate so that a permanent
buyer can be found. At the present time, the management of IRLP is
negotiating an interim financing facility with a major financial institution
but there can be no assurance such financing facility will be obtained. The
Company and IRLP's management continue to negotiate a sale of the Indian
Refinery to IRLP's management but conclusion of such a sale is subject to
successful interim financing in the short-term and permanent equity and long-
term financing before September 30, 1995. In addition, there can be no
assurance that MGTFC will not attempt to execute on its liens against the
inventory and receivables of IRLP in the interim.
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Powerine Refinery
As noted above, Powerine has obtained an interim working capital
facility through July 1, 1995 from Wickland and continues to operate the
Powerine Refinery. In addition, Powerine has recently received an offer to
replace Wickland's interim financing and the management at Powerine is
currently evaluating such offer.
To date, three offers have been received to purchase the refining plant
of Powerine and two outside parties are preparing offers to purchase the
stock of the Powerine subsidiaries. The Company expects that it will be in a
position to make a decision as to the ultimate disposition of the Powerine
Refinery in the next two months. Powerine's cash is currently sufficient to
fund operations but by July 1, 1995 Powerine will have to extend its existing
working capital financing, find replacement working capital financing or have
entered into a transaction to sell the Powerine Refinery which provides such
financing. If the Company decides to sell the Powerine Refinery plant,
ongoing working capital financing will not be required. In such a case, the
Company management believes the proceeds of such sale would pay for all non-
environmental closing costs.
General
The Offtake Agreements with MG ended January 31, 1995 although sales
under the Powerine Agreement continued for Powerine into March 1995. The
Company is currently attempting to sell both of its Refineries. The Company
is responsible for marketing its refined products until the Refineries are
sold or abandoned. As noted above, the refining margins earned during this
period have been and are expected to continue to be significantly less than
those earned under the Offtake Agreements.
As of April 30, 1995, the Company estimated that the working capital of
the Refineries was approximately $30,000. To the extent the Company is
unable to sell the Refineries, the Company will bear any losses incurred by
the Refineries until they are sold or abandoned and such losses, if any, will
reduce the aforementioned working capital.
Natural Gas Marketing
Pursuant to the terms of the MG Settlement, the Company had the
opportunity to replace MG as the supplier of natural gas for its long-term
contract with Lone Star. The Company, however, was not able to obtain the
consent of GECC, which was required for the Company to replace MG.
Accordingly, the Company will continue to purchase its natural gas from MGNG
under the existing contract through June 1999. Although the cash flow
generated from the natural gas marketing segment aggregates approximately
$25,000 annually, such cash flow is dedicated to the GECC loan and cannot be
used to fund refining or corporate operations. The Company expects that the
GECC loan, which is currently $41,472, will be repaid by the end of 1996. At
such time, the cash flow from natural gas marketing operations will be
available for other purposes.
Exploration and Production
Exclusive of the cash flow dedicated to the GECC loan, the exploration
and production segment generates approximately $2,000 annually. Such cash
flow is currently used to fund corporate operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MG Matters
In connection with the MG Settlement, the Company entered into an
Amended and Restated Guaranty (the "Guaranty") pursuant to which the Company
guaranteed to MGTFC the performance of Powerine and IRLP under their
respective loan agreements with MGTFC. On April 3, 1995, MGTFC filed a
complaint against the Company in Delaware state court to collect $105,011,
plus interest, under the Guaranty. The complaint alleges that as of March
31, 1995, Powerine was obligated to pay MGTFC $24,290, IRLP was obligated to
pay MGTFC $80,722, and the Company was required to pay those amounts pursuant
to the Guaranty. The Company has filed an answer denying the allegations
made in the complaint and asserting affirmative defenses to the complaint.
On April 3, 1995, MGTFC filed a motion for summary judgment in lieu of
a complaint in New York state court against IRLP to recover $80,722 pursuant
to a promissory note executed by IRLP in favor of MGTFC and $24,290 pursuant
to a guaranty whereby IRLP guaranteed to MGTFC the performance by Powerine
under its loan agreement with MGTFC. On May 16, 1995, IRLP filed a response
denying liability and asserting defenses. A hearing has been scheduled for
May 25, 1995.
On April 6, 1995, MGTFC filed an action in California state court
against Powerine to recover $24,290 pursuant to a promissory note executed by
Powerine in favor of MGTFC. This complaint was never served on Powerine.
The action was voluntarily dismissed by MGTFC on April 10, 1995.
On April 3, 1995, IRLP filed a complaint in Illinois State Court in
Lawrence County, Illinois against MG, MGTFC, and MG Refining and Marketing,
Inc. The complaint seeks damages of at least $100,000, plus punitive
damages, for breaches of contract and tortious interference with contract
that have prevented IRLP from obtaining financing needed to repay its working
capital loan to MGTFC. On April 5, 1995, IRLP presented a motion for a
temporary restraining order to prevent MGTFC from foreclosing on IRLP's
assets that are pledged to MGTFC as collateral and to permit IRLP to use its
assets in the normal course of business to maintain and operate the Indian
Refinery. That motion was denied, and further injunction proceedings have
been stayed by mutual consent pending negotiations between the parties.
On April 14, 1995, pursuant to the terms of the Payoff Agreement of
that date, Powerine repaid all of its loan to MGTFC (see Note 9 to the March
31, 1995 financial statements included in this Form 10-Q).
Long-Term Supply Agreement
IRLP is a party to a Long-Term Supply Agreement (the "LTSA") with Shell
Canada Limited and Salmon Resources Ltd. (collectively, "Shell") for the
supply of Caroline Condensate feedstock to the Indian Refinery. MGRM is the
alternate purchaser under the LTSA in the event IRLP should fail to perform.
On December 23, 1994, Shell filed suit in the United States District Court
for the Northern District of Illinois against IRLP, Indian Refining &
Marketing, Inc. (IRLP's general partner) and MGRM. The complaint alleges
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that MGRM failed to provide Shell with adequate assurances concerning its role
as "alternate purchaser" under the LTSA, and that as a result, MGRM repudiated
the LTSA pursuant to provisions of the Illinois Uniform Commercial Code. The
complaint further alleges that the LTSA should be terminated because its purpose
has been frustrated, and the performance has become impossible. IRLP has moved
the case to the United States District Court for the Southern District of
Illinois. The court has not yet ruled on that motion.
Other Matters
On January 30, 1995, Powerine was served with a personal injury
complaint, which was filed in California Superior Court, on behalf of 57
individual plaintiffs relating to asbestos exposure. The complaint seeks
unspecified damages and punitive damages for negligence and vicarious
liability. Powerine is one of numerous defendants, including asbestos
manufacturers, contractors and refineries. The complaint alleges that the
plaintiffs were exposed to asbestos during the course of their employment and
have suffered asbestos-related injuries. Powerine has filed an answer
denying liability.
Powerine has received a Proposition 65 notice dated May 9, 1995 stating
that certain unspecified persons intend to file suit against Powerine under
the California Health and Safety Code (the "CHS Code"). The notice, which is
required under the CHS Code at least 60 days prior to the filing of a suit
thereunder, alleges that the refinery at Powerine has, in the course of its
business, exposed persons living, working and commuting in the vicinity of the
Refinery to certain chemicals without first providing appropriate warning under
the CHS Code and further states that the suit will seek injunctive and other
relief as provided by law. Powerine is in the process of investigating
this claim.
On May 3, 1995, Powerine received notice from Transit Mixed Concrete
Company ("TMC"), which owns and operates a batch plant adjacent to the
Powerine Refinery, alleging that petroleum contamination from the Powerine
Refinery had migrated onto the TMC site. Powerine is currently investigating
the allegations contained in the notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Legal Proceedings" under Item 1 of Part II of this Form 10-Q and
Note 9 to the March 31, 1995 financial statements included in Part I of this
Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements 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.
Date: May 17, 1995 CASTLE ENERGY CORPORATION
Joseph L. Castle II
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Chairman of the Board and Chief Executive
Officer
Richard E. Staedtler
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Chief Financial Officer