<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended _______________________________________________
Commission file number: 0-10990
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CASTLE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0035225
- ---------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
One Radnor Corporate Center, Suite 250,
100 Matsonford Road, Radnor, Pennsylvania 19087
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 995-9400
----------------
_______________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes __X__ No _____.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 5,925,946 shares of
Common Stock, $.50 par value outstanding as of February 10, 1997.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - December 31, 1996
(Unaudited) and September 30, 1996........................................... 1
Consolidated Statements of Operations - Three Months
Ended December 31, 1996 and 1995 (Unaudited)................................. 2
Consolidated Statements of Cash Flows - Three Months
Ended December 31, 1996 and 1995 (Unaudited)................................. 3
Consolidated Statements of Stockholders' Equity - Year
Ended September 30, 1996 and Three Months Ended
December 31, 1996 (Unaudited)................................................ 4
Notes to the Consolidated Financial Statements (Unaudited) .................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 9
Part II. Other Information
Item 1. Legal Proceedings............................................................ 16
Item 6. Exhibits and Reports on Form 8-K............................................. 16
Signature .......................................................................................... 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 3,366 $ 3,457
Restricted cash........................................................... 1,908 1,743
Accounts receivable....................................................... 16,133 10,217
Prepaid expenses and other current assets................................. 238 73
Deferred income taxes..................................................... 2,373 2,373
Estimated realizable value of discontinued net refining assets............ 6,288 6,288
-------- --------
Total current assets.................................................... 30,306 24,151
Property, plant and equipment, net:
Natural gas transmission.................................................. 20,519 20,987
Furniture, fixtures and equipment......................................... 210 222
Oil and gas properties, net................................................... 14,622 15,014
Gas contracts, net............................................................ 22,798 25,142
Deferred income taxes......................................................... 4,155 5,343
Other assets, net............................................................. 601 371
Note receivable............................................................... 10,000 10,000
-------- --------
Total assets............................................................ $103,211 $101,230
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 6,000 $ 8,172
Accounts payable.......................................................... 6,954 3,817
Accrued expenses.......................................................... 2,489 1,875
Other liabilities......................................................... 4,094 3,660
Net refining liabilities retained......................................... 10,048 11,079
-------- --------
Total current liabilities............................................... 29,585 28,603
Long-term debt................................................................ 4,627 5,834
Other long-term liabilities................................................... 83 82
-------- --------
Total liabilities....................................................... 34,295 34,519
-------- --------
Commitments and contingencies
Stockholders' equity:
Series B participating preferred stock; par value - $1.00; 10,000,000 shares
authorized; no shares issued
Common stock; par value - $0.50; 25,000,000 shares authorized;
6,693,646 issued and outstanding........................................ 3,347 3,347
Additional paid-in capital.................................................... 66,316 66,316
Accumulated deficit........................................................... (716) (2,952)
-------- --------
68,947 66,711
Treasury stock - at cost (3,500 shares)................................. (31) -
-------- --------
68,916 66,711
-------- --------
Total liabilities and stockholders' equity.............................. $103,211 $101,230
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1996 1995
---------- -------------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales.......................................................... $ 18,425 $ 15,840
---------- -------------
18,425 15,840
----------- -------------
Exploration and production:
Oil and gas sales.................................................. 2,094 2,071
Well operations.................................................... 106 131
------------ -------------
2,200 2,202
------------ -------------
20,625 18,042
------------ -------------
Expenses:
Natural gas marketing and transmission:
Gas purchases...................................................... 11,243 8,741
Operating costs.................................................... 239 256
General and administrative......................................... 304 244
Depreciation and amortization...................................... 2,905 2,846
------------ -------------
14,691 12,087
------------ -------------
Exploration and production:
Oil and gas production............................................. 577 734
General and administrative......................................... 212 220
Depreciation, depletion and amortization........................... 494 631
------------ -------------
1,283 1,585
------------ ------------
Corporate general and administrative expenses........................ 1,143 1,144
------------ ------------
17,117 14,816
------------ ------------
Operating income......................................................... 3,508 3,226
------------ ------------
Other income (expense):
Interest income...................................................... 225 231
Other income (expense)............................................... (40) 2,744
Interest expense..................................................... (199) (707)
----------- ------------
(14) 2,268
----------- ------------
Net income before provision for income taxes............................. 3,494 5,494
------------ ------------
Provision for income taxes:
State............................................................ 35
Federal.......................................................... 1,223
------------
1,258
------------ ------------
Net income............................................................... $ 2,236 $ 5,494
============ ============
Net income per share:
Primary.............................................................. $ .33 $ .82
============ ============
Fully diluted........................................................ $ .33 $ .82
============ ============
Weighted average number of common and common equivalent shares outstanding:
Primary........................................................... 6,717,477 6,711,741
========== ============
Fully diluted..................................................... 6,728,709 6,717,043
========== ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-2-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1996 1995
------------- ----------
<S> <C> <C>
Net cash flow provided by (used in) operating activities................................ $ 3,543 $ 12,875
----------- ----------
Cash flows from investing activities:
Investment in oil and gas properties................................................. (98) (15)
Investment in pipelines.............................................................. (1) (23)
---------- ----------
Net cash used in investing activities........................................... (99) (38)
---------- ----------
Cash flows from financing activities:
Proceeds of long-term debt............................................................ 7,456
Repayment of long-term debt........................................................... (10,835) (14,658)
Payment of debt issuance costs........................................................ (125)
Acquisition of treasury stock......................................................... (31)
---------- ----------
Net cash provided by (used in) financing activities............................. (3,535) (14,658)
---------- ----------
Net increase (decrease) in cash and cash equivalents..................................... (91) (1,821)
Cash and cash equivalents - beginning of period.......................................... 3,457 6,710
----------- -----------
Cash and cash equivalents - end of period................................................ $ 3,366 $ 4,889
========== ==========
Supplemental disclosures of cash flow information are as follows:
Cash paid during the period:
Interest.............................................................................. $ 298 $ 718
=========== ===========
Income taxes.......................................................................... - $ 500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------ Paid-In Accumulated ------------------
Shares Amount Capital Deficit Shares Amount Total
------ ------ ---------- -------------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1995.......... 6,693,646 $3,347 $66,316 ($28,026) $41,637
Net income............................ 25,074 25,074
--------- ------ ------- ------- -------
Balance - September 30, 1996.......... 6,693,646 3,347 66,316 (2,952) 66,711
Purchase of treasury stock............ 3,500 ($31) (31)
Net income............................ 2,236 2,236
--------- ------ ------- -------- ----- ----- -------
Balance - December 31, 1996 6,693,646 $3,347 $66,316 ($ 716) 3,500 ($31) $68,916
========= ====== ======= ========= ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 1 - Basis of Preparation
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three-month period ended December 31, 1996 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 1997.
These unaudited consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
Reference should be made to such Form 10-K for capitalized (defined) terms used
herein.
In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
of operations for the three-month periods ended December 31, 1996 and 1995 and
for a fair statement of financial position at December 31, 1996.
Note 2 - September 30, 1996 Balance Sheet
The amounts presented in the balance sheet as of September 30, 1996
were derived from the Company's audited consolidated financial statements which
were included in its Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
Note 3 - Discontinued Operations
From August 1989 to September 30, 1995, several of the Company's
subsidiaries conducted refining operations. By December 12, 1995, the Company's
refining subsidiaries had sold all of their refining assets. In addition,
Powerine Oil Company ("Powerine"), one of the Company's refining subsidiaries,
merged into a subsidiary of the purchaser and is no longer a subsidiary of the
Company. The Company's other refining subsidiaries own no refining assets and
are in the process of liquidation. As a result, the Company has accounted for
its refining operations as discontinued operations.
Note 4 - Contingencies/Litigation
Powerine Arbitration
One of the Company's subsidiaries owns a $10,000 note (the "MG Note")
due from MG Corp. ("MG"), a former related party. The subsidiary also owes a
$10,000 note to MG. The subsidiary was also assigned the claim of another former
subsidiary of the Company against MG. The claim relates to discontinued refining
operations. The claim was submitted to binding arbitration. In December
-5-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
1996, after lengthy written arguments, the parties presented final oral
arguments to the arbitrator. A final decision of the arbitrator is expected by
March 31, 1997.
The arbitrator's decision will affect the amount the Company's
subsidiary ultimately realizes on the MG Note. The amount stipulated by the
arbitrator will be offset against the subsidiary's note to MG. If the arbitrator
settles the claim entirely in the subsidiary's favor, the subsidiary will reduce
its note to MG to zero and expect to collect the entire $10,000 due on the MG
Note on its due date, October 14, 1997. If the arbitrator settles the claim
entirely in MG's favor, the two $10,000 notes will be offset and the Company
will not collect any note proceeds. If the arbitrator settles the claim in the
subsidiary's favor but for less than $10,000, the MG Note due to the subsidiary
and ultimate note proceeds to be collected by it will be reduced. Since the
Company expects to prevail and has not recorded an arbitration reserve against
the MG Note, the Company's future operations will be adversely impacted to the
extent the arbitrator's award is less than $10,000. Since the claim relates to
discontinued operations, any impact will be considered with and be offset, where
applicable, against other items impacting discontinued operations.
SWAP Agreement - MGNG
Another of the Company's subsidiaries is involved with litigation with
MG Natural Gas Corp. ("MGNG"), a subsidiary of MG. The litigation concerns
competing claims by both parties concerning a terminated natural gas swap
agreement between MGNG and one of the Company's refining subsidiaries. The
litigation is related to the Powerine Arbitration litigation (see above) and the
Company expects this litigation to be settled at the same time or shortly after
the Powerine Arbitration litigation is settled. If the Company's subsidiary
prevails, it expects to recover up to $703. If MGNG prevails, the Company's
subsidiary may be liable for up to $653. The amount at stake is accordingly
$1,356. The Company has recorded neither an asset nor a liability as a result of
this litigation. Therefore, the amount at which it is resolved will directly
impact discontinued operations. The impact of resolution will be considered with
and be offset against other items, if any, impacting discontinued operations.
Larry Long Litigation
In May 1996, Larry Long, representing himself and allegedly "others
similarly situated," filed suit against the Company, three of the Company's
natural gas marketing and transmission and exploration and production
subsidiaries, Atlantic Richfield Company ("ARCO"), B&A Pipeline Company (a
former subsidiary of ARCO), and MGNG in the Fourth Judicial District Court of
Rusk County, Texas. The plaintiff originally claimed, among other things, that
the defendants underpaid non-operating working interest owners, royalty interest
owners, and overriding royalty interest owners with respect to gas sold to the
Lone Star Gas Company ("Lone Star"). Although no amount of actual damages was
specified in the plaintiff's initial pleadings, it appeared that , based upon
the volumes of gas sold to Lone Star, the plaintiff may have been seeking actual
damages in excess of $40,000.
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
After some initial recovery, additional named plaintiffs have joined the
suit and the pleadings have been significantly amended. ARCO, B&A Pipeline
Company and MGNG have been dropped as defendants in the lawsuit and the
plaintiffs have limited their proposed class of plaintiffs to royalty owners and
overriding royalty owners of the Company's exploration and production
subsidiary. In amending their pleadings, the plaintiffs have reduced their basic
claim for actual damages to seeking royalties based upon certain operating fee
reimbursements received by the Company's natural gas marketing subsidiary. The
management of the Company believes that the plaintiffs' claims are without merit
and that the total exposure to the Company is less than $3,000 if it were to
lose the case. The Company intends to vigorously defend its position. The
Company is also considering ceasing the payment of excess royalties (royalties
at a rate in excess of current market prices) to royalty and overriding royalty
owners in certain wells based upon recent legal precedents.
Powerine Class Action Lawsuit
In July 1996, Powerine was served with a suit concerning operations of
the Powerine Refinery in the Superior Court of the State of California in Los
Angeles, California. The suit claims the Powerine Refinery is a public nuisance,
that it has released excessive toxic and noxious emissions and caused physical
and emotional distress on residents living nearby. The Company is also named as
a defendant in the suit but has not as yet been served with the lawsuit.
The Company believes it is not properly a defendant in the lawsuit,
since it did not operate the Powerine Refinery. Furthermore, when the Company
sold Powerine in January 1996, the buyer assumed all liabilities, including
environmental liabilities.
Note 5 - Stockholder Litigation Recovery
In December 1995, the Company received $2,725 from a plaintiff class
escrow fund related to stockholder litigation. The parties reached a settlement
with respect to the stockholder litigation in October 1994. The proceeds to the
Company represent unclaimed funds that were to revert to the Company pursuant to
the Settlement Order for the litigation. The recovery is shown as "Other Income
(Expense)" in the Consolidated Statement of Operations.
Note 6 - Refinancing of Debt
In December 1996, the Company entered into a $25,000 credit facility
with a syndicate of banks, including its subordinated lender. The credit
facility consists of a $10,000 revolving credit facility and a $15,000 term loan
facility. The revolving credit facility is repayable on December 31, 1997. The
revolving credit borrowing base is equal to predetermined values for the Lone
Star Contract (see below) and the Company's proved developed producing reserves
less the amount outstanding under the term loan facility and cannot exceed
$10,000. The term loan facility is repayable at $500 per month with a balloon
payment of remaining principal on May 31, 1999. The revolving credit and term
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
loan facilities bear interest at the prime rate plus 1% and are secured by all
of the Company's natural gas marketing and transmission and exploration and
production assets, as well as by the stock and partnership interests of its
natural gas marketing and transmission and exploration and production
subsidiaries. The proceeds of the $25,000 credit facility were used to repay the
loan to General Electric Capital Corporation, the Company's previous natural gas
marketing and transmission lender, and are to be used to finance drilling of the
Company's Texas properties and for other capital projects. In addition, up to
$11,000 of the facility could be used to repurchase the Company's stock. The
credit facility also contains working capital and tangible net worth covenants.
At January 31, 1997, the amount outstanding under the term loan facility
was $12,127. No amounts were outstanding under the revolving credit facility.
The remaining amount that could be used to repurchase the Company's stock was
approximately $8,000.
Note 7 - Subsequent Event
Subsequent to December 31, 1996, the Company purchased 764,206 shares of
its outstanding common stock. The purchase price was $8,452. The shares acquired
are held in treasury. Of the amount paid for the acquired shares, $2,000 was
financed from the Company's $25,000 credit facility (see above) and the
remainder from internally generated funds. Had the shares been acquired as of
September 30, 1996, net income per share for the quarter ended December 31, 1996
would have been $.38.
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GENERAL
As noted previously, the Company had discontinued its refining
operations by September 30, 1995. As a result, management's discussion and
analysis focuses primarily on the Company's continuing operations -- natural gas
marketing and transmission and exploration and production. All references herein
to dollars are in thousands.
The discussion and analysis below includes forward-looking data that
are based upon management's estimates, assumptions and projections. Important
factors such as litigation, oil and gas price fluctuations and other factors
could cause results to differ materially from those expected by management.
Natural Gas Marketing and Transmission
Gross Margin
A comparison of the gross margins earned by the Company's natural gas
marketing segment is as follows:
<TABLE>
<CAPTION>
Lone
Star MGNG Intercompany
Contract Contract Other Eliminations Consolidated
-------- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Quarter Ended December 31,
1996:
Gas sales $18,370 $1,236 ($1,181) $18,425
Gas purchases (11,017) (1,407) 1,181 (11,243)
------- ------ ------- -------
Gross margin $ 7,353 ($ 171) $ 0 $ 7,182
======= ====== ======= =======
Quarter Ended December 31,
1995:
Gas sales $16,683 $139 ($ 982) $15,840
Gas purchases (9,584) (139) 982 (8,741)
------- ----- ------- -------
Gross margin $ 7,099 - - $ 7,099
======= ===== ======= =======
</TABLE>
-9-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Lone Star Contract
Natural gas sales under the Lone Star Contract (see below)
increased $1,687 or 10.1% from the first quarter of fiscal 1996 to the first
quarter of fiscal 1997. Under the Company's long-term gas sales contract with
Lone Star Gas Company ("Lone Star Contract"), the price received for gas is
essentially fixed through May 31, 1999. The variance in gas sales, therefore, is
almost entirely attributable to the volumes of gas delivered. Although the
volumes sold to Lone Star annually are essentially fixed (the Lone Star Contract
has a take-or-pay provision), the Lone Star Contract year is from February 1 to
January 31 whereas the Company's fiscal year is from October 1 to September 30.
Furthermore, although the volumes to be taken by Lone Star in a given contract
year are fixed, there is no provision requiring fixed monthly or daily volumes
and deliveries accordingly vary with Lone Star's seasonal and peak demands. Such
variances have been significant. As a result, Lone Star deliveries, although
fixed for a contract year, may be skewed and not proportional for the Company's
fiscal periods.
For the first quarter of fiscal 1997 deliveries and sales to Lone
Star exceeded by approximately 21% those which would have resulted if daily
deliveries had been fixed and equal. Since deliveries and sales have
historically approximated the annual volumes Lone Star is required to take under
the Lone Star Contract, it is expected that deliveries and sales for the
remainder of fiscal 1997 will average less than those which would have resulted
if daily deliveries were fixed and equal.
Gas purchases for the Lone Star Contract increased $1,433 or 15.0%
from the first quarter of fiscal 1996 to the first quarter of fiscal 1997. For
the quarter ended December 31, 1995 gas purchases comprised 57.4% of gas sales
versus 60.0% of gas sales for the quarter ended December 31, 1996. From 1996 to
1997 the gross margin increased $254 or 3.6%. During the same periods the gross
margin percentage ((gas sales - gas purchases) as a percentage of gas sales)
decreased 2.6% from 42.6% for the quarter ended December 31, 1995 to 40.0% for
the quarter ended December 31, 1996. The increase in gas purchases as a
percentage of gas sales and resulting decrease in the gross margin percentage
results from two factors - a $251 non recurring favorable gas purchase
adjustment in the first quarter of fiscal 1996 which had no counterpart in the
first quarter of fiscal 1997 and increased gas purchase costs applicable to the
Company's own equity gas production. The increased gas purchase costs applicable
to the Company's equity gas production result from the fact that approximately
12% of the gas supplied to Lone Star is from the Company's own production. The
average price applicable to such production increased approximately 20% from the
first quarter of fiscal 1996 to the first quarter of fiscal 1997 and such
increase is reflected in the increased gas purchase cost applicable to the Lone
Star Contract.
-10-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
MGNG Contract
One of the Company's natural gas marketing subsidiaries is a party
to a gas sales contract with MG Natural Gas Corp. ("MGNG"), a subsidiary of
Metallgesellschaft Corp. ("MG"). MG is a former related party of the Company.
Pursuant to the terms of the contract, the subsidiary is required to sell to
MGNG 7,356 Btu's (British thermal units) of natural gas at a fixed price ratably
over the period from June 1, 1996 to May 31, 1999. The fixed price for the gas
sold to MGNG is significantly less than the fixed price of gas sold to Lone
Star. For the quarter ended December 31, 1996, the Company realized a negative
gross margin of $171 on gas sales to MGNG. The negative margin resulted because
the spot (market) prices paid by the Company for gas, less hedging adjustments
where applicable, exceeded the fixed price received by the Company from MGNG
under the contract. The Company has not yet hedged the entire gas purchase
requirement for this contract. As a result, the Company expects to realize a
negative gross margin on this contract through at least the second quarter of
fiscal 1997. Future gross margins will depend primarily on future spot (market)
prices of gas and the results of the Company's ability to hedge its commitments
at favorable prices.
Other Gas Sales
In the first quarter of fiscal 1996, the Company recorded gas
sales of $139 to outside parties. Since February 1996, the Company has not sold
gas to outside parties other than Lone Star and MGNG.
General and Administrative Expenses
General and administrative expenses applicable to natural gas marketing
and transmission increased $60 or 24.6% from the first quarter of 1996 to the
first quarter of 1997. The increase consists primarily of increased salaries and
other employee costs and increased insurance expense. The Company has recently
reduced the number of employees in its natural gas marketing and transmission
segment and has terminated its contracts with subsidiaries of MG to manage its
pipeline and gas marketing administration. These functions are now being handled
by the Company internally. As a result of these initiatives, the Company
anticipates that future general and administrative expenses will decline.
Exploration and Production
Revenues
Oil and Gas Sales
Oil and gas sales increased $23 or 1.1% from the first quarter of
fiscal 1996 to the first quarter of fiscal 1997. The net increase is
attributable to offsetting factors. The prices received for oil and gas
production in the first quarter of fiscal 1997 increased approximately 20%
versus the oil and gas prices received in the first quarter of fiscal 1996. Such
prices were the highest for a sustained
-11-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
period in several years. The increase in oil and gas prices was, however, offset
by a decrease in production volumes of approximately 16% from the first quarter
of fiscal 1996 to fiscal 1997. The decline in production results from the
general maturing of the Company's reserves since the Company has not made any
significant reserve acquisitions or conducted any significant drilling for
approximately two years. Now that the Company has refinanced its debt, however,
all of the cash flow from exploration and production is no longer dedicated to
repayment of debt. As a result, the Company tentatively expects to conduct
significant workovers and new drilling - especially on its Texas properties and
acreage - for at least the next two or three years. The Company has already
commenced several well workovers. The Company expects that these activities, if
completed as planned, will result in significantly increased oil and gas
production in the future. (See below under "Liquidity and Capital Resources".)
Expenses
Oil and Gas Sales
Oil and gas production (lease operating) expenses decreased $157
or 21.4% from the first quarter of fiscal 1996 to the first quarter of fiscal
1997. Such expenses constituted 27.6% of oil and gas sales during the first
quarter of fiscal 1997 versus 35.4% of oil and gas sales during the first
quarter of fiscal 1996. Since oil and gas production expenses do not occur
evenly throughout the year, a comparison of expenses for annual periods is more
meaningful and more indicative of future results. As noted above, the Company
has commenced what it anticipates will be an extensive workover program on its
producing wells. Although most of these costs will be capitalized, some will be
expensed and will result in increased oil and gas production expense.
Conversely, the Company has recently reduced its pumper staff by 25% and
anticipates that the reduction will decrease oil and gas production expenses by
approximately $130 annually.
General and Administrative
General and administrative expense decreased $8 or 3.6% from the
first quarter of fiscal 1996 to the first quarter of fiscal 1997. The net
decrease resulted from offsetting factors. General and administrative costs
decreased approximately $50 because the Company closed its Tulsa, Oklahoma
production office in February 1996. Such costs, however, increased approximately
$40 due to legal costs related to the Larry Long Lawsuit, which was filed in
July 1996 (see Note 4 to the financial statements).
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased $137 or 21.7%
from the first quarter of fiscal 1996 to the first quarter of fiscal 1997. The
decrease relates to a decrease of approximately 16% in production volumes. For
the last two years the Company has not made any substantial reserve acquisitions
or conducted substantial drilling. As a result, depletion has been primarily
dependent upon estimates of existing proved reserves and actual production. As
noted above, the Company currently
-12-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
plans to commence drilling its Texas acreage in the near future. To the extent
it does so, future depletion will be significantly influenced by the finding
costs (cost/mcf of gas discovered) applicable to such new drilling.
Other Income (Expense)
Other Income (Expense)
Other income (expense) decreased $2,784 from $2,744 of other income for
the quarter ended December 31, 1995 to other expense of $40 for the quarter
ended December 31, 1996. Of the $2,744 of other income in 1996, $2,725
represented recoveries from a plaintiff class escrow fund related to stockholder
litigation. The parties reached a settlement with respect to the stockholder
litigation in October 1994. The proceeds to the Company represent unclaimed
funds that were to revert to the Company pursuant to the Settlement Order for
the litigation. There was no counterpart in fiscal 1997.
Interest Expense
Interest expense decreased $508 or 71.9% from the first quarter of fiscal
1996 to the first quarter of fiscal 1997. The decrease is primarily attributable
to the decrease in debt owed to General Electric Capital Corporation ("GECC"),
the Company's former natural gas marketing and transmission lender. This debt
bore interest at a constant 8.33% interest rate. In December 1996, the Company
refinanced the GECC debt and replaced it with a $25,000 facility with an
interest rate of the prime rate plus 1%. (See Note 6 to the financial
statements). At December 31, 1996, the amount of long-term debt outstanding
under the new facility was $10,627. Subsequent to December 31, 1996, this was
increased by $2,000. If the Company does not significantly increase its
borrowings under the new facility, it expects only a slight increase in interest
expense given a steady prime rate.
TAX PROVISION
During the periods being compared, the Company had substantial tax
carryforwards. At September 30, 1995 a 100% valuation reserve was recorded to
offset the deferred tax asset resulting from such tax carryforwards and other
book-tax timing differences. The valuation reserve was recorded because of
uncertainties related to the disposition of the Company's refining operation and
other factors. No tax provision was required for the quarter ended December 31,
1995 because, as a result of strategies being pursued that would more likely
than not generate taxable income, management believed the Company would utilize
some of its tax carryforwards during fiscal 1996, resulting in a projected
annual tax rate of zero.
At September 30, 1996, the Company reduced its valuation reserve to
$13,944 resulting in a $7,716 net deferred tax asset. The deferred tax asset was
recorded primarily because of anticipated future taxable income related to the
Lone Star Contract. Management had determined that it was more likely than not
such taxable income would be earned; hence the net deferred tax asset was
recorded.
-13-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
The tax provision for the quarter ended December 31, 1996 essentially
represents the amortization of the deferred tax asset recorded at September 30,
1996 at an effective rate of 36% of earnings. The Company expects to record a
similar tax provision for future earnings through amortization of the deferred
tax asset. If future events change the Company's estimate concerning the
probability of utilizing its tax assets, appropriate adjustments will be made
when such a conclusion is reached.
LIQUIDITY AND CAPITAL RESOURCES
As noted in Note 6 to the financial statements, the Company refinanced
its natural gas market debt with a new $25,000 facility in December 1996.
Whereas virtually all of the Company's cash flow from the assets securing the
refinanced debt were dedicated to repayment of the former debt, only $500 is
required to be repaid monthly under the new facility. The result of the
refinancing is that approximately $1,000 - $2,500 of additional cash flow is
available to the Company monthly. As a result of the refinancing, the Company's
cash position has improved significantly. An estimate of the Company's expected
cash resources and obligations from January 1, 1997 to September 30, 1999 is as
follows:
Expected Cash Obligations
Repurchase of company shares (including 764,206 shares purchased
after December 31, 1996).................................... $11,000
Drilling......................................................... 28,000
Other capital expenditures....................................... 6,000
Repayment of debt................................................ 10,607
--------
55,607
--------
Expected Cash Resources
Cash on hand - January 1, 1997................................... 3,366
Expected cash flow - existing operations......................... 63,000
Expected cash flow - new drilling................................ 21,000
--------
87,366
--------
Excess of Cash Resources Over Cash Obligation....................... $31,759
=======
The foregoing analysis assumes that stock repurchase, drilling and other
capital expenditures obligations are undertaken. Although the Company intends to
spend funds for each of these activities, it is not obligated to do so.
Furthermore, no cash proceeds with respect to the Powerine Arbitration are
included although the Company expects to recover a significant portion of the
$10,000 at stake. Finally, as of December 31, 1996, the Company has an
additional $13,893 of funds available for these anticipated cash obligations
under its $25,000 credit facility.
-14-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Although the Company has exited the refining business and does not
anticipate any further required expenditures related to discontinued refining
operations, interested parties could seek redress from the Company for vendor or
environmental liabilities. In the past, government and other plaintiffs have
often named the most financially capable parties in such cases regardless of the
existence or extent of actual liability. Although the Company's management does
not believe the Company would ultimately be held liable and has not included any
related costs in the above projections, there can be no assurance such will be
the case. Even if the Company were to prevail in such litigation, the related
legal costs and distraction of the Company's management resources from
continuing operations could be significant.
One of the Company's subsidiaries that previously managed refining
activities, Indian Refining I Limited Partnership ("IRLP"), owes its vendors
approximately $7,000. Its only major asset is a $5,500 note due from the
purchaser of the Indian Refinery, American Western Refining Limited Partnership
("American Western"). IRLP believes that it can fully discharge its vendor
liabilities if it receives the entire $5,500 due from the American Western note.
In November 1996, American Western filed for bankruptcy and has undertaken to
sell the Indian Refinery while in bankruptcy. To date it has not found any
qualified and willing buyers. Although IRLP holds a first mortgage on the Indian
Refinery, other creditors of American Western hold a lien superior to that of
IRLP. If the Indian Refinery is sold, there can be no assurance that IRLP's
share of the proceeds will be sufficient to settle its vendor liabilities. If
the Indian Refinery is not sold, IRLP will not be able to settle its vendor
liabilities. In either of these situations, IRLP may file for bankruptcy since
its only significant asset is its note due from American Western. Although the
Company does not believe such a development would affect its projected cash
flow, such may not be the case.
In addition, the above analysis assumes the Company will not have to pay
any claim related to the Larry Long Litigation (see Note 4 to the financial
statements). Although the Company does not believe its exposure is material, a
court of competent jurisdiction may find otherwise. If it appears that the
Company will be held liable for any significant royalty claims because of the
Larry Long Litigation, the Company may postpone new drilling until June 1999,
when the issues being raised are no longer applicable or it may sell its oil and
gas assets to a new purchaser which would not be subject to excess royalty
issues and would pay royalties at spot (market) prices.
Finally, the above analysis assumes the Company will not be adversely
impacted by any of the factors discussed under "Risk Factors" in Item 7 to the
Company's Form 10-K for the year ended September 30, 1996. Reference should be
made to such document. The same risk factors apply at December 31, 1996.
-15-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding lawsuits, reference is made to Item 3 of the Company's
Form 10-K (Annual Report) for the fiscal year ended September 30, 1996. Also see
Note 4 to the December 31, 1996 financial statements included in Part I.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 11.1- Statement re: Computation of Earnings Per Share
Exhibit 27- Financial Data Schedule
(B) Reports on Form 8-K: None
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 1997 CASTLE ENERGY CORPORATION
/s/Richard E. Staedtler
-----------------------------
Richard E. Staedtler
Chief Financial Officer
Chief Accounting Officer
-17-
<PAGE>
Exhibit 11.1
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------------------------------------------
1996 1995
----------------------------- ------------------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
I. Shares Outstanding, Net of Treasury
Stock Purchased During the Period:
Stock, net 6,693,646 6,693,646 6,693,646 6,693,646
Purchase of treasury stock (weighted) (1,865) (1,865) - -
------------ ------------ ----------- ----------
6,691,781 6,691,781 6,693,646 6,693,646
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 25,696 36,928 18,095 23,397
------------ ------------ ----------- ----------
III. Weighted Average Shares and Equivalent Shares 6,717,477 6,728,709 6,711,741 6,717,043
============ ============ =========== ==========
IV. Net Income $ 2,236 $ 2,236 $ 5,494 $ 5,494
============ ============ =========== ==========
V. Net Income Per Share $ .33 $ .33 $ .82 $ .82
============ ============ =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1996
INCLUDED IN PART I FINANCIAL INFORMATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,274
<SECURITIES> 0
<RECEIVABLES> 16,133
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,306
<PP&E> 28,639
<DEPRECIATION> 7,910
<TOTAL-ASSETS> 103,211
<CURRENT-LIABILITIES> 29,585
<BONDS> 4,627
0
0
<COMMON> 3,347
<OTHER-SE> 65,600
<TOTAL-LIABILITY-AND-EQUITY> 103,211
<SALES> 20,625
<TOTAL-REVENUES> 20,625
<CGS> 11,243
<TOTAL-COSTS> 17,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> 3,494
<INCOME-TAX> 1,258
<INCOME-CONTINUING> 1,258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,258
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
