SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 June 30, 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: 6,683,646 shares of Common
Stock, $.50 par value.
CASTLE ENERGY CORPORATION
INDEX
Page #
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Part I. Financial Information
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Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1995 (Unaudited) and September 30, 1994.. 1
Consolidated Statements of Operations - Three Months Ended June 30, 1995
and 1994 (Unaudited)............................................................ 2
Consolidated Statements of Operations - Nine Months Ended June 30, 1995
and 1994 (Unaudited)............................................................ 3
Consolidated Statements of Cash Flows - Nine Months Ended June 30, 1995
and 1994 (Unaudited)............................................................ 4
Consolidated Statements of Stockholders' Equity - Year Ended September 30, 1994
and Nine Months Ended June 30, 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............................................................ 14
Part II. Other Information
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Item 1. Legal Proceedings........................................................ 27
Item 3. Defaults Upon Senior Securities.......................................... 28
Item 4. Submission of Matters to a Vote of Security Holders...................... 28
Item 6. Exhibits and Reports on Form 8-K......................................... 29
Signatures........................................................................................... 32
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, September 30,
1995 1994
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 9,989 $ 18,118
Restricted cash................................................... 5,914 12,525
Temporary investments............................................. 3,000 4,436
Accounts receivable............................................... 61,613 22,413
Accounts receivable - related party............................... 19,941
Inventories....................................................... 37,159 83,711
Prepaid expenses and other current assets......................... 2,818 7,341
Deferred income taxes............................................. 91,216 68,088
-------- ----------
Total current assets........................................... 211,709 236,573
Property, plant and equipment, net:
Refining.......................................................... 292,612
Natural gas transmission.......................................... 23,148 24,535
Furniture, fixtures and equipment................................. 290 3,245
Oil and gas properties............................................... 17,970 16,146
Gas contracts, net................................................... 36,859 43,889
Goodwill............................................................. 5,413
Other assets, net.................................................... 10,046 24,078
---------- ----------
Total assets................................................... $300,022 $646,491
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 24,370 $ 84,297
Current portion of long-term debt - related party................. 250 9,974
Accounts payable.................................................. 23,677 53,999
Accrued expenses.................................................. 57,486 27,169
Due to related parties............................................ 17,663
Deferred revenue.................................................. 62,333
Income taxes payable.............................................. 84,686 136
Other liabilities................................................. 3,112 3,771
----------- -----------
Total current liabilities...................................... 193,581 259,342
Long-term debt....................................................... 30,326 51,361
Long-term debt - related party....................................... 248,491
Other long-term liabilities.......................................... 30,656 34,191
Deferred income taxes................................................ 6,530 15,186
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Total liabilities.............................................. 261,093 608,571
----------- -----------
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;
6,683,646 shares and 7,627,646 issued and outstanding at
June 30, 1995 and September 30, 1994, respectively................
3,342 3,814
Additional paid-in capital......................................... 62,724 73,490
Accumulated deficit................................................ (27,137) (39,384)
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38,929 37,920
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Total liabilities and stockholders' equity..................... $300,022 $646,491
========== ==========
The accompanying notes are an integral part of these financial statements
-1-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30,
----------------------------
1995 1994
---- ----
Revenues:
Refining ........................................................................ $ 177,298 $ 255,389
Natural gas transmission and marketing .......................................... 17,800 10,697
Exploration and production ...................................................... 2,966 1,859
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198,064 267,945
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Expenses:
Refining ........................................................................ 194,350 241,449
Natural gas transmission and marketing .......................................... 13,450 9,929
Exploration and production ...................................................... 1,729 1,489
Corporate ....................................................................... 1,204 1,627
(Gain) on MG Settlement ......................................................... 8
Provision for impairment loss (recovery of) refining assets .................... (6,702)
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204,039 254,494
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Operating income ................................................................... (5,975) 13,451
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Other income (expenses):
Interest income ................................................................. 283 362
Other income .................................................................... 589 85
Interest expense ................................................................ (2,603) (6,643)
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(1,731) (6,196)
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Income before provision for (recovery of) income taxes ............................. (7,706) 7,255
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Provision for (recovery of)income taxes:
Federal ......................................................................... (5,104) 2,546
State ........................................................................... (729) 364
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(5,833) 2,910
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Net income (loss) .................................................................. ($ 1,873) $ 4,345
============= =============
Net income (loss) per share - primary .............................................. ($ .28) $ .37
============= =============
- fully diluted ........................................ ($ .28) $ .35
============= =============
Weighted average number of common and common equivalent
shares outstanding - primary ..................................................... 6,668,976 12,040,849
============= =============
- fully diluted ............................................... 6,712,505 12,374,493
============= =============
The accompanying notes are an integral part of these financial statements
-2-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Nine Months Ended June 30,
----------------------------------
1995 1994
---- ----
Revenues:
Refining ...................................................................... $ 670,913 $ 631,203
Natural gas transmission and marketing ........................................ 58,989 45,361
Exploration and production .................................................... 7,106 6,439
-------------- --------------
737,008 683,003
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Expenses:
Refining ...................................................................... 665,640 585,081
Natural gas transmission and marketing ........................................ 43,681 37,560
Exploration and production .................................................... 4,568 4,545
Corporate ..................................................................... 3,426 3,539
(Gain) on MG Settlement ....................................................... (391,135)
Provision for impairment loss on refining assets .............................. 339,404
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665,584 630,725
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Operating income ................................................................. 71,424 52,278
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Other income (expenses):
Interest income ............................................................... 1,476 953
Other income .................................................................. 1,052 353
Interest expense .............................................................. (7,894) (21,178)
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(5,366) (19,872)
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Income before provision for income taxes ......................................... 66,058 32,406
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Provision for income taxes:
Federal ....................................................................... 46,877 11,356
State ......................................................................... 6,934 1,623
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53,811 12,979
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Net income ....................................................................... $ 12,247 $ 19,427
============== ==============
Net income per share - primary ................................................... $ 1.80 $ 1.72
============== ==============
- fully diluted ............................................. $1.80 $ 1.69
============== ==============
Weighted average number of common and common equivalent
shares outstanding - primary .................................................. 6,797,492 11,345,037
============== ==============
- fully diluted ............................................ 6,785,861 11,546,532
============== ==============
The accompanying notes are an integral part of these financial statements
-3-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended June 30,
-------------------------------
1995 1994
---- ----
Cash Flows From Operating Activities:
Net income ............................................................................... $ 12,247 $ 19,427
---------- ----------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation, depletion and amortization ................................................. 17,645 40,340
Deferred tax expense (benefit) ........................................................... (31,784) 10,675
Gain on MG Settlement .................................................................... (396,166)
Provision for impairment loss ............................................................ 339,404
Decrease in restricted cash .............................................................. 6,611 1,776
Decrease in temporary investments ........................................................ 1,436
Decrease in accounts receivable .......................................................... 5,153 1,214
(Increase) decrease in inventories ....................................................... 46,552 (41,675)
(Increase) decrease in prepaid assets .................................................... 4,522 (4,139)
(Increase) decrease in other assets ...................................................... 6,637 (1,135)
Increase (decrease) in accounts payable .................................................. (30,321) 30,485
Increase in accrued expenses, including income taxes ..................................... 78,027 1,321
(Decrease) in amounts due to related parties ............................................. (17,663) (12,035)
(Decrease) in other current liabilities .................................................. (659) (137)
(Decrease) in deferred revenues .......................................................... (12,124) (37,031)
Increase (decrease) in other long-term liabilities ....................................... (434) 1,371
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Total adjustments ..................................................................... 16,836 (8,970)
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Net cash by provided (used in) operating activities ................................... 29,083 10,457
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Cash Flows From Investing Activities:
Proceeds from sale of oil and gas properties ............................................. 75
Purchase of oil and gas properties ....................................................... (4,066) (552)
Purchase of furniture, fixtures and equipment ............................................ (283) (1,882)
Investment in refining plant ............................................................. (32,471) (45,209)
Purchase of pipeline ..................................................................... (8)
Business acquisition, net of cash acquired ............................................... (8,230)
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Net cash provided by (used in) investing activities ................................... (36,828) (55,798)
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Cash Flows From Financing Activities:
Repayment of long-term debt .............................................................. (28,781) (33,632)
Proceeds of long-term debt - revolving credit facility ................................... 20,860 12,485
Proceeds from issuance of common stock, net .............................................. 48,205
Proceeds from exercise of stock options .................................................. 144
Proceeds of related party debt, net ...................................................... 7,393 35,365
Other.....................................................................................
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Net cash provided by financing activities ............................................. (384) 62,423
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Net increase (decrease) in cash and cash equivalents ....................................... (8,129) 17,082
Cash and cash equivalents - beginning of period ............................................ 18,118 4,304
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Cash and cash equivalents - end of period .................................................. $ 9,989 $ 21,386
========== ==========
Supplemental disclosures of cash flow information are as follows:
Cash paid during the period for:
Interest .............................................................................. $ 9,633 $ 13,759
========== ==========
Income taxes .......................................................................... $ 145 $ 6,140
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Interest capitalized during the period ................................................... $ 1,087
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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
-4-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands except shares)
(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 ........... 25,000 13 131 144
Net income ........................ 12,247 12,247
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Balance - June 30, 1995 ........... 6,683,646 $3,342 $ 62,724 ($27,137) 0 0 $ 38,929
========== ====== ======== ======== ======= ====== =========
The accompanying notes are an integral part of these financial statements
-5-
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(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. Results for the three and nine month
periods ended June 30, 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 nine month periods ended June 30, 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 classified as those of an
unrelated party.
Provision for Impairment Loss on Refining Assets
In the first quarter of fiscal 1995, the Company decided to dispose
of its refining business.
-6-
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
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 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
including CORE. A description of the initial 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 August 15, 1995, the situation with respect to the sale of
the Company's refining assets/refining subsidiaries was as follows:
Powerine Refinery:
The Powerine Refinery was shut down on June 30, 1995.
Three outside offers to purchase the refinery assets have been
received. The Company is currently negotiating with two of those making offers.
Two offers to acquire the land at Powerine have also been received. These offers
are contingent upon a sale of the refinery assets.
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 conducting discussions with all parties.
The Company expects to enter into a definitive agreement to sell
either the Refinery assets or the stock of the Powerine refining subsidiaries
before September 30, 1995 but there can be no assurance the Company will be able
to do so.
Indian Refinery:
On May 25, 1995, the Company entered into an agreement to sell
Indian to CORE Refining Corporation, a company formed by William S. Sudhaus, a
director and the President of Castle Energy Corporation. The agreement provides
for CORE to acquire all of the assets of the Indian Refinery on an "as is, where
is" basis. CORE will pay to Castle Energy at closing an amount equal to the
adjusted working capital, plus certain capital expenditures of the Indian
Refinery and reimbursements of transaction costs, payable in the form of a
$5,500 subordinated promissory note and the balance in cash. The adjusted
working capital of the Indian Refinery, including catalyst, and the estimated
capital expenditure and transaction cost reimbursements approximated $21,000 as
of June 30, 1995. CORE will assume all of the environmental and certain other
liabilities relating to the Indian Refinery. In addition, CORE will pay Castle
Energy over eight years a royalty of up to $20,000 based on deliveries of
Caroline condensate by Shell Canada Limited and its affiliates under an existing
long-term supply contract. The payment of the royalty will be contingent on
continued performance by Shell Canada under the supply contract, which is
currently the subject of certain litigation between Castle Energy and Shell
Canada.
-7-
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
CORE's obligations under the CORE agreement are subject to a number
of conditions, including there being no material adverse change in the
operations or financial condition of the Indian Refinery, CORE securing
financing for the transaction, and receipt of certain regulatory approvals.
Corral Petroleum and Gulf Interstate Oil Company have placed into escrow $16,500
million to provide the equity financing for the transaction. CORE has also
obtained a "highly confident" letter for up to $100,000 of high-yield debt
financing and a commitment letter for a $125,000 revolving credit facility from
major financial institutions.
Castle Energy's obligations under the CORE agreement are also subject
to a number of conditions, including receipt of a fairness opinion from Lazard
Freres & Co. LLP with respect to the transaction, CORE receiving its financing,
and receipt of regulatory approvals.
Under the CORE agreement, Castle Energy may respond to other offers
for the Indian Refinery and may accept another offer and terminate the CORE
agreement. The CORE agreement provides for Castle Energy to pay CORE's legal and
other expenses pending the closing. If the closing occurs, CORE will repay such
expenses, including one-half of the expenses incurred by Castle Energy in
connection with Indian Refinery's interim credit facility.
Castle Energy's Board of Directors, based in part on the
recommendation of a Special Committee of the Board, has approved the CORE
agreement.
In addition to CORE, one outside party has made an offer for the
Refinery assets.
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 in
order to reflect their estimated fair market values:
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
accrued 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.
c. An additional loss provision of $1,098 was recorded at
March 31, 1995.
During the period from January 1, 1995 to June 30, 1995, the Company
charged $6,488 of expenditures against the closing cost accrual. In addition,
the Company reduced the closing costs accrual by $6,702 based upon current
offers to buy the Powerine refining assets and updated estimates of costs to
close both refineries. At June 30, 1995, the remaining net closing cost accrual
was $7,565, consisting of estimated proceeds from the sale of refining assets of
$31,306 offset against estimated closing costs of $38,871.
-8-
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
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 both of the refineries,
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 $7,564 of accrued net closing costs, the Company
had accrued approximately $32,500 for environmental liabilities as of June 30,
1995.
The adjusted impairment loss of $339,404 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. If the Company is
able to sell one or both 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 proceeds to be received and
loss upon disposition of the Refineries may be less than that recorded.
Note 4 - Inventories
The Company's inventories consist of the following:
June 30, September 30,
1995 1994
------------ -------------
(Unaudited)
Crude oil ............................................. $ 5,885 $49,029
Unfinished products ................................... 23,401 19,549
Finished products ..................................... 854 4,458
Materials and supplies ................................ 10,568 10,675
-------- -------
40,708 83,711
Provision to reduce inventory to market value ......... (3,549)
--------- -------
$37,159 $83,711
======= =======
The decrease in inventories is attributable to the bulk sale of
Powerine's inventories to Wickland Oil Company in conjunction with the
settlement with MGTFC (see Note 5) and to IRLP's reduced level of operations.
-9-
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
Note 5 - Debt
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 was guaranteed by the
Company. On April 3, 1995, MGTFC filed a complaint against the Company 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 lifted by MG
subsidiary, MGR&M, and over MGR&M's failure to lift and pay 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 an additional $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 refining revenues assuming the Company's position will
be upheld. To the extent it is not upheld, pre-tax earnings will be adversely
affected. Arbitration has commenced and a hearing is anticipated in late 1995.
-10-
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
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 purchased 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 had the
option to purchase Wickland's inventories of such commodities. If Powerine did
not purchase all of Wickland's inventories of such commodities, either at the
end of the term or at the Product Purchase Date, Powerine would be required to
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 had 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 terminated on July 1,
1995 and Powerine ceased purchasing crude oil and feedstocks from Wickland and
began to close its refining plant. Powerine and Wickland are currently
finalizing a settlement. To secure its obligations to Wickland under the
agreement, Powerine granted Wickland a security interest in all of Powerine's
assets and provided Wickland with a $3,000 letter of credit. The Company has
guaranteed Powerine's obligations to Wickland. The letter of credit expires
October 31, 1995.
On May 25, 1995, IRLP obtained a $30,000 interim credit facility.
Concurrently, the Company and its affiliates entered into a Payoff Agreement
with MG and its affiliates which accomplished the following:
1. Utilizing the interim credit facility, IRLP repaid the
MGTFC Revolving Loan and Credit Facility.
2. MG released all liens and claims against IRLP.
3. MG returned all collateral.
The interim credit facility bears interest at prime plus 2% and
will provide up to $30,000 for letters of credit and other funds for the
operations of the Indian Refinery pending the closing of the transaction with
CORE. All indebtedness under the facility is due on demand by the lenders and,
in any case, on August 31, 1995 or, if earlier, the termination of or closing
under the CORE agreement. The interim credit facility has been secured by the
pledge of the working capital assets for the Indian Refinery. In addition, the
Company and two of its subsidiaries engaged in the gas business have guaranteed
the interim credit facility and have pledged certain assets as security for such
guarantees. IRLP and the interim credit lenders are currently negotiating an
extension of the facility and other amendments.
-11-
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
Note 6 - 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 7 - 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 8 - 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 9 - Contingencies
See Item 1, in Part II.
-12-
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
Note 10 - Name Change
In May 1995, IRLP changed its name to Indian Refining I Limited
Partnership but is nevertheless referred to herein as IRLP.
Note 11 - Subsequent Events
Operating Industries, Inc. - see Powerine in Part II, Item 1, Legal
Proceedings.
On July 5, 1995, Powerine Oil Company failed to make a payment to
Wickland Oil Company which constituted a default under its Sale and Storage
Agreement with Wickland Oil Company. Wickland has acknowledged the default and
reserved its rights and remedies under the agreement. Wickland continues to hold
a $3,000 letter of credit from Powerine which amount exceeds the amounts claimed
under the default. The parties have tentatively agreed that if Powerine should
be unable to pay amounts due, such amounts would be drawn against the letter of
credit.
-13-
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 its remaining
969,000 shares of Common Stock of the Company, (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, which has
been terminated (see Part II, Item 1).
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. Such facilities were fully repaid as of May 25, 1995.
Third, for Federal and state income tax purposes, the Company recognized income
of $391,135. Federal and state income taxes payable of $84,686 were accrued as
of June 30, 1995 on this gain less other tax losses incurred during the period
October 1, 1994 to June 30, 1995.
-14-
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
entail significant 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 its 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 discussing the sale of the stock of
the Powerine refining subsidiaries with two outside parties. On May 25, 1995,
the Company entered into an agreement to sell the Indian Refinery to CORE
Refining Corporation, subject to certain conditions.
The factors contributing to the variances associated with the results
of operations for the current three and nine months are similar unless otherwise
noted.
-15-
RESULTS OF OPERATIONS
The Company has three business segments - refining, natural gas
transmission and marketing, and oil and gas exploration and production. The
following represents the disaggregated elements of operating income with respect
to each segment:
(Dollars in Thousands)
Increase
Income (Loss) (Decrease)
For Nine Months Ended In Net
June 30, Income
----------------------- ----------
1995 1994
------- ------
(Unaudited)
Revenues:
Refining................................................... $670,913 $631,203 $ 39,710
Natural gas marketing...................................... 58,989 45,361 13,628
Exploration and production ................................ 7,106 6,439 667
---------- ---------- -----------
Total 737,008 683,003 54,005
-------- -------- ---------
Operating Expenses:
Refining:
Costs of materials sold ................................... 565,281 452,248 (113,033)
Operating costs ........................................... 83,787 95,491 11,704
Selling, general and administrative ....................... 11,634 15,713 4,079
Depreciation and amortization ............................. 4,938 21,629 16,691
Gain on MG Settlement ..................................... (391,135) 391,135
Provision for impairment loss ............................. 339,404 (339,404)
Natural gas transmission and marketing:
Gas purchases ............................................. 33,709 27,378 (6,331)
Operating costs ........................................... 789 980 191
General and administrative ................................ 645 686 41
Depreciation and amortization ............................. 8,538 8,516 (22)
Exploration and Production:
Oil and gas production .................................... 1,947 2,179 232
General and administrative ................................ 369 652 283
Depreciation, depletion and amortization .................. 2,252 1,714 (538)
Corporate:
General and administrative ................................ 3,367 3,539 172
Depreciation .............................................. 59 (59)
-------- -------- ----------
Total ..................................................... 665,584 630,725 (34,859)
-------- -------- ----------
Operating Income ............................................. 71,424 52,278 19,146
Other income (expense):
Interest income ........................................... 1,476 953 523
Interest expense .......................................... (7,894) (21,178) 13,284
Other income, net ......................................... 1,052 353 699
---------- -------- ----------
Income before provision for income taxes ..................... 66,058 32,406 33,652
Provision for income taxes ................................... (53,811) (12,979) (40,832)
--------- -------- ----------
Net income ................................................ $ 12,247 $ 19,427 ($ 7,180)
========= ======== ==========
-16-
Revenues
Refining
Revenues for the refining segment increased $39,710 or 6% during the
nine month period ended June 30, 1995 versus the corresponding period in 1994.
The increase was primarily attributable to the following factors: (i) contract
sales to third parties in 1995 with no corresponding sales in the prior years,
(ii) a bulk sale of inventory to Wickland Oil in April 1995 with no
corresponding sale in the prior year, (iii) increased throughput at the Indian
Refinery for the first half of the nine month period. These increases were
offset by the following: (i) the Company ceased operating under the Offtake
Agreements as of January 31, 1995 at IRLP and in March 1995 at Powerine and
sales under alternative marketing arrangements were less than they would have
been under Offtake Arrangements, (ii) Indian and Powerine reduced throughput
subsequent to January 1995 as a result of the lack of adequate financing, low
refining margins and in anticipation of potential plant closings, (iii) IRLP
conducted turnaround operations during the third quarter, reducing its feedstock
processing capability.
Revenues for the quarter ended June 30, 1995 versus the same period
in the prior year declined $78,091 or 31%. The primary factors contributing to
this decline were: (i) three monthly sales under the Forward Sale Contract in
fiscal 1994 with no counterpart in fiscal 1995, (ii) low throughputs resulting
from the lack of adequate financing, low refining margins and the anticipated
closing down of the Powerine Refinery, (iii) turnaround operations conducted at
Indian during 1995, (iv) sales under arrangements at prices which were less than
those realized in the prior year under the Offtake Arrangement. These decreases
were offset by (i) a bulk sale of inventory to Wickland Oil Company.
Of the total refining revenues of $670,913 for the first nine months
of fiscal 1995, $474,917 or 71% represented sales of refined products to MG
under the Offtake Agreements.
Natural Gas Marketing
Revenues from natural gas marketing increased by $13,628 or 30% and
$7,103 or 66% for the nine and three months ended June 30, 1995, respectively,
when compared with the same period in 1994. The reason for the increase was
higher average daily volumes 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 June 30, 1995, gas sales would
approximate $52,500, which is roughly three quarters of the expected annual
sales in a given gas contract year.
-17-
Exploration and Production
Exploration and production revenues increased $667 or 10% and $1,107
or 60% for the nine and three months ended June 30, 1995, respectively, as
compared to the corresponding periods in 1994. The increase during the nine
month period is attributable to the revenues derived from the royalty acquired
from ARCO in October 1994 ($420) and non-recurring gas balancing and other
recoveries ($650) but was offset by lower gas prices during the period ($403).
Although decreases in the prices received for natural gas adversely impacted the
Company's exploration and production revenues, such impact is partially offset
by lower gas purchase costs in the Company's natural gas marketing segment.
Expenses
Refining
The cost of materials sold increased from 72% of refining revenues
during the first nine months of fiscal 1994 to 84% of refining revenues during
the first nine months of fiscal 1995. The increase in the cost of materials sold
as a percentage of refining revenues is attributable to (i) significantly better
refining margins under the Offtake Agreements (under which sales had ceased in
January 1995 for IRLP and in March 1995 for Powerine), (ii) the increased
absorption of operating costs into cost of material sold rather than operating
expenses at IRLP ($2,346) 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), (iii) a market write-down of $3,463 at June 30, 1995 for
which there was no counterpart in fiscal 1994 since the termination of the
Offtake Arrangement occurred during the second quarter of fiscal 1995 and (iv)
extremely low refining margins on refined products sold by IRLP and, to a lesser
extent, by Powerine, during much of the period. 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 could not yet be made.
As a result of the termination of the Offtake Agreements, neither
IRLP nor Powerine are insulated from fluctuations in refining margins but, when
operating, are now subject to the results of such fluctuations as are most other
independent refiners.
Operating costs decreased $11,704 or 12% from 1994 to 1995 and
selling, general and administrative costs decreased $4,079 or 26% over the same
period. The decrease in operating costs is primarily due to the absorption of
operating costs into refined products cost of material and inventories in 1995
for which there was no counterpart in 1994 and the reduction in workforce
described below. Selling, general and administrative costs decreased because of
a $2,200 charge for stock appreciation rights in the first half of 1994 that had
no counterpart in 1995 and the workforce reductions described below.
During the second quarter of fiscal 1995, IRLP and Powerine laid off
a total of approximately 110 people and implemented wage reductions. Subsequent
to June 30, 1995, Powerine reduced its workforce by an additional 250 employees
as part of the process of closing the refining plant. The Company has accrued
the costs of closing and, accordingly, does not expect to incur related expenses
in the future. There can be no assurance, however, that the costs accrued are
sufficient and that future closing costs in excess of those accrued will not be
incurred.
-18-
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.
The $16,691 or 77% 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 six months ended June 30, 1995, the Company recorded no
depreciation on refining property, plant and equipment.
The provision for loss on assets to be disposed of for the nine
months ended June 30, 1995 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 offers by third
parties for refining plant of Powerine ........................... 12,955
----------
$339,404
==========
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 remaining net closing cost accrual of
$7,565 at June 30, 1995 represents the excess of anticipated remaining 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 (($38,871) over the anticipated proceeds to be
realized from selling the refining assets ($31,306)). 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 and not sold as going concerns. 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.
-19-
Natural Gas Marketing
Gas purchase expense increased $6,331 or 23% in the first nine months
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% because a deferred purchase price to be paid to
MGNG was terminated and no longer added to current gas purchases. This decrease
was offset by higher prices for natural gas not purchased from MGNG. 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 $232 or
14% from 1994 to 1995 primarily because of decreased legal and insurance costs
and decreased maintenance costs. These decreases were offset by a one-time fee
in 1995 paid to a financial institution when the Company was evaluating a
refinancing of its loan.
Exploration and Production
The Company's exploration and production segment incurred operating
and general and administrative expenses of $2,316 for the nine months ended June
30, 1995 versus $2,831 for the same period in 1994. The decrease results
primarily from decreased well operating costs, legal fees, insurance costs and
property taxes.
Corporate
Corporate general and administrative expenses decreased $172 or 5 %
primarily as a result of a charge related to stock appreciation rights in 1994
with no corresponding charge in 1995.
Other Income (Expense)
Interest Income and Expense
Interest expense decreased approximately $13,284 or 63% during the
first nine months of fiscal 1995 as compared with the first nine 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. In addition, the debt
owed by the Company's natural gas subsidiaries has decreased by $21,230 during
the nine month period ended June 30, 1995.
Interest income increased by $523 primarily as a result of $566 of
interest earned on the $10,000 note received from MG on October 14, 1994. This
increase was offset by a decrease in interest earned on invested cash funds.
Provision for Income Taxes
The combined state and Federal tax provision for the first three
quarters of fiscal 1994 approximated the expected blended statutory rate of 40%.
The combined state and Federal tax provision for the first three quarters of
fiscal 1995 consists of primarily two components as follows:
-20-
$ Rate
-- -----
State and Federal provision .................................. $26,423 40%
Valuation reserve for state and Federal deferred taxes ....... 27,088 N/A
--------
$53,511
========
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 its net operating loss carryforwards and
depletion carryforwards in anticipation of using all such tax carryforwards to
offset taxable income from the MG Settlement. At December 31, 1994, March 31,
1995 and June 30, 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 net operating losses and percentage depletion carryforwards of
approximately $40,000. The Company thus recognized deferred tax assets on such
operating losses only to the extent of deferred taxes of approximately $6,500.
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 June 30, 1995, additional losses will be provided. To the
extent the loss provision recorded through June 30, 1995 exceeds the estimated
loss on disposition, such recovery will be recorded as a reduction of the loss
provision recorded through June 30, 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
anticipated effects of the discontinuance of refining operations are as follows:
March 15, After
1995 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
-21-
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
$29,083 of cash was provided by operating activities during the nine
months ended June 30, 1995 compared to $10,457 of cash provided by 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 $32,471 for both
Refineries during the nine months ended June 30, 1995 compared with $45,209 for
the same period in the prior year. Of such amount, $23,682 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 initially 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. In April 1995, Powerine Oil Company
sold all of its feedstocks to Wickland Oil Company and entered into a feedstock
supply and processing agreement which financed the operations through closing in
early July 1995. In May 1995, IRLP refinanced its working capital facility with
a third party lender. This facility, which is in the aggregate amount of
$30,000, is payable on demand or August 31, 1995. This facility has financed
IRLP's operations since May 1995.
The Company anticipates that it will limit future capital
expenditures at the Indian Refinery to sustaining capital expenditures until the
Refinery is sold or closed and abandoned. Such funds are expected to be
generated from working capital.
Debt Service
As of June 30, 1995, the Company's debt service requirements,
excluding working capital loans, were as follows: $3,254 for the remainder of
fiscal 1995, $11,768 and $26,614 in fiscal 1996 and 1997, respectively. Of the
$41,636 of total debt service requirements, $38,886 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 equal quarterly
installments commencing in September 1995 and ending in June 1996.
-22-
Significant Considerations
The following are significant considerations of the Company affecting
cash flow, liquidity and capital resources as of August 15, 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, if
possible, as operating businesses. The Company believes that the sale of either
Refinery as an operating business may 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. However, the proceeds from the sale of an
operating business are expected to be significantly less than the proceeds from
an asset sale. As previously announced, the Company intends to retire or dispose
of the Refineries not later than September 30, 1995 so that it is entitled to
resulting tax deductions which will offset the $391,135 gain it realized on the
MG Settlement. Without such tax deductions, the Company would owe approximately
$84,700 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
As previously noted, IRLP refinanced its MGTFC working capital
facility in May 1995. As of August 15, 1995, the balance of IRLP's revolving
credit facility debt was $6,865. In addition, IRLP has approximately $500 of
unrestricted funds to fund operations. Furthermore, cash from the Company's
other segments 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 through
September 30, 1995. However, at the present time, the management of IRLP is
renegotiating its interim financing facility with its interim lender, but there
can be no assurance such financing facility will be extended beyond August 31,
1995, its current expiration. Such facility is due upon demand and contains
cross collateral provisions applicable to the assets of the Company and its
subsidiaries.
If the CORE transaction closes prior to September 30, 1995, the
Company expects to receive approximately $14,000 - $15,000, representing the
estimated working capital at closing plus certain transaction cost
reimbursements and capital expenditures of Indian, of which $5,500 would be in
the form of a subordinated promissory note payable in 10 years and the balance
paid in cash. In addition, the Company would receive a royalty of up to $20,000
over the next eight years based upon deliveries of Caroline Condensate by Shell
Canada Limited and its affiliates under an existing long-term supply contract.
The payment of the royalty will be contingent on continued performance by Shell
Canada under the supply contract which is currently the subject of certain
litigation between Castle Energy and Shell Canada. In addition to the cash,
notes and royalty, CORE would assume all of the environmental and certain other
liabilities and the Company would avoid approximately $19,000 of shut down
costs, which have been accrued.
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If the interim working capital is not extended or the CORE
transaction fails, the Company plans to shut down the Indian Refining by
September 30, 1995 and anticipates selling the Indian Refinery for its salvage
value. Based upon a previous offer received, the Company would expect to receive
$12,500 - $15,000 in salvage value for the plant and equipment. Management
believes that the working capital would be sufficient to liquidate any balance
outstanding under the interim credit facility and that remaining working capital
and the proceeds from the sale of the refinery's assets would be available for
closing costs. In addition, IRLP would have to fund the environmental closure
costs. Although management believes that a sale of the assets would generate
sufficient cash to fund the known shut down costs, it is possible that the funds
for the asset sales would not be received in time to fund the shut down
obligations when incurred. Further, there can be no assurance that additional
costs would not be required to close or abandon the facility including security,
clean up and land remediation, if necessary. If such turns out to be the case,
IRLP would have to seek additional financing or alternative purchasers of its
refining assets.
Powerine Refinery
As noted above, Powerine obtained an interim working capital facility
through July 1, 1995 from Wickland and continued to operate the Powerine
Refinery through June 30, 1995 at which time the facility was shut down.
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. In addition, two parties have offered to
acquire the Powerine land if the operating assets are sold and removed. The
Company expects that it will be in a position to make a decision as to the
ultimate disposition of the Powerine Refinery not later than August 31, 1995.
Through July 1, 1995, Powerine operated under the Wickland Oil Company agreement
which provided sufficient cash to fund operations. Since that time, Powerine has
idled the facility, reducing its workforce to approximately 70 people as of
August 15, 1995. These individuals are responsible for security, removal and
sale of the remaining barrels of product, interaction with regulatory
authorities and maintenance of the assets for purposes of a sale. In order to
fund these continuing operations, Powerine has begun to liquidate non-current
assets including some equipment, certain catalysts and the sale of a portion of
its air emissions credits. Management estimates that if Powerine is not sold
within the next month, Powerine will have to continue to sell assets to finance
operations.
If Powerine is sold as a stock transaction, the Company expects to
receive a nominal amount of cash. However, the buyer will assume all
liabilities, including $10,000 of accounts payable and $28,000 of accrued
environmental costs. Further, the Company would avoid approximately
$8,000-$10,000 of additional closing costs.
If the operating assets of Powerine are sold, the Company expects to
receive $24,000-$30,000 for the operating assets, a substantial portion of which
would be paid at closing and the remainder, over a one to two year period as the
assets are dismantled and removed. The Company anticipates that the deferred
payments would be utilized to fund closing operations and fund environmental
liabilities and site remediation.
In addition to the above sale, Powerine has approximately $7,000 of
assets which would not be transferred to the buyer of the operating assets.
Powerine intends to sell these assets prior to December 1995 and utilize the
proceeds for the continuing operations obligations under the proposed sale
agreement, payments to vendors and funding of environmental costs.
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If the above asset sales are consummated, Powerine will continue to
own the 88 acres of land on which the facility is located in Santa Fe Springs,
California, the Santa Fe Springs terminal, the Southern Pacific Pipeline Pumping
Station, offsite pipelines and a lease on the Long Beach, California terminal.
Powerine's options regarding these remaining assets are as follows:
1. Conduct limited operations such as a terminal facility.
2. Sale of the land for a nominal fee in exchange for assumption
of the remediation costs.
3. Remediate the land over the next several years in
anticipation of selling the land in the future.
Powerine intends to consummate a sale of the operating assets prior
to the consummation of a transaction regarding the land.
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 July 31, 1995, the Company estimated that the working capital
of the Refineries was approximately $13,000. 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
approximately $36,450 as of July 31, 1995, will be repaid by December 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 is currently generating approximately $3,000
annually but is expected to generate $2,000-$2,500 annually hereafter. Such cash
flow is currently used to fund corporate operations.
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Corporate
As of August 15, 1995, Castle and the exploration and production
subsidiaries have unrestricted cash of approximately $4,000. If the CORE
transaction fails, Castle has agreed to pay the stockholder and former
stockholder loans which aggregate $2,750 in four equal installments commencing
September 30, 1995. In addition, Castle has accrued liabilities of approximately
$900. The other sources of revenues for Castle are as follows:
1. $2,000-$2,500 per year of cash flows from exploration and
production businesses, decreasing as reserves are depleted.
2. Interest on the $10,000 MG note at 8% per annum, which note is
currently pledged to MG pending the outcome of an arbitration
(see Note 5 - Debt in Part I, Item I of this Form 10-Q).
3. Principal on the MG note in October 1997, if the arbitration
is decided in Castle's favor.
4. If the CORE transaction closes prior to September 30, 1995,
the Company expects to receive approximately $8,500-$9,500 in
cash, a $5,500 note bearing interest annually with the
principal payable in 10 years and royalties based on
deliveries of condensate by Shell Canada Limited.
5. Cash flows from the natural gas marketing segment, averaging
$25,000 annually, once the senior facility has been repaid in
December 1996.
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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 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 complaints in New York, Delaware and
California state courts to recover under the IRLP and Powerine loan agreements
and the related guarantees. Those actions were dismissed on or around June 1,
1995 with prejudice pursuant to payment of the amounts due. See "Legal
Proceedings -- MG Matters" in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995.
MG Natural Gas
In April 1995, IRLP terminated a Natural Gas Swap Agreement, dated
October 14, 1994 between MGNG and IRLP, claiming the right to do so based on
breaches of other agreements by MG and its affiliates. MGNG disregarded IRLP's
termination notice and sent IRLP a termination notice alleging IRLP was the
defaulting party and claiming $1.2 million of losses. IRLP has refused to pay
MGNG's claim. In June 1995, MGNG filed suit in Delaware and informed IRLP that
it was applying a $707,000 receivable owing by its affiliate (MGRM) to IRLP
against the claim. The Company's management believes that IRLP has good defenses
to the claim, expects to prevail and expects to recover the $707,000 receivable.
Powerine
Powerine has been identified as a potentially responsible party
("PRP") in litigation regarding the clean-up of a former waste disposal site in
Monterey Park, California known as the Operating Industries, Inc. site (the "OII
Site"). The OII site operated as a permitted landfill from 1948 to 1984,
accepting both municipal and industrial waste. The OII Site now is listed on
both state and federal superfund lists. Certain waste materials from Powerine's
refinery and from joint venture oil field operations with the City of Long Beach
were transported to the OII Site by approved independent trucking contractors.
Powerine has notified the City of Long Beach that the city could be liable for a
portion of the waste shipped at the OII Site based on the terms of their
petroleum drilling joint venture, which generated some of the waste allegedly
sent to the site. In addition to the City of Los Angeles, which use the OII Site
for municipal waste, Powerine is one of over 250 industrial companies identified
to date as PRPs.
The government plaintiffs and most PRPs have executed several partial
consent decrees for the first three portions of the clean-up at the OII Site.
Under those decrees, the private PRPs are either undertaking or financing the
remedial work. Powerine elected not to become a party to any of these partial
consent decrees. On October 31, 1994, the USEPA offered all non-settling PRPs,
including Powerine, another opportunity to resolve their liability with respect
to the first three Partial Consent Decrees at the OII Site. However, as part of
the offer, USEPA raised Powerine's volume from its former 4.17 million gallons
to 6.06 million gallons. On January 3, 1995, Powerine submitted a challenge to
approximately 1.3 million gallons of those attributed to Powerine by the USEPA.
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On July 25, 1995, the USEPA informed Powerine that it had accepted
virtually all of Powerine's challenges and was assigning Powerine a revised
volume of approximately 4.81 million gallons. Based on this revised volume, the
USEPA offered to resolve Powerine's liability for the first three Partial
Consent Decrees in exchange for a cash payment of approximately $13 million.
This sum represents Powerine's volumetric share multiplied by a 42 percent
multiplier based on Powerine's prior status as a non-settling party. The USEPA
has established a deadline of September 1, 1995 for Powerine's response and has
stated that the terms of the settlement offer are not negotiable. Powerine is
currently evaluating the USEPA's offer and has scheduled a meeting with its
insurers to discuss the offer. Three of Powerine's insurers have agreed to
assume defense costs while reserving their rights to contest coverage for any of
Powerine's potential liability. Powerine also has notified the Port of Long
Beach (the "Port") regarding the USEPA's settlement offer and the Port's
indemnification obligations. The Port declined to indemnify Powerine.
The USEPA is currently developing the final remedy for the OII Site,
which will address contaminated groundwater, leachate, and landfill gas, and
will include long-term operation and maintenance of all environmental control
facilities at the OII Site. Because the cost of the final remedy has not yet
been determined, it is impossible to calculate Powerine's volumetric share as
approximately 1.7 percent of the total site volume contributed by the top 250
industrial PRP's.
Other Matters
In May 1995, Powerine was served with a personal injury complaint
relating to asbestos exposure, James Todd and Virginia Todd v. Abex Corporation,
et. al., in California Superior Court. The suit alleges that James Todd suffers
from exposure to asbestos fibers during his employment with various contractors
in California and that Virginia Todd has been injured based on loss of
consortium. Powerine is one of numerous defendants and has filed an answer
denying liability.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Item 1 of Part II of this Form 10-Q and Note 5 to the June 30,
1995 financial statements included in Part I of this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on June 5, 1995. Proxies
were solicited pursuant to the Notice of Annual Meeting of Stockholders, dated
May 8, 1995 and the accompanying Proxy Statement. A total of 6,668,646 shares
were eligible to vote of which 5,894,648 were present in person or by proxy.
The selection of accountants was ratified by the vote of a majority
of the votes cast at the Annual Meeting.
The directors elected to the Board and the number of votes cast with
respect to each nominee are as follows:
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Martin R. Hoffmann
For 5,440,657
Against 453,991
William S. Sudhaus
For 5,440,930
Against 453,718
Joseph L. Castle II
For 5,883,726
Against 10,921
Sidney F. Wentz
For 5,884,061
Against 10,586
In Addition to the above, Sheldon Bonovitz and John Sullivan
continued on the Board of Directors.
The First Amendment to the Company's 1992 Executive Equity Plan was
approved. The number of votes cast with respect thereto was as follow:
Affirmative 5,576,614
Negative 114,057
Abstain 24,664
The Refinery Plan, which provides for the Company to sell its Indian
and Powerine Refineries on such terms and conditions as the Board of Directors
may determine, subject to certain minimum price conditions, was approved. The
number of votes cast with respect thereto was as follows:
Affirmative 5,656,800
Negative 14,388
Abstain 18,103
No other matters were voted upon.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
10.1 Letter Agreement, dated February 21, 1995, between William S.
Sudhaus and Castle Energy Corporation
10.2 Letter Agreement, dated February 24, 1995, between William S.
Sudhaus and Castle Energy Corporation
10.3 Powerine Petroleum Sale and Storage Agreement, dated April 8, 1995,
between Wickland Oil Company and Powerine Oil Company.
10.4 The Castle Agreement, dated April 8, 1995, among Wickland Oil
Company, Castle Energy Corporation, and Indian Powerine L.P.
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10.5 Security Agreement, dated April 8, 1995, between Powerine Oil
Company and Wickland Oil Company
10.6 Supplemental Letter Agreement, dated April 13, 1995, between
Powerine Oil Company and Wickland Oil Company amending the Powerine
Petroleum Sale and Storage Agreement
10.7 Payoff Loan and Pledge Agreement, dated April 13, 1995, among
Powerine Oil Company, CEC, Inc., Castle Energy Corporation,
Metallgesellschaft Corp., MG Refining & Marketing, Inc., and MG
Trade Finance Corp.
10.8 Promissory Note, dated April 13, 1995, by CEC, Inc. in favor of
Metallgesellschaft Corp., in the principal amount of $10,000,000.
10.9 Letter Agreement, dated May 10, 1995, between John D. R. Wright and
Castle Energy Corporation
10.10 Letter Agreement, dated May 10, 1995, between William S. Sudhaus
and Castle Energy Corporation
10.11 Payoff Agreement, dated May 25, 1995, between Indian Refining
Limited Partnership, Indian Refining & Marketing, Inc., Castle
Energy Corporation, Indian Powerine L.P., Metallgesellschaft Corp.,
MG Refining and Marketing, Inc., and MG Trade Finance Corp.
10.12 Stock and Asset Purchase Agreement, dated May 25, 1995, among CORE
Refining Corporation, Castle Energy Corporation, Indian Refining &
Marketing, Inc., Indian Refining Limited Partnership, IP Oil Co.,
Indian Powerine L.P., and Indian Oil Company
10.13 Supplemental Letter Agreement, dated June 1, 1995, between Powerine
Oil Company, Castle Energy Corporation, Indian Powerine L.P., CEC,
Inc. and Wickland Oil Company to the Powerine Petroleum Sale and
Storage Agreement
10.14 Supplemental Letter Agreement, dated June 30, 1995, between
Powerine Oil Company, Castle Energy Corporation, Indian Powerine
L.P., CEC, Inc. and Wickland Oil Company to the Powerine Petroleum
Sale and Storage Agreement
10.15 Line of Credit Agreement, dated May 25, 1995, between Indian Oil
Company, BT Commercial Corporation, MeesPierson N.V., and Bankers
Trust Company
10.16 Borrower Security Agreement, dated May 25, 1995, by Indian Oil
Company in favor of BT Commercial Corporation.
10.17 Guaranty Agreement, dated May 25, 1995, made by Castle Energy
Corporation, Castle Production Resource Company, and Castle
Production Company in favor of BT Commercial Corporation.
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10.18 Amendment to Stock and Asset Purchase Agreement, dated July 31,
1995, among Castle Energy Corporation, Indian Refining and
Marketing I, Inc., Indian Refining I, Limited Partnership., IP Oil
Co., Indian Powerine L.P., Indian Oil Company and CORE Refining
Corporation
10.19 Second Amendment to Stock and Asset Purchase Agreement, dated
August 15, 1995, among Castle Energy Corporation, Indian Refining
and Marketing I, Inc., Indian Refining I, Limited Partnership, IP
Oil Co., Indian Powerine L.P., Indian Oil Company and CORE Refining
Corporation
11.1 Statement re: Computation of Earnings Per Share
27 Financial Data Schedule
(B) Reports on Form 8-K:
On April 14, 1995, the Registrant filed a Form 8-K regarding Powerine Oil
Company's repayment of its working capital facility with MGTFC.
On May 30, 1995, the Registrant filed a Form 8-K regarding its agreement
to sell Indian Refining to CORE Refining Corporation.
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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: August 18, 1995 CASTLE ENERGY CORPORATION
/s/ Joseph L. Castle II
--------------------------------------------------
Chairman of the Board and Chief Executive Officer
/s/ Richard E. Staedtler
--------------------------------------------------
Chief Financial Officer
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