<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended
------------------------------------------------
Commission file number: 0-10990
---------
CASTLE ENERGY CORPORATION
-------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 76-0035225
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
One Radnor Corporate Center, Suite 250, 100 Matsonford Road, Radnor, Pennsylvania 19087
-------------------------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code (610) 995-9400
-----------------------------
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check [CHECK] 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 [CHECK] No .
--------- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 6,752,887 shares of
Common Stock, $.50 par value outstanding as of August 11, 2000.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2000 (Unaudited)
and September 30, 1999............................................... 1
Consolidated Statements of Operations - Three Months
Ended June 30, 2000 and 1999 (Unaudited)............................. 2
Consolidated Statements of Operations - Nine Months
Ended June 30, 2000 and 1999 (Unaudited)............................. 3
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended June 30, 2000 and 1999 (Unaudited)...................... 4
Consolidated Statements of Stockholders' Equity and Other
Comprehensive Income - Year Ended September 30, 1999
and Nine Months Ended June 30, 2000 (Unaudited)...................... 5
Notes to the Consolidated Financial Statements (Unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 12
Item 3. Qualitative and Quantitative Disclosures About Market Risk............ 20
Part II. Other Information
Item 1. Legal Proceedings.................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders.................. 21
Item 6. Exhibits and Reports on Form 8-K..................................... 21
Signature ..................................................................................... 22
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 8,956 $ 22,252
Restricted cash............................................................. 2,114 770
Accounts receivable......................................................... 3,930 5,172
Marketable securities....................................................... 7,607 4,194
Prepaid expenses and other current assets................................... 561 594
Note receivable - Penn Octane Corporation................................... 502
Estimated realizable value of discontinued net refining assets.............. 800 800
--------- --------
Total current assets...................................................... 24,470 33,782
Property, plant and equipment, net:
Natural gas transmission.................................................... 56 60
Furniture, fixtures and equipment........................................... 306 298
Oil and gas properties, net (full cost method):.............................
Proved properties................................................... 30,658 24,765
Unproved properties not being amortized............................. 1,904 1,862
Other assets.................................................................... 29
--------- --------
Total assets.............................................................. $ 57,394 $ 60,796
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable............................................................ $ 337 $ 368
Accounts payable............................................................ 1,756 2,918
Accrued expenses............................................................ 181 802
Net refining liabilities retained......................................... 3,205 3,205
--------- --------
Total current liabilities................................................. 5,479 7,293
--------- --------
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;
11,503,904 issued at June 30, 2000 and September 30, 1999................. 5,752 5,752
Additional paid-in capital.................................................. 67,365 67,365
Accumulated other comprehensive income - unrealized gains on
marketable securities, net of taxes....................................... 5,740 2,396
Retained earnings........................................................... 38,692 38,716
--------- --------
117,549 114,229
Treasury stock at cost - 4,751,017 shares at June 30, 2000 and
4,282,217 shares at September 30, 1999.................................. (65,634) (60,726)
--------- --------
Total stockholders' equity................................................ 51,915 53,503
--------- --------
Total liabilities and stockholders' equity................................ $ 57,394 $ 60,796
========= ========
</TABLE>
-1-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Revenues:
Natural gas marketing:
Gas sales............................................. $ 7,950
----------
Exploration and production:
Oil and gas sales..................................... $ 4,945 1,599
Well operations....................................... 187 119
---------- ----------
5,132 1,718
---------- ----------
5,132 9,668
---------- ----------
Expenses:
Natural gas marketing:
Gas purchases......................................... 4,838
Transportation........................................ 170
Operating costs.......................................
General and administrative............................ 60
Amortization.......................................... 1,553
----------
6,621
----------
Exploration and production:
Oil and gas production................................ 1,849 741
General and administrative............................ 370 259
Depreciation, depletion and amortization.............. 1,071 691
Write off of option................................... 119
---------- ----------
3,409 1,691
---------- ----------
Corporate general and administrative expenses........... 888 1,211
---------- ----------
4,297 9,523
---------- ----------
Operating income............................................ 835 145
---------- ----------
Other income (expense):
Interest income..................................... 187 356
Other income (expense).............................. 2 404
---------- ----------
189 760
---------- ----------
Income before provision for income taxes.................... 1,024 905
---------- ----------
Provision for income taxes:
State...................................................
Federal................................................. 5
----------
5
----------
Net income.................................................. $ 1,024 $ 900
========== ==========
Net income per share:
Basic............................................... $ .15 $ .12
========== ==========
Diluted............................................. $ .15 $ .11
========== ==========
Weighted average number of common and potential
dilutive common shares outstanding:
Basic................................................ 6,866,357 7,788,936
========== ==========
Diluted.............................................. 6,977,214 7,931,154
========== ==========
</TABLE>
-2-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Revenues:
Natural gas marketing:
Gas sales............................................. $ 50,102
----------
Exploration and production:
Oil and gas sales..................................... $ 12,348 2,571
Well operations....................................... 546 296
---------- ----------
12,894 2,867
---------- ----------
12,894 52,969
---------- ----------
Expenses:
Natural gas marketing:
Gas purchases......................................... 31,102
Transportation........................................ 1,123
Operating costs.......................................
General and administrative............................ 216
Amortization.......................................... 6,284
----------
38,725
----------
Exploration and production:
Oil and gas production................................ 5,034 1,222
General and administrative............................ 1,229 655
Depreciation, depletion and amortization.............. 3,284 840
Write off of option................................... 119
---------- ----------
9,666 2,717
---------- ----------
Corporate general and administrative expenses........... 2,748 3,102
---------- ----------
12,414 44,544
---------- ----------
Operating income............................................ 480 8,425
---------- ----------
Other income (expense):
Interest income..................................... 581 1,301
Other income (expense).............................. (55) 438
---------- ----------
526 1,739
---------- ----------
Income before provision for income taxes.................... 526 10,164
---------- ----------
Provision for income taxes:
State............................................... 78
Federal............................................. 2,737
----------
2,815
----------
Net income.................................................. $ 1,006 $ 7,349
========== ==========
Net income per share:
Basic............................................... $ .14 $ .88
========== ==========
Diluted............................................. $ .14 $ .86
========== ==========
Weighted average number of common and potential dilutive
common shares outstanding:
Basic............................................... 7,001,047 8,367,516
========== ==========
Diluted............................................. 7,144,368 8,516,391
========== ==========
</TABLE>
-3-
<PAGE>
CASTLE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Net cash flow provided by operating activities........................... $ 2,522 $20,616
--------- -------
Net cash flows used in investing activities:
Investment in furniture, fixtures, equipment and software......... (172) (113)
Investment in oil and gas properties.............................. (9,169) (21,620)
Investment in note receivable - Penn Octane Corporation........... (500)
--------- ------
(9,841) (21,733)
--------- ------
Net cash flows used in financing activities:
Dividends paid to stockholders.................................... (1,069) (1,283)
Acquisition of treasury stock..................................... (4,908) (6,145)
Proceeds from exercise of stock options........................... 255
--------- -------
(5,977) (7,173)
--------- -------
Net decrease in cash and cash equivalents................................ (13,296) (8,290)
Cash and cash equivalents - beginning of period.......................... 22,252 36,600
--------- -------
Cash and cash equivalents - end of period................................ $ 8,956 $28,310
========= =======
</TABLE>
-4-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
OTHER COMPREHENSIVE INCOME
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
Year Ended September 30, 1999 And Nine Months Ended June 30, 2000
-----------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
--------------------------- Paid-In Comprehensive Comprehensive Retained
Shares Amount Capital Income Income Earnings
------ ------ ------------ ---------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance - October 1, 1998.......... 6,803,646 $3,402 $67,122 $34,836
Stock acquired.....................
Options exercised.................. 25,000 12 243
Dividends declared ($.25 per share) (2,048)
Stock split retroactively applied.. 4,675,258 2,338 (2,338)
Comprehensive income...............
Net income....................... $ 8,266 8,266
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax...... 2,396 $2,396
--------
$ 10,662
---------- ------ ------- ======== ------ -------
Balance - September 30, 1999....... 11,503,904 5,752 67,365 2,396 38,716
Stock acquired.....................
Dividends declared ($.05/share).... (1,030)
Comprehensive income............... $ 1,006 1,006
Net income (loss)................
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax...... 3,344 3,344
--------
$ 4,350
---------- ------ ------- ======== ------ -------
Balance - June 30, 2000............ 11,503,904 $5,752 $67,365 $5,740 $38,692
========== ====== ======= ====== =======
Treasury Stock
-----------------------
Shares Amount Total
------ ------ ---------
Balance - October 1, 1998.......... 3,862,917 ($53,807) $51,553
Stock acquired..................... 419,300 (6,919) (6,919)
Options exercised.................. 255
Dividends declared ($.25 per share) (2,048)
Stock split retroactively applied..
Comprehensive income...............
Net income....................... 8,266
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax...... 2,396
--------- ------- -------
Balance - September 30, 1999....... 4,282,217 (60,726) 53,503
Stock acquired..................... 468,800 (4,908) (4,908)
Dividends declared ($.05/share).... (1,030)
Comprehensive income............... 1,006
Net income (loss)................
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax...... 3,344
--------- ------- -------
Balance - June 30, 2000............ $4,751,017 ($65,634) $51,915
========== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 1 - Basis of Preparation
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three-month and nine month periods ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2000 or subsequent periods. These unaudited consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999 and the Company's reports on Form 10-Q for
the fiscal quarters ended December 31, 1999 and March 31, 2000.
In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
of operations for the three-month and nine month periods ended June 30, 2000 and
1999 and for a fair statement of financial position at June 30, 2000.
Note 2 - September 30, 1999 Balance Sheet
The amounts presented in the balance sheet as of September 30, 1999
were derived from the Company's audited consolidated financial statements which
were included in its Annual Report on Form 10-K for the fiscal year ended
September 30, 1999.
Note 3 - Discontinued Operations
From August 1989 to September 30, 1995, several of the Company's
subsidiaries conducted refining operations. By December 12, 1995, the Company's
refining subsidiaries had sold all of their refining assets and the purchasers
had assumed all related liabilities, including contingent environmental
liabilities. In addition, in 1996, Powerine Oil Company ("Powerine"), one of the
Company's former refining subsidiaries, merged into a subsidiary of the
purchaser and is no longer a subsidiary of the Company. The Company's remaining
refining subsidiaries own no refining assets, have been inactive for almost five
years, and are inactive and in the process of liquidation. As a result, the
Company has accounted for its refining operations as discontinued operations.
Such discontinued refining operations have not impacted the Company's operations
since September 30, 1995 although they may impact the Company's future
operations.
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 4 - Contingencies/Litigation
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 a refinery in Santa Fe
Springs, California ("Powerine Refinery"), was effectively acquired by Energy
Merchant Corp. ("EMC"), an unrelated party.
In July of 1996, the Company was named a defendant in a class action
lawsuit concerning emissions from the Powerine Refinery. In April of 1997, the
court granted the Company's motion to quash the plaintiff's complaint based upon
lack of jurisdiction and the Company is no longer involved in the case.
During fiscal 1998, the Company was informed that the United States
Environmental Protection Agency ("EPA") was investigating offsite acid sludge
waste found near the Indian Refinery and was also investigating and remediating
surface contamination in the Indian Refinery property. The Indian Refinery,
located in Lawrenceville, Illinois, was previously operated by Indian Refinery I
Limited Partnership ("IRLP"), a subsidiary of the Company inactive since
September 30, 1995. Neither the Company nor IRLP was named with respect to these
specific matters.
In October 1998, the EPA named the Company and two of its subsidiaries,
including IRLP, as potentially responsible parties for the expected overall
clean-up of the Indian Refinery. In addition, eighteen other parties were named
including Texaco Refining and Marketing, Inc. ("Texaco"), the refinery operator
for approximately 50 years. The Company subsequently responded to the EPA
indicating that it was neither the owner nor operator of the Indian Refinery and
thus not responsible for its remediation.
In November 1999, the Company received a request for information from
the EPA concerning the Company's involvement in the ownership and operation of
the Indian Refinery. The Company responded to the EPA information request in
January 2000.
As of August 11, 2000, neither of the refineries had restarted. The
Powerine Refinery has been sold to an unrelated party, which, the Company has
been informed, is seeking financing to restart that refinery. The purchaser of
the Indian Refinery, American Western Refining Limited Partnership ("American
Western"), defaulted on its $5 million note to IRLP, filed a voluntary petition
for bankruptcy in the United States Bankruptcy Court in the District of Delaware
under
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Chapter 11 of the United States Bankruptcy Code and later sold the Indian
Refinery to another unrelated party. The new owner is in the process of
dismantling much of the Indian Refinery. Estimated undiscounted clean-up costs
for the Indian Refinery are $80,000 to $150,000 according to third parties. In
addition, the Company received a claim from Texaco (see Note 9).
Although the environmental liabilities related to the Indian Refinery
and the Powerine Refinery have been transferred to others, there can be no
assurance that the parties assuming such liabilities will be able to pay them.
American Western, purchaser of the Indian Refinery, filed for bankruptcy and is
in the process of liquidation. The current owner of the Indian Refinery is
dismantling it. The current owner of the Powerine Refinery is reported to be
continuing to seek financing to restart that refinery. Furthermore, as noted
above, the Company and two of its subsidiaries have been named by the EPA as
potentially responsible parties for the remediation of the Indian Refinery.
An opinion issued by the U.S. Supreme Court in June 1998 in a comparable
matter supports the Company's position. Nevertheless, if funds for environmental
clean-up are not provided by former and/or present owners of the refineries, it
is possible that the Company and/or one or more of its former refining
subsidiaries could be named parties in additional legal actions to recover
remediation costs. In recent years, government and other plaintiffs have often
sought redress for environmental liabilities from the party most capable of
payment without regard to responsibility or fault. Whether or not the Company
ultimately prevails in such a circumstance, should litigation involving the
Company or any of its former or current refining subsidiaries occur, the Company
would probably incur substantial legal fees and experience a diversion of
management resources from other operations.
See Note 9
Litigation
Rex Nichols et al Lawsuit
In March 1998, the Company, one of its subsidiaries and one of its
officers were sued by two outside interest owners owning interests in several
wells formerly operated by one of the Company's exploration and production
subsidiaries. The lawsuit was filed in the Fourth Judicial District of Rusk
County, Texas. The lawsuit, as initially filed, sought unspecified net
production revenues resulting from reversionary interests on several wells
formerly operated by the Company's subsidiary. Subsequently, the plaintiffs
expanded their petition claiming amounts in excess of $250 based upon their
interpretation of other provisions of the underlying oil and gas leases.
In May 2000, the Company settled this lawsuit for $120.
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 5 - New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, as amended,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), was
issued by the Financial Accounting Standards Board in June 1998. SFAS 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether such instrument
has been designated and qualifies as part of a hedging relationship and, if so,
depends on the reason for holding it. If certain conditions are met, entities
may elect to designate a derivative instrument as a hedge of exposures to
changes in fair values, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative instrument
is recognized in earnings in the period of change together with the offsetting
loss or gain on the hedged item attributable to the risk being hedged. If the
hedged exposure is a cash flow exposure, the effective portion of the gain or
loss on the derivative instrument is reported initially as a component of other
comprehensive income (not included in earnings) and subsequently reclassified
into earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness, as well as the ineffective
portion of the gain or loss, is reported in earnings immediately. Accounting for
foreign currency hedges is similar to the accounting for fair value and cash
flow hedges. If the derivative instrument is not designated as a hedge, the gain
or loss is recognized in earnings in the period of change. The Company
anticipates that it will adopt SFAS 133 effective October 1, 2000. The Company
has no outstanding hedges maturing after September 30, 2000 and would thus not
be affected by SFAS 133 unless it hedges its anticipated production after
September 30, 2000.
All hedging by the Company through June 30, 1999 was applicable to the
Company's gas marketing operations. Hedging transactions applicable to gas
marketing operations terminated on May 31, 1999 when all of the Company's
long-term gas contracts terminated. The Company, however, acquired substantial
oil and gas reserves from AmBrit Energy Corp. ("AmBrit") in June 1999 and began
hedging its crude oil and natural gas production (see Note #6).
The Company will continue to account for any future crude oil or
natural gas hedges applicable to anticipated production prior to October 1, 2000
pursuant to Statement of Financial Accounting Standards No. 80, Accounting for
Futures Contracts ("SFAS 80") until SFAS 133 becomes effective for the Company.
Note 6 - Derivative Financial Instruments
Until May 31, 1999, the Company's natural gas marketing subsidiaries
utilized futures contracts and natural gas basis swaps to reduce their exposure
to changes in the market price of natural gas. Effective May 31, 1999, all
natural gas marketing contracts terminated. As a result of
-9-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except production unit amounts)
(Unaudited)
these hedging transactions, the cost of gas purchases increased $569 for the
nine months ending June 30, 1999 and decreased $152 for the three month period
ended June 30, 1999.
On June 1, 1999, the Company acquired all of the oil and gas assets of
AmBrit. In July 1999, the Company hedged approximately 69% of its anticipated
consolidated crude oil production at the time (approximately 22,000 barrels per
month) and approximately 50% of its anticipated consolidated natural gas
production (approximately 300,000 mcf per month) for the period from September
1, 1999 to July 31, 2000. The Company used futures contracts to hedge such
production. The average hedged prices for crude oil and natural gas, which are
based upon futures prices on the New York Mercantile Exchange, were $20.02 per
barrel of crude oil and $2.64 per mcf of gas. The Company settled all of its
outstanding natural gas hedges in November 1999. For the nine and three month
periods ended June 30, 2000, oil and gas sales decreased $1,269 and $285,
respectively, as a result of such hedging activities.
Note 7 - Information Concerning Reportable Segments
During the nine month period ended June 30, 1999, the Company operated
in two segments of the energy industry: oil and gas exploration and production
and natural gas marketing. During the three and nine month periods ended June
30, 2000, the Company operated in only one segment of the energy industry - oil
and gas exploration and production. The Company does not allocate interest
income, interest expense or income tax expense to these segments. The operating
income achieved by each of the Company's segments was as follows:
<TABLE>
<CAPTION>
Nine months ended June 30, 2000:
Operating
Segment Revenues Expenses Income
--------------------------- -------- -------- ---------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $12,894 ($9,666) $ 3,228
======= ====== =======
Nine months ended June 30, 1999:
Operating
Segment Revenues Expenses Income
--------------------------- -------- -------- ---------
1. Oil and gas exploration and
production $ 2,867 ($2,717) $ 150
2. Natural gas marketing 50,102 (38,725) 11,377
------- ------- -------
$52,969 ($41,442) $11,527
======= ======= =======
</TABLE>
-10-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, 2000:
Operating
Segment Revenues Expenses Income
--------------------------- -------- -------- ---------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $5,132 ($3,409) $1,723
====== ====== ======
Three months ended June 30, 1999:
Operating
Segment Revenues Expenses Income
--------------------------- -------- -------- ---------
1. Oil and gas exploration and
production $1,718 ($1,691) $ 27
2. Natural gas marketing 7,950 (6,621) 1,329
------ ------- ------
$9,668 ($8,312) $1,356
====== ======= ======
</TABLE>
Total assets applicable to each of the Company's two operating segments
were as follows:
June 30, September 30,
2000 1999
------- -------------
Oil and gas exploration and production......... $86,161 $79,076
Natural gas marketing.......................... 67,727 67,720
Corporate and intercompany adjustments......... (96,494) (86,000)
------- -------
$57,394 $60,796
======= =======
Note 8 - Stock Split
On December 29, 1999, the Company's Board of Directors declared a stock
split in the form of a 200% stock dividend applicable to all stockholders of
record on January 12, 2000. The additional shares were paid on January 31, 2000
and the Company's shares first traded at post split prices on February 1, 2000.
The stock split applied only to the Company's outstanding shares on January 12,
2000 (2,337,629 shares) and did not apply to treasury shares (4,491,017 shares)
on that date. As a result of the stock split 4,675,258 additional shares were
issued and the Company's common stock book value was increased $2,338 to reflect
additional par value applicable to the additional shares issued to effect the
stock split. All share changes, including those affecting the recorded book
value of common stock, have been recorded retroactively.
Note 9 - Subsequent Events
In July 2000, the Company engaged Energy Spectrum Advisors of Dallas,
Texas to advise the Company concerning strategic alternative including the
possible sale of its oil and gas assets.
-11-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
At the present time the Company is in the process of obtaining indications of
interest and bids for its oil and gas properties excluding the Company's
Romanian oil and gas concession. The Company is also pursuing other strategic
alternatives.
In August 2000, one of the Company's exploration and production
subsidiaries entered into an agreement to sell its West Delta Block 52 offshore
Louisiana properties to Delta Petroleum Company ("Delta"), a public company
engaged in oil and gas exploration and development. The gross sales price is
$1,313 plus 437,250 shares of Delta common stock. In addition, Delta agreed to
replace several letters of credit issued by the Company to previous owners of
the properties by June 30, 2001. The effective date of the sale is June 30, 2000
and the planned closing date is September 30, 2000. The Company anticipates that
the proceeds of the sale will be recorded as a reduction in the book value of
its oil and gas properties pursuant to the full cost method of accounting for
oil and gas properties.
In August 2000 the Company agreed to purchase thirty-five percent (35%)
of the stock of Networked Energy LLC ("Network"). Network is a private company
engaged in the operation of energy facilities that supply power, heating and
cooling services directly to retail customers.
On August 7, 2000, the Company received notice of a claim against it
and two of its inactive refining subsidiaries from Texaco and its parent. In its
claim, Texaco demanded that the Company and its former subsidiaries indemnify
Texaco for all liability resulting from environmental contamination at and
around the Indian Refinery. In addition, Texaco demanded that the Company assume
Texaco's defense in all matters relating to environmental contamination at and
around the Indian Refinery, including lawsuits, claims and administrative
actions initiated by the EPA as well as indemnify Texaco for costs that Texaco
has already incurred addressing environmental contamination at the Indian
Refinery. Finally, Texaco also claimed that the Company and its two inactive
subsidiaries are liable to Texaco under the Federal Comprehensive Environmental
Response Compensation and Liability Act as owners and operators of the Indian
Refinery.
The Company and its special counsel believe that Texaco's claims are
utterly without merit and the Company intends to vigorously defend itself
against Texaco's claims and any lawsuits that may follow.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
As noted previously, the Company had discontinued its refining
operations by September 30, 1995. During the nine month period ended June 30,
1999, the Company was engaged in natural gas marketing and oil and gas
exploration and production. During this period revenues from natural gas
marketing operations aggregated $50,102 while those from the Company's
exploration and
-12-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
production operations aggregated only $2,867. On May 31, 1999, the Company's
natural gas marketing operations ended because of the expiration of the
Company's subsidiaries' natural gas marketing gas contracts. On June 1, 1999,
however, the Company acquired all of the oil and gas assets of AmBrit. The
production associated with AmBrit's oil and gas properties approximated 425% of
the Company's oil and gas production prior to the acquisition. As a result of
the foregoing, the Company was engaged in only exploration and production for
the nine months ended June 30, 2000 and comparison with the Company's operations
for the nine months ended June 30, 1999 is neither meaningful nor applicable to
the Company's expected future operations. Accordingly, we have compared
exploration and production operations for the quarter ended June 30, 2000 with
exploration and production operations for the quarter ended March 31, 2000.
Conversely, for the other components of operations and net income (corporate
general and administrative expenses, other income (loss) and provisions for
income taxes) we have continued to compare fiscal 2000 year-to-date results
with fiscal 1999 year-to-date results because changes in these components are
not substantially related to the Company's change in emphasis from natural gas
marketing to exploration and production. Instead, changes in these components
are primarily related to other factors.
Exploration and Production
Key exploration and production data for the quarters ended March 31,
2000 and June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, March 31,
2000 2000
------ ------
<S> <C> <C>
Revenues:
Oil and gas sales..................................... $4,945 $3,318
Well operations....................................... 187 185
------ ------
5,132 3,503
------ ------
Expenses:
Oil and gas production................................ 1,849 1,636
General and administrative............................ 370 361
Depreciation, depletion and amortization.............. 1,071 941
Write off of option................................... 119
------ ------
3,409 2,938
------ ------
Operating income............................................ $1,723 $ 565
====== =======
Production Volumes:
Barrels of crude oil (net)............................ 89,115 61,820
Mcf (thousand cubic feet) of natural gas (net)........ 886,671 876,763
Mcf equivalents (net)*................................ 1,421,361 1,247,683
</TABLE>
-13-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except production unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, March 31,
2000 2000
------ ------
<S> <C> <C>
Oil/Gas Prices:
Crude Oil/Barrel:
Gross.............................................. $26.84 $27.65
Hedging effects.................................... (3.20) (10.81)
------ ------
Net of hedging..................................... $23.64 $16.84
====== ======
Natural Gas/Mcf:
Gross.............................................. $ 3.22 $ 2.58
Hedging effects.................................... 0.00 0.02
------- -------
Net of hedging..................................... $ 3.22 $ 2.60
======= =======
Oil and Gas Production Expenses/mcf Equivalent.............. $ 1.30 $ 1.31
======= =======
</TABLE>
-----------
* Barrels of crude oil have been converted to mcf based upon relative energy
content of 6 MCF of natural gas per barrel of crude oil.
Oil and gas sales, including hedging effects, increased $1,627 or 49%
from the quarter ended March 31, 2000 to the quarter ended June 30, 2000.
Approximately $462 or 28.4% of the increase was caused by increased production
volumes, which increased from 1,247,683 equivalent mcf for the quarter ended
March 31, 2000 to 1,421,361 equivalent mcf for the quarter ended June 30, 2000.
Much of this increase in production resulted because the Company's wells in West
Delta Block 52 (offshore Louisiana) were returned to production in May 2000. In
addition, several other wells that had been shut in or shut down for repairs
were returned to production during the quarter ended June 30, 2000. The
remaining $1,165 or 71.6% of the increase in oil and gas sales resulted
primarily from significant increases in the prices received for natural gas
production. The average price received for natural gas, net of hedging effects,
increased $.62 per mcf from $2.60 in the quarter ended March 31, 2000 to $3.22
in the quarter ended June 30, 2000. Such gas prices are the highest average
quarterly prices for the last fifteen years.
The Company hedged 22,000 barrels of expected crude oil production in
July 2000 at an average price of $19.15 per barrel. In June 2000, the Company
settled its July crude oil hedges at an average price of $30.93 per barrel,
resulting in a loss of $259. The loss will decrease crude oil sales for July
2000 by $259. The Company has not hedged any of its anticipated crude oil
production after July 31, 2000 or any of its anticipated natural gas production
after June 30, 2000, and thus remains subject to crude oil and natural gas price
risk for actual production after these dates.
-14-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Oil and gas production expense increased $213 or 13% from the quarter
ended March 31, 2000 to the quarter ended June 30, 2000. Most of the increase is
attributable to increased production in the quarter ended June 30, 2000. For the
quarter ended March 31, 2000 oil and gas production expenses were $1.31 per
equivalent mcf versus $1.30 per equivalent mcf for the quarter ended June 30,
2000. Although production expenses for the quarters being compared were
generally proportional to production, such is not always the case. Well repairs
often do not occur evenly throughout a fiscal period and certain components of
production expenses, such as pumpers' salaries and operating overhead, are
generally fixed and do not depend primarily on production. As a result,
production expense is better compared and analyzed over a longer fixed period -
preferably a period of a year or more.
Depreciation, depletion and amortization increased $130 or 13.8% from
the second quarter of fiscal 2000 to the third quarter of fiscal 2000. The
increase parallels the increase in production for the periods being compared.
Other Components of Operations
Corporate general and administrative expenses decreased $354 or 11.4%
from the first nine months of fiscal 1999 to the first nine months of fiscal
2000. The decrease resulted primarily from decreased legal, consulting and
insurance costs during fiscal 2000.
Interest income decreased $720 or 55.3% from the first nine months of
fiscal 1999 to the first nine months of fiscal 2000. The decrease is primarily
attributable to a decrease in the average balance of cash outstanding during the
periods being compared.
Other income decreased $493 from other income of $438 for the nine
months ended June 30, 1999 to other expense of $55 for the nine months ended
June 30, 2000. For the nine months ended June 30, 1999 other income consisted of
a $355 non-recurring litigation recovery and other miscellaneous income of $83.
For the nine months ended June 30, 2000, other expenses consisted of a $120
litigation settlement offset by $65 of miscellaneous income.
The tax provision for the nine months ended June 30, 1999 primarily
represents the amortization of the Company's net deferred tax asset previously
provided. There is no tax provision for the nine months ending June 30, 2000 due
to the deferred tax liability associated with the book income for the nine
months ending June 30, 2000 being offset by the utilization of deferred tax
assets for which there had been no previous benefit due to a valuation
allowance.
Earnings per Share
On December 29, 1999, the Company's Board of Directors declared a stock
split in the form of a 200% stock dividend applicable to all stockholders of
record on January 12, 2000. The effect of the stock split was to triple the
number of shares outstanding. The stock split did not apply to the
-15-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Company's treasury stock. The stock split is reflected retroactively in share
amounts and earnings per share computations in the accompanying financial
statements.
In addition, from October 1, 1998 to June 30, 2000, the Company
reacquired 2,144,300 shares of its common stock. As a result of these share
acquisitions, earnings per outstanding share for the three and nine month
periods ended June 30, 2000 and 1999 have been higher than would have been the
case if no shares had been repurchased.
LIQUIDITY AND CAPITAL RESOURCES
All statements other than statements of historical fact contained in
this report are forward-looking statements. Forward-looking statements in this
report generally are accompanied by words such as "anticipate," "believe,"
"estimate," or "expect" or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements are disclosed in this
report.
During the nine months ended June 30, 2000, the Company generated
$2,522 from operating activities. During the same period the Company invested
$9,169 in oil and gas properties and $4,908 to reacquire shares of its common
stock. In addition, it paid $1,069 in stockholder dividends. At June 30, 2000,
the Company had $8,956 of unrestricted cash, $18,991 of working capital and no
long-term debt.
Discontinued Refining Operations
Although the Company's former and present subsidiaries have exited the
refining business and third parties have assumed the related environmental
liabilities, if any, of such subsidiaries, the Company and several of its
subsidiaries remain liable for contingent environmental liabilities (see Item 3
to the Company's Form 10-K for the year ended September 30, 1999 and Note 4 to
Item 1 of Part I of this Form 10-Q.)
Expected Sources and Uses of Funds
As of May 5, 2000, the estimated minimum future cash expenditures of
the Company for the period from June 30, 2000 to September 30, 2001 are as
follows:
a. Oil and Gas Drilling
1. Development drilling on existing acreage.......... $4,345
2. Romanian concession .............................. 1,250
3. Investment in Network............................. 500
------
$6,095
======
-16-
<PAGE>
The first four wells in one of the two South Texas exploratory
drilling ventures in which the Company participated resulted in four
dry holes. As a result, the Company elected to terminate the joint
venture although the Company continues to own undrilled acreage in
the area and may elect to participate in future drilling on such
acreage.
In the second South Texas exploratory drilling venture in which the
Company participated, the Company participated in the drilling of
four wells. Two wells drilled resulted in dry holes, one well was
completed as a producer and one well is still being evaluated. The
Company is not obligated to participate in any more wells in this
joint venture but may participate in the drilling of an additional
well offsetting the productive well drilled by the joint venture.
The Company's Romanian subsidiary owns a 50% interest in a 3,000,000
acre Romanian concession and plans to participate in the drilling of
at least six wells on the concession. To date, two wells have been
drilled resulting in shows of hydrocarbons. One well is being
plugged because the hydrocarbon indications found do not appear
commercial. The second well drilled is being evaluated and may be
used as a disposal well for future drilling. The Company's
subsidiary anticipates that the remaining four wells will be drilled
within the next nine months. The subsidiary's share of the expected
future costs for these four wells is approximately $1,250. If any of
these wildcat wells are successful, the subsidiary may participate
in the drilling of several additional offset wells. The cost of such
additional wells, if any, is not included in the estimate above.
b. Repurchase of Company Shares - As of August 11, 2000, the Company
had repurchased 4,751,017 of its shares of common stock at a cost of
$65,634. The Company's Board of Directors has authorized the
repurchase of up to 516,949 additional shares (after taking into
account the 200% stock dividend effective January 31, 2000) to
provide an exit vehicle for investors who want to liquidate their
investment in the Company. The decision whether to repurchase
additional shares and/or to increase the repurchase authorization
will depend upon the market price of the Company's stock, tax
considerations, the number of stockholders seeking to sell their
shares and other factors.
c. Recurring Dividends - The Company's Board of Directors adopted a
policy of paying a $.20 per share annual dividend ($.05 per share
quarterly) in June of 1997. The Company expects to continue to pay
such dividend until the Board of Directors, in its sole discretion,
changes such policy.
-17-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
At June 30, 2000, the Company had available the following sources of
funds:
Unrestricted cash - June 30, 2000..................................$ 8,956
Line of credit - energy bank....................................... 30,000
Marketable securities of Penn Octane Corporation ("Penn Octane")... 7,607
-------
$46,563
=======
In addition, the Company anticipates significant future cash flow from
exploration and production operations, the sale of its West Delta Block 52
properties and, perhaps, the sale of some or all of its oil and gas properties.
Finally, as noted above (see Note 9), the Company has engaged a
financial advisor and is presently considering the sale of its oil and gas
properties excluding those in Romania. As a result, the Company does not expect
to make significant investments in the acquisition of oil and gas properties in
the near future although the Company expects to use its cash flow to continue to
participate in drilling new wells and reworking existing wells. Nevertheless, if
the Company decides not to sell its oil and gas properties, it may again seek
investments in oil and gas properties and/or other energy investments. If such
were the case, the Company believes it could fund such acquisitions through its
cash flow from exploration and production operations, its $30,000 line of credit
from an energy bank or from additional debt or equity where necessary.
The foregoing discussions do not contemplate any adverse effects from
the risk factors listed below:
a. Contingent environmental liabilities (see Note 9) especially in
light of Texaco's recent claim against the Company.
b. Litigation - Travis Crim Litigation (formerly Long Trusts
Litigation). If the Company loses this case, its cash flow and
future earnings would be adversely affected.
c. Reserve price risk - the affect of price changes on unhedged oil
and gas production. The Company has not hedged most of its
anticipated future production.
d. Exploration and production reserve risk - the effect of not finding
the oil and gas reserves sought during new drilling - especially
given the high percentage of exploratory and wildcat drilling in
which the Company is participating in Romania.
e. Reserve risk - the effect of differences between estimated and
actual reserves and production.
f. Public market for Company's stock. The Company's stock price has
fluctuated significantly in the last quarter. Often such
fluctuations have occurred although trading volumes have been
insignificant.
-18-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
g. Foreign operation risks. Since the Company has already incurred
$1,904 and expects to spend a minimum of $1,250 in the next nine
months to drill on its Romanian concession, the Company's interests
are subject to certain foreign country risks over which the Company
has no control - including political risk, the risk of additional
taxation and the possibility that foreign operating requirements
and procedures may reduce estimated profitability.
h. The realization from the sale of the Company's investment in Penn
Octane (common stock and options) is dependent on the market value
of such stock and the Company's ability to liquidate its Penn
Octane stock investment at or near market values. Since Penn Octane
is thinly capitalized and traded, liquidation of a large volume of
Penn Octane common stock, such as that owned by the Company,
1,067,667 shares, without significantly lowering the market price,
may be impossible.
i. Other risks including general business risks, insurance claims
against the Company in excess of insurance recoveries, tax
liabilities resulting from tax audits, drilling risks and
litigation risk.
j. As noted above, the Company engaged Energy Spectrum Advisors and is
currently in the process of soliciting bids on its oil and gas
properties, as well as considering other strategic alternatives.
Although energy prices for oil and gas production are currently at
record high levels there can be no assurance such prices will not
decrease significantly during the period that the Company is
soliciting bids for its oil and gas reserves. In addition, many
other oil and gas producers also are putting their reserves on the
market in an effect to sell them while prices are high. As a result
of the foregoing the Company may not be able to sell its reserves
or otherwise restructure itself on terms which it finds favorable
and thus there may be no sale or restructuring.
k. The Company's Board of Directors has not yet determined a course of
action should the Company be able to sell its reserves at favorable
prices. One alternative, complete liquidation of the Company, could
require a significant time period given the Company's unresolved
litigation, contingent environmental liabilities and the
complicated legal procedures required to liquidate. As a result of
the foregoing and other opportunities and/or changing oil and gas
prices, the Company's Board of Directors may decide to embark upon
other ventures - including the acquisition of oil and gas reserves
or other energy related investments even if the Company is able to
sell its current oil and gas properties. Accordingly, the future
activities of the Company cannot be predicted at this time even if
all of its oil and gas properties are successfully sold.
If any or several of these risks materialize, the Company's estimated
financial position, cash flow and results of operations will probably be
adversely impacted and the impact may be material.
-19-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except production unit amounts)
(Unaudited)
Given the number and variety of risks and the litigiousness of today's corporate
world, it is reasonably possible that one or more of these risks may adversely
impact the Company's future operations.
Readers should refer to the Management Discussion and Analysis of
Financial Condition and Results of Operations Section of the Company's Form 10-K
for the fiscal year ended September 30, 1999 for a description of the
aforementioned risk factors.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company had hedged 22,000 barrels of crude oil that it expected to
produce in July 2000 using futures contracts. The average hedged price (based
upon prices on the New York Mercantile Exchange ("NYMEX")) for these hedged
barrels was $19.15 per barrel. The Company settled the hedge for these barrels
at an average price of $30.93 per barrel resulting in a loss of $11.78 per
barrel and $259 in aggregate which will be reflected in operations for the
fourth quarter of fiscal 2000.
Excluding the 22,000 barrels of hedged crude oil production above, the
Company has not hedged its remaining expected crude oil production or any of its
expected natural gas production. As a result, the Company remains at risk with
respect to such unhedged expected production. If oil and gas market prices
increase, oil and gas sales applicable to the unhedged production will increase.
If oil and gas market prices decrease, oil and gas sales related to such
unhedged production will decrease.
-20-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding lawsuits, reference is made to Item 3 of the
Company's Form 10-K (Annual Report) for the fiscal year ended September 30,
1999. Also see Note 4 to the June 30, 2000 financial statements included in Part
I.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on June 29, 2000. Proxies
were solicited pursuant to the Notice of Annual Meeting of Stockholders, dated
May 15, 2000 and the accompanying Proxy Statement. A total of 5,325,935 shares
were present in person or by proxy.
Messrs. John P. Keller and Richard E. Staedtler were elected to serve as
directors until the 2003 Annual Meeting. The number of votes cast with respect
to Messrs. Keller and Staedtler were as follows:
For Withheld
--------- --------
John P. Keller 5,307,857 18,078
Richard E. Staedtler 5,301,853 24,082
At the Annual Meeting, the stockholders also approved the appointment of
KPMG LLP as the Company's independent accountants for the fiscal year ending
September 30, 2000 by a vote of 5,285,525 votes for such appointment, 29,926
against and 10,484 abstentions.
In addition to the above, Joseph L. Castle II, Martin R. Hoffmann,
Sidney F. Wentz and Russell S. Lewis continued on the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000 CASTLE ENERGY CORPORATION
-------------------------
/s/Richard E. Staedtler
-------------------------------
Richard E. Staedtler
Chief Financial Officer
Chief Accounting Officer
