CRYSTAL OIL CO, 10-Q, 1997-08-11

CRYSTAL OIL CO
10-Q, 1997-08-11
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1997

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 1-8715

CRYSTAL OIL COMPANY
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Louisiana 72-0163810
- ------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

229 Milam Street, Shreveport, Louisiana 71101
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (318) 222-7791
-------------------

NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)

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
--- ----

Common Stock outstanding on August 8, 1997 2,665,622
--------------------------------
<PAGE> 2

CRYSTAL OIL COMPANY

INDEX

Page No.
--------
Part I

Item 1. Financial Statements

Consolidated Condensed Balance Sheets -
June 30, 1997 (Unaudited) and December 31, 1996 3

Consolidated Condensed Statements of Operations -
Three and Six Months Ended June 30, 1997 and 1996 (Unaudited) 4

Consolidated Condensed Statements of Stockholders' Equity -
Six Months Ended June 30, 1997 and 1996 (Unaudited) 5

Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 (Unaudited) 6

Notes to Consolidated Condensed Financial Statements
(Unaudited) 8

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11

Part II

Item 1. Legal Proceedings 18

Item 4. Submission of Matters to a Vote of Security Holders 20

Item 6. Exhibits and Reports on Form 8-K 20

Signatures 21

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<PAGE> 3

CRYSTAL OIL COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS
($ in Thousands)

<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1997 1996
---------- -----------
(Unaudited) (1)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,302 $ 11,576
Marketable securities available for sale 49,120 50,885
Accounts receivable - net 1,170 1,042
Receivable from natural gas forward sale 12,737 -
Prepaid expenses and other current assets 308 102
---------- ----------
TOTAL CURRENT ASSETS 70,637 63,605

MARKETABLE SECURITIES 11,873 2,999

PROPERTY, PLANT AND EQUIPMENT - net 103,285 92,965

OTHER ASSETS
Deferred tax assets 12,828 6,422
Restricted cash equivalents and
marketable securities 1,908 1,963
Others 1,698 1,639
---------- ----------
16,434 10,024
---------- ----------

TOTAL ASSETS $ 202,229 $ 169,593
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of long-term obligations $ 267 $ 271
Accounts payable 1,207 796
Other accrued expenses 325 510
---------- ----------
TOTAL CURRENT LIABILITIES 1,799 1,577

LONG-TERM OBLIGATIONS 37,261 36,879

DEFERRED REVENUE 42,444 17,861

COMMITMENT AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Senior preferred stock 148 148
Common stock 27 27
Additional paid-in capital 103,296 97,156
Retained earnings 17,254 15,945
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 120,725 113,276
---------- ----------

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 202,229 $ 169,593
========== ==========
</TABLE>

(1) The balance sheet at December 31, 1996, has been taken from the audited
financial statements at that date, and condensed.

See accompanying notes to consolidated condensed financial statements.

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<PAGE> 4

CRYSTAL OIL COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
($ in Thousands Except Shares and Per Share Amounts)
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES
Gas storage fees $ 3,012 $ 3,015 $ 6,341 $ 6,433
Crude oil and natural gas 272 177 513 336
Interest and investment income 901 850 1,778 1,730
Other 8 29 25 78
----------- ----------- ----------- -----------
4,193 4,071 8,657 8,577

COSTS AND EXPENSES
Operating expense and taxes 543 458 1,007 947
General and administrative
expense 669 699 1,358 1,520
Interest and debt expense 804 820 1,610 1,642
Amortization of discount on
sale of future contract
receivables and natural
gas forward sale 427 390 756 800
Depreciation, depletion and
amortization 903 801 1,776 1,562
----------- ----------- ----------- -----------
3,346 3,168 6,507 6,471
----------- ----------- ----------- -----------

INCOME BEFORE PROVISION
FOR INCOME TAXES 847 903 2,150 2,106

PROVISION FOR INCOME TAXES 352 364 841 824
----------- ----------- ----------- -----------

NET INCOME $ 495 $ 539 $ 1,309 $ 1,282
=========== ========== =========== ===========

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,665,622 2,662,082 2,665,622 2,658,229
=========== ========== =========== ===========

NET INCOME PER COMMON SHARE $ .19 $ .20 $ .49 $ .48
=========== ========== ============ ===========
</TABLE>

See accompanying notes to consolidated condensed financial statements.

-4-

<PAGE> 5

CRYSTAL OIL COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
1997 1996
--------- ---------
<S> <C> <C>
SENIOR PREFERRED STOCK
Balance at beginning and end of period $ 148 $ 148
--------- ---------
COMMON STOCK
Balance at beginning and end of period 27 27
--------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 97,156 96,902
Issuance of Common Stock - 221
Utilization of net operating loss carryforward
and recognition of deferred tax assets 6,800 -
Recognition of environmental remediation
liability, net of tax (660) -
--------- ---------
Balance at end of period 103,296 97,123
--------- ---------
RETAINED EARNINGS
Balance at beginning of period 15,945 13,472
Net income 1,309 1,282
--------- ---------

Balance at end of period 17,254 14,754
--------- ---------

TOTAL STOCKHOLDERS' EQUITY $ 120,725 $ 112,052
========= =========
</TABLE>

See accompanying notes to consolidated condensed financial statements.

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<PAGE> 6

CRYSTAL OIL COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,309 $ 1,282
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred financing cost 129 142
Depreciation, depletion and amortization 1,776 1,562
Deferred income taxes 734 722
Net gain on sale of property, plant and equipment - (42)
Net change in accrued interest income (19) (232)
Decrease (increase) in accounts receivable (128) 130
Decrease (increase) in prepaid expense and
other current assets (206) 100
Decrease in other assets 1 -
Increase (decrease) in accounts payable
and accrued expenses 226 (995)
--------- ---------
Net cash provided by operating activities 3,822 2,669
--------- ---------
Cash flows from investing activities:
Acquisition of DeSoto Properties (11,917) -
Proceeds from sale of property, plant and equipment - 52
Capital expenditures (119) (411)
Purchases of marketable securities (58,878) (58,679)
Maturity of marketable securities 51,788 60,461
Investment of restricted funds - (918)
Other 55 (25)
--------- ---------
Net cash provided by (used in) investing activities: (19,071) 480
--------- ---------
Cash flows from financing activities:
Reduction of long-term obligations (622) (272)
Reduction of deferred revenue from sale of future
contract receivables (2,274) (2,109)
Payment of costs for financing and sale of future
contract receivables - (89)
Proceeds from natural gas forward sale 14,120 -
Payment of costs for natural gas forward sale contract (249) -
Proceeds from issuance of common stock - 221
--------- ---------
Net cash provided by (used in) financing activities 10,975 (2,249)
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,274) 900

Cash and cash equivalents at beginning of period 11,576 10,812
--------- ---------
Cash and cash equivalents at end of period $ 7,302 $ 11,712
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.

-6-

<PAGE> 7

CRYSTAL OIL COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Continued)
($ in Thousands)
(Unaudited)

Supplemental disclosures of cash flow information:

Six Months Ended
June 30
-------------------
1997 1996
--------- --------
Cash paid during the period for:

Interest, net of amounts capitalized $ 1,481 $ 1,607
========= =======
Amortization of discount on sale of
future contract receivables and
natural gas forward sale $ 756 $ 800
========= =======
Income taxes $ 134 $ 128
========= =======

See accompanying notes to consolidated condensed financial statements.

-7-

<PAGE> 8

CRYSTAL OIL COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Consolidated Condensed Financial Statements

The consolidated condensed balance sheet of Crystal Oil Company and its
subsidiaries (the "Company") as of June 30, 1997, and the consolidated
condensed statements of operations for the three and six months and
stockholders' equity and cash flows for the six months ended June 30, 1997 and
1996, have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows for all periods presented have been made.

There have been no changes in the accounting policies from those set forth
in Note A of the Notes to Consolidated Financial Statements included in the
Company's 1996 Annual Report on Form 10-K.

Note 2. Commitments and Contingencies

The Company currently has outstanding approximately $333 thousand in
standby letters of credit that relate to certain tax benefits transferred
pursuant to safe harbor lease transactions and $1.5 million in an irrevocable
letter of credit to support certain obligations with respect to the outstanding
$36.5 million in Secured Guaranteed Notes Due 2005. The Company's obligations
with respect to the letters of credit for the safe harbor lease transactions
are secured by approximately $100 thousand in restricted marketable securities.

For information with respect to various claims regarding environmental and
other matters, see "Part II: Other Information - Item 1. Legal Proceedings".

Note 3. Earnings Per Share

Earnings per common share were computed by dividing net income by the
weighted average number of shares of Common Stock outstanding during the
periods presented. The Senior Preferred Stock, all classes of the Company's
warrants and the stock options have been considered to be the equivalent of
Common Stock for all periods presented; however, the Senior Preferred Stock and
the stock options were not assumed converted in 1997 and 1996, because the
dilution effect was less than 3%. No warrants were assumed converted during
the periods presented because the effective exercise prices were greater than
the average market price of the Common Stock.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings per Share, in February
1997. SFAS 128 is effective for periods ending after December 15, 1997. SFAS
128 establishes standards for computing and presenting earnings per share and
supersedes the standards currently used for computing earnings per share under
the Accounting Principles Board Opinion No. 15, Earnings Per Share. After the
effective date, any prior

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<PAGE> 9

period earnings per share data in subsequent reports must be restated to conform
to the new standard. The adoption of SFAS 128 is not expected to have a
significant effect on the Company's earnings per share as reported herein.

Note 4. Property Acquisition

Note 5. Natural Gas Forward Sale

On June 6, 1997, the Company entered into a natural gas forward sale of
approximately 16.3 Bcf of natural gas to be delivered during the period of
September 1997 through December 2002 at a discounted current cash price of
approximately $27 million. Under the forward sale, the Company has agreed to
deliver approximately .6 Bcf of natural gas during the period beginning
September 1, 1997, through December 31, 1997. The Company has also agreed to
deliver on an annual basis from 1998 to 2002 between 4.2 Bcf and 2.2 Bcf of
natural gas. The natural gas sold can be delivered from the production of the
DeSoto Properties or other properties and to the extent necessary or desirable
from other natural gas owned, developed or acquired in the future.

In June 1997, the Company received $14 million from the forward sale of
natural gas and will receive the remaining balance of approximately $12.7
million in September 1997. The total proceeds of approximately $27 million
from the forward sale are reflected for financial accounting purposes as
deferred revenues from the sale of natural gas and will be recognized as
natural gas revenues and charged against deferred revenues as deliveries are
made by the Company based on an undiscounted reference price for the natural
gas sold subject to adjustments for certain hedging arrangements entered into
by the Company. The undiscounted reference price for the natural gas sold for
1997 averaged $2.14 per MMbtu. The undiscounted reference price for the years
1998 to 2002 ranges between $1.88 and $2.34 per MMbtu. Such reference price
for natural gas is subject to adjustment for price differential at delivery
points. An imputed charge based on the 8.105% discount rate used in
establishing the sales price of the natural gas sold will be amortized over the
life of the forward sale contract as production is delivered and recorded as
amortization of discount on natural gas forward sale.

-9-
<PAGE> 10

approximately $6.8 million, which represented the benefit realized from the use
of the Company's net operating loss carryforwards. Because the net loss
operating carryforwards related to periods prior to the Company's
quasi-reorganization in 1986, the Company recognized no income as a result of
its use of its net operating loss carryforwards.

Note 6. Commodity Swap Contract

The Company has entered into a hedging arrangement with a third party for
the purpose of hedging against the volatility in prices of natural gas in the
event the Company is unable to fully satisfy its obligations under the forward
sale contract with the production from the DeSoto Properties and was therefore
required to acquire or use production of natural gas from other sources to
satisfy these obligations. This hedging arrangement is also designed to cover
additional production by the Company from other properties. Under this hedging
arrangement, the Company will either be entitled to receive or be required to
pay, on a quarterly basis, an amount of cash equal to the difference between a
scheduled price per the contract and a reference price of a MMbtu of natural
gas multiplied by the schedule of volumes hedged. The hedge contract covers
the period of September 1997 through December 2002 and includes an amount of
natural gas volumes that approximates 40% of the Company's commitment for
delivery under the forward sale contract.

The Company has in effect a hedge contract for the purchase of .2 Bcf of
natural gas at an average monthly price of $2.15 per MMbtu during the period
of September 1, 1997, through December 31, 1997. In subsequent years, the
hedge contract covers purchases between 1.8 Bcf and .7 Bcf of natural gas on an
annual basis from 1998 to 2002 at monthly prices ranging from $1.89 to $2.35
per MMbtu of natural gas. The hedge contract is a derivative financial
instrument and does not require deliveries of the commodity hedged.

The gains or losses on the above hedge contracts will be recognized as an
increase or decrease in natural gas revenues as deliveries of natural gas are
made by the Company. In the case of natural gas sold by the Company pursuant
to its forward sale contracts, such gains and losses will be reflected as an
adjustment to the recognized price for the natural gas sold as described above.
With respect to other sales of natural gas, the gains or losses will be
reflected as an adjustment to the price received from such sales. Risks
associated with the Company's hedge contracts arise primarily from the possible
inability of the counterparties to meet their obligations under these
contracts. The Company's existing hedge contract is secured by an irrevocable
letter of credit from a major investment grade financial institution. The cash
flows from future contracts are accounted for as hedges for sales of production
and are classified as operating activities in the consolidated statements of
cash flows.

-10-

<PAGE> 11

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following is provided to assist in a further understanding of the
Company's financial condition as of June 30, 1997, as well as changes in the
Company's operating results. The notes to the Company's Consolidated Condensed
Financial Statements included in this report, as well as the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, should be read in
conjunction with this discussion.

The Company currently owns and operates through a wholly-owned subsidiary,
First Reserve Gas Company ("FRGC"), a natural gas storage facility located near
Hattiesburg, Mississippi (the "Hattiesburg Facility") and holds various
interests in crude oil and natural gas properties in Mississippi, Texas and
Louisiana.

On May 30, 1997, the Company consummated the acquisition of various proved
producing and undeveloped reserves in the Bethany-Longstreet and Holly Fields
in DeSoto Parish, Louisiana (the "DeSoto Properties") for a total cash purchase
price of approximately $11.9 million, net of adjustments and related
acquisition costs of approximately $256 thousand. The properties, which are
located in North Louisiana, had at March 1, 1997, estimated net proved reserves
in excess of 28 billion cubic feet of natural gas and 38 thousand barrels of
condensate. The Company currently contemplates drilling approximately 20 wells
in the fields over the next three years, beginning in the third quarter of this
year, to supplement the existing 16 producing wells. In another transaction
effective on June 6, 1997, the Company entered into a natural gas forward sale
of approximately 16.3 Bcf of natural gas to be delivered during the period of
September 1997 through December 2002 at a discounted current cash price of
approximately $27 million.

The Company is also continuing to review additional acquisition
opportunities with a focus on acquisitions that will maximize the return on the
Company's existing capital resources and benefit from the availability of the
Company's large net operating loss carryforwards and other tax benefits. The
Company is currently directing its efforts toward the acquisition of businesses
and assets that would generate income for the Company on a current basis and
would utilize the Company's existing tax benefits as well as present the
opportunity for capital appreciation. Although the Company has and expects to
continue to review acquisitions in the energy industry, the Company's
acquisition strategy is not limited as to the type of business or industry. As
of June 30, 1997, the Company's financial resources included $68.3 million in
cash, cash equivalents and marketable securities that could be utilized for
future acquisitions.

The Company's only material debt consists of the indebtedness directly
associated with the permanent financing for the acquisition of FRGC in 1995 and
the recourse of which is primarily limited to FRGC and the assets and
operations of the Hattiesburg Facility. The Company also has ongoing
performance obligations with respect to the Hattiesburg Facility and with
respect to its delivery obligations under its recent forward sale contract.
Future acquisitions will likely involve a combination of the use of a portion
of the Company's available cash and debt or other financing. To the extent
possible, the Company will seek to limit the recourse of any financing to the
business and assets acquired. The Company may also seek to finance future
acquisitions with additional equity, if desirable.

-11-
<PAGE> 12

Results of Operations

General

The Company recorded net income for the three and six month periods ended
June 30, 1997, of $495 thousand, $.19 per share, and $1.3 million, $.49 per
share, respectively, compared to net income of $539 thousand, $.20 per share,
and $1.3 million, $.48 per share, respectively, for the comparative periods in
1996. Income for the periods ended June 30, 1997 and 1996, were primarily
derived from natural gas storage activities, interest and investment income on
the Company's available cash and to a lesser extent from sales of crude oil and
natural gas production. As a result of the recent acquisition of the DeSoto
Properties, sales of natural gas production are expected to increase
substantially in future periods.

The Company's natural gas storage activities for the three and six month
periods ended June 30, 1997, provided revenues of $3.0 million and $6.3
million, respectively, and operating income of $2.0 million and $4.3 million,
respectively. For the three and six month periods ended June 30, 1996, natural
gas storage activities contributed revenues of $3.0 million and $6.4 million,
respectively, and operating income of $2.0 million and $4.4 million,
respectively. Natural gas storage revenues derived from firm long-term
contracts were $2.8 million and $5.5 million in each of the three and six month
periods ended June 30, 1997 and 1996. The remaining natural gas storage
revenues for the three and six month periods ended June 30, 1997 and 1996, were
derived from winter and interruptible storage services, injection and
withdrawal charges and other fees relating to services provided in connection
with the storage and delivery of natural gas at the Hattiesburg Facility.
Storage revenues for the six month period ended June 30, 1997, reflected a
lower demand for winter storage due to milder weather conditions. The Company
is actively marketing its interruptible storage services as well as pursuing
joint venture and other arrangements with third parties to increase the
utilization of the Hattiesburg Facility beyond the use for firm storage
services.

During the three and six month periods ended June 30, 1997, the Company's
operating income from natural gas storage activities reflected operational
expenses of $342 thousand and $645 thousand, respectively, and depreciation and
amortization of $695 thousand and $1.4 million, respectively. The Company's
natural gas storage activities for the three and six month periods ended June
30, 1996, included operational expenses of $296 thousand and $654 thousand,
respectively, and depreciation and amortization of $706 thousand and $1.4
million, respectively.

The Company's crude oil and natural gas exploration and production segment
for the three and six month periods ended June 30, 1997, provided revenues of
$272 thousand and $513 thousand, respectively, and operating income of $87
thousand and $171 thousand, respectively. For the three and six month periods
ended June 30, 1996, the crude oil and natural gas exploration and production
segment contributed revenues of $177 thousand and $336 thousand, respectively,
and operating income of $53 thousand and $137 thousand, respectively. Crude
oil and natural gas revenues resulted from the Company's limited drilling
activities in late 1995 and 1996 and the Company's recent acquisition. During
1997, the Company's operating income from crude oil and natural gas production
activities reflected the

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<PAGE> 13

effect of increased revenues from additional natural gas production and
increased operating expense and depletion expense primarily from the effect of
the acquisition of the DeSoto Properties. Revenues and expenses from the
Company's crude oil and natural gas exploration and production segment are
expected to substantially increase as a result of the recent acquisition.

Interest and Investment Income

The Company's interest and investment income for the three and six month
periods ended June 30, 1997, was approximately $901 thousand and $1.8 million,
respectively. For the three and six month periods ended June 30, 1996, the
Company's interest and investment income was approximately $850 thousand and
$1.7 million, respectively. The levels of interest and investment income
reflected an average investment in debt securities of $60.5 million and $63.9
million for the six month periods ended June 30, 1997 and 1996, respectively.
The average interest rate received by the Company was 5.9% and 5.4% for the
six month periods ended June 30, 1997 and 1996, respectively. The Company's
investments of its liquid assets are primarily invested in investment grade
corporate and government obligations that are for terms of less than two years.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization increased in the three and six
month periods ended June 30, 1997, to $903 thousand and $1.8 million,
respectively, from $801 thousand and $1.6 million, respectively, for the
comparative periods in 1996. The increase was primarily attributable to
increases in the volumes of natural gas production and the depletion rate per
net equivalent barrel of production. Depreciation, depletion and amortization
will also increase in future periods as a result of the acquisition of the
DeSoto Properties.

Interest and Debt Expense

The Company's interest and debt expense for the three and six month
periods ended June 30, 1997, was $804 thousand and $1.6 million, respectively,
and $820 thousand and $1.6 million, respectively, for the comparative periods
in 1996. Such interest and debt expense related solely to the $36.5 million of
long-term debt incurred to finance the acquisition of FRGC.

Amortization of Discount on Sale of Future Contract Receivables and
Natural Gas Forward Sale

For the three and six month periods ended June 30, 1997, the Company
recorded an expense of approximately $427 thousand and $756 thousand,
respectively, for the amortization of discount on its prior sale of future
fixed contract receivables to be generated from firm gas storage services and
to a lesser extent for the amortization of discount on the natural gas forward
sale. This expense reflects the amortization of the discount of such contract
receivables through June 30, 2000, the date through which the receivables were
sold, and the amortization of discount on the natural gas forward sale through
December 31, 2002, under the interest method. The amortization of discount on
sale of future contract receivables was approximately $390 thousand and $800
thousand for the three and six months ended June 30, 1996.

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<PAGE> 14

General and Administrative Expense

The Company's general and administrative expense for the three and six
month periods ended June 30, 1997, was approximately $669 thousand and $1.4
million, respectively, compared to approximately $699 thousand and $1.5
million, respectively, for the comparative periods in 1996. The decrease in
general and administrative expense primarily reflected the incurrence of
severance compensation during the first quarter of 1996 for the termination of
an employment contract with a former employee of the Company. In respect to
the recent acquisition, the Company does not currently contemplate any
substantial increase in the number of its employees and will consolidate the
acquired operations with its current exploration and production activities.

Provision for Income Taxes

The results for the three and six month periods ended June 30, 1997,
included a provision for income taxes of $352 thousand and $841 thousand,
respectively, and $364 thousand and $824 thousand, respectively, for the
comparative periods in 1996. The Company's provision for income taxes for the
three and six month periods ended June 30, 1997, includes deferred tax expense
and a corresponding reduction in deferred tax assets of approximately $289
thousand and $734 thousand, respectively, and $321 thousand and $722 thousand,
respectively, for the comparative periods in 1996 as a result of utilization of
the Company's tax net-operating loss carryforwards and other tax benefits.

The forward sale of natural gas by the Company constituted a taxable
transaction to the Company of approximately $27 million. The Company, however,
was able to apply a portion of its net operating loss carryforwards against the
tax that would otherwise have been paid. As a result, the Company recorded an
increase in stockholders' equity of approximately $6.8 million, which
represented the benefit realized from the use of the Company's net operating
loss carryforwards. Because the net loss operating carryforwards related to
periods prior to the Company's quasi-reorganization in 1986, the Company
recognized no income as a result of its use of its net operating loss
carryforwards.

Liquidity and Capital Resources

At June 30, 1997, the Company had cash and cash equivalents of
approximately $7.3 million and marketable securities of approximately $61.0
million. The Company also had approximately $1.9 million in restricted cash
and marketable securities securing the Company's contingent obligations with
respect to outstanding letters of credit and the previously sold future
accounts receivable. In addition, the Company had no debt other than the debt
directly associated with and recourse primarily limited to FRGC and the
Hattiesburg Facility.

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<PAGE> 15

the extent necessary or desirable from other natural gas owned, developed or
acquired in the future.

In June 1997, the Company received $14 million from the forward sale of
natural gas and will receive the remaining balance of approximately $12.7
million in September 1997. The initial proceeds from the forward sale of
natural gas by the Company were used to refinance the purchase price of the
DeSoto Properties. The remaining proceeds from the sale are expected to be
used to fund the development of the DeSoto Properties. The total proceeds of
approximately $27 million from the forward sale are reflected for financial
accounting purposes as deferred revenues from the sale of natural gas and will
be recognized as natural gas revenues and charged against deferred revenues as
deliveries are made by the Company based on an undiscounted reference price for
the natural gas sold subject to adjustments for certain hedging arrangements
entered into by the Company. The undiscounted reference price for the natural
gas sold for 1997 averaged $2.14 per MMbtu. The undiscounted reference price
for the years 1998 to 2002 ranges between $1.88 and $2.34 per MMbtu. Such
reference price for natural gas is subject to adjustment for price differential
at delivery points. An imputed charge based on the 8.105% discount rate used
in establishing the sales price of the natural gas sold will be amortized over
the life of the forward sale contract as production is delivered and recorded
as amortization of discount on natural gas forward sale.

-15-
<PAGE> 16

arise primarily from the possible inability of the counterparties to meet their
obligations under these contracts. The Company's existing hedge contract is
secured by an irrevocable letter of credit from a major investment grade
financial institution. The cash flows from future contracts are accounted for
as hedges for sales of production and are classified as operating activities in
the consolidated statements of cash flows.

At June 30, 1997, the Company had outstanding approximately $36.5 million
in 8.12% Secured Guaranteed Notes Due 2005 (the "Notes") requiring payment of
interest only through June 30, 2000, at which time principal is to be amortized
over the remaining life of the Notes. At June 30, 1997, the Company also had
approximately $15.6 million in deferred revenue from the sale of future
contract receivables that is being recognized for accounting purposes over the
period during which the receivables are to be generated. During the six month
period ended June 30, 1997, the Company recognized approximately $5.5 million
of revenue from the previously sold receivables. The Notes and obligations
under the agreement pursuant to which the Company sold the future accounts
receivable are secured by substantially all of the assets of FRGC and its
subsidiaries and are without recourse to Crystal Oil Company, except for
certain amounts in the event of bankruptcy of FRGC and its subsidiaries. As of
June 30, 1997, restricted funds of approximately $1.8 million, consisting of
distributions from the trust that acquired the receivables, had been pledged to
secure the obligations with respect to the Hattiesburg Sold Receivables. In
addition, the Company currently has outstanding $1.5 million in an irrevocable
letter of credit to support certain obligations with respect to the Notes.

The Company's working capital position increased by approximately $6.8
million to approximately $68.8 million at June 30, 1997, from approximately
$62.0 million at December 31, 1996, primarily as a result of the effect of the
forward sale of natural gas net of the funds required for the acquisition of
the DeSoto Properties and the investment of available funds in non-current
marketable securities. The Company generated net cash flow from operating
activities of approximately $3.8 million and $2.7 million for the six month
periods ended June 30, 1997 and 1996, respectively.

Pending the redeployment of the Company's available funds, the Company is
investing its cash primarily in United States government and other investment
grade securities. The Company believes that these securities do not present
any material risks with respect to its liquidity, operations or financial
position.

Other Matters

The Company is currently subject to various claims regarding environmental
matters, which will require the expenditure of funds for legal costs and could
require additional expenditure of funds for remediation if it is determined
that the Company is responsible for such remediation or otherwise agrees to
contribute to the cost of such remediation. It is the Company's policy to
accrue for environmental remediation costs if it is probable that a liability
has been incurred and an amount is reasonably estimable. The resolution of
the known environmental matters affecting the Company will be subject to
various factors, including the discovery of additional information with respect
to the nature of contamination at the known sites, the legal responsibility

-16-
<PAGE> 17
of various parties for any cleanup obligations, the financial capability of
responsible parties, the resolution of the reopening of the Company's bankruptcy
proceeding and other actions by governmental agencies and private parties.
Although the cost of cleanup of sites in which the Company has been notified of
potential liability is currently estimated to involve the expenditure of funds
by all potentially responsible parties in excess of $9 million, based on
information known to the Company, the Company does not believe that its ultimate
payment obligations with respect to such matters will have a material adverse
impact on the Company's financial position.

Statements in this Report other than historical facts are forward-looking
statements made in reliance upon the safe harbor of the Private Securities
Litigation Reform Act of 1995. As such, the involved risk and uncertainties
are subject to change at any time. The Company derives its forward-looking
statements from its operating budgets which are based on various assumptions,
including matters regarding natural gas prices, demand and supply for natural
gas, changes in the market for natural gas storage and transportation, the
ultimate recovery and realization of the estimated reserves of the Louisiana
Property Acquisition, the success of the Company's ability to market
interruptible service at the Hattiesburg Facility, the Company's successful
execution of its acquisition strategy and internal operating plans, labor
relations, regulatory uncertainties and legal proceedings, in particular its
pending litigation with the State of Louisiana and the State of Indiana
regarding environmental matters. Although the Company believes its assumptions
are reasonable, it is impossible to predict the impact of certain factors that
could cause actual results to differ materially from those currently
anticipated. These factors are discussed in the Company's filings with the
Securities and Exchange Commission, in particular its most recent Annual Report
on Form 10-K filed with the Securities and Exchange Commission.

-17-

<PAGE> 18

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

In 1995, an agency of the State of Louisiana notified the Company that the
Company had potential liability under a Louisiana environmental act on account
of certain activity while the Company was "owner/operator and/or owner" of a
particular facility located in Louisiana from 1926 until 1935. This property
had been sold by the Company in 1935. The State of Louisiana is seeking $4.5
million from all potentially responsible parties. In April 1996, the Company
filed a petition to reopen the Company's 1986 bankruptcy proceeding for the
sole purpose of enforcing the previous confirmation order and other orders in
the bankruptcy proceeding to establish that this claim by the State of
Louisiana is barred by the discharge in the Company's 1986 bankruptcy
reorganization and can no longer be brought against the Company. This reopened
case is now pending in the United States Bankruptcy Court for the Western
District of Louisiana, Shreveport Division. The Company also referred to the
Bankruptcy Court an environmental claim from another agency of the State of
Louisiana concerning the environmental remediation in a 30 acre tract of land
that the Company previously owned and on which a fuel oil refinery was operated
from 1920 until 1940. In October 1996, the Bankruptcy Court entered an order
barring the State of Louisiana from asserting claims against the Company
concerning the fuel oil refinery site on the grounds that such claims had
accrued prior to the Company's 1986 bankruptcy. This order was recently
affirmed by the United States District Court for the Western District of
Louisiana in an appeal by the State of Louisiana. On April 9, 1997, the State
of Louisiana proceeded to appeal the District Court's decision to the United
States Court of Appeals for the Fifth Circuit where the matter is currently
pending.

In 1991, the Company was named, among others, as a potentially responsible
party ("PRP") for environmental clean-up by an agency of the State of Indiana
and received an informational request concerning the Company's activities at a
site located in Indiana. A now dissolved subsidiary of the Company owned a
refinery on this site for a period of approximately four years during the
1970s. Except for such period, other parties have owned and engaged in
operations of this site since the construction of the refinery in 1946. In
1996, the State of Indiana brought an action against the Company and others to
recover approximately $1.8 million in remediation costs that was alleged to
have been incurred by it from 1990 through 1994 for the environmental clean-up
of this site. The Company has referred this claim to the Bankruptcy Court for
the Western District of Louisiana on the basis that such claim is barred as a
result of the Company's 1986 bankruptcy proceeding.

In another environmental matter, the Company is among a number of
defendants in a suit pending in the 14th District Court in Calcasieu Parish,
Louisiana, by the H. C. Drew Estate for remediation of alleged saltwater damage
and pit cleanup at a drilling location near Lake Charles, Louisiana, in which
the plaintiff asserts that the Company has a 25% working interest ownership in
a leasehold interest relating to the location. Reunion Energy ("Reunion") was
the operator for the drilling operations at the site and primarily responsible
for the cleanup of the site under the terms of the Company's operating
agreement with Reunion. The Company, however, may be responsible under the
operating agreement for its pro rata share of certain cleanup costs. The
amount of the

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<PAGE> 19

plaintiff's claim is presently not known. The plaintiff, however, has estimated
an environmental cleanup cost of $3.0 million based on the process of removing
and replacing the soil at the site. Reunion had advised the Company that it
believes that the plaintiff's proposed cleanup is neither required under the
operating agreement or by law. Reunion has proposed to follow the environmental
remediation requirements under the regulations of the State of Louisiana that
would require surface remediation through the treatment of salt water
contamination at a cost that would be expected to be substantially less than the
amount under the plaintiff's proposal. Reunion's proposal has been referred to
the Office of Conservation of the Louisiana Department of Natural Resources for
a determination. Presently, the Company is investigating this matter. However,
based on information currently known to the Company, the Company does not expect
that the resolution of this matter will have a material adverse effect on its
financial condition.

In July 1979, a suit styled "AGB Oil Company et al vs. The Charter
Company, Charter Oil Company, and Crystal Exploration and Production Company",
was filed in the Circuit Court of the Eleventh Judicial Circuit in and for Dade
County, Florida. The plaintiff is the limited partner of Caloosa 1974 Limited
Partnership, a Colorado limited partnership, of which a subsidiary of the
Company, Crystal Exploration and Production Company (formerly Charter
Exploration and Production Company), is the general partner. The plaintiff
claims compensatory damages of $10 million, punitive damages in an undetermined
amount, interest and costs of litigation. The suit alleges breach of contract,
breach of fiduciary duty, mismanagement and fraud in connection with the
operation of Caloosa 1974 Limited Partnership. In recent years, the suit has
been generally inactive. However, in 1996 the plaintiff amended its complaint
and added Crystal Oil Company as a defendant to the lawsuit. In response, the
Company referred this claim to the Bankruptcy Court for the Western District of
Louisiana based on the consideration that such claim was barred in the
Company's 1986 bankruptcy proceeding. The Company and plaintiff agreed to a
stand down period through October 31, 1997, as extended, with respect to the
proceedings in Bankruptcy Court pending the results of a mediation process
between the parties. The Company does not believe that a recovery by Plaintiff
of a material amount is likely.

As in the case of the fuel oil refinery site in Louisiana, the Company
intends to pursue in Bankruptcy Court its position that the other claim against
the Company by the State of Louisiana and the claims of the State of Indiana
are barred by reason of orders entered in its previous bankruptcy proceeding
and has filed motions in the Bankruptcy Court requesting such a ruling. In the
litigation with AGB, the Company will continue the proceedings in Bankruptcy
Court if the mediation process between the parties fails to provide
satisfactory results. In light of the foregoing matters, the Company accrued
an additional $1.0 million during the second quarter of 1997 for defense and
other related costs of such matters. Because the forgoing matters relate to
matters existing prior to the Company's quasi-reorganization in 1986, this
accrual was recorded net of related tax impact as an offset to additional
paid-in capital.

-19-

<PAGE> 20

Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of shareholders was held on May 29, 1997, in New York,
New York. Two proposals were submitted to shareholders as described in the
Company's Proxy Statement dated April 24, 1997, and were voted upon and
approved by shareholders at the meeting. The table below briefly describes the
proposals and results of the shareholders votes.

Votes in Votes
Favor Withheld/Against
--------- ----------------
Election of six directors:
J. N. Averett, Jr. 2,644,610 4,723
George P. Giard, Jr. 2,644,861 4,472
Gary S. Gladstein 2,644,201 5,132
Robert B. Hodes 2,644,801 4,532
Donald G. Housley 2,644,801 4,532
Lief D. Rosenblatt 2,644,861 4,472

Votes in Votes
Favor Against Abstain
--------- ------- -------
Proposal for ratification of
appointment of independent auditors 2,645,730 3,200 403

There were no broker non votes.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

*10 Natural Gas Inventory Forward Sale Contract dated
June 6, 1997, between Crystal Gas L. L. C. and The Chase
Manhattan Bank.

*11 Computation of Earnings Per Common Share.

27 Financial Data Schedule

(b) Reports on Form 8-K

None

- -----------------------
* Filed herein

-20-

<PAGE> 21

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, on the 8th day of August 1997.

CRYSTAL OIL COMPANY

BY: /S/ J. N. AVERETT, JR.
------------------------------------
J. N. Averett, Jr.
President
and Director
(Principal Executive Officer)

BY: /S/ J. A. BALLEW
------------------------------------
J. A. Ballew
Senior Vice President,
Treasurer, and
Chief Financial Officer

BY: /S/ PAUL E. HOLMES
------------------------------------
Paul E. Holmes
Vice President/Controller
(Principal Accounting Officer)

-21-

<PAGE> 1
EXHIBIT 10

NATURAL GAS INVENTORY FORWARD SALE CONTRACT

DATED

JUNE 6, 1997

BETWEEN

CRYSTAL GAS L.L.C.

AND

THE CHASE MANHATTAN BANK
<PAGE> 2

NATURAL GAS INVENTORY FORWARD SALE CONTRACT

This NATURAL GAS INVENTORY FORWARD SALE CONTRACT (this "Agreement") is
entered into as of June 6, 1997 between CRYSTAL GAS L.L.C., a limited liability
company organized under the laws of the State of Louisiana (the "Seller"), and
The Chase Manhattan Bank, a New York state banking corporation (the
"Purchaser").

WHEREAS, Seller has recently purchased certain oil and gas properties
located in DeSoto Parish, Louisiana and, together with its affiliates, is
engaged in the acquisition, storage and sale of natural gas, and desires to
sell to Purchaser certain quantities of natural gas currently owned or to be
produced or acquired by Seller on the terms and conditions set forth herein to
refinance the acquisition and fund the future development of those properties;
and

WHEREAS, Seller desires to sell and Purchaser desires to purchase
certain quantities of Natural Gas on the terms and conditions set forth herein;

NOW THEREFORE, in consideration of the respective covenants and
agreements of the parties hereinafter set forth and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
each of the parties, the parties hereby agree as follows:

ARTICLE I - INTERPRETATION

Section 1.01 Definitions. For purposes of this Agreement, the following
terms shall have the meanings indicated:

"Accelerated Termination Date" shall have the meaning ascribed thereto
in Section 6.02(b).

"Applicable Instruments" of any Person shall mean the Certificate or
Articles of Incorporation or the Certificate and Memorandum of Association,
by-laws and other organizational documents of such Person and all contracts,
indentures, agreements, instruments and documents to which such Person is a
party or by which such Person or any assets of such Person may be bound or
affected.

"Btu" means the amount of energy required to raise the temperature of
one pound of pure water one degree Fahrenheit from 59 degrees Fahrenheit to 60
degrees Fahrenheit.

"Business Day" means a day, other than a Saturday or a Sunday, on
which commercial banks are not authorized or required to be closed in New York,
New York.

"Confirmation Letter" have the meaning ascribed thereto in Section
2.01.

"Deficiency Quantity" means, in respect of a particular Delivery
Month, the amount by which the Required Delivery Quantity of Natural Gas for
that Delivery Month exceeds the quantity of Natural Gas actually delivered and
received hereunder in respect of such Delivery Month.

"Delivery Month" means each calendar month commencing with the month
of September, 1997 through and including the month of December, 2002.

1
<PAGE> 3

"Delivery Point" means a delivery point at the Texas Eastern Pipeline,
East Texas - Pool, or if the terms of Section 2.05(b) are satisfied, any of the
following locations: (i) Tennessee Gas Transmission, Zone 1, (ii) Transco
Pipeline (Upstream of Station 65) Zone 4, or (iii) Henry Hub.

"Early Termination Date" shall have the meaning ascribed thereto in
Section 5.02.

"Event of Change" shall have the meaning ascribed thereto in Section
6.01.

"Event of Default" shall have the meaning ascribed thereto in Section
5.01.

"Federal Funds Rate" means, for any day, a fluctuating interest rate
per annum equal for such day to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System arranged
by Federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day
which is a Business Day, the average of the quotations for such day on such
transactions received by Purchaser from three Federal funds brokers of
recognized standing selected by Purchaser.

"Force Majeure" shall mean a failure by either party to perform
obligations hereunder, except for the obligation to make payment due hereunder,
to the extent that such failure is caused by war, riots, insurrections, fires,
explosions, sabotage, strikes and other labor or industrial disturbances, acts
of God or the elements, government laws, regulations or requests, disruption or
breakdown of production or transportation facilities, failures of transporters
in receiving and delivering natural gas tendered, compliance with OFO's or
other similar notice from a transporter, or by any other cause reasonably
beyond the control of such party, but does not include the failure to perform
obligations solely as a result of the fact that to do so will result in
economic loss or hardship to such party.

"Governmental Requirement" shall mean all judgments, orders, writs,
injunctions, decrees, awards, laws, ordinances, statutes, regulations, rules,
franchises, permits, certificates, licenses, authorizations and the like of any
government or any commission, board, court, agency, instrumentality or
political subdivision thereof.

"Guarantor" shall mean Crystal Oil Company, a Louisiana corporation.

"Guaranty Agreement" shall mean that certain Guaranty Agreement dated
of even date herewith by Guarantor, in favor of Purchaser.

"Henry Hub" means the Sabine Pipe Line Company pipeline facilities at
Texaco Inc.'s Henry Gas Processing Plant near Erath, Louisiana.

"Margin Agreement" means the Margin Agreement of even date herewith
between Seller and Purchaser, as the same may be modified or amended from time
to time.

"MMBtu" means one million Btus.

"Natural Gas" means a mixture of gaseous hydrocarbons consisting
primarily of methane and meeting the quality standards and specifications
required pursuant to Section 2.02.

"NYMEX" means the New York Mercantile Exchange, Inc. and any successor
thereto by merger, consolidation, or sale of assets.

2
<PAGE> 4

"OFO" shall have the meaning given such term in Section 2.06(c).

"Payment Date" shall mean the 20th day of each month commencing on
October 20, 1997.

"Person" shall mean any individual, corporation, company, partnership,
joint venture, trust, unincorporated association, government or any commission,
board, court, agency, instrumentality or political subdivision thereof, any
other entity or any trustee, receiver, custodian or similar official.

"Prepaid Price" shall be the amount set forth in the Confirmation
Letter.

"Reference Dealer" means a leading company in the natural gas
marketing business selected by Purchaser in good faith from among companies
whose credit standings satisfy all the criteria that Purchaser applies
generally with respect to transactions similar to those contemplated by this
Agreement.

"Replacement Value" means (i) if Seller is the party which has failed
to perform, the price which Purchaser, acting in good faith and at arm's
length, actually pays, or has contracted to pay, for Natural Gas to replace the
Deficiency Quantity at the agreed Delivery Point plus any additional
transportation and other costs and expenses incurred by Purchaser in connection
with the purchase of such Natural Gas, and (ii) if Purchaser is the party which
has failed to perform, the price which Seller, acting in good faith and at
arm's length, actually receives, or has contracted to receive, for the sale of
the Deficiency Quantity at the agreed Delivery Point less any additional
transportation and other costs and expenses incurred by Seller in connection
with the sale of such Natural Gas.

"Required Delivery Quantity" means the amount of MMBtus of Natural Gas
to be delivered and received during a given Delivery Month pursuant to this
Agreement as agreed upon in the Confirmation Letter.

"Taxes" means all ad valorem, property, occupation, severance,
production, gathering, pipeline, utility, gross production, sales, use, excise,
transaction and any other governmental charges and assessments, other than
taxes based on net income or net worth.

"Termination Date" means either the Accelerated Termination Date or
the Early Termination Date, as the case may be.

"Termination Payment" shall have the meaning given such term in
Section 5.03.

"United States Dollars", "U.S. Dollars", or "U.S. $" means the lawful
currency of the United States of America in immediately available funds.

"Unpaid Amounts" means, with respect to any Termination Date, the
aggregate of all amounts that became payable (whether or not due) to Purchaser
hereunder prior to the occurrence of such Termination Date and that remain
payable (whether or not due) as at such Termination Date, together with
interest thereon from (and including) the date such amounts became due and
payable to (but excluding) such Termination Date at the U.S. Base Rate.

"U.S. Base Rate" means, at any time, a fluctuating interest rate per
annum as shall be in effect from time to time, which rate per annum shall at
all times be equal to the highest of: (a) the rate of interest announced
publicly by The Chase Manhattan Bank in New York, New York, from time to time,
as its prime commercial lending rate; or (b) one percent per annum above the
Federal Funds Rate in

3
<PAGE> 5

effect from time to time. In the event there is any Unpaid Amount, Purchaser
will use reasonable efforts to inform Seller of changes in the U.S. Base Rate
promptly upon the occurrence of such changes.

Section 1.02 Headings. The division of this Agreement into Articles and
Sections and the insertion of an index and headings are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement. The terms "this Agreement", "hereof", "hereunder" and similar
expressions refer to this Agreement and not to any particular Article, Section,
paragraph, Schedule or other portion hereof and include any agreement
supplemental hereto. Unless something in the subject matter or context is
inconsistent therewith, references herein to Articles, Sections and paragraphs
are to Articles, Sections and paragraphs of this Agreement.

Section 1.03 Number. Words importing the singular number shall include the
plural and vice versa, and words importing the masculine gender shall include
the feminine and neuter genders and vice versa.

Section 1.04 Non-Business Days. Whenever any action to be taken hereunder
shall be stated to be required to be taken or any payment to be made hereunder
shall be stated to be due on a day other than a Business Day, unless otherwise
specifically provided for herein, such payment shall be made or such action
shall be taken on the next succeeding Business Day if the due date was a Sunday
or a NYMEX or New York bank holiday which occurs on a Monday or on the last
preceding Business Day if the due date was a Saturday or a NYMEX or New York
bank holiday other than a Monday, and in the case of the payment of any
monetary amount, the extension or curtailment of time shall be taken into
account for the purposes of computation of interest or fees thereon.

ARTICLE II - SALE AND PURCHASE OF NATURAL GAS

Section 2.01 Sale and Purchase of Natural Gas.

(a) On or before June 6, 1997, Purchaser and Seller shall agree
upon and execute a letter described in this Section 2.01 (such letter being the
"Confirmation Letter"). The Confirmation Letter shall specify a mutually
acceptable Prepaid Price (which shall be approximately U.S. $30,000,000), the
date or dates on which the Prepaid Price shall be paid, and for each Delivery
Month, the Delivery Point, the Required Delivery Quantity, and the proportion
thereof to be delivered and received at the Delivery Point, each as mutually
agreed by Purchaser and Seller. On the date or dates specified for such
purpose in the Confirmation Letter, Purchaser shall pay to Seller the Prepaid
Price by wire transfer of immediately available funds to such account or
accounts as Seller may designated in writing, provided that the conditions
precedent set out in Annex 1 have been satisfied by Seller and no Event of
Default or Event of Change shall have occurred.

(b) In consideration of the payment to Seller of the Prepaid
Price, Seller hereby agrees to sell and deliver, or cause to be delivered, to
Purchaser or to its account in each Delivery Month, at the Delivery Point, the
Required Delivery Quantity of Natural Gas on the terms and conditions set forth
in this Agreement; and Purchaser hereby agrees to accept delivery of such
Natural Gas. Payment of the Prepaid Price on the date or dates set forth in
the Confirmation Letter shall constitute payment in full of the purchase price
of all quantities of Natural Gas to be delivered hereunder.

Section 2.02 Measurement and Quality. Natural Gas delivered to a specific
Delivery Point hereunder shall be measured by the operator of the Delivery
Point in accordance with its standard practices. All such Natural Gas shall
meet or exceed the requirements of Purchaser's transporter receiving gas at the
Delivery Point, including, without limitation, requirements of quality,
composition, temperature and pressure.

4
<PAGE> 6

Section 2.03 Delivery and Receipt of Natural Gas.

(a) Seller agrees to deliver to Purchaser, and Purchaser agrees to
accept delivery from Seller in each Delivery Month at the Delivery Point
determined pursuant to this Agreement, the Required Delivery Quantity of
Natural Gas required to be delivered under the Confirmation Letter in such
Delivery Month.

(b) Seller and Purchaser shall take such action as shall be
necessary to properly schedule the delivery and receipt of such Natural Gas at
the Delivery Point in each Delivery Month in compliance with all rules,
regulations and procedures applicable at the Delivery Point.

(c) Each Delivery Month, Seller shall arrange for delivery, and
Purchaser shall arrange for receipt, of Natural Gas to begin at the Delivery
Point no later than the first day of the Delivery Month and to be completed no
later than the last calendar day of the Delivery Month. All deliveries and
receipts shall be at hourly and daily rates that are as uniform as possible
over the course of the Delivery Month in accordance with generally accepted
pipeline scheduling practices.

Section 2.04 Payment of Fees. Seller shall obtain and pay all costs in
connection with transportation of the Natural Gas to the Delivery Point and
Purchaser shall obtain and pay all costs in connection with transportation of
the Natural Gas from the Delivery Point. Seller shall be responsible for the
payment of all hub fees (whether charged to Seller or Purchaser) payable in
connection with delivery of Natural Gas hereunder at the Delivery Point.
Seller shall not be responsible for any insurance, storage, transportation or
other costs in respect of the period after title to any Natural Gas delivered
hereunder has passed to Purchaser in accordance with Section 2.08 of this
Agreement. Purchaser shall not be responsible for any insurance, storage,
transportation or other costs in respect of the period prior to the time title
to any Natural Gas delivered hereunder has passed to Purchaser in accordance
with Section 2.08 of this Agreement.

Section 2.05 Delivery Points upon Force Majeure; Alternate Delivery Points.

(a) Seller is obligated to deliver to Purchaser and Purchaser is
obligated to receive from Seller, at the Delivery Point, the Required Delivery
Quantity of Natural Gas in accordance with the terms and conditions of this
Agreement. If as the result of a Force Majeure, either (i) Seller is unable,
after using all reasonable business efforts, to deliver the Required Delivery
Quantity of Natural Gas to Purchaser at the Delivery Point in the proportions
agreed upon pursuant to this Agreement or (ii) Purchaser is unable, after using
all reasonable business efforts, to receive the Required Delivery Quantity of
Natural Gas from Seller at the Delivery Point in the proportions agreed upon
pursuant to this Agreement, then Seller shall be obligated to deliver and
Purchaser shall be obligated to receive, the relevant Required Delivery
Quantity of Natural Gas at a mutually acceptable comparable delivery point or
points with mutually acceptable adjustments for quality and location.

(b) Seller may elect to deliver Natural Gas at an alternate
delivery point other than the Texas Eastern Pipeline, East Texas - Pool which
alternate delivery point may be any of the following locations: (i) Tennessee
Gas Transmission, Zone 1, (ii) Transco Pipeline (Upstream of Station 65) Zone 4
or (iii) Henry Hub; provided that Seller has given Purchaser written notice of
its election no later than five (5) Business Days before the end the calendar
month preceding the Delivery Month in which it proposes to make delivery at
such alternate delivery point. If there is transportation cost differential
associated with delivery of such Natural Gas at such alternate delivery point
(as measured against delivery at the Texas Eastern Pipeline, East Texas -
Pool), Purchaser shall prepare and deliver to Seller, within five (5) Business
Days after the end of the applicable Delivery Month a certificate setting out
the calculation of

5
<PAGE> 7

the transportation cost differential accompanied by reasonably available
back-up documentation therefor. Any such certificate shall, absent manifest
error, be conclusive evidence of the amount of such transportation cost
differential. If Seller owes Purchaser compensation pursuant to this Section
2.05(b), Seller shall pay Purchaser such amount within five (5) Business Days
following its receipt of Purchaser's certificate. If Purchaser owes Seller
compensation pursuant to this Section 2.05(b), Purchaser shall pay Seller
amount on the next succeeding Payment Date.

(c) During any Delivery Month, Seller may elect to deliver Natural
Gas in excess of the Required Delivery Quantity for such Delivery Month by
giving Purchaser not less than two (2) Business Day's prior written notice;
provided that Purchaser may decline to accept such excess volumes if it
determines, in its sole discretion, that no readily available market exists for
such excess volumes, that such volumes are too small to be readily marketed or
that it is uneconomical for it to accept such excess volumes. If Purchaser
wishes to decline Seller's election, it shall give Seller written notice within
one (1) Business Day of its receipt of Seller's notice. If Purchaser accepts
Seller's election, the excess volume so delivered shall be allocated on a pro
rata basis to reduce the Required Delivery Quantity for each of the remaining
Delivery Months, commencing on the next succeeding Delivery Month. Purchaser
shall promptly furnish to Seller an amendment to the Confirmation Letter
evidencing such new Required Delivery Quantities.

Section 2.06 Failure of Delivery or Receipt; Transportation and Balancing.

(a) (i) Without prejudice to Articles V and VI, if as a result of
an event of Force Majeure, Seller is unable to meet its delivery obligation in
respect of a Delivery Month at the Delivery Point or at a mutually satisfactory
comparable delivery point or points (in which case Seller shall be deemed the
"Responsible Party"), then Seller shall pay to Purchaser, as liquidated
damages, the Replacement Value of the Deficiency Quantity of Natural Gas in
respect of that Delivery Month. The Replacement Value shall be paid to
Purchaser no later than the Payment Date next following such Delivery Month,
and Purchaser will accept such payment in lieu of Natural Gas not delivered in
such Delivery Month. Where Seller is unable to meet its acceptance obligation
as aforesaid, Purchaser shall use all reasonable efforts to minimize the
Replacement Value of any Deficiency Quantity. If the Replacement Value is
based on the price Purchaser pays to replace the Deficiency Quantity, Purchaser
shall prepare and deliver to Seller, within 5 Business Days after the end of
the applicable Delivery Month, a certificate setting out the calculation of the
Replacement Value accompanied by reasonably available back-up documentation
therefor. Any such certificate shall, absent manifest error, be conclusive
evidence of the amount due in respect of the Replacement Value. Purchaser
shall notify Seller as soon as possible of any anticipated inability to perform
all or any portion of its obligations hereunder.

(ii) Without prejudice to Article VI, if as a result of an
event of Force Majeure, Purchaser is unable to meet its obligation to accept
delivery in respect of a Delivery Month at the Delivery Point or at a mutually
satisfactory comparable delivery point or points (in which case Purchaser shall
be deemed the "Responsible Party"), then Seller shall pay to Purchaser, in lieu
of delivery of the Required Delivery Quantity, the Replacement Value of the
Deficiency Quantity of Natural Gas in respect of that Delivery Month. The
Replacement Value shall be paid to Purchaser no later than the Payment Date
next following such Delivery Month, and Purchaser will be required to accept
such payment in lieu of Natural Gas not delivered in such Delivery Month.
Where Purchaser is unable to meet its acceptance obligation as aforesaid,
Seller shall use all reasonable efforts to maximize the Replacement Value of
any Deficiency Quantity. If the Replacement Value is based on the price Seller
receives for the Deficiency Quantity, Seller shall prepare and deliver to
Purchaser, within 5 Business Days after the end of the applicable Delivery
Month, a certificate setting out the calculation of the Replacement Value
accompanied by reasonably available back-up documentation therefor. Any such
certificate shall, absent

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<PAGE> 8

manifest error, be conclusive evidence of the amount due in respect of the
Replacement Value. Purchaser shall notify Seller as soon as possible of any
anticipated inability to perform all or any portion of its obligations
hereunder.

(b) In the event that (i) Seller or Seller's transporter
inadvertently delivers more or less than the Required Delivery Quantity for any
Delivery Month, or (ii) Purchaser or Purchaser's transporter inadvertently
receives more or less than the Required Delivery Quantity for any Delivery
Month, such overages or underages shall be corrected or adjusted in cash or
Natural Gas as the parties may agree or in accordance with applicable tariff
provisions; and the Responsible Party will be liable to the other party for any
associated pipeline penalties or cashouts. Each party shall notify the other
as promptly as possible of any changes in its rate of delivery or receipt of
Natural Gas at the Delivery Point and take all reasonable actions necessary to
avoid the incurrence of pipeline penalties and imbalances.

(c) Should either party receive an operational flow order ("OFO")
or other order or notice from a transporter requiring action to be taken in
connection with this Agreement or Natural Gas flowing under this Agreement,
such party shall immediately notify the other party of the OFO and promptly
provide the other party a copy of same by facsimile. The parties shall take
all actions required by the OFO within the time prescribed therein. Each party
shall indemnify, defend and hold harmless the other party from any damages or
liability, including, without limitation, all non-compliance penalties and
attorneys' fees, associated with an OFO (i) of which the indemnifying party
failed to give the indemnified party the notice required hereunder or (ii)
under which the indemnifying party failed to take the action required by the
OFO within the time prescribed therein.

(d) If a party is unable to perform any of its obligations to
deliver or receive gas hereunder as a result of an event of Force Majeure, such
party shall give notice and full particulars of such event of Force Majeure to
the other party as soon as reasonably possible and shall take all reasonable
actions necessary to remedy the event of Force Majeure.

Section 2.07 Exclusive Remedy. It is expressly agreed, except as provided
in Sections 5.02, 5.03, 6.02 and 6.03, that payments made in accordance with
Section 2.06 hereof shall constitute the exclusive remedies available to Seller
and Purchaser for nondelivery, nonacceptance, over-delivery or over-acceptance
of Natural Gas. To the fullest extent permitted by applicable law, neither
party shall be liable for any punitive, exemplary, incidental, consequential,
indirect or direct (other than as set forth in Section 2.06) or other damages,
in tort, contract or otherwise in respect thereof.

Section 2.08 Possession, Title and Risk. Possession of and title to
Natural Gas delivered pursuant hereto shall pass from Seller to Purchaser at
the Delivery Points when the Natural Gas is accepted by the pipeline for
transport for Purchaser's account and is recorded by the proper metering
device. Until such time, Seller shall be deemed to be in control and possession
of, have title to and be responsible for such Natural Gas and, after such time,
Purchaser shall be deemed to be in control and possession of, have title to and
be responsible for such Natural Gas.

Section 2.09 Royalties. Seller shall at all times have the obligation to
make settlements for all royalties and payments to mineral and royalty owners
and all other Persons having an ownership interest in the Natural Gas delivered
by Seller to Purchaser hereunder. Seller hereby agrees to indemnify Purchaser
and save it harmless from all suits, actions, debts, accounts, damages, costs,
losses and expenses arising from or out of adverse claims of any and all
Persons in respect of royalties, taxes, license fees or charges thereon which
are applicable before the title passes to Purchaser or which may be levied and
assessed upon Seller in respect of a sale of the Natural Gas to Purchaser.

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<PAGE> 9

Section 2.10 Taxes. Seller is liable for and shall pay, cause to be paid
or reimburse Purchaser if Purchaser shall have paid, all Taxes applicable to
the Natural Gas sold hereunder prior to the time title to the Natural Gas has
passed to Purchaser, unless allocated to Purchaser as hereinafter provided.
Purchaser is liable for and shall pay, cause to be paid or reimburse Seller if
Seller shall have paid, all Taxes applicable to the Natural Gas sold hereunder
at or after the time title to the Natural Gas has passed to Purchaser,
applicable to the sale hereunder as a result of any subsequent sale or use of
the Natural Gas by Purchaser, or imposed on or collected from Purchaser by law.
Both parties shall use reasonable efforts to administer this Agreement and
implement the provisions in accordance with their intent to minimize Taxes.
Purchaser represents that it is engaged in the business of reselling the
Natural Gas delivered under this Agreement and Purchaser is purchasing the
Natural Gas for resale to third parties, and accordingly Purchaser is entitled
to purchase the Natural Gas hereunder free of any Taxes. Purchaser shall
provide Seller with a certificate of exemption or other reasonably satisfactory
evidence of exemption promptly after execution of this Agreement. For each
Delivery Month during the term of this Agreement, Purchaser shall provide
Seller appropriate evidence that the Required Delivery Quantity of Natural Gas
was resold to a third party in accordance with the sale for resale exemption
under applicable state law. Each party agrees to cooperate with obtaining any
exemption from or reduction of Tax upon request by the other party.

Section 2.11 No Warranty. PURCHASER ACKNOWLEDGES THAT IT HAS ENTERED INTO
THIS AGREEMENT AND IS CONTRACTING FOR THE NATURAL GAS TO BE SUPPLIED BY SELLER
BASED SOLELY UPON THE EXPRESS COVENANTS, REPRESENTATIONS AND WARRANTIES HEREIN
SET FORTH (including Section 2.02) AND, SUBJECT TO SUCH COVENANTS,
REPRESENTATIONS AND WARRANTIES (including Section 2.02), ACCEPTS SUCH NATURAL
GAS "AS IS, WHERE IS" AND "WITH ALL FAULTS."

ARTICLE III - REPRESENTATIONS AND WARRANTIES

Section 3.01 Representations and Warranties of Seller. Seller represents
and warrants to Purchaser as follows:

(a) Status and Authority. Seller is a limited liability company
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its formation and has all requisite power and authority to own
its properties, to conduct its business as conducted at present and to execute,
deliver and perform this Agreement.

(b) Power and Authority. The execution, delivery and performance
by Seller of this Agreement and the consummation of the transactions
contemplated by this Agreement are within Seller's power and authority and have
been duly authorized by all necessary action.

(c) Consents, Approvals, Etc.. No authorization, consent or
approval of, or other action by, or notice to or filing with, any governmental
authority, regulatory body or any other Person is required for the due
authorization, execution, delivery or performance by Seller of this Agreement,
or the consummation of the transactions contemplated by this Agreement, except
those approvals which have been obtained, and those notices and filings which
have been made, copies of all of which have been delivered to Purchaser.

(d) Execution and Delivery. This Agreement has been duly executed
and delivered to Purchaser by Seller and is the legal, valid and binding
obligation of Seller enforceable against Seller in accordance with its terms
except as the enforceability thereof may be limited by the effect of any

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<PAGE> 10

applicable bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights generally and by general principles of equity.

(e) Compliance with Laws. Neither the execution, delivery and
performance by Seller of this Agreement nor the consummation of the
transactions contemplated by this Agreement (1) does or will violate any
provision of any Applicable Instrument of Seller or any Governmental
Requirement or (2) does or will result in or require the creation or imposition
of any lien on any properties, assets or revenues of Seller. Seller is in
compliance in all material respects with the Applicable Instruments of Seller
and all Governmental Requirements applicable to Seller.

(f) Investment Company. Seller is not an "investment company"
subject to regulation under the Investment Company Act of 1940, as amended.

(g) Public Utility Holding Company. Seller is not, or is not
subject to regulation as, a "holding company," a "subsidiary company" of a
"holding company," an "affiliate" of a "holding company," or an affiliate" of a
"subsidiary company" of a "holding company," in each case as such term is
defined in the Public Utility Holding Company Act of 1935, as amended.

(h) Ownership of Natural Gas. The Natural Gas to be delivered by
Seller to Purchaser hereunder shall be delivered to Purchaser with good and
marketable title thereto, free and clear of all liens, encumbrances or any
other adverse claims whatsoever, including royalties and Taxes for which Seller
is responsible under Sections 2.09 and 2.10.

(i) Commercial Purpose. Seller has entered into this transaction
for commercial purposes related to its business as a producer, processor, or
merchandiser of Natural Gas or natural gas liquids. Seller has the capability,
and intends, to make delivery of the Natural Gas to be delivered hereunder.
Seller is selling the Natural Gas in the ordinary course of business. Seller
is also acting as a principal and not as an agent, understands and acknowledges
that the Purchaser has been and will be acting only on an arm's length basis
and not as its agent, broker, advisor or fiduciary in any respect, is relying
solely upon its own evaluation of this Agreement and the transactions
contemplated hereby (including the present and future results, consequences,
risks and benefits thereof, whether financial, accounting, tax, legal or
otherwise) and upon advice from its own professional advisors, understands this
Agreement and the transactions contemplated hereby and the risks associated
therewith, has determined that those risks are appropriate for it, and is
willing to assume those risks, and has not relied and will not be relying upon
any evaluation or advice (including any recommendation, opinion or
representation) from Purchaser or its affiliates or the representatives or
advisors of Purchaser or its affiliates.

Section 3.02 Representations and Warranties of Purchaser. Purchaser
represents and warrants to Seller as follows:

(a) Corporate Status and Authority. Purchaser is a company
incorporated under the laws of the State of New York and has all necessary
corporate power and authority to carry on its business as now being conducted
by it. Purchaser has full power and authority to enter into this Agreement and
to do all acts and things and execute and deliver all other documents as are
required hereunder to be done, observed or performed by it in accordance with
the terms hereof.

(b) Valid Authority. Purchaser has taken all necessary corporate
action to authorize the creation, execution, delivery and performance by it of
this Agreement and for it to observe and perform the provisions of this
Agreement in accordance with its terms.

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<PAGE> 11

(c) Validity of Documents and Enforceability. This Agreement
constitutes a valid and legally binding obligation of Purchaser enforceable
against it in accordance with its terms, except as the enforceability thereof
may be limited by the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and by general principles of equity. Neither the execution and
delivery of this Agreement nor compliance with the terms and conditions hereof
by Purchaser (i) will result in a violation of the terms of any Applicable
Instrument of Purchaser or (ii) requires any approval or consent of any
governmental authority or agency having jurisdiction except such as has already
been obtained.

(d) Commercial Purpose. Purchaser has entered into this
transaction for commercial purposes related to its business as conjunction with
its line of business and not for speculative purposes. Purchaser has the
capacity, and intends, to take delivery of the Natural Gas to be delivered
hereunder. Purchaser is acquiring the Natural Gas in the ordinary course of
business.

ARTICLE IV - COVENANTS

Section 4.01 Affirmative Covenants of Seller. Seller covenants and agrees
with Purchaser that so long as any obligation of Seller to deliver Natural Gas
or to make any payment is outstanding hereunder:

(a) Compliance with Laws, etc.. Seller will comply with all
Governmental Requirements applicable to the performance of Seller's obligations
hereunder, except where noncompliance therewith would not have a material
adverse effect on Seller. Seller will comply in all material respects with the
Applicable Instruments of Seller.

(b) Notice of Event of Default. Seller shall notify Purchaser of
the occurrence of any event which with the passage of time or the giving of
notice, or both, would be an Event of Default or an Event of Change promptly
after becoming aware of the same.

(c) Qualification. Seller will be duly qualified to do business
as a foreign corporation and will be in good standing under the laws of all
jurisdictions in which the failure to be so qualified could have a material
adverse effect on Seller by or before the first Delivery Month.

ARTICLE V - EVENTS OF DEFAULT AND EARLY TERMINATION

Section 5.01 Events of Default. Each of the following events shall
constitute an "Event of Default" by Seller under this Agreement:

(a) Seller shall (i) fail to deliver the Required Delivery
Quantity of Natural Gas to the Delivery Point in accordance with the terms of
this Agreement, and (ii) if such failure is the result of an event of Force
Majeure, fail to make a payment of the Replacement Value in respect thereof in
accordance with the provisions of Section 2.06(a) and such failure is not
remedied within one (1) Business Day; or

(b) Seller shall fail to pay any amounts due to Purchaser in
accordance with the terms of Section 2.05(b) of this Agreement and such failure
is not remedied within one (1) Business Day after the Business Day on which
such payment is due; or

(c) Seller shall fail to perform or observe any material term,
covenant or agreement herein contained on its part to be performed or observed
(other than any term, covenant or agreement whose

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<PAGE> 12

breach or default in performance is specifically dealt with elsewhere in this
Section 5.01) and such failure shall remain unremedied for thirty (30) days
after notice thereof to Seller by Purchaser; or

(d) Seller shall generally not pay its debts as such debts become
due, or shall admit in writing its inability to pay its debts generally, or
shall make a general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against Seller seeking to adjudicate it as bankrupt
or insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee, or other similar official for it or for any substantial part of its
property, and in the case of any such proceeding instituted against it (but not
yet instituted by it), shall remain undismissed or unstayed for a period of
sixty (60) days or Seller shall take any corporate action to authorize any of
the actions set forth above in this Section 5.01(d); or

(e) any representation or warranty made by Seller in this
Agreement shall prove to have been incorrect in any material respect when made
or when deemed made; or

(f) Seller shall fail to deliver Margin (as defined in the Margin
Agreement) in accordance with its obligations under the second sentence of
Section 2 of the Margin Agreement and such failure is not remedied within one
(1) Business Day after notice of such failure is given to Seller by Purchaser;
or

(g) Seller shall fail to perform or observe any term, covenant or
agreement (other than with respect to its obligations under the second sentence
of Section 2 thereof) contained in the Margin Agreement on its part to be
performed or observed and such failure is not remedied within thirty (30) days
notice thereof to Seller by Purchaser; or

(h) an Event of Default under the Guaranty Agreement shall occur
and be continuing.

Section 5.02 Early Termination by Purchaser. If at any time an Event of
Default has occurred and is continuing, Purchaser may, by not more than five
(5) Business Days notice to Seller specifying the relevant Event of Default,
designate a Business Day not earlier than the Business Day such notice is
effective as an early termination date ("Early Termination Date"); provided,
however, that if an Event of Default pursuant to Section 5.01(d) shall have
occurred, the Early Termination Date shall occur immediately on the occurrence
of such Event of Default without the need for Purchaser to give any prior
notice. Upon the designation or occurrence of an Early Termination Date, the
obligation of Seller to make any further deliveries of Natural Gas to Purchaser
under this Agreement shall terminate and Seller shall pay to Purchaser the
Termination Payment together with any Unpaid Amounts. All amounts payable
under this Section 5.02 shall become due on the Early Termination Date and
shall be payable on the Business Day immediately following delivery by
Purchaser of the statement required pursuant to Section 5.03(c). Such amount
will be paid, together with (to the extent permitted by applicable law)
interest thereon (before as well as after judgment) from (and including) the
Early Termination Date to (but excluding) the date such amount is paid, at the
rate specified in Section 7.02. The parties agree that the Termination Payment
is a reasonable pre-estimate of the damages which would be incurred by
Purchaser as a result of an Event of Default and not a penalty.

Section 5.03 Calculation of Termination Payment.

(a) "Termination Payment" shall be the lowest amount determined on
the basis of quotations from at least four Reference Dealers as the amount that
would have been payable on the Termination Date by Purchaser in consideration
of an agreement between Purchaser and the quoting Reference

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<PAGE> 13

Dealer, and subject to such documentation evidencing agreement on price as they
may in good faith agree, with the relevant Termination Date as the date of
commencement of such agreement that would have the effect of preserving for
Purchaser the equivalent of the delivery obligations that, but for the
occurrence of the relevant Termination Date, Seller would have been obligated
to perform hereunder after such Termination Date. Purchaser will request each
Reference Dealer to provide its quotation to the extent practicable as of the
same time (without regard to different time zones) on the relevant Termination
Date (or, if a Termination Date is deemed to occur, as of a time as soon
thereafter as practicable). The time as of which such quotations are to be
provided will be selected in good faith by Purchaser.

(b) If the Termination Payment cannot be determined in accordance
with Section 5.03(a), "Termination Payment" shall be an amount equal to the
total amount required, as determined as of the relevant Early Termination Date
by Purchaser in good faith, to compensate it for its direct actual losses and
costs (including loss of bargain and reasonable legal fees and other
out-of-pocket expenses) that it may incur as a result of the early termination
of Seller's delivery obligations hereunder, including, without limitation, any
damages, losses, or expenses incurred in obtaining, terminating, liquidating,
reestablishing or employing hedges or related trading positions against
Purchaser's position hereunder.

(c) On or as soon as reasonably practicable following the
occurrence of a Termination Date, Purchaser will calculate the Termination
Payment and will provide Seller with a statement (1) showing, in reasonable
detail, such calculations (including all relevant quotations) and (2) giving
details of the relevant account to which the Termination Payment is payable.
Any such statement shall, absent manifest error, be conclusive evidence of the
amount due in respect of the Termination Payment.

ARTICLE VI - EVENTS OF CHANGE AND ACCELERATED TERMINATION

Section 6.01 Events of Change. Each of the following events shall
constitute an "Event of Change" for the purposes of this Agreement:

(a) the enactment, promulgation, execution or ratification of, or
any change in or amendment to, any regulation or law (or the application or
interpretation of any regulation or law, as determined by a court or regulatory
authority of competent jurisdiction or as determined by the opinion of
independent counsel mutually acceptable to Seller and Purchaser) that occurs
after the date hereof which would result in the imposition of a Tax (other than
an increase in the rate of a general tax on overall income) or of state or
federal government royalties (in excess of those royalties currently in effect)
or of price controls in a material amount by any government or taxing authority
upon a party hereto with respect to delivery of, or acceptance of delivery of,
Natural Gas under this Agreement or with respect to any cash payment made
pursuant to Section 2.06 which in any case would materially and adversely
affect the net cost to Seller or Purchaser of performing its obligations
hereunder; or

(b) the enactment, promulgation, execution or ratification of, or
any change in or amendment to, any regulation or law (or the application or
interpretation of any regulation or law, as determined by a court or regulatory
authority of competent jurisdiction or as determined by the opinion of
independent counsel mutually acceptable to Seller and Purchaser) that occurs
after the date hereof which would result in the performance of any obligation
of Seller to deliver Natural Gas or Purchaser to accept delivery of Natural Gas
under this Agreement being unlawful; or

(c) any one or more events of Force Majeure that occur and
continue for a consecutive period of longer than ninety (90) days.

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<PAGE> 14

Section 6.02 Accelerated Termination.

(a) During the continuation of an Event of Change contemplated by
Section 6.01(a), both parties shall make reasonable efforts to make
arrangements to avoid the imposition of any Tax contemplated by Section
6.01(a); provided that this Section 6.02 shall not impose on either party any
obligation other than to negotiate in good faith to make such arrangements as
will not adversely affect the parties.

(b) During the continuation of any Event of Change, and if any
arrangement is not, or is not capable of being, made pursuant to Section
6.02(a), then either party may designate an accelerated termination date
("Accelerated Termination Date") upon not less than two (2) and not more than
ten (10) Business Days' notice to the other party. Upon the Accelerated
Termination Date, the parties' obligations hereunder shall terminate, except
for the obligations contained in Section 6.03 and Section 7.02.

Section 6.03 Payments on Accelerated Termination. Upon the designation of
an Accelerated Termination Date, Seller, at the option of Purchaser, shall
either (i) deliver any Natural Gas otherwise deliverable hereunder to
Purchaser, provided that such delivery of Natural Gas by Seller would not then
be unlawful and Seller has the ability to make such delivery or (ii) Seller
shall pay to Purchaser an amount equal to the Termination Payment plus any
Unpaid Amounts. All amounts payable under this Section 6.03 shall become due
on the Accelerated Termination Date and shall be payable on the fifth (5th)
Business Day following delivery by Purchaser of the certificate of calculation
of the Termination Payment contemplated by Section 5.03. Upon the occurrence
of an Accelerated Termination Date, Purchaser may, in its sole discretion,
elect either remedy set forth in this Section 6.03. Such remedies shall be
Purchaser's sole remedy; provided that nothing herein shall affect a party's
obligation to make payments of amounts which were due and owing (whether or not
payable) on or prior to the occurrence of such Accelerated Termination Date.

ARTICLE VII - MISCELLANEOUS

Section 7.01 Notice. Any demand, notice or communication to be made or
given hereunder shall be in writing and may be made or given by personal
delivery or by transmittal by telecopy, rapifax or other electronic means of
communication addressed to the respective party as follows:

To Seller:

Crystal Gas L.L.C.
c/o Crystal Oil Company
229 Milam
Shreveport, Louisiana 71101
Attention: Chief Financial Officer
Telecopier No.: (318) 677-5515
Telephone No.: (318) 677-5512

with copy to:

Fulbright & Jaworski, L.L.P.
1301 McKinney Street
Suite 5100
Houston, Texas 77002

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<PAGE> 15

Attention: Curtis W. Huff
Telcopier No.: (713) 651-5246
Telephone No.: (713) 651-5657

To Purchaser:

The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, New York 10081
Attention: Alex Mintcheff
Telecopier No.: (212) 552-2259
Telephone No.: (212) 552-1255

with copy to:

Chase Securities Inc.
700 Travis -5 TCBN
Houston, Texas 77002
Telecopier No.: (713) 216-4117
Telephone No.: (713) 216-4110
Attention: Paul Nidoh

or to such other address or telecopy number or rapifax number as any party may
from time to time notify the others in accordance with this Section 7.01. Any
demand, notice or certification made or given by personal delivery shall be
conclusively deemed to have been given on the day of actual delivery thereof,
or, if made or given by electronic means of communication, on the date of such
transmittal or if such date is not a Business Day, on the first Business Day
following the transmittal thereof.

Section 7.02 Interest on Overdue Amounts. If any monetary amounts payable
under this Agreement are not paid when due, then such overdue amount shall bear
interest for each day until paid in full, payable on demand, both before and
after default, judgment, the Early Termination Date and the Accelerated
Termination Date, at the U.S. Base Rate plus one and one-half percent per annum
on the basis of the actual number of days elapsed and on the basis of a year of
360 days, as the case may be. Such interest shall be determined daily and
compounded monthly in arrears on the last day of each calendar month.

Section 7.03 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the principles of conflicts of laws that would result in the
application of the laws of a another jurisdiction.

Section 7.04 Severability. In the event that one or more of the provisions
contained in this Agreement shall be invalid, illegal or unenforceable in any
respect under any applicable law the validity, legality or enforceability of
the remaining provisions hereof shall not be affected or impaired thereby.
Each of the Sections of this Agreement is hereby declared to be separate and
distinct.

Section 7.05 Currency. All amounts expressed herein or therein in terms of
money refer to the United States Dollar and all payments to be made hereunder
shall be made in such currency.

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Section 7.06 Purchaser Not an Agent. Purchaser acknowledges and confirms
that all purchases of Natural Gas hereunder are being made by it as a principal
and that it is not acting as agent for any other Person in connection with
purchases of Natural Gas hereunder.

Section 7.07 Benefit of the Agreement. This Agreement shall inure to the
benefit of and be binding upon Seller, Purchaser and their respective
successors and assigns.

Section 7.08 Assignment and Transfer. Except as expressly provided in this
Section 7.08, neither party may assign any rights or delegate any obligations
hereunder without the prior written consent of the other party. Without the
consent of Seller, Purchaser may assign this Agreement to any of its direct or
indirect wholly owned subsidiaries, whether now existing or hereafter created.
Upon notice to Seller of any such assignment, Seller agrees to substitute such
assignee or successor corporation for Purchaser hereunder. Without the consent
of Purchaser, Seller may (i) assign this Agreement to any direct or indirect
wholly owned subsidiary of Guarantor or (ii) merge with any direct or indirect
wholly owned subsidiary of Guarantor; provided, however, that (A) such
subsidiary agrees to assume all obligations under this Agreement and the Margin
Agreement, (B) such subsidiary is a corporation, limited liability company or
limited partnership incorporated under the laws of a state in the United
States, (C) no Event of Default would occur as the result thereof, and (D) the
Guaranty Agreement remains in effect. Upon notice to Purchaser of any such
assignment or merger, Purchaser agrees to substitute such assignee or successor
for Seller hereunder.

Section 7.09 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto and supersedes any prior agreement,
undertaking, declarations, commitments or representations, written or oral, in
respect thereof. There are no unwritten oral agreements among the parties.

Section 7.10 Amendments. This Agreement may not be modified or amended
except by an instrument in writing signed by Purchaser and Seller or by their
respective successors or permitted assigns.

Section 7.11 No Waivers, Remedies. No failure to exercise and no delay in
exercising any right hereunder shall operate as a waiver thereof nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law
except as otherwise expressly provided herein.

Section 7.12 Time of the Essence. Time shall be of the essence of this
Agreement.

Section 7.13 Counterparts. This Agreement may be executed in counterparts,
each of which so executed shall be deemed to be an original and such
counterparts together shall constitute one and the same instrument.

Section 7.14 Margin Agreement. Seller's payment obligations under this
Agreement are secured by the Margin Agreement, which Margin Agreement is hereby
incorporated herein for all purposes.

Section 7.15 Intent. The parties intend that this Agreement shall
constitute a purchase and sale of inventoriable goods and a forward contract
within the meaning of Section 556 of the United States Bankruptcy Code of 1978,
as amended from time to time.

Section 7.16 Disclosure of Information. In the event that Seller provides
to Purchaser written confidential information belonging to Seller or its
affiliates which has been denominated in writing as "confidential", Purchaser
agrees to thereafter maintain such information in confidence in accordance with

15
<PAGE> 17

the standards of care and diligence that each utilizes in maintaining its own
confidential information. This obligation of confidence shall not apply to
such portions of the information which (i) are in the public domain, (ii)
hereafter become part of the public domain without Purchaser breaching its
obligation of confidence to Seller, (iii) are previously known by Purchaser
from some source other than Seller, (iv) are hereafter developed by Purchaser
without using Seller's information, (v) are hereafter obtained by or available
to Purchaser from a third party who owes no obligation of confidence to Seller
with respect to such information or through any other means other than through
disclosure by Seller, (vi) are disclosed with Seller's consent, (vii) must be
disclosed either pursuant to any Governmental Requirement or to Persons
regulating the activities of Purchaser, or (viii) as may be required by law or
regulation or order of any governmental authority in any judicial, arbitration
or governmental proceeding. Further, Purchaser may disclose any such
information to any independent petroleum engineers or consultants, any
independent certified public accountants, any legal counsel employed by it in
connection with this Agreement, including without limitation, the enforcement
or exercise of all rights and remedies thereunder; provided, however, that it
imposes on such Person to whom such information is disclosed the same
obligation to maintain the confidentiality of such information as is imposed
upon it hereunder. Notwithstanding anything to the contrary provided herein,
this obligation of confidence shall cease three (3) years from the date the
information was furnished, unless Seller requests in writing at least 30 days
prior to the expiration of such three year period, that Purchaser maintain the
confidentiality of such information for an additional three year period.
Seller waives any and all other rights it may have to confidentiality as
against Purchaser arising by contract, agreement, statute or law except as
expressly stated in this Section.

16
<PAGE> 18

IN WITNESS WHEREOF the Parties hereto have executed this Agreement as
of the date first written above.

CRYSTAL GAS L.L.C.

By: CRYSTAL OIL COMPANY, member

By:______________________________
J.A. Ballew
Senior Vice President

By: CRYSTAL PROGRAM LIMITED, INC.,
member

By:______________________________
J.A. Ballew
Vice President

THE CHASE MANHATTAN BANK

By:____________________________________
Name:
Title:

17
<PAGE> 19

TABLE OF CONTENTS

<TABLE>
<S> <C>
ARTICLE I - INTERPRETATION
Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.03 Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.04 Non-Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ARTICLE II - SALE AND PURCHASE OF NATURAL GAS
Section 2.01 Sale and Purchase of Natural Gas . . . . . . . . . . . . . . . . . . . 4
Section 2.02 Measurement and Quality . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.03 Delivery and Receipt of Natural Gas. . . . . . . . . . . . . . . . . 5
Section 2.04 Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.05 Delivery Points upon Force Majeure; Alternate Delivery Points . . . . . 5
Section 2.06 Failure of Delivery or Receipt; Transportation and Balancing . . . . . 6
Section 2.07 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.08 Possession, Title and Risk . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.09 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.11 No Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE III - REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations and Warranties of Seller . . . . . . . . . . . . . . . 8
Section 3.02 Representations and Warranties of Purchaser . . . . . . . . . . . . . . 10

ARTICLE IV - COVENANTS
Section 4.01 Affirmative Covenants of Seller . . . . . . . . . . . . . . . . . . . . 10

ARTICLE V - EVENTS OF DEFAULT AND EARLY TERMINATION
Section 5.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.02 Early Termination by Purchaser . . . . . . . . . . . . . . . . . . . . 11
Section 5.03 Calculation of Termination Payment . . . . . . . . . . . . . . . . . . 12

ARTICLE VI - EVENTS OF CHANGE AND ACCELERATED TERMINATION
Section 6.01 Events of Change . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.02 Accelerated Termination . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.03 Payments on Accelerated Termination . . . . . . . . . . . . . . . . . . 13

ARTICLE VII - MISCELLANEOUS
Section 7.01 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.02 Interest on Overdue Amounts . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.03 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>

i
<PAGE> 20

<TABLE>
<S> <C> <C>
Section 7.04 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.05 Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.06 Purchaser Not an Agent . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.07 Benefit of the Agreement . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.08 Assignment and Transfer . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.09 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.10 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.11 No Waivers, Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.12 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.13 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.14 Margin Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.15 Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.16 Disclosure of Information . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>

Annex 1 Seller's Conditions Precedent

Exhibit A - Form of Opinion of Counsel of Guarantor

ii
<PAGE> 21

ANNEX 1

TO NATURAL GAS INVENTORY FORWARD SALE CONTRACT

CONDITIONS PRECEDENT

1. The executed Margin Agreement.

2. The executed Guaranty Agreement.

3. An opinion of Fulbright and Jaworski, L.L.P., special counsel to
Seller and Guarantor, in substantially the form set out in Exhibit A.

4. A certificate of the Secretary or an Assistant Secretary of Seller
setting forth (i) resolutions of its members with respect to the
authorization of Seller to execute and deliver the Agreement and the
Margin Agreement and to enter into the transactions contemplated in
those documents, (ii) the managing member or officers of such Person
(y) who are authorized to sign such agreements and (z) who will, until
replaced by another officer or officers duly authorized for that
purpose, act as its representative for the purposes of signing
documents and giving notices and other communications in connection
with such agreements and the transactions contemplated hereby, (iii)
specimen signatures of the authorized officers, and (iv) the
organization documents of Seller, certified as being true and
complete. Purchaser may conclusively rely on such certificate until
it receives notice in writing from Seller to the contrary.

5. A certificate of the Secretary or an Assistant Secretary of Guarantor
setting forth (i) resolutions of its board of directors with respect
to the authorization of Guarantor to execute and deliver the Guaranty
Agreement and to enter into the transactions contemplated in those
documents, (ii) the officers of the Guarantor (y) who are authorized
to sign such agreement and (z) who will, until replaced by another
officer or officers duly authorized for that purpose, act as its
representative for the purposes of signing documents and giving
notices and other communications in connection with such agreement and
the transactions contemplated hereby, (iii) specimen signatures of the
authorized officers, and (iv) the articles or certificate of
incorporation and bylaws of Guarantor, certified as being true and
complete. Purchaser may conclusively rely on such certificate until
it receives notice in writing from Seller to the contrary.

6. An executed security agreement and financing statement granting to the
Purchaser a lien on the agreements evidencing the Hedged Volumes (as
defined in the Margin Agreement).

7. Copy of the agreements evidencing the Hedged Volumes.

Annex 1-i

<PAGE> 1

EXHIBIT 11

CRYSTAL OIL COMPANY

COMPUTATION OF INCOME PER COMMON SHARE
(In Thousands Except Share and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- --------------------------
1997 1996 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Earnings per common share:
Income from operations $ 495 $ 539 $ 1,309 $ 1,282
=========== ============ =========== ===========
Weighted average of common
shares outstanding 2,665,622 2,662,082 2,665,622 2,658,229
=========== ============ =========== ===========

Earnings per common share $ .19 $ .20 $ .49 $ .48
=========== ============ =========== ===========

Primary: (Including dilutive
Common Stock
equivalents)
Income from operations $ 495 $ 539 $ 1,309 $ 1,282
Adjustments to income
(net of income tax): - - - -
----------- ------------ ----------- -----------
Adjusted net income $ 495 $ 539 $ 1,309 $ 1,282
=========== ============ =========== ===========

Weighted average of common
and common equivalent
shares:
Outstanding 2,665,622 2,662,082 2,665,622 2,658,229
Assuming conversion or
exercise of:
Stock options, net
of treasury shares 27,954 26,974 27,823 30,666
Remaining senior
preferred stock 33,274 33,274 33,274 33,274
----------- ------------ ----------- -----------
2,726,850 2,722,330 2,726,719 2,722,169
=========== ============ =========== ===========
Per share amount:
Net income $ .18 $ .20 $ .48 $ .47
=========== ============ =========== ===========
</TABLE>

<PAGE> 2

EXHIBIT 11
(continued)

CRYSTAL OIL COMPANY

COMPUTATION OF INCOME PER COMMON SHARE
(In Thousands Except Share and Per Share Amounts)
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ --------------------------
1997 1996 1997 1996
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fully-diluted:
Income from operations $ 495 $ 539 $ 1,309 $ 1,282
Adjustments to income
(net of income tax): - - - -
---------- ----------- ----------- ------------
Adjusted net income $ 495 $ 539 $ 1,309 $ 1,282
========== =========== =========== ============

Weighted average of
common shares:
Outstanding 2,665,622 2,662,082 2,665,622 2,658,229
Assuming conversion or
exercise of:
Stock options, net
of treasury shares 29,417 26,974 29,079 30,666
Remaining senior
preferred stock 33,274 33,274 33,274 33,274
---------- ----------- ----------- ------------
2,728,313 2,722,330 2,727,975 2,722,169
========== =========== =========== ============

Per share amount:
Net income $ .18 $ .20 $ .48 $ .47
========== =========== =========== ============
</TABLE>

NOTE: See Note 3 of Notes to Consolidated Condensed Financial Statements.

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at June 30, 1997 and the consolidated statement of
income for the six months ended June 30, 1997 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,302
<SECURITIES> 49,120
<RECEIVABLES> 13,969
<ALLOWANCES> 62
<INVENTORY> 0
<CURRENT-ASSETS> 70,637
<PP&E> 110,600
<DEPRECIATION> 7,315
<TOTAL-ASSETS> 202,229
<CURRENT-LIABILITIES> 1,799
<BONDS> 79,705
0
148
<COMMON> 27
<OTHER-SE> 120,550
<TOTAL-LIABILITY-AND-EQUITY> 202,229
<SALES> 6,854
<TOTAL-REVENUES> 3,657
<CGS> 0
<TOTAL-COSTS> 2,783
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18
<INTEREST-EXPENSE> 1,610
<INCOME-PRETAX> 2,150
<INCOME-TAX> 841
<INCOME-CONTINUING> 1,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,309
<EPS-PRIMARY> .49
<EPS-DILUTED> .49

</TABLE>