<PAGE>
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- - -------------------------------------------------------------------------------
FORM 10-K/A-2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
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Commission file number: 0-10990
CASTLE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0035225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Radnor Corporate Center
Suite 250
100 Matsonford Road
Radnor, Pennsylvania 19087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (610) 995-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock --
$.50 par value and related Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
As of November 30, 1994, there were 6,658,646 shares of the registrant's
Common Stock ($.50 par value) outstanding. The aggregate market value of
voting stock held by non-affiliates of the registrant as of such date was
$63,105,220 (4,949,429 shares at $12.75 per share).
<PAGE>
CASTLE ENERGY CORPORATION
1994 FORM 10-K/A-2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
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PART I
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<S> <C> <C>
1. and 2. Business and Properties .................................................................... 1
3. Legal Proceedings .......................................................................... 16
4. Submission of Matters to a Vote of Security Holders ........................................ 25
PART II
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5. Market for the Registrant's Common Stock and Related Stockholder Matters ................... 26
6. Selected Financial Data .................................................................... 27
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................... 28
8. Financial Statements and Supplementary Data ................................................ 37
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ....................................................................... 83
PART III
--------
10. Directors, Executive Officers and Key Employees ............................................ 83
11. Executive Compensation ..................................................................... 86
12. Security Ownership of Certain Beneficial Owners and Management.............................. 91
13 Certain Relationships and Related Transactions ............................................. 93
PART IV
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14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 103
</TABLE>
<PAGE>
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
Castle Energy Corporation (the "Company") has been primarily engaged in
petroleum refining in the United States, with additional operations in
natural gas marketing and oil and gas exploration and production. The Company
owns the Indian Refinery, an 86,000 barrel per day ("B/D") refinery located
in Lawrenceville, Illinois (the "Indian Refinery"), through one of its
refining subsidiaries, Indian Refining Limited Partnership ("IRLP"), and the
Powerine Refinery, a 49,500 B/D refinery located in Santa Fe Springs,
California (the "Powerine Refinery" and, together with the Indian Refinery,
the "Refineries"), through its other refining subsidiary, Powerine Oil
Company ("Powerine"). The Powerine Refinery was acquired in October 1993.
Both Refineries are complex facilities capable of processing a broad slate of
sour crude oils and producing principally higher-margin products -- such as
gasoline, diesel fuel, jet fuel and heating oil -- versus lower-margin
products, such as residual fuel and asphalts.
Currently, substantially all of the output from the Refineries is
delivered to MG Refining and Marketing, Inc. ("MGRM"), a wholly-owned
subsidiary of Metallgesellschaft Corp. ("MG"), pursuant to offtake agreements
which commit MGRM to purchase substantially all of the refined product output
of the Indian Refinery (the "Indian Offtake Agreement") and the Powerine
Refinery (the "Powerine Offtake Agreement" and, together with the Indian
Offtake Agreement, the "Offtake Agreements") until the termination of such
agreements on February 1, 1995. The Indian Offtake Agreement establishes
prices based on a $5.105 per barrel increment over near month West Texas
Intermediate crude oil prices, and the Powerine Offtake Agreement establishes
prices based on a $10.506 per barrel increment over near month Alaskan North
Slope crude oil prices. Upon termination of the Offtake Agreements (and
subject to certain specified post-termination obligations), the Refineries
will assume direct responsibility for marketing their refined product output.
On December 5, 1994, the Company entered into an Asset and Stock Purchase
Agreement (the "SIPAC Agreement") with SIPAC Inc., a corporation formed by
William S. Sudhaus, President and Chief Operating Officer of the Company
("SIPAC") pursuant to which the Company has agreed to sell the Refineries and
certain related assets to SIPAC for $38.75 million, payable pursuant to a ten
year promissory note convertible into approximately 41% of SIPAC's common
stock, plus or minus the positive or negative net working capital of the
Refineries as of January 31, 1995, the anticipated closing, subject to
adjustment for the amount of capital expenditures made during the period
between October 1, 1994 and the closing. The sale of the Refineries, which is
subject to a number of conditions including the approval of the Company's
stockholders and SIPAC's obtaining the financing for the transaction, is
expected to close in February 1995. The SIPAC Agreement allows the Company to
continue to pursue other buyers for the Refineries.
The Company also engages in natural gas marketing operations which provide
gas to the Lone Star Gas Company, a division of ENSERCH Corporation ("Lone
Star"), pursuant to a fixed price take-or-pay contract for 77.5 billion cubic
feet through May 31, 1999. The Company has proved reserves and fixed price
gas purchase contracts in place for the supply of all of the natural gas
necessary to fulfill its commitments under the Lone Star gas sales contract
(the "Lone Star Contract") and, accordingly, has fixed a substantial portion
of its gross margin with respect to this operation. The Company delivers
natural gas to Lone Star through the Company's 77-mile intrastate pipeline
located in Rusk County, Texas. At September 30, 1994, the Company's
exploration and production operations had proved reserves of approximately 55
billion cubic feet of natural gas and 322,500 barrels of oil.
On October 14, 1994, the Company completed a restructuring with MG and its
affiliates (the "MG Settlement"). As a result, substantially all of the
Company's contractual relationships with MG and its affiliates were amended
or terminated as of such date. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
See Note 22 to the Company's Consolidated Financial Statements for
information with respect to the Company's three identifiable industry
segments for the years ended September 30, 1994, 1993 and 1992.
1
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REFINING
The Company owns and operates the Indian Refinery and the Powerine
Refinery. The Refineries have combined refining (distillation) capacity of
135,500 B/D.
INDIAN REFINERY
Overview
The Indian Refinery commenced operations in 1907 as the Indian Asphalt
Company. That company subsequently went public and traded on the New York
Stock Exchange. Texaco, Inc. ("Texaco") acquired its interest in that company
in the early 1930's and eventually purchased 100% (reportedly to acquire
control of the Havoline motor oil brand). Texaco operated the facility until
mid-1985 when it was shut down for strategic reasons. In 1986, Texaco
transferred the Indian Refinery to Indian Refining Company. The Company
purchased the Indian Refinery in August 1989 and, after an extensive
refurbishment program, reopened it in November 1990.
The Indian Refinery is a complex refinery located on 760 acres of land in
Lawrenceville, Illinois. A recently completed expansion program has increased
the Indian Refinery's capacity to 86,000 B/D with a production yield in
excess of 85% light product. The Indian Refinery has a sour crude oil
"cracking" configuration with the ability to convert certain residual streams
via fluid catalytic cracking unit processing. The Indian Refinery's Nelson
complexity index is approximately 8.3, above the world average of
approximately 5.5.
IRLP has 4 million barrels of storage capacity located in Lawrenceville,
with an additional 1.2 million barrels of tankage at IRLP's Mt. Vernon,
Indiana terminal (the "Indian Terminal") on the Ohio River (57 miles south of
the Indian Refinery and connected by a 10 inch product pipeline). The Indian
Terminal operates a year-round barge loading and unloading facility. Another
product pipeline running north from the Indian Refinery provides access to
the Buckeye pipeline system which delivers products to Indiana, Ohio and
Pennsylvania.
IRLP is capable of strategically accessing substantially all of the
world's crude streams via several Gulf Coast and inland pipeline connections,
including the Mobil, ARCO, Capline and Platte pipeline systems. Moreover,
IRLP recently developed the ability to access Canadian crude directly via the
InterProvincial--Lakehead pipeline systems and a reversed Mobil pipeline
connecting Chicago and Patoka, Illinois.
IRLP is strategically located in the Mid-continent (PADD II) region, an
industrial area short of refining capacity. The Mid-continent is a net
importer of approximately 600,000 B/D of light crude products. The cost of
transporting and locally refining crude, however, is below the cost of
shipping finished products from the Gulf Coast. As a result of this
imbalance, Mid-continent refineries have traditionally generated
above-average margins.
Operations
The Company has invested over $140 million in the Indian Refinery since
the re-start in 1990, increasing capacity 50% to 86,000 B/D. In November
1993, the Indian Refinery's ability to process sour crude oil was increased
significantly with the startup of a new 62 ton per day Sulfur Recovery Unit
and the restart of a 23,000 B/D high pressure Distillate Hydrotreater.
Between 70-80% of the Indian Refinery's distillate production is ultra low
sulfur diesel (.05% Sulfur). With the completion of an 11,500 B/D
Isomerization Unit in early 1995, IRLP will be able to make reformulated
gasoline comprising over 50% of the plant's production, with the balance
consisting of conventional (statutory baseline) gasoline as required by the
Clean Air Act.
2
<PAGE>
IRLP's operating units afford significant crude slate flexibility. Key
processing units and their stream day capacities are as follows:
Unit Capacity
----- --------
(BPSD)
Crude Distillation Unit No. 1 -- VPS ............. 64,000
Crude Distillation Unit No. 2 -- FPU ............. 22,000
Fluid Catalytic Cracker -- FCC ................... 34,000
Alkylation Unit No. 2 ............................ 6,000
Hydrotreating Unit No. 1 -- Distillate ........... 11,500
Hydrotreating Unit No. 2 -- Naphtha .............. 18,500
Hydrotreating Unit No. 3 -- Distillate ........... 23,000
Catalytic Reformer No. 2 ......................... 18,500
Sulfur Recovery Unit No. 1 ....................... 27 tons/day
Sulfur Recovery Unit No. 2 ....................... 62 tons/day
Isomerization Unit (completion early 1995) ........ 11,500
Crude/Feedstock Supply
IRLP's refining and marketing assets are strategically located in the
Midwest in close proximity to a variety of supply and distribution channels.
As a result, IRLP has the flexibility to acquire the most economic domestic
or foreign crude oil and the ability to distribute its products to a number
of domestic wholesale markets.
The Indian Refinery is capable of processing up to 100% sour crude oil
(1.8 - 2.0% Sulfur) and currently operates on a blend of West Texas Sour,
Eugene Island, Louisiana Light Sweet and various foreign crude oils including
Urals, Oriente, Brent and Canadian sours (such as Caroline Condensate, MSO
and LSB). The majority of Indian Refinery's crude and other feedstock supply
is acquired from various sources on a spot basis. In November 1992, IRLP
entered into a ten-year supply agreement with Shell Canada, Ltd. and Salmon
Resources, Ltd. (collectively "Shell") for 13,000 B/D of Caroline Condensate
pursuant to a "net-back" pricing mechanism. The arrangement reduces IRLP's
exposure to market volatility by establishing a feedstock price based upon
refiner product market values less (i) all processing and related
transportation and marketing costs and (ii) a fixed margin. On December 23,
1994, Shell filed a lawsuit seeking to terminate this agreement. Shell has
agreed, however, that it will continue to perform its obligations under the
agreement pending the outcome of the lawsuit. See Item 3. Legal Proceedings
- - -- IRLP -- Long-Term Supply Agreement.
Planning and Economics
IRLP employs sophisticated linear programming models to optimize the
Indian Refinery operations. These models enable IRLP to predict the yield
structure of given crude oils and feedstocks, facilitating optimal feedstock
combinations and production of the most advantageous refined product mix for
a given set of market conditions. In this manner, IRLP is able to take
advantage of lower cost crude oils and adjust the output mix in response to
changing market prices at any given time.
Inventory Management
IRLP employs several strategies to minimize the impact of the volatility
in feedstock costs. These strategies generally involve the purchase and sale
of exchange-traded, energy-related futures and options with a duration of 12
months or less. These strategies are designed to minimize, on a short-term
basis, IRLP's exposure to the risk of fluctuations in crude oil prices and
refined product margins. The number of barrels of crude oil and refined
products covered by such contracts varies from time to time. Such purchases
and sales are closely managed, balanced daily and subject to internally
established risk standards. See Note 2 to the Company's Consolidated
Financial Statements included in Item 8. Financial Statements and Financial
Statement Schedules.
3
<PAGE>
Production of Refined Products
Production of refined products since October 1, 1993 reflects both the
increase in the throughput capacity of the Indian Refinery and its increased
capability to produce higher-margin products. Production of refined products
from the Indian Refinery for the fiscal years ended September 30, 1992 (the
first full year of sustained production), 1993 and 1994 was as follows:
<TABLE>
<CAPTION>
Barrels Produced
---------------------------------------------------------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, 1992 September 30, 1993 September 30, 1994
----------------------------------- ----------------------------------- -----------------------------
Average Per Day Average Per Day Average Per Day
-------------------- -------------------- ---------------
Total Barrels % Total Barrels % Total Barrels %
------------ --------- ------- ------------ --------- ------- ------------ --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gasolines ........... 9,394,700 25,669 48.3 11,486,520 31,470 51.3 12,123,348 33,215 51.9
Distillates ......... 6,477,400 17,698 33.3 6,819,312 18,683 30.5 6,374,906 17,466 27.3
Residual products and
asphalt ............ 2,231,900 6,098 11.5 2,787,038 7,636 12.5 3,867,460 10,596 16.5
Other ............... 1,358,700 3,712 6.9 1,282,102 3,513 5.7 1,011,275 2,771 4.3
------------ --------- ------- ------------ --------- ------- ------------ --------- -----
19,462,700 53,177 100.0 22,374,972 61,302 100.0 23,376,989 64,048 100.0
============ ========= ======= ============ ========= ======= ============ ========= =====
</TABLE>
Production of refined products by IRLP exceeded 80,000 B/D in November
1994.
Marketing/Offtake Agreement
Currently, all of the output from the Indian Refinery is delivered to MGRM
pursuant to the Indian Offtake Agreement which, as amended in connection with
the MG Settlement, commits MGRM to purchase such refined product output
through termination on February 1, 1995 for a purchase price equal to (a) the
settlement price of near month West Texas Intermediate crude oil; plus (b)
$5.105 per barrel (adjusted annually for inflation); plus (c) certain taxes
and other costs and charges.
During the term of the Indian Offtake Agreement, MGRM has the right to
direct IRLP to run the Indian Refinery at less than full refining capacity
for any period of time specified by MGRM (a "Reduced Run Period"). During
Reduced Run Periods, MGRM is obligated under a "make whole" arrangement to
pay IRLP an amount equal to (a) the aggregate payments that would have been
made to IRLP by MGRM under the Indian Offtake Agreement for the Reduced Run
Period had MGRM not directed the run reductions, less (b) the sum of (i) the
aggregate payments actually made by MGRM to IRLP for products produced during
such period, plus (ii) any demonstrable operational cost savings by IRLP
directly attributable to the applicable run reductions.
Under the Indian Offtake Agreement, IRLP is entitled to additional
consideration for its refined products equal to 50% of the profits, if any,
earned by MGRM related to the sales of Indian's products from its Bel Air,
Maryland profit center (not including any profits earned through the
marketing of Powerine products), subject to a limit of $0.50 per barrel (the
"Indian Profit Participation"). The Indian Profit Participation is to be
applied against outstanding financial obligations of IRLP. IRLP has not
received any Indian Profit Participation and, at this time, does not expect
to receive any future payments of the Indian Profit Participation.
IRLP and Powerine are currently assembling a joint marketing department
which will assume responsibility for marketing all of the refined product
output of the Refineries upon termination of the Offtake Agreements effective
February 1, 1995. The marketing plan for IRLP encompasses four major
categories of sales channels for refined products:
o Wholesale rack sales at the Indian Refinery and at the Indian Terminal;
o Wholesale rack sales at various terminals along the lower Ohio River,
accessed by barge from the Indian Terminal;
o Wholesale rack or term sales at various regional terminals accessed by
pipeline; and
o Product exchanges with other marketers serving the region, with product
delivered to terminals along the Ohio River, Chicago, the U.S. Gulf
Coast and other locations.
4
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Proposed Sale of the Indian Refinery
The Company has agreed to sell its refining operations, including the
Indian Refinery, pursuant to the terms of the SIPAC Agreement. Upon
consummation of this sale, which is subject to receipt of the approval of the
Company's stockholders and certain other conditions, the Company will no
longer be directly engaged in petroleum refining. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
POWERINE REFINERY
Overview
Originally built in 1934, the Powerine Refinery underwent several
modernization programs in the late 1960's and early 1980's, including a major
modernization project completed in 1982 which substantially upgraded the
facility for full conversion capabilities. The $230 million project included
new delayed coking and hydrocracking units, a hydrogen plant and kerosene and
FCC feed hydrotreaters. Due to operating losses, Powerine sought Chapter 11
bankruptcy protection and shut down the Powerine Refinery in March 1984.
Powerine was acquired out of bankruptcy by an investor in September 1986.
Powerine incurred substantial expenses during an extended start-up period and
was subject to the poor market conditions that existed in 1987. Powerine
again sustained large operating losses which caused it to enter into various
financing and processing transactions with MG and its affiliates. Powerine
continued to operate the Powerine Refinery for the next five years utilizing
credit facilities from MG Trade Finance Corp. ("MGTFC"), a wholly-owned
subsidiary of MG.
From its restart in 1987 until November 1992, Powerine continued to
perform unprofitably. In November 1992, Powerine's management shut down the
Powerine Refinery due to market and financing conditions and commenced an
extensive maintenance program. Powerine arranged additional financing from
MGTFC and, in connection therewith, in March 1993 MG acquired an option to
purchase Powerine. Repairs and modifications were completed and the Powerine
Refinery was restarted in March 1993. Since April 1993, the Powerine Refinery
has operated at or near its operating capacity. The Company acquired the
Powerine Refinery from MG in October 1993.
Operations
The Powerine Refinery is a high conversion coking facility located on 88
acres in the Los Angeles suburb of Santa Fe Springs, California. The Powerine
Refinery has a throughput capacity of 49,500 B/D and a Nelson complexity
index of 10.3, which is in excess of U.S. and world averages. The Powerine
Refinery's high degree of complexity enables it to produce a product slate of
94% high-value products while running a crude slate with an average gravity
of 25|Ao and a sulfur content of 1.1%.
Powerine has 2 million barrels of tankage and is served primarily by a
leased marine terminal in Long Beach, California (the "Long Beach Terminal")
and product terminals located in San Diego, California and Phoenix, Arizona
(together with the Long Beach Terminal, the "Powerine Terminals"). The Port
of Long Beach has taken steps which could result in Powerine's having to
vacate the Long Beach Terminal. However, if Powerine were to vacate the Long
Beach Terminal, management does not anticipate any material operational
disruption. The product terminals are leased to third parties. Powerine also
owns and operates several crude and product pipeline systems in the Los
Angeles basin, including a pipeline which links the Powerine Refinery to the
Santa Fe Pacific Pipeline Company's facility in Norwalk, California, the
Defense Fuels Supply Center in Norwalk, the GATX terminal in Carson,
California, and the Golden West Refinery in Santa Fe Springs, California.
Powerine is located in the West Coast (PADD V) region, historically the
most profitable in the United States. The region combines high demand growth
with geographic isolation for refined products.
5
<PAGE>
The Powerine Refinery's configuration offers significant flexibility with
respect to crude and feedstock inputs. Key processing units and their current
capacities are as follows:
Unit Capacity (BPSD)
---- ---------------
Crude Units ......................... 49,500
Vacuum Unit ......................... 26,000
Coker ............................... 11,500
FCC Hydrotreater (FHT) .............. 13,000
FCCU ................................ 13,000
Hydrocracker ........................ 8,000
Diesel Hydrotreater (DHT) ........... 9,500
Kerosene Hydrotreater Unifiner (idle) 10,000
Catalytic Reforming ................. 10,000
Butane Isomerization ................ 1,500
Alkylation .......................... 2,300
Sulphur Recover Unit (SRU) .......... 50
Hydrogen Plant ...................... 20
Bensat/ISOM ......................... 3,750
Platformate Splitter ................ 7,000
Depentzanier ........................ 7,000
Crude/Feedstock Supply
Powerine's refining and marketing assets are strategically located in
Southern California in close proximity to a variety of supply and
distribution channels. As a result, Powerine has the flexibility to acquire
the most economic domestic or foreign crude oil and the ability to distribute
its products to a number of domestic wholesale markets.
Powerine operates principally on a mix of sour crude oils including
Alaskan North Slope, Oriente, Wilmington and Point Arguello. The majority of
crude and other feedstocks are acquired from various sources on a spot basis.
Powerine is in the process of developing a gathering company which will
acquire up to 20,000 B/D of local California crude oils delivered via truck
and/or pipeline.
Planning and Economics
Powerine employs sophisticated linear programming models to optimize the
Powerine Refinery's operations. These models enable Powerine to predict the
yield structure of given crude oils and feedstocks, facilitating optimal
feedstock combinations and production of the most advantageous refined
product mix for a given set of market conditions. In this manner, Powerine is
able to take advantage of lower cost crude oils and adjust the output mix in
response to changing market prices at any given time.
Inventory Management
Powerine employs several strategies to minimize the impact of the
volatility in feedstock costs. These strategies generally involve the
purchase and sale of exchange-traded, energy-related futures and options with
a duration of 12 months or less. These strategies are designed to minimize,
on a short-term basis, Powerine's exposure to the risk of fluctuations in
crude oil prices and refined product margins. The number of barrels of crude
oil and refined products covered by such contracts varies from time to time.
Such purchases and sales are closely managed, balanced daily and subject to
internally established risk standards. See Note 2 to the Company's
Consolidated Financial Statements included in Item 8. Financial Statements
and Financial Statement Schedules.
6
<PAGE>
Production of Refined Products
Production of refined products since October 1992 reflects the increase in
Powerine's capacity to produce high margin products. Production of refined
products from the Powerine Refinery for the twelve months ended September 30,
1992, 1993 and 1994 was as follows:
<TABLE>
<CAPTION>
Barrels Produced
-----------------------------------------------------------------------------------------------------------
Twelve Months Ended Twelve Months Ended Twelve Months Ended
September 30, 1992 September 30, 1993 (1) September 30, 1994
----------------------------------- ---------------------------------- ----------------------------------
Average Per Day Average Per Day Average Per Day
-------------------- -------------------- -----------------
Total Barrels % Total Barrels % Total Barrels %
------------ --------- ------- ----------- --------- ------- ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gasolines ........... 6,304,517 17,225 50.4 4,631,422 18,234 48.1 6,588,431 18,050 45.2
Distillates ......... 5,140,943 14,046 41.1 4,210,437 16,577 43.8 6,474,091 17,737 44.5
Residual products and
asphalt ............ 412,964 1,128 3.3 311,710 1,227 3.2 374,468 1,026 2.6
Other ............... 651,102 1,779 5.2 466,565 1,837 4.9 1,114,953 3,055 7.7
------------ --------- ------- ----------- --------- ------- ------------ --------- ------
12,509,526 34,178 100.0 9,620,134 37,875 100.0 14,551,943 39,868 100.0
============ ========= ======= =========== ========= ======= ============ ========= ======
</TABLE>
- - ------
(1) The Company acquired Powerine effective October 1, 1993. The Powerine
Refinery was not in operation from November 11, 1992 through March 1,
1993. Figures for average per day production are calculated based upon
refinery output for 254 actual days of operation.
Marketing/Offtake Agreement
Currently, substantially all of the output from the Powerine Refinery is
delivered to MGRM pursuant to the Powerine Offtake Agreement which, as
amended in connection with the MG Settlement, commits MGRM to purchase such
refined product output through termination on February 1, 1995 for a purchase
price equal to (a) the Platt's West Coast price of near month Alaskan North
Slope crude oil; plus (b) $10.506 per barrel; plus (c) certain taxes and
other costs and charges. Unlike the Indian Offtake Agreement, the Powerine
Offtake Agreement does not contain any profit participation. The Powerine
Offtake Agreement does include, however, a "make whole" provision for Reduced
Run Periods for Powerine similar to that contained in the Indian Offtake
Agreement.
Powerine and IRLP are currently assembling a joint marketing department
which will assume responsibility for marketing all of the Refineries refined
product output upon termination of the Offtake Agreements effective February
1, 1995. The marketing plan for Powerine encompasses several major categories
of sales channels for refined products:
o Wholesale rack sales at the Powerine Refinery;
o Bulk pipeline sales into the SPPL Common Carrier System; and
o Product exchanges with other marketers serving the region.
Proposed Sale of the Powerine Refinery
The Company has agreed to sell its refining operations, including the
Powerine Refinery, pursuant to the terms of the SIPAC Agreement. Upon
consummation of this sale, which is subject to receipt of the approval of the
Company's stockholders and certain other conditions, the Company will no
longer be directly engaged in petroleum refining. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
NATURAL GAS MARKETING
GENERAL
On December 3, 1992, the Company, through three wholly-owned subsidiary
limited partnerships, CEC Gas Marketing Limited Partnership ("CEC Gas
Marketing"), Castle Texas Pipeline Limited Partnership ("Castle Texas
Pipeline") and Castle Texas Production Limited Partnership ("Castle
Production"), acquired from ARCO the Lone Star Contract, a 77-mile pipeline
in Rusk County, Texas (the "Castle Pipeline"), majority working interests in
7
<PAGE>
approximately 100 producing oil and gas wells and several gas supply contracts
for an aggregate purchase price of approximately $103.7 million, including cash,
assumption of debt and certain transaction costs. Upon acquiring these assets,
the Company entered a new segment of the petroleum business, natural gas
marketing. The Company, through CEC Gas Marketing, sells 65% of its natural gas
production to Lone Star and the balance to a variety of customers pursuant to
fixed price contracts and in spot markets.
ASSETS
Gas Contract
Pursuant to the terms of the Lone Star Contract, CEC Gas Marketing sells
natural gas to Lone Star at a fixed price per thousand Btu ("MBtu"), plus
transportation and certain other charges. The Lone Star Contract, which
expires in May 1999, provides for minimum deliveries averaging 47 million
cubic feet per day ("MMCFPD"). The contract also includes a take-or-pay
provision whereby Lone Star must pay for 60% of the monthly contract volume
whether or not it takes such volume (although deficiencies in one month may,
subject to certain limitations, be taken in subsequent months without
additional payments). Company management anticipates that 17% of annual
contract volumes can be supplied from wells currently operated by Castle
Texas Production. Pursuant to a gas purchase contract between CEC Gas
Marketing and MG Natural Gas Corp. ("MGNG"), a wholly-owned subsidiary of MG,
MGNG is required to supply the remaining 83% of the natural gas required to
meet the requirements of the Lone Star Contract at pre-established prices.
This gas purchase contract may be terminated by CEC Gas Marketing through
March 31, 1995 under certain conditions. CEC Gas Marketing has also entered
into a management contract with MGNG to manage gas contracts with outside
working interest owners in wells operated by Castle Production. This contract
may be terminated by CEC Gas Marketing upon 30 days notice. Pursuant to the
terms of the MG Settlement, all of the Company's other financial obligations
to MG and its subsidiaries with respect to the marketing of natural gas by
CEC Gas Marketing have been terminated.
The fixed price received by CEC Gas Marketing for gas sold to Lone Star is
substantially in excess of the spot (market) price. It also exceeds the fixed
price of gas purchased from MGNG to meet the requirements of the Lone Star
Contract. As a result, CEC Gas Marketing has locked in a gross margin equal
to the excess of the price received from Lone Star over the price paid to
MGNG with respect to the 83% of its natural gas requirement that it must
purchase. Such "locked up" gross margins are, however, subject to the supply
risk of MGNG, the credit risks of Lone Star and other contractual risks in
the Lone Star Contract.
The Castle Pipeline
The Castle Pipeline, which is an intrastate pipeline system located in
Rusk County, Texas, gathers natural gas produced primarily from the Oak Hill
Field located north of Henderson, Texas for delivery to Lone Star through ten
different interconnects with a Lone Star pipeline in north Rusk County. The
Castle Pipeline is the principal means by which CEC Gas Marketing delivers
gas to Lone Star. Other sources of natural gas are accessible through
interconnects with six other pipelines.
The Castle Pipeline consists of 77 miles of pipeline with diameters
ranging from two to six inches and six compressor stations. The Castle
Pipeline has maximum allowable working pressures of 1040 pounds per square
inch ("psi") to 1264 psi with the exception of a low pressure gathering
system which has maximum allowable working pressure of 323 psi. The combined
delivery capacities of the components are in excess of 90 MMCFPD. The actual
deliveries made on the Castle Pipeline by CEC Gas Marketing and various
subsidiaries of ARCO during the periods shown were as follows:
Twelve Months Ended September 30,
-------------------------------------------
1992 1993 1994
------------ ------------ ------------
MCF(1) .... 21,709,087 21,050,592 18,208,312
MCFPD(2) .. 59,477 57,673 49,886
- - ------
(1) Thousand cubic feet
(2) Average throughput per day in thousand cubic feet
8
<PAGE>
Castle Texas Pipeline has entered into a management service contract with
MG Gathering Corp. ("MG Gathering"), a wholly-owned subsidiary of MG, to
operate the Castle Pipeline for the Company. This contract may be terminated
by Castle Texas Pipeline upon 30 days notice.
OIL AND GAS EXPLORATION AND PRODUCTION
GENERAL
The Company's oil and gas exploration and production business, conducted
through Castle Production, Castle Exploration Company and Petroleum Reserve
Corporation, includes interests in approximately 450 producing oil and gas
wells located in nine states. Until June 1993, the Company also administered
a number of oil and gas partnerships.
PROPERTIES
Proved Oil and Gas Reserves
The following is a description of the Company's oil and gas reserves as of
September 30, 1994. All estimates of reserves are based upon engineering
evaluations prepared by Ryder Scott and Company and Huntley and Huntley,
independent petroleum reserve engineers, in accordance with the requirements
of the Securities and Exchange Commission. Such estimates include only proved
reserves. The Company reports its reserves annually to the Department of
Energy. The Company's estimated reserves as of September 30, 1994 are as
follows:
Location of Reserves
---------------------------------------------
Other States
Texas (2) Total
------------ -------------- ------------
Net MCF (1) of gas:
Proved developed producing ... 12,100,000 7,700,000 19,800,000
Proved developed non-producing 25,200,000 1,000,000 26,200,000
Proved undeveloped ........... 5,700,000 3,300,000 9,000,000
------------ -------------- ------------
Total ........................ 43,000,000 12,000,000 55,000,000
============ ============== ============
Net barrels of oil:
Proved developed producing ... 63,000 185,000 248,000
Proved developed non-producing 51,300 1,600 52,900
Proved undeveloped ........... 21,600 21,600
------------ -------------- ------------
Total ........................ 135,900 186,600 322,500
============ ============== ============
- - ------
(1) Thousand cubic feet
(2) Alabama, California, Illinois, Louisiana, Mississippi, Ohio, Oklahoma and
Pennsylvania
The Texas reserves were acquired on December 3, 1992 when Castle
Production acquired majority working interests in 100 producing oil and gas
wells from ARCO. Pursuant to the terms of the MG Settlement, all of the
Company's obligations to pay MG marketing fees with respect to certain of the
natural gas purchased from these wells have been terminated effective October
14, 1994.
In October 1994, one of the Company's exploration and production
subsidiaries acquired a royalty interest from ARCO. The cost was $4 million.
The reserves attributed to the purchase were 2,800,000 MCF (proved developed
producing). All of these reserves are located in Texas.
9
<PAGE>
Oil and Gas Production
The following table summarizes the net quantities of oil and gas
production of the Company for the three fiscal years ended September 30,
1994, including production from acquired properties since the date of
acquisition.
Fiscal Years Ended September 30,
-------------------------------------
1992 1993 1994
--------- -------- --------
Oil -- BBLS .............. 67,000 45,000 52,000
Gas -- MCF ............... 1,571,000 3,472,000 3,606,000
Average Sales Price and Production Cost Per Unit
The following table sets forth the average sales price per barrel of oil
and MCF of gas produced by the Company and the average production cost
(lifting cost) per equivalent unit of production for the periods indicated.
Production costs include applicable operating costs and maintenance costs of
support equipment and facilities, labor, repairs, severance taxes, property
taxes, insurance, materials, supplies and fuel consumed in operating the
wells and related equipment and facilities.
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
--------------------------------
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
Average Sales Price per Barrel of Oil ........ $19.87 $17.69 $16.03
Average Sales Price per MCF of Gas ........... 1.80 2.44 2.02
Average Production Cost per Equivalent MCF(1) 0.91 0.71 0.57
</TABLE>
- - ------
(1) For purposes of equivalency of units, a barrel of oil is assumed equal to
six MCF of gas, based upon relative energy content.
Productive Wells and Acreage
The following table presents the oil and gas properties in which the
Company held an interest as of September 30, 1994. The wells and acreage
owned by the Company and its subsidiaries are located in Alabama, California,
Illinois, Louisiana, Mississippi, Ohio, Oklahoma, Pennsylvania and Texas.
As of
September 30, 1994
--------------------
Gross(2) Net (3)
-------- --------
Productive Wells:(1)
Gas Wells ........................ 374 193
Oil Wells ........................ 76 26
Acreage: .........................
Developed Acreage ................ 81,902 34,054
Undeveloped Acreage ............... 10,534 9,217
- - ------
(1) A "productive well" is a producing well or a well capable of production.
Sixty-two wells are dual wells producing oil and gas. Such wells are
classified according to the dominant mineral being produced.
(2) A gross well or acre is a well or acre in which a working interest is
owned. The number of gross wells is the total number of wells in which a
working interest is owned.
(3) A net well or acre is deemed to exist when the sum of fractional working
interests owned in gross wells or acres equals one. The number of net
wells or acres is the sum of the fractional working interests owned in
gross wells or acres.
10
<PAGE>
Drilling Activity
The table below sets forth for the three fiscal years ended September 30,
1994, the number of gross and net productive and dry developmental wells
drilled including wells drilled on acquired properties since the dates of
acquisition. The Company did not drill any exploratory wells during these
periods.
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
-------------------------------------------------------------------
1992 1993 1994
-------------------- -------------------- --------------------
Productive Dry Productive Dry Productive Dry
------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Developmental:
Gross ........ 5 -- 8 -- -- --
Net .......... 0.3 -- 0.48 -- -- --
</TABLE>
Sale of Partnership Administration Business
Until June 1993, the Company was in the business of oil and gas
partnership administration. As a result of depressed oil and gas prices and
tax legislation during the last nine years, the number of oil and gas
partnerships in existence and the number of oil and gas partnerships being
formed have decreased. These developments have significantly limited the
number of opportunities for the Company to obtain new sources of
administrative revenue. Therefore, the Company discontinued its business of
administration of oil and gas partnerships effective as of June 1993 and sold
the business to a former officer and director of the Company who in November
1994 rejoined the Company as an officer.
REGULATIONS
The Company's business and properties are subject to a variety of federal,
state and local environmental laws and regulations pertaining to the
discharge of pollutants into the air and water, as well as the generation,
treatment, storage, transportation and disposal of solid and hazardous waste.
The primary regulatory authority is the federal government, although state
and local governments also promulgate and enforce environmental rules and
regulations which usually are equivalent to, but occasionally are more
stringent than, their federal counterparts. The following is a discussion of
the major federal environmental laws and regulations which materially affect
the Company's business and properties as well as relevant state or local
equivalents.
REFINING
Air Regulation
The Refineries and the Indian Terminal and Powerine Terminals
(collectively, the "Terminals") are subject to extensive federal, state and
local environmental regulation concerning air emissions from various refining
operations, processes and products. The primary source of federal
environmental regulations and proposed regulations is the Clean Air Act which
regulates, among other things, individual sources of air pollution as well as
the air quality of entire cities through restrictions on air emissions and
specifications for motor vehicle fuels. The provisions of the Clean Air Act
are predominantly administered through the permitting authority of the state
and local governments in which the individual air pollution sources are
located. The United States Environmental Protection Agency (the "USEPA") also
has regulatory authority over various air emission and fuel formulation
requirements. The Refineries and Terminals have a large number of air
emission permits issued by the states in which they are located.
IRLP
IRLP has approximately 50 air emission permits issued by the States of
Illinois and Indiana. IRLP has operating permits for individual sources of
air pollution such as heaters, boilers, storage tanks and individual
processing units. Illinois, Indiana and the USEPA regularly inspect the
Indian Refinery and the Indian Terminal for compliance purposes. See Item 3.
Legal Proceedings -- IRLP.
During the fall of 1993, IRLP completed construction of a 50 ton per day
sulfur recovery unit and refurbishment of its No. 3 Hydrotreater. The new
plant is operating under an extended IEPA construction permit. The operating
permit for the No. 3 Hydrotreater was issued in January 1994 and the
operations permit for the sulfur recovery unit should be issued shortly.
11
<PAGE>
IRLP also is in the process of completing its isomerization unit to make
conventional and reformulated gasoline. It is anticipated that these projects
will enable the Indian Refinery to make reformulated fuels under the
environmental requirements of the Clean Air Act. Management believes that the
regulatory burden per barrel of throughput for IRLP to make reformulated fuels
under the Clean Air Act may be less than that of many of its competitors
primarily because IRLP has several idle units that can be converted to achieve
regulatory compliance rather than "grass roots" construction of new units.
Powerine
The Powerine Refinery is located within the jurisdiction of the South
Coast Air Quality Management District (the "SCAQMD") which has adopted strict
air emissions standards. The Enforcement Division of the SCAQMD regularly
inspects the Powerine Refinery for compliance with air quality laws and
regulations. See Item 3. Legal Proceedings -- Powerine.
In April 1991, the SCAQMD adopted Rule 1410, which restricted and
ultimately may ban the use of hydrofluoric ("HF") acid in the Los Angeles
area by four refineries (Mobil, Ultramar, Golden West and Powerine) which use
HF acid in the alkylation process. This rule called for a complete phaseout
of HF acid by January 1, 1998, unless a safer form of HF acid was developed
by January 1, 1995. While Mobil has been working on a safer form of HF acid,
this rule has been stricken as a result of litigation brought by Ultramar
which successfully challenged the procedure followed by the SCAQMD to
promulgate Rule 1410. SCAQMD has announced that it intends to re-promulgate
Rule 1410 in some form but it will not do so until 1995 at the earliest.
Powerine has largely completed the interim improvements required by the
now-stricken Rule 1410.
If Rule 1410 is repromulgated with HF emission limits that Powerine cannot
meet, Powerine would have to replace its HF alkylation unit with a sulfuric
acid system. Cost estimates for a new or modified alkylation unit are
currently $30-35 million (new) or $15 million (modified). Because of the
importance of alkylation capacity to cost-effective production of
reformulated gas, a new alkylation unit would give Powerine an opportunity to
increase effective throughput by a better designed alkylation unit. Thus,
there would be financial benefits offsetting the cost of a new unit should
one become necessary. Management will also evaluate other alternatives to
meet repromulgated HF emission limits.
The SCAQMD recently adopted a market-based regulatory program called the
Regional Clean Air Incentives Market ("RECLAIM") program. Under the RECLAIM
program, all major stationary sources such as the Powerine Refinery with
oxides of nitrogen (NOx) and oxides of sulfur (SOx) emissions greater than
four tons per year received an annual emissions cap and an annual rate of
required emissions reduction. The required emission reductions have to be
achieved by using add-on controls, modernization, process improvements or by
purchasing emission credits from other facilities.
The SCAQMD issued Powerine its initial RECLAIM allocation cap and emission
reduction rates on October 15, 1993 and a substantially higher final
allocation on September 9, 1994. Powerine installed most of the required
emission monitors before the January 1, 1995 deadline at an estimated cost of
$3.5 million over 1993- 94. Powerine obtained a variance from the SCAQMD to
install the remaining emission monitors in early 1995.
Based on monitoring data from the first two quarters of 1994, the
management of Powerine believes that Powerine may be able to defer
approximately $3.5 million of control costs to 2001. Powerine also should
have excess emission credits in 1995 and 1996 to sell and partially offset
RECLAIM expenses.
The California Air Resources Board (the "CARB") recently adopted Phase II
standards for reformulated gasoline which establish maximum concentrations
for aromatic hydrocarbons, benzene, oxygen, olefins and sulfur in gasoline;
establish minimum distillation temperatures; and establish a maximum Reid
vapor pressure for gasoline sold in California. These standards will take
effect in March 1996. Regulations restricting the amount of sulfur and
aromatic hydrocarbon content of diesel fuel sold in California have also been
adopted. These standards went into effect on October 1, 1993. The CARB has
provided two one-year exemptions for small refiners, such as Powerine, with
crude oil capacities of less than 55,000 B/D and combined U.S. crude oil
capacities of less than 137,500 B/D, from the gasoline standards for sulfur,
olefins and distillation temperatures; a one year suspension from the
aromatic standard for diesel fuel; and a less stringent aromatic hydrocarbon
standard in diesel fuel following the suspension. Several major oil companies
have instituted a legal challenge to the CARB
12
<PAGE>
gasoline exemptions which was recently rejected by the California Superior
Court and the time for filing an appeal has expired. The capital costs to
comply with the reformulated gasoline standards, including any savings
realized by taking advantage of the small refiner exemptions, is estimated to
range from $55 million to $60 million over the next four years.
Waste Disposal Regulation
The Refineries and the Terminals are subject to extensive federal, state
and local environmental regulation governing the generation, treatment,
storage, transportation and disposal of solid and hazardous wastes and
materials. The primary source of federal environmental regulations is the
Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA prohibits the
treatment, storage or disposal of hazardous waste at both private and
governmental facilities without a permit issued by the USEPA or an authorized
state. States may be authorized to implement the RCRA program in lieu of the
federal requirements if the regulations promulgated by the state are
equivalent to, or more stringent than, the federal regulations concerning the
same conduct.
IRLP
Routine refinery operations generate hazardous and non-hazardous wastes
which must be disposed of in accordance with applicable state and federal
regulations. Waste is generally stored in tanks and other on-site containers
for brief periods of time prior to shipment to permitted off-site disposal
and treatment facilities. IRLP recently completed construction of a building
dedicated to the interim storage of waste generated by refinery operations
prior to shipment offsite. IRLP has been sending its hazardous waste offsite
to an incinerator and its non-hazardous waste to a solid waste disposal
facility in Indiana. IRLP does not operate any disposal facilities within the
Indian Refinery or the Indian Terminal.
Powerine
Powerine's routine operations also generate hazardous and non-hazardous
waste. Powerine has installed a facility to recycle many of the sludges
routinely generated in the refinery operation through its delayed coker unit.
The process destroys the sludge, recovers the hydrocarbon content as usable
product, and avoids costs associated with disposal at landfills. Hazardous
and non-hazardous wastes generated at the Powerine Refinery which cannot be
recycled in the delayed coker unit are stored, handled and disposed off-site
in accordance with applicable state and federal regulations. Powerine does
not operate any disposal facilities within the Powerine Refinery or the
Powerine Terminals.
Water Regulation
The Refineries and the Terminals are subject to extensive federal, state
and local environmental regulation concerning the discharge of pollutants
into navigable waters and municipal sewer systems. The primary source of
federal environmental regulations is the Clean Water Act which prohibits the
discharge of any pollutant into the waters of the United States unless
authorized by a National Pollutant Discharge Elimination System ("NPDES")
Permit issued by the USEPA or an authorized state agency. The Clean Water Act
also establishes a pretreatment program to regulate industrial discharges to
municipal sewer systems. The NPDES and pretreatment programs are implemented
through the establishment of technology-based limitations on the amount and
type of pollutants that can be discharged into a navigable waterway or a
municipal sewer system. The Refineries and the Indian Terminal have
appropriate permits under the Clean Water Act's NPDES and under state and
local pretreatment programs.
IRLP
The Indian Terminal's NPDES permit authorizes the discharge of stormwater
into the Ohio River in compliance with certain parameters. Management of IRLP
believes that the Indian Terminal has been in compliance with its NPDES
permit limitations since it was purchased in April 1990.
IRLP maintains a waste water treatment plant at the Indian Refinery
designed to treat stormwater and process water flows prior to discharge into
a local river. Discharge into the river is regulated by the Indian Refinery's
NPDES permit issued by the State of Illinois. During start-up, IRLP
refurbished and repaired the waste water treatment system, and continues to
improve its efficiency and reduce the likelihood of violations caused by
upsets in process units.
13
<PAGE>
The Illinois Environmental Protection Agency (the "IEPA") issued a new
NPDES permit, effective September 24, 1993, that has, in many instances,
higher limits reflecting increases in the capacity of the Indian Refinery.
The permit is effective until 1998. IRLP management believes that it will be
able to meet the new permit limits on a consistent basis.
Powerine
The Powerine Refinery's NPDES permit authorizes it to discharge stormwater
into the North Fork of Coyote Creek, a tributary of the San Gabriel River, in
compliance with certain parameters. The permit was issued by the Regional
Water Quality Control Board ("RWQCB"), Los Angeles Region, and expired on May
10, 1994. Powerine timely applied to renew its NPDES water discharge permit
for the portion of its discharge going to the storm drain system. On December
5, 1994, the RWQCB approved Powerine's new permit. The new permit, which
expires in 3 years, requires Powerine to sample for additional parameters and
to meet more stringent effluent limitations. Powerine's management believes
that it can meet these new requirements at an additional cost of $50,000 per
year.
The Powerine Refinery also discharges approximately 250 gallons per minute
of treated process waste water into the municipal sewer system. Discharges
into the sewer system are regulated by the terms of an industrial user permit
issued by the Los Angeles County Sanitation District. On November 30, 1994,
Powerine received a Notice of Violation ("NOV") from the Los Angeles
Sanitation District concerning an alleged violation of Powerine's industrial
contamination discharge permit. The Sanitation District has informed Powerine
that it will be taking more frequent samples of Powerine's wastewater
discharges over the next two months as a result of the NOV.
NATURAL GAS MARKETING
The Castle Pipeline is an intrastate pipeline system and is primarily
regulated by the Texas Railroad Commission (the "Railroad Commission"). Under
Texas statutes, the Railroad Commission, whose members are elected, has
authority to regulate the intrastate transportation, sale, delivery and
pricing of natural gas by intrastate pipelines in Texas, including the Castle
Pipeline. In its conservation and production regulations, the Railroad
Commission has adopted the Market Demand Rule, which provides, in general,
that the production of gas in excess of reasonable demand is prohibited, and
requires that producers tender and deliver, and gas purchasers, including
pipelines, take only volumes of gas equal to their market demand. The
Railroad Commission further requires that such purchasers must adhere to the
Ratable Take Rule and take gas by priority categories, ratably among
producers, without undue discrimination, and with high-priority gas (defined
as casinghead gas, or gas from wells primarily producing oil, and certain
special allowable gas that are the last to be shut-in during periods of
reduced market demand), having greater priority than gas well gas (defined as
gas from wells primarily producing gas), notwithstanding any contractual
commitments. A Texas state appellate court has determined, in a case to which
neither the Company nor any of its subsidiaries was a party, that certain
provisions of the Market Demand Rule are preempted by federal law and,
therefore, unconstitutional. The Railroad Commission has proposed revisions
to its Market-Demand and Ratable Take Rules to address, among other things,
this court decision. As originally proposed, such revised rules are intended
to simplify the current system of nominations and bring allowable production
in line with estimated market demand. Although management of the Company does
not anticipate any adverse consequences, the Company is unable to predict
what action, if any, the Railroad Commission may ultimately take in
connection with this matter and what rules, if any, may be adopted.
The Company's activities in connection with the operation of pipelines and
other facilities for transporting, processing, treating or storing natural
gas are subject to environmental regulation by federal and state authorities,
including the USEPA, the Texas Air Control Board (the "TACB"), the Texas
Water Commission (the "TWC") and the Railroad Commission. Compliance with
regulations promulgated by these various governmental authorities increases
the cost of planning, designing, installing and operating such facilities. In
most instances, the regulatory requirements relate to water, air and land
pollution and control measures. The Company believes it is currently in
material compliance with the measures set forth by the TACB, the TWC and the
Railroad Commission.
14
<PAGE>
Oil and Gas Exploration and Production
The oil and gas exploration and production operations of the Company are
subject to a number of local, state and federal environmental laws and
regulations. To date, compliance with such regulations by the Company has not
resulted in material expenditures.
All states in which the Company conducts oil and gas exploration and
production activities have laws regulating the production and sale of oil and
gas. Such laws and regulations generally are intended to prevent waste of oil
and gas and to protect correlative rights and opportunities to produce oil
and gas as between owners of interests in a common reservoir. Some state
regulatory authorities also regulate the amount of oil and gas produced by
assigning allowable rates of production to each well or unit. Recently there
has been a significant increase in the amount of state regulation, including
increased bonding, plugging and operational requirements. Such increased
state regulation has resulted in, and is anticipated to continue to result
in, increased legal and compliance costs being incurred by the Company. Based
on past costs, even considering recent increases, management of the Company
does not believe such legal and compliance costs will have a material adverse
effect on the financial condition or operations of the Company.
EMPLOYEES AND OFFICE FACILITIES
As of September 30, 1994, the Company employed 826 individuals, including
160 general and administrative employees and 666 operational employees.
The Company owns certain office facilities as follows:
Office Location Function
- - ----------------- ---------
Henderson, TX Oil and Gas Production Office
Henderson, TX Natural Gas Pipeline and Marketing Office
Lawrenceville, IL IRLP Office
Santa Fe Springs, CA Powerine Office
The Company also leases certain offices as follows:
Office Location Function
- - ----------------- ---------
Radnor, PA Corporate Headquarters
Houston, TX Crude Purchasing & Management and Administration
Mt. Pleasant, PA Oil and Gas Production Office
Pittsburgh, PA Drilling and Exploration Office
Tulsa, OK Oil and Gas Production Office
Calgary, Canada Oversight of Canadian Sourcing
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in a number of lawsuits
which are enumerated below. Management believes that it has provided adequate
reserves related to these matters and, accordingly, does not believe that the
ultimate outcome of these cases will have a material adverse impact on the
future results of operations or financial position of the Company. While
management believes that the $32.9 million accrual for environmental claims
as of September 30, 1994 is adequate, it is possible that remediation costs
could be as great as 150% of the amount accrued.
THE COMPANY
Stockholder Litigation
In January 1994, the Company was served with one complaint filed in the
United States District Court for the Central District of California (the
"District Court") and five complaints filed in the United States District
Court for the Eastern District of Pennsylvania, each of which alleged certain
violations of federal securities laws relating to developments regarding MG
and its affiliates. The lawsuit filed in California, entitled Leslie Susser
and Robert Susser v. Castle Energy Corporation, et al.; and the lawsuits
filed in Philadelphia, which were consolidated as a single action under the
title In Re Castle Energy Securities Litigation (the "Pennsylvania Action")
were filed as class action complaints on behalf either of all persons who
purchased the Company's Common Stock in its November 1993 public offering or
all persons who purchased the Company's Common Stock during various periods
from February 3, 1993 through January 14, 1994. The complaints sought
unquantified damages and other relief from the Company, MG and certain of the
Company's officers and directors. On June 7, 1994, the Judicial Panel on
Multidistrict Litigation ordered the Pennsylvania Action to be transferred to
the District Court for coordinated or consolidated pre-trial procedures under
the caption In re Castle Energy Corporation Securities Litigation (the
"Stockholder Litigation"). The District Court certified a class of persons
who purchased the Company's Common Stock during the period from February 3,
1993 through and including January 14, 1994.
In October 1994, the parties reached a settlement of the claims in the
Stockholder Litigation, including certain added derivative claims. On
December 5, 1994, after notice to class members and the Company's
stockholders, the District Court entered an order approving the settlement,
including approval of: (i) a payment to the plaintiff class and its attorneys
of $15 million, of which the Company's portion will not exceed $500,000 after
contribution by MG and application of insurance proceeds; and (ii) the MG
Settlement as fair and reasonable to the Company and its stockholders. On the
same date the District Court issued orders dismissing the Stockholder
Litigation (including the Pennsylvania Action) with prejudice.
UI Banque Note
In November 1994, the Company received a notice from UI Banque ("UI")
indicating that UI believes that the consummation of the MG Settlement
constituted an event of default under a loan agreement pursuant to which UI
had lent the Company $2.5 million in 1991. The Company does not agree with UI
and is discussing the matter with UI. If the Company's Indian Refinery is
sold, the Company intends to repay UI so the related lien will be released.
If the Indian Refinery is not sold, the Company does not believe that the
debt is due but nevertheless believes it has sufficient funds to repay UI
should repayment prior to maturity be required or be in the best interest of
the Company.
IRLP
People v. Indian Refining Co.
In October 1989, in connection with the IEPA's concern over contamination
from prior operators of the Indian Refinery, the Company's subsidiary, Indian
Refining Company ("IRC"), signed an Agreement in Principle with the IEPA
which requires IRC to conduct certain environmental tests to determine the
nature and extent of historical contamination at the Indian Refinery, to
develop remediation plans as necessary for the contamination revealed by the
testing, and to provide up to $1 million of financial security until the work
is completed. After execution of the Agreement in Principle, IRC and the IEPA
16
<PAGE>
signed a superseding Consent Agreement (the "Consent Agreement") which was
approved by the Circuit Court of Lawrenceville County, Illinois on May 14, 1992.
The legal action provides a forum with court supervision for the resolution of
any dispute which might arise regarding the conduct of the investigation.
Pursuant to the Consent Agreement, IRC has submitted irrevocable letters
of credit providing the required financial security and an approved
prioritization plan for conducting the eventual investigation. Pursuant to
the approved plan, the IEPA dropped any further requirements for 10 of the
original 33 solid waste management units ("SWMUs") at the site. In November
1993, IRC submitted a draft work plan. IRC projects that the testing program
will be substantially completed within the next 36 months.
In April 1990, during negotiations over the language of the Consent
Agreement, IRC sold a portion of its assets, including the Indian Refinery,
to IRLP. As part of its acquisition, IRLP agreed to fund $1 million per year
to IRC for eight years for environmental testing, studies and monitoring.
Although the formal studies required by the Consent Agreement have not
begun, IRC and IRLP each have conducted limited studies regarding
environmental conditions at the Indian Refinery. Areas of subsurface
contamination have been identified, but not categorized by type or quantified
by extent. Neither the contamination found to date nor any liabilities or
expenditures currently projected would have a material adverse effect on the
overall operation or competitive position of the Indian Refinery. There can
be no assurance, however, that the additional studies required by the Consent
Agreement will not reveal environmental contamination requiring expenditures
in excess of the amounts funded or that such liabilities and related
expenditures will not have a material adverse effect on the financial
condition or results of operations of the Company.
While under CERCLA Texaco would be liable for at least a portion if not
all of any cleanup costs arising out of its operation of the Indian Refinery,
in 1986 and again in 1988, Texaco's then-subsidiary, IRC, agreed to indemnify
Texaco for any environmental claims related to the Indian Refinery. While IRC
will contest the enforceability of the indemnity agreements, there can be no
assurance that Texaco will pay its appropriate share of any cleanup costs.
Other IEPA Matters
IRLP has received NOVs from the IEPA related to various air emissions
exceeding permit and regulatory limits. Most of these events occurred within
the first 18 months after restart while the Indian Refinery operations were
stabilizing and have been resolved. The one continuing NOV problem relates to
the opacity of IRLP's emissions from the fluid catalytic cracking unit
("FCCU"). The continuous emission opacity monitor on the FCCU records
periodic, short-term spikes above regulatory limits during cleaning
operations necessary to maintain the FCCU's pollution control equipment. In
cooperation with the IEPA, IRLP is experimenting with alternative cleaning
methods that reduce the duration and severity of the spikes. IRLP has filed a
variance request with the Illinois Pollution Control Board to seek a
determination of compliance or alternatively, to provide interim relief. IRLP
also filed a petition in October 1994 for a site-specific rule which would
exempt the FCCU from the opacity restrictions. The IEPA has referred this
matter to the Illinois Attorney General's Office in order to evaluate whether
to bring an enforcement action related to the opacity readings.
Since 1990, the Indian Refinery experienced process system upsets which
resulted in water discharges exceeding various permit parameters. The IEPA
and IRLP have agreed to settle claims based upon all exceedances of the NPDES
limits occurring through August 31, 1994 by IRLP's payment of a $25,000 fine.
In December 1994, IRLP filed a provisional variance request with the IEPA.
The variance request is related to the emmission of smoke from IRLP's flare
system during repairs to one of the flare heads.
United States Environmental Protection Agency Matters
During the summer of 1994, IRLP reported several low level sulfur dioxide
releases at the Indian Refinery. In September 1994, the USEPA issued an
information request to IRLP regarding these sulfur dioxide emissions. IRLP
submitted its response in mid-November 1994, and is preparing to meet with
the USEPA. In addition, the IEPA has asked IRLP to attend a pre-enforcement
conference to discuss these releases.
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In the first quarter of 1995, IRLP will produce conventional gasoline and
most likely will be capable of producing reformulated gasoline in compliance
with the applicable federal standards. IRLP's ability to make conventional
and reformulated gasolines consistently meeting the baseline standards
requires completion of various capital projects. Because of the financial
difficulties caused by the financial problems of MG and its affiliates in
late 1993, IRLP was unable to complete those projects by June 1994 as
originally scheduled. IRLP currently expects to complete the essential
capital projects by the end of January 1995 and complete various less
critical projects by the first quarter of 1995.
IRLP has filed a variance petition with the USEPA seeking relief from the
baseline gasoline standards during the first half of 1995. Because the
standards for baseline gasoline must be met on an annual average basis, IRLP
will be able to comply with the annual average for 1995 even if the USEPA
denies the variance. IRLP would comply by purchasing gasoline additives to
meet the required contaminant limits at a cost of less than one million
dollars per month for the first four months of 1995.
IRLP currently is able to produce low sulfur diesel meeting the applicable
federal standards.
IRC and IRLP v. IEPA
As the former owner of the Indian Refinery, Texaco operated 13 hazardous
waste storage tanks. IRLP now owns 12 of those tanks and operates the 13th on
IRC property. The IEPA has approved the clean closure of five of the 13
tanks. As for the status of the remaining eight tanks, in 1991, the IEPA
originally set cleanup standards to which IRC and IRLP objected. IRC and IRLP
appealed to the Illinois Pollution Control Board. The parties then stayed the
litigation. Since then, the IEPA, IRC and IRLP have agreed upon an
alternative testing program to set cleanup standards for the soils within the
bermed area around the tanks. As part of that agreement, in October 1993 the
IEPA withdrew its previously established cleanup standards and IRLP and IRC
withdrew their appeal to the Illinois Pollution Control Board. The IEPA
approved the work plan for the testing program. In July 1994 the final report
regarding the tests on contaminated soil was submitted for the IEPA's review.
IEPA and IRC met in November 1994 to discuss the IEPA's comments regarding
the report, and IRC is revising the report to address the IEPA's comments.
Upon completion of the alternative testing program, the parties will
negotiate over soil cleanup standards for the tank berm areas should any
cleanup be necessary.
IRC v. IEPA
As the former owner of the Indian Refinery, Texaco operated a hazardous
waste treatment unit (the "Landfarm") on property now owned by IRC. Since
1989, IRC has been closing this unit under the supervision of the IEPA. In
March 1993, the IEPA set cleanup objectives for the closure as part of the
approval of the Landfarm closure plan. In April 1993, IRC appealed the
cleanup objectives to the Illinois Pollution Control Board. The parties
negotiated over setting different cleanup objectives for the Landfarm or
deferring the issue until completion of the sampling already scheduled as
part of the closure plan. IRC and the IEPA have now reached an oral agreement
that will delete most of the challenged conditions, including the clean-up
objectives. IRC and IEPA are currently finalizing a revised closure approval
letter. IRC's current estimate of closure costs, excluding the appealed
cleanup objectives, is $403,000 with an additional $1.47 million for
post-closure care.
Other IRC Matters
In July 1994, T.H. Agriculture & Nutrition Company, Inc. ("THAN") sent IRC
a letter stating that IRC owned or operated a particular site in
Indianapolis, Indiana from May 1907 to May 1944. THAN, a former owner of the
site, and Harcros Chemicals, Inc., the site's current owner, have asked IRC
to assist in the investigation of potential soil and groundwater
contamination at the site and any resulting remediation.
IRC has no record of operating any facility in Indianapolis. THAN provided
title records suggesting that the Indianapolis property was once owned by a
company known as the Indian Refining Company, a Maine corporation
headquartered in Kentucky. Historical corporate records show that the Maine
corporation was incorporated in 1907 and dissolved in August 1958.
IRC, however, was incorporated in Delaware in 1943. IRC is in the process
of notifying THAN that IRC is a separate company and had no connection with
the Indianapolis site.
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Indiana Department of Environmental Management
In 1991, IRLP experienced two spills of gasoline at the Indian Terminal in
Indiana. Testing completed in December 1993 disclosed the potential presence
of contamination in the soil and groundwater near the tank which was the
source of the spill. IRLP is conducting further testing to delineate the
scope of the contamination.
In connection with these spills and subsequent remedial activities, IDEM
has issued two NOVs to IRLP. The first NOV concerns IRLP's alleged late
reporting of the two incidents to IDEM. The second NOV relates to IRLP's
purported failure to proceed promptly with remedial activities.
IDEM has asked IRLP to pay a fine of less than $50,000 in connection with
these NOVs. To date, IRLP and IDEM have not reached an agreement but one is
expected shortly.
During field investigations concerning the gasoline plume, IRLP also
discovered methyl tertiary butyl ether ("MTBE") in the groundwater. IRLP has
never used MTBE and former Texaco employees have advised IRLP that Texaco
also never used MTBE at the Mount Vernon Terminal. IRLP believes that the
MTBE originated from a nearby pipeline leading to another refinery.
In late October 1994, IRLP was contacted by the local sewer authority
regarding gasoline contamination that the authority had allegedly detected in
sewer lines near the Indian Terminal. IRLP investigated to determine if it
was the source of the contamination. In early November 1994, IRLP discovered
a leak in one of its pipelines that was located near the contaminated sewer
line. IRLP has excavated the most contaminated soil and is investigating the
extent of the remaining contamination.
Lauren Constructors, Inc.
On September 22, 1994, Lauren Constructors, Inc. ("Lauren") filed a
lawsuit in the Circuit Court for the Second Judicial Circuit, Lawrence
County, Illinois against IRLP and its general partner. The suit alleges that
IRLP breached a construction contract with Lauren by improperly terminating
the contract and by failing to pay for work allegedly performed by Lauren at
the Indian Refinery. Lauren seeks damages of $887,436.42 plus interest for
amounts allegedly due under the contract. Lauren also seeks damages in an
unspecified amount for the value of property allegedly converted by IRLP and
consequential damages for losses incurred because of Lauren's decreased
business operations and loss of bonding capacity. Lauren's lawsuit also seeks
to foreclose a mechanic's lien against the Indian Refinery in the amount
Lauren alleges is due under the contract.
IRLP and its general partner filed their Answer to Lauren's Complaint on
November 18, 1994, denying Lauren's claims and counterclaiming for damages.
The Counterclaim alleges that Lauren breached the contract by failing to
complete the required construction by the mechanical completion date
specified in the contract as extended by agreement of the parties. The
Counterclaim also alleges Lauren breached the warranties it gave IRLP by
failing to perform and test welding work in a good and workmanlike manner.
IRLP seeks damages of $126,000 for Lauren's breach of warranty and an
unspecified amount of damages for Lauren's breach of contract, including lost
profits relating to Lauren's delay and IRLP's costs of completing the
construction.
Long-Term Supply Agreement
IRLP is a party to a Long-Term Supply Agreement (the "LTSA") with Shell
for the supply of Caroline Condensate feedstock to the Indian Refinery. MGRM
is the alternate purchaser under the LTSA in the event IRLP should fail to
perform. Beginning on November 14, 1994, Shell engaged in correspondence with
MGRM and the Company asserting that Shell had a right under Illinois Uniform
Commercial Code Section 2-609 ("Section 2-609") to obtain assurances that
MGRM could perform its obligations as an alternate purchaser in light of the
terms of the MG Settlement.
On December 23, 1994, Shell filed suit in the United States District Court
for the Northern District of Illinois against IRLP and its general partner,
Indian Refining & Marketing, Inc., and MGRM. The suit, which seeks to
terminate the LTSA, contends that MGRM has anticipatorily repudiated the LTSA
under Section 2-609 and that the transactions contemplated by the MG
Settlement frustrate the purpose of further performance of the LTSA, and
render further performance of the LTSA impossible.
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The termination of the LTSA would have a materially adverse impact on the
operating results of IRLP, which management estimates could be a loss of
gross margin of $8,000,000 per year. In addition, the lawsuit could preclude
sale of the Indian Refinery or significantly reduce the purchase price
obtainable.
The Company believes that Shell's requests of MGRM and its lawsuit have no
merit and is vigorously opposing Shell's attempt to terminate the LTSA. Shell
has separately represented to the Company that it will continue to perform
its obligations under the LTSA pending the outcome of the lawsuit.
Powerine
Under CERCLA and analogous state statutes, historically lawful disposal
activities may give rise to claims for significant, retroactive liability for
cleanup of contaminated sites. These statutes have been construed to impose
joint and several liability so that any one of the potentially responsible
parties ("PRPs") could be liable for all costs associated with the
environmental contamination.
OII Site
Powerine has been identified as a 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 1948-1984, 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 such site. In
addition to the City of Los Angeles, which used the OII Site for municipal
waste, Powerine is one of over 250 industrial companies identified to date as
PRPs.
Based on the total volume of waste (both hazardous and non-hazardous) at
the OII Site which has been attributed to Powerine by the USEPA, Powerine's
alleged liability for the first three portions of the cleanup is estimated to
be in the range of $6 million to $7 million. The government plaintiffs and
most PRPs have executed several partial consent decrees for the first three
portions of the cleanup 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. Because the
cost for complete remediation of the OII Site has not yet been determined,
the total amount of Powerine's alleged liability, if any, is unknown.
Recent cost estimates indicate that the total cost for complete
remediation of the site is approximately $500 million to $600 million. If
these estimates are accurate, Powerine's alleged liability at the site could
be as high as $10 to $12 million assuming that Powerine's allocation is based
on its current percentage of the total industrial volume (1.96 percent). The
private PRPs conducting the work may file a contribution claim against
Powerine and, if so, Powerine will contest the alleged liability on several
grounds. 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.
On September 7, 1994, a group of over ninety plaintiffs filed a "toxic
tort" complaint in California Superior Court against almost all of the OII
PRPs. Although Powerine was not named in the suit, Long Beach Oil Development
Company, the entity to which Powerine surrendered a portion of its Long Beach
drilling rights in 1986, was named in the action.
On October 31, 1994, the USEPA informed Powerine that it intends to offer
all nonsettling PRPs, including Powerine, another opportunity to resolve
their liability with respect to the first three Partial Consent Decrees at
the OII Site. The USEPA has raised Powerine's volume, however, from its
former 4.17 million gallons (1.96%) to 6.06 million gallons. Powerine is
unable to calculate its revised allocation percentage, however, because it
does not know how much the USEPA has revised the volume of the other PRPs. On
January 3, 1995, Powerine submitted a challenge to approximately 1.3 million
gallons of those attributed to Powerine by the USEPA. Powerine is evaluating
whether to enter into a settlement agreement with the USEPA under these
terms.
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Stringfellow Site
In 1982, Powerine was named a PRP in the clean-up of the former waste
disposal site known as the Stringfellow Site in Riverside County, California
(the "Stringfellow Site"). The Stringfellow Site is listed on both the state
and federal superfund lists. Since being named as a PRP, Powerine has been
sued by a number of private parties with regard to the Stringfellow Site. In
addition, because the laws that govern the clean-up of the Stringfellow Site
have been construed to authorize joint and several liability, the USEPA could
seek to recover all of its oversight costs involving the Stringfellow Site
from Powerine despite the involvement of other PRPs. In connection with its
1984 bankruptcy reorganization proceedings, Powerine entered into a
stipulation with these plaintiffs estimating their claims at an aggregate sum
of $1 million for the purposes of sharing the proceeds of distributions to
unsecured general creditors from the bankruptcy estate. In July 1985, the
bankruptcy court confirmed Powerine's plan of reorganization, thereby
discharging pre-petition claims. Despite receiving notice of the
reorganization plan, neither the USEPA nor the State of California filed any
claims against Powerine prior to the discharge. In March 1991, Powerine
received a notice from the USEPA inviting Powerine to participate in
negotiations with the USEPA regarding the most recent work at the site.
Powerine has responded to the USEPA by notifying the USEPA of Powerine's
discharge in bankruptcy. Powerine will continue to defend itself vigorously
against any claims by the USEPA.
Waste Disposal Inc. Site
On April 5, 1994, Powerine received notice from the USEPA naming Powerine
as a PRP in connection with the Waste Disposal, Inc. Site located in Santa Fe
Springs, California (the "Waste Disposal Site"). The USEPA estimates that the
cost of cleaning up the soil at the Site is approximately $4 million. The
USEPA also is seeking reimbursement of $3.8 million in past costs.
On July 1, 1994, Powerine informed the USEPA that Powerine would not
participate in the cleanup at the Waste Disposal Site because any claim the
USEPA had against Powerine with respect to the Waste Disposal Site was
discharged in bankruptcy and other defenses. On August 8, 1994, the USEPA
issued an administrative order to the other PRPs at the Waste Disposal Site,
but not to Powerine. The order requires the other PRPs to clean up the Waste
Disposal Site or face administrative penalties. It is unknown whether the
other PRPs will file contribution claims against Powerine to recoup
Powerine's alleged portion of the cleanup costs.
Thomas Ranch Site
On January 5, 1994, Western Properties Services Corporation ("WPSC")
notified Powerine that it believed that Powerine was responsible for
contributing to environmental contamination at the Thomas Ranch Site in
Corona, California (the "Thomas Ranch Site"). WPSC claims that during the
early 1940s, certain oil refineries in the Los Angeles Basin area arranged
for the disposal of refinery wastes in sludge ponds at the Thomas Ranch Site.
WPSC alleges that Powerine generated some or all of the waste in the ponds
and/or held a share of the market which produced the products resulting in
such waste.
On July 22, 1994, WPSC served a complaint against Powerine, along with
other Los Angeles area refiners, with respect to the Thomas Ranch Site. On
September 19, 1994, Powerine filed its answer to the complaint denying
liability. Following discovery, Powerine intends to file a dispositive motion
seeking summary judgment in its favor on all claims.
On November 7, 1994, Powerine attended a discovery/settlement conference
in the Thomas Ranch Site matter. At the meeting, WPSC agreed not to propound
written discovery requests until after the court resolves another defendant's
outstanding motion to dismiss. The motion to dismiss, which is fully briefed,
directly addresses the liability of all parties under plaintiff's market
share theory. A hearing on the motion to dismiss currently is scheduled for
January 23, 1995.
Torco Property
On April 1, 1991, counsel for Dascoa, Inc., formerly Torco U.S.A.
Lubricants Corporation ("Torco"), the owner and operator of property located
adjacent to the west end of the Powerine Refinery, notified Powerine of
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volatile organic and petroleum hydrocarbon soil contamination along the
eastern border of its property. Torco asserted that Powerine's pipeline and
refinery activities were responsible for the contamination. Torco demanded
that Powerine reimburse it for any costs and expenses associated with the
removal of the contamination.
Since this initial demand letter, there have been numerous exchanges
between the two parties. On August 10, 1993, Powerine advised Torco that it
saw no basis for Torco's claim that Powerine was responsible for a portion of
the $2 million cleanup of Torco's property. On June 6, 1994, Torco responded
disputing Powerine's interpretation of the data. Powerine is in the process
of preparing a response.
California Regional Water Quality Control Board
In August 1985, the RWQCB issued an order to refineries in the Los Angeles
region to determine, through site investigations, the existence and extent of
any soil and groundwater contamination. Those investigations were completed
by IT Corporation in 1986 on behalf of Powerine and have been updated several
times. Copies of those reports have been provided to the RWQCB and other
agencies. Powerine has installed both onsite and offsite monitoring wells and
samples the wells on a quarterly basis. Powerine has identified soil
contamination and free hydrocarbon floating on the surface of the groundwater
in some wells and hydrocarbon contamination of the groundwater, both of which
extend beyond the boundaries of the Powerine Refinery. In 1990, Powerine
submitted a remediation plan to the RWQCB, but has not yet received a
response.
Although regulatory authorities have taken no action, Powerine is
proceeding to address the subsurface contamination issues at the refinery. In
February 1994, Powerine requested proposals from various experienced
groundwater investigation and remediation engineering firms. Powerine
subsequently selected TriHydro Corporation to complete the investigation
determining the extent of the groundwater plume and developing potential
remedial options. TriHydro has quoted projected costs for 1994 and 1995 at
between $75,000-150,000 for delineation of the plume.
On July 27, 1994, Powerine submitted a workplan to the RWQCB for this next
phase of the investigation. RWQCB had relatively minor comments and Powerine
is in the process of implementing the workplan. Powerine projects eventual
remediation costs at a present value of $2.5 million total through 2000.
On January 3, 1992, the RWQCB -- San Diego Region, issued Cleanup and
Abatement Order No. 92-01 to five owner/operators of above ground petroleum
storage tanks, including Powerine. The order directs the five owner/operators
to assess the extent and concentration of subsurface petroleum hydrocarbon
contamination in and around the Mission Valley Terminal property owned by
Santa Fe Pacific Pipeline. The order further requires the owners/operators to
submit a corrective action plan for the contamination. Powerine is currently
investigating the degree of its involvement, if any, with the activities
which are the subject of the order. At present, capital costs and future
operating expenses for the Mission Valley Terminal remediation are estimated
to be $3 million. Powerine believes that its share of the remediation costs
should not exceed 12%, but the other PRPs are demanding that Powerine pay at
least 25%. Negotiations are ongoing.
RWQCB notified Powerine that Powerine was considered a PRP in connection
with the contamination of soil and groundwater along a portion of Powerine's
crude oil pipeline connecting the Powerine Refinery to the Long Beach
Terminal. Powerine has investigated the RWQCB's allegations, has concluded
that they are without foundation, and has responded to the RWQCB accordingly.
Historically, Powerine sold jet fuel to the United States Defense Supply
Center located approximately two miles south of the Powerine Refinery. Fuel
was transferred to the Defense Center by a pipeline running near a retail
service station (the "ARCO Station"), which Powerine believes is owned by
ARCO Products Company ("ARCO Products"). During a 1987 investigation into
leaking underground storage tanks, ARCO Products purportedly learned that at
least some of the contamination may have contained jet fuel components.
In April 1993, the RWQCB orally notified Powerine that jet fuel had been
found at the ARCO Station and requested that Powerine join a consortium of
pipeline owners to investigate the nature and extent of the contamination.
Upon review, however, Powerine determined that its pipeline was downgradient
of the release at the ARCO Station and that other pipelines in the vicinity
leading to the same jet fuel storage depot might be the actual source of any
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jet fuel contamination. The RWQCB had not made any further requests of
Powerine. The RWQCB recently indicated in a letter to ARCO Products, however,
that it was preparing a Cleanup and Abatement Order for the jet fuel
contamination. It is unknown whether the RWQCB will name Powerine as a recipient
of the Order.
California Department of Toxic Substances Control
Powerine formerly neutralized acid streams in a concrete tank. Powerine
now uses in-line neutralization and has applied to close its former treatment
tank. California's Department of Toxic Substances Control ("DTSC") recently
approved Powerine's closure plan and Powerine has submitted sampling data
taken from the vicinity of the former neutralization tank. Once Powerine has
completed its review, Powerine will request a formal closure letter from DTSC
and will then backfill the neutralization tank.
In January 1992, Powerine received a request for information from the DTSC
in connection with the DTSC's investigation of soil and groundwater
contamination on the property adjacent to the Powerine Refinery which
Powerine leased from 1968 to 1986 (the "Walker Property"). Powerine no longer
has an interest in the property. The DTSC requested Powerine, along with
several other third parties who may have operated facilities or had an
interest in the property, to provide information relative to operations at
the Walker Property. The DTSC has not made any claims against Powerine, nor
has any other party made any allegations that Powerine is responsible for any
of the contamination the DTSC is investigating. After Powerine responded to
the request for information, the DTSC entered an order directing other PRP's
to proceed with remediation of a large portion of the site. On October 8,
1993, Powerine received correspondence from one of the PRP's regarding the
status of the site. The letter did not request that Powerine contribute
financially or otherwise participate in the work being done at the site but
explained that additional information would be provided to Powerine as the
work proceeded. On July 19, 1994, DTSC issued a supplemental request for
information to Powerine concerning the Walker Property Site. Powerine
responded to the request on August 19, 1994, and has had no further contact
with the state or other parties since then.
Arizona Department of Environmental Quality
On October 16, 1992, the Arizona Department of Environmental Quality (the
"ADEQ") invited Powerine, as one of eleven companies leasing space in a
petroleum storage and distribution facility located in Phoenix, Arizona (the
"Phoenix Terminal"), to participate in or finance a portion of an ongoing
subsurface and groundwater investigation in the area.
Powerine voluntarily originally joined a group investigating a small
hydrocarbon plume located near the Phoenix Terminal and paid approximately
$35,000 towards the cost of the investigation. Additional analysis indicates
that Powerine appears to have no responsibility for the hydrocarbon plume or
for a larger regional chlorinated solvent problem in the Phoenix area.
Powerine is currently negotiating with the ADEQ regarding the scope of
additional sampling that the ADEQ has requested at the Site.
South Coast Air Quality Management District
Powerine has received 26 NOVs from the SCAQMD in the last year related to
various air emissions and regulatory limits. Powerine hopes to resolve the
NOVs as a group sometime in the near future. Powerine's realistic financial
exposure is approximately from $100,000-225,000.
Powerine also has received a NOV with respect to Powerine's alleged
failure to include certain additives in its product stream. The violation
occurred after a plant start-up and has since been rectified. Powerine
intends to settle this matter following the resolution of similar complaints
against other area refineries.
Powerine also recently received a NOV with respect to a sulfur dioxide
release into the atmosphere. The release, which occurred on October 13, 1994,
resulted from an upset condition at the refinery. Powerine immediately
notified the Santa Fe Springs Fire Department of the release and the problem
was corrected in a short time.
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After the release, students and staff members at three local schools
reported some respiratory problems. The Santa Fe Springs Fire Department
responded and approximately 42 people were transported to local medical
facilities for treatment and observation. Local medical facilities later
advised Powerine that one school staff member was admitted to the hospital
for observation and all others were treated and released. Powerine has paid
all of the medical expenses of the affected individuals. Powerine also is in
the process of installing additional monitoring equipment and developing an
action plan regarding the notification of local schools in the event that a
similar release occurs in the future.
Formerly Owned Retail Gas Stations
On August 3, 1993, Powerine was served with a complaint in California
state court by Levonard A. Thomsen and Margaret S. Thomsen alleging that
Powerine is partially responsible for soil and groundwater contamination
caused by leaking underground storage tanks on property previously leased by
Powerine. Powerine had operated the property as a retail gasoline service
station. The complaint seeks compensatory and punitive damages as well as a
permanent injunction to compel Powerine to clean up the property in
accordance with applicable laws.
Claims against Powerine are proceeding on the theory that Powerine remains
responsible during the period that it assigned the property to subsequent
operators. There is no allegation that any materials leaked from the
underground storage tanks during the period of Powerine's actual operations.
Powerine has filed a dispositive motion seeking entry of judgment in its
favor. The court denied Powerine's action on December 20, 1994. The parties
currently are exploring outside mediation as a means to resolve the dispute.
On July 16, 1992, the Padre Dam Municipal Water District ("Padre Dam")
filed an action in California Superior Court against E-Z Serve Petroleum
Marketing Company ("E-Z Serve"). Padre Dam's complaint alleges that petroleum
leaks from a gasoline station located in Santee, California and operated by
E-Z Serve (the "E-Z Serve Station") contaminated adjacent sewer and water
lines owned by Padre Dam. On July 12, 1994, E-Z Serve filed a third-party
complaint against Powerine, alleging that Powerine, Phillips 66 and Super Cal
A Gas operated a gasoline station (the "Phillips Station") on a property
adjacent to the E-Z Serve Station between the years 1964 to 1972. E-Z Serve
further asserted that the Phillips Station released petroleum into the
groundwater on a yearly basis during its entire operation. Powerine allegedly
operated the Phillips Station from 1964 to 1965. Based on the discovery
conducted to date, there appears to be no evidence that Powerine is
responsible for any of the petroleum contamination at the E-Z Serve Station.
On November 9, 1994, E-Z Serve offered to settle its cross- claim against
Powerine for $20,000. Powerine currently is negotiating with E-Z Serve.
During the past 30 years, Powerine owned or leased approximately 150
service station properties. The foregoing actions are the only ones to allege
environmental contamination associated with any of Powerine's retail gas
station interests. Powerine presently has an interest in only three service
station properties.
Other Matters
The Los Angeles County Department of Public Works (the "DPW") has informed
Powerine that it considers the four API separators operated at the Powerine
Refinery to require underground storage tank permits. Powerine responded to
the DPW in October 1991 by informing the DPW that the API separators are
exempt from permit requirements pursuant to definitional exemptions set forth
in the underground storage tank regulations issued by the State of California
Water Resources Control Board. Powerine's response to the DPW included a
reference to other Los Angeles Basin refineries that have not been required
by the DPW to permit their API separators as underground storage tanks. The
DPW has not responded to Powerine's position.
On November 30, 1994, Powerine received a NOV from the Los Angeles
Sanitation District (the "LA Sanitation District") regarding alleged
violations of its industrial wastewater discharge permit. The LA Sanitation
District has informed Powerine that it will be taking more frequent samples
of Powerine's wastewater discharges over the next two months as a result of
the NOV.
Asbestos Complaints
In September 1994, Powerine was served with two personal injury complaints
relating to asbestos exposure. In the first case, an oil refinery worker
employed at various Los Angeles area refineries alleges that he contracted
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mesothelioma from exposure to asbestos fibers during the course of his
employment. In the second case, the spouse of an insulation contractor who
worked at a number of refineries in the Los Angeles area alleges that she
contracted mesothelioma from exposure to asbestos fibers on her husband's
clothes. In both cases, the plaintiff also sued numerous other asbestos
contractors and refineries in addition to Powerine. Powerine has filed answers
to each complaint denying liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders during the fourth quarter of fiscal 1994.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDERS'
MATTERS
PRINCIPAL MARKET
The Company's Common Stock is quoted on the Nasdaq National Market ("NNM")
under the trading symbol "CECX".
STOCK PRICE AND DIVIDEND INFORMATION
Stock Price:
The table below presents the high and low sales prices of the Company's
Common Stock as reported by the NNM for each of the quarters during the two
fiscal years ended September 30, 1994 as adjusted to give effect to the
1-for-2 reverse stock split effected on November 12, 1993:
Fiscal Year Ended September 30,
------------------------------------------
1993 1994
-------------------- --------------------
High Low High Low
-------- -------- -------- --------
First Quarter (December 31) . $ 8.50 $ 4.50 $25.00 $11.00
Second Quarter (March 31) ... 15.25 7.50 14.50 7.25
Third Quarter (June 30) ..... 17.00 8.50 15.00 9.75
Fourth Quarter (September 30) 20.00 13.00 19.00 11.50
The final sales price of the Company's Common Stock as reported by the NNM
on December 30, 1994 was $11.50.
Dividends:
The Company has not adopted a formal dividend policy and has not declared
a dividend since 1989. Several of the loan agreements in place with
subsidiaries of the Company restrict the subsidiaries from distributing cash
to the Company until the debt obligations are satisfied. Accordingly, the
subsidiaries' profits are generally not available for dividends.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of December 31, 1994, the Company's Common Stock was held by
approximately 2,000 stockholders.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
During the Company's five fiscal years ended September 30, 1994, the
Company consummated a number of transactions affecting the comparability of
the financial information set forth below. In August 1989, the Company
acquired the Indian Refinery. From April 1990 until November 1990, the
Company performed refurbishment work on the Indian Refinery and recommenced
operations in November 1990. In February 1992, the Company entered into the
Indian Offtake Agreement, which was restructured and extended in May 1993. In
December 1992, the Company acquired certain assets from ARCO. In June 1993,
the Company sold its business of administration of oil and gas partnerships.
In October 1993, the Company acquired the Powerine Refinery. During 1994, the
Company reached a settlement with MG and its affiliates which will affect the
future results of operations. See Item 7. Management's Discussion and
Analysis of Financial Condition and Note 26 to the Company's Consolidated
Financial Statements included in Item 8. Financial Statements and Financial
Statement Schedules.
The following selected financial data has been derived from the
Consolidated Financial Statements of the Company for each of the five years
ended September 30, 1994. The information should be read in conjunction with
the Consolidated Financial Statements and notes thereto included in Item 8.
Financial Statements and Financial Statement Schedules and Item 7.
Management's Discussion and Analysis of Financial Condition.
<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30,
--------------------------------------------------------
(in Thousands, except per share amounts)
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Refining ............................................................ -- $117,927 $344,770 $532,010 940,514
Natural gas production and transmission ............................. -- -- -- 56,676 61,259
Exploration and production .......................................... $ 7,713 7,709 5,165 10,124 8,552
Gross Margin:
Refining ............................................................ -- 7,856 63,340 101,611 244,292
Natural gas production and transmission ............................. -- -- -- 22,235 24,230
Exploration and production .......................................... 5,712 5,379 3,372 7,469 4,707
Earnings (loss) before interest, taxes, depreciation, and
amortization:
Refining ............................................................ -- (61,809) (25,052) 40,349 88,253
Natural gas production and transmission ............................. -- -- -- 20,361 22,003
Corporate general and administrative ................................ (1,607) (1,707) (1,706) (2,191) (5,499)
Exploration and production .......................................... 4,590 4,189 2,181 5,940 4,494
Depreciation, depletion and amortization ............................. 1,609 16,876 11,136 22,185 43,774
Interest expense ..................................................... -- 11,098 13,640 21,111 28,487
Interest income and other income (expense) ........................... 1,425 (11,808) (2,835) 2,190 2,453
Income (loss) before provision for (recovery of) income taxes ........ 2,799 (99,109) (52,188) 23,353 39,443
Provision for (recovery of) income taxes ............................. 224 (17) 81 (35,970) 526
Minority share of loss ............................................... -- 8 -- -- --
Net income (loss) before cumulative effect of a change in
accounting principle ................................................. 2,575 (99,084) (52,269) 59,323 38,917
Cumulative effect of change in accounting principle -- adoption
of FAS 109 ........................................................... -- -- -- 8,514 --
Net income (loss) .................................................... 2,575 (99,084) (52,269) 67,837 38,917
Net income (loss) per share before cumulative effect of a change in
accounting principle ................................................ $ 0.72 ($ 21.20) ($ 8.22) $ 7.84 $ 3.48
Net income (loss) per share .......................................... $ 0.72 ($ 21.20) ($ 8.22) $ 8.96 $ 3.48
Balance Sheet Data (at End of Period) ................................
Working capital (deficit) ........................................... ($ 21,354) ($88,952) $ 6,451 $47,462) ($22,769)
Property, plant and equipment, net, including oil and gas
properties ........................................................ 57,481 82,818 85,420 150,299 339,876
Total assets ........................................................ 113,456 110,732 167,873 392,738 646,491
Long-term debt, including current maturities ........................ 36,756 127,364 202,860 199,020 394,123
Stockholders' equity (deficit) ...................................... 46,625 (37,749) (89,124) (9,387) 37,920
</TABLE>
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is primarily engaged in petroleum refining in the United
States, with additional operations in natural gas marketing and oil and gas
exploration and production. Until August 1989, the Company was involved in
only one segment of the petroleum industry -- oil and gas production,
including the administration of related oil and gas partnerships. At that
time, the Company began shifting its primary focus and made a material
investment in the refining segment of the petroleum industry by acquiring the
Indian Refinery.
The Indian Refinery was acquired in August 1989. From April 1990 until
November 1990, IRLP performed refurbishment work and in November 1990
commenced refining operations. All expenditures related to the Indian
Refinery were capitalized until operations commenced, so refining activities
did not affect consolidated operations until the fiscal year ended September
30, 1991. Since commencing refining operations, IRLP has processed and sold
refined products to third parties, has processed refined products for MGRM
under a Processing Agreement with MGRM (the "Indian Processing Agreement")
and has processed and sold all of its refined products to MGRM under the
Indian Offtake Agreement.
During the period from October 1, 1991 through January 31, 1992, IRLP
processed crude oil for MGRM pursuant to the Indian Processing Agreement.
Under that arrangement, IRLP earned a fixed fee per barrel of crude
processed, was entitled to receive as an additional processing fee 100% of
any profits earned by MGRM on sales of the processed product and related
activities and was required to indemnify MGRM for 100% of any losses incurred
by MGRM on such sales and related activities.
On February 1, 1992, IRLP commenced processing and selling refined
products exclusively to MGRM under the Indian Offtake Agreement. Under the
Indian Offtake Agreement, IRLP currently sells all of its refined product
output to MGRM at a price related to near month West Texas Intermediate crude
prices.
On December 3, 1992, the Company acquired from ARCO the Lone Star
Contract, a 77-mile intrastate gas pipeline located in Rusk County, Texas,
majority working interests in 100 producing oil and gas wells and several gas
purchase contracts for an aggregate purchase price of approximately $103.7
million including liabilities assumed and transaction costs.
In June 1993, the Company sold its business of administration of oil and
gas partnerships.
As of October 1, 1993, the Company acquired Powerine, which owns a 49,500
B/D refinery in Santa Fe Springs, California. The results of operations of
Powerine are included in the refining segment for the year-to- date period
ending September 30, 1994. During the year ended September 30, 1994, Powerine
operated under the Powerine Offtake Agreement and sold substantially all of
its refined products at a $10.20 increment to near month Alaskan North Slope
crude prices.
As of September 30, 1994, the Company's environmental liabilities
aggregated $32.9 million, including $1.9 million of current environmental
liabilities and $31 million of long-term liabilities. Of the $1.9 million in
current liabilities, $1.1 million relates to hazardous waste removal. The
remaining $800,000 of current liabilities and $31 million of long-term
liabilities relates to potential remediation and related environmental
assessments. If the Refinery Transactions are completed as planned, SIPAC
will assume all $32.9 million of the Company's environmental liabilities and
the Company will retain no recorded environmental liabilities. See Item 3 --
Legal Proceedings.
As a result of the foregoing, retrospective period by period comparisons
of all three segments in which the Company operates (refining, natural gas
marketing and exploration and production) may not be meaningful.
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 3.6 million shares of the
Company's Common Stock to the Company in exchange for approximately $39.8
million of participations the Company held in debt obligations of the Company
and its affiliates to MGTFC.
28
<PAGE>
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 million under
its senior facility with Societe Generale (the "Senior Facility"), together
totaling approximately $322 million, (b) transferred back to the Company the
remaining 969,000 shares of Common Stock held by MG and a $5.5 million
debenture convertible into 500,000 shares of the Company's Common Stock, (c)
issued the Company a $10 million note payable in 3 years, (d) terminated all
of its interests in the Company's natural gas operations and (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. In exchange for the foregoing, IRLP and Powerine (i) amended
the Offtake Agreements to terminate on February 1, 1995, (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 also entered into a four-year natural gas swap
agreement.
The completion of the transactions contemplated by the MG Settlement has,
among others, three consequences for the Company. First, on February 1, 1995,
the Offtake Agreements will terminate and the Company will have to market its
own products and, therefore, will be subject to market risks. Second,
effective March 31, 1995, the working capital facilities provided by MGTFC
will terminate and the Company will need to arrange other financing for its
Refinery operations. Third, for Federal and state income tax purposes, the
Company recognized income of approximately $390 million, on which, after
giving effect to applicable net operating loss and other tax carryovers and
other items of expense and deduction, Federal and state income taxes of
approximately $91 million will be owing.
The Company began to explore its options for dealing with these
consequences before and during the negotiation of the MG Settlement. The
Company considered a number of alternatives, ranging from continuing its
Refinery operations on substantially the same basis as prior to the MG
Settlement, but obtaining new working capital financing and a new customer
base, to selling or closing the Refineries. The Company believed, however,
that it would need to raise substantial new equity for the payment of its
income taxes, in addition to raising the working capital financing for the
Refineries, if it decided to continue the Refinery operations. Further,
continuing the Refinery operations would require the Company to add
significant marketing personnel, expertise and expense. On the other hand,
closing the Refineries would result in substantial shut-down costs, including
severance obligations to employees and potential environmental clean-up
costs, although it would allow the Company to write-off the costs of its
Refineries to substantially reduce its taxes. The Company believes that the
working capital of the Refineries would be adequate to provide for such
severance obligations and environmental costs. Based upon these factors, the
Company early on determined to focus its efforts on seeking to sell the
Refinery operations.
On December 5, 1994, the Company entered into the SIPAC Agreement pursuant
to which it agreed to sell certain assets, including the assets of IRLP and
the capital stock of Powerine, to SIPAC, a newly formed corporation organized
by William S. Sudhaus, President and Chief Operating Officer of the Company.
Pursuant to the terms of the SIPAC Agreement, the Company will receive
$38.75 million principal amount of ten-year, 10%, promissory notes of SIPAC,
convertible into approximately 41% of SIPAC's common stock, and a cash
payment equal to the adjusted working capital of the Refineries as of January
31, 1995. If the adjusted working capital had been determined as of September
30, 1994, the cash payment by SIPAC would have been approximately $39.3
million and the net increase in cash would have been approximately $24
million ($39.3 million less $15.3 million of cash included in the assets
sold). In addition, if the capital expenditures of the Refineries during the
period from October 1, 1994 through the date of the closing exceed $32
million, the Company will receive an amount equal to such excess in cash, and
if such capital expenditures are less than $32 million, the Company will be
required to pay an amount equal to such deficiency to SIPAC in cash. Upon
consummation of this sale, which is subject to receipt of the approval of the
Company's stockholders and certain other conditions, the Company will no
longer be directly engaged in petroleum refining.
In the discussion that follows, period-to-period comparisons will be
limited to the Company's revenues and expenses that lend themselves to
period-to-period comparison. Discussion of operations that are not comparable
will be limited to an analysis of actual results and the factors contributing
to such results.
29
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------
1992 1993 1994
------------ ---------- ------------
(in thousands)
<S> <C> <C> <C>
Revenues:
Refining .............................................. $344,770 $532,010 $ 940,514
Natural gas marketing ................................. -- 56,676 61,259
Exploration and production ............................ 5,165 10,124 8,552
----------- ---------- -----------
Total ................................................ $349,935 $598,810 $1,010,325
=========== ========== ===========
Operating income (loss):
Refining .............................................. $ (34,735) $ 30,355 $ 57,931
Natural gas marketing ................................. -- 10,866 10,643
Exploration and production ............................ 728 3,244 2,402
Corporate general and administrative .................. (1,706) (2,191) (5,499)
----------- ---------- -----------
Total ................................................ (35,713) 42,274 65,477
----------- ---------- -----------
Other income (expense):
Interest expense ...................................... (13,640) (21,111) (28,487)
Other income, net ..................................... (2,835) 2,190 2,453
----------- ---------- -----------
Income (loss) before provision for (recovery of) income
taxes ................................................. (52,188) 23,353 39,443
Provision for (recovery of) income taxes ............... 81 (35,970) 526
----------- ---------- -----------
Net income (loss) before cumulative effect of a change
in accounting principle ............................... $ (52,269) $ 59,323 $ 38,917
=========== ========== ===========
</TABLE>
FISCAL 1994
Revenues
Revenues from refining operations increased by $408.5 million or 77%
during the year ended September 30, 1994 from the corresponding period in
1993, principally as a result of the Company having acquired Powerine,
effective October 1, 1993 and as a result of sales of crude oil to third
parties including the first seven deliveries under the Company's crude oil
forward sale contract. Had the acquisition of Powerine and the third party
sales not been consummated (sales of $359.3 million and $71.1 million,
respectively), revenues would have decreased by $21.9 million or 4% primarily
as a result of an approximately $2.36 per barrel decline in average crude oil
prices during the year ended September 30, 1994 versus the same period in
1993 (approximately $1.00 increase per barrel for the three month period
ending September 30, 1994 versus 1993). In addition, at the direction of
MGRM, the Company's refining subsidiaries operated at less than maximum
capacity during the year ended September 30, 1994. This reduced refining
activity, which primarily occurred during the fiscal quarter ended March 31,
1994, resulted in the recognition of revenue as paid by MGRM pursuant to its
request for run reductions in accordance with the Indian Offtake Agreement
equal to the lost operating profits during the period of reduced operations.
These run reductions accounted for much of the $21.9 million decrease in
refining revenues from IRLP. Reduced throughputs occurred in January and
February 1994 due to the inability of MGTFC to provide the appropriate letter
of credit requirements to cover feedstock acquisitions for the Powerine
Refinery to run at full capacity.
Revenues from natural gas marketing increased by $4.6 million or 8% for
the year ended September 1994, principally as a result of the Company having
acquired the Lone Star Contract from ARCO on December 3, 1992. The increased
sales for the additional two months were slightly offset by decreased average
daily quantities sold to Lone Star during the year ended September 30, 1994.
The average daily takes of gas under the Lone Star Contract decreased 14% in
1994. The decrease in daily takes is attributable to small decreases in the
annual contractual volumes under the Lone Star Contract and seasonal
requirements of Lone Star within a contract year. Contract years end January
31. For the three months ended September, 30, 1994, versus the same period in
the prior year, sales increased $2.3 million or 16%, principally as a result
of the increased quantities of natural gas sold pursuant to the terms of the
Lone Star Contract.
30
<PAGE>
Exploration and production revenues decreased $1.6 million or 16% for the
year ended September, 1994 as compared to the prior year primarily as a
result of the June 30, 1993 sale of certain exploration and production
properties, as well as the general depletion of other Company wells.
Furthermore, the Company drilled no new wells in fiscal 1994 and made minimal
capital investments to enhance existing production. This is partially offset
by the addition of 100 working oil and gas wells on December 3, 1992.
Operating Income
Refining operating income was approximately $57.9 million for fiscal 1994
compared to $30.4 million in fiscal 1993. The improved operating income was
primarily attributable to the operations of Powerine, which was acquired
October 1, 1993, ($27.5 million) and the increased average throughputs at the
Indian Refinery. This increase was offset by increased expense related to
stock appreciation rights, depreciation and legal fees for MG related
matters.
Natural gas marketing earned operating income of approximately $10.6
million in fiscal 1994 versus $10.9 million in fiscal 1993. The decrease is
primarily attributable to the decreased average daily quantities sold to Lone
Star which was offset by an increase attributable to twelve months of
operations in 1994 as compared with ten months in 1993.
Operating income for the exploration and production operations was
approximately $2.4 million in 1994 as compared with $3.2 million in fiscal
1993. The decrease results from the sale of certain properties in June 1993
and the loss of administrative revenues as a result of the sale of the
Company's partnership management business in June 1993. This is partially
offset by the addition of 100 working oil and gas wells on December 3, 1992.
Corporate general and administrative expenses increased $3.3 million over
the corresponding period in 1993. This increase is primarily attributable to
legal fees associated with defending the Stockholder Litigation and related
matters. As the settlement of the Stockholder Litigation was approved by the
District Court on December 5, 1994, the Company does not anticipate a
recurrence of these expenses.
Other Expenses
Interest expense increased approximately $7.4 million during fiscal 1994
as compared with the fiscal 1993. This increase was primarily attributable to
the amortization of deferred financing fees associated with the Senior
Facility entered into in May 1993, MG financing facilities, and the crude oil
forward sale agreement entered into in September 1993 ($8.6 million). In
addition, the Company incurred interest expense on debt assumed with the
acquisition of Powerine ($6.1 million). Interest expense for the year ended
September 30, 1994 was reduced ($6.5 million) as a result of the Company's
repayment of debt resulting from the purchase of cash participations.
Income Taxes
In fiscal 1993, the Company recorded an income tax recovery of $36.0
million. This recovery was principally related to recognition of deferred tax
assets associated with the reduction in the valuation allowance for deferred
tax assets. In fiscal 1994, the Company recorded a tax provision of $.5
million. This provision resulted from an additional reduction in the
valuation allowance recognized during the period. See Note 21 to the
Company's Consolidated Financial Statements included in Item 8. Financial
Statements and Financial Statement Schedules.
FISCAL 1993
Revenues
Revenues from refining increased approximately $187.2 million, or 54.3%,
from the fiscal year ended September 30, 1992 to fiscal year 1993 primarily
because IRLP operated under the Indian Offtake Agreement for only eight
months during fiscal year 1992. Furthermore, as a result of an increase in
crude distillation capacity of approximately 35% in April 1993, an average of
61,301 B/D were sold during fiscal year 1993, compared to 53,177 B/D in the
previous fiscal year.
31
<PAGE>
Revenues from natural gas marketing to Lone Star aggregated approximately
$62.5 million for the period from December 3, 1992, the date the natural gas
marketing assets were acquired, to September 30, 1993. Of this amount,
approximately $56.7 million was derived from sales of purchased gas and the
remaining $5.8 million was derived from the sale of gas produced by the
Company. Lone Star's gas purchases in the ten month period ending September
30, 1993 approximated 66.3% of the contract volume required to be taken by
Lone Star for the contract year ended January 31, 1994.
Exploration and production revenues during fiscal 1993 increased
approximately $5.0 million, or 96%, because of the production related to the
purchase of majority working interests in 100 producing oil and gas wells
from ARCO on December 3, 1992. If the producing wells had not been acquired,
exploration and production revenues would have decreased approximately $1.4
million.
Operating Income
Refining operating income was approximately $30.4 million for the fiscal
year ended September 30, 1993 compared to an operating loss of $34.7 million
in fiscal year 1992. This increase is primarily attributable to the Company
operating under the Indian Offtake Agreement for the entire year in fiscal
1993 compared to only eight months in fiscal 1992, the expansion of refining
capacity, improvements in saleable yields and lower cost raw material supply.
The 1992 period included a $31.6 million charge for processing losses
pursuant to IRLP's indemnity obligations to MGRM under the Indian Processing
Agreement, which was terminated on January 31, 1992.
Natural gas marketing had operating income of approximately $10.9 million
for the fiscal year 1993.
Operating income of exploration and production was approximately $3.2
million for the fiscal year ended September 30, 1993 compared to operating
income of $0.7 million for fiscal year 1992. This increase is due to the
addition of majority working interests in 100 wells on December 3, 1992.
Other Expense
Interest expense increased approximately $7.5 million during fiscal year
1993 compared to fiscal year 1992. This increase was primarily attributable
to the incremental borrowings necessary to fund the acquisition of assets
from ARCO and the increased capital spending at the Indian Refinery.
Income Taxes
In fiscal 1992 no income taxes, except $81,000 of state taxes, were
recorded because the Company incurred an operating loss. In 1993, the Company
adopted FAS 109 and recorded a deferred tax asset related to anticipated
temporary difference related to a forward sale of crude oil.
FISCAL 1992
Revenues
Refining revenues were approximately $344.8 million during fiscal year
1992, an increase of 192% over the previous year. This increase was due to
IRLP's operating under the Indian Offtake Agreement during the last eight
months of fiscal year 1992. During the majority of fiscal year 1991, IRLP
operated under the Indian Processing Agreement.
Revenues from exploration and production activities declined approximately
33% in fiscal year 1992 from fiscal year 1991 levels, due to a decrease in
the average sale price per MCF of gas and a reduction in the number of oil
and gas partnerships managed by the Company.
Operating Loss
Refining operations incurred an operating loss of approximately $34.7
million in fiscal year 1992, improving from an operating loss of $77.2
million in fiscal year 1991. The principal reason for the decreased loss was
the termination of the Indian Processing Agreement and the transition to the
Indian Offtake Agreement. Under the Indian Processing Agreement, IRLP
incurred an operating loss of approximately $36.6 million during the first
four months of fiscal year 1992. During the last eight months of the fiscal
year, IRLP operated under the Indian Offtake Agreement and recorded
32
<PAGE>
operating income of approximately $1.9 million. Relatively low refining runs at
the Indian Refinery and higher cost feedstocks limited the favorable effect of
the Indian Offtake Agreement. In addition to the favorable effects of the Indian
Offtake Agreement, exploration and production activities generated an operating
loss of approximately $1 million in fiscal year 1992 compared to operating
income of $1 million in fiscal year 1991. This was due to a reduction in the
average sale price per MCF of gas in addition to a decline in oil and gas
partnership administrative fees due to the on-going liquidation of several oil
and gas partnerships managed by the Company.
Other Expense
Interest expense was approximately $13.6 million in fiscal year 1992, an
increase of 23% over fiscal year 1991. Although interest rates were somewhat
lower in fiscal year 1992, the Company's average outstanding borrowings were
higher due to continued capital investment programs and an increase in
required working capital to fund operations under the Indian Offtake
Agreement and operating losses incurred during the first four months of
fiscal year 1992.
Other net expenses in fiscal year 1991 included certain writeoffs that did
not recur in fiscal 1992.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company generated cash flow from operating activities of approximately
$12.9 million during the fiscal year ended September 30, 1994, compared to
$147.2 million of cash flow provided by operations for fiscal year 1993. This
decrease is primarily attributable to $120 million received on September 28,
1993 as a prepayment on the sale by IPLP of specific quantities of West Texas
Intermediate crude oil pursuant to a forward sale contract (the "Forward Sale
Contract") with Percolin Limited for delivery over a 12-month period
(extended to a 17-month period in connection with the MG Settlement).
In addition to cash flow from operations, the Company and its affiliates
utilized funds provided under a senior facility at Indian and certain loan
facilities provided by MGTFC during the fiscal year. Pursuant to the terms of
the MG Settlement, on October 14, 1994 MG and its affiliates assumed IRLP's
obligation to repay $73.041 million under the Senior Facility and cancelled
certain debt obligations owed by the Company, IRLP and Powerine to MGTFC
aggregating approximately $255 million (including a $5.5 million convertible
debenture).
During the year ended September 30, 1994, the Company's refining segment
generated $66 million of cash flow from operations (net income before income
taxes plus depreciation). However, approximately $64 million was invested in
refining property, plant and equipment, so that the net cash contribution
from the refining segment approximated $2 million exclusive of any income
taxes, which are computed on a consolidated basis.
If the Refineries are sold, no significant effect on the Company's
liquidity is expected. As a result of the MG Settlement, the Company's cash
flow from refining operations remains dedicated to the Revolving Credit
Facility provided by MG and thus continues to be unavailable to the Company
for other than refining operations. Since the Revolving Credit Facility will
terminate on March 31, 1995, the Company would be affected by the cash flow
from refining operations should it continue refining operations after March
31, 1995. As described below, however, the Company intends to close or
significantly curtail operations at one or both Refineries if the Refineries
are not sold by that time.
The Company expects to generate $23 to $25 million of cash flow from
operations from its natural gas marketing operations and $2 to $2.5 million
of cash flow from its exploration and production operations in fiscal 1995.
Virtually all of the cash flow from the natural gas marketing segment is,
however, dedicated to its natural gas marketing segment lender and is thus
not available to the Company for corporate purposes. The $2.0 to $2.5 million
of anticipated cash flow from the exploration and production segment,
interest on the MG Note received from MG in the MG Settlement, and any
proceeds from the sale of the Refineries will be available to fund corporate
activities, including payment of income taxes. There can be no assurance that
the Company will achieve such expected levels of cash flow.
33
<PAGE>
On December 2, 1993, the Company consummated an offering of its Common
Stock. Pursuant to the terms of the offering, the Company sold 2,800,000
shares of its Common Stock to the public and 700,000 shares of its Common
Stock to MG at a gross offering price of $15.00 per share. The offering
resulted in aggregate net proceeds to the Company of approximately $48.2
million.
As a result of the MG Settlement which was consummated in two steps in
September and October 1994, the Company recognized taxable income of
approximately $390 million. Absent any offsets to such income, and after
giving effect to the Company's existing net operating loss and depletion
carryforwards, the Company will owe Federal and state taxes of approximately
$91 million. If the Refinery operations are not sold, the Company would
likely require outside financing to pay such obligation, and there can be no
assurance the Company would be able to obtain such financing. The sale of the
Refineries pursuant to the SIPAC Agreement (the "Refinery Transactions") will
result in an ordinary loss of approximately $206 million for Federal income
tax purposes. As a result, consummation of a sale of the Refineries (or a
similar sale or abandonment of the Refinery operations) would reduce the
Company's Federal and state income tax liability to approximately $11
million.
The Company has submitted an application to change its tax year from a
year ending December 31, to a year ending September 30, to be effective for
the year ended September 30, 1994. Management anticipates that such
application will be approved. If the application is not approved, additional
tax obligations comprised of interest of approximately $11 million will be
due, assuming the sale of the Refineries pursuant to the SIPAC Agreement.
At September 30, 1994, the Company had approximately $18 million of
unrestricted cash. As a result of the MG Settlement, $9 million of previously
restricted cash was made available to the Company. If the sale of the
Refineries is consummated pursuant to the terms of the SIPAC Agreement, the
Company expects to receive an amount equal to the adjusted working capital of
the Refineries upon closing. The Company estimates that, if the adjusted
working capital had been determined as of September 30, 1994, the cash
payment by SIPAC would have been approximately $39.3 million and the net
increase in cash would have been approximately $24 million, of which $3
million would have been utilized to repay long-term indebtedness. As a
result, the Company anticipates that it will have cash of approximately $48
million (and long-term debt of approximately $46 million) if the sale of the
Refineries is consummated pursuant to the SIPAC Agreement and there are no
additional adjustments to the purchase price for capital expenditures or
operating cash flow from October 1, 1994 to closing.
The Company intends to utilize these funds for income taxes and for
general corporate purposes including the expansion of both its current gas
marketing and exploration and production operations through new drilling and
acquisitions. The Company will also consider repayment or refinancing of the
existing long-term debt of its natural gas marketing subsidiaries and a
repurchase of its own shares if market conditions justify such repurchase.
The Company anticipates that if the Refinery Transactions are not
consummated, it will pursue one of the following alternatives:
a. Close one or both Refineries while seeking alternative purchasers for
one or both Refineries.
b. Curtail operations at one or both Refineries while seeking alternative
purchasers for one or both Refineries.
If the Company does not close either Refinery, it intends to curtail
operations at such Refinery until such Refinery is sold or closed.
If alternatives "a" or "b" are undertaken, the Company anticipates that
the costs to close or curtail operations of one or both Refineries can be
financed by the net working capital of the Refineries. If, however, an
alternative purchaser is not found before the end of the Company's next tax
year, the Company will close and abandon one or both Refineries. In such
case, the Company believes that the proceeds of the Refineries' working
capital would be sufficient to cover any severance and known environmental
liabilities upon closure.
If the Refinery sale is not consummated and the Company closes the
Refineries, the Company's tax liability will be reduced to approximately $11
million but the Company may be required to fund closing costs including
environmental and employee severance costs. The Company believes that it
could fund such costs from working capital.
34
<PAGE>
The Company's refining segment employs several hedging strategies to
minimize the impact of the volatility of feedstock costs. The Company hedges
current inventory and future commitments. Gains and losses from hedging
activities are credited or debited to the value of the inventory being
hedged. In fiscal 1994, the Company had hedging gains of approximately $9.8
million, which reduced the cost of refining materials sold by the same
amount. The Company intends to continue to hedge current refining inventories
and future commitments using exchange-traded, energy-related futures and
options with a duration of 12 months or less until the Refineries are sold or
closed. In addition, if the Company replaces MG as gas supplier in its
natural gas marketing segment and itself purchases the gas supplies necessary
to fulfill the Lone Star Contract, the Company intends to hedge the future
price of all or most of such gas supply using swap agreements, options or
futures contracts or a combination thereof.
During the period from October 1, 1994 to January 31, 1995, the proposed
effective date of the Refinery Transactions, the Company expects to make
capital expenditures of approximately $32 million, including approximately $2
million of environmental compliance expenditures and approximately $2 million
of sustaining capital expenditures. If the Refinery Transactions are not
consummated, the Company intends to close or to significantly curtail
operations at one or both Refineries while seeking alternative purchasers.
Under either scenario, the Company does not expect to make any capital
expenditures for new equipment or improvements. The Company's planned capital
expenditures in fiscal 1995 for its exploration and production segment
approximate $1 million, but may increase if gas prices increase. Acquisitions
and improvements of approximately $5 million for the Company's natural gas
marketing segment are currently being considered.
If the Company ceases its operations in the refining segment, its
continuing operations would be confined to the natural gas marketing and
exploration and production segments. Commencing in the summer of 1994, the
prices received by producers of natural gas, including the Company, declined
significantly. Furthermore, primarily as a result of a mild winter thus far
in 1994-1995, many econometricians have significantly lowered their natural
gas price projections for 1995 and 1996. Although such lower gas prices, if
they in fact continue, would adversely affect the revenues of the Company's
exploration and production segment, such lower gas prices would also
significantly decrease the cost of natural gas for the Company's natural gas
marketing segment.
During fiscal 1994, the Company's exploration and production segment
produced and sold 3,606,000 mcf of gas. The average price received for each
mcf of gas sold was $2.02 (versus $2.44 in fiscal 1993). Approximately
900,000 of the mcf produced and sold were sold under a fixed price contract
that expires in 1997. The remaining 2,706,000 mcf produced were sold at
market prices. If the average spot price declines to $1.50 to $1.60 per mcf,
as same econometricians now predict, the Company's gas revenues will decline
$1.1 to $1.4 million annually assuming stable production.
The Company's natural gas marketing segment currently obtains
approximately 12% of its annual gas supply requirements at market prices, 5%
at a fixed price under a gas contract expiring in 1997, and the remaining 83%
at $2.10/mcf from an affiliate of MG under a contract expiring in 1999. Since
all gas purchased is ultimately sold under the Lone Star Contract ending in
1999, any decreases in the market prices paid for natural gas supply decrease
the Company's gas purchase cost and increase the Company's gross margin. The
Company is currently purchasing approximately 2,100,000 mcf of gas at market
prices. Accordingly, the Company believes that its natural gas marketing
segment would make up approximately 75% to 80% of gas merchant margins lost
by its exploration and production segment due to lower gas prices.
In addition, as a result of the MG Settlement, by March 31, 1995 the
Company may terminate three agreements with MG: a supply agreement pursuant
to which MG supplies approximately 15,000,000 mcf of gas a year at $2.10/mcf,
a pipeline management agreement costing the Company approximately $400,000
(including management fees of $148,000) annually, and a gas marketing
services agreement costing the Company approximately $240,000 annually. The
Company would like to terminate these agreements because it believes that it
can obtain gas at a price significantly less than $2.10/mcf. However, the
replacement of MG is dependent upon the Company's receiving consent of its
natural gas lender and securing a satisfactory alternate source of gas, and
there can be no assurance that the Company will be able to replace MG or, if
it is able to replace MG, that the prices to be paid will be as low as those
currently obtainable. If these agreements are terminated, the Company would
operate its own pipeline and perform its own gas marketing.
35
<PAGE>
Although the Company does not expect to shut down any wells due to low gas
prices, local producers might shut down some production that would otherwise
be purchased by the Company's natural gas segment. In such case, the Company
believes that alternative gas supplies will be available, although at
slightly higher prices.
INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared on the
historical cost method of accounting and do not reflect changes in the
dollar's purchasing power. Inflation and changing prices could materially
affect the Company's operating costs but, due to the inflation adjustments
built into the Offtake Agreements, should not materially adversely affect the
Company's refining operating profits through February 1, 1995. Inflation
could, however, adversely affect operating profits of its other two business
segments. As a result of the MG Settlement, virtually all remaining debt is
at a fixed rate. Accordingly, the Company is not sensitive to fluctuations in
interest rates, except as it relates to the working capital facilities at the
Refineries.
Due to the existing pricing structure under the Offtake Agreements, IRLP
and Powerine are not currently subject to the same degree of refining margin
risk that most other refiners face. If refining margins are high for the
industry (relative to historic averages), the price received by IRLP and
Powerine for their refined products may be less than those obtainable in the
market. Conversely, if refining margins are low for the industry, the price
received by IRLP and Powerine for their refined products is likely to be
higher than those obtainable in the market. Refining margins for the industry
were depressed during most of the fiscal year ended September 30, 1994. As a
result, the prices received by Powerine and IRLP for their refined product
output under the Offtake Agreements were significantly higher than the prices
that would have been obtainable selling refined products in the market.
Accordingly, the Company's management believes that the refining segment
would have incurred a loss for fiscal 1994 absent the Offtake Agreements. Any
failure of MGRM to honor the Offtake Agreements could have a material adverse
effect on the Company. The Offtake Arrangements will terminate on February 1,
1995. If the Company has not disposed of the Refineries by that date, the
Company will be responsible for marketing its own products and will be
subject to margin risk.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the years ended September 30, 1994, 1993 and 1992 .... 38
Consolidated Balance Sheets, as of September 30, 1994 and 1993 ................................. 40
Consolidated Statements of Cash Flows for the years ended September 30, 1994, 1993 and 1992 .... 41
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended September 30,
1994, 1993 and 1992 ........................................................................... 43
Notes to Consolidated Financial Statements ..................................................... 44
FINANCIAL STATEMENT SCHEDULES:
III. Condensed financial information -- parent company only ................................... 79
Report of Independent Accountants .............................................................. 82
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
37
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000'S" OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Refining:
Crude oil sales ................................ $ 71,062
Refined product - related party ................ 849,492 $525,690 $327,488
Refined product ................................ 8,061
Other revenues -- related party ................ 11,899 6,320 17,282
----------- ----------- -----------
940,514 532,010 344,770
----------- ----------- -----------
Natural gas production and transmission:
Gas sales ........................................ 61,228 56,641
Transportation ................................... 31 35
----------- -----------
61,259 56,676
----------- -----------
Exploration and production:
Oil and gas sales ................................ 8,069 9,268 4,160
Administrative fees .............................. 423 697
Well operations .................................. 483 433 308
----------- ----------- -----------
8,552 10,124 5,165
----------- ----------- -----------
1,010,325 598,810 349,935
----------- ----------- -----------
Expenses:
Refining:
Cost of materials sold -- crude oil sales ...... 69,112
Cost of materials sold -- refined products --
related party ................................ 618,324 430,399 281,430
Cost of materials sold -- refined products ..... 8,786
Operating costs ................................ 132,281 54,747 52,815
Share of processing agreement loss -- related
party ........................................ 31,611
Selling, general and administrative costs ...... 23,758 6,515 3,966
Depreciation and amortization .................. 30,322 9,994 9,683
----------- ----------- -----------
882,583 501,655 379,505
----------- ----------- -----------
Natural gas production and transmission:
Gas purchases .................................... 37,029 34,441
Operating costs .................................. 1,973 961
General and administrative ....................... 254 913
Depreciation and amortization .................... 11,360 9,495
----------- -----------
50,616 45,810
----------- -----------
Exploration and production:
Oil and gas production ........................... 3,845 2,655 1,793
General and administrative ....................... 213 1,529 1,191
Depreciation, depletion and amortization ......... 2,092 2,696 1,453
----------- ----------- -----------
6,150 6,880 4,437
----------- ----------- -----------
Corporate general and administrative. ............ 5,499 2,191 1,706
----------- ----------- -----------
944,848 556,536 385,648
----------- ----------- -----------
Operating profit (loss) .......................... 65,477 42,274 (35,713)
</TABLE>
(continued on next page)
38
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000'S" OMITTED EXCEPT PER SHARE AMOUNTS)
(continued from previous page)
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------
1994 1993 1992
---------- ---------- -----------
<S> <C> <C> <C>
Other income (expenses):
Interest income ..................................... 1,292 739 1,235
Other income ........................................ 1,161 1,451 91
Interest expense .................................... (28,487) (21,111) (13,640)
Write-off ........................................... (4,161)
---------- ---------- -----------
(26,034) (18,921) (16,475)
---------- ---------- -----------
Income (loss) before provision for (recovery of) income
taxes ................................................. 39,443 23,353 (52,188)
Provision for (recovery of) income taxes:
State ................................................. 3,648 (4,614) 81
Federal ............................................... (3,122) (31,356)
---------- ---------- -----------
526 (35,970) 81
---------- ---------- -----------
Net income (loss) before cumulative effect of a change
in accounting principle ............................... 38,917 59,323 (52,269)
Cumulative effect of change in accounting principle --
adoption of FAS 109 ................................... 8,514
---------- ---------- -----------
Net income (loss) ...................................... $ 38,917 $ 67,837 $(52,269)
========== ========== ===========
Net income (loss) per share:
Net income (loss) before cumulative effect of change in
accounting principle -- primary ..................... $3.48 $8.12 $ (8.22)
========== ========== ===========
-- fully diluted .................................. $3.43 $7.84
========== ==========
Cumulative effect of change in accounting principle --
adoption of FAS 109 -- primary ...................... $1.16
==========
-- fully diluted .................................. $1.12
==========
Net income (loss) per share -- primary ................ $3.48 $9.28 $ (8.22)
========== ========== ===========
Net income per share -- fully diluted ................. $3.43 $8.96
========== ==========
Weighted average number of common and common equivalent
shares outstanding -- primary ....................... 11,209 7,316 6,365
========== ========== ===========
-- fully diluted .................................. 11,397 7,581
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
("000'S" OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Proforma
September September 30,
30, 1994 ------------------------
(See Note 3) 1994 1993
------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 26,618 $ 18,118 $ 4,304
Restricted cash ........................................ 276 12,525 13,709
Temporary investments .................................. 4,436 7,247
Assets held for sale, net .............................. 62,763
Accounts receivable .................................... 17,744 22,413 15,356
Accounts receivable -- related party ................... 114 19,941 9,004
Inventories ............................................ 83,711 59,603
Prepaid expenses and other current assets .............. 60 7,341 826
Deferred income taxes .................................. 68,088 14,520
------------ ---------- ----------
Total current assets ............................... 107,575 236,573 124,569
Property, plant and equipment, net:
Refining ............................................... 295,950 104,784
Natural gas transmission ............................... 24,535 24,535 26,374
Furniture, fixtures and equipment ...................... 337 3,245 1,869
Oil and gas properties, net ............................. 16,146 16,146 17,272
Gas contracts, net ...................................... 43,889 43,889 53,444
Goodwill, net ........................................... 5,413
Deferred income taxes ................................... 34,595
Other assets, net ....................................... 891 20,740 29,831
Notes receivable ........................................ 10,000
------------ ---------- ----------
Total assets ....................................... $203,373 $646,491 $392,738
============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ...................... $ 11,256 $ 84,297 $ 25,344
Current portion of long-term debt -- related party ..... 9,974 12,915
Accounts payable ....................................... 7,318 53,999 33,038
Accrued expenses ....................................... 2,032 27,169 10,626
Due to related parties ................................. 7,055 17,663 19,298
Deferred revenue ....................................... 62,333 64,070
Income taxes payable ................................... 11,220 136 3,017
Other liabilities ...................................... 3,041 3,771 3,723
------------ ---------- ----------
Total current liabilities .......................... 41,922 259,342 172,031
Long-term debt .......................................... 51,361 51,361 144,056
Long-term debt -- related party ......................... 250 248,491 16,705
Deferred revenue ........................................ 64,071
Other long-term liabilities ............................. 83 34,191 5,262
Deferred income taxes ................................... 4,419 15,186
------------ ---------- ----------
Total liabilities .................................. 98,035 608,571 402,125
------------ ---------- ----------
Commitments and contingencies
Stockholders' equity (deficit):
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; 7,627,646 and 7,722,646 shares issued and
outstanding in 1994 and 1993 respectively ............ 3,329 3,814 3,891
Additional paid-in capital .............................. 62,593 73,490 65,387
Accumulated earnings (deficit) .......................... 39,416 (39,384) (78,301)
------------ ---------- ----------
105,338 37,920 (9,023)
Treasury stock -- at cost (59,860 shares in 1993) ....... (364)
------------ ---------- ----------
105,338 37,920 (9,387)
------------ ---------- ----------
Total liabilities and stockholders' equity (deficit) $203,373 $646,491 $392,738
============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
40
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000'S" OMITTED)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $ 38,917 $ 67,837 ($ 52,269)
---------- ----------- -----------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation, depletion and amortization ........ 43,774 22,185 11,136
Amortization of deferred debt issue costs ....... 8,885 2,054 1,616
Write-offs ...................................... 4,161
Cumulative effect of a change in accounting
principle -- adoption of FAS 109 ............... (8,514)
Deferred income taxes ........................... (2,900) (38,976)
Changes in assets and liabilities:
(Increase) decrease in restricted cash ......... 1,185 (9,153) (1,082)
(Increase) decrease in temporary investments ... 2,811 (65) (7,182)
(Increase) in accounts receivable .............. (6,178) (19,512) (844)
(Increase) in inventory ........................ (18,787) (7,942) (48,424)
(Increase) decrease in prepaid assets .......... (4,762) (454) 208
(Increase) decrease in other assets ............ (1,523) (970) 66
Increase (decrease) in accounts payable ........ 23,448 24,126 (2,869)
Increase in accrued expenses ................... 1,958 8,573 187
Increase in other current liabilities .......... 41 3,071 77
Increase (decrease) in other long-term
liabilities .................................. 927 906 (187)
Increase (decrease) in due to related parties .. (9,046) (17,014) 36,312
Increase in processing debt and accrued interest 35,665
Increase (decrease) in deferred revenues ....... (65,807) 121,046
---------- ----------- -----------
Total adjustments .............................. (25,974) 79,361 28,840
---------- ----------- -----------
Net cash flow provided by (used in)
operating activities ...................... 12,943 147,198 (23,429)
---------- ----------- -----------
Cash flows from investment activities:
(Increase) decrease in deposit made on account of
acquisition ....................................... 6,250 (6,250)
Proceeds from sale of oil and gas properties ........ 75 265 168
Investment in refining operations ................... (63,819) (34,394) (11,859)
Investment in oil and gas properties ................ (956) (13,592) (340)
Investment in pipelines ............................. (21) (27,909)
Purchase of furniture, fixtures and equipment ....... (1,670) (1,265) (278)
Purchase of gas contracts ........................... (63,049)
Investments in GAMXX Energy, Inc .................... (887)
Purchase of minority interest ....................... (117)
Business acquisition, net of cash acquired .......... (8,230)
---------- ----------- -----------
Net cash used in investing activities ............... (74,621) (133,811) (19,446)
---------- ----------- -----------
</TABLE>
(continued on next page)
41
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000'S" OMITTED)
(continued from previous page)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1994 1993 1992
---------- ----------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds of long-term debt -- related party ......... $ 67,915 $ 15,115
Proceeds of long-term debt .......................... 12,114 168,735 $46,409
Proceeds from issuance of common stock, net ......... 48,207 20 379
Repayment of long-term debt -- related party ........ (4,388) (142,112)
Repayment of long-term debt ......................... (48,356) (51,129) (7,236)
Payment of debt issuance costs ...................... (3,309) (110)
Purchase of treasury stock .......................... (175)
---------- ----------- ---------
Net cash provided by (used in) financing
activities ................................... 75,492 (12,855) 39,442
---------- ----------- ---------
Net increase (decrease) in cash and cash equivalents . 13,814 532 (3,433)
Cash and cash equivalents -- beginning of period ..... 4,304 3,772 7,205
---------- ----------- ---------
Cash and cash equivalents -- end of period ........... $ 18,118 $ 4,304 $ 3,772
========== =========== =========
Supplemental disclosure of cash flow information
as follows:
Cash paid during the period:
Interest ............................................ $ 16,583 $ 18,263 $ 6,626
========== =========== =========
Income taxes ........................................ $ 8,802 $ 8 $ 15
========== =========== =========
Interest capitalized during the period ............... $ 1,519 $ 723
========== ===========
Supplemental schedule of noncash investing and
financing activities:
Purchase of Powerine Oil Company:
Basis in assets acquired .......................... $186,867
Cash paid for capital stock and transaction costs . (8,230)
----------
Basis in liabilities assumed ...................... $178,637
==========
Exchanges of common stock:
Fair value of debt issuance/extension, processing
agreement issuance costs, and offtake agreement
amendments ...................................... $ 11,855 $ 506
=========== =========
Acquisition of common stock in exchange for reduction
in cash participations ............................ $ 39,817
==========
Debt issued in exchange for debt extensions and
offtake amendments .................................. $ 5,500
===========
Sale of properties for note .......................... $ 600
===========
Options exercised for short term receivable .......... $ 45
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
("000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Treasury Stock
-------------------------- Paid-In (Accumulated ----------------------
Shares Amount Capital Deficit) Shares Amount Total
------------- --------- ------------ ------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- October 1, 1991 ...... 6,222,201 $ 3,111 $ 53,199 $ (93,870) 47,376 $(189) $(37,749)
Shares issued in return for debt 110,000 55 451 506
Shares issued to stockholders for
accrued interest ............... 1,644 1 8 9
Shares issued for cash .......... 62,500 31 312 343
Warrants exercised .............. 34,950 17 18 35
Other ........................... (31) 1 1
Net loss ........................ (52,269) (52,269)
------------- --------- ------------ ------------- ---------- -------- ---------
Balance -- September 30, 1992 ... 6,431,264 3,215 53,988 (146,138) 47,376 (189) (89,124)
Warrants exercised .............. 20,000 10 10 20
Options exercised ............... 7,500 4 41 45
Treasury stock acquired ......... 12,484 (175) (175)
Shares issued for Long-Term
Supply Agreement guaranty ...... 300,000 150 705 855
Shares issued in return for debt
extension and Indian Offtake
Agreement extension ............ 1,000,000 500 10,500 11,000
Other ........................... 23,742 12 143 155
Net income ...................... 67,837 67,837
------------- --------- ------------ ------------- ---------- -------- ---------
Balance -- September 30, 1993 ... 7,782,506 3,891 65,387 (78,301) 59,860 (364) (9,387)
Treasury stock reissued ......... (59,860) (30) (334) (59,860) 364
Shares issued for cash .......... 3,500,000 1,750 46,428 48,178
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
============= ========= ============ ============= ========== ======== ========
</TABLE>
See accompanying notes are an integral part of these financial statements.
43
<PAGE>
CASTLE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
("000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- BUSINESS AND ORGANIZATION
Settlement with Principal Shareholder
As of September 30, 1994 and 1993, approximately 13% and 49%,
respectively, of the Company's common stock outstanding was owned by
Metallgesellschaft Corporation ("MG" and the "Principal Shareholder"), an
indirect wholly-owned subsidiary of Metallgesellschaft AG ("MG AG"), a German
Conglomerate. In addition, the Company has extensive transactions and
agreements with MG and its affiliates as described in Notes 4, 14, 15, 16, 17
and 23. On August 31, 1994, the Company entered into two agreements with MG
and its affiliates that will significantly amend or terminate the
relationships between the Company and MG and its affiliates (the "MG
Settlement") ( See Notes 3 and 26).
Business Segments
Castle Energy Corporation's ("Castle" or the "Company") principal line of
business is petroleum refining, with additional operations in natural gas
marketing and oil and gas exploration and production. The Company's
operations are conducted primarily within the United States, with an
additional office in Calgary, Canada. In December 1994, the Company entered
into an agreement to sell its refining segment (See Note 26).
Stock Split
On September 16, 1993, the Board of Directors of the Company authorized a
1-for-2 reverse stock split, which became effective on November 12, 1993. All
share and per share amounts have been restated to give effect to the
aforementioned 1-for-2 reverse stock split.
Refining
IRLP
The Company entered the refining business in 1989 when it acquired the
operating assets of an idle refinery located in Lawrenceville, Illinois (the
"Indian Refinery"), now owned and operated by the Company's subsidiary,
Indian Refining Limited Partnership ("IRLP").
From April 24, 1990 through November 1990, IRLP refurbished the Indian
Refinery. In November 1990, IRLP commenced production of and made its first
significant sales of refined products. From November 1990 until January 31,
1991, IRLP purchased feedstock and sold refined products on its own behalf.
Then, in part due to difficulties encountered in achieving acceptable
operating levels at the Indian Refinery, it entered into the first of a
series of crude oil processing agreements ("Indian Processing Agreements")
with MG and its subsidiaries. MG was a Principal Shareholder of the Company.
Pursuant to the Indian Processing Agreements, IRLP processed crude oil on
behalf of MG Refining and Marketing, Inc. ("MGRM") , a wholly owned subsdiary
of MG, from February 1, 1991 until February 1, 1992, receiving a fixed amount
for each barrel processed. MGRM was responsible for purchasing feedstocks,
delivering them to the Indian Refinery and delivering the refined product to
its customers.
Effective February 1, 1992 these arrangements were replaced with a supply
agreement with MG (the "MG Supply Agreement") and a product offtake agreement
(as amended, the "Indian Offtake Agreement") with MGRM. These agreements
essentially provide that IRLP is again responsible for the purchase of
feedstocks and sells all of its refined product to MGRM. As a result of the
MG Settlement, MGRM's commitment to purchase IRLP's refined products
terminates February 1, 1995.
Powerine
In October 1993, the Company purchased Powerine Oil Company ("Powerine"),
the owner of a refinery located in Santa Fe Springs, California (the
"Powerine Refinery") from MG (See Note 4). Results of Powerine's operations
are included in these financial statements, commencing October 1, 1993.
44
<PAGE>
Currently, substantially all of the output from the Powerine Refinery is
sold to MGRM pursuant to an offtake arrangement (the "Powerine Offtake
Agreement") which, as amended in connection with the MG Settlement (See Note
26), commits MGRM to purchase such refined product output through February 1,
1995.
Natural Gas Marketing
On December 3, 1992, the Company acquired from Atlantic Richfield Company
("ARCO") a long-term natural gas sales agreement (the "Lone Star Contract")
with the Lone Star Gas Company ("Lone Star"), a 77-mile pipeline in Rusk
County, Texas (the "Castle Pipeline"), majority working interests in
approximately 100 producing oil and gas wells and several gas supply
contracts. The acquisition of the Castle Pipeline and the gas contracts
created a new business segment for the Company.
At present the principal use of the Castle Pipeline is to deliver gas
pursuant to the Lone Star Contract. The Company has entered into a management
service contract with MG Gathering Corp. ("MGG"), a subsidiary of MG, to
operate the Castle Pipeline.
The Lone Star Contract expires in June 1999. This contract provides for
minimum daily deliveries of gas at specific fixed prices, and also includes
certain minimum amounts under take-or-pay provisions. Based on reserve
reports, management believes approximately 17% of the annual contract volumes
can be supplied from Company-operated wells; the Company has entered into a
long-term contract with MG Natural Gas Corp. ("MGNG"), a subsidiary of MG, to
supply the remaining gas. Pursuant to the terms of the MG Settlement, the
Company may unilaterally terminate the long-term contract through March 31,
1995 (See Note 26).
Oil and Gas Exploration and Production
The Company's oil and gas exploration and production operations currently
include interests in approximately 450 producing oil and gas wells located in
nine states, including the Texas reserves acquired in connection with the
acquisition of the natural gas marketing assets. At present, approximately
65% of the Company's production is sold to Lone Star as described above.
The Company discontinued its oil and gas partnership administration
business and divested that business effective June 30, 1993 (See Note 23).
Operating Matters
The 1992 financial statements reflect the transition of the Company's
refining segment from various processing agreements to the offtake agreements
with MG. Prior to fiscal 1993, the Company's refining operations reflected
the results of delays in starting up key refinery units, unexpected
mechanical problems and extended depressed refining margins.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements presented include the accounts of
the Company and its subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
Cash and Cash Equivalents; Temporary Investments
The Company considers all highly liquid investments, such as time
deposits, money market instruments, commercial paper and United States and
foreign government securities, purchased with a maturity of three months or
less, to be cash equivalents. Temporary investments consist of similar
investments, as well as United States government security funds, maturing
more than three months from the date of purchase and are carried at the lower
of cost or market. Treasury Bills which are used to collateralize margin
accounts are considered temporary investments regardless of the maturity
date. The Company invests only in AA rated or better fixed income marketable
securities or the short-term rated equivalent.
45
<PAGE>
Inventories
Crude oil, unfinished products and finished products are stated at the
lower of cost, adjusted for hedging gains and losses, or market value. Cost
is determined on an average cost method. Materials and supplies are stated at
cost. Cost is determined using the first-in, first-out ("FIFO") method.
Amounts paid to suppliers for purchases of product prior to the title passing
to the Company are reported as prepaid inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is recorded
on a straight-line basis over the estimated useful lives of the assets, as
follows:
Property, plant and equipment
(excluding buildings) .......... 3-15 years, primarily 15 years
Buildings ....................... 30 years
Natural gas pipeline systems .... 15 years
Furniture and fixtures .......... 3-10 years
Refining
Interest costs incurred during IRLP's refurbishment stage were capitalized
and are being depreciated over the estimated useful lives of the property,
plant and equipment to which such costs were allocated. Environmental costs
required to remediate property, plant and equipment were capitalized during
the preoperating phase and are being depreciated over the estimated useful
lives of the related property, plant and equipment. Ongoing environmental
expenditures are reviewed to determine if they extend the life, increase the
capacity, improve the safety or mitigate future environmental risks at the
Indian and Powerine Refineries. If any of these conditions are satisfied, the
costs are capitalized. Otherwise, such costs are expensed as incurred.
At intervals of approximately every three years, it is anticipated that
the Indian and Powerine Refineries will be shut down so that necessary
periodic repairs and maintenance can be conducted (a "turnaround").
Refurbishment costs approximately equal to the expected cost of the first
Indian turnaround were capitalized at September 30, 1990. Upon acquisition of
Powerine, such refurbishment costs were identified and included in
capitalized costs. The refurbishment capitalized costs are being amortized on
a straight-line basis over the estimated period between turnarounds -- 3
years. Future costs associated with each subsequent turnaround will likewise
be capitalized and amortized over the projected period until the next
turnaround.
Costs for precious metal catalysts are included in Refining property,
plant and equipment and are not amortized.
Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and gas
properties and equipment costs. Under this method of accounting, all
productive and nonproductive costs incurred in the acquisition, exploration
and development of oil and gas reserves are capitalized. Capitalized costs
are amortized on a composite unit-of- production method using estimates of
proved reserves. Capitalized costs which relate to unevaluated oil and gas
properties are not amortized until proved reserves are associated with such
costs or impairment of the property occurs. Management and drilling fees
earned in connection with the transfer of oil and gas properties to a
partnership or joint venture and proceeds from the sale of oil and gas
properties are recorded as reductions in capitalized costs. Expenditures for
repairs and maintenance of wellhead equipment are expensed as incurred. Net
capitalized costs in excess of the estimated present value of future cash
inflows from proved oil and gas reserves, reduced by operating expenses and
future development expenditures, are charged to current expense.
Hedging Activities
The Company employs several hedging strategies to minimize the impact of
the volatility in feedstock costs. These strategies generally involve the
purchase and sale of exchange-traded, energy-related futures and options with
a duration of 12 months or less. The Company hedges current inventory and
future commitments.
46
<PAGE>
The number of barrels of crude oil and refined products covered by such
contracts varies from time to time. Such purchases and sales are closely
managed, balanced daily and subject to internally established risk standards.
Gains and losses from hedging activities are credited or debited to the value
of the inventory being hedged.
Other Assets
Costs incurred related to the initial issuance or extension of debt or
other long-term agreements are capitalized and amortized over a) the stated
term of the related agreement or b) the expected term of benefit of the
agreement, if shorter than the stated term. Unamortized costs are written-off
when the related agreement is terminated. Costs for long-term catalysts are
capitalized and amortized on a straight-line basis over the estimated useful
lives of such catalysts -- generally 2.5 to 10 years (See Note 11).
Goodwill
Goodwill was acquired in conjunction with the acquisition of Powerine.
Goodwill is amortized over 15 years on a straight-line basis.
Gas Contract
The purchase price allocated to the Lone Star Contract (See Note 4) is
deferred and amortized on a straight-line basis over the term of the related
contract (6.5 years).
Deferred Revenue
Commitments related to forward sales are recorded at their fulfillment
value at the date of the transaction. The difference between the cash
proceeds and the future commitments are amortized over the lives of the
agreements using the interest method (See Note 15).
Income Taxes
In October 1992, the Company adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), Accounting for Income Taxes. FAS 109 is an
accounting approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, FAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates.
Previously, the Company used the FAS 96 asset and liability approach that
gave no recognition to future events other than the recovery of assets and
settlement of liabilities at their carrying amounts (See Note 21).
Earnings Per Share
Primary earnings per common share are based upon the weighted average
number of common and common equivalent (if considered dilutive) shares
outstanding using either the treasury stock or modified treasury stock
method. Fully diluted earnings per common share are presented where the
dilution in earnings per share resulting from full dilution is greater than
3% and for all succeeding annual periods.
Reclassifications
Certain reclassifications have been made to make the periods presented
comparable.
NOTE 3 -- MG SETTLEMENT AND REFINERY TRANSACTIONS -- PROFORMA BALANCE SHEET
(UNAUDITED)
The unaudited proforma consolidated balance sheet illustrates the
anticipated consolidated financial position of the Company after giving
retroactive effect to the MG Settlement and after writing down the refining
assets to the amount of proceeds that would have been receivable had the
Refinery Transactions (as defined below) closed on September 30, 1994.
On August 31, 1994, the Company entered into agreements with MG and
certain of its affiliates pursuant to which the parties thereto agreed to
amend or terminate a number of contractual relationships. This settlement was
effected through two steps as described in Note 26.
47
<PAGE>
On December 5, 1994, the Company entered into an agreement with SIPAC
Inc., a Delaware company formed by the Company's President and Chief
Operating Officer, to sell all of its refining operations (the "Refinery
Transactions"). This transaction, which is subject to stockholder approval,
is to be effective as of January 31, 1995 as described in Note 26.
The significant adjustments to the consolidated balance sheet reflecting
the MG Settlement and the Refinery Transactions are as follows:
<TABLE>
<CAPTION>
Adjustments
------------------------------
Historical MG Refinery
9/30/94 Settlement Transactions ProForma
------------ ------------ -------------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets .................... $236,573 ($ 68,088) ($ 123,673) $ 44,812
Assets held for sale, net ......... 62,763 62,763
Property, plant and equipment ..... 323,730 (298,858) 24,872
Other assets ...................... 86,188 3,325 (18,587) 70,926
------------ ------------ -------------- -----------
$646,491 ($ 64,763) ($ 378,355) $203,373
============ ============ ============== ===========
Liabilities and Stockholder's Equity
Current liabilities ............... $259,342 ($ 39,936) ($ 177,484) $ 41,922
Long-term debt .................... 51,361 51,361
Long-term debt-related parties .... 248,491 (248,241) 250
Other liabilities ................. 49,377 677 (45,552) 4,502
Equity ............................ 37,920 222,737 (155,319) 105,338
------------ ------------ -------------- -----------
$646,491 ($ 64,763) ($ 378,355) $203,373
============ ============ ============== ===========
</TABLE>
The unaudited proforma consolidated financial position of the Company is
based upon available information and assumes that the MG Settlement occurred
as of September 30, 1994 and the Refining assets were written down to the
amount of proceeds that would have been receivable pursuant to the proposed
Refinery Transactions assuming an effective date of September 30, 1994. There
can, however, be no assurance that the refining assets and operations will be
sold or that they will be sold for the same terms as those set forth in the
proposed Refinery Transaction or that the Company's actual consolidated
financial position will be as set forth in the Proforma Balance Sheet
pursuant to the terms of the Refinery Transactions.
NOTE 4 -- ACQUISITIONS
As described in Note 1, on December 3, 1992, the Company acquired certain
oil and gas assets from ARCO. The purchase price of $103,680 consisted of
$95,934 in cash paid for assets, $5,634 cash paid for transaction costs and
$2,112 in liabilities assumed. The asset acquisition was accounted for as a
purchase. The Company's allocation of the purchase price is as follows:
Gas contracts ............................. $ 61,348
Gas pipeline .............................. 27,439
Oil and gas properties ..................... 13,193
Deferred tax asset ........................ 1,700
----------
$103,680
==========
As of October 1, 1993, the Company acquired from MG an option to acquire
Powerine, the owner of a 49,500 barrel per day refinery located in Santa Fe
Springs, California in consideration of (i) the payment of $8,000; (ii) the
assumption of a $3,027 indemnity obligation related to yield losses incurred
by Powerine under a processing arrangement with MG; (iii) the assumption of a
$2,675 tax indemnification to the previous owner of Powerine; (iv) the
assumption of debt obligations to MG of $128,002 and other liabilities of
$44,933; and (v) the payment of transaction costs of $980. In addition, the
Company borrowed $2,971 from MG Trade Finance Corp. ("MGTFC"), a wholly owned
48
<PAGE>
subsidiary of MG, to purchase feedstocks. The acquisition was accounted for as a
purchase at predecessor basis due to the significant related party relationship.
The Company recorded $160,106 of refinery assets, $14,151 of other tangible
assets and the remaining $13,360 of goodwill and deferred tax assets. The
Company immediately exercised the option to acquire Powerine for a nominal
amount, and concurrently (a) entered into the Powerine Offtake Agreement with
MGRM; (b) amended Powerine's loan agreement with MGTFC; and (c) amended the
Company's crude oil supply agreement with MG to include Powerine as a party. To
finance the acquisition, a subsidiary company resold to MGTFC a cash
participation in the revolving credit facility provided by MGTFC to IRLP.
The results of operations of Powerine are included in the statement of
operations commencing October 1, 1993.
The following unaudited proforma results of operations assume that the
aforementioned acquisitions of the ARCO assets and Powerine occurred at the
inception of fiscal year 1993, that Powerine was operating under the Powerine
Offtake Agreement during 1993, and that the Powerine Refinery was operating
at full capacity during this period. In addition to the inclusion of actual
Powerine financial results, an incremental adjustment to reflect these
assumptions has been made. Such adjustment includes additional revenues of
$145.6 million and net income of approximately $34.1 million pertaining to a
liquid yield of 5.3 million barrels assumed during the shutdown period.
Year Ended
September 30,
1993
---------------
(Unaudited)
Revenues ......................................... $ 999,392
Operating income ................................. $ 62,732
Net income per share before cumulative effect of a
change in accounting principle .................. $ 67,503
Net income per share before cumulative effect of a
change in accounting principle, fully diluted ... $ 8.92
Weighted average number of common and common
equivalent shares outstanding, fully diluted .... 7,581,000
NOTE 5 -- RESTRICTED CASH
Restricted cash consists of the following:
September 30,
----------------------
1994 1993
--------- ---------
Environmental escrow funds ................... $ 5,589 $ 5,514
Margin accounts related to hedging activities.. 3,360
Funds supporting letters of credit ........... 1,365 2,873
Capital funding accounts ..................... 4,017 971
Other ........................................ 1,554 991
--------- ---------
$12,525 $13,709
========= =========
NOTE 6 -- TEMPORARY INVESTMENTS
Temporary investments consist of the following:
September 30,
--------------------
1994 1993
-------- --------
Treasury bills ........ $2,490 $7,247
Commercial paper........ 1,946
-------- --------
$4,436 $7,247
======== ========
49
<PAGE>
The Company invests in United States Treasury Bills with a maturity of
less than 90 days and has pledged this investment as collateral for NYMEX
margin activity. In addition, commercial paper purchased through a major bank
has been pledged as collateral against letters of credit held by the Illinois
Environmental Protection Agency ( See Note 13).
NOTE 7 -- ACCOUNTS RECEIVABLE
Based upon past customer experiences combined with the limited number of
customer accounts receivable relationships, management believes all
receivables to be collectible. Accounts Receivable consists of the following:
September 30,
----------------------
1994 1993
--------- ---------
Natural gas marketing. ................ $11,472 $ 9,231
Unrealized gain on forward commitments 847 2,885
Insurance claims and refunds .......... 3,160 1,500
Oil and gas ........................... 1,485 1,740
Income tax refunds .................... 4,770
Refined products ...................... 342
Other ................................. 337
--------- ---------
$22,413 $15,356
========= =========
NOTE 8 -- INVENTORIES
Inventories consist of the following:
September 30,
----------------------
1994 1993
--------- ---------
Crude oil ...................... $49,029 $48,241
Unfinished products ............ 19,549 7,242
Finished products .............. 4,458
Materials and supplies........... 10,675 4,120
--------- ---------
$83,711 $59,603
========= =========
NOTE 9 -- PROPERTY, PLANT AND EQUIPMENT
Refining property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
September 30,
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Refining plant ......................................................... $260,379 $ 89,459
Refining plant -- capitalized turnaround costs ......................... 23,218 10,151
Land ................................................................... 10,550 84
Precious metal catalyst ................................................ 3,338
Transportation and heavy equipment ..................................... 1,789 1,009
Maintenance and technical equipment .................................... 1,892 1,203
Buildings .............................................................. 1,332 1,048
Construction in progress ............................................... 40,238 23,250
---------- ----------
342,736 126,204
Less: Accumulated depreciation and amortization of capitalized
turnaround costs ...................................................... (46,786) (21,420)
---------- ----------
$295,950 $104,784
========== ==========
</TABLE>
50
<PAGE>
Natural gas transmission consists of the following:
September 30,
----------------------------
1994 1993
--------- ---------
Natural gas pipeline ....................... $ 27,930 $ 27,909
Less: Accumulated depreciation ............. (3,395) (1,535)
--------- ---------
$ 24,535 $ 26,374
========= =========
Furniture, fixtures and equipment are as follows:
September 30,
--------------------
1994 1993
-------- --------
Furniture and fixtures ............. $4,177 $2,371
Less: Accumulated depreciation ...... (932) (502)
-------- --------
$3,245 $1,869
======== ========
Gas contracts consist of the following:
September 30,
-----------------------
1994 1993
---------- ---------
Gas contracts ...................... $ 61,151 $61,348
Less: Accumulated amortization ...... (17,262) (7,904)
---------- ---------
$ 43,889 $53,444
========== =========
NOTE 10 -- OIL AND GAS PROPERTIES
September 30,
----------------------
1994 1993
--------- ---------
Evaluated properties ............................... $24,153 $23,169
Less:
Accumulated depreciation, depletion and
amortization .................................. (7,910) (5,897)
Accumulated full cost ceiling reserve ........... (97) (97)
--------- ---------
16,146 17,175
Undeveloped properties .......................... 97
--------- ---------
$16,146 $17,272
========= =========
NOTE 11 -- OTHER ASSETS
Other assets consist of the following:
September 30,
-----------------------
1994 1993
---------- ---------
Indian Offtake Agreement extension -- related party $ 11,725 $11,550
Debt issuance costs ............................... 2,957 3,057
Debt issuance costs -- related party .............. 8,757 9,484
Long-term catalysts ............................... 5,176 1,005
Long-Term Supply Agreement support -- related party 855 855
Forward Sale deferred interest and related costs .. 7,273 7,095
Officer note receivable ........................... 250 250
Other ............................................. 1,405 2,197
---------- ---------
38,398 35,493
Less: Accumulated amortization .................... (17,658) (5,662)
---------- ---------
$ 20,740 $29,831
========== =========
51
<PAGE>
In fiscal 1993, the Company recorded $17,355 of deferred assets which
reflects the fair value of the Company's common stock, warrants to purchase
common stock and convertible debt issued to certain shareholders, principally
MG, and their nominees. The securities were issued in consideration for debt
issuances, debt extension, processing agreements and the extension of the
Indian Offtake Agreement. On October 14, 1994, in conjunction with the MG
Settlement, the Company wrote off all deferred assets related to the
agreements terminated on that date (See Note 26).
NOTE 12 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
September 30,
------------------------
1994 1993
--------- --------
Interest ....................................... $ 679 $ 1,866
Employee related costs ......................... 7,924 2,613
Taxes, including payroll taxes ................. 9,622 1,437
Stock appreciation rights ...................... 4,191 3,603
Environmental .................................. 1,132 728
Other .......................................... 3,621 379
------- -------
$27,169 $10,626
======= =======
NOTE 13 -- ENVIRONMENTAL MATTERS
Powerine Oil Company
Powerine is the subject of various environmental claims, including being
named as a potentially responsible party ("PRP") in three sites in
California. Powerine, in consultation with outside legal counsel and
environmental specialists, had recorded, prior to acquisition, a $28,000
reserve for various long-term environmental claims. This reserve was to
satisfy pending and anticipated claims such as those related to such
discontinued operations like former gasoline service stations and pipelines,
historic offsite waste disposal sites located within the state of California,
refinery groundwater contamination, and alleged impacts on nearby properties.
Management believes that the reserve is adequate to satisfy anticipated
environmental claims. However, as a PRP, Powerine's liability is joint and
several. Accordingly, if another PRP should fail to fulfill its obligations,
Powerine may be responsible in the future for a portion of the failing
parties' obligations.
Current year costs of $619 associated with investigations addressing
underground water contamination beneath the Powerine Refinery and claims by
various regulatory agencies and adjacent property owners regarding reported
impacts by Powerine at various locations were expensed.
Indian Refining Company
In October 1989, in connection with the Illinois Environmental Protection
Agency's (the "IEPA") concern over contamination from operations prior to the
Company's acquisition of the Indian Refinery, Indian Refining Company
("IRC"), a wholly-owned subsidiary of the Company which then owned the Indian
Refinery, signed an agreement in principle (the "Agreement in Principle")
with the IEPA which requires IRC to conduct certain environmental tests to
determine the nature and extent of historical contamination at the Indian
Refinery, to develop remediation plans as necessary for the contamination
revealed by the testing, and to provide up to $1,000 of financial security
until the work is completed.
In April 1990, IRC sold the Indian Refinery's operating assets to IRLP. In
conjunction with the transfer, IRLP is required to make payments of $1,000 to
IRC annually for eight years to be used for environmental assessment and
testing. IRC is required to use such payments to conduct the required
environmental assessment and testing. IRLP recorded this liability of $5,170,
the present value of such payments discounted at 12.5%.
Since April 1990, IRC has incurred expenses of $1,644 to conduct the
required environmental assessments and testing. IRC's accrued environmental
compliance cost liability was $3,526 at September 30, 1994, representing the
best estimate of future costs to be incurred. Until further environmental
testing and assessment is completed, management cannot determine if
environmental expenditures will be required in excess of those already
accrued.
52
<PAGE>
Indian Refining Limited Partnership
Included in accrued expenses (See Note 12), IRLP has incurred $1,132 of
costs associated with disposal of existing hazardous waste.
NOTE 14 -- DEBT
On October 14, 1994, a significant amount of the Company's debt was
exchanged with or assumed by MG (See Notes 3 and 26).
In connection with its acquisition of IRLP, the Company arranged for
financing through a financial institution for senior mortgage debt (the
"Senior Mortgage Debt"). This financing, in combination with credit
agreements put in place with MG, were believed to be adequate to fund the
acquisition and start-up period. As described in Note 1, the Company
encountered significant difficulties in starting the Indian Refinery and
additional funding was necessary. This funding was provided by MG and its
subsidiaries primarily in the form of working capital and capital expenditure
advances as well as debt accrued under the Indian Processing Agreements. In
conjunction with the Powerine acquisition on October 1, 1993 (See Note 4), a
preexisting loan agreement between Powerine and MGTFC ("Powerine Loan
Agreement") was modified and Powerine's existing balance of $128,002 of
credit agreements with MGTFC was assumed by the Company.
Long-term debt consists of the following:
September 30,
------------------------------
1994 1993
---------- ----------
Senior Facility ........................ $ 73,041 $ 89,594
GECC Loan .............................. 60,117 79,141
Other .................................. 2,500 665
--------- ---------
135,658 169,400
Less: Current portion .................. (84,297) (25,344)
--------- ---------
$ 51,361 $ 144,056
========= =========
Long-term debt-related party consists of the following:
September 30,
-------------------------
1994 1993
---------- -----------
Credit agreements ............................... $168,130 $ 37,375
MGTFC Subordinated Loan ......................... 9,441 7,932
MGTFC Subordinated Note ......................... 72,281 70,000
Revolving Credit Facility ....................... 26,861 27,609
Convertible Debenture ........................... 5,500 5,500
Cash Participations ............................. (23,748) (118,796)
---------- -----------
258,465 29,620
Less: Current portion, net of cash participations (9,974) (12,915)
---------- -----------
$248,491 $ 16,705
========== ===========
SENIOR FACILITY
On May 27, 1993, IRLP entered into a $120,000 senior loan facility (the
"Senior Facility") with a third party financial institution, Societe Generale
("SocGen"). The Senior Facility was used to (a) repay the Senior Mortgage
Debt, (b) repay MGTFC for certain advances made for capital expenditures, (c)
repay certain subordinated debt owing by IRLP to MGTFC, (d) repay MGTFC for
certain advances made to IRLP for capital expenditures, and (e) provide IRLP
with funds for capital projects designed to enable the Indian Refinery to
comply with the 1990 Clean Air Act and to expand its capacity. The right of
IRLP to draw down on the Senior Facility terminates on June 30, 1996. The
Senior Facility matures on May 31, 2000, and is payable, in arrears, in
twenty-six quarterly installments which commenced December 31, 1993. In
addition, IRLP is required to make certain prepayments of its obligations
under the Senior Facility if IRLP generates excess cash flow, as defined in
<PAGE>
the loan agreement. Interest on the advances under the Senior Facility is
computed, at IRLP's election, based upon one of three base rates plus an
applicable margin, which may decline over the life of the loan if certain tests
are met. On June 7, 1993 the Company entered into a four year rate cap agreement
with the Senior Facility lender which places an 8% per annum interest rate
ceiling on the loans. In addition, IRLP was required to pay a commitment fee of
.0375% on the unused portion of the facility.
The Company received notice from SocGen that IRLP is in default of several
covenants contained in the Senior Facility, under which $73,041 is
outstanding at September 30, 1994. The defaults in question relate primarily
to the financial and other problems of MG AG and its United States
subsidiaries. SocGen has also formally notified the Company that no further
borrowings will be allowed under the Senior Facility at which time the
commitment fee was waived. Notwithstanding the defaults, IRLP has paid all
principal, interest and other amounts owing under the Senior Facility on a
current, timely basis. During September, the Company determined that a
prepayment obligation existed since IRLP had generated significant excess
cash flows. This obligation combined with the mandatory quarterly payment
resulted in a payment due of $21,597. In conjunction with the MG Settlement,
MG agreed to assume all of IRLP's obligations to SocGen under the Senior
Facility. As such, MG and SocGen agreed that MG would fund $10,000 during
September 1994 and that $11,597 would not be subject to the rate cap and
would be converted to the prime interest rate plus one point (8.75%) and be
settled by October 14, 1994. Interest on the balance of the debt obligations
is based upon the Eurodollar rate plus 1.75% (6.8% at September 30, 1994)
(See Note 26).
MG has an option to purchase all outstanding obligations under the Senior
Facility at any time. The Senior Facility contains covenants prohibiting
debt, liens, distributions on stock, certain corporate transactions including
cash distributions to the Company other than those related to management
fees, income taxes and other matters. The Senior Facility is secured by the
Indian Refinery's real property, fixed assets and a percentage of accounts
receivable, as well as by a second lien on inventory and the remaining
accounts receivable. On October 14, 1994, MG assumed IRLP's obligations to
SocGen (See Note 26).
SENIOR MORTGAGE DEBT
In connection with obtaining the new Senior Facility, IRLP repaid the
previous Senior Mortgage Debt in full. As part of that transaction, IRLP paid
MG the $3,600 prepayment earned as consideration for certain guarantees
provided by MG for the Senior Mortgage Debt. The debt bore interest at the
one-month LIBOR rate plus 5.0% and was payable quarterly in arrears.
IRLP wrote off $2,680 of unamortized debt issuance costs related to the
Senior Mortgage Debt as of September 30, 1992.
MGTFC BRIDGE LOAN, GECC LOAN AND MGTFC SUBORDINATED LOAN
As described in Note 1, on December 3, 1992, the Company through its
subsidiary limited partnerships, CEC Gas Marketing Limited Partnership ("CEC
Gas Marketing"), Castle Texas Pipeline Limited Partnership ("Castle Texas
Pipeline") and Castle Texas Production Limited Partnership ("Castle
Production"), acquired certain oil and gas assets from ARCO. The Company
obtained a loan from MGTFC to make the initial $6,250 deposit to ARCO (the
"Deposit Note"). The Deposit Note bore interest at 9% and was secured by the
deposit and the stock of a subsidiary of the Company. Upon the closing of the
ARCO acquisition on December 3, 1992, the purchase price was financed by an
aggregate $100,500 term loan from MGTFC bearing interest at 9% (the "MGTFC
Bridge Loan"). In connection with this financing, the Company paid MGTFC
$3,206 as a loan syndication and advisory fee.
On September 2, 1993, the Company refinanced a substantial portion of the
MGTFC Bridge Loan with General Electric Capital Corporation ("GECC"). Under
the terms of the GECC financing, GECC made an $80,000 senior secured loan
(the "GECC Loan") to CEC Gas Marketing and Castle Texas Pipeline which was
used to repay the majority of the MGTFC Bridge Loan. MGTFC provided a
subordinated loan (the "MGTFC Subordinated Loan") for the balance of the
existing MGTFC Bridge Loan of approximately $8,000 bearing interest at 9%.
The MGTFC Subordinated Loan was cancelled on October 14, 1994 as part of the
MG Settlement (See Note 26). The GECC Loan bears interest at a fixed rate of
8.33%. Interest payments and principal amortization will be made on a monthly
54
<PAGE>
basis in an amount equal to the greater of a pre-established amortization
schedule or 90% of the combined net cash flow of CEC Gas Marketing and Castle
Texas Pipeline. Such net cash flow also includes the gas sales revenues from
Castle Production, less a fixed allowance for operating and other expenses. Both
the GECC Loan and the MGTFC Subordinated Loan contain various representations,
warranties and covenants. GECC has a first security interest in the assets of
CEC Gas Marketing and Castle Texas Pipeline as well as a pledge of the
partnership interests and capital stock of the general and limited partners of
these partnerships. In consideration for making the MGTFC Subordinated Loan, the
Company granted MGTFC a 20% interest in the net profits of certain partnerships,
which interest will become effective after the repayment of the GECC Loan and
the MGTFC Subordinated Loan, and the payment of the $20,000 due to MGNG under
the Net Cash Flow Agreement, as defined in Note 23. In conjunction with the
October 14, 1994 restructuring, the Net Cash Flow Agreement and the 20% interest
in the net profits of certain partnerships agreements were terminated prior to
the time any amounts were paid under any of such agreements (See Note 26).
CREDIT AGREEMENTS -- RELATED PARTIES
The principal due under credit agreements with related parties consists of
the following:
September 30,
------------------------
1994 1993
---------- ----------
Loans from MGTFC ................................. $167,880 $ 34,625
Loans from stockholders of the Company ........... 250 2,750
-------- --------
$168,130 $ 37,375
======== ========
As a result of the Powerine acquisition (See Note 4) effective October 1,
1993, the Company assumed an additional $128,002 of debt to MGTFC. As of
September 30, 1994, the Company and Powerine had outstanding debt obligations
to MGTFC of $34,625 and $133,255, respectively. (See Powerine Loan Agreement,
as defined below).
The Company's loans from MGTFC (the "MGTFC Credit Agreement") are secured
by a pledge of the promissory note issued by Terrapin Resources, Inc.
("Terrapin"), a collateral assignment of the Terrapin pledge agreement and a
collateral assignment of a second lien on the assets of IRLP. At September
30, 1994, the book values of the related exploration and production assets
and the Indian Refinery plant were approximately $5,243 and $121,032,
respectively.
The aggregate principal amount of the MGTFC Credit Agreement is due and
payable on the later of December 31, 1996 or the date upon which the Senior
Facility is repaid in full. Principal is divided into two tranches; tranche A
is in the amount of $8,000 which bears interest initially at the prime rate
plus 1%, escalated each June 30 and December 31 beginning on December 31,
1993 by another 2%, to a maximum of prime plus 6% (12.75% at September 30,
1994); and tranche B is in the amount of $26,625 which bears interest at the
twelve month LIBOR rate, determined annually on June 30, plus 1/2% (6.31% at
September 30, 1994).
Interest is payable annually in arrears on December 31. The Company can
elect to pay interest in cash or common stock. MGTFC can also elect to
capitalize interest on the loan in the event that the Company elects to pay
interest in common stock rather than in cash. During fiscal 1994, the Company
paid MGTFC $1,200 of accrued interest and during fiscal 1993, the Company
paid MGTFC $7,734 related to principal, previously capitalized interest and
accrued interest. On October 14, 1994, the MGTFC Credit Agreement was
terminated at which time the $36,300 of principal and accrued interest owing
thereunder was exchanged as part of the MG Settlement (See Note 26).
On December 11, 1991, two stockholders loaned the Company a total of
$2,750. The stockholder loans mature on June 30, 1996 and earn interest at
the twelve month LIBOR rate, determined annually on December 11, plus 1/2%
(4.25% at September 30, 1994). Interest is payable annually on December 31 of
each year and at maturity of the stockholder loans. The Company may elect to
pay interest in either cash or common stock. Should the Company elect to pay
interest in common stock, the lenders may, independently, elect to capitalize
interest in lieu of accepting common stock. The Company issued 110,000 shares
of its stock as consideration for making these loans. During fiscal 1994, the
Company paid the two stockholders accrued interest of $130. During fiscal 1994,
55
<PAGE>
one of the two stockholders sold all of their shares in the Company. The debt
related to this stockholder has been reclassified as third party debt. During
November 1994, the Company received notice from the former stockholder that the
consummation of the MG Settlement may have constituted an event of default (See
Note 26).
POWERINE LOAN AGREEMENT
Powerine and MGTFC entered into the Powerine Loan Agreement dated as of
February 2, 1992, which was amended and restated on October 1, 1993.
The Powerine Loan Agreement provides for a revolving credit facility and a
term loan facility. Under the revolving loan portion of the Powerine Loan
Agreement, Powerine may obtain up to $115,000 of cash advances or letters of
credit for the purchase of feedstocks, for commitments to finance the
purchase of feedstocks pursuant to the MG Supply Agreement, for the purchase
of petroleum products in connection with exchange or hedging contracts, to
pay or satisfy bonding or other requirements of public utilities and/or
government entities, for general working capital purposes and for the payment
of a management fee to the Company. The revolving loan portion of the
Powerine Loan Agreement bears interest at the overnight Eurodollar rate plus
1/2% (5.44% at September 30, 1994) and as amended on October 14, 1994,
terminates on March 31, 1995. There was no outstanding debt at September 30,
1994 related to the revolving credit facility.
The term loan portion of the Powerine Loan Agreement was used by Powerine
to repay all existing obligations and indebtedness of Powerine to MGRM and to
provide funds for working capital purposes. The term loan portion of the
Powerine Loan Agreement is divided into three tranches. Tranche A is in the
principal amount of $90,000, of which $89,255 was outstanding at September
30, 1994, and bears interest at the one month LIBOR rate, determined on the
first of the month, plus 3/4% (5.56% at September 30, 1994). Tranche B is in
the principal amount of $44,000 and bears interest at the one month LIBOR
rate, determined on the first of the month, plus 2 1/4% (7.06% at September
30, 1994). Tranche C is in the principal amount of $35,000 and bears interest
at the one month LIBOR rate, determined on the first of the month, plus 2%
and is available to be used for a sulfuric acid alkylation unit if various
specified conditions are met and for certain other environmental compliance
projects.
There were no borrowings under Tranche C at September 30, 1994. Principal
under each of the tranches is due and payable on September 30, 1997.
The Powerine Loan Agreement includes various representations, warranties
and covenants, including covenants restricting liens, debt, distributions on
stock and certain corporate transactions. The Powerine Loan Agreement is
secured by liens on Powerine's real and personal property, as well as by
Powerine's futures accounts at MG Futures, Inc., a wholly-owned subsidiary of
MG. The Company has guaranteed Powerine's obligations under the term portion
of the Powerine Loan Agreement and has agreed to guarantee up to an
additional $15,000 of revolver indebtedness. On October 14, 1994, the term
loan portions of the loan were terminated, at which time the $133,600 of
principal and accrued interest owing thereunder was forgiven ( See Note 26).
POWERINE OFFTAKE SUBDEBT
Under the terms of the Powerine Offtake Agreement, MGRM is required to
purchase substantially all of Powerine's refined products. In the event that
Powerine delivers any non-spec products to MGRM, then Powerine will be deemed
to have incurred debt to MGRM ("Powerine Offtake Subdebt") in an amount equal
to the difference in value between the non-spec product delivered and product
which would have met industry specifications. No Powerine Offtake Subdebt has
accrued as of September 30, 1994. Any Powerine Offtake Subdebt that accrues
will be represented by a subordinated note (the "Powerine Offtake Note") in
favor of MGRM. The Powerine Offtake Note is secured by Powerine's real
property and fixed assets. Pursuant to the terms of the MG Settlement, the
Powerine Offtake Agreement terminates on February 1, 1995 (See Note 26).
REVOLVING CREDIT FACILITY
February 1, 1992 through May 26, 1993
The Revolving Credit Facility provided funding for IRLP's (a) acquisition
of feedstocks, (b) day-to-day operations, (c) up to $13,500 of capital
expenditures for the Indian Refinery, (d) repayment of debt due to MGRM under
the Indian Processing Agreement, (e) the cost of margin requirements in
hedging, (f) debt service payments to the senior mortgage lender and
56
<PAGE>
(g) installment obligation payments to Indian Refining Company. Pursuant to the
terms of the Revolving Credit Facility, a total letter of credit commitment of
$180,000 and an advance commitment of $115,000 were available to IRLP. The total
of advances, including working capital loans, permitted under the facility was
further limited to a stipulated collateral base equal to the net stipulated
values of certain IRLP assets less the stipulated values of certain IRLP
liabilities plus $90,900.
Commitments under the Revolving Credit Facility were secured by (a) all of
IRLP's current assets, except certain restricted funds applicable to the
Senior Mortgage Debt and (b) a junior lien on the Indian Refinery.
May 27, 1993 Through September 30, 1994
On May 27, 1993, the Revolving Credit Facility was amended to (a) increase
the amount of the Revolving Credit Facility to an amount up to $362,000 and
(b) segregate the $70 million of the existing facility which represented the
amount previously owing to MGRM under the Indian Processing Agreement into a
subordinated note (discussed below). As of September 30, 1994, the total
commitment available was equal to $245,000. Of this amount, and subject to a
defined borrowing base, up to 60% of the total commitment is available to be
drawn as advances and 80% of the total commitment is available to be used for
letters of credit. The Revolving Credit Facility was further amended on
October 1, 1993 to extend the termination date for the commitments to finance
and the letters of credit to September 30, 1997. All outstanding advances,
letters of credit and commitments to finance cannot exceed the total
commitment in effect at any time. The total commitment increases up to
$362,000 under certain conditions. At September 30, 1994, $43,140 was
available for additional advances, and letters of credit of $79,501 and
commitments to finance of $942 were outstanding. The Revolving Credit
Facility contains provisions allowing a $20,000 working capital deficit, as
defined in the agreement and restricting debt, liens, distributions on stock,
and certain corporate transactions including restrictions on payments of
dividends to the Company. The Revolving Credit Facility, as amended on
October 14, 1994, terminates on March 31, 1995.
The Revolving Credit Facility is secured by a first lien on a portion of
inventory and accounts receivable and a second lien on the remaining
inventory, accounts receivable, real estate and personal property. In
addition, the Company must pay certain fees in connection with the issuance
of letters of credit and other administrative fees. Those fees aggregated
$1,415 for the year ended September 30, 1993 and $1,364 for the year ended
September 30, 1994. Interest on the Revolving Credit Facility is due monthly
based on the overnight Eurodollar rate plus 1/2% (5.44% at September 30,
1994). On October 14, 1994, the Revolving Credit Facility was amended (See
Note 26).
MGTFC SUBORDINATED NOTE
IRLP executed a subordinated note (the "MGTFC Subordinated Note") in favor
of MGTFC dated May 27, 1993 in the aggregate principal amount of $70,000
which represents indebtedness previously owing to MGRM under the Indian
Processing Agreement. During fiscal 1994, IRLP borrowed an additional $2,281.
The MGTFC Subordinated Note bears interest at a rate equal to the 90 day
LIBOR rate, determined daily, plus 3% (8.5% at September 30, 1994). The
entire principal amount of the MGTFC Subordinated Note is due, under certain
circumstances, upon the later of December 31, 1996 or the date upon which the
Senior Facility has been paid in full. On October 14, 1994, the MGTFC
Subordinated Note was terminated, at which time $76,400 of principal and
accrued interest owing thereunder was forgiven (See Note 26).
INDIAN OFFTAKE SUBDEBT
Under the terms of the Indian Offtake Agreement, MGRM is required to
purchase all of IRLP's refined products. In the event that IRLP delivers any
non-spec products to MGRM, then IRLP will be deemed to have incurred debt to
MGRM ("Indian Offtake Subdebt") in an amount equal to the difference in value
between the non-spec product delivered and product which would have met
industry specifications. No Indian Offtake Subdebt has accrued as of
September 30, 1994. Any Indian Offtake Subdebt that accrues will be
represented by a subordinated note (the "Indian Offtake Note") in favor of
MGRM. The Indian Offtake Note is secured by IRLP's real property and fixed
assets. Pursuant to the terms of the MG Settlement, the Indian Offtake
Agreement will terminate on February 1, 1995 (See Note 26).
57
<PAGE>
CONVERTIBLE DEBENTURE
The Company issued MG a debenture with a face amount of $5,500 (the
"Convertible Debenture") in conjunction with the restructuring of its offtake
and debt agreements. The note bears interest at the ninety day LIBOR rate,
determined annually on May 12 (4.81% at September 30, 1994), and matures on
December 31, 1996. However, MG has the option to convert the principal of the
note into 500,000 shares of the Company's common stock after April 30, 1994
until the expiration of the conversion feature on May 31, 1995. On October
14, 1994, the Convertible Debenture was cancelled (See Note 26).
MGTFC PRODUCTION LOAN
On September 30, 1993, Castle Production and MGTFC entered into a term
loan (the "MGTFC Production Loan") of up to $52,000 to Castle Production,
$47,000 of which is available to be drawn until December 31, 1996 to finance
additional drilling and well completions, and $5,000 of which is available to
finance the acquisition of additional interests in its wells. The MGTFC
Production Loan bears interest at the prime rate plus 1% and will be
amortized through the application of 100% of Castle Production's net cash
flow. The $5,000 acquisition loan matures on September 30, 1998, and the
development loan matures five years after Castle Production's first drawdown
under the development loan. There were no borrowings on the loan at September
30, 1994.
In connection with the MGTFC Production Loan, MGTFC and Castle Production
entered into a swap agreement (the "Swap") with MG under which, during a term
ending May 31, 1999, Castle Production is required to pay MG the current
market price that Castle Production is being paid at the wellhead for its
production from the Oak Hill Field and MG is obligated to pay Castle
Production a fixed price for the gas produced. The payment obligations under
the Swap were designed to correspond to the development and physical
deliveries of gas by Castle Production under its gas contracts.
In consideration for the MGTFC Production Loan, Castle Production has
agreed to grant MGTFC rights to 50% of Castle Production's net cash flow,
commencing on the date on which the MGTFC Production Loan is repaid. In
addition, in the five year period commencing on September 30, 1993 (the
"Initial Period"), MGTFC will receive a marketing fee of $.35 per MMBtu of
gas produced by Castle Production in lieu of the 50% interest.
On October 14, 1994, the MGTFC Production Loan, the Swap and the 50% net
cash flow interest agreements were terminated prior to the time when any
amounts were paid to MGTFC (See Note 26).
CASH PARTICIPATIONS
In conjunction with the Forward Sale Contract (see Note 15), on September
29, 1993 the Company utilized $118,796 of the cash proceeds to purchase
participations in the MGTFC Credit Agreements, the Revolving Credit Facility
and the Subordinated Loan. During the year ended September 30, 1994, the
Company purchased additional participations with funds obtained from the
stock offering. In addition, participations were utilized to acquire Powerine
Oil Company, to finance margin requirements, to acquire the Company's common
stock and to purchase crude oil related to the Forward Sale Contract (See
Notes 3 and 15). As the right of offset exists, the remaining participations
are shown as a reduction of debt on the Consolidated Balance Sheets. On
October 14, 1994, all remaining cash participations were exchanged as part of
the MG Settlement (See Note 26).
MATURITIES
The scheduled maturities of long-term debt outstanding as of September 30,
1994, after giving retroactive effect to the MG Settlement (see Note 26), are
as follows:
For the Year Ending September 30,
--------------------------------
1995 ........................ $11,256
1996 ........................ 23,385
1997 ........................ 28,226
---------
$62,867
=========
58
<PAGE>
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
FORWARD SALE CONTRACT
On September 28, 1993, IPLP entered into a forward sale contract (the
"Forward Sale Contract") pursuant to which in exchange for a prepayment of
$120 million, IPLP sold specified quantities of crude oil to Percolin Limited
("Percolin") for delivery over a 12-month period commencing March 1994.
Pursuant to the terms of the MG Settlement, MGRM agreed to supply all crude
oil necessary to meet IPLP's delivery obligations under the Forward Sale
Contract. In addition and with the agreement of Percolin, the MG Settlement
provided for the extension of IPLP's delivery obligations through July 1995
(See Note 26).
OPERATING LEASE COMMITMENTS
The Company has the following noncancelable operating lease commitments at
September 30, 1994:
For the Year Ending September 30,
---------------------------------
1995 ......................... $2,103
1996 ......................... 1,722
1997 ......................... 1,456
1998 ......................... 1,296
1999 ......................... 1,074
Thereafter ................... 85
--------
$7,736
========
Rent expense for the years ended September 30, 1994, 1993 and 1992 was
$2,718, $1,095, and $1,059, respectively.
COMPENSATION OBLIGATIONS
As of September 30, 1994, the Company has an obligation to fulfill
employment agreements with several of its employees. These obligations are as
follows:
For the Year Ending September 30,
---------------------------------
1995 ........................ $2,665
1996 ........................ 2,002
1997 ........................ 422
--------
$5,089
========
Under the terms of the employment agreements in effect as of September 30,
1994, certain officers are entitled to bonuses to the extent earnings of
certain subsidiaries, as defined, exceed certain thresholds. For the years
ended September 30, 1994, 1993, and 1992, no bonuses were accrued.
LETTERS OF CREDIT
At September 30, 1994, the Company and its subsidiaries had issued or
guaranteed letters of credit as follows:
Description Amount Expiration
- - ------------------------------------------------- -------- ------------
Crude oil purchasing ............................ $114,807 Various
Oil and gas drilling operating and plugging bonds 359 September 1995
Compensation obligation security ................ 100 November 8, 1994
Security for IEPA obligations (See Note 13) ..... 2,992 September 1995
Refinery other .................................. 1,250 Various
--------
$119,508
========
59
<PAGE>
Long-Term Supply Commitments
On September 25, 1992, IRLP entered into a commitment for the supply of
13,000 barrels per day of certain Caroline condensate to the Indian Refinery
over a ten year term (the "Long-Term Supply Agreement"). As part of the
agreement, MGRM agreed to provide certain performance assurances with respect
to IRLP's obligations in consideration for the Company's issuance of 300,000
shares of its stock to MGRM's nominees. During the years ended September 30,
1994 and 1993, the Company purchased $50,279 and $24,600, respectively under
this contract. Subsequent to September 30, 1994, the supplier filed a lawsuit
against IRLP related to the Long- Term Supply Agreement (See Note 26).
In addition, the Company has a gas purchase agreement with MGNG (See Note
23).
Aggregate future commitments under these two long-term supply commitments
are as follows:
For the Year Ending September 30,
---------------------------------
1995 ........................ $108,346
1996 ........................ 107,466
1997 ........................ 106,506
1998 ........................ 107,004
1999 ........................ 83,265
Thereafter .................. 204,324
----------
$716,911
==========
MANAGEMENT AGREEMENTS
The Company has two long-term management agreements with Terrapin
Resources, Inc. (See Note 23). Obligations under these agreements are as
follows:
For the Year Ending September 30,
- - ----------------------------------
1995 ........................ $ 581
1996 ........................ 530
1997 ........................ 396
1998 ........................ 412
1999 ........................ 283
-------
$2,202
=======
CREDIT AND HEDGING RISKS
During the period from November 1990 to January 31, 1991, when IRLP
processed crude oil for its own account, IRLP was subject to inherent credit
risks related to its customers and to performance risks related to its
hedging program, which included options and futures contracts for the
purchase and sale of crude oil. Effective February 1, 1991, IRLP began
processing crude oil for the account of MGRM pursuant to the Processing
Agreement and credit risk was substantially reduced. However, IRLP
indemnified MG for certain losses in this period, including hedging losses.
In February 1992, IRLP entered into a Supply Agreement with MG and the Indian
Offtake Agreement with MGRM which substantially reduced IRLP's credit and
hedging risks.
Virtually all of the Company's sales were to MG or Lone Star under
long-term contracts. Accordingly, the Company's credit risk is concentrated
in two customers. At September 30, 1994, the receivables from these customers
were $19,698 and $11,472, respectively.
Due to the pricing structure under the Indian and Powerine Offtake
Agreements, IRLP and Powerine are not subject to the same extent of refining
margin risk that most other refiners face. If refining margins are high
(relative to historic averages), the price received by IRLP and Powerine for
refined products may be less than those obtainable in the market. Conversely,
if refining margins are low, the price received by IRLP and Powerine for
refined products is likely to be higher than those obtainable in the market.
The Forward Sale Contract requires the Company to supply approximately
$57,600 of crude oil to a third party over the next ten months. The Company
has entered into hedging transactions with respect to this commitment. On
October 14, 1994, the Company's obligations under the Forward Sale Contract
were assumed by MG (See Note 26).
60
<PAGE>
Additionally, the Company supplies a substantial portion of its natural
gas to only one customer -- Lone Star. Approximately 17% of Lone Star's
requirements under the Lone Star Contract are supplied from wells operated by
the Company. The balance of these requirements are purchased from MGNG
pursuant to a gas purchase contract. If MGNG were to fail to perform its
obligations under this contract, there could be no assurance that the Company
could fulfill its obligations under the Lone Star Contract in a manner which
would permit the Company to maintain its current profit margin on sales of
natural gas.
LEGAL PROCEEDINGS
The Company is also subject to other matters in the ordinary course of
business which management believes will not have a material impact on future
results of operations.
NOTE 16 -- EMPLOYEE BENEFIT PLANS:
The Company does not sponsor any employee benefit plans; however, employee
benefit plans of the Company's consolidated group are maintained by IRLP and
Powerine.
DEFINED BENEFIT PENSION PLAN:
IRLP established a defined benefit retirement plan (the "IRLP Retirement
Plan") commencing January 1, 1991. All employees of IRLP on January 1, 1991,
including officers, are eligible for benefits under the IRLP Retirement Plan
and all employees joining IRLP after January 1 are eligible after attaining
20.5 years of age and six months of service with IRLP. During the 1994 fiscal
year, employees of Indian Powerine LP ("IPLP") were included in the IRLP
Retirement Plan.
The charge against operations for the years ended September 30, 1994, 1993
and 1992 was $1,280, $716, and $573 respectively.
Net periodic pension cost included the following components:
Year Ended September 30,
----------------------------
1994 1993 1992
-------- ------- ------
Cost of benefits earned during the
period. ............................. $1,165 $ 694 $602
Interest cost on projected benefit
obligation .......................... 206 95 48
Actual return on assets ............... (185) (263) (52)
Net amortization and deferral ......... 94 190 (25)
------ ------- ------
Net periodic pension cost ............. $1,280 $ 716 $573
====== ======= ======
Significant assumptions used in the actuarial calculations were as
follows:
Discount rate ........................... 8.5% 7.0% 8.0%
Rate of increase in compensation level .. 6.0% 6.0% 6.0%
Expected long-term rate of return on
assets ................................ 9.0% 9.0% 9.0%
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<PAGE>
A reconciliation of the plan's funded status to amounts included in the
consolidated balance sheet follows:
<TABLE>
<CAPTION>
September 30
-------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation .......................... $ (19) ($ 20) $ (24)
========== ========== ==========
Accumulated benefit obligation ..................... ($ 1,416) ($ 1,108) ($ 611)
========== ========== ==========
Projected benefit obligation ....................... ($ 3,085) ($ 2,421) ($1,250)
Plan assets at fair value ............................. 1,857 1,401 899
---------- ---------- ----------
Projected benefit obligation (in excess of) plan assets (1,228) (1,020) (351)
Unrecognized net gain (loss) .......................... (451) 229 24
Unrecognized prior service cost ....................... 44 163 176
---------- ---------- ----------
Pension liability recognized in the consolidated
balance sheets ....................................... ($ 1,635) $ (628) ($ 151)
========== ========== ==========
</TABLE>
Employees are generally entitled to an annual retirement benefit based on
their average earnings. Plan assets were invested in money market funds and
short-term investments.
DEFINED CONTRIBUTION PLAN
Powerine maintains a defined contribution plan (the "Powerine Retirement
Plan") for the majority of its employees. Powerine makes contributions to the
retirement plan at the end of each plan year equal to 2.5 percent of each
participant's compensation equal to or less than the social security taxable
wage base ("Wage Base"), plus 5 percent of the participant's compensation in
excess of the Wage Base, subject to certain limitations. Contributions are
invested in various investments as directed by the Powerine Retirement Plan's
administrative committee, primarily combinations of common trust funds.
Powerine's contribution to the Powerine Retirement Plan for the year ended
September 30, 1994 approximated $484.
401(K) PLANS
IRLP
IRLP sponsors a tax savings 401(k) plan (the "IRLP 401(k) Plan") for its
employees. Employees hired prior to January 1, 1991 became eligible to
participate in the IRLP 401(k) Plan when hired. Employees hired during the
period from January 1, 1991 to January 31, 1991 became eligible to
participate in the IRLP 401(k) Plan on July 1, 1991 (if still employed). All
employees hired after January 31, 1991 become eligible to participate in the
IRLP 401(k) Plan on the January 1 immediately following the date on which the
employee has completed 500 hours of eligible service in a six-month period.
During fiscal 1994 the plan was expanded to include employees of IPLP and the
Company.
Employees participating in the IRLP 401(k) Plan may authorize IRLP to
contribute up to 15% of their gross compensation to the IRLP 401(k) Plan.
IRLP will match such voluntary employee contributions up to 3% of employee
gross compensation. Employees' contributions to the IRLP 401(k) Plan may not
exceed thresholds set by the Secretary of the Treasury. During the years
ended September 30, 1994, 1993 and 1992, the Company and its subsidiaries'
contributions to the IRLP 401(k) Plan aggregated $467, $393 and $328,
respectively.
Powerine
Powerine sponsors a 401(k) plan (the "Powerine 401(k) Plan") for the
majority of its employees. Under the terms of the plan, Powerine will match
50% of the voluntary employee contributions to the plan up to a maximum of 6%
of the participant's compensation. Contributions are invested in various
combinations of common trust funds comprising the investment options
available to and directed by the participant. For the year ended September
30, 1994, Powerine's contributions to the plan were $282.
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<PAGE>
POST RETIREMENT BENEFITS
Neither the Company nor its subsidiaries provide any other post retirement
benefits to employees.
NOTE 17 -- STOCKHOLDERS' EQUITY
In June 1992, the directors of the Company issued 300,000 stock
appreciation rights to the then President and several other key employees of
MGRM. Under the terms of the related agreement the recipients are entitled to
cash compensation equal to the difference between the common stock price per
share of common stock and $5.00 with respect to an aggregate of 300,000 stock
appreciation rights. The appreciation rights were effective June 1, 1992 and
expire June 1, 1997.
Effective November 18, 1992, the Company issued 300,000 shares of its
common stock to certain nominees of MGRM, including three individuals who
were at that time directors of the Company, in return for MGRM's agreeing to
provide performance assurances of IRLP's obligations in conjunction with
IRLP's long- term supply agreement for Caroline condensate (See Note 15).
In connection with the May 1993 extension and restructuring of the Indian
Offtake Agreement, the Revolving Credit Facility, the Subordinated Note, the
MGTFC Credit Agreement and the provision by MG AG and MG of support
agreements required by the senior lender under the Senior Facility, on May
11, 1993, the Company issued 1 million shares of the Company's common stock
to MG, 7-year warrants to purchase 1,975,000 shares of the Company's common
stock at a purchase price of $11.00 per share to MG and/or its nominees; and
a $5,500 convertible debenture to MG with a maturity of December 31, 1996,
with interest at the 90-day LIBOR rate, determined annually on May 12, and
the right to convert principal after April 30, 1994 but prior to May 31, 1995
into the Company's common stock at a conversion price of $11.00 per share.
The value of the securities issued was based upon the estimated fair value
of such securities and was recorded as deferred assets and was amortized over
the lives of the related agreements.
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. The offering
resulted in aggregate net proceeds to the Company of $48,178. Of such amount,
$30,800 was used to pay down various debt obligations of the Company owed to
MGTFC. The remainder of such amount has been and will continue to be
available for other uses. As a result of the offering, MG's percentage
ownership of the Company's common stock was reduced from approximately 49% to
approximately 41%. All treasury stock of the Company was reissued in
conjunction with the offering.
On April 21, 1994, the Board of Directors of the Company adopted a
Stockholder Rights plan under which one preferred stock purchase right has
been distributed for each outstanding share of the Company's common stock.
Each right will initially entitle holders of common stock to buy
one-hundredth of one share of a new series of preferred stock at an exercise
price of $35.00. The rights will be exercisable only if a person or group,
without the prior approval of the Company's Board of Directors, acquires 15%
or more of the outstanding common stock or announces a tender offer as a
result of which such person or group would own 15% or more of the common
stock. MG, which owned approximately 41% of the outstanding common stock at
that time, is exempted from this 15% test as long as it does not increase its
holdings over approximately 42% of the common stock or directly or indirectly
transfer its holdings to someone else. If a person to whom these provisions
apply becomes a beneficial owner of 15% or more of the outstanding common
stock, each right (other than rights held by such acquiring person) will also
enable its holder to purchase common stock (or equivalent securities) of the
Company having a value of $70.00 for a purchase price of $35.00. In addition,
if the Company is involved in a merger or other business combination with
another entity, at or after the time that any person acquires 15% or more of
the outstanding common stock, each right will entitle its holder to purchase,
at $35.00 per right, common shares of such other entity having a value of
$70.00
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 surrendered by MG and cancelled by the Company, reducing MG's
ownership of the Company's common stock to zero. In addition, the convertible
debenture and certain warrants were surrendered (See Note 26).
63
<PAGE>
NOTE 18 -- STOCK OPTIONS AND WARRANTS
Option and warrant activities during each of the three years ended
September 30, 1994 are as follows (in whole units):
<TABLE>
<CAPTION>
Non- Incentive
Incentive Qualified Plan Other
Warrants Options Options Options Options Total
------------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - October 1, 1991 .............. 55,000 66,000 230,000 21,500 372,500
Issued ..................................... 35,000 95,000 45,000 175,000
Exercised .................................. (35,000) (35,000)
Expired .................................... (22,500) (11,500) (34,000)
------------- ----------- ----------- ----------- ---------- ----------
Outstanding - September 30, 1992 ........... 20,000 101,000 302,500 55,000 478,500
Issued ..................................... 1,975,000 7,500 195,000 45,000 2,222,500
Exercised .................................. (20,000) (7,500) (27,500)
Cancelled .................................. (98,500) (172,500) (7,500) (278,500)
Expired .................................... (20,000) (20,000)
------------- ----------- ----------- ----------- ---------- ---------
Outstanding - September 30, 1993 ........... 1,975,000 2,500 110,000 195,000 92,500 2,375,000
Issued ..................................... 434,000 100,000 534,000
Exercised .................................. (5,000) (5,000)
Cancelled .................................. (100,000) (100,000)
Expired .................................... (1,055,000) (17,500) (41,666) (7,500) (1,121,666)
------------- ----------- ----------- ----------- ---------- ----------
Outstanding - September 30, 1994 ........... 920,000 2,500 92,500 487,334 180,000 1,682,334
============= =========== =========== =========== ========== ==========
Reserved at September 30, 1993 ............. 1,975,000 2,500 110,000 562,500 92,500 2,742,500
============= =========== =========== =========== ========== ==========
Reserved at September 30, 1994 ............. 920,000 2,500 92,500 562,500 180,000 1,757,500
============= =========== =========== =========== ========== ==========
Exercisable at September 30, 1994 .......... 920,000 2,000 92,500 112,918 166,666 1,294,084
============= =========== =========== =========== ========== ==========
Become exercisable during fiscal year ended:
September 30, 1995 ...................... 500 160,958 6,667 168,125
September 30, 1996 ...................... 121,833 6,667 128,500
September 30, 1997 ...................... 91,625 91,625
----------- ----------- ---------- ---------
500 374,416 13,334 388,250
=========== =========== ========== =========
Exercise prices at:
September 30, 1994 ...................... $ 11.00 $ 6.00 $ 6.00- $ 10.25- $ 5.75-
$ 8.50 $ 14.25 $ 12.25
September 30, 1993 ...................... $ 11.00 $ 6.00 $ 6.00- $ 12.25 $ 5.36-
$ 8.50 $ 11.00
September 30, 1992 ...................... $ 1.00 $ 6.00 $ 6.00- $ 6.00
$ 19.26
Exercise Termination Dates .............. 2000 1997 1997 2004 2004
</TABLE>
Effective May 18, 1992, the Company's Board terminated the existing stock
plans. Unexercised options to purchase 120,000 shares of common stock awarded
under the prior plans will continue to be governed by the terms of the prior
plans.
In fiscal 1993, the Company adopted the 1992 Executive Equity Incentive
Plan (the "Incentive Plan"). The purpose of the Incentive Plan is to increase
the ownership of common stock of the Company by those non-union key employees
(including officers and directors who are officers) and outside directors who
contribute to the continued growth, development and financial success of the
Company and its subsidiaries, and to attract and retain key employees and
reward them for the Company's profitable performance.
The Incentive Plan provides that an aggregate of 562,500 shares of common
stock of the Company will be available for awards in the form of stock
options, including incentive stock options and nonqualified stock options
generally at prices at or in excess of market prices at the date of grant.
The Incentive Plan also provides (subject to shareholder approval) that
each outside director of the Company will annually be granted an option to
purchase 5,000 shares of common stock.
In conjunction with the MG Settlement, certain warrants were cancelled
(See Note 26).
In addition to stock options and warrants, the Company has issued the
following stock appreciation rights or equivalent:
64
<PAGE>
Stock Appreciation Rights:
<TABLE>
<CAPTION>
Measurement Price
---------------------------------------------------------------------------------
$5.00 $6.00 $8.00 $12.50 $13.00 Total
----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-October 1, 1991 .. 175,000 175,000
Issued ....................... 300,000 67,500 367,500
----------- ----------- ----------- -----------
Outstanding-September 30, 1992 300,000 67,500 175,000 542,500
Issued ....................... 112,500 60,000 150,000 36,667 359,167
Exercised .................... (6,667) (6,667)
Cancelled. ................... (87,500) (87,500)
----------- ----------- ----------- ---------- ---------- -----------
Outstanding-September 30, 1993 300,000 180,000 140,833 150,000 36,667 807,500
Exercised .................... (300,000) (67,500) (20,000) (387,500)
----------- ----------- ----------- ---------- ---------- -----------
Outstanding-September 30, 1994 0 112,500 140,833 130,000 36,667 420,000
=========== =========== =========== ========== ========== ===========
Expiration date(s) ........... 05/30/97- 09/30/95-
11/20/97 12/31/97 06/21/00 08/01/95
</TABLE>
The stock appreciation rights entitle the holder to cash compensation
equal to the difference between the price per share of the Company's common
stock and the measurement price with respect to the number of rights issued,
subject to adjustment. Costs associated with stock appreciation rights are
recorded over the relevant period of employment. During the years ended
September 30, 1994 and 1993, the Company recorded $4,848 and $2,268,
respectively, related to stock appreciation rights.
NOTE 19 -- INTEREST EXPENSE
Interest expense for the years ended September 30, 1994, 1993 and 1992 is
as follows:
Year Ended September 30,
----------------------------------
1994 1993 1992
--------- --------- ---------
Interest ................................ $21,121 $19,780 $12,024
Debt issuance/extension cost amortization 8,885 2,054 1,616
--------- --------- ---------
30,006 21,834 13,640
Less: Amount capitalized ................ (1,519) (723)
--------- --------- ---------
$28,487 $21,111 $13,640
========= ========= =========
NOTE 20 -- WRITE-OFFS
Write-offs for the year ended September 30, 1992 consist of the following:
Year Ended September 30,
------------------------
1992
------
Investment in GAMXX Energy, Inc. $ 886
Debt issuance costs ............. 2,679
Other ........................... 596
------
$4,161
======
GAMXX Energy, Inc. is a minority-owned refining company which owns an idle
refinery near Mobile, Alabama. As of September 30, 1991 the Company wrote-off
its investment in GAMXX. From October 1, 1991 to June 30, 1992, the Company
provided additional advances to GAMXX which were written off in fiscal 1992.
NOTE 21 -- INCOME TAXES
Effective October 1, 1992, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes.
Financial Statements for years prior to fiscal 1993 were not restated.
Information shown below for fiscal 1992 was determined under the provisions
of Statement of Financial Accounting Standards No. 96.
65
<PAGE>
Provisions for (recovery of) income taxes consist of:
September 30,
---------------------------------
1994 1993 1992
--------- ----------- ------
Provision for (recovery of) Income Taxes:
Current:
Federal ........................... $ 2,877 $ 3,006
State ............................. 549 $81
Deferred:
Federal ........................... (5,999) (34,362)
State ............................. 3,099 (4,614)
--------- ----------- ------
$ 526 ($ 35,970) $81
========= =========== ======
Deferred tax (liabilities) assets are comprised of the following at
September 30, 1994:
September 30,
------------------------
1994 1993
---------- ----------
Operating loss and other tax carryforwards ..... $ 65,467 $ 19,624
Depletion accounting .......................... (814) 2,530
Depreciation .................................. (29,327) (5,017)
Amortization (gas contracts) .................. 3,369
Environmental liabilities ..................... 11,586
Deferred Revenue .............................. 47,640
Other ......................................... 2,621 1,113
---------- ----------
52,902 65,890
Valuation allowance ........................... (16,775)
---------- ----------
$ 52,902 $ 49,115
========== ==========
Deferred tax assets -- current ................ $ 68,088 $ 14,520
Deferred tax assets -- non-current ............ 34,595
Deferred tax liabilities -- non-current ....... (15,186)
---------- ----------
$ 52,902 $ 49,115
========== ==========
The deferred tax assets are classified as current because the net
operating losses upon which such deferred tax assets were based were utilized
subsequent to Setember 30, 1994 as a result of gains from the MG Settlement
(See Note 26).
As a result of operating losses in fiscal 1992 and 1991, all deferred
taxes were written-off in those periods. Upon adoption of FAS 109, the
Company recorded an asset of $73,909 and provided a valuation reserve against
the asset of $65,395. During fiscal 1993, the Company reduced the valuation
reserve based upon the Company's entering into certain long-term purchase and
sale commitments, refinancing its debt and the related earnings projections.
At September 30, 1994, the Company adjusted its valuation reserve such that
the remaining deferred tax assets approximate the tax benefit that the
Company realized from its net operating loss carryforwards as a result of the
gain realized from the MG Settlement (See Note 26). As a result of the MG
Settlement, the Company used all of its federal and most of its state net
operating loss and other carryforwards.
66
<PAGE>
The income tax provision (recovery) differs from the amount computed by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Tax (recovery) at statutory rate .................... $ 13,805 $ 8,174 ($17,744)
State taxes, net of federal benefit ................. 2,371 1,081 54
Non-deductible goodwill amortization ................ 311
Change in tax rate .................................. (1,130)
Operating losses for which no tax benefit is
currently available ................................ 17,771
Changes in valuation allowance ...................... (16,775) (44,095)
Other ............................................... 814
---------- ----------- ----------
$ 526 ($ 35,970) $ 81
========== =========== ==========
</TABLE>
At September 30, 1994, the Company had the following tax carryforwards
available:
Federal Tax
---------------------------
Alternative
Minimum
Regular Tax
-------- ---------
Net operating loss ............. $142,050 $120,643
Alternative minimum tax credits $ 947
Statutory depletion ............ $ 12,208 $ 12,208
Investment tax credit .......... $ 688
The net operating loss and investment tax credit carryforwards expire from
1994 through 2007. Of the Company's net operating losses, approximately
$24,458 (approximately $18,959 for alternative minimum tax purposes) are
applicable to subsidiaries acquired by the Company and may only be used to
offset future taxable income of the acquired companies which generated the
loss. Similar restrictions apply to all of the Company's investment tax
credit carryforwards and $9,000 of the Company's statutory depletion
carryforwards.
On September 9, 1994, the Company experienced a change of ownership for
tax purposes. As a result of such change of ownership, the Company's net
operating loss became subject to an annual limitation of $7,845. Such annual
limitation, however, is increased by the amount of net built in gain at the
time of the change of ownership. At September 30, 1994, such built in gain
was in excess of $240,000. Subsequent to September 30, 1994, the Company
utilized all of its net operating loss, alternative minimum tax and
investment tax credit carryforwards to partially offset the gain from the MG
Settlement (See Note 26).
The Company also has approximately $129,510 in individual state tax loss
carryforwards available at September 30, 1994. Such carryforwards are
generally available to offset taxable income apportioned to certain states
from which the Company derives income.
67
<PAGE>
NOTE 22 -- BUSINESS SEGMENTS
Prior to August 14, 1989, when the Indian Refinery was acquired, the
Company was involved in only one business segment, the exploration for and
the production of oil and gas and administration of related oil and gas
partnerships. Upon the acquisition of the Indian Refinery in August 1989, the
Company became engaged in an additional business segment, refining. This
segment had no operations until October 1, 1990. The fiscal year ended
September 30, 1994 includes the operations of the Powerine Refinery as a
result of the acquisition of Powerine on October 1, 1993. On December 3,
1992, the Company entered a third segment of the petroleum business --
natural gas marketing. The following sets forth information with respect to
the Company's three identifiable industry segments for the years ended
September 30, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Year Ended September 30, 1994
---------------------------------------------------------------------------
Oil & Gas Eliminations
Exploration Natural and
and Gas Corporate
Production Refining Marketing Items Consolidated
------------- ---------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ 8,552 $940,514 $66,424 ($ 5,165) $1,010,325
Operating income (loss) ......... 2,681 62,596 10,898 (10,698) 65,477
Identifiable assets ............. 19,714 469,149 80,560 77,068 646,491
Capital expenditures ............ 956 218,088 21 346 219,411(1)
Depreciation, depletion and
amortization ................... 2,026 30,322 11,360 66 43,774
</TABLE>
- - ------
(1) Includes $152,945 of additions related to the acquisition of Powerine.
<TABLE>
<CAPTION>
Year Ended September 30, 1993
---------------------------------------------------------------------------
Oil & Gas Eliminations
Exploration Natural and
and Gas Corporate
Production Refining Marketing Items Consolidated
------------- ---------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues .................. $10,124 $532,010 $62,572 ($ 5,896) $598,810
Operating income (loss) ... 3,244 30,355 10,866 (2,191) 42,274
Identifiable assets ....... 20,161 230,647 89,965 51,965 392,738
Capital expenditures ...... 13,592 35,695 27,909 77,196
Depreciation, depletion and
amortization ............. 2,666 9,994 9,495 30 22,185
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1992
-------------------------------------------------------------
Oil & Gas Eliminations
Exploration and
and Corporate
Production Refining Items Consolidated
------------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues .................. $ 5,165 $344,770 $349,935
Operating income (loss) ... 728 (34,735) ($1,706) (35,713)
Identifiable assets ....... 17,707 150,178 (12) 167,873
Capital expenditures ...... 340 12,137 12,477
Depreciation, depletion and
amortization ............. 1,453 9,683 1,616 12,752
</TABLE>
NOTE 23 -- RELATED PARTY TRANSACTIONS
During the years ended September 30, 1994, 1993 and 1992, the Company's
transactions with related parties were as follows:
Sale of Subsidiaries
On March 31, 1993, the Company entered into an agreement to sell to
Terrapin Resources, Inc. its oil and gas partnership management businesses
for $1,100 ($800 note bearing interest at 8% per annum and $300 cash)
68
<PAGE>
which approximated book value. The closing of the stock purchase transaction
occurred on June 30, 1993. Terrapin is wholly-owned by a former officer and
director of the Company. Subsequent to September 30, 1994, this former
officer and director rejoined the Company as an officer (See Note 26).
Purchase of IRLP Interests
During 1993, the Company acquired the partnership units of IRLP it did not
already own. Certain of these units were acquired from an officer of the
Company for an aggregate of 262,500 of stock appreciation rights, entitling
the holder to cash compensation equal to the difference between the price per
share of the Company's common stock and stated prices. These stock
appreciation rights expire in 1997 and 2000.
Professional Fees
An officer of the Company is also a partner in a law firm which serves as
general counsel to the Company. Legal fees paid by the Company to this firm
during the years ended September 30, 1994 and 1993 approximated $5,101 and
$1,343, respectively.
A member of the Board of Directors is also a partner in a law firm which
has been engaged by the Company. Legal fees paid by the Company to this firm
during fiscal 1994 approximated $806.
Loan to Officer
On February 26, 1993, an officer of a subsidiary of the Company was loaned
$250. The principal amount of the loan is due and payable in full on the
earlier of January 31, 1996 or the termination of the officer's employment.
The loan accrues interest at the prime rate in effect on the date of the loan
as adjusted each January 1.
MG and Its Affiliates
MG, which is a wholly-owned subsidiary of Metallgesellschaft Capital
Corporation, which is a wholly- owned subsidiary of MG AG, a German publicly
held corporation, owns approximately 13% of the Company at September 30,
1994. MG, in turn, also owns 100% of MGRM, MGTFC, MG Futures, Inc. ("MGF"),
MG Natural Gas Corp. ("MGNG") (which owns 100% of the shares of MG Gas
Gathering Corp. ("MGG")), and MGPC Petcoke, Inc. ("MG Petcoke"). Transactions
with MG, MGRM, MGTFC, MGNG, MGG, MGF and MG Petcoke for the years ended
September 30, 1994, 1993 and 1992 were as follows: (see also Note 3 for
restructuring which occurred on October 14, 1994, Note 4 for acquisition of
Powerine, Note 14 for debt transactions, Note 17 for equity transactions with
MG, its affiliates and employees, and Note 26 for subsequent events related
to MG).
MG AG
Support Agreement
MG AG and IRLP entered into a Support Agreement whereby MG AG, as
consideration for IRLP's entering into the Indian Offtake Agreement, agreed
that the obligations of MG under the MG Support Agreement (as defined below)
with respect to the Indian Offtake Agreement may be put by IRLP to MG AG.
MG
Intercreditor Agreement
The Senior Facility lender, MGTFC, MG and IRLP entered into an
Intercreditor Agreement (the "Intercreditor Agreement") which sets forth the
relative priorities of the Senior Facility lender, MGTFC and MG with respect
to collateral granted by IRLP pursuant to the Revolving Credit Facility, the
MG Supply Agreement and the Senior Facility. The Intercreditor Agreement
further provides for the subordination of all amounts owing by IRLP to MGTFC
and MG with respect to agreements other than the Revolving Credit Facility
and the MG Supply Agreement (including the MGTFC Subordinated Note). However,
so long as no event of default under the Senior Facility exists and certain
financial tests are met, the Intercreditor Agreement does permit IRLP to make
quarterly payments of interest at the rate of 8% on the MGTFC Subordinated
Note (which rate of interest payment can be increased if IRLP has sufficient
excess cash flow). For the years ended September 30, 1994 and 1993, IRLP has
made interest payments of $1,147 and $1,537 on the MGTFC Subordinated Note.
69
<PAGE>
In addition, MG and MGTFC agreed not to amend their agreements without the
prior written consent of the Senior Facility lender (except for specified
amendments deemed favorable to IRLP). During the period that the Senior
Facility remains outstanding, MGTFC also agreed not to cancel, terminate or
permit the expiration of the Revolving Credit Facility unless an event of
default thereunder has occurred and is continuing (subject to the Senior
Facility lender's right to cure such defaults), or if IRLP and MG have
entered into a supply agreement satisfactory to the Senior Facility lender.
MG Support Agreement
MG and IRLP entered into a support agreement dated as of May 27, 1993 (the
"MG Support Agreement"), as partial consideration for IRLP's entering into
the Indian Offtake Agreement and various other agreements with MG entities.
Pursuant to the MG Support Agreement, MG agreed that upon the occurrence of a
default by MGTFC or MGRM under the Indian Offtake Agreement, the Swap
Agreement (as defined below) or the Revolving Credit Facility, such
obligations may be put by IRLP to MG.
MG Supply Agreement
As of February 1, 1992, IRLP entered into an agreement for the purchase
and sale of feedstocks (as amended, the "MG Supply Agreement") with MG. Under
the terms of the MG Supply Agreement, MG agreed to supply IRLP with up to 2.1
million barrels of crude and intermediate feedstocks each month from February
1, 1992 through June 30, 1994 on a cost plus fee basis. The MG Supply
Agreement was amended as of October 1, 1993 to (a) add Powerine and IPLP as
parties and (b) extend the term to September 30, 1997. Under the MG Supply
Agreement, as amended, Powerine is permitted to request deliveries of up to
1.5 million barrels of crude oil and intermediate feedstocks each month, and
IPLP is permitted to request deliveries of up to 1 million barrels per month
for sale to entities other than IRLP or Powerine. Pursuant to the terms of
the MG Settlement, the MG Supply Agreement was terminated as of October 14,
1994 (See Note 26).
During the fiscal year ended September 30, 1994, IRLP and IPLP purchased
approximately $9,150 and $41,107 of crude oil and feedstocks from MG,
respectively, including hedging transactions. Powerine did not purchase any
crude oil or feedstocks from MG under this agreement during fiscal 1994. In
addition, IRLP, Powerine and IPLP respectively incurred approximately $1,364,
$1,238 and $12 of fees and reimbursable expenses pursuant to the MG Supply
Agreement, the Revolving Credit Facility and the Powerine Loan Agreement.
During the years ended September 30, 1993 and 1992, IRLP purchased
approximately $527,300 and $275,700 of crude oil and feedstocks from MG, as
noted above, and incurred during fiscal 1993, $1,415 of fees and reimbursable
expense, as noted above.
MGRM
During the period from February 1, 1991 to January 31, 1992, IRLP entered
into several crude and feedstock processing transactions with MGRM:
Processing Arrangements
1. First Amended Processing Agreement -- Effective June 30, 1991, IRLP and
MGRM entered into the First Amended Processing Agreement. The significant
changes were to extend the term of the agreement until June 30, 1992 and to
eliminate the yield loss guarantee and minimum production guarantees. IRLP
also agreed to indemnify MGRM for 50% of any cumulative processing losses for
a particular calendar quarter.
2. Second Amended Processing Agreement -- Under the Second Amended
Processing Agreement, effective as of October 1, 1991, IRLP became entitled
to receive an additional processing fee equal to 100% of all profits
generated by MGRM on the sale of refined product produced by IRLP and IRLP
also agreed to indemnify MGRM for 100% of losses incurred on the sale of such
products.
During the term of the Second Amended Processing Agreement (October 1,
1991 to January 31, 1992) IRLP's allocated share of processing losses (as a
result of its indemnification of MGRM) aggregated $31,611. During the same
period IRLP earned $17,282 in processing fees from MGRM.
70
<PAGE>
3. Purchase of Crude Oil and Feedstocks
At the termination of the Second Amended Processing Agreement, IRLP
purchased MGRM's crude oil and feedstocks on hand at IRLP for $43,163
pursuant to the terms of the Indian Processing Agreement.
4. Indian Offtake Agreement
On February 1, 1992, IRLP and MGRM entered into the Indian Offtake
Agreement. Under the terms of the Indian Offtake Agreement, MGRM purchased
100% of IRLP's refined product output ("Products") from February 1, 1992
through September 30, 1994 at a purchase price equal to (a) the settlement
price of near month West Texas Intermediate crude oil; plus (b) the "Margin
Increment" which as of September 30, 1994 was $5.105; plus (c) certain taxes
and other costs and charges. In return, IRLP dedicated 100% of its refined
product output to MGRM. The termination date of the Indian Offtake Agreement
is June 30, 2000, however, pursuant to the terms of the MG Settlement (See
Note 26) this agreement will terminate on February 1, 1995.
From February 1, 1992 through September 30, 1992, IRLP recorded sales of
$327,488 to MGRM under the Indian Offtake Agreement. For the year ended
September 30, 1994 and 1993, the sales were $498,225 and $525,690,
respectively.
In addition, IRLP is entitled to additional consideration for its refined
products equal to 50% of the profits, if any, earned by MGRM on sales of
Indian's products from its Bel Air, Maryland profit center (not including any
profits earned through the marketing of Powerine products), subject to a
limit of $0.50 per barrel (the "Indian Profit Participation"). The Indian
Profit Participation declines each year pursuant to a formula tied to
inflation which the Company believes will result in the elimination of the
profit participation in approximately three to five years. No profit
participation accrued during the years ending September 30, 1994, 1993 or
1992.
The Indian Offtake Agreement also includes a provision whereby MGRM has
the right to direct IRLP to run the Indian Refinery at less than full
refining capacity for any period of time specified by MGRM (a "Reduced Run
Period") in exchange for a fee that approximates the gross margin that would
have been earned if the reduced run had not occurred. During the years ended
September 30, 1994 and 1993, IRLP was paid $11,899 and $6,320 by MGRM
pursuant to this provision.
Shell Agreement
On November 1, 1992, IRLP entered into a ten year crude oil supply
agreement with Shell Canada, Ltd. and Salmon Resources, Ltd. (collectively
"Shell"). In connection with this supply agreement, MGRM provided certain
support of IRLP's obligations under this agreement. As consideration for
providing this support, the Company issued 300,000 shares of common stock to
certain designees of MGRM, who were employees of MG and MGRM, including
certain individuals who were at that time directors of the Company, who were
issued 232,500 of the 300,000 shares of common stock. Subsequent to September
30, 1994, Shell filed a lawsuit against IRLP (See Note 26).
Swap Agreement
On May 27, 1993, IRLP entered into a 20,000 barrel per day swap agreement
with MGRM (the "Swap Agreement"). Under the terms of the agreement, which
expires May 26, 2000, IRLP will pay to or will receive from MGRM the
differential of the monthly mean price per barrel of West Texas Intermediate
crude oil minus $1.60 versus the monthly mean price per barrel of West Texas
sour crude oil. This agreement effectively is designed to allow IRLP the
ability to purchase up to 20,000 barrels per day of sour crude at a fixed
discount from sweet crude, thereby limiting exposure to reductions in gross
margin by reason of a collapse in the price differential between the two
types of crude oil. For the period May 27, 1993 through September 30, 1993,
the Company received $18 (net) under this agreement and for the year ended
September 30, 1994, IRLP received $3,082 (net) under this agreement. The Swap
Agreement was terminated on October 14, 1994 (See Note 26).
Forward Sale Contract
See Note 15.
71
<PAGE>
Office Lease
IRLP entered into a sublease with MGRM pursuant to which IRLP leased 3,000
square feet of office space from MGRM in Houston, Texas at a rate of $15 per
month. This lease was terminated in June 1994.
Powerine Offtake Agreement
Pursuant to the terms of the Powerine Offtake Agreement, Powerine agreed
to sell substantially all of its refined products it produces to MGRM through
January 1, 1998 at a purchase price equal to (a) the Platt's West Coast price
of near month Alaskan North Slope crude oil; plus (b) the "Margin Increment"
which as of September 30, 1994 was $10.20 per barrel; plus (c) certain taxes
and other costs and charges.
During the fiscal year ended September 30, 1994, Powerine recorded sales
of $348,751 to MGRM under the Powerine Offtake Agreement. The Powerine
Offtake Agreement contains a Reduced Run provision similar to that included
in the Indian Offtake Agreement. During fiscal 1994, Powerine did not receive
any amounts in connection with the Reduced Run provision under the Powerine
Offtake Agreement. This agreement was amended on October 14, 1994 to
terminate on February 1, 1995 (See Note 26).
Powerine, prior to being acquired by the Company, had processed crude oil
and feedstocks for MGRM (See Note 4). On the effective date of the
acquisition, MGRM had previously made commitments to purchase crude oil and
feedstocks that would be processed by Powerine. In connection with entering
into the Powerine Offtake Agreement, Powerine agreed to honor these
commitments and as such paid MGRM $47,129 for the delivery of this crude oil
and feedstocks during fiscal 1994. Powerine did not incur any fees as a
result of these transactions.
MG Petcoke
Petroleum Coke Purchase Agreement
Effective January 1, 1994, Powerine entered into a 36-month Petroleum Coke
and Purchase Agreement with MG Petcoke, to which MG Petcoke agreed to
purchase all petroleum coke produced at the Powerine Refinery. During the
fiscal year ended September 30, 1994, Powerine recorded sales of $2,516 under
this agreement.
MGTFC
Revolving Credit Facility and the Subordinated Note
MGTFC agreed to refinance MGRM's processing debt, working capital loans
and capital expenditure advances, and to provide for ongoing working capital
requirements effective September 25, 1992. On May 27, 1993, the financing
facility was again amended (see Note 14).
MGTFC Bridge Loan
In December 1992, MGTFC financed the Company's acquisition of certain oil
and gas assets purchased from ARCO. In conjunction with the financing, the
Company paid MGTFC $3,206 as a loan syndication and advisory fee. The fee was
added to the financing provided by MGTFC (See Note 14).
Credit Agreements
MGTFC loaned the Company $37,250 pursuant to a credit agreement between
the parties. In addition, the Company had capitalized approximately $3,914 of
accrued interest related to the loans as of December 31, 1992. In May 1993
the Company paid $7,734 of capitalized interest, principal and accrued
interest on the loans (See Note 14).
As a result of the Powerine acquisition (See Note 4) effective October 1,
1993, MGTFC amended and restated the Powerine Loan Agreement (See Note 14).
Production Loan
See Note 14.
72
<PAGE>
Catalyst Lease
IRLP leases certain long-term catalyst components from MGTFC. The annual
lease payment for the long- term catalyst approximates 6% of the market value
of the leased catalyst components. Catalyst lease payments for the years
ended September 30, 1994, 1993 and 1992 were $85, $109 and $58, respectively.
On October 14, 1994, the catalyst lease was cancelled and the catalyst was
transferred to IRLP without incremental payment (See Note 26).
MGNG
Gas Purchases -- Refining
IRLP purchases gas for refining operations from MGNG. Such purchases are
made at market rates. During the years ended September 30, 1994, 1993 and
1992, IRLP paid $8,462, $7,260 and $7,255, respectively, to MGNG for natural
gas purchases. Pursuant to the terms of the MG Settlement (See Note 26), IRLP
and MGNG terminated their natural gas supply relationship; however, the
parties did enter into a natural gas swap agreement pursuant to which the
parties agreed that IRLP would pay to or receive from MGNG the differential
between the prompt month's natural gas price as reported on the NYMEX and the
one-year futures price for 10,000 MMBTU per day through June 23, 1998.
Management Contract
MGNG has entered into an agreement with certain limited partnership
subsidiaries of the Company to provide natural gas and gas marketing services
through June 1, 1999 in conjunction with the purchase of assets from ARCO
(See Note 4). For the year ended September 30, 1994 and the period ended
September 30, 1993, the Company paid MGNG $240 and $195 for its management
services. Pursuant to the MG Settlement, this agreement may terminate upon
thirty days notice (See Note 26).
MGNG Net Cash Flow Agreement
In consideration of MGNG's agreement to supply natural gas pursuant to the
terms of the MGNG Supply Agreement, CEC Gas Marketing agreed to indemnify
MGNG for the disparity between MGNG's cost of the gas and the prices at which
the gas is sold to CEC Gas Marketing in an amount estimated at $20,000 (the
"Net Cash Flow Agreement"). The payment of such indemnification is deferred,
however, until after the repayment of the GECC Loan and the MGTFC
Subordinated Loan. At September 30, 1994, the Company had recorded a long-
term liability of $3,101 related to this provision. On October 14, 1994, this
obligation was terminated prior to the time any amounts were paid under such
agreement (See Note 26).
MGNG Supply Agreement
CEC Gas Marketing supplies a contractual amount of natural gas to the Lone
Star Gas Company pursuant to the Lone Star Contract acquired from ARCO.
Approximately 17% of those supplies come from the wells operated by Castle
Texas Production. The balance is purchased by CEC Gas Marketing from MGNG
pursuant to the Amended and Restated Gas Purchase Contract dated as of August
1, 1993 (the "MGNG Supply Agreement"). Natural gas is purchased from MGNG
pursuant to a six tier formula at varying prices. It is anticipated that a
substantial portion (approximately 83%) of the natural gas used to meet CEC
Gas Marketing's delivery obligations under the Lone Star Contract will
consist of natural gas provided by MGNG which, effective June 1, 1993, is
priced at $2.10 per MMBtu.
The MGNG Supply Agreement contains take-or-pay provisions which obligate
CEC Gas Marketing to take (and pay for if not taken) certain annual
quantities of natural gas. The agreement also has limitations on the maximum
amounts of gas which CEC Gas Marketing can require MGNG to deliver on any
given day and governing the quality of gas deliverable by MGNG, points of
delivery, passage of title and other relevant provisions. MG AG has
guaranteed delivery of the natural gas as provided in the MGNG Supply
Agreement in the event that MGNG fails to perform under the agreement.
Pursuant to the terms of the MG Settlement, CEC Gas Marketing has the option
to terminate the MGNG Supply Agreement on or before March 31, 1995, so long
as it has obtained the approval of General Electric Capital Corporation.
73
<PAGE>
The Company's future purchase commitments under this contract aggregate
$136,101 at September 30, 1994. For the years ended September 30, 1994 and
1993, the Company purchased $31,069 and $21,519 under this contract.
MG Gathering Corp.
In conjunction with the Company's acquisition of the Castle Pipeline, the
Company entered into a management service contract with MG Gathering to
operate the Castle Pipeline for $12 per month. This contract expires June 1,
1999. During the year ended September 30, 1994 and the period from December
3, 1992 through September 30, 1993, Castle Texas Pipeline paid $148 and $120
to MG Gathering for such management services. Pursuant to the MG Settlement,
this agreement may terminate upon thirty days notice (See Note 26).
MG Futures, Inc.
Subsequent to September 30, 1990, IRLP executed and cleared hedging
activities through MGF. MGF is a registered Futures Commission Merchant.
During the 1994 fiscal year, Powerine and IPLP also executed and cleared
hedging activities through MGF. MGF was paid standard industry fees for its
broker functions. For the years ended September 30, 1994, 1993 and 1992, IRLP
paid $182, $622 and $443, respectively, for such services. Powerine and IPLP
paid $92 and $18, respectively during 1994 for the services provided by MGF.
Pursuant to the terms of the MG Settlement, the Company's subsidiaries ceased
to conduct hedging activities through MGF (See Note 26).
NOTE 24 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Temporary Investments -- For those short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Cash Participations -- All cash participations are invested in the
Company's variable interest rate debt and are considered to be stated at fair
value.
Long-term Debt -- At September 30, 1994, the Company had the following
debt with interest rates which were fixed:
GECC Loan ................................... $60,117 8.33%
MGTFC Subordinated Loan.................... $ 9,441 9.00%
When the loans were established, the borrowing interest rates were
established with a risk premium which had been added to two year treasury
securities. In order to estimate a current market value of these loans, the
future cash payments have been discounted by the sum of treasury rates
available at September 30, 1994 and the same risk differential. Based upon
these assumptions, the estimated fair value of the GECC Loan and the MGTFC
Subordinated Loan is $57,730 and $8,594, based upon interest rates of 10.7%
and 11.4%, respectively.
All other debt is at rates tied to market indices and is considered to be
stated at fair value. The MGTFC Subordinated Loan was cancelled on October
14, 1994 (See Note 26).
Interest Rate Cap
The Company has an interest rate cap of 8% on its Senior Facility. At
September 30, 1994, the Company's rate of interest on borrowings under this
Facility was 6.8%, accordingly no fair value presentation is considered
necessary. The obligations under the Senior Facility were assumed by MG
effective October 14, 1994 (See Note 26).
74
<PAGE>
NOTE 25 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(December 31) (March 31) (June 30) (September 30)
------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Fiscal 1994:
Revenues ................................... $222,036 $193,022 $267,945 $327,322
Operating income before interest and income
taxes .................................... $ 20,934 $ 17,893 $ 13,451 $ 13,199
Net income ................................. $ 8,383 $ 6,699 $ 4,345 $ 19,490
Net income per share ....................... $ 0.82 $ 0.56 $ 0.37 $ 1.73
Fiscal 1993:
Revenues ................................... $163,137 $137,807 $154,624 $143,242
Operating income before interest and income
taxes. ................................... $ 7,822 $ 11,252 $ 8,959 $ 14,241
Net income before cumulative effect of a
change in accounting. .................... $ 3,075 $ 5,065 $ 40,514 $ 10,669
Net income per share before cumulative
effect of a change in accounting ......... $ .48 $ 0.75 $ 5.22 $ 1.19
Net income ................................. $ 11,589 $ 5,065 $ 40,514 $ 10,669
Net income per share ....................... $ 1.78 $ 0.75 $ 5.22 $ 1.19
</TABLE>
Net income for the quarter ended September 30, 1994 increased $16,775
because of a decrease in the Company's valuation allowance against the
deferred tax assets. The decrease resulted from the recognition of additional
tax benefits arising from the anticipated utilization of net operating losses
and other tax carryforwards to offset taxable income derived from the MG
Settlement (See Notes 21 and 26).
Net income for the quarter ended June 30, 1993 reflects a tax benefit
resulting from the Company's reduction of its valuation allowance based upon
the extension of the Indian Offtake Agreement in May 1993 (See Note 21).
NOTE 26 -- SUBSEQUENT EVENTS
MG Settlement
In December 1993, the Company learned that MG and its parent corporation,
MG AG had incurred cash expenditures and substantial losses related in part
to margin payments required by the New York Mercantile Exchange and various
over-the-counter derivatives trading counterparties as a result of a decline
in oil prices.
As a result of the financial difficulties surrounding MG and its
affiliates, in July 1994 the Company and MG commenced negotiations to attempt
to restructure the contractual and other relationships between MG and its
affiliates and the Company and its affiliates.
On August 31, 1994, the Company entered into agreements with MG and
certain of its affiliates pursuant to which the parties thereto agreed to
amend or terminate a number of contractual relationships between them. In the
first step of the MG Settlement, which closed on September 9, 1994, MG
transferred 3.6 million shares of common stock to the Company in exchange for
approximately $39,800 of participations the Company held in debt obligations
of the Company and its affiliates 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 under its $120 million Senior
Facility with Societe Generale, together totalling $321,282, (b) transferred
back to the Company the remaining 969,000 shares of common stock held by MG
and a $5,500 debenture convertible into 500,000 shares of common stock, (c)
issued to the Company a $10,000 note payble in three years, (d) terminated
all of its interests in the Company's natural gas operations and (e) agreed
to supply all crude oil necessary for the Company to meet its delivery
obligations under the Forward Sale Contract with a third party entered into
during September 1993. In exchange for the foregoing, IRLP and Powerine (i)
amended their Offtake Agreements to terminate effective February 1, 1995,
(ii) amended their working capital facilities to terminate on March 31,
75
<PAGE>
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 also entered into a four- year natural
gas swap agreement and MG agreed that the Company, through March 31, 1995,
could unilaterally terminate the MGNG Supply Agreement.
As a result of the MG Settlement, the Company will recognize a net gain of
$222,737 (consisting of a gross gain of $378,817 less federal and state
income taxes of $156,080) (unaudited). For federal and state income tax
purposes approximately $91,270 (unaudited) of income taxes will be owed as a
result of the gain. See Refinery Transactions below.
Refinery Transactions
On December 5, 1994, the Company entered into an agreement with SIPAC
Inc., a newly formed Delaware Company, to sell all of its refining operations
to SIPAC effective January 31, 1995. SIPAC was formed by Mr. William Sudhaus,
the Chief Operating Officer and the President of the Company. If the
transaction with SIPAC is consummated, it is the intention of the parties
that most of the current management of the Company's refining subsidiaries
would leave the Company and join SIPAC.
The following are the principal terms of the Purchase Agreement:
(a) The Company would sell to SIPAC substantially all of its refining
assets and operations, including six of its refining subsidiaries.
(b) In return for the refining assets and stock of the refining
subsidiaries, SIPAC would (a) issue a $38,750 unsecured convertible note
to the Company, (b) assume substantially all of the liabilities of all of
the Company's refining subsidiaries, and (c) pay the Company an amount for
the working capital of the Company's refining subsidiaries as of January
31, 1995, the anticipated effective date. The note would bear interest at
ten percent and interest will be payable semi-annually. In addition, the
notes would be convertible after two years into approximately 41% of the
equity of SIPAC.
(c) If the capital expenditures of the Refineries during the period
from October 1, 1994 through the date of the closing exceed $32,000, the
Company will receive an amount equal to such excess in cash, and if such
capital expenditures are less than $32,000, the Company will be required
to pay an amount equal to such deficiency to SIPAC in cash.
(d) The Company would be responsible for all income taxes through
January 31, 1995, the anticipated closing date, and SIPAC would be
responsible for all income taxes after January 31, 1995.
Consummation of the Refinery Transactions is subject to (a) approval of
the Company's stockholders, (b) SIPAC's obtaining equity capital and debt
financing and (c) necessary regulatory approvals.
If the Refinery Transactions are consummated, the Company will have sold
all of its refining assets and operations and will no longer be engaged in
the refining segment of the oil and gas industry. If the Refinery
Transactions were closed on September 30, 1994, the Company would realize a
net loss of approximately $155,300, ($250,000 less $94,700 income tax
recovery) for financial reporting purposes (unaudited). For tax purposes, the
loss will be approximately $206,000 (unaudited). After giving effect to the
MG Settlement, if the Refinery Transactions are consummated, the Company will
owe approximately $11,220 (unaudited) of Federal and state income taxes. This
loss was not recorded in the September 30, 1994 financial statements since
the aggregate value of the refining assets, including the MG Settlement, was
in excess of their net book value.
Management Actions Regarding the MG Settlement and the Refinery
Transactions
As a result of the MG Settlement which was consummated in two steps in
September and October 1994, the Company recognized taxable income of
approximately $390,000 (unaudited). Absent any offsets to such income, and
after giving effect to the Company's existing net operating loss and
depletion carryforwards, the Company will owe Federal and state taxes of
approximately $91,000 (unaudited). If the Refinery operations are not sold,
the Company would likely require outside financing to pay such obligation,
and there can be no assurance the Company would be able to obtain such
financing. The sale of the Refineries pursuant to the SIPAC
76
<PAGE>
Agreement will result in an ordinary loss of approximately $206,000
(unaudited) for Federal income tax purposes. As a result, consummation of a
sale of the Refineries ( or a similar sale or abandonment of the Refinery
operations) would reduce the Company's Federal and state income tax liability
to approximately $11,000 (unaudited).
The Company has submitted an application to change its tax year from a
year ending December 31, to a year ending September 30, to be effective for
the year ended September 30, 1994. Management anticipates that such
application will be approved. If the application is not approved, additional
tax obligations comprised of interest of approximately $11,000 (unaudited)
will be due, assuming the sale of the Refineries pursuant to the SIPAC
Agreement.
At September 30, 1994, the Company had approximately $18,000 of
unrestricted cash. As a result of the MG Settlement, $9,000 of previously
restricted cash was made available to the Company. If the sale of the
Refineries is consummated pursuant to the terms of the SIPAC Agreement, the
Company expects to receive an amount equal to the adjusted working capital of
the Refineries upon closing. The Company estimates that, if the adjusted
working capital had been determined as of September 30, 1994, the cash
payment by SIPAC would have been approximately $39,300 (unaudited) and the
net increase in cash would have been approximately $24,000 (unaudited), of
which $3,000 would have been utilized to repay long-term indebtedness. As a
result, the Company anticipates that it will have cash of approximately
$48,000 (unaudited) (and long-term debt of approximately $46,000 (unaudited))
if the sale of the Refineries is consummated pursuant to the SIPAC Agreement
and there are no additional adjustments to the purchase price for capital
expenditures or operating cash flow from October 1, 1994 to closing.
The Company intends to utilize these funds for income taxes and for
general corporate purposes including the expansion of both its current gas
marketing and exploration and production operations through new drilling and
acquisitions. The Company will also consider repayment or refinancing of the
existing long-term debt of its natural gas marketing subsidiaries and a
repurchase of its own shares if market conditions justify such repurchase.
The Company anticipates that if the Refinery Transactions are not
consummated, it will pursue one of the following alternatives:
a. Close one or both Refineries while seeking alternative purchasers
for one or both Refineries.
b. Curtail operations at one or both Refineries while seeking
alternative purchasers for one or both Refineries.
If alternatives "a" or "b" are undertaken, the Company anticipates that
the costs to close or curtail operations of one or both Refineries can be
financed by the net working capital of the Refineries. If, however, an
alternative purchaser is not found before the end of the Company's next tax
year, the Company will close and abandon one or both Refineries. In such
case, the Company believes that the proceeds of the Refineries' working
capital would be sufficient to cover any severance and known environmental
liabilities upon closure.
If the Refinery sale is not consummated and the Company closes the
Refineries, the Company's tax liability will be reduced to approximately
$11,000 (unaudited) but the Company may be required to fund closing costs
including environmental and employee severance costs. The Company believes
that it could fund such costs from working capital.
Purchased 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 $4,050.
Related Party
During November 1994, a former officer and director joined the Company as
an officer. The Company and its subsidiaries have two management contracts
with Terrapin Resources, Inc. which is wholly-owned by this individual. See
Management Agreements in Note 15 for future commitments under these two
agreements.
77
<PAGE>
Long-Term Supply Agreement
MGRM is the alternate purchaser under the Long-Term Supply Agreement
("LTSA") in the event IRLP should fail to perform. On November 14, 1994,
Shell engaged in correspondence with MGRM and the Company asserting that
Shell had a right under the Illinois Uniform Commercial Code ("IUCC") to
obtain assurances that MGRM could perform its obligations as an alternate
purchaser in light of the terms of the MG Settlement.
On December 23, 1994, Shell filed suit in the United States District Court
for the Northern District of Illinois against IRLP and its general partner,
Indian Refining & Marketing, Inc., and MGRM. The suit, which seeks to
terminate the LTSA, contends that MGRM has anticipatorily repudiated the LTSA
under the IUCC and that the transactions contemplated by the MG Settlement
frustrate the purpose of further performance of the LTSA, and render further
performance of the LTSA impossible.
The Company believes that Shell's requests of MGRM and its lawsuit have no
merit and is vigorously opposing Shell's attempt to terminate the LTSA. Shell
has separately represented to the Company that it will continue to perform
its obligations under the LTSA pending the outcome of the lawsuit.
Stockholder Notes
In November 1994, the Company received notice from a lender that the
lender believes that consummation of the MG Settlement constituted an event
of default under its loan agreement pursuant to which the lender had lent the
Company $2.5 million in December 1991 which was scheduled for repayment in
1996. The Company is discussing this matter with the lender but expects to
repay all amounts due in connection with the sale of the Refineries.
Other Events (unaudited)
Subsequent to January 5, 1995, the SIPAC Agreement was terminated. For
subsequent developments related to the Refinery Transactions, the Long-Term
Supply Agreement and other transactions, see the Company's Form 10-Q for the
quarter ended December 31, 1994.
78
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
The following represents the financial position, statements of operations
and statements of cash flows for Castle Energy Corporation, the parent
company, as of September 30, 1994, 1993 and 1992 and for the three periods
then ended.
CASTLE ENERGY CORPORATION
CONDENSED BALANCE SHEETS
("000'S" OMITTED, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1994 1993 1992
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ................................................. $ 9,729 $ 409 $ 35
Accounts Receivable .................................. 2,673 858
Deferred taxes ....................................... 68,088 14,520
Other assets ......................................... 11 144 1
---------- ---------- -----------
Total current assets ............................. 80,501 15,931 36
Deferred income taxes ................................. 34,595
Intercompany advances ................................. 8,486 44,449 19,193
Other assets .......................................... 385 1,452 81
---------- ---------- -----------
Total assets ..................................... $ 89,372 $ 96,427 $ 19,310
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ................ $ 4,908 $ 2,783 $ 137
Income taxes payable ................................. 86 3,006
---------- ---------- -----------
Total current liabilities .......................... 4,994 5,789 137
Accumulated losses of subsidiaries in excess of
investments:
Exploration and production ......................... (9,402) (9,513) 2,721
Refining ........................................... 2,798 70,301 105,521
Natural gas transmission and marketing ............. (8,825) (4,738)
Long-term debt ....................................... 42,875 42,875
Other Liabilities .................................... 1,100 55
Deferred income taxes ................................ 19,012
---------- ---------- -----------
Total liabilities ................................ 51,452 105,814 108,434
---------- ---------- -----------
Stockholders' equity:
Common stock, $.50; 25,000,000 shares authorized;
7,627,646, 7,722,646 and 6,383,888 shares issued and
outstanding in 1994, 1993 and 1992 respectively .... 3,814 3,891 3,215
Additional paid-in capital ........................... 73,490 65,387 53,988
Accumulated deficit .................................. (39,384) (78,301) (146,138)
---------- ---------- -----------
37,920 (9,023) (88,935)
Treasury stock-at cost (59,860 shares in 1993, 47,376
in 1992) ........................................... (364) (189)
---------- ---------- -----------
37,920 (9,387) (89,124)
---------- ---------- -----------
Total liabilities and stockholders' equity
(deficit) ....................................... $ 89,372 $ 96,427 $ 19,310
========== ========== ===========
</TABLE>
79
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED STATEMENTS OF OPERATIONS
("000'S" OMITTED)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1994 1993 1992
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Oil and gas sales ...................................... $ 15 $ 12 $ 13
Management fees ........................................ 4,956 1,414
Interest Income ........................................ 3,354 2,426
--------- --------- ----------
8,325 3,852 13
Costs and expenses:
General and administrative ............................. 10,631 2,265 59
Oil and gas production ................................. 6 4 6
Interest expense ....................................... 2,608 2,124
Depreciation, depletion and amortization ............... 66 30 2
Other .................................................. 541
Write-offs ............................................. 886
--------- --------- ----------
13,852 4,423 953
--------- --------- ----------
Income (loss) before equity in undistributed earnings
(losses) of subsidiaries and income taxes .............. (5,527) (571) (940)
Equity in undistributed earnings (losses) of
subsidiaries:
Exploration and production ............................. (111) 1,341 (544)
Refining ............................................... 38,537 17,865 (50,704)
Natural gas transmission and marketing ................. 4,087 4,718
--------- --------- ----------
Income (loss) before income taxes ...................... 36,986 23,353 (52,188)
(Provision for) recovery of income taxes ............... 1,931 35,970 (81)
--------- --------- ----------
Net income (loss) before cumulative effect of change in
accounting principle ................................. 38,917 59,323 (52,269)
Cumulative effect of a change in accounting principle --
adoption of FAS 109 .................................. 8,514
--------- --------- ----------
Net Income (loss) ...................................... $38,917 $67,837 ($ 52,269)
========= ========= ==========
</TABLE>
80
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED STATEMENT OF CASH FLOWS
("000'S" OMITTED)
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1994 1993 1992
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before equity in undistributed earnings of
subsidiaries and cumulative effect of a change in accounting,
includes (provisions for) recovery of income taxes .............. $ (3,596) $ 35,399 $ (1,021)
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization ........................ 66 30 2
Write-offs ...................................................... 886
Deferred Income Taxes ........................................... 39 (38,976)
Changes in assets and liabilities:
(Increase) in accounts receivable ................................ (1,815)
(Increase) decrease in other assets .............................. 1,482 (1,342) 1
Increase (decrease) in accounts payable and accrued expenses ..... (795) 5,652 51
(Decrease) in other liabilities .................................. (1,100) (55)
---------- --------- --------
Total adjustments ............................................ (2,123) (34,691) 940
---------- --------- --------
Net cash flows provided by (used in) operating activities .... (5,719) 708 (81)
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Investment in GAMXX ............................................... (886)
Purchase of furniture, fixtures and equipment ..................... (348) (40)
Business acquisition, net of cash acquired ........................ (8,230)
---------- --------- --------
Net cash (used in) investing activities ........................... (8,578) (40) (886)
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ........................ 48,207 20 379
Proceeds of sale of subsidiaries ................................... 265
Loan from shareholder .............................................. 250
Purchase of treasury stock ......................................... (175)
Investment in subsidiaries ......................................... (17,300)
Intercompany (advances) loans ...................................... (7,290) (654) 616
---------- --------- --------
Net cash provided by (used in) financing activities ............. 23,617 (294) 995
---------- --------- --------
Net increase (decrease) in cash and cash equivalents ............... 9,320 374 28
Cash and cash equivalents-beginning of period ...................... 409 35 7
---------- --------- --------
Cash and cash equivalents-end of period ............................ $ 9,729 $ 409 $ 35
========== ========= ========
Supplemental schedule of noncash investing and financing activities:
Purchase of Powerine Oil Company:
Basis in assets acquired .......................................... $186,867
Cash paid for capital stock and transaction costs ................. (8,230)
----------
Basis in liabilities assumed ...................................... $178,637
==========
Exchanges of common stock:
Fair value of debt issuance/extension, processing agreement,
issuance costs, and offtake amendments ............................ $ 11,000 $ 506
========== =========
Acquisition of common stock in exchange for reduction in cash
participations .................................................... $ 39,817
==========
Debt issued in exchange for debt extensions and offtake amendments . $ 5,500
==========
Stock issued in exchange for support of supply agreement ........... $ 855
==========
Sale of properties for note ........................................ $ 600
==========
Options exercised for short term receivable ........................ $ 45
==========
Transactions with subsidiaries:
Investment in IRLP ............................................... $ 17,355
==========
Investment in natural gas marketing and transmission ............. $ 20
==========
Investment in exploration and production ......................... $ 10
==========
Transfer third party debt from Subsidiary to Parent .............. $ 37,125
==========
</TABLE>
81
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors
CASTLE ENERGY CORPORATION
We have audited the consolidated financial statements of Castle Energy
Corporation listed in the accompanying index. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us
present fairly, in all material respects, the financial position of Castle
Energy Corporation and its subsidiaries at September 30, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1994, in conformity with generally
accepted accounting principles.
As described in Notes 1, 14, and 23 to the financial statements, during
the three years in the period ended September 30, 1994 the Company has had
extensive agreements, transactions and relationships with Metallgesellschaft
Corp. (MG), which during those periods was a significant shareholder of the
Company, various subsidiaries of MG and MG's ultimate parent,
Metallgesellschaft AG (MGAG). Those agreements, transactions and
relationships included MG and its affiliates providing financing and credit
support to the Company, purchasing all of the output of the Company's
refineries and agreements to supply certain products to the Company which the
Company is obligated to deliver to other parties. As a result of these
relationships, the Company has been heavily reliant upon MG, its affiliates
and MGAG in the conduct of its operations and for its continued viability.
As described in Notes 1 and 26 to the financial statements, on August 31,
1994 the Company entered into two agreements that will significantly amend or
terminate the relationship between the Company and MG and its affiliates
("the MG Settlement"). See Note 26 for a discussion of the consequences of
the MG Settlement and management's plans related thereto.
As discussed in Note 2, the Company changed its method of accounting for
income taxes effective October 1, 1992.
PRICE WATERHOUSE LLP
Philadelphia, PA
January 3, 1995
82
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no disagreements on any matter of accounting principles or
financial statement disclosure with the Company's independent accountants
during the fiscal years ended September 30, 1994 or 1993.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Directors, nominees for Director, executive officers and key employees
of the Company (including certain officers of Indian Refining & Marketing
Inc. ("IR&M"), a wholly-owned subsidiary of the Company and the sole general
partner of Indian Refining Limited Partnership ("IRLP"), a wholly-owned
subsidiary limited partnership of the Company; Powerine Oil Company
("Powerine"), a wholly-owned subsidiary of the Company; and IP Oil Co., a
wholly-owned subsidiary of the Company ("IPCO") and the sole general partner
of Indian Powerine Limited Partnership ("IPLP"), a wholly-owned subsidiary
limited partnership of the Company) who perform key policy-making functions
for the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- ----------
<S> <C> <C>
Joseph L. Castle II . 62 Chairman of the Board and Chief Executive Officer of the Company
William S. Sudhaus .. 46 President and Chief Operating Officer and Director of the
Company; Chairman and Chief Executive Officer of IR&M, Powerine
and IPCO
Richard E. Staedtler.. 50 Senior Vice President and Chief Financial Officer of the Company
Donald L. Marsh, Jr... 47 Senior Vice President, Development and Treasurer of the Company;
John D.R. Wright, III 57 Senior Vice President and Chief Financial Officer of IPCO
President and Chief Operating Officer of IR&M
A.L. Gualtieri ...... 51 President and Chief Operating Officer of Powerine
David M. Hermes ..... 39 Senior Vice President, Raw Material Supply of IR&M, Powerine and
IPCO
Chris A. Woods ...... 36 Vice President and Chief Accounting Officer of the Company, IR&M,
Powerine and IPCO
Chris J. Bloomer .... 41 Senior Vice President -- Canadian Operations of IR&M
W. Arthur Benson .... 55 Director
Sheldon M. Bonovitz . 57 Director
Warren V. Musser .... 67 Director
John W. Sullivan .... 59 Director
Martin R. Hoffmann .. 62 Nominee for Director
Sidney F. Wentz ..... 62 Nominee for Director
</TABLE>
Joseph L. Castle II has been a Director of the Company since 1985. Mr.
Castle is the Chairman of the Board of Directors and Chief Executive Officer
of the Company, having served as Chairman from December 1985 through May 1992
and since December 20, 1993. Mr. Castle also served as President of the
Company from December 1985 through December 20, 1993 when he reassumed his
position as Chairman of the Board. Mr. Castle has worked in the energy
industry in various capacities since 1971. Mr. Castle is a director of The
Reading Company, Comcast Corporation, Charming Shoppes, Inc., Independence
Capital Management, Inc. and Mark Centers Trust, a real estate investment
trust.
William S. Sudhaus has been a Director of the Company since February 1993.
Mr. Sudhaus became the President and Chief Operating Officer of the Company
in February 1994 having served as Executive Vice President of the Company
since December 1993. Mr. Sudhaus also serves as Chairman and Chief Executive
Officer of both IR&M, Powerine and IPCO. Mr. Sudhaus previously served as
Chairman, President and Chief Executive Officer of IRMC, the former general
partner of IRLP. Effective December 1991, Mr. Sudhaus became the Chairman and
Chief Executive Officer of IR&M when it assumed the duties as IRLP's general
partner. Prior to assuming his position with IRMC, Mr. Sudhaus was the
President of Danik Corporation from January 1987 through May 1989, an
investment banking and consulting firm to companies operating in the areas of
energy, trade finance, shipping and consumer products. Mr. Sudhaus is the
Chairman of the Board, President and Chief
83
<PAGE>
Executive Officer of SIPAC which has entered into the Purchase Agreement with
the Company. Mr. Sudhaus has agreed to resign as a Director if the closing of
the Refinery Transactions is consummated. See Proposed Refinery Transactions
in Item 13 -- Certain Relationships and Related Transactions.
Richard E. Staedtler has been Senior Vice President and Chief Financial
Officer of the Company since November 1994. Mr. Staedtler served as a
Director of the Company from 1986 through September 1992, and as Chief
Financial Officer of the Company from 1986 through June 1993, when he formed
Terrapin Resources Corp. ("Terrapin") to purchase Minden Energy Corporation,
then a wholly-owned subsidiary of the Company. Mr. Staedtler also serves as
President of Terrapin, which provides certain administrative services to the
Company. See Item 13. -- Certain Relationships and Related Transactions --
Transactions With Other Related Parties.
Donald L. Marsh, Jr. has been Senior Vice President, Development of the
Company since November 1994, Senior Vice President and Chief Financial
Officer of IPCO since September 1993, and Treasurer of the Company since
October 1993. Prior to serving as Senior Vice President, Development, Mr.
Marsh served as Senior Vice President, Finance of the Company. From 1986
until he joined the Company in August 1993, Mr. Marsh had been an independent
consultant with Earned Interest Inc.
John D.R. Wright, III is the President and Chief Operating Officer of
IR&M, and formerly the President and Chief Operating Officer of Indian
Refining Management Company ("IRMC"). Prior to assuming his position with
IRMC, Mr. Wright founded and was for 11 years Chairman of Wright Killen &
Co., consultants to the downstream sector of the petroleum industry.
A.L. Gualtieri is the President and Chief Operating Officer of Powerine,
and was formerly its Vice President of Refining. Prior to assuming employment
with Powerine in September 1986, Mr. Gualtieri was Vice President of West
Coast Trading of Oxbow Resources Inc. Mr. Gualtieri is expected to be
employed by SIPAC, and to resign his positions with the Company and its
remaining subsidiaries, effective upon and subject to the closing of the
Refinery Transactions. See Proposed Refinery Transactions in Item 13 --
Certain Relationships and Related Transactions.
David M. Hermes is the Senior Vice President, Raw Material Supply of IR&M,
Powerine and IPCO. From 1983 until he assumed his positions with the Company
in February 1992, Mr. Hermes was Senior Crude Trading Representative of Fina
Oil and Chemical Company. Mr. Hermes is expected to be employed by SIPAC, and
to resign his positions with the Company and its remaining subsidiaries,
effective upon and subject to the closing of the Refinery Transactions. See
Proposed Refinery Transactions in Item 13 -- Certain Relationships and
Related Transactions.
Chris A. Woods is the Vice President and Chief Accounting Officer of the
Company, IR&M, Powerine and IPCO. Prior to joining the Company in 1989, Mr.
Woods served as the Treasurer of Woods Oil Company, and as an accounting and
tax consultant for other regional oil and gas companies. From 1980 until
1982, Mr. Woods was a staff accountant for Marathon Oil Company. Mr. Woods is
expected to be employed by SIPAC, and to resign his positions with the
Company and its remaining subsidiaries, effective upon and subject to the
closing of the Refinery Transactions. See Proposed Refinery Transactions in
Item 13 -- Certain Relationships and Related Transactions.
Chris J. Bloomer has been Senior Vice President -- Canadian Operations of
IR&M since December 1993. Prior to joining IR&M, Mr. Bloomer served as
Director -- Liquids Business Centre of Shell Canada Limited, a major Canadian
integrated oil company, where he held various staff and senior management
positions since joining that company in 1977. Mr. Bloomer is expected to be
employed by SIPAC, and to resign his positions with the Company and its
remaining subsidiaries, effective upon and subject to the closing of the
Refinery Transactions. See Proposed Refinery Transactions in Item 13 --
Certain Relationships and Related Transactions.
W. Arthur Benson has been a Director of the Company since September 1992.
Mr. Benson was employed by Metallgesellschaft Corp. ("MG") from November 1991
through February 1994, having served as President of MG's wholly-owned
subsidiary MG Refining & Marketing, Inc. ("MGRM"), Senior Vice President of
MG and Chairman of MG's wholly-owned subsidiary MG Natural Gas Corp. ("MGNG")
from November 1991 until December 1993. From December 1993 through February
1994, Mr. Benson was responsible for MGRM's physical marketing activities.
84
<PAGE>
Mr. Benson was Senior Vice President of Louis Dreyfus Energy Corporation, a
world- wide energy company, from November 1988 through November 1991 and was
Vice President, Marketing of MGRM from September 1987 through November 1988. Mr.
Benson has elected not to stand for reelection as a Director at the Annual
Meeting.
Sheldon M. Bonovitz has been a Director of the Company since September
1988 and is currently the Chairman of the Compensation Committee of the Board
of Directors. Mr. Bonovitz has been a partner of the Philadelphia law firm of
Duane, Morris & Heckscher since 1966, was Chairman of the Tax Department of
that firm from 1972 to 1994, and is currently Vice Chairman of that firm
since 1992 and has served as a member of the partners Board of that firm
since 1976. Mr. Bonovitz is also a director of Comcast Corporation, WWF Paper
Corporation, The Graham Company, Inc., Surgical Laser Technologies, Inc. and
Escalon Opthalmics, Inc.
Warren V. Musser has been a Director of the Company since December 1991.
Since 1968, Mr. Musser has been the Chairman and Chief Executive Officer of
Safeguard Scientifics, Inc. (formerly Safeguard Industries, Inc.). Since
December 1991, Mr. Musser has been the Chairman of Technology Leaders
Management, Inc. Mr. Musser is also a Director of CenterCore, Inc., CompuCom
Systems, Inc., Rabbit Software Corp., Cambridge Technology Partners, Inc.,
Coherent Communications Corp. and Tangram Enterprise Solutions, Inc. Mr.
Musser has elected not to stand for reelection as a Director at the Annual
Meeting.
John W. Sullivan has been a Director of the Company since January 1986.
Since April 1987, Mr. Sullivan has been the President of Loblolly Pines
Development Company, a real estate development firm located in Hobe Sound,
Florida. Mr. Sullivan is a director of The Reading Company.
Martin R. Hoffmann has been a Senior Visiting Fellow at the Center for
Technology, Policy and Industrial Development of the Massachusetts Institute
of Technology since 1993 and a private business consultant since 1993. From
1989 to 1993, Mr. Hoffman served as Vice President and General Counsel of
Digital Equipment Corporation. Prior to assuming this position, Mr. Hoffmann
practiced law as Managing Partner of the Washington, D.C. office of Gardner,
Carton and Douglas from 1977 to 1989. Mr. Hoffmann also served in various
capacities at the United States Department of Defense, including General
Counsel from 1974 to 1975 and Secretary of the Army from 1975 to 1977. Mr.
Hoffman is a director of E-Systems, Inc.
Sidney F. Wentz has been Chairman of the Board of The Robert Wood Johnson
Foundation, the nation's largest health care philanthropy, since June 1989.
Commencing in 1967, he held several positions with Crum and Forster, an
insurance holding company, retiring as Chairman and Chief Executive Officer
in 1988. Previously, he was Corporate Attorney for Western Electric
Company/AT&T and then attorney with the law firm of White & Case. Mr. Wentz
is a director of Ace Limited, a Bermuda-based insurance company, and a
trustee for Morristown Memorial Hospital and Drew University.
SECTION 16 COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers, directors and owners of
more than 10% of any class of the Company's securities registered pursuant to
Section 12 of the Exchange Act to file reports of ownership and changes in
ownership with the Commission. The Commission's rules also require such
persons to furnish the Company with a copy of all Section 16(a) reports that
they file.
Based solely on a review of the copies of the reports which the Company
received and written representations from certain persons, the Company
believes that, except as set forth below, all such reporting persons complied
with such requirements:
David M. Hermes, who serves as an executive officer of the Company, filed
a Form 3 that was four days delinquent and that inadvertently omitted to
report certain derivative securities held by Mr. Hermes at that time, which
delinquency and omission was not reported on a Form 5. Mr. Hermes has now
filed an amended Form 3 to report his holding of the derivative securities
that were omitted from the original Form 3 report.
John W. Sullivan, who serves as a Director of the Company, did not file a
Form 4 report with respect to two transactions in April 1993, which omission
was not reported on a Form 5 with respect to the fiscal years ended September
30, 1993 or 1994. Mr. Sullivan has now filed a Form 4 reporting such
transactions.
85
<PAGE>
Richard E. Staedtler, who became an executive officer of the Company in
November 1994, filed a Form 3 that was one day delinquent.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table summarizes all compensation paid to the Named
Executives for the Company's last three completed fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------ --------------
Securities
Underlying
Awards All Other
Fiscal Options/ Compensation(1)
Name and Principal Position Year Salary($) Bonus($) SARs(#) ($)
- - -------------------------------------- -------- ---------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Joseph L. Castle II .................. 1994 $416,667 $285,000 -- $ 6,000
Chairman of the Board, Chief 1993 300,000 -- 32,500 9,000
Executive Officer and Director of the 1992 333,328 -- 67,500 6,000
Company .............................
William S. Sudhaus ................... 1994 $443,695 $292,311 75,000 $ 6,000
President, Chief Operating Officer 1993 409,690 122,907 37,500 7,500
and Director of the Company ........ 1992 397,230 -- -- --
John D.R. Wright, III ................ 1994 $273,114 $ 50,000 -- --
President and Chief Operating 1993 260,250 50,000 87,500(2) --
Officer of IR&M ..................... 1992 250,000 -- -- --
A. L. Gualtieri ...................... 1994 $333,754 $ 53,202 50,000 $207,013(3)
President and Chief Operating Officer
of Powerine .........................
David M. Hermes ...................... 1994 $181,042 $262,875 50,000 --
Senior Vice President, Raw Material 1993 196,875 37,500 16,666 --
Supply of IR&M, Powerine and 1992 85,625 -- 20,000 --
IPCO ................................
</TABLE>
- - ------
(1) Directors' fees, except for Mr. Gualtieri.
(2) Mr. Wright was granted 175,000 stock appreciation rights ("SARs")
pursuant to a Bonus Payment Rights Agreement dated October 1, 1991 among
Mr. Wright, IR&M and IRLP. Pursuant to an Amendment to Agreement dated as
of February 25, 1993, IR&M, IRLP and Mr. Wright agreed to reduce the
number of SARs then held by Mr. Wright from 175,000 to 87,500. In
addition, the terms of the SARs held by Mr. Wright were amended to
provide that (a) until the aggregate amount received by Mr. Wright upon
exercise of SARs equals $2 million, each SAR would be exercisable for the
sum of (i) the amount (the "Basic Value") by which the average closing
price of shares of Common Stock of the Company for the 20 trading days
prior to the date of exercise exceeds the base price of $8.00, plus (ii)
the Basic Value up to $11.42 (the "Incremental Value"); (b) thereafter
and until the aggregate Basic Value of the SARs to be exercised equals
the aggregate Incremental Value received by Mr. Wright described in (a)
above, Mr. Wright would not receive any amount upon the exercise of SARs;
and (c) thereafter, each SAR would be exercisable for the Basic Value.
(3) Amounts paid as consideration for termination of prior employment
contract.
86
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes all options and SARs granted as
compensation to the Named Executives during the fiscal year ended September
30, 1994:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------
Percent
of Total
Number of Options/ Potential Realization
Securities SARs Value at Assumed
Underlying Granted to Exercise Annual Rates of Stock
Options/ Employees or Base Price Appreciation
SARs in Fiscal Price Expiration For Option Term
--------------------------
Name Granted (#) Year ($/Sh) Date 5%($) 10%($)
- - ---------------------- ------------ ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph L. Castle II .. 0 -- -- -- -- --
William S. Sudhaus ... 75,000(1) 17.3% $11.00 1/12/04 $519,000 $1,314,838
John D.R. Wright, III 0 -- -- -- -- --
A. L. Gualtieri ...... 50,000(1) 11.5% $11.00 1/12/04 $346,000 $ 876,500
David M. Hermes ...... 50,000(1) 11.5% $11.00 1/12/04 $346,000 $ 876,500
</TABLE>
- - ------------
(1) Options granted vest 25% on July 12, 1994, 25% on January 12, 1995, 25%
on January 12, 1996 and 25% on January 12, 1997, unless sooner vested as
a result of a "Change in Control" of the Company, as defined in the
Company's 1992 Executive Equity Incentive Plan.
OPTION/SAR EXERCISES AND OPTION/SAR VALUES
No options or SARs were exercised by the Named Executives during the
fiscal year ended September 30, 1994. The following table shows the total
number of unexercised options and SARs held at September 30, 1994 by such
officers. The table also shows the values for unexercised "in-the money"
options and SARs which represent the positive spread between the exercise
price of such stock options or SARs and the fair market value of the shares
of Common Stock as of September 30, 1994 ($16.00 per share).
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs Options/SARs
at at
Fiscal Year-End Fiscal Year-End
Shares Value (#) ($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- - ---------------------- ------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Joseph L. Castle II .. 0 -- 83,750/16,250 $735,938/$60,938
William S. Sudhaus ... 0 -- 37,500/75,000 $142,188/354,688
John D.R. Wright, III 0 -- 87,500/ -- $ 1,468,250/ --
A. L. Gualtieri ...... 0 -- 12,500/37,500 $ 62,500/187,500
David M. Hermes ...... 0 -- 40,833/45,833 $336,549/218,749
</TABLE>
PENSION PLANS
The Company has no defined benefit pension plans.
IRLP Retirement Plan. IRLP established a defined benefit retirement plan
(the "IRLP Retirement Plan") commencing January 1, 1991. All employees of
IRLP and IPLP, including officers, are eligible for benefits under the IRLP
Retirement Plan commencing on the first January 1 after attaining 20.5 years
of age and six months of service with IRLP or IPLP. The IRLP Retirement Plan
is administered by a trustee and is funded at amounts required by the
Employee Retirement Income Security Act of 1974, as amended.
87
<PAGE>
The table below shows the estimated annual retirement benefits at age 65
to participants in the IRLP Retirement Plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Remuneration Years of Service(1)
- - --------------------- ---------------------------------------------------------------
15 20 25 30 35
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$125,000 ............ $25,445 $33,940 $42,425 $50,910 $59,395
$150,000 and greater 31,455 41,940 52,425 62,910 73,395
</TABLE>
- - ------------
(1) Employees are generally entitled to annual retirement benefits equal to
1.1% of average earnings up to compensation covered by social security
and 0.5% of average earnings that exceed compensation covered by social
security, up to a maximum of $150,000. Such annual benefit is multiplied
by the years of service up to a maximum of 35 years. Average earnings are
generally computed based upon all salary and bonuses received by each
eligible employee during the five highest paid compensation years during
the last ten years before retirement. Employees may retire at age 65 or
at age 62 if they have 20 years of vested service.
As of September 30, 1994, the Named Executives were credited under the
IRLP Retirement Plan with the years of service indicated: William S. Sudhaus,
four years; John D.R. Wright, III, three years; and David M. Hermes, three
years.
COMPENSATION OF DIRECTORS
All of the Outside Directors are paid director's fees of $25,000 per year.
In addition, all Directors receive $1,500 per Board meeting attended and
$1,500 per Board committee meeting attended ($500 per committee meeting if
held in conjunction with a Board meeting).
On October 20, 1994, the Board of Directors formed the Special Committee,
consisting of Joseph L. Castle II, Sheldon M. Bonovitz and John W. Sullivan
to consider the Refinery Transactions. See Proposed Refinery Transactions in
Item 13. -- Certain Relationships and Related Transactions. On December 1,
1994, the Board determined that each member of the Special Committee, other
than Mr. Castle, would receive the sum of $40,000 for his service on the
Special Committee. Mr. Bonovitz, because of his law firm's retention by the
Special Committee, waived such fee.
On May 11, 1993, the Board of Directors of the Company adopted, subject to
stockholder approval, an amendment to the Incentive Plan, which amendment was
modified and readopted by the Board on November 17, 1994. Pursuant to the
terms of the amendment if adopted by the Stockholders, each Outside Director
will automatically be granted an option to purchase 5,000 shares of Common
Stock each calendar year on the earlier to occur of (a) the first trading day
coinciding with or immediately following the fifteenth day after the
Company's regular Annual Stockholders' Meeting or (b) the first trading day
in May, for serving as a Director, as more fully provided in the Incentive
Plan. Contingent upon Stockholder approval of a proposed amendment, on May 2,
1994 the Company issued each Outside Director (Messrs. Benson, Bonovitz,
Musser and Sullivan) options to purchase 5,000 shares of Common Stock at
$11.75 per share.
EMPLOYMENT AGREEMENTS
Employment Agreements among the Company and certain of its subsidiaries
and the Named Executives are described below:
Effective January 1, 1994, Joseph L. Castle II entered into an Employment
Agreement with the Company pursuant to which Mr. Castle agreed to serve as
Chairman and Chief Executive Officer of the Company through December 31,
1995. This agreement provides for Mr. Castle to receive annual compensation
at the rate of $475,000 plus cost of living increases and discretionary
bonuses to be determined by the Compensation Committee of the Board of
Directors (the "Compensation Committee"). Mr. Castle's agreement also
provides that he will be entitled to receive certain separation pay and
benefits in the event that the Company fails to renew the agreement or
following a change in control of the Company, as such event is described in
the agreement and to certain benefits upon his retirement from the Company.
Under the agreement, a change in control includes any person becoming the
88
<PAGE>
beneficial owner of more than 50% of the Company's voting stock or the sale of
all or substantially all of the assets of the Company. Upon retirement, subject
to certain conditions set forth in the agreement, Mr. Castle will be entitled to
receive, for life, 20% of his annual base salary, as defined in the agreement,
or one of three actuarially equivalent benefits.
Effective January 1, 1994, William S. Sudhaus entered into an Amended and
Restated Employment Agreement with the Company, IR&M, Powerine and IRLP
pursuant to which Mr. Sudhaus agreed to serve as President and Chief
Operating Officer of the Company and Chairman and Chief Executive Officer of
IR&M and Powerine. This agreement provides for Mr. Sudhaus to receive annual
compensation at the rate of $450,000 plus cost of living increases and
bonuses based on the profitability of IRLP, Powerine and IPLP, and
discretionary bonuses to be determined by the Compensation Committee. The
agreement also provides that Mr. Sudhaus will be entitled to receive certain
separation pay and benefits following a change in control of the Company, as
such event is defined in the agreement. Under the agreement, a change in
control includes any person becoming the beneficial owner of more than 50% of
the Company's voting stock, any such person having nominated or designated
more than 50% of the Company's directors, or the sale of all or substantially
all of the assets of the Company. Mr. Sudhaus, as the Chairman and Chief
Executive Officer of SIPAC, has agreed to the termination of his agreement
and the cancellation of his outstanding options to purchase 112,500 shares of
Common Stock, effective upon and subject to the closing of the Refinery
Transactions. See Proposed Refinery Transactions in Item 13. -- Certain
Relationships and Related Transactions.
On October 1, 1991, John D.R. Wright, III entered into an Employment
Agreement with IR&M and IRLP, as amended on February 25, 1993, pursuant to
which Mr. Wright agreed to serve as President and Chief Operating Officer of
IR&M through January 31, 1996. This agreement provides for Mr. Wright to
receive annual compensation at the rate of $250,000 plus cost of living
increases and bonuses based on achievement of certain targeted levels of
performance by the Indian Refinery and on the profitability of IRLP. Mr.
Wright's agreement also provides that he will be entitled to receive certain
separation pay and benefits following a change in control of IRLP, as such
event is described in the agreement. Under the agreement, a change in control
occurs if the Company and MG no longer own at least 50% of the equity
interests in IRLP or if IRLP no longer owns at least 50.01% of the Indian
Refinery. In connection with Mr. Wright's agreement, Mr. Wright is also a
party to a Bonus Payment Rights Agreement, dated October 1, 1991, as amended
on February 25, 1993, with IR&M and IRLP pursuant to which Mr. Wright
received 87,500 SARs from IR&M. See Footnote 2 to the Summary Compensation
Table.
On April 1, 1994, A. L. Gualtieri entered into an Employment Agreement
with Powerine pursuant to which Mr. Gualtieri agreed to serve as President
and Chief Operating Officer of Powerine through December 31, 1995. This
agreement provides for Mr. Gualtieri to receive annual compensation at the
rate of $280,000 plus cost of living increases and discretionary bonuses
based on achievement of certain targeted levels of performance of Powerine as
determined by the Compensation Committee. Mr. Gualtieri's agreement also
provides that he will be entitled to receive certain separation pay and
benefits following a change in control of Powerine, as such event is
described in the agreement. Under the agreement, a change in control includes
any person becoming the beneficial owner of more than 50% of the Company's or
Powerine's voting stock or the sale of all or substantially all of the assets
of Powerine.
On February 14, 1992, David M. Hermes entered into an Employment Agreement
with IR&M, Powerine and IPCO, as amended on March 1, 1993, March 2, 1994, and
May 9, 1994, pursuant to which Mr. Hermes agreed to serve as Senior Vice
President, Raw Material Supply of IR&M, Powerine and IPCO through February
29, 1997. The agreement, which is guaranteed by the Company, provides for Mr.
Hermes to receive annual compensation at the rate of $200,000 plus cost of
living increases and discretionary bonuses based on achievement of certain
targeted levels of performance by IR&M. In addition, Mr. Hermes was advanced
$75,000 in 1992, which amount will either be applied against Mr. Hermes'
future compensation or be repaid if Mr. Hermes' employment is terminated
under certain circumstances prior to February 29, 1997. In connection with
Mr. Hermes' agreement, Mr. Hermes also entered into a Bonus Payment Rights
Agreement, dated February 12, 1992, pursuant to which Mr. Hermes received
20,000 SARs which were exercised on November 4, 1994.
As noted above, pursuant to their employment agreements, the Named
Executives, including the Chairman of the Board and Chief Executive Officer,
are entitled to certain separation pay and benefits following termina-
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tion of employment (except for death, disability, willful misconduct or,
except for Mr. Castle, normal retirement) or (except for Mr. Hermes) a change
in control of the Company or certain of its subsidiaries, as such event is
defined in their respective employment agreements. It is a condition to the
Company's obligations under the Purchase Agreement that the Company receive,
from each employee, officer or Director of the Company or its affiliates who
is or is anticipated to become an officer, director or stockholder of SIPAC,
an agreement to, effective as of the closing of the Refinery Transactions,
waive and release (i) any payments which may be or become due to such
individual as a result of the consummation of the Refinery Transactions and
(ii) such other rights as the Company may reasonably request.
RETENTION BONUS PROGRAM
On March 17, 1994, the Compensation Committee approved a retention bonus
program (the "Retention Bonus Program") pursuant to which the Compensation
Committee may, in its sole discretion, award a retention bonus to any covered
executive in any calendar quarter during which the Retention Bonus Program is
in effect. Currently, the covered executives include each of the Named
Executives. Each retention bonus award may include one or both of: (a) an
acceleration of the payment of a designated percentage of the covered
executive's then current annual performance bonus, not to exceed 100% of such
performance bonus prorated on a quarterly basis; and (b) the payment of an
additional bonus which for any quarter may not aggregate more than 7.5% of
such executive's base salary. The Retention Bonus Program also contemplates
that a retention bonus pool be established for employees other than the
covered executives; the Compensation Committee may make retention bonus
awards from this bonus pool in its sole discretion.
During the fiscal year ended September 30, 1994, Mr. Castle earned
$285,000, Mr. Sudhaus earned $168,750 and Mr. Gualtieri earned $53,202 under
the Retention Bonus Program.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consisted of Sheldon M. Bonovitz, Chairman,
Warren V. Musser and John W. Sullivan. The Company has engaged the law firm
of Duane, Morris & Heckscher, of which Mr. Bonovitz is a partner, to provide
legal services to the Company.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth, as of November 30, 1994, the names of all
persons who were known by the Company to be the beneficial owners (as defined
in the rules of the Securities and Exchange Commission (the "Commission") of
more than five percent of the shares of Common Stock of the Company:
<TABLE>
<CAPTION>
Class of Amount and Nature of Percent of
Stock Name and Address of Beneficial Owner Beneficial Ownership(1) Class(1)
----- --------------------------------------- ----------------------- ------------
<S> <C> <C> <C>
Common ... Joseph L. Castle II and Sally W. Castle 556,758(2) 8.25%
One Radnor Corporate Center, Suite 250
100 Matsonford Road
Radnor, Pennsylvania 19087
Common ... FMR Corp. 1,121,450(3) 16.84%
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- - ------------
(1) Based on a total of 6,658,646 shares of Common Stock issued and
outstanding as of November 30, 1994. In calculating each respective
holder's percentage ownership and beneficial ownership in the table
above, shares of Common Stock which the holder has the right to acquire
within 60 days are included.
(2) Joseph L. Castle II and Sally W. Castle are husband and wife. As such,
each is deemed to beneficially own 556,758 shares of Common Stock.
Includes (a) 435,733 shares of Common Stock owned by Mr. Castle and
32,275 shares of Common Stock owned by Mrs. Castle; (b) 67,500 shares of
Common Stock issuable upon exercise of options which are exercisable
within 60 days by Mr. Castle at $6.00 per share; (c) 16,250 shares of
Common Stock issuable upon exercise of options which are exercisable
within 60 days by Mr. Castle at $12.25 per share; and (d) 5,000 shares of
Common Stock issuable upon exercise of options which are exercisable
within 60 days by Mrs. Castle at $5.75 per share.
(3) Includes 1,121,450 shares of Common Stock beneficially owned by Fidelity
Management & Research Company as a result of its serving as investment
adviser to various investment companies registered under Section 8 of the
Investment Company Act of 1940 and as investment adviser to certain other
funds which are generally offered to limited groups of investors.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of November 30, 1994, the shares of
Common Stock beneficially owned by each of the Company's Chief Executive
Officer and the Company's four other most highly compensated executive
officers (the "Named Executives"), by each Director and nominee for Director
of the Company and by the Directors, nominees and executive officers of the
Company as a group, with sole voting and investment power unless otherwise
indicated:
<TABLE>
<CAPTION>
Amount and
Nature of
Class of Beneficial Percent of
Stock Name of Beneficial Owner Ownership(1) Class(1)(2)
- - ---------- -------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Common Joseph L. Castle II .................................... 556,758(3) 8.25%
Common William S. Sudhaus ..................................... 58,750(4)
Common John D.R. Wright, III ................................. 0
Common A.L. Gualtieri ......................................... 25,000(5)
Common David M. Hermes ....................................... 33,333(6)
Common John W. Sullivan ...................................... 49,637(7)
Common Sheldon M. Bonovitz .................................... 36,788(8)
Common W. Arthur Benson ...................................... 75,000(9) 1.12%
Common Warren V. Musser ...................................... 20,000(10)
Common Martin R. Hoffmann ..................................... 0
Common Sidney F. Wentz ....................................... 0
Common All Directors, Nominees and Executive Officers as a
group (15 persons) .................................... 884,016 12.7%
</TABLE>
- - ------------
(1) Based on a total of 6,658,646 shares of Common Stock issued and
outstanding as of November 30, 1994. In calculating each respective
holder's percentage ownership and beneficial ownership in the table
above, shares of Common Stock which the holder has the right to acquire
within 60 days are included.
(2) Percentages of less than one percent are omitted.
(3) Includes (a) 435,733 shares of Common Stock owned by Mr. Castle and
32,275 shares of Common Stock owned by Mrs. Castle; (b) 67,500 shares of
Common Stock issuable upon exercise of options which are exercisable
within 60 days by Mr. Castle at $6.00 per share; (c) 16,250 shares of
Common Stock issuable upon exercise of options which are exercisable
within 60 days by Mr. Castle at $12.25 per share; and (d) 5,000 shares
of Common Stock issuable upon exercise of options which are exercisable
within 60 days by Mrs. Castle at $5.75 per share.
(4) Includes (a) 42,500 shares of Common Stock issuable upon exercise of
options which are exercisable within 60 days by Mr. Sudhaus at $11.00
per share and (b) 16,250 shares of Common Stock issuable upon exercise
of options which are exercisable within 60 days by Mr. Sudhaus at $12.25
per share. Mr. Sudhaus, as the Chairman and Chief Executive Officer of
SIPAC, has agreed to the termination of his employment agreement and the
cancellation of his outstanding options to purchase 112,500 shares of
Common Stock, effective upon and subject to the closing of the Refinery
Transactions. See Proposed Refinery Transactions in Item 13. -- Certain
Relationships and Related Transactions.
(5) Includes 25,000 shares of Common Stock issuable upon exercise of options
which are exercisable within 60 days by Mr. Gualtieri at $11.00 per
share.
(6) Includes (a) 8,333 shares of Common Stock issuable upon exercise of
options which are exercisable by Mr. Hermes at $12.25 per share and (b)
25,000 shares of Common Stock issuable upon exercise of options which
are exercisable within 60 days by Mr. Hermes at $11.00 per share.
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(7) Includes (a) 2,158 shares of Common Stock owned by Mr. Sullivan; (b)
25,146 shares of Common Stock held by Mr. Sullivan as Trustee, under a
Trust Agreement dated March 25, 1991; (c) 4,000 shares of Common Stock
owned by the John W. and Susan R. Sullivan Foundation of which Mr.
Sullivan disclaims beneficial ownership although retaining voting and
investment power with respect to such shares of Common Stock; (d) 5,000
shares of Common Stock held by an Individual Retirement Account for the
benefit of Mr. Sullivan; (e) 5,000 shares of Common Stock issuable upon
exercise of options which are exercisable within 60 days by Mr. Sullivan
at $8.50 per share; and (f) 8,333 shares of Common Stock issuable upon
exercise of options which are exercisable within 60 days by Mr. Sullivan
at $11.00 per share. Does not include 2,500 shares of Common Stock held
by Mr. Sullivan's wife as Trustee under a Trust Agreement dated March
25, 1991, of which Mr. Sullivan disclaims beneficial ownership, or 5,000
shares of Common Stock issuable upon exercise of options which will
become exercisable by Mr. Sullivan at $11.75 per share in the event the
Company adopts the First Amendment to the Company's 1992 Executive
Equity Incentive Plan, at its next Annual Meeting.
(8) Includes (a) 23,455 shares of Common Stock owned by Mr. Bonovitz; (b)
5,000 shares of Common Stock issuable upon exercise of options which are
exercisable within 60 days by Mr. Bonovitz at $8.50 per share; and (c)
8,333 shares of Common Stock issuable upon exercise of options which are
exercisable within 60 days by Mr. Bonovitz at $11.00 per share. Does not
include (a) 15,633 shares of Common Stock held by Mr. Bonovitz's wife,
Jill F. Bonovitz; (b) 7,266 shares of Common Stock owned by the Trust
under Will #1 Robert H. Fleisher, of which Mr. Bonovitz is one of four
trustees and shares voting power; (c) 4,821 shares of Common Stock held
by Mr. Bonovitz as Trustee, u/t/d 5/24/91, f/b/o Erik F. Bonovitz; (d)
4,821 shares of Common Stock held by Mr. Bonovitz as Trustee, u/t/d
11/14/89, f/b/o Christopher F. Bonovitz, of which Mr. Bonovitz disclaims
beneficial ownership or (e) options to acquire 5,000 shares of Common
Stock which will become exercisable by Mr. Bonovitz at $11.75 per share
in the event the Company adopts the First Amendment to the Company's
1992 Executive Equity Incentive Plan, at its next Annual Meeting.
(9) Includes (a) 50,000 shares of Common Stock owned by Mr. Benson and (b)
25,000 shares of Common Stock issuable upon exercise of options which
are exercisable by Mr. Benson at $5.75 per share. Does not include
47,500 shares of Common Stock issuable upon exercise of warrants which
are exercisable within 60 days at $11.00 per share by Mr. Benson's wife,
of which Mr. Benson disclaims beneficial ownership or 5,000 shares of
Common Stock issuable upon exercise of options which will become
exercisable by Mr. Benson at $11.75 per share in the event the Company
adopts the First Amendment to the Company's 1992 Executive Equity
Incentive Plan, at its next Annual Meeting.
(10) Includes (a) 10,000 shares of Common Stock owned by Mr. Musser; (b)
5,000 shares of Common Stock issuable upon exercise of options which are
exercisable within 60 days by Mr. Musser at $8.50 per share; and (c)
5,000 shares of Common Stock issuable upon exercise of options which are
exercisable within 60 days by Mr. Musser at $11.00 per share. Does not
include 5,000 shares of Common Stock issuable upon exercise of options
which will become exercisable by Mr. Musser at $11.75 per share in the
event the Company adopts the First Amendment to the Company's 1992
Executive Equity Incentive Plan, at its next Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise indicated, the Company believes the terms of each of
the following transactions were comparable to those available from a
non-affiliate.
MG AND ITS AFFILIATES
Immediately prior to the MG Settlement described below, in excess of 40%
of the Company's outstanding common stock was owned by MG, and the Company
and its subsidiaries had entered into many agreements, described below, with
MG and its affiliates, including agreements pursuant to which MG and its
affiliates financed the Company's refining and natural gas marketing
operations, purchased all of the Company's refined product output, and
supplied natural gas to the Company for resale under a long-term contract to
a third party. In December 1993, the Company was informed that MG and its
parent corporation, Metallgesellschaft AG ("MG AG"), had incurred substantial
cash expenditures and losses related in part to margin payments required
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by the New York Mercantile Exchange and various over-the-counter derivatives
trading counterparties as a result of a decline in oil prices. Thereafter, in
its annual report issued in February 1994, MG AG announced that its
consolidated net deficit (net loss) for fiscal 1993 was DM 2.025 billion
($1.241 billion).
As a result of the financial difficulties surrounding MG and its
affiliates, the Company became concerned that MG and its affiliates would be
unable to perform their obligations under their agreements with the Company
or might seek to avoid performance through litigation challenging the
validity of some or all of such agreements. Although the Company believed it
would be successful in any litigation seeking to enforce the agreements, the
Company also believed that the risks and substantial costs of such
litigation, including the risk of being unable to collect any damages which
might be awarded, as well as the disruption to the Company's business, made
litigation undesirable. In addition, the Company believed that MG might enter
bankruptcy and seek to reject some or all of such agreements, in which case
the Company would be likely to recover little if any damages. In addition,
relationships between the Company and MG, as a major stockholder of the
Company, had become adversarial, which the Company believed was not in the
best interests of the Company or its other stockholders. Accordingly, in July
1994 the Company and MG commenced negotiations to attempt to restructure the
contractual and other relationships between MG and its affiliates and the
Company and its affiliates.
On August 31, 1994, the Company entered into two agreements with MG and
certain of its affiliates pursuant to which the parties thereto agreed to
amend or terminate a number of contractual relationships among them (the "MG
Settlement"). In the first step of the MG Settlement, which closed on
September 9, 1994, MG transferred 3.6 million shares of Common Stock to the
Company in exchange for approximately $39.8 million of participations the
Company held in debt obligations of the Company and its affiliates to MG
Trade Finance Corp. ("MGTFC"), a wholly-owned subsidiary of MG.
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 under its $120 million senior
facility with Societe Generale (the "Senior Facility"), together totaling
approximately $322 million, (b) transferred back to the Company the remaining
969,000 shares of Common Stock held by MG and a $5.5 million debenture
convertible into 500,000 shares of Common Stock, (c) issued to the Company a
$10 million note payable in three years (the MG Note ), (d) terminated all of
its interests in the Company's natural gas operations and (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. In exchange for the foregoing, IRLP and Powerine (i) amended
their offtake agreements (the "Indian Offtake Agreement" and the "Powerine
Offtake Agreement" respectively and collectively the "Offtake Agreements") to
terminate effective February 1, 1995, (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 also
entered into a four-year natural gas swap agreement.
The following is a summary of certain of the agreements, arrangements and
transactions between the Company and MG and its affiliates.
INDIAN REFINERY OPERATIONS
Indian Offtake Agreement. The Company entered into the Indian Offtake
Agreement with MGRM in February 1992. Under the terms of the Indian Offtake
Agreement, as amended through October 14, 1993, MGRM agreed to purchase 100%
of IRLP's refined products through June 30, 2000 at a purchase price equal to
(a) the settlement price of near month West Texas Intermediate crude oil;
plus (b) the "Margin Increment" which is currently $5.105 per barrel; plus
(c) certain taxes and other costs and charges.
Pursuant to the terms of the MG Settlement, MGRM and IRLP agreed to
terminate the Indian Offtake Agreement effective February 1, 1995 (except for
certain specified post-termination obligations) and to change certain
provisions relating to the refined product mix to be delivered thereunder.
Such revised product mix provisions are not expected to have a material
impact on IRLP's operations.
During the fiscal year ended September 30, 1994, IRLP recorded sales of
approximately $498.2 million to MGRM under the Indian Offtake Agreement. In
addition, during such period IRLP was paid approximately $11.9 million in
connection with reduced run periods for which MGRM was responsible under the
IRLP Offtake Agreement.
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Although other refineries could mitigate the effect of low refining
margins to a minor degree through hedging activities, the Company believes
that long term, exclusive offtake agreements were generally not available to
other refineries.
MG Supply Agreement. As of February 1, 1992, IRLP entered into an
Agreement for the Purchase and Sale of Feedstocks (the "MG Supply Agreement")
with MG. Under the terms of the MG Supply Agreement, MG originally agreed to
supply IRLP with up to 2.1 million barrels of crude oil and intermediate
feedstocks each month through June 30, 1994 on a cost plus fee basis. The MG
Supply Agreement was amended as of October 1, 1993 to (a) add Powerine and
IPLP as parties and (b) extend the term to September 30, 1997. Under the MG
Supply Agreement, as amended, Powerine was permitted to request deliveries of
up to 1.5 million barrels of crude oil and intermediate feedstocks each
month, and IPLP was permitted to request deliveries of up to 1 million
barrels per month for sale to entities other than IRLP or Powerine. Pursuant
to the terms of the MG Settlement, the MG Supply Agreement was terminated as
of October 14, 1994.
During the fiscal year ended September 30, 1994, IRLP and IPLP purchased
$9.1 million and $41.1 million, respectively, of crude oil and feedstocks
from MG, including hedging transactions. Powerine did not purchase any crude
oil or feedstocks from MG under this agreement during fiscal 1994. In
addition, IRLP, Powerine and IPLP incurred approximately $1.4 million, $1.2
million and $12,000, respectively, of fees and reimbursable expenses pursuant
to the MG Supply Agreement, the Revolving Credit Facility and the Powerine
Loan Agreement (as such terms are defined below).
Swap Agreement. On May 27, 1993, IRLP entered into a 20,000 barrel per day
("B/D") swap agreement with MGRM (the "Swap Agreement"). Under the terms of
this agreement, IRLP was to pay to or receive from MGRM the differential of
the monthly mean price per barrel of West Texas Intermediate crude oil minus
$1.60 versus the monthly mean price per barrel of West Texas sour crude oil.
IRLP and its senior lender considered it prudent to hedge against unprotected
decreases in the price differentials between sweet and sour crude, which had
fluctuated significantly in the past, since IRLP intended to run an
increasing percentage of sour crude. Pursuant to the terms of the MG
Settlement, the Swap Agreement was terminated as of October 14, 1994. During
the fiscal year ended September 30, 1994, the Company received a net amount
of approximately $3.1 million under this agreement.
Forward Sale Transaction. On September 28, 1993, IPLP entered into a
forward sale contract (the "Forward Sale Contract") pursuant to which, in
exchange for a prepayment of $120 million, IPLP sold specified quantities of
crude oil to Percolin Limited ("Percolin") for delivery over a 12-month
period commencing March 1994. Pursuant to the terms of the MG Settlement,
MGRM agreed to supply all crude oil necessary to meet IPLP's delivery
obligations under the Forward Sale Contract. In addition and by agreement
with Percolin, the MG Settlement provided for the extension of IPLP's
delivery obligations through July 1995.
Hedging. During fiscal 1994, IRLP, Powerine and IPLP conducted and cleared
hedging activities through MG Futures, Inc., a wholly-owned subsidiary of MG
("MG Futures"), which is a registered Futures Commission Merchant. During the
fiscal year ended September 30, 1994, IRLP, Powerine and IPLP paid MG Futures
approximately $182,000, $92,000 and $18,000, respectively, for standard
commission fees. Pursuant to the terms of the MG Settlement, IRLP and
Powerine ceased to conduct hedging activities through MG Futures.
Natural Gas Contracts. During the fiscal year ended September 30, 1994,
IRLP purchased natural gas for its refining operations from MGNG. Such
purchases were made at market rates. During such fiscal year, IRLP paid
approximately $8.5 million to MGNG for natural gas purchases. Pursuant to the
terms of the MG Settlement, IRLP and MGNG terminated their natural gas supply
relationship; however, the parties entered into a natural gas swap agreement
pursuant to which the parties agreed that MGNG would pay to IRLP the excess,
if any, of the prompt month's natural gas price as reported on the NYMEX over
the one-year futures price, or IRLP would pay to MGNG the excess, if any, of
such futures price over such prompt month's price, for 10,000 MMBtu per day
through June 23, 1998.
Catalyst Lease. During the fiscal year ended September 30, 1994, IRLP
leased platinum from MGTFC to be used as a catalyst component on a
year-to-year basis. Pursuant to the terms of the MG Settlement, the platinum
lease was terminated and all platinum leased thereunder was transferred to
IRLP without incremental payment. Catalyst lease payments to MGTFC for the
fiscal year ended September 30, 1994 were $85,000.
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POWERINE REFINERY OPERATIONS
Acquisition of Powerine. On August 9, 1993, the Company entered into a
letter of intent with MG pursuant to which the Company agreed to purchase
MG's option to acquire Powerine (the "Powerine Option"). The Powerine Option
had been acquired by MG in March 1993 for $8 million and the assumption of an
indemnity obligation. Pursuant to the terms of an Option Assignment Agreement
dated as of October 1, 1993, the Company (a) paid MG $8 million for the
Powerine Option which was immediately exercised for nominal consideration;
(b) assumed MG's estimated $3.027 million indemnity obligation related to
yield losses incurred by Powerine under a processing arrangement with MG; (c)
assumed a $2.7 million tax indemnification to the previous owner of Powerine;
(d) assumed $128 million of debt obligations to MG and other liabilities of
$45 million; and (e) paid transaction costs of $980,000. Concurrently with
the closing of the Powerine acquisition (i) MGRM entered into the Powerine
Offtake Agreement, (ii) MGTFC entered into the Revised Powerine Loan
Agreement (as defined below), and (iii) Powerine became a party to the MG
Supply Agreement.
The purchase price for Powerine approximated its appraised value at the
time of the Company's purchase.
Powerine Offtake Agreement. Pursuant to the terms of the Powerine Offtake
Agreement, Powerine agreed to sell substantially all of its refined products
it produces to MGRM through January 1, 1998 at a purchase price equal to (a)
the Platt's West Coast price of near month Alaskan North Slope crude oil;
plus (b) the "Margin Increment" which is currently $10.506 per barrel; plus
(c) certain taxes and other costs and charges.
Pursuant to the terms of the MG Settlement, MGRM and Powerine agreed to
terminate the Powerine Offtake Agreement effective February 1, 1995 (except
for certain specified post-termination obligations).
During the fiscal year ended September 30, 1994, Powerine recorded sales
of $348.8 million to MGRM under the Powerine Offtake Agreement. During such
period Powerine did not receive any amounts in connection with reduced run
periods under the Powerine Offtake Agreement.
Prior to the acquisition of Powerine by the Company, Powerine had
processed crude oil and feedstocks for MGRM and MGRM had made commitments to
purchase crude oil and feedstocks for processing by Powerine. In connection
with entering into the Powerine Offtake Agreement, Powerine agreed to honor
such commitments. As a result of such agreement, Powerine paid MGRM
approximately $47.1 million during fiscal 1994 for the delivery of such crude
oil and feedstocks. Powerine did not incur any fees as a result of these
transactions.
Although other refineries could mitigate the effect of low refining
margins to a minor degree through hedging activities, the Company believes
that long term, exclusive offtake agreements were generally not available to
other refineries.
Petroleum Coke Purchase Agreement. Effective January 1, 1994, Powerine
entered into a 36-month Petroleum Coke and Purchase Agreement with MGPC
Petcoke Inc., a wholly-owned subsidiary of MG ("MG Petcoke"), pursuant to
which MG Petcoke agreed to purchase all petroleum coke produced at the
Powerine Refinery. During the fiscal year ended September 30, 1994, Powerine
recorded sales of $2.5 million to MG Petcoke under this agreement.
NATURAL GAS OPERATIONS
Management Agreement. In connection with the acquisition of the 77-mile
intrastate pipeline located in Rusk County, Texas (the "Castle Pipeline")
from Atlantic Richfield Company ("ARCO"), Castle Texas Pipeline Limited
Partnership, a wholly-owned subsidiary limited partnership of the Company
("Castle Texas Pipeline"), and MG Gathering Corp., a wholly-owned subsidiary
of MG ("MG Gathering"), entered into a Management Agreement dated as of
December 1, 1992 (the "Management Agreement") pursuant to which MG Gathering
agreed to manage the operations of the Castle Pipeline. The Management
Agreement runs until June 1, 1999 and continues thereafter on a year-to-year
basis until terminated by either of the parties. During the fiscal year ended
September 30, 1994, Castle Texas Pipeline paid MG Gathering $148,000 for
services rendered pursuant to this agreement. Pursuant to the terms of the MG
Settlement, Castle Texas Pipeline may terminate the Management Agreement upon
thirty days notice.
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Service Agreement. In connection with the acquisition of the various gas
supply contracts from ARCO, CEC Gas Marketing Limited Partnership, a
wholly-owned subsidiary limited partnership of the Company, and MGNG entered
into a Service Agreement dated as of December 1, 1992 (the "Service
Agreement") pursuant to which MGNG agreed to administer all gas supply
contracts owned by CEC Gas Marketing. Subject to certain termination events,
the Service Agreement runs until June 1, 1999, and continues thereafter on a
month-to-month basis until terminated by either of the parties. During the
fiscal year ended September 30, 1994, CEC Gas Marketing paid MGNG $240,000
for services rendered pursuant to this agreement. Pursuant to the terms of
the MG Settlement, CEC Gas Marketing may terminate the Service Agreement upon
thirty days notice.
MGNG Supply Agreement. CEC Gas Marketing supplies a contractual amount of
natural gas to the Lone Star Gas Company pursuant to the terms of a long-term
take or pay contract (the "Lone Star Contract") acquired from ARCO.
Approximately 17% of those supplies come from the wells operated by Castle
Texas Production. The balance is purchased by CEC Gas Marketing from MGNG
pursuant to the Amended and Restated Gas Purchase Contract dated as of August
1, 1993 (the "MGNG Supply Agreement"). Natural gas is purchased from MGNG
pursuant to a six tier formula at varying prices. It is anticipated that a
substantial portion (approximately 83%) of the natural gas used to meet CEC
Gas Marketing's delivery obligations under the Lone Star Contract will
consist of natural gas provided by MGNG which, effective June 1, 1993, is
priced at $2.10 per MMBtu.
The MGNG Supply Agreement contains take-or-pay provisions which obligate
CEC Gas Marketing to take (and pay for if not taken) certain annual
quantities of natural gas. The agreement also has limitations on the maximum
amounts of gas which CEC Gas Marketing can require MGNG to deliver on any
given day and governing the quality of gas deliverable by MGNG, points of
delivery, passage of title and other relevant provisions. MG AG has
guaranteed delivery of the natural gas as provided in the MGNG Supply
Agreement in the event that MGNG fails to perform under the agreement.
Pursuant to the terms of the MG Settlement, CEC Gas Marketing has the option
to terminate the MGNG Supply Agreement on or before March 31, 1995, so long
as it has obtained the approval of General Electric Capital Corporation.
During the fiscal year ended September 30, 1994, CEC Gas Marketing paid
approximately $31.1 million to MGNG for natural gas purchases.
The MGNG Supply Agreement contains several tranches of natural gas
pricing, one of which calls for MGNG to supply gas at prices which were below
the prevailing market price at the time the Agreement was entered into. In
consideration for MGNG's agreement to supply this gas to CEC Gas Marketing at
such price, CEC Gas Marketing agreed, pursuant to the Net Cash Flow Agreement
described below, to indemnify MGNG for the disparity between MGNG's cost of
the gas and the price at which the gas is sold to CEC Gas Marketing. Although
the Net Cash Flow Agreement decreased CEC Gas Marketing's gas merchant
margins, the Lone Star Contract was profitable to CEC Gas Marketing. Although
the Company believes that the terms of the MGNG Supply Agreement and the Net
Cash Flow Agreement, viewed together, were fair from the Company's point of
view given its accumulated deficit, financial condition, and lack of credit
at the time, it is unclear whether such terms would have been available from
an unaffiliated third party.
Net Cash Flow Agreement. In consideration of MGNG's agreement to supply
natural gas pursuant to the terms of the MGNG Supply Agreement, CEC Gas
Marketing originally agreed to indemnify MGNG for the disparity between
MGNG's cost of the gas and the prices at which the gas is sold to CEC Gas
Marketing in an amount estimated at $20 million. The payment of such
indemnification was to have been deferred, however, until after the repayment
of the GECC Loan (as defined below) and the MGTFC Subordinated Loan (as
defined below). Pursuant to the terms of the MG Settlement, this
indemnification obligation was terminated.
FINANCING
Although the Company believes that the terms of each of the financings
with MG and its subsidiaries described below were fair from the Company's
point of view given its accumulated deficit, financial condition, lack of
credit, and lack of alternative financing at the time, it is unclear whether
such terms would have been available from an unaffiliated third party.
MGTFC Credit Agreement. In October 1990, the Company and MG Trade Finance
Corp., a wholly-owned subsidiary of MG ("MGTFC"), entered into a Credit
Agreement (the "Credit Agreement"). A portion of the proceeds of this loan
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was used by the Company to make loans to IRLP. The aggregate principal amount of
the loans owing to MGTFC pursuant to the Credit Agreement was $34.6 million as
of September 30, 1994. The Credit Agreement was secured by (a) a pledge of the
promissory note dated July 1, 1993 executed by Terrapin in favor of the Company,
(b) a collateral assignment of the pledge agreement executed by Terrapin in
favor of the Company and (c) a collateral assignment of a second lien on the
assets of IRLP, which lien was granted to the Company in connection with the
Company's advances to IRLP.
For purposes of the calculation of interest, the Credit Agreement was
divided into two tranches: tranche A, in the principal amount of $8 million,
bore interest initially at the prime rate plus 1%, escalated each December 31
and June 30, beginning on December 31, 1993, by another 2% to a maximum of
prime plus 6%; and tranche B, in the principal amount of $26.6 million, bore
interest at LIBOR plus 1/2 %. Interest was payable annually in arrears. The
Company could elect to pay such interest in shares of Common Stock rather
than cash. However, if the Company elected such option, MGTFC could require
that the interest be capitalized rather than paid in shares of Common Stock.
In December 1993, the Company paid MGTFC approximately $1.2 million of
interest accruing as of that date.
Pursuant to the terms of the MG Settlement, the Credit Agreement was
terminated as of October 14, 1994 at which time the $36.3 million of
principal and accrued interest owing thereunder was forgiven.
GECC Loan/MGTFC Subordinated Loan. On December 3, 1992, the Company,
through three newly formed subsidiary limited partnerships, CEC Gas
Marketing, Castle Texas Pipeline and Castle Production Limited Partnership, a
wholly-owned subsidiary limited partnership of the Company ("Castle
Production"), acquired (i) the Lone Star Contract and several gas supply
contracts, (ii) the Castle Pipeline and (iii) majority working interests in
approximately 100 producing oil and gas wells from ARCO. The Company obtained
a loan from MGTFC to make a $6.25 million deposit to ARCO upon entering into
the purchase and sale agreement with ARCO on September 3, 1992 (the "Deposit
Note"). The Deposit Note bore interest at 9% and was secured by the deposit
and the stock of a subsidiary of the Company. Upon the closing of the ARCO
acquisition on December 3, 1992, the purchase price was financed by an
aggregate $100.5 million term loan (the "MGTFC Bridge Loan") from MGTFC which
included the refinancing of the Deposit Note (at which time the Deposit Note
was repaid) and the deposit was applied to the purchase price. In connection
with this financing, the Company paid MGTFC $3.2 million as a loan
syndication and advisory fee, which was included in the financing provided by
MGTFC.
On September 2, 1993, the Company refinanced a substantial portion of the
then-outstanding $88 million balance of the MGTFC Bridge Loan with General
Electric Capital Corporation ("GECC"). Under the terms of the GECC financing,
GECC made an $80 million senior secured loan (the "GECC Loan") to CEC Gas
Marketing and Castle Texas Pipeline which was used to repay the majority of
the MGTFC Bridge Loan. MGTFC made a subordinated loan to CEC Gas Marketing
and Castle Texas Pipeline (the "MGTFC Subordinated Loan") for the $8 million
balance of the existing MGTFC Bridge Loan. All obligations under the MGTFC
Subordinated Loan were terminated in connection with the MG Settlement. The
GECC Loan bears interest at a fixed rate of 8.33%. Interest payments and
principal amortization are made on a monthly basis in an amount equal to the
greater of a pre-established amortization schedule or 90% of the combined net
cash flow of CEC Gas Marketing and Castle Texas Pipeline. In any month if the
aggregate net cash flow exceeds the amounts necessary to pay the applicable
principal and interest on the GECC Loan, the excess will be used to further
reduce the principal balance of the GECC Loan. In addition to the MGTFC
Subordinated Loan, MGTFC entered into an agreement with Castle Production
(the "Castle Production Guaranty") under which Castle Production guaranteed
the obligations under the MGTFC Subordinated Loan. This guaranty was secured
by a first security interest in all of the assets of Castle Production as
well as a pledge of the partnership interests of Castle Production and a
pledge of the capital stock of the general and limited partners of Castle
Production. All obligations under the Castle Production Guaranty were
terminated under the MG Settlement. The GECC Loan contains various
representations, warranties and covenants. Under the terms of the GECC Loan,
GECC has a first security interest in all of the assets of CEC Gas Marketing
and Castle Texas Pipeline as well as a pledge of the partnership interests of
CEC Gas Marketing and Castle Texas Pipeline and a pledge of the capital stock
of each general and limited partner of both CEC Gas Marketing and Castle
Texas Pipeline. In consideration for making the MGTFC Subordinated Loan and
for supplying certain volumes of natural gas at below market prices, CEC Gas
Marketing agreed to allow MGNG to share in $20 million of its cash flow (the
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"Indemnification Agreement") and each of CEC Gas Marketing and Castle Texas
Pipeline agreed to grant MGTFC a 20% interest in the respective net profits
of the two entities (the "Partnership Interest Option Agreements"), which
interest became effective after the repayment of the GECC Loan and the MGTFC
Subordinated Loan, and the aforesaid $20 million cash flow payment due to
MGNG. Pursuant to the terms of the MG Settlement, all obligations under the
Indemnification Agreement and the Partnership Interest Option Agreements were
terminated prior to the time any amounts were paid under any of such
agreements.
MGTFC Production Loan. On September 30, 1993, Castle Production and MGTFC
entered into an additional term loan (the "MGTFC Production Loan") of up to
$52 million to Castle Production, $47 million of which was available to be
drawn until December 31, 1996 to finance additional drilling and well
completions in the Oak Hill Field, the oil and gas producing properties owned
by Castle Production in Rusk County, Texas, and $5 million of which was
available to finance the acquisition of additional interests in its wells.
The MGTFC Production Loan was to bear interest at the prime rate plus 1% and
would have been amortized through the application of 100% of Castle
Production's net cash flow. Pursuant to the terms of the MG Settlement, the
MGTFC Production Loan was terminated prior to the time any amounts were
funded thereunder.
In connection with the MGTFC Production Loan, Castle Production entered
into a swap agreement (the "Swap") with MG under which, during a term ending
May 31, 1999, Castle Production was required to pay MG the current market
price that Castle Production was being paid at the wellhead for its
production from the Oak Hill Field and MG was obligated to pay Castle
Production a fixed price for the gas produced. The payment obligations under
the Swap were designed to correspond to the development and physical
deliveries of gas by Castle Production under its gas contracts. The Swap was
intended to have the economic effect of setting a fixed price for the gas
that was projected to be developed by Castle Production in connection with
the MGTFC Production Loan which was sufficient to provide funds to pay
principal and interest on the MGTFC Production Loan through May 31, 1999.
Pursuant to the terms of the MG Settlement, the Swap was terminated as of
October 14, 1994.
In consideration for the MGTFC Production Loan, Castle Production also
agreed to grant to MGTFC rights to 50% of Castle Production's net cash flow,
commencing on the date on which the MGTFC Production Loan was repaid. In
addition, in the five year period commencing on September 30, 1993 (the
"Initial Period"), MGTFC was to have received a marketing fee of $.35 per
MMBtu of gas produced by Castle Production in lieu of the 50% interest. At
the end of the Initial Period, MGTFC's right to the $.35 marketing fee was to
have terminated and, provided the MGTFC Production Loan had been repaid and
no obligations remained outstanding under the Swap, MGTFC was to become
entitled to 50% of the net cash flow of Castle Production. Pursuant to the
terms of the MG Settlement, all of such obligations of Castle Production were
terminated prior to the time when any amounts were paid to MGTFC.
SocGen Senior Facility. IRLP entered into the Senior Facility with SocGen
on May 27, 1993. In April 1994, the Company received notice from SocGen that
IRLP was in default of several covenants contained in the Senior Facility,
under which approximately $85.3 million was then outstanding. The defaults in
question related primarily to financial and other problems of MG and its
affiliates. Pursuant to the terms of the MG Settlement Agreement, MG assumed
all of IRLP's obligations under the Senior Facility including IRLP's
obligation to pay $73.1 of principal and interest owing thereunder as of
October 14, 1994.
MGTFC Revolving Credit Facility. MGTFC and IRLP entered into a revolving
credit facility on September 24, 1992 (the "Revolving Credit Facility")
pursuant to which MGTFC (a) refinanced IRLP's indebtedness to MGRM under
IRLP's previous Processing Agreement with MGRM (the "Processing Agreement"),
(b) provides funds to IRLP for working capital and capital expenditures, (c)
issues, or provides for the issuance of, letters of credit for the benefit of
IRLP and (d) provides commitments to finance for the purchase of feedstocks
pursuant to the MG Supply Agreement with MG. On May 27, 1993, the Revolving
Credit Facility was amended to (a) increase the total commitment under the
Revolving Credit Facility to up to $362 million (of which $26.9 million was
used as of September 30, 1994) and (b) segregate $70 million of the existing
facility which represented the amount previously owing to MGRM under the
Processing Agreement into a subordinated loan (discussed below). The
Revolving Credit Facility was further amended on October 1, 1993 to extend
the termination date for the commitments to finance and the letters of credit
to September 30, 1997. Pursuant to the terms of the MG Settlement, the
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Revolving Credit Facility was amended to terminate on March 31, 1995, to cap the
total commitment at $130 million and to provide for the financing of certain
capital expenditures. In addition, the Company agreed to guarantee IRLP's
obligations under the Revolving Credit Facility. The Company also agreed to
grant an option to purchase a new class of preferred stock of IRLP's general
partner to a nominee of MG which could have the effect of precluding certain
changes of control and bankruptcy events relating to IRLP without the approval
of the nominee while any amounts are outstanding under the Revolving Credit
Facility.
The Revolving Credit Facility contains various representations, warranties
and covenants, including covenants restricting certain indebtedness, liens,
distributions to the Company, certain corporate transactions and other
matters. The Revolving Credit Facility is secured by a first lien on
inventory and a percentage of IRLP's accounts receivable and a second lien on
real estate, fixed assets inventory and the remaining accounts receivable.
The Revolving Credit Facility bears interest payable monthly at a Eurodollar
Base Rate plus 1/2 %. IRLP also pays standard fees in connection with the
issuance of letters of credit and commitments to finance.
MGTFC Subordinated Note. IRLP executed a Subordinated Note (the "MGTFC
Subordinated Note") in favor of MGTFC dated May 27, 1993 in the aggregate
principal amount of $70 million. In connection with the execution of the
Subordinated Note, IRLP also granted a junior lien on all of its assets in
favor of MGTFC. The MGTFC Subordinated Note represented indebtedness
previously owing to MGRM under the Processing Agreement and refinanced by
MGTFC in 1992 under the Revolving Credit Facility. Pursuant to the terms of
the MG Settlement, the MGTFC Subordinated Note was terminated as of October
14, 1994 at which time the $76.4 million of principal and interest owing
thereunder was forgiven.
Indian Offtake Subdebt. Under the terms of the Indian Offtake Agreement as
revised pursuant to the MG Settlement, MGRM is required to purchase all of
IRLP's refined products. In the event that IRLP delivers any non-spec
products to MGRM, then IRLP will be deemed to have incurred debt to MGRM
("Indian Offtake Subdebt") in an amount equal to the difference in value
between the non-spec product delivered and product which would have met
industry specifications. No Indian Offtake Subdebt has accrued as of the date
hereof. Any Indian Offtake Subdebt that accrues will be represented by a
subordinated note (the "Indian Offtake Note") in favor of MGRM. The Indian
Offtake Note is secured by IRLP's real property and fixed assets. Pursuant to
the terms of the MG Settlement, the Indian Offtake Agreement will terminate
effective February 1, 1995.
Powerine Loan Agreement. Powerine and MGTFC entered into a Loan Agreement
(the "Powerine Loan Agreement") dated as of February 2, 1992 which was
amended and restated on October 1, 1993 and which was further amended
pursuant to the MG Settlement.
The Powerine Loan Agreement originally provided for a revolving credit
facility and a term loan facility. Under the revolving loan portion of the
Powerine Loan Agreement, Powerine was able to obtain up to $115 million (of
which none was outstanding as of September 30, 1994) of cash advances or
letters of credit for the purchase of feedstocks, for commitments to finance
the purchase of feedstocks pursuant to the MG Supply Agreement, for the
purchase of petroleum products in connection with exchange or hedging
contracts, to pay or satisfy bonding or other requirements of public
utilities and/or government entities, for general working capital purposes
and for the payment of a management fee to the Company. The revolving loan
portion of the Powerine Loan Agreement bears interest at the overnight
Eurodollar rate plus 1/2 %. Pursuant to the terms of the MG Settlement, the
$115 million cap was reduced to $100 million, and the parties agreed that
such revolving credit facility would be due and payable on March 31, 1995.
Powerine also agreed to grant an option to purchase a new class of preferred
stock to a nominee of MG which could have the effect of precluding certain
changes of control and bankruptcy events relating to Powerine without the
approval of the nominee while any amounts are outstanding under the Powerine
Loan Agreement.
The term loan portion of the Powerine Loan Agreement was used by Powerine
to repay all existing obligations and indebtedness of Powerine to MGRM and to
provide funds for working capital purposes. The term loan portion of the
Powerine Loan Agreement was divided into three tranches. Tranche A was in the
principal amount of $90 million and bore interest at LIBOR plus 3/4%. Tranche
B was in the principal amount of $44 million and bore interest at LIBOR plus
2 1/4%. Tranche C was in the principal amount of $35 million and bore
interest at LIBOR plus 2%. Pursuant to the terms of the MG Settlement, the
term loan portion of the Powerine Loan Agreement was terminated as of October
14, 1994 at which time the $133.6 million of principal and accrued interest
owing thereunder was forgiven.
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The Powerine Loan Agreement includes various representations, warranties
and covenants, including covenants restricting liens, debt, distributions on
stock and certain corporate transactions, and is secured by liens on
Powerine's real and personal property. The Company has guaranteed Powerine's
obligations under the Powerine Loan Agreement.
Powerine Offtake Subdebt. Under the terms of the Powerine Offtake
Agreement, MGRM is required to purchase substantially all of Powerine's
refined products. In the event that Powerine delivers any non-spec products
to MGRM, then Powerine will be deemed to have incurred debt to MGRM
("Powerine Offtake Subdebt") in an amount equal to the difference in value
between the non-spec product delivered and product which would have met
industry specifications. No Powerine Offtake Subdebt has accrued as of the
date hereof. Any Powerine Offtake Subdebt that accrues will be represented by
a subordinated note (the "Powerine Offtake Note") in favor of MGRM. The
Powerine Offtake Note is secured by Powerine's real property and fixed
assets. Pursuant to the terms of the MG Settlement, the Powerine Offtake
Agreement terminates effective February 1, 1995.
TRANSACTIONS WITH OTHER RELATED PARTIES
STOCKHOLDER LOANS
On December 11, 1991, John W. Sullivan, a Director of the Company, UI
Banque ("UI") and the Company entered into a Loan Agreement pursuant to which
Mr. Sullivan loaned the Company $250,000, and UI loaned the Company $2.5
million (collectively, the "Stockholder Loans"). Guy Barbey was the Executive
Director of UI at the time the loan was made by UI and was also then a
Director of the Company. Mr. Barbey is no longer an employee of UI and
resigned as a Director of the Company to pursue other interests effective
December 31, 1993.
The Stockholder Loans mature on June 30, 1996 and earn interest at the
annual rate of LIBOR plus one-half of one percent established in advance on
November 21 of each year while the Stockholder Loans are outstanding.
Interest is payable annually on December 31 of each year and at maturity of
the Stockholder Loans. The Company may elect to pay interest in either cash
or Common Stock. Should the Company elect to pay interest in Common Stock,
each of Mr. Sullivan and UI may, independently, elect to capitalize the
interest in lieu of accepting the Common Stock. The Company paid $118,208 and
$11,821 to UI and Mr. Sullivan as interest on their respective loans during
the year. The security for the Stockholder Loans, a collateral assignment of
the Company's second mortgage on the assets of IRLP, is further subject to an
intercreditor agreement by and among UI, Mr. Sullivan and MGTFC.
In November 1994, the Company received a notice from UI indicating that UI
believes that the consummation of the MG Settlement constituted an event of
default under the Stockholder Loans. The Company does not agree with UI and
is discussing the matter with UI. If the Company's Indian Refinery is sold,
the Company intends to repay UI so the related lien will be released. If the
Indian Refinery is not sold, the Company does not believe that the debt is
due but nevertheless believes it has sufficient funds to repay UI should
repayment prior to maturity be required or be in the best interest of the
Company.
LOAN TO OFFICER
On February 26, 1993, John D.R. Wright, III, President and Chief Operating
Officer of IR&M, was loaned $250,000 by IR&M. The principal amount of the
loan is due and payable in full on the earlier of January 31, 1996 or the
termination of Mr. Wright's employment with IR&M. The loan accrues interest
at the prime rate in effect on the date of the loan as adjusted each January
1. The loan was made to Mr. Wright pursuant to a provision in Mr. Wright's
employment agreement. The largest amount of indebtedness outstanding at any
time was $250,000, and at January 31, 1995, $250,000 remained outstanding. At
January 1, 1995, the prime rate (and thus the rate being charged on the loan)
was 8.5%.
TERRAPIN AGREEMENT
Effective June 1993, the Company entered into a Stock Purchase Agreement
with Terrapin, a corporation owned by Richard E. Staedtler, Senior Vice
President and Chief Financial Officer of the Company, pursuant to which the
Company sold Minden Energy Corporation and three of its subsidiaries which
were principally engaged in the business of management of oil and gas
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partnerships. In connection with this acquisition, Terrapin issued a promissory
note to the Company pursuant to which Terrapin agreed to pay $800,000 to the
Company over 12 months along with 8% interest. The note has been repaid in full.
The Company and one of its subsidiaries entered into management agreements with
Terrapin and one of its subsidiaries pursuant to which Terrapin and Mr.
Staedtler agreed to provide certain management, accounting and other services to
the Company and its affiliates through May 1999. Pursuant to the terms of these
agreements, Terrapin received management fees of $590,500 during the fiscal year
ended September 30, 1994. The Company has also agreed to indemnify Terrapin with
respect to $311,000 of gas balancing liabilities related to partnerships
previously managed by a subsidiary of Terrapin.
PROPOSED REFINERY TRANSACTIONS
On December 5, 1994, the Company entered into an agreement with SIPAC
Inc., a newly formed Delaware Company, to sell all of its refining operations
to SIPAC effective January 31, 1995. SIPAC was formed by Mr. William Sudhaus,
the Chief Operating Officer and the President of the Company. If the
transaction with SIPAC is consummated, it is the intention of the parties
that most of the current management of the Company's refining subsidiaries
would leave the Company and join SIPAC.
The following are the principal terms of the Purchase Agreement:
(a) The Company would sell to SIPAC substantially all of its refining
assets and operations, including six of its refining subsidiaries.
(b) In return for the refining assets and stock of the refining
subsidiaries, SIPAC would (a) issue a $38.75 million unsecured convertible
note to the Company, (b) assume substantially all of the liabilities of
all of the Company's refining subsidiaries, and (c) pay the Company an
amount for the working capital of the Company's refining subsidiaries as
of January 31, 1995, the anticipated effective date. The note would bear
interest at ten percent and interest will be payable semi-annually. In
addition, the notes would be convertible after two years into
approximately 41% of the equity of SIPAC.
(c) If the capital expenditures of the Refineries during the period
from October 1, 1994 through the date of the closing exceed $32 million,
the Company will receive an amount equal to such excess in cash, and if
such capital expenditures are less than $32 million, the Company will be
required to pay an amount equal to such deficiency to SIPAC in cash.
(d) The Company would be responsible for all income taxes through
January 31, 1995, the anticipated closing date, and SIPAC would be
responsible for all income taxes after January 31, 1995.
Consummation of the Refinery Transactions is subject to (a) approval of
the Company's stockholders, (b) SIPAC's obtaining equity capital and debt
financing and (c) necessary regulatory approvals.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Financial Statement Schedules
Financial statements and schedules filed as part of this Report on Form
10-K are listed in Item 8 to this Form 10-K.
3. EXHIBITS
The Exhibits required by Item 601 of Regulation S-K and filed herewith or
incorporated by reference herein are listed in the Exhibit Index below.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- - ------ -----------------------
<S> <C>
3.1 Restated Certificate of Incorporation(15)
3.2 Bylaws(10)
4.1 Specimen Stock Certificate representing Common Stock(8)
4.2 Rights Agreement between Castle Energy Corporation and American Stock Transfer and Trust Company
as Rights Agent, dated as of April 21, 1994(10)
10.1 Credit Agreement between Castle Energy Corporation and MG Trade Finance Corp., dated October 24,
1990(1)
10.2 Sixth Amendment to Credit Agreement, effective as of May 27, 1993, between MG Trade Finance
Corp. and Castle Energy Corporation(2)
10.3 Seventh Amendment to Credit Agreement, dated August 25, 1993, between MG Trade Finance Corp. and
Castle Energy Corporation(8)
10.4 Amended and Restated Revolving Loan and Security Agreement, dated May 27, 1993, among Indian
Refining Limited Partnership, Indian Refining & Marketing Inc. and MG Trade Finance Corp.(8)
10.5 Term Loan and Security Agreement, dated December 1, 1992, among Castle Production Company,
Castle Pipeline Company, CEC Marketing Company, Castle Production Resources Company, Castle
Pipeline Resources Company, CEC Marketing Resources Company, Castle Texas Production Limited
Partnership, Castle Texas Pipeline Limited Partnership, CEC Gas Marketing Limited Partnership,
Castle Energy Corporation and MG Trade Finance Corp.(6)
10.6 Loan Agreement, dated December 11, 1991, among Castle Energy Corporation, Union d'Etudes et
d'Investissements and John W. Sullivan with MG Trade Finance Corp. joining for the limited
purpose stated therein(3)
10.7 Intercreditor Agreement, dated December 11, 1991, among MG Trade Finance Corp., Union d'Etudes
et d'Investissements and John W. Sullivan(3)
10.8 Amended and Restated Offtake Agreement, dated May 12, 1993, between Indian Refining Limited
Partnership and MG Refining and Marketing, Inc.(8)
10.9 Agreement for the Purchase and Sale of Feedstocks, dated February 1, 1992, between
Metallgesellschaft Corp. and Indian Refining Limited Partnership(4)
10.10 Amendment 1 to Agreement for the Purchase and Sale of Feedstocks, dated February 1, 1992,
between Metallgesellschaft Corp. and Indian Refining Limited Partnership(5)
10.11 Amendment No. 2 to Agreement for the Purchase and Sale of Feedstocks, dated June 29, 1993,
between Metallgesellschaft Corp. and Indian Refining Limited Partnership(8)
10.12 ** Long Term Supply Agreement, dated November 1, 1992, among Shell Canada Limited, Salmon Resources
Ltd. and Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and MG Refining
and Marketing, Inc.(7)
10.13 First Amendment to Long Term Supply Agreement, dated as of January 12, 1993, among Indian
Refining Limited Partnership, Indian Refining & Marketing Inc., MG Refining and Marketing, Inc.,
Salmon Resources Ltd. and Shell Canada Limited(8)
</TABLE>
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<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- - ------ -----------------------
<S> <C>
10.14 Second Amendment to Long Term Supply Agreement, dated June 28, 1993, among Shell Canada Limited,
Salmon Resources Ltd. and Indian Refining Limited Partnership, Indian Refining & Marketing Inc.
and MG Refining and Marketing, Inc.(8)
10.15 Replacement Gas Purchase Contract, effective February 1, 1992, between ARCO Oil and Gas Company
and Lone Star Gas Company(8)
10.16 Loan Agreement, dated September 30, 1993, among Castle Texas Production Limited Partnership,
Castle Production Company, Castle Energy Corporation and MG Trade Finance Corp., and Appendix A
thereto(9)
10.17 Swap Agreement, dated May 27, 1993, between Indian Refining Limited Partnership and MG Refining
and Marketing, Inc.(8)
10.18 Amendment to Swap Agreement, dated July 29, 1993, between Indian Refining Limited Partnership
and MG Refining and Marketing, Inc.(8)
10.19 Amended and Restated Pipeline Management Agreement, effective as of December 1, 1992, between
Castle Texas Pipeline Limited Partnership and MG Gathering Corp.(8)
10.20 Amended and Restated Service Agreement, effective as of December 1, 1992, between CEC Gas
Marketing Limited Partnership and MG Natural Gas Corp.(8)
10.21 Credit Agreement, dated May 27, 1993, among Indian Refining Limited Partnership, certain Banks
named therein and Societe Generale, Southwest Agency, as Agent(8)
10.22 Support Agreement, dated May 27, 1993, between Metallgesellschaft Corp. and Indian Refining
Limited Partnership(8)
10.23 Support Agreement dated as of May 27, 1993, between Metallgesellschaft AG and Indian Refining
Limited Partnership(8)
10.24 Consent and Agreement, dated May 27, 1993, between MG Refining and Marketing, Inc., Indian
Refining Limited Partnership and Societe Generale, Southwest Agency(8)
10.25 Consent and Agreement, dated May 27, 1993, between Shell Canada Limited and Salmon Resources
Ltd. and Societe Generale, Southwest Agency(8)
10.26 Consent, dated May 27, 1993, between Texaco Pipeline, Inc. and Societe Generale, Southwest
Agency(8)
10.27 Intercreditor Agreement, dated May 27, 1993, among MG Trade Finance Corp., Metallgesellschaft
Corp., Indian Refining Limited Partnership and Societe Generale, Southwest Agency(8)
10.28 Subordination Agreement, dated May 27, 1993, among MG Refining and Marketing, Inc., Indian
Refining Limited Partnership and Societe Generale, Southwest Agency(8)
10.29 Subordination Agreement, dated May 27, 1993, among Castle Energy Corporation, Indian Refining
Limited Partnership and Societe Generale, Southwest Agency(8)
10.30 Security Agreement, dated May 27, 1993, between Indian Refining Limited Partnership and Societe
Generale, Southwest Agency(8)
10.31 Subordinated Note, dated May 27, 1993, by Indian Refining Limited Partnership in favor of MG
Refining and Marketing, Inc.(8)
10.32 Cash Collateral Agreement, dated May 27, 1993, between Societe Generale, Southwest Agency,
Societe Generale, NY Branch and Indian Refining Limited Partnership(8)
10.33 $70,000,000 Subordinated Note, dated May 27, 1993, by Indian Refining Limited Partnership in
favor of MG Trade Finance Corp.(8)
10.34 Security Agreement, dated May 27, 1993, between Indian Refining Limited Partnership and MG Trade
Finance Corp.(8)
10.35 Registration Rights Agreement, dated as of December 11, 1991, among Castle Energy Corporation,
MG Trade Finance Corp., Union d'Etudes et d'Investissements and John W. Sullivan(3)
10.36 Rights Agreement, dated June 1, 1992, between Castle Energy Corporation and certain members of
management of MG Refining and Marketing, Inc.(5)
10.37 Bonus Payment Rights Agreement, dated November 20, 1992, among Indian Refining Limited
Partnership, Indian Refining & Marketing Inc. and William S. Sudhaus(8)
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- - ------- -----------------------
<S> <C>
10.38 Bonus Payment Rights Agreement, dated June 21, 1993, among Indian Refining Limited Partnership,
Indian Refining & Marketing Inc. and William S. Sudhaus(8)
10.39 Amended and Restated Employment Agreement, dated December 21, 1992, among Indian Refining
Limited Partnership, Indian Refining & Marketing Inc., Castle Energy Corporation, William S.
Sudhaus and Danik Corporation(8)
10.40 Employment Agreement, dated October 1, 1991, among John D.R. Wright, III, Indian Refining
Management Company and Indian Refining Limited Partnership(3)
10.41 Amendment to Agreement, dated February 25, 1993, between Indian Refining & Marketing Inc.,
Indian Refining Limited Partnership and John D.R. Wright, III(8)
10.42 Bonus Payment Rights Agreement, dated October 1, 1991, among Indian Refining Management Company,
Indian Refining Limited Partnership and John D.R. Wright, III(3)
10.43 Letter Agreement, dated February 25, 1993, between John D.R. Wright, III and Indian Refining &
Marketing Inc.(8)
10.44 Stock Purchase Agreement, dated March 31, 1993, between Castle Energy Corporation and Terrapin
Resources, Inc.(8)
10.45 Management Agreement, dated July 1, 1993, between Castle Energy Corporation and Terrapin
Resources, Inc.(8)
10.46 Consent Order, dated May 14, 1992, between Indian Refining Company and the Illinois
Environmental Protection Agency(5)
10.47 Castle Energy Corporation 1992 Executive Equity Incentive Plan(8)
10.48 First Amendment to Castle Energy Corporation 1992 Executive Equity Incentive Plan, effective May
11, 1993(8)
10.49 Loan Agreement, dated August 6, 1993, among Castle Texas Pipeline Limited Partnership, CEC Gas
Marketing Limited Partnership, Castle Pipeline Company, CEC Marketing Company, Castle Energy
Corporation and General Electric Capital Corporation, and exhibits thereto(8)
10.50 Subordinated Loan Agreement, dated August 6, 1993, among CEC Gas Marketing Limited Partnership,
Castle Texas Pipeline Limited Partnership, Castle Pipeline Company, CEC Marketing Company,
Castle Energy Corporation and MG Trade Finance Corp., and exhibits thereto(8)
10.51 Guarantee Agreement, dated August 6, 1993, among Castle Texas Production Limited Partnership,
Castle Production Company, Castle Energy Corporation and MG Trade Finance Corp., and exhibits
thereto(8)
10.52 Acquisition Note, dated September 30, 1993, by Castle Texas Production Limited Partnership in
favor of MG Trade Finance Corp.(8)
10.53 Letter Guarantee, dated August 31, 1993, between Metallgesellschaft AG, CEC Gas Marketing
Limited Partnership and General Electric Capital Corporation(8)
10.54 Amended and Restated Gas Purchase Contract, dated as of August 1, 1993, between MG Natural Gas
Corp. and CEC Gas Marketing Limited Partnership(8)
10.55 Termination Agreement, dated as of October 1, 1993, between MG Refining and Marketing, Inc. and
Powerine Oil Company(8)
10.56 Offtake Agreement, dated as of October 1, 1993, by and between MG Refining and Marketing, Inc.
and Powerine Oil Company(8)
10.57 Amended and Restated Agreement for the Purchase and Sale of Feedstocks, dated as of October 1,
1993, by and between Metallgesellschaft Corp., Indian Refining Limited Partnership, Powerine Oil
Company and Indian Powerine L.P.(8)
10.58 Agreement for the Purchase and Sale of Feedstocks, dated as of September 15, 1993, among Indian
Powerine L.P., Indian Refining Limited Partnership and Powerine Oil Company(8)
10.59 First Amendment to Loan Agreement, dated as of September 17, 1993, among Indian Refining Limited
Partnership, Indian Refining & Marketing Inc. and MG Trade Finance Corp.(8)
10.60 Second Amended and Restated Offtake Agreement, dated as of October 1, 1993, between MG Refining
and Marketing, Inc. and Indian Refining Limited Partnership(8)
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- - ------- -----------------------
<S> <C>
10.61 First Allonge to Subordinated Note, dated as of October 1, 1993, by Indian Refining Limited
Partnership in favor of MG Refining and Marketing, Inc.(8)
10.62 First Allonge to Subordinated Note, dated as of October 1, 1993, by Indian Refining Limited
Partnership in favor of MG Trade Finance Corp.(8)
10.63 Guaranty, dated as of October 1, 1993, by Castle Energy Corporation for the benefit of MG Trade
Finance Corp.(8)
10.64 Purchase Money Security Agreement, dated as of October 1, 1993, between Indian Powerine L.P. and
MG Trade Finance Corp.(8)
10.65 Global Consent, dated as of October 1, 1993, among Societe Generale, Southwest Agency, MG Trade
Finance Corp., Metallgesellschaft Corp., MG Refining and Marketing, Inc. and Indian Refining
Limited Partnership(8)
10.66 Amended and Restated Loan Agreement, dated as of October 1, 1993, between Powerine Oil Company
and MG Trade Finance Corp.(8)
10.67 Second Amendment to Deed of Trust with Assignment of Rents, Leases and Profits, Security
Agreement and Fixture Filing, dated October 1, 1993, by Powerine Oil Company in favor of MG
Trade Finance Corp.(8)
10.68 Amended and Restated Assignment of Agreements, Permits, Licenses, Warranties and Authorizations,
dated as of October 1, 1993, between Powerine Oil Company and MG Trade Finance Corp.(8)
10.69 Amended and Restated Secured Promissory Note (Revolving Note), dated as of October 1, 1993, by
Powerine Oil Company in favor of MG Trade Finance Corp.(8)
10.70 Second Amended and Restated Secured Promissory Note (Term Note), dated as of October 1, 1993, by
Powerine Oil Company in favor of MG Trade Finance Corp.(8)
10.71 Amended and Restated Pledge and Security Agreement, dated as of October 1, 1993, by Powerine Oil
Company in favor of MG Trade Finance Corp.(8)
10.72 Amended and Restated Three Party Security Agreement and Collateral Assignment of Hedging
Account, dated as of October 1, 1993, among Powerine Oil Company, MG Futures, Inc. and MG Trade
Finance Corp.(8)
10.73 Guaranty, dated as of October 1, 1993, by Castle Energy Corporation for the benefit of MG Trade
Finance Corp.(8)
10.74 Three Party Security Agreement and Collateral Assignment of Hedging Account, dated October 1,
1993, among Indian Powerine L.P., MG Futures, Inc. and Powerine Oil Company(8)
10.75 Performance Guaranty, dated as of September 28, 1993, by Castle Energy Corporation(8)
10.76 Subordinated Offtake Note, dated as of October 1, 1993, by Powerine Oil Company in favor of MG
Refining and Marketing, Inc.(8)
10.77 Security Agreement, dated as of October 1, 1993, by Powerine Oil Company in favor of MG Refining
and Marketing, Inc.(8)
10.78 Deed of Trust with Assignment of Rents, Leases and Profits, Security Agreement and Fixture
Filing, dated as of October 1, 1993, by Powerine Oil Company for the benefit of MG Refining and
Marketing, Inc.(8)
10.79 Development Note, dated September 30, 1993, by Castle Texas Production Limited Partnership in
favor of MG Trade Finance Corp.(8)
10.80 Security Agreement, dated September 30, 1993, among Castle Texas Production Limited Partnership,
MG Trade Finance Corp. and Metallgesellschaft Corp.(8)
10.81 Stock Pledge Agreement, dated September 30, 1993, among Castle Energy Corporation, MG Trade
Finance Corp. and Metallgesellschaft Corp.(8)
10.82 General Partner Pledge Agreement, dated September, 1993, among Castle Production Company, MG
Trade Finance Corp. and Metallgesellschaft Corp.(8)
10.83 Limited Partner Pledge Agreement, dated September 30, 1993, among Castle Production Resources
Company, MG Trade Finance Corp. and Metallgesellschaft Corp.(8)
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- - ------- -----------------------
<S> <C>
10.84 Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement,
dated September 30, 1993, among Castle Texas Production Limited Partnership, MG Trade Finance
Corp. and Metallgesellschaft Corp.(8)
10.85 Amended and Restated Crude Oil Option Agreement, dated September 30, 1993, by Castle Texas
Production Limited Partnership and Metallgesellschaft Corp.(8)
10.86 Letter agreement (re Natural Gas Swap), dated September 30, 1993, between Metallgesellschaft
Corp. and Castle Texas Production Limited Partnership(8)
10.87 Letter agreement (re Gas Purchase Contract), dated September 30, 1993, between Castle Texas
Production Limited Partnership and MG Natural Gas Corp.(8)
10.88 Crude Oil Forward Sale Contract, dated September 28, 1993, between Indian Powerine L.P. and
Percolin Limited(8)
10.89 Confirmation of Crude Oil Forward Sale, dated September 29, 1993, between Indian Powerine L.P.
and Percolin Limited(8)
10.90 Side Letter Agreement, dated September 28, 1993, between Indian Powerine L.P. and Percolin
Limited(8)
10.91 Crude Oil Forward Sale Contract, dated September 28, 1993, between Indian Powerine L.P. and MG
Refining and Marketing, Inc.(8)
10.92 Confirmation of Crude Oil Forward Sale, dated September 29, 1993, between Indian Powerine L.P.
and MG Refining and Marketing, Inc.(8)
10.93 Pledge and Security Agreement, dated October 1, 1993, by Indian Powerine L.P. in favor of
Powerine Oil Company(8)
10.94 Participation Agreement, dated September 29, 1993, between MG Trade Finance Corp. and Indian
Powerine L.P. with respect to the MGTFC Credit Agreement(8)
10.95 Participation Agreement, dated September 29, 1993, between MG Trade Finance Corp. and Indian
Powerine L.P. with respect to the MGTFC Revolving Credit Facility(8)
10.96 Participation Agreement, dated September 29, 1993, between MG Trade Finance Corp. and Indian
Powerine L.P. with respect to the MGTFC Subordinated Note(8)
10.97 Employment Agreement, dated as of January 1, 1994, by and between Castle Energy Corporation and
Joseph L. Castle II(11)
10.98 Employment Agreement, dated as of January 1, 1994, by and among Castle Energy Corporation,
Indian Refining & Marketing Inc., Powerine Oil Company, Indian Refining Limited Partnership and
William S. Sudhaus(11)
10.99 Letter Agreement, dated February 12, 1992, by and between Indian Refining and Marketing Inc. and
David Hermes(15)
10.100 Bonus Payments Rights Agreement, dated February 12, 1992, by and among Indian Refining and
Marketing Inc., Indian Refining Limited Partnership and David Hermes(15)
10.101 Letter Agreement, dated March 1, 1993, between Indian Refining and Marketing Inc. and David
Hermes(15)
10.102 Letter Agreement, dated March 2, 1994, between Indian Refining and Marketing Inc. and David
Hermes(15)
10.103 Letter Agreement, dated May 9, 1994, among Powerine Oil Company, Indian Refining & Marketing
Inc., IP Oil Co., Inc., Castle Energy Corporation and David Hermes(15)
10.104 Employment Agreement, dated April 1, 1994, by and between Powerine Oil Company and Albert L.
Gualtieri, Jr.(15)
10.105 Stock Purchase Agreement, dated August 31, 1994, among MG Trade Finance Corp.,
Metallgesellschaft Corp., Indian Powerine L.P. and Castle Energy Corporation (12)
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- - ------ -----------------------
<S> <C>
10.106 Settlement Agreement, dated August 31, 1994, among Metallgesellschaft AG, Metallgesellschaft
Capital Corp., Metallgesellschaft Corp., MG Refining and Marketing, Inc., MG Trade Finance
Corp., MG Natural Gas Corp., MG Gathering Corp., and MG Futures Inc. and Castle Energy
Corporation, Indian Refining Limited Partnership, IP Oil Co., Inc., Powerine Oil Company, Indian
Powerine L.P., Indian Refining & Marketing Inc., Castle Texas Production Limited Partnership,
Castle Texas Pipeline Limited Partnership, CEC Gas Marketing Limited Partnership, Castle
Production Co., Castle Pipeline Company, CEC Marketing Company and CEC, Inc.(12)
10.107 Amendment to the Amended and Restated Offtake Agreement, dated October 14, 1994, between MG
Refining and Marketing, Inc. and Indian Refining Limited Partnership(15)
10.108 Amendment to the Offtake Agreement, dated October 14, 1994, between MG Trade Finance Corp. and
Powerine Oil Company(15)
10.109 First Amendment to the Amended and Restated Loan Agreement, dated October 14, 1994, between
Powerine Oil Company and MG Trade Finance Corp.(15)
10.110 Third Amendment to the Amended and Restated Revolving Loan and Security Agreement, dated October
14, 1994, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and MG
Trade Finance Corp.(15)
10.111 Crude Oil Forward Sale Contract, dated October 14, 1994, between Percolin Limited and MG
Refining and Marketing, Inc.(13)
10.112 Crude Oil Sale Contract, dated October 14, 1994, between Indian Powerine L.P. and MG Refining
and Marketing, Inc.(13)
10.113 Natural Gas Swap Agreement, dated October 14, 1994, between MG Natural Gas Corp. and Indian
Refining Limited Partnership(13)
10.114 Participation Cancellation Agreement, dated October 14, 1994, among Indian Powerine L.P., MG
Refining and Marketing, Inc., MG Trade Finance Corp. and Metallgesellschaft Corp.(13)
10.115 Pledge Agreement (Partnership Interests), dated October 14, 1994, between Castle Energy
Corporation and MG Trade Finance Corp.(13)
10.116 Pledge Agreement (Capital Stock), dated October 14, 1994, among Castle Energy Corporation,
Powerine Holding Company and MG Trade Finance Corp.(13)
10.117 Stock Option Agreement, dated October 14, 1994, among Castle Energy Corporation, Powerine
Holding Company and Powerine Oil Company(13)
10.118 Assignment Agreement, dated October 14, 1994, among Powerine Holding Company, Powerine Oil
Company, Castle Energy Corporation and Wilmington Trust Company(13)
10.119 Stock Option Agreement, dated October 14, 1994, between Castle Energy Corporation and Indian
Refining & Marketing Inc.(13)
10.120 Assignment Agreement, dated October 14, 1994, among Castle Energy Corporation, Indian Refining &
Marketing Inc. and Wilimington Trust Company(13)
10.121 Stock and Asset Purchase Agreement among SIPAC Inc. and Castle Energy Corporation, Indian
Refining & Marketing Inc., Indian Refining Limited Partnership, IP Oil Co., and Indian Powerine
L.P., dated December 6, 1994(14)
10.122 Petroleum Coke Purchase and Sales Agreement between Powerine Oil Company and MGPC Petcoke, Inc.,
dated as of January 1, 1994(15)
11.1 Statement re: Computation of Earnings Per Share(15)
21 List of subsidiaries of Registrant(15)
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Ryder Scott Company
27 Financial Data Schedule
</TABLE>
108
<PAGE>
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the last
quarter of the Company's fiscal year ended September 30, 1994:
Date Item
---- ----
(i) August 31, 1994 Item 5. Other Events
(ii) September 13, 1994 Item 2. Acquisition or Disposition of Assets
- - ------------
** The confidential portion of this document has been omitted and filed with
the Securities and Exchange Commission
(1) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended September 30, 1990
(2) Incorporated by reference to the Registrant's Form 10-Q for the fiscal
third quarter ended June 30, 1991
(3) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended September 30, 1991
(4) Incorporated by reference to the Registrant's Form 10-Q for the second
quarter ended December 31, 1991
(5) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended September 30, 1992
(6) Incorporated by reference to the Registrant's Form 8-K, dated December
3, 1992
(7) Incorporated by reference to the Registrant's Form 10-Q for the second
quarter ended March 31, 1993
(8) Incorporated by reference to the Registrant's Form S-1 (Registration
Statement), dated September 29, 1993
(9) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended September 30, 1993
(10) Incorporated by reference to the Registrant's Form 10-Q for the second
quarter ended March 31, 1994
(11) Incorporated by reference to the Registrant's Form 10-Q/A for the third
quarter ended June 30, 1994
(12) Incorporated by reference to the Registrant's Form 8-K, dated August 31,
1994.
(13) Incorporated by reference to the Registrant's Form 8-K, dated November
3, 1994.
(14) Incorporated by reference to the Registrant's Form 8-K, dated December
9, 1994.
(15) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended September 30, 1994.
109
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CASTLE ENERGY CORPORATION
Date: March 31, 1995
By: JOSEPH L. CASTLE II
---------------------
Joseph L. Castle II
Chairman of the Board
and Chief Executive Officer
110
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-88760) of Castle Energy Corporation of our report
dated January 3, 1995 appearing on page 82 of this Form 10-K/A-2.
PRICE WATERHOUSE LLP
Philadelphia, PA
April 7, 1995
<PAGE>
EXHIBIT 23.2
February 27, 1995
Mr. Richard E. Staedtler
Chief Financial Officer
Castle Energy Corporation
One Radnor Corporate Center
100 Matsonford Road, Suite 250
Radnor, PA 19087
Dear Rick:
We consent to the inclusion of our firm name and reserve data from our September
30, 1994 report dated October 18, 1994 in the Form 10-K of Castle Energy
Corporation for the year ended September 30, 1994. Our report covers only the
properties purchased from Atlantic Richfield Company (ARCO) in December of 1992,
all of which are located in Rusk or Gregg Counties, Texas.
RYDER SCOTT COMPANY
Petroleum Engineers
- - --------------------
Signature
March 1, 1995
- - -----------------
Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Company's
Consolidated Financial Statements for the fiscal year ended September 30, 1994
included in Item 8. Financial Statements and Financial Statement Schedules and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-END> SEP-30-1994
<CASH> 30,643
<SECURITIES> 0
<RECEIVABLES> 42,354
<ALLOWANCES> 0
<INVENTORY> 83,711
<CURRENT-ASSETS> 236,573
<PP&E> 374,843
<DEPRECIATION> 51,113
<TOTAL-ASSETS> 646,491
<CURRENT-LIABILITIES> 259,342
<BONDS> 299,852
<COMMON> 3,814
0
0
<OTHER-SE> 34,106
<TOTAL-LIABILITY-AND-EQUITY> 646,491
<SALES> 1,010,325
<TOTAL-REVENUES> 1,010,325
<CGS> 733,251
<TOTAL-COSTS> 944,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,487
<INCOME-PRETAX> 39,443
<INCOME-TAX> 526
<INCOME-CONTINUING> 38,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,917
<EPS-PRIMARY> 3.48
<EPS-DILUTED> 3.43
</TABLE>
