<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
- -------------------------------------------------------------------------------
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 --
$.50 par value and related Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ x ].
As of November 30, 1996, there were 6,693,646 shares of the
registrant's Common Stock ($.50 par value) outstanding. The aggregate market
value of voting stock held by non-affiliates of the registrant as of such date
was $58,491,360 (6,282,638 shares at $9.31 per share).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11, 12 and 13
<PAGE>
CASTLE ENERGY CORPORATION
1996 FORM 10-K
TABLE OF CONTENTS
Item Page
----
PART I
1. and 2. Business and Properties.......................................... 1
3. Legal Proceedings................................................ 8
4. Submission of Matters to a Vote of Security Holders.............. 10
PART II
5. Market for the Registrant's Common Stock and Related Stockholder
Matters ........................................................ 11
6. Selected Financial Data ........................................ 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 14
8. Financial Statements and Supplementary Data..................... 21
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................... 60
PART III
10. Directors and Executive Officers of the Registrant ............. 61
11. Executive Compensation ......................................... 61
12. Security Ownership of Certain Beneficial Owners
and Management ................................................. 61
13. Certain Relationships and Related Transactions ................. 61
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ....................................................... 62
<PAGE>
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
Castle Energy Corporation (the "Company") is primarily engaged in
natural gas marketing and transmission and oil and gas exploration and
production in the United States. During the period from 1989 through September
30, 1995, the Company, through certain subsidiaries, was primarily engaged in
petroleum refining. Indian Refining I Limited Partnership (formerly Indian
Refining Limited Partnership) ("IRLP"), an indirect wholly-owned subsidiary of
the Company, owned the Indian Refinery, an 86,000 barrel per day (B/D) refinery
located in Lawrenceville, Illinois. Powerine Oil Company ("Powerine"), another
indirect wholly-owned subsidiary of the Company, owned and operated a 49,500 B/D
refinery located in Santa Fe Springs, California. By September 30, 1995, the
Company had terminated and discontinued all of its refining operations.
The Company engages in natural gas marketing operations which provide
gas to Lone Star Gas Company, a division of ENSERCH Corporation ("Lone Star"),
pursuant to a take-or-pay contract for natural gas through May 31, 1999 ("Lone
Star Contract"). At September 30, 1996, approximately 44 billion cubic feet of
natural gas remained to be sold to Lone Star. 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 commitments under the Lone Star Contract and,
accordingly, has fixed a substantial portion of its gross margin with respect to
its gas marketing operations. The Company delivers natural gas to Lone Star
through the Company's 77-mile intrastate pipeline located in Rusk County, Texas.
At September 30, 1996, the Company's exploration and production operations had
proved reserves of approximately 69.6 billion cubic feet of natural gas and
462,000 barrels of oil.
During the period from September 1989 to October 14, 1994, a substantial
portion of the Company's stock was owned by Metallgesellschaft Corp. ("MG"), a
wholly-owned subsidiary of Metallgesellschaft A.G. ("MG AG"), a German
conglomerate. During this period, MG provided financing and crude supplies to
IRLP and Powerine and entered into processing and product offtake agreements
with them. These and other transactions with MG and its affiliates are
summarized in footnote 20 to the consolidated financial statements, which are
included as Item 8 to this Form 10-K. In December 1993, it was reported that MG
AG had incurred substantial losses as a result of hedging and other related
activities. Thereafter, MG sought to terminate its on-going relationships with
the Company. In October 1994, the Company and MG completed the restructuring of
such relationships ("MG Settlement"). As a result, substantially all of the
Company's contractual relationships with MG and its affiliates were amended or
terminated. Subsequent to the MG Settlement, the Company sought to dispose of
its two refineries and to expand its natural gas marketing and transmission and
exploration and production businesses. Operations at the Powerine Refinery
ceased in July 1995 and operations at the Indian Refinery ceased by September
30, 1995. On September 29, 1995, Powerine sold the Powerine Refinery to Kenyen
Projects Limited ("Kenyen"). On January 16, 1996, Powerine merged into a
subsidiary of Energy Merchant Corp. ("EMC"). On December 12, 1995, IRLP sold the
Indian Refinery to American Western Refining L.P. ("American Western"), a
subsidiary of Gadgil Western Corporation ("Gadgil"). For accounting purposes,
refining operations were classified as discontinued operations in the Company's
Consolidated Financial Statements as of September 30, 1995 and retroactively for
the fiscal year ended September 30, 1994 (see Note 3 to the consolidated
financial statements included in Item 8 to this Form 10-K).
See Note 21 to the Company's Consolidated Financial Statements for
information with respect to the Company's identifiable industry segments for the
years ended September 30, 1996, 1995 and 1994.
On March 5, 1996, the Company engaged an investment banking firm to
explore strategic alternatives to enhance stockholder value and to act as the
Company's exclusive advisor.
In July 1996, an owner of oil and gas interests in wells operated by one
of the Company's subsidiaries filed a suit against the Company and three of its
subsidiaries. The plaintiff claims, among other things, that the subsidiaries
have underpaid nonoperating owners with respect to gas production from oil and
gas properties and attempts to bring a class action on behalf of all such owners
based upon various legal theories.
In October 1996, the Company announced that it would defer consideration
of the sale of its assets and would continue to operate and manage its remaining
natural gas marketing and transmission and exploration and production
businesses.
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<PAGE>
The Company also announced in October 1996 a program to repurchase up to
1,000,000 of its shares through April of 1997 in the open market at stock prices
beneficial to the Company.
NATURAL GAS MARKETING AND TRANSMISSION
General
On December 3, 1992, the Company, through three wholly-owned subsidiary
limited partnerships, CEC Gas Marketing Limited Partnership ("Marketing"),
Castle Texas Pipeline Limited Partnership ("Pipeline") and Castle Texas
Production Limited Partnership ("Production"), acquired from Atlantic Richfield
Company ("ARCO"), a gas contract with Lone Star Gas Company, 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
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 oil and gas business, natural gas
marketing and transmission. The Company, through Marketing, sells 75% 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, 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 45.1 million cubic feet per day
through May 31, 1999. 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 24% of annual contract volumes are currently being
supplied from wells currently operated by Production. Pursuant to a gas purchase
contract between Marketing and MG Natural Gas Corp. ("MGNG"), a wholly-owned
subsidiary of MG, MGNG is supplying the remaining 76% of the natural gas
required to meet the requirements of the Lone Star Contract at pre-established
prices.
The fixed price received by Marketing for gas sold to Lone Star has been
substantially in excess of the spot (market) price during most of the Lone Star
Contract from December 3, 1992 (date acquired) through September 30, 1996. It
also exceeds the fixed price of gas purchased from MGNG to meet the requirements
of the Lone Star Contract. As a result, Marketing has substantially 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 84% 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.
In September 1993, one of the Company's subsidiaries entered into a
contract to sell 7,356,000 btu's (British thermal units) of gas to MGNG. The
subsidiary is buying the gas to be sold to MGNG on the spot market and has
hedged approximately 14% of the remaining gas to be sold to MGNG. The subsidiary
remains exposed to the difference between the sales price to MGNG and the price
it will pay to purchase the gas unhedged on the spot market. The gas is to be
provided ratably from June 1, 1996 through May 31, 1999 at a fixed price.
The Castle Pipeline
The Castle Pipeline is an intrastate pipeline system located in Rusk
County, Texas, which 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 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 million cubic feet per day. The actual
deliveries made on the Castle Pipeline by Marketing during the periods shown
were as follows:
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<PAGE>
Twelve Months Ended September 30,
----------------------------------------------
1996 1995 1994
--------------- --------------- ------------
MCF(1)......................... 17,027,691 19,504,735 18,208,312
MCFPD(2)....................... 46,651 53,438 49,886
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(1) Thousand cubic feet
(2) Average throughput per day in thousand cubic feet
OIL AND GAS EXPLORATION AND PRODUCTION
General
The Company's oil and gas exploration and production business, conducted
through Production and Castle Exploration Company, Inc. ("CECI"), a wholly-owned
subsidiary, includes interests in approximately 420 producing oil and gas wells
located in eight 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, 1996. All estimates of reserves are based upon engineering
evaluations prepared by Ryder Scott Company Petroleum Engineers and Huntley and
Huntley, independent petroleum reservoir 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, 1996
are as follows:
<TABLE>
<CAPTION>
Location of Reserves
-------------------------------------------------
Texas Other States(2) Total
------------ --------------- ----------
<S> <C> <C> <C>
Net MCF (1) of gas:
Proved developed producing................................. 16,279,000 7,202,000 23,481,000
Proved developed non-producing............................. 10,002,000 1,281,000 11,283,000
Proved undeveloped......................................... 32,416,000 2,449,000 34,865,000
------------ ---------- ----------
Total...................................................... 58,697,000 10,932,000 69,629,000
============ ========== ==========
Net barrels of oil:
Proved developed producing................................. 96,000 171,000 267,000
Proved developed non-producing............................. 46,000 46,000
Proved undeveloped......................................... 149,000 149,000
------------ ------------ ----------
Total...................................................... 291,000 171,000 462,000
============ ============ ==========
</TABLE>
- -----------
(1) Thousand cubic feet
(2) Alabama, California, Illinois, Louisiana, Mississippi, New Mexico,
Oklahoma and Pennsylvania
The Texas reserves were acquired on December 3, 1992 when Production
acquired majority working interests in 100 producing oil and gas wells from
ARCO.
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<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, 1996,
including production from acquired properties since the date of acquisition.
Fiscal Year Ended September 30,
-----------------------------------
1996 1995 1994
---- ---- ----
Oil -- Bbls (barrels).................. 46,000 51,000 52,000
Gas -- MCF............................. 3,349,000 3,721,000 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 Year Ended September 30,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average Sales Price per Barrel of Oil.............................. $17.33 $15.59 $16.03
Average Sales Price per MCF of Gas................................. $ 2.38 $ 2.13 $ 2.02
Average Production Cost per Equivalent MCF(1)...................... $ 0.56 $ 0.59 $ 0.67
</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.
Approximately 75%, 74% and 67% of gas sold during the fiscal years ended
September 30, 1996, 1995 and 1994, respectively, were sold to Lone Star to
partially provide the volumes needed for the Lone Star Contract.
Productive Wells and Acreage
The following table presents the oil and gas properties in which the
Company held an interest as of September 30, 1996. The wells and acreage owned
by the Company and its subsidiaries are located in Alabama, California,
Illinois, Louisiana, Mississippi, New Mexico, Oklahoma, Pennsylvania and Texas.
As of
September 30, 1996
-------------------------
Gross(2) Net(3)
-------- ------
Productive Wells:(1)
Gas Wells.................................... 345 174
Oil Wells.................................... 73 27
Acreage:
Developed Acreage............................ 79,775 33,303
Undeveloped Acreage.......................... 22,360 19,243
- -----------------
(1) A "productive well" is a producing well or a well capable of production.
Sixty 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.
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<PAGE>
Drilling Activity
The table below sets forth for the three fiscal years ended September
30, 1996 the number of gross and net productive and dry developmental wells
drilled including wells drilled on acquired properties since the dates of
acquisition.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ----------------------
Productive Dry Productive Dry Productive Dry
---------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Developmental:
Gross.................................. -- -- -- -- -- --
Net.................................... -- -- -- -- -- --
</TABLE>
REFINING
Until September 30, 1995 two of the Company's subsidiaries operated in
the refining segment of the petroleum business. The two subsidiaries owned and
operated refineries with a combined refining (distillation) capacity of 135,500
barrels per day. IRLP owned and operated the Indian Refinery in Lawrenceville,
Illinois and Powerine owned and operated the Powerine Refinery in Santa Fe
Springs, California. On September 20, 1995, Powerine sold the Powerine Refinery
to Kenyen. On December 12, 1995, IRLP sold the Indian Refinery to American
Western. In addition, Powerine merged into a subsidiary of EMC on January 16,
1996 and was no longer a subsidiary of the Company. The Company still owns IRLP,
which is inactive and owns no refining assets.
As a result of the foregoing, refining operations were classified as
discontinued operations in the Company's financial statements as of September
30, 1995 and retroactively.
REGULATIONS
Since the Company has disposed of its refineries and third parties have
assumed environmental liabilities associated with the refineries, the Company's
current activities are not subject to environmental regulations that generally
pertain to refineries, e.g., the generation, treatment, storage, transportation
and disposal of hazardous wastes, the discharge of pollutants into the air and
water and other environmental laws. Nevertheless, the natural gas marketing and
transmission and 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's
natural gas marketing and transmission and exploration and production segments
has not resulted in material expenditures.
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 is
authorized to limit production to market demand. If implemented such limitations
could significantly curtail production by mineral owners. To date, either the
Railroad Commission has not limited production or the limitations have not
affected production by the Company's subsidiaries. There can, however, be no
assurance that future limitations of the Railroad Commission will not curtail
production.
The Company's activities in connection with the operation of pipelines
and other facilities for transporting natural gas are subject to environmental
regulation by federal and state authorities, including the United States
Environmental Protection Agency (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 USEPA, the
TACB, the TWC and the Railroad Commission.
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<PAGE>
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 results of operations of the Company.
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<PAGE>
EMPLOYEES AND OFFICE FACILITIES
As of November 30, 1996, the Company, through its subsidiaries, employed
22 personnel.
The Company owns certain office facilities as follows:
Office Location Function
- --------------- --------
Henderson, TX Oil and Gas Exploration and Production Office
Henderson, TX Natural Gas Pipeline and Marketing Office
The Company also leases certain offices as follows:
Office Location Function
- --------------- --------
Radnor, PA Corporate Headquarters
Mt. Pleasant, PA Oil and Gas Production Office
Pittsburgh, PA Drilling and Exploration Office
Tuscaloosa, Alabama Gas Production Office
-7-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Contingent Environmental Liabilities - Refining
Until September 30, 1995, the Company, through its subsidiaries,
operated in the refining segment of the petroleum business. As operators of
refineries, certain of the Company's subsidiaries were potentially liable for
environmental costs related to air emissions, ground and water contamination,
hazardous waste disposal and third party claims related to the foregoing.
Between September 29, 1995 and December 12, 1995 both of the refineries owned by
the Company's refining subsidiaries were sold to outside parties. In each case
the purchaser assumed all environmental liabilities. Furthermore, on January 16,
1996, Powerine, the subsidiary that previously owned the Powerine Refinery, was
effectively acquired by EMC, an outside, unrelated party. The environmental
liabilities of the Powerine Refinery and Indian Refinery as of September 30,
1995 were estimated at $23.6 million and $12.5 million, respectively.
As of November 30, 1996, neither of the purchasers of the refineries had
restarted the refineries. In addition, the purchaser of the Indian Refinery,
American Western, has defaulted on its $5 million note to IRLP and filed a
voluntary petition for bankruptcy in the United States Bankruptcy Court in the
District of Delaware under Chapter 11 of the United States Bankruptcy Code.
American Western is currently seeking to sell the Indian Refinery.
Although the environmental liabilities related to both of the
subsidiaries' refineries have been assumed by others, there can be no assurance
that the Company or IRLP will not be sued for matters related to environmental
liabilities of the refineries. Both of the companies to which the refining
assets or refining subsidiary stock were sold are thinly capitalized and without
significant financial resources. EMC is currently seeking to raise financing for
restarting the Powerine Refinery and American Western is attempting to sell the
Indian Refinery. If either of these companies fails in such endeavors and cannot
pay such notes or environmental liabilities, it is possible that the Company or
IRLP (still a subsidiary of the Company) could be named a party in related legal
actions. Although the Company does not believe it has any liability with respect
to such environmental liabilities, a court of competent jurisdiction may find
otherwise and the Company may be required to fund portions of such liabilities.
In recent years, government and other plaintiffs have often sought redress for
environmental damage from the party most capable of payment without regard to
responsibility and fault. Whether or not the Company is ultimately held liable
in such a circumstance, should litigation involving the Company and/or IRLP
occur, the Company would incur substantial legal fees and experience the
diversion of management resources from other operations.
General
SWAP Agreement - MGNG
In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap
Agreement"), dated October 14, 1994 between MGNG and IRLP, claiming the right to
do so based on breaches of other agreements by MG and its affiliates. MGNG
disregarded IRLP's termination notice and sent IRLP a termination notice
alleging IRLP was the defaulting party and claiming approximately $1.2 million
of losses. IRLP has refused to pay MGNG's claim. In June 1995, MGRM, as MGNG's
assignee, filed a complaint in Delaware state court, claiming $653,000,
consisting of $1,356,000 under the Swap Agreement less $703,000 owed to IRLP by
MGNG in transactions unrelated to the Swap Agreement, plus interest. IRLP has
answered the complaint. The Company's management believes that IRLP has good
defenses to that claim, expects to prevail and to recover its $703,000
receivable. The litigation is related to the Powerine Arbitration (see below)
and the Company expects this litigation to be settled at the same time as or
shortly after the Powerine Arbitration litigation is settled.
Powerine Arbitration
On April 14, 1995, Powerine repaid all of the indebtedness owed by it to
MGTFC, including $10.8 million of disputed amounts (the "Disputed Amount"). On
the same day, the Company and two of its subsidiaries and MG and two of its
subsidiaries entered into the Payoff Loan and Pledge Agreement ("Payoff
Agreement"), which provided the following:
a. MG released Powerine from all liens and claims.
b. MG loaned the Company $10 million.
c. Powerine transferred its claim with respect to the Disputed Amount
to the Company.
-8-
<PAGE>
d. The claim with respect to the Disputed Amount was agreed to be
submitted to binding arbitration (the "Powerine Arbitration").
e. MG can offset the $10 million loan to the Company against the $10
million note it issued to the Company as part of the MG Settlement,
to the extent the arbitrator decides the claim with respect to the
Disputed Amount in MG's favor.
The Disputed Amount relates primarily to disputes over the prices paid
by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's
subsidiary, MGRM, and nonpayment for refined products that were processed after
January 31, 1995 and that MGRM was obligated to, but did not, lift and pay for.
To the extent that the arbitrator decides in favor of the Company, the Company's
note to MG will be reduced and the net amount due to the Company from MG will be
increased. If the arbitrator settles the Disputed Amount entirely in the
Company's favor, the Company's note to MG will be cancelled and MG will still
owe the Company its $10 million note (due October 14, 1997). If the arbitrator
settles the Disputed Amount entirely in MG's favor, the Company's note from MG
will be discharged. In such case the Company's future earnings will also be
adversely impacted since the Company has not recorded any reserve against the
note.
In December 1996, the Company and MG presented oral arguments to the
arbitrator. A decision is expected in the second quarter of fiscal 1997.
In January 1996, MG did not pay interest on the $10,000,000 note when
such interest was due. As a result, the entire note is due to be paid to the
escrow account for the Powerine Arbitration. The Company filed suit in Delaware
Superior Court to compel MG to pay the entire note. By its terms the note is due
on October 14, 1997. The effect of compelling MG to pay the note into the escrow
account, if successful, will be that the note, after adjustment by the
Arbitrator, if any, will be paid to the Company when the Arbitration is
concluded rather than on October 14, 1997, the due date before MG's default.
Larry Long Litigation
In January 1996, Larry Long, a nonoperating owner of oil and gas wells,
filed a suit against the Company, Production, Pipeline, Marketing, ARCO, B&A
Pipeline Company, and a subsidiary of MG in the Fourth Judicial District Court
of Rusk County, Texas. The plaintiff claims, among other things, that the
parties being sued have underpaid non-operating working interest owners, royalty
interest owners, and overriding royalty interests owners with respect to gas
production from oil and gas properties operated by Production and attempts to
bring a class action on behalf of all such owners based upon various legal
theories. The plaintiff is seeking recovery of $40,000,000.
The Company has responded to the lawsuit and has asserted that the suit
is not a proper class action and that the named plaintiff is not an appropriate
class representative. Management of the Company and special counsel retained by
the Company believe that there are a number of meritorious defenses to the
claims being asserted. Among other defenses, the Company has asserted that many
of the matters which form the basis for the plaintiff's claims were resolved
adversely to certain of the members of the purported class in prior litigation
involving the predecessors in title to the Company's subsidiaries. In addition,
the Company believes that the amount claimed by the plaintiff is not supported
by the allegations made. Based upon a review of the pleadings which have been
filed, the Company believes that the claims are without merit and intends to
vigorously defend the lawsuit. The Company has recently filed a petition for
summary judgement against Larry Long. The lawsuit is currently in discovery and
deposition proceedings.
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 plaintiff 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.
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<PAGE>
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 1996.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER 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, 1996.
<TABLE>
<CAPTION>
1996 1995
------------------------- -----------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C>
First Quarter (December 31).................... $ 9.00 $7.00 $16.00 $11.25
Second Quarter (March 31)...................... 9.38 7.38 14.25 8.00
Third Quarter (June 30)........................ 12.25 8.75 10.75 7.00
Fourth Quarter (September 30).................. 11.25 8.00 11.00 8.00
</TABLE>
The final sale of the Company's Common Stock as reported by the NNM on
November 30, 1996 was $9.31.
Dividends:
The Company has not adopted a formal dividend policy and has not
declared a dividend since 1989. The loan agreements currently in place with
subsidiaries of the Company limit the amount of cash that subsidiaries can
transfer to the parent to 25% of the subsidiaries' cash flow. Accordingly, not
all of the subsidiaries' profits are available for dividends.
Approximate Number of Holders of Common Stock
As of November 30, 1996, the Company's Common Stock was held by
approximately 4,000 stockholders.
-11-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
During the Company's five fiscal years ended September 30, 1996, 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 a product offtake agreement
with MGR&M ("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 1995, the Company reached a settlement with MG and its affiliates which
would affect the results of operations for all future periods. In September
1995, the Company discontinued its refining operations. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 3 to the Company's Consolidated Financial Statements
included in Item 8 to this Form 10-K.
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, 1996 and all such income statement information has been
reclassified to give effect to the discontinuance of the refining operations.
The information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in Item 8 - "Financial Statements and
Supplementary Data" and Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30,
(in Thousands, except per share amounts)
-------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Natural gas marketing and transmission .......... $ 59,471 $ 70,402 $ 61,259 $ 56,676 --
Exploration and production ...................... 9,224 9,197 8,552 10,124 $ 5,165
Gross Margin:
Natural gas marketing and transmission .......... 25,238 30,242 24,199 22,200 --
Exploration and production ...................... 7,179 6,831 5,923 7,469 3,372
Earnings (loss) before interest, taxes, depreciation,
and amortization:
Natural gas marketing and transmission .......... 23,162 28,252 22,003 20,361 --
Exploration and production ...................... 5,944 5,761 4,494 5,940 2,181
Corporate general and administrative expenses ....... (3,499) (4,995) (5,499) (2,191) (1,706)
Depreciation, depletion and amortization ............ (13,717) (14,155) (13,452) (12,191) (1,453)
Interest expense .................................... (1,959) (4,046) (9,233) (9,117) (2,919)
Interest income and other income (expense) .......... 3,884 966 950 85 (476)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change
in accounting ................................... 13,815 11,783 (737) 2,887 (4,373)
Provision for (benefit of) income taxes related to
continuing operations ........................... (11,259) 37,823 (17,077) (44,081) 81
--------- --------- --------- --------- ---------
Income (loss) from continuing operations ............ 25,074 (26,040) 16,340 46,968 (4,454)
Income (loss) from discontinued refining operations
net of applicable income taxes .................. 40,937 22,577 12,355 (47,815)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of a change
in accounting principle ......................... 25,074 14,897 38,917 59,323 (52,269)
Cumulative effect on prior years of change in
accounting principle - adoption of FAS 109 ...... 8,514
--------- --------- --------- --------- ---------
Net income (loss) ................................... $ 25,074 $ 14,897 $ 38,917 $ 67,837 ($ 52,269)
========= ========= ========= ========= =========
Net income (loss) per share (fully diluted):
Continuing operations ........................... $ 3.73 ($ 3.84) $ 1.44 $ 6.20 ($ 0.35)
Discontinued operations ......................... 6.04 1.99 1.64 (3.76)
Cumulative effect of a change in accounting ..... 1.12
--------- --------- --------- --------- ---------
$ 3.73 $ 2.20 $ 3.43 $ 8.96 ($ 4.11)
========= ========= ========= ========= =========
</TABLE>
(continued on next page)
-12-
<PAGE>
<TABLE>
<CAPTION>
September 30,
(in Thousands)
-------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of Period):
Working capital (deficit) ........................ ($ 4,452) ($ 12,474) ($ 22,769) ($ 47,462) $ 6,451
Property, plant and equipment, net, including oil
and gas properties ............................ 36,223 40,406 339,876 150,299 85,420
Total assets ..................................... 101,230 116,904 646,491 392,738 167,873
Long-term debt, including current maturities ..... 14,006 35,946 394,123 199,020 202,860
Stockholders' equity (deficit) ................... 66,711 41,637 37,920 (9,387) (89,124)
</TABLE>
-13-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
("000's" Omitted)
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
GENERAL
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, one of the Company's refining subsidiaries, merged into a subsidiary
of EMC and was 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 in the Company's financial statements as of September
30, 1996 and retroactively. Accordingly, discussion of results of operations has
been confined to the results of continuing operations and the anticipated
impact, if any, of liquidation of the remaining inactive refining subsidiaries.
Fiscal 1996 vs Fiscal 1995
Revenues
Gas sales from natural gas marketing decreased $10,931 or 15.5% from
fiscal 1995 to fiscal 1996. The net decrease was caused by three factors one of
which increased gas sales and the other two of which decreased gas sales. Gas
sales increased $1,833 or 2.6% as a result of gas sales to MGNG commencing in
June of 1996 and other gas sales in the first half of fiscal 1996. In fiscal
1995 virtually all gas sales were to Lone Star. This increase was offset by a
5.7% scheduled reduction in contract volumes under the Lone Star Contract and a
12.4% reduction in volumes of gas otherwise delivered to Lone Star in fiscal
1996. 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 year. On January 31, 1997, the annual
contract volume will decrease approximately 1.5% and remain at such decreased
level through the end of the Lone Star Contract.
Oil and gas sales from the exploration and production segment increased
$62 or .7% as a result of offsetting factors. Production, expressed in
equivalent units of natural gas, decreased approximately 10% while the prices
received for oil and gas production increased approximately 11%. At the current
time gas prices are higher than they have been for several years although there
can be no assurance this trend will continue.
Expenses
Gas purchases decreased $5,937 or 14.8% from fiscal 1995 to fiscal 1996.
The decrease closely parallels the decrease in gas sales. In fiscal 1995 gas
purchases comprised 57% of gas sales versus 57.6% of gas sales in fiscal 1996.
Oil and gas production expenses decreased $321 or 13.6% from fiscal 1995
to fiscal 1996. The decrease results primarily from two factors: decreased ad
valorem (property) taxes and decreased well maintenance in the summer of 1996
when the Company expected to sell its oil and gas properties. As a result of
such deferral of maintenance, it is anticipated that oil and gas production
expenses will be slightly higher in fiscal 1997 now that the Company has
withdrawn its oil and gas properties from the market and expects to continue to
operate and produce them.
General and administrative expenses applicable to the exploration and
production segment increased $165 or 15.4% from fiscal 1995 to fiscal 1996. The
increase was caused by increased salaries, insurance and employee benefit costs
and increased legal fees.
-14-
<PAGE>
Depreciation, depletion and amortization decreased $446 or 16.1%.
Approximately 10% of the decrease was caused by and parallels a 10% decrease in
oil and gas production. The remaining 6.1% decrease is attributable to changes
in estimates concerning proved reserves.
Corporate general and administrative expenses decreased $1,496 or 30%
from fiscal 1995 to fiscal 1996. The decrease was primarily attributable to
decreased legal fees, employee salaries and employee benefits.
Other income increased $2,642 or 940.2%. All of the increase is
attributable to recoveries from a plaintiff escrow fund related to shareholder
litigation. The amount recovered and recorded as other income in fiscal 1996 was
$2,725. There was no counterpart to this item in fiscal 1995.
Interest expense decreased $2,087 or 51.6% from fiscal 1995 to fiscal
1996. The decrease parallels the decrease in outstanding long-term debt. As a
result of the refinancing of the GECC loan on November 26, 1996 the Company
replaced a fixed 8.33% rate of interest with a floating interest rate equal to
the prime rate plus 1%. The prime rate is currently 8.25%. As a result of the
refinancing, changes in the prime rate will henceforth impact the Company's
interest expense and results of operations.
The income tax benefit has been determined pursuant to "Financial
Accounting Standards Number 109 - Accounting for Income Taxes (FAS 109)." The
tax benefit in fiscal 1996 results from changes in management's assessment of
the probability of future taxable income. As a result of the tax benefit
recorded in fiscal 1996, the Company expects to provide for income taxes at a
36% blended statutory rate for the remainder of the Lone Star Contract for book
purposes. During this period the Company expects to pay income taxes at a 2%
effective rate, consisting of federal alternative minimum tax (see Note 19 to
the Consolidated Financial Statements).
Fiscal 1995 vs Fiscal 1994
Revenues
Gas sales from natural gas marketing increased $9,174 or 15% from fiscal
1994 to fiscal 1995. Under the Company's long-term gas sale contract with Lone
Star, 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 year. Lone Star deliveries
and sales for 1995 approximated those which would have occurred if daily takes
under the Lone Star Contract had been fixed and equal. Except for $84, all
fiscal 1995 sales by the natural gas marketing and transmission segment were to
Lone Star.
Exploration and production revenues increased $645 or 7.5% from fiscal
1994. The increase is primarily attributable to increased gas prices. Production
for fiscal 1994 consisted of 3,918 equivalent mcf (consisting of 52 barrels of
crude and 3,606 mcf of gas) versus 4,027 equivalent mcf (consisting of 51
barrels of crude and 3,721 mcf of gas) for fiscal 1995. The net increase in
equivalent mcf was 109 equivalent mcf or 2.8%. Average gas prices increased $.11
per mcf or 5.4% from $2.02 in fiscal 1994 to $2.13 in fiscal 1995. The increase
in production consisted of two factors: an increase resulting from the purchase
of the production payment from ARCO in October 1994 (see footnote 4 to the
consolidated financial statements) offset by a similar decline in production
from the Company's other depleting wells. With the exception of the ARCO
production payment purchase, only $199 was invested in oil and gas properties in
fiscal 1995.
Expenses
Gas purchases increased $3,131 or 8.5% from fiscal 1994. In fiscal 1994
gas purchases constituted 60.5% of gas sales versus 57% of gas sales in fiscal
1995. The decrease in the gas purchase cost percentage is primarily attributable
to the elimination of deferred gas purchase cost. In fiscal 1994, a deferred gas
purchase cost of $2,400 was included in gas purchase
-15-
<PAGE>
cost. This cost represented additional deferred gas purchase costs that the
Company expected to pay after the GECC Loan was repaid. As a result of the MG
Settlement on October 14, 1994 the deferred gas purchase obligation was
discharged and did not apply to most of fiscal 1995.
Operating costs of the natural gas transmission segment increased $69 or
6.1% from 1994 to 1995. This increase consists primarily of wage increases given
to pipeline personnel.
General and administrative expenses applicable to natural gas marketing
and transmission decreased $306 or 28.1% from fiscal 1994 to fiscal 1995. The
decrease occurred primarily because of a decrease in insurance and legal costs.
Operating (oil and gas production) expenses in the exploration and
production segment decreased $263 or 10% from fiscal 1994 to fiscal 1995. The
decrease results primarily from decreased operating costs applicable to
non-operated wells and significantly decreased property taxes.
General and administrative costs applicable to exploration and
production decreased $359 or 25.1% from 1994 to 1995. The decrease results
primarily from decreased insurance expense, administrative fees and legal costs.
Interest expense decreased $5,187 or 56.2% from fiscal 1994 to fiscal
1995. The decrease results entirely from the decrease in the GECC Loan and the
discharge of a $9.5 million subordinated loan due to MGTFC on October 14, 1994
as part of the MG Settlement.
The tax provision allocation applicable to continuing operations has
been determined pursuant to "Financial Accounting Standards Number 109 -
Accounting for Income Taxes" ("FAS 109"). The management of the Company believes
that the intraperiod tax provision allocation between continuing and
discontinued operations is misleading because the tax rate applicable to
continuing operations does not approximate the tax rate expected by the Company
in future years.
Fiscal 1994 vs Fiscal 1993
Revenues
Revenues from natural gas marketing increased by $4,583 or 8.1% for the
year ended September 30, 1994, principally as a result of the Company's
acquisition of the Lone Star Contract from ARCO on December 3, 1992. The
increased sales for the additional two months in fiscal 1994 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.
Exploration and production revenues decreased $1,572 or 15.5% for the
year ended September 30, 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 was partially offset by
the addition of 100 working oil and gas wells on December 3, 1992.
Operating Income and Expenses
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.
-16-
<PAGE>
Other Expenses
Interest expense increased $116 or 1.3% from fiscal 1993. The net
increase is the result of two offsetting factors. Interest expense decreased
because the loan principal of the GECC Loan and a subordinated loan to MGTFC
decreased in 1994. Interest expense increased in 1994 because the loans, which
were used to finance the acquisition of the ARCO assets, were not made until
December 1992 hence such loans were outstanding for less than a whole year in
fiscal 1993.
Income Taxes
The Company allocated the 1994 tax provision between continuing and
discontinued operations retroactively pursuant to FAS 109. The Company believes
such allocation is misleading for the reason noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources position has improved
considerably since September 30, 1995. During fiscal 1996 the Company generated
$26,864 of operating cash flow. Approximately 91% of this operating cash flow
was restricted to and used to reduce the GECC loan and pay related interest
expense. As noted above, the Company refinanced the GECC loan and entered into a
$25,000 credit facility on November 26, 1996. As of December 1, 1996, $11,126
was outstanding and $13,874 was still available under that facility. In
addition, under the new credit facility required principal payments are only
$500 per month instead of the entire cash flow generated by the natural gas
marketing and transmission and exploration and production subsidiaries as was
the case with the previous loan from General Electric Capital Corporation
("GECC"), the Company's natural gas marketing and transmission segment lender.
As noted previously, the Company withdrew its natural gas marketing and
transmission and exploration and production assets from the market and is
currently planning to operate these assets rather than sell them. Such plans
also include drilling much of the Company's undrilled Texas acreage and other
capital projects.
As a result of the foregoing the Company's expected cash obligations and
resources from October 1, 1996 to September 30, 1999 are as follows:
<TABLE>
<CAPTION>
10/01/96- 10/01/97- 10/01/96-
09/30/97 09/30/99 09/30/99
--------- --------- ---------
Cash Obligations:
<S> <C> <C> <C>
Repurchase of the Company's shares.............. $11,000 $11,000
Repayment of long-term debt..................... 8,172 $ 5,834 14,006
Planned drilling................................ 9,660 18,407 28,067
Other planned capital expenditures.............. 3,000 3,000 6,000
--------- --------- ---------
31,832 27,241 59,073
--------- --------- ---------
Cash Resources:
Cash on hand - 10/01/96......................... 3,457 3,457
Expected cash flow - existing operations........ 26,000 43,300 69,300
Expected cash flow - new operations............. 2,650 18,715 21,365
--------- -------- --------
32,107 62,015 94,122
--------- -------- --------
Excess of Cash Resources over Cash Obligations..... $ 275 $34,774 $35,049
========= ======= =======
</TABLE>
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 all or most of the $10,000 at
stake. Finally, as of December 3, 1996, the Company has an additional $13,874 of
funds available for these anticipated cash obligations under its $25,000 credit
facility.
-17-
<PAGE>
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.
Finally, the above projections assume that the Company's cash flows will
not be adversely impacted by any of the factors discussed subsequently under
"Risk Factors." Obviously, if such is not the case and such factors do impact
the Company, results could vary and vary significantly from those set forth
above.
INFLATION AND CHANGING PRICES
Natural Gas Marketing and Transmission
The Company's gas sales contract with Lone Star is essentially a fixed
price contract. It continues through May 1999. The Company's gas supply contract
is also a fixed price contract. The result is that the Company's gross margin is
essentially "locked in" and does not change with inflation. Although there are
some operating costs applicable to the natural gas marketing and pipeline
transmission segment, which tend to increase with inflation, they are minor and
inflation of such costs without concomitant inflation in revenues does not
significantly impact operating profits.
Exploration and Production
Oil and gas sales are determined by markets locally and worldwide and
often move inversely to inflation. Whereas operating expenses related to oil and
gas sales may be expected to parallel inflation, such costs have often tended to
move more in response to oil and gas sales prices than in response to inflation.
General
As noted above, the Company entered into a $25 million facility from a
bank syndicate on November 26, 1996. The effective interest rate on the facility
is the prime rate plus 1%. To the extent that the Company uses the facility and
the prime rate fluctuates, the Company's cost of capital will fluctuate. If the
Company draws down all or most of the entire $25,000 facility and the prime rate
changes significantly, the effect on the Company's results of operations could
be significant.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has released several
pronouncements that are not effective until future years. The Company believes
that such pronouncements, when effective, will not materially affect the
Company's financial condition or results of operations.
RISK FACTORS
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and is including this
section of Item 7 to this Form 10-K to do so. The Company cautions readers that
the following important risk factors could affect the Company's future results
of operations, liquidity and capital resources and financial condition and could
cause the Company's actual future results of operations, liquidity and capital
resources and financial condition to differ materially from those expressed in
forward looking statements made by or on behalf of the Company.
Refinery Matters
American Western Note
As a result of the sale of the Indian Refinery, IRLP received a $5,000
note from the purchaser, American Western. At September 30, 1996, the note plus
accrued interest aggregated $5,387. At the same date, IRLP owed vendors
-18-
<PAGE>
approximately $7,000. IRLP believes that it can fully discharge its vendor
liabilities if it receives the entire $5,387 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. 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, as explained below.
Although the Company's subsidiaries' have disposed of their two
refineries, the Company's future results of operations and cash flow could be
adversely affected by contingent liabilities, including environmental
liabilities, related to such refineries if the purchasers of such refineries are
unable to satisfy such liabilities and the Company becomes liable for such
liabilities, including the environmental liabilities as discussed above. In
addition, one purchaser is obligated to subsidiaries of the Company for an
aggregate of $6,358 in notes and accrued interest, which may not be paid if the
purchaser does not receive sufficient proceeds from the sale of the Indian
Refinery. See Item 3 - "Legal Proceedings." Although the Company does not
believe it has any liabilities with respect to environmental liabilities of the
refineries, a court of competent jurisdiction may find otherwise and the Company
may be required to fund portions of such liabilities. In recent years,
government and other plaintiffs have often sought redress for environmental
damage from the party most capable of payment without regard to responsibility
or fault. Whether or not the Company is ultimately held liable in such a
circumstance, should litigation involving the Company and/or IRLP occur, the
Company would incur substantial legal fees and experience a diversion of
management resources from other operations.
Supply Risk - MGNG Supply Contract
Approximately 82% of the gas currently delivered to Lone Star pursuant
to the Lone Star Contract is provided by MGNG, including approximately 6% of
such volumes purchased by MGNG from outside owners in wells operated by
Production. The Lone Star Contract expires on May 31, 1999. MGNG is a
wholly-owned subsidiary of MG, which, in turn, is indirectly owned by MG AG. If
spot gas prices increase significantly and MGNG has not hedged its future
commitment to supply gas to the Company or if MGNG experiences financial
problems, MGNG may be unable to meet its gas supply commitments to the Company.
If MGNG does not fulfill its gas supply commitment to the Company, the Company
may not be able to fulfill its gas delivery commitment to Lone Star or to
achieve the gross margins currently being earned. This would adversely impact
the Company's results of operations and cash flow. Under such circumstances the
Company may not be able to recover lost profits and cash flow from MGNG despite
provisions providing for such recovery.
Credit Risk - Lone Star
At the current time, virtually all of the Company's gas marketing
volumes and approximately 75% of the Company's own gas production is sold to a
single customer, Lone Star, under a long-term gas sales contract which
terminates on May 31, 1999. Although Lone Star has paid for all gas purchased
when such payments were due, any inability of Lone Star to continue to pay for
gas purchased would adversely affect the Company.
Supply Risk - MGNG Sales Contract
The Company has a commitment to sell 7,356 btu's of natural gas to MGNG
ratably from June 1, 1996 to May 31, 1999. At September 30, 1996, the remaining
commitment of natural gas to be sold to MGNG was 6,537 btu's. Of this remaining
volume, only 14% was hedged as of September 30, 1996. If gas prices remain high,
as is the situation currently, the Company may incur significant losses when it
purchases the unhedged gas to provide the remaining gas to be sold to MGNG (see
Note 15 to the Consolidated Financial Statements).
Drilling Risk
After obtaining the requisite financing, the Company anticipates
spending as much as $28,000 during the next three years (and as much as $42,000
over the next five years) to drill new wells primarily on acreage acquired from
ARCO. Drilling is inherently risky and there can be no assurance that any wells
drilled will be economically viable or enable the Company to recover the costs
of drilling. If the initial wells drilled by the Company do not find the
reserves expected, the Company may not drill additional wells and the revenues
and cash flow expected from such drilling may never materialize.
-19-
<PAGE>
In addition, an outside interest owner has filed a lawsuit against the
Company and three of its subsidiaries (see Item 3 - "Legal Proceedings - Larry
Long Litigation"). The Company's management believes that the plaintiff's claims
were already resolved in the Company's favor in prior litigation and has filed
for summary judgement against the plaintiff. If the issues in such lawsuit are
not resolved in the Company's favor or the landowners owning the land on which
the new wells are to be drilled do not agree in advance to the gas prices being
paid by Marketing, drilling may be postponed until after May 31, 1999. At such
time, the Company believes that the pricing issues raised in the Larry Long
litigation are no longer applicable.
Public Market for the Company's Stock
Although there presently exists a market for the Company's stock, such
market is volatile and the Company's stock is thinly traded. In addition, the
Company's earnings history is sporadic and the Company has not paid dividends
since 1989. Although the Company believes that its earnings and cash flow will
be more predictable in the future, there can be no assurance that such will be
the case. Such volatility may adversely affect the market price and liquidity of
the Company's common stock. In addition, there are presently, to the Company's
knowledge, several brokerage firms making a market in the Company's common
stock. Any cessation of such market making activities by such brokerage firms
could adversely affect the market for the Company's common stock.
As noted earlier, IRLP's only significant asset is a $5.4 million note
due from American Western yet IRLP owes approximately $7.0 million to trade
vendors. As noted above American Western recently filed for bankruptcy and is
conducting an auction to sell its assets. If IRLP does not receive sufficient
proceeds for its note to satisfy its trade vendors IRLP may file a voluntary
petition for bankruptcy. Under such circumstances the share price of the
Company's common stock may decrease significantly given the required public
releases and the perceived public reaction to such releases and the estimated
period of time customarily required for such proceedings.
Operational Considerations
The Company's operations are subject to the risks inherent in the
pipeline and oil and gas industries, including the risks of fire, explosion,
pipe failure and environmental accidents such as oil spills, gas leaks and
ruptures or discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. The Company's
operations could be subject to significant interruption in the event any of
these or other problems developed. In accordance with customary industry
practice, the Company maintains significant liability, property and business
interruption insurance against most, but not all, of the risks described above.
There can be no assurance that such an adverse event will not happen, that the
Company's insurance will be adequate to cover any losses or liabilities or that
it would not have a material adverse effect on the Company's financial condition
or results of operations.
-20-
<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, 1996, 1995 and 1994................. 22
Consolidated Balance Sheets, as of September 30, 1996 and 1995.............................................. 24
Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994................. 25
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended September 30, 1996, 1995
and 1994............................................................................................ 27
Notes to the Consolidated Financial Statements.............................................................. 28
FINANCIAL STATEMENT SCHEDULE:
III. Condensed Financial Information - Parent Company Only................................................. 56
REPORT OF INDEPENDENT ACCOUNTANTS........................................................................... 59
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
-21-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales.............................................. $59,471 $70,402 $61,228
Transportation......................................... 31
-------- -------- --------
59,471 70,402 61,259
-------- -------- --------
Exploration and production:
Oil and gas sales...................................... 8,782 8,720 8,069
Well operations........................................ 442 477 483
---------- ----------- ---------
9,224 9,197 8,552
--------- ---------- --------
68,695 79,599 69,811
-------- --------- -------
Expenses:
Natural gas marketing and transmission:
Gas purchases.......................................... 34,233 40,160 37,029
Operating costs........................................ 845 804 1,139
General and administrative............................. 1,231 1,186 1,088
Depreciation and amortization.......................... 11,393 11,385 11,360
-------- --------- -------
47,702 53,535 50,616
-------- --------- -------
Exploration and production:
Oil and gas production................................. 2,045 2,366 2,629
General and administrative............................. 1,235 1,070 1,429
Depreciation, depletion and amortization............... 2,324 2,770 2,092
--------- --------- --------
5,604 6,206 6,150
--------- --------- --------
Corporate general and administrative expenses............ 3,499 4,995 5,499
--------- --------- --------
56,805 64,736 62,265
-------- -------- -------
Operating income............................................. 11,890 14,863 7,546
-------- -------- --------
</TABLE>
(Continued on next page)
The accompanying notes are an integral part
of these financial statements
-22-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Per Share Amounts)
(continued from previous page)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Other income (expense):
Interest income........................................................ 961 685 528
Other income........................................................... 2,923 281 422
Interest expense....................................................... (1,959) (4,046) (9,233)
------------- ------------ --------------
1,925 (3,080) (8,283)
------------- ----------- --------------
Income (loss) from continuing operations before income taxes.............. 13,815 11,783 (737)
------------ ---------- ---------------
Provision for (benefit of) income taxes related to continuing operations:
State.............................................................. (309) 4,728 (68)
Federal............................................................ (10,950) 33,095 (17,009)
------------ ---------- -------------
(11,259) 37,823 (17,077)
------------ ---------- -------------
Income (loss) from continuing operations................................... 25,074 (26,040) 16,340
Income from discontinued refining operations less applicable income
taxes of $19,850 and $17,603 in 1995 and 1994, respectively............ 40,937 22,577
-------------- ----------- --------------
Net income................................................................. $ 25,074 $ 14,897 $ 38,917
============== =========== =============
Net income (loss) per share:
Income (loss) per share from continuing operations - primary........... $ 3.73 ($ 3.84) $ 1.46
============== ============ ===============
- fully diluted.................................................. $ 3.73 ($ 3.84) $ 1.44
============== ============ ===============
Income per share from discontinued refining operations - primary....... $ $ 6.04 $ 2.02
=============== ============= ===============
- fully diluted.................................................. $ $ 6.04 $ 1.99
=============== ============= ===============
Net income per share - primary......................................... $ 3.73 $ 2.20 $ 3.48
============== ============= ===============
- fully diluted.................................................. $ 3.73 $ 2.20 $ 3.43
============== ============= ===============
Weighted average number of common and common equivalent shares
outstanding - primary.......................................... 6,719,000 6,778,000 11,209,000
=========== =========== ===========
- fully diluted.................................................. 6,719,000 6,778,000 11,397,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
-23-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
September 30,
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 3,457 $ 5,341
Restricted cash............................................................. 1,743 4,959
Accounts receivable......................................................... 10,217 5,641
Prepaid expenses and other current assets................................... 73 153
Deferred income taxes....................................................... 2,373 4,623
Estimated realizable value of discontinued net refining assets.............. 6,288 10,803
--------- ---------
Total current assets...................................................... 24,151 31,520
Property, plant and equipment, net:
Natural gas transmission.................................................... 20,987 22,720
Furniture, fixtures and equipment........................................... 222 276
Oil and gas properties, net..................................................... 15,014 17,410
Gas contracts, net.............................................................. 25,142 34,515
Deferred income taxes........................................................... 5,343
Other assets, net............................................................... 371 463
Note receivable................................................................. 10,000 10,000
---------- ----------
Total assets.............................................................. $101,230 $116,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 8,172 $ 12,080
Current portion of long-term debt - related party........................... 250
Accounts payable............................................................ 3,817 4,715
Accrued expenses............................................................ 1,875 3,284
Other liabilities........................................................... 3,660 3,323
Net refining liabilities retained........................................... 11,079 20,342
----------- ----------
Total current liabilities................................................. 28,603 43,994
Long-term debt.................................................................. 5,834 23,616
Other long-term liabilities..................................................... 82 83
Deferred income taxes........................................................... 7,574
----------- -----------
Total liabilities......................................................... 34,519 75,267
----------- ----------
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 in 1996 and 1995, respectively........... 3,347 3,347
Additional paid-in capital...................................................... 66,316 66,316
Accumulated deficit............................................................. (2,952) (28,026)
----------- ----------
66,711 41,637
---------- ----------
Total liabilities and stockholders' equity ............................... $101,230 $116,904
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements
-24-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 25,074 $ 14,897 $ 38,917
-------- ---------- --------
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation, depletion and amortization............................... 13,612 19,238 43,774
Amortization of deferred debt issue costs.............................. 356 2,732 8,885
Deferred income taxes.................................................. (10,667) 55,799 (2,900)
Gain on MG Settlement.................................................. (396,166)
Provision for impairment loss.......................................... 323,078
Write-off of debt acquisition costs.................................... 161
Changes in assets and liabilities:
Decrease in restricted cash......................................... 5,942 4,750 1,185
Decrease in temporary investments................................... 4,436 2,811
(Increase) decrease in accounts receivable.......................... 22,658 27,685 (6,178)
(Increase) decrease in inventory.................................... 22,914 57,401 (18,787)
(Increase) decrease in prepaid expenses and other current assets.... 903 6,366 (4,762)
(Increase) in other assets.......................................... (103) (1,793) (1,523)
Increase (decrease) in accounts payable............................. (1,744) (29,660) 23,448
Increase (decrease) in accrued expenses............................. (28,105) (29,936) 1,958
Increase (decrease) in other current liabilities.................... (329) 283 41
Increase (decrease) in other long-term liabilities.................. (23,265) (630) 927
(Decrease) in due to related parties................................ (385) (9,014) (9,046)
(Decrease) in deferred revenues..................................... (12,124) (65,807)
-------------- --------- --------
Total adjustments............................................... 1,948 22,445 (25,974)
---------- --------- --------
Net cash flow provided by operating activities.................. 27,022 37,342 12,943
--------- --------- --------
Cash flows from investment activities:
Proceeds from sale of furniture, fixtures and equipment................... 4,723 75
Investment in refining plant............................................. (35,355) (63,819)
Realization of discontinued net refining assets........................... 4,000
Investment in oil and gas properties...................................... (34) (4,022) (956)
Investment in pipelines................................................... (140) (47) (21)
Purchase of furniture, fixtures and equipment............................. (1) (288) (1,670)
Business acquisition, net of cash acquired................................ (8,230)
-------------- -------------- ---------
Net cash provided by (used in) investing activities............. 3,825 (34,989) (74,621)
---------- --------- --------
</TABLE>
(continued on next page)
The accompanying notes are an integral part
of these financial statements
-25-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted Except Share Amounts)
(continued from previous page)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds of long-term debt - related party................................ $ 530 $ 67,915
Proceeds of long-term debt................................................ $ 3,800 25,108 12,114
Proceeds from issuance of common stock, net............................... 202 48,207
Repayment of long-term debt - related party............................... (250) (4,388)
Repayment of long-term debt............................................... (37,984) (38,781) (48,356)
Payment of debt issuance costs............................................ (486)
---------- --------- ----------
Net cash provided by (used in) financing activities................. (34,920) (12,941) 75,492
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents......................... (4,073) (10,588) 13,814
Cash and cash equivalents - beginning of period.............................. 7,530 18,118 4,304
---------- --------- -----------
Cash and cash equivalents - end of period.................................... $ 3,457 $ 7,530 $ 18,118
========== ========= =========
Supplemental disclosures of cash flow information are as follows:
Cash paid during the period:
Interest............................................................... $ 2,086 $ 10,207 $ 16,583
========= ========= =========
Income taxes........................................................... $ 536 $ 1,080 $ 8,802
========= ========= =========
Interest capitalized during the period....................................... - - $ 1,519
========== ========== =========
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
=========
Payment of related party payables in exchange for reduction in cash
participations........................................................ $ 6,862
========
MG Settlement, including surrender of 969,000 common shares, cancellation of
debt obligations and the assumption by MG of the
forward sale obligations and Societe Generale loan $396,166
========
Exchange of common stock:
Acquisition of common stock in exchange for reduction in cash
participations......................................................... $ 39,817
=========
</TABLE>
The accompanying notes are an integral part
of these financial statements
-26-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
("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, 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) (35,753) (2,264) (39,817)
Net income ....................... 38,917 38,917
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - September 30, 1994 ..... 7,627,646 3,814 75,754 (41,648) 37,920
Stock acquired ................... (969,000) (485) (9,622) (1,275) (11,382)
Options exercised ................ 35,000 18 184 202
Net income ....................... 14,897 14,897
---------- ---------- ---------- ---------- ---------- ---------- ----------
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
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements
-27-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
NOTE 1 - BUSINESS AND ORGANIZATION
Settlement with Principal Stockholder
Castle Energy Corporation ("Castle" or the "Company") is a Delaware
corporation. From September 1989 until October 14, 1994, its principal
shareholder was Metallgesellschaft Corporation ("MG"), an indirect wholly-owned
subsidiary of Metallgesellschaft AG ("MG AG"), a German conglomerate which had,
in the past, owned as much as 49% of the Company. In addition, the Company had
extensive transactions and agreements with MG and its affiliates as described in
Notes 17 and 20. On August 31, 1994, the Company entered into two agreements
with MG and its affiliates which terminated most relationships with MG and
significantly restructured the remaining relationships (the "MG Settlement")
(see Note 3). All amounts related to transactions with MG and its affiliates are
not reported as related party transactions subsequent to October 14, 1994.
Business Segments
The Company's principal lines of business are natural gas marketing and
transmission and oil and gas exploration and production. Until September 30,
1995, the Company's major business segment was refining (see Note 3). The
Company's operations are conducted within the United States.
Natural Gas Marketing and Transmission
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 entered into a management
service contract with MG Gathering Corp. ("MGG"), a subsidiary of MG, to operate
the Castle Pipeline. Subsequent to September 30, 1996, the Company's pipeline
subsidiary notified MGG of its intent to terminate the management service
contract with MGG (see Note 24).
The Lone Star Contract expires May 31, 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 16% 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 84% of the annual contract volumes needed for the Lone Star Contract.
For the year ended September 30, 1996, approximately 95% of all gas volumes and
97% of all gas sales by the natural gas marketing and transmission segment were
sold to Lone Star. Until June of 1996 in excess of 99% of all gas volumes sold
by the natural gas marketing and transmission segment were sold to Lone Star.
In addition to the Lone Star Contract, a subsidiary of the Company has a
contract to sell 7,356 btu's (British thermal units) of natural gas at a fixed
price from June 1, 1996 to May 31, 1999.
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 and transmission assets. At present,
approximately 75% of the Company's natural gas production is sold to Lone Star
as described above.
-28-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
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"), which was owned and operated by the Company's subsidiary,
Indian Refining I Limited Partnership ("IRLP"), until September 30, 1995 when it
was shut down. On December 12, 1995, the Indian Refinery assets were sold (for
legal purposes) to American Western Refining, L.P. ("American Western") (see
Note 3).
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). From October 1, 1993 to February 1, 1995,
Powerine sold all of its refined products to MGRM under a product offtake
agreement (the "Powerine Offtake Agreement") subject to MGRM's obligation to
purchase refined products from raw materials on hand at the Powerine Refinery at
(or subject to contracts calling for delivery to the Powerine Refinery by)
February 1, 1995. MGRM's failure to purchase products refined after February 1,
1995 is at issue in the Powerine Arbitration (see Note 15). On September 29,
1995, Powerine sold substantially all of its refining plant to Kenyen Projects
Limited ("Kenyen"). On January 16, 1996, Powerine merged into a subsidiary of
Energy Merchant Corp. ("EMC") (see Note 3). Results of Powerine's operations are
included in these financial statements (discontinued operations - refining)
commencing October 1, 1993.
As a result of the transactions with Kenyen, American Western and EMC, the
Company disposed of its interests in the refining segment. The results of
refining operations are shown as discontinued operations in the Consolidated
Statement of Operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The significant accounting policies discussed are limited to those
applicable to the Company's continuing business segments - natural gas marketing
and exploration and production. References should be made to previous Forms 10-K
for summaries of accounting principles applicable to the discontinued refining
segment.
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.
Revenue Recognition
Natural Gas Marketing and Transmission
Revenues are recorded when deliveries are made. Essentially all of the
Company's deliveries are made under two contracts, the Lone Star Contract and a
contract with MGNG.
Exploration and Production
Oil and gas revenues are recorded when oil and gas volumes are
delivered to the purchaser. Fees from well operations are recorded when earned.
-29-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Cash and Cash Equivalents
The Company considers all highly liquid investments, such as time deposits
and money market instruments, purchased with a maturity of three months or less,
to be cash equivalents.
Property, Plant and Equipment
Natural gas transmission, property, plant and equipment and furniture,
fixtures and equipment are stated at the lower of cost or impaired (fair market)
value. Depreciation on natural gas transmission, property, plant and equipment
is recorded on a straight-line basis over fifteen years, the estimated useful
life of the assets. Furniture, fixtures and equipment is depreciated on a
straight-line basis over periods of three to ten years, the estimated useful
lives of the assets.
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 joint venture and proceeds from the sale
of oil and gas properties are recorded as reductions in capitalized costs unless
such sales are material and involve a significant change in the relationship
between cost and the value of proved reserves in which case a gain or loss is
recognized. 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, if any, are charged to
current expense.
Impairment of Long-Term Assets
The Company adopted Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
during the second quarter of fiscal 1995. The effect of adoption was not
significant. Accordingly, the Company reviews its long-term assets other than
oil and gas properties for impairment whenever events or changes in circumstance
indicate that the carrying amount of an asset may not be recoverable. If the sum
of the expected future cash flows expected to result from the use of the asset
and its eventual disposition is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss would be based
on the fair market value of the asset. Impairment for oil and gas properties is
computed in the manner described above under "Oil and Gas Properties."
Hedging Activities
The Company employs hedging strategies to hedge its future natural gas
purchase requirements for its gas sales contract to MGNG (see Notes 1 and 15).
The Company hedges future commitments. Gains and losses from hedging activities
are credited or debited to the item being hedged, the cost of gas purchased for
the MGNG gas sales contract.
Other Assets
Costs applicable to the issuance of debt are capitalized and amortized
using the interest method based upon the scheduled debt repayment terms.
-30-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Gas Contracts
The purchase price allocated to the Lone Star Contract was capitalized and
is being amortized over the term of the related contract (6.5 years).
Gas Balancing
The Company operates under several natural gas sales contracts where it is
entitled to sell other owners' shares of natural gas produced from a well if
such other owners do not elect to sell their shares of production. Under the
terms of the related joint operating agreements, the non-selling owners are
entitled to make up gas sales from the Company's share of production in the
future. The Company records sales of other owners' production as deferred
revenue and recognizes such deferred revenue when the other owners make up their
gas balancing deficiency from the Company's share of production.
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 anticipated enactments of changes in the tax law or rates. (See Note
19). FAS 109 also requires that tax provisions and recoveries related to changes
in the valuation reserve for deferred tax assets because of a change in
circumstances that causes a change in judgement about the realizability of the
related deferred tax asset in future years be allocated entirely to continuing
operations.
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 for all succeeding annual
periods where the dilution in earnings per share resulting from full dilution is
greater than 3%.
Reclassifications
Certain reclassifications have been made to make the periods presented
comparable.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NOTE 3 - MG SETTLEMENT AND DISCONTINUED OPERATIONS - REFINING
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. In the first step of the MG
Settlement, which closed on September 9, 1994, MG transferred 3,600,000 shares
of common stock of the Company to the Company in exchange for $39,817 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 $120,000 Senior Facility
with Societe Generale, together totaling $321,282, (b) transferred back to the
Company the remaining 969,000 shares of common
-31-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
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 payable 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 a 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
although sales under the Powerine Offtake Agreement were to continue
subsequently, (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 and MG agreed that the Company, through
March 31, 1995, could unilaterally terminate its gas supply agreement with MGNG
("MGNG Gas Supply Agreement"). As a result of the MG Settlement, the Company
realized a gain of $391,135, consisting of $396,166 gross proceeds less $5,031
of investment banking fees and related expenses.
The completion of the transactions contemplated by the MG Settlement had,
among others, three consequences for the Company. First, the offtake agreements
with MG terminated and the Company, until it sold the Refineries, was required
to market its own products and was subject to market risks. Second, also in
1995, the working capital facilities provided by MGTFC terminated. Third, for
Federal and state income tax purposes, the Company recognized income of
approximately $391 million, on which, after giving effect to applicable net
operating loss and other tax carryforwards and other items of expense and
deduction, Federal and state income taxes of approximately $91 million would
have been owed had the Company not disposed of or discontinued the refining
operations.
After the MG Settlement was consummated, the Company decided to
discontinue the operations of its refining business and to sell or retire its
two refineries. At December 31, 1994, the Company provided $345,008 for the
estimated impairment of the related refinery assets.
In July 1995, operations ceased at the Powerine Refinery and Powerine
retired the assets of the Powerine Refinery. On September 29, 1995, Powerine
sold substantially all of the refining plant assets to Kenyen, retaining certain
rack facilities and the land on which the Powerine Refinery is situated. The
purchase price was $22,763 consisting of $3,000 cash and a note for $19,763. The
note was secured by the Powerine refining plant and bore interest at 10%. The
note was due in three equal installments of principal and interest of $7,108 (of
which $19,763 is principal) on April 30, June 30 and September 30, 1996. On
January 16, 1996 Powerine merged into a subsidiary of EMC and was no longer a
subsidiary of the Company. As part of the sale, EMC also indemnified Powerine
and the Company for any and all environmental liabilities of Powerine.
On September 30, 1995, operations also ceased at the Indian Refinery and
IRLP retired the plant assets of the Indian Refinery. On December 12, 1995, IRLP
sold the plant assets of the Indian Refinery to American Western, a subsidiary
of Gadgil Western Corporation ("Gadgil"). The purchase price was $8,000,
including $3,000 cash and a note for $5,000. The note bears interest at 8% and
was due on the earlier of October 31, 1996 or the date American Western obtained
financing to restart the Indian Refinery. The note is secured by the real
property and the Indian Refinery. American Western also assumed certain
liabilities of IRLP, including employee pension and all environmental
liabilities, in conjunction with the sale. Indian Oil Company ("IOC"), another
wholly-owned refining subsidiary, also sold certain precious metal catalysts to
American Western for a note for $1,803.
On October 31, 1996, American Western failed to pay the $5,000 note plus
$387 of related accrued interest. On November 6, 1996, American Western filed a
voluntary petition for bankruptcy in the United States Bankruptcy Court in the
District of Delaware under Chapter 11 of the United States Bankruptcy Code.
Shortly thereafter, American Western filed motions to approve debtor in
possession financing and the sale of the Indian Refinery. Both motions were
approved.
American Western expects to sell the Indian Refinery in January 1997.
Although IRLP holds a first mortgage on the Indian Refinery other creditors of
American Western hold a lien superior to that of IRLP. There can, however, be no
assurance that the Indian Refinery will be sold or that the proceeds, if any, to
IRLP will equal the note plus interest which is owed to IRLP by American
Western. IRLP intends to use the note proceeds, if any, to pay its vendor
liabilities, which approximated $7,000 at September 30, 1996. If IRLP does not
receive sufficient note proceeds to settle its vendor liabilities, IRLP may file
a voluntary petition for bankruptcy.
-32-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
In May 1996, IOC seized the platinum securing the $1,803 note and
processed approximately fifty-one percent of the platinum. The proceeds were
applied to the note. As of September 30, 1996, $971, consisting of $833 of
principal and $138 of accrued interest was still owed on the note by American
Western. Although IRLP believes the value of the platinum is sufficient to pay
such outstanding principal and interest on the note, a vendor of IRLP has
obtained a restraining order which precludes IOC from processing the platinum.
IOC is seeking to reverse the restraining order so it can continue processing
the platinum and obtain payment for its platinum note. The platinum is security
for a loan to a financial institution. This loan aggregated $756 at September
30, 1996.
As a result of the discontinuance of refining operations, all assets and
liabilities related to the refining segment have been netted. The realizable
value of net refining assets is shown under the caption "Estimated realizable
value of discontinued net refining assets" on the accompanying Consolidated
Balance Sheet. The estimated value of the refining liabilities retained is shown
under the caption "Net refining liabilities retained."
An analysis of the assets and liabilities related to the refining segment
for the period September 30, 1995 to September 30, 1996 is as follows:
<TABLE>
<CAPTION>
Estimated
Realizable Value
of Discontinued Net Refining
Net Refining Assets Liabilities Retained
------------------- ---------------------
<S> <C> <C>
Property, plant and equipment, net............................... $340,280
Goodwill, net.................................................... 5,413
Catalyst, net.................................................... 4,191
Environmental liabilities........................................ (36,061)
Other, net....................................................... 20,058
----------
333,881
Impairment reserve............................................... (323,078)
Revolving credit loan............................................ $13,249
Other working capital deficit, net............................... 7,093
---------- ---------
Balance - September 30, 1995..................................... 10,803 20,342
Cash transactions................................................ (4,000) (9,263)
Other, net....................................................... (515)
---------- ---------
Balance - September 30, 1996..................................... $ 6,288 $11,079
========== =======
</TABLE>
"Estimated realizable value of discontinued net refining assets" is based
on the transactions consummated with American Western and EMC and includes
management's best estimates of the amounts expected to be realized on the
disposal of the refining segment. "Net refining liabilities retained" includes
management's best estimates of amounts expected to be paid and amounts expected
to be realized on the settlement of this net liability. The amounts the Company
ultimately realizes could differ materially in the near term from such amounts.
Summary operating results of discontinued operations are as follows and
include the $391,135 gain realized on the settlement with MG in 1995 and the
$323,078 impairment write-down in 1995. No refining operations were recorded in
1996 because processing had ceased by September 30, 1995 and all refining
subsidiaries were in the process of liquidation.
<TABLE>
<CAPTION>
September 30,
--------------------------
1995 1994
---- ----
<S> <C> <C>
Revenues............................................................................ $711,976 $940,514
======== ========
Income before income taxes.......................................................... $ 60,787 $ 40,180
Provision for income taxes.......................................................... 19,850 17,603
---------- ----------
Net earnings from discontinued operations........................................... $ 40,937 $ 22,577
========= =========
</TABLE>
33
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
In computing the operating results of discontinued operations, interest
expense specifically associated with refining debt has been included in
discontinued operations.
NOTE 4 -- ACQUISITIONS
Purchase of Powerine
As of October 1, 1993, the Company acquired from MG an option to acquire
Powerine, the owner of the Powerine Refinery, 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 MGTFC 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 MG (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. On
January 16, 1996, Powerine merged into a subsidiary of EMC (see Note 3). The
results of operations of Powerine are included in the statement of operations
(discontinued operations - refining) commencing October 1, 1993.
Purchase of ARCO Royalty
In October 1994, one of the Company's exploration and production
subsidiaries purchased certain royalty interests held by ARCO in wells purchased
by another of the Company's exploration and production subsidiaries from ARCO in
December 1992. The purchase price was $3,823.
NOTE 5 - RESTRICTED CASH
Restricted cash consists of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Lender escrow....................................................................... $ 875
Gas revenues deposited in lender's escrow account................................... $4,143
Funds supporting letters of credit issued for operating bonds....................... 216 362
Other............................................................................... 652 454
-------- --------
$1,743 $4,959
====== ======
</TABLE>
Subsequent to September 30, 1996, the lender escrow was released in
conjunction with the Company's refinancing of its natural gas marketing loan
from General Electric Capital Corporation ("GECC") (see Notes 14 and 24).
NOTE 6 - ACCOUNTS RECEIVABLE
Based upon past customer experiences, the limited number of customer
accounts receivable relationships, and the fact that the Company's subsidiaries
can offset unpaid accounts receivable against an outside owner's share of oil
and gas revenues, management believes all receivables to be collectible.
Accounts receivable consist of the following:
-34-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Natural gas marketing............................................................... $ 8,553 $4,450
Oil and gas......................................................................... 1,487 991
Other............................................................................... 177 200
-------- --------
$10,217 $5,641
======= ======
</TABLE>
Account receivable due from Lone Star aggregated $8,149 and $4,044 at
September 30, 1996 and 1995, respectively.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Natural gas transmission consists of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Natural gas pipeline................................................................ $28,117 $27,977
Less: Accumulated depreciation..................................................... (7,130) (5,257)
---------- ---------
$20,987 $22,720
======= =======
</TABLE>
Furniture, fixtures and equipment are as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Furniture, fixtures and equipment................................................... $423 $467
Less: Accumulated depreciation..................................................... (201) (191)
----- ------
$222 $276
==== ====
</TABLE>
NOTE 8 - GAS CONTRACTS
Gas contracts consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Gas contracts....................................................................... $61,151 $61,151
Less: Accumulated amortization..................................................... (36,009) (26,636)
-------- --------
$25,142 $34,515
======= =======
</TABLE>
<PAGE>
NOTE 9 - OIL AND GAS PROPERTIES
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Evaluated properties................................................................ $28,090 $28,175
Less: Accumulated depreciation, depletion and amortization........................ (12,979) (10,668)
Accumulated full cost ceiling reserve............................................... (97) (97)
---------- -----------
15,014 17,410
Unevaluated properties..............................................................
$15,014 $17,410
======= =======
</TABLE>
-35-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Capital costs incurred by the Company in oil and gas activities, all
of which are located in the United States, are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Property acquisition costs - proved properties.................... $3,823
Development costs................................................. $34 199 $956
------ -------- ----
$34 $4,022 $956
=== ====== ====
</TABLE>
Results of operations, excluding corporate overhead and interest
expense, from the Company's oil and gas producing activities are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Crude oil, condensate, natural gas liquids and natural gas
sales.......................................................... $8,782 $8,720 $8,069
------ ------ ------
Costs and expenses:
Production costs............................................... $2,045 $2,366 $2,629
Depreciation, depletion and amortization....................... 2,311 2,757 2,014
------- ------- -------
Total costs and expenses....................................... 4,356 5,123 4,643
------- ------- -------
Income tax provision.............................................. 1,593 1,439 1,370
------- ------- -------
Income from oil and gas producing activities...................... $2,833 $2,158 $2,056
====== ====== ======
</TABLE>
The income tax provision is computed at the blended rate (Federal and
state combined) of 36% in 1996 and 40% in 1995 and 1994.
Assuming conversion of oil and gas production into common equivalent
units of measure on the basis of energy content, depletion rates per equivalent
MCF (thousand cubic feet) of natural gas were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Depreciation, depletion and amortization.......................... $2,311 $2,757 $2,014
====== ====== ======
Depletion rate per equivalent MCF of natural gas.................. $ 0.64 $ 0.68 $ 0.51
======= ======= =======
</TABLE>
NOTE 10 -- PROVED OIL AND GAS RESERVES AND RESERVE VALUATION (UNAUDITED)
Reserve estimates are based upon subjective engineering judgements made
by the Company's independent petroleum reservoir engineers, Ryder Scott Company
Petroleum Engineers and Huntley & Huntley, and may be affected by the
limitations inherent in such estimations. The process of estimating reserves is
subject to continuous revisions as additional information is made available
through drilling, testing, reservoir studies and production history. There can
be no assurance such estimates will not be materially revised in subsequent
periods.
-36-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Estimated quantities of proved reserves and changes therein, all of which
are domestic reserves, are summarized below:
<TABLE>
<CAPTION>
Oil (BBLS) Natural Gas (MCF)
---------- ----------------
Proved developed and undeveloped reserves:
<S> <C> <C>
As of October 1, 1993.............................................. 238,354 45,478,755
Revisions of previous estimates................................. 136,132 13,051,146
Production...................................................... (52,078) (3,605,915)
-------- -----------
As of September 30, 1994........................................... 322,408 54,923,986
Revisions of previous estimates................................. 65,562 2,537,310
Acquisition of minerals in place................................ 13,882 2,828,172
Production...................................................... (50,972) (3,721,249)
-------- -----------
As of September 30, 1995........................................... 350,880 56,568,219
Revisions of previous estimates................................. 156,992 16,410,374
Production...................................................... (46,030) (3,349,493)
-------- -----------
As of September 30, 1996........................................... 461,842 69,629,100
======= ==========
Proved developed reserves:
October 1, 1993.................................................... 238,354 41,926,376
======= ==========
September 30, 1994................................................. 300,813 45,941,369
======= ==========
September 30, 1995................................................. 248,228 31,534,882
======= ==========
September 30, 1996................................................. 312,527 34,763,938
======= ==========
</TABLE>
The revisions of previous estimates result from significant additions of
proved undeveloped and proved developed non-producing reserves.
All of the Company's oil and gas reserves are located in United States.
The following is a standardized measure of discounted future net cash
flows and changes therein relating to estimated proved oil and gas reserves, as
prescribed in Statement of Financial Accounting Standards No. 69. The
standardized measure of discounted future net cash flows does not purport to
present the fair market value of the Company's oil and gas properties. An
estimate of fair value would also take into account, among other factors, the
likelihood of future recoveries of oil and gas in excess of proved reserves,
anticipated future changes in prices of oil and gas and related development and
production costs, a discount factor based on market interest rates in effect at
the date of valuation and the risks inherent in reserve estimates.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Future cash inflows................................................ $138,327 $103,811 $97,098
Future production costs............................................ (46,835) (32,537) (35,994)
Future development costs........................................... (31,195) (22,976) (12,995)
Future income tax expense.......................................... (7,451) (6,829) (5,875)
----------- ----------- --------
Future net cash flows.............................................. 52,846 41,469 42,234
Discount factor of 10% for estimated timing of future cash flows... (28,352) (20,096) (23,769)
---------- ---------- -------
Standardized measure of discounted future cash flows............... $ 24,494 $ 21,373 $18,465
========= ========= =======
</TABLE>
The future cash flows were computed using the applicable year-end prices
and costs and respective year-end statutory tax rates that related to then
existing proved oil and gas reserves in which the Company has mineral interests.
The estimates of future income tax expense are computed at the blended rate
(Federal and state combined) of 36% in 1996 and 40% in 1995 and 1994.
The following were the sources of changes in the standardized measure of
discounted future net cash flows:
-37-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Standardized measure, beginning of year............................. $21,373 $18,465 $26,956
Sale of oil and gas, net of production costs........................ (6,737) (6,354) (5,440)
Net changes in prices............................................... 2,094 4,474 (9,927)
Purchases of reserves in place...................................... - 3,016 -
Changes in estimated future development costs....................... (2,617) (6,158) 5,079
Development costs incurred during the period that reduced future
development costs................................................ - 207 706
Revisions in reserve quantity estimates............................. 10,391 1,601 8,887
Net changes in income taxes......................................... 66 (952) (616)
Accretion of discount............................................... 2,137 1,847 2,696
Other:
Change in timing of production................................... (2,213) 3,566 (5,814)
Other factors.................................................... 1,661 (4,062)
-------- ------- --------
Standardized measure, end of year................................... $24,494 $21,373 $18,465
======= ======= =======
</TABLE>
NOTE 11 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Debt issuance costs.................................................................. $ 487 $ 87
Organization costs................................................................... 805 805
Other................................................................................ 14 12
-------- -----
1,306 904
Less: Accumulated amortization..................................................... (935) (441)
------- -----
$ 371 $463
======= ====
</TABLE>
NOTE 12 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Interest............................................................................. $ 99 $ 391
Employee related costs............................................................... 870 1,003
Taxes, including payroll taxes....................................................... 171 877
Other................................................................................ 735 1,013
-------- -------
$1,875 $3,284
====== ======
</TABLE>
<PAGE>
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Deferred revenue - gas balancing.................................................. $1,623 $1,147
Undistributed revenues - outside interest owners.................................. 1,163 1,468
Suspended revenues - outside interest owners...................................... 679 693
Other............................................................................. 195 15
-------- ---------
$3,660 $3,323
====== ======
</TABLE>
-38-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
NOTE 13 -- ENVIRONMENTAL MATTERS
As noted previously, the purchasers of Powerine and the Indian Refinery
assumed all of the environmental liabilities of Powerine, the Powerine Refinery
and the Indian Refinery. At the time such environmental liabilities were assumed
by the purchasers, their recorded book values were $23,561 for the Powerine
Refinery and $12,500 for the Indian Refinery.
As of November 30, 1996, EMC had not obtained financing and had not
restarted the Powerine Refinery. On November 6, 1996, American Western filed a
voluntary petition for bankruptcy and thereafter obtained bankruptcy court
approval to sell the Indian Refinery to the highest bidder.
Accordingly, although the environmental liabilities related to both of
the Company's Refineries have been assumed by others, there can be no assurance
that the Company or one of its subsidiaries will not be sued for matters related
to environmental liabilities of the Refineries. The purchasers of Powerine and
the Indian Refinery are thinly capitalized and without significant financial
resources. One purchaser, American Western, has filed for bankruptcy and plans
to sell the Indian Refinery to the highest bidder. If either of these companies
fails in such endeavors and they or their successors cannot pay their
environmental liabilities, it is possible that the Company or IRLP (still a
subsidiary of the Company) could become a party in related legal actions.
Although the Company does not believe it has any liabilities with respect to
environmental liabilities of the refineries, a court of competent jurisdiction
may find otherwise and the Company may be required to fund portions of such
liabilities. In recent years, government and other plaintiffs have often sought
redress for environmental damage from the party most capable of payment without
regard to responsibility or fault. Whether or not the Company is ultimately held
liable in such a circumstance, should litigation involving the Company and/or
IRLP occur, the Company would incur substantial legal fees and experience a
diversion of management resources from other operations.
NOTE 14 -- DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
GECC loan........................................................................... $10,488 $33,196
Subordinated debt................................................................... 3,518
Other............................................................................... 2,500
-------- ---------
14,006 35,696
Less: Current portion.............................................................. (8,172) (12,080)
-------- -------
$ 5,834 $23,616
======= =======
</TABLE>
The General Electric Corp. ("GECC") loan was made to two of the
Company's natural gas subsidiaries, Castle Texas Pipeline L.P. ("Pipeline") and
CEC Gas Marketing L.P. ("Marketing"). The GECC loan bore interest of 8.33% and
was secured by a first security interest in all of the assets of Pipeline and
Marketing, as well as a pledge of the partnership interests and capital stock of
the general and limited partners of these partnerships. All of the cash flow
generated by Pipeline and Marketing was dedicated to repayment of the GECC loan.
Subsequent to September 30, 1996, the GECC loan was refinanced
(see Note 24).
In May 1996, the Company entered into a subordinated term loan facility
of $3,800. The loan was subordinated to the GECC Loan, was payable over 18
months and bore interest at the prime rate plus 1%. In November 1996, the
Company entered into a $25,000 facility with a syndicate of banks and the
subordinated lender contributed its loan to the new facility (see Note 24).
-39-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
The balance sheet classification and scheduled maturities of long term
debt at September 30, 1996 are based upon the repayment schedule of the $25,000
facility (see Note 24).
The other long-term debt of $2,500 earned interest at the twelve-month
LIBOR rate determined annually on December 11, plus 1/2%. The debt was due to a
financial institution which was previously a shareholder of the Company. The
debt was repaid in June 1996.
Long-term debt-related party consists of a loan from Stockholder which
earned interest at the twelve-month LIBOR rate determined annually on December
11, plus 1/2%. The debt was due to a stockholder who was also a director of the
Company until January 5, 1996. The debt was repaid in June 1996.
Maturities
The scheduled maturities of long-term debt outstanding as of September
30, 1996 are as follows:
For the Year Ending September 30,
- ---------------------------------
1997.................................................... $ 8,172
1998.................................................... 5,834
---------
$14,006
=========
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has the following noncancellable operating lease commitments
at September 30, 1996:
For the Year Ending September 30,
- ---------------------------------
1997................................................. $227
1998................................................. 189
1999................................................. 34
------
$450
======
Rent expense for the years ended September 30, 1996, 1995 and 1994,
excluding refining related rent expense, was $236, $255 and $255, respectively.
Compensation/Severance Obligations
As of September 30, 1996, the Company had the following compensation
obligations under employment agreements with three officers of three of its
subsidiaries:
For the Year Ending September 30,
- ---------------------------------
1997................................................. $251
1998................................................. 53
------
$304
======
The Company entered into the employment agreements in fiscal 1995 and
fiscal 1996.
In addition, the Company and its subsidiaries have severance agreements
with all of their employees that provide for severance compensation, in the
event substantially all of the Company's assets are sold and the employees are
terminated. Such severance obligations, net of $95 compensation obligations,
approximate $1,000 at September 30, 1996. In addition, in the event of such sale
of substantially all its assets, the Company has agreed to pay the remaining
contractual obligations under its agreement with Terrapin Resources, Inc. (see
below) and to pay its Chairman his accumulated retirement benefit (see Note 16).
-40-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Letters of Credit
At September 30, 1996, the Company had issued letters of credit of $216
for oil and gas drilling, operating and plugging bonds. The letters of credit
are renewed semi-annually or annually.
At September 30, 1996, the Company had also guaranteed gas purchase
obligations related to its gas marketing activities. At the present level of gas
purchases by such subsidiaries, such guarantees approximate $800.
Long Term Supply Commitments
The Company has a gas purchase agreement with MGNG (see Note 20).
Aggregate future purchase commitments under the gas purchase long-term supply
commitment are as follows:
For the Year Ending September 30,
- ---------------------------------
1997............................................... $29,705
1998............................................... 30,444
1999............................................... 20,727
--------
$80,876
========
If MGNG fails to perform its obligations under this contract, there is
no assurance that Marketing could fulfill its obligations under the Lone Star
Contract in a manner which would permit Marketing to maintain its current profit
margin on sales of natural gas.
The Company also has a commitment to sell 7,356 btu's (British thermal
units) of natural gas at a fixed price from June 1, 1996 to May 31, 1999 to
MGNG. The Company anticipates supplying the gas from gas purchases on the spot
market. The Company's obligations to sell natural gas to MGNG at September 30,
1996 are as follows:
For the Year Ending September 30,
- ---------------------------------
BTU's
(British Thermal Units)
-----------------------
1997......................................... 2,452
1998......................................... 2,452
1999......................................... 1,633
-----
6,537
=====
Prior to September 30, 1996, Production entered into fixed price
contracts to hedge 14% of the gas to be sold to MGNG at a fixed price. At
September 30, 1996, the market value of the hedges was approximately $316 and
the excess of the gas sales price to MGNG over the hedged cost was approximately
$136. Production has not yet hedged the other 86% of the gas that must be
delivered to MGNG under the contract. If spot gas prices are above the fixed
price to MGNG, Production could incur a loss when it buys the gas to supply MGNG
on the remaining unhedged volumes. At December 31, 1996, the cost to purchase
fixed price contracts for the remaining unhedged deliveries to MGNG exceeded the
gas sales revenues to be received from MGNG by approximately $825. In addition,
Production has provided a $264 margin account deposit and must provide
additional cash in a margin account if the market price of gas is less than the
fixed price.
The notional amounts of fixed price contracts for natural gas were as
follows:
September 30, 1996
------------------
Fixed price contracts to buy gas........................ $2,070
Fixed price contracts to sell gas....................... (418)
-------
Net..................................................... $1,652
=======
-41-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Management Agreements
The Company has two long-term management agreements with a subsidiary of
Terrapin Resources, Inc. ("Terrapin") to provide accounting and management with
respect to the Company's exploration and production assets and to provide
corporate accounting services. Terrapin is wholly-owned by an officer of the
Company. Obligations under these agreements are as follows:
For the Year Ending September 30,
- ---------------------------------
1997................................................. $ 384
1998................................................. 399
1999................................................. 277
--------
$1,060
========
Lone Star Contract
Additionally, the Company's natural gas marketing and pipeline segment
sells substantially all of its natural gas to only one customer -- Lone Star.
Sales to Lone Star by the Natural Gas Marketing and Transmission segment
aggregated $62,140, $74,675 and $66,393 for the fiscal years ended September 30,
1996, 1995 and 1994, respectively. Approximately 24% of Lone Star's requirements
under the gas sales contract are currently 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
Powerine Arbitration
On April 14, 1995, Powerine repaid all of the indebtedness owed by it to
MGTFC, including $10.8 million of disputed amounts (the "Disputed Amount"). On
the same day, the Company and two of its subsidiaries and MG and two of its
subsidiaries entered into the Payoff Loan and Pledge Agreement ("Payoff
Agreement"), which provided the following:
a. MG released Powerine from all liens and claims.
b. MG loaned the Company $10 million.
c. Powerine transferred its claim with respect to the Disputed Amount
to the Company.
d. The claim with respect to the Disputed Amount was submitted to
binding arbitration (the "Powerine Arbitration").
e. MG can offset the $10 million loan to the Company against the $10
million note it issued to the Company as part of the MG
Settlement, to the extent the arbitrator decides the claim with
respect to the Disputed Amount in MG's favor.
The Disputed Amount relates primarily to disputes over the prices paid
by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's
subsidiary, MGRM, and nonpayment for refined products that were processed after
January 31, 1995 and that MGRM was obligated to, but did not, lift and pay for.
To the extent that the arbitrator decides in favor of the Company, the Company's
note to MG will be reduced and the net amount due to the Company from MG will be
increased. If the arbitrator settles the Disputed Amount entirely in the
Company's favor, the Company's note to MG will be cancelled and MG will still
owe the Company its $10,000 note (due October 14, 1997). If the arbitrator
settles the Disputed Amount entirely in MG's favor, the Company's note from MG
will be discharged and the Company will incur a $10,000 loss from discontinued
refining operations. In such case the Company's future earnings will also be
adversely impacted since the Company has not recorded any reserve against the
note. Although the Company expects to prevail, there can be no assurance such
will be the case.
-42-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
In December 1996, the Company and MG presented oral arguments to the
arbitrator. A decision is expected in the second quarter of fiscal 1997.
In January 1996, MG did not pay interest on the $10,000 note when such
interest was due. As a result, the entire note is due to be paid to the escrow
account for the Powerine Arbitration. The Company is litigating to compel MG to
pay the entire note. By its terms the note is due on October 14, 1997. The
effect of compelling MG to pay the note into the escrow account, if successful,
will be that the note, after adjustment by the Arbitrator, if any, will be paid
to the Company when the Arbitration is concluded rather than on October 14,
1997, the due date before MG's default.
Swap Agreement - MGNG
In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap
Agreement"), dated October 14, 1994 between MGNG and IRLP, claiming the right to
do so based on breaches of other agreements by MG and its affiliates. MGNG
disregarded IRLP's termination notice and sent IRLP a termination notice
alleging IRLP was the defaulting party and claiming approximately $1,200 of
losses. IRLP has refused to pay MGNG's claim. In June 1995, MGRM, as MGNG's
assignee, filed a complaint in Delaware state court, claiming $653, consisting
of $1,356 under the Swap Agreement less $703 owed to IRLP by MGNG in
transactions unrelated to the Swap Agreement, plus interest. IRLP has answered
the complaint. The Company's management believes that IRLP has good defenses to
that claim, expects to prevail and to recover its $703 receivable. This
litigation is related to the Powerine Arbitration (see above) and the Company
expects this litigation to be settled at the same time as or shortly after the
Powerine Arbitration litigation is settled.
Powerine Class Action Lawsuit
In July 1996, Powerine was served with a suit concerning operations of
the Powerine Refinery. 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.
Larry Long Litigation
Larry Long filed a suit against the Company, Production, Pipeline,
Marketing, ARCO, a subsidiary of ARCO and MGNG. The plaintiff claims, among
other things, that the parties being sued have underpaid non-operating working
interest owners, royalty interest owners, and overriding royalty interests
owners with respect to gas production from oil and gas properties operated by
Production and attempts to bring a class action on behalf of all such owners
based upon various legal theories. The plaintiff is seeking recovery of $40,000.
The Company has responded to the lawsuit and has asserted that the suit
is not a proper class action and that the named plaintiff is not an appropriate
class representative. Management of the Company and special counsel retained by
the Company believe that there are a number of meritorious defenses to the
claims being asserted. Among other defenses, the Company has asserted that many
of the matters which form the basis for the plaintiff's claims were resolved
adversely to certain of the members of the purported class in prior litigation
involving the predecessors in title to the Company's subsidiaries. In addition,
the Company believes that the amount claimed by the plaintiff is far in excess
of and not supported by the allegations made. Based upon a review of the
pleadings which have been filed, the Company believes that the claims are
without merit and intends to vigorously defend the lawsuit. The Company has
recently filed a petition for summary judgement against Larry Long. The lawsuit
is currently in discovery and deposition proceedings.
-43-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
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"
in the Consolidated Statement of Operations.
NOTE 16 -- EMPLOYEE BENEFIT PLANS:
On October 1, 1995, the Company adopted a 401(k) plan (the "Plan") for
its employees and those of its subsidiaries. All employees are eligible to
participate.
Employees participating in the Plan could authorize the Company to
contribute up to 15% of their gross compensation to the Plan. The Company
matches such voluntary employee contributions up to 3% of employee gross
compensation. Employees' contributions to the Plan cannot exceed thresholds set
by the Secretary of the Treasury. Vesting of Company contributions is immediate.
During the year ended September 30, 1996, the Company's and its subsidiaries'
contributions to the Plan aggregated $26.
Although the Company's refining subsidiaries sponsored pension, profit
sharing and 401(k) plans for their employees, such plans were transferred to the
purchasers of such refineries and the purchasers assumed all related plan
liabilities.
Post Retirement Benefits
Neither the Company nor its subsidiaries provide any other post
retirement plans for employees. The Company has, however, granted the Company's
Chief Executive Officer a retirement benefit. At September 30, 1996, the Chief
Executive Officer's accrued retirement benefit was $848.
NOTE 17 -- STOCKHOLDERS' EQUITY
On December 2, 1993, the Company consummated a public offering of its
common stock. Pursuant to the terms of the offering, the Company sold 2,800,000
shares of common stock to the public and 700,000 shares of common stock to MG at
a gross offering price of $15.00 per share. 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 was used for general corporate purposes. 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
initially entitles 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. 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 was cancelled and all warrants were subsequently cancelled (see Notes
3, 18 and 20).
-44-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Subsequent to September 30, 1996, the Company repurchased 3,500 of its
shares pursuant to a share repurchase plan (see Note 24).
Pursuant to the terms of its $25,000 credit facility with a syndicate
of banks, the Company's natural gas marketing and transmission and exploration
and production subsidiaries are precluded from paying more than 25% of quarterly
cash flow, as defined, to the parent. The book value of the restricted net
assets of the related natural gas marketing and transmission and exploration and
production subsidiaries aggregated $76,719 at September 30, 1996 (see Note 24).
NOTE 18 -- STOCK OPTIONS AND WARRANTS
Option and warrant activities during each of the three years ended
September 30, 1996 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, 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
Issued..................................... 115,000 115,000
Exercised.................................. (35,000) (35,000)
Expired.................................... (897,500) (25,000) (58,500) (10,000) (991,000)
---------- --------- -------- -------- ------- ---------
Outstanding-September 30, 1995............. 22,500 2,500 67,500 543,834 135,000 771,334
Issued..................................... 10,000 15,000 25,000
Expired.................................... (22,500) (270,834) (15,000) (308,334)
Cancelled.................................. (100,000) (100,000)
------------ --------- ------------ ------------- -------- ----------
Outstanding-September 30, 1996............. - 2,500 77,500 288,000 20,000 388,000
------------ ===== ======= ======= ======== ==========
Exercisable at September 30, 1996 - 2,500 77,500 218,500 20,000 318,500
============ ===== ======= ======= ======== ==========
Become exercisable during fiscal year ended:
September 30, 1997.................. 48,250 48,250
September 30, 1998.................. 20,000 20,000
September 30, 1999.................. 1,250 1,250
--------- ------------
69,500 69,500
======== ===========
Reserved at September 30, 1994............. 920,000 2,500 92,500 562,500 180,000 1,757,500
========== ===== ======= ======= ======= =========
Reserved at September 30, 1995............. 22,500 2,500 67,500 562,500 135,000 790,000
========== ===== ======= ======= ======= ==========
Reserved at September 30, 1996............. - 2,500 77,500 562,500 20,000 662,500
============ ===== ======= ======= ======== ==========
Exercise prices at:
September 30, 1996.................. N/A $6.00 $6.00- $ 8.44- $11.00
$8.00 $ 14.25
September 30, 1995.................. $11.00 $6.00 $6.00 $ 8.50- $11.00-
$ 14.25 $12.25
September 30, 1994.................. $11.00 $6.00 $6.00- $ 10.25 $ 5.75-
$8.50 $ 14.25 $12.25
Exercise Termination Dates.......... N/A 1997 1997-1998 1996-2006 1996-2003
</TABLE>
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
-45-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
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 non-qualified stock options
generally at prices at or in excess of market prices at the date of grant.
The Incentive Plan also provides that each outside director of the
Company will annually be granted an option to purchase 5,000 shares of common
stock at fair market value on the date of grant.
In conjunction with the MG Settlement, certain warrants were cancelled
(see Note 3).
In December 1996, 162,500 options expired, 10,000 options were
exercised and an additional 32,000 options were issued. The exercise price was
the market price on date of issuance.
In addition to stock options and warrants, the Company has issued the
following 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, 1993............... 300,000 180,000 140,833 150,000 36,667 807,500
Exercised................................. (300,000) (67,500) (20,000) (387,500)
Cancelled................................. (13,333) (13,333)
-------- --------- -------- -------- ------- ---------
Outstanding-September 30, 1994............ - 112,500 107,500 150,000 36,667 406,667
Exercised................................. (112,500) (20,000) (132,500)
-------- --------- -------- -------- ------- ---------
Outstanding-September 30, 1995............ - - 87,500 150,000 36,667 274,167
Cancelled................................. (87,500) (150,000) (36,667) (274,167)
-------- --------- -------- -------- ------- ---------
Outstanding-September 30, 1996............ - - - - - -
======== ========= ======== ======== ======= =========
</TABLE>
The stock appreciation rights entitled 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 were
recorded over the relevant period of employment. During the years ended
September 30, 1995 and 1994, the Company recorded (income) expense related to
stock appreciation rights of ($1,162) and $4,848, respectively.
The stock appreciation rights cancelled in fiscal 1996 were cancelled
as part of severance settlements with former officers of the Company and IRLP.
-46-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
NOTE 19 -- INCOME TAXES
Provisions for (benefit of) income taxes consist of:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Provision for (benefit of) income taxes:
Current:
Federal....................................................... $ 300 $ 1,852 $ 2,877
State......................................................... 11 22 549
Deferred:
Federal....................................................... 4,462 20,157 28,702
State......................................................... 128 2,532 (14,827)
Adjustment to the valuation reserve for deferred taxes:
Federal....................................................... (15,712) 29,415 (34,701)
State......................................................... (448) 3,695 17,926
--------- --------- --------
($11,259) $57,673 $ 526
======= ======= =========
Intraperiod tax allocation of tax provision (benefit):
Continuing operations......................................... ($11,259) $37,823 ($17,077)
Discontinued operations....................................... 19,850 17,603
--------- -------- --------
($11,259) $57,673 $ 526
======= ======= ==========
</TABLE>
The intraperiod tax allocation was made pursuant to FAS 109.
Deferred tax assets (liabilities) are comprised of the following at
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
September 30,
------------------------
1996 1995
---- ----
<S> <C> <C>
Operating loss and other tax carryforwards.......................................... $28,098 $23,786
Depletion accounting................................................................ (1,106) (1,398)
Depreciation........................................................................ (5,194) (6,232)
Amortization (gas contracts)........................................................ 1,665 2,553
Discontinued net refining assets, including environmental........................... 1,147 18,557
Installment sale accounting......................................................... - (4,000)
Other............................................................................... (2,950) (3,107)
-------- --------
21,660 30,159
Valuation allowance................................................................. (13,944) (33,110)
-------- -------
$ 7,716 ($ 2,951)
======== ========
Deferred tax assets - current....................................................... $ 2,373 $ 4,623
Deferred tax assets - non-current................................................... 5,343 -
Deferred tax liabilities - non-current.............................................. (7,574)
-------- ---------
$ 7,716 ($ 2,951)
======== ========
</TABLE>
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 approximated the
net tax benefit that the Company expected to realize from its net operating loss
carryforwards as a result of the gain realized from the MG Settlement (See Note
3). As a result of unanticipated delays and larger than expected losses in the
sale of its refineries, the Company did not realize all of its tax
carryforwards. As a result, the Company provided a $31,955 valuation reserve at
-47-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
December 31, 1994 which was subsequently increased to $33,110 at September 30,
1995. During the year ended September 30, 1996, the Company reduced its
valuation reserve to $13,944 in anticipation of future taxable income from the
Lone Star Contract and the decreased probability of additional losses related to
discontinued refining operations.
The Company has recorded a net deferred tax asset of $7,716 at
September 30, 1996. Realization is dependent on generating sufficient taxable
income through the remaining term of the Lone Star Contract. Although
realization is not assured, management believes it is more likely than not that
the deferred tax asset will be realized.
The income tax provision (benefit) differs from the amount computed by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate.............................................. $ 4,835 $25,400 $13,805
State taxes, net of federal benefit................................ 138 4,063 2,371
Non-deductible goodwill amortization............................... 1,855 311
Changes in prior year's estimates.................................. (6,847)
Changes in valuation allowance..................................... (16,160) 33,110 (16,775)
Other.............................................................. (72) 92 814
------- ------- --------
($11,259) $57,673 $ 526
======= ======= ========
</TABLE>
The tax provision (benefit) applicable to discontinued operations -
refining differs from the amount computed by applying the statutory federal
income tax rate to income (loss) before income taxes as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Income (loss) before income taxes - discontinued operations - refining............... $60,787 $40,180
======= =======
Tax (benefit) at statutory rate...................................................... $21,275 $14,063
State taxes, net of federal benefit.................................................. 3,403 2,416
Non-deductible goodwill amortization................................................. 1,855 311
Change in prior year's estimate...................................................... (6,847)
Other................................................................................ 164 813
------- -------
$19,850 $17,603
======= =======
</TABLE>
At September 30, 1996, the Company had the following tax carryforwards
available:
<TABLE>
<CAPTION>
Federal Tax
-----------------------------
Alternative
Minimum
Regular Tax
------- ------------
<S> <C> <C>
Net operating loss................................................................... $58,636 $74,073
Alternative minimum tax credits...................................................... $ 2,176 N/A
Statutory depletion.................................................................. $12,702 $ 3,153
Investment tax credit................................................................ $ 239 N/A
</TABLE>
-48-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
The net operating loss and investment tax credit carryforwards expire
from 1997 through 2008. Of the Company's net operating losses, approximately
$6,821 (approximately $2,341 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 approximately $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, was increased by the amount of net built in gain at the
time of the change of ownership. Such net built-in gain aggregated $219,430.
During fiscal 1995, the Company utilized $81,175 of its net operating loss,
including $72,653 of built-in gain, to offset the gain from the MG Settlement
(see Note 3). During fiscal 1996, the Company utilized $9,657 of its operating
loss, including $1,812 of built-in gain.
The Company also has approximately $61,200 in individual state tax loss
carryforwards available at September 30, 1996. Such carryforwards are primarily
available to offset taxable income apportioned to certain states in which the
Company previously incurred refining losses and currently has only minor
operations and no current plans for future operations.
NOTE 20 -- RELATED PARTIES
During the fiscal year ended September 30, 1994, the Company conducted
several transactions with its principal stockholder, MG, and its subsidiaries.
As a result of the MG Settlement on October 14, 1994, MG's ownership of the
Company was reduced to zero and MG was thereafter no longer a related party. The
following summarizes the MG subsidiaries with which the Company and its
affiliates conducted transactions, and the nature and dollar amount of such
related party transactions.
The MG affiliates and subsidiaries which the Company engaged in
transactions were as follows:
Metallgesellschaft Corp. A.G. ("MG AG"), German parent
Metallgesellschaft Corp. ("MG"), U.S. subsidiary
MG Refining and Marketing, Inc. ("MGRM"), U.S. subsidiary
MG Trade Finance Corp. ("MGTFC"), U.S. subsidiary
MG Futures, Inc. ("MGF"), U.S. subsidiary
MG Natural Gas Corp. ("MGNG"), U.S. subsidiary
MG Gathering Corp ("MGG"), U.S. subsidiary
MGPC Petcoke, Inc. ("MG Petcoke"), U.S. subsidiary
All of the above U.S. subsidiaries are directly or indirectly
wholly-owned by MG which, in turn, is indirectly owned by MG AG.
The fiscal 1994 transactions with MG and its affiliates are as follows:
-49-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Dollar
Volume of
Transaction
Parties Year Ended
- ------------------------------------------ September 30,
Company MG Description 1994
- ---------------------- ------------ ----------- -------------
<S> <C> <C> <C>
IRLP MGTFC Interest paid by IRLP to MGTFC on MGTFC $1,147
Subordinated Note.
IRLP, Indian Powerine MG Payments by IRLP and IPLP to MG for crude oil $50,257
Limited Partnership and feedstock supply.
("IPLP"), a wholly-owned
subsidiary of the Company
IRLP, IPLP & Powerine MG Payments of fees to MG with respect to feedstock $2,614
supply and credit agreements.
IRLP MGRM Payments by MGRM to IRLP under swap (hedging) $3,082
agreement with respect to crude oil.
Powerine MGRM Payments by Powerine to MGRM for the supply of $47,129
crude and oil.
Powerine MG Petcoke Payment by MG Petcoke to Powerine for purchase $2,516
of coke.
IRLP MGTFC Payment by IRLP to MGTFC for lease catalyst $85
costs.
IRLP MGTFC Payment by IRLP to MGRM for natural gas $8,462
supplies.
IRLP, IPLP & Powerine MGF Payments by IRLP, IPLP and Powerine to MGF for $292
brokerage services for hedging activities.
IRLP MGRM Payments received by IRLP for sales of refined $498,225
products to MGRM under the Indian Offtake
Agreement.
Powerine MGRM Payments received by Powerine for sales of refined $348,751
products to MGRM under Powerine Offtake
Agreement.
IRLP MGRM Payments by MGRM to IRLP for IRLP's operating $11,899
the Indian Refinery at less than full capacity.
Pipeline MGG Pipeline paid MGG for pipeline management $148
services.
Marketing MGNG Marketing paid MGNG for gas marketing services. $240
Marketing MGNG Marketing paid MGNG for gas supplies under a $31,069
long-term gas supply agreement
</TABLE>
In addition to the above-related party transactions with MG and its
affiliates, the Company undertook the following related party transactions:
-50-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Sale of Subsidiaries
On March 31, 1993, the Company entered into an agreement to sell to
Terrapin Resources, Inc. ("Terrapin") its oil and gas partnership management
businesses for $1,100 ($800 note bearing interest at 8% per annum and $300 cash)
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. In November 1994, this former officer and director
rejoined the Company as an officer. In December 1994, the note was repaid.
In conjunction with the sale of its partnership management business,
the Company and Production entered into two management agreements with Terrapin
to manage its exploration and production operations. The second agreement was
amended in 1996 to include corporate accounting functions. Management fees
incurred to Terrapin for the years ended September 30, 1996, 1995 and 1994
aggregated $613, $579 and $584, respectively.
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 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. In November 1994, 112,500 stock
appreciation rights were exercised for $1,026 and the remaining 150,000 stock
appreciation rights were surrendered as part of the Company's severance
agreement with the officer for $500.
Professional Fees
A former officer of the Company is also a partner in a law firm which
served as general counsel to the Company. Legal fees incurred by the Company to
this firm during the years ended September 30, 1996, 1995 and 1994 were $307,
$2,593 and $5,101, respectively. The officer resigned on June 5, 1995.
A former member of the Board of Directors is also a partner in a law
firm which currently serves as general counsel for the Company. Legal fees
incurred by the Company to this firm during fiscal 1996, 1995 and 1994
approximated $317, $1,225 and $806, respectively. The partner in the law firm
resigned as a director of the Company on October 6, 1995.
Loan to Officer
On February 26, 1993, an officer of IRLP was loaned $250. The principal
amount of the loan was due and payable in full on the earlier of January 31,
1996 or the termination of the officer's employment. The loan accrued interest
at the prime rate in effect on the date of the loan as adjusted each January 1.
The officer terminated his employment on December 22, 1995. The loan and accrued
interest was offset against compensation due to the officer as part of the
officer's severance. In addition, the officer surrendered all stock appreciation
rights which he held.
CORE, Inc.
In the first quarter of fiscal 1995, the Company decided to dispose of
its refining operations. During the period from October 14, 1994 to September
29, 1995, the Company financed three attempts to sell one or both of its
refineries to CORE Refining Corporation ("CORE") (previously SIPAC, Inc.). CORE
is wholly-owned by a director of the Company. The director was also the
President and Chief Operating Officer of the Company until January 1996.
Pursuant to several agreements with CORE, the Company agreed to reimburse CORE
for certain expenses incurred by CORE in attempting to raise financing for a
management buyout of one or both of the Company's Refineries. Such agreements
with CORE also provided that the Company would be reimbursed for most of such
funding should CORE succeed in raising financing. In September 1995, the third
CORE attempt to obtain financing for the management buyout failed. During the
year ended September 30, 1995, IRLP recorded $3,768 of expenses related to CORE.
The Company is not responsible for any CORE expenses incurred after September
29, 1995.
-51-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Payment of Legal Fees for Former Director
In conjunction with the MG Settlement, the Company paid legal fees
incurred by a director of the Company. For the years ended September 30, 1996,
1995 and 1994, such fees were $3, $327 and $191, respectively. The director
resigned in June 1995.
NOTE 21 -- 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. On December 3, 1992, the Company
entered a third segment of the petroleum business - natural gas marketing. The
Company disposed of its partnership administration business in June 1993 but
continued its exploration and production business. As a result of the foregoing,
the Company operated in three segments of the petroleum business during the
fiscal years ended September 30, 1995 and 1994 - refining, natural gas marketing
and transmission and exploration and production. As of September 30, 1995, the
Company had disposed of its refining segment (see Note 3) and thus operated in
only two business segments in fiscal 1996 - natural gas marketing and
transmission and exploration and production.
<TABLE>
<CAPTION>
Year Ended September 30, 1996
--------------------------------------------------------------------------------------------
Natural Gas Oil & Gas Eliminations
Marketing Exploration and
and and Refining Corporate
Transmission Production (Discontinued) Items Consolidated
------------ ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues........................... $63,789 $ 9,224 ($ 4,318) $ 68,695
Operating income (loss)............ 11,769 3,620 (3,499) 11,890
Identifiable assets................ 58,368 27,281 15,581 101,230
Capital expenditures............... 140 34 1 175
Depreciation, depletion and
amortization.................... 11,393 2,324 251 13,968
Year Ended September 30, 1995
-------------------------------------------------------------------------------------------
Natural Gas Oil & Gas Eliminations
Marketing Exploration and
and and Refining Corporate
Transmission Production (Discontinued) Items Consolidated
------------ ----------- -------------- ------------ ------------
Revenues........................... $74,675 $ 9,197 ($ 4,273) $ 79,599
Operating income (loss)............ 16,867 2,991 (4,995) 14,863
Identifiable assets................ 72,724 25,272 18,908 116,904
Capital expenditures............... 47 4,022 $35,355 4 39,428
Depreciation, depletion and
amortization.................... 11,385 2,770 77 14,232
</TABLE>
-52-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended September 30, 1994
--------------------------------------------------------------------------------------------
Natural Gas Oil & Gas Eliminations
Marketing Exploration and
and and Refining Corporate
Transmission Production (Discontinued) Items Consolidated
------------ ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues........................... $66,424 $ 8,552 ($ 5,165) $ 69,811
Operating income (loss)............ 10,643 2,402 (5,499) 7,546
Identifiable assets................ 80,560 19,714 $469,149 77,068 646,491
Capital expenditures............... 21 956 218,088 346 219,411(1)
Depreciation, depletion and
amortization.................... 11,360 2,092 66 13,518
</TABLE>
- ----------------
(1) Includes $152,945 of additions related to the acquisition of Powerine.
NOTE 22 -- 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.
Note receivable - MG - at September 30, 1996, the Company had the
following long-term note receivable:
Note - MG $10,000 8%
The Company believes the interest rate on the note approximates the
market value given the guarantee of the note by MG AG.
Debt -- At September 30, 1996, the Company had the following debt with
interest rates which were fixed:
GECC Loan............................. $10,488 8.33%
Subordinated Loan..................... $ 3,518 Prime plus 1%
The Company has recently conducted negotiations with prospective lenders
and has ascertained that an interest rate of approximately 9.25% would have been
likely if the Company were to have refinanced the GECC loan at September 30,
1996. Accordingly, the estimated fair market value of the GECC loan at September
30, 1996, based upon an interest rate of 9.25%, and anticipated future cash
flows, is approximately $10,472.
All other debt is at rates tied to market indices and is considered to be
stated at fair value.
Hedges -- At September 30, 1996, the Company had hedged approximately 910
btu of gas that it expects to purchase to sell to MGNG. The book value of such
hedges is zero. The fair market value, based upon the market value of the
related fixed price hedge contracts, was $316 at September 30, 1996.
Other Current Assets and Current Liabilities - the Company believes that
the book values of other current assets and current liabilities approximate the
market values.
-53-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
NOTE 23 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following information has been restated to reflect the discontinuance
of refining operations, retroactively.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(December 31) (March 31) (June 30) (September 30)
------------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Fiscal 1996:
Revenues.................................. $18,042 $22,424 $16,616 $11,613
Operating income before interest and
income taxes............................ 3,226 5,365 1,415 1,884
Net income................................ 5,494 5,134 1,816 12,630
Net income per share...................... $ .82 $ .76 $ .27 $ 1.88
</TABLE>
Net income for the quarter ended September 30, 1996 includes an $11,259
tax benefit related to a change in the valuation reserve for deferred tax assets
(see Note 2 and 19).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(December 31) (March 31) (June 30) (September 30)
------------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Fiscal 1995:
Revenues................................ $22,414 $22,915 $20,766 $13,504
Operating income before interest and
income taxes......................... 4,784 5,253 4,383 443
Net income (loss)....................... 14,084 36 (1,873) 2,650
Net income (loss) per share............. $ 1.97 $ 0.01 ($ 0.28) $ .39
</TABLE>
See Note 3 for a discussion of the first quarter gain on the MG
Settlement and the quarterly adjustments to the carrying value of net refining
assets. Changes in the valuation reserve for deferred tax assets are discussed
in Note 19.
The sum of the quarterly per share amounts ($2.09) differs from the
annual per share amount ($2.20) primarily because of the 969,000 shares of the
Company's common stock acquired on October 14, 1994 as part of the MG Settlement
(see Note 3).
NOTE 24 -- SUBSEQUENT EVENTS
Refinancing of GECC Debt
On November 26, 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 calculated values for the
Lone Star Contract 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 $15,000 and is repayable at $500 per month with a
balloon payment of remaining principal on May 31, 1999. The revolving credit and
term loan facilities bear interest at the prime rate plus 1% and are secured by
all of the Company's natural gas marketing and exploration and production
assets, as well as the stock and partnership interests of its natural gas
marketing and exploration and production subsidiaries. The proceeds of the
$25,000 credit facility are to be used to repay the GECC loan, to finance
drilling of the Company's Texas properties and for other capital projects. In
addition, up to $11,000 can be used to repurchase the Company's stock. The
credit facility also contains working capital and tangible net worth covenants.
-54-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
As of December 1, 1996, $11,126 was outstanding under the new facility,
consisting of $7,592 used to repay the GECC loan, $3,409 contributed by the
subordinated lender and a $125 facility fee paid to the bank syndicate.
Repurchase of Shares
In October 1996, the Company announced a plan to repurchase up to
1,000,000 of its shares. Subsequently, the Company repurchased 3,500 of its
shares on the open market for $31.
Termination of MG Management Agreements
In December 1996, the Company informed MG of its intention to terminate
its pipeline management and gas services agreements with subsidiaries of MG.
These agreements are to be terminated January 31, 1997 and the Company intends
to perform these functions internally.
Stock Options
In December 1996, 162,500 options expired, 10,000 options were
exercised and an additional 32,000 options were issued (see Note 18).
-55-
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
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, 1996, 1995 and 1994 and for the three
periods then ended.
CASTLE ENERGY CORPORATION
CONDENSED BALANCE SHEETS
("000's" Omitted, except share amounts)
<TABLE>
<CAPTION>
September 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash......................................................................... $ 1,322 $ 6,067
Accounts receivable.......................................................... 4
Deferred income taxes........................................................ 2,373 4,623
Other assets................................................................. 140
------- -------
Total current assets.................................................. 3,699 10,830
Deferred income taxes........................................................... 5,343
Investment (accumulated losses in excess of investment) in subsidiaries:........
Exploration and production................................................... 11,932 9,650
Refining (discontinued)...................................................... (9,842) 38,478
Natural gas marketing and transmission....................................... 43,988 34,462
CEC Inc...................................................................... 1,587 759
Intercompany advances........................................................... 28,949
Other assets.................................................................... 545 300
------- -------
Total assets.......................................................... $86,201 $94,479
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - long-term debt............................................. $ 1,200 $ 2,750
Accounts payable and accrued expenses........................................ 809 7,337
Income taxes payable......................................................... 507
------- -------
Total current liabilities............................................. 2,009 10,594
Long-term debt - intercompany................................................ 12,042 34,674
Long-term debt............................................................... 2,317
Other liabilities............................................................ 3,122
Deferred income taxes........................................................ 7,574
------- -------
Total liabilities..................................................... 19,490 52,842
------- -------
Stockholders' equity:
Series B participating preferred stock; par value - $1.00; 10,000,000 shares
authorized, no shares issued Common stock, $.50; 25,000,000 shares
authorized; 6,693,646, 6,693,646 and 7,627,646 shares issued and
outstanding in 1996,
1995 and 1994, respectively.............................................. 3,347 3,347
Additional paid-in capital................................................... 66,316 66,316
Accumulated deficit.......................................................... (2,952) (28,026)
------- -------
66,711 41,637
------- -------
Total liabilities and stockholders' equity (deficit).................. $86,201 $94,479
======= =======
</TABLE>
-56-
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED STATEMENTS OF OPERATIONS
("000's" Omitted)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Other income............................................................ $ 3,341
Oil and gas sales....................................................... $ 9 $ 15
Management fees......................................................... 600 3,640 4,956
Interest/dividend income................................................ 78 5,352 3,354
-------- --------- --------
4,019 9,001 8,325
-------- --------- --------
Costs and expenses:
General and administrative.............................................. 2,398 6,820 10,631
Oil and gas production.................................................. 6 6
Interest expense........................................................ 192 3,633 2,608
Depreciation, depletion and amortization................................ 250 77 66
Other................................................................... 1,909 541
-------- --------- --------
2,840 12,445 13,852
-------- --------- --------
Income (loss) before equity in undistributed earnings (losses) of
subsidiaries and provision for (benefit of) income taxes................ 1,179 (3,444) (5,527)
Equity in undistributed earnings (losses) of subsidiaries:
Exploration and production.............................................. 2,282 248 (111)
Refining (discontinued)................................................. 44,866 38,537
Natural gas transmission and marketing.................................. 9,526 25,636 4,087
CEC, Inc................................................................ 828 759
-------- --------- --------
13,815 68,065 36,986
Provision for (benefit of) income taxes.................................... (11,259) 53,168 (1,931)
-------- --------- --------
Net income................................................................. $25,074 $14,897 $38,917
======== ========= ========
</TABLE>
-57-
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED STATEMENTS OF CASH FLOWS
("000's" Omitted)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before equity in undistributed earnings of
subsidiaries and provision for (benefit of) income taxes............ $12,438 ($56,613) ($ 3,596)
------- --------- ----------
Adjustment to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization............................. 250 77 66
Deferred income taxes................................................ 10,667 52,027 39
Changes in assets and liabilities:
(Increase) decrease in accounts receivable........................... (4) 2,673 (1,815)
(Increase) decrease in other assets.................................. 131 (129) 1,482
Increase (decrease) in accounts payable, accrued expenses............ (7,035) 2,850 (795)
(Decrease) in other liabilities...................................... 3,122 (1,100)
------- --------- ----------
Total adjustments................................................. 7,131 57,498 (2,123)
------- --------- ----------
Net cash flows provided by operating activities................... 19,569 885 (5,719)
------- --------- ----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Proceeds of sale of subsidiaries......................................... 1,000
Proceeds from sale of fixed assets....................................... 10
Purchase of furniture, fixtures and equipment............................ (1) (3) (348)
Business acquisition, net of cash acquired............................... (8,230)
------- --------- ----------
Net cash provided by (used in) investing activities............... 999 7 (8,578)
------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net.............................. 202 48,207
Proceeds of long-term debt............................................... 3,800
Repayment of long-term debt, including intercompany debt................. (25,665)
Payment of debt issuance costs........................................... (486)
Investment in subsidiaries............................................... 3,590 (17,300)
Intercompany (advances) loans............................................ (2,962) (8,346) (7,290)
------- --------- ----------
Net cash provided by (used in) financing activities............... (25,313) (4,554) 23,617
------- --------- ----------
Net increase (decrease) in cash and cash equivalents........................ (4,745) (3,662) 9,320
Cash and cash equivalents - beginning of period............................. 6,067 9,729 409
------- --------- ----------
Cash and cash equivalents - end of period................................... $ 1,322 $ 6,067 $ 9,729
======= ======== =========
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
=========
Exchange of common stock:
Acquisition of common stock in exchange for reduction in cash $ 39,817
participations................................................ =========
</TABLE>
-58-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
CASTLE ENERGY CORPORATION
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Castle
Energy Corporation and its subsidiaries at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial 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 the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
January 9, 1997
-59-
<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, 1996, 1995 or 1994 which will be
filed with the Securities Exchange Commission pursuant to Rule 14g-6 under the
Securities Exchange Act of 1934.
-60-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**
ITEM 11. EXECUTIVE COMPENSATION**
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
- --------------
** The information required by Item 10, 11, 12 and 13 are incorporated by
reference to the Registrant's Proxy Statement for its 1997 Annual Meeting
of Stockholders.
-61-
<PAGE>
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 Purchase and Sale Agreement, dated September 3, 1992, by and among Castle Energy Corporation,
Atlantic Richfield Company, Tabasco Gas Pipe Line Company and B&A Marketing Company(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)
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)
</TABLE>
-62-
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
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 Consent and Agreement, dated May 27, 1993, between Shell Canada Limited and Salmon Resources
Ltd. and Societe Generale, Southwest Agency(8)
10.22 Consent, dated May 27, 1993, between Texaco Pipeline, Inc. and Societe Generale, Southwest
Agency(8)
10.23 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)
10.24 Bonus Payment Rights Agreement, dated November 20, 1992, among Indian Refining Limited
Partnership, Indian Refining & Marketing Inc. and William S. Sudhaus(8)
10.25 Bonus Payment Rights Agreement, dated June 21, 1993, among Indian Refining Limited Partnership,
Indian Refining & Marketing Inc. and William S. Sudhaus(8)
10.26 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)
10.27 Employment Agreement, dated October 1, 1991, among John D.R. Wright, III, Indian Refining
Management Company and Indian Refining Limited Partnership(3)
10.28 Amendment to Agreement, dated February 25, 1993, between Indian Refining & Marketing Inc.,
Indian Refining Limited Partnership and John D.R. Wright, III(8)
10.29 Bonus Payment Rights Agreement, dated October 1, 1991, among Indian Refining Management
Company, Indian Refining Limited Partnership and John D.R. Wright, III(3)
10.30 Letter Agreement, dated February 25, 1993, between John D.R. Wright, III and Indian Refining &
Marketing Inc.(8)
10.31 Management Agreement, dated July 1, 1993, between Castle Energy Corporation and Terrapin
Resources, Inc.(8)
10.32 Consent Order, dated May 14, 1992, between Indian Refining Company and the Illinois
Environmental Protection Agency(5)
10.33 Castle Energy Corporation 1992 Executive Equity Incentive Plan(8)
10.34 First Amendment to Castle Energy Corporation 1992 Executive Equity Incentive Plan, effective
May 11, 1993(8)
10.35 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)
</TABLE>
-63-
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
10.36 Letter Guarantee, dated August 31, 1993, between Metallgesellschaft AG, CEC Gas Marketing
Limited Partnership and General Electric Capital Corporation(8)
10.37 Amended and Restated Gas Purchase Contract, dated as of August 1, 1993, between MG Natural Gas
Corp. and CEC Gas Marketing Limited Partnership(8)
10.38 Offtake Agreement, dated as of October 1, 1993, by and between MG Refining and Marketing, Inc.
and Powerine Oil Company(8)
10.39 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)
10.40 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)
10.41 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)
10.42 Second Amended and Restated Offtake Agreement, dated as of October 1, 1993, between MG
Refining and Marketing, Inc. and Indian Refining Limited Partnership(8)
10.43 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)
10.44 First Allonge to Subordinated Note, dated as of October 1, 1993, by Indian Refining Limited
Partnership in favor of MG Trade Finance Corp.(8)
10.45 Guaranty, dated as of October 1, 1993, by Castle Energy Corporation for the benefit of MG Trade
Finance Corp.(8)
10.46 Purchase Money Security Agreement, dated as of October 1, 1993, between Indian Powerine L.P. and
MG Trade Finance Corp.(8)
10.47 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)
10.48 Amended and Restated Loan Agreement, dated as of October 1, 1993, between Powerine Oil
Company and MG Trade Finance Corp.(8)
10.49 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)
10.50 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)
10.51 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)
10.52 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)
10.53 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)
10.54 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)
10.55 Guaranty, dated as of October 1, 1993, by Castle Energy Corporation for the benefit of MG Trade
Finance Corp.(8)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
10.56 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)
10.57 Subordinated Offtake Note, dated as of October 1, 1993, by Powerine Oil Company in favor of MG
Refining and Marketing, Inc.(8)
10.58 Security Agreement, dated as of October 1, 1993, by Powerine Oil Company in favor of MG Refining
and Marketing, Inc.(8)
10.59 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)
10.60 Letter agreement (re Natural Gas Swap), dated September 30, 1993, between Metallgesellschaft Corp.
and Castle Texas Production Limited Partnership(8)
10.61 Letter agreement (re Gas Purchase Contract), dated September 30, 1993, between Castle Texas
Production Limited Partnership and MG Natural Gas Corp.(8)
10.62 Crude Oil Forward Sale Contract, dated September 28, 1993, between Indian Powerine L.P. and
Percolin Limited(8)
10.63 Confirmation of Crude Oil Forward Sale, dated September 29, 1993, between Indian Powerine L.P.
and Percolin Limited(8)
10.64 Side Letter Agreement, dated September 28, 1993, between Indian Powerine L.P. and Percolin
Limited(8)
10.65 Crude Oil Forward Sale Contract, dated September 28, 1993, between Indian Powerine L.P. and MG
Refining and Marketing, Inc.(8)
10.66 Confirmation of Crude Oil Forward Sale, dated September 29, 1993, between Indian Powerine L.P.
and MG Refining and Marketing, Inc.(8)
10.67 Pledge and Security Agreement, dated October 1, 1993, by Indian Powerine L.P. in favor of
Powerine Oil Company(8)
10.68 Employment Agreement, dated as of January 1, 1994, by and between Castle Energy Corporation and
Joseph L. Castle II(11)
10.69 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)
10.70 Letter Agreement, dated February 12, 1992, by and between Indian Refining and Marketing Inc. and
David Hermes(15)
10.71 Bonus Payments Rights Agreement, dated February 12, 1992, by and among Indian Refining and
Marketing Inc., Indian Refining Limited Partnership and David Hermes(15)
10.72 Letter Agreement, dated March 1, 1993, between Indian Refining and Marketing Inc. and David
Hermes(15)
10.73 Letter Agreement, dated March 2, 1994, between Indian Refining and Marketing Inc. and David
Hermes(15)
10.74 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)
10.75 Employment Agreement, dated April 1, 1994, by and between Powerine Oil Company and Albert L.
Gualtieri, Jr.(15)
10.76 Stock Purchase Agreement, dated August 31, 1994, among MG Trade Finance Corp.,
Metallgesellschaft Corp., Indian Powerine L.P. and Castle Energy Corporation (12)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
10.77 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)
10.78 Amendment to the Amended and Restated Offtake Agreement, dated October 14, 1994, between MG
Refining and Marketing, Inc. and Indian Refining Limited Partnership(15)
10.79 Amendment to the Offtake Agreement, dated October 14, 1994, between MG Trade Finance Corp.
and Powerine Oil Company(15)
10.80 First Amendment to the Amended and Restated Loan Agreement, dated October 14, 1994, between
Powerine Oil Company and MG Trade Finance Corp.(15)
10.81 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)
10.82 Crude Oil Forward Sale Contract, dated October 14, 1994, between Percolin Limited and MG
Refining and Marketing, Inc.(13)
10.83 Crude Oil Sale Contract, dated October 14, 1994, between Indian Powerine L.P. and MG Refining
and Marketing, Inc.(13)
10.84 Natural Gas Swap Agreement, dated October 14, 1994, between MG Natural Gas Corp. and Indian
Refining Limited Partnership(13)
10.85 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)
10.86 Pledge Agreement (Partnership Interests), dated October 14, 1994, between Castle Energy
Corporation and MG Trade Finance Corp.(13)
10.87 Pledge Agreement (Capital Stock), dated October 14, 1994, among Castle Energy Corporation,
Powerine Holding Company and MG Trade Finance Corp.(13)
10.88 Stock Option Agreement, dated October 14, 1994, among Castle Energy Corporation, Powerine
Holding Company and Powerine Oil Company(13)
10.89 Assignment Agreement, dated October 14, 1994, among Powerine Holding Company, Powerine Oil
Company, Castle Energy Corporation and Wilmington Trust Company(13)
10.90 Stock Option Agreement, dated October 14, 1994, between Castle Energy Corporation and Indian
Refining & Marketing Inc.(13)
10.91 Assignment Agreement, dated October 14, 1994, among Castle Energy Corporation, Indian Refining
& Marketing Inc. and Wilmington Trust Company(13)
10.92 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)
10.93 Petroleum Coke Purchase and Sales Agreement between Powerine Oil Company and MGPC Petcoke,
Inc., dated as of January 1, 1994(15)
10.94 August 30, 1994 Letter Agreement between Castle Energy Corporation and ARCO regarding the
Purchase of the Oak Hill Production Payment(16)
10.95 Letter Agreement, dated February 21, 1995, between William S. Sudhaus and Castle Energy
Corporation(17)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
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<S> <C>
10.96 Letter Agreement, dated February 24, 1995, between William S. Sudhaus and Castle Energy
Corporation(17)
10.97 Powerine Petroleum Sale and Storage Agreement, dated April 8, 1995, between Wickland Oil
Company and Powerine Oil Company(17)
10.98 The Castle Agreement, dated April 8, 1995, among Wickland Oil Company, Castle Energy
Corporation, and Indian Powerine L.P.(17)
10.99 Security Agreement, dated April 8, 1995, between Powerine Oil Company and Wickland Oil
Company(17)
10.100 Supplemental Letter Agreement, dated April 13, 1995, between Powerine Oil Company and Wickland
Oil Company amending the Powerine Petroleum Sale and Storage Agreement(17)
10.101 Payoff Loan and Pledge Agreement, dated April 13, 1995, among Powerine Oil Company, CEC, Inc.,
Castle Energy Corporation, Metallgesellschaft Corp., MG Refining & Marketing, Inc., and MG Trade
Finance Corp.(17)
10.102 Promissory Note, dated April 13, 1995, by CEC, Inc. in favor of Metallgesellschaft Corp., in the
principal amount of $10,000,000(17)
10.103 Letter Agreement, dated May 10, 1995, between John D. R. Wright and Castle Energy
Corporation(17)
10.104 Letter Agreement, dated May 10, 1995, between William S. Sudhaus and Castle Energy Corporation
(17)
10.105 Payoff Agreement, dated May 25, 1995, between Indian Refining Limited Partnership, Indian
Refining & Marketing, Inc., Castle Energy Corporation, Indian Powerine L.P., Metallgesellschaft
Corp., MG Refining and Marketing, Inc., and MG Trade Finance Corp.(17)
10.106 Supplemental Letter Agreement, dated June 1, 1995, between Powerine Oil Company, Castle Energy
Corporation, Indian Powerine L.P., CEC, Inc. and Wickland Oil Company to the Powerine Petroleum
Sale and Storage Agreement(17)
10.107 Supplemental Letter Agreement, dated June 30, 1995, between Powerine Oil Company, Castle Energy
Corporation, Indian Powerine L.P., CEC, Inc. and Wickland Oil Company to the Powerine Petroleum
Sale and Storage Agreement(17)
10.108 Line of Credit Agreement, dated May 25, 1995, between Indian Oil Company, BT Commercial Corporation,
MeesPierson N.V., and Bankers Trust Company(17)
10.109 Borrower Security Agreement, dated May 25, 1995, by Indian Oil Company in favor of BT
Commercial Corporation(17)
10.110 Guaranty Agreement, dated May 25, 1995, made by Castle Energy Corporation, Castle Production
Resource Company, and Castle Production Company in favor of BT Commercial Corporation(17)
10.111 Stock and Asset Purchase Agreement, dated November 21, 1995, among Castle Energy Corporation,
Indian Refining I, Limited Partnership, Indian Refining and Marketing I, Inc. and AM West G.P.,
Inc.(18)
10.112 Agreement and Plan of Merger by and among Energy Merchant Corp., POC Acquisition Corporation,
Powerine Holding Corp., Castle Energy Corporation and Powerine Oil Company, dated January 10,
1996.(18)
10.113 Letter Agreement, dated January 3, 1996, among Castle Energy Corporation, Indian Refining and
Marketing I, Inc., Powerine Oil Company, Indian Refining I., L.P. and William S. Sudhaus regarding
Mr. Sudhaus' resignation.(18)
10.114 Letter Agreement, dated January 22, 1996, among Castle Energy Corporation, Powerine Oil
Company, Indian Refining and Marketing I, Inc., IP Oil Company and David M. Hermes regarding
Mr. Hermes' resignation.(18)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
10.115 Letter Agreement, dated January 29, 1996, between Indian Refining and Marketing Company, Indian
Refining & Marketing Inc., Indian Refining Limited Partnership and John D. R. Wright III regarding
Mr. Wright's termination.(18)
10.116 Amendment No. 1 to Stock and Asset Purchase Agreement Dated as of November 21, 1995.(18)
10.117 Loan Agreement among Castle Exploration Company, Inc.; Castle Texas Production Limited
Partnership; Castle Texas Pipeline Limited Partnership; and CEC Gas Marketing Limited Partnership, as
Borrowers, Castle Pipeline Company; CEC Marketing Company and Castle Production Company, as General
Partners, Castle Energy Corporation and Commercial National Bank in Shreveport as of April 30, 1996
10.118 First Amendment to Loan Agreement, dated November 8, 1996, Castle Exploration Company, Inc.;
Castle Texas Production Limited Partnership; Castle Texas Pipeline Limited Partnership; and CEC
Gas Marketing Limited Partnership, as Borrowers, Castle Pipeline Company; CEC Marketing
Company and Castle Production Company, as General Partners, Castle Energy Corporation and
Commercial National Bank in Shreveport
10.119 Amended and Restated Loan Agreement, dated November 26, 1996, among Commercial National
Bank in Shreveport, As Agent, the Several Financial Institutions From Time to Time thereto, and
Castle Exploration Company, Inc.; Castle Texas Production Limited Partnership; Castle Texas
Pipeline Limited Partnership; and CEC Gas Marketing Limited Partnership, as Borrowers, Castle
Pipeline Company; CEC Marketing Company and Castle Production Company, as General Partners,
and Castle Energy Corporation
11.1 Statement re: Computation of Earnings Per Share
21 List of subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Ryder Scott Company
23.3 Consent of Huntley & Huntley
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
Company's fiscal year ended September 30, 1996.
<TABLE>
<CAPTION>
- --------------
<S> <C>
** 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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(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.
(16) Incorporated by reference to the Registrant's Form 10-Q for the first quarter ended December 31, 1994.
(17) Incorporated by reference to the Registrant's Form 10-Q for the third quarter ended June 30, 1995.
(18) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1995.
</TABLE>
-69-
<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: January 3, 1997 By:/s/JOSEPH L. CASTLE II
----------------------
Joseph L. Castle II
Chairman of the Board
and Chief Executive Officer
Date: January 2, 1997 By:/s/RICHARD E. STAEDTLER
-----------------------
Richard E. Staedtler
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
/s/JOSEPH L. CASTLE II Chairman of the Board January 3, 1997
- ----------------------
Joseph L. Castle II
/s/MARTIN R. HOFFMANN Director January 7, 1997
- ----------------------
Martin R. Hoffmann
/s/WILLIAM S. SUDHAUS Director January 3, 1997
- ----------------------
William S. Sudhaus
/s/SIDNEY F. WENTZ Director January 3, 1997
- ----------------------
Sidney F. Wentz
-70-
<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
(December 31, 1996)
JOSEPH L. CASTLE II WILLIAM S. SUDHAUS
Director Director
Chairman & Chief Executive Officer President of TALON Resources
MARTIN R. HOFFMANN SIDNEY F. WENTZ
Director Director
Of Counsel to Washington, D.C. Chairman of The Robert Wood Johnson
Office of Skadden, Arps, Slate, Foundation
Meagher & Flom
OPERATING OFFICERS
JOSEPH L. CASTLE II RICHARD E. STAEDTLER
Chairman & Chief Executive Officer Chief Financial Officer
Chief Accounting Officer
<PAGE>
PRINCIPAL OFFICES
Headquarters Drilling And Operating
Castle Energy Corporation Castle Exploration Company, Inc.
One Radnor Corporate Center 1815 Washington Road
Suite 250 Pittsburgh, PA 15241-1423
100 Matsonford Road
Radnor, PA 19087
Exploration And Production Natural Gas Transmission and
Marketing
Castle Texas Production Limited Partnership Castle Texas Pipeline Limited
2410 State Highway, 322 North Partnership
Henderson, Texas 75652 2410 State Highway, 322 North
Henderson, Texas 75652
CEC Gas Marketing Limited
Partnership
2410 State Highway, 322 North
Henderson, Texas 75652
AGENTS
Counsel Independent Reservoir Engineers
Duane, Morris & Heckscher Huntley & Huntley, Inc.
One Liberty Place, 42nd Floor 340 Mansfield Avenue
Philadelphia, PA 19103-7396 Pittsburgh, PA 15220
Independent Accountants Ryder Scott Company Petroleum
Engineers
600 Seventeenth Street, Suite 900N
Price Waterhouse LLP Denver, Colorado 80202
Thirty South Seventeenth Street
Philadelphia, PA 19103
Registrant and Transfer Agent
American Stock Transfer
40 Wall Street, 46th Floor
New York, New York 10005
<PAGE>
Exhibit 10.117
- ------------------------------------------------------------------------------
LOAN AGREEMENT
among
CASTLE EXPLORATION COMPANY, INC.,
CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP,
CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP,
CEC GAS MARKETING LIMITED PARTNERSHIP,
as Borrowers,
CASTLE PIPELINE COMPANY,
CEC MARKETING COMPANY,
CASTLE PRODUCTION COMPANY,
as General Partners,
CASTLE ENERGY CORPORATION,
and
COMMERCIAL NATIONAL BANK IN SHREVEPORT,
Dated as of April 30, 1996
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
SECTION 1. DEFINITIONS.......................................................... 1
SECTION 2. AMOUNT AND TERM OF TERM LOAN......................................... 2
2.1 Term Loan..................................................... 2
2.2 Term Note..................................................... 2
2.3 Use of Proceeds............................................... 2
2.4 Prepayments................................................... 2
2.5 Interest Rate and Payment Dates............................... 3
2.6 Payments and Payment Dates.................................... 3
2.7 Computation of Interest and Fees.............................. 4
2.8 Applicable Law................................................ 4
2.9 Joint and Several Obligations................................. 4
2.10 Commitment Fee................................................ 4
SECTION 3. REPRESENTATIONS AND WARRANTIES....................................... 4
3.1 Financial Statements.......................................... 4
3.2 Corporate Existence and Business.............................. 5
3.3 Subsidiaries.................................................. 6
3.4 Compliance with Law........................................... 6
3.5 Power and Authorization; Enforceable Obligations.............. 6
3.6 Governmental Approvals and Other Consents and Approvals....... 8
3.7 No Legal Bar.................................................. 8
3.8 No Proceeding or Litigation................................... 8
3.9 No Default, Event of Default or Event of Loss................. 9
3.10 Ownership of Property; Liens.................................. 9
3.11 Indebtedness.................................................. 9
3.12 Taxes......................................................... 10
3.13 Regulation U.................................................. 10
3.14 ERISA......................................................... 10
3.15 Investment Company Act........................................ 11
3.16 Public Utility Holding Company................................ 11
3.17 Full Disclosure............................................... 11
3.18 Project Documents............................................. 11
3.19 Environmental Matters......................................... 11
3.20 Intellectual Property......................................... 12
3.21 Intentionally Left Blank...................................... 12
3.22 Chief Executive Office........................................ 12
3.23 Solvency...................................................... 12
3.24 Joint Venture................................................. 13
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
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<S> <C>
3.25 No Fees....................................................... 13
3.26 Validity of Leases............................................ 13
3.27 Collateral Security Documents................................. 13
3.28 Pipeline Contracts............................................ 13
3.29 No Obligations................................................ 13
3.30 Prepayment.................................................... 14
3.31 Gas Contracts................................................. 14
3.32 FERC Jurisdiction............................................. 14
3.33 Lone Star Contract............................................ 15
SECTION 4. CONDITIONS PRECEDENT................................................. 15
4.1 Conditions to Term Loan....................................... 15
SECTION 5. AFFIRMATIVE COVENANTS................................................ 21
5.1 Conduct of Business, Maintenance of Existence, Etc............ 21
5.2 Payment of Obligations........................................ 21
5.3 Performance Under Other Agreements............................ 21
5.4 Partnership Insurance Coverage................................ 21
5.5 Inspection of Property; Books and Records..................... 24
5.6 Compliance with Laws.......................................... 25
5.7 Financial Statements.......................................... 25
5.8 Certificates; Operating Statements; Other Information......... 25
5.9 Taxes......................................................... 28
5.10 Maintenance of Property....................................... 28
5.11 Notices....................................................... 28
5.12 Employee Plans................................................ 30
5.13 Management Letters............................................ 30
5.14 Easements..................................................... 31
5.15 Hazardous Materials........................................... 31
5.16 Use of Proceeds............................................... 31
5.17 Servicers..................................................... 31
5.18 Intentionally Left Blank...................................... 32
5.19 Further Assurances............................................ 32
5.20 Assignment of Additional Contracts; Future Mortgages.......... 32
5.21 Annual Opinion of Counsel..................................... 33
5.22 Fiscal Year................................................... 33
5.23 Environmental Compliance and Management Program............... 33
5.24 FERC Jurisdiction............................................. 34
5.25 Cover Damages................................................. 34
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
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<S> <C>
5.26 Proceeds from the Production Payment and Receivables
from Lone Star Contract.................................... 34
5.27 Post-Closing Title Opinions................................... 35
SECTION 6. NEGATIVE COVENANTS................................................... 35
6.1 Merger, Sale of Assets, Etc................................... 35
6.2 Purchases of Assets........................................... 35
6.3 Indebtedness.................................................. 35
6.4 Distributions, Etc............................................ 35
6.5 Liens......................................................... 35
6.6 Nature of Business............................................ 36
6.7 Amendment of Contracts, Etc................................... 36
6.8 Investments................................................... 36
6.9 Leases........................................................ 36
6.10 Change of Office.............................................. 36
6.11 Change of Name................................................ 36
6.12 Compliance with ERISA......................................... 36
6.13 Transactions with Affiliates and Others....................... 37
6.14 Approval of Additional Contracts.............................. 37
6.15 Alteration or Abandonment..................................... 37
6.16 Capital Expenditures; Operating Expenses, Etc................. 37
6.17 Sale and Leaseback............................................ 37
6.18 Sale of Partnership Interests................................. 38
6.19 Servicers; Service Agreements................................. 38
6.20 Hazardous Materials........................................... 38
6.21 Intentionally Left Blank...................................... 38
6.22 Executive Offices............................................. 38
6.23 Fiscal Year................................................... 38
6.24 FERC Jurisdiction............................................. 38
6.25 Lone Star Contract............................................ 38
SECTION 7. EVENTS OF DEFAULT.................................................... 38
SECTION 8. MISCELLANEOUS........................................................ 42
8.1 Amendments and Waivers........................................ 42
8.2 Notices....................................................... 42
8.3 No Waiver; Cumulative Remedies................................ 44
8.4 Survival...................................................... 44
8.5 Expenses and Taxes............................................ 44
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
8.6 INDEMNIFICATION............................................... 45
8.7 Successors and Assigns; Transferees; Transferred Interests.... 46
8.8 Severability.................................................. 46
8.9 Headings...................................................... 46
8.10 Counterparts.................................................. 47
8.11 GOVERNING LAW................................................. 47
8.12 Submission to Jurisdiction; Waivers........................... 47
8.13 Maximum Interest Rate......................................... 47
8.14 Release of Collateral......................................... 48
8.15 Publicity..................................................... 48
8.16 Recourse to Borrowers......................................... 48
8.17 No Release.................................................... 48
8.18 Collateral Security........................................... 48
8.19 Intercreditor Agreement....................................... 48
</TABLE>
-iv-
<PAGE>
APPENDIX A Definitions
SCHEDULES
Schedule 1 Indebtedness
Schedule 2 Project Documents
Schedule 3 Project Document Amendments
Schedule 4 Governmental Approvals
Schedule 5 Recordings and Filings
Schedule 6 Form of Operating Budget
Schedule 7 Post-Closing Title Work
EXHIBITS
Exhibit A Form of Term Note
Exhibit B-1 Matters to be Addressed by Legal Opinion of Counsel to the
Borrowers and Castle
Exhibit B-2 Matters to be Addressed by Legal Opinion of Pennsylvania Counsel to
the Borrowers and Castle
Exhibit C-1 Form of Borrower Security Agreement
Exhibit C-2 Form of Security Agreement
Exhibit D-1 Form of Borrower Deed of Trust
Exhibit D-2 Form of Borrower Mortgage
Exhibit D-3 Form of Castle Deed of Trust
Exhibit D-4 Form of Castle Mortgage
Exhibit E Form of Utility Security Notice
Exhibit F Form of General Partner Pledge Agreement
Exhibit G Form of Limited Partner Pledge Agreement
Exhibit H Form of Castle Pledge Agreement
Exhibit I Exploration Pledge Agreement
Exhibit J Form of Castle Guaranty
Exhibit K Form of Lockbox Operating Agreement
-v-
<PAGE>
LOAN AGREEMENT, dated as of April 30, 1996 (this "Agreement"), by and
among CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership
("Pipeline"), CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership
("Marketing"), CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation
("Exploration"), CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited
partnership ("Production"; and together with Pipeline, Marketing, and
Exploration, the "Borrowers"), CASTLE PIPELINE COMPANY, a Texas corporation,
CASTLE PRODUCTION COMPANY, a Texas corporation, CEC MARKETING COMPANY, a Texas
corporation (collectively, the "General Partners"); CASTLE ENERGY CORPORATION, a
Delaware corporation (solely with respect to Section 3 of this Agreement)
("Castle"); and COMMERCIAL NATIONAL BANK IN SHREVEPORT ("Lender").
W I T N E S S E T H :
WHEREAS, the Borrowers have requested that the Lender make available to
them a term loan in the aggregate principal amount of Three Million Eight
Hundred Thousand and No/100 Dollars ($3,800,000.00); and
WHEREAS, the Lender is willing to make such term loan to the Borrowers
on the terms and subject to the conditions set forth herein;
NOW, THEREFORE, it is agreed:
SECTION 1. DEFINITIONS
(a) All terms defined in this Agreement or in Appendix A shall have
their defined meanings when used herein or in any certificate or other document
made or delivered pursuant hereto (such definitions to be equally applicable to
both the singular and plural forms of the terms defined).
(b) As used herein and in any certificate or other document made or
delivered pursuant hereto, accounting terms not defined herein or in Appendix A
and accounting terms partly defined herein or in Appendix A to the extent not
defined, shall have the respective meanings given to them under GAAP.
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and section, subsection,
appendix, schedule and exhibit references are to this Agreement unless otherwise
specified.
(d) References to agreements defined herein or in Appendix A shall,
unless otherwise specified, include such agreements as they may be amended,
supplemented or otherwise modified from time to time in accordance with the
provisions of the Basic Documents.
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(e) Terms defined in this Agreement or in Appendix A by reference to
any other agreement, document or instrument shall have the meanings assigned to
them in such agreement, document or instrument, whether or not such agreement,
document or instrument is then in effect.
SECTION 2. AMOUNT AND TERM OF TERM LOAN
2.1 Term Loan. Subject to and upon the terms and conditions set forth
herein, Lender agrees on the Closing Date to make a term loan (the "Term Loan")
in the principal amount of Three Million Eight Hundred Thousand Dollars
($3,800,000.00) to the Borrowers, on a joint and several basis. The Borrowers
shall give the Lender not less than three Business Days prior written notice of
the proposed Closing Date.
2.2 Term Note. The Term Loan made by Lender shall be evidenced by a
single promissory note of the Borrowers, substantially in the form of Exhibit A
(the "Term Note"), with appropriate insertions, payable to the order of Lender
and in the aggregate principal amount equal to the Term Loan. The Term Note
shall (i) be dated the Closing Date, (ii) represent the joint and several
obligations of the Borrowers to pay the principal amount of and interest on the
Term Loan, (iii) provide for the payment of interest in accordance with
subsection 2.5, (iv) be entitled to the benefit of this Agreement and the
Collateral Security Documents, (v) mature on August 29, 1997, and (vi) be
payable in nine (9) consecutive monthly installments in an amount equal to
ninety-five thousand fifteen dollars ($95,015.00) each, applied first to all
accrued and unpaid interest and then to outstanding principal, commencing on
June 4, 1996, and continuing on each Installment Payment Date thereafter until
and including February 4, 1997, and thereafter five (5) monthly installments in
the principal amount of five hundred thirty-one thousand six hundred seventy-six
and 53/100 dollars ($531,676.53) each, plus accrued and unpaid interest thereon
shall be due and payable on each Installment Payment Date, with a final
installment in the amount of all outstanding principal of the Term Loan, plus
all accrued and unpaid interest thereon due and payable on August 29, 1997.
2.3 Use of Proceeds. The proceeds of the Term Loan shall be used by the
Borrowers (a) to refinance the outstanding principal balance of and accrued and
unpaid interest on the Existing BTCC Loans, (b) to establish an escrow account
in the amount of $1,800,000.00 for the purpose of settling various accounts
payable associated with the CORE Refining Corp. transaction as set forth on
Schedule 1 hereto, and (c) for general corporate purposes. To the extent such
accounts are settled for less than $1,800,000.00, the excess shall be released
to Borrower.
2.4 Prepayments. (a) Mandatory Prepayments.
(i) If an Event of Loss shall occur, the Borrowers shall prepay in
full the unpaid principal amount of the then outstanding Term Note,
together with accrued interest thereon to the date of prepayment and
all other amounts owing hereunder and under the Collateral Security
Documents, on the earlier of (A) the date occurring 60 days after the
date of such Event of Loss and (B) the date on which insurance proceeds
are received with respect to such Event of Loss.
LOAN AGREEMENT - Page 2
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(ii) Notwithstanding anything to the contrary otherwise contained
in this Agreement, in the event that (A) the Senior Loan Termination
Date has not occurred on or before September 4, 1997, (B) the principal
amount of the Senior Obligations is increased (other than in accordance
with the terms of the Senior Loan Agreement as in effect on the date
hereof) to an amount in excess of the principal amount of the Senior
Obligations outstanding on the date hereof, or (C) the Term Loan
Interest Rate (as defined in the GE Capital Loan Agreement) is modified
such that it is greater than 8.33%, the Obligations shall become
immediately due and payable and the Borrowers shall, within three (3)
days of such event, prepay in full the unpaid principal amount of the
then outstanding Term Note, together with accrued and unpaid interest
thereon to the date of prepayment and all other amounts owing hereunder
and under the Collateral Security Documents.
(b) Optional Prepayments. The Borrowers may on at least three (3)
Business Days prior notice to Lender, at any time and from time to time prepay
the Term Loan, in whole or in part, without premium or penalty but with accrued
and unpaid interest to the date of prepayment on the amount so prepaid. Partial
prepayments shall be in a principal amount of $100,000.00 or an integral
multiple thereof.
(c) Partial Prepayments. Partial prepayment of the Term Loan shall be
applied to the installments thereof in the inverse order of maturity.
2.5 Interest Rate and Payment Dates. (a) The Term Loan shall bear
interest on the unpaid principal amount thereof at the Term Loan Interest Rate.
(b) If all or a portion of the principal amount of the Term Loan made
hereunder or any other amount due and payable hereunder shall not be paid when
due (whether at the stated maturity, by acceleration or otherwise), the Term
Loan or other amount shall bear interest at a rate per annum which is 2% above
the Term Loan Interest Rate from the date of such non-payment until paid in full
(as well after as before judgment).
(c) Interest on the unpaid principal amount of the Term Loan shall be
payable monthly in arrears on each Installment Payment Date and on the date the
Term Loan is paid in full; provided that interest accruing pursuant to
subsection 2.5(b) shall be payable from time to time on demand.
2.6 Payments and Payment Dates. (a) All payments (including prepayments
hereunder) due hereunder or under the Term Note on account of principal,
interest, fees, or any other obligation incurred hereunder shall be paid to the
Lender at its office at 333 Texas Street, P.O. Box 21119, Shreveport, Louisiana
71152, in freely transferable Dollars and in immediately available funds without
set-off or counterclaim. Borrowers shall, at the time of making each such
payment, specify to Lender the sums payable by Borrowers under this Agreement,
the Term Note or other Loan Documents to which such payment is to be applied
(and in the event Borrowers fail to so specify or if an Event of Default has
occurred and is continuing, Lender may apply such payment to the Obligations in
such order and manner as it may elect in its sole discretion). All payments
LOAN AGREEMENT - Page 3
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hereunder shall be made without any presentment of the Term Note to the
Borrowers, but upon payment in full of the Term Note, the holder thereof shall
cancel it and return it to the Borrowers.
(b) If any payment hereunder becomes due and payable on a day other
than a Business Day, such payment shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
2.7 Computation of Interest and Fees. Interest on the Term Loan and all
fees hereunder shall be calculated on the basis of a 360-day year and the actual
number of days elapsed (including the first day but excluding the last day of
any relevant period).
2.8 Applicable Law. In the event that Lender shall have determined that
any change in any Applicable Law regarding capital adequacy or in the
interpretation or application thereof or compliance by Lender or any corporation
controlling Lender with any request or directive regarding capital adequacy
(whether or not having the force of law) from any Governmental Authority made
subsequent to the date hereof does or shall have the effect of reducing the rate
of return on Lender's or such corporation's capital as a consequence of its
obligations hereunder to a level below that which Lender or such corporation
could have achieved but for such change or compliance (taking into consideration
Lender's or such corporation's policies with respect to capital adequacy) by an
amount deemed by Lender to be material, then from time to time, after submission
by Lender to the Borrowers of a written request therefor, the Borrowers shall
pay to Lender such additional amount or amounts as will compensate Lender for
such reduction. A certificate as to any additional amounts payable pursuant to
this subsection 2.8 submitted by Lender to the Borrowers shall be conclusive in
the absence of manifest error.
2.9 Joint and Several Obligations. The Borrowers shall, subject to the
terms of the Intercreditor Agreement with respect to Pipeline and Marketing, be
jointly and severally liable for all payments of principal and interest on the
Term Note and for the observance and performance of all obligations, covenants,
conditions, indemnities and other terms and provisions hereunder applicable to
the Borrowers or to any Borrower.
2.10 Commitment Fee. The Borrowers have agreed pursuant to the
commitment letter dated March 14, 1996, to pay to Lender a non-refundable
commitment fee in the aggregate amount of $388,000, which shall be payable on
the date this Agreement is executed.
SECTION 3. REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and to make
the Term Loan, each Borrower, each General Partner and Castle (collectively, the
"Representing Parties") represent and warrant to the Lender that:
3.1 Financial Statements. (a) The balance sheet of each Borrower, each
General Partner, each Limited Partner and Castle, and the related statements of
LOAN AGREEMENT - Page 4
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income and of cash flows furnished to the Lender pursuant to subsection 4.1(q)
and certified by a Responsible Officer of such Person is complete and correct in
all material respects and fairly presents the financial condition of such Person
on such date and the results of such Person's operations and cash flows for the
fiscal year then ended, all in conformity with GAAP applied on a consistent
basis. All liabilities, direct and contingent, of such Person on such date
required to be disclosed pursuant to GAAP are disclosed on such balance sheet.
(b) None of the Borrowers, the General Partners, the Limited Partners
nor Castle had, at the date of its balance sheet referred to in subsection
3.1(a), any material Guarantee Obligations, contingent liabilities or
liabilities for taxes, or any long term lease or unusual forward or long-term
commitment, including, without limitation, any interest rate or foreign currency
swap or exchange transaction, which is not reflected in the financial statements
referred to in subsection 3.1(a) or in the notes thereto.
(c) Since the dates of the financial statements referred to in
subsection 3.1(a) no material adverse change has occurred in (A) the financial
condition of any Borrower, any General Partner, any Limited Partner or Castle,
(B) the properties, business, operations or prospects of any Borrower, any
General Partner, any Limited Partner or Castle or (C) any Borrower's, any
General Partner's, any Limited Partner's or Castle's ability to perform its
obligations under this Agreement and the other Basic Documents to which it is or
is to become a party.
3.2 Corporate Existence and Business. (a) Each Borrower (other than
Exploration) is a limited partnership duly organized and validly existing and in
good standing under the laws of the State of Texas. Exploration is a corporation
duly organized and validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. Each Borrower is duly qualified to do business
under the laws of each jurisdiction in which the conduct of its business or the
ownership, lease or operation of its property so requires. The Certificate of
Limited Partnership of each Borrower (other than Exploration) has been duly
filed in the office of the Secretary of State of Texas; the Certificate of
Incorporation of Exploration has been duly filed in the Office of the Secretary
of State of the Commonwealth of Pennsylvania; and no other filing, recording,
publishing or other act is necessary or appropriate in connection with the
existence or the business of any Borrower except those which have been duly made
or performed.
(b) Each General Partner is duly organized and validly existing and in
good standing under the laws of Texas, is duly qualified to do business under
the laws of each jurisdiction in which the conduct of its business so requires
and has the corporate power and authority and the legal right to own and operate
its property and to conduct the business in which it is currently engaged.
(c) Pipeline GP is the sole general partner of Pipeline. Marketing GP
is the sole general partner of Marketing. Production GP is the sole general
partner of Production. Pipeline GP, Marketing GP and Production GP are engaged
solely in the business of being the general partners of Pipeline, Marketing and
Production, respectively, and activities incident thereto.
LOAN AGREEMENT - Page 5
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(d) Each Limited Partner is duly organized and validly existing and in
good standing under the laws of Pennsylvania, is duly qualified to do business
under the law of each jurisdiction in which the conduct of its business so
requires and has the corporate power and authority and the legal right to own
and operate its property and to conduct the business in which it is currently
engaged.
(e) Pipeline LP is the sole limited partner of Pipeline. Marketing LP
is the sole limited partner of Marketing. Production LP is the sole limited
partner of Production.
3.3 Subsidiaries. (a) None of the Borrowers has any subsidiaries or any
equity interests in any other Person. None of the General Partners nor the
Limited Partners has any equity interests in any other Person other than in the
Borrower of which it is a general partner or a limited partner, as the case may
be.
(b) Castle directly owns 100% of the issued and outstanding capital
stock of each General Partner and each Limited Partner.
3.4 Compliance with Law. Each Borrower, each General Partner and each
Limited Partner is in compliance with all Requirements of Law applicable to it
(including, without limitation, all Relevant Environmental Laws).
3.5 Power and Authorization; Enforceable Obligations. (a) Each Borrower
has full power and authority and the legal right to conduct its business as now
conducted and as proposed to be conducted by it, to execute, deliver and perform
this Agreement, the Term Note and the other Basic Documents (other than the OWI
Contracts) to which it is or is to become a party, to take all action as may be
necessary to complete the transactions contemplated hereunder and thereunder, to
grant the Liens and security interests provided for in the Collateral Security
Documents to which it is a party and to borrow hereunder. Each Borrower has
taken all necessary partnership and legal action to authorize the borrowings
hereunder on the terms and conditions of this Agreement, the Term Note and the
other Basic Documents (other than the OWI Contracts) to which it is a party, to
grant the Liens and security interests provided for in the Collateral Security
Documents to which it is a party and to authorize the execution, delivery and
performance of this Agreement, the Term Note and the other Basic Documents
(other than the OWI Contracts) to which it is a party or is to become a party.
No consent or authorization of, filing with, or other act by or in respect of
any other Person, that has not been made, obtained or complied with, is required
in connection with the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of this Agreement, the Term Note or the
other Basic Documents (other than the OWI Contracts). Each of this Agreement,
the Term Note and the other Basic Documents (other than the OWI Contracts) to
which any Borrower is a party has been duly executed and delivered by such
Borrower and, assuming the due authorization and delivery hereof and thereof by
the other parties hereto and thereto, constitutes, and each of the other Basic
Documents (other than the OWI Contracts) to which such Borrower is to become a
party will upon execution and delivery thereof by such Borrower and, assuming
the due authorization and delivery thereof by the other parties thereto (if
any), constitute a legal, valid and binding obligation of such Borrower
LOAN AGREEMENT - Page 6
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enforceable against such Borrower in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally and by general principles of equity (whether such enforcement is
sought in a proceeding at law or in equity); all Project Documents (other than
the OWI Contracts) to which such Borrower is a party are in full force and
effect.
(b) Each General Partner has full power and authority and the legal
right to own its properties and to conduct its business as now conducted and
proposed to be conducted by it, to execute, deliver and perform this Agreement
and the other Basic Documents to which it is or is to become a party and to take
all action as may be necessary to complete the transactions contemplated
hereunder and thereunder. Each General Partner has taken all necessary corporate
action to authorize the execution, delivery and performance of this Agreement
and the other Basic Documents to which it is or is to become a party. No consent
or authorization of, filing with, or other act by or in respect of any other
Person that has not been made, obtained or complied with is required in
connection with the execution, delivery, performance, validity or enforceability
of this Agreement or the other Basic Documents to which such General Partner is
a party or is to become a party. Each of this Agreement, the Term Note and the
other Basic Documents to which any General Partner is a party has been duly
executed and delivered by such General Partner and, assuming the due
authorization, execution and delivery thereof by the other parties thereto,
constitutes, and each of the other Basic Documents to which such General Partner
is to become a party will upon execution and delivery thereof by such General
Partner and, assuming the due authorization, execution and delivery thereof by
the other parties thereto (if any), constitute a legal, valid and binding
obligation of such General Partner enforceable against such General Partner in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
rights of creditors generally and by general principles of equity (whether such
enforcement is sought in a proceeding at law or in equity).
(c) Castle has full power and authority and the legal right to own its
properties and to conduct its business as now conducted and proposed to be
conducted by it, to execute, deliver and perform this Agreement and the other
Basic Documents to which it is or is to become a party and to take all action as
may be necessary to complete the transactions contemplated hereunder and
thereunder. Castle has taken all necessary corporate action to authorize the
execution, delivery and performance of this Agreement and the other Basic
Documents to which it is or is to become a party. No consent or authorization
of, filing with, or other-act by or in respect of any other Person that has not
been made, obtained or complied with is required in connection with the
execution, delivery, performance, validity or enforceability of this Agreement
or the other Basic Documents to which it is a party or is to become a party.
Each of this Agreement and the other Basic Documents to which Castle is a party
has been duly executed and delivered by Castle and, assuming the due
authorization, execution and delivery thereof by the other parties thereto,
constitutes, and each of the other Basic Documents to which Castle is to become
a party will upon execution and delivery thereof by Castle and, assuming the due
authorization, execution and delivery thereof by the other parties thereto (if
any), constitute a legal, valid and binding obligation of Castle enforceable
against Castle in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the rights of creditors generally and by general
principles of equity (whether such enforcement is sought in a proceeding at law
or in equity).
LOAN AGREEMENT - Page 7
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3.6 Governmental Approvals and Other Consents and Approvals. No
Governmental Approvals or other consents, actions or approvals are required in
connection with (i) the participation by any Borrower, any General Partner or
any Limited Partner in the transactions contemplated by this Agreement and the
other Basic Documents, (ii) the use, ownership, maintenance or operation of the
Assets in accordance with the applicable provisions of the Basic Documents and
in compliance with all Applicable Laws, (iii) the validity and enforceability of
the Lone Star Contract, the Supply Agreement and the other Basic Documents, (iv)
the participation by Lender in the transactions contemplated by this Agreement
and the other Basic Documents to which it is a party (other than any
Governmental Approvals, consents, actions or approvals under any law, rule or
regulation of (or administered by) any federal or state regulatory body
primarily responsible for regulating the activities of Lender) and (v) the grant
by the Borrowers, the General Partners, the Limited Partners and Castle of the
Liens created pursuant to the Collateral Security Documents and the validity,
perfection and enforceability thereof and the exercise by the Lender of its
rights and remedies thereunder, except in each case for those Governmental
Approvals set forth on Schedule 4. The continuation, validity and effectiveness
of each such Governmental Approval set forth on Schedule 4 will in no way be
adversely affected by the transactions contemplated by this Agreement or the
Collateral Security Documents. No Borrower is in breach of, or in default under
the terms of, and has not engaged in any activity which would cause revocation
or suspension of, any such Governmental Approval and, to such Representing
Party's knowledge after diligent investigation, no action or proceeding looking
to or contemplating the revocation or suspension of any thereof is pending or
threatened.
3.7 No Legal Bar. The execution delivery and performance of this
Agreement, the Term Note and the other Basic Documents, the borrowings by the
Borrowers hereunder and the use of the proceeds thereof will not violate any law
applicable to, or any Requirement of Law or Contractual Obligation of, any
Borrower, any General Partner or any Limited Partner and will not result in, or
require, the creation or imposition of any Lien on any of the Assets or any of
the other properties, assets or revenues of any Borrower, any General Partner,
any Limited Partner or Castle, pursuant to any Requirement of Law or Contractual
Obligation, except for the Liens created pursuant to the Collateral Security
Documents.
3.8 No Proceeding or Litigation. Except as disclosed in the Form 10Q
for the quarter ended December 31, 1995 filed by Castle with the Securities and
Exchange Commission, no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the best knowledge of
such Representing Party, after due inquiry, threatened against or affecting any
Borrower, any General Partner or any Limited Partner or against or affecting any
of their respective properties, rights, revenues or assets (including the
Assets), or which could result in a rescission, termination or suspension of any
Governmental Approval, consent or approval or could have a Material Adverse
Effect.
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3.9 No Default, Event of Default or Event of Loss. No Borrower or
General Partner is in default in any material respect under or with respect to
any Basic Document or any other Contractual Obligation to which such Person is a
party; and no notice of default has been given to any Borrower or any General
Partner under any of the Basic Documents. To such Person's knowledge, no other
party to a Basic Document (other than any OWI Contract) is in default
thereunder. No Default or Event of Default has occurred and is continuing. No
Event of Loss has occurred.
3.10 Ownership of Property; Liens. (a) Pipeline has Marketable Title in
and to the Pipeline Assets, free and clear of any claim, Lien or other
encumbrance other than Permitted Liens. Each of Castle, Production and Marketing
has good title to all of its property and assets (including, without limitation
with respect to Marketing, the Lone Star Contract), free and clear of any claim,
Lien or other encumbrance other than Permitted Liens.
(b) Except for Permitted Liens, prior to the satisfaction in full of
the Obligations, no Borrower shall directly or indirectly reserve or retain any
recorded or unrecorded interest in the Collateral, and shall not reserve any
recorded executory rights therein, upon which a Lien is not created in favor of
the Lender by any Borrower pursuant to the Collateral Security Documents.
(c) Except for Permitted Liens, the GE Capital Loan Agreement, the
Senior Collateral Documents, this Agreement and the Collateral Security
Documents, as of the Closing Date, there will be no unrecorded documents or
agreements which may result in impairment or loss of any Borrower's rights to
convey or assign any Assets held by it.
(d) Except for Permitted Liens, Pipeline has all beneficial right,
title and interest in and to the Pipeline Assets and has the exclusive right to
sell and use the same. Pipeline has succeeded to all right, title and interest
of Tabasco in and to the Interconnect Agreement and the Transportation Agreement
(Marketing). Marketing has succeeded to all of the right, title and interest of
ARCO in and to (i) the Lone Star Contract and (ii) the Transportation Agreement
(Marketing). Production has succeeded to all of the right, title and interest of
ARCO in and to the oil and gas assets purchased from ARCO pursuant to the
Purchase and Sale Agreement dated September 3, 1992. Exploration has succeeded
to all of the right, title and interest of ARCO in and to the Production
Payment.
(e) Part A of Schedule 5 hereto lists all UCC-1 financing statements
and all mortgages, security agreements, pledge agreements and deeds of trust on
file in any jurisdiction prior to the date hereof on or with respect to any
Borrower, any General Partner or any Limited Partner or any of their respective
properties and assets. Part B of Schedule 5 hereto lists all UCC-1 financing
statements and all mortgages, security agreements, pledge agreements and deeds
of trust on file in any jurisdiction prior to the date hereof on or with respect
to Castle's ownership interest in the General Partners and the Limited Partners.
3.11 Indebtedness. (a) Schedule 1 correctly describes, as of the dates
indicated therein, all outstanding Indebtedness of the Borrowers.
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(b) No Borrower is the lessor or lessee under any lease other than (i)
leases constituting part of the Pipeline Interests or (ii) leases permitted
pursuant to subsection 6.9.
(c) No Borrower is or will be a party to any "take or pay" contract or
settlement or any other contract or agreement which (i) allows the gas purchaser
thereunder to take gas previously paid for out of future gas production or (ii)
provides for a cash rebate to such gas purchaser if reimbursement of take or pay
monies is not made through gas production, other than (x) the Supply Agreement,
(y) the Lone Star Contract, and (z) the gas balancing liabilities shown on the
balance sheet of Production delivered pursuant to subsection 4.1(q).
3.12 Taxes. (a) Each Borrower, each General Partner, each Limited
Partner and each corporation which has been affiliated with either Borrower,
either General Partner or either Limited Partner in any form of combined,
unitary or consolidated tax group (a "Tax Affiliate") has filed or caused to be
filed all tax returns which are required to be filed by it, and has paid or
caused to be paid all taxes shown to be due and payable on such returns or on
any assessments made against it, or any of its property and all other taxes,
fees or other charges imposed on it or any of its property by any Governmental
Authority including, without limitation, all ad valorem, property, production,
excise, severance, windfall profit and similar taxes and assessments based on or
measured by the ownership of property or the production or removal of
Hydrocarbons or the receipt of proceeds therefrom or from the Assets have been
timely paid; no tax Lien has been filed, and, to the knowledge of such Person no
claim is being asserted, with respect to any such tax, fee or other charge;
provided, however, that in the case of a Tax Affiliate, this subsection 3.12(a)
shall only apply in respect of taxes for which either Borrower (or any General
Partner or Limited Partner) could be held liable.
(b) Neither the execution and delivery of this Agreement, the Term Note
or any other Basic Document, nor the consummation of any of the transactions
contemplated hereby or thereby, will result in any tax, levy, impost, duty,
charge or withholding imposed by the United States or any agency or taxing
authority thereof, or by any state of the United States or any political
subdivision or taxing authority thereof or therein, on or with respect to such
execution, delivery or consummation, or upon or with respect to the Lender.
3.13 Regulation U. No part of the proceeds of the Term Loan will be
used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation U of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect or for any purpose which violates the provisions of the Regulations of
such Board of Governors.
3.14 ERISA. No Borrower nor any General Partner is in violation of any
applicable provisions of ERISA and the regulations and published interpretations
thereunder with respect to any Plan. No Borrower nor any General Partner
maintains or is required under ERISA to maintain, any Plan.
LOAN AGREEMENT - Page 10
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3.15 Investment Company Act. None of the Borrowers, the General
Partners nor the Limited Partners is an "investment company" or a company
"controlled" by an "investment company" or an "investment adviser", within the
meaning of the Investment Company Act of 1940, as amended.
3.16 Public Utility Holding Company. None of the Borrowers, the General
Partners nor the Limited Partners is a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" of a "holding company" or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.
3.17 Full Disclosure. No representation, warranty or other statement
made by such Representing Party in this Agreement or in any other Basic Document
or in any certificate, written statement or other document furnished to the
Lender by or on behalf of such Representing Party, contains, at the time made,
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein, in light
of the circumstances under which they were made, not misleading (unless
corrected or disclosed prior to the date hereof), which misstatement or omission
has had a Material Adverse Effect or which could have a Material Adverse Effect;
and there is no fact known to such Representing Party, whether related to
Governmental Approvals, the Basic Documents or otherwise, that has not been
disclosed in writing to the Lender that has had a Material Adverse Effect or
which could have a Material Adverse Effect.
3.18 Project Documents. (a) Each of the Project Documents (other than
the OWI Contracts) constitutes the legal, valid and binding obligation of each
of the parties thereto, and is enforceable against each such party in accordance
with its terms except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally and by general principles of equity. All Governmental
Approvals and other consents or approvals required in connection with the
execution, delivery and performance of each of the Project Documents by the
parties thereto have been duly obtained or made and are Final.
(b) No Borrower is party to any contract (other than employment
contracts and contracts involving less than $100,000, in the aggregate,
annually) other than the contracts listed on Schedule 2 and the OWI Contracts;
true and complete copies of all such contracts listed on Schedule 2 have been
delivered to the Lender pursuant to subsection 4.1(c).
(c) Other than the amendments listed on Schedule 3, no Project Document
has been amended, supplemented or otherwise modified prior to the date hereof.
3.19 Environmental Matters. (a) To the knowledge of each of the
Representing Parties the Mortgaged Properties do not contain, and have not
previously contained, any Hazardous Materials in concentrations which violate,
or could reasonably be expected to give rise to liability under, Relevant
Environmental Laws.
LOAN AGREEMENT - Page 11
<PAGE>
(b) To the knowledge of each of the Representing Parties the Mortgaged
Properties and all operations of either Borrower are in compliance with all
Relevant Environmental Laws, and there is no Hazardous Materials contamination
which could materially interfere with the continued operation of the Mortgaged
Properties or the operations of any Borrower or materially impair the fair
saleable value thereof.
(c) No Borrower has received any notice of violation, alleged
violation, non-compliance, liability or potential liability regarding
environmental matters or compliance with or liability under any Relevant
Environmental Law, nor is any Borrower aware that any person is contemplating
delivering to such Borrower any such notice.
(d) To the knowledge of each of the Representing Parties Hazardous
Materials have not been transferred, transported, or disposed of by any Borrower
at any location in violation of, or in a manner that could give rise to
liability under, a Relevant Environmental Law.
(e) There are no judicial proceedings or governmental administrative
actions pending or, to the knowledge of the Borrowers, contemplated under any
Relevant Environmental Law to which any Borrower is or will be named as a party.
(f) Each of the representations and warranties set forth in subsections
3.19(a) through (e) is true and correct with respect to each parcel of real
property owned or operated by any Borrower.
3.20 Intellectual Property. No licenses, trademarks, patents or
agreements with respect to the use of technology (other than any thereof which
have been obtained and are in full force and effect and have been assigned to
the Agent under the GE Capital Loan Agreement and the Lender) are necessary for
the ownership, operation and maintenance of the Assets and the conduct of any
Borrower's business. Each Borrower owns, or is licensed to use, all trademarks,
tradenames, copyrights, technology, know-how and processes necessary for the
conduct of its business as currently conducted that are material to the
condition (financial or other), business, or operations of such Borrower (the
"Intellectual Property"). No claim has been asserted and is pending by any
Person with respect to the use of any such Intellectual Property in connection
with the Assets or the conduct of any Borrower's business, or challenging or
questioning the validity or effectiveness of any such Intellectual Property and
such Borrower does not know of any valid basis for any such claim. The use of
such Intellectual Property by such Borrower does not infringe on the rights of
any Person.
3.21 Intentionally Left Blank.
3.22 Chief Executive Office. The chief executive office of each
Borrower and of each General Partner is at the address set forth in subsection
8.2.
3.23 Solvency. Each Borrower, each General Partner and each Limited
Partner are Solvent. Castle is generally able to meet its debts as they come
due.
LOAN AGREEMENT - Page 12
<PAGE>
3.24 Joint Venture. None of the Borrowers, the General Partners nor the
Limited Partners is engaged in any joint venture or partnership with any other
Person except as contemplated by the Basic Documents.
3.25 No Fees. No broker's or finder's fees or commissions have been
paid or will be payable by any Borrower to any Person in connection with the
transactions contemplated by this Agreement. The Borrowers will indemnify Lender
and its officers, directors, employees and agents from and against, and hold
each of such parties harmless on demand from, all liabilities, costs, damages
and expenses, including, but not limited to, attorneys' fees and disbursements
relating to any third parties concerning finders', brokerage or similar fees
arising from or relating to the transactions contemplated under this Agreement.
3.26 Validity of Leases. The leases and easements constituting a part
of the Pipeline Interests are in full force and effect in accordance with their
terms.
3.27 Collateral Security Documents. Upon execution and delivery
thereof, the Collateral Security Documents to which any Borrower is a party will
be effective to create, in favor of the Lender, legal, valid and enforceable
liens on and security interests in all right, title, estate and interest of the
Borrowers in and to the Collateral and, prior to the Closing Date hereunder, all
necessary and appropriate recordings and filings will have been duly effected in
all appropriate public offices so that the liens and security interests created
by each of the Collateral Security Documents to which the Borrowers are parties
will constitute perfected first (except with respect to the security interests
granted by Marketing, Marketing GP, Marketing LP, Pipeline, Pipeline GP,
Pipeline LP and Castle in the Subject Party Collateral) liens on and prior
perfected security interests in all right, title, estate and interest of the
Borrowers in and to the Collateral described therein, prior and superior to all
other Liens, existing or future, except Permitted Liens. The recordings and
filings shown on Schedule 5 are all the recordings, filings and other action
necessary and appropriate in order to establish, protect and perfect the
Lender's lien on and security interest in the right, title, estate and interest
of the Borrowers in and to the Collateral.
3.28 Pipeline Contracts. Pipeline, with respect to the Pipeline Assets,
has fulfilled all requirements for filings, certificates, disclosures of parties
in interest, and other similar matters contained in (or otherwise applicable
thereto by law, rule or regulation) any lease unit agreement, pooling agreement,
communitization agreement, Basic Document or other document granting or
governing the operation or maintenance of such interests and assets, and
Pipeline is qualified to own, hold and exercise such rights under such lease
unit agreements, pooling agreements, communitization agreements, Basic Documents
or other documents.
3.29 No Obligations. Except for (i) obligations pursuant to the Project
Documents, no Borrower has any obligation owing to, or any Indebtedness in favor
of, MGTF or any other MG Affiliate, or (ii) the Senior Obligations, no Borrower
has any obligation owing to, or any indebtedness in favor of GE Capital or any
of its Affiliates.
LOAN AGREEMENT - Page 13
<PAGE>
3.30 Prepayment. Marketing has fully and irrevocably prepaid a quantity
of Natural Gas (a) from Production pursuant to the Production $2.90 Contract
equal to the aggregate sum of the Tier II Minuends (as defined in the Supply
Agreement) for each Day in the period from August 1, 1993 through May 31, 1999,
inclusive, as set forth in Exhibit B to the Supply Agreement, and (b) from MGNG
pursuant to the Supply Agreement equal to all Tier II and Tier III Gas (as
defined therein) to be delivered thereunder.
3.31 Gas Contracts. (a) Except pursuant to the Supply Agreement and the
OWI Contracts, Marketing is not a party to any contract providing for the
purchase of gas by it nor is it otherwise obligated to purchase gas from any
other source.
(b) Marketing has no obligation to purchase any specified minimum
quantity of gas pursuant to any OWI Contract, nor does it have any other
obligations under any OWI Contract other than the obligation to pay for any gas
actually taken thereunder (i) in the case of the Owner OWI Contracts, at a price
of $2.90 per MMBtu fixed for the life of such contract and (ii) in the case of
the Production $2.90 Contract, at a price of $2.90 per MMBtu fixed for the life
of such contract, such price having been irrevocably prepaid; provided, however,
that Marketing is not permitted to discriminate against producers within any
field from which it purchases Natural Gas or unjustly and unreasonably
discriminate between fields.
3.32 FERC Jurisdiction. (a) None of the Assets, nor any portion
thereof, is subject to the jurisdiction of FERC.
(b) No Representing Party is aware of any assertion by any Governmental
Authority or any other Person, or any proceeding asserting, that the Assets, or
any portion thereof, are subject to the jurisdiction of FERC.
(c) No transportation of Natural Gas by Pipeline, Marketing,
Exploration or Production constitutes transportation of Natural Gas in
interstate commerce subject to the jurisdiction of FERC under the NGA.
(d) No Natural Gas sales by Marketing, including the gas sold to Lone
Star under the Lone Star Contract, or by Production or Exploration are sales in
interstate commerce for resale subject to the jurisdiction of the FERC under the
NGA.
(e) The Natural Gas which MGNG or any Affiliate of Marketing purchases
and subsequently sells to Marketing for resale to Lone Star is purchased by MGNG
or such Affiliate only in sales that are not a sale in interstate commerce for
resale subject to FERC jurisdiction under the NGA and that sales of such gas by
MGNG or such Affiliate to Marketing do not constitute a sale in interstate
commerce for resale subject to FERC jurisdiction under the NGA.
(f) The purchase of gas by Marketing from any other source does not
constitute a sale in interstate commerce for resale subject to FERC jurisdiction
under the NGA.
LOAN AGREEMENT - Page 14
<PAGE>
3.33 Lone Star Contract. As of the date hereof, Lone Star has not made
a payment under the Lone Star Contract during the current Operating Year in
respect of any natural gas which it has not already taken, nor does it have any
outstanding credit thereunder permitting it to take any natural gas in the
future without paying for the same.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions to Term Loan. The agreement of Lender to make the Term
Loan is subject to the satisfaction on or prior to the Closing Date of each of
the following conditions:
(a) Term Note. The Lender shall have received the Term Note, conforming
to the requirements of subsection 2.2, and duly executed and delivered by each
Borrower.
(b) Loan Documents. The Lender shall have received each of the
following documents:
(i) this Agreement, executed and delivered by a duly authorized
officer of each Borrower, each General Partner and Castle;
(ii) the Borrower Security Agreement, executed and delivered by a
duly authorized officer of each Borrower;
(iii) the Security Agreement, executed and delivered by a duly
authorized officer of Pennsylvania Castle Energy Corporation, a Texas
corporation, as general partner of Deerlick Creek Field Limited
Partnership;
(iv) the Utility Security Notice, executed and delivered by a duly
authorized officer of Pipeline;
(v) the Exploration Mortgages, executed and delivered by a duly
authorized officer of Exploration;
(vi) the Exploration Deed of Trust, executed and delivered by a
duly authorized officer of Exploration;
(vii) the Castle Deeds of Trust, executed and delivered by a duly
authorized officer of Castle;
(viii) the Castle Mortgages, executed and delivered by a duly
authorized officer of Castle;
(ix) the Pipeline Dead of Trust, executed and delivered by a duly
authorized officer of Pipeline;
LOAN AGREEMENT - Page 15
<PAGE>
(x) the Production Deed of Trust, executed and delivered by a duly
authorized officer of Production;
(xi) the GP Pledge Agreement, executed and delivered by a duly
authorized officer of each General Partner;
(xii) the LP Pledge Agreement, executed and delivered by a duly
authorized officer of each Limited Partner;
(xiii) the Castle Pledge Agreement, executed and delivered by a
duly authorized officer of Castle;
(xiv) the Exploration Pledge Agreement, executed and delivered by a
duly authorized officer of Exploration; and
(xv) the Castle Guaranty, executed and delivered by a duly
authorized officer of Castle.
(c) Project Documents. The Lender shall have received each of the
following documents:
(i) a true and complete copy of the Pipeline Partnership Agreement,
duly certified by a Responsible Officer of Pipeline; a true and
complete copy of the Marketing Partnership Agreement, duly certified by
a Responsible Officer of Marketing; and a true and complete copy of the
Production Partnership Agreement, duly certified by a Responsible
Officer of Production;
(ii) a true and complete copy of the Assignment Agreement, duly
certified by a Responsible Officer of each of Pipeline, Marketing and
Production;
(iii) a true and complete copy of the Assignment Agreement (Lone
Star Agreement and Transportation Agreement), duly certified by a
Responsible Officer of Marketing;
(iv) a true and complete copy of the ARCO Purchase and Sale
Agreement, duly certified by a Responsible Officer of Pipeline,
Marketing and Production;
(v) a true and complete copy of the Lone Star Contract, duly
certified by a Responsible officer of Marketing;
(vi) a true and complete copy of the Assignment Agreement (Gas
Contracts), duly certified by a Responsible Officer of Marketing;
(vii) a true and complete copy of the Interconnect Agreement, duly
certified by a Responsible officer of Pipeline;
LOAN AGREEMENT - Page 16
<PAGE>
(viii) a true and complete copy of the Assignment Agreement
(Pipeline Assets), duly certified by a Responsible Officer of Pipeline;
(ix) a true and complete copy of the Transportation Agreement
(Marketing), duly certified by a Responsible officer of Marketing;
(x) Intentionally Left Blank;
(xi) a true and complete copy of the Transportation Agreement
(MGNG), duly certified by a Responsible officer of Pipeline;
(xii) a true and complete copy of the Management Agreement
Amendment, duly certified by a Responsible Officer of Pipeline;
(xiii) a true and complete copy of the Supply Agreement Amendment,
duly certified by a Responsible Officer of Marketing;
(xiv) a true and complete copy of the Service Agreement Amendment,
duly certified by a Responsible Officer of Marketing;
(xv) Intentionally Left Blank;
(xvi) Intentionally Left Blank;
(xvii) a counterpart of each Consent, executed and delivered by a
duly authorized officer of the parties thereto;
(xviii) true and complete copies of the GE Capital Loan Agreement
and all instruments, documents and agreements executed in connection
therewith and any and all amendments and modifications thereto;
(xix) Intentionally Left Blank;
(xx) a certificate of a Responsible Officer of each Borrower that
other than the Project Documents delivered to the Lender pursuant to
this subsection 4.1(c), such Borrower is not party to any other Project
Document on the date hereof or any other contract on the date hereof
(other than employment contracts and contracts involving less than
$100,000 annually); and
(xxi) a true and complete copy of the Contribution Agreement, duly
certified by a Responsible Officer of each Borrower.
(d) Corporate Documents. The Lender shall have received each of the
following documents:
LOAN AGREEMENT - Page 17
<PAGE>
(i) a copy of the charter of Castle, Exploration, each General
Partner and each Limited Partner, duly certified by the Secretary of
State of the appropriate jurisdiction, within five (5) days prior to
the Closing Date;
(ii) a Certificate of Good Standing of Castle, Exploration, each
General Partner and each Limited Partner in the jurisdiction in which
it was chartered, certified by the Secretary of State of such
jurisdiction, dated within five (5) days prior to the Closing Date;
(iii) certificates of existence and good standing of each Borrower
in the State of Texas, certified by the Secretary of State of the State
of Texas, dated within five (5) days prior to the Closing Date;
(iv) copies of each Borrower's Certificate of Limited Partnership
certified by the Secretary of State of the State of Texas, dated within
five (5) days prior to the Closing Date; and
(v) a certificate from the Secretary of Castle, Exploration, each
General Partner and each Limited Partner, dated the Closing Date,
certifying (A) there have been no amendments to the charter of such
Person from that delivered pursuant to clause (i) above, (B) a copy of
the by-laws of such Person, (C) corporate resolutions of its Board of
Directors authorizing its (and, in the case of each General Partner,
the relevant Borrower's) execution, delivery and performance of the
Basic Documents to which such Person (or such Borrower) is a party and,
in the case of such General Partner, authorizing the borrowing by the
relevant Borrower hereunder, (D) the incumbency of its officers
executing the Basic Documents to which such Person (or the relevant
Borrower) is a party and all related documentation.
(e) Intercreditor Agreement. The Intercreditor Agreement duly executed
by GE Capital, as agent and each of the Subject Parties.
(f) Authorizing Actions. All partnership, corporate and other
proceedings in connection with the transactions contemplated by this Agreement
and the other Basic Documents, and all documents and instruments incident
thereto, shall be reasonably satisfactory in form and substance to the Lender
and its counsel; and the Lender and its counsel shall have received such
counterpart originals or certified or other copies of all such documents and
instruments and of all records of partnership and corporate proceedings in
connection with such transactions, and such incumbency and signature
certificates of officers of the Borrowers, the General Partners, the Limited
Partners and Castle as the Lender or its counsel may reasonably request,
together with certificates of good standing and payment of franchise taxes in
the jurisdiction of each such Person's organization.
(g) No Violation. The consummation of the transactions contemplated
hereby shall not contravene, violate or conflict with, nor involve the Lender in
any violation of any Applicable Law.
(h) Opinions. The Lender shall have received (i) the legal opinion of
Akin, Gump, Strauss, Hauer & Feld, L.L.P., Texas counsel to Castle, the
LOAN AGREEMENT - Page 18
<PAGE>
Borrowers, the General Partners and the Limited Partners, addressing the matters
set forth on Exhibit B-1, (ii) the legal opinion of Cassidy, Kotjarapoglus &
Pohland, special Pennsylvania counsel to Castle, the Borrowers, the General
Partners and the Limited Partners addressing the matters set forth on Exhibit
B-2, and (iii) the legal opinion of Ottinger, Hebert & Sikes, L.L.P., special
Louisiana counsel to Castle, the Borrowers, the General Partners and the Limited
Partners addressing the matters set forth on Exhibit B-3.
(i) Representations and Warranties. Each of the representations and
warranties made pursuant to this Agreement or made by any Representing Party
pursuant to any other Basic Document shall be true and correct in all material
respects on and as of the Closing Date.
(j) No Default. No Default or Event of Default shall have occurred and
be continuing on the Closing Date. No Event of Loss shall have occurred.
(k) Additional Documents. The Lender shall have received each
additional document, instrument, legal opinion or item of information reasonably
requested by it, including, without limitation, a copy of any debt instrument,
security agreement or other material contract to which any Borrower or any other
party hereto may be a party.
(l) Additional Matters. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
transactions contemplated by this Agreement and the other Basic Documents shall
be satisfactory in form and substance to the Lender, and the Lender shall have
received such other documents and legal opinions in respect of any aspect or
consequence of the transactions contemplated hereby or thereby as it shall
reasonably request.
(m) Environmental Information. The Lender shall have received such
information as the Lender may reasonably request and such information shall not
disclose any unusual environmental risks associated with the Assets or the
business or properties of the Borrowers and shall otherwise be satisfactory in
form and substance to the Lender.
(n) Updated Reports of Consultants. The Lender shall have received the
following:
(i) a copy of the Ryder Scott Company Report;
(ii) a copy of the Huntley and Huntley Report; and
(iii) a copy of the ENSR Consulting and Engineering Report.
(o) Existing BTCC Obligations; Release of Liens. The Lender shall have
received satisfactory evidence that all obligations of the Borrowers (other than
any obligations specifically provided for pursuant to that certain Agreement
Regarding Release and Instruction dated as of April 30, 1996 among Castle,
Production GP, Castle LP, BTCC, Production and Lender) under the Existing BTCC
Loan Agreement and any agreement executed and delivered in connection therewith
have been or upon funding of the Term Loan, will be satisfied and that all
documents, instruments and financing statements (including, without limitation,
LOAN AGREEMENT - Page 19
<PAGE>
Uniform Commercial Code financing statements) requested by the Lender to release
all Liens granted by Castle and the Borrowers in favor of BTCC in connection
with the Existing BTCC Loan Agreement have been executed, delivered and filed
or, upon funding of the Term Loan will be filed.
(p) Perfection of Liens and Security Interests. All filings, recordings
and other actions that are necessary or desirable in order to establish,
protect, preserve and perfect the Lender's Lien on and perfected security
interest in all right, title, estate and interest of the Borrowers, the General
Partners, the Limited Partners or Castle, as the case may be, in and to all
Collateral covered by the Collateral Security Documents, prior and superior to
all other Liens (other than the Liens of GE Capital pursuant to the Senior
Collateral Documents), existing or future, shall have been duly made or taken
and all fees, taxes and other charges relating to such filings and recordings
and other actions shall have been paid by the Borrowers, the General Partners,
the Limited Partners or Castle, as the case may be, or filings for exemptions
therefrom shall have been made. The Lender shall have received authenticated
copies or other evidence of all filings, recordings and other actions obtained
or made in order to create and perfect such Lien on and perfected security
interest in the right, title, estate and interest of the Borrowers, the General
Partners, the Limited Partners or Castle, as the case may be, in and to all
Collateral covered by the Collateral Security Documents.
(q) Insurance. Insurance complying with the provisions of subsection
5.4 shall be in full force and effect and the Lender shall have received (i)
certificates of insurance signed in each case by the insurer or any agent
authorized to bind the insurer, conforming to the requirements of subsection
5.4(d) and (ii) an opinion of an independent insurance broker acceptable to the
Lender, conforming to the requirements of subsection 5.4(e).
(r) Financial Statements. The Lender shall have received (i) the most
recent balance sheet and related financial statements of each Borrower, each
General Partner and each Limited Partner, in each case certified by a
Responsible Officer of such Person and (ii) the most recent annual audited
balance sheet and related financial statements of Castle and Enserch, each of
which financial statements shall be satisfactory to the Lender.
(s) No Material Adverse Change. In the opinion of the Lender, since the
dates of the financial statements referred to in subsection 4.1(q), no material
adverse change has occurred in (A) the financial condition of any Borrower, any
General Partner, any Limited Partner, Castle or Lone Star, (B) the properties,
business, operations or prospects of any Borrower, any General Partner, any
Limited Partner, Castle or Lone Star, or (C) any Borrower's, any General
Partner's, any Limited Partner's, Castle's or Lone Star's ability to perform its
obligations under this Agreement and/or the other Basic Documents to which it is
or is to become a party.
(t) Project Documents. Each of the Project Documents (other than any
OWI Contract) shall be in full force and effect. No default shall exist and be
continuing under any Project Document (other than any OWI Contract).
LOAN AGREEMENT - Page 20
<PAGE>
SECTION 5. AFFIRMATIVE COVENANTS
Each Borrower and each General Partner (as to each General Partner,
only as to subsections 5.1, 5.3 and 5.6) covenants and agrees that, so long as
the Term Note remains outstanding and unpaid or any other amount is owing to
Lender hereunder or under the Collateral Security Documents, such Borrower and
such General Partner shall:
5.1 Conduct of Business, Maintenance of Existence, Etc. (a) Continue to
engage in business of the same general type as now conducted by it and preserve,
renew and keep in full force and effect its corporate or partnership existence
and take all reasonable action to maintain all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business; comply
with all Contractual Obligations and Requirements of Law; maintain, or cause
each Servicer to maintain, all licenses, permits, charters and registrations
necessary to conduct its business.
(b) The General Partners will engage solely in the business of being
general partners of the Borrowers.
(c) Pipeline GP shall remain at all times the sole general partner of
Pipeline. Marketing GP shall remain at all times the sole general partner of
Marketing. Production GP shall remain at all times the sole general partner of
Production.
5.2 Payment of Obligations. Pay, discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all of its
obligations under the Basic Documents and all of its other obligations of
whatever nature, including, without limitation, any payments due to lessors,
suppliers, vendors and tax authorities, except, in the case of such other
obligations, when (a) the amount or validity thereof is currently being
contested in good faith by appropriate actions or proceedings and such contest
does not involve any risk of the sale, forfeiture or loss of any of the
Collateral, (b) adequate cash reserves shall have been established in respect
thereof and (c) any action or proceeding instituted to enforce such obligations
shall have been effectively stayed.
5.3 Performance Under Other Agreements. Duly perform and observe all of
the covenants, agreements and conditions on its part to be performed and
observed hereunder and under the Term Note and the Collateral Security Documents
to which it is or is to become a party and, unless the Lender otherwise consents
in writing, duly perform and observe in all respects all of the covenants,
agreements and conditions on its part to be performed and observed under the
other Basic Documents (other than the OWI Contracts) to which it is or is to
become a party; and diligently enforce all of its rights under each Assigned
Contract to which it is or is to become a party.
5.4 Partnership Insurance Coverage. (a) Each Borrower shall, without
limiting any of the other obligations or liabilities of such Borrower under this
Agreement, at all times maintain, at no cost to the Lender, the following
minimum insurance coverages (such coverage shall be written by insurers and be
in such form and contain terms and conditions as are acceptable to the Lender
and with deductibles in the amounts as specified below):
LOAN AGREEMENT - Page 21
<PAGE>
(i) Workers' Compensation and Employer's Liability Insurance
covering the employees of the Borrowers and Castle engaged in
operations hereunder and under the Basic Documents in compliance
with all applicable state and federal laws, and written with
statutory limits and containing $50,000,000 (when combined with
umbrella and excess limits) of employers liability. Such
coverage shall not contain an occupational disease exclusion.
The deductible shall not exceed $10,000;
(ii) Comprehensive General Liability Insurance written in an amount
not less than $50,000,000 (when combined with umbrella and
excess limits) of which the primary $25,000,000 shall be written
on an occurrence basis. Such coverage shall include: premises
and operations; broad form contractual; broad form property
damage; underground resources; sudden and accidental pollution;
x.c.u. (explosion, collapse and underground perils); and
independent contractors. The deductible shall not exceed
$10,000;
(iii) Comprehensive Automobile Liability Insurance covering all owned,
non-owned and hired vehicles in an amount not less than
$50,000,000 (when combined with umbrella and excess limits). The
deductible shall not exceed $10,000;
(iv) Business Interruption Insurance and Extra Expense on the
Pipeline Assets and above ground equipment written in an amount
not less than the equivalent of 90 days' net income and
continuing expenses of the Borrowers. Such policy shall include
loss of net profits and continuing expenses for a period of not
less than 90 days and shall be written with an agreed amount
endorsement waiving any coinsurance penalty. The deductible
shall not exceed 10 days or the dollar equivalent of 10 days
loss of net profits and continuing expenses;
(v) All Risk Property Insurance with limits of not less than
$15,000,000 on the Pipeline Assets, the above ground equipment
and the other property covered by the Collateral Security
Documents written on a 100% replacement cost basis including not
but limited to fire and extended coverage, comprehensive boiler
machinery perils with a combined property damage/business
interruption limits of not less than $10,000,000, flood and
earthquake coverage with limits of not less than $5,000,000.
Such policy shall contain an agreed amount endorsement waiving
any coinsurance penalty. The deductible shall not exceed
$50,000; and
(vi) such insurance as any Borrower is required to maintain pursuant
to the provisions of any other Basic Documents.
(b) Without limiting in anyway the foregoing, each Borrower shall keep
all of its property insured for replacement value of like kind and quality by
insurance companies licensed to do business in the State of Texas and reasonably
satisfactory to the Lender against loss or damage by fire or other risk usually
insured against by other owners or users of such properties in similar
businesses under extended coverage endorsement and against theft, burglary and
LOAN AGREEMENT - Page 22
<PAGE>
pilferage together with other insurance covering such other hazards as the
Lender may from time to time reasonably request, in amounts customary with
industry standards. Subject to any obligation to deliver the original policies
of insurance to GE Capital under the GE Capital Loan Agreement, each Borrower
shall deliver the policy or policies of such insurance (or, in the event such
policies have previously been delivered to GE Capital, true and complete copies
thereof) or certificates of insurance to the Lender if the Lender so requests
and whether or not so delivered such policies and all proceeds thereof shall be
security for all Obligations.
(c) Each Borrower shall cause the insurance carried in accordance with
this subsection 5.4 to be endorsed as follows:
(i) with the exception of workers compensation insurance, the
Borrowers shall be the named insured[s] and the Lender shall be an
additional named insured, as its interest may appear with the
understanding that any obligation of the Borrowers (including without
limitation the liability to pay premiums) shall be the sole obligation
of the Borrowers;
(ii) the interest of the Lender shall not be invalidated by any
action or inaction of any Borrower or any other Person and of any
breach or violation by any Borrower or any other Person of any
warranties, declarations or conditions in such policies;
(iii) the insurer thereunder shall waive all rights of subrogation
against the Lender, any right of setoff or counterclaim and any other
right to deduction, whether by attachment or otherwise;
(iv) such insurance shall be primary without right of contribution
of any other insurance carried by or on behalf of the Lender with
respect to its interest as such in the Assets or other insured
property;
(v) if such insurance is canceled for any reason whatsoever,
including nonpayment of premium, or any changes are initiated by the
carrier which reduces the limits or which otherwise affects the
interest of the Lender, such cancellation or change shall not be
effective as to the Lender for 60 days, except for nonpayment of
premium which shall be 30 days, after receipt by the Lender of written
notice sent by registered mail from such insurer of such cancellation
or change;
(vi) shall be endorsed to provide that, inasmuch as the policy is
written to cover more than one insured, all terms, conditions, insuring
agreements and endorsements, with the exception of limits of liability,
shall operate in the same manner as if there were a separate policy
covering each insured; and
(vii) shall include a standard Lender's loss payable endorsement in
favor of the Lender, as its interest may appear. Deductibles or self
insured retentions shall be subject to approval by the Lender.
LOAN AGREEMENT - Page 23
<PAGE>
(d) Evidence of Insurance. At the Closing Date and at each policy
anniversary date, but not less than annually, the Borrowers shall furnish the
Lender with approved certification of all required insurance. Such certification
shall be executed by each insurer or by an authorized representative of each
insurer where it is not practical for such insurer to execute the certificate
itself. Such certification shall identify underwriters, the type of insurance,
the insurance limits and the policy term, and shall specifically list the
special provisions enumerated for such insurance required by paragraph (a) of
this subsection 5.4). Upon request, the Borrowers will furnish the Lender with
copies of all insurance policies, binders and cover notes or other evidence of
such insurance relating to the Assets.
(e) Insurance Report. Concurrently with the furnishing of the
certification referred to in paragraph (d), the Borrowers shall furnish the
Lender with an opinion of each insurance broker stating that all premiums then
due have been paid and that, in the opinion of such broker, the insurance then
carried and maintained with respect to the Assets is in accordance with the
terms of this Agreement. Furthermore, the Borrowers shall cause each insurer or
such broker to advise the Borrowers in writing of any default in the payment of
any premiums or any other act or omission on the part of the Borrowers which
might invalidate or render unenforceable, in whole or in part, any insurance
provided hereunder. The Lender may at its sole option obtain such insurance if
not provided by the Borrowers and, in such event, the Borrowers shall reimburse
the Lender upon demand for the cost thereof.
(f) Notwithstanding anything to the contrary herein, no provision of
this subsection 5.4 or any provision of any other Basic Document shall impose on
the Lender any duty or obligation to verify the existence or adequacy of the
insurance coverage maintained by such Borrower, nor shall the Lender be
responsible for any representations or warranties made by or on behalf of any
Borrower to any insurance company or underwriter.
5.5 Inspection of Property; Books and Records. (a) Keep proper books of
records and accounts in which full, true and correct entries in accordance with
GAAP and all Requirements of Law shall be made of all of its dealings and
transactions in relation to its business and activities; and permit, and cause
Castle to permit, representatives of the Lender to visit and inspect any of its
properties and examine and make abstracts from any of its books and records (in
the case of Castle, only such books and records relating to the Borrowers or the
transactions contemplated by the Basic Documents) at any reasonable time and as
often as may reasonably be desired and to discuss the business, operations,
properties and financial and other condition of the Borrowers with officers and
employees of the Borrowers and with their independent certified public
accountants. Permit the Lender to select and retain consultants to advise the
Lender as to technical matters pertaining to the Borrowers' businesses and
operations and the Assets.
(b) Upon the request of the Lender, promptly undertake a diligent
investigation of the Assets for the purpose of enabling any Borrower to enforce,
if necessary, the environmental or title indemnities relating to the Assets
provided to Castle by ARCO and assigned to the Borrowers.
LOAN AGREEMENT - Page 24
<PAGE>
5.6 Compliance with Laws. Comply with all Requirements of Law, and from
time to time obtain and comply with all Governmental Approvals as shall now or
hereafter be necessary under all Applicable Laws (except any thereof the
non-compliance with which would not have a material adverse effect on the
Borrowers or the Assets, the Borrowers' ability to perform their obligations
under the Project Documents or the rights or interests of the Lender), in
connection with the ownership, operation or maintenance of its properties and
the Assets.
5.7 Financial Statements. Furnish or cause to be furnished to the
Lender:
(a) as soon as available, but in any event within 105 days (or, in
the case of Enserch, as soon as publicly available) after the end of
each fiscal year of each Borrower, each General Partner, each Limited
Partner, Castle and Enserch (each a "Reporting Party"), a copy of the
balance sheet of such Reporting Party as of the end of such fiscal year
and the related statements of income, retained earnings (or partners'
capital) and changes in cash flows of such Reporting Party for such
fiscal year, setting forth in each case in comparative form the figures
for the previous fiscal year, certified without qualification or
exception as to the scope of its audit by independent public
accountants of national standing; and
(b) as soon as available, but in any event within 45 days after the
end of each quarterly period of each fiscal year of each Reporting
Party (other than Castle and Enserch), the unaudited balance sheet of
such Reporting Party as of the end of such quarterly period and the
related unaudited statements of income and retained earnings (or
partners' capital) and changes in cash flows of such Reporting Party
for such quarterly period and for the portion of the fiscal year then
ended, setting forth in each case in comparative form the figures for
the previous period, certified by a Responsible Officer of such
Reporting Party as being fairly stated in all material respects
(subject to normal audit adjustments);
All such financial statements (other than the financial statements of Enserch,
which shall be the financial statements in the form filed by Enserch on Form
10-K with the Securities and Exchange Commission) shall be complete and correct
in all material respects and shall be prepared in reasonable detail and in
accordance with GAAP applied consistently throughout the periods reflected
therein and with prior periods (except for changes approved or required by the
independent public accountants certifying such statements and disclosed
therein).
5.8 Certificates; Operating Statements; Other Information. Furnish or
cause to be furnished to the Lender:
(a) concurrently with the delivery of the financial statements of
the Borrowers referred to in subsection 5.7(a), a certificate of the
independent public accountants which certified such financial
statements stating that in making the examination necessary for the
audit thereof no knowledge was obtained of any Default or Event of
Default, except as specified in such certificate;
LOAN AGREEMENT - Page 25
<PAGE>
(b) concurrently with the delivery of the financial statements of
the Borrowers referred to in subsections 5.7(a) and (b), a certificate
of a Responsible Officer of such Borrower, stating that such officer
has reviewed, or caused to be reviewed, by individuals under his or her
supervision, this Agreement and each other Basic Document to which such
Borrower is a party and has made, or caused to be made under his
supervision, a review of the transactions contemplated hereby and
thereby and to the best of such Responsible Officer's knowledge after
such review, such Borrower has observed and performed all of its
covenants and other agreements hereunder, and satisfied every material
condition, contained in this Agreement, the Term Note and the other
Basic Documents to be observed, performed or satisfied by it, and that
such Responsible Officer in the course of such review has obtained no
knowledge of any Default or Event of Default hereunder at any time
during such period or on the date of such certificate and no knowledge
of any default or event which with the giving of notice or the lapse of
time or both would constitute a default under any of the other Basic
Documents at any time during such period or on the date of such
certificate (or, if any such Default or Event of Default or default or
event shall have occurred, a statement setting forth the nature thereof
and the steps being taken by such Borrower to remedy the same);
(c) as soon as practicable, but in any event within 45 days after
the and of each calendar month, an operating report of each Borrower as
at the end of such period and for the period of such Operating Year
then ended, setting forth the revenues of such Borrower received during
such month and the expenses and extraordinary items disbursed during
such month and containing, (i) with respect to Pipeline, a summary
transportation statement and (ii) with respect to Marketing, a summary
of Natural Gas sales and purchases, and such other information as shall
be agreed to by the Lender and the Borrowers setting forth in
comparative form the corresponding figures for the corresponding
periods in the preceding Operating Year (if applicable) and the
corresponding figures for the corresponding periods contained in the
current Operating Budget, accompanied by a certificate of a Responsible
officer of such Borrower, which certificate shall state that such
report is true and correct to the best of his knowledge.
(d) not later than 135 days prior to the end of each Operating
Year, a copy of the monthly Operating Budget of each Borrower for the
next Operating Year of such Borrower, such Operating Budget to be
approved by the Lender and to include, on a cash basis, a budget for
each Operating Year specifying on a monthly basis for such Operating
Year the principal items of (i) revenue anticipated to be received in
respect of the operation of such Borrower's business and (ii) costs and
expenses anticipated to be incurred in connection with the maintenance,
administration, operation of such Borrower's business including,
without limitation, taxes, premiums for insurance policies required to
be maintained pursuant to the Loan Agreement and any fees and expenses
payable to the Lender pursuant to the Loan Documents, together with a
manpower forecast and periodic inspection, maintenance and repair
schedule and any other items necessary to calculate "operating income"
in the proposed Operating Budget and (iii) a revised estimate (and
related schedule) of costs, if any, to be incurred by such Borrower in
respect of major maintenance items during the next two year period. The
Operating Budget and projections shall be accompanied by (A) a
LOAN AGREEMENT - Page 26
<PAGE>
forecasted Operating Budget for the next succeeding Operating Year
specifying, in the same format, on an annual basis the items described
in clauses (i), (ii) and (iii) above for each such Operating Year, (B)
a discussion of any significant changes from the approved Operating
Budget for the previous year, (C) a discussion of any significant
changes from the forecasted Operating Budget delivered the previous
year, (D) a discussion of any anticipated changes to the terms and
conditions, coverages, policies or carriers of the insurance required
to be maintained pursuant to subsection 5.4, (E) a discussion of any
contemplated changes to agreements or elections covering the
production, removal, supply, sale, purchase or transportation of
Natural Gas and (F) a certificate of a Responsible Officer of such
Borrower to the effect that such Operating Budget and projections have
been prepared in good faith on a reasonable basis and that such officer
has no reason to believe they are incorrect or misleading in any
material respect;
(e) promptly after the same are sent, copies of all financial
statements and reports which any Borrower sends to its partners;
(f) promptly after the filing thereof, the "Annual Returns" (Form
5500 series) and attachments filed annually with the IRS with respect
to each Single Employer Plan, if any, of each Borrower;
(g) promptly after delivery or receipt thereof, a copy of each
material notice, demand or other communication (not to include routine
correspondence) delivered or received by any Borrower or any General
Partner pursuant to any Basic Document, including without limitation,
the certificate delivered to Marketing pursuant to Paragraph 11.1 of
the Supply Agreement, the reports delivered to Marketing pursuant to
Section 3 of Exhibit A of the Service Agreement and each report
delivered to Pipeline pursuant to paragraphs (a) and (c) of Section 4
of Exhibit A to the Management Agreement;
(h) promptly, such additional financial and other information with
respect to the Borrowers or any other Reporting Party or the Assets as
the Lender may from time to time reasonably request;
(i) with respect to any Single Employer Plan adopted or amended by
any Borrower or any Commonly Controlled Entity on or after the date
hereof, any determination letters received from the IRS with respect to
the qualification for such Plan, as initially adopted or amended under
Section 401(a) of the Code;
(j) copies of each Governmental Approval or other consent or
approval obtained or made by any Borrower;
(k) promptly after any material diminution in (other than ordinary
month to month variations of volume), or interruption of, the supply of
Natural Gas to Marketing, or the flow of Natural Gas through the
Pipeline Assets, a notice describing the circumstances of such
diminution or interruption; and
LOAN AGREEMENT - Page 27
<PAGE>
(l) as soon as practicable, but in any event within 15 days after
the end of each Operating Year (or, in the event that the Lone Star
Contract terminates prior to the end of an Operating Year, within 15
days from the date of such termination), Marketing shall deliver to the
Lender a certificate (together with such back-up information as may be
reasonably requested to confirm the information contained in such
certificate) of a Responsible Officer of Marketing setting forth the
quantity of gas that Lone Star purchased during such Operating Year (or
such shorter period if applicable) under the Lone Star Contract
together with an itemized statement setting forth whether Lone Star
purchased the quantity of gas required to be purchased under the Lone
Star Contract for such period. In the event that Lone Star shall fail
to purchase the quantity of gas required to be purchased under the Lone
Star Contract for any Operating Year (or shorter period if applicable)
then, simultaneously with the delivery of the certificate referred to
in this paragraph (l), Marketing shall notify Lone Star in writing
(with a copy to the Lender) of such failure in accordance with
paragraph 7.2 of the Lone Star Contract.
5.9 Taxes. Each Borrower and each General Partner shall, and shall
cause each Limited Partner and each Tax Affiliate to, pay and discharge all
taxes, assessments and governmental charges or levies imposed on it or on its
income or profits or on any of its property or on the transportation or sale of
Hydrocarbons or on the receipt of proceeds therefrom prior to the date on which
penalties attach thereto, and all lawful claims which, if unpaid, might become a
Lien upon the property of such Borrower, General Partner, Limited Partner or Tax
Affiliate; provided, that, if no Event of Default shall have occurred and be
continuing, such Borrower, General Partner, Limited Partner or Tax Affiliate may
contest in good faith the validity or amount of any such tax, assessment,
charge, levy or claim by proper proceedings timely instituted, and may permit
the taxes, assessments, charges, levies or claims so contested to remain unpaid
during the period of such contest if: (a) such Borrower, diligently prosecutes
such contest, (b) such Borrower, sets aside adequate cash reserves with respect
to the contested items, (c) during the period of such contest the enforcement of
any contested item is effectively stayed, and (d) in the reasonable opinion of
the Lender, such contest will not involve any material danger of the sale,
forfeiture or loss of any part of the Collateral, title thereto or any interest
therein and will not interfere with the performance of the Basic Documents. Each
Borrower will promptly pay or cause to be paid any valid, final judgment
enforcing any such tax, assessment, charge, levy or claim and cause the same to
be satisfied of record. The foregoing notwithstanding, this subsection 5.9 shall
only apply in the case of a Tax Affiliate with respect to those taxes for which
any Borrower, any General Partner or any Limited Partner could be held liable.
5.10 Maintenance of Property. At its expense, keep all property useful
and necessary in its business in good working order and condition and make all
repairs, replacements and renewals with respect thereto.
5.11 Notices. Promptly give notice to the Lender:
(a) of the occurrence of any Default, Event of Default or Event of
Loss;
(b) of any default or event of default under any Project Document;
LOAN AGREEMENT - Page 28
<PAGE>
(c) of any litigation, investigation or proceeding which may exist
at any time between any Borrower or any General Partner and any
Governmental Authority including, without limitation, any litigation,
investigation or proceeding to revoke or modify any license or
Governmental Approval required for the ownership or operation of such
Person's business;
(d) of any litigation or proceeding affecting any Borrower in which
the amount involved is $50,000 or more and not covered by insurance or
in which injunctive or similar relief is sought;
(e) of any litigation, investigation or proceeding affecting any
Borrower or, if it knows or has reason to know thereof, affecting any
other Person party to a Project Document which, if adversely
determined, could reasonably be expected to have a Material Adverse
Effect;
(f) of the following events, as soon as possible and in any event
within 30 days after any Borrower or any General Partner knows or has
reason to know thereof: (i) the occurrence or expected occurrence of
any Reportable Event with respect to any Plan, or any withdrawal from,
or the termination, Reorganization or Insolvency of any Multiemployer
Plan, or (ii) the institution of proceedings or the taking or expected
taking of any other action by PBGC or any Borrower to terminate,
withdraw or partially withdraw from any Plan, or (iii) the
reorganization or insolvency of any Multiemployer Plan, and, in
addition to such notice, deliver to the Lender whichever of the
following may be applicable: (A) a certificate of a Responsible Officer
of such Borrower, setting forth details as to such Reportable Event and
the action that such Borrower proposes to take with respect thereto,
together with a copy of any notice of such Reportable Event that may be
required to be filed with PBGC, or (B) any notice delivered by PBGC
evidencing its intent to institute such proceedings or any notice to
PBGC that such Plan is to be terminated, or (C) any notice of
Reorganization or Insolvency of a Multiemployer Plan received by such
Borrower;
(g) of any Material Adverse Effect or any event which could result
in a Material Adverse Effect or of any change of law, rule or
regulation which has or could have a Material Adverse Effect;
(h) of any loss or damage to the Collateral in excess of $50,000;
(i) of the proposed execution and delivery of any Additional
Contract;
(j) of the cancellation or expiration (without renewal or
replacement) of any insurance required to be maintained under
subsection 5.4;
(k) of the initiation of any condemnation proceedings against any
of the Collateral;
(l) of any Lien or claim against any Collateral other than
Permitted Liens;
LOAN AGREEMENT - Page 29
<PAGE>
(m) of any event constituting force majeure under any of the Basic
Documents or any claim by any party to any Basic Document alleging that
a force majeure event thereunder has occurred;
(n) the failure by Marketing on any day to supply Lone Star with
the quantity of gas which Lone Star has requested (and which Marketing
is required to deliver) for such day pursuant to the Lone Star
Contract;
(o) of any notice sent to Marketing pursuant to Section 7.6 of the
Supply Agreement (in each case, with a copy of such notice received by
Marketing);
(p) of discovery of any Hazardous Materials at any Borrower's
property that is in violation of any Relevant Environmental Law or that
could reasonably be expected to require remediation or similar action
at any time in the reasonably foreseeable future under any Relevant
Environmental Law or of any litigation or proceeding relating to
environmental matters concerning any of the Borrowers or their
respective assets and properties (including receipt by such Borrower of
any notice of any proceeding involving a Relevant Environmental Law or
any discharge of Hazardous Materials); and
(q) of the receipt by any General Partner or Borrower of any notice
or declaration by any Governmental Authority or of any assertion by any
Governmental Authority or any written assertion by any other Person
which relates to, or could result in, the Assets, or any portion
thereof, becoming subject to the jurisdiction of FERC.
Each notice pursuant to this subsection 5.11 shall be accompanied by a statement
of a Responsible Officer of the applicable Borrower setting forth details of the
occurrence referred to therein and stating what action such Borrower proposes to
take with respect thereto and, with respect to a notice given pursuant to clause
(i), shall be accompanied by a copy of the Additional Contract. For all purposes
of clause (f) of this subsection, the Borrowers shall be deemed to have all
knowledge or knowledge of all facts attributable to the administrator of such
Plan.
5.12 Employee Plans. For each Plan adopted by a Borrower, (a) use its
best efforts to seek and receive determination letters from the IRS to the
effect that such Plan is qualified within the meaning of Section 401(a) of the
Code; and (b) from and after the date of adoption of any Plan, cause such Plan
to be qualified within the meaning of Section 401(a) of the Code and to be
administered in all material respects in accordance with the requirements of
ERISA and Section 401(a) of the Code.
5.13 Management Letters. Promptly deliver to the Lender a copy of each
report delivered to any Borrower by its independent public accountants in
connection with any annual or interim audit of its books, including, without
limitation, any letters or reports addressed to such Borrower or any of its
officers or partners relating to internal controls, adequacy of records or the
like.
LOAN AGREEMENT - Page 30
<PAGE>
5.14 Easements. Submit to the Lender for the Lender's approval, which
shall not be unreasonably withheld, copies of all prospective easements,
licenses, restrictive covenants or other similar agreements affecting the Assets
prior to their execution, together with a drawing or survey showing the location
thereof.
5.15 Hazardous Materials. (a) Provide such information as is reasonably
requested by the Lender about all Hazardous Materials and the storage, handling
or disposal thereof which may exist at any Borrower's properties.
(b) Comply with, and undertake all reasonable efforts to ensure that
all tenants and subtenants, if any, comply with, all Relevant Environmental
Laws.
(c) Defend, indemnify and hold harmless the Lender, its Affiliates,
successors and assigns, and any of their respective employees, agents, officers
and directors, from and against any claims, demands, penalties, fines,
liabilities, settlements, damages, costs and expenses of whatever kind or nature
known or unknown, contingent or otherwise, arising out of, or in any way
relating to the violation of, noncompliance with or liability under any Relevant
Environmental Laws applicable to any of the Borrowers, their operations or the
Mortgaged Properties, or any orders, requirements or demands of Governmental
Authorities related thereto, including, without limitation, reasonable
attorneys' and consultants' fees, investigation and laboratory fees,
environmental audits, response costs, court costs and litigation expenses,
except to the extent that any of the foregoing arise out of the gross negligence
or willful misconduct of the party seeking indemnification therefor. This
indemnity shall continue in full force and effect regardless of the termination
of this Agreement and the payment of the Term Note and all other amounts payable
hereunder.
(d) Operate, and cause each Servicer to operate, any property owned or
operated by the Borrowers (whether or not such property constitutes a "facility"
as defined by CERCLA) so that no clean up or other obligation arises in respect
of CERCLA or other in respect of any Applicable Law.
5.16 Use of Proceeds. Use the proceeds of the Term Loan for the
purposes set forth in subsection 2.3.
5.17 Servicers. (a) Cause each applicable Servicer to provide services
with respect to the Pipeline Assets in a manner substantially similar to other
prudent managers of similar Projects or providers of such services. Pipeline
shall, and shall cause each applicable Servicer to, give immediate notice to the
Lender of any problem which may result in a significant diminution in, or
cessation of, transportation of Natural Gas by, or involve a significant risk of
loss to, the Pipeline Assets.
(b) Cause each applicable Servicer to administer the Gas Contracts in
accordance with prudent business practices. Marketing shall, and shall cause
each applicable Servicer to, give immediate notice to the Lender of any problem
which is reasonably likely to involve a significant risk of loss relating to the
Gas Contracts.
LOAN AGREEMENT - Page 31
<PAGE>
(c) Cause, and cause each applicable Servicer to: (i) maintain the
Pipeline Assets and the Gas Contracts in full force and effect in accordance
with prudent operator standards and comply with all express and implied
covenants with respect thereto; (ii) use its best efforts to pay or cause to be
paid all costs and expenses incurred in connection with the Pipeline Assets or
the Gas Contracts before they become delinquent; and (iii) furnish the Lender
with copies of all authorizations for expenditures on material operations prior
to the commencement thereof.
(d) Upon the Lender's request, obtain opinions from independent
consultants (or, if appropriate, legal counsel) reasonably satisfactory to the
Lender that each Servicer has all of the necessary Environmental Protection
Agency permits and other Governmental Approvals and licenses and that the
planned operation of the Pipeline Assets is in compliance with Applicable Laws.
(e) In the event of a failure by any Servicer to perform its
obligations under any Project Service Agreement which is not cured within the
applicable cure period, immediately, upon the request of the Lender, remove such
Servicer, seek indemnification or damages from such Servicer and its successors
or assigns under the Project Service Agreements for any loss or liability
incurred by it in accordance with the terms and conditions of the Project
Service Agreements and cause such Servicer to deliver to the successor operator
all books, agreements, contracts, papers, records, and any and all documents,
written, printed or computerized, which may be pertinent in any way to the
operations to be conducted by such successor, or which may have formerly been
conducted by such Servicer, and shall cause such Servicer to fully cooperate
with such successor to ensure that no portion of the Assets serviced are
terminated or their value diminished by virtue of such resignation or removal,
and cause such Servicer to take all steps necessary to ensure such results as
may be directed by such successor.
5.18 Intentionally Left Blank.
5.19 Further Assurances. Cause to be promptly and duly taken, executed,
acknowledged and delivered all such further acts, documents and assurances as
may be necessary or as the Lender from time to time may reasonably request in
order to carry out more effectively the intent and purposes of this Agreement
and the other Basic Documents, and the transactions contemplated hereby and
thereby.
5.20 Assignment of Additional Contracts; Future Mortgages. (a) Upon
entering into any Additional Contract, each Borrower will use reasonable efforts
to obtain any required consent to the assignment by such Borrower to the Lender
of such Additional Contract (as security for the Obligations) and of all of the
right, title, interest, privilege and benefit of such Borrower under such
Additional Contract. Such Borrower shall grant such assignment to the Lender
promptly upon receipt of such required consent.
(b) If any Borrower shall at any time acquire any property or leasehold
or other interest in real property, such Borrower shall promptly notify the
Lender of such acquisition and shall promptly execute, deliver, record and file
LOAN AGREEMENT - Page 32
<PAGE>
instruments and documents (including, without limitation, a supplement to the
applicable Deed of Trust and the Borrower Security Agreement) as the Lender
shall request in order to create a perfected Lien thereon in favor of the
Lender.
5.21 Annual Opinion of Counsel. The Borrowers shall furnish to the
Lender within 90 days after the end of each calendar year, beginning with the
calendar year ending December 31, 1996, an opinion of counsel addressed to the
Lender (i) stating that such action has been taken with respect to the filing,
recording, re-filing and re-recording of the Collateral Security Documents
and/or financing statements and continuation statements with respect thereto as
is necessary to protect and preserve the Lender's liens on and security
interests in and to the Collateral created by the Collateral Security Documents
and reciting the details of such action or referring to prior opinions of
counsel in which such details are given and (ii) stating what, if any, action of
the foregoing nature may reasonably be expected to become necessary during the
next succeeding twelve months in order to protect and preserve the Lender's
liens on and security interests in the Collateral created by the Collateral
Security Documents.
5.22 Fiscal Year. The fiscal year of each Borrower shall be the
twelve-month period ending on September 30 of each year.
5.23 Environmental Compliance and Management Program. Pipeline shall
maintain an environmental program to (i) ensure that it, its Assets and its
operations are and remain in compliance with all Relevant Environmental Laws,
and (ii) minimize prudently any liabilities or potential liabilities that it,
its Assets or operations may have under any Relevant Environmental law.
The program shall include the following:
(a) By each anniversary following the Closing Date until all other
obligations under this Agreement are discharged, Pipeline shall, at its
expense, have arranged for and received from an Environmental
Consultant an updated and reasonably comprehensive review of its
operations, similar in scope and nature to the ENSR Consulting and
Engineering Report and expected to involve approximately 70 hours of
the Environmental Consultant's professional time, identifying issues
that could give rise to Pipeline's noncompliance with or liability
under any Relevant Environmental Law. In addition, at any reasonable
time following written notice to Pipeline, the Lender (or any
environmental consultant that the Lender in its sole discretion may
designate) may have reasonable access to any property owned or operated
by Pipeline and to any documents in the possession or control of
Pipeline, Pipeline's agents or other representatives, and may interview
knowledgeable Pipeline employees, agents, or other representatives, for
the purpose of reviewing Pipeline's compliance with or potential
liability under any Relevant Environmental Law, provided that Pipeline
shall not be responsible for any of the costs of the Lender or the
Lender's environmental consultant in connection with such additional
review, and provided further that no more than one such review shall
take place per calendar year unless Pipeline consents to any additional
reviews, which consent shall not be unreasonably withheld.
(b) Following each review identified in (a) of this section,
Pipeline shall (i) promptly implement any measures that it has
LOAN AGREEMENT - Page 33
<PAGE>
reasonably determined through such review to be necessary to comply
with any Relevant Environmental Laws, and (ii) prudently implement any
other measures to minimize its liability under any Relevant
Environmental Laws.
(c) Pipeline shall provide the Lender with quarterly reports
addressing the status of its environmental program. At the reasonable
request of the Lender, Pipeline shall make available to the Lender or
its designated representative any information, any documents, or any of
Pipeline's employees, agents, or other representatives, relating to
such quarterly reports.
5.24 FERC Jurisdiction. (a) Marketing shall sell all gas, including all
gas sold to Lone Star under the Lone Star Contract, only in sales that do not
constitute a sale in interstate commerce for resale subject to the jurisdiction
of the FERC under the NGA.
(b) Marketing shall purchase all of its gas, including from MGNG, only
in sales that do not constitute a sale in interstate commerce for resale subject
to the jurisdiction of the FERC under the NGA.
5.25 Cover Damages. With respect to any Delivery Default (as defined in
the Supply Agreement), Marketing shall, upon consulting with the Lender, obtain
Cover Supplies (as defined in the Supply Agreement).
5.26 Proceeds from the Production Payment and Receivables from Lone
Star Contract. All proceeds received (i) by Exploration from the Production
Payment after April 1, 1996, and (ii) by Marketing under the Lone Star Contract
after the Senior Loan Termination Date, shall be payable directly to a lockbox
under the control of Lender which shall then be deposited by Lender into a
lockbox account in accordance with the terms of the Lockbox Operating Agreement.
Unless an Event of Default has occurred, all such amounts so deposited shall be
transferred to such Borrower's operating account maintained with Lender within
two Business Days of the deposit thereof in the lockbox account. On each
Installment Payment Date prior to the Senior Loan Termination Date, Lender will
make the required payment by debiting Exploration's and Production's operating
accounts in the aggregate amount of such payment. Following the Senior Loan
Termination Date, Lender may debit the Borrowers' operating accounts in the
aggregate amount of such payment. In the event the aggregate amount on deposit
in such operating accounts is insufficient to make the required payment on any
Installment Payment Date, the Borrowers shall, subject to the terms of the
Intercreditor Agreement with respect to Pipeline and Marketing, remain liable
for the deficiency and agree to promptly pay same. If an Event of Default has
occurred, Lender may, subject to the terms of the Intercreditor Agreement with
respect to Pipeline and Marketing, apply all such amounts on deposit in the
lockbox account or the operating accounts to the Obligations in such order and
manner as it may elect in its sole discretion. Exploration and Marketing shall
each execute and deliver notices to the applicable Persons with respect to the
Production Payment and the Lone Star Contract to effectuate the direct payment
thereunder to the lockbox established pursuant to the Lockbox Agreement.
LOAN AGREEMENT - Page 34
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5.27 Post-Closing Title Opinions. Within thirty (30) days after the
Closing Date, Borrowers shall deliver to Lender title opinions in form and
substance satisfactory to Lender with respect to the Mortgaged Properties
identified on Schedule 7 hereto.
SECTION 6. NEGATIVE COVENANTS
Each Borrower and each General Partner (as to each General Partner,
only as to subsections 6.1, 6.2 and 6.6(b)) covenants and agrees that, so long
as the Term Note remains outstanding and unpaid or any other amount is owing to
Lender hereunder or under any Collateral Security Document, it shall not:
6.1 Merger, Sale of Assets, Etc. Merge into or consolidate with any
other Person, change its form of organization or its business, or liquidate or
dissolve itself (or suffer any liquidation or dissolution), or sell, lease,
transfer or otherwise dispose of any assets other than (i) Hydrocarbons in the
ordinary course of such Borrower's business and pursuant to the Project
Documents and (ii) obsolete or worn-out equipment.
6.2 Purchases of Assets. Purchase or acquire any assets other than the
purchase of assets in the ordinary course of business of such Borrower required
in connection with the operation and maintenance of such Borrower's business in
accordance with the Basic Documents and the Operating Budget of such Borrower.
6.3 Indebtedness. Create, incur, assume or suffer to exist any
Indebtedness, except:
(a) Indebtedness arising under the Basic Documents (as in existence
on the date hereof); and
(b) Permitted Indebtedness.
6.4 Distributions, Etc. Without the prior written consent of the
Lender, make any distributions to its General Partner, to its Limited Partner or
to any other Person in respect of any partnership interest in such Borrower or
any payments of management fees to its General Partner or its Limited Partner,
whether in cash, securities or other property, or redeem, purchase or otherwise
acquire any interest of its General Partner or its Limited Partner, or permit
its General Partner or its Limited Partner to withdraw any capital from such
Borrower.
6.5 Liens. Create or suffer to exist any Lien on any of its properties
or assets securing any Indebtedness or other ligation of such Borrower or any
other Person, other than (i) Liens in favor of the Lender created pursuant to
the Collateral Security Documents and (ii) Permitted Liens. The Borrowers agree
that they will, at their own cost and expense, take such action as may be
necessary to duly discharge and satisfy in full any such Lien.
LOAN AGREEMENT - Page 35
<PAGE>
6.6 Nature of Business. (a) With respect to the Borrowers, engage in
any business other than the transportation, purchase or sale of, Natural Gas, as
the case may be, as contemplated by and in accordance with the Basic Documents.
(b) With respect to the General Partners and the Limited Partners,
engage in any business other than being the general partner or the limited
partner, as the case may be, of its respective Borrower.
6.7 Amendment of Contracts, Etc. Without the prior written consent of
the Lender, agree to or permit (a) the cancellation, suspension or termination
of any Basic Document (other than any OWI Contract), except upon the expiration
of the stated term thereof, (b) the assignment of the rights or obligations of
any party to any Basic Document (other than any OWI Contract), except (i) as
contemplated by this Agreement or the Collateral Security Documents or (ii) as
permitted without the consent of such Borrower by the terms of such Basic
Document or (c) any amendment, supplement, or modification of, or waiver with
respect to any of the provisions of, any Basic Document.
6.8 Investments. Make any investments (whether by purchase of stock,
bonds, notes or other securities, loan, advance or otherwise).
6.9 Leases. Enter into, or be or become liable under, any agreement for
the lease, hire or use of any real property or of any personal property, except
for (a) pipeline-related leases, or any extensions or renewals thereof, entered
into in the ordinary course of business and (b) other leases of personal
property in the ordinary course of business of such Borrower which are not
Capital Leases the aggregate annual rental under which shall not exceed, in the
aggregate for all Borrowers, $25,000 per Operating Year.
6.10 Change of Office. Change the location of its chief executive
office or principal place of business or the office where it keeps its records
concerning its property and assets and all contracts relating thereto from that
existing on the date of this Agreement and specified in subsection 3.22.
6.11 Change of Name. Change its name.
6.12 Compliance with ERISA. (a) Terminate any Single Employer Plan so
as to result in any material liability to PBGC, (b) engage in or permit any
Affiliate to engage in any "prohibited transaction" (as defined in Section 406
of ERISA or Section 4975 of the Code) involving any Plan which would subject
such Person, to any material tax, penalty or other liability, (c) incur or
suffer to exist any material "accumulated funding deficiency" (as defined in
section 302 of ERISA), whether or not waived, involving any Plan subject to
Section 412 of the Code or Part 3 of Title I(b) of ERISA, (d) allow or permit to
exist any event (including a Reportable Event) or condition which represents a
material risk of incurring a material liability to PBGC, or (e) permit the
present value of all benefits vested under all Single Employer Plans subject to
LOAN AGREEMENT - Page 36
<PAGE>
Title IV of ERISA, based on those assumptions used to fund the Plans, as of any
valuation date with respect to such Plans to exceed the value of the assets of
the Plans allocable to such benefits.
6.13 Transactions with Affiliates and Others. Directly or indirectly,
purchase, acquire, exchange or lease any property from, or sell, transfer or
lease any property to, or borrow any money from, or enter into any management or
similar fee arrangement with, any Affiliate of such Borrower (or of any partner
of such Borrower) or any officer, director or employee of such Borrower (or of
any partner of such Borrower) except for (a) the transactions contemplated by
the Basic Documents and (b) transactions in the ordinary course of business and
upon fair and reasonable terms no less favorable than such Borrower could
obtain, or could become entitled to, in an arm's length transaction with a
Person which is not an Affiliate of such Borrower (or any partner of such
Borrower).
6.14 Approval of Additional Contracts. Without the consent of the
Lender, enter into any Additional Contract.
6.15 Alteration or Abandonment. (a) Alter, remodel, add to,
reconstruct, improve or demolish any part of the Assets or any other Collateral
covered by the Collateral Security Documents, in any manner that could impair
the value of the security provided by the Collateral Security Documents, or (b)
release or abandon the Assets or any other Collateral covered by the Collateral
Security Documents, or (c) allow the Assets to be developed, maintained,
operated or administered in a manner less favorable than with prior operations,
or (d) enter into any agreement for the sale, disposition, encumbrance or
assignment of any of the Assets or any of the services or oil and gas production
attributable thereto, except in the ordinary course of business.
6.16 Capital Expenditures; Operating Expenses, Etc. (a) Directly or
indirectly, make or commit to make any expenditure in respect of the purchase or
other acquisition (including installment purchases or financing leases) of fixed
or capital assets (excluding normal replacements and maintenance which are
properly charged to current operations), except for expenditures in the ordinary
course of business of such Borrower not exceeding, in the aggregate for all
Borrowers, the amount allocated therefor in the Operating Budget for the then
current operating Year.
(b) Allow, or permit any Servicer to allow, without the prior written
consent of the Lender, the commencement of any operation with respect to the
Pipeline Assets which is anticipated to exceed fifty thousand dollars
($50,000.00) (except for operations provided for in the Operating Budget for the
then current Operating Year, emergency operations, operations required under the
Basic Documents in existence on the date hereof and under any applicable
governmental agreement or order).
6.17 Sale and Leaseback. Enter into any arrangement with any Person
providing for the leasing by any Borrower of real or personal property which has
been or is to be sold or transferred by such Borrower to such Person or to any
other Person to whom funds have been or are to be advanced by such Person on the
security of such property or rental obligations of such Borrower.
LOAN AGREEMENT - Page 37
<PAGE>
6.18 Sale of Partnership Interests. (a) With respect to the Borrowers,
sell or create any partnership interest, of whatever nature, not in existence on
the date hereof.
(b) With respect to the General Partners, transfer, sign sell or
otherwise encumber any of its interests in any Borrower, except as provided in
the Collateral Security Documents.
6.19 Servicers; Service Agreements. Without the prior written consent
of the Lender, (i) remove, replace or substitute any Servicer, (ii) enter into
any Project Service Agreement not in existence on the date hereof and (iii)
permit (to the extent such Person can influence) the resignation, replacement or
withdrawal of any Servicer as such, unless a new Servicer satisfactory to the
Lender has been appointed.
6.20 Hazardous Materials. Use or permit the Pipeline Assets or any part
thereof to be used to generate, treat, store, handle, transport or dispose of
Hazardous Materials except in strict compliance with all applicable Relevant
Environmental Laws. Upon the occurrence of any release of Hazardous Materials,
the Borrowers shall promptly commence and perform, or cause to be promptly
commenced and performed, without cost to the Lender, all investigations,
studies, sampling and testing, and all remedial, removal and other actions
necessary to clean up and remove all Hazardous Materials so released, in
compliance with the requirements of all applicable Relevant Environmental Laws.
6.21 Intentionally Left Blank.
6.22 Executive Offices. Transfer its executive offices or transfer its
registered office in the State of Texas (if any) or change its corporate or
partnership name or keep Collateral at any locations other than those at which
the same are presently kept or maintained.
6.23 Fiscal Year. Change its fiscal year.
6.24 FERC Jurisdiction. Take any action, or omit to take any action,
which will subject any Borrower, the Assets, or any portion thereof, to the
jurisdiction of the FERC under the NGA.
6.25 Lone Star Contract. Without the consent of Lender, Marketing shall
not, nor shall it permit any Servicer to, seek to redetermine the price under
the Lone Star Contract.
SECTION 7. EVENTS OF DEFAULT
If any of the Events of Default listed below in this Section 7 shall
occur and be continuing, the Lender may (x) declare the entire unpaid principal
amount of the Term Loan and the then outstanding Term Note, all interest accrued
and unpaid thereon, and all other Obligations to be forthwith due and payable,
whereupon such amounts shall become and be forthwith due and payable, without
presentment, demand, protest, or notice of any kind, all of which are hereby
expressly waived by each of the Borrowers; and/or (y) subject to the terms of
the Intercreditor Agreement with respect to Pipeline and Marketing, foreclose on
LOAN AGREEMENT - Page 38
<PAGE>
any or all of the Collateral; and/or (z) subject to the terms of the
Intercreditor Agreement with respect to Pipeline and Marketing, proceed to
enforce all other remedies available to it under applicable law.
Notwithstanding the foregoing, if an Event of Default referred to in paragraph
(h) or (i) below shall occur, automatically and without notice, the actions
described in clause (x) above shall be deemed to have occurred.
Such Events of Default are the following:
(a) Any principal of or interest on the Term Loan shall not be paid
when due; or any fee or any other amount payable to Lender hereunder,
under the Term Note or under any other Loan Document shall not be paid
when due and shall remain unpaid for five or more days; or
(b) Any representation or warranty made or deemed made by any
Borrower, any General Partner or Castle in any Basic Document to which
such Person is a party, or any representation, warranty or statement in
any certificate, financial statement or other document furnished to the
Lender by or on behalf of the Borrowers or any such other Person
hereunder or under any Basic Document, shall prove to have been false
or misleading in any material respect as of the time made or deemed
made; or
(c) (i) Any Borrower or any General Partner shall fail to perform
or observe any of its covenants in subsection 5.4 or in Section 6 of
this Agreement or (ii) any Borrower or any General Partner shall fail
to perform or observe any other of its covenants contained in this
Agreement (other than those referred to in paragraphs (a) and (b) above
or in clause (i) of this paragraph (c)) and such failure shall continue
unremedied or unwaived for a period for 30 days after written notice
thereof from the Lender to such party; or
(d) Any Borrower, any General Partner or Castle shall fail to
perform or observe any of its covenants or obligations (other than the
covenants and obligations referred to in paragraphs (a), (b) and (c)
above) contained in any of the Basic Documents and such failure shall
continue unremedied for a period of 30 days after written notice
thereof from the Lender to such party; or
(e) Any Borrower or any General Partner shall (i) default in any
payment of principal of or interest on any Indebtedness (other than the
Term Note) or in the payment of any Guarantee Obligation, for a period
in excess of the period of grace, if any, provided in the instrument
and agreement under which such Indebtedness or Guarantee Obligation was
created; or (ii) default in the observance or performance of any other
agreement or condition contained in any agreement or instrument
relating to any such other Indebtedness or Guarantee Obligation or
contained in any instrument or agreement evidencing, securing or
relating thereto, or any other event shall occur or condition exist,
the effect of which default or other event or condition is to cause, or
to permit the holder or holders of such other Indebtedness or
beneficiary or beneficiaries of such Guarantee Obligation (or a trustee
or agent on behalf of such holder or holders or beneficiary or
beneficiaries) to cause, with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity or such
Guarantee Obligation to become payable or to realize upon any
collateral given as security therefor; or
LOAN AGREEMENT - Page 39
<PAGE>
(f) Any material provision of any Basic Document (other than any
OWI Contract) shall at any time for any reason cease to be valid and
binding or in full force and effect or any party thereto shall so
assert in writing; or any material provision of any Basic Document
(other than any OWI Contract) shall be declared to be null and void or
the validity or enforceability thereof shall be contested by any party
thereto (other than the Lender) or any Governmental Authority; or any
party to any Basic Document (other than any OWI Contract), other than
the Lender, shall deny that it has any liability or obligation under
any Basic Document (other than any OWI Contract), except upon
fulfillment of its obligations thereunder; provided that with respect
to any Project Document (other than the Supply Agreement and the Lone
Star Contract) it shall not be a default under this paragraph (f) if
the Borrowers shall obtain a replacement agreement reasonably
satisfactory in form and substance to the Lender with a Person
reasonably satisfactory to the Lender within 30 days after such
invalidity, contest or denial shall have occurred; or
(g) Lone Star, MGNG or MGCC shall fail to perform or observe any of
its material covenants or obligations contained in any of the Basic
Documents to which it is a party within the grace period, if any,
provided for in such Basic Documents which failure shall continue
unremedied for a period of 30 days after notice by Lender to the
Borrowers; or
(h) Any Borrower, any General Partner, Castle, MGNG, MGAG, MGCC,
Lone Star (or Enserch) shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its
assets or property, (ii) admit in writing its inability, or be
generally unable, to pay its debts as such debts become due, (iii) make
a general assignment for the benefit of its creditors, (iv) commence a
voluntary case under the Bankruptcy Code (as now or hereafter in
effect), (v) file or consent to the filing of a petition seeking to
take advantage of any other law (domestic or foreign law or existing in
future law) relating to bankruptcy, insolvency, reorganization, winding
up, or composition or readjustment of debts, (vi) fail to controvert in
a timely and appropriate manner, or acquiesce in writing to, any
petition filed against such Person in an involuntary case under the
Bankruptcy Code, or (vii) take any partnership or corporate action for
the purpose of effecting any of the foregoing; or
(i) A proceeding or case shall be commenced without the application
or consent of any Borrower, any General Partner, Castle, MGNG, MGAG,
MGCC, Lone Star (or Enserch) in any court of competent jurisdiction,
seeking (i) its liquidation, reorganization, dissolution, winding-up,
or the composition or readjustment of debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of such Person
under any law (domestic or foreign law or existing or future law)
relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts or (iii) a warrant of attachment,
execution or similar process against all or a substantial part of the
LOAN AGREEMENT - Page 40
<PAGE>
assets or property of such Person, and such proceeding or case shall
continue undismissed, or any order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed
and in effect, for a period of 60 or more days, or any order for relief
against such Person shall be entered in an involuntary case under the
Bankruptcy Code; or
(j) A judgment or judgments for the payment of money in excess of
$150,000 shall be rendered against any Borrower or any General Partner,
and such judgment or judgments shall remain in effect and unstayed and
unbonded for a period of 30 or more consecutive days; or
(k) Any Collateral Security Document shall cease, for any reason,
to be in full force and effect or any party thereto shall so assert in
writing; any Collateral Security Document shall cease to be effective
to grant a perfected Lien to the Lender on the Collateral described
therein with the priority purported to be created thereby; or
(l) Any General Partner shall at any time cease to be the General
Partner of the Borrower of which it is general partner or, shall
transfer, sell, assign, mortgage, pledge or otherwise dispose of its
equity interest in such Borrower except in accordance with the
Collateral Security Documents or with the Lender's prior written
consent; or
(m) Castle shall, at any time, transfer, sell, assign, mortgage,
pledge or otherwise dispose of its equity interests in any General
Partner or any Limited Partner, except in accordance with the
Collateral Security Documents or with the Lender's prior written
consent; or
(n) (i) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving
any Plan, (ii) any "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived, shall exist with respect
to any Plan, or (iii) a Reportable Event shall occur with respect to,
or proceedings shall commence to have a trustee appointed, or a trustee
shall be appointed, to administer or to terminate any Single Employer
Plan, which Reportable Event or institution of proceedings is, in the
reasonable opinion of the Lender, likely to result in the termination
of such Plan for purposes of Title IV of ERISA, or (iv) any Single
Employer Plan shall terminate for purposes of Title IV of ERISA, or (v)
any Borrower, any General Partner or any Commonly Controlled Entity
shall, or is, in the reasonable opinion of the Lender, likely to incur
any liability in connection with a withdrawal from, or the insolvency
or reorganization of, a Multiemployer Plan, or (vi) any other event or
condition shall occur or exist with respect to a Plan; and in each case
in clauses (i) through (vi) above, such event or condition, together
with all other such events or conditions, if any, could subject any
Borrower or any General Partner to any tax, penalty or other
liabilities in the aggregate material in relation to the business,
operations, property or financial or other condition of any Borrower or
any General Partner; or
(o) An Event of Loss shall have occurred; or
LOAN AGREEMENT - Page 41
<PAGE>
(p) (i) Any Governmental Approval required to be obtained by any
Borrower pursuant to subsection 5.6 shall be revoked, terminated,
withdrawn, suspended, modified or withheld or shall cease to be in full
force and effect, and Lender shall have determined that such
revocation, termination, withdrawal, suspension, modification,
withholding or cessation could reasonably be expected to have a
Material Adverse Effect; or (ii) any proceeding which could reasonably
be expected to have a Material Adverse Effect shall be commenced by or
before any Governmental Authority for the purpose of so revoking,
terminating, withdrawing, suspending, modifying or withholding any such
Governmental Approval and the Lender shall have determined that such
proceeding could reasonably be expected to have a Material Adverse
Effect and such proceeding shall not have been dismissed or stayed
within 90 days, or notice shall be given by such Governmental Authority
for such purpose and shall have remained uncontested for 30 days; or
(q) The sale of gas by Marketing under the Lone Star Contract, or
any of Marketing, Lone Star and/or its facilities, or Pipeline and/or
the Pipeline Assets, shall become subject to regulation pursuant to the
NGA, or any rules or regulations promulgated pursuant thereto; or
Upon the occurrence of and during the continuance of any Event of
Default, but subject to the terms of the Intercreditor Agreement with respect to
Pipeline and Marketing, the rights, powers and privileges provided in this
Section and all other remedies available to the Lender under this Agreement or
any Collateral Security Document or by statute or by rule of law may be
exercised by the Lender at any time and from time to time whether or not the
Term Loan shall be due and payable, and whether or not the Lender shall have
instituted any foreclosure or other action for the enforcement of any of the
Basic Documents. For the purpose of carrying out the provisions and exercising
the rights, powers and privileges granted by this paragraph, each of the
Borrowers hereby irrevocably constitutes and appoints the Lender its true and
lawful attorney-in-fact to execute, acknowledge and deliver any instruments and
to do and to perform, subject to the terms of the Intercreditor Agreement, any
acts such as are referred to in this paragraph in the name and on behalf of such
Borrower. This power of attorney is a power coupled with an interest and cannot
be revoked.
SECTION 8. MISCELLANEOUS
8.1 Amendments and Waivers. No provision of this Agreement or of any
other Loan Document to which the Lender is a party may be amended, supplemented
or modified, except in writing and signed by the parties hereto.
8.2 Notices. (a) All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing, by telecopier or,
if available, by telex and, unless otherwise expressly provided herein, shall be
deemed to have been duly given or made when delivered by hand, or when deposited
in the mail, first class postage prepaid, or in the case of transmission by
telecopier, when confirmation of receipt is obtained, or in the case of telex
notice, when sent, answerback received, addressed as follows in the case of the
LOAN AGREEMENT - Page 42
<PAGE>
Borrowers, the Lender and the other parties below, or to such other address as
may be hereafter notified by the respective parties hereto and any future
holders of the Term Note:
If to a Borrower: Castle Texas Pipeline Limited Partnership,
CEC Gas Marketing Limited Partnership or
Castle Texas Production Limited Partnership
2410 State Highway, 322 North
Henderson, Texas 75652
Attention: Richard E. Staedtler
Telecopy: (215) 542-8065
Castle Exploration Company, Inc.
512 Township Line Road
Blue Bell, Pennsylvania 19422
Attention: Richard E. Staedtler
Telecopy: (215) 542-1496
with a copy to the applicable General Partner
If to a General Partner: Castle Pipeline Company,
CEC Marketing Company or
Castle Production Company
2410 State Highway, 322 North
Henderson, Texas 75652
Attention: Richard E. Staedtler
Telecopy: (215) 542-8065
with copies to: Castle Energy Corporation
One Radnor Corporate Center-Suite 250
100 Matsonford Road
Radnor, Pennsylvania 19087
Attention: Richard E. Staedtler
Telecopy: (610) 995-0409
If to Castle: Castle Energy Corporation
One Radnor Corporate Center-Suite 250
100 Matsonford Road
Radnor, Pennsylvania 19087
Attention: Richard E. Staedtler
Telecopy: (610) 995-0409
If to the Lender: Commercial National Bank In Shreveport
333 Texas Street
Post Office Box 21119
Shreveport, Louisiana 71152
Attention: Martin W. Wilson
Assistant Vice President
Telecopy: (318) 429-1864
LOAN AGREEMENT - Page 43
<PAGE>
(b) Any notice, request or demand duly given or made upon any Borrower
in accordance with the provisions of subsection 8.2(a), shall be deemed to have
been duly given or made upon all Borrowers.
8.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay
in exercising, on the part of the Lender, any right, remedy, power or privilege
hereunder, shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law. When the Lender is pursuing its rights and remedies hereunder
against any Borrower, the Lender may, but shall be under no obligation to,
pursue such rights and remedies as it may have against any other Borrower or
Person or against any collateral security or guaranty for the Obligations or any
right of offset with respect thereto, and any failure by the Lender to pursue
such other rights or remedies or to collect any payments from such other
Borrower or Person or to realize any such right of offset, or any release of
such other Borrower or any such other Person or of any such collateral security,
guaranty or right of offset, shall not impair or affect the rights and remedies,
whether express, implied or available as a matter of law, of the Lender against
such Borrower.
8.4 Survival. All representations and warranties made in this Agreement
and in any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Agreement
and the Term Note.
8.5 Expenses and Taxes. Whether or not the Term Loan is made or any of
the other transactions contemplated by this Agreement are consummated, the
Borrowers shall, on a joint and several basis:
(a) pay all reasonable out-of-pocket expenses incurred by Lender in
connection with the negotiation, preparation, execution and delivery of
this Agreement and the other Basic Documents, any and all transactions
contemplated hereby or thereby and the preparation of any document
reasonably required hereunder or thereunder, including, without
limiting the generality of the foregoing, all reasonable fees and
expenses of Winstead Sechrest & Minick P.C., counsel for Lender, all
title and conveyancing charges, recording and filing fees and taxes,
mortgage taxes, intangible personal property taxes, escrow fees,
revenue and tax stamp expenses, insurance premiums (including title
insurance premiums), placement and other fees of investment bankers of
the Borrowers, court costs, and surveyors', appraisers', architects',
engineers', environmental, gas and other consultants' and accountants'
reasonable fees and disbursements;
LOAN AGREEMENT - Page 44
<PAGE>
(b) pay all reasonable out-of-pocket expenses incurred by the
Lender with respect to (i) any amendments, waivers or supplements to
any of the Basic Documents or (ii) any request of the Borrowers for a
consent, waiver or other action in connection with the Assigned
Contracts and with respect to enforcement of their rights and remedies
hereunder;
(c) pay the Lender for all their reasonable out-of-pocket costs and
expenses incurred in connection with, and to pay, indemnify and hold
the Lender harmless from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever
arising out of or in connection with, the enforcement or preservation
of any rights under this Agreement and the other Basic Documents and
any such other documents, including without limitation, reasonable fees
and disbursements of counsel to the Lender incurred in connection with
the foregoing and in connection with advising the Lender with respect
to its rights and responsibilities under this Agreement, the other
Basic Documents and the documentation relating thereto; and
(d) pay, indemnify, and hold the Lender harmless from and against,
any and all recording and filing fees and any and all liabilities with
respect to, or resulting from any delay in paying, stamp, excise and
other similar taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or the
consummation of any of the transactions contemplated by, or any
amendment, supplement or modification of, or any waiver or consent
under or in respect of, this Agreement and the other Basic Documents
and any such other documents;
provided, that the Borrower, shall have no obligation hereunder with respect to
indemnified liabilities of the Lender or its Affiliates or any of their
respective officers and directors to the extent that such indemnified liability
resulted from the gross negligence or willful misconduct of the Lender. The
Lender may pay or deduct from the Term Loan proceeds any of such expenses and
any Term Loan proceeds so applied shall be deemed advances under this Agreement
and secured by the Collateral Security Documents. The agreements in this
subsection 8.5 shall survive repayment of the Term Note and all other amounts
payable hereunder.
8.6 INDEMNIFICATION. EACH BORROWER AGREES TO PAY, INDEMNIFY AND HOLD
THE LENDER AND ITS AFFILIATES, DIRECTORS AND OFFICERS HARMLESS FROM AND AGAINST
ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND WHATSOEVER WHICH
MAY AT ANY TIME (INCLUDING, WITHOUT LIMITATION, AT ANY TIME FOLLOWING THE
PAYMENT OF THE TERM NOTE) BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY
SUCH PERSON BY A THIRD PARTY IN ANY WAY RELATING TO OR ARISING OUT OF THIS
AGREEMENT OR THE OTHER BASIC DOCUMENTS, OR ANY DOCUMENTS CONTEMPLATED BY OR
REFERRED TO HEREIN OR THEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY
(ALL OF THE FOREGOING, COLLECTIVELY, THE "INDEMNIFIED LIABILITIES"), PROVIDED,
LOAN AGREEMENT - Page 45
<PAGE>
THAT SUCH PERSON SHALL HAVE NO OBLIGATION HEREUNDER TO THE LENDER WITH RESPECT
TO INDEMNIFIED LIABILITIES ARISING FROM (I) THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF ANY SUCH PERSON, OR (II) LEGAL PROCEEDINGS COMMENCED AGAINST ANY
SUCH PERSON BY ANY SECURITY HOLDER OR CREDITOR OF ANY SUCH PERSON ARISING OUT
OF AND BASED UPON RIGHTS AFFORDED ANY SUCH SECURITY HOLDER OR CREDITOR SOLELY IN
ITS CAPACITY AS SUCH. THE AGREEMENTS IN THIS SUBSECTION SHALL SURVIVE REPAYMENT
OF THE TERM NOTE AND ALL OTHER AMOUNTS PAYABLE HEREUNDER.
8.7 Successors and Assigns; Transferees; Transferred Interests. (a)
This Agreement shall be binding upon and inure to the benefit of the parties
hereto, all future holders of the Term Note and their respective successors and
assigns, except that no Borrower may assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of the
Lender.
(b) The Borrowers acknowledge that Lender may at any time grant
participations in this Agreement and the Collateral Security Documents
(collectively, "Participations") to one or more Persons (such Persons being
herein called "Transferees"); provided, however, that (i) Lender's obligations
under this Agreement and under any Collateral Security Document shall remain
unchanged, (ii) Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iii) the Transferees shall be
entitled to the benefit of the provisions contained in subsection 2.8, and (iv)
the Borrowers shall continue to deal solely and directly with Lender in
connection with Lender's rights and obligations under this Agreement and under
any Collateral Security Document.
(c) The Borrowers authorize Lender to disclose to any prospective
Transferee pursuant to paragraph (b) of this subsection 8.7 which has entered
into a confidentiality agreement all financial or other necessary information in
Lender's possession concerning the Borrowers, any General Partner, Lone Star,
Castle, MGAG or any MG Affiliate which has been delivered to Lender pursuant to
this Agreement or any other Basic Document or which has been delivered to Lender
by or on behalf of the Borrowers or any such other party in connection with such
Lender's credit evaluation of the Borrowers and the transactions contemplated
hereby prior to or after entering into this Agreement.
(d) The Borrowers shall not bear the costs of due diligence of any
Transferee.
8.8 Severability. Any provision hereof which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof and without affecting the validity or enforceability
of any provision in any other jurisdiction.
8.9 Headings. The headings of the various sections and paragraphs of
this Agreement are for convenience of reference only, do not constitute a part
hereof and shall not affect the meaning or construction of any provision hereof.
LOAN AGREEMENT - Page 46
<PAGE>
8.10 Counterparts. This Agreement may be executed by one or more of the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8.11 GOVERNING LAW. THIS AGREEMENT AND THE TERM NOTE AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE TERM NOTE SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF LOUISIANA.
8.12 Submission to Jurisdiction; Waivers. (a) Each of the parties
hereto hereby irrevocably and unconditionally:
(i) Submits for itself and its property in any legal action or
proceeding relating to this Agreement or any other Basic Document, or
for recognition and enforcement of any judgment in respect thereof, to
the non-exclusive general jurisdiction of the courts of the State of
Louisiana, the courts of the United States of America for the Western
District of Louisiana, and Appellate Courts from any thereof;
(ii) Consents that any such action or proceeding may be brought in
such courts, and waives any objection that it may now or hereafter have
to the venue of any such action or proceeding in any such court or that
such action or proceeding was brought in any inconvenient court and
agrees not to plead or claim the same;
(iii) Agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such Borrower at its address set forth in subsection 8.2 or
at such other address of which the Lender shall have been notified
pursuant thereto; and
(iv) Agrees that nothing herein shall affect the right to effect
service of process in any-other manner permitted by law or shall limit
the right to sue in any other jurisdiction.
(b) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY
HERETO IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION,
OR ENFORCEMENT THEREOF.
8.13 Maximum Interest Rate. Anything to the contrary notwithstanding,
the Lender shall not charge, take or receive and the Borrowers shall not be
obligated to pay to the Lender, any amounts constituting interest on the Term
Loan in excess of the maximum rate permitted by applicable law. The Term Loan is
made for commercial and business purposes as contemplated by La. R.S. 9:3509.
LOAN AGREEMENT - Page 47
<PAGE>
8.14 Release of Collateral. Following the payment in full of all
obligations, the Lender shall release the Collateral under the Collateral
Security Documents.
8.15 Publicity. Each party hereto agrees to consult in good faith with
the other parties hereto before disseminating any publicity which is related to
this Agreement and the transactions contemplated hereby and which mentions such
other party by name; provided, however, the Lender shall have the right to
publish "tombstone" advertisements regarding this Agreement and the transactions
contemplated hereby without the obligation to consult with any other party
hereto.
8.16 Recourse to Borrowers. Subject to the terms of the Intercreditor
Agreement, there shall be full recourse to the Borrowers and all of their assets
for the liabilities and obligations of the Borrowers under this Agreement and
the Term Note, but in no event shall there be any recourse against any partners
or any officer, director, employee, shareholder or holder of any equity interest
in any Borrower or any partner, or any affiliate thereof, nor shall any partners
or any officer, director, employee, shareholder or holder of any equity interest
in any Borrower or any partner, or any affiliate thereof, be personally liable
or obligated for such liabilities and obligations of the Borrowers, except that
each party hereto shall be liable for (i) any representations and warranties
made by it and (ii) any obligations of such party specifically provided for in
any other Loan Document to which such Person is a party. Subject to the terms of
the Intercreditor Agreement with respect to Pipeline and Marketing, nothing
herein contained shall limit or be construed to limit the liabilities and
obligations of any such Person for any representations made by it or limit such
Person's obligations and liabilities set forth in any other Basic Document
creating such liabilities and obligations to which such Person is a party.
8.17 No Release. No payment or payments made by any Borrower or any
other Person or received or collected by the Lender from any Borrower or any
other Person by virtue of any action or proceeding, at any time or from time to
time, in reduction of or in payment of the obligations shall be deemed to
modify, reduce, release or otherwise affect the liability of any Borrower
hereunder which shall remain obligated hereunder, notwithstanding any such
payment or payments, until the obligations are paid in full.
8.18 Collateral Security. As to any Borrower, such Borrower agrees that
any collateral security or guaranty to the extent provided by any other Person
(including any other Borrower), at any time held by the Lender for the payment
of the obligations, may be sold, exchanged, waived, surrendered or released
without the giving of notice to, or obtaining the consent of, such Borrower.
8.19 Intercreditor Agreement. Anything to the contrary contained in
this Agreement notwithstanding, certain of the rights of the Lender (including
any successor or assignee thereof) hereunder and under applicable law are
subject to the terms of the Intercreditor Agreement. The Intercreditor Agreement
provides, among other things (a) that all obligations of Pipeline, Pipeline GP,
Pipeline LP, Marketing, Marketing GP and Marketing LP hereunder and under the
other Loan Documents (whether in respect of any obligation hereunder or
thereunder, the breach of any covenant or representation or warranty, any
indemnity claim or otherwise, or whether in respect of its several obligations
or in respect of another Person's obligations hereunder or thereunder) are
LOAN AGREEMENT - Page 48
<PAGE>
subordinated and junior in right of payment to the prior payment in full of the
Senior Obligations, and (b) limitations with respect to the Lender's ability to
exercise certain rights hereunder, under any other Loan Document or under
applicable law with respect to the obligations hereunder or thereunder of
Pipeline, Pipeline GP, Pipeline LP, Marketing, Marketing GP and Marketing LP
(and each such Person's joint and several obligations with respect to another
Person's obligations), and the Subject Party Collateral.
LOAN AGREEMENT - Page 49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP
By: CASTLE PIPELINE COMPANY,
its General Partner
By:
---------------------------------
Richard E. Staedtler
Vice President
CASTLE PIPELINE COMPANY
By:
---------------------------------------
Richard E. Staedtler
Vice President
CEC GAS MARKETING LIMITED PARTNERSHIP
By: CEC MARKETING COMPANY,
its General Partner
By:
----------------------------------
Richard E. Staedtler
Vice President
CEC MARKETING COMPANY
By:
---------------------------------------
Richard E. Staedtler
Vice President
LOAN AGREEMENT - Page 50
<PAGE>
CASTLE TEXAS PRODUCTION
LIMITED PARTNERSHIP
By: CASTLE PRODUCTION COMPANY
By:
-----------------------------------
Richard E. Staedtler
Vice President
CASTLE PRODUCTION COMPANY
By:
---------------------------------------
Richard E. Staedtler
Vice President
CASTLE EXPLORATION COMPANY, INC.
By:
---------------------------------------
Richard E. Staedtler
Vice President
CASTLE ENERGY CORPORATION
By:
---------------------------------------
Richard E. Staedtler
Vice President
LOAN AGREEMENT - Page 51
<PAGE>
COMMERCIAL NATIONAL BANK IN SHREVEPORT
By:
---------------------------------------
Martin W. Wilson
Assistant Vice President
LOAN AGREEMENT - Page 52
<PAGE>
Exhibit 10.118
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (the "Amendment"), dated as of
November 8, 1996, is among CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas
limited partnership ("Pipeline"), CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas
limited partnership ("Marketing"), CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation ("Exploration"), CASTLE TEXAS PRODUCTION LIMITED
PARTNERSHIP, a Texas limited partnership ("Production," and together with
Pipeline, Marketing and Exploration, the "Borrowers"), CASTLE PIPELINE COMPANY,
a Texas corporation, CASTLE PRODUCTION COMPANY, a Texas corporation, CEC
MARKETING COMPANY, a Texas corporation (collectively, the "General Partners"),
CASTLE ENERGY CORPORATION, a Delaware corporation ("Castle") and COMMERCIAL
NATIONAL BANK IN SHREVEPORT ("Lender").
RECITALS:
A. Borrowers, the General Partners, Castle and Lender entered into that
certain Loan Agreement dated as of April 30, 1996 (as the same may be amended or
otherwise modified from time to time, the "Agreement").
B. Pursuant to the Agreement, Castle executed that certain Guaranty
Agreement (the "Castle Guaranty") dated as of April 30, 1996 which guaranteed to
Lender the payment and performance of the Obligations (as defined in the
Agreement).
C. The Borrowers, General Partners, Castle and Lender now desire to
amend the Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions
1.1 Definitions. Capitalized terms used in this Amendment, to the
extent not otherwise defined herein, shall have the same meanings as in the
Agreement, as amended hereby.
FIRST AMENDMENT TO LOAN AGREEMENT - Page 1
<PAGE>
ARTICLE II
Amendments
2.1 Amendment to Agreement. Effective as of the date hereof, the
Agreement is hereby amended to add the following section thereto to
read in its entirety as follows:
SECTION 2A AMOUNT AND TERM OF SECOND TERM LOAN
2.1A Second Term Loan. Subject to and upon the terms and conditions
set forth herein, Lender agrees to make a second term loan (the "Second
Term Loan") to the Borrowers, on a joint and several basis, in one or
more advances to be made on or prior to December 6, 1996 in the
aggregate principal amount of up to Three Million Dollars ($3,000,000).
Amounts borrowed and repaid under the Second Term Loan cannot be
reborrowed.
2.2A Second Term Note. The Second Term Loan made by Lender shall be
evidenced by a single promissory note of the Borrowers, substantially
in the form of Exhibit A-1 (the "Second Term Note"), with appropriate
insertions, payable to the order of Lender and in the aggregate
principal amount equal to the Second Term Loan. The Second Term Note
shall (i) be dated November 8, 1996, (ii) represent the joint and
several obligations of the Borrowers to pay the principal amount of and
interest on the Second Term Loan, (iii) provide for the payment of
interest in accordance with subsection 2.5A, (iv) be entitled to the
benefit of this Agreement and the Collateral Security Documents, (v)
mature on August 29, 1997, and (vi) be payable in five (5) consecutive
monthly installments in an amount equal to the lesser of (a) the
outstanding principal balance of the Second Term Note, plus accrued and
unpaid interest thereon, or (b) Five Hundred Thousand Dollars
($500,000) each, plus accrued and unpaid interest thereon, commencing
on March 4, 1997, and continuing on each Installment Payment Date
thereafter until and including July 4, 1997, with a final installment
in the amount of all outstanding principal of the Second Term Loan,
plus all accrued and unpaid interest thereon due and payable on August
29, 1997.
2.3A Use of Proceeds. The proceeds of the Second Term Loan shall be
used by the Borrowers to make a loan to Castle, the proceeds of which
will be used by Castle to repurchase outstanding shares of its common
stock. With reference to Sections 6.8 and 6.13, Lender hereby consents
to such loan to Castle on such terms as the Borrowers may, in their
discretion, approve.
2.4A Prepayments. (a) Mandatory Prepayments.
(i) If an Event of Loss shall occur, the Borrowers shall
prepay in full the unpaid principal amount of the then outstanding
Second Term Note, together with accrued interest thereon to the
date of prepayment and all other amounts owing hereunder and under
FIRST AMENDMENT TO LOAN AGREEMENT - Page 2
<PAGE>
the Collateral Security Documents, on the earlier of (A) the date
occurring 60 days after the date of such Event of Loss and (B)
the date on which insurance proceeds are received with respect to
such Event of Loss.
(ii) Notwithstanding anything to the contrary otherwise
contained in this Agreement, in the event that (A) the Senior Loan
Termination Date has not occurred on or before September 4, 1997,
(B) the principal amount of the Senior Obligations is increased
(other than in accordance with the terms of the Senior Loan
Agreement as in effect on the date hereof) to an amount in excess
of the principal amount of the Senior Obligations outstanding on
the Closing Date, or (C) the Term Loan Interest Rate (as defined in
the GE Capital Loan Agreement) is modified such that it is greater
than 8.33%, the Obligations shall become immediately due and
payable and the Borrowers shall, within three (3) days of such
event, prepay in full the unpaid principal amount of the then
outstanding Second Term Note, together with accrued and unpaid
interest thereon to the date of prepayment and all other amounts
owing hereunder and under the Collateral Security Documents.
(iii) Notwithstanding anything to the contrary otherwise
contained in this Agreement, in the event that the Borrowers and
the Lender consummate the transactions contemplated by that certain
commitment letter dated October 17, 1996, Lender's commitment to
make advances under the Second Term Loan shall terminate and the
Obligations shall be refinanced pursuant to the revolving credit
facility described in such commitment letter.
(b) Optional Prepayments. The Borrowers may on at least three (3)
Business Days prior notice to Lender, at any time and from time to time
prepay the Second Term Loan, in whole or in part, without premium or
penalty but with accrued and unpaid interest to the date of prepayment
on the amount so prepaid. Partial prepayments shall be in a principal
amount of $100,000.00 or an integral multiple thereof.
(c) Partial Prepayments. Partial prepayment of the Second Term Loan
shall be applied to the installments thereof in the inverse order of
maturity.
2.5A Interest Rate and Payment Dates. (a) The Second Term Loan
shall bear interest on the unpaid principal amount thereof at the Term
Loan Interest Rate.
(b) If all or a portion of the principal amount of the Second Term
Loan made hereunder or any other amount due and payable hereunder shall
not be paid when due (whether at the stated maturity, by acceleration
or otherwise), the Second Term Loan or other amount shall bear interest
at a rate per annum which is 2% above the Term Loan Interest Rate from
the date of such non-payment until paid in full (as well after as
before judgment).
FIRST AMENDMENT TO LOAN AGREEMENT - Page 3
<PAGE>
(c) Interest on the unpaid principal amount of the Second Term Loan
shall be payable monthly in arrears on each Installment Payment Date
and on the date the Second Term Loan is paid in full; provided that
interest accruing pursuant to subsection 2.5A(b) shall be payable from
time to time on demand.
2.6A Payments and Payment Dates. (b) All payments (including
prepayments hereunder) due hereunder or under the Second Term Note on
account of principal, interest, fees, or any other obligation incurred
hereunder shall be paid to the Lender at its office at 333 Texas
Street, P.O. Box 21119, Shreveport, Louisiana 71152, in freely
transferable Dollars and in immediately available funds without set-off
or counterclaim. Borrowers shall, at the time of making each such
payment, specify to Lender the sums payable by Borrowers under this
Agreement, the Second Term Note or other Loan Documents to which such
payment is to be applied (and in the event Borrowers fail to so specify
or if an Event of Default has occurred and is continuing, Lender may
apply such payment to the Obligations in such order and manner as it
may elect in its sole discretion). All payments hereunder shall be made
without any presentment of the Second Term Note to the Borrowers, but
upon payment in full of the Second Term Note, the holder thereof shall
cancel it and return it to the Borrowers.
(b) If any payment hereunder becomes due and payable on a day other
than a Business Day, such payment shall be extended to the next
succeeding Business Day and, with respect to payments of principal,
interest thereon shall be payable at the then applicable rate during
such extension.
2.7A Computation of Interest and Fees. Interest on the Second Term
Loan and all fees hereunder shall be calculated on the basis of a
360-day year and the actual number of days elapsed (including the first
day but excluding the last day of any relevant period).
2.8A Applicable Law. In the event that Lender shall have determined
that any change in any Applicable Law regarding capital adequacy or in
the interpretation or application thereof or compliance by Lender or
any corporation controlling Lender with any request or directive
regarding capital adequacy (whether or not having the force of law)
from any Governmental Authority made subsequent to the date hereof does
or shall have the effect of reducing the rate of return on Lender's or
such corporation's capital as a consequence of its obligations
hereunder to a level below that which Lender or such corporation could
have achieved but for such change or compliance (taking into
consideration Lender's or such corporation's policies with respect to
capital adequacy) by an amount deemed by Lender to be material, then
from time to time, after submission by Lender to the Borrowers of a
written request therefor, the Borrowers shall pay to Lender such
additional amount or amounts as will compensate Lender for such
reduction. A certificate as to any additional amounts payable pursuant
to this subsection 2.8A submitted by Lender to the Borrowers shall be
conclusive in the absence of manifest error.
FIRST AMENDMENT TO LOAN AGREEMENT - Page 4
<PAGE>
2.9A Joint and Several Obligations. The Borrowers shall, subject to
the terms of the Intercreditor Agreement with respect to Pipeline and
Marketing, be jointly and severally liable for all payments of
principal and interest on the Second Term Note and for the observance
and performance of all obligations, covenants, conditions, indemnities
and other terms and provisions hereunder applicable to the Borrowers or
to any Borrower.
2.10A Commitment Fee. The Borrowers have agreed to pay to Lender a
non-refundable commitment fee in the aggregate amount of $60,000, which
shall be payable on January 2, 1997.
2.11A Maximum Interest Rate. Anything to the contrary
notwithstanding, the Lender shall not charge, take or receive and the
Borrowers shall not be obligated to pay to the Lender, any amounts
constituting interest on the Second Term Loan in excess of the maximum
rate permitted by applicable law. The Second Term Loan is made for
commercial and business purposes as contemplated by La. R.S. 9:3509.
2.12A Recourse to Borrowers. Subject to the terms of the
Intercreditor Agreement, there shall be full recourse to the Borrowers
and all of their assets for the liabilities and obligations of the
Borrowers under this Agreement and the Second Term Note, but in no
event shall there be any recourse against any partners or any officer,
director, employee, shareholder or holder of any equity interest in any
Borrower or any partner, or any affiliate thereof, nor shall any
partners or any officer, director, employee, shareholder or holder of
any equity interest in any Borrower or any partner, or any affiliate
thereof, be personally liable or obligated for such liabilities and
obligations of the Borrowers, except that each party hereto shall be
liable for (i) any representations and warranties made by it and (ii)
any obligations of such party specifically provided for in any other
Loan Document to which such Person is a party. Subject to the terms of
the Intercreditor Agreement with respect to Pipeline and Marketing,
nothing herein contained shall limit or be construed to limit the
liabilities and obligations of any such Person for any representations
made by it or limit such Person's obligations and liabilities set forth
in any other Basic Document creating such liabilities and obligations
to which such Person is a party.
2.13A Borrowing Procedure. The Borrowers shall give the Lender
notice of each requested advance under the Second Term Loan by means of
an Advance Request Form substantially in the form of Exhibit L attached
hereto ("Advance Request Form") containing the information therein
required on at least one Business Day before the requested date of each
FIRST AMENDMENT TO LOAN AGREEMENT - Page 5
<PAGE>
such advance. At its option the Lender may accept telephonic
requests for advances, provided that such acceptance shall not
constitute a waiver of the Lender's right to delivery of an Advance
Request Form in connection with subsequent advances. Any telephonic
request for an advance by the Borrowers shall be promptly confirmed by
submission of a properly completed Advance Request Form to Lender.
2.2 Amendment to Section 7. Effective as of the date hereof, clause (i)
of subsection 7(e) of the Agreement is hereby amended in its entirety to read as
follows:
(e) Any Borrower or any General Partner shall (i) default in
any payment of principal or interest on any Indebtedness (other than
the Term Note or the Second Term Note) or in the payment of any
Guarantee Obligation, for a period in excess of the period of grace, if
any, provided in the instrument and agreement under which such
Indebtedness or Guarantee Obligation was created;
2.3 Amendment to Agreement. Effective as of the date hereof, the
Agreement is hereby amended to add Exhibits A-1 and L thereto to read in their
respective entireties as set forth on Annexes 1 and 2 attached hereto.
2.4 Amendments to Appendix A.
(a) Effective as of the date hereof, Appendix A to the Agreement is
hereby amended to add the following definitions thereto to read in
their respective entireties as follows:
"Second Term Loan" shall have the meaning assigned to such term in
subsection 2.1A of the Loan Agreement.
"Second Term Note" shall have the meaning assigned to such term in
subsection 2.2A of the Loan Agreement.
(b) Effective as of the date hereof, the definitions of Loan
Documents and Obligations set forth in Appendix A to the Agreement are
hereby amended and restated to read in their entireties as follows:
"Loan Documents" shall be the collective reference to the Loan
Agreement, the Term Note, the Second Term Note and the Collateral
Security Documents.
"Obligations" shall mean all the unpaid principal amount of, and
accrued and unpaid interest on, the Term Note, the Second Term Note and
all other obligations and liabilities of the Borrowers or any other
Person to the Lender, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter
incurred, which may arise under, out of or in connection with the Loan
Agreement, the Term Note, the Second Term Note, the Collateral Security
FIRST AMENDMENT TO LOAN AGREEMENT - Page 6
<PAGE>
Documents, or any other Loan Document whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs, expenses
(including, without limitation, all fees and disbursements of counsel
to Lender) or otherwise.
ARTICLE III
Conditions Precedent
3.1 Conditions. The effectiveness of this Amendment is subject to the
satisfaction of the following conditions precedent:
(a) Lender shall have received all of the following, each dated
(unless otherwise indicated) the date of this Amendment, in form
and substance satisfactory to Lender:
(1) Resolutions. Resolutions of the Board of Directors of each
General Partner certified by its Secretary or an Assistant
Secretary which authorize the execution, delivery, and performance
by such General Partner and the relevant Borrower of this Amendment
and the other Loan Documents to which such General Partner and the
relevant Borrower are or are to be parties hereunder;
(2) Incumbency Certificate. A certificate of incumbency certified
by the Secretary or an Assistant Secretary of each General Partner
certifying the names of the officers of such Person authorized to
sign this Amendment and each of the other Loan Documents to which
such Person or the relevant Borrower is or is to be a party
hereunder (including the certificates contemplated herein) together
with specimen signatures of such officers;
(3) Second Term Note. The Second Term Note executed by the
Borrowers in substantially the form of Annex 1 attached hereto;
(4) Consents. Any and all consents, waivers, authorizations and
approvals from third parties necessary for the execution, delivery
and performance of this Amendment and the Second Term Note by
Borrowers shall have been obtained;
(5) Opinion of Counsel. A favorable opinion of Akin, Gump, Strauss,
Hauer & Feld L.L.P., legal counsel to the Borrowers, the General
Partners and Castle, addressing the matters set forth on Annex II
attached hereto;
(6) Additional Information. Lender shall have received such
additional documents, instruments and information as Lender or its
legal counsel, Winstead Sechrest & Minick P.C., may request; and
FIRST AMENDMENT TO LOAN AGREEMENT - Page 7
<PAGE>
(a) The representations and warranties contained herein and in all
other Loan Documents, as amended hereby, shall be true and correct
as of the date hereof as if made on the date hereof;
(b) No Event of Default shall have occurred and be continuing and
no event or condition shall have occurred that with the giving of
notice or lapse of time or both would be an Event of Default.
(c) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments, and other legal matters incident thereto shall be
satisfactory to Lender and its legal counsel, Winstead Sechrest &
Minick P.C.
ARTICLE IV
Ratifications, Representations and Warranties
4.1 Ratifications. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions set forth in
the Agreement and except as expressly modified and superseded by this Amendment,
the terms and provisions of the Agreement and the other Loan Documents are
ratified and confirmed and shall continue in full force and effect. Borrower and
Lender agree that the Agreement as amended hereby and the other Loan Documents
shall continue to be legal, valid, binding and enforceable in accordance with
their respective terms. Each of the Borrowers and the General Partners
acknowledge and agree that the indebtedness, liabilities and obligations of the
Borrowers under the Second Term Note constitute a portion of the Obligations and
are secured by the Collateral Security Documents.
4.2 Representations and Warranties. Each Borrower hereby represents and
warrants to Lender that (i) the execution, delivery and performance of this
Amendment and any and all other Loan Documents executed and/or delivered in
connection herewith have been authorized by all requisite corporate action on
the part of such Borrower and will not violate the articles of incorporation or
bylaws of such Borrower or breach the terms of any material agreement to which
such Borrower is a party, (ii) the representations and warranties contained in
the Agreement, as amended hereby, and any other Loan Document are true and
correct on and as of the date hereof as though made on and as of the date
hereof, (iii) no Event of Default has occurred and is continuing and no event or
condition has occurred that with the giving of notice or lapse of time or both
would be an Event of Default, and (iv) such Borrower is in full compliance with
all covenants and agreements contained in the Agreement as amended hereby.
FIRST AMENDMENT TO LOAN AGREEMENT - Page 8
<PAGE>
ARTICLE V
Miscellaneous
5.1 Survival of Representations and Warranties. All representations and
warranties made in this Amendment or any other Loan Document including any Loan
Document furnished in connection with this Amendment shall survive the execution
and delivery of this Amendment and the other Loan Documents, and no
investigation by Lender or any closing shall affect the representations and
warranties or the right of Lender to rely upon them.
5.2 Reference to Agreement. Each of the Loan Documents, including the
Agreement and any and all other agreements, documents, or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Agreement as amended hereby, are hereby amended so that any
reference in such Loan Documents to the Agreement shall mean a reference to the
Agreement as amended hereby.
5.3 Expenses of Lender. As provided in the Agreement, the Borrowers
agree to pay on demand all costs and expenses incurred by Lender in connection
with the preparation, negotiation, and execution of this Amendment and the other
Loan Documents executed pursuant hereto and any and all amendments,
modifications, and supplements thereto, including without limitation the costs
and fees of Lender's legal counsel, and all costs and expenses incurred by
Lender in connection with the enforcement or preservation of any rights under
the Agreement, as amended hereby, or any other Loan Document, including without
limitation the costs and fees of Lender's legal counsel.
5.4 Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
5.5 Applicable Law. This Amendment and all other Loan Documents
executed pursuant hereto shall be deemed to have been made and to be performable
in Shreveport, Caddo Parish, Louisiana and shall be governed by and construed in
accordance with the laws of the State of Louisiana.
5.6 Successors and Assigns. This Amendment is binding upon and shall
inure to the benefit of Lender, Borrowers, the General Partners and Castle and
their respective successors and assigns, except no Borrower may assign or
transfer any of its rights or obligations hereunder without the prior written
consent of Lender.
5.7 Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
FIRST AMENDMENT TO LOAN AGREEMENT - Page 9
<PAGE>
5.8 Effect of Waiver. No consent or waiver, express or implied, by
Lender to or for any breach of or deviation from any covenant, condition or duty
by any Borrower, any General Partner or Castle shall be deemed a consent or
waiver to or of any other breach of the same or any other covenant, condition or
duty.
5.9 Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
5.10 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS,
DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS
AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND
SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND
UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT
BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL
AGREEMENTS AMONG THE PARTIES HERETO.
Executed as of the date first written above.
Borrowers:
CASTLE TEXAS PIPELINE
LIMITED PARTNERSHIP
By: Castle Pipeline Company,
its General Partner
By:
-------------------------------------
Richard E. Staedtler, Vice President
CEC GAS MARKETING LIMITED
PARTNERSHIP
By: CEC Marketing Company,
its General Partner
By:
---------------------------------------
Richard E. Staedtler, Vice President
FIRST AMENDMENT TO LOAN AGREEMENT - Page 10
<PAGE>
CASTLE EXPLORATION COMPANY, INC.
By:
---------------------------------------
Richard E. Staedtler, Vice President
CASTLE TEXAS PRODUCTION LIMITED
PARTNERSHIP
By: Castle Production Company,
its General Partner
By:
---------------------------------------
Richard E. Staedtler, Vice President
CASTLE PIPELINE COMPANY
By:
---------------------------------------
Richard E. Staedtler, Vice President
CASTLE PRODUCTION COMPANY
By:
---------------------------------------
Richard E. Staedtler, Vice President
CEC MARKETING COMPANY
By:
---------------------------------------
Richard E. Staedtler, Vice President
CASTLE ENERGY CORPORATION
By:
---------------------------------------
Richard E. Staedtler, Vice President
FIRST AMENDMENT TO LOAN AGREEMENT - Page 11
<PAGE>
Lender:
COMMERCIAL NATIONAL BANK
IN SHREVEPORT
By:
---------------------------------------
Martin W. Wilson
Assistant Vice President
Each of the undersigned hereby consents and agrees to this Amendment
and agrees that the Loan Documents executed by such Person shall remain in full
force and effect and shall continue to be the legal, valid and binding
obligation of such Person enforceable against such Person in accordance with
their respective terms. Each of the undersigned hereby further acknowledges and
agrees that the indebtedness, obligations and liabilities of the Borrowers under
the Second Term Note constitute a portion of the Obligations and are secured by
the Collateral Security Documents.
CASTLE ENERGY CORPORATION
CASTLE PRODUCTION RESOURCES
COMPANY
CASTLE PIPELINE RESOURCES COMPANY
CEC MARKETING RESOURCES COMPANY
By:
---------------------------------------
Richard E. Staedtler
Vice President of each of the above
DEERLICK CREEK FIELD LIMITED
PARTNERSHIP
By: Pennsylvania Castle Energy Corporation
Its: General Partner
By:
----------------------------------
Richard E. Staedtler
Vice President
FIRST AMENDMENT TO LOAN AGREEMENT - Page 12
<PAGE>
ANNEX 1
Second Term Note
<PAGE>
ANNEX 2
Advance Request Form
<PAGE>
Exhibit 10.119
******************************************************************************
AMENDED AND RESTATED LOAN AGREEMENT
among
COMMERCIAL NATIONAL BANK IN SHREVEPORT,
AS AGENT,
THE SEVERAL FINANCIAL INSTITUTIONS
FROM TIME TO TIME PARTY THERETO,
CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP,
CEC GAS MARKETING LIMITED PARTNERSHIP,
CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP,
CASTLE EXPLORATION COMPANY, INC.,
CASTLE PIPELINE COMPANY,
CASTLE PRODUCTION COMPANY,
CEC MARKETING COMPANY,
and
CASTLE ENERGY CORPORATION
Dated as of November 26, 1996
******************************************************************************
<PAGE>
TABLE OF CONTENTS
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ARTICLE I
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Definitions..............................................................................................2
Section 1.1 Definitions..........................................................................2
Section 1.2 Other Definitional Provisions.......................................................19
ARTICLE II
Revolving Credit Loans..................................................................................19
Section 2.1 Revolving Credit Commitments........................................................19
Section 2.2 Revolving Credit Notes..............................................................19
Section 2.3 Repayment of Revolving Credit Loans.................................................19
Section 2.4 Interest............................................................................19
Section 2.5 Use of Proceeds.....................................................................20
Section 2.6 Facility Fee........................................................................20
Section 2.7 [Intentionally Omitted].............................................................20
Section 2.8 Borrowing Base......................................................................20
Section 2.9 Mandatory Prepayments or Addition of Collateral.....................................20
Section 2.10 Required Date and Amount of Mandatory Prepayment....................................21
Section 2.11 Borrowers' Option to Increase Collateral in Lieu of Prepayment......................21
Section 2.12 Evidence of Title...................................................................21
ARTICLE III
Term Loans..............................................................................................22
Section 3.1 Term Loans..........................................................................22
Section 3.2 The Term Notes......................................................................22
Section 3.3 Repayment of Term Loans.............................................................22
Section 3.4 Interest............................................................................22
Section 3.5 Request for Term Loans..............................................................22
Section 3.6 Use of Proceeds.....................................................................22
Section 3.7 Mandatory Prepayment................................................................23
ARTICLE IV
Borrowing Procedure; Payments...........................................................................23
Section 4.1 Borrowing Procedure.................................................................23
Section 4.2 Method of Payment...................................................................23
Section 4.3 Voluntary Prepayment................................................................24
Section 4.4 Pro Rata Treatment..................................................................24
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Section 4.5 Non-Receipt of Funds by the Agent...................................................24
Section 4.6 Computation of Interest.............................................................24
ARTICLE V
Security................................................................................................25
Section 5.1 Collateral..........................................................................25
Section 5.2 Setoff..............................................................................26
ARTICLE VI
Conditions Precedent....................................................................................27
Section 6.1 Initial Loan........................................................................27
Section 6.2 All Loans...........................................................................29
ARTICLE VII
Representations and Warranties..........................................................................30
Section 7.1 Corporate Existence.................................................................30
Section 7.2 Financial Statements................................................................31
Section 7.3 Corporate Action; No Breach.........................................................31
Section 7.4 Operation of Business...............................................................31
Section 7.5 Litigation and Judgments............................................................32
Section 7.6 Rights in Properties; Liens.........................................................32
Section 7.7 Enforceability......................................................................32
Section 7.8 Approvals...........................................................................32
Section 7.9 Debt................................................................................32
Section 7.10 Taxes...............................................................................32
Section 7.11 Use of Proceeds; Margin Securities..................................................32
Section 7.12 ERISA...............................................................................33
Section 7.13 Disclosure..........................................................................33
Section 7.14 Subsidiaries........................................................................33
Section 7.15 Agreements..........................................................................33
Section 7.16 Compliance with Laws................................................................33
Section 7.17 Investment Company Act..............................................................34
Section 7.18 Public Utility Holding Company Act..................................................34
Section 7.19 Environmental Matters...............................................................34
Section 7.20 Pipeline Contracts..................................................................35
Section 7.21 No Obligations......................................................................35
Section 7.22 Prepayment..........................................................................35
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Section 7.23 Gas Contracts.......................................................................35
Section 7.24 FERC Jurisdiction...................................................................35
Section 7.25 Lone Star Contract..................................................................36
ARTICLE VIII
Positive Covenants......................................................................................36
Section 8.1 Reporting Requirements..............................................................36
Section 8.2 Maintenance of Existence; Conduct of Business.......................................39
Section 8.3 Maintenance of Properties...........................................................39
Section 8.4 Taxes and Claims....................................................................40
Section 8.5 Insurance...........................................................................40
Section 8.6 Inspection Rights...................................................................40
Section 8.7 Keeping Books and Records...........................................................40
Section 8.8 Compliance with Laws................................................................40
Section 8.9 Compliance with Agreements..........................................................40
Section 8.10 Further Assurances..................................................................40
Section 8.11 ERISA...............................................................................41
Section 8.12 [Intentionally omitted.]............................................................41
Section 8.13 Pledge of Additional Contracts; Future Mortgages....................................41
Section 8.14 FERC Jurisdiction...................................................................41
Section 8.15 Cover Damages.......................................................................41
Section 8.16 Proceeds from the Production Payment and Receivables from Lone Star
Contract.......................................................................................41
ARTICLE IX
Negative Covenants......................................................................................42
Section 9.1 Debt................................................................................42
Section 9.2 Limitation on Liens.................................................................42
Section 9.3 Mergers, Etc........................................................................44
Section 9.4 Sale of Partnership Interests.......................................................44
Section 9.5 Investments.........................................................................44
Section 9.6 Transactions With Affiliates........................................................45
Section 9.7 Disposition of Assets...............................................................45
Section 9.8 Sale and Leaseback..................................................................45
Section 9.9 Prepayment of Debt..................................................................45
Section 9.10 Nature of Business..................................................................45
Section 9.11 Environmental Protection............................................................45
Section 9.12 Accounting..........................................................................46
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Section 9.13 Executive Offices...................................................................46
Section 9.14 Fiscal Year.........................................................................46
Section 9.15 FERC Jurisdiction...................................................................46
Section 9.16 Lone Star Contract..................................................................46
Section 9.17 Additional Contracts................................................................46
Section 9.18 Distribution, Etc...................................................................46
ARTICLE X
Financial Covenants.....................................................................................47
Section 10.1 Consolidated Tangible Net Worth.....................................................47
Section 10.2 Cash Flow Coverage Ratio............................................................47
Section 10.3 Net Working Capital.................................................................47
ARTICLE XI
Default.................................................................................................47
Section 11.1 Events of Default...................................................................47
Section 11.2 Remedies............................................................................50
Section 11.3 Performance by the Agent............................................................50
ARTICLE XII
The Agent...............................................................................................51
Section 12.1 Appointment, Powers and Immunities..................................................51
Section 12.2 Rights of Agent as a Bank...........................................................52
Section 12.3 Sharing of Payments, Etc............................................................53
Section 12.4 INDEMNIFICATION.....................................................................53
Section 12.5 Independent Credit Decisions........................................................54
Section 12.6 Several Commitments.................................................................54
Section 12.7 Successor Agent.....................................................................54
Section 12.8 Nonconsenting Bank..................................................................55
ARTICLE XIII
Miscellaneous...........................................................................................55
Section 13.1 Expenses............................................................................55
Section 13.2 INDEMNIFICATION.....................................................................55
Section 13.3 LIMITATION OF LIABILITY.............................................................56
Section 13.4 No Duty.............................................................................57
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Section 13.5 No Fiduciary Relationship...........................................................57
Section 13.6 Equitable Relief....................................................................57
Section 13.7 No Waiver; Cumulative Remedies......................................................57
Section 13.8 Successors and Assigns..............................................................57
Section 13.9 Survival............................................................................60
Section 13.10 ENTIRE AGREEMENT....................................................................60
Section 13.11 Amendments, Etc.....................................................................60
Section 13.12 Maximum Interest Rate...............................................................60
Section 13.13 Notices.............................................................................61
Section 13.14 GOVERNING LAW; VENUE; SERVICE OF PROCESS............................................61
Section 13.15 Counterparts........................................................................62
Section 13.16 Severability........................................................................62
Section 13.17 Headings............................................................................62
Section 13.18 Construction........................................................................62
Section 13.19 Independence of Covenants...........................................................62
Section 13.20 Treatment of Certain Information; Confidentiality...................................62
Section 13.21 WAIVERS OF JURY TRIAL...............................................................63
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<PAGE>
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT (the "Agreement"), dated as of
November 26, 1996, is among CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas
limited partnership ("Pipeline"), CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas
limited partnership ("Marketing"), CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP,
a Texas limited partnership ("Production"), CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation ("Exploration," and together with Pipeline, Marketing
and Production, the "Borrowers"), CASTLE PIPELINE COMPANY, a Texas corporation,
CASTLE PRODUCTION COMPANY, a Texas corporation, CEC MARKETING COMPANY, a Texas
corporation (collectively, the "General Partners"), CASTLE ENERGY CORPORATION, a
Delaware corporation ("Castle"), each of the banks or other lending institutions
which is or which may from time to time become a signatory hereto or any
successor or assignee thereof (individually, a "Bank" and, collectively, the
"Banks"), and COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking
association, as agent for itself and the other Banks (in such capacity, together
with its successors in such capacity, the "Agent").
R E C I T A L S:
A. The Borrowers, the General Partners, Castle and Commercial National
Bank In Shreveport ("CNB") previously entered into that certain Loan Agreement
dated as of April 30, 1996, as amended pursuant to that certain First Amendment
to Loan Agreement dated as of November 8, 1996, pursuant to which the Borrowers
borrowed from CNB $6,800,000 (the "Prior Loan Agreement").
B. The Borrowers have requested that the Banks renew, extend, refinance
and increase the debt of the Borrowers outstanding under the Prior Loan
Agreement in the form of (i) revolving credit advances not to exceed an
aggregate principal amount of $10,000,000 outstanding at any time, and (ii) a
term loan in the principal amount of $15,000,000. The Banks are willing to make
such extensions of credit to the Borrowers upon the terms and conditions
hereinafter set forth.
C. The Borrowers and CNB intend that all outstanding indebtedness of
Borrowers under the Prior Loan Agreement as of the date hereof remain
outstanding under this Agreement and that the terms and conditions of this
Agreement hereinafter apply to such indebtedness.
D. The Borrowers and the Banks intend that the repayment of the
outstanding indebtedness of Pipeline and Marketing to GE Capital (as hereinafter
defined) be deemed to have occurred simultaneously with the initial Loan (as
hereinafter defined) hereunder.
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
AMENDED AND RESTATED LOAN AGREEMENT - Page 1
<PAGE>
ARTICLE I
Definitions
Section 1.1 Definitions. As used in this Agreement, the following terms
have the following meanings:
"Additional Contract" shall mean, with respect to any
Borrower, any contract entered into by such Borrower after the Closing
Date (other than employment contracts and contracts requiring payments
of less than, in the aggregate, $100,000 annually).
"Affiliate" means, as to any Person, any other Person (a) that
directly or indirectly, through one or more intermediaries, controls or
is controlled by, or is under common control with, such Person; (b)
that directly or indirectly beneficially owns or holds five percent or
more of any class of voting stock of such Person; or (c) five percent
or more of the voting stock of which is directly or indirectly
beneficially owned or held by the Person in question. The term
"control" means the possession, directly or indirectly, of the power to
direct or cause direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract, or
otherwise; provided, however, in no event shall the Agent or any Bank
be deemed an Affiliate of any Borrower.
"Applicable Rate" means at any time an annual rate equal to
(i) the prime rate (as most recently reported in the Wall Street
Journal under the "Money Rates" section or, if no longer published
therein, as reported in a similar publication as selected by the
Agent), plus (ii) three-quarters of one percent (3/4%).
"Assigned Contracts" shall be the collective reference to the
Project Documents from and after the date of execution thereof by any
Borrower, and each Additional Contract that the Agent has requested to
be pledged as collateral to it pursuant to Section 8.13 of this
Agreement.
"Assignee" has the meaning assigned to it in Section 13.8(b).
"Assigning Bank" has the meaning assigned to it in Section
13.8(b).
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Bank and its assignee and accepted by the Agent
pursuant to Section 13.8, in substantially the form of Exhibit "G"
hereto.
"Basic Documents" shall be the collective reference to the
Loan Documents, and the Project Documents.
"Borrower(s)" shall mean the singular or collective reference,
as appropriate, to Marketing, Pipeline, Production and Exploration.
AMENDED AND RESTATED LOAN AGREEMENT - Page 2
<PAGE>
"Borrower Security Agreement" means the Amended and Restated
Security Agreement of the Borrowers in favor of the Agent for the
benefit of the Agent and the Banks, in substantially the form of
Exhibit "D-1" hereto, as the same may be amended, supplemented, or
modified.
"Borrowing Base" means, at any particular time, the sum of (a)
an amount established at least annually by the Agent and the Banks
equal to fifty percent (50%) of the net present value, discounted at
ten percent (10%) per annum of the proved developed producing reserves
owned directly or indirectly by Borrowers and Castle in which the Agent
holds a perfected, first priority Lien, as outlined, subject to the
review and adjustment by the Banks, in independent consulting
engineers' reports prepared by Ryder Scott Company, Huntley and Huntley
and/or other engineering firms reasonably acceptable to the Agent and
the Banks under the then applicable SEC Case for the reserves of the
Borrowers, as the same may be reviewed and adjusted by the Banks, plus
(b) the Lone Star Contract Value. In calculating the Borrowing Base,
the Banks may make adjustments to the amount of the borrowing base
established based on the SEC Case of the Borrowers' reserves as
presented in engineering reports prepared by Ryder Scott & Associates,
Huntley and Huntley or other engineering firm, which may include any or
all of the following:
(a) Banks may use a price forecast and discount rate
different from the SEC price forecast;
(b) Banks may adjust volume projections made by Ryder
Scott & Associates, Huntley and Huntley or other such
engineering firm to conform to the volume projections
of their own engineers or their consulting engineers;
and
(c) Banks may adjust lease operating expenses and taxes
to conform to the estimates of their own engineers or
their consulting engineers.
"Borrowing Base Overage" shall have the meaning specified in
Section 2.10.
"Business Day" means a day other than Saturday or Sunday, or
day on which any Bank is not authorized or required to close.
"Capital Lease Obligations" means, as to any Person, the
obligations of such Person to pay rent or other amounts under a lease
of (or other agreement conveying the right to use) real and/or personal
property, which obligations are required to be classified and accounted
for as a capital lease on a balance sheet of such Person under GAAP.
For purposes of this Agreement, the amount of such Capital Lease
Obligations shall be the capitalized amount thereof, determined in
accordance with GAAP.
"Cash Flow" means, for any period, the sum of the following
for Castle, without duplication: (i) Net Income for such period, plus
(ii) depreciation, depletion and amortization of goodwill and non-cash
expenses (including, without limitation, write-offs),
AMENDED AND RESTATED LOAN AGREEMENT - Page 3
<PAGE>
which in determining Net Income for such period were deducted from
gross income, less (iii) non-cash income for such period, determined on
a consolidated basis in accordance with GAAP to the extent included in
Net Income for such period.
"Cash Flow Coverage Ratio" means, at any particular time, the
ratio of Cash Flow to Debt Service.
"Castle" shall mean Castle Energy Corporation, a Delaware
corporation.
"Castle Deeds of Trust" shall mean each Deed of Trust,
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of April 30, 1996, made by Castle in favor of the
Agent for the benefit of the Agent and the Banks, as the same may be
amended, supplemented or otherwise modified from time to time.
"Castle Guaranty" shall mean the Amended and Restated
Guaranty, dated as of the Closing Date, executed by Castle in favor of
the Agent for the benefit of the Agent and the Banks, substantially in
the form of Exhibit "C" attached hereto, as the same may be amended,
supplemented or otherwise modified from time to time.
"Castle Mortgages" shall mean each Open End Mortgage,
Assignment of Production, Security Agreement and Financing Statement
dated as of April 30, 1996, made by Castle in favor of the Agent for
the benefit of the Agent and the Banks, as the same may be amended,
supplemented or otherwise modified from time to time.
"Castle Pledge Agreement" shall mean the Amended and Restated
Pledge Agreement, dated as of the Closing Date, made by Castle in favor
of the Agent for the benefit of the Agent and the Banks, substantially
in the form of Exhibit "E-1" attached hereto, as the same may be
amended, supplemented or otherwise modified from time to time.
"Closing Date" shall mean November 26, 1996.
"CNB" has the meaning specified in the Recitals hereto.
"Code" means the Internal Revenue Code of 1986, as amended,
and the regulations promulgated and rulings issued thereunder.
"Collateral" has the meaning specified in Section 5.1.
"Collateral Security Documents" shall be the collective
reference to the Borrower Security Agreement, the Security Agreement,
the Deeds of Trust, the Castle Guaranty, the Utility Security Notice,
the Lockbox Operating Agreement and the Pledge Agreements.
"Commitments" means, as to each Bank, its Revolving Credit
Commitment and its Term Loan Commitment.
AMENDED AND RESTATED LOAN AGREEMENT - Page 4
<PAGE>
"Consents" shall be the collective reference to each consent
and agreement with respect to the assignment of an Additional Contract,
each of which shall be in form and substance reasonably satisfactory to
the Agent.
"Consolidated Liabilities" means, at any particular time, all
amounts which, in conformity with GAAP, would be included as
liabilities on a consolidated balance sheet of Castle and the
Subsidiaries, including all accruable contingent liabilities (as
defined in FAS #5).
"Consolidated Net Worth" means, at any particular time, all
amounts which, in conformity with GAAP, would be included as
stockholders' equity on a consolidated balance sheet of Castle and the
Subsidiaries.
"Consolidated Tangible Net Worth" means, at any particular
time, the book value of the Gas Contracts, oil and gas properties,
pipelines, furniture and fixtures and all other amounts which, in
conformity with GAAP, would be included as Consolidated Net Worth;
provided, however, there shall be excluded therefrom: (a) any amount at
which shares of capital stock of Castle appear as an asset on Castle's
balance sheet, (b) goodwill, including any amounts, however designated,
that represent the excess of the purchase price paid for assets or
stock over the value assigned thereto, (c) patents, trademarks, trade
names, and copyrights, (d) deferred expenses and deferred taxes, (e)
loans and advances, other than travel and expense related advances to
any stockholder, director, officer, or employee of Castle or any
Affiliate of Castle not made in the ordinary course of business, and
(f) all other assets which are properly classified as intangible
assets.
"Debt" means as to any Person at any time (without
duplication): (a) all obligations of such Person for borrowed money,
(b) all obligations of such Person evidenced by bonds, notes,
debentures, or other similar instruments, (c) all obligations of such
Person to pay the deferred purchase price of property or services,
except trade accounts payable of such Person arising in the ordinary
course of business that are not past due by more than 90 days, (d) all
Capital Lease Obligations of such Person, (e) all obligations secured
by a Lien existing on property owned by such Person, whether or not the
obligations secured thereby have been assumed by such Person or are
non-recourse to the credit of such Person, (f) all reimbursement
obligations of such Person (whether contingent or otherwise) in respect
of letters of credit, bankers' acceptances, surety or other bonds and
similar instruments, and (g) all liabilities of such Person in respect
of unfunded vested benefits under any Plan; provided, however, that
Debt as to any Person shall not include (i) trade accounts payable of
such Person that are being contested in good faith by such Person and
(ii) production payments and similar obligations of such Person
provided such obligations are non-recourse to such Person.
"Debt Service" means, for any period, the sum of the current
portion of scheduled payments of long-term Debt of Castle and its
Subsidiaries (determined on a consolidated basis) for such period
(determined on a consolidated basis).
AMENDED AND RESTATED LOAN AGREEMENT - Page 5
<PAGE>
"Deeds of Trust" shall mean collectively, the Pipeline Deed of
Trust, the Exploration Deed of Trust, the Exploration Mortgages, the
Production Deed of Trust, the Castle Mortgages and the Castle Deeds of
Trust.
"Default" means an Event of Default or the occurrence of an
event or condition which with notice or lapse of time or both would
become an Event of Default.
"Default Rate" means the lesser of (i) the Maximum Rate, or
(ii) the sum of the Applicable Rate in effect from day to day, plus two
percent.
"Dollars" and "$" mean lawful money of the United States of
America.
"Eligible Assignee" means any commercial bank, savings and
loan association, savings bank, finance company, insurance company,
pension fund, mutual fund, or other financial institution (whether a
corporation, partnership, or other entity) acceptable to the Agent and
unless an Event of Default has occurred and is continuing, reasonably
approved by the Borrowers to the extent required in Section 13.8, such
approval by Borrowers not to be unreasonably withheld or delayed.
"Enserch" shall mean ENSERCH Corporation, a Texas corporation.
"Environmental Laws" means any and all federal, state, and
local laws, regulations, and requirements pertaining to health, safety,
or the environment, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act
of 1976, 42 U.S.C. Section 6901 et seq., the Occupational Safety and
Health Act, 29 U.S.C. Section 651 et seq., the Clean Air Act, 42 U.S.C.
Section 7401 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et
seq., and the Toxic Substances Control Act, 15 U.S.C. Section 2601 et
seq., as such laws, regulations, and requirements may be amended or
supplemented from time to time.
"Environmental Liabilities" means as to any Person, all
liabilities, obligations, responsibilities, Remedial Actions, losses,
damages, punitive damages, consequential damages, treble damages,
costs, and expenses (including, without limitation, all reasonable
fees, disbursements and expenses of counsel, expert and consulting fees
and costs of investigation and feasibility studies), fines, penalties,
sanctions, and interest incurred as a result of any claim or demand, by
any Person, whether based in contract, tort, implied or express
warranty, strict liability, criminal or civil statute, including any
Environmental Law, permit, order or agreement with any Governmental
Authority or other Person, arising from environmental, health or safety
conditions or the Release or threatened Release of a Hazardous Material
into the environment, resulting from the past or present operations of
such Person or its Affiliates.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations and published
interpretations thereunder.
AMENDED AND RESTATED LOAN AGREEMENT - Page 6
<PAGE>
"ERISA Affiliate" means any corporation or trade or business
which is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the Code) as the Borrowers or is under
common control (within the meaning of Section 414(c) of the Code) with
the Borrowers.
"Event of Default" has the meaning specified in Section 11.1.
"Event of Loss" shall mean (i) the actual or constructive
total loss of the Pipeline Assets; or (ii) the loss, theft, destruction
or damage of a portion of the Pipeline Assets rendering the Pipeline
Assets unable to meet the Specified Delivery Requirements, unless (x)
no Default or Event of Default shall have occurred and be continuing
and (y) in the reasonable opinion of the Required Banks, sufficient
funds are or will be available to Pipeline to restore the Pipeline
Assets such that it will be able to meet the Specified Delivery
Requirements within 90 days after the occurrence of such event; or
(iii) the condemnation, confiscation or seizure of, or requisition of
title to, or requisition for a period exceeding 90 days of the use of
such portion of, the Pipeline Assets as shall render the Pipeline
Assets unable to meet the Specified Delivery Requirements.
"Exploration Mortgages" shall mean each Open End Mortgage,
Assignment of Production, Security Agreement and Financing Statement
dated as of April 30, 1996, made by Exploration in favor of the Agent
for the benefit of the Agent and the Banks, as amended, supplemented or
otherwise modified from time to time.
"Exploration Deed of Trust" shall mean the Deed of Trust,
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of April 30, 1996, made by Exploration in favor of
the Agent for the benefit of the Agent and the Banks, as amended,
supplemented or otherwise modified from time to time.
"Exploration Pledge Agreement" shall mean the Amended and
Restated Pledge Agreement, dated as of the Closing Date, made by
Exploration in favor of the Agent for the benefit of the Agent and the
Banks, as amended, supplemented or otherwise modified from time to
time.
"Fee Letter" means the letter agreement dated October 15,
1996, between the Agent and Castle.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers on such day, as published by the Federal Reserve Bank of New
York on the Business Day next succeeding such day, provided that (a) if
the day for which such rate is to be determined is not a Business Day,
the Federal Funds Rate for such day shall be such rate on such
transactions on the next proceeding Business Day as so published on the
next succeeding Business Day, and (b) if such rate is not so published
on such next succeeding
AMENDED AND RESTATED LOAN AGREEMENT - Page 7
<PAGE>
Business Day, the Federal Funds Rate for any day shall be the average
rate charged to the Agent on such day on such transactions as
determined by the Agent.
"FERC" shall mean the Federal Energy Regulatory Commission or
any successor or analogous United States Federal Governmental
Authority.
"Fiscal Year" shall mean the twelve month period beginning on
October 1st of each year and ending on September 30th of the next
succeeding year.
"GAAP" means generally accepted accounting principles, applied
on a consistent basis, as set forth in Opinions of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and/or in statements of the Financial Accounting Standards
Board and/or their respective successors and which are applicable in
the circumstances as of the date in question. Accounting principles are
applied on a "consistent basis" when the accounting principles applied
in a current period are comparable in all material respects to those
accounting principles applied in a preceding period.
"GAAS" shall mean generally accepted auditing standards in the
United States of America in effect from time to time.
"GE Capital" shall mean General Electric Capital Corporation,
a New York corporation or its successors or assigns.
"General Partner(s)" shall mean the individual or collective
reference, as the case may be, to Pipeline GP, Marketing GP and
Production GP.
"Governmental Authority" means any nation or government, any
state or political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory, or administrative
functions of or pertaining to government.
"GP Pledge Agreement" shall mean the Amended and Restated
Pledge Agreement, dated as of the Closing Date, made by Pipeline GP,
Marketing GP and Production GP in favor of the Agent for the benefit of
the Agent and the Banks, as amended, supplemented or otherwise modified
from time to time.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt
or other obligation of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect,
contingent or otherwise, of such Person (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt or
other obligation (whether arising by virtue of partnership
arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (b) entered into for the purpose
of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect the obligee against
loss in respect thereof (in
AMENDED AND RESTATED LOAN AGREEMENT - Page 8
<PAGE>
whole or in part), provided that the term "Guarantee" shall not include
(i) endorsements for collection or deposit in the ordinary course of
business and (ii) operating leases entered into in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding
meaning.
"Hazardous Material" means any substance, product, waste,
pollutant, material, chemical, contaminant, constituent, or other
material which is or becomes listed, regulated, or addressed under any
Environmental Law, including, without limitation, asbestos, petroleum,
and polychlorinated biphenyls.
"Hydrocarbons" shall mean all crude oil, Natural Gas,
distillate and sulphur, natural gas liquids and all products recovered
in the processing of natural gas liquids, including, without
limitation, natural gasoline, iso-butane, normal butane, propane and
ethane (including such methane allowable in commercial ethane).
"Interconnect Agreement" shall mean the Interconnect
Agreement, dated June 15, 1992, by and between Tabasco and Lone Star,
as assigned by Tabasco to Pipeline pursuant to the Assignment Agreement
(Pipeline Assets), as such Interconnect Agreement may be amended,
supplemented or otherwise modified from time to time.
"Interest Expense" means, for any period, all interest on Debt
(including the interest portion of payments under Capital Lease
Obligations and any capitalized interest) of Castle and its
Subsidiaries (determined on a consolidated basis) paid or accrued
during such period.
"Lien" means any lien, mortgage, security interest, tax lien,
financing statement, pledge, charge, hypothecation, assignment,
preference, priority, or other encumbrance of any kind or nature
whatsoever (including, without limitation, any conditional sale or
title retention agreement), whether arising by contract, operation of
law, or otherwise.
"Limited Partner(s)" shall mean the individual or collective
reference, as the case may be, to Pipeline LP, Marketing LP and
Production LP.
"Loan Documents" means this Agreement, the Collateral Security
Documents and all promissory notes, security agreements, pledge
agreements, deeds of trust, mortgages, fee letters, assignments,
guaranties, letters of credit, letter of credit applications and other
instruments, documents, and agreements executed and delivered pursuant
to or in connection with this Agreement or the Collateral Security
Documents, as such instruments, documents, and agreements may be
amended, modified, renewed, extended, or supplemented from time to
time.
"Loan Request Form" means a certificate, in substantially the
form of Exhibit "B" hereto, properly completed and signed by the
Borrowers requesting a Loan.
"Loans" means the Revolving Credit Loans and the Term Loans.
AMENDED AND RESTATED LOAN AGREEMENT - Page 9
<PAGE>
"Lockbox Operating Agreement" shall mean the Lockbox Operating
Agreement dated as of April 30, 1996, among the Agent and Exploration,
as the same may be amended, supplemented or otherwise modified from
time to time.
"Lone Star" shall mean Lone Star Gas Company, a division of
Enserch.
"Lone Star Contract" shall mean the Replacement Gas Purchase
Contract, dated October 22, 1992, by and between ARCO and Lone Star, as
assigned by ARCO to Marketing, as such contract may be amended,
supplemented or otherwise modified from time to time.
"Lone Star Contract Value" shall initially mean $25,000,000,
which amount shall be reviewed and may be redetermined by the Banks on
an annual basis or more frequently as the Agent and the Banks deem
necessary. In the absence of such redetermination, such amount shall be
reduced by 1/30 of such initial value per month; provided, however,
that the Lone Star Contract Value shall never be less than $0.00.
"LP Pledge Agreement" shall mean the Amended and Restated
Pledge Agreement, dated as of the Closing Date, made by the Limited
Partners in favor of the Agent for the benefit of the Agent and the
Banks, substantially in the form of Exhibit "E-4" attached hereto, as
the same may be amended, supplemented or otherwise modified from time
to time.
"Marketing" shall mean CEC Gas Marketing Limited Partnership,
a Texas limited partnership.
"Marketing GP" shall mean CEC Marketing Company, a Texas
corporation.
"Marketing LP" shall mean CEC Marketing Resources Company, a
Pennsylvania corporation.
"Marketing Partnership Agreement" shall mean the Agreement of
Limited Partnership of Marketing, dated as of November 25, 1992,
between Marketing GP and Marketing LP, as amended by Amendment No. 1
thereto and as may further be amended, supplemented or otherwise
modified from time to time.
"Maximum Rate" means, at any time the maximum rate of interest
permitted by applicable law.
"MGAC" shall mean Metallgesellchaft, AG, an
Aktiengesellschaft, organized under the laws of the Federal Republic of
Germany.
"MGC" shall mean MetallgeSellschaft Corp., a Delaware
corporation.
"MGCC" shall mean Metallgesellschaft Capital Corp., a Delaware
corporation.
AMENDED AND RESTATED LOAN AGREEMENT - Page 10
<PAGE>
"MGG" shall mean MG Gathering Corp., a Texas corporation.
"MGNG" shall mean MG Natural Gas Corp., a Texas corporation.
"MGTF" shall mean MG Trade Finance Corp., a Delaware
corporation.
"Mortgaged Properties" shall be the reference to the
properties subject to the Deeds of Trust.
"Multiemployer Plan" means a multiemployer plan defined as
such in Section 3(37) of ERISA to which contributions have been made by
the Borrowers or any ERISA Affiliate and which is covered by Title IV
of ERISA.
"Natural Gas" shall mean, in its gaseous state, all natural
gas, and any natural gas liquids and all products recovered in the
processing of natural gas.
"Net Cash Flow" means, for any period, with respect to any
Person, the Net Income of such Person for such period, plus without
duplication and to the extent reflected as a charge in the statement of
Net Income for such period, the sum of (i) amortization, (ii)
depreciation, and (iii) other non-cash charges and minus, without
duplication and to the extent reflected as a credit or gain in Net
Income for such period, other non-cash credits or gains.
"Net Income" means, for any period, with respect to any
Person, the consolidated net income of such Person and its Subsidiaries
for such period determined in accordance with GAAP provided that there
shall be excluded therefrom: (a) any net income (or net loss) of any
Person in which such Person has an ownership interest other than the
Subsidiaries, except to the extent that any such income has actually
been received by such Person in the form of cash dividends or similar
distributions; (b) any net gain (or net loss) on the sale or other
disposition, not in the ordinary course of business, of investments and
other capital assets, provided that there shall also be excluded any
related items for taxes thereon and other costs associated with the
sale or other disposition thereof; (c) any net gain (or net loss)
arising from the collection of proceeds of any insurance policy; and
(d) changes in deferred taxes.
"New Properties" shall have the meaning specified in Section
2.10.
"NGA" shall mean the Natural Gas Act of 1938, as amended, or
any successor act.
"Notes" means the Revolving Credit Notes and the Term Notes.
"Obligated Party" means any Person who is or becomes party to
any agreement that guarantees or secures payment and performance of the
Obligations or any part thereof.
AMENDED AND RESTATED LOAN AGREEMENT - Page 11
<PAGE>
"Obligations" means all obligations, indebtedness, and
liabilities of the Borrowers and the Obligated Parties to the Agent and
the Banks, or any of them, arising pursuant to any of the Loan
Documents, now existing or hereafter arising, whether direct, indirect,
related, fixed, contingent, liquidated, unliquidated, joint, several,
or joint and several, including, without limitation, the obligations,
indebtedness, and liabilities of the Borrowers under this Agreement and
the other Loan Documents, and all interest accruing thereon and all
attorneys' fees and other expenses incurred in the enforcement or
collection thereof.
"Operating Lease" means any lease (other than a lease
constituting a Capital Lease Obligation) of real or personal property.
"OWI Contracts" shall be the collective reference to the Owner
OWI Contracts and the Production $2.90 Contract.
"Owner OWI Contracts" shall be the collective reference to the
contracts covering the wells listed in Exhibit D to the Supply
Agreement.
"Partnership(s)" shall mean the singular or collective
reference, as appropriate, to Pipeline, Marketing and Production.
"Partnership Agreements" shall be the collective reference to
the Pipeline Partnership Agreement, the Marketing Partnership Agreement
and the Production Partnership Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to all or any of its functions under ERISA.
"Payment Notice" has the meaning specified in Section 2.9.
"Payor" has the meaning assigned to it in Section 4.5.
"Permitted Debt" has the meaning specified in Section 9.1.
"Permitted Liens" has the meaning specified in Section 9.2.
"Person" means any individual, corporation, business trust,
association, company, partnership, joint venture, Governmental
Authority, or other entity.
"Pipeline" shall mean Castle Texas Pipeline Limited
Partnership, a Texas limited partnership.
"Pipeline Assets" shall mean all of Pipeline's right, title
and interest in and to the assets and interests comprising a part of or
utilized in connection with Pipeline's intrastate pipeline system
located in Rusk County, Texas, including, without limitation, the
following:
AMENDED AND RESTATED LOAN AGREEMENT - Page 12
<PAGE>
(a) real property, whether owned of record or
beneficially, and the improvements, buildings and fixtures
located thereon, including, without limitation, those that are
described on Exhibit A to the Pipeline Deed of Trust;
(b) easements, rights-of-way, licenses and permits,
whether owned of record or beneficially, and all prescriptive
rights, titles, interests and claims, together with the
improvements, buildings and fixtures located thereon,
including, without limitation, those that are described on
Exhibit A to the Pipeline Deed of Trust;
(c) leases of real property, whether owned of record
or beneficially, and the improvements, buildings and fixtures
located thereon, including, without limitation, those that are
described on Exhibit A to the Pipeline Deed of Trust;
(d) pipelines, storage, compressor and other
facilities, whether above or below ground, and all
appurtenances thereto, including, without limitation,
compressor stations, metering stations, valves, cathodic
protection systems, improvements, buildings and fixtures;
(e) certificates of authority, licenses and permits
to construct, own, maintain, operate and remove pipeline
facilities within the boundaries of various federal, state,
municipal and local governmental and quasi-governmental
jurisdictions;
(f) licenses, permits, authorizations, registrations
and exemptions relating to the handling, treatment, disposal
and discharge of pollutants, contaminants and environmentally
sensitive materials and substances;
(g) computer hardware and software, including all
leases and licenses thereof;
(h) radios and other communication equipment;
(i) governmental permits, licenses, franchises,
registrations and similar rights;
(j) contracts, contract rights, agreements and other
instruments including, without limitation, the Transportation
Agreement (Marketing), the Transportation Agreement (MGNG) and
the Interconnect Agreement to the extent such indemnity
agreements cover or relate to the Mortgaged Properties
described in paragraphs (a) through (i) hereof;
(k) materials, supplies and parts and personal
property used or useful in connection with the assets
described as a part of this defined term; and
AMENDED AND RESTATED LOAN AGREEMENT - Page 13
<PAGE>
(1) books of account, customer lists, files, papers,
records and computer data bases, together with related file
layouts, and any other relevant files, documents and records
relating to any and all of the properties described in clauses
(a)-(k) above.
"Pipeline Deed of Trust" shall mean the Deed of Trust,
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of April 30, 1996, made by Pipeline in favor of the
Agent for the benefit of the Agent and the Banks, as amended,
supplemented or otherwise modified from time to time.
"Pipeline GP" shall mean Castle Pipeline Company, a Texas
corporation.
"Pipeline Interests" shall mean the real property interests
(including easements, rights of way and similar interests),
constituting a part of the Pipeline Assets.
"Pipeline LP" shall mean Castle Pipeline Resources Company, a
Pennsylvania corporation.
"Pipeline Partnership Agreement" shall mean the Agreement of
Limited Partnership of Pipeline, dated as of November 25, 1992, between
Pipeline GP and Pipeline LP, as amended by Amendment No. 1 thereto and
as may be further amended, supplemented or otherwise modified from time
to time.
"Plan" means any employee benefit or other plan established or
maintained by any Borrower, General Partner or any ERISA Affiliate and
which is covered by Title IV of ERISA.
"Pledge Agreements" shall be the collective reference to the
GP Pledge Agreement, the LP Pledge Agreement, the Exploration Pledge
Agreement and the Castle Pledge Agreement.
"Principal Office" means the principal office of the Agent,
presently located at 333 Texas Street, Shreveport, Louisiana 71101.
"Production" shall mean Castle Texas Production Limited
Partnership, a Texas limited partnership.
"Production Deed of Trust" shall mean the Deed of Trust,
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of April 30, 1996, made by Production in favor of
Agent for the benefit of the Agent and the Banks, as the same may be
amended, supplemented or otherwise modified from time to time.
"Production GP" shall mean Castle Production Company, a Texas
corporation.
AMENDED AND RESTATED LOAN AGREEMENT - Page 14
<PAGE>
"Production LP" shall mean Castle Production Resources
Company, a Pennsylvania corporation.
"Production Partnership Agreement" shall mean the Agreement of
Limited Partnership of Production dated as of November 25, 1992,
between Production GP and Production LP, as the same may be amended,
supplemented or otherwise modified from time to time.
"Production Payment" shall mean the production payment
reserved and created under that certain Assignment and Bill of Sale
(Oil and Gas Assets) dated effective as of 7:00 a.m. Central Standard
Time on February 1, 1992 from ARCO to Exploration, as recorded in
Volume 1799, Page 713 of the Official Records of Rusk County, Texas,
and as conveyed by ARCO to Exploration under that certain Conveyance of
Production Payment dated as of November 28, 1994 from ARCO to
Exploration.
"Production $2.90 Contract" shall be the reference to the
contract listed on Exhibit E to the Supply Agreement.
"Prohibited Transaction" means any transaction set forth in
Section 406 of ERISA or Section 4975 of the Code.
"Project Documents" shall be the collective reference to the
Partnership Agreements, the Lone Star Contract, the Supply Agreement,
the Interconnect Agreement and the Suspension Agreement.
"Register" has the meaning assigned to it in Section 13.8(d).
"Regulation D" means Regulation D of the Board of Governors of
the Federal Reserve System as the same may be amended or supplemented
from time to time.
"Regulatory Change" means, with respect to any Bank, any
change after the date of this Agreement in United States federal,
state, or foreign laws or regulations (including Regulation D) or the
adoption or making after such date of any interpretations, directives,
or requests applying to a class of banks including such Bank of or
under any United States federal or state, or any foreign, laws or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Release" means, as to any Person, any release, spill,
emission, leaking, pumping, injection, deposit, disposal, disbursement,
leaching, or migration of Hazardous Materials into or out of property
owned by such Person, including, without limitation, the movement of
Hazardous Materials through or in the air, soil, surface water, ground
water, or property.
AMENDED AND RESTATED LOAN AGREEMENT - Page 15
<PAGE>
"Remedial Action" means all actions required under
Environmental Laws to (a) clean up, remove, treat, or otherwise address
Hazardous Materials in the indoor or outdoor environment, (b) prevent
the Release or threat of Release or minimize the further Release of
Hazardous Materials so that they do not migrate or endanger or threaten
to endanger public health or welfare or the indoor or outdoor
environment, or (c) perform pre-remedial studies and investigations and
post-remedial monitoring and care.
"Reportable Event" means any of the events set forth in
Section 4043 of ERISA.
"Reporting Party" shall have the meaning specified in Section
8.1(a).
"Representing Parties" shall have the meaning specified in
Article VII.
"Required Banks" means at any time while no Loans are
outstanding, Banks having at least 66-2/3% of the aggregate amount of
the Commitments and, at any time while Loans are outstanding, Banks
holding at least 66-2/3% of the outstanding aggregate principal amount
of the Loans.
"Required Payment" has the meaning assigned to it in Section
4.5.
"Responsible Officer" means, with respect to any Person, in
the case of a Person which is a partnership, the president or any vice
president of the general partner of such Person, or with respect to
financial matters, the chief financial officer or chief accounting
officer of the general partner of such Person and in the case of any
Person which is a corporation, the president or any vice president of
such Person or with respect to financial matters, the chief financial
officer of such Person.
"Revolving Credit Commitment" means, as to each Bank, the
obligation of such Bank to make Revolving Credit Loans in an aggregate
principal amount at any one time outstanding up to but not exceeding
the amount set forth opposite the name of such Bank on the signature
pages hereto under the heading "Revolving Credit Commitment," or in the
Assignment and Acceptance pursuant to which such Bank assumed its
Revolving Credit Commitment, as applicable as the same may be (a)
reduced pursuant to Section 2.7 or terminated pursuant to Section 2.7
or 11.2 and (b) reduced or increased from time to time pursuant to
assignments by or to such Bank pursuant to Section 13.8.
"Revolving Credit Loan" means, as to each Bank, the loans to
be made by such Bank pursuant to Section 2.1.
"Revolving Credit Note" means a promissory note of the
Borrowers payable to the order of a Bank, in substantially the form of
Exhibit "A-1" hereto, and all extensions, renewals, and modifications
thereof and all substitutions therefor.
AMENDED AND RESTATED LOAN AGREEMENT - Page 16
<PAGE>
"Revolving Credit Termination Date" means 11:00 A.M.
Shreveport, Louisiana time on December 31, 1997 (unless extended
pursuant to a written agreement among the parties hereto), or such
earlier date and time on which the Revolving Credit Commitments
terminate as provided in this Agreement.
"RICO" means the Racketeer Influenced and Corrupt Organization
Act of 1970, as amended from time to time.
"SEC" means the Securities and Exchange Commission.
"Security Agreement" shall mean the Amended and Restated
Security Agreement and Assignment of Production, dated as of the
Closing Date, made by Deerlick Creek Field Limited Partnership in favor
of the Agent for the benefit of the Agent and the Banks, substantially
in the form of Exhibit "D-2" attached hereto, as the same may be
amended, supplemented or otherwise modified from time to time.
"Specified Delivery Requirements" shall mean, with respect to
the Pipeline Assets, the capability of such Pipeline Assets to receive,
transport and deliver the quantities of gas necessary for Marketing to
fully perform its obligations under the Lone Star Contract, in each
case assuming that Lone Star purchases the maximum amount of gas which
it is entitled to purchase (and Marketing is required to deliver)
pursuant to the Lone Star Contract.
"Stock Repurchase Commitment Amount" means (i) from the
Closing Date until February 1, 1997, $4,000,000, and (ii) commencing on
February 1, 1997 and on the first day of each calendar month
thereafter, such amount shall reduce by $333,334 until and including
the Revolving Credit Termination Date.
"Subsidiary" means any corporation of which at least a
majority of the outstanding shares of stock having by the terms thereof
ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether or not at the time stock of
any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the
time directly or indirectly owned or controlled by any Borrower or one
or more of the Subsidiaries or by a Borrower and one or more of the
Subsidiaries.
"Supply Agreement" shall mean the Gas Purchase Contract, dated
as of December 1, 1992, as amended and restated by the Amended and
Restated Supply Agreement, dated as of August 1, 1993, between MGNG and
Marketing, as the same may be further amended, supplemented or
otherwise modified from time to time.
"Supply Agreement Amendment" shall mean the Amended and
Restated Gas Purchase Contract, dated as of August 1, 1993, between
MGNG and Marketing.
AMENDED AND RESTATED LOAN AGREEMENT - Page 17
<PAGE>
"Suspension Agreement" shall mean the Suspension Agreement,
dated as of August 1, 1993, between MGNG and Marketing, as amended,
supplemented or otherwise modified from time to time.
"Tabasco" shall mean Tabasco Gas Pipeline Company, a Delaware
corporation and a subsidiary of ARCO.
"Term Loan" means as to each Bank, the term loan to be made by
such Bank pursuant to Section 3.1.
"Term Loan Commitments" means, as to each Bank, the obligation
of such Bank to make a Term Loan hereunder in the principal amount set
forth opposite the name of such Bank on the signature pages hereto
under the heading "Term Loan Commitment" or on the signature pages of
an Assignment and Acceptance, as the case may be.
"Term Loan Maturity Date" means 11:00 A.M. Shreveport,
Louisiana time on May 31, 1999.
"Term Loan Termination Date" means 11:00 A.M. Shreveport,
Louisiana time on April 10, 1997.
"Term Note" means a promissory note of the Borrowers payable
to the order of a Bank, in substantially the form of Exhibit "A-2"
hereto, and all extensions, renewals, and modifications thereof and all
substitutions therefor.
"Termination Date" means, with respect to the Revolving Credit
Commitments, the Revolving Credit Termination Date, and with respect to
the Term Loan Commitments, the Term Loan Termination Date.
"Transportation Agreement" shall mean the Transportation
Agreement (Marketing).
"Transportation Agreement (Marketing)" shall mean the Gas
Transportation Agreement, dated as of July 1, 1992, by and between ARCO
and Tabasco, as assigned by ARCO to Marketing pursuant to the
Assignment Agreement (Lone Star Agreement and Transportation Agreement)
and by Tabasco to Pipeline pursuant to the Assignment Agreement
(Pipeline Assets), as the same may be amended, supplemented or
otherwise modified from time to time.
"UCC" means the Uniform Commercial Code as in effect in the
State of Louisiana.
"Utility Security Notice" shall mean the Notice of Utility
Security Instrument Affecting Real Property, dated as of April 30,
1996, made by Pipeline, as the same may be amended, supplemented or
otherwise modified from time to time.
AMENDED AND RESTATED LOAN AGREEMENT - Page 18
<PAGE>
Section 1.2 Other Definitional Provisions. All definitions contained in
this Agreement are equally applicable to the singular and plural forms of the
terms defined. The words "hereof," "herein," and "hereunder" and words of
similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Unless otherwise
specified, all Article and Section references pertain to this Agreement. All
accounting terms not specifically defined herein shall be construed in
accordance with GAAP. Terms used herein that are defined in the UCC, unless
otherwise defined herein, shall have the meanings specified in the UCC.
ARTICLE II
Revolving Credit Loans
Section 2.1 Revolving Credit Commitments. Subject to the terms and
conditions of this Agreement, each Bank severally agrees to make one or more
Revolving Credit Loans to the Borrowers on a joint and several basis, from time
to time from the date hereof to and including the Revolving Credit Termination
Date in an aggregate principal amount at any time outstanding up to but not
exceeding the amount of such Bank's Revolving Credit Commitment as then in
effect, provided that the aggregate amount of all Revolving Credit Loans at any
time outstanding shall not exceed the lesser of (i) the aggregate amount of the
Revolving Credit Commitments or (ii) the Borrowing Base less the aggregate
outstanding principal balance of the Term Loans. Notwithstanding the foregoing,
the aggregate amount of Revolving Credit Loans at any time outstanding, the
proceeds of which were used to make loans to Castle to repurchase outstanding
shares of common stock of Castle pursuant to Section 2.5 shall not at any time
exceed the Stock Repurchase Commitment Amount. Subject to the foregoing
limitations, and the other terms and provisions of this Agreement, the Borrowers
may borrow, repay, and reborrow hereunder the amount of the Revolving Credit
Commitments until the Revolving Credit Termination Date.
Section 2.2 Revolving Credit Notes. The obligation of the Borrowers to
repay each Bank for Revolving Credit Loans made by such Bank and interest
thereon shall be evidenced by a Revolving Credit Note executed by the Borrowers,
payable to the order of such Bank, in the principal amount of such Bank's
Revolving Credit Commitment, and dated the date hereof or such later date as may
be required with respect to transactions contemplated by Section 13.8.
Section 2.3 Repayment of Revolving Credit Loans. The outstanding
principal balance of the Revolving Credit Loans shall be due and payable on the
Revolving Credit Termination Date.
Section 2.4 Interest. The unpaid principal amount of the Revolving
Credit Loans shall bear interest at a varying rate per annum equal from day to
day to the lesser of (a) the Maximum Rate, or (b) the Applicable Rate. If at any
time the Applicable Rate for any Revolving Credit Loan shall exceed the Maximum
Rate, thereby causing the interest accruing on such Revolving Credit Loan to be
limited to the Maximum Rate, then any subsequent reduction in the Applicable
Rate for such Revolving Credit Loan shall not reduce the rate of interest on
such Revolving Credit Loan below the Maximum Rate until the aggregate amount of
interest accrued on such Revolving Credit Loan equals the aggregate amount of
interest which would have accrued on such Revolving Credit
AMENDED AND RESTATED LOAN AGREEMENT - Page 19
<PAGE>
Loan if the Applicable Rate had at all times been in effect. Accrued and unpaid
interest on the Revolving Credit Loans shall be due and payable on the first day
of each month commencing January 1, 1997 and on the Revolving Credit Termination
Date. Notwithstanding the foregoing, any outstanding principal of any Revolving
Credit Loan and (to the fullest extent permitted by law) any other amount
payable by the Borrowers under this Agreement or any other Loan Document that is
not paid in full when due (whether at stated maturity, by acceleration, or
otherwise) shall bear interest at the Default Rate for the period from and
including the due date thereof to but excluding the date the same is paid in
full. Interest payable at the Default Rate shall be payable from time to time on
demand.
Section 2.5 Use of Proceeds. The proceeds of Revolving Credit Loans
shall be used by the Borrowers (i) to finance the development of Oak Hill Field,
Rusk County, Texas, (ii) up to $4,000,000 may be used to loan to Castle to
repurchase outstanding shares of common stock of Castle, and (iii) for other
purposes reasonably approved by the Agent and the Banks.
Section 2.6 Facility Fee. The Borrowers agree to pay to the Agent on
the date hereof for the account of the Banks a facility fee in the aggregate
amount of $125,000. In the event that the Banks in their sole discretion elect
to extend the Revolving Credit Termination Date, the Borrowers shall not be
required to pay an additional facility fee to the Banks in connection therewith.
Notwithstanding the foregoing, the Banks have no obligation or commitment to so
extend the Revolving Credit Termination Date and nothing contained herein shall
be construed as such.
Section 2.7 [Intentionally Omitted]
Section 2.8 Borrowing Base. The Borrowing Base shall be cumulative of
all other limitations contained in this Agreement and the other Loan Documents.
On or prior to the date hereof, the Banks shall have determined the amount of
the Borrowing Base to be in effect during the period from the date hereof to the
date of the first redetermination of the Borrowing Base pursuant to the
provisions of this Section 2.8. The Borrowing Base shall be redetermined
annually by the Banks on each December 31 as of September 30 of the same
calendar year, which redetermination shall be made by the Banks in accordance
with their customary practices and standards for oil and gas loans and as
contemplated by this Agreement. The Borrowers shall pay to the Agent for the
account of the Banks $15,000 for each annual redetermination of the Borrowing
Base, which shall be used by the Banks to pay for the cost of the annual
redetermination. The Banks shall have the right to redetermine the Borrowing
Base more frequently than annually; however, the Borrowers shall have no
obligation to reimburse the Banks for the cost of any such additional
redetermination of the Borrowing Base. The Borrowers shall have the right to
request that the Agent and the Banks redetermine the Borrowing Base more
frequently than annually and upon such request the Agent and the Banks shall do
so, provided that in connection with such a redetermination of the Borrowing
Base, the Borrowers shall pay to the Agent for the account of the Banks $15,000
for any such additional redetermination of the Borrowing Base.
Section 2.9 Mandatory Prepayments or Addition of Collateral. If the
outstanding principal balance of the Revolving Credit Loans at any time exceeds
the difference of the Borrowing
AMENDED AND RESTATED LOAN AGREEMENT - Page 20
<PAGE>
Base, as determined pursuant to Section 2.8, less the aggregate outstanding
principal balance of the Term Loans, the Agent may request the Borrowers by a
notice ("Payment Notice") in writing to pay any such excess amount in the manner
provided below or to increase the Collateral in lieu of such payment, as
provided below.
Section 2.10 Required Date and Amount of Mandatory Prepayment. Within
35 days after the Borrowers have received a Payment Notice, the Borrowers shall
make a prepayment of principal on the Revolving Credit Notes equal to the amount
by which the outstanding principal balance of the Revolving Credit Notes as of
the date of the Payment Notice exceeds the Borrowing Base less the aggregate
outstanding principal balance of the Term Loans (such amount is hereinafter
referred to as the "Borrowing Base Overage"), as of such date, unless either (a)
the Borrowers have notified the Agent in writing (within 10 days after the
Borrowers have received the Payment Notice) of the Borrowers' election to comply
with Section 2.11 hereof and have provided the Agent with complete descriptions
of other properties or interests ("New Properties") which the Borrowers shall
add to the Collateral and subject to Liens in favor of the Agent for the benefit
of itself and the Banks for purposes of Section 2.11 hereof, or (b) the Required
Banks determine that the Borrowers are proceeding diligently with appropriate
actions which will enable the Borrowers to make the prepayment required by this
Section 2.10, then the Required Banks may grant to the Borrowers an additional
period of time within which to make such prepayment.
Section 2.11 Borrowers' Option to Increase Collateral in Lieu of
Prepayment. Within 30 days after the date on which the Agent receives notice of
the Borrowers' election to comply with this Section 2.11, the Borrowers shall
grant to the Agent for the benefit of itself and the Banks, valid, enforceable,
perfected, first priority Liens (subject to Permitted Liens) in the New
Properties, pursuant to security documents in form and substance reasonably
satisfactory to the Agent. In addition, the Borrowers shall deliver to the Agent
upon request such other information, data, and reports describing the New
Properties and the reserves and production related thereto, as the Agent shall
reasonably request. Within a reasonable period of time after the date on which
the Agent receives notice of the Borrowers' election to comply with this Section
2.11, the Banks shall redetermine and notify the Borrowers of the Borrowing Base
determined as if the New Properties were part of the Collateral as of the date
of the last redetermination of the Borrowing Base. Within 10 Business Days after
receipt of such notice, the Borrowers shall make a prepayment of principal on
the Revolving Credit Notes equal to the amount (if any) by which the outstanding
principal balance of the Revolving Credit Loans, as of the date of such
redetermination, exceeds the difference of the applicable Borrowing Base as of
such date as determined by the Banks pursuant to Section 2.8 less the aggregate
outstanding principal balance of the Term Loans.
Section 2.12 Evidence of Title. In the event any New Properties become
a part of the Collateral pursuant to Section 2.11 hereof, at the Agent's request
and option, the Borrowers shall deliver to the Agent title data, landman reports
or title opinions covering such properties or provide such other evidence of
title to such New Properties as the Agent may reasonably require.
AMENDED AND RESTATED LOAN AGREEMENT - Page 21
<PAGE>
ARTICLE III
Term Loans
Section 3.1 Term Loans. Subject to the terms and conditions of this
Agreement, each Bank agrees to make a Term Loan to the Borrowers on a joint and
several basis, in the amount of its Term Loan Commitment in one or more advances
on or before the Term Loan Termination Date.
Section 3.2 The Term Notes. The obligation of the Borrowers to repay
the Term Loans and interest thereon shall be evidenced by the Term Notes
executed by the Borrowers, payable to the order of a Bank, in the principal
amount of such Bank's Term Loan Commitment and dated the date hereof or such
later date as may be required with respect to transactions contemplated by
Section 13.8.
Section 3.3 Repayment of Term Loans. The Borrower shall repay the
unpaid principal amount of the Term Loans in twenty-nine (29) equal consecutive
monthly installments in the aggregate amount of the lesser of (i) the aggregate
outstanding principal balance of the Term Loans, or (ii) $500,000.00 each,
payable on the first day of each month, commencing on December 1, 1996, until
and including April 1, 1999, with a final installment in the amount of all
outstanding principal of the Term Loans payable on May 31, 1999.
Section 3.4 Interest. The unpaid principal amount of the Term Loans
shall bear interest at a varying rate per annum equal from day to day to the
lesser of (a) the Maximum Rate, or (b) the Applicable Rate. If at any time the
Applicable Rate for any Term Loan shall exceed the Maximum Rate, thereby causing
the interest accruing on such Term Loan to be limited to the Maximum Rate, then
any subsequent reduction in the Applicable Rate for such Term Loan shall not
reduce the rate of interest on such Term Loan below the Maximum Rate until the
aggregate amount of interest accrued on such Term Loan equals the aggregate
amount of interest which would have accrued on such Term Loan if the Applicable
Rate had at all times been in effect. Accrued and unpaid interest on the Term
Loans shall be due and payable on the first day of each month commencing
December 1, 1996 and continuing on the first day of each month thereafter until
and including the Term Loan Maturity Date. Notwithstanding the foregoing, any
outstanding principal of any Term Loan and (to the fullest extent permitted by
law) any other amount payable by the Borrowers under this Agreement or any other
Loan Document that is not paid in full when due (whether at stated maturity, by
acceleration, or otherwise) shall bear interest at the Default Rate for the
period from and including the due date thereof to but excluding the date the
same is paid in full. Interest payable at the Default Rate shall be payable from
time to time on demand.
Section 3.5 Request for Term Loans. The Term Loans shall be made on at
least one Business Day's prior notice from Borrowers to the Agent by means of a
Loan Request Form containing the information required therein.
Section 3.6 Use of Proceeds. The proceeds of the Term Loans shall be
used by Borrowers to (i) refinance the outstanding indebtedness of Pipeline and
Marketing to GE Capital, (ii) renew,
AMENDED AND RESTATED LOAN AGREEMENT - Page 22
<PAGE>
extend and modify the outstanding indebtedness of the Borrowers to CNB, (iii)
the balance of the proceeds of the Term Loans may be used to make loans to
Castle for the purpose of repurchasing outstanding shares of common stock of
Castle, (iv) to finance the development of Oak Hill Field, Rusk County, Texas,
and (v) for other purposes approved by the Agent and the Banks.
Section 3.7 Mandatory Prepayment. If an Event of Loss shall occur, the
Borrowers shall prepay in full the unpaid principal amount of the Term Loans,
together with accrued interest thereon to the date of prepayment and all other
amounts owing hereunder and under the Loan Documents, on the earlier of (A) the
date occurring 60 days after the date of such Event of Loss and (B) the date on
which insurance proceeds are received with respect to such Event of Loss.
ARTICLE IV
Borrowing Procedure; Payments
Section 4.1 Borrowing Procedure. The Borrowers shall give the Agent
notice by means of a Loan Request Form of each requested Loan at least one
Business Day before the requested date of the Loan, specifying: (a) the
requested date of such Loan (which shall be a Business Day), (b) the amount of
such Loan, and (c) whether such Loan is a Revolving Credit Loan or a Term Loan.
Each Revolving Credit Loan and each Term Loan shall be in a minimum principal
amount of $250,000. The Agent shall notify each Bank in writing of the contents
of each such notice. Not later than 12:00 P.M. Shreveport, Louisiana time on the
date specified for each Loan hereunder, each Bank will make available to the
Agent at the Principal Office in immediately available funds, for the account of
the Borrowers, its pro rata share of each Loan. After the Agent's receipt of
such funds and subject to the other terms and conditions of this Agreement, the
Agent will make each Loan available to the Borrowers by depositing the same, in
immediately available funds, in an account of the Borrowers (designated by the
Borrowers) maintained with the Agent at the Principal Office. All notices under
this Section shall be irrevocable and shall be given not later than noon
Shreveport, Louisiana, time on the day which is not less than the number of
Business Days specified above for such notice.
Section 4.2 Method of Payment. All payments of principal, interest, and
other amounts to be made by the Borrowers under this Agreement and the other
Loan Documents shall be made to the Agent at the Principal Office for the
account of each Bank in Dollars and in immediately available funds, without
setoff, deduction, or counterclaim, not later than 1:00 P.M., Shreveport,
Louisiana time on the date on which such payment shall become due (each such
payment made after such time on such due date to be deemed to have been made on
the next succeeding Business Day). The Borrowers shall, at the time of making
each such payment, specify to the Agent the sums payable by the Borrowers under
this Agreement and the other Loan Documents to which such payment is to be
applied (and in the event that the Borrowers fail to so specify, or if an Event
of Default has occurred and is continuing, the Agent may apply such payment to
the Obligations in such order and manner as it may elect in its sole discretion,
subject to Section 4.4 hereof). Each payment received by the Agent under this
Agreement or any other Loan Document for the account of a Bank shall be paid
promptly to such Bank, in immediately available funds. Whenever any
AMENDED AND RESTATED LOAN AGREEMENT - Page 23
<PAGE>
payment under this Agreement or any other Loan Document shall be stated to be
due on a day that is not a Business Day, such payment may be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of the payment of interest.
Section 4.3 Voluntary Prepayment. The Borrowers may prepay the Loans in
whole at any time or from time to time in part without premium or penalty but
with accrued interest to the date of prepayment on the amount so prepaid,
provided that each partial prepayment shall be in the principal amount of
$250,000 or an integral multiple thereof. All notices under this Section shall
be irrevocable and shall be given not later than 1:00 P.M. Shreveport,
Louisiana, time on the day of such prepayment.
Section 4.4 Pro Rata Treatment. Except to the extent otherwise provided
herein: (a) each Loan shall be made by the Banks under Section 2.1 and 3.1; (b)
the payment of the facility fee under Section 2.6 and the engineering fees under
Section 2.8 shall be made for the account of the Banks; and (c) each termination
or reduction of the Revolving Credit Commitments under Section 2.7 shall be
applied to the Revolving Credit Commitments of the Banks, pro rata according to
the respective unused Revolving Credit Commitments.
Section 4.5 Non-Receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Bank or the Borrowers (the "Payor") prior to the date on
which such Bank is to make payment to the Agent of the proceeds of a Loan to be
made by it hereunder or the Borrowers are to make a payment to the Agent for the
account of one or more of the Banks, as the case may be (such payment being
herein called the "Required Payment"), which notice shall be effective upon
receipt, that the Payor does not intend to make the Required Payment to the
Agent, the Agent may assume that the Required Payment has been made and may, in
reliance upon such assumption (but shall not be required to), make the amount
thereof available to the intended recipient on such date and, if the Payor has
not in fact made the Required Payment to the Agent, the recipient of such
payment shall, on demand, pay to the Agent the amount made available to it
together with interest thereon in respect of the period commencing on the date
such amount was so made available by the Agent until the date the Agent recovers
such amount at a rate per annum equal to the Federal Funds Rate (or, in the case
of the Borrowers, the Applicable Rate) for such period.
Section 4.6 Computation of Interest. Interest on the Loans and all
other amounts payable by the Borrowers hereunder shall be computed on the basis
of a year of 360 days and the actual number of days elapsed (including the first
day but excluding the last day) unless such calculation would result in a
usurious rate, in which case interest shall be calculated on the basis of a year
of 365 or 366 days, as the case may be.
AMENDED AND RESTATED LOAN AGREEMENT - Page 24
<PAGE>
ARTICLE V
Security
Section 5.1 Collateral. To secure full and complete payment and
performance of the Obligations, the Borrowers shall execute and deliver or cause
to be executed and delivered the documents described below covering the property
described in this Section 5.1 (which, together with any other property which may
now or hereafter secure the Obligations or any part thereof, is sometimes herein
called the "Collateral"):
(a) Each Borrower shall grant to the Agent for the benefit of
itself and the Banks a first priority (subject only to Permitted Liens)
security interest in all of its accounts, accounts receivable,
equipment, machinery, fixtures, inventory, chattel paper, documents,
instruments, and general intangibles, whether now owned or hereafter
acquired, and all products and proceeds thereof, pursuant to the
Borrower Security Agreement; provided, such security interest shall not
attach to (i) funds in possession of the Borrower constituting trust
funds owned by third parties, (ii) capital lease obligations and
property subject to a purchase money security interest to the extent it
is subject to a Permitted Lien, which Permitted Lien prohibits the
imposition of other Liens, (iii) operating leases, licenses and other
agreements (but excluding oil and gas leases) entered in the ordinary
course of business to the extent such agreements prohibit assignment or
the imposition of Liens, (iv) all permits, authorizations,
registrations, consents, approvals, waivers, exceptions, variances,
claims, orders, judgments and decrees, licenses, exemptions,
franchises, registrations, publications, filings, notices to and
declarations of, or with, any Governmental Authority, including,
without limitation, all construction, siting, environmental and
operating permits and licenses that are required for the use and
operation of the Pipeline Assets, to that extent that any of the above
would, by its terms or operation of law, become void, voidable,
terminable or revocable if mortgaged, pledged or assigned or if a
security interest therein were granted hereunder, (v) all licenses,
permits, authorizations, registrations and exemptions relating to the
handling, treatment, disposal and discharge of pollutants, contaminants
and environmentally sensitive materials and substances which are not
assignable by law or in accordance with their terms, (vi) leases,
licenses and other agreements relating to computer hardware and
software which are not assignable by law or in accordance with their
terms, (vii) contracts, contract rights, agreements and other
instruments including, without limitation, the Transportation Agreement
(Marketing) and the Interconnect Agreement, which are not assignable by
law or in accordance with their terms, and (viii) all other consents,
licenses and permits which are not assignable by law or in accordance
with their terms.
(b) Each Borrower shall grant to the Agent for the benefit of
itself and the Banks and confirm its prior grant of a Lien on all of
its real property, Hydrocarbons and all interests therein and proceeds
thereof pursuant to the Deeds of Trust.
AMENDED AND RESTATED LOAN AGREEMENT - Page 25
<PAGE>
(c) Castle shall pledge and grant to the Agent for the benefit
of itself and the Banks a first priority security interest in (i) all
of the outstanding capital stock of Exploration and each of the General
Partners and the Limited Partners, and all products and proceeds
thereof, pursuant to the Castle Pledge Agreement. The Agent shall
retain possession in Louisiana of the certificates evidencing the
capital stock of such Subsidiaries, together with stock powers duly
executed in blank by Castle.
(d) Each of the General Partners shall pledge and grant to the
Agent for the benefit of itself and the Banks a first priority security
interest in its general partnership interest in the relevant Borrower
for which it is the general partner, and all products and proceeds
thereof, pursuant to the GP Pledge Agreement.
(e) Each of the Limited Partners shall pledge and grant to the
Agent for the benefit of itself and the Banks a first priority security
interest in its limited partnership interest in the relevant Borrower
for which it is the limited partner, and all products and proceeds
thereof, pursuant to the LP Pledge Agreement.
(f) Exploration shall pledge and grant to the Agent for the
benefit of itself and the Banks a first priority security interest in
Exploration's entire limited partnership interest in Deerlick Creek
Field Limited Partnership and all products and proceeds thereof
pursuant to the Exploration Pledge Agreement.
(g) Castle shall grant to the Agent for the benefit of itself
and the Banks and confirm its prior grant of a Lien on the Mortgaged
Properties owned by Castle pursuant to the Castle Mortgages and the
Castle Deeds of Trust.
(h) The Borrowers, Castle, the General Partners and the
Limited Partners shall execute and cause to be executed such further
documents and instruments, including without limitation, Uniform
Commercial Code financing statements, as the Agent, in its sole
discretion, deems necessary or desirable to evidence and perfect its
liens and security interests in the Collateral.
Section 5.2 Setoff. If an Event of Default shall have occurred and is
continuing, the Agent and each Bank are hereby authorized at any time and from
time to time, without notice to the Borrowers (any such notice being hereby
expressly waived by the Borrowers), to set off and apply any and all deposits
(general, time or demand, provisional or final, other than deposits constituting
trust funds belonging to third parties) at any time held and other indebtedness
at any time owing by the Agent or such Bank to or for the credit or the account
of any Borrower against any and all of the obligations of the Borrowers now or
hereafter existing under this Agreement, the Notes, or any other Loan Document,
irrespective of whether or not the Agent or such Bank shall have made any demand
under this Agreement, the Notes or any other Loan Document and although such
obligations may be unmatured. The rights and remedies of the Agent and each Bank
hereunder are in addition to other rights and remedies (including, without
limitation, other rights of setoff) which the Agent and such Bank may have.
AMENDED AND RESTATED LOAN AGREEMENT - Page 26
<PAGE>
ARTICLE VI
Conditions Precedent
Section 6.1 Initial Loan. The obligation of each Bank to make its
initial Loan is subject to the condition precedent that the Agent shall have
received on or before the day of such Loan of all of the following, each dated
(unless otherwise indicated) the date hereof, in form and substance satisfactory
to the Agent:
(a) Resolutions. Resolutions of the Board of Directors of
Castle, Exploration, each General Partner and each Limited Partner
certified by its Secretary or an Assistant Secretary which authorize
the execution, delivery, and performance by such Person (and in the
case of each General Partner, the relevant Borrower) of the Loan
Documents to which such Person is or is to be a party;
(b) Incumbency Certificate. A certificate of incumbency
certified by the Secretary or an Assistant Secretary of Castle,
Exploration, each General Partner and each Limited Partner certifying
the names of the officers of such Person authorized to sign each of the
Loan Documents to which such Person (or the relevant Borrower) is or is
to be a party (including the certificates contemplated herein) together
with specimen signatures of such officers;
(c) Articles of Incorporation. The articles of incorporation
of Castle, Exploration, each General Partner and each Limited Partner
certified by the Secretary or Assistant Secretary of each such Person;
(d) Bylaws. The bylaws of Castle, Exploration, each General
Partner and each Limited Partner certified by the Secretary or an
Assistant Secretary of such Person;
(e) Governmental Certificates. Certificates of (i) the
appropriate government officials of the state of incorporation of
Castle, Exploration, each General Partner and each Limited Partner as
to the existence and good standing of such Person, and (ii)
certificates of existence of each Borrower (other than Exploration) in
the State of Texas, certified by the Secretary of State of Texas, each
dated within ten (10) days prior to the date of the initial Loan;
(f) Certificates of Limited Partnership. Copies of each
Borrower's (other than Exploration) Certificate of Limited Partnership
certified by the Secretary of State of the State of Texas, dated within
ten (10) days prior to the date of the initial Loan;
(g) Revolving Credit Notes. The Revolving Credit Notes
executed by the Borrowers;
(h) Term Notes. The Term Notes executed by the Borrowers;
AMENDED AND RESTATED LOAN AGREEMENT - Page 27
<PAGE>
(i) Borrower Security Agreement. The Borrower Security
Agreement executed by the Borrowers;
(j) Security Agreement. The Security Agreement executed by
Exploration;
(k) Financing Statements. Uniform Commercial Code financing
statements executed by the Borrowers, Castle, the General Partners and
the Limited Partners covering the Collateral;
(l) Castle Pledge Agreement. The Castle Pledge Agreement
executed by Castle;
(m) Stock Certificates. The original certificates evidencing
the stock pledged by Castle pursuant to the Castle Pledge Agreement,
together with stock powers duly executed in blank by Castle;
(n) Exploration Pledge Agreement. The Exploration Pledge
Agreement executed by Exploration;
(o) GP Pledge Agreement. The GP Pledge Agreement executed by
the General Partners;
(p) LP Pledge Agreement. The LP Pledge Agreement executed by
the Limited Partners;
(q) Modifications. Modifications of the Deeds of Trust and
such other of the Collateral Security Documents as the Agent deems
necessary, executed by the respective Obligated Parties;
(r) Repayment of Debt. Evidence that Borrowers shall have
satisfied (or upon funding of the Term Loans will satisfy) in full all
amounts owing to GE Capital;
(s) Material Adverse Change. No material adverse change shall
have occurred since the date of the most recent financial statements
delivered by Castle to the Agent, in the financial condition, business,
operations, or prospects of Castle, any Borrower, any General Partner,
any Limited Partner or Lone Star or in any of their respective assets,
liabilities or properties and there shall be no material threatened or
pending litigation adversely affecting any of their respective
property;
(t) Insurance Policies. Copies or other evidence of all
insurance policies required by Section 8.5;
(u) UCC Searches. The results of a Uniform Commercial Code
search showing all financing statements and other documents or
instruments on file against Castle, the Borrowers, the General Partners
and the Limited Partners in such jurisdictions as the Agent
AMENDED AND RESTATED LOAN AGREEMENT - Page 28
<PAGE>
shall determine, such searches to be as of a date no more than 10 days
prior to the date of the initial Loan;
(v) Lien Releases. Executed UCC-3 Termination Statements and
other Lien releases that release or assign to the Agent all Liens held
by holders of Debt not constituting Permitted Debt (including, without
limitation, all Liens in favor of GE Capital) and all other Liens that
do not constitute Permitted Liens;
(w) Opinion of Counsel. A favorable opinion of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., legal counsel to Castle, the General
Partners, the Limited Partners and the Borrowers, as to the matters set
forth in Exhibit "F" hereto, and such other matters as the Agent may
reasonably request;
(x) Engineering Report. Engineering reports updated on an
annual basis acceptable to the Agent in form and substance from the
Ryder Scott & Associates and Huntley and Huntley;
(y) Project Documents. Each of the Project Documents shall be
in full force and effect and no material default shall exist or be
continuing under any Project Document; and
(z) Attorneys' Fees and Expenses. Evidence that the costs,
fees and expenses referred to in the Fee Letter, Section 2.6 and in
Section 13.1, to the extent incurred, shall have been paid in full by
the Borrowers.
Section 6.2 All Loans. The obligation of each Bank to make any Loan
(including the initial Loan) is subject to the following additional conditions
precedent:
(a) Request for Loan. The Agent shall have received, in
accordance with Section 4.1, a Loan Request Form executed by an
authorized officer of the Borrowers;
(b) No Default. No Default shall have occurred and be
continuing, or would result from such Loan;
(c) Representations and Warranties. All of the representations
and warranties contained in Article VII hereof and in the other Loan
Documents shall be true and correct on and as of the date of such Loan
with the same force and effect as if such representations and
warranties had been made on and as of such date except (i) to the
extent such representations and warranties relate to an earlier date,
in which case they were true and correct as of such date, and (ii) as
such representations and warranties are modified to give effect to
transactions expressly permitted hereby; and
(d) Additional Documentation. The Agent shall have received
such additional approvals, opinions, or documents as the Agent or its
legal counsel, Winstead Sechrest & Minick P.C., may reasonably request.
AMENDED AND RESTATED LOAN AGREEMENT - Page 29
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ARTICLE VII
Representations and Warranties
To induce the Agent and the Banks to enter into this Agreement, each
Borrower, each General Partner, and Castle (collectively, the "Representing
Parties") represent and warrant to the Agent and the Banks that:
Section 7.1 Corporate Existence. (a) Each Borrower (other than
Exploration) is a limited partnership duly organized and validly existing under
the laws of the State of Texas. Exploration is a corporation duly organized and
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania. Each Borrower is duly qualified to do business under the laws of
each jurisdiction in which the conduct of its business or the ownership, lease
or operation of its property so requires, except where failure to so qualify
would not have a material adverse effect on its business, financial condition,
or operations. The Certificate of Limited Partnership of each Borrower (other
than Exploration) has been duly filed in the office of the Secretary of State of
Texas; the Certificate of Incorporation of Exploration has been duly filed in
the Office of the Secretary of State of the Commonwealth of Pennsylvania; and no
other filing, recording, publishing or other act is necessary or appropriate in
connection with the existence of any Borrower except those which have been duly
made or performed.
(b) Each General Partner is duly organized and validly existing and in
good standing under the laws of Texas, is duly qualified to do business under
the laws of each jurisdiction in which the conduct of its business so requires
(except where the failure to so qualify would not have a material adverse effect
on its business, financial conditions or operations) and has the corporate power
and authority and the legal right to own and operate its property and to conduct
the business in which it is currently engaged.
(c) Pipeline GP is the sole general partner of Pipeline. Marketing GP
is the sole general partner of Marketing. Production GP is the sole general
partner of Production. Pipeline GP, Marketing GP and Production GP are engaged
solely in the business of being the general partners of Pipeline, Marketing and
Production, respectively, and activities incident thereto.
(d) Each Limited Partner is duly organized and validly existing and in
good standing under the laws of Pennsylvania, is duly qualified to do business
under the law of each jurisdiction in which the conduct of its business so
requires (except where the failure to so qualify would not have a material
adverse effect on its business, financial conditions or operations) and has the
corporate power and authority and the legal right to own and operate its
property and to conduct the business in which it is currently engaged.
(e) Pipeline LP is the sole limited partner of Pipeline. Marketing LP
is the sole limited partner of Marketing. Production LP is the sole limited
partner of Production.
AMENDED AND RESTATED LOAN AGREEMENT - Page 30
<PAGE>
Section 7.2 Financial Statements. Castle has delivered to the Agent
audited consolidated financial statements (Form 10-K) of Castle and its
Subsidiaries as at and for the fiscal year ended September 30, 1995, and
unaudited consolidated financial statements (Form 10-Q) of Castle and its
Subsidiaries for the nine month period ended June 30, 1996. Such financial
statements have been prepared in accordance with GAAP, and fairly present, in
all material respects, on a consolidated basis, the financial condition of
Castle and its Subsidiaries as of the respective dates indicated therein and the
results of operations for the respective periods indicated therein. Neither
Castle nor any of its Subsidiaries has any material contingent liabilities,
liabilities for taxes, unusual forward or long-term commitments, or unrealized
or anticipated losses from any unfavorable commitments except as scheduled or
referred to or reflected in such financial statements. There has been no
material adverse change in the business, condition (financial or otherwise),
operations, prospects, or properties of Castle, any Borrower, any General
Partner or any Limited Partner since the effective date of the most recent
financial statements referred to in this Section.
Section 7.3 Corporate Action; No Breach. The execution, delivery, and
performance by Castle, each General Partner, each Limited Partner and each
Borrower of the Loan Documents to which such Person is or may become a party and
compliance with the terms and provisions hereof and thereof have been duly
authorized by all requisite corporate or partnership action on the part of such
Person and do not and will not (a) violate or conflict with, or result in a
breach of, or require any consent that has not been obtained under (i) the
articles of incorporation or certificate of limited partnership, as the case may
be, or bylaws or agreement of limited partnership, as the case may be, of such
Person, (ii) any applicable law, rule, or regulation or any order, writ,
injunction, or decree of any Governmental Authority or arbitrator in any way
that would reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise), operations, prospects or
properties of such Person or the ability of such Person to perform its
obligations under the Loan Documents, or (iii) any agreement or instrument to
which such Person is a party or by which it or any of its property is bound or
subject in any way that would reasonably be expected to have a material adverse
effect on the business, condition (financial or otherwise), operations,
prospects or properties of such person or the ability of such Person to perform
its obligations under the Loan Documents, or (b) constitute a default under any
such agreement or instrument, or result in the creation or imposition of any
Lien (except as provided in Article V) upon any of the revenues or assets of any
such Person in any way that would reasonably be expected to have a material
adverse effect on the business, condition (financial or otherwise), operations,
prospects or properties of such Person or the ability of such person to perform
its obligations under the Loan Documents.
Section 7.4 Operation of Business. Each of Castle, each General
Partner, each Limited Partner and each Borrower possesses all licenses, permits,
franchises, patents, copyrights, trademarks, and tradenames, or rights thereto,
necessary to conduct its business substantially as now conducted and as
presently proposed to be conducted, and no such Person is in violation of any
valid rights of others with respect to any of the foregoing except in each case
to the extent that any such failure or violation would not reasonably be
expected to have a material adverse effect on the business, condition (financial
or otherwise), operations, prospects or properties of such Person or the ability
of such Person to perform its obligations under the Loan Documents.
AMENDED AND RESTATED LOAN AGREEMENT - Page 31
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Section 7.5 Litigation and Judgments. Except as disclosed on Schedule 1
hereto, there is no action, suit, investigation, or proceeding before or by any
Governmental Authority or arbitrator pending, or to the knowledge of any
Representing Party, threatened against or affecting Castle, any General Partner,
Limited Partner or Borrower, that would, if adversely determined, have a
material adverse effect on the business, condition (financial or otherwise),
operations, prospects, or properties of such Person or the ability of any such
Person to perform its obligations under the Loan Documents. There are no
outstanding judgments against any such Person.
Section 7.6 Rights in Properties; Liens. Castle, each General Partner,
each Limited Partner and each Borrower have good and indefeasible title to or
valid leasehold interests in their respective properties and assets, real and
personal, including the properties, assets, and leasehold interests reflected in
the financial statements described in Section 7.2, and none of the properties,
assets, or leasehold interests of any such Person is subject to any Lien, except
the Permitted Liens.
Section 7.7 Enforceability. This Agreement constitutes, and the other
Loan Documents to which Castle, any General Partner, Limited Partner or Borrower
is party, when delivered, shall constitute the legal, valid, and binding
obligations of such Person, enforceable against such Person in accordance with
their respective terms, except as limited by bankruptcy, insolvency, or other
laws of general application relating to the enforcement of creditors' rights.
Section 7.8 Approvals. No authorization, approval, or consent of, and
no filing or registration with, any Governmental Authority or third party is or
will be necessary for the execution, delivery, or performance by Castle, any
General Partner, Limited Partner or Borrower of the Loan Documents to which such
Person is or may become a party or for the validity or enforceability thereof,
except (a) routine corporate and limited partnership filings, (b) UCC-1, UCC-3,
and similar filings, (c) filings in connection with the exercise of remedies by
the Banks, and (d) routine filings in connection with conducting business in the
ordinary course.
Section 7.9 Debt. The Borrowers have no Debt, except Permitted Debt.
Section 7.10 Taxes. Each Borrower, each General Partner, each Limited
Partner and Castle has filed all material tax returns (federal, state, and
local) required to be filed, including all income, franchise, employment,
property, and sales tax returns, and have paid all material respective
liabilities for taxes, assessments, governmental charges, and other levies that
are due and payable. No Representing Party knows of any pending investigation of
any such Person by any taxing authority or of any pending but unassessed tax
liability of any such Person.
Section 7.11 Use of Proceeds; Margin Securities. No Borrower, General
Partner or Limited Partner is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulations G, T, U, or X of the
Board of Governors of the Federal Reserve System), and no part of the proceeds
of any Loan will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying margin stock.
AMENDED AND RESTATED LOAN AGREEMENT - Page 32
<PAGE>
Section 7.12 ERISA. Each Borrower, each General Partner and each
Limited Partner are in compliance in all material respects with all applicable
provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has
occurred and is continuing with respect to any Plan. No notice of intent to
terminate a Plan has been filed, nor has any Plan been terminated. No
circumstances exist which constitute grounds entitling the PBGC to institute
proceedings to terminate, or appoint a trustee to administer, a Plan, nor has
the PBGC instituted any such proceedings. No Borrower, General Partner, Limited
Partner or any ERISA Affiliate has completely or partially withdrawn from a
Multiemployer Plan. Each Borrower, each General Partner and each Limited Partner
and each ERISA Affiliate have met their minimum funding requirements under ERISA
with respect to all of their Plans, and the present value of all vested benefits
under each Plan do not exceed the fair market value of all Plan assets allocable
to such benefits, as determined on the most recent valuation date of the Plan
and in accordance with ERISA. No Borrower, General Partner, Limited Partner or
any ERISA Affiliate has incurred any liability to the PBGC under ERISA.
Section 7.13 Disclosure. No statement, information, report,
representation, or warranty made by any Representing Party in this Agreement or
in any other Loan Document or furnished to the Agent or any Bank in connection
with this Agreement or any transaction contemplated hereby contains any untrue
statement of a material fact or omits to state any material fact necessary to
make the statements herein or therein not misleading. There is no fact known to
such Representing Party which has a material adverse effect, or which might in
the future have a material adverse effect, on the business, condition (financial
or otherwise), operations, prospects, or properties of such Representing Party
that has not been disclosed in writing to the Agent and the Banks.
Section 7.14 Subsidiaries. Castle has no Subsidiaries other than those
listed on Schedule 3 hereto, and Schedule 3 sets forth the jurisdiction of
incorporation of each Subsidiary and the percentage of the Borrower's ownership
of the outstanding voting stock of each Subsidiary. All of the outstanding
capital stock of each Subsidiary has been validly issued, is fully paid, and is
nonassessable.
Section 7.15 Agreements. Neither Castle, any Borrower, any General
Partner nor any Limited Partner is a party to any indenture, loan, or credit
agreement, or to any lease or other agreement or instrument, or subject to any
charter or corporate restriction which would reasonably be expected to have a
material adverse effect on the business, condition (financial or otherwise),
operations, prospects, or properties of such Persons, or the ability of such
Person to pay and perform its obligations under the Loan Documents to which it
is a party. Neither Castle, any Borrower, any General Partner nor any Limited
Partner is in default in any respect in the performance, observance, or
fulfillment of any of the obligations, covenants, or conditions contained in any
agreement or instrument material to its business to which it is a party.
Section 7.16 Compliance with Laws. Neither Castle, any Borrower, any
General Partner nor any Limited Partner is in violation in any material respect
of any law, rule, regulation, order, or decree of any Governmental Authority or
arbitrator.
AMENDED AND RESTATED LOAN AGREEMENT - Page 33
<PAGE>
Section 7.17 Investment Company Act. Neither Castle, any Borrower, any
General Partner nor any Limited Partner is an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
Section 7.18 Public Utility Holding Company Act. None of the Borrowers,
the General Partners nor the Limited Partners is a "holding company" or a
"subsidiary company" of a "holding company" or an "affiliate" of a "holding
company" or a "public utility" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
Section 7.19 Environmental Matters. Except as disclosed on Schedule 4
hereto:
(a) The Borrowers, the General Partners, the Limited Partners
and Castle, and all of their respective properties, assets, and
operations are in compliance in all material respects with all
Environmental Laws. No Representing Party is aware of, nor has any
Representing Party received notice of, any past, present, or future
conditions, events, activities, practices, or incidents which may
interfere with or prevent the compliance or continued compliance of any
such Person with all Environmental Laws;
(b) To the best of such Representing Party's knowledge, the
Borrowers, the General Partners, the Limited Partners and Castle have
obtained all permits, licenses, and authorizations that are required
under applicable Environmental Laws, and have received no notice that
any such permit is not in good standing, or that any such Person is not
in compliance with all of the terms and conditions of such permits;
(c) To the best of such Representing Party's knowledge, no
Hazardous Materials exist on, about, or within or have been used,
generated, stored, transported, disposed of on, or Released from any of
the Mortgaged Properties except in amounts that would not violate
applicable law;
(d) None of the Borrowers nor any of their respective
currently or previously owned or leased properties or operations is
subject to any outstanding or, to the best of such Borrower's
knowledge, threatened order from or agreement with any Governmental
Authority or other Person or subject to any judicial or docketed
administrative proceeding with respect to (i) failure to comply with
Environmental Laws, (ii) Remedial Action, or (iii) any Environmental
Liabilities arising from a Release or threatened Release;
(e) To the best of such Representing Party's knowledge, there
are no conditions or circumstances associated with the currently or
previously owned or leased properties or operations of any Borrower
that could reasonably be expected to give rise to any Environmental
Liabilities;
(f) None of the Borrowers is a treatment, storage, or disposal
facility requiring a permit under the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq., regulations thereunder or
any comparable provision of state law. Each of the Borrowers is
AMENDED AND RESTATED LOAN AGREEMENT - Page 34
<PAGE>
in substantial compliance with all applicable financial responsibility
requirements of all Environmental Laws; and
(g) No Borrower has received any notice that a Lien arising
under any Environmental Law has attached to any property or revenues of
such Borrower.
Section 7.20 Pipeline Contracts. Pipeline, with respect to the Pipeline
Assets, has fulfilled all requirements for filings, certificates, disclosures of
parties in interest, and other similar matters contained in (or otherwise
applicable thereto by law, rule or regulation) any Basic Document or other
document granting or governing the operation or maintenance of such interests
and assets, and Pipeline is qualified to own, hold and exercise such rights
under such lease unit agreements, Basic Documents or other documents.
Section 7.21 No Obligations. Except for obligations pursuant to the
Project Documents, no Borrower has any obligation or Debt owing to MGTF or any
other MGC Affiliate except in connection with the termination by the Borrowers
of certain management and service agreements to which MGTF, MGC or an Affiliate
thereof is a party.
Section 7.22 Prepayment. Marketing has fully and irrevocably prepaid a
quantity of Natural Gas (a) from Production pursuant to the Production $2.90
Contract equal to the aggregate sum of the Tier II Minuends (as defined in the
Supply Agreement) for each day in the period from August 1, 1993 through May 31,
1999, inclusive, as set forth in Exhibit B to the Supply Agreement, and (b) from
MGNG pursuant to the Supply Agreement equal to all Tier II and Tier III Gas (as
defined therein) to be delivered thereunder.
Section 7.23 Gas Contracts.
(a) Except pursuant to the Supply Agreement and the OWI
Contracts, Marketing is not a party to any contract providing for the
purchase of gas by it nor is it otherwise obligated to purchase gas
from any other source.
(b) Marketing has no obligation to purchase any specified
minimum quantity of gas pursuant to any OWI Contract, nor does it have
any other obligations under any OWI Contract other than the obligation
to pay for any gas actually taken thereunder in the case of the Owner
OWI Contracts, at a price of $2.90 per MMBtu fixed for the life of such
contract and (ii) in the case of the Production $2.90 Contract, at a
price of $2.90 per MMBtu fixed for the life of such contract, such
price having been irrevocably prepaid; provided, however, that
Marketing is not permitted to discriminate against producers within any
field from which it purchases Natural Gas or unjustly and unreasonably
discriminate between fields.
Section 7.24 FERC Jurisdiction.
(a) None of the Assets, nor any portion thereof, is subject to
the jurisdiction of FERC.
AMENDED AND RESTATED LOAN AGREEMENT - Page 35
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(b) No Representing Party is aware of any assertion by any
Governmental Authority or any other Person, or any proceeding
asserting, that the Pipeline Assets, or any portion thereof, are
subject to the jurisdiction of FERC.
(c) No transportation of Natural Gas by Pipeline or Marketing
constitutes transportation of Natural Gas in interstate commerce
subject to the jurisdiction of FERC under the NGA.
(d) No Natural Gas sales by Marketing, including the gas sold
to Lone Star under the Lone Star Contract, or by Production or
Exploration are sales in interstate commerce for resale subject to the
jurisdiction of the FERC under the NGA.
(e) The Natural Gas which MGNG or any Affiliate of Marketing
purchases and subsequently sells to Marketing for resale to Lone Star
is purchased by MGNG or such Affiliate only in sales that are not a
sale in interstate commerce for resale subject to FERC jurisdiction
under the NGA and that sales of such gas by MGNG or such Affiliate to
Marketing do not constitute a sale in interstate commerce for resale
subject to FERC jurisdiction under the NGA.
(f) The purchase of gas by Marketing from any other source
does not constitute a sale in interstate commerce for resale subject to
FERC jurisdiction under the NGA.
Section 7.25 Lone Star Contract. As of the date hereof, Lone Star has
not made a payment under the Lone Star Contract during the current Operating
Year in respect of any Natural Gas which it has not already taken, nor does it
have any outstanding credit thereunder permitting it to take any natural gas in
the future without paying for the same.
ARTICLE VIII
Positive Covenants
Each Borrower covenants and agrees that, as long as the Obligations or
any part thereof are outstanding or any Bank has any Commitment hereunder, such
Borrower will perform and observe the following positive covenants:
Section 8.1 Reporting Requirements. The Borrowers will furnish to the
Agent and each Bank:
(a) Annual Financial Statements. As soon as available, but in
any event within 105 days (or, in the case of Enserch, as soon as
publicly available) after the end of each fiscal year of each Borrower
and Castle (each a "Reporting Party"), a copy of the balance sheet of
such Reporting Party as of the end of such fiscal year and the related
statements of income, retained earnings (or partners' capital) and
changes in cash flows of such Reporting Party (which, in the case of
Pipeline, Marketing and Production, may be combined) for such fiscal
AMENDED AND RESTATED LOAN AGREEMENT - Page 36
<PAGE>
year, setting forth in each case in comparative form the figures for
the previous fiscal year, certified without qualification or exception
as to the scope of its audit by independent public accountants of
national standing; and
(b) Quarterly Financial Statements. As soon as available, but
in any event within 45 days after the end of each of the first three
(3) quarterly periods of each fiscal year of each Reporting Party, the
unaudited balance sheet of such Reporting Party as of the end of such
quarterly period and the related unaudited statements of income and
retained earnings (or partners' capital) and changes in cash flows of
such Reporting Party for such quarterly period and for the portion of
the fiscal year then ended, setting forth in each case in comparative
form the figures for the previous period, certified by a Responsible
Officer of such Reporting Party as being fairly presented in all
material respects (subject to normal audit adjustments);
All such financial statements (other than the financial
statements of Enserch, which shall be the financial statements in the
form filed by Enserch on Form 10-K with the Securities and Exchange
Commission) shall be fairly presented in all material respects as to
the matters contained therein and shall be prepared in reasonable
detail and in accordance with GAAP applied consistently throughout the
periods reflected therein and with prior periods (except for changes
approved or required by the independent public accountants certifying
such statements and disclosed therein).
(c) Certificate of No Default. Within 45 days after the end of
each fiscal quarter, a certificate of an authorized officer of each
Borrower (i) stating that to the best of such officer's knowledge, no
Default has occurred and is continuing, or if a Default has occurred
and is continuing, a statement as to the nature thereof and the action
that is proposed to be taken with respect thereto, and (ii) showing in
reasonable detail the calculations demonstrating compliance with
Article X;
(d) Management Letters. Promptly upon receipt thereof, a copy
of any management letter or written report submitted to any Borrower by
independent certified public accountants with respect to the business,
condition (financial or otherwise), operations, prospects, or
properties of the Borrower or any Subsidiary;
(e) Notice of Litigation. Promptly after the commencement
thereof, notice of all actions, suits, and proceedings before any
Governmental Authority or arbitrator affecting any Borrower which, if
determined adversely to such Borrower, could reasonably be expected to
have a material adverse effect on the business, condition (financial or
otherwise), operations, prospects, or properties of such Borrower;
(f) Annual Reserve Report. On or before November 15th of each
fiscal year at the Borrowers' expense, an annual report in form and
substance satisfactory to the Agent prepared by an independent third
party engineering firm acceptable to the Agent and the Banks dated as
of September 30th of the same calendar year, reflecting the quantity of
existing proven and producing oil and gas reserves attributable to the
Mortgaged Properties
AMENDED AND RESTATED LOAN AGREEMENT - Page 37
<PAGE>
and any New Properties since the last such annual report submitted to
the Agent and the Banks, a projection of the rate of production and net
operating income with respect thereto as of such date, and such other
information as is customarily obtained from and provided in such
reports, each as prepared in accordance with the SEC Case.
(g) Notice of Default. As soon as possible and in any event
within five (5) days after the occurrence of each Default, a written
notice setting forth the details of such Default and the action that
the Borrowers have taken and propose to take with respect thereto;
(h) ERISA Reports. Promptly after the filing or receipt
thereof, copies of all reports, including annual reports, and notices
which any Borrower files with or receives from the PBGC or the U.S.
Department of Labor under ERISA; and as soon as possible and in any
event within 5 days after such Borrower knows or has reason to know
that any Reportable Event or Prohibited Transaction has occurred with
respect to any Plan or that the PBGC or such Borrower has instituted or
will institute proceedings under Title IV of ERISA to terminate any
Plan, a certificate of the chief financial officer of such Borrower
setting forth the details as to such Reportable Event or Prohibited
Transaction or Plan termination and the action that such Borrower
proposes to take with respect thereto;
(i) Reports to Other Creditors. Promptly after the furnishing
thereof, copies of any statement or report furnished to any other party
pursuant to the terms of any indenture, loan, or credit or similar
agreement and not otherwise required to be furnished to the Agent and
the Banks pursuant to any other clause of this Section;
(j) Notice of Material Adverse Change. As soon as possible and
in any event within 5 days after the occurrence thereof, written notice
of any matter that could have a material adverse effect on the
business, condition (financial or otherwise), operations, prospects, or
properties of Castle, any General Partner, Limited Partner or Borrower,
other than matters affecting the Natural Gas marketing business or the
oil and gas industry generally;
(k) Proxy Statements, Etc. As soon as available and in any
event within 10 days of sending or filing with the Securities and
Exchange Commission or successor agency, one copy of each financial
statement, report, press release, notice or proxy statement sent by
Castle to its stockholders generally as published by Castle and one
copy of each regular, periodic or special report, form (including,
without limitation, all 10-K and 10-Q filings), registration statement,
or prospectus filed by Castle with any securities exchange or the
Securities and Exchange Commission or any successor agency;
(l) Operating Reports. As soon as practicable, but in any
event within 45 days after the end of each calendar month, an operating
report of each Borrower as at the end of such period and for the period
of such Fiscal Year then ended, setting forth the revenues of such
Borrower received during such month and the expenses and extraordinary
items disbursed during such month and containing, (i) with respect to
Pipeline, a summary
AMENDED AND RESTATED LOAN AGREEMENT - Page 38
<PAGE>
transportation statement, (ii) with respect to Marketing, a summary of
Natural Gas sales and purchases, and such other information as shall be
agreed to by the Agent and the Borrowers setting forth in comparative
form the corresponding figures for the corresponding periods in the
preceding Fiscal Year (if applicable) and the corresponding figures for
the corresponding periods contained in the current operating budget of
the Borrowers, accompanied by a certificate of a responsible officer of
such Borrower, which certificate shall state that such report is true
and correct to the best of his knowledge, and (iii) with respect to
Production a Summary Operating Statement identifying the most recent
information available regarding the gross volumes of Hydrocarbons
produced from the Mortgaged Properties and a statement of revenues and
expenses attributable to the Mortgaged properties for such calendar
month then ended, such reports to be in form and substance reasonably
satisfactory to the Agent;
(m) Diminution of Natural Gas. Promptly after any material
diminution in (other than ordinary month to month variations of
volume), or interruption of, the supply of Natural Gas to Marketing, or
the flow of Natural Gas through the Pipeline Assets, a notice
describing the circumstances of such diminution or interruption; and
(n) Lone Star Contract. As soon as practicable, but in any
event within 30 days after the end of each Fiscal Year (or, in the
event that the Lone Star Contract terminates prior to January 31 in any
year, within 30 days from the date of such termination), Marketing
shall deliver to the Agent a certificate (together with such back-up
information as may be reasonably requested to confirm the information
contained in such certificate) of a responsible officer of Marketing
setting forth the quantity of gas that Lone Star purchased during such
Operating Year (or such shorter period if applicable) under the Lone
Star Contract together with an itemized statement setting forth whether
Lone Star purchased the quantity of gas required to be purchased under
the Lone Star Contract for such period. In the event that Lone Star
shall fail to purchase the quantity of gas required to be purchased
under the Lone Star Contract for any Operating Year (or shorter period
if applicable) then, simultaneously with the delivery of the
certificate referred to in this paragraph (m), Marketing shall notify
Lone Star in writing (with a copy to the Agent) of such failure in
accordance with paragraph 7.2 of the Lone Star Contract.
(o) General Information. Promptly, such other information
concerning the Borrowers, the General Partners, the Limited Partners or
Castle as the Agent or any Bank may from time to time reasonably
request.
Section 8.2 Maintenance of Existence; Conduct of Business. Each
Borrower will preserve and maintain its existence and all of its leases,
privileges, licenses, permits, franchises, qualifications, and rights that are
necessary or desirable in such Borrower's reasonable business judgment, and in
the ordinary conduct of its business. Each Borrower will conduct its business in
an orderly and efficient manner in accordance with good business practices.
Section 8.3 Maintenance of Properties. Each Borrower will maintain,
keep, and preserve all of its properties (tangible and intangible) necessary or
useful in the proper conduct of its business
AMENDED AND RESTATED LOAN AGREEMENT - Page 39
<PAGE>
in good working order and condition, ordinary wear and tear and immaterial
impairments of value and damage by the elements excepted.
Section 8.4 Taxes and Claims. Each Borrower will pay or discharge at or
before maturity or before becoming delinquent (a) all taxes, levies,
assessments, and governmental charges imposed on it or its income or profits or
any of its property, and (b) all lawful claims for labor, material, and
supplies, which, if unpaid, might become a Lien upon any of its property;
provided, however, that the Borrower shall not be required to pay or discharge
any tax, levy, assessment, or governmental charge which is being contested in
good faith by appropriate proceedings diligently pursued, and for which adequate
reserves have been established.
Section 8.5 Insurance. Each Borrower will maintain, and will cause each
of the Subsidiaries to maintain, insurance with financially sound and reputable
insurance companies in such amounts and covering such risks as is usually
carried by Persons engaged in similar businesses and owning similar properties
in the same general areas in which such Borrower operates, provided that in any
event such Borrower will maintain workmen's compensation insurance, property
insurance, $25,000,000 in comprehensive general liability insurance, products
liability insurance, and business interruption insurance reasonably satisfactory
to the Agent and the Banks. Each insurance policy covering Collateral shall
provide that such policy will not be cancelled or reduced without 30 days' prior
written notice to the Agent. Each Borrower will cause each insurance policy
covering Collateral to name the Agent as additional assured and loss payee for
the benefit of itself and the Banks.
Section 8.6 Inspection Rights. The Borrowers will permit
representatives of the Agent and each Bank to examine, copy, and make extracts
from its books and records, to visit and inspect its properties during normal
business hours (unless a Default or an Event of Default has occurred and is then
continuing), and to discuss its business, operations, and financial condition
with its officers and independent certified public accountants.
Section 8.7 Keeping Books and Records. Each Borrower will maintain
proper books of record and account in which entries in conformity with GAAP
shall be made of all dealings and transactions in relation to its business and
activities.
Section 8.8 Compliance with Laws. Each Borrower will comply in all
material respects with all applicable laws, rules, regulations, orders, and
decrees of any Governmental Authority or arbitrator.
Section 8.9 Compliance with Agreements. Each Borrower will comply in
all material respects with all agreements, contracts, and instruments binding on
it or affecting its properties or business.
Section 8.10 Further Assurances. Each Borrower will execute and deliver
such further agreements and instruments and take such further action as may be
requested by the Agent to carry out the provisions and purposes of this
Agreement and the other Loan Documents and, subject to
AMENDED AND RESTATED LOAN AGREEMENT - Page 40
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Section 5.1, to create, preserve, and perfect the Liens of the Agent for the
benefit of itself and the Banks in the Collateral.
Section 8.11 ERISA. Each Borrower will comply, and will cause each
Subsidiary to comply, with all minimum funding requirements, and all other
material requirements, of ERISA, if applicable, so as not to give rise to any
liability thereunder.
Section 8.12 [Intentionally omitted.]
Section 8.13 Pledge of Additional Contracts; Future Mortgages.
(a) Upon entering into any Additional Contract, each Borrower
will use reasonable efforts to obtain any required consent to the
pledge as collateral by such Borrower to the Agent of such Additional
Contract (as security for the Obligations). Such Borrower shall pledge
such Additional Contract to the Agent as collateral promptly upon
receipt of such required consent.
(b) Prior to January 1, 1997 and continuing for each year
thereafter so long as the Obligations are outstanding, each Borrower
shall notify the Agent of the acquisition of any property or leasehold
or other interest in real property during the preceding year valued at
the lower of cost or fair market value in excess of $100,000, and shall
execute, deliver, record and file instruments and documents (including,
without limitation, a supplement to the applicable Deed of Trust and
the Borrower Security Agreement) as the Agent shall request in order to
create a perfected Lien thereon in favor of the Agent.
Section 8.14 FERC Jurisdiction.
(a) Marketing shall sell all gas, including all gas sold to
Lone Star under the Lone Star Contract, only in sales that do not
constitute a sale in interstate commerce for resale subject to the
jurisdiction of the FERC under the NGA.
(b) Marketing shall purchase all of its gas, including from
MGNG, only in sales that do not constitute a sale in interstate
commerce for resale subject to the jurisdiction of the FERC under the
NGA.
Section 8.15 Cover Damages. With respect to any Delivery Default (as
defined in the Supply Agreement), Marketing shall, upon consulting with the
Banks, obtain Cover Supplies (as defined in the Supply Agreement).
Section 8.16 Proceeds from the Production Payment and Receivables from
Lone Star Contract. All proceeds received (i) by Exploration from the Production
Payment, and (ii) by Marketing under the Lone Star Contract, shall be payable
directly to a lockbox under the control of the Agent which shall then be
deposited by the Agent into a lockbox account in accordance with the terms of
the Lockbox Operating Agreement. Unless an Event of Default has occurred and is
AMENDED AND RESTATED LOAN AGREEMENT - Page 41
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continuing, all such amounts so deposited shall be transferred to such
Borrower's operating account maintained with the Agent within two Business Days
of the deposit thereof in the lockbox account. If an Event of Default has
occurred and is continuing, the Agent may apply all such amounts on deposit in
the lockbox account or the operating accounts to the Obligations pursuant to the
terms hereof. Exploration and Marketing have each executed and delivered notices
to the applicable Persons with respect to the Production Payment and the Lone
Star Contract to effectuate the direct payment thereunder to the lockbox
established pursuant to the Lockbox Agreement.
ARTICLE IX
Negative Covenants
Each Borrower covenants and agrees that, as long as the Obligations or
any part thereof are outstanding or any Bank has any Commitment hereunder, such
Borrower will perform and observe the following negative covenants:
Section 9.1 Debt. Such Borrower will not incur, create, assume, or
permit to exist any Debt exceeding $100,000 in the aggregate, except the
following (herein referred to as "Permitted Debt"):
(a) Debt to the Agent and the Banks pursuant to the Loan
Documents;
(b) Net oil and gas balancing positions arising in the
ordinary course of business;
(c) Debt to Castle, the General Partners, the Limited Partners
and other Borrowers;
(d) Debt arising under oil and/or gas hedging agreements;
(e) Debt incurred in connection with or necessarily incidental
to commitments for the purchase or sale of, or the transportation or
distribution of, products derived from oil and/or gas producing
properties; and
(f) Existing Debt described on Schedule 2 hereto.
Section 9.2 Limitation on Liens. Such Borrower will not incur, create,
assume, or permit to exist any Lien upon any of its property, assets, or
revenues, whether now owned or hereafter acquired, except the following (herein
referred to as "Permitted Liens"):
(a) Liens on the property described on Schedule 5 hereto to
secure Permitted Debt;
(b) Liens in favor of the Agent for the benefit of itself and
the Banks;
AMENDED AND RESTATED LOAN AGREEMENT - Page 42
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(c) Encumbrances consisting of minor easements, zoning
restrictions, or other restrictions on the use of real property that do
not (individually or in the aggregate) materially affect the value of
the assets encumbered thereby or materially impair the ability of such
Borrower to use such assets in its business, and none of which
encumbrances is violated in any material respect by existing or
proposed structures or land use;
(d) Liens for taxes, assessments, or other governmental
charges which are not delinquent or which are being contested in good
faith and for which adequate reserves have been established;
(e) Liens of mechanics, materialmen, warehousemen, carriers,
or other similar statutory Liens securing obligations that are incurred
in the ordinary course of business and are not yet due or are being
contested in good faith;
(f) Liens resulting from good faith deposits to secure
payments of workmen's compensation or other social security programs or
to secure the performance of tenders, statutory obligations, surety and
appeal bonds, bids, contracts (other than for payment of Debt), or
leases made in the ordinary course of business;
(g) Liens created under pooling orders, operating agreements,
and similar agreements relating to the Mortgaged Properties with
respect to obligations of a Borrower or Castle which are not delinquent
or are being contested in good faith, by appropriate proceedings
diligently pursued and for which adequate reserves have been
established and other Liens incidental to the conduct of its business
or the ownership of its property and assets which do not in the
aggregate materially detract from the value of its property or assets
or materially impair the use thereof in the operation of his business;
(h) Defects or irregularities of title arising from events or
transactions which have been barred by limitations or that are
acceptable to a reasonable and prudent oil and gas operator;
(i) Royalties, overriding royalties, production payments and
other burdens relating to the Mortgaged Properties that do not cause a
Borrower or Castle to have an interest in production under any oil and
gas lease, or unit to which such lease may be contributed, which is
materially less than the interest in production from the Mortgaged
Properties as specified in the Deeds of Trust;
(j) Liens on pipelines or pipeline facilities that arise by
operation of law;
(k) Liens under the Marketing Partnership Agreement, Pipeline
Partnership Agreement, and Production Partnership Agreement, including
all rights of first refusal thereunder; and
(l) Liens securing oil and/or gas hedging agreements.
AMENDED AND RESTATED LOAN AGREEMENT - Page 43
<PAGE>
Section 9.3 Mergers, Etc. Such Borrower will not become a party to a
merger or consolidation, or wind-up, dissolve, or liquidate itself.
Section 9.4 Sale of Partnership Interests. Such Borrower shall not sell
(other than to an Affiliate) any partnership interest or create any partnership
interest not in existence on the date hereof.
Section 9.5 Investments. The Borrowers will not make any advance, loan,
extension of credit, or capital contribution to or investment in, or purchase or
own any stock, bonds, notes, debentures, or other securities of, any Person in
excess of $100,000 in the aggregate at any one time outstanding, except:
(a) readily marketable direct obligations of the United States
of America or any agency thereof with maturities of one year or less
from the date of acquisition;
(b) fully insured certificates of deposit with maturities of
one year or less from the date of acquisition issued by any commercial
bank operating in the United States of America having capital and
surplus in excess of $50,000,000;
(c) commercial paper of a domestic issuer if at the time of
purchase such paper is rated in one of the two highest rating
categories of Standard & Poor's Rating Services or Moody's Investors
Service, Inc.;
(d) loans to Castle as contemplated by Sections 2.5 and 3.6 to
repurchase outstanding shares of common stock of Castle;
(e) loans to Castle as permitted by Sections 2.5, 3.6 and 9.18
and to any of the other Borrowers;
(f) loans or other extensions of credit to customers in the
ordinary course of business;
(g) oil and/or gas hedging agreements;
(h) investments in the Subsidiaries and partnership interests
owned on the Closing Date;
(i) investments in deposits available for withdrawal on demand
with any commercial bank;
(j) repurchase and reverse repurchase obligations with a term
of not more than seven days for underlying securities of the types
described in clause (a); and
AMENDED AND RESTATED LOAN AGREEMENT - Page 44
<PAGE>
(k) investments and expenditures made in the ordinary course
of, and of a nature that is or shall have become customary in, the oil
and gas business as a means of actively exploiting, exploring for,
acquiring, developing, processing, gathering, storing, marketing or
transporting oil and gas through agreements, transactions, interests or
arrangements which permit one to share risks or costs, comply with
regulatory requirements regarding local ownership or satisfy other
objectives customarily achieved through the conduct of oil and gas
business jointly with third parties, including, without limitation, (i)
ownership interests in oil and gas properties or gathering,
transportation, processing, storage or related systems and (ii)
investments and expenditures in the form of or pursuant to operating
agreements, process agreements, farm-in agreements, farm-out
agreements, development agreements, area of mutual interest agreements,
unitization agreements, pooling arrangements, join bidding agreements,
service contracts, joint venture agreements, partnership agreements,
limited liability company agreements, subscription agreements, stock
purchase agreements and other similar agreements with third parties.
Section 9.6 Transactions With Affiliates. Such Borrower will not enter
into any transaction (other than with another Borrower), including, without
limitation, the purchase, sale, or exchange of property or the rendering of any
service, with any Affiliate of the Borrower, except pursuant to the reasonable
requirements of such Borrower's business and upon fair and reasonable terms no
less favorable to such Borrower than would be obtained in a comparable
arm's-length transaction with a Person not an Affiliate of such Borrower.
Section 9.7 Disposition of Assets. Such Borrower will not without the
prior written consent of the Required Banks, sell, lease, assign, transfer, or
otherwise dispose of any of its assets except dispositions in the ordinary
course of business.
Section 9.8 Sale and Leaseback. Such Borrower will not enter into any
arrangement with any Person pursuant to which it leases from such Person real or
personal property that has been or is to be sold or transferred, directly or
indirectly, by it to such Person.
Section 9.9 Prepayment of Debt. Such Borrower will not prepay any Debt,
except the Obligations and Permitted Debt, excluding Permitted Debt set forth on
Schedule 2.
Section 9.10 Nature of Business. Such Borrower will not, without the
prior written consent of the Required Banks, engage in any business other than
the businesses in which they are engaged on the date hereof. The General
Partners and the Limited Partners shall not engage in any business other than
being the general partner or the limited partner, as the case may be, of its
respective Borrower.
Section 9.11 Environmental Protection. Such Borrower will not (a) use
(or permit any tenant to use) any of their respective properties or assets for
the handling, processing, storage, transportation, or disposal of any Hazardous
Material except in amounts that will not violate applicable law, (b) generate
any Hazardous Material in violation of applicable law, (c) conduct any activity
that is likely to cause a Release or threatened Release of any Hazardous
Material in violation
AMENDED AND RESTATED LOAN AGREEMENT - Page 45
<PAGE>
of applicable law, or (d) otherwise conduct any activity or use any of their
respective properties or assets in any manner that is likely to violate any
Environmental Law or create any Environmental Liabilities for which such
Borrower would be responsible except for any such violations or Environmental
Liabilities that would not individually or in the aggregate have a material
adverse effect on the business, condition (financial or otherwise), operations,
prospects, or properties of such Borrower.
Section 9.12 Accounting. Such Borrower will not change its fiscal year
or make any change (a) in accounting treatment or reporting practices, except as
required or permitted by GAAP and disclosed to the Agent, or (b) in tax
reporting treatment, except as required or permitted by law and disclosed to the
Agent.
Section 9.13 Executive Offices. Such Borrower shall not transfer its
executive offices or transfer its registered office in the State of Texas (if
any) or change its corporate or partnership name or keep Collateral at any
locations other than those at which the same are presently kept or maintained.
Section 9.14 Fiscal Year. Such Borrower shall not change its fiscal
year.
Section 9.15 FERC Jurisdiction. Such Borrower shall not take any
action, or omit to take any action, which will subject any Borrower, the
Pipeline Assets, or any portion thereof, to the jurisdiction of the FERC under
the NGA.
Section 9.16 Lone Star Contract. Without the consent of Required Banks,
Marketing shall not seek to redetermine the price or modify any other material
term or provision under the Lone Star Contract or the Supply Agreement.
Section 9.17 Additional Contracts. Without the prior consent of
Required Banks, such Borrower will not enter into any Additional Contract.
Section 9.18 Distribution, Etc. Without the prior written consent of
Required Banks, such Borrower shall not make any distributions to its General
Partner, to its Limited Partner or to any other Person in respect of any
partnership interest in such Borrower or any payments of management fees to its
General Partner or its Limited Partner, whether in cash, securities or other
property, or redeem, purchase or otherwise acquire any interest of its General
Partner or its Limited Partner, or permit its General Partner or its Limited
Partner to withdraw any capital from such Borrower; provided, however, so long
as no Event of Default then exists or would result therefrom, the Borrowers
shall have the right to make monthly distributions to the General Partners,
Limited Partners or parent corporation, as the case may be, in an aggregate
amount not to exceed 25% of the Borrowers' Net Cash Flow on a combined basis as
of the end of any such month for the preceding four quarter period then ended
such rolling four quarter period shall commence as of January 1, 1997.
AMENDED AND RESTATED LOAN AGREEMENT - Page 46
<PAGE>
ARTICLE X
Financial Covenants
The Borrowers or Castle, as the case may be, covenant and agree that,
as long as the Obligations or any part thereof are outstanding or any Bank has
any Commitment hereunder, the Borrowers will perform and observe the following
financial covenants:
Section 10.1 Consolidated Tangible Net Worth. Castle will maintain
Consolidated Tangible Net Worth in an amount not less than $45,000,000, plus 50%
of positive Net Income of Castle, plus 100% of the net proceeds obtained from
the issuance of equity securities by Castle, calculated quarterly (commencing
December 31, 1996) as of the last day of each March, June, September and
December. Notwithstanding the foregoing, the minimum required Consolidated
Tangible Net Worth shall be reduced (a) up to $11,000,000 in connection with the
repurchase of Castle common stock, (b) up to an additional $10,000,000 in
connection with any required write-down of the note receivable from MG as
determined pursuant to binding arbitration, and (c) up to an additional
$5,400,000 in connection with any writedown of the note receivable from the
purchasers of the Indian Refinery.
Section 10.2 Cash Flow Coverage Ratio. Castle will not permit its Cash
Flow Coverage Ratio to be less than 1.25 to 1.0, calculated quarterly as of the
last day of each March, June, September and December for the four fiscal
quarters of Castle then ended.
Section 10.3 Net Working Capital. Each Borrower will maintain positive
net working capital as of the last day of each March, June, September and
December . For the purposes hereof, net working capital shall mean the amount by
which consolidated current assets exceed consolidated current liabilities, less
the current maturities of long-term debt, as determined in accordance with GAAP.
ARTICLE XI
Default
Section 11.1 Events of Default. Each of the following shall be deemed
an "Event of Default":
(a) Any principal of or interest on any Loan shall not be paid
when due; or any fee or any other amount payable hereunder, under any
Note or under any other Loan Document shall not be paid when due and
shall remain unpaid for five or more days.
(b) Any representation or warranty made or deemed made by any
Borrower or any Obligated Party (or any of their respective officers)
in any Loan Document or in any certificate, report, notice, or
financial statement furnished at any time in connection with this
AMENDED AND RESTATED LOAN AGREEMENT - Page 47
<PAGE>
Agreement shall be false, misleading, or erroneous in any material
respect when made or deemed to have been made.
(c) Any Borrower, General Partner or Castle shall fail to
perform, observe, or comply with any covenant, agreement, or term
contained in Section 8.1(e), (f), (h) or (i), Article IX, or Article X
of this Agreement; or any Borrower or any Obligated Party shall fail to
perform, observe, or comply with any other covenant, agreement, or term
contained in this Agreement or any other Loan Document (other than
covenants to pay the Obligations) and such failure shall continue for a
period of 30 days after notice thereof to the Borrowers by the Agent or
any Bank (through the Agent).
(d) Any Borrower, any General Partner, Limited Partner or
Castle shall commence a voluntary proceeding seeking liquidation,
reorganization, or other relief with respect to itself or its debts
under any bankruptcy, insolvency, or other similar law now or hereafter
in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of it or a substantial
part of its property or shall consent to any such relief or to the
appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it or shall make
a general assignment for the benefit of creditors or shall generally
fail to pay its debts as they become due or shall take any corporate
action to authorize any of the foregoing.
(e) An involuntary proceeding shall be commenced against any
Borrower, any General Partner, Limited Partner or Castle seeking
liquidation, reorganization, or other relief with respect to it or its
debts under any bankruptcy, insolvency, or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official for it or a substantial
part of its property, and such involuntary proceeding shall remain
undismissed and unstayed for a period of sixty (60) days.
(f) Any Borrower, any General Partner, Limited Partner or
Castle shall fail to discharge within a period of 30 days after the
commencement thereof any attachment, sequestration, or similar
proceeding or proceedings involving an aggregate amount in excess of
$100,000 against any of its assets or properties.
(g) A final judgment or judgments for the payment of money in
excess of $100,000 in the aggregate shall be rendered by a court or
courts against any Borrower, any General Partner, Limited Partner or
Castle and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be
procured, within 30 days from the date of entry thereof and such
Borrower, General Partner, Limited Partner or Castle shall not, within
said period of thirty (30) days, or such longer period during which
execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal.
(h) The Borrower, any General Partner, Limited Partner or
Castle shall fail to pay when due any principal of or interest on any
Debt (other than the Obligations) aggregating
AMENDED AND RESTATED LOAN AGREEMENT - Page 48
<PAGE>
$100,000 or more, or the maturity of any such Debt shall have been
accelerated, or any such Debt shall have been required to be prepaid
prior to the stated maturity thereof, or any event shall have occurred
that permits (or, with the giving of notice or lapse of time or both,
would permit) any holder or holders of such Debt or any Person acting
on behalf of such holder or holders to accelerate the maturity thereof
or require any such prepayment.
(i) This Agreement or any other Basic Document shall cease to
be in full force and effect or shall be declared null and void or the
validity or enforceability thereof shall be contested or challenged by
any Borrower, any Obligated Party, any other party thereto or any of
their respective shareholders, or any Borrower, any Obligated Party or,
any other party thereto shall deny that it has any further liability or
obligation under any of the Basic Documents, or any lien or security
interest created by the Loan Documents shall for any reason (other than
any Bank's gross negligence or willful misconduct) cease to be a valid,
first priority perfected security interest in and lien upon any of the
Collateral purported to be covered thereby, subject only to the
Permitted Liens.
(j) Any of the following events shall occur or exist with
respect to any Borrower or any ERISA Affiliate: (i) any Prohibited
Transaction involving any Plan; (ii) any Reportable Event with respect
to any Plan; (iii) the filing under Section 4041 of ERISA of a notice
of intent to terminate any Plan or the termination of any Plan; (iv)
any event or circumstance that might constitute grounds entitling the
PBGC to institute proceedings under Section 4042 of ERISA for the
termination of, or for the appointment of a trustee to administer, any
Plan, or the institution by the PBGC of any such proceedings; or (v)
complete or partial withdrawal under Section 4201 or 4204 of ERISA from
a Multiemployer Plan or the reorganization, insolvency, or termination
of any Multiemployer Plan; and in each case above, such event or
condition, together with all other events or conditions, if any, have
subjected or could in the reasonable opinion of Required Banks subject
any Borrower to any tax, penalty, or other liability to a Plan, a
Multiemployer Plan, the PBGC, or otherwise (or any combination thereof)
which in the aggregate exceed or could reasonably be expected to exceed
$100,000.
(k) Any Borrower or any of their material properties,
revenues, and assets, shall become the subject of an order of
forfeiture, seizure, or divestiture (whether under RICO or otherwise)
and the same shall not have been discharged (or provisions shall not be
made for such discharge) within 30 days from the date of entry thereof.
(l) Lone Star or MGNG shall fail to perform or observe any of
its material covenants or obligations contained in any of the Basic
Documents to which it is a party within the grace period, if any,
provided for in such Basic Documents which failure shall continue
unremedied for a period of 30 days after notice by the Agent to the
Borrowers.
(m) Any General Partner shall at any time cease to be the
General Partner of the Borrower of which it is general partner or,
shall transfer, sell, assign, mortgage, pledge or
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otherwise dispose of its equity interest in such Borrower except in
accordance with the Collateral Security Documents or with the Required
Banks' prior written consent.
(n) Castle shall, at any time, transfer, sell, assign,
mortgage, pledge or otherwise dispose of its equity interests in any
General Partner or any Limited Partner, except (i) to any Borrower,
General Partner or Limited Partner, (ii) in accordance with the
Collateral Security Documents, or (iii) with the Required Banks' prior
written consent.
Section 11.2 Remedies. If any Event of Default shall occur and be
continuing, the Agent may (and if directed by Required Banks, shall) do any one
or more of the following:
(a) Acceleration. Declare all outstanding principal of and
accrued and unpaid interest on the Notes and all other obligations of
the Borrowers under the Loan Documents immediately due and payable, and
the same shall thereupon become immediately due and payable, without
notice, demand, presentment, notice of dishonor, notice of
acceleration, notice of intent to accelerate, protest, or other
formalities of any kind, all of which are hereby expressly waived by
the Borrowers.
(b) Termination of Commitments. Terminate the Commitments
hereunder without notice to the Borrowers.
(c) Judgment. Reduce any claim to judgment.
(d) Foreclosure. Foreclose or otherwise enforce any Lien
granted to the Agent for the benefit of itself and the Banks to secure
payment and performance of the Obligations in accordance with the terms
of the Loan Documents.
(e) Rights. Exercise any and all rights and remedies afforded
by applicable laws, by any of the Loan Documents, by equity, or
otherwise.
Provided, however, that upon the occurrence of an Event of Default under
Subsection (d) or (e) of Section 11.1, the Commitments of all of the Banks shall
automatically terminate, and the outstanding principal of and accrued and unpaid
interest on the Notes and all other obligations of the Borrowers under the Loan
Documents shall thereupon become immediately due and payable without notice,
demand, presentment, notice of dishonor, notice of acceleration, notice of
intent to accelerate, protest, or other formalities of any kind, all of which
are hereby expressly waived by the Borrowers.
Section 11.3 Performance by the Agent. If any Borrower shall fail to
perform any covenant or agreement in accordance with the terms of the Loan
Documents, the Agent may, at the direction of Required Banks, perform or attempt
to perform such covenant or agreement on behalf of such Borrower. In such event,
the Borrowers shall, at the request of the Agent, promptly pay any amount
expended by the Agent or the Banks in connection with such performance or
attempted performance to the Agent at the Principal Office, together with
interest thereon at the lesser of the Applicable Rate and the Maximum Rate prior
to demand and at the lesser of the Default Rate and the Maximum Rate
AMENDED AND RESTATED LOAN AGREEMENT - Page 50
<PAGE>
subsequent to demand from and including the date of such expenditure to but
excluding the date such expenditure is paid in full. Notwithstanding the
foregoing, it is expressly agreed that neither the Agent nor any Bank shall have
any liability or responsibility for the performance of any obligation of the
Borrowers under this Agreement or any of the other Loan Documents.
ARTICLE XII
The Agent
Section 12.1 Appointment, Powers and Immunities. In order to expedite
the various transactions contemplated by this agreement, the Banks hereby
irrevocably appoint and authorize CNB to act as their Agent hereunder and under
each of the other Loan Documents. CNB consents to such appointment and agrees to
perform the duties of the Agent as specified herein. The Banks authorize and
direct the Agent to take such action in their name and on their behalf under the
terms and provisions of the Loan Documents and to exercise such rights and
powers thereunder as are specifically delegated to or required of the Agent for
the Banks, together with such rights and powers as are reasonably incidental
thereto. The Agent is hereby expressly authorized to act as the Agent on behalf
of itself and the other Banks:
(a) To receive on behalf of each of the Banks any payment of
principal, interest, fees or other amounts paid pursuant to this
Agreement and the Notes and to distribute to each Bank its share of all
payments so received as provided in this Agreement;
(b) To receive all documents and items to be furnished under
the Loan Documents;
(c) To act as nominee for and on behalf of the Banks in and
under the Loan Documents;
(d) To arrange for the means whereby the funds of the Banks
are to be made available to the Borrowers;
(e) To distribute to the Banks information, requests, notices,
payments, prepayments, documents and other items received from the
Borrowers, the other Obligated Parties, and other Persons;
(f) To execute and deliver to the Borrowers, the other
Obligated Parties, and other Persons, all requests, demands, approvals,
notices, and consents received from the Banks;
(g) To the extent permitted by the Loan Documents, to exercise
on behalf of each Bank all rights and remedies of Banks upon the
occurrence of any Event of Default;
AMENDED AND RESTATED LOAN AGREEMENT - Page 51
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(h) To accept, execute, and deliver the Collateral Security
Documents and any other security documents as the secured party,
including, without limitation all UCC financing statements; and
(i) To take such other actions as may be requested by Required
Banks.
Neither the Agent nor any of its Affiliates, officers, directors,
employees, attorneys, or agents shall be liable for any action taken or omitted
to be taken by any of them hereunder or otherwise in connection with this
Agreement or any of the other Loan Documents except for its or their own gross
negligence or willful misconduct. Without limiting the generality of the
preceding sentence, the Agent (i) may treat the payee of any Note as the holder
thereof until the Agent receives written notice of the assignment or transfer
thereof signed by such payee and in form satisfactory to the Agent; (ii) shall
have no duties or responsibilities except those expressly set forth in this
Agreement and the other Loan Documents, and shall not by reason of this
Agreement or any other Loan Document be a trustee or fiduciary for any Bank;
(iii) shall not be required to initiate any litigation or collection proceedings
hereunder or under any other Loan Document except to the extent requested by
Required Banks; (iv) shall not be responsible to the Banks for any recitals,
statements, representations or warranties contained in this Agreement or any
other Loan Document, or any certificate or other document referred to or
provided for in, or received by any of them under, this Agreement or any other
Loan Document, or for the value, validity, effectiveness, enforceability, or
sufficiency of this Agreement or any other Loan Document or any other document
referred to or provided for herein or therein or for any failure by any Person
to perform any of its obligations hereunder or thereunder; (v) may consult with
legal counsel, independent public accountants, and other experts selected by it
and shall not be liable for any action taken or omitted to be taken in good
faith by it in accordance with the advice of such counsel, accountants, or
experts; and (vi) shall incur no liability under or in respect of any Loan
Document by acting upon any notice, consent, certificate, or other instrument or
writing believed by it to be genuine and signed or sent by the proper party or
parties. As to any matters not expressly provided for by this Agreement, the
Agent shall in all cases be fully protected in acting, or in refraining from
acting, hereunder in accordance with instructions signed by Required Banks, and
such instructions of Required Banks and any action taken or failure to act
pursuant thereto shall be binding on all of the Banks; provided, however, that
the Agent shall not be required to take any action which exposes the Agent to
personal liability or which is contrary to this Agreement or any other Loan
Document or applicable law.
Section 12.2 Rights of Agent as a Bank. With respect to its Commitment,
the Loans made by it and the Notes issued to it, CNB in its capacity as a Bank
hereunder shall have the same rights and powers hereunder as any other Bank and
may exercise the same as though it were not acting as the Agent, and the term
"Bank" or "Banks" shall, unless the context otherwise indicates, include the
Agent in its individual capacity. The Agent and its Affiliates may (without
having to account therefor to any Bank) accept deposits from, lend money to, act
as trustee under indentures of, provide merchant banking services to, and
generally engage in any kind of business with the Borrowers, any of its
Subsidiaries, any other Obligated Party, and any other Person who may do
business with or own securities of the Borrowers or any other Obligated Party,
all as if it were not acting as the Agent and without any duty to account
therefor to the Banks.
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Section 12.3 Sharing of Payments, Etc. If any Bank shall obtain any
payment of any principal of or interest on any Loan made by it under this
Agreement or payment of any other obligation under the Loan Documents then owed
by the Borrowers or any other Obligated Party to such Bank, whether voluntary,
involuntary, through the exercise of any right of setoff, banker's lien,
counterclaim or similar right, or otherwise, in excess of its pro rata share,
such Bank shall promptly purchase from the other Banks participations in the
Loans held by them hereunder in such amounts, and make such other adjustments
from time to time as shall be necessary to cause such purchasing Bank to share
the excess payment ratably with each of the other Banks in accordance with its
pro rata portion thereof. To such end, all of the Banks shall make appropriate
adjustments among themselves (by the resale of participations sold or otherwise)
if all or any portion of such excess payment is thereafter rescinded or must
otherwise be restored. The Borrowers agree, to the fullest extent they may
effectively do so under applicable law, that any Bank so purchasing a
participation in the Loans made by the other Banks may exercise all rights of
setoff, banker's lien, counterclaim, or similar rights with respect to such
participation as fully as if such Bank were a direct holder of Loans to the
Borrowers in the amount of such participation. Nothing contained herein shall
require any Bank to exercise any such right or shall affect the right of any
Bank to exercise, and retain the benefits of exercising, any such right with
respect to any other indebtedness or obligation of the Borrowers.
Section 12.4 INDEMNIFICATION. THE BANKS HEREBY AGREE TO INDEMNIFY THE
AGENT FROM AND HOLD THE AGENT HARMLESS AGAINST (TO THE EXTENT NOT REIMBURSED
UNDER SECTIONS 13.1 AND 13.2, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE
BORROWERS UNDER SECTIONS 13.1 AND 13.2), RATABLY IN ACCORDANCE WITH THEIR
RESPECTIVE COMMITMENTS, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING
ATTORNEYS' FEES), AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY
BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE AGENT IN ANY WAY RELATING TO
OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED TO BE
TAKEN BY THE AGENT UNDER OR IN RESPECT OF ANY OF THE LOAN DOCUMENTS; PROVIDED,
FURTHER, THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF THE FOREGOING TO THE
EXTENT CAUSED BY THE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT
LIMITATION OF THE FOREGOING, IT IS THE EXPRESS INTENTION OF THE BANKS THAT THE
AGENT SHALL BE INDEMNIFIED HEREUNDER FROM AND HELD HARMLESS AGAINST ALL OF SUCH
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS,
DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES), AND
DISBURSEMENTS OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE AGENT. WITHOUT
LIMITING ANY OTHER PROVISION OF THIS SECTION, EACH BANK AGREES TO REIMBURSE THE
AGENT PROMPTLY UPON DEMAND FOR ITS PRO RATA SHARE (CALCULATED ON THE BASIS OF
THE COMMITMENTS) OF ANY AND ALL OUT-OF-POCKET EXPENSES (INCLUDING
AMENDED AND RESTATED LOAN AGREEMENT - Page 53
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ATTORNEYS' FEES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION,
EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT
(WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL
ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THE LOAN DOCUMENTS, TO
THE EXTENT THAT THE AGENT IS NOT REIMBURSED FOR SUCH EXPENSES BY THE BORROWERS.
Section 12.5 Independent Credit Decisions. Each Bank agrees that it has
independently and without reliance on the Agent or any other Bank, and based on
such documents and information as it has deemed appropriate, made its own credit
analysis of the Borrowers and decision to enter into this Agreement and that it
will, independently and without reliance upon the Agent or any other Bank, and
based upon such documents and information as it shall deem appropriate at the
time, continue to make its own analysis and decisions in taking or not taking
action under this Agreement or any of the other Loan Documents. The Agent shall
not be required to keep itself informed as to the performance or observance by
the Borrowers or any Obligated Party of this Agreement or any other Loan
Document or to inspect the properties or books of the Borrowers or any Obligated
Party. Except for notices, reports and other documents and information expressly
required to be furnished to the Banks by the Agent hereunder or under the other
Loan Documents, the Agent shall not have any duty or responsibility to provide
any Bank with any credit or other financial information concerning the affairs,
financial condition or business of the Borrowers or any Obligated Party (or any
of their Affiliates) which may come into the possession of the Agent or any of
its Affiliates.
Section 12.6 Several Commitments. The Commitments and other obligations
of the Banks under this Agreement are several. The default by any Bank in making
a Loan in accordance with its Commitment shall not relieve the other Banks of
their obligations under this Agreement. In the event of any default by any Bank
in making any Loan, each nondefaulting Bank shall be obligated to make its Loan
but shall not be obligated to advance the amount which the defaulting Bank was
required to advance hereunder. In no event shall any Bank be required to advance
an amount or amounts which shall in the aggregate exceed such Bank's Commitment.
No Bank shall be responsible for any act or omission of any other Bank.
Section 12.7 Successor Agent. Subject to the appointment and acceptance
of a successor Agent as provided below, the Agent may resign at any time by
giving notice thereof to the Banks and the Borrowers. Upon any such resignation,
Required Banks will have the right to appoint a successor Agent with the consent
of Borrowers unless the successor Agent is then a Bank in which case, the
Borrowers' consent shall not be required. If no successor Agent shall have been
so appointed by Required Banks and shall have accepted such appointment within
30 days after the retiring Agent's giving of notice of resignation or the
Required Banks' removal of the retiring Agent, then the retiring Agent may, on
behalf of the Banks, appoint a successor Agent, which shall be a commercial bank
organized under the laws of the United States of America or any State thereof
and having combined capital and surplus of at least $100,000,000. Upon the
acceptance of its appointment as successor Agent, such successor Agent shall
thereupon succeed to and become vested with all rights, powers, privileges,
immunities, and duties of the resigning Agent, and the resigning Agent shall be
discharged from its duties and obligations under this Agreement and the
AMENDED AND RESTATED LOAN AGREEMENT - Page 54
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other Loan Documents, except as set forth in Section 13.9. After any Agent's
resignation as Agent, the provisions of this Article XII shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken by
it while it was the Agent.
Section 12.8 Nonconsenting Bank. In the event that (a) the Borrower or
the Agent has requested the Banks to consent to a departure or waiver of any
provisions of the Loan Documents or to agree to any amendment thereto, (b) the
consent, waiver or amendment in question requires the agreement of all Banks in
accordance with the terms of Section 13.11 and (c) Required Banks have agreed to
such consent, waiver or amendment, then any Bank that does not agree to such
consent, waiver or amendment shall be deemed a "Nonconsenting Bank." If at any
time any Bank becomes a Nonconsenting Bank, then the Agent may but shall have no
obligation to, on ten Business Day's prior written notice to the Borrowers and
such Bank, replace such Bank by causing such Bank to (and such Bank shall)
assign pursuant to 13.8 all of its rights and obligations under this Agreement
to one or more Banks or other Person(s) selected by the Agent and consented to
by the Borrowers for a purchase price equal to the outstanding principal amount
of such Bank's Loans and all accrued interest and fees and other amounts payable
to such Bank hereunder.
ARTICLE XIII
Miscellaneous
Section 13.1 Expenses. The Borrowers hereby agree to pay on demand: (a)
all reasonable costs and expenses of the Agent in connection with the
preparation, negotiation, execution, and delivery of this Agreement and the
other Loan Documents (up to the amount as agreed to by the Agent and the
Borrowers) and any and all amendments, modifications, renewals, extensions, and
supplements thereof and thereto, including, without limitation, the reasonable
fees and expenses of legal counsel for the Agent, (b) all costs and expenses of
the Agent and the Banks in connection with any Default and the enforcement of
this Agreement or any other Loan Document, including, without limitation, the
reasonable fees and expenses of legal counsel for the Agent and the Banks, up to
the amount agreed upon under the Fee Letter, (c) all transfer, stamp,
documentary, or other similar taxes, assessments, or charges levied by any
Governmental Authority in respect of this Agreement or any of the other Loan
Documents, (d) all costs, expenses, assessments, and other charges incurred in
connection with any filing, registration, recording, or perfection of any
security interest or Lien contemplated by this Agreement or any other Loan
Document, and (e) all other reasonable costs and expenses incurred by the Agent
and the Banks in connection with this Agreement or any other Loan Document,
including, without limitation, all reasonable costs, expenses, and other charges
incurred following the occurrence of a Default in connection with obtaining any
audit or appraisal in respect of the Collateral.
Section 13.2 INDEMNIFICATION. THE BORROWERS SHALL JOINTLY AND SEVERALLY
INDEMNIFY THE AGENT AND EACH BANK AND EACH AFFILIATE THEREOF AND THEIR
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLD
EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES,
PENALTIES,
AMENDED AND RESTATED LOAN AGREEMENT - Page 55
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JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) TO
WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR
RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION,
OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS
CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY ANY BORROWER OR OBLIGATED
PARTY OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN
ANY OF THE LOAN DOCUMENTS, (D) THE PRESENCE, RELEASE, THREATENED RELEASE,
DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT,
WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF THE BORROWERS OR ANY
OBLIGATED PARTY, OR (E) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING,
INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR
OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING. WITHOUT LIMITING ANY
PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS
INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS
SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES,
LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND
EXPENSES (INCLUDING ATTORNEYS' FEES, BUT EXCLUDING THE LOSSES, LIABILITIES,
CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES OF SUCH
PERSON TO BE INDEMNIFIED ARISING FROM SUCH PERSON'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE
OF SUCH PERSON.
Section 13.3 LIMITATION OF LIABILITY. NONE OF THE AGENT, ANY BANK, OR
ANY AFFILIATE, OFFICER, DIRECTOR, EMPLOYEE, ATTORNEY, OR AGENT THEREOF SHALL
HAVE ANY LIABILITY WITH RESPECT TO, AND EACH BORROWER HEREBY WAIVES, RELEASES,
AND AGREES NOT TO SUE ANY OF THEM UPON, ANY CLAIM FOR ANY SPECIAL OR PUNITIVE
DAMAGES SUFFERED OR INCURRED BY SUCH BORROWER IN CONNECTION WITH, ARISING OUT
OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS,
OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS. EACH BORROWER HEREBY WAIVES, RELEASES, AND AGREES NOT TO SUE THE
AGENT OR ANY BANK OR ANY OF THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS,
EMPLOYEES, ATTORNEYS, OR AGENTS FOR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM IN
CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR ANY
OF THE OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS.
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Section 13.4 No Duty. All attorneys, accountants, appraisers, and other
professional Persons and consultants retained by the Agent and the Banks shall
have the right to act exclusively in the interest of the Agent and the Banks and
shall have no duty of disclosure, duty of loyalty, duty of care, or other duty
or obligation of any type or nature whatsoever to the Borrowers, any Obligated
Party or any of the Borrower's shareholders or any other Person.
Section 13.5 No Fiduciary Relationship. The relationship among the
Borrowers and each Bank is solely that of debtor and creditor, and neither the
Agent nor any Bank has any fiduciary or other special relationship with any
Borrower or Obligated Party, and no term or condition of any of the Loan
Documents shall be construed so as to deem the relationship between the
Borrowers and any Bank to be other than that of debtor and creditor.
Section 13.6 Equitable Relief. The Borrowers recognize that in the
event the Borrowers fail to pay, perform, observe, or discharge any or all of
the Obligations, any remedy at law may prove to be inadequate relief to the
Agent and the Banks. The Borrowers therefore agree that the Agent and the Banks,
if the Agent or the Banks so request, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
Section 13.7 No Waiver; Cumulative Remedies. No failure on the part of
the Agent or any Bank to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power, or privilege under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power, or privilege under this Agreement preclude any other or
further exercise thereof or the exercise of any other right, power, or
privilege. The rights and remedies provided for in this Agreement and the other
Loan Documents are cumulative and not exclusive of any rights and remedies
provided by law.
Section 13.8 Successors and Assigns.
(a) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
assigns. The Borrowers may not assign or transfer any of their rights
or obligations hereunder without the prior written consent of the Agent
and all of the Banks. Any Bank may sell participations to one or more
banks or other institutions in or to all or a portion of its rights and
obligations under this Agreement and the other Loan Documents
(including, without limitation, all or a portion of its Commitments and
the Loans owing to it); provided, however, that (i) any transfer to a
bank that is not a U.S. Person may be made only with the prior written
consent of Borrower, (ii) such Bank's obligations under this Agreement
and the other Loan Documents (including, without limitation, its
Commitments) shall remain unchanged, (iii) such Bank shall remain
solely responsible to the Borrowers for the performance of such
obligations, (iv) such Bank shall remain the holder of its Notes for
all purposes of this Agreement, (v) the Borrowers shall continue to
deal solely and directly with such Bank in connection with such Bank's
rights and obligations under this Agreement and the other Loan
Documents, and (vi) such Bank shall not sell a participation that
conveys to the participant the right to vote or give or withhold
consents under this Agreement or any other Loan Document, other than
the right to vote
AMENDED AND RESTATED LOAN AGREEMENT - Page 57
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upon or consent to (A) any increase of such Bank's Commitments, (B) any
reduction of the principal amount of, or interest to be paid on, the
Loans of such Bank, (C) any reduction of any commitment fee or other
amount payable to such Bank under any Loan Document, or (D) any
postponement of any date for the payment of any amount payable in
respect of the Loans of such Bank.
(b) The Borrowers and each of the Banks agree that any Bank
(the "Assigning Bank") may, upon thirty days prior written notice to
the Agent and with the Agent's consent and unless an Event of Default
has occurred, the Borrowers' consent which consent of the Borrowers
shall not be unreasonably withheld or delayed, at any time assign to
one or more Eligible Assignees all of its rights and obligations under
this Agreement and the other Loan Documents (including, without
limitation, its Commitments and Loans) (each an "Assignee"); provided,
however, that (i) each such assignment shall be of a consistent, and
not a varying, percentage of all of the assigning Bank's Commitments,
rights and obligations under this Agreement and the other Loan
Documents, and (ii) the parties to each such assignment shall execute
and deliver to the Agent for its acceptance and recording in the
Register (as defined below), an Assignment and Acceptance, together
with the Notes subject to such assignment, and a processing and
recordation fee of $2,500, to be paid by the Assignee. Upon such
execution, delivery, acceptance, and recording, from and after the
effective date specified in each Assignment and Acceptance, which
effective date shall be at least five Business Days after the execution
thereof, or, if so specified in such Assignment and Acceptance, the
date of acceptance thereof by the Agent, (x) the assignee thereunder
shall be a party hereto as a "Bank" and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, have the rights and obligations of a Bank
hereunder and under the Loan Documents and (y) the Bank that is an
assignor thereunder shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such Assignment and
Acceptance, relinquish its rights and be released from its obligations
under this Agreement and the other Loan Documents (and, in the case of
an Assignment and Acceptance covering all or the remaining portion of a
Bank's rights and obligations under the Loan Documents, such Bank shall
cease to be a party thereto).
(c) By executing and delivering an Assignment and Acceptance,
the Bank that is an assignor thereunder and the assignee thereunder
confirm to and agree with each other and the other parties hereto as
follows: (i) other than as provided in such Assignment and Acceptance,
such assigning Bank makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties, or
representations made in or in connection with the Loan Documents or the
execution, legality, validity, and enforceability, genuineness,
sufficiency, or value of the Loan Documents or any other instrument or
document furnished pursuant thereto; (ii) such assigning Bank makes no
representation or warranty and assumes no responsibility with respect
to the financial condition of the Borrowers or any Obligated Party or
the performance or observance by the Borrowers or any Obligated Party
of its obligations under the Loan Documents; (iii) such assignee
confirms that it has received a copy of the other Loan Documents,
together with copies of the financial
AMENDED AND RESTATED LOAN AGREEMENT - Page 58
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statements referred to in Section 7.2 and such other documents and
information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance;
(iv) such assignee will, independently and without reliance upon the
Agent or such assignor and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under this Agreement and the
other Loan Documents; (v) such assignee confirms that it is an Eligible
Assignee; (vi) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and exercise such powers under the
Loan Documents as are delegated to the Agent by the terms thereof,
together with such powers as are reasonably incidental thereto; and
(vii) such assignee agrees that it will perform in accordance with
their terms all of the obligations which by the terms of the Loan
Documents are required to be performed by it as a Bank.
(d) The Agent shall maintain at its Principal Office a copy of
each Assignment and Acceptance delivered to and accepted by it and a
register for the recordation of the names and addresses of the Banks
and the Commitments of, and principal amount of the Loans owing to,
each Bank from time to time (the "Register"). The entries in the
Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrowers, the Agent and the Banks may treat
each Person whose name is recorded in the Register as a Bank hereunder
for all purposes under the Loan Documents. The Register shall be
available for inspection by the Borrowers or any Bank at any reasonable
time and from time to time upon reasonable prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed
by an assigning Bank and assignee representing that it is an Eligible
Assignee, together with any Note subject to such assignment, the Agent
shall, if such Assignment and Acceptance has been completed and is in
substantially the form of Exhibit "G" hereto, (i) accept such
Assignment and Acceptance, (ii) record the information contained
therein in the Register, and (iii) give prompt written notice thereof
to the Borrowers. Within five (5) Business Days after its receipt of
such notice, the Borrowers, at their expense, shall execute and deliver
to the Agent in exchange for the surrendered Notes new Notes to the
order of such Eligible Assignee in an amount equal to the Commitments
assumed by it pursuant to such Assignment and Acceptance (each such
promissory note shall constitute a "Note" for purposes of the Loan
Documents). Such new Notes shall be in an aggregate principal amount of
the surrendered Notes, shall be dated the effective date of such
Assignment and Acceptance, and shall otherwise be in substantially the
form of Exhibits "A-1" and "A-2" hereto.
(f) Any Bank may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this
Section, disclose to the assignee or participant or proposed assignee
or participant, any information relating to the Borrowers furnished to
such Bank by or on behalf of the Borrowers, subject, however, to the
provisions of Section 13.20.
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Section 13.9 Survival. All representations and warranties made in this
Agreement or any other Loan Document or in any document, statement, or
certificate furnished in connection with this Agreement shall survive the
execution and delivery of this Agreement and the other Loan Documents, and no
investigation by the Agent or any Bank or any closing shall affect the
representations and warranties or the right of the Agent or any Bank to rely
upon them. Without prejudice to the survival of any other obligation of the
Borrowers hereunder, the obligations of the Borrowers under Article IV and
Sections 13.1 and 13.2 and the obligations of the Agent and the Banks under
Section 13.20 shall survive repayment of the Notes and termination of the
Commitments.
Section 13.10 ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES, AND THE
OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG
THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE
PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
Section 13.11 Amendments, Etc. No amendment or waiver of any provision
of this Agreement, the Notes, or any other Loan Document to which the Borrowers
are a party, nor any consent to any departure by the Borrowers or Obligated
Parties therefrom, shall in any event be effective unless the same shall be
agreed or consented to by Required Banks and the Borrowers, and each such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, that no amendment, waiver, or consent shall,
unless in writing and signed by all of the Banks and the Borrowers, do any of
the following: (a) increase the Commitments of the Banks or subject the Banks to
any additional obligations; (b) reduce the principal of, or interest on, the
Notes or any fees or other amounts payable to the Banks hereunder; (c) postpone
any date fixed for any payment of principal of, or interest on, the Notes or any
fees or other amounts payable to the Banks hereunder; (d) waive any of the
conditions specified in Article VI; (e) change the percentage of the Commitments
or of the aggregate unpaid principal amount of the Notes or the number of Banks
which shall be required for the Banks or any of them to take any action under
this Agreement; (f) change any provision contained in this Section 13.11; (g)
release any Collateral having a present worth discounted at 10% of greater than
$100,000 as reflected in the most recent independent consultant's report
provided by Borrowers; or (h) change the definition of the Borrowing Base.
Notwithstanding anything to the contrary contained in this Section, no
amendment, waiver, or consent shall be made with respect to Article XII hereof
without the prior written consent of the Agent.
Section 13.12 Maximum Interest Rate. No provision of this Agreement or
of any other Loan Document shall require the payment or the collection of
interest in excess of the maximum amount permitted by applicable law. If any
excess of interest in such respect is hereby provided for, or shall be
adjudicated to be so provided, in any Loan Document or otherwise in connection
with this loan
AMENDED AND RESTATED LOAN AGREEMENT - Page 60
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transaction, the provisions of this Section shall govern and prevail and neither
the Borrowers nor the sureties, guarantors, successors, or assigns of the
Borrowers shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event any Bank ever receives, collects, or applies as
interest any such sum, such amount which would be in excess of the maximum
amount permitted by applicable law shall be applied as a payment and reduction
of the principal of the indebtedness evidenced by the Notes; and, if the
principal of the Notes has been paid in full, any remaining excess shall
forthwith be paid to the Borrowers. In determining whether or not the interest
paid or payable exceeds the Maximum Rate, the Borrowers and each Bank shall, to
the extent permitted by applicable law, (a) characterize any non-principal
payment as an expense, fee, or premium rather than as interest, (b) exclude
voluntary prepayments and the effects thereof, and (c) amortize, prorate,
allocate, and spread in equal or unequal parts the total amount of interest
throughout the entire contemplated term of the indebtedness evidenced by the
Notes so that interest for the entire term does not exceed the Maximum Rate.
Section 13.13 Notices. All notices and other communications provided
for in this Agreement and the other Loan Documents to which the Borrowers are a
party shall be given or made by telecopy or mailed by overnight courier or
certified mail return receipt requested, or delivered to the intended recipient
at the "Address for Notices" specified below their names on the signature pages
hereof; or, as to any party at such other address as shall be designated by such
party in a notice to each other party given in accordance with this Section.
Except as otherwise provided in this Agreement, all such communications shall be
deemed to have been duly given when transmitted by telecopy, subject to
telephone confirmation of receipt, or when personally delivered or, in the case
of a mailed notice, when duly deposited in the mails, in each case given or
addressed as aforesaid; provided, however, notices to the Agent pursuant to
Article II and III shall not be effective until received by the Agent.
Section 13.14 GOVERNING LAW; VENUE; SERVICE OF PROCESS. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS
AGREEMENT HAS BEEN ENTERED INTO IN CADDO PARISH, LOUISIANA, AND IT SHALL BE
PERFORMABLE FOR ALL PURPOSES IN CADDO PARISH, LOUISIANA. ANY ACTION OR
PROCEEDING AGAINST ANY OBLIGATED PARTY OR THE BORROWERS UNDER OR IN CONNECTION
WITH ANY OF THE LOAN DOCUMENTS MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN
CADDO PARISH, LOUISIANA. EACH OBLIGATED PARTY AND EACH BORROWER HEREBY
IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B)
WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN
INCONVENIENT FORUM. THE OBLIGATED PARTIES AND THE BORROWERS AGREE THAT SERVICE
OF PROCESS UPON THEM MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT
REQUESTED, AT THE ADDRESS SPECIFIED OR DETERMINED IN ACCORDANCE WITH THE
PROVISIONS OF SECTION 13.13. NOTHING HEREIN OR IN ANY OF THE OTHER LOAN
AMENDED AND RESTATED LOAN AGREEMENT - Page 61
<PAGE>
DOCUMENTS SHALL AFFECT THE RIGHT OF THE AGENT OR ANY BANK TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW SHALL LIMIT THE RIGHT OF THE AGENT OR ANY BANK
TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER OR ANY OBLIGATED PARTY OR
WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTIONS. ANY ACTION
OR PROCEEDING BY ANY BORROWER OR OBLIGATED PARTY AGAINST THE AGENT OR ANY BANK
SHALL BE BROUGHT ONLY IN A COURT LOCATED IN CADDO PARISH, LOUISIANA.
Section 13.15 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 13.16 Severability. Any provision of this Agreement held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Agreement and the effect thereof shall be
confined to the provision held to be invalid or illegal.
Section 13.17 Headings. The headings, captions, and arrangements used
in this Agreement are for convenience only and shall not affect the
interpretation of this Agreement.
Section 13.18 Construction. The Borrowers, the Agent and each Bank
acknowledge that each of them has had the benefit of legal counsel of its own
choice and has been afforded an opportunity to review this Agreement and the
other Loan Documents with its legal counsel and that this Agreement and the
other Loan Documents shall be construed as if jointly drafted by the parties
hereto.
Section 13.19 Independence of Covenants. All covenants hereunder shall
be given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of a Default if such action is taken or such condition
exists.
Section 13.20 Treatment of Certain Information; Confidentiality. Each
Bank and the Agent agrees (on behalf of itself and each of its affiliates,
directors, officers, employees, attorneys, agents and representatives) to keep
confidential any non-public information supplied to it by Borrowers pursuant to
this Agreement that the Borrowers identify to such Bank or the Agent (as the
case may be) as confidential at the time the Borrowers so supply such
information, provided, that nothing herein shall limit the disclosure of any
such information (i) to the extent required by statute, rule, regulation or
judicial process, (ii) to counsel for any of the Banks or the Agent, (iii) to
bank examiners, auditors or accountants, (iv) to the Agent or any other Bank,
(v) in connection with any litigation to which any one or more of the Banks or
the Agent is a party, (vi) to a subsidiary or affiliate of such Bank, or (vii)
to any assignee or participant (or prospective assignee or participant) so long
as such assignee or participant (or prospective assignee or participant) first
executes and delivers to the respective Bank an acknowledgement to the effect
that it is bound by the provisions of this Section 13.20, which acknowledgement
may be included as part of the respective assignment
AMENDED AND RESTATED LOAN AGREEMENT - Page 62
<PAGE>
or participation agreement pursuant to which such assignee or participant
acquires an interest in the Loans hereunder; and provided, further, that in no
event shall any Bank or the Agent be obligated or required to return any
materials furnished to it by the Borrowers.
Section 13.21 WAIVERS OF JURY TRIAL. EACH BORROWER, GENERAL PARTNER,
CASTLE, THE AGENT, AND EACH BANK HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES
TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING BETWEEN ONE OR MORE PARTIES
HERETO RELATING TO THIS AGREEMENT OR ANY OF THE NOTES OR ANY OTHER LOAN DOCUMENT
AND FOR ANY COUNTERCLAIM THEREIN.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
BORROWERS:
CASTLE TEXAS PIPELINE
LIMITED PARTNERSHIP
By:________________________________
Richard E. Staedtler
Vice President
CEC GAS MARKETING
LIMITED PARTNERSHIP
By:________________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PRODUCTION
LIMITED PARTNERSHIP
By:________________________________
Richard E. Staedtler
Vice President
AMENDED AND RESTATED LOAN AGREEMENT - Page 63
<PAGE>
CASTLE EXPLORATION COMPANY, INC.
By:_______________________________
Richard E. Staedtler
Vice President
Address for Notices:
2410 State Highway, 322 North
Henderson, Texas 75652
Fax No.: (903) 657-5620
Telephone No.: (903) 657-0700
Attention: Richard E. Staedtler
With a copy to:
512 Township Line Road
Blue Bell, Pennsylvania 19422
Fax No.: (610) 995-0409
Telephone No.: (610) 995-9400
Attention: Richard E. Staedtler
GENERAL PARTNERS:
CASTLE PIPELINE COMPANY
CASTLE PRODUCTION COMPANY
CEC MARKETING CORPORATION
By:_________________________________
Richard E. Staedtler
Vice President
AMENDED AND RESTATED LOAN AGREEMENT - Page 64
<PAGE>
CASTLE:
CASTLE ENERGY CORPORATION
By:________________________________
Richard E. Staedtler
Vice President
AMENDED AND RESTATED LOAN AGREEMENT - Page 65
<PAGE>
AGENT:
COMMERCIAL NATIONAL BANK
IN SHREVEPORT, as Agent
By:________________________________
Martin W. Wilson
Assistant Vice President
Address for Notices:
333 Texas Street
Shreveport, Louisiana 71101
Fax No.: (318) 429-1864
Telephone No.: (318) 429-1561
Attention: Mr. Martin W. Wilson
AMENDED AND RESTATED LOAN AGREEMENT - Page 66
<PAGE>
BANKS:
COMMERCIAL NATIONAL BANK
IN SHREVEPORT
Revolving Credit Commitment: By:__________________________________
Name: Martin W. Wilson
$3,400,000 Title: Assistant Vice President
Term Loan Commitment: Address for Notices:
$5,100,000 333 Texas Street
Shreveport, Louisiana 71101
Fax No.: (318) 429-1864
Telephone No.: (318) 429-1561
Attention: Mr. Martin W. Wilson
AMENDED AND RESTATED LOAN AGREEMENT - Page 67
<PAGE>
COMERICA BANK-TEXAS
Revolving Credit Commitment: By:__________________________________
Elizabeth W. Falco
$3,300,000 Vice President
Term Loan Commitment: Address for Notices:
$4,950,000 1601 Elm Street
Dallas, Texas 75201
Fax No.: (214) 965-8990
Telephone No.: (214) 965-8992
Attention: Elizabeth Falco
AMENDED AND RESTATED LOAN AGREEMENT - Page 68
<PAGE>
COMPASS BANK
Revolving Credit Commitment: By:__________________________________
Dorothy Marchand Wilson
$3,300,000 Vice President
Term Loan Commitment: Address for Notices:
$4,950,000 24 Greenway Plaza, Suite 1401
Houston, Texas 77046
Fax No.: (713) 968-2222
Telephone No.: (713) 968-8272
Attention: Energy Lending Group
DA963160385
120296 v22
351:3087-29
AMENDED AND RESTATED LOAN AGREEMENT - Page 69
<PAGE>
REVOLVING CREDIT NOTE
$3,300,000.00 Shreveport, Louisiana November 26, 1996
FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas
limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited
partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership
(collectively, the "Makers"), hereby jointly and severally promise to pay to the
order of COMERICA BANK-TEXAS ("Payee"), at the offices of COMMERCIAL NATIONAL
BANK IN SHREVEPORT, a national banking association (together with any successor
as provided in the Agreement, as hereinafter defined, the "Agent"), at its
offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo Parish,
Louisiana, or at such other location as the Agent may designate in writing to
Maker, in lawful money of the United States of America, the principal sum of
Three Million Three Hundred Thousand and No/100 Dollars ($3,300,000.00), or so
much thereof as may be advanced and outstanding hereunder, together with
interest on the outstanding principal balance from day to day remaining as
herein specified.
The principal balance from time to time outstanding hereunder shall be
due and payable in full on the Revolving Credit Termination Date. Accrued and
unpaid interest on the principal balance from day to day outstanding shall be
due and payable on the first day of each month, commencing January 1, 1997, and
on the first day of each month thereafter until and including the Revolving
Credit Termination Date.
The outstanding principal balance hereof shall bear interest prior to
maturity at a varying rate per annum which shall from day to day be equal to the
lesser of (a) the maximum rate permitted by applicable law, or (b) the
Applicable Rate (as defined in the Agreement referred to below) in effect from
day to day, each such change in the rate of interest charged hereunder to become
effective, without notice to Makers, on the effective date of each change in the
Applicable Rate or the maximum rate permitted by applicable law, as the case may
be. All past due principal and interest shall bear interest at the rate set
forth in Article II of the Agreement referred to below.
Interest on the indebtedness evidenced by this Note shall be computed
on the basis of a year of 360 days and the actual number of days elapsed
(including the first day but excluding the last day).
This Note is a Revolving Credit Note provided for in that certain
Amended and Restated Loan Agreement dated of even date herewith among Makers,
Castle Production Company, Castle Pipeline Company, CEC Marketing Company,
Castle Energy Corporation, each of the banks or other lending institutions or
other Eligible Assignees (as defined therein) which is or may become a
REVOLVING CREDIT NOTE - Page 1
<PAGE>
signatory thereto and any successors or assigns thereof (collectively, the
"Lenders") and Agent (such Amended and Restated Loan Agreement as the same may
be amended, supplemented or otherwise modified from time to time is hereinafter
referred to as the "Agreement"). All capitalized terms not otherwise defined
herein shall have the same meanings as set forth in the Agreement. Reference is
hereby made to the Agreement for provisions affecting this Note including
provisions regarding repayments, prepayments, Events of Default and Payee's
rights as a result of the occurrence thereof. Maker may borrow, repay and
reborrow under the terms and conditions specified in the Agreement.
If default be made in the payment of principal or interest under this
Note, or upon the occurrence of any other Event of Default, the holder hereof
may, at its option, declare the entire unpaid principal of and accrued interest
on this Note immediately due and payable without notice, demand or presentment,
all of which are hereby waived, and upon such declaration, the same shall become
and shall be immediately due and payable, and the holder hereof shall have the
right to foreclose or otherwise enforce all liens or security interests securing
payment hereof, or any part hereof, and offset against this Note any sum or sums
owed by the holder hereof to Makers. Failure of the holder hereof to exercise
this option shall not constitute a waiver of the right to exercise the same upon
the occurrence of a subsequent Event of Default.
If the holder hereof expends any effort in any attempt to enforce
payment of all or any part or installment of any sum due the holder hereunder,
or if this Note is placed in the hands of an attorney for collection, or if it
is collected through any legal proceedings, Makers agree to pay all collection
costs and fees incurred by the holder, including reasonable attorneys' fees.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF
AMERICA. THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA.
Each Maker and each surety, guarantor, endorser, and other party ever
liable for payment of any sums of money payable on this Note jointly and
severally waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, diligence in collecting, grace, and all
other formalities of any kind, and consent to all extensions without notice for
any period or periods of time and partial payments, before or after maturity,
and any impairment of any collateral securing this Note, all without prejudice
to the holder. The holder shall similarly have the right to deal in any way, at
any time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part or all of the collateral
securing this Note, or to grant any other indulgences or forbearances
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
REVOLVING CREDIT NOTE - Page 2
<PAGE>
Each Maker hereby authorizes the holder hereof to record in its
internal records all advances made to Makers hereunder and all payments made on
account of the principal hereof, which recordings shall be prima facie evidence
as to the outstanding principal amount of this Note; provided, however, any
failure by the holder hereof to make any recording shall not limit or otherwise
affect the obligations of Makers under the Agreement or this Note.
CASTLE EXPLORATION COMPANY, INC.
By:______________________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PRODUCTION LIMITED
PARTNERSHIP
By: CASTLE PRODUCTION COMPANY,
Its General Partner
By:____________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PIPELINE LIMITED
PARTNERSHIP
By: CASTLE TEXAS PIPELINE COMPANY,
Its General Partner
By:_____________________________
Richard E. Staedtler
Vice President
REVOLVING CREDIT NOTE - Page 3
<PAGE>
CEC GAS MARKETING LIMITED
PARTNERSHIP
By: CEC MARKETING COMPANY,
Its General Partner
By:____________________________
Richard E. Staedtler
Vice President
DA963310149
112696 v2
393:3087-29
REVOLVING CREDIT NOTE - Page 4
<PAGE>
REVOLVING CREDIT NOTE
$3,400,000.00 Shreveport, Louisiana November 26, 1996
FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas
limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited
partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited
partnership (collectively, the "Makers"), hereby jointly and severally promise
to pay to the order of COMMERCIAL NATIONAL BANK IN SHREVEPORT ("Payee"), at the
offices of COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking
association (together with any successor as provided in the Agreement, as
hereinafter defined, the "Agent"), at its offices at 333 Texas Street, Post
Office Box 21119, Shreveport, Caddo Parish, Louisiana, or at such other location
as the Agent may designate in writing to Maker, in lawful money of the United
States of America, the principal sum of Three Million Four Hundred Thousand and
No/100 Dollars ($3,400,000.00), or so much thereof as may be advanced and
outstanding hereunder, together with interest on the outstanding principal
balance from day to day remaining as herein specified.
The principal balance from time to time outstanding hereunder shall be due
and payable in full on the Revolving Credit Termination Date. Accrued and unpaid
interest on the principal balance from day to day outstanding shall be due and
payable on the first day of each month, commencing January 1, 1997, and on the
first day of each month thereafter until and including the Revolving Credit
Termination Date.
The outstanding principal balance hereof shall bear interest prior to
maturity at a varying rate per annum which shall from day to day be equal to the
lesser of (a) the maximum rate permitted by applicable law, or (b) the
Applicable Rate (as defined in the Agreement referred to below) in effect from
day to day, each such change in the rate of interest charged hereunder to become
effective, without notice to Makers, on the effective date of each change in the
Applicable Rate or the maximum rate permitted by applicable law, as the case may
be. All past due principal and interest shall bear interest at the rate set
forth in Article II of the Agreement referred to below.
Interest on the indebtedness evidenced by this Note shall be computed on
the basis of a year of 360 days and the actual number of days elapsed (including
the first day but excluding the last day).
This Note is a Revolving Credit Note provided for in that certain Amended
and Restated Loan Agreement dated of even date herewith among Makers, Castle
Production Company, Castle Pipeline Company, CEC Marketing Company, Castle
Energy Corporation, each of the banks or other lending institutions or other
Eligible Assignees (as defined therein) which is or may become a signatory
thereto and any successors or assigns thereof (collectively, the "Lenders") and
Agent (such Amended
REVOLVING CREDIT NOTE - Page 1
<PAGE>
and Restated Loan Agreement as the same may be amended, supplemented or
otherwise modified from time to time is hereinafter referred to as the
"Agreement"). All capitalized terms not otherwise defined herein shall have the
same meanings as set forth in the Agreement. Reference is hereby made to the
Agreement for provisions affecting this Note including provisions regarding
repayments, prepayments, Events of Default and Payee's rights as a result of the
occurrence thereof. Maker may borrow, repay and reborrow under the terms and
conditions specified in the Agreement.
If default be made in the payment of principal or interest under this Note,
or upon the occurrence of any other Event of Default, the holder hereof may, at
its option, declare the entire unpaid principal of and accrued interest on this
Note immediately due and payable without notice, demand or presentment, all of
which are hereby waived, and upon such declaration, the same shall become and
shall be immediately due and payable, and the holder hereof shall have the right
to foreclose or otherwise enforce all liens or security interests securing
payment hereof, or any part hereof, and offset against this Note any sum or sums
owed by the holder hereof to Makers. Failure of the holder hereof to exercise
this option shall not constitute a waiver of the right to exercise the same upon
the occurrence of a subsequent Event of Default.
If the holder hereof expends any effort in any attempt to enforce payment
of all or any part or installment of any sum due the holder hereunder, or if
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Makers agree to pay all collection
costs and fees incurred by the holder, including reasonable attorneys' fees.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA.
Each Maker and each surety, guarantor, endorser, and other party ever
liable for payment of any sums of money payable on this Note jointly and
severally waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, diligence in collecting, grace, and all
other formalities of any kind, and consent to all extensions without notice for
any period or periods of time and partial payments, before or after maturity,
and any impairment of any collateral securing this Note, all without prejudice
to the holder. The holder shall similarly have the right to deal in any way, at
any time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part or all of the collateral
securing this Note, or to grant any other indulgences or forbearances
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
Each Maker hereby authorizes the holder hereof to record in its internal
records all advances made to Makers hereunder and all payments made on account
of the principal hereof, which
REVOLVING CREDIT NOTE - Page 2
<PAGE>
recordings shall be prima facie evidence as to the outstanding principal amount
of this Note; provided, however, any failure by the holder hereof to make any
recording shall not limit or otherwise affect the obligations of Makers under
the Agreement or this Note.
CASTLE EXPLORATION COMPANY, INC.
By:___________________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PRODUCTION LIMITED
PARTNERSHIP
By: CASTLE PRODUCTION COMPANY,
Its General Partner
By:__________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PIPELINE LIMITED
PARTNERSHIP
By: CASTLE TEXAS PIPELINE COMPANY,
Its General Partner
By:___________________________
Richard E. Staedtler
Vice President
REVOLVING CREDIT NOTE - Page 3
<PAGE>
CEC GAS MARKETING LIMITED
PARTNERSHIP
By: CEC MARKETING COMPANY,
Its General Partner
By:_____________________________
Richard E. Staedtler
Vice President
DA963310140
112696 v2
351:3087-29
REVOLVING CREDIT NOTE - Page 4
<PAGE>
REVOLVING CREDIT NOTE
$3,300,000.00 Shreveport, Louisiana November 26, 1996
FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas
limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited
partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited
partnership (collectively, the "Makers"), hereby jointly and severally promise
to pay to the order of COMPASS BANK ("Payee"), at the offices of COMMERCIAL
NATIONAL BANK IN SHREVEPORT, a national banking association (together with any
successor as provided in the Agreement, as hereinafter defined, the "Agent"), at
its offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo
Parish, Louisiana, or at such other location as the Agent may designate in
writing to Maker, in lawful money of the United States of America, the principal
sum of Three Million Three Hundred Thousand and No/100 Dollars ($3,300,000.00),
or so much thereof as may be advanced and outstanding hereunder, together with
interest on the outstanding principal balance from day to day remaining as
herein specified.
The principal balance from time to time outstanding hereunder shall be due
and payable in full on the Revolving Credit Termination Date. Accrued and unpaid
interest on the principal balance from day to day outstanding shall be due and
payable on the first day of each month, commencing January 1, 1997, and on the
first day of each month thereafter until and including the Revolving Credit
Termination Date.
The outstanding principal balance hereof shall bear interest prior to
maturity at a varying rate per annum which shall from day to day be equal to the
lesser of (a) the maximum rate permitted by applicable law, or (b) the
Applicable Rate (as defined in the Agreement referred to below) in effect from
day to day, each such change in the rate of interest charged hereunder to become
effective, without notice to Makers, on the effective date of each change in the
Applicable Rate or the maximum rate permitted by applicable law, as the case may
be. All past due principal and interest shall bear interest at the rate set
forth in Article II of the Agreement referred to below.
Interest on the indebtedness evidenced by this Note shall be computed on
the basis of a year of 360 days and the actual number of days elapsed (including
the first day but excluding the last day).
This Note is a Revolving Credit Note provided for in that certain Amended
and Restated Loan Agreement dated of even date herewith among Makers, Castle
Production Company, Castle Pipeline Company, CEC Marketing Company, Castle
Energy Corporation, each of the banks or other lending institutions or other
Eligible Assignees (as defined therein) which is or may become a signatory
thereto and any successors or assigns thereof (collectively, the "Lenders") and
Agent (such Amended
REVOLVING CREDIT NOTE - Page 1
<PAGE>
and Restated Loan Agreement as the same may be amended, supplemented or
otherwise modified from time to time is hereinafter referred to as the
"Agreement"). All capitalized terms not otherwise defined herein shall have the
same meanings as set forth in the Agreement. Reference is hereby made to the
Agreement for provisions affecting this Note including provisions regarding
repayments, prepayments, Events of Default and Payee's rights as a result of the
occurrence thereof. Maker may borrow, repay and reborrow under the terms and
conditions specified in the Agreement.
If default be made in the payment of principal or interest under this Note,
or upon the occurrence of any other Event of Default, the holder hereof may, at
its option, declare the entire unpaid principal of and accrued interest on this
Note immediately due and payable without notice, demand or presentment, all of
which are hereby waived, and upon such declaration, the same shall become and
shall be immediately due and payable, and the holder hereof shall have the right
to foreclose or otherwise enforce all liens or security interests securing
payment hereof, or any part hereof, and offset against this Note any sum or sums
owed by the holder hereof to Makers. Failure of the holder hereof to exercise
this option shall not constitute a waiver of the right to exercise the same upon
the occurrence of a subsequent Event of Default.
If the holder hereof expends any effort in any attempt to enforce payment
of all or any part or installment of any sum due the holder hereunder, or if
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Makers agree to pay all collection
costs and fees incurred by the holder, including reasonable attorneys' fees.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA.
Each Maker and each surety, guarantor, endorser, and other party ever
liable for payment of any sums of money payable on this Note jointly and
severally waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, diligence in collecting, grace, and all
other formalities of any kind, and consent to all extensions without notice for
any period or periods of time and partial payments, before or after maturity,
and any impairment of any collateral securing this Note, all without prejudice
to the holder. The holder shall similarly have the right to deal in any way, at
any time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part or all of the collateral
securing this Note, or to grant any other indulgences or forbearances
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
Each Maker hereby authorizes the holder hereof to record in its internal
records all advances made to Makers hereunder and all payments made on account
of the principal hereof, which
REVOLVING CREDIT NOTE - Page 2
<PAGE>
recordings shall be prima facie evidence as to the outstanding principal amount
of this Note; provided, however, any failure by the holder hereof to make any
recording shall not limit or otherwise affect the obligations of Makers under
the Agreement or this Note.
CASTLE EXPLORATION COMPANY, INC.
By:___________________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PRODUCTION LIMITED
PARTNERSHIP
By: CASTLE PRODUCTION COMPANY,
Its General Partner
By:_____________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PIPELINE LIMITED
PARTNERSHIP
By: CASTLE TEXAS PIPELINE COMPANY,
Its General Partner
By:___________________________
Richard E. Staedtler
Vice President
REVOLVING CREDIT NOTE - Page 3
<PAGE>
CEC GAS MARKETING LIMITED
PARTNERSHIP
By: CEC MARKETING COMPANY,
Its General Partner
By:____________________________
Richard E. Staedtler
Vice President
DA963310142
112696 v2
393:3087-29
REVOLVING CREDIT NOTE - Page 4
<PAGE>
TERM NOTE
$4,950,000.00 Shreveport, Louisiana November 26, 1996
FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas
limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited
partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited
partnership (collectively, the "Makers"), hereby jointly and severally promise
to pay to the order of COMERICA BANK-TEXAS ("Payee"), at the offices of
COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking association (together
with any successor as provided in the Agreement, as hereinafter defined, the
"Agent"), at its offices at 333 Texas Street, Post Office Box 21119, Shreveport,
Caddo Parish, Louisiana, in lawful money of the United States of America, the
principal sum of Four Million Nine Hundred Fifty Thousand and No/100 Dollars
($4,950,000.00), or so much thereof as may be advanced and outstanding
hereunder, together with interest on the outstanding principal balance from day
to day remaining at the rates specified herein, and on the dates provided in the
Agreement referred to below.
The outstanding principal balance hereof shall bear interest prior to
maturity at a varying rate per annum which shall from day to day be equal to the
lesser of (a) the maximum rate permitted by applicable law, or (b) the
Applicable Rate (as defined in the Agreement referred to below) in effect from
day to day, each such change in the rate of interest charged hereunder to become
effective, without notice to Makers, on the effective date of each change in the
Applicable Rate or the maximum rate permitted by applicable law, as the case may
be. All past due principal and interest shall bear interest at the rate set
forth in Article III of the Agreement referred to below.
Interest on the indebtedness evidenced by this Note shall be computed on
the basis of a year of 360 days and the actual number of days elapsed (including
the first day but excluding the last day).
This Note is a Term Note provided for in that certain Amended and Restated
Loan Agreement dated of even date herewith among Makers, Castle Production
Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy
Corporation, each of the banks or other lending institutions or other Eligible
Assignees (as defined therein) which is or may become a signatory thereto and
any successors or assigns thereof (collectively, the "Lenders") and Agent (such
Amended and Restated Loan Agreement as the same may be amended, supplemented or
otherwise modified from time to time is hereinafter referred to as the
"Agreement"). All capitalized terms not otherwise defined herein shall have the
same meanings as set forth in the Agreement. Reference is hereby made to the
Agreement for provisions affecting this Note including, but not limited to,
provisions regarding interest rates, repayments, prepayments, Events of Default
and Payee's rights as a result thereof. Maker may prepay the principal of this
Note upon the terms and conditions specified in the Agreement.
TERM NOTE - Page 1
<PAGE>
If default be made in the payment of principal or interest under this Note,
or upon the occurrence of any other Event of Default, the holder hereof may, at
its option, declare the entire unpaid principal of and accrued interest on this
Note immediately due and payable without notice, demand or presentment, all of
which are hereby waived, and upon such declaration, the same shall become and
shall be immediately due and payable, and the holder hereof shall have the right
to foreclose or otherwise enforce all liens or security interests securing
payment hereof, or any part hereof, and offset against this Note any sum or sums
owed by the holder hereof to Makers. Failure of the holder hereof to exercise
this option shall not constitute a waiver of the right to exercise the same upon
the occurrence of a subsequent Event of Default.
If the holder hereof expends any effort in any attempt to enforce payment
of all or any part or installment of any sum due the holder hereunder, or if
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Makers agree to pay all collection
costs and fees incurred by the holder, including reasonable attorneys' fees.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA.
Each Maker and each surety, guarantor, endorser, and other party ever
liable for payment of any sums of money payable on this Note jointly and
severally waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, diligence in collecting, grace, and all
other formalities of any kind, and consent to all extensions without notice for
any period or periods of time and partial payments, before or after maturity,
and any impairment of any collateral securing this Note, all without prejudice
to the holder. The holder shall similarly have the right to deal in any way, at
any time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part or all of the collateral
securing this Note, or to grant any other indulgences or forbearances
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
CASTLE EXPLORATION COMPANY, INC.
By:___________________________________
Richard E. Staedtler
Vice President
TERM NOTE - Page 2
<PAGE>
CASTLE TEXAS PRODUCTION LIMITED
PARTNERSHIP
By: CASTLE PRODUCTION COMPANY,
Its General Partner
By:____________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PIPELINE LIMITED
PARTNERSHIP
By: CASTLE PIPELINE COMPANY,
Its General Partner
By:____________________________
Richard E. Staedtler
Vice President
CEC GAS MARKETING LIMITED
PARTNERSHIP
By: CEC MARKETING COMPANY,
Its General Partner
By:_____________________________
Richard E. Staedtler
Vice President
DA963310175
112696 v1
393:3087-29
TERM NOTE - Page 3
<PAGE>
TERM NOTE
$5,100,000.00 Shreveport, Louisiana November 26, 1996
FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas
limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited
partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited
partnership (collectively, the "Makers"), hereby jointly and severally promise
to pay to the order of COMMERCIAL NATIONAL BANK IN SHREVEPORT ("Payee"), at the
offices of COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking
association (together with any successor as provided in the Agreement, as
hereinafter defined, the "Agent"), at its offices at 333 Texas Street, Post
Office Box 21119, Shreveport, Caddo Parish, Louisiana, in lawful money of the
United States of America, the principal sum of Five Million One Hundred Thousand
and No/100 Dollars ($5,100,000.00), or so much thereof as may be advanced and
outstanding hereunder, together with interest on the outstanding principal
balance from day to day remaining at the rates specified herein, and on the
dates provided in the Agreement referred to below.
The outstanding principal balance hereof shall bear interest prior to
maturity at a varying rate per annum which shall from day to day be equal to the
lesser of (a) the maximum rate permitted by applicable law, or (b) the
Applicable Rate (as defined in the Agreement referred to below) in effect from
day to day, each such change in the rate of interest charged hereunder to become
effective, without notice to Makers, on the effective date of each change in the
Applicable Rate or the maximum rate permitted by applicable law, as the case may
be. All past due principal and interest shall bear interest at the rate set
forth in Article III of the Agreement referred to below.
Interest on the indebtedness evidenced by this Note shall be computed on
the basis of a year of 360 days and the actual number of days elapsed (including
the first day but excluding the last day).
This Note is a Term Note provided for in that certain Amended and Restated
Loan Agreement dated of even date herewith among Makers, Castle Production
Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy
Corporation, each of the banks or other lending institutions or other Eligible
Assignees (as defined therein) which is or may become a signatory thereto and
any successors or assigns thereof (collectively, the "Lenders") and Agent (such
Amended and Restated Loan Agreement as the same may be amended, supplemented or
otherwise modified from time to time is hereinafter referred to as the
"Agreement"). All capitalized terms not otherwise defined herein shall have the
same meanings as set forth in the Agreement. Reference is hereby made to the
Agreement for provisions affecting this Note including, but not limited to,
provisions regarding interest rates, repayments, prepayments, Events of Default
and Payee's rights as a result thereof. Maker may prepay the principal of this
Note upon the terms and conditions specified in the Agreement.
TERM NOTE - Page 1
<PAGE>
If default be made in the payment of principal or interest under this Note,
or upon the occurrence of any other Event of Default, the holder hereof may, at
its option, declare the entire unpaid principal of and accrued interest on this
Note immediately due and payable without notice, demand or presentment, all of
which are hereby waived, and upon such declaration, the same shall become and
shall be immediately due and payable, and the holder hereof shall have the right
to foreclose or otherwise enforce all liens or security interests securing
payment hereof, or any part hereof, and offset against this Note any sum or sums
owed by the holder hereof to Makers. Failure of the holder hereof to exercise
this option shall not constitute a waiver of the right to exercise the same upon
the occurrence of a subsequent Event of Default.
If the holder hereof expends any effort in any attempt to enforce payment
of all or any part or installment of any sum due the holder hereunder, or if
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Makers agree to pay all collection
costs and fees incurred by the holder, including reasonable attorneys' fees.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA.
Each Maker and each surety, guarantor, endorser, and other party ever
liable for payment of any sums of money payable on this Note jointly and
severally waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, diligence in collecting, grace, and all
other formalities of any kind, and consent to all extensions without notice for
any period or periods of time and partial payments, before or after maturity,
and any impairment of any collateral securing this Note, all without prejudice
to the holder. The holder shall similarly have the right to deal in any way, at
any time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part or all of the collateral
securing this Note, or to grant any other indulgences or forbearances
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
CASTLE EXPLORATION COMPANY, INC.
By:________________________________
Richard E. Staedtler
Vice President
TERM NOTE - Page 2
<PAGE>
CASTLE TEXAS PRODUCTION LIMITED
PARTNERSHIP
By: CASTLE PRODUCTION COMPANY,
Its General Partner
By:_______________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PIPELINE LIMITED
PARTNERSHIP
By: CASTLE PIPELINE COMPANY,
Its General Partner
By:_______________________________
Richard E. Staedtler
Vice President
CEC GAS MARKETING LIMITED
PARTNERSHIP
By: CEC MARKETING COMPANY,
Its General Partner
By:________________________________
Richard E. Staedtler
Vice President
DA963310179
112696 v1
351:3087-29
TERM NOTE - Page 3
<PAGE>
TERM NOTE
$4,950,000.00 Shreveport, Louisiana November 26, 1996
FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas
limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited
partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited
partnership (collectively, the "Makers"), hereby jointly and severally promise
to pay to the order of COMPASS BANK ("Payee"), at the offices of COMMERCIAL
NATIONAL BANK IN SHREVEPORT, a national banking association (together with any
successor as provided in the Agreement, as hereinafter defined, the "Agent"), at
its offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo
Parish, Louisiana, in lawful money of the United States of America, the
principal sum of Four Million Nine Hundred Fifty Thousand and No/100 Dollars
($4,950,000.00), or so much thereof as may be advanced and outstanding
hereunder, together with interest on the outstanding principal balance from day
to day remaining at the rates specified herein, and on the dates provided in the
Agreement referred to below.
The outstanding principal balance hereof shall bear interest prior to
maturity at a varying rate per annum which shall from day to day be equal to the
lesser of (a) the maximum rate permitted by applicable law, or (b) the
Applicable Rate (as defined in the Agreement referred to below) in effect from
day to day, each such change in the rate of interest charged hereunder to become
effective, without notice to Makers, on the effective date of each change in the
Applicable Rate or the maximum rate permitted by applicable law, as the case may
be. All past due principal and interest shall bear interest at the rate set
forth in Article III of the Agreement referred to below.
Interest on the indebtedness evidenced by this Note shall be computed on
the basis of a year of 360 days and the actual number of days elapsed (including
the first day but excluding the last day).
This Note is a Term Note provided for in that certain Amended and Restated
Loan Agreement dated of even date herewith among Makers, Castle Production
Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy
Corporation, each of the banks or other lending institutions or other Eligible
Assignees (as defined therein) which is or may become a signatory thereto and
any successors or assigns thereof (collectively, the "Lenders") and Agent (such
Amended and Restated Loan Agreement as the same may be amended, supplemented or
otherwise modified from time to time is hereinafter referred to as the
"Agreement"). All capitalized terms not otherwise defined herein shall have the
same meanings as set forth in the Agreement. Reference is hereby made to the
Agreement for provisions affecting this Note including, but not limited to,
provisions regarding interest rates, repayments, prepayments, Events of Default
and Payee's rights as a result thereof. Maker may prepay the principal of this
Note upon the terms and conditions specified in the Agreement.
TERM NOTE - Page 1
<PAGE>
If default be made in the payment of principal or interest under this Note,
or upon the occurrence of any other Event of Default, the holder hereof may, at
its option, declare the entire unpaid principal of and accrued interest on this
Note immediately due and payable without notice, demand or presentment, all of
which are hereby waived, and upon such declaration, the same shall become and
shall be immediately due and payable, and the holder hereof shall have the right
to foreclose or otherwise enforce all liens or security interests securing
payment hereof, or any part hereof, and offset against this Note any sum or sums
owed by the holder hereof to Makers. Failure of the holder hereof to exercise
this option shall not constitute a waiver of the right to exercise the same upon
the occurrence of a subsequent Event of Default.
If the holder hereof expends any effort in any attempt to enforce payment
of all or any part or installment of any sum due the holder hereunder, or if
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Makers agree to pay all collection
costs and fees incurred by the holder, including reasonable attorneys' fees.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA.
Each Maker and each surety, guarantor, endorser, and other party ever
liable for payment of any sums of money payable on this Note jointly and
severally waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, diligence in collecting, grace, and all
other formalities of any kind, and consent to all extensions without notice for
any period or periods of time and partial payments, before or after maturity,
and any impairment of any collateral securing this Note, all without prejudice
to the holder. The holder shall similarly have the right to deal in any way, at
any time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part or all of the collateral
securing this Note, or to grant any other indulgences or forbearances
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
CASTLE EXPLORATION COMPANY, INC.
By:___________________________________
Richard E. Staedtler
Vice President
TERM NOTE - Page 2
<PAGE>
CASTLE TEXAS PRODUCTION LIMITED
PARTNERSHIP
By: CASTLE PRODUCTION COMPANY,
Its General Partner
By:______________________________
Richard E. Staedtler
Vice President
CASTLE TEXAS PIPELINE LIMITED
PARTNERSHIP
By: CASTLE PIPELINE COMPANY,
Its General Partner
By:______________________________
Richard E. Staedtler
Vice President
CEC GAS MARKETING LIMITED
PARTNERSHIP
By: CEC MARKETING COMPANY,
Its General Partner
By:______________________________
Richard E. Staedtler
Vice President
DA963310183
112696 v2
351:3087-29
TERM NOTE - Page 3
<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 September 30,
----------------------------------------------------------------------
1996 1995
------------------------------ -------------------------------
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
I. Weighted Shares Outstanding, Net of Treasury
Stock Outstanding - Beginning of Period: 6,693,646 6,693,646 6,683,646 6,683,646
Options and warrants exercised 9,451 9,451
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 29,041 21,773 28,646 30,883
---------- ---------- ---------- ----------
III. Weighted Average Shares and Equivalent Shares 6,722,687 6,715,419 6,721,743 6,723,980
========== ========== ========== ==========
IV. Net Income (Loss):
Continuing operations $ 12,630 $ 12,630 ($ 2,464) ($ 2,464)
Discontinued operations 5,114 5,114
------------ ----------- ------------- -------------
$ 12,630 $ 12,630 $ 2,650 $ 2,650
============ =========== ============= =============
V. Net Income (Loss) Per Share:
Continuing operations $ 1.88 $ 1.88 ($ .37) ($ .37)
Discontinued operations, as adjusted - - .76 .76
------------ ----------- ------------- -------------
$ 1.88 $ 1.88 $ .39 $ .39
============ =========== ============= =============
</TABLE>
<PAGE>
Exhibit 11.1
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
----------------------------------------------------------------------
1996 1995
------------------------------ -------------------------------
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
I. Weighted Shares Outstanding, Net of Treasury
Stock Outstanding - Beginning of Period: 6,693,646 6,693,646 7,627,646 7,627,646
Stock, net - - (929,174) (929,174)
Options and warrants exercised - - 11,986 11,986
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 25,191 21,506 47,890 37,988
Assumed debenture conversion - - 19,200 19,200
------------ ----------- ------------- -------------
III. Weighted Average Shares and Equivalent Shares 6,718,837 6,715,152 6,777,548 6,767,646
============ ============ ============= =============
IV. Net Income (Loss):
Continuing operations $ 25,074 $ 25,074 ($ 26,040) ($ 26,040)
Discontinued operations:
Before adjustment - - 40,937 40,937
Assumed interest savings as if convertible
debentures exercised and retired - - 12 12
------------ ------------ ------------- -------------
$ 25,074 $ 25,074 $ 14,909 $ 14,909
============ ============ ============= =============
V. Net Income (Loss) Per Share:
Continuing operations $ 3.73 $ 3.73 ($ 3.84) ($ 3.84)
Discontinued operations, as adjusted - - 6.04 6.04
------------ ------------ ------------- -------------
$ 3.73 $ 3.73 $ 2.20 $ 2.20
============ ============ ============= =============
</TABLE>
<PAGE>
Exhibit 21
CASTLE ENERGY CORPORATION
Listing of Parent and Subsidiaries
As of November 30, 1996
<TABLE>
<CAPTION>
Relationship Company's
to Ownership
Entity Company Business Percentage
------ ------------ -------- -----------
<S> <C> <C> <C>
Parent
Castle Energy Corporation Parent Holding Company N/A
Refining
Indian Oil Company Subsidiary Inactive 100%
Indian Refining I. L.P. Subsidiary- Inactive 100%
Limited
Partnership
Indian Refining & Marketing I. Inc. Subsidiary General Partner of IRLP - Inactive 100%
Natural Gas Marketing
Castle Pipeline Company Subsidiary General Partner - Pipeline 100%
Partnership
Castle Pipeline Resources Company Subsidiary Limited Partner - Pipeline 100%
Partnership
Castle Texas Pipeline L.P. Subsidiary Natural Gas Transmission 100%
Limited
Partnership
CEC Marketing Company Subsidiary General Partner - Gas Marketing 100%
Partnership
CEC Marketing Resources Company Subsidiary Limited Partner - Gas Marketing 100%
Partnership
CEC Gas Marketing L.P. Subsidiary- Gas Marketing 100%
Limited
Partnership
Exploration and Production
Castle Exploration Company, Inc. Subsidiary Oil and gas development, drilling 100%
and well operations
Castle Production Company Subsidiary General Partner - Production 100%
Partnership
Castle Production Resources Subsidiary Limited Partner - Production 100%
Company Partnership
Castle Texas Production L.P. Subsidiary- Oil and gas production 100%
Limited
Partnership
Holding
CEC, Inc. Subsidiary Passive Activities 100%
</TABLE>
(1) Division of Castle Energy Corporation
(2) Inactive
<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 9, 1997 appearing on page 59 of this Form 10-K.
Price Waterhouse LLP
Philadelphia, PA
January 9, 1997
<PAGE>
Exhibit 23.2
RYDER SCOTT COMPANY
- -------------------
PETROLEUM ENGINEERS FAX: (303) 623-4258
<TABLE>
<CAPTION>
<S> <C> <C> <C>
600 SEVENTEENTH STREET SUITE 900N DENVER, COLORADO 80202 TELEPHONE (303) 623-9147
</TABLE>
December 27, 1996
Mr. Richard E. Staedtler
Chief Financial Officer
Castle Energy Corporation
One Radnor Corporate Center, Suite 250
Radnor, Pennsylvania 19087
Dear Rick,
We hereby consent to the use of our name and the reference to our
reports dated November 5, 1996 in the Form 10-K of Castle Energy Corporation for
the year ended September 30, 1996.
Sincerely,
/s/ Ryder Scott Company
--------------------------
Authorized Signature
12-27-96
- -------------------------
Date
<PAGE>
Exhibit 23.3
HUNTLEY & HUNTLEY, INC
GEOLOGISTS AND ENGINEERS
L.G. HUNTLEY 1912-1970 ESTABLISHED 1912 340 MANSFIELD AVENUE
J.R. WYLIE, JR. 1927-1974 PITTSBURGH, PA 15220
R.S. STEWART 1948-1988 ----
T. BARTHOLOMEW, II AREA CODE 412
1988-1994 920-0800
Fax Number
(412) 920-2972
December 29, 1996
Mr. Richard E. Staedtler
Chief Financial Officer
Castle Energy Corporation
One Radnor Corporate Center, Suite 250
Radnor, PA 19087
Dear Mr. Staedtler:
We hereby consent to the use of our name and reference to our report in
the Form 10-K of Castle Energy Corporation for the year ended September 30,
1996.
Sincerely,
/s/ Keith N. Mangini
- --------------------------
By: Keith N. Mangini
President
December 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
INCLUDED IN ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,200
<SECURITIES> 0
<RECEIVABLES> 10,217
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,151
<PP&E> 28,540
<DEPRECIATION> 7,331
<TOTAL-ASSETS> 101,230
<CURRENT-LIABILITIES> 28,603
<BONDS> 5,834
0
0
<COMMON> 3,347
<OTHER-SE> 63,364
<TOTAL-LIABILITY-AND-EQUITY> 101,130
<SALES> 68,695
<TOTAL-REVENUES> 68,695
<CGS> 34,223
<TOTAL-COSTS> 56,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,959
<INCOME-PRETAX> 13,815
<INCOME-TAX> (11,259)
<INCOME-CONTINUING> 25,074
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,074
<EPS-PRIMARY> 3.73
<EPS-DILUTED> 3.73
</TABLE>
