-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sjx98A9aNs3BxwIS14aPIw/Nftl/fhgFxzOjxuHvYMGIxfgnJz+rpwcvtCTUS5zp oF9PNveEF/Jp2+VhtEkVIw== 0000950116-97-000040.txt : 19970113 0000950116-97-000040.hdr.sgml : 19970113 ACCESSION NUMBER: 0000950116-97-000040 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970110 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASTLE ENERGY CORP CENTRAL INDEX KEY: 0000709355 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 760035225 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10990 FILM NUMBER: 97504138 BUSINESS ADDRESS: STREET 1: ONE RADNOR CORPORATE CTR STE 250 STREET 2: 100 MATSONFORD RD CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6109959400 MAIL ADDRESS: STREET 1: ONE RADNOR CORPORATE CENTER SUITE 250 STREET 2: 100 MATSONFORD CITY: RADNOR STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: MINDEN OIL & GAS INC/NEW DATE OF NAME CHANGE: 19861117 FORMER COMPANY: FORMER CONFORMED NAME: MINDEN HOLDING CO DATE OF NAME CHANGE: 19830310 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1996 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ - ------------------------------------------------------------------------------- Commission file number: 0-10990 CASTLE ENERGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 76-0035225 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Radnor Corporate Center Suite 250, 100 Matsonford Road Radnor, Pennsylvania 19087 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (610) 995-9400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock -- $.50 par value and related Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ]. As of November 30, 1996, there were 6,693,646 shares of the registrant's Common Stock ($.50 par value) outstanding. The aggregate market value of voting stock held by non-affiliates of the registrant as of such date was $58,491,360 (6,282,638 shares at $9.31 per share). DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12 and 13 CASTLE ENERGY CORPORATION 1996 FORM 10-K TABLE OF CONTENTS Item Page ---- PART I 1. and 2. Business and Properties.......................................... 1 3. Legal Proceedings................................................ 8 4. Submission of Matters to a Vote of Security Holders.............. 10 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters ........................................................ 11 6. Selected Financial Data ........................................ 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... 14 8. Financial Statements and Supplementary Data..................... 21 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................... 60 PART III 10. Directors and Executive Officers of the Registrant ............. 61 11. Executive Compensation ......................................... 61 12. Security Ownership of Certain Beneficial Owners and Management ................................................. 61 13. Certain Relationships and Related Transactions ................. 61 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................................................... 62 PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES INTRODUCTION Castle Energy Corporation (the "Company") is primarily engaged in natural gas marketing and transmission and oil and gas exploration and production in the United States. During the period from 1989 through September 30, 1995, the Company, through certain subsidiaries, was primarily engaged in petroleum refining. Indian Refining I Limited Partnership (formerly Indian Refining Limited Partnership) ("IRLP"), an indirect wholly-owned subsidiary of the Company, owned the Indian Refinery, an 86,000 barrel per day (B/D) refinery located in Lawrenceville, Illinois. Powerine Oil Company ("Powerine"), another indirect wholly-owned subsidiary of the Company, owned and operated a 49,500 B/D refinery located in Santa Fe Springs, California. By September 30, 1995, the Company had terminated and discontinued all of its refining operations. The Company engages in natural gas marketing operations which provide gas to Lone Star Gas Company, a division of ENSERCH Corporation ("Lone Star"), pursuant to a take-or-pay contract for natural gas through May 31, 1999 ("Lone Star Contract"). At September 30, 1996, approximately 44 billion cubic feet of natural gas remained to be sold to Lone Star. The Company has proved reserves and fixed price gas purchase contracts in place for the supply of all of the natural gas necessary to fulfill commitments under the Lone Star Contract and, accordingly, has fixed a substantial portion of its gross margin with respect to its gas marketing operations. The Company delivers natural gas to Lone Star through the Company's 77-mile intrastate pipeline located in Rusk County, Texas. At September 30, 1996, the Company's exploration and production operations had proved reserves of approximately 69.6 billion cubic feet of natural gas and 462,000 barrels of oil. During the period from September 1989 to October 14, 1994, a substantial portion of the Company's stock was owned by Metallgesellschaft Corp. ("MG"), a wholly-owned subsidiary of Metallgesellschaft A.G. ("MG AG"), a German conglomerate. During this period, MG provided financing and crude supplies to IRLP and Powerine and entered into processing and product offtake agreements with them. These and other transactions with MG and its affiliates are summarized in footnote 20 to the consolidated financial statements, which are included as Item 8 to this Form 10-K. In December 1993, it was reported that MG AG had incurred substantial losses as a result of hedging and other related activities. Thereafter, MG sought to terminate its on-going relationships with the Company. In October 1994, the Company and MG completed the restructuring of such relationships ("MG Settlement"). As a result, substantially all of the Company's contractual relationships with MG and its affiliates were amended or terminated. Subsequent to the MG Settlement, the Company sought to dispose of its two refineries and to expand its natural gas marketing and transmission and exploration and production businesses. Operations at the Powerine Refinery ceased in July 1995 and operations at the Indian Refinery ceased by September 30, 1995. On September 29, 1995, Powerine sold the Powerine Refinery to Kenyen Projects Limited ("Kenyen"). On January 16, 1996, Powerine merged into a subsidiary of Energy Merchant Corp. ("EMC"). On December 12, 1995, IRLP sold the Indian Refinery to American Western Refining L.P. ("American Western"), a subsidiary of Gadgil Western Corporation ("Gadgil"). For accounting purposes, refining operations were classified as discontinued operations in the Company's Consolidated Financial Statements as of September 30, 1995 and retroactively for the fiscal year ended September 30, 1994 (see Note 3 to the consolidated financial statements included in Item 8 to this Form 10-K). See Note 21 to the Company's Consolidated Financial Statements for information with respect to the Company's identifiable industry segments for the years ended September 30, 1996, 1995 and 1994. On March 5, 1996, the Company engaged an investment banking firm to explore strategic alternatives to enhance stockholder value and to act as the Company's exclusive advisor. In July 1996, an owner of oil and gas interests in wells operated by one of the Company's subsidiaries filed a suit against the Company and three of its subsidiaries. The plaintiff claims, among other things, that the subsidiaries have underpaid nonoperating owners with respect to gas production from oil and gas properties and attempts to bring a class action on behalf of all such owners based upon various legal theories. In October 1996, the Company announced that it would defer consideration of the sale of its assets and would continue to operate and manage its remaining natural gas marketing and transmission and exploration and production businesses. -1- The Company also announced in October 1996 a program to repurchase up to 1,000,000 of its shares through April of 1997 in the open market at stock prices beneficial to the Company. NATURAL GAS MARKETING AND TRANSMISSION General On December 3, 1992, the Company, through three wholly-owned subsidiary limited partnerships, CEC Gas Marketing Limited Partnership ("Marketing"), Castle Texas Pipeline Limited Partnership ("Pipeline") and Castle Texas Production Limited Partnership ("Production"), acquired from Atlantic Richfield Company ("ARCO"), a gas contract with Lone Star Gas Company, a 77-mile pipeline in Rusk County, Texas (the "Castle Pipeline"), majority working interests in approximately 100 producing oil and gas wells and several gas supply contracts for an aggregate purchase price of approximately $103.7 million, including cash, assumption of debt and certain transaction costs. Upon acquiring these assets, the Company entered a new segment of the oil and gas business, natural gas marketing and transmission. The Company, through Marketing, sells 75% of its natural gas production to Lone Star and the balance to a variety of customers pursuant to fixed price contracts and in spot markets. Assets Gas Contract Pursuant to the terms of the Lone Star Contract, Marketing sells natural gas to Lone Star at a fixed price per thousand Btu ("MBtu"), plus transportation and certain other charges. The Lone Star Contract, which expires in May 1999, provides for minimum deliveries averaging 45.1 million cubic feet per day through May 31, 1999. The contract also includes a take-or-pay provision whereby Lone Star must pay for 60% of the monthly contract volume whether or not it takes such volume (although deficiencies in one month may, subject to certain limitations, be taken in subsequent months without additional payments). Company management anticipates that 24% of annual contract volumes are currently being supplied from wells currently operated by Production. Pursuant to a gas purchase contract between Marketing and MG Natural Gas Corp. ("MGNG"), a wholly-owned subsidiary of MG, MGNG is supplying the remaining 76% of the natural gas required to meet the requirements of the Lone Star Contract at pre-established prices. The fixed price received by Marketing for gas sold to Lone Star has been substantially in excess of the spot (market) price during most of the Lone Star Contract from December 3, 1992 (date acquired) through September 30, 1996. It also exceeds the fixed price of gas purchased from MGNG to meet the requirements of the Lone Star Contract. As a result, Marketing has substantially locked in a gross margin equal to the excess of the price received from Lone Star over the price paid to MGNG with respect to the 84% of its natural gas requirement that it must purchase. Such "locked up" gross margins are, however, subject to the supply risk of MGNG, the credit risks of Lone Star and other contractual risks in the Lone Star Contract. In September 1993, one of the Company's subsidiaries entered into a contract to sell 7,356,000 btu's (British thermal units) of gas to MGNG. The subsidiary is buying the gas to be sold to MGNG on the spot market and has hedged approximately 14% of the remaining gas to be sold to MGNG. The subsidiary remains exposed to the difference between the sales price to MGNG and the price it will pay to purchase the gas unhedged on the spot market. The gas is to be provided ratably from June 1, 1996 through May 31, 1999 at a fixed price. The Castle Pipeline The Castle Pipeline is an intrastate pipeline system located in Rusk County, Texas, which gathers natural gas produced primarily from the Oak Hill Field located north of Henderson, Texas for delivery to Lone Star through ten different interconnects with a Lone Star pipeline in north Rusk County. The Castle Pipeline is the principal means by which Marketing delivers gas to Lone Star. Other sources of natural gas are accessible through interconnects with six other pipelines. The Castle Pipeline consists of 77 miles of pipeline with diameters ranging from two to six inches and six compressor stations. The Castle Pipeline has maximum allowable working pressures of 1040 pounds per square inch ("psi") to 1264 psi with the exception of a low pressure gathering system which has maximum allowable working pressure of 323 psi. The combined delivery capacities of the components are in excess of 90 million cubic feet per day. The actual deliveries made on the Castle Pipeline by Marketing during the periods shown were as follows: -2- Twelve Months Ended September 30, ---------------------------------------------- 1996 1995 1994 --------------- --------------- ------------ MCF(1)......................... 17,027,691 19,504,735 18,208,312 MCFPD(2)....................... 46,651 53,438 49,886 - ------------- (1) Thousand cubic feet (2) Average throughput per day in thousand cubic feet OIL AND GAS EXPLORATION AND PRODUCTION General The Company's oil and gas exploration and production business, conducted through Production and Castle Exploration Company, Inc. ("CECI"), a wholly-owned subsidiary, includes interests in approximately 420 producing oil and gas wells located in eight states. Until June 1993 the Company also administered a number of oil and gas partnerships. Properties Proved Oil and Gas Reserves The following is a description of the Company's oil and gas reserves as of September 30, 1996. All estimates of reserves are based upon engineering evaluations prepared by Ryder Scott Company Petroleum Engineers and Huntley and Huntley, independent petroleum reservoir engineers, in accordance with the requirements of the Securities and Exchange Commission. Such estimates include only proved reserves. The Company reports its reserves annually to the Department of Energy. The Company's estimated reserves as of September 30, 1996 are as follows:
Location of Reserves ------------------------------------------------- Texas Other States(2) Total ------------ --------------- ---------- Net MCF (1) of gas: Proved developed producing................................. 16,279,000 7,202,000 23,481,000 Proved developed non-producing............................. 10,002,000 1,281,000 11,283,000 Proved undeveloped......................................... 32,416,000 2,449,000 34,865,000 ------------ ---------- ---------- Total...................................................... 58,697,000 10,932,000 69,629,000 ============ ========== ========== Net barrels of oil: Proved developed producing................................. 96,000 171,000 267,000 Proved developed non-producing............................. 46,000 46,000 Proved undeveloped......................................... 149,000 149,000 ------------ ------------ ---------- Total...................................................... 291,000 171,000 462,000 ============ ============ ==========
- ----------- (1) Thousand cubic feet (2) Alabama, California, Illinois, Louisiana, Mississippi, New Mexico, Oklahoma and Pennsylvania The Texas reserves were acquired on December 3, 1992 when Production acquired majority working interests in 100 producing oil and gas wells from ARCO. -3- Oil and Gas Production The following table summarizes the net quantities of oil and gas production of the Company for the three fiscal years ended September 30, 1996, including production from acquired properties since the date of acquisition. Fiscal Year Ended September 30, ----------------------------------- 1996 1995 1994 ---- ---- ---- Oil -- Bbls (barrels).................. 46,000 51,000 52,000 Gas -- MCF............................. 3,349,000 3,721,000 3,606,000 Average Sales Price and Production Cost Per Unit The following table sets forth the average sales price per barrel of oil and MCF of gas produced by the Company and the average production cost (lifting cost) per equivalent unit of production for the periods indicated. Production costs include applicable operating costs and maintenance costs of support equipment and facilities, labor, repairs, severance taxes, property taxes, insurance, materials, supplies and fuel consumed in operating the wells and related equipment and facilities.
Fiscal Year Ended September 30, ---------------------------------- 1996 1995 1994 ---- ---- ---- Average Sales Price per Barrel of Oil.............................. $17.33 $15.59 $16.03 Average Sales Price per MCF of Gas................................. $ 2.38 $ 2.13 $ 2.02 Average Production Cost per Equivalent MCF(1)...................... $ 0.56 $ 0.59 $ 0.67
- ------------ (1) For purposes of equivalency of units, a barrel of oil is assumed equal to six MCF of gas, based upon relative energy content. Approximately 75%, 74% and 67% of gas sold during the fiscal years ended September 30, 1996, 1995 and 1994, respectively, were sold to Lone Star to partially provide the volumes needed for the Lone Star Contract. Productive Wells and Acreage The following table presents the oil and gas properties in which the Company held an interest as of September 30, 1996. The wells and acreage owned by the Company and its subsidiaries are located in Alabama, California, Illinois, Louisiana, Mississippi, New Mexico, Oklahoma, Pennsylvania and Texas. As of September 30, 1996 ------------------------- Gross(2) Net(3) -------- ------ Productive Wells:(1) Gas Wells.................................... 345 174 Oil Wells.................................... 73 27 Acreage: Developed Acreage............................ 79,775 33,303 Undeveloped Acreage.......................... 22,360 19,243 - ----------------- (1) A "productive well" is a producing well or a well capable of production. Sixty wells are dual wells producing oil and gas. Such wells are classified according to the dominant mineral being produced. (2) A gross well or acre is a well or acre in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (3) A net well or acre is deemed to exist when the sum of fractional working interests owned in gross wells or acres equals one. The number of net wells or acres is the sum of the fractional working interests owned in gross wells or acres. -4- Drilling Activity The table below sets forth for the three fiscal years ended September 30, 1996 the number of gross and net productive and dry developmental wells drilled including wells drilled on acquired properties since the dates of acquisition.
Fiscal Year Ended September 30, ------------------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- ---------------------- Productive Dry Productive Dry Productive Dry ---------- --- ---------- --- ---------- --- Developmental: Gross.................................. -- -- -- -- -- -- Net.................................... -- -- -- -- -- --
REFINING Until September 30, 1995 two of the Company's subsidiaries operated in the refining segment of the petroleum business. The two subsidiaries owned and operated refineries with a combined refining (distillation) capacity of 135,500 barrels per day. IRLP owned and operated the Indian Refinery in Lawrenceville, Illinois and Powerine owned and operated the Powerine Refinery in Santa Fe Springs, California. On September 20, 1995, Powerine sold the Powerine Refinery to Kenyen. On December 12, 1995, IRLP sold the Indian Refinery to American Western. In addition, Powerine merged into a subsidiary of EMC on January 16, 1996 and was no longer a subsidiary of the Company. The Company still owns IRLP, which is inactive and owns no refining assets. As a result of the foregoing, refining operations were classified as discontinued operations in the Company's financial statements as of September 30, 1995 and retroactively. REGULATIONS Since the Company has disposed of its refineries and third parties have assumed environmental liabilities associated with the refineries, the Company's current activities are not subject to environmental regulations that generally pertain to refineries, e.g., the generation, treatment, storage, transportation and disposal of hazardous wastes, the discharge of pollutants into the air and water and other environmental laws. Nevertheless, the natural gas marketing and transmission and oil and gas exploration and production operations of the Company are subject to a number of local, state and federal environmental laws and regulations. To date, compliance with such regulations by the Company's natural gas marketing and transmission and exploration and production segments has not resulted in material expenditures. The Castle Pipeline is an intrastate pipeline system and is primarily regulated by the Texas Railroad Commission (the "Railroad Commission"). Under Texas statutes, the Railroad Commission, whose members are elected, has authority to regulate the intrastate transportation, sale, delivery and pricing of natural gas by intrastate pipelines in Texas, including the Castle Pipeline. In its conservation and production regulations, the Railroad Commission is authorized to limit production to market demand. If implemented such limitations could significantly curtail production by mineral owners. To date, either the Railroad Commission has not limited production or the limitations have not affected production by the Company's subsidiaries. There can, however, be no assurance that future limitations of the Railroad Commission will not curtail production. The Company's activities in connection with the operation of pipelines and other facilities for transporting natural gas are subject to environmental regulation by federal and state authorities, including the United States Environmental Protection Agency (the "USEPA"), the Texas Air Control Board (the "TACB"), the Texas Water Commission (the "TWC") and the Railroad Commission. Compliance with regulations promulgated by these various governmental authorities increases the cost of planning, designing, installing and operating such facilities. In most instances, the regulatory requirements relate to water, air and land pollution and control measures. The Company believes it is currently in material compliance with the measures set forth by the USEPA, the TACB, the TWC and the Railroad Commission. -5- All states in which the Company conducts oil and gas exploration and production activities have laws regulating the production and sale of oil and gas. Such laws and regulations generally are intended to prevent waste of oil and gas and to protect correlative rights and opportunities to produce oil and gas as between owners of interests in a common reservoir. Some state regulatory authorities also regulate the amount of oil and gas produced by assigning allowable rates of production to each well or unit. Recently there has been a significant increase in the amount of state regulation, including increased bonding, plugging and operational requirements. Such increased state regulation has resulted in, and is anticipated to continue to result in, increased legal and compliance costs being incurred by the Company. Based on past costs, even considering recent increases, management of the Company does not believe such legal and compliance costs will have a material adverse effect on the financial condition or results of operations of the Company. -6- EMPLOYEES AND OFFICE FACILITIES As of November 30, 1996, the Company, through its subsidiaries, employed 22 personnel. The Company owns certain office facilities as follows: Office Location Function - --------------- -------- Henderson, TX Oil and Gas Exploration and Production Office Henderson, TX Natural Gas Pipeline and Marketing Office The Company also leases certain offices as follows: Office Location Function - --------------- -------- Radnor, PA Corporate Headquarters Mt. Pleasant, PA Oil and Gas Production Office Pittsburgh, PA Drilling and Exploration Office Tuscaloosa, Alabama Gas Production Office -7- ITEM 3. LEGAL PROCEEDINGS Contingent Environmental Liabilities - Refining Until September 30, 1995, the Company, through its subsidiaries, operated in the refining segment of the petroleum business. As operators of refineries, certain of the Company's subsidiaries were potentially liable for environmental costs related to air emissions, ground and water contamination, hazardous waste disposal and third party claims related to the foregoing. Between September 29, 1995 and December 12, 1995 both of the refineries owned by the Company's refining subsidiaries were sold to outside parties. In each case the purchaser assumed all environmental liabilities. Furthermore, on January 16, 1996, Powerine, the subsidiary that previously owned the Powerine Refinery, was effectively acquired by EMC, an outside, unrelated party. The environmental liabilities of the Powerine Refinery and Indian Refinery as of September 30, 1995 were estimated at $23.6 million and $12.5 million, respectively. As of November 30, 1996, neither of the purchasers of the refineries had restarted the refineries. In addition, the purchaser of the Indian Refinery, American Western, has defaulted on its $5 million note to IRLP and filed a voluntary petition for bankruptcy in the United States Bankruptcy Court in the District of Delaware under Chapter 11 of the United States Bankruptcy Code. American Western is currently seeking to sell the Indian Refinery. Although the environmental liabilities related to both of the subsidiaries' refineries have been assumed by others, there can be no assurance that the Company or IRLP will not be sued for matters related to environmental liabilities of the refineries. Both of the companies to which the refining assets or refining subsidiary stock were sold are thinly capitalized and without significant financial resources. EMC is currently seeking to raise financing for restarting the Powerine Refinery and American Western is attempting to sell the Indian Refinery. If either of these companies fails in such endeavors and cannot pay such notes or environmental liabilities, it is possible that the Company or IRLP (still a subsidiary of the Company) could be named a party in related legal actions. Although the Company does not believe it has any liability with respect to such environmental liabilities, a court of competent jurisdiction may find otherwise and the Company may be required to fund portions of such liabilities. In recent years, government and other plaintiffs have often sought redress for environmental damage from the party most capable of payment without regard to responsibility and fault. Whether or not the Company is ultimately held liable in such a circumstance, should litigation involving the Company and/or IRLP occur, the Company would incur substantial legal fees and experience the diversion of management resources from other operations. General SWAP Agreement - MGNG In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap Agreement"), dated October 14, 1994 between MGNG and IRLP, claiming the right to do so based on breaches of other agreements by MG and its affiliates. MGNG disregarded IRLP's termination notice and sent IRLP a termination notice alleging IRLP was the defaulting party and claiming approximately $1.2 million of losses. IRLP has refused to pay MGNG's claim. In June 1995, MGRM, as MGNG's assignee, filed a complaint in Delaware state court, claiming $653,000, consisting of $1,356,000 under the Swap Agreement less $703,000 owed to IRLP by MGNG in transactions unrelated to the Swap Agreement, plus interest. IRLP has answered the complaint. The Company's management believes that IRLP has good defenses to that claim, expects to prevail and to recover its $703,000 receivable. The litigation is related to the Powerine Arbitration (see below) and the Company expects this litigation to be settled at the same time as or shortly after the Powerine Arbitration litigation is settled. Powerine Arbitration On April 14, 1995, Powerine repaid all of the indebtedness owed by it to MGTFC, including $10.8 million of disputed amounts (the "Disputed Amount"). On the same day, the Company and two of its subsidiaries and MG and two of its subsidiaries entered into the Payoff Loan and Pledge Agreement ("Payoff Agreement"), which provided the following: a. MG released Powerine from all liens and claims. b. MG loaned the Company $10 million. c. Powerine transferred its claim with respect to the Disputed Amount to the Company. -8- d. The claim with respect to the Disputed Amount was agreed to be submitted to binding arbitration (the "Powerine Arbitration"). e. MG can offset the $10 million loan to the Company against the $10 million note it issued to the Company as part of the MG Settlement, to the extent the arbitrator decides the claim with respect to the Disputed Amount in MG's favor. The Disputed Amount relates primarily to disputes over the prices paid by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's subsidiary, MGRM, and nonpayment for refined products that were processed after January 31, 1995 and that MGRM was obligated to, but did not, lift and pay for. To the extent that the arbitrator decides in favor of the Company, the Company's note to MG will be reduced and the net amount due to the Company from MG will be increased. If the arbitrator settles the Disputed Amount entirely in the Company's favor, the Company's note to MG will be cancelled and MG will still owe the Company its $10 million note (due October 14, 1997). If the arbitrator settles the Disputed Amount entirely in MG's favor, the Company's note from MG will be discharged. In such case the Company's future earnings will also be adversely impacted since the Company has not recorded any reserve against the note. In December 1996, the Company and MG presented oral arguments to the arbitrator. A decision is expected in the second quarter of fiscal 1997. In January 1996, MG did not pay interest on the $10,000,000 note when such interest was due. As a result, the entire note is due to be paid to the escrow account for the Powerine Arbitration. The Company filed suit in Delaware Superior Court to compel MG to pay the entire note. By its terms the note is due on October 14, 1997. The effect of compelling MG to pay the note into the escrow account, if successful, will be that the note, after adjustment by the Arbitrator, if any, will be paid to the Company when the Arbitration is concluded rather than on October 14, 1997, the due date before MG's default. Larry Long Litigation In January 1996, Larry Long, a nonoperating owner of oil and gas wells, filed a suit against the Company, Production, Pipeline, Marketing, ARCO, B&A Pipeline Company, and a subsidiary of MG in the Fourth Judicial District Court of Rusk County, Texas. The plaintiff claims, among other things, that the parties being sued have underpaid non-operating working interest owners, royalty interest owners, and overriding royalty interests owners with respect to gas production from oil and gas properties operated by Production and attempts to bring a class action on behalf of all such owners based upon various legal theories. The plaintiff is seeking recovery of $40,000,000. The Company has responded to the lawsuit and has asserted that the suit is not a proper class action and that the named plaintiff is not an appropriate class representative. Management of the Company and special counsel retained by the Company believe that there are a number of meritorious defenses to the claims being asserted. Among other defenses, the Company has asserted that many of the matters which form the basis for the plaintiff's claims were resolved adversely to certain of the members of the purported class in prior litigation involving the predecessors in title to the Company's subsidiaries. In addition, the Company believes that the amount claimed by the plaintiff is not supported by the allegations made. Based upon a review of the pleadings which have been filed, the Company believes that the claims are without merit and intends to vigorously defend the lawsuit. The Company has recently filed a petition for summary judgement against Larry Long. The lawsuit is currently in discovery and deposition proceedings. Powerine Class Action Lawsuit In July 1996, Powerine was served with a suit concerning operations of the Powerine Refinery in the Superior Court of the State of California in Los Angeles, California. The suit claims the Powerine Refinery is a public nuisance, that it has released excessive toxic and noxious emissions and caused physical and emotional distress on residents living nearby. The Company is also named as a plaintiff in the suit but has not as yet been served with the lawsuit. The Company believes it is not properly a defendant in the lawsuit, since it did not operate the Powerine Refinery. Furthermore, when the Company sold Powerine in January 1996, the buyer assumed all liabilities, including environmental liabilities. -9- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not hold a meeting of stockholders or otherwise submit any matter to a vote of stockholders during the fourth quarter of fiscal 1996. -10- PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Principal Market The Company's Common Stock is quoted on the Nasdaq National Market ("NNM") under the trading symbol "CECX". Stock Price and Dividend Information Stock Price: The table below presents the high and low sales prices of the Company's Common Stock as reported by the NNM for each of the quarters during the two fiscal years ended September 30, 1996.
1996 1995 ------------------------- ----------------------- High Low High Low ---- --- ---- --- First Quarter (December 31).................... $ 9.00 $7.00 $16.00 $11.25 Second Quarter (March 31)...................... 9.38 7.38 14.25 8.00 Third Quarter (June 30)........................ 12.25 8.75 10.75 7.00 Fourth Quarter (September 30).................. 11.25 8.00 11.00 8.00
The final sale of the Company's Common Stock as reported by the NNM on November 30, 1996 was $9.31. Dividends: The Company has not adopted a formal dividend policy and has not declared a dividend since 1989. The loan agreements currently in place with subsidiaries of the Company limit the amount of cash that subsidiaries can transfer to the parent to 25% of the subsidiaries' cash flow. Accordingly, not all of the subsidiaries' profits are available for dividends. Approximate Number of Holders of Common Stock As of November 30, 1996, the Company's Common Stock was held by approximately 4,000 stockholders. -11- ITEM 6. SELECTED FINANCIAL DATA During the Company's five fiscal years ended September 30, 1996, the Company consummated a number of transactions affecting the comparability of the financial information set forth below. In August 1989, the Company acquired the Indian Refinery. From April 1990 until November 1990, the Company performed refurbishment work on the Indian Refinery and recommenced operations in November 1990. In February 1992, the Company entered into a product offtake agreement with MGR&M ("Indian Offtake Agreement") which was restructured and extended in May 1993. In December 1992, the Company acquired certain assets from ARCO. In June 1993, the Company sold its business of administration of oil and gas partnerships. In October 1993, the Company acquired the Powerine Refinery. During 1995, the Company reached a settlement with MG and its affiliates which would affect the results of operations for all future periods. In September 1995, the Company discontinued its refining operations. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to the Company's Consolidated Financial Statements included in Item 8 to this Form 10-K. The following selected financial data has been derived from the Consolidated Financial Statements of the Company for each of the five years ended September 30, 1996 and all such income statement information has been reclassified to give effect to the discontinuance of the refining operations. The information should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8 - "Financial Statements and Supplementary Data" and Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations."
For the Fiscal Years Ended September 30, (in Thousands, except per share amounts) ------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- Revenues: Natural gas marketing and transmission .......... $ 59,471 $ 70,402 $ 61,259 $ 56,676 -- Exploration and production ...................... 9,224 9,197 8,552 10,124 $ 5,165 Gross Margin: Natural gas marketing and transmission .......... 25,238 30,242 24,199 22,200 -- Exploration and production ...................... 7,179 6,831 5,923 7,469 3,372 Earnings (loss) before interest, taxes, depreciation, and amortization: Natural gas marketing and transmission .......... 23,162 28,252 22,003 20,361 -- Exploration and production ...................... 5,944 5,761 4,494 5,940 2,181 Corporate general and administrative expenses ....... (3,499) (4,995) (5,499) (2,191) (1,706) Depreciation, depletion and amortization ............ (13,717) (14,155) (13,452) (12,191) (1,453) Interest expense .................................... (1,959) (4,046) (9,233) (9,117) (2,919) Interest income and other income (expense) .......... 3,884 966 950 85 (476) --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and cumulative effect of a change in accounting ................................... 13,815 11,783 (737) 2,887 (4,373) Provision for (benefit of) income taxes related to continuing operations ........................... (11,259) 37,823 (17,077) (44,081) 81 --------- --------- --------- --------- --------- Income (loss) from continuing operations ............ 25,074 (26,040) 16,340 46,968 (4,454) Income (loss) from discontinued refining operations net of applicable income taxes .................. 40,937 22,577 12,355 (47,815) --------- --------- --------- --------- --------- Income (loss) before cumulative effect of a change in accounting principle ......................... 25,074 14,897 38,917 59,323 (52,269) Cumulative effect on prior years of change in accounting principle - adoption of FAS 109 ...... 8,514 --------- --------- --------- --------- --------- Net income (loss) ................................... $ 25,074 $ 14,897 $ 38,917 $ 67,837 ($ 52,269) ========= ========= ========= ========= ========= Net income (loss) per share (fully diluted): Continuing operations ........................... $ 3.73 ($ 3.84) $ 1.44 $ 6.20 ($ 0.35) Discontinued operations ......................... 6.04 1.99 1.64 (3.76) Cumulative effect of a change in accounting ..... 1.12 --------- --------- --------- --------- --------- $ 3.73 $ 2.20 $ 3.43 $ 8.96 ($ 4.11) ========= ========= ========= ========= =========
(continued on next page) -12-
September 30, (in Thousands) ------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- Balance Sheet Data (at end of Period): Working capital (deficit) ........................ ($ 4,452) ($ 12,474) ($ 22,769) ($ 47,462) $ 6,451 Property, plant and equipment, net, including oil and gas properties ............................ 36,223 40,406 339,876 150,299 85,420 Total assets ..................................... 101,230 116,904 646,491 392,738 167,873 Long-term debt, including current maturities ..... 14,006 35,946 394,123 199,020 202,860 Stockholders' equity (deficit) ................... 66,711 41,637 37,920 (9,387) (89,124)
-13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("000's" Omitted) - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS GENERAL From August 1989 to September 30, 1995, several of the Company's subsidiaries conducted refining operations. By December 12, 1995, the Company's refining subsidiaries had sold all of their refining assets. In addition, Powerine, one of the Company's refining subsidiaries, merged into a subsidiary of EMC and was no longer a subsidiary of the Company. The Company's other refining subsidiaries own no refining assets and are in the process of liquidation. As a result, the Company has accounted for its refining operations as discontinued operations in the Company's financial statements as of September 30, 1996 and retroactively. Accordingly, discussion of results of operations has been confined to the results of continuing operations and the anticipated impact, if any, of liquidation of the remaining inactive refining subsidiaries. Fiscal 1996 vs Fiscal 1995 Revenues Gas sales from natural gas marketing decreased $10,931 or 15.5% from fiscal 1995 to fiscal 1996. The net decrease was caused by three factors one of which increased gas sales and the other two of which decreased gas sales. Gas sales increased $1,833 or 2.6% as a result of gas sales to MGNG commencing in June of 1996 and other gas sales in the first half of fiscal 1996. In fiscal 1995 virtually all gas sales were to Lone Star. This increase was offset by a 5.7% scheduled reduction in contract volumes under the Lone Star Contract and a 12.4% reduction in volumes of gas otherwise delivered to Lone Star in fiscal 1996. Although the volumes sold to Lone Star annually are essentially fixed (the Lone Star Contract has a take-or-pay provision), the Lone Star contract year is from February 1 to January 31 whereas the Company's fiscal year is from October 1 to September 30. Furthermore, although the volumes to be taken by Lone Star in a given contract year are fixed, there is no provision requiring fixed monthly or daily volumes and deliveries accordingly vary with Lone Star's seasonal and peak demands. Such variances have been significant. As a result, Lone Star deliveries, although fixed for a contract year, may be skewed and not proportional for the Company's fiscal year. On January 31, 1997, the annual contract volume will decrease approximately 1.5% and remain at such decreased level through the end of the Lone Star Contract. Oil and gas sales from the exploration and production segment increased $62 or .7% as a result of offsetting factors. Production, expressed in equivalent units of natural gas, decreased approximately 10% while the prices received for oil and gas production increased approximately 11%. At the current time gas prices are higher than they have been for several years although there can be no assurance this trend will continue. Expenses Gas purchases decreased $5,937 or 14.8% from fiscal 1995 to fiscal 1996. The decrease closely parallels the decrease in gas sales. In fiscal 1995 gas purchases comprised 57% of gas sales versus 57.6% of gas sales in fiscal 1996. Oil and gas production expenses decreased $321 or 13.6% from fiscal 1995 to fiscal 1996. The decrease results primarily from two factors: decreased ad valorem (property) taxes and decreased well maintenance in the summer of 1996 when the Company expected to sell its oil and gas properties. As a result of such deferral of maintenance, it is anticipated that oil and gas production expenses will be slightly higher in fiscal 1997 now that the Company has withdrawn its oil and gas properties from the market and expects to continue to operate and produce them. General and administrative expenses applicable to the exploration and production segment increased $165 or 15.4% from fiscal 1995 to fiscal 1996. The increase was caused by increased salaries, insurance and employee benefit costs and increased legal fees. -14- Depreciation, depletion and amortization decreased $446 or 16.1%. Approximately 10% of the decrease was caused by and parallels a 10% decrease in oil and gas production. The remaining 6.1% decrease is attributable to changes in estimates concerning proved reserves. Corporate general and administrative expenses decreased $1,496 or 30% from fiscal 1995 to fiscal 1996. The decrease was primarily attributable to decreased legal fees, employee salaries and employee benefits. Other income increased $2,642 or 940.2%. All of the increase is attributable to recoveries from a plaintiff escrow fund related to shareholder litigation. The amount recovered and recorded as other income in fiscal 1996 was $2,725. There was no counterpart to this item in fiscal 1995. Interest expense decreased $2,087 or 51.6% from fiscal 1995 to fiscal 1996. The decrease parallels the decrease in outstanding long-term debt. As a result of the refinancing of the GECC loan on November 26, 1996 the Company replaced a fixed 8.33% rate of interest with a floating interest rate equal to the prime rate plus 1%. The prime rate is currently 8.25%. As a result of the refinancing, changes in the prime rate will henceforth impact the Company's interest expense and results of operations. The income tax benefit has been determined pursuant to "Financial Accounting Standards Number 109 - Accounting for Income Taxes (FAS 109)." The tax benefit in fiscal 1996 results from changes in management's assessment of the probability of future taxable income. As a result of the tax benefit recorded in fiscal 1996, the Company expects to provide for income taxes at a 36% blended statutory rate for the remainder of the Lone Star Contract for book purposes. During this period the Company expects to pay income taxes at a 2% effective rate, consisting of federal alternative minimum tax (see Note 19 to the Consolidated Financial Statements). Fiscal 1995 vs Fiscal 1994 Revenues Gas sales from natural gas marketing increased $9,174 or 15% from fiscal 1994 to fiscal 1995. Under the Company's long-term gas sale contract with Lone Star, the price received for gas is essentially fixed through May 31, 1999. The variance in gas sales, therefore, is almost entirely attributable to the volumes of gas delivered. Although the volumes sold to Lone Star annually are essentially fixed (the Lone Star Contract has a take-or-pay provision), the Lone Star contract year is from February 1 to January 31 whereas the Company's fiscal year is from October 1 to September 30. Furthermore, although the volumes to be taken by Lone Star in a given contract year are fixed, there is no provision requiring fixed monthly or daily volumes and deliveries accordingly vary with Lone Star's seasonal and peak demands. Such variances have been significant. As a result, Lone Star deliveries, although fixed for a contract year, may be skewed and not proportional for the Company's fiscal year. Lone Star deliveries and sales for 1995 approximated those which would have occurred if daily takes under the Lone Star Contract had been fixed and equal. Except for $84, all fiscal 1995 sales by the natural gas marketing and transmission segment were to Lone Star. Exploration and production revenues increased $645 or 7.5% from fiscal 1994. The increase is primarily attributable to increased gas prices. Production for fiscal 1994 consisted of 3,918 equivalent mcf (consisting of 52 barrels of crude and 3,606 mcf of gas) versus 4,027 equivalent mcf (consisting of 51 barrels of crude and 3,721 mcf of gas) for fiscal 1995. The net increase in equivalent mcf was 109 equivalent mcf or 2.8%. Average gas prices increased $.11 per mcf or 5.4% from $2.02 in fiscal 1994 to $2.13 in fiscal 1995. The increase in production consisted of two factors: an increase resulting from the purchase of the production payment from ARCO in October 1994 (see footnote 4 to the consolidated financial statements) offset by a similar decline in production from the Company's other depleting wells. With the exception of the ARCO production payment purchase, only $199 was invested in oil and gas properties in fiscal 1995. Expenses Gas purchases increased $3,131 or 8.5% from fiscal 1994. In fiscal 1994 gas purchases constituted 60.5% of gas sales versus 57% of gas sales in fiscal 1995. The decrease in the gas purchase cost percentage is primarily attributable to the elimination of deferred gas purchase cost. In fiscal 1994, a deferred gas purchase cost of $2,400 was included in gas purchase -15- cost. This cost represented additional deferred gas purchase costs that the Company expected to pay after the GECC Loan was repaid. As a result of the MG Settlement on October 14, 1994 the deferred gas purchase obligation was discharged and did not apply to most of fiscal 1995. Operating costs of the natural gas transmission segment increased $69 or 6.1% from 1994 to 1995. This increase consists primarily of wage increases given to pipeline personnel. General and administrative expenses applicable to natural gas marketing and transmission decreased $306 or 28.1% from fiscal 1994 to fiscal 1995. The decrease occurred primarily because of a decrease in insurance and legal costs. Operating (oil and gas production) expenses in the exploration and production segment decreased $263 or 10% from fiscal 1994 to fiscal 1995. The decrease results primarily from decreased operating costs applicable to non-operated wells and significantly decreased property taxes. General and administrative costs applicable to exploration and production decreased $359 or 25.1% from 1994 to 1995. The decrease results primarily from decreased insurance expense, administrative fees and legal costs. Interest expense decreased $5,187 or 56.2% from fiscal 1994 to fiscal 1995. The decrease results entirely from the decrease in the GECC Loan and the discharge of a $9.5 million subordinated loan due to MGTFC on October 14, 1994 as part of the MG Settlement. The tax provision allocation applicable to continuing operations has been determined pursuant to "Financial Accounting Standards Number 109 - Accounting for Income Taxes" ("FAS 109"). The management of the Company believes that the intraperiod tax provision allocation between continuing and discontinued operations is misleading because the tax rate applicable to continuing operations does not approximate the tax rate expected by the Company in future years. Fiscal 1994 vs Fiscal 1993 Revenues Revenues from natural gas marketing increased by $4,583 or 8.1% for the year ended September 30, 1994, principally as a result of the Company's acquisition of the Lone Star Contract from ARCO on December 3, 1992. The increased sales for the additional two months in fiscal 1994 were slightly offset by decreased average daily quantities sold to Lone Star during the year ended September 30, 1994. The average daily takes of gas under the Lone Star Contract decreased 14% in 1994. The decrease in daily takes is attributable to small decreases in the annual contractual volumes under the Lone Star Contract and seasonal requirements of Lone Star within a contract year. Exploration and production revenues decreased $1,572 or 15.5% for the year ended September 30, 1994 as compared to the prior year primarily as a result of the June 30, 1993 sale of certain exploration and production properties, as well as the general depletion of other Company wells. Furthermore, the Company drilled no new wells in fiscal 1994 and made minimal capital investments to enhance existing production. This was partially offset by the addition of 100 working oil and gas wells on December 3, 1992. Operating Income and Expenses Natural gas marketing earned operating income of approximately $10.6 million in fiscal 1994 versus $10.9 million in fiscal 1993. The decrease is primarily attributable to the decreased average daily quantities sold to Lone Star which was offset by an increase attributable to twelve months of operations in 1994 as compared with ten months in 1993. Operating income for the exploration and production operations was approximately $2.4 million in 1994 as compared with $3.2 million in fiscal 1993. The decrease results from the sale of certain properties in June 1993 and the loss of administrative revenues as a result of the sale of the Company's partnership management business in June 1993. This is partially offset by the addition of 100 working oil and gas wells on December 3, 1992. Corporate general and administrative expenses increased $3.3 million over the corresponding period in 1993. This increase is primarily attributable to legal fees associated with defending the Stockholder Litigation and related matters. -16- Other Expenses Interest expense increased $116 or 1.3% from fiscal 1993. The net increase is the result of two offsetting factors. Interest expense decreased because the loan principal of the GECC Loan and a subordinated loan to MGTFC decreased in 1994. Interest expense increased in 1994 because the loans, which were used to finance the acquisition of the ARCO assets, were not made until December 1992 hence such loans were outstanding for less than a whole year in fiscal 1993. Income Taxes The Company allocated the 1994 tax provision between continuing and discontinued operations retroactively pursuant to FAS 109. The Company believes such allocation is misleading for the reason noted above. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity and capital resources position has improved considerably since September 30, 1995. During fiscal 1996 the Company generated $26,864 of operating cash flow. Approximately 91% of this operating cash flow was restricted to and used to reduce the GECC loan and pay related interest expense. As noted above, the Company refinanced the GECC loan and entered into a $25,000 credit facility on November 26, 1996. As of December 1, 1996, $11,126 was outstanding and $13,874 was still available under that facility. In addition, under the new credit facility required principal payments are only $500 per month instead of the entire cash flow generated by the natural gas marketing and transmission and exploration and production subsidiaries as was the case with the previous loan from General Electric Capital Corporation ("GECC"), the Company's natural gas marketing and transmission segment lender. As noted previously, the Company withdrew its natural gas marketing and transmission and exploration and production assets from the market and is currently planning to operate these assets rather than sell them. Such plans also include drilling much of the Company's undrilled Texas acreage and other capital projects. As a result of the foregoing the Company's expected cash obligations and resources from October 1, 1996 to September 30, 1999 are as follows:
10/01/96- 10/01/97- 10/01/96- 09/30/97 09/30/99 09/30/99 --------- --------- --------- Cash Obligations: Repurchase of the Company's shares.............. $11,000 $11,000 Repayment of long-term debt..................... 8,172 $ 5,834 14,006 Planned drilling................................ 9,660 18,407 28,067 Other planned capital expenditures.............. 3,000 3,000 6,000 --------- --------- --------- 31,832 27,241 59,073 --------- --------- --------- Cash Resources: Cash on hand - 10/01/96......................... 3,457 3,457 Expected cash flow - existing operations........ 26,000 43,300 69,300 Expected cash flow - new operations............. 2,650 18,715 21,365 --------- -------- -------- 32,107 62,015 94,122 --------- -------- -------- Excess of Cash Resources over Cash Obligations..... $ 275 $34,774 $35,049 ========= ======= =======
The foregoing analysis assumes that stock repurchase, drilling and other capital expenditures obligations are undertaken. Although the Company intends to spend funds for each of these activities, it is not obligated to do so. Furthermore, no cash proceeds with respect to the Powerine Arbitration are included although the Company expects to recover all or most of the $10,000 at stake. Finally, as of December 3, 1996, the Company has an additional $13,874 of funds available for these anticipated cash obligations under its $25,000 credit facility. -17- Although the Company has exited the refining business and does not anticipate any further required expenditures related to discontinued refining operations, interested parties could seek redress from the Company for vendor or environmental liabilities. In the past, government and other plaintiffs have often named the most financially capable parties in such cases regardless of the existence or extent of actual liability. Although the Company's management does not believe the Company would ultimately be held liable and has not included any related costs in the above projections, there can be no assurance such will be the case. Even if the Company were to prevail in such litigation, the related legal costs and distraction of the Company's management resources from continuing operations could be significant. Finally, the above projections assume that the Company's cash flows will not be adversely impacted by any of the factors discussed subsequently under "Risk Factors." Obviously, if such is not the case and such factors do impact the Company, results could vary and vary significantly from those set forth above. INFLATION AND CHANGING PRICES Natural Gas Marketing and Transmission The Company's gas sales contract with Lone Star is essentially a fixed price contract. It continues through May 1999. The Company's gas supply contract is also a fixed price contract. The result is that the Company's gross margin is essentially "locked in" and does not change with inflation. Although there are some operating costs applicable to the natural gas marketing and pipeline transmission segment, which tend to increase with inflation, they are minor and inflation of such costs without concomitant inflation in revenues does not significantly impact operating profits. Exploration and Production Oil and gas sales are determined by markets locally and worldwide and often move inversely to inflation. Whereas operating expenses related to oil and gas sales may be expected to parallel inflation, such costs have often tended to move more in response to oil and gas sales prices than in response to inflation. General As noted above, the Company entered into a $25 million facility from a bank syndicate on November 26, 1996. The effective interest rate on the facility is the prime rate plus 1%. To the extent that the Company uses the facility and the prime rate fluctuates, the Company's cost of capital will fluctuate. If the Company draws down all or most of the entire $25,000 facility and the prime rate changes significantly, the effect on the Company's results of operations could be significant. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has released several pronouncements that are not effective until future years. The Company believes that such pronouncements, when effective, will not materially affect the Company's financial condition or results of operations. RISK FACTORS The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this section of Item 7 to this Form 10-K to do so. The Company cautions readers that the following important risk factors could affect the Company's future results of operations, liquidity and capital resources and financial condition and could cause the Company's actual future results of operations, liquidity and capital resources and financial condition to differ materially from those expressed in forward looking statements made by or on behalf of the Company. Refinery Matters American Western Note As a result of the sale of the Indian Refinery, IRLP received a $5,000 note from the purchaser, American Western. At September 30, 1996, the note plus accrued interest aggregated $5,387. At the same date, IRLP owed vendors -18- approximately $7,000. IRLP believes that it can fully discharge its vendor liabilities if it receives the entire $5,387 due from the American Western note. In November 1996, American Western filed for bankruptcy and has undertaken to sell the Indian Refinery while in bankruptcy. Although IRLP holds a first mortgage on the Indian Refinery, other creditors of American Western hold a lien superior to that of IRLP. If the Indian Refinery is sold, there can be no assurance that IRLP's share of the proceeds will be sufficient to settle its vendor liabilities. If the Indian Refinery is not sold, IRLP will not be able to settle its vendor liabilities. In either of these situations, IRLP may file for bankruptcy since its only significant asset is its note due from American Western. Although the Company does not believe such a development would affect its projected cash flow, such may not be the case, as explained below. Although the Company's subsidiaries' have disposed of their two refineries, the Company's future results of operations and cash flow could be adversely affected by contingent liabilities, including environmental liabilities, related to such refineries if the purchasers of such refineries are unable to satisfy such liabilities and the Company becomes liable for such liabilities, including the environmental liabilities as discussed above. In addition, one purchaser is obligated to subsidiaries of the Company for an aggregate of $6,358 in notes and accrued interest, which may not be paid if the purchaser does not receive sufficient proceeds from the sale of the Indian Refinery. See Item 3 - "Legal Proceedings." Although the Company does not believe it has any liabilities with respect to environmental liabilities of the refineries, a court of competent jurisdiction may find otherwise and the Company may be required to fund portions of such liabilities. In recent years, government and other plaintiffs have often sought redress for environmental damage from the party most capable of payment without regard to responsibility or fault. Whether or not the Company is ultimately held liable in such a circumstance, should litigation involving the Company and/or IRLP occur, the Company would incur substantial legal fees and experience a diversion of management resources from other operations. Supply Risk - MGNG Supply Contract Approximately 82% of the gas currently delivered to Lone Star pursuant to the Lone Star Contract is provided by MGNG, including approximately 6% of such volumes purchased by MGNG from outside owners in wells operated by Production. The Lone Star Contract expires on May 31, 1999. MGNG is a wholly-owned subsidiary of MG, which, in turn, is indirectly owned by MG AG. If spot gas prices increase significantly and MGNG has not hedged its future commitment to supply gas to the Company or if MGNG experiences financial problems, MGNG may be unable to meet its gas supply commitments to the Company. If MGNG does not fulfill its gas supply commitment to the Company, the Company may not be able to fulfill its gas delivery commitment to Lone Star or to achieve the gross margins currently being earned. This would adversely impact the Company's results of operations and cash flow. Under such circumstances the Company may not be able to recover lost profits and cash flow from MGNG despite provisions providing for such recovery. Credit Risk - Lone Star At the current time, virtually all of the Company's gas marketing volumes and approximately 75% of the Company's own gas production is sold to a single customer, Lone Star, under a long-term gas sales contract which terminates on May 31, 1999. Although Lone Star has paid for all gas purchased when such payments were due, any inability of Lone Star to continue to pay for gas purchased would adversely affect the Company. Supply Risk - MGNG Sales Contract The Company has a commitment to sell 7,356 btu's of natural gas to MGNG ratably from June 1, 1996 to May 31, 1999. At September 30, 1996, the remaining commitment of natural gas to be sold to MGNG was 6,537 btu's. Of this remaining volume, only 14% was hedged as of September 30, 1996. If gas prices remain high, as is the situation currently, the Company may incur significant losses when it purchases the unhedged gas to provide the remaining gas to be sold to MGNG (see Note 15 to the Consolidated Financial Statements). Drilling Risk After obtaining the requisite financing, the Company anticipates spending as much as $28,000 during the next three years (and as much as $42,000 over the next five years) to drill new wells primarily on acreage acquired from ARCO. Drilling is inherently risky and there can be no assurance that any wells drilled will be economically viable or enable the Company to recover the costs of drilling. If the initial wells drilled by the Company do not find the reserves expected, the Company may not drill additional wells and the revenues and cash flow expected from such drilling may never materialize. -19- In addition, an outside interest owner has filed a lawsuit against the Company and three of its subsidiaries (see Item 3 - "Legal Proceedings - Larry Long Litigation"). The Company's management believes that the plaintiff's claims were already resolved in the Company's favor in prior litigation and has filed for summary judgement against the plaintiff. If the issues in such lawsuit are not resolved in the Company's favor or the landowners owning the land on which the new wells are to be drilled do not agree in advance to the gas prices being paid by Marketing, drilling may be postponed until after May 31, 1999. At such time, the Company believes that the pricing issues raised in the Larry Long litigation are no longer applicable. Public Market for the Company's Stock Although there presently exists a market for the Company's stock, such market is volatile and the Company's stock is thinly traded. In addition, the Company's earnings history is sporadic and the Company has not paid dividends since 1989. Although the Company believes that its earnings and cash flow will be more predictable in the future, there can be no assurance that such will be the case. Such volatility may adversely affect the market price and liquidity of the Company's common stock. In addition, there are presently, to the Company's knowledge, several brokerage firms making a market in the Company's common stock. Any cessation of such market making activities by such brokerage firms could adversely affect the market for the Company's common stock. As noted earlier, IRLP's only significant asset is a $5.4 million note due from American Western yet IRLP owes approximately $7.0 million to trade vendors. As noted above American Western recently filed for bankruptcy and is conducting an auction to sell its assets. If IRLP does not receive sufficient proceeds for its note to satisfy its trade vendors IRLP may file a voluntary petition for bankruptcy. Under such circumstances the share price of the Company's common stock may decrease significantly given the required public releases and the perceived public reaction to such releases and the estimated period of time customarily required for such proceedings. Operational Considerations The Company's operations are subject to the risks inherent in the pipeline and oil and gas industries, including the risks of fire, explosion, pipe failure and environmental accidents such as oil spills, gas leaks and ruptures or discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The Company's operations could be subject to significant interruption in the event any of these or other problems developed. In accordance with customary industry practice, the Company maintains significant liability, property and business interruption insurance against most, but not all, of the risks described above. There can be no assurance that such an adverse event will not happen, that the Company's insurance will be adequate to cover any losses or liabilities or that it would not have a material adverse effect on the Company's financial condition or results of operations. -20- ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page ---- CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Statements of Operations for the years ended September 30, 1996, 1995 and 1994................. 22 Consolidated Balance Sheets, as of September 30, 1996 and 1995.............................................. 24 Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994................. 25 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended September 30, 1996, 1995 and 1994............................................................................................ 27 Notes to the Consolidated Financial Statements.............................................................. 28 FINANCIAL STATEMENT SCHEDULE: III. Condensed Financial Information - Parent Company Only................................................. 56 REPORT OF INDEPENDENT ACCOUNTANTS........................................................................... 59
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. -21- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ("000's" Omitted Except Per Share Amounts)
Year Ended September 30, --------------------------------------------- 1996 1995 1994 ---- ---- ---- Revenues: Natural gas marketing and transmission: Gas sales.............................................. $59,471 $70,402 $61,228 Transportation......................................... 31 -------- -------- -------- 59,471 70,402 61,259 -------- -------- -------- Exploration and production: Oil and gas sales...................................... 8,782 8,720 8,069 Well operations........................................ 442 477 483 ---------- ----------- --------- 9,224 9,197 8,552 --------- ---------- -------- 68,695 79,599 69,811 -------- --------- ------- Expenses: Natural gas marketing and transmission: Gas purchases.......................................... 34,233 40,160 37,029 Operating costs........................................ 845 804 1,139 General and administrative............................. 1,231 1,186 1,088 Depreciation and amortization.......................... 11,393 11,385 11,360 -------- --------- ------- 47,702 53,535 50,616 -------- --------- ------- Exploration and production: Oil and gas production................................. 2,045 2,366 2,629 General and administrative............................. 1,235 1,070 1,429 Depreciation, depletion and amortization............... 2,324 2,770 2,092 --------- --------- -------- 5,604 6,206 6,150 --------- --------- -------- Corporate general and administrative expenses............ 3,499 4,995 5,499 --------- --------- -------- 56,805 64,736 62,265 -------- -------- ------- Operating income............................................. 11,890 14,863 7,546 -------- -------- --------
(Continued on next page) The accompanying notes are an integral part of these financial statements -22- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ("000's" Omitted Except Per Share Amounts) (continued from previous page)
Year Ended September 30, ------------------------------------------------- 1996 1995 1994 ---- ---- ---- Other income (expense): Interest income........................................................ 961 685 528 Other income........................................................... 2,923 281 422 Interest expense....................................................... (1,959) (4,046) (9,233) ------------- ------------ -------------- 1,925 (3,080) (8,283) ------------- ----------- -------------- Income (loss) from continuing operations before income taxes.............. 13,815 11,783 (737) ------------ ---------- --------------- Provision for (benefit of) income taxes related to continuing operations: State.............................................................. (309) 4,728 (68) Federal............................................................ (10,950) 33,095 (17,009) ------------ ---------- ------------- (11,259) 37,823 (17,077) ------------ ---------- ------------- Income (loss) from continuing operations................................... 25,074 (26,040) 16,340 Income from discontinued refining operations less applicable income taxes of $19,850 and $17,603 in 1995 and 1994, respectively............ 40,937 22,577 -------------- ----------- -------------- Net income................................................................. $ 25,074 $ 14,897 $ 38,917 ============== =========== ============= Net income (loss) per share: Income (loss) per share from continuing operations - primary........... $ 3.73 ($ 3.84) $ 1.46 ============== ============ =============== - fully diluted.................................................. $ 3.73 ($ 3.84) $ 1.44 ============== ============ =============== Income per share from discontinued refining operations - primary....... $ $ 6.04 $ 2.02 =============== ============= =============== - fully diluted.................................................. $ $ 6.04 $ 1.99 =============== ============= =============== Net income per share - primary......................................... $ 3.73 $ 2.20 $ 3.48 ============== ============= =============== - fully diluted.................................................. $ 3.73 $ 2.20 $ 3.43 ============== ============= =============== Weighted average number of common and common equivalent shares outstanding - primary.......................................... 6,719,000 6,778,000 11,209,000 =========== =========== =========== - fully diluted.................................................. 6,719,000 6,778,000 11,397,000 =========== =========== ===========
The accompanying notes are an integral part of these financial statements -23- CASTLE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS ("000's" Omitted Except Share Amounts)
September 30, 1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents................................................... $ 3,457 $ 5,341 Restricted cash............................................................. 1,743 4,959 Accounts receivable......................................................... 10,217 5,641 Prepaid expenses and other current assets................................... 73 153 Deferred income taxes....................................................... 2,373 4,623 Estimated realizable value of discontinued net refining assets.............. 6,288 10,803 --------- --------- Total current assets...................................................... 24,151 31,520 Property, plant and equipment, net: Natural gas transmission.................................................... 20,987 22,720 Furniture, fixtures and equipment........................................... 222 276 Oil and gas properties, net..................................................... 15,014 17,410 Gas contracts, net.............................................................. 25,142 34,515 Deferred income taxes........................................................... 5,343 Other assets, net............................................................... 371 463 Note receivable................................................................. 10,000 10,000 ---------- ---------- Total assets.............................................................. $101,230 $116,904 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt........................................... $ 8,172 $ 12,080 Current portion of long-term debt - related party........................... 250 Accounts payable............................................................ 3,817 4,715 Accrued expenses............................................................ 1,875 3,284 Other liabilities........................................................... 3,660 3,323 Net refining liabilities retained........................................... 11,079 20,342 ----------- ---------- Total current liabilities................................................. 28,603 43,994 Long-term debt.................................................................. 5,834 23,616 Other long-term liabilities..................................................... 82 83 Deferred income taxes........................................................... 7,574 ----------- ----------- Total liabilities......................................................... 34,519 75,267 ----------- ---------- Commitments and contingencies Stockholders' equity: Series B participating preferred stock; par value - $1.00; 10,000,000 shares authorized; no shares issued Common stock; par value - $0.50; 25,000,000 shares authorized; 6,693,646 issued and outstanding in 1996 and 1995, respectively........... 3,347 3,347 Additional paid-in capital...................................................... 66,316 66,316 Accumulated deficit............................................................. (2,952) (28,026) ----------- ---------- 66,711 41,637 ---------- ---------- Total liabilities and stockholders' equity ............................... $101,230 $116,904 ======== ========
The accompanying notes are an integral part of these financial statements -24- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ("000's" Omitted Except Share Amounts)
Year Ended September 30, --------------------------------------- 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income ............................................................... $ 25,074 $ 14,897 $ 38,917 -------- ---------- -------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation, depletion and amortization............................... 13,612 19,238 43,774 Amortization of deferred debt issue costs.............................. 356 2,732 8,885 Deferred income taxes.................................................. (10,667) 55,799 (2,900) Gain on MG Settlement.................................................. (396,166) Provision for impairment loss.......................................... 323,078 Write-off of debt acquisition costs.................................... 161 Changes in assets and liabilities: Decrease in restricted cash......................................... 5,942 4,750 1,185 Decrease in temporary investments................................... 4,436 2,811 (Increase) decrease in accounts receivable.......................... 22,658 27,685 (6,178) (Increase) decrease in inventory.................................... 22,914 57,401 (18,787) (Increase) decrease in prepaid expenses and other current assets.... 903 6,366 (4,762) (Increase) in other assets.......................................... (103) (1,793) (1,523) Increase (decrease) in accounts payable............................. (1,744) (29,660) 23,448 Increase (decrease) in accrued expenses............................. (28,105) (29,936) 1,958 Increase (decrease) in other current liabilities.................... (329) 283 41 Increase (decrease) in other long-term liabilities.................. (23,265) (630) 927 (Decrease) in due to related parties................................ (385) (9,014) (9,046) (Decrease) in deferred revenues..................................... (12,124) (65,807) -------------- --------- -------- Total adjustments............................................... 1,948 22,445 (25,974) ---------- --------- -------- Net cash flow provided by operating activities.................. 27,022 37,342 12,943 --------- --------- -------- Cash flows from investment activities: Proceeds from sale of furniture, fixtures and equipment................... 4,723 75 Investment in refining plant............................................. (35,355) (63,819) Realization of discontinued net refining assets........................... 4,000 Investment in oil and gas properties...................................... (34) (4,022) (956) Investment in pipelines................................................... (140) (47) (21) Purchase of furniture, fixtures and equipment............................. (1) (288) (1,670) Business acquisition, net of cash acquired................................ (8,230) -------------- -------------- --------- Net cash provided by (used in) investing activities............. 3,825 (34,989) (74,621) ---------- --------- --------
(continued on next page) The accompanying notes are an integral part of these financial statements -25- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ("000's" Omitted Except Share Amounts) (continued from previous page)
Year Ended September 30, --------------------------------------- 1996 1995 1994 ---- ---- ---- Cash flows from financing activities: Proceeds of long-term debt - related party................................ $ 530 $ 67,915 Proceeds of long-term debt................................................ $ 3,800 25,108 12,114 Proceeds from issuance of common stock, net............................... 202 48,207 Repayment of long-term debt - related party............................... (250) (4,388) Repayment of long-term debt............................................... (37,984) (38,781) (48,356) Payment of debt issuance costs............................................ (486) ---------- --------- ---------- Net cash provided by (used in) financing activities................. (34,920) (12,941) 75,492 ---------- --------- ---------- Net increase (decrease) in cash and cash equivalents......................... (4,073) (10,588) 13,814 Cash and cash equivalents - beginning of period.............................. 7,530 18,118 4,304 ---------- --------- ----------- Cash and cash equivalents - end of period.................................... $ 3,457 $ 7,530 $ 18,118 ========== ========= ========= Supplemental disclosures of cash flow information are as follows: Cash paid during the period: Interest............................................................... $ 2,086 $ 10,207 $ 16,583 ========= ========= ========= Income taxes........................................................... $ 536 $ 1,080 $ 8,802 ========= ========= ========= Interest capitalized during the period....................................... - - $ 1,519 ========== ========== ========= Supplemental schedule of noncash investing and financing activities.......... Purchase of Powerine Oil Company: Basis in assets acquired............................................... $ 186,867 Cash paid for capital stock and transaction costs...................... (8,230) ---------- Basis in liabilities assumed........................................... $ 178,637 ========= Payment of related party payables in exchange for reduction in cash participations........................................................ $ 6,862 ======== MG Settlement, including surrender of 969,000 common shares, cancellation of debt obligations and the assumption by MG of the forward sale obligations and Societe Generale loan $396,166 ======== Exchange of common stock: Acquisition of common stock in exchange for reduction in cash participations......................................................... $ 39,817 =========
The accompanying notes are an integral part of these financial statements -26- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) ("000's" Omitted Except Share Amounts)
Common Stock Additional Treasury Stock ---------------------- Paid-In Accumulated -------------------- Shares Amount Capital Deficit Shares Amount Total ------ ------ ------- --------------- ------ ------ --------- Balance - September 30, 1993 ..... 7,782,506 $ 3,891 $ 65,387 ($ 78,301) 59,860 ($ 364) ($ 9,387) Treasury stock reissued .......... (59,860) (30) (334) (59,860) 364 Shares issued for cash ........... 3,500,000 1,750 46,428 48,178 Options exercised ................ 5,000 3 26 29 Shares repurchased with cash participations ........ (3,600,000) (1,800) (35,753) (2,264) (39,817) Net income ....................... 38,917 38,917 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance - September 30, 1994 ..... 7,627,646 3,814 75,754 (41,648) 37,920 Stock acquired ................... (969,000) (485) (9,622) (1,275) (11,382) Options exercised ................ 35,000 18 184 202 Net income ....................... 14,897 14,897 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance - September 30, 1995 ..... 6,693,646 $ 3,347 66,316 (28,026) 41,637 Net income ....................... 25,074 25,074 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance - September 30, 1996 ..... 6,693,646 $ 3,347 $ 66,316 ($ 2,952) $ 66,711 ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements -27- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) NOTE 1 - BUSINESS AND ORGANIZATION Settlement with Principal Stockholder Castle Energy Corporation ("Castle" or the "Company") is a Delaware corporation. From September 1989 until October 14, 1994, its principal shareholder was Metallgesellschaft Corporation ("MG"), an indirect wholly-owned subsidiary of Metallgesellschaft AG ("MG AG"), a German conglomerate which had, in the past, owned as much as 49% of the Company. In addition, the Company had extensive transactions and agreements with MG and its affiliates as described in Notes 17 and 20. On August 31, 1994, the Company entered into two agreements with MG and its affiliates which terminated most relationships with MG and significantly restructured the remaining relationships (the "MG Settlement") (see Note 3). All amounts related to transactions with MG and its affiliates are not reported as related party transactions subsequent to October 14, 1994. Business Segments The Company's principal lines of business are natural gas marketing and transmission and oil and gas exploration and production. Until September 30, 1995, the Company's major business segment was refining (see Note 3). The Company's operations are conducted within the United States. Natural Gas Marketing and Transmission On December 3, 1992, the Company acquired from Atlantic Richfield Company ("ARCO") a long-term natural gas sales agreement (the "Lone Star Contract") with the Lone Star Gas Company ("Lone Star"), a 77-mile pipeline in Rusk County, Texas (the "Castle Pipeline"), majority working interests in approximately 100 producing oil and gas wells and several gas supply contracts. The acquisition of the Castle Pipeline and the gas contracts created a new business segment for the Company. At present the principal use of the Castle Pipeline is to deliver gas pursuant to the Lone Star Contract. The Company entered into a management service contract with MG Gathering Corp. ("MGG"), a subsidiary of MG, to operate the Castle Pipeline. Subsequent to September 30, 1996, the Company's pipeline subsidiary notified MGG of its intent to terminate the management service contract with MGG (see Note 24). The Lone Star Contract expires May 31, 1999. This contract provides for minimum daily deliveries of gas at specific fixed prices, and also includes certain minimum amounts under take-or-pay provisions. Based on reserve reports, management believes approximately 16% of the annual contract volumes can be supplied from Company-operated wells; the Company has entered into a long-term contract with MG Natural Gas Corp. ("MGNG"), a subsidiary of MG, to supply the remaining 84% of the annual contract volumes needed for the Lone Star Contract. For the year ended September 30, 1996, approximately 95% of all gas volumes and 97% of all gas sales by the natural gas marketing and transmission segment were sold to Lone Star. Until June of 1996 in excess of 99% of all gas volumes sold by the natural gas marketing and transmission segment were sold to Lone Star. In addition to the Lone Star Contract, a subsidiary of the Company has a contract to sell 7,356 btu's (British thermal units) of natural gas at a fixed price from June 1, 1996 to May 31, 1999. Oil and Gas Exploration and Production The Company's oil and gas exploration and production operations currently include interests in approximately 450 producing oil and gas wells located in nine states, including the Texas reserves acquired in connection with the acquisition of the natural gas marketing and transmission assets. At present, approximately 75% of the Company's natural gas production is sold to Lone Star as described above. -28- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Refining IRLP The Company entered the refining business in 1989 when it acquired the operating assets of an idle refinery located in Lawrenceville, Illinois (the "Indian Refinery"), which was owned and operated by the Company's subsidiary, Indian Refining I Limited Partnership ("IRLP"), until September 30, 1995 when it was shut down. On December 12, 1995, the Indian Refinery assets were sold (for legal purposes) to American Western Refining, L.P. ("American Western") (see Note 3). Powerine In October 1993, the Company purchased Powerine Oil Company ("Powerine"), the owner of a refinery located in Santa Fe Springs, California (the "Powerine Refinery") from MG (see Note 4). From October 1, 1993 to February 1, 1995, Powerine sold all of its refined products to MGRM under a product offtake agreement (the "Powerine Offtake Agreement") subject to MGRM's obligation to purchase refined products from raw materials on hand at the Powerine Refinery at (or subject to contracts calling for delivery to the Powerine Refinery by) February 1, 1995. MGRM's failure to purchase products refined after February 1, 1995 is at issue in the Powerine Arbitration (see Note 15). On September 29, 1995, Powerine sold substantially all of its refining plant to Kenyen Projects Limited ("Kenyen"). On January 16, 1996, Powerine merged into a subsidiary of Energy Merchant Corp. ("EMC") (see Note 3). Results of Powerine's operations are included in these financial statements (discontinued operations - refining) commencing October 1, 1993. As a result of the transactions with Kenyen, American Western and EMC, the Company disposed of its interests in the refining segment. The results of refining operations are shown as discontinued operations in the Consolidated Statement of Operations. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL The significant accounting policies discussed are limited to those applicable to the Company's continuing business segments - natural gas marketing and exploration and production. References should be made to previous Forms 10-K for summaries of accounting principles applicable to the discontinued refining segment. Principles of Consolidation The consolidated financial statements presented include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Revenue Recognition Natural Gas Marketing and Transmission Revenues are recorded when deliveries are made. Essentially all of the Company's deliveries are made under two contracts, the Lone Star Contract and a contract with MGNG. Exploration and Production Oil and gas revenues are recorded when oil and gas volumes are delivered to the purchaser. Fees from well operations are recorded when earned. -29- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Cash and Cash Equivalents The Company considers all highly liquid investments, such as time deposits and money market instruments, purchased with a maturity of three months or less, to be cash equivalents. Property, Plant and Equipment Natural gas transmission, property, plant and equipment and furniture, fixtures and equipment are stated at the lower of cost or impaired (fair market) value. Depreciation on natural gas transmission, property, plant and equipment is recorded on a straight-line basis over fifteen years, the estimated useful life of the assets. Furniture, fixtures and equipment is depreciated on a straight-line basis over periods of three to ten years, the estimated useful lives of the assets. Oil and Gas Properties The Company follows the full-cost method of accounting for oil and gas properties and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the acquisition, exploration and development of oil and gas reserves are capitalized. Capitalized costs are amortized on a composite unit-of-production method using estimates of proved reserves. Capitalized costs which relate to unevaluated oil and gas properties are not amortized until proved reserves are associated with such costs or impairment of the property occurs. Management and drilling fees earned in connection with the transfer of oil and gas properties to a joint venture and proceeds from the sale of oil and gas properties are recorded as reductions in capitalized costs unless such sales are material and involve a significant change in the relationship between cost and the value of proved reserves in which case a gain or loss is recognized. Expenditures for repairs and maintenance of wellhead equipment are expensed as incurred. Net capitalized costs in excess of the estimated present value of future cash inflows from proved oil and gas reserves, reduced by operating expenses and future development expenditures, if any, are charged to current expense. Impairment of Long-Term Assets The Company adopted Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" during the second quarter of fiscal 1995. The effect of adoption was not significant. Accordingly, the Company reviews its long-term assets other than oil and gas properties for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss would be based on the fair market value of the asset. Impairment for oil and gas properties is computed in the manner described above under "Oil and Gas Properties." Hedging Activities The Company employs hedging strategies to hedge its future natural gas purchase requirements for its gas sales contract to MGNG (see Notes 1 and 15). The Company hedges future commitments. Gains and losses from hedging activities are credited or debited to the item being hedged, the cost of gas purchased for the MGNG gas sales contract. Other Assets Costs applicable to the issuance of debt are capitalized and amortized using the interest method based upon the scheduled debt repayment terms. -30- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Gas Contracts The purchase price allocated to the Lone Star Contract was capitalized and is being amortized over the term of the related contract (6.5 years). Gas Balancing The Company operates under several natural gas sales contracts where it is entitled to sell other owners' shares of natural gas produced from a well if such other owners do not elect to sell their shares of production. Under the terms of the related joint operating agreements, the non-selling owners are entitled to make up gas sales from the Company's share of production in the future. The Company records sales of other owners' production as deferred revenue and recognizes such deferred revenue when the other owners make up their gas balancing deficiency from the Company's share of production. Income Taxes In October 1992, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109 is an accounting approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, FAS 109 generally considers all expected future events other than anticipated enactments of changes in the tax law or rates. (See Note 19). FAS 109 also requires that tax provisions and recoveries related to changes in the valuation reserve for deferred tax assets because of a change in circumstances that causes a change in judgement about the realizability of the related deferred tax asset in future years be allocated entirely to continuing operations. Earnings Per Share Primary earnings per common share are based upon the weighted average number of common and common equivalent (if considered dilutive) shares outstanding using either the treasury stock or modified treasury stock method. Fully diluted earnings per common share are presented for all succeeding annual periods where the dilution in earnings per share resulting from full dilution is greater than 3%. Reclassifications Certain reclassifications have been made to make the periods presented comparable. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. NOTE 3 - MG SETTLEMENT AND DISCONTINUED OPERATIONS - REFINING On August 31, 1994, the Company entered into agreements with MG and certain of its affiliates pursuant to which the parties thereto agreed to amend or terminate a number of contractual relationships. In the first step of the MG Settlement, which closed on September 9, 1994, MG transferred 3,600,000 shares of common stock of the Company to the Company in exchange for $39,817 of participations the Company held in debt obligations of the Company and its affiliates to MG Trade Finance Corp. ("MGTFC"), a wholly-owned subsidiary of MG. In the second step of the MG Settlement, which closed on October 14, 1994, MG (a) cancelled certain debt obligations owed to MGTFC by the Company and its affiliates and assumed IRLP's obligations under its $120,000 Senior Facility with Societe Generale, together totaling $321,282, (b) transferred back to the Company the remaining 969,000 shares of common -31- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) stock held by MG and a $5,500 debenture convertible into 500,000 shares of common stock, (c) issued to the Company a $10,000 note payable in three years, (d) terminated all of its interests in the Company's natural gas operations and (e) agreed to supply all crude oil necessary for the Company to meet its delivery obligations under a forward sale contract with a third party entered into during September 1993. In exchange for the foregoing, IRLP and Powerine (i) amended their Offtake Agreements to terminate effective February 1, 1995 although sales under the Powerine Offtake Agreement were to continue subsequently, (ii) amended their working capital facilities to terminate on March 31, 1995, and (iii) transferred to MG certain of the Company's participations in debt obligations of the Company and its affiliates to MGTFC. In connection with the MG Settlement, IRLP and MGNG also entered into a four-year natural gas swap agreement and MG agreed that the Company, through March 31, 1995, could unilaterally terminate its gas supply agreement with MGNG ("MGNG Gas Supply Agreement"). As a result of the MG Settlement, the Company realized a gain of $391,135, consisting of $396,166 gross proceeds less $5,031 of investment banking fees and related expenses. The completion of the transactions contemplated by the MG Settlement had, among others, three consequences for the Company. First, the offtake agreements with MG terminated and the Company, until it sold the Refineries, was required to market its own products and was subject to market risks. Second, also in 1995, the working capital facilities provided by MGTFC terminated. Third, for Federal and state income tax purposes, the Company recognized income of approximately $391 million, on which, after giving effect to applicable net operating loss and other tax carryforwards and other items of expense and deduction, Federal and state income taxes of approximately $91 million would have been owed had the Company not disposed of or discontinued the refining operations. After the MG Settlement was consummated, the Company decided to discontinue the operations of its refining business and to sell or retire its two refineries. At December 31, 1994, the Company provided $345,008 for the estimated impairment of the related refinery assets. In July 1995, operations ceased at the Powerine Refinery and Powerine retired the assets of the Powerine Refinery. On September 29, 1995, Powerine sold substantially all of the refining plant assets to Kenyen, retaining certain rack facilities and the land on which the Powerine Refinery is situated. The purchase price was $22,763 consisting of $3,000 cash and a note for $19,763. The note was secured by the Powerine refining plant and bore interest at 10%. The note was due in three equal installments of principal and interest of $7,108 (of which $19,763 is principal) on April 30, June 30 and September 30, 1996. On January 16, 1996 Powerine merged into a subsidiary of EMC and was no longer a subsidiary of the Company. As part of the sale, EMC also indemnified Powerine and the Company for any and all environmental liabilities of Powerine. On September 30, 1995, operations also ceased at the Indian Refinery and IRLP retired the plant assets of the Indian Refinery. On December 12, 1995, IRLP sold the plant assets of the Indian Refinery to American Western, a subsidiary of Gadgil Western Corporation ("Gadgil"). The purchase price was $8,000, including $3,000 cash and a note for $5,000. The note bears interest at 8% and was due on the earlier of October 31, 1996 or the date American Western obtained financing to restart the Indian Refinery. The note is secured by the real property and the Indian Refinery. American Western also assumed certain liabilities of IRLP, including employee pension and all environmental liabilities, in conjunction with the sale. Indian Oil Company ("IOC"), another wholly-owned refining subsidiary, also sold certain precious metal catalysts to American Western for a note for $1,803. On October 31, 1996, American Western failed to pay the $5,000 note plus $387 of related accrued interest. On November 6, 1996, American Western filed a voluntary petition for bankruptcy in the United States Bankruptcy Court in the District of Delaware under Chapter 11 of the United States Bankruptcy Code. Shortly thereafter, American Western filed motions to approve debtor in possession financing and the sale of the Indian Refinery. Both motions were approved. American Western expects to sell the Indian Refinery in January 1997. Although IRLP holds a first mortgage on the Indian Refinery other creditors of American Western hold a lien superior to that of IRLP. There can, however, be no assurance that the Indian Refinery will be sold or that the proceeds, if any, to IRLP will equal the note plus interest which is owed to IRLP by American Western. IRLP intends to use the note proceeds, if any, to pay its vendor liabilities, which approximated $7,000 at September 30, 1996. If IRLP does not receive sufficient note proceeds to settle its vendor liabilities, IRLP may file a voluntary petition for bankruptcy. -32- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) In May 1996, IOC seized the platinum securing the $1,803 note and processed approximately fifty-one percent of the platinum. The proceeds were applied to the note. As of September 30, 1996, $971, consisting of $833 of principal and $138 of accrued interest was still owed on the note by American Western. Although IRLP believes the value of the platinum is sufficient to pay such outstanding principal and interest on the note, a vendor of IRLP has obtained a restraining order which precludes IOC from processing the platinum. IOC is seeking to reverse the restraining order so it can continue processing the platinum and obtain payment for its platinum note. The platinum is security for a loan to a financial institution. This loan aggregated $756 at September 30, 1996. As a result of the discontinuance of refining operations, all assets and liabilities related to the refining segment have been netted. The realizable value of net refining assets is shown under the caption "Estimated realizable value of discontinued net refining assets" on the accompanying Consolidated Balance Sheet. The estimated value of the refining liabilities retained is shown under the caption "Net refining liabilities retained." An analysis of the assets and liabilities related to the refining segment for the period September 30, 1995 to September 30, 1996 is as follows:
Estimated Realizable Value of Discontinued Net Refining Net Refining Assets Liabilities Retained ------------------- --------------------- Property, plant and equipment, net............................... $340,280 Goodwill, net.................................................... 5,413 Catalyst, net.................................................... 4,191 Environmental liabilities........................................ (36,061) Other, net....................................................... 20,058 ---------- 333,881 Impairment reserve............................................... (323,078) Revolving credit loan............................................ $13,249 Other working capital deficit, net............................... 7,093 ---------- --------- Balance - September 30, 1995..................................... 10,803 20,342 Cash transactions................................................ (4,000) (9,263) Other, net....................................................... (515) ---------- --------- Balance - September 30, 1996..................................... $ 6,288 $11,079 ========== =======
"Estimated realizable value of discontinued net refining assets" is based on the transactions consummated with American Western and EMC and includes management's best estimates of the amounts expected to be realized on the disposal of the refining segment. "Net refining liabilities retained" includes management's best estimates of amounts expected to be paid and amounts expected to be realized on the settlement of this net liability. The amounts the Company ultimately realizes could differ materially in the near term from such amounts. Summary operating results of discontinued operations are as follows and include the $391,135 gain realized on the settlement with MG in 1995 and the $323,078 impairment write-down in 1995. No refining operations were recorded in 1996 because processing had ceased by September 30, 1995 and all refining subsidiaries were in the process of liquidation.
September 30, -------------------------- 1995 1994 ---- ---- Revenues............................................................................ $711,976 $940,514 ======== ======== Income before income taxes.......................................................... $ 60,787 $ 40,180 Provision for income taxes.......................................................... 19,850 17,603 ---------- ---------- Net earnings from discontinued operations........................................... $ 40,937 $ 22,577 ========= =========
33 Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) In computing the operating results of discontinued operations, interest expense specifically associated with refining debt has been included in discontinued operations. NOTE 4 -- ACQUISITIONS Purchase of Powerine As of October 1, 1993, the Company acquired from MG an option to acquire Powerine, the owner of the Powerine Refinery, a 49,500 barrel per day refinery located in Santa Fe Springs, California in consideration of (i) the payment of $8,000; (ii) the assumption of a $3,027 indemnity obligation related to yield losses incurred by Powerine under a processing arrangement with MG, (iii) the assumption of a $2,675 tax indemnification to the previous owner of Powerine; (iv) the assumption of debt obligations to MG of $128,002 and other liabilities of $44,933; and (v) the payment of transaction costs of $980. In addition, the Company borrowed $2,971 from MGTFC to purchase feedstocks. The acquisition was accounted for as a purchase at predecessor basis due to the significant related party relationship. The Company recorded $160,106 of refinery assets, $14,151 of other tangible assets and the remaining $13,360 of goodwill and deferred tax assets. The Company immediately exercised the option to acquire Powerine for a nominal amount, and concurrently (a) entered into the Powerine Offtake Agreement with MG (b) amended Powerine's loan agreement with MGTFC and (c) amended the Company's crude oil supply agreement with MG to include Powerine as a party. To finance the acquisition, a subsidiary company resold to MGTFC a cash participation in the revolving credit facility provided by MGTFC to IRLP. On January 16, 1996, Powerine merged into a subsidiary of EMC (see Note 3). The results of operations of Powerine are included in the statement of operations (discontinued operations - refining) commencing October 1, 1993. Purchase of ARCO Royalty In October 1994, one of the Company's exploration and production subsidiaries purchased certain royalty interests held by ARCO in wells purchased by another of the Company's exploration and production subsidiaries from ARCO in December 1992. The purchase price was $3,823. NOTE 5 - RESTRICTED CASH Restricted cash consists of the following:
September 30, ------------------------- 1996 1995 ---- ---- Lender escrow....................................................................... $ 875 Gas revenues deposited in lender's escrow account................................... $4,143 Funds supporting letters of credit issued for operating bonds....................... 216 362 Other............................................................................... 652 454 -------- -------- $1,743 $4,959 ====== ======
Subsequent to September 30, 1996, the lender escrow was released in conjunction with the Company's refinancing of its natural gas marketing loan from General Electric Capital Corporation ("GECC") (see Notes 14 and 24). NOTE 6 - ACCOUNTS RECEIVABLE Based upon past customer experiences, the limited number of customer accounts receivable relationships, and the fact that the Company's subsidiaries can offset unpaid accounts receivable against an outside owner's share of oil and gas revenues, management believes all receivables to be collectible. Accounts receivable consist of the following: -34- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts)
September 30, ------------------------- 1996 1995 ---- ---- Natural gas marketing............................................................... $ 8,553 $4,450 Oil and gas......................................................................... 1,487 991 Other............................................................................... 177 200 -------- -------- $10,217 $5,641 ======= ======
Account receivable due from Lone Star aggregated $8,149 and $4,044 at September 30, 1996 and 1995, respectively. NOTE 7 - PROPERTY, PLANT AND EQUIPMENT Natural gas transmission consists of the following:
September 30, ------------------------- 1996 1995 ---- ---- Natural gas pipeline................................................................ $28,117 $27,977 Less: Accumulated depreciation..................................................... (7,130) (5,257) ---------- --------- $20,987 $22,720 ======= =======
Furniture, fixtures and equipment are as follows:
September 30, ------------------------- 1996 1995 ---- ---- Furniture, fixtures and equipment................................................... $423 $467 Less: Accumulated depreciation..................................................... (201) (191) ----- ------ $222 $276 ==== ====
NOTE 8 - GAS CONTRACTS Gas contracts consist of the following:
September 30, ------------------------- 1996 1995 ---- ---- Gas contracts....................................................................... $61,151 $61,151 Less: Accumulated amortization..................................................... (36,009) (26,636) -------- -------- $25,142 $34,515 ======= =======
NOTE 9 - OIL AND GAS PROPERTIES
September 30, ------------------------- 1996 1995 ---- ---- Evaluated properties................................................................ $28,090 $28,175 Less: Accumulated depreciation, depletion and amortization........................ (12,979) (10,668) Accumulated full cost ceiling reserve............................................... (97) (97) ---------- ----------- 15,014 17,410 Unevaluated properties.............................................................. $15,014 $17,410 ======= =======
-35- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Capital costs incurred by the Company in oil and gas activities, all of which are located in the United States, are as follows:
September 30, ---------------------------------------- 1996 1995 1994 ---- ---- ---- Property acquisition costs - proved properties.................... $3,823 Development costs................................................. $34 199 $956 ------ -------- ---- $34 $4,022 $956 === ====== ====
Results of operations, excluding corporate overhead and interest expense, from the Company's oil and gas producing activities are as follows:
Year Ended September 30, ---------------------------------------- 1996 1995 1994 ---- ---- ---- Revenues: Crude oil, condensate, natural gas liquids and natural gas sales.......................................................... $8,782 $8,720 $8,069 ------ ------ ------ Costs and expenses: Production costs............................................... $2,045 $2,366 $2,629 Depreciation, depletion and amortization....................... 2,311 2,757 2,014 ------- ------- ------- Total costs and expenses....................................... 4,356 5,123 4,643 ------- ------- ------- Income tax provision.............................................. 1,593 1,439 1,370 ------- ------- ------- Income from oil and gas producing activities...................... $2,833 $2,158 $2,056 ====== ====== ======
The income tax provision is computed at the blended rate (Federal and state combined) of 36% in 1996 and 40% in 1995 and 1994. Assuming conversion of oil and gas production into common equivalent units of measure on the basis of energy content, depletion rates per equivalent MCF (thousand cubic feet) of natural gas were as follows:
Year Ended September 30, ------------------------------------------ 1996 1995 1994 ---- ---- ---- Depreciation, depletion and amortization.......................... $2,311 $2,757 $2,014 ====== ====== ====== Depletion rate per equivalent MCF of natural gas.................. $ 0.64 $ 0.68 $ 0.51 ======= ======= =======
NOTE 10 -- PROVED OIL AND GAS RESERVES AND RESERVE VALUATION (UNAUDITED) Reserve estimates are based upon subjective engineering judgements made by the Company's independent petroleum reservoir engineers, Ryder Scott Company Petroleum Engineers and Huntley & Huntley, and may be affected by the limitations inherent in such estimations. The process of estimating reserves is subject to continuous revisions as additional information is made available through drilling, testing, reservoir studies and production history. There can be no assurance such estimates will not be materially revised in subsequent periods. -36- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Estimated quantities of proved reserves and changes therein, all of which are domestic reserves, are summarized below:
Oil (BBLS) Natural Gas (MCF) ---------- ---------------- Proved developed and undeveloped reserves: As of October 1, 1993.............................................. 238,354 45,478,755 Revisions of previous estimates................................. 136,132 13,051,146 Production...................................................... (52,078) (3,605,915) -------- ----------- As of September 30, 1994........................................... 322,408 54,923,986 Revisions of previous estimates................................. 65,562 2,537,310 Acquisition of minerals in place................................ 13,882 2,828,172 Production...................................................... (50,972) (3,721,249) -------- ----------- As of September 30, 1995........................................... 350,880 56,568,219 Revisions of previous estimates................................. 156,992 16,410,374 Production...................................................... (46,030) (3,349,493) -------- ----------- As of September 30, 1996........................................... 461,842 69,629,100 ======= ========== Proved developed reserves: October 1, 1993.................................................... 238,354 41,926,376 ======= ========== September 30, 1994................................................. 300,813 45,941,369 ======= ========== September 30, 1995................................................. 248,228 31,534,882 ======= ========== September 30, 1996................................................. 312,527 34,763,938 ======= ==========
The revisions of previous estimates result from significant additions of proved undeveloped and proved developed non-producing reserves. All of the Company's oil and gas reserves are located in United States. The following is a standardized measure of discounted future net cash flows and changes therein relating to estimated proved oil and gas reserves, as prescribed in Statement of Financial Accounting Standards No. 69. The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's oil and gas properties. An estimate of fair value would also take into account, among other factors, the likelihood of future recoveries of oil and gas in excess of proved reserves, anticipated future changes in prices of oil and gas and related development and production costs, a discount factor based on market interest rates in effect at the date of valuation and the risks inherent in reserve estimates.
September 30, ---------------------------------------------- 1996 1995 1994 ---- ---- ---- Future cash inflows................................................ $138,327 $103,811 $97,098 Future production costs............................................ (46,835) (32,537) (35,994) Future development costs........................................... (31,195) (22,976) (12,995) Future income tax expense.......................................... (7,451) (6,829) (5,875) ----------- ----------- -------- Future net cash flows.............................................. 52,846 41,469 42,234 Discount factor of 10% for estimated timing of future cash flows... (28,352) (20,096) (23,769) ---------- ---------- ------- Standardized measure of discounted future cash flows............... $ 24,494 $ 21,373 $18,465 ========= ========= =======
The future cash flows were computed using the applicable year-end prices and costs and respective year-end statutory tax rates that related to then existing proved oil and gas reserves in which the Company has mineral interests. The estimates of future income tax expense are computed at the blended rate (Federal and state combined) of 36% in 1996 and 40% in 1995 and 1994. The following were the sources of changes in the standardized measure of discounted future net cash flows: -37- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts)
September 30, ----------------------------------------- 1996 1995 1994 ---- ---- ---- Standardized measure, beginning of year............................. $21,373 $18,465 $26,956 Sale of oil and gas, net of production costs........................ (6,737) (6,354) (5,440) Net changes in prices............................................... 2,094 4,474 (9,927) Purchases of reserves in place...................................... - 3,016 - Changes in estimated future development costs....................... (2,617) (6,158) 5,079 Development costs incurred during the period that reduced future development costs................................................ - 207 706 Revisions in reserve quantity estimates............................. 10,391 1,601 8,887 Net changes in income taxes......................................... 66 (952) (616) Accretion of discount............................................... 2,137 1,847 2,696 Other: Change in timing of production................................... (2,213) 3,566 (5,814) Other factors.................................................... 1,661 (4,062) -------- ------- -------- Standardized measure, end of year................................... $24,494 $21,373 $18,465 ======= ======= =======
NOTE 11 -- OTHER ASSETS Other assets consist of the following:
September 30, ------------------------- 1996 1995 ---- ---- Debt issuance costs.................................................................. $ 487 $ 87 Organization costs................................................................... 805 805 Other................................................................................ 14 12 -------- ----- 1,306 904 Less: Accumulated amortization..................................................... (935) (441) ------- ----- $ 371 $463 ======= ====
NOTE 12 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses consist of the following:
September 30, ------------------------- 1996 1995 ---- ---- Interest............................................................................. $ 99 $ 391 Employee related costs............................................................... 870 1,003 Taxes, including payroll taxes....................................................... 171 877 Other................................................................................ 735 1,013 -------- ------- $1,875 $3,284 ====== ======
Other current liabilities consist of the following:
September 30, ------------------------- 1996 1995 ---- ---- Deferred revenue - gas balancing.................................................. $1,623 $1,147 Undistributed revenues - outside interest owners.................................. 1,163 1,468 Suspended revenues - outside interest owners...................................... 679 693 Other............................................................................. 195 15 -------- --------- $3,660 $3,323 ====== ======
-38- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) NOTE 13 -- ENVIRONMENTAL MATTERS As noted previously, the purchasers of Powerine and the Indian Refinery assumed all of the environmental liabilities of Powerine, the Powerine Refinery and the Indian Refinery. At the time such environmental liabilities were assumed by the purchasers, their recorded book values were $23,561 for the Powerine Refinery and $12,500 for the Indian Refinery. As of November 30, 1996, EMC had not obtained financing and had not restarted the Powerine Refinery. On November 6, 1996, American Western filed a voluntary petition for bankruptcy and thereafter obtained bankruptcy court approval to sell the Indian Refinery to the highest bidder. Accordingly, although the environmental liabilities related to both of the Company's Refineries have been assumed by others, there can be no assurance that the Company or one of its subsidiaries will not be sued for matters related to environmental liabilities of the Refineries. The purchasers of Powerine and the Indian Refinery are thinly capitalized and without significant financial resources. One purchaser, American Western, has filed for bankruptcy and plans to sell the Indian Refinery to the highest bidder. If either of these companies fails in such endeavors and they or their successors cannot pay their environmental liabilities, it is possible that the Company or IRLP (still a subsidiary of the Company) could become a party in related legal actions. Although the Company does not believe it has any liabilities with respect to environmental liabilities of the refineries, a court of competent jurisdiction may find otherwise and the Company may be required to fund portions of such liabilities. In recent years, government and other plaintiffs have often sought redress for environmental damage from the party most capable of payment without regard to responsibility or fault. Whether or not the Company is ultimately held liable in such a circumstance, should litigation involving the Company and/or IRLP occur, the Company would incur substantial legal fees and experience a diversion of management resources from other operations. NOTE 14 -- DEBT Long-term debt consists of the following:
September 30, ----------------------------- 1996 1995 ---- ---- GECC loan........................................................................... $10,488 $33,196 Subordinated debt................................................................... 3,518 Other............................................................................... 2,500 -------- --------- 14,006 35,696 Less: Current portion.............................................................. (8,172) (12,080) -------- ------- $ 5,834 $23,616 ======= =======
The General Electric Corp. ("GECC") loan was made to two of the Company's natural gas subsidiaries, Castle Texas Pipeline L.P. ("Pipeline") and CEC Gas Marketing L.P. ("Marketing"). The GECC loan bore interest of 8.33% and was secured by a first security interest in all of the assets of Pipeline and Marketing, as well as a pledge of the partnership interests and capital stock of the general and limited partners of these partnerships. All of the cash flow generated by Pipeline and Marketing was dedicated to repayment of the GECC loan. Subsequent to September 30, 1996, the GECC loan was refinanced (see Note 24). In May 1996, the Company entered into a subordinated term loan facility of $3,800. The loan was subordinated to the GECC Loan, was payable over 18 months and bore interest at the prime rate plus 1%. In November 1996, the Company entered into a $25,000 facility with a syndicate of banks and the subordinated lender contributed its loan to the new facility (see Note 24). -39- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) The balance sheet classification and scheduled maturities of long term debt at September 30, 1996 are based upon the repayment schedule of the $25,000 facility (see Note 24). The other long-term debt of $2,500 earned interest at the twelve-month LIBOR rate determined annually on December 11, plus 1/2%. The debt was due to a financial institution which was previously a shareholder of the Company. The debt was repaid in June 1996. Long-term debt-related party consists of a loan from Stockholder which earned interest at the twelve-month LIBOR rate determined annually on December 11, plus 1/2%. The debt was due to a stockholder who was also a director of the Company until January 5, 1996. The debt was repaid in June 1996. Maturities The scheduled maturities of long-term debt outstanding as of September 30, 1996 are as follows: For the Year Ending September 30, - --------------------------------- 1997.................................................... $ 8,172 1998.................................................... 5,834 --------- $14,006 ========= NOTE 15 -- COMMITMENTS AND CONTINGENCIES Operating Lease Commitments The Company has the following noncancellable operating lease commitments at September 30, 1996: For the Year Ending September 30, - --------------------------------- 1997................................................. $227 1998................................................. 189 1999................................................. 34 ------ $450 ====== Rent expense for the years ended September 30, 1996, 1995 and 1994, excluding refining related rent expense, was $236, $255 and $255, respectively. Compensation/Severance Obligations As of September 30, 1996, the Company had the following compensation obligations under employment agreements with three officers of three of its subsidiaries: For the Year Ending September 30, - --------------------------------- 1997................................................. $251 1998................................................. 53 ------ $304 ====== The Company entered into the employment agreements in fiscal 1995 and fiscal 1996. In addition, the Company and its subsidiaries have severance agreements with all of their employees that provide for severance compensation, in the event substantially all of the Company's assets are sold and the employees are terminated. Such severance obligations, net of $95 compensation obligations, approximate $1,000 at September 30, 1996. In addition, in the event of such sale of substantially all its assets, the Company has agreed to pay the remaining contractual obligations under its agreement with Terrapin Resources, Inc. (see below) and to pay its Chairman his accumulated retirement benefit (see Note 16). -40- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Letters of Credit At September 30, 1996, the Company had issued letters of credit of $216 for oil and gas drilling, operating and plugging bonds. The letters of credit are renewed semi-annually or annually. At September 30, 1996, the Company had also guaranteed gas purchase obligations related to its gas marketing activities. At the present level of gas purchases by such subsidiaries, such guarantees approximate $800. Long Term Supply Commitments The Company has a gas purchase agreement with MGNG (see Note 20). Aggregate future purchase commitments under the gas purchase long-term supply commitment are as follows: For the Year Ending September 30, - --------------------------------- 1997............................................... $29,705 1998............................................... 30,444 1999............................................... 20,727 -------- $80,876 ======== If MGNG fails to perform its obligations under this contract, there is no assurance that Marketing could fulfill its obligations under the Lone Star Contract in a manner which would permit Marketing to maintain its current profit margin on sales of natural gas. The Company also has a commitment to sell 7,356 btu's (British thermal units) of natural gas at a fixed price from June 1, 1996 to May 31, 1999 to MGNG. The Company anticipates supplying the gas from gas purchases on the spot market. The Company's obligations to sell natural gas to MGNG at September 30, 1996 are as follows: For the Year Ending September 30, - --------------------------------- BTU's (British Thermal Units) ----------------------- 1997......................................... 2,452 1998......................................... 2,452 1999......................................... 1,633 ----- 6,537 ===== Prior to September 30, 1996, Production entered into fixed price contracts to hedge 14% of the gas to be sold to MGNG at a fixed price. At September 30, 1996, the market value of the hedges was approximately $316 and the excess of the gas sales price to MGNG over the hedged cost was approximately $136. Production has not yet hedged the other 86% of the gas that must be delivered to MGNG under the contract. If spot gas prices are above the fixed price to MGNG, Production could incur a loss when it buys the gas to supply MGNG on the remaining unhedged volumes. At December 31, 1996, the cost to purchase fixed price contracts for the remaining unhedged deliveries to MGNG exceeded the gas sales revenues to be received from MGNG by approximately $825. In addition, Production has provided a $264 margin account deposit and must provide additional cash in a margin account if the market price of gas is less than the fixed price. The notional amounts of fixed price contracts for natural gas were as follows: September 30, 1996 ------------------ Fixed price contracts to buy gas........................ $2,070 Fixed price contracts to sell gas....................... (418) ------- Net..................................................... $1,652 ======= -41- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Management Agreements The Company has two long-term management agreements with a subsidiary of Terrapin Resources, Inc. ("Terrapin") to provide accounting and management with respect to the Company's exploration and production assets and to provide corporate accounting services. Terrapin is wholly-owned by an officer of the Company. Obligations under these agreements are as follows: For the Year Ending September 30, - --------------------------------- 1997................................................. $ 384 1998................................................. 399 1999................................................. 277 -------- $1,060 ======== Lone Star Contract Additionally, the Company's natural gas marketing and pipeline segment sells substantially all of its natural gas to only one customer -- Lone Star. Sales to Lone Star by the Natural Gas Marketing and Transmission segment aggregated $62,140, $74,675 and $66,393 for the fiscal years ended September 30, 1996, 1995 and 1994, respectively. Approximately 24% of Lone Star's requirements under the gas sales contract are currently supplied from wells operated by the Company. The balance of these requirements are purchased from MGNG pursuant to a gas purchase contract. If MGNG were to fail to perform its obligations under this contract, there could be no assurance that the Company could fulfill its obligations under the Lone Star Contract in a manner which would permit the Company to maintain its current profit margin on sales of natural gas. Legal Proceedings Powerine Arbitration On April 14, 1995, Powerine repaid all of the indebtedness owed by it to MGTFC, including $10.8 million of disputed amounts (the "Disputed Amount"). On the same day, the Company and two of its subsidiaries and MG and two of its subsidiaries entered into the Payoff Loan and Pledge Agreement ("Payoff Agreement"), which provided the following: a. MG released Powerine from all liens and claims. b. MG loaned the Company $10 million. c. Powerine transferred its claim with respect to the Disputed Amount to the Company. d. The claim with respect to the Disputed Amount was submitted to binding arbitration (the "Powerine Arbitration"). e. MG can offset the $10 million loan to the Company against the $10 million note it issued to the Company as part of the MG Settlement, to the extent the arbitrator decides the claim with respect to the Disputed Amount in MG's favor. The Disputed Amount relates primarily to disputes over the prices paid by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's subsidiary, MGRM, and nonpayment for refined products that were processed after January 31, 1995 and that MGRM was obligated to, but did not, lift and pay for. To the extent that the arbitrator decides in favor of the Company, the Company's note to MG will be reduced and the net amount due to the Company from MG will be increased. If the arbitrator settles the Disputed Amount entirely in the Company's favor, the Company's note to MG will be cancelled and MG will still owe the Company its $10,000 note (due October 14, 1997). If the arbitrator settles the Disputed Amount entirely in MG's favor, the Company's note from MG will be discharged and the Company will incur a $10,000 loss from discontinued refining operations. In such case the Company's future earnings will also be adversely impacted since the Company has not recorded any reserve against the note. Although the Company expects to prevail, there can be no assurance such will be the case. -42- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) In December 1996, the Company and MG presented oral arguments to the arbitrator. A decision is expected in the second quarter of fiscal 1997. In January 1996, MG did not pay interest on the $10,000 note when such interest was due. As a result, the entire note is due to be paid to the escrow account for the Powerine Arbitration. The Company is litigating to compel MG to pay the entire note. By its terms the note is due on October 14, 1997. The effect of compelling MG to pay the note into the escrow account, if successful, will be that the note, after adjustment by the Arbitrator, if any, will be paid to the Company when the Arbitration is concluded rather than on October 14, 1997, the due date before MG's default. Swap Agreement - MGNG In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap Agreement"), dated October 14, 1994 between MGNG and IRLP, claiming the right to do so based on breaches of other agreements by MG and its affiliates. MGNG disregarded IRLP's termination notice and sent IRLP a termination notice alleging IRLP was the defaulting party and claiming approximately $1,200 of losses. IRLP has refused to pay MGNG's claim. In June 1995, MGRM, as MGNG's assignee, filed a complaint in Delaware state court, claiming $653, consisting of $1,356 under the Swap Agreement less $703 owed to IRLP by MGNG in transactions unrelated to the Swap Agreement, plus interest. IRLP has answered the complaint. The Company's management believes that IRLP has good defenses to that claim, expects to prevail and to recover its $703 receivable. This litigation is related to the Powerine Arbitration (see above) and the Company expects this litigation to be settled at the same time as or shortly after the Powerine Arbitration litigation is settled. Powerine Class Action Lawsuit In July 1996, Powerine was served with a suit concerning operations of the Powerine Refinery. The suit claims the Powerine Refinery is a public nuisance, that it has released excessive toxic and noxious emissions and caused physical and emotional distress on residents living nearby. The Company is also named as a defendant in the suit but has not as yet been served with the lawsuit. The Company believes it is not properly a defendant in the lawsuit, since it did not operate the Powerine Refinery. Furthermore, when the Company sold Powerine in January 1996, the buyer assumed all liabilities, including environmental liabilities. Larry Long Litigation Larry Long filed a suit against the Company, Production, Pipeline, Marketing, ARCO, a subsidiary of ARCO and MGNG. The plaintiff claims, among other things, that the parties being sued have underpaid non-operating working interest owners, royalty interest owners, and overriding royalty interests owners with respect to gas production from oil and gas properties operated by Production and attempts to bring a class action on behalf of all such owners based upon various legal theories. The plaintiff is seeking recovery of $40,000. The Company has responded to the lawsuit and has asserted that the suit is not a proper class action and that the named plaintiff is not an appropriate class representative. Management of the Company and special counsel retained by the Company believe that there are a number of meritorious defenses to the claims being asserted. Among other defenses, the Company has asserted that many of the matters which form the basis for the plaintiff's claims were resolved adversely to certain of the members of the purported class in prior litigation involving the predecessors in title to the Company's subsidiaries. In addition, the Company believes that the amount claimed by the plaintiff is far in excess of and not supported by the allegations made. Based upon a review of the pleadings which have been filed, the Company believes that the claims are without merit and intends to vigorously defend the lawsuit. The Company has recently filed a petition for summary judgement against Larry Long. The lawsuit is currently in discovery and deposition proceedings. -43- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Stockholder Litigation Recovery In December 1995, the Company received $2,725 from a plaintiff class escrow fund related to stockholder litigation. The parties reached a settlement with respect to the stockholder litigation in October 1994. The proceeds to the Company represent unclaimed funds that were to revert to the Company pursuant to the Settlement Order for the litigation. The recovery is shown as "Other Income" in the Consolidated Statement of Operations. NOTE 16 -- EMPLOYEE BENEFIT PLANS: On October 1, 1995, the Company adopted a 401(k) plan (the "Plan") for its employees and those of its subsidiaries. All employees are eligible to participate. Employees participating in the Plan could authorize the Company to contribute up to 15% of their gross compensation to the Plan. The Company matches such voluntary employee contributions up to 3% of employee gross compensation. Employees' contributions to the Plan cannot exceed thresholds set by the Secretary of the Treasury. Vesting of Company contributions is immediate. During the year ended September 30, 1996, the Company's and its subsidiaries' contributions to the Plan aggregated $26. Although the Company's refining subsidiaries sponsored pension, profit sharing and 401(k) plans for their employees, such plans were transferred to the purchasers of such refineries and the purchasers assumed all related plan liabilities. Post Retirement Benefits Neither the Company nor its subsidiaries provide any other post retirement plans for employees. The Company has, however, granted the Company's Chief Executive Officer a retirement benefit. At September 30, 1996, the Chief Executive Officer's accrued retirement benefit was $848. NOTE 17 -- STOCKHOLDERS' EQUITY On December 2, 1993, the Company consummated a public offering of its common stock. Pursuant to the terms of the offering, the Company sold 2,800,000 shares of common stock to the public and 700,000 shares of common stock to MG at a gross offering price of $15.00 per share. The offering resulted in aggregate net proceeds to the Company of $48,178. Of such amount, $30,800 was used to pay down various debt obligations of the Company owed to MGTFC. The remainder of such amount was used for general corporate purposes. As a result of the offering, MG's percentage ownership of the Company's common stock was reduced from approximately 49% to approximately 41%. All treasury stock of the Company was reissued in conjunction with the offering. On April 21, 1994, the Board of Directors of the Company adopted a Stockholder Rights plan under which one preferred stock purchase right has been distributed for each outstanding share of the Company's common stock. Each right initially entitles holders of common stock to buy one-hundredth of one share of a new series of preferred stock at an exercise price of $35.00. The rights will be exercisable only if a person or group, without the prior approval of the Company's Board of Directors, acquires 15% or more of the outstanding common stock or announces a tender offer as a result of which such person or group would own 15% or more of the common stock. If a person to whom these provisions apply becomes a beneficial owner of 15% or more of the outstanding common stock, each right (other than rights held by such acquiring person) will also enable its holder to purchase common stock (or equivalent securities) of the Company having a value of $70.00 for a purchase price of $35.00. In addition, if the Company is involved in a merger or other business combination with another entity, at or after the time that any person acquires 15% or more of the outstanding common stock, each right will entitle its holder to purchase, at $35.00 per right, common shares of such other entity having a value of $70.00 On September 9, 1994, the Company acquired and cancelled 3,600,000 shares of its common stock from MG. On October 14, 1994, 969,000 shares of common stock were surrendered by MG and cancelled by the Company, reducing MG's ownership of the Company's common stock to zero. In addition, the convertible debenture was cancelled and all warrants were subsequently cancelled (see Notes 3, 18 and 20). -44- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Subsequent to September 30, 1996, the Company repurchased 3,500 of its shares pursuant to a share repurchase plan (see Note 24). Pursuant to the terms of its $25,000 credit facility with a syndicate of banks, the Company's natural gas marketing and transmission and exploration and production subsidiaries are precluded from paying more than 25% of quarterly cash flow, as defined, to the parent. The book value of the restricted net assets of the related natural gas marketing and transmission and exploration and production subsidiaries aggregated $76,719 at September 30, 1996 (see Note 24). NOTE 18 -- STOCK OPTIONS AND WARRANTS Option and warrant activities during each of the three years ended September 30, 1996 are as follows (in whole units):
Non- Incentive Incentive Qualified Plan Other Warrants Options Options Options Options Total ---------- ---------- ---------- --------- ---------- ----------- Outstanding-October 1, 1993................ 1,975,000 2,500 110,000 195,000 92,500 2,375,000 Issued..................................... 434,000 100,000 534,000 Exercised.................................. (5,000) (5,000) Cancelled.................................. (100,000) (100,000) Expired.................................... (1,055,000) (17,500) (41,666) (7,500) (1,121,666) --------- --------- -------- -------- ---------- --------- Outstanding-September 30, 1994............. 920,000 2,500 92,500 487,334 180,000 1,682,334 Issued..................................... 115,000 115,000 Exercised.................................. (35,000) (35,000) Expired.................................... (897,500) (25,000) (58,500) (10,000) (991,000) ---------- --------- -------- -------- ------- --------- Outstanding-September 30, 1995............. 22,500 2,500 67,500 543,834 135,000 771,334 Issued..................................... 10,000 15,000 25,000 Expired.................................... (22,500) (270,834) (15,000) (308,334) Cancelled.................................. (100,000) (100,000) ------------ --------- ------------ ------------- -------- ---------- Outstanding-September 30, 1996............. - 2,500 77,500 288,000 20,000 388,000 ------------ ===== ======= ======= ======== ========== Exercisable at September 30, 1996 - 2,500 77,500 218,500 20,000 318,500 ============ ===== ======= ======= ======== ========== Become exercisable during fiscal year ended: September 30, 1997.................. 48,250 48,250 September 30, 1998.................. 20,000 20,000 September 30, 1999.................. 1,250 1,250 --------- ------------ 69,500 69,500 ======== =========== Reserved at September 30, 1994............. 920,000 2,500 92,500 562,500 180,000 1,757,500 ========== ===== ======= ======= ======= ========= Reserved at September 30, 1995............. 22,500 2,500 67,500 562,500 135,000 790,000 ========== ===== ======= ======= ======= ========== Reserved at September 30, 1996............. - 2,500 77,500 562,500 20,000 662,500 ============ ===== ======= ======= ======== ========== Exercise prices at: September 30, 1996.................. N/A $6.00 $6.00- $ 8.44- $11.00 $8.00 $ 14.25 September 30, 1995.................. $11.00 $6.00 $6.00 $ 8.50- $11.00- $ 14.25 $12.25 September 30, 1994.................. $11.00 $6.00 $6.00- $ 10.25 $ 5.75- $8.50 $ 14.25 $12.25 Exercise Termination Dates.......... N/A 1997 1997-1998 1996-2006 1996-2003
In fiscal 1993, the Company adopted the 1992 Executive Equity Incentive Plan (the "Incentive Plan"). The purpose of the Incentive Plan is to increase the ownership of common stock of the Company by those non-union key employees (including officers and directors who are officers) and outside directors who contribute to the continued growth, development -45- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) and financial success of the Company and its subsidiaries, and to attract and retain key employees and reward them for the Company's profitable performance. The Incentive Plan provides that an aggregate of 562,500 shares of common stock of the Company will be available for awards in the form of stock options, including incentive stock options and non-qualified stock options generally at prices at or in excess of market prices at the date of grant. The Incentive Plan also provides that each outside director of the Company will annually be granted an option to purchase 5,000 shares of common stock at fair market value on the date of grant. In conjunction with the MG Settlement, certain warrants were cancelled (see Note 3). In December 1996, 162,500 options expired, 10,000 options were exercised and an additional 32,000 options were issued. The exercise price was the market price on date of issuance. In addition to stock options and warrants, the Company has issued the following stock appreciation rights:
Measurement Price -------------------------------------------------------------------------------- $5.00 $6.00 $8.00 $12.50 $13.00 Total ----- ----- ----- ------ ------ ----- Outstanding-October 1, 1993............... 300,000 180,000 140,833 150,000 36,667 807,500 Exercised................................. (300,000) (67,500) (20,000) (387,500) Cancelled................................. (13,333) (13,333) -------- --------- -------- -------- ------- --------- Outstanding-September 30, 1994............ - 112,500 107,500 150,000 36,667 406,667 Exercised................................. (112,500) (20,000) (132,500) -------- --------- -------- -------- ------- --------- Outstanding-September 30, 1995............ - - 87,500 150,000 36,667 274,167 Cancelled................................. (87,500) (150,000) (36,667) (274,167) -------- --------- -------- -------- ------- --------- Outstanding-September 30, 1996............ - - - - - - ======== ========= ======== ======== ======= =========
The stock appreciation rights entitled the holder to cash compensation equal to the difference between the price per share of the Company's common stock and the measurement price with respect to the number of rights issued, subject to adjustment. Costs associated with stock appreciation rights were recorded over the relevant period of employment. During the years ended September 30, 1995 and 1994, the Company recorded (income) expense related to stock appreciation rights of ($1,162) and $4,848, respectively. The stock appreciation rights cancelled in fiscal 1996 were cancelled as part of severance settlements with former officers of the Company and IRLP. -46- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) NOTE 19 -- INCOME TAXES Provisions for (benefit of) income taxes consist of:
September 30, ---------------------------------------------- 1996 1995 1994 ---- ---- ---- Provision for (benefit of) income taxes: Current: Federal....................................................... $ 300 $ 1,852 $ 2,877 State......................................................... 11 22 549 Deferred: Federal....................................................... 4,462 20,157 28,702 State......................................................... 128 2,532 (14,827) Adjustment to the valuation reserve for deferred taxes: Federal....................................................... (15,712) 29,415 (34,701) State......................................................... (448) 3,695 17,926 --------- --------- -------- ($11,259) $57,673 $ 526 ======= ======= ========= Intraperiod tax allocation of tax provision (benefit): Continuing operations......................................... ($11,259) $37,823 ($17,077) Discontinued operations....................................... 19,850 17,603 --------- -------- -------- ($11,259) $57,673 $ 526 ======= ======= ==========
The intraperiod tax allocation was made pursuant to FAS 109. Deferred tax assets (liabilities) are comprised of the following at September 30, 1996 and 1995:
September 30, ------------------------ 1996 1995 ---- ---- Operating loss and other tax carryforwards.......................................... $28,098 $23,786 Depletion accounting................................................................ (1,106) (1,398) Depreciation........................................................................ (5,194) (6,232) Amortization (gas contracts)........................................................ 1,665 2,553 Discontinued net refining assets, including environmental........................... 1,147 18,557 Installment sale accounting......................................................... - (4,000) Other............................................................................... (2,950) (3,107) -------- -------- 21,660 30,159 Valuation allowance................................................................. (13,944) (33,110) -------- ------- $ 7,716 ($ 2,951) ======== ======== Deferred tax assets - current....................................................... $ 2,373 $ 4,623 Deferred tax assets - non-current................................................... 5,343 - Deferred tax liabilities - non-current.............................................. (7,574) -------- --------- $ 7,716 ($ 2,951) ======== ========
Upon adoption of FAS 109, the Company recorded an asset of $73,909 and provided a valuation reserve against the asset of $65,395. During fiscal 1993, the Company reduced the valuation reserve based upon the Company's entering into certain long-term purchase and sale commitments, refinancing its debt and the related earnings projections. At September 30, 1994, the Company adjusted its valuation reserve such that the remaining deferred tax assets approximated the net tax benefit that the Company expected to realize from its net operating loss carryforwards as a result of the gain realized from the MG Settlement (See Note 3). As a result of unanticipated delays and larger than expected losses in the sale of its refineries, the Company did not realize all of its tax carryforwards. As a result, the Company provided a $31,955 valuation reserve at -47- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) December 31, 1994 which was subsequently increased to $33,110 at September 30, 1995. During the year ended September 30, 1996, the Company reduced its valuation reserve to $13,944 in anticipation of future taxable income from the Lone Star Contract and the decreased probability of additional losses related to discontinued refining operations. The Company has recorded a net deferred tax asset of $7,716 at September 30, 1996. Realization is dependent on generating sufficient taxable income through the remaining term of the Lone Star Contract. Although realization is not assured, management believes it is more likely than not that the deferred tax asset will be realized. The income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes as follows:
Year Ended September 30, ------------------------------------------- 1996 1995 1994 ---- ---- ---- Tax at statutory rate.............................................. $ 4,835 $25,400 $13,805 State taxes, net of federal benefit................................ 138 4,063 2,371 Non-deductible goodwill amortization............................... 1,855 311 Changes in prior year's estimates.................................. (6,847) Changes in valuation allowance..................................... (16,160) 33,110 (16,775) Other.............................................................. (72) 92 814 ------- ------- -------- ($11,259) $57,673 $ 526 ======= ======= ========
The tax provision (benefit) applicable to discontinued operations - refining differs from the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes as follows:
Year Ended September 30, ---------------------------- 1995 1994 ---- ---- Income (loss) before income taxes - discontinued operations - refining............... $60,787 $40,180 ======= ======= Tax (benefit) at statutory rate...................................................... $21,275 $14,063 State taxes, net of federal benefit.................................................. 3,403 2,416 Non-deductible goodwill amortization................................................. 1,855 311 Change in prior year's estimate...................................................... (6,847) Other................................................................................ 164 813 ------- ------- $19,850 $17,603 ======= =======
At September 30, 1996, the Company had the following tax carryforwards available:
Federal Tax ----------------------------- Alternative Minimum Regular Tax ------- ------------ Net operating loss................................................................... $58,636 $74,073 Alternative minimum tax credits...................................................... $ 2,176 N/A Statutory depletion.................................................................. $12,702 $ 3,153 Investment tax credit................................................................ $ 239 N/A
-48- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) The net operating loss and investment tax credit carryforwards expire from 1997 through 2008. Of the Company's net operating losses, approximately $6,821 (approximately $2,341 for alternative minimum tax purposes) are applicable to subsidiaries acquired by the Company and may only be used to offset future taxable income of the acquired companies which generated the loss. Similar restrictions apply to all of the Company's investment tax credit carryforwards and approximately $9,000 of the Company's statutory depletion carryforwards. On September 9, 1994, the Company experienced a change of ownership for tax purposes. As a result of such change of ownership, the Company's net operating loss became subject to an annual limitation of $7,845. Such annual limitation, however, was increased by the amount of net built in gain at the time of the change of ownership. Such net built-in gain aggregated $219,430. During fiscal 1995, the Company utilized $81,175 of its net operating loss, including $72,653 of built-in gain, to offset the gain from the MG Settlement (see Note 3). During fiscal 1996, the Company utilized $9,657 of its operating loss, including $1,812 of built-in gain. The Company also has approximately $61,200 in individual state tax loss carryforwards available at September 30, 1996. Such carryforwards are primarily available to offset taxable income apportioned to certain states in which the Company previously incurred refining losses and currently has only minor operations and no current plans for future operations. NOTE 20 -- RELATED PARTIES During the fiscal year ended September 30, 1994, the Company conducted several transactions with its principal stockholder, MG, and its subsidiaries. As a result of the MG Settlement on October 14, 1994, MG's ownership of the Company was reduced to zero and MG was thereafter no longer a related party. The following summarizes the MG subsidiaries with which the Company and its affiliates conducted transactions, and the nature and dollar amount of such related party transactions. The MG affiliates and subsidiaries which the Company engaged in transactions were as follows: Metallgesellschaft Corp. A.G. ("MG AG"), German parent Metallgesellschaft Corp. ("MG"), U.S. subsidiary MG Refining and Marketing, Inc. ("MGRM"), U.S. subsidiary MG Trade Finance Corp. ("MGTFC"), U.S. subsidiary MG Futures, Inc. ("MGF"), U.S. subsidiary MG Natural Gas Corp. ("MGNG"), U.S. subsidiary MG Gathering Corp ("MGG"), U.S. subsidiary MGPC Petcoke, Inc. ("MG Petcoke"), U.S. subsidiary All of the above U.S. subsidiaries are directly or indirectly wholly-owned by MG which, in turn, is indirectly owned by MG AG. The fiscal 1994 transactions with MG and its affiliates are as follows: -49- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts)
Dollar Volume of Transaction Parties Year Ended - ------------------------------------------ September 30, Company MG Description 1994 - ---------------------- ------------ ----------- ------------- IRLP MGTFC Interest paid by IRLP to MGTFC on MGTFC $1,147 Subordinated Note. IRLP, Indian Powerine MG Payments by IRLP and IPLP to MG for crude oil $50,257 Limited Partnership and feedstock supply. ("IPLP"), a wholly-owned subsidiary of the Company IRLP, IPLP & Powerine MG Payments of fees to MG with respect to feedstock $2,614 supply and credit agreements. IRLP MGRM Payments by MGRM to IRLP under swap (hedging) $3,082 agreement with respect to crude oil. Powerine MGRM Payments by Powerine to MGRM for the supply of $47,129 crude and oil. Powerine MG Petcoke Payment by MG Petcoke to Powerine for purchase $2,516 of coke. IRLP MGTFC Payment by IRLP to MGTFC for lease catalyst $85 costs. IRLP MGTFC Payment by IRLP to MGRM for natural gas $8,462 supplies. IRLP, IPLP & Powerine MGF Payments by IRLP, IPLP and Powerine to MGF for $292 brokerage services for hedging activities. IRLP MGRM Payments received by IRLP for sales of refined $498,225 products to MGRM under the Indian Offtake Agreement. Powerine MGRM Payments received by Powerine for sales of refined $348,751 products to MGRM under Powerine Offtake Agreement. IRLP MGRM Payments by MGRM to IRLP for IRLP's operating $11,899 the Indian Refinery at less than full capacity. Pipeline MGG Pipeline paid MGG for pipeline management $148 services. Marketing MGNG Marketing paid MGNG for gas marketing services. $240 Marketing MGNG Marketing paid MGNG for gas supplies under a $31,069 long-term gas supply agreement
In addition to the above-related party transactions with MG and its affiliates, the Company undertook the following related party transactions: -50- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Sale of Subsidiaries On March 31, 1993, the Company entered into an agreement to sell to Terrapin Resources, Inc. ("Terrapin") its oil and gas partnership management businesses for $1,100 ($800 note bearing interest at 8% per annum and $300 cash) which approximated book value. The closing of the stock purchase transaction occurred on June 30, 1993. Terrapin is wholly-owned by a former officer and director of the Company. In November 1994, this former officer and director rejoined the Company as an officer. In December 1994, the note was repaid. In conjunction with the sale of its partnership management business, the Company and Production entered into two management agreements with Terrapin to manage its exploration and production operations. The second agreement was amended in 1996 to include corporate accounting functions. Management fees incurred to Terrapin for the years ended September 30, 1996, 1995 and 1994 aggregated $613, $579 and $584, respectively. Purchase of IRLP Interests During 1993, the Company acquired the partnership units of IRLP it did not already own. Certain of these units were acquired from an officer of the Company for an aggregate of 262,500 stock appreciation rights, entitling the holder to cash compensation equal to the difference between the price per share of the Company's common stock and stated prices. In November 1994, 112,500 stock appreciation rights were exercised for $1,026 and the remaining 150,000 stock appreciation rights were surrendered as part of the Company's severance agreement with the officer for $500. Professional Fees A former officer of the Company is also a partner in a law firm which served as general counsel to the Company. Legal fees incurred by the Company to this firm during the years ended September 30, 1996, 1995 and 1994 were $307, $2,593 and $5,101, respectively. The officer resigned on June 5, 1995. A former member of the Board of Directors is also a partner in a law firm which currently serves as general counsel for the Company. Legal fees incurred by the Company to this firm during fiscal 1996, 1995 and 1994 approximated $317, $1,225 and $806, respectively. The partner in the law firm resigned as a director of the Company on October 6, 1995. Loan to Officer On February 26, 1993, an officer of IRLP was loaned $250. The principal amount of the loan was due and payable in full on the earlier of January 31, 1996 or the termination of the officer's employment. The loan accrued interest at the prime rate in effect on the date of the loan as adjusted each January 1. The officer terminated his employment on December 22, 1995. The loan and accrued interest was offset against compensation due to the officer as part of the officer's severance. In addition, the officer surrendered all stock appreciation rights which he held. CORE, Inc. In the first quarter of fiscal 1995, the Company decided to dispose of its refining operations. During the period from October 14, 1994 to September 29, 1995, the Company financed three attempts to sell one or both of its refineries to CORE Refining Corporation ("CORE") (previously SIPAC, Inc.). CORE is wholly-owned by a director of the Company. The director was also the President and Chief Operating Officer of the Company until January 1996. Pursuant to several agreements with CORE, the Company agreed to reimburse CORE for certain expenses incurred by CORE in attempting to raise financing for a management buyout of one or both of the Company's Refineries. Such agreements with CORE also provided that the Company would be reimbursed for most of such funding should CORE succeed in raising financing. In September 1995, the third CORE attempt to obtain financing for the management buyout failed. During the year ended September 30, 1995, IRLP recorded $3,768 of expenses related to CORE. The Company is not responsible for any CORE expenses incurred after September 29, 1995. -51- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) Payment of Legal Fees for Former Director In conjunction with the MG Settlement, the Company paid legal fees incurred by a director of the Company. For the years ended September 30, 1996, 1995 and 1994, such fees were $3, $327 and $191, respectively. The director resigned in June 1995. NOTE 21 -- BUSINESS SEGMENTS Prior to August 14, 1989, when the Indian Refinery was acquired, the Company was involved in only one business segment, the exploration for and the production of oil and gas and administration of related oil and gas partnerships. Upon the acquisition of the Indian Refinery in August 1989, the Company became engaged in an additional business segment, refining. This segment had no operations until October 1, 1990. On December 3, 1992, the Company entered a third segment of the petroleum business - natural gas marketing. The Company disposed of its partnership administration business in June 1993 but continued its exploration and production business. As a result of the foregoing, the Company operated in three segments of the petroleum business during the fiscal years ended September 30, 1995 and 1994 - refining, natural gas marketing and transmission and exploration and production. As of September 30, 1995, the Company had disposed of its refining segment (see Note 3) and thus operated in only two business segments in fiscal 1996 - natural gas marketing and transmission and exploration and production.
Year Ended September 30, 1996 -------------------------------------------------------------------------------------------- Natural Gas Oil & Gas Eliminations Marketing Exploration and and and Refining Corporate Transmission Production (Discontinued) Items Consolidated ------------ ----------- -------------- ------------ ------------ Revenues........................... $63,789 $ 9,224 ($ 4,318) $ 68,695 Operating income (loss)............ 11,769 3,620 (3,499) 11,890 Identifiable assets................ 58,368 27,281 15,581 101,230 Capital expenditures............... 140 34 1 175 Depreciation, depletion and amortization.................... 11,393 2,324 251 13,968 Year Ended September 30, 1995 ------------------------------------------------------------------------------------------- Natural Gas Oil & Gas Eliminations Marketing Exploration and and and Refining Corporate Transmission Production (Discontinued) Items Consolidated ------------ ----------- -------------- ------------ ------------ Revenues........................... $74,675 $ 9,197 ($ 4,273) $ 79,599 Operating income (loss)............ 16,867 2,991 (4,995) 14,863 Identifiable assets................ 72,724 25,272 18,908 116,904 Capital expenditures............... 47 4,022 $35,355 4 39,428 Depreciation, depletion and amortization.................... 11,385 2,770 77 14,232
-52- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts)
Year Ended September 30, 1994 -------------------------------------------------------------------------------------------- Natural Gas Oil & Gas Eliminations Marketing Exploration and and and Refining Corporate Transmission Production (Discontinued) Items Consolidated ------------ ----------- -------------- ------------ ------------ Revenues........................... $66,424 $ 8,552 ($ 5,165) $ 69,811 Operating income (loss)............ 10,643 2,402 (5,499) 7,546 Identifiable assets................ 80,560 19,714 $469,149 77,068 646,491 Capital expenditures............... 21 956 218,088 346 219,411(1) Depreciation, depletion and amortization.................... 11,360 2,092 66 13,518
- ---------------- (1) Includes $152,945 of additions related to the acquisition of Powerine. NOTE 22 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, Cash Equivalents and Temporary Investments -- For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Note receivable - MG - at September 30, 1996, the Company had the following long-term note receivable: Note - MG $10,000 8% The Company believes the interest rate on the note approximates the market value given the guarantee of the note by MG AG. Debt -- At September 30, 1996, the Company had the following debt with interest rates which were fixed: GECC Loan............................. $10,488 8.33% Subordinated Loan..................... $ 3,518 Prime plus 1% The Company has recently conducted negotiations with prospective lenders and has ascertained that an interest rate of approximately 9.25% would have been likely if the Company were to have refinanced the GECC loan at September 30, 1996. Accordingly, the estimated fair market value of the GECC loan at September 30, 1996, based upon an interest rate of 9.25%, and anticipated future cash flows, is approximately $10,472. All other debt is at rates tied to market indices and is considered to be stated at fair value. Hedges -- At September 30, 1996, the Company had hedged approximately 910 btu of gas that it expects to purchase to sell to MGNG. The book value of such hedges is zero. The fair market value, based upon the market value of the related fixed price hedge contracts, was $316 at September 30, 1996. Other Current Assets and Current Liabilities - the Company believes that the book values of other current assets and current liabilities approximate the market values. -53- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) NOTE 23 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following information has been restated to reflect the discontinuance of refining operations, retroactively.
First Second Third Fourth Quarter Quarter Quarter Quarter (December 31) (March 31) (June 30) (September 30) ------------- ---------- --------- -------------- Fiscal 1996: Revenues.................................. $18,042 $22,424 $16,616 $11,613 Operating income before interest and income taxes............................ 3,226 5,365 1,415 1,884 Net income................................ 5,494 5,134 1,816 12,630 Net income per share...................... $ .82 $ .76 $ .27 $ 1.88
Net income for the quarter ended September 30, 1996 includes an $11,259 tax benefit related to a change in the valuation reserve for deferred tax assets (see Note 2 and 19).
First Second Third Fourth Quarter Quarter Quarter Quarter (December 31) (March 31) (June 30) (September 30) ------------- ---------- --------- -------------- Fiscal 1995: Revenues................................ $22,414 $22,915 $20,766 $13,504 Operating income before interest and income taxes......................... 4,784 5,253 4,383 443 Net income (loss)....................... 14,084 36 (1,873) 2,650 Net income (loss) per share............. $ 1.97 $ 0.01 ($ 0.28) $ .39
See Note 3 for a discussion of the first quarter gain on the MG Settlement and the quarterly adjustments to the carrying value of net refining assets. Changes in the valuation reserve for deferred tax assets are discussed in Note 19. The sum of the quarterly per share amounts ($2.09) differs from the annual per share amount ($2.20) primarily because of the 969,000 shares of the Company's common stock acquired on October 14, 1994 as part of the MG Settlement (see Note 3). NOTE 24 -- SUBSEQUENT EVENTS Refinancing of GECC Debt On November 26, 1996, the Company entered into a $25,000 credit facility with a syndicate of banks, including its subordinated lender. The credit facility consists of a $10,000 revolving credit facility and a $15,000 term loan facility. The revolving credit facility is repayable on December 31, 1997. The revolving credit borrowing base is equal to calculated values for the Lone Star Contract and the Company's proved developed producing reserves less the amount outstanding under the term loan facility and cannot exceed $10,000. The term loan facility is $15,000 and is repayable at $500 per month with a balloon payment of remaining principal on May 31, 1999. The revolving credit and term loan facilities bear interest at the prime rate plus 1% and are secured by all of the Company's natural gas marketing and exploration and production assets, as well as the stock and partnership interests of its natural gas marketing and exploration and production subsidiaries. The proceeds of the $25,000 credit facility are to be used to repay the GECC loan, to finance drilling of the Company's Texas properties and for other capital projects. In addition, up to $11,000 can be used to repurchase the Company's stock. The credit facility also contains working capital and tangible net worth covenants. -54- Castle Energy Corporation Notes to Consolidated Financial Statements ("000's" Omitted Except Share and Per Share Amounts) As of December 1, 1996, $11,126 was outstanding under the new facility, consisting of $7,592 used to repay the GECC loan, $3,409 contributed by the subordinated lender and a $125 facility fee paid to the bank syndicate. Repurchase of Shares In October 1996, the Company announced a plan to repurchase up to 1,000,000 of its shares. Subsequently, the Company repurchased 3,500 of its shares on the open market for $31. Termination of MG Management Agreements In December 1996, the Company informed MG of its intention to terminate its pipeline management and gas services agreements with subsidiaries of MG. These agreements are to be terminated January 31, 1997 and the Company intends to perform these functions internally. Stock Options In December 1996, 162,500 options expired, 10,000 options were exercised and an additional 32,000 options were issued (see Note 18). -55- SCHEDULE III CASTLE ENERGY CORPORATION (PARENT) CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 The following represents the financial position, statements of operations and statements of cash flows for Castle Energy Corporation, the parent company, as of September 30, 1996, 1995 and 1994 and for the three periods then ended. CASTLE ENERGY CORPORATION CONDENSED BALANCE SHEETS ("000's" Omitted, except share amounts)
September 30, ------------------------------ 1996 1995 ---- ---- ASSETS Current assets: Cash......................................................................... $ 1,322 $ 6,067 Accounts receivable.......................................................... 4 Deferred income taxes........................................................ 2,373 4,623 Other assets................................................................. 140 ------- ------- Total current assets.................................................. 3,699 10,830 Deferred income taxes........................................................... 5,343 Investment (accumulated losses in excess of investment) in subsidiaries:........ Exploration and production................................................... 11,932 9,650 Refining (discontinued)...................................................... (9,842) 38,478 Natural gas marketing and transmission....................................... 43,988 34,462 CEC Inc...................................................................... 1,587 759 Intercompany advances........................................................... 28,949 Other assets.................................................................... 545 300 ------- ------- Total assets.......................................................... $86,201 $94,479 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion - long-term debt............................................. $ 1,200 $ 2,750 Accounts payable and accrued expenses........................................ 809 7,337 Income taxes payable......................................................... 507 ------- ------- Total current liabilities............................................. 2,009 10,594 Long-term debt - intercompany................................................ 12,042 34,674 Long-term debt............................................................... 2,317 Other liabilities............................................................ 3,122 Deferred income taxes........................................................ 7,574 ------- ------- Total liabilities..................................................... 19,490 52,842 ------- ------- Stockholders' equity: Series B participating preferred stock; par value - $1.00; 10,000,000 shares authorized, no shares issued Common stock, $.50; 25,000,000 shares authorized; 6,693,646, 6,693,646 and 7,627,646 shares issued and outstanding in 1996, 1995 and 1994, respectively.............................................. 3,347 3,347 Additional paid-in capital................................................... 66,316 66,316 Accumulated deficit.......................................................... (2,952) (28,026) ------- ------- 66,711 41,637 ------- ------- Total liabilities and stockholders' equity (deficit).................. $86,201 $94,479 ======= =======
-56- SCHEDULE III CASTLE ENERGY CORPORATION (PARENT) CONDENSED STATEMENTS OF OPERATIONS ("000's" Omitted)
Year Ended September 30, -------------------------------------------- 1996 1995 1994 ---- ---- ---- Revenues: Other income............................................................ $ 3,341 Oil and gas sales....................................................... $ 9 $ 15 Management fees......................................................... 600 3,640 4,956 Interest/dividend income................................................ 78 5,352 3,354 -------- --------- -------- 4,019 9,001 8,325 -------- --------- -------- Costs and expenses: General and administrative.............................................. 2,398 6,820 10,631 Oil and gas production.................................................. 6 6 Interest expense........................................................ 192 3,633 2,608 Depreciation, depletion and amortization................................ 250 77 66 Other................................................................... 1,909 541 -------- --------- -------- 2,840 12,445 13,852 -------- --------- -------- Income (loss) before equity in undistributed earnings (losses) of subsidiaries and provision for (benefit of) income taxes................ 1,179 (3,444) (5,527) Equity in undistributed earnings (losses) of subsidiaries: Exploration and production.............................................. 2,282 248 (111) Refining (discontinued)................................................. 44,866 38,537 Natural gas transmission and marketing.................................. 9,526 25,636 4,087 CEC, Inc................................................................ 828 759 -------- --------- -------- 13,815 68,065 36,986 Provision for (benefit of) income taxes.................................... (11,259) 53,168 (1,931) -------- --------- -------- Net income................................................................. $25,074 $14,897 $38,917 ======== ========= ========
-57- SCHEDULE III CASTLE ENERGY CORPORATION (PARENT) CONDENSED STATEMENTS OF CASH FLOWS ("000's" Omitted)
Year Ended September 30, -------------------------------------------- 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) before equity in undistributed earnings of subsidiaries and provision for (benefit of) income taxes............ $12,438 ($56,613) ($ 3,596) ------- --------- ---------- Adjustment to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization............................. 250 77 66 Deferred income taxes................................................ 10,667 52,027 39 Changes in assets and liabilities: (Increase) decrease in accounts receivable........................... (4) 2,673 (1,815) (Increase) decrease in other assets.................................. 131 (129) 1,482 Increase (decrease) in accounts payable, accrued expenses............ (7,035) 2,850 (795) (Decrease) in other liabilities...................................... 3,122 (1,100) ------- --------- ---------- Total adjustments................................................. 7,131 57,498 (2,123) ------- --------- ---------- Net cash flows provided by operating activities................... 19,569 885 (5,719) ------- --------- ---------- CASH FLOWS FROM INVESTMENT ACTIVITIES: Proceeds of sale of subsidiaries......................................... 1,000 Proceeds from sale of fixed assets....................................... 10 Purchase of furniture, fixtures and equipment............................ (1) (3) (348) Business acquisition, net of cash acquired............................... (8,230) ------- --------- ---------- Net cash provided by (used in) investing activities............... 999 7 (8,578) ------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net.............................. 202 48,207 Proceeds of long-term debt............................................... 3,800 Repayment of long-term debt, including intercompany debt................. (25,665) Payment of debt issuance costs........................................... (486) Investment in subsidiaries............................................... 3,590 (17,300) Intercompany (advances) loans............................................ (2,962) (8,346) (7,290) ------- --------- ---------- Net cash provided by (used in) financing activities............... (25,313) (4,554) 23,617 ------- --------- ---------- Net increase (decrease) in cash and cash equivalents........................ (4,745) (3,662) 9,320 Cash and cash equivalents - beginning of period............................. 6,067 9,729 409 ------- --------- ---------- Cash and cash equivalents - end of period................................... $ 1,322 $ 6,067 $ 9,729 ======= ======== ========= Supplemental schedule of noncash investing and financing activities: Purchase of Powerine Oil Company: Basis in assets acquired............................................. $ 186,867 Cash paid for capital stock and transaction costs.................... (8,230) --------- Basis in liabilities assumed...................................... $ 178,637 ========= Exchange of common stock: Acquisition of common stock in exchange for reduction in cash $ 39,817 participations................................................ =========
-58- REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors CASTLE ENERGY CORPORATION In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Castle Energy Corporation and its subsidiaries at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Philadelphia, PA January 9, 1997 -59- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS There have been no disagreements on any matter of accounting principles or financial statement disclosure with the Company's independent accountants during the fiscal years ended September 30, 1996, 1995 or 1994 which will be filed with the Securities Exchange Commission pursuant to Rule 14g-6 under the Securities Exchange Act of 1934. -60- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT** ITEM 11. EXECUTIVE COMPENSATION** ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT** ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS** - -------------- ** The information required by Item 10, 11, 12 and 13 are incorporated by reference to the Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders. -61- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. and 2. Financial Statements and Financial Statement Schedules Financial statements and schedules filed as part of this Report on Form 10-K are listed in Item 8 to this Form 10-K. 3. Exhibits The Exhibits required by Item 601 of Regulation S-K and filed herewith or incorporated by reference herein are listed in the Exhibit Index below.
Exhibit Number Description of Document - -------------- ----------------------- 3.1 Restated Certificate of Incorporation(15) 3.2 Bylaws(10) 4.1 Specimen Stock Certificate representing Common Stock(8) 4.2 Rights Agreement between Castle Energy Corporation and American Stock Transfer and Trust Company as Rights Agent, dated as of April 21, 1994(10) 10.1 Credit Agreement between Castle Energy Corporation and MG Trade Finance Corp., dated October 24, 1990(1) 10.2 Sixth Amendment to Credit Agreement, effective as of May 27, 1993, between MG Trade Finance Corp. and Castle Energy Corporation(2) 10.3 Seventh Amendment to Credit Agreement, dated August 25, 1993, between MG Trade Finance Corp. and Castle Energy Corporation(8) 10.4 Amended and Restated Revolving Loan and Security Agreement, dated May 27, 1993, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and MG Trade Finance Corp.(8) 10.5 Purchase and Sale Agreement, dated September 3, 1992, by and among Castle Energy Corporation, Atlantic Richfield Company, Tabasco Gas Pipe Line Company and B&A Marketing Company(6) 10.6 Loan Agreement, dated December 11, 1991, among Castle Energy Corporation, Union d'Etudes et d'Investissements and John W. Sullivan with MG Trade Finance Corp. joining for the limited purpose stated therein(3) 10.7 Intercreditor Agreement, dated December 11, 1991, among MG Trade Finance Corp., Union d'Etudes et d'Investissements and John W. Sullivan(3) 10.8 Amended and Restated Offtake Agreement, dated May 12, 1993, between Indian Refining Limited Partnership and MG Refining and Marketing, Inc.(8) 10.9 Agreement for the Purchase and Sale of Feedstocks, dated February 1, 1992, between Metallgesellschaft Corp. and Indian Refining Limited Partnership(4) 10.10 Amendment 1 to Agreement for the Purchase and Sale of Feedstocks, dated February 1, 1992, between Metallgesellschaft Corp. and Indian Refining Limited Partnership(5) 10.11 Amendment No. 2 to Agreement for the Purchase and Sale of Feedstocks, dated June 29, 1993, between Metallgesellschaft Corp. and Indian Refining Limited Partnership(8) 10.12 ** Long Term Supply Agreement, dated November 1, 1992, among Shell Canada Limited, Salmon Resources Ltd. and Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and MG Refining and Marketing, Inc.(7) 10.13 First Amendment to Long Term Supply Agreement, dated as of January 12, 1993, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc., MG Refining and Marketing, Inc., Salmon Resources Ltd. and Shell Canada Limited(8) 10.14 Second Amendment to Long Term Supply Agreement, dated June 28, 1993, among Shell Canada Limited, Salmon Resources Ltd. and Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and MG Refining and Marketing, Inc.(8)
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Exhibit Number Description of Document - -------------- ----------------------- 10.15 Replacement Gas Purchase Contract, effective February 1, 1992, between ARCO Oil and Gas Company and Lone Star Gas Company(8) 10.16 Loan Agreement, dated September 30, 1993, among Castle Texas Production Limited Partnership, Castle Production Company, Castle Energy Corporation and MG Trade Finance Corp., and Appendix A thereto(9) 10.17 Swap Agreement, dated May 27, 1993, between Indian Refining Limited Partnership and MG Refining and Marketing, Inc.(8) 10.18 Amendment to Swap Agreement, dated July 29, 1993, between Indian Refining Limited Partnership and MG Refining and Marketing, Inc.(8) 10.19 Amended and Restated Pipeline Management Agreement, effective as of December 1, 1992, between Castle Texas Pipeline Limited Partnership and MG Gathering Corp.(8) 10.20 Amended and Restated Service Agreement, effective as of December 1, 1992, between CEC Gas Marketing Limited Partnership and MG Natural Gas Corp.(8) 10.21 Consent and Agreement, dated May 27, 1993, between Shell Canada Limited and Salmon Resources Ltd. and Societe Generale, Southwest Agency(8) 10.22 Consent, dated May 27, 1993, between Texaco Pipeline, Inc. and Societe Generale, Southwest Agency(8) 10.23 Registration Rights Agreement, dated as of December 11, 1991, among Castle Energy Corporation, MG Trade Finance Corp., Union d'Etudes et d'Investissements and John W. Sullivan(3) 10.24 Bonus Payment Rights Agreement, dated November 20, 1992, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and William S. Sudhaus(8) 10.25 Bonus Payment Rights Agreement, dated June 21, 1993, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and William S. Sudhaus(8) 10.26 Amended and Restated Employment Agreement, dated December 21, 1992, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc., Castle Energy Corporation, William S. Sudhaus and Danik Corporation(8) 10.27 Employment Agreement, dated October 1, 1991, among John D.R. Wright, III, Indian Refining Management Company and Indian Refining Limited Partnership(3) 10.28 Amendment to Agreement, dated February 25, 1993, between Indian Refining & Marketing Inc., Indian Refining Limited Partnership and John D.R. Wright, III(8) 10.29 Bonus Payment Rights Agreement, dated October 1, 1991, among Indian Refining Management Company, Indian Refining Limited Partnership and John D.R. Wright, III(3) 10.30 Letter Agreement, dated February 25, 1993, between John D.R. Wright, III and Indian Refining & Marketing Inc.(8) 10.31 Management Agreement, dated July 1, 1993, between Castle Energy Corporation and Terrapin Resources, Inc.(8) 10.32 Consent Order, dated May 14, 1992, between Indian Refining Company and the Illinois Environmental Protection Agency(5) 10.33 Castle Energy Corporation 1992 Executive Equity Incentive Plan(8) 10.34 First Amendment to Castle Energy Corporation 1992 Executive Equity Incentive Plan, effective May 11, 1993(8) 10.35 Loan Agreement, dated August 6, 1993, among Castle Texas Pipeline Limited Partnership, CEC Gas Marketing Limited Partnership, Castle Pipeline Company, CEC Marketing Company, Castle Energy Corporation and General Electric Capital Corporation, and exhibits thereto(8)
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Exhibit Number Description of Document - -------------- ----------------------- 10.36 Letter Guarantee, dated August 31, 1993, between Metallgesellschaft AG, CEC Gas Marketing Limited Partnership and General Electric Capital Corporation(8) 10.37 Amended and Restated Gas Purchase Contract, dated as of August 1, 1993, between MG Natural Gas Corp. and CEC Gas Marketing Limited Partnership(8) 10.38 Offtake Agreement, dated as of October 1, 1993, by and between MG Refining and Marketing, Inc. and Powerine Oil Company(8) 10.39 Amended and Restated Agreement for the Purchase and Sale of Feedstocks, dated as of October 1, 1993, by and between Metallgesellschaft Corp., Indian Refining Limited Partnership, Powerine Oil Company and Indian Powerine L.P.(8) 10.40 Agreement for the Purchase and Sale of Feedstocks, dated as of September 15, 1993, among Indian Powerine L.P., Indian Refining Limited Partnership and Powerine Oil Company(8) 10.41 First Amendment to Loan Agreement, dated as of September 17, 1993, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and MG Trade Finance Corp.(8) 10.42 Second Amended and Restated Offtake Agreement, dated as of October 1, 1993, between MG Refining and Marketing, Inc. and Indian Refining Limited Partnership(8) 10.43 First Allonge to Subordinated Note, dated as of October 1, 1993, by Indian Refining Limited Partnership in favor of MG Refining and Marketing, Inc.(8) 10.44 First Allonge to Subordinated Note, dated as of October 1, 1993, by Indian Refining Limited Partnership in favor of MG Trade Finance Corp.(8) 10.45 Guaranty, dated as of October 1, 1993, by Castle Energy Corporation for the benefit of MG Trade Finance Corp.(8) 10.46 Purchase Money Security Agreement, dated as of October 1, 1993, between Indian Powerine L.P. and MG Trade Finance Corp.(8) 10.47 Global Consent, dated as of October 1, 1993, among Societe Generale, Southwest Agency, MG Trade Finance Corp., Metallgesellschaft Corp., MG Refining and Marketing, Inc. and Indian Refining Limited Partnership(8) 10.48 Amended and Restated Loan Agreement, dated as of October 1, 1993, between Powerine Oil Company and MG Trade Finance Corp.(8) 10.49 Second Amendment to Deed of Trust with Assignment of Rents, Leases and Profits, Security Agreement and Fixture Filing, dated October 1, 1993, by Powerine Oil Company in favor of MG Trade Finance Corp.(8) 10.50 Amended and Restated Assignment of Agreements, Permits, Licenses, Warranties and Authorizations, dated as of October 1, 1993, between Powerine Oil Company and MG Trade Finance Corp.(8) 10.51 Amended and Restated Secured Promissory Note (Revolving Note), dated as of October 1, 1993, by Powerine Oil Company in favor of MG Trade Finance Corp.(8) 10.52 Second Amended and Restated Secured Promissory Note (Term Note), dated as of October 1, 1993, by Powerine Oil Company in favor of MG Trade Finance Corp.(8) 10.53 Amended and Restated Pledge and Security Agreement, dated as of October 1, 1993, by Powerine Oil Company in favor of MG Trade Finance Corp.(8) 10.54 Amended and Restated Three Party Security Agreement and Collateral Assignment of Hedging Account, dated as of October 1, 1993, among Powerine Oil Company, MG Futures, Inc. and MG Trade Finance Corp.(8) 10.55 Guaranty, dated as of October 1, 1993, by Castle Energy Corporation for the benefit of MG Trade Finance Corp.(8)
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Exhibit Number Description of Document - -------------- ----------------------- 10.56 Three Party Security Agreement and Collateral Assignment of Hedging Account, dated October 1, 1993, among Indian Powerine L.P., MG Futures, Inc. and Powerine Oil Company(8) 10.57 Subordinated Offtake Note, dated as of October 1, 1993, by Powerine Oil Company in favor of MG Refining and Marketing, Inc.(8) 10.58 Security Agreement, dated as of October 1, 1993, by Powerine Oil Company in favor of MG Refining and Marketing, Inc.(8) 10.59 Deed of Trust with Assignment of Rents, Leases and Profits, Security Agreement and Fixture Filing, dated as of October 1, 1993, by Powerine Oil Company for the benefit of MG Refining and Marketing, Inc.(8) 10.60 Letter agreement (re Natural Gas Swap), dated September 30, 1993, between Metallgesellschaft Corp. and Castle Texas Production Limited Partnership(8) 10.61 Letter agreement (re Gas Purchase Contract), dated September 30, 1993, between Castle Texas Production Limited Partnership and MG Natural Gas Corp.(8) 10.62 Crude Oil Forward Sale Contract, dated September 28, 1993, between Indian Powerine L.P. and Percolin Limited(8) 10.63 Confirmation of Crude Oil Forward Sale, dated September 29, 1993, between Indian Powerine L.P. and Percolin Limited(8) 10.64 Side Letter Agreement, dated September 28, 1993, between Indian Powerine L.P. and Percolin Limited(8) 10.65 Crude Oil Forward Sale Contract, dated September 28, 1993, between Indian Powerine L.P. and MG Refining and Marketing, Inc.(8) 10.66 Confirmation of Crude Oil Forward Sale, dated September 29, 1993, between Indian Powerine L.P. and MG Refining and Marketing, Inc.(8) 10.67 Pledge and Security Agreement, dated October 1, 1993, by Indian Powerine L.P. in favor of Powerine Oil Company(8) 10.68 Employment Agreement, dated as of January 1, 1994, by and between Castle Energy Corporation and Joseph L. Castle II(11) 10.69 Employment Agreement, dated as of January 1, 1994, by and among Castle Energy Corporation, Indian Refining & Marketing Inc., Powerine Oil Company, Indian Refining Limited Partnership and William S. Sudhaus(11) 10.70 Letter Agreement, dated February 12, 1992, by and between Indian Refining and Marketing Inc. and David Hermes(15) 10.71 Bonus Payments Rights Agreement, dated February 12, 1992, by and among Indian Refining and Marketing Inc., Indian Refining Limited Partnership and David Hermes(15) 10.72 Letter Agreement, dated March 1, 1993, between Indian Refining and Marketing Inc. and David Hermes(15) 10.73 Letter Agreement, dated March 2, 1994, between Indian Refining and Marketing Inc. and David Hermes(15) 10.74 Letter Agreement, dated May 9, 1994, among Powerine Oil Company, Indian Refining & Marketing Inc., IP Oil Co., Inc., Castle Energy Corporation and David Hermes(15) 10.75 Employment Agreement, dated April 1, 1994, by and between Powerine Oil Company and Albert L. Gualtieri, Jr.(15) 10.76 Stock Purchase Agreement, dated August 31, 1994, among MG Trade Finance Corp., Metallgesellschaft Corp., Indian Powerine L.P. and Castle Energy Corporation (12)
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Exhibit Number Description of Document - -------------- ----------------------- 10.77 Settlement Agreement, dated August 31, 1994, among Metallgesellschaft AG, Metallgesellschaft Capital Corp., Metallgesellschaft Corp., MG Refining and Marketing, Inc., MG Trade Finance Corp., MG Natural Gas Corp., MG Gathering Corp., and MG Futures Inc. and Castle Energy Corporation, Indian Refining Limited Partnership, IP Oil Co., Inc., Powerine Oil Company, Indian Powerine L.P., Indian Refining & Marketing Inc., Castle Texas Production Limited Partnership, Castle Texas Pipeline Limited Partnership, CEC Gas Marketing Limited Partnership, Castle Production Co., Castle Pipeline Company, CEC Marketing Company and CEC, Inc.(12) 10.78 Amendment to the Amended and Restated Offtake Agreement, dated October 14, 1994, between MG Refining and Marketing, Inc. and Indian Refining Limited Partnership(15) 10.79 Amendment to the Offtake Agreement, dated October 14, 1994, between MG Trade Finance Corp. and Powerine Oil Company(15) 10.80 First Amendment to the Amended and Restated Loan Agreement, dated October 14, 1994, between Powerine Oil Company and MG Trade Finance Corp.(15) 10.81 Third Amendment to the Amended and Restated Revolving Loan and Security Agreement, dated October 14, 1994, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and MG Trade Finance Corp.(15) 10.82 Crude Oil Forward Sale Contract, dated October 14, 1994, between Percolin Limited and MG Refining and Marketing, Inc.(13) 10.83 Crude Oil Sale Contract, dated October 14, 1994, between Indian Powerine L.P. and MG Refining and Marketing, Inc.(13) 10.84 Natural Gas Swap Agreement, dated October 14, 1994, between MG Natural Gas Corp. and Indian Refining Limited Partnership(13) 10.85 Participation Cancellation Agreement, dated October 14, 1994, among Indian Powerine L.P., MG Refining and Marketing, Inc., MG Trade Finance Corp. and Metallgesellschaft Corp.(13) 10.86 Pledge Agreement (Partnership Interests), dated October 14, 1994, between Castle Energy Corporation and MG Trade Finance Corp.(13) 10.87 Pledge Agreement (Capital Stock), dated October 14, 1994, among Castle Energy Corporation, Powerine Holding Company and MG Trade Finance Corp.(13) 10.88 Stock Option Agreement, dated October 14, 1994, among Castle Energy Corporation, Powerine Holding Company and Powerine Oil Company(13) 10.89 Assignment Agreement, dated October 14, 1994, among Powerine Holding Company, Powerine Oil Company, Castle Energy Corporation and Wilmington Trust Company(13) 10.90 Stock Option Agreement, dated October 14, 1994, between Castle Energy Corporation and Indian Refining & Marketing Inc.(13) 10.91 Assignment Agreement, dated October 14, 1994, among Castle Energy Corporation, Indian Refining & Marketing Inc. and Wilmington Trust Company(13) 10.92 Stock and Asset Purchase Agreement among SIPAC Inc. and Castle Energy Corporation, Indian Refining & Marketing Inc., Indian Refining Limited Partnership, IP Oil Co., and Indian Powerine L.P., dated December 6, 1994(14) 10.93 Petroleum Coke Purchase and Sales Agreement between Powerine Oil Company and MGPC Petcoke, Inc., dated as of January 1, 1994(15) 10.94 August 30, 1994 Letter Agreement between Castle Energy Corporation and ARCO regarding the Purchase of the Oak Hill Production Payment(16) 10.95 Letter Agreement, dated February 21, 1995, between William S. Sudhaus and Castle Energy Corporation(17)
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Exhibit Number Description of Document - -------------- ----------------------- 10.96 Letter Agreement, dated February 24, 1995, between William S. Sudhaus and Castle Energy Corporation(17) 10.97 Powerine Petroleum Sale and Storage Agreement, dated April 8, 1995, between Wickland Oil Company and Powerine Oil Company(17) 10.98 The Castle Agreement, dated April 8, 1995, among Wickland Oil Company, Castle Energy Corporation, and Indian Powerine L.P.(17) 10.99 Security Agreement, dated April 8, 1995, between Powerine Oil Company and Wickland Oil Company(17) 10.100 Supplemental Letter Agreement, dated April 13, 1995, between Powerine Oil Company and Wickland Oil Company amending the Powerine Petroleum Sale and Storage Agreement(17) 10.101 Payoff Loan and Pledge Agreement, dated April 13, 1995, among Powerine Oil Company, CEC, Inc., Castle Energy Corporation, Metallgesellschaft Corp., MG Refining & Marketing, Inc., and MG Trade Finance Corp.(17) 10.102 Promissory Note, dated April 13, 1995, by CEC, Inc. in favor of Metallgesellschaft Corp., in the principal amount of $10,000,000(17) 10.103 Letter Agreement, dated May 10, 1995, between John D. R. Wright and Castle Energy Corporation(17) 10.104 Letter Agreement, dated May 10, 1995, between William S. Sudhaus and Castle Energy Corporation (17) 10.105 Payoff Agreement, dated May 25, 1995, between Indian Refining Limited Partnership, Indian Refining & Marketing, Inc., Castle Energy Corporation, Indian Powerine L.P., Metallgesellschaft Corp., MG Refining and Marketing, Inc., and MG Trade Finance Corp.(17) 10.106 Supplemental Letter Agreement, dated June 1, 1995, between Powerine Oil Company, Castle Energy Corporation, Indian Powerine L.P., CEC, Inc. and Wickland Oil Company to the Powerine Petroleum Sale and Storage Agreement(17) 10.107 Supplemental Letter Agreement, dated June 30, 1995, between Powerine Oil Company, Castle Energy Corporation, Indian Powerine L.P., CEC, Inc. and Wickland Oil Company to the Powerine Petroleum Sale and Storage Agreement(17) 10.108 Line of Credit Agreement, dated May 25, 1995, between Indian Oil Company, BT Commercial Corporation, MeesPierson N.V., and Bankers Trust Company(17) 10.109 Borrower Security Agreement, dated May 25, 1995, by Indian Oil Company in favor of BT Commercial Corporation(17) 10.110 Guaranty Agreement, dated May 25, 1995, made by Castle Energy Corporation, Castle Production Resource Company, and Castle Production Company in favor of BT Commercial Corporation(17) 10.111 Stock and Asset Purchase Agreement, dated November 21, 1995, among Castle Energy Corporation, Indian Refining I, Limited Partnership, Indian Refining and Marketing I, Inc. and AM West G.P., Inc.(18) 10.112 Agreement and Plan of Merger by and among Energy Merchant Corp., POC Acquisition Corporation, Powerine Holding Corp., Castle Energy Corporation and Powerine Oil Company, dated January 10, 1996.(18) 10.113 Letter Agreement, dated January 3, 1996, among Castle Energy Corporation, Indian Refining and Marketing I, Inc., Powerine Oil Company, Indian Refining I., L.P. and William S. Sudhaus regarding Mr. Sudhaus' resignation.(18) 10.114 Letter Agreement, dated January 22, 1996, among Castle Energy Corporation, Powerine Oil Company, Indian Refining and Marketing I, Inc., IP Oil Company and David M. Hermes regarding Mr. Hermes' resignation.(18)
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Exhibit Number Description of Document - -------------- ----------------------- 10.115 Letter Agreement, dated January 29, 1996, between Indian Refining and Marketing Company, Indian Refining & Marketing Inc., Indian Refining Limited Partnership and John D. R. Wright III regarding Mr. Wright's termination.(18) 10.116 Amendment No. 1 to Stock and Asset Purchase Agreement Dated as of November 21, 1995.(18) 10.117 Loan Agreement among Castle Exploration Company, Inc.; Castle Texas Production Limited Partnership; Castle Texas Pipeline Limited Partnership; and CEC Gas Marketing Limited Partnership, as Borrowers, Castle Pipeline Company; CEC Marketing Company and Castle Production Company, as General Partners, Castle Energy Corporation and Commercial National Bank in Shreveport as of April 30, 1996 10.118 First Amendment to Loan Agreement, dated November 8, 1996, Castle Exploration Company, Inc.; Castle Texas Production Limited Partnership; Castle Texas Pipeline Limited Partnership; and CEC Gas Marketing Limited Partnership, as Borrowers, Castle Pipeline Company; CEC Marketing Company and Castle Production Company, as General Partners, Castle Energy Corporation and Commercial National Bank in Shreveport 10.119 Amended and Restated Loan Agreement, dated November 26, 1996, among Commercial National Bank in Shreveport, As Agent, the Several Financial Institutions From Time to Time thereto, and Castle Exploration Company, Inc.; Castle Texas Production Limited Partnership; Castle Texas Pipeline Limited Partnership; and CEC Gas Marketing Limited Partnership, as Borrowers, Castle Pipeline Company; CEC Marketing Company and Castle Production Company, as General Partners, and Castle Energy Corporation 11.1 Statement re: Computation of Earnings Per Share 21 List of subsidiaries of Registrant 23.1 Consent of Price Waterhouse LLP 23.2 Consent of Ryder Scott Company 23.3 Consent of Huntley & Huntley 27 Financial Data Schedule
(b) Reports on Form 8-K The Company filed no reports on Form 8-K during the last quarter of the Company's fiscal year ended September 30, 1996.
- -------------- ** The confidential portion of this document has been omitted and filed with the Securities and Exchange Commission (1) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1990 (2) Incorporated by reference to the Registrant's Form 10-Q for the fiscal third quarter ended June 30, 1991 (3) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1991 (4) Incorporated by reference to the Registrant's Form 10-Q for the second quarter ended December 31, 1991 (5) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1992 (6) Incorporated by reference to the Registrant's Form 8-K, dated December 3, 1992 (7) Incorporated by reference to the Registrant's Form 10-Q for the second quarter ended March 31, 1993 (8) Incorporated by reference to the Registrant's Form S-1 (Registration Statement), dated September 29, 1993 (9) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1993 (10) Incorporated by reference to the Registrant's Form 10-Q for the second quarter ended March 31, 1994 (11) Incorporated by reference to the Registrant's Form 10-Q/A for the third quarter ended June 30, 1994 (12) Incorporated by reference to the Registrant's Form 8-K, dated August 31, 1994. (13) Incorporated by reference to the Registrant's Form 8-K, dated November 3, 1994.
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(14) Incorporated by reference to the Registrant's Form 8-K, dated December 9, 1994. (15) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1994. (16) Incorporated by reference to the Registrant's Form 10-Q for the first quarter ended December 31, 1994. (17) Incorporated by reference to the Registrant's Form 10-Q for the third quarter ended June 30, 1995. (18) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1995.
-69- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CASTLE ENERGY CORPORATION Date: January 3, 1997 By:/s/JOSEPH L. CASTLE II ---------------------- Joseph L. Castle II Chairman of the Board and Chief Executive Officer Date: January 2, 1997 By:/s/RICHARD E. STAEDTLER ----------------------- Richard E. Staedtler Senior Vice President, Chief Financial Officer and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. /s/JOSEPH L. CASTLE II Chairman of the Board January 3, 1997 - ---------------------- Joseph L. Castle II /s/MARTIN R. HOFFMANN Director January 7, 1997 - ---------------------- Martin R. Hoffmann /s/WILLIAM S. SUDHAUS Director January 3, 1997 - ---------------------- William S. Sudhaus /s/SIDNEY F. WENTZ Director January 3, 1997 - ---------------------- Sidney F. Wentz -70- DIRECTORS AND OFFICERS BOARD OF DIRECTORS (December 31, 1996) JOSEPH L. CASTLE II WILLIAM S. SUDHAUS Director Director Chairman & Chief Executive Officer President of TALON Resources MARTIN R. HOFFMANN SIDNEY F. WENTZ Director Director Of Counsel to Washington, D.C. Chairman of The Robert Wood Johnson Office of Skadden, Arps, Slate, Foundation Meagher & Flom OPERATING OFFICERS JOSEPH L. CASTLE II RICHARD E. STAEDTLER Chairman & Chief Executive Officer Chief Financial Officer Chief Accounting Officer PRINCIPAL OFFICES Headquarters Drilling And Operating Castle Energy Corporation Castle Exploration Company, Inc. One Radnor Corporate Center 1815 Washington Road Suite 250 Pittsburgh, PA 15241-1423 100 Matsonford Road Radnor, PA 19087 Exploration And Production Natural Gas Transmission and Marketing Castle Texas Production Limited Partnership Castle Texas Pipeline Limited 2410 State Highway, 322 North Partnership Henderson, Texas 75652 2410 State Highway, 322 North Henderson, Texas 75652 CEC Gas Marketing Limited Partnership 2410 State Highway, 322 North Henderson, Texas 75652 AGENTS Counsel Independent Reservoir Engineers Duane, Morris & Heckscher Huntley & Huntley, Inc. One Liberty Place, 42nd Floor 340 Mansfield Avenue Philadelphia, PA 19103-7396 Pittsburgh, PA 15220 Independent Accountants Ryder Scott Company Petroleum Engineers 600 Seventeenth Street, Suite 900N Price Waterhouse LLP Denver, Colorado 80202 Thirty South Seventeenth Street Philadelphia, PA 19103 Registrant and Transfer Agent American Stock Transfer 40 Wall Street, 46th Floor New York, New York 10005 EX-10.117 2 LOAN AGREEMENT Exhibit 10.117 - ------------------------------------------------------------------------------ LOAN AGREEMENT among CASTLE EXPLORATION COMPANY, INC., CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, CEC GAS MARKETING LIMITED PARTNERSHIP, as Borrowers, CASTLE PIPELINE COMPANY, CEC MARKETING COMPANY, CASTLE PRODUCTION COMPANY, as General Partners, CASTLE ENERGY CORPORATION, and COMMERCIAL NATIONAL BANK IN SHREVEPORT, Dated as of April 30, 1996 - ------------------------------------------------------------------------------ TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS.......................................................... 1 SECTION 2. AMOUNT AND TERM OF TERM LOAN......................................... 2 2.1 Term Loan..................................................... 2 2.2 Term Note..................................................... 2 2.3 Use of Proceeds............................................... 2 2.4 Prepayments................................................... 2 2.5 Interest Rate and Payment Dates............................... 3 2.6 Payments and Payment Dates.................................... 3 2.7 Computation of Interest and Fees.............................. 4 2.8 Applicable Law................................................ 4 2.9 Joint and Several Obligations................................. 4 2.10 Commitment Fee................................................ 4 SECTION 3. REPRESENTATIONS AND WARRANTIES....................................... 4 3.1 Financial Statements.......................................... 4 3.2 Corporate Existence and Business.............................. 5 3.3 Subsidiaries.................................................. 6 3.4 Compliance with Law........................................... 6 3.5 Power and Authorization; Enforceable Obligations.............. 6 3.6 Governmental Approvals and Other Consents and Approvals....... 8 3.7 No Legal Bar.................................................. 8 3.8 No Proceeding or Litigation................................... 8 3.9 No Default, Event of Default or Event of Loss................. 9 3.10 Ownership of Property; Liens.................................. 9 3.11 Indebtedness.................................................. 9 3.12 Taxes......................................................... 10 3.13 Regulation U.................................................. 10 3.14 ERISA......................................................... 10 3.15 Investment Company Act........................................ 11 3.16 Public Utility Holding Company................................ 11 3.17 Full Disclosure............................................... 11 3.18 Project Documents............................................. 11 3.19 Environmental Matters......................................... 11 3.20 Intellectual Property......................................... 12 3.21 Intentionally Left Blank...................................... 12 3.22 Chief Executive Office........................................ 12 3.23 Solvency...................................................... 12 3.24 Joint Venture................................................. 13
-i- TABLE OF CONTENTS (Continued)
Page ---- 3.25 No Fees....................................................... 13 3.26 Validity of Leases............................................ 13 3.27 Collateral Security Documents................................. 13 3.28 Pipeline Contracts............................................ 13 3.29 No Obligations................................................ 13 3.30 Prepayment.................................................... 14 3.31 Gas Contracts................................................. 14 3.32 FERC Jurisdiction............................................. 14 3.33 Lone Star Contract............................................ 15 SECTION 4. CONDITIONS PRECEDENT................................................. 15 4.1 Conditions to Term Loan....................................... 15 SECTION 5. AFFIRMATIVE COVENANTS................................................ 21 5.1 Conduct of Business, Maintenance of Existence, Etc............ 21 5.2 Payment of Obligations........................................ 21 5.3 Performance Under Other Agreements............................ 21 5.4 Partnership Insurance Coverage................................ 21 5.5 Inspection of Property; Books and Records..................... 24 5.6 Compliance with Laws.......................................... 25 5.7 Financial Statements.......................................... 25 5.8 Certificates; Operating Statements; Other Information......... 25 5.9 Taxes......................................................... 28 5.10 Maintenance of Property....................................... 28 5.11 Notices....................................................... 28 5.12 Employee Plans................................................ 30 5.13 Management Letters............................................ 30 5.14 Easements..................................................... 31 5.15 Hazardous Materials........................................... 31 5.16 Use of Proceeds............................................... 31 5.17 Servicers..................................................... 31 5.18 Intentionally Left Blank...................................... 32 5.19 Further Assurances............................................ 32 5.20 Assignment of Additional Contracts; Future Mortgages.......... 32 5.21 Annual Opinion of Counsel..................................... 33 5.22 Fiscal Year................................................... 33 5.23 Environmental Compliance and Management Program............... 33 5.24 FERC Jurisdiction............................................. 34 5.25 Cover Damages................................................. 34
-ii- TABLE OF CONTENTS (Continued)
Page ---- 5.26 Proceeds from the Production Payment and Receivables from Lone Star Contract.................................... 34 5.27 Post-Closing Title Opinions................................... 35 SECTION 6. NEGATIVE COVENANTS................................................... 35 6.1 Merger, Sale of Assets, Etc................................... 35 6.2 Purchases of Assets........................................... 35 6.3 Indebtedness.................................................. 35 6.4 Distributions, Etc............................................ 35 6.5 Liens......................................................... 35 6.6 Nature of Business............................................ 36 6.7 Amendment of Contracts, Etc................................... 36 6.8 Investments................................................... 36 6.9 Leases........................................................ 36 6.10 Change of Office.............................................. 36 6.11 Change of Name................................................ 36 6.12 Compliance with ERISA......................................... 36 6.13 Transactions with Affiliates and Others....................... 37 6.14 Approval of Additional Contracts.............................. 37 6.15 Alteration or Abandonment..................................... 37 6.16 Capital Expenditures; Operating Expenses, Etc................. 37 6.17 Sale and Leaseback............................................ 37 6.18 Sale of Partnership Interests................................. 38 6.19 Servicers; Service Agreements................................. 38 6.20 Hazardous Materials........................................... 38 6.21 Intentionally Left Blank...................................... 38 6.22 Executive Offices............................................. 38 6.23 Fiscal Year................................................... 38 6.24 FERC Jurisdiction............................................. 38 6.25 Lone Star Contract............................................ 38 SECTION 7. EVENTS OF DEFAULT.................................................... 38 SECTION 8. MISCELLANEOUS........................................................ 42 8.1 Amendments and Waivers........................................ 42 8.2 Notices....................................................... 42 8.3 No Waiver; Cumulative Remedies................................ 44 8.4 Survival...................................................... 44 8.5 Expenses and Taxes............................................ 44
-iii- TABLE OF CONTENTS (Continued)
Page ---- 8.6 INDEMNIFICATION............................................... 45 8.7 Successors and Assigns; Transferees; Transferred Interests.... 46 8.8 Severability.................................................. 46 8.9 Headings...................................................... 46 8.10 Counterparts.................................................. 47 8.11 GOVERNING LAW................................................. 47 8.12 Submission to Jurisdiction; Waivers........................... 47 8.13 Maximum Interest Rate......................................... 47 8.14 Release of Collateral......................................... 48 8.15 Publicity..................................................... 48 8.16 Recourse to Borrowers......................................... 48 8.17 No Release.................................................... 48 8.18 Collateral Security........................................... 48 8.19 Intercreditor Agreement....................................... 48
-iv- APPENDIX A Definitions SCHEDULES Schedule 1 Indebtedness Schedule 2 Project Documents Schedule 3 Project Document Amendments Schedule 4 Governmental Approvals Schedule 5 Recordings and Filings Schedule 6 Form of Operating Budget Schedule 7 Post-Closing Title Work EXHIBITS Exhibit A Form of Term Note Exhibit B-1 Matters to be Addressed by Legal Opinion of Counsel to the Borrowers and Castle Exhibit B-2 Matters to be Addressed by Legal Opinion of Pennsylvania Counsel to the Borrowers and Castle Exhibit C-1 Form of Borrower Security Agreement Exhibit C-2 Form of Security Agreement Exhibit D-1 Form of Borrower Deed of Trust Exhibit D-2 Form of Borrower Mortgage Exhibit D-3 Form of Castle Deed of Trust Exhibit D-4 Form of Castle Mortgage Exhibit E Form of Utility Security Notice Exhibit F Form of General Partner Pledge Agreement Exhibit G Form of Limited Partner Pledge Agreement Exhibit H Form of Castle Pledge Agreement Exhibit I Exploration Pledge Agreement Exhibit J Form of Castle Guaranty Exhibit K Form of Lockbox Operating Agreement -v- LOAN AGREEMENT, dated as of April 30, 1996 (this "Agreement"), by and among CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership ("Pipeline"), CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership ("Marketing"), CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation ("Exploration"), CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership ("Production"; and together with Pipeline, Marketing, and Exploration, the "Borrowers"), CASTLE PIPELINE COMPANY, a Texas corporation, CASTLE PRODUCTION COMPANY, a Texas corporation, CEC MARKETING COMPANY, a Texas corporation (collectively, the "General Partners"); CASTLE ENERGY CORPORATION, a Delaware corporation (solely with respect to Section 3 of this Agreement) ("Castle"); and COMMERCIAL NATIONAL BANK IN SHREVEPORT ("Lender"). W I T N E S S E T H : WHEREAS, the Borrowers have requested that the Lender make available to them a term loan in the aggregate principal amount of Three Million Eight Hundred Thousand and No/100 Dollars ($3,800,000.00); and WHEREAS, the Lender is willing to make such term loan to the Borrowers on the terms and subject to the conditions set forth herein; NOW, THEREFORE, it is agreed: SECTION 1. DEFINITIONS (a) All terms defined in this Agreement or in Appendix A shall have their defined meanings when used herein or in any certificate or other document made or delivered pursuant hereto (such definitions to be equally applicable to both the singular and plural forms of the terms defined). (b) As used herein and in any certificate or other document made or delivered pursuant hereto, accounting terms not defined herein or in Appendix A and accounting terms partly defined herein or in Appendix A to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, appendix, schedule and exhibit references are to this Agreement unless otherwise specified. (d) References to agreements defined herein or in Appendix A shall, unless otherwise specified, include such agreements as they may be amended, supplemented or otherwise modified from time to time in accordance with the provisions of the Basic Documents. LOAN AGREEMENT - Page 1 (e) Terms defined in this Agreement or in Appendix A by reference to any other agreement, document or instrument shall have the meanings assigned to them in such agreement, document or instrument, whether or not such agreement, document or instrument is then in effect. SECTION 2. AMOUNT AND TERM OF TERM LOAN 2.1 Term Loan. Subject to and upon the terms and conditions set forth herein, Lender agrees on the Closing Date to make a term loan (the "Term Loan") in the principal amount of Three Million Eight Hundred Thousand Dollars ($3,800,000.00) to the Borrowers, on a joint and several basis. The Borrowers shall give the Lender not less than three Business Days prior written notice of the proposed Closing Date. 2.2 Term Note. The Term Loan made by Lender shall be evidenced by a single promissory note of the Borrowers, substantially in the form of Exhibit A (the "Term Note"), with appropriate insertions, payable to the order of Lender and in the aggregate principal amount equal to the Term Loan. The Term Note shall (i) be dated the Closing Date, (ii) represent the joint and several obligations of the Borrowers to pay the principal amount of and interest on the Term Loan, (iii) provide for the payment of interest in accordance with subsection 2.5, (iv) be entitled to the benefit of this Agreement and the Collateral Security Documents, (v) mature on August 29, 1997, and (vi) be payable in nine (9) consecutive monthly installments in an amount equal to ninety-five thousand fifteen dollars ($95,015.00) each, applied first to all accrued and unpaid interest and then to outstanding principal, commencing on June 4, 1996, and continuing on each Installment Payment Date thereafter until and including February 4, 1997, and thereafter five (5) monthly installments in the principal amount of five hundred thirty-one thousand six hundred seventy-six and 53/100 dollars ($531,676.53) each, plus accrued and unpaid interest thereon shall be due and payable on each Installment Payment Date, with a final installment in the amount of all outstanding principal of the Term Loan, plus all accrued and unpaid interest thereon due and payable on August 29, 1997. 2.3 Use of Proceeds. The proceeds of the Term Loan shall be used by the Borrowers (a) to refinance the outstanding principal balance of and accrued and unpaid interest on the Existing BTCC Loans, (b) to establish an escrow account in the amount of $1,800,000.00 for the purpose of settling various accounts payable associated with the CORE Refining Corp. transaction as set forth on Schedule 1 hereto, and (c) for general corporate purposes. To the extent such accounts are settled for less than $1,800,000.00, the excess shall be released to Borrower. 2.4 Prepayments. (a) Mandatory Prepayments. (i) If an Event of Loss shall occur, the Borrowers shall prepay in full the unpaid principal amount of the then outstanding Term Note, together with accrued interest thereon to the date of prepayment and all other amounts owing hereunder and under the Collateral Security Documents, on the earlier of (A) the date occurring 60 days after the date of such Event of Loss and (B) the date on which insurance proceeds are received with respect to such Event of Loss. LOAN AGREEMENT - Page 2 (ii) Notwithstanding anything to the contrary otherwise contained in this Agreement, in the event that (A) the Senior Loan Termination Date has not occurred on or before September 4, 1997, (B) the principal amount of the Senior Obligations is increased (other than in accordance with the terms of the Senior Loan Agreement as in effect on the date hereof) to an amount in excess of the principal amount of the Senior Obligations outstanding on the date hereof, or (C) the Term Loan Interest Rate (as defined in the GE Capital Loan Agreement) is modified such that it is greater than 8.33%, the Obligations shall become immediately due and payable and the Borrowers shall, within three (3) days of such event, prepay in full the unpaid principal amount of the then outstanding Term Note, together with accrued and unpaid interest thereon to the date of prepayment and all other amounts owing hereunder and under the Collateral Security Documents. (b) Optional Prepayments. The Borrowers may on at least three (3) Business Days prior notice to Lender, at any time and from time to time prepay the Term Loan, in whole or in part, without premium or penalty but with accrued and unpaid interest to the date of prepayment on the amount so prepaid. Partial prepayments shall be in a principal amount of $100,000.00 or an integral multiple thereof. (c) Partial Prepayments. Partial prepayment of the Term Loan shall be applied to the installments thereof in the inverse order of maturity. 2.5 Interest Rate and Payment Dates. (a) The Term Loan shall bear interest on the unpaid principal amount thereof at the Term Loan Interest Rate. (b) If all or a portion of the principal amount of the Term Loan made hereunder or any other amount due and payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), the Term Loan or other amount shall bear interest at a rate per annum which is 2% above the Term Loan Interest Rate from the date of such non-payment until paid in full (as well after as before judgment). (c) Interest on the unpaid principal amount of the Term Loan shall be payable monthly in arrears on each Installment Payment Date and on the date the Term Loan is paid in full; provided that interest accruing pursuant to subsection 2.5(b) shall be payable from time to time on demand. 2.6 Payments and Payment Dates. (a) All payments (including prepayments hereunder) due hereunder or under the Term Note on account of principal, interest, fees, or any other obligation incurred hereunder shall be paid to the Lender at its office at 333 Texas Street, P.O. Box 21119, Shreveport, Louisiana 71152, in freely transferable Dollars and in immediately available funds without set-off or counterclaim. Borrowers shall, at the time of making each such payment, specify to Lender the sums payable by Borrowers under this Agreement, the Term Note or other Loan Documents to which such payment is to be applied (and in the event Borrowers fail to so specify or if an Event of Default has occurred and is continuing, Lender may apply such payment to the Obligations in such order and manner as it may elect in its sole discretion). All payments LOAN AGREEMENT - Page 3 hereunder shall be made without any presentment of the Term Note to the Borrowers, but upon payment in full of the Term Note, the holder thereof shall cancel it and return it to the Borrowers. (b) If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. 2.7 Computation of Interest and Fees. Interest on the Term Loan and all fees hereunder shall be calculated on the basis of a 360-day year and the actual number of days elapsed (including the first day but excluding the last day of any relevant period). 2.8 Applicable Law. In the event that Lender shall have determined that any change in any Applicable Law regarding capital adequacy or in the interpretation or application thereof or compliance by Lender or any corporation controlling Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which Lender or such corporation could have achieved but for such change or compliance (taking into consideration Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by Lender to be material, then from time to time, after submission by Lender to the Borrowers of a written request therefor, the Borrowers shall pay to Lender such additional amount or amounts as will compensate Lender for such reduction. A certificate as to any additional amounts payable pursuant to this subsection 2.8 submitted by Lender to the Borrowers shall be conclusive in the absence of manifest error. 2.9 Joint and Several Obligations. The Borrowers shall, subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, be jointly and severally liable for all payments of principal and interest on the Term Note and for the observance and performance of all obligations, covenants, conditions, indemnities and other terms and provisions hereunder applicable to the Borrowers or to any Borrower. 2.10 Commitment Fee. The Borrowers have agreed pursuant to the commitment letter dated March 14, 1996, to pay to Lender a non-refundable commitment fee in the aggregate amount of $388,000, which shall be payable on the date this Agreement is executed. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Agreement and to make the Term Loan, each Borrower, each General Partner and Castle (collectively, the "Representing Parties") represent and warrant to the Lender that: 3.1 Financial Statements. (a) The balance sheet of each Borrower, each General Partner, each Limited Partner and Castle, and the related statements of LOAN AGREEMENT - Page 4 income and of cash flows furnished to the Lender pursuant to subsection 4.1(q) and certified by a Responsible Officer of such Person is complete and correct in all material respects and fairly presents the financial condition of such Person on such date and the results of such Person's operations and cash flows for the fiscal year then ended, all in conformity with GAAP applied on a consistent basis. All liabilities, direct and contingent, of such Person on such date required to be disclosed pursuant to GAAP are disclosed on such balance sheet. (b) None of the Borrowers, the General Partners, the Limited Partners nor Castle had, at the date of its balance sheet referred to in subsection 3.1(a), any material Guarantee Obligations, contingent liabilities or liabilities for taxes, or any long term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the financial statements referred to in subsection 3.1(a) or in the notes thereto. (c) Since the dates of the financial statements referred to in subsection 3.1(a) no material adverse change has occurred in (A) the financial condition of any Borrower, any General Partner, any Limited Partner or Castle, (B) the properties, business, operations or prospects of any Borrower, any General Partner, any Limited Partner or Castle or (C) any Borrower's, any General Partner's, any Limited Partner's or Castle's ability to perform its obligations under this Agreement and the other Basic Documents to which it is or is to become a party. 3.2 Corporate Existence and Business. (a) Each Borrower (other than Exploration) is a limited partnership duly organized and validly existing and in good standing under the laws of the State of Texas. Exploration is a corporation duly organized and validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. Each Borrower is duly qualified to do business under the laws of each jurisdiction in which the conduct of its business or the ownership, lease or operation of its property so requires. The Certificate of Limited Partnership of each Borrower (other than Exploration) has been duly filed in the office of the Secretary of State of Texas; the Certificate of Incorporation of Exploration has been duly filed in the Office of the Secretary of State of the Commonwealth of Pennsylvania; and no other filing, recording, publishing or other act is necessary or appropriate in connection with the existence or the business of any Borrower except those which have been duly made or performed. (b) Each General Partner is duly organized and validly existing and in good standing under the laws of Texas, is duly qualified to do business under the laws of each jurisdiction in which the conduct of its business so requires and has the corporate power and authority and the legal right to own and operate its property and to conduct the business in which it is currently engaged. (c) Pipeline GP is the sole general partner of Pipeline. Marketing GP is the sole general partner of Marketing. Production GP is the sole general partner of Production. Pipeline GP, Marketing GP and Production GP are engaged solely in the business of being the general partners of Pipeline, Marketing and Production, respectively, and activities incident thereto. LOAN AGREEMENT - Page 5 (d) Each Limited Partner is duly organized and validly existing and in good standing under the laws of Pennsylvania, is duly qualified to do business under the law of each jurisdiction in which the conduct of its business so requires and has the corporate power and authority and the legal right to own and operate its property and to conduct the business in which it is currently engaged. (e) Pipeline LP is the sole limited partner of Pipeline. Marketing LP is the sole limited partner of Marketing. Production LP is the sole limited partner of Production. 3.3 Subsidiaries. (a) None of the Borrowers has any subsidiaries or any equity interests in any other Person. None of the General Partners nor the Limited Partners has any equity interests in any other Person other than in the Borrower of which it is a general partner or a limited partner, as the case may be. (b) Castle directly owns 100% of the issued and outstanding capital stock of each General Partner and each Limited Partner. 3.4 Compliance with Law. Each Borrower, each General Partner and each Limited Partner is in compliance with all Requirements of Law applicable to it (including, without limitation, all Relevant Environmental Laws). 3.5 Power and Authorization; Enforceable Obligations. (a) Each Borrower has full power and authority and the legal right to conduct its business as now conducted and as proposed to be conducted by it, to execute, deliver and perform this Agreement, the Term Note and the other Basic Documents (other than the OWI Contracts) to which it is or is to become a party, to take all action as may be necessary to complete the transactions contemplated hereunder and thereunder, to grant the Liens and security interests provided for in the Collateral Security Documents to which it is a party and to borrow hereunder. Each Borrower has taken all necessary partnership and legal action to authorize the borrowings hereunder on the terms and conditions of this Agreement, the Term Note and the other Basic Documents (other than the OWI Contracts) to which it is a party, to grant the Liens and security interests provided for in the Collateral Security Documents to which it is a party and to authorize the execution, delivery and performance of this Agreement, the Term Note and the other Basic Documents (other than the OWI Contracts) to which it is a party or is to become a party. No consent or authorization of, filing with, or other act by or in respect of any other Person, that has not been made, obtained or complied with, is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement, the Term Note or the other Basic Documents (other than the OWI Contracts). Each of this Agreement, the Term Note and the other Basic Documents (other than the OWI Contracts) to which any Borrower is a party has been duly executed and delivered by such Borrower and, assuming the due authorization and delivery hereof and thereof by the other parties hereto and thereto, constitutes, and each of the other Basic Documents (other than the OWI Contracts) to which such Borrower is to become a party will upon execution and delivery thereof by such Borrower and, assuming the due authorization and delivery thereof by the other parties thereto (if any), constitute a legal, valid and binding obligation of such Borrower LOAN AGREEMENT - Page 6 enforceable against such Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally and by general principles of equity (whether such enforcement is sought in a proceeding at law or in equity); all Project Documents (other than the OWI Contracts) to which such Borrower is a party are in full force and effect. (b) Each General Partner has full power and authority and the legal right to own its properties and to conduct its business as now conducted and proposed to be conducted by it, to execute, deliver and perform this Agreement and the other Basic Documents to which it is or is to become a party and to take all action as may be necessary to complete the transactions contemplated hereunder and thereunder. Each General Partner has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement and the other Basic Documents to which it is or is to become a party. No consent or authorization of, filing with, or other act by or in respect of any other Person that has not been made, obtained or complied with is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement or the other Basic Documents to which such General Partner is a party or is to become a party. Each of this Agreement, the Term Note and the other Basic Documents to which any General Partner is a party has been duly executed and delivered by such General Partner and, assuming the due authorization, execution and delivery thereof by the other parties thereto, constitutes, and each of the other Basic Documents to which such General Partner is to become a party will upon execution and delivery thereof by such General Partner and, assuming the due authorization, execution and delivery thereof by the other parties thereto (if any), constitute a legal, valid and binding obligation of such General Partner enforceable against such General Partner in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally and by general principles of equity (whether such enforcement is sought in a proceeding at law or in equity). (c) Castle has full power and authority and the legal right to own its properties and to conduct its business as now conducted and proposed to be conducted by it, to execute, deliver and perform this Agreement and the other Basic Documents to which it is or is to become a party and to take all action as may be necessary to complete the transactions contemplated hereunder and thereunder. Castle has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement and the other Basic Documents to which it is or is to become a party. No consent or authorization of, filing with, or other-act by or in respect of any other Person that has not been made, obtained or complied with is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement or the other Basic Documents to which it is a party or is to become a party. Each of this Agreement and the other Basic Documents to which Castle is a party has been duly executed and delivered by Castle and, assuming the due authorization, execution and delivery thereof by the other parties thereto, constitutes, and each of the other Basic Documents to which Castle is to become a party will upon execution and delivery thereof by Castle and, assuming the due authorization, execution and delivery thereof by the other parties thereto (if any), constitute a legal, valid and binding obligation of Castle enforceable against Castle in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally and by general principles of equity (whether such enforcement is sought in a proceeding at law or in equity). LOAN AGREEMENT - Page 7 3.6 Governmental Approvals and Other Consents and Approvals. No Governmental Approvals or other consents, actions or approvals are required in connection with (i) the participation by any Borrower, any General Partner or any Limited Partner in the transactions contemplated by this Agreement and the other Basic Documents, (ii) the use, ownership, maintenance or operation of the Assets in accordance with the applicable provisions of the Basic Documents and in compliance with all Applicable Laws, (iii) the validity and enforceability of the Lone Star Contract, the Supply Agreement and the other Basic Documents, (iv) the participation by Lender in the transactions contemplated by this Agreement and the other Basic Documents to which it is a party (other than any Governmental Approvals, consents, actions or approvals under any law, rule or regulation of (or administered by) any federal or state regulatory body primarily responsible for regulating the activities of Lender) and (v) the grant by the Borrowers, the General Partners, the Limited Partners and Castle of the Liens created pursuant to the Collateral Security Documents and the validity, perfection and enforceability thereof and the exercise by the Lender of its rights and remedies thereunder, except in each case for those Governmental Approvals set forth on Schedule 4. The continuation, validity and effectiveness of each such Governmental Approval set forth on Schedule 4 will in no way be adversely affected by the transactions contemplated by this Agreement or the Collateral Security Documents. No Borrower is in breach of, or in default under the terms of, and has not engaged in any activity which would cause revocation or suspension of, any such Governmental Approval and, to such Representing Party's knowledge after diligent investigation, no action or proceeding looking to or contemplating the revocation or suspension of any thereof is pending or threatened. 3.7 No Legal Bar. The execution delivery and performance of this Agreement, the Term Note and the other Basic Documents, the borrowings by the Borrowers hereunder and the use of the proceeds thereof will not violate any law applicable to, or any Requirement of Law or Contractual Obligation of, any Borrower, any General Partner or any Limited Partner and will not result in, or require, the creation or imposition of any Lien on any of the Assets or any of the other properties, assets or revenues of any Borrower, any General Partner, any Limited Partner or Castle, pursuant to any Requirement of Law or Contractual Obligation, except for the Liens created pursuant to the Collateral Security Documents. 3.8 No Proceeding or Litigation. Except as disclosed in the Form 10Q for the quarter ended December 31, 1995 filed by Castle with the Securities and Exchange Commission, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the best knowledge of such Representing Party, after due inquiry, threatened against or affecting any Borrower, any General Partner or any Limited Partner or against or affecting any of their respective properties, rights, revenues or assets (including the Assets), or which could result in a rescission, termination or suspension of any Governmental Approval, consent or approval or could have a Material Adverse Effect. LOAN AGREEMENT - Page 8 3.9 No Default, Event of Default or Event of Loss. No Borrower or General Partner is in default in any material respect under or with respect to any Basic Document or any other Contractual Obligation to which such Person is a party; and no notice of default has been given to any Borrower or any General Partner under any of the Basic Documents. To such Person's knowledge, no other party to a Basic Document (other than any OWI Contract) is in default thereunder. No Default or Event of Default has occurred and is continuing. No Event of Loss has occurred. 3.10 Ownership of Property; Liens. (a) Pipeline has Marketable Title in and to the Pipeline Assets, free and clear of any claim, Lien or other encumbrance other than Permitted Liens. Each of Castle, Production and Marketing has good title to all of its property and assets (including, without limitation with respect to Marketing, the Lone Star Contract), free and clear of any claim, Lien or other encumbrance other than Permitted Liens. (b) Except for Permitted Liens, prior to the satisfaction in full of the Obligations, no Borrower shall directly or indirectly reserve or retain any recorded or unrecorded interest in the Collateral, and shall not reserve any recorded executory rights therein, upon which a Lien is not created in favor of the Lender by any Borrower pursuant to the Collateral Security Documents. (c) Except for Permitted Liens, the GE Capital Loan Agreement, the Senior Collateral Documents, this Agreement and the Collateral Security Documents, as of the Closing Date, there will be no unrecorded documents or agreements which may result in impairment or loss of any Borrower's rights to convey or assign any Assets held by it. (d) Except for Permitted Liens, Pipeline has all beneficial right, title and interest in and to the Pipeline Assets and has the exclusive right to sell and use the same. Pipeline has succeeded to all right, title and interest of Tabasco in and to the Interconnect Agreement and the Transportation Agreement (Marketing). Marketing has succeeded to all of the right, title and interest of ARCO in and to (i) the Lone Star Contract and (ii) the Transportation Agreement (Marketing). Production has succeeded to all of the right, title and interest of ARCO in and to the oil and gas assets purchased from ARCO pursuant to the Purchase and Sale Agreement dated September 3, 1992. Exploration has succeeded to all of the right, title and interest of ARCO in and to the Production Payment. (e) Part A of Schedule 5 hereto lists all UCC-1 financing statements and all mortgages, security agreements, pledge agreements and deeds of trust on file in any jurisdiction prior to the date hereof on or with respect to any Borrower, any General Partner or any Limited Partner or any of their respective properties and assets. Part B of Schedule 5 hereto lists all UCC-1 financing statements and all mortgages, security agreements, pledge agreements and deeds of trust on file in any jurisdiction prior to the date hereof on or with respect to Castle's ownership interest in the General Partners and the Limited Partners. 3.11 Indebtedness. (a) Schedule 1 correctly describes, as of the dates indicated therein, all outstanding Indebtedness of the Borrowers. LOAN AGREEMENT - Page 9 (b) No Borrower is the lessor or lessee under any lease other than (i) leases constituting part of the Pipeline Interests or (ii) leases permitted pursuant to subsection 6.9. (c) No Borrower is or will be a party to any "take or pay" contract or settlement or any other contract or agreement which (i) allows the gas purchaser thereunder to take gas previously paid for out of future gas production or (ii) provides for a cash rebate to such gas purchaser if reimbursement of take or pay monies is not made through gas production, other than (x) the Supply Agreement, (y) the Lone Star Contract, and (z) the gas balancing liabilities shown on the balance sheet of Production delivered pursuant to subsection 4.1(q). 3.12 Taxes. (a) Each Borrower, each General Partner, each Limited Partner and each corporation which has been affiliated with either Borrower, either General Partner or either Limited Partner in any form of combined, unitary or consolidated tax group (a "Tax Affiliate") has filed or caused to be filed all tax returns which are required to be filed by it, and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments made against it, or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority including, without limitation, all ad valorem, property, production, excise, severance, windfall profit and similar taxes and assessments based on or measured by the ownership of property or the production or removal of Hydrocarbons or the receipt of proceeds therefrom or from the Assets have been timely paid; no tax Lien has been filed, and, to the knowledge of such Person no claim is being asserted, with respect to any such tax, fee or other charge; provided, however, that in the case of a Tax Affiliate, this subsection 3.12(a) shall only apply in respect of taxes for which either Borrower (or any General Partner or Limited Partner) could be held liable. (b) Neither the execution and delivery of this Agreement, the Term Note or any other Basic Document, nor the consummation of any of the transactions contemplated hereby or thereby, will result in any tax, levy, impost, duty, charge or withholding imposed by the United States or any agency or taxing authority thereof, or by any state of the United States or any political subdivision or taxing authority thereof or therein, on or with respect to such execution, delivery or consummation, or upon or with respect to the Lender. 3.13 Regulation U. No part of the proceeds of the Term Loan will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of such Board of Governors. 3.14 ERISA. No Borrower nor any General Partner is in violation of any applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to any Plan. No Borrower nor any General Partner maintains or is required under ERISA to maintain, any Plan. LOAN AGREEMENT - Page 10 3.15 Investment Company Act. None of the Borrowers, the General Partners nor the Limited Partners is an "investment company" or a company "controlled" by an "investment company" or an "investment adviser", within the meaning of the Investment Company Act of 1940, as amended. 3.16 Public Utility Holding Company. None of the Borrowers, the General Partners nor the Limited Partners is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.17 Full Disclosure. No representation, warranty or other statement made by such Representing Party in this Agreement or in any other Basic Document or in any certificate, written statement or other document furnished to the Lender by or on behalf of such Representing Party, contains, at the time made, any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading (unless corrected or disclosed prior to the date hereof), which misstatement or omission has had a Material Adverse Effect or which could have a Material Adverse Effect; and there is no fact known to such Representing Party, whether related to Governmental Approvals, the Basic Documents or otherwise, that has not been disclosed in writing to the Lender that has had a Material Adverse Effect or which could have a Material Adverse Effect. 3.18 Project Documents. (a) Each of the Project Documents (other than the OWI Contracts) constitutes the legal, valid and binding obligation of each of the parties thereto, and is enforceable against each such party in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally and by general principles of equity. All Governmental Approvals and other consents or approvals required in connection with the execution, delivery and performance of each of the Project Documents by the parties thereto have been duly obtained or made and are Final. (b) No Borrower is party to any contract (other than employment contracts and contracts involving less than $100,000, in the aggregate, annually) other than the contracts listed on Schedule 2 and the OWI Contracts; true and complete copies of all such contracts listed on Schedule 2 have been delivered to the Lender pursuant to subsection 4.1(c). (c) Other than the amendments listed on Schedule 3, no Project Document has been amended, supplemented or otherwise modified prior to the date hereof. 3.19 Environmental Matters. (a) To the knowledge of each of the Representing Parties the Mortgaged Properties do not contain, and have not previously contained, any Hazardous Materials in concentrations which violate, or could reasonably be expected to give rise to liability under, Relevant Environmental Laws. LOAN AGREEMENT - Page 11 (b) To the knowledge of each of the Representing Parties the Mortgaged Properties and all operations of either Borrower are in compliance with all Relevant Environmental Laws, and there is no Hazardous Materials contamination which could materially interfere with the continued operation of the Mortgaged Properties or the operations of any Borrower or materially impair the fair saleable value thereof. (c) No Borrower has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with or liability under any Relevant Environmental Law, nor is any Borrower aware that any person is contemplating delivering to such Borrower any such notice. (d) To the knowledge of each of the Representing Parties Hazardous Materials have not been transferred, transported, or disposed of by any Borrower at any location in violation of, or in a manner that could give rise to liability under, a Relevant Environmental Law. (e) There are no judicial proceedings or governmental administrative actions pending or, to the knowledge of the Borrowers, contemplated under any Relevant Environmental Law to which any Borrower is or will be named as a party. (f) Each of the representations and warranties set forth in subsections 3.19(a) through (e) is true and correct with respect to each parcel of real property owned or operated by any Borrower. 3.20 Intellectual Property. No licenses, trademarks, patents or agreements with respect to the use of technology (other than any thereof which have been obtained and are in full force and effect and have been assigned to the Agent under the GE Capital Loan Agreement and the Lender) are necessary for the ownership, operation and maintenance of the Assets and the conduct of any Borrower's business. Each Borrower owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted that are material to the condition (financial or other), business, or operations of such Borrower (the "Intellectual Property"). No claim has been asserted and is pending by any Person with respect to the use of any such Intellectual Property in connection with the Assets or the conduct of any Borrower's business, or challenging or questioning the validity or effectiveness of any such Intellectual Property and such Borrower does not know of any valid basis for any such claim. The use of such Intellectual Property by such Borrower does not infringe on the rights of any Person. 3.21 Intentionally Left Blank. 3.22 Chief Executive Office. The chief executive office of each Borrower and of each General Partner is at the address set forth in subsection 8.2. 3.23 Solvency. Each Borrower, each General Partner and each Limited Partner are Solvent. Castle is generally able to meet its debts as they come due. LOAN AGREEMENT - Page 12 3.24 Joint Venture. None of the Borrowers, the General Partners nor the Limited Partners is engaged in any joint venture or partnership with any other Person except as contemplated by the Basic Documents. 3.25 No Fees. No broker's or finder's fees or commissions have been paid or will be payable by any Borrower to any Person in connection with the transactions contemplated by this Agreement. The Borrowers will indemnify Lender and its officers, directors, employees and agents from and against, and hold each of such parties harmless on demand from, all liabilities, costs, damages and expenses, including, but not limited to, attorneys' fees and disbursements relating to any third parties concerning finders', brokerage or similar fees arising from or relating to the transactions contemplated under this Agreement. 3.26 Validity of Leases. The leases and easements constituting a part of the Pipeline Interests are in full force and effect in accordance with their terms. 3.27 Collateral Security Documents. Upon execution and delivery thereof, the Collateral Security Documents to which any Borrower is a party will be effective to create, in favor of the Lender, legal, valid and enforceable liens on and security interests in all right, title, estate and interest of the Borrowers in and to the Collateral and, prior to the Closing Date hereunder, all necessary and appropriate recordings and filings will have been duly effected in all appropriate public offices so that the liens and security interests created by each of the Collateral Security Documents to which the Borrowers are parties will constitute perfected first (except with respect to the security interests granted by Marketing, Marketing GP, Marketing LP, Pipeline, Pipeline GP, Pipeline LP and Castle in the Subject Party Collateral) liens on and prior perfected security interests in all right, title, estate and interest of the Borrowers in and to the Collateral described therein, prior and superior to all other Liens, existing or future, except Permitted Liens. The recordings and filings shown on Schedule 5 are all the recordings, filings and other action necessary and appropriate in order to establish, protect and perfect the Lender's lien on and security interest in the right, title, estate and interest of the Borrowers in and to the Collateral. 3.28 Pipeline Contracts. Pipeline, with respect to the Pipeline Assets, has fulfilled all requirements for filings, certificates, disclosures of parties in interest, and other similar matters contained in (or otherwise applicable thereto by law, rule or regulation) any lease unit agreement, pooling agreement, communitization agreement, Basic Document or other document granting or governing the operation or maintenance of such interests and assets, and Pipeline is qualified to own, hold and exercise such rights under such lease unit agreements, pooling agreements, communitization agreements, Basic Documents or other documents. 3.29 No Obligations. Except for (i) obligations pursuant to the Project Documents, no Borrower has any obligation owing to, or any Indebtedness in favor of, MGTF or any other MG Affiliate, or (ii) the Senior Obligations, no Borrower has any obligation owing to, or any indebtedness in favor of GE Capital or any of its Affiliates. LOAN AGREEMENT - Page 13 3.30 Prepayment. Marketing has fully and irrevocably prepaid a quantity of Natural Gas (a) from Production pursuant to the Production $2.90 Contract equal to the aggregate sum of the Tier II Minuends (as defined in the Supply Agreement) for each Day in the period from August 1, 1993 through May 31, 1999, inclusive, as set forth in Exhibit B to the Supply Agreement, and (b) from MGNG pursuant to the Supply Agreement equal to all Tier II and Tier III Gas (as defined therein) to be delivered thereunder. 3.31 Gas Contracts. (a) Except pursuant to the Supply Agreement and the OWI Contracts, Marketing is not a party to any contract providing for the purchase of gas by it nor is it otherwise obligated to purchase gas from any other source. (b) Marketing has no obligation to purchase any specified minimum quantity of gas pursuant to any OWI Contract, nor does it have any other obligations under any OWI Contract other than the obligation to pay for any gas actually taken thereunder (i) in the case of the Owner OWI Contracts, at a price of $2.90 per MMBtu fixed for the life of such contract and (ii) in the case of the Production $2.90 Contract, at a price of $2.90 per MMBtu fixed for the life of such contract, such price having been irrevocably prepaid; provided, however, that Marketing is not permitted to discriminate against producers within any field from which it purchases Natural Gas or unjustly and unreasonably discriminate between fields. 3.32 FERC Jurisdiction. (a) None of the Assets, nor any portion thereof, is subject to the jurisdiction of FERC. (b) No Representing Party is aware of any assertion by any Governmental Authority or any other Person, or any proceeding asserting, that the Assets, or any portion thereof, are subject to the jurisdiction of FERC. (c) No transportation of Natural Gas by Pipeline, Marketing, Exploration or Production constitutes transportation of Natural Gas in interstate commerce subject to the jurisdiction of FERC under the NGA. (d) No Natural Gas sales by Marketing, including the gas sold to Lone Star under the Lone Star Contract, or by Production or Exploration are sales in interstate commerce for resale subject to the jurisdiction of the FERC under the NGA. (e) The Natural Gas which MGNG or any Affiliate of Marketing purchases and subsequently sells to Marketing for resale to Lone Star is purchased by MGNG or such Affiliate only in sales that are not a sale in interstate commerce for resale subject to FERC jurisdiction under the NGA and that sales of such gas by MGNG or such Affiliate to Marketing do not constitute a sale in interstate commerce for resale subject to FERC jurisdiction under the NGA. (f) The purchase of gas by Marketing from any other source does not constitute a sale in interstate commerce for resale subject to FERC jurisdiction under the NGA. LOAN AGREEMENT - Page 14 3.33 Lone Star Contract. As of the date hereof, Lone Star has not made a payment under the Lone Star Contract during the current Operating Year in respect of any natural gas which it has not already taken, nor does it have any outstanding credit thereunder permitting it to take any natural gas in the future without paying for the same. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions to Term Loan. The agreement of Lender to make the Term Loan is subject to the satisfaction on or prior to the Closing Date of each of the following conditions: (a) Term Note. The Lender shall have received the Term Note, conforming to the requirements of subsection 2.2, and duly executed and delivered by each Borrower. (b) Loan Documents. The Lender shall have received each of the following documents: (i) this Agreement, executed and delivered by a duly authorized officer of each Borrower, each General Partner and Castle; (ii) the Borrower Security Agreement, executed and delivered by a duly authorized officer of each Borrower; (iii) the Security Agreement, executed and delivered by a duly authorized officer of Pennsylvania Castle Energy Corporation, a Texas corporation, as general partner of Deerlick Creek Field Limited Partnership; (iv) the Utility Security Notice, executed and delivered by a duly authorized officer of Pipeline; (v) the Exploration Mortgages, executed and delivered by a duly authorized officer of Exploration; (vi) the Exploration Deed of Trust, executed and delivered by a duly authorized officer of Exploration; (vii) the Castle Deeds of Trust, executed and delivered by a duly authorized officer of Castle; (viii) the Castle Mortgages, executed and delivered by a duly authorized officer of Castle; (ix) the Pipeline Dead of Trust, executed and delivered by a duly authorized officer of Pipeline; LOAN AGREEMENT - Page 15 (x) the Production Deed of Trust, executed and delivered by a duly authorized officer of Production; (xi) the GP Pledge Agreement, executed and delivered by a duly authorized officer of each General Partner; (xii) the LP Pledge Agreement, executed and delivered by a duly authorized officer of each Limited Partner; (xiii) the Castle Pledge Agreement, executed and delivered by a duly authorized officer of Castle; (xiv) the Exploration Pledge Agreement, executed and delivered by a duly authorized officer of Exploration; and (xv) the Castle Guaranty, executed and delivered by a duly authorized officer of Castle. (c) Project Documents. The Lender shall have received each of the following documents: (i) a true and complete copy of the Pipeline Partnership Agreement, duly certified by a Responsible Officer of Pipeline; a true and complete copy of the Marketing Partnership Agreement, duly certified by a Responsible Officer of Marketing; and a true and complete copy of the Production Partnership Agreement, duly certified by a Responsible Officer of Production; (ii) a true and complete copy of the Assignment Agreement, duly certified by a Responsible Officer of each of Pipeline, Marketing and Production; (iii) a true and complete copy of the Assignment Agreement (Lone Star Agreement and Transportation Agreement), duly certified by a Responsible Officer of Marketing; (iv) a true and complete copy of the ARCO Purchase and Sale Agreement, duly certified by a Responsible Officer of Pipeline, Marketing and Production; (v) a true and complete copy of the Lone Star Contract, duly certified by a Responsible officer of Marketing; (vi) a true and complete copy of the Assignment Agreement (Gas Contracts), duly certified by a Responsible Officer of Marketing; (vii) a true and complete copy of the Interconnect Agreement, duly certified by a Responsible officer of Pipeline; LOAN AGREEMENT - Page 16 (viii) a true and complete copy of the Assignment Agreement (Pipeline Assets), duly certified by a Responsible Officer of Pipeline; (ix) a true and complete copy of the Transportation Agreement (Marketing), duly certified by a Responsible officer of Marketing; (x) Intentionally Left Blank; (xi) a true and complete copy of the Transportation Agreement (MGNG), duly certified by a Responsible officer of Pipeline; (xii) a true and complete copy of the Management Agreement Amendment, duly certified by a Responsible Officer of Pipeline; (xiii) a true and complete copy of the Supply Agreement Amendment, duly certified by a Responsible Officer of Marketing; (xiv) a true and complete copy of the Service Agreement Amendment, duly certified by a Responsible Officer of Marketing; (xv) Intentionally Left Blank; (xvi) Intentionally Left Blank; (xvii) a counterpart of each Consent, executed and delivered by a duly authorized officer of the parties thereto; (xviii) true and complete copies of the GE Capital Loan Agreement and all instruments, documents and agreements executed in connection therewith and any and all amendments and modifications thereto; (xix) Intentionally Left Blank; (xx) a certificate of a Responsible Officer of each Borrower that other than the Project Documents delivered to the Lender pursuant to this subsection 4.1(c), such Borrower is not party to any other Project Document on the date hereof or any other contract on the date hereof (other than employment contracts and contracts involving less than $100,000 annually); and (xxi) a true and complete copy of the Contribution Agreement, duly certified by a Responsible Officer of each Borrower. (d) Corporate Documents. The Lender shall have received each of the following documents: LOAN AGREEMENT - Page 17 (i) a copy of the charter of Castle, Exploration, each General Partner and each Limited Partner, duly certified by the Secretary of State of the appropriate jurisdiction, within five (5) days prior to the Closing Date; (ii) a Certificate of Good Standing of Castle, Exploration, each General Partner and each Limited Partner in the jurisdiction in which it was chartered, certified by the Secretary of State of such jurisdiction, dated within five (5) days prior to the Closing Date; (iii) certificates of existence and good standing of each Borrower in the State of Texas, certified by the Secretary of State of the State of Texas, dated within five (5) days prior to the Closing Date; (iv) copies of each Borrower's Certificate of Limited Partnership certified by the Secretary of State of the State of Texas, dated within five (5) days prior to the Closing Date; and (v) a certificate from the Secretary of Castle, Exploration, each General Partner and each Limited Partner, dated the Closing Date, certifying (A) there have been no amendments to the charter of such Person from that delivered pursuant to clause (i) above, (B) a copy of the by-laws of such Person, (C) corporate resolutions of its Board of Directors authorizing its (and, in the case of each General Partner, the relevant Borrower's) execution, delivery and performance of the Basic Documents to which such Person (or such Borrower) is a party and, in the case of such General Partner, authorizing the borrowing by the relevant Borrower hereunder, (D) the incumbency of its officers executing the Basic Documents to which such Person (or the relevant Borrower) is a party and all related documentation. (e) Intercreditor Agreement. The Intercreditor Agreement duly executed by GE Capital, as agent and each of the Subject Parties. (f) Authorizing Actions. All partnership, corporate and other proceedings in connection with the transactions contemplated by this Agreement and the other Basic Documents, and all documents and instruments incident thereto, shall be reasonably satisfactory in form and substance to the Lender and its counsel; and the Lender and its counsel shall have received such counterpart originals or certified or other copies of all such documents and instruments and of all records of partnership and corporate proceedings in connection with such transactions, and such incumbency and signature certificates of officers of the Borrowers, the General Partners, the Limited Partners and Castle as the Lender or its counsel may reasonably request, together with certificates of good standing and payment of franchise taxes in the jurisdiction of each such Person's organization. (g) No Violation. The consummation of the transactions contemplated hereby shall not contravene, violate or conflict with, nor involve the Lender in any violation of any Applicable Law. (h) Opinions. The Lender shall have received (i) the legal opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., Texas counsel to Castle, the LOAN AGREEMENT - Page 18 Borrowers, the General Partners and the Limited Partners, addressing the matters set forth on Exhibit B-1, (ii) the legal opinion of Cassidy, Kotjarapoglus & Pohland, special Pennsylvania counsel to Castle, the Borrowers, the General Partners and the Limited Partners addressing the matters set forth on Exhibit B-2, and (iii) the legal opinion of Ottinger, Hebert & Sikes, L.L.P., special Louisiana counsel to Castle, the Borrowers, the General Partners and the Limited Partners addressing the matters set forth on Exhibit B-3. (i) Representations and Warranties. Each of the representations and warranties made pursuant to this Agreement or made by any Representing Party pursuant to any other Basic Document shall be true and correct in all material respects on and as of the Closing Date. (j) No Default. No Default or Event of Default shall have occurred and be continuing on the Closing Date. No Event of Loss shall have occurred. (k) Additional Documents. The Lender shall have received each additional document, instrument, legal opinion or item of information reasonably requested by it, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which any Borrower or any other party hereto may be a party. (l) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Basic Documents shall be satisfactory in form and substance to the Lender, and the Lender shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. (m) Environmental Information. The Lender shall have received such information as the Lender may reasonably request and such information shall not disclose any unusual environmental risks associated with the Assets or the business or properties of the Borrowers and shall otherwise be satisfactory in form and substance to the Lender. (n) Updated Reports of Consultants. The Lender shall have received the following: (i) a copy of the Ryder Scott Company Report; (ii) a copy of the Huntley and Huntley Report; and (iii) a copy of the ENSR Consulting and Engineering Report. (o) Existing BTCC Obligations; Release of Liens. The Lender shall have received satisfactory evidence that all obligations of the Borrowers (other than any obligations specifically provided for pursuant to that certain Agreement Regarding Release and Instruction dated as of April 30, 1996 among Castle, Production GP, Castle LP, BTCC, Production and Lender) under the Existing BTCC Loan Agreement and any agreement executed and delivered in connection therewith have been or upon funding of the Term Loan, will be satisfied and that all documents, instruments and financing statements (including, without limitation, LOAN AGREEMENT - Page 19 Uniform Commercial Code financing statements) requested by the Lender to release all Liens granted by Castle and the Borrowers in favor of BTCC in connection with the Existing BTCC Loan Agreement have been executed, delivered and filed or, upon funding of the Term Loan will be filed. (p) Perfection of Liens and Security Interests. All filings, recordings and other actions that are necessary or desirable in order to establish, protect, preserve and perfect the Lender's Lien on and perfected security interest in all right, title, estate and interest of the Borrowers, the General Partners, the Limited Partners or Castle, as the case may be, in and to all Collateral covered by the Collateral Security Documents, prior and superior to all other Liens (other than the Liens of GE Capital pursuant to the Senior Collateral Documents), existing or future, shall have been duly made or taken and all fees, taxes and other charges relating to such filings and recordings and other actions shall have been paid by the Borrowers, the General Partners, the Limited Partners or Castle, as the case may be, or filings for exemptions therefrom shall have been made. The Lender shall have received authenticated copies or other evidence of all filings, recordings and other actions obtained or made in order to create and perfect such Lien on and perfected security interest in the right, title, estate and interest of the Borrowers, the General Partners, the Limited Partners or Castle, as the case may be, in and to all Collateral covered by the Collateral Security Documents. (q) Insurance. Insurance complying with the provisions of subsection 5.4 shall be in full force and effect and the Lender shall have received (i) certificates of insurance signed in each case by the insurer or any agent authorized to bind the insurer, conforming to the requirements of subsection 5.4(d) and (ii) an opinion of an independent insurance broker acceptable to the Lender, conforming to the requirements of subsection 5.4(e). (r) Financial Statements. The Lender shall have received (i) the most recent balance sheet and related financial statements of each Borrower, each General Partner and each Limited Partner, in each case certified by a Responsible Officer of such Person and (ii) the most recent annual audited balance sheet and related financial statements of Castle and Enserch, each of which financial statements shall be satisfactory to the Lender. (s) No Material Adverse Change. In the opinion of the Lender, since the dates of the financial statements referred to in subsection 4.1(q), no material adverse change has occurred in (A) the financial condition of any Borrower, any General Partner, any Limited Partner, Castle or Lone Star, (B) the properties, business, operations or prospects of any Borrower, any General Partner, any Limited Partner, Castle or Lone Star, or (C) any Borrower's, any General Partner's, any Limited Partner's, Castle's or Lone Star's ability to perform its obligations under this Agreement and/or the other Basic Documents to which it is or is to become a party. (t) Project Documents. Each of the Project Documents (other than any OWI Contract) shall be in full force and effect. No default shall exist and be continuing under any Project Document (other than any OWI Contract). LOAN AGREEMENT - Page 20 SECTION 5. AFFIRMATIVE COVENANTS Each Borrower and each General Partner (as to each General Partner, only as to subsections 5.1, 5.3 and 5.6) covenants and agrees that, so long as the Term Note remains outstanding and unpaid or any other amount is owing to Lender hereunder or under the Collateral Security Documents, such Borrower and such General Partner shall: 5.1 Conduct of Business, Maintenance of Existence, Etc. (a) Continue to engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate or partnership existence and take all reasonable action to maintain all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business; comply with all Contractual Obligations and Requirements of Law; maintain, or cause each Servicer to maintain, all licenses, permits, charters and registrations necessary to conduct its business. (b) The General Partners will engage solely in the business of being general partners of the Borrowers. (c) Pipeline GP shall remain at all times the sole general partner of Pipeline. Marketing GP shall remain at all times the sole general partner of Marketing. Production GP shall remain at all times the sole general partner of Production. 5.2 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all of its obligations under the Basic Documents and all of its other obligations of whatever nature, including, without limitation, any payments due to lessors, suppliers, vendors and tax authorities, except, in the case of such other obligations, when (a) the amount or validity thereof is currently being contested in good faith by appropriate actions or proceedings and such contest does not involve any risk of the sale, forfeiture or loss of any of the Collateral, (b) adequate cash reserves shall have been established in respect thereof and (c) any action or proceeding instituted to enforce such obligations shall have been effectively stayed. 5.3 Performance Under Other Agreements. Duly perform and observe all of the covenants, agreements and conditions on its part to be performed and observed hereunder and under the Term Note and the Collateral Security Documents to which it is or is to become a party and, unless the Lender otherwise consents in writing, duly perform and observe in all respects all of the covenants, agreements and conditions on its part to be performed and observed under the other Basic Documents (other than the OWI Contracts) to which it is or is to become a party; and diligently enforce all of its rights under each Assigned Contract to which it is or is to become a party. 5.4 Partnership Insurance Coverage. (a) Each Borrower shall, without limiting any of the other obligations or liabilities of such Borrower under this Agreement, at all times maintain, at no cost to the Lender, the following minimum insurance coverages (such coverage shall be written by insurers and be in such form and contain terms and conditions as are acceptable to the Lender and with deductibles in the amounts as specified below): LOAN AGREEMENT - Page 21 (i) Workers' Compensation and Employer's Liability Insurance covering the employees of the Borrowers and Castle engaged in operations hereunder and under the Basic Documents in compliance with all applicable state and federal laws, and written with statutory limits and containing $50,000,000 (when combined with umbrella and excess limits) of employers liability. Such coverage shall not contain an occupational disease exclusion. The deductible shall not exceed $10,000; (ii) Comprehensive General Liability Insurance written in an amount not less than $50,000,000 (when combined with umbrella and excess limits) of which the primary $25,000,000 shall be written on an occurrence basis. Such coverage shall include: premises and operations; broad form contractual; broad form property damage; underground resources; sudden and accidental pollution; x.c.u. (explosion, collapse and underground perils); and independent contractors. The deductible shall not exceed $10,000; (iii) Comprehensive Automobile Liability Insurance covering all owned, non-owned and hired vehicles in an amount not less than $50,000,000 (when combined with umbrella and excess limits). The deductible shall not exceed $10,000; (iv) Business Interruption Insurance and Extra Expense on the Pipeline Assets and above ground equipment written in an amount not less than the equivalent of 90 days' net income and continuing expenses of the Borrowers. Such policy shall include loss of net profits and continuing expenses for a period of not less than 90 days and shall be written with an agreed amount endorsement waiving any coinsurance penalty. The deductible shall not exceed 10 days or the dollar equivalent of 10 days loss of net profits and continuing expenses; (v) All Risk Property Insurance with limits of not less than $15,000,000 on the Pipeline Assets, the above ground equipment and the other property covered by the Collateral Security Documents written on a 100% replacement cost basis including not but limited to fire and extended coverage, comprehensive boiler machinery perils with a combined property damage/business interruption limits of not less than $10,000,000, flood and earthquake coverage with limits of not less than $5,000,000. Such policy shall contain an agreed amount endorsement waiving any coinsurance penalty. The deductible shall not exceed $50,000; and (vi) such insurance as any Borrower is required to maintain pursuant to the provisions of any other Basic Documents. (b) Without limiting in anyway the foregoing, each Borrower shall keep all of its property insured for replacement value of like kind and quality by insurance companies licensed to do business in the State of Texas and reasonably satisfactory to the Lender against loss or damage by fire or other risk usually insured against by other owners or users of such properties in similar businesses under extended coverage endorsement and against theft, burglary and LOAN AGREEMENT - Page 22 pilferage together with other insurance covering such other hazards as the Lender may from time to time reasonably request, in amounts customary with industry standards. Subject to any obligation to deliver the original policies of insurance to GE Capital under the GE Capital Loan Agreement, each Borrower shall deliver the policy or policies of such insurance (or, in the event such policies have previously been delivered to GE Capital, true and complete copies thereof) or certificates of insurance to the Lender if the Lender so requests and whether or not so delivered such policies and all proceeds thereof shall be security for all Obligations. (c) Each Borrower shall cause the insurance carried in accordance with this subsection 5.4 to be endorsed as follows: (i) with the exception of workers compensation insurance, the Borrowers shall be the named insured[s] and the Lender shall be an additional named insured, as its interest may appear with the understanding that any obligation of the Borrowers (including without limitation the liability to pay premiums) shall be the sole obligation of the Borrowers; (ii) the interest of the Lender shall not be invalidated by any action or inaction of any Borrower or any other Person and of any breach or violation by any Borrower or any other Person of any warranties, declarations or conditions in such policies; (iii) the insurer thereunder shall waive all rights of subrogation against the Lender, any right of setoff or counterclaim and any other right to deduction, whether by attachment or otherwise; (iv) such insurance shall be primary without right of contribution of any other insurance carried by or on behalf of the Lender with respect to its interest as such in the Assets or other insured property; (v) if such insurance is canceled for any reason whatsoever, including nonpayment of premium, or any changes are initiated by the carrier which reduces the limits or which otherwise affects the interest of the Lender, such cancellation or change shall not be effective as to the Lender for 60 days, except for nonpayment of premium which shall be 30 days, after receipt by the Lender of written notice sent by registered mail from such insurer of such cancellation or change; (vi) shall be endorsed to provide that, inasmuch as the policy is written to cover more than one insured, all terms, conditions, insuring agreements and endorsements, with the exception of limits of liability, shall operate in the same manner as if there were a separate policy covering each insured; and (vii) shall include a standard Lender's loss payable endorsement in favor of the Lender, as its interest may appear. Deductibles or self insured retentions shall be subject to approval by the Lender. LOAN AGREEMENT - Page 23 (d) Evidence of Insurance. At the Closing Date and at each policy anniversary date, but not less than annually, the Borrowers shall furnish the Lender with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits and the policy term, and shall specifically list the special provisions enumerated for such insurance required by paragraph (a) of this subsection 5.4). Upon request, the Borrowers will furnish the Lender with copies of all insurance policies, binders and cover notes or other evidence of such insurance relating to the Assets. (e) Insurance Report. Concurrently with the furnishing of the certification referred to in paragraph (d), the Borrowers shall furnish the Lender with an opinion of each insurance broker stating that all premiums then due have been paid and that, in the opinion of such broker, the insurance then carried and maintained with respect to the Assets is in accordance with the terms of this Agreement. Furthermore, the Borrowers shall cause each insurer or such broker to advise the Borrowers in writing of any default in the payment of any premiums or any other act or omission on the part of the Borrowers which might invalidate or render unenforceable, in whole or in part, any insurance provided hereunder. The Lender may at its sole option obtain such insurance if not provided by the Borrowers and, in such event, the Borrowers shall reimburse the Lender upon demand for the cost thereof. (f) Notwithstanding anything to the contrary herein, no provision of this subsection 5.4 or any provision of any other Basic Document shall impose on the Lender any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by such Borrower, nor shall the Lender be responsible for any representations or warranties made by or on behalf of any Borrower to any insurance company or underwriter. 5.5 Inspection of Property; Books and Records. (a) Keep proper books of records and accounts in which full, true and correct entries in accordance with GAAP and all Requirements of Law shall be made of all of its dealings and transactions in relation to its business and activities; and permit, and cause Castle to permit, representatives of the Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records (in the case of Castle, only such books and records relating to the Borrowers or the transactions contemplated by the Basic Documents) at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrowers with officers and employees of the Borrowers and with their independent certified public accountants. Permit the Lender to select and retain consultants to advise the Lender as to technical matters pertaining to the Borrowers' businesses and operations and the Assets. (b) Upon the request of the Lender, promptly undertake a diligent investigation of the Assets for the purpose of enabling any Borrower to enforce, if necessary, the environmental or title indemnities relating to the Assets provided to Castle by ARCO and assigned to the Borrowers. LOAN AGREEMENT - Page 24 5.6 Compliance with Laws. Comply with all Requirements of Law, and from time to time obtain and comply with all Governmental Approvals as shall now or hereafter be necessary under all Applicable Laws (except any thereof the non-compliance with which would not have a material adverse effect on the Borrowers or the Assets, the Borrowers' ability to perform their obligations under the Project Documents or the rights or interests of the Lender), in connection with the ownership, operation or maintenance of its properties and the Assets. 5.7 Financial Statements. Furnish or cause to be furnished to the Lender: (a) as soon as available, but in any event within 105 days (or, in the case of Enserch, as soon as publicly available) after the end of each fiscal year of each Borrower, each General Partner, each Limited Partner, Castle and Enserch (each a "Reporting Party"), a copy of the balance sheet of such Reporting Party as of the end of such fiscal year and the related statements of income, retained earnings (or partners' capital) and changes in cash flows of such Reporting Party for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, certified without qualification or exception as to the scope of its audit by independent public accountants of national standing; and (b) as soon as available, but in any event within 45 days after the end of each quarterly period of each fiscal year of each Reporting Party (other than Castle and Enserch), the unaudited balance sheet of such Reporting Party as of the end of such quarterly period and the related unaudited statements of income and retained earnings (or partners' capital) and changes in cash flows of such Reporting Party for such quarterly period and for the portion of the fiscal year then ended, setting forth in each case in comparative form the figures for the previous period, certified by a Responsible Officer of such Reporting Party as being fairly stated in all material respects (subject to normal audit adjustments); All such financial statements (other than the financial statements of Enserch, which shall be the financial statements in the form filed by Enserch on Form 10-K with the Securities and Exchange Commission) shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except for changes approved or required by the independent public accountants certifying such statements and disclosed therein). 5.8 Certificates; Operating Statements; Other Information. Furnish or cause to be furnished to the Lender: (a) concurrently with the delivery of the financial statements of the Borrowers referred to in subsection 5.7(a), a certificate of the independent public accountants which certified such financial statements stating that in making the examination necessary for the audit thereof no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; LOAN AGREEMENT - Page 25 (b) concurrently with the delivery of the financial statements of the Borrowers referred to in subsections 5.7(a) and (b), a certificate of a Responsible Officer of such Borrower, stating that such officer has reviewed, or caused to be reviewed, by individuals under his or her supervision, this Agreement and each other Basic Document to which such Borrower is a party and has made, or caused to be made under his supervision, a review of the transactions contemplated hereby and thereby and to the best of such Responsible Officer's knowledge after such review, such Borrower has observed and performed all of its covenants and other agreements hereunder, and satisfied every material condition, contained in this Agreement, the Term Note and the other Basic Documents to be observed, performed or satisfied by it, and that such Responsible Officer in the course of such review has obtained no knowledge of any Default or Event of Default hereunder at any time during such period or on the date of such certificate and no knowledge of any default or event which with the giving of notice or the lapse of time or both would constitute a default under any of the other Basic Documents at any time during such period or on the date of such certificate (or, if any such Default or Event of Default or default or event shall have occurred, a statement setting forth the nature thereof and the steps being taken by such Borrower to remedy the same); (c) as soon as practicable, but in any event within 45 days after the and of each calendar month, an operating report of each Borrower as at the end of such period and for the period of such Operating Year then ended, setting forth the revenues of such Borrower received during such month and the expenses and extraordinary items disbursed during such month and containing, (i) with respect to Pipeline, a summary transportation statement and (ii) with respect to Marketing, a summary of Natural Gas sales and purchases, and such other information as shall be agreed to by the Lender and the Borrowers setting forth in comparative form the corresponding figures for the corresponding periods in the preceding Operating Year (if applicable) and the corresponding figures for the corresponding periods contained in the current Operating Budget, accompanied by a certificate of a Responsible officer of such Borrower, which certificate shall state that such report is true and correct to the best of his knowledge. (d) not later than 135 days prior to the end of each Operating Year, a copy of the monthly Operating Budget of each Borrower for the next Operating Year of such Borrower, such Operating Budget to be approved by the Lender and to include, on a cash basis, a budget for each Operating Year specifying on a monthly basis for such Operating Year the principal items of (i) revenue anticipated to be received in respect of the operation of such Borrower's business and (ii) costs and expenses anticipated to be incurred in connection with the maintenance, administration, operation of such Borrower's business including, without limitation, taxes, premiums for insurance policies required to be maintained pursuant to the Loan Agreement and any fees and expenses payable to the Lender pursuant to the Loan Documents, together with a manpower forecast and periodic inspection, maintenance and repair schedule and any other items necessary to calculate "operating income" in the proposed Operating Budget and (iii) a revised estimate (and related schedule) of costs, if any, to be incurred by such Borrower in respect of major maintenance items during the next two year period. The Operating Budget and projections shall be accompanied by (A) a LOAN AGREEMENT - Page 26 forecasted Operating Budget for the next succeeding Operating Year specifying, in the same format, on an annual basis the items described in clauses (i), (ii) and (iii) above for each such Operating Year, (B) a discussion of any significant changes from the approved Operating Budget for the previous year, (C) a discussion of any significant changes from the forecasted Operating Budget delivered the previous year, (D) a discussion of any anticipated changes to the terms and conditions, coverages, policies or carriers of the insurance required to be maintained pursuant to subsection 5.4, (E) a discussion of any contemplated changes to agreements or elections covering the production, removal, supply, sale, purchase or transportation of Natural Gas and (F) a certificate of a Responsible Officer of such Borrower to the effect that such Operating Budget and projections have been prepared in good faith on a reasonable basis and that such officer has no reason to believe they are incorrect or misleading in any material respect; (e) promptly after the same are sent, copies of all financial statements and reports which any Borrower sends to its partners; (f) promptly after the filing thereof, the "Annual Returns" (Form 5500 series) and attachments filed annually with the IRS with respect to each Single Employer Plan, if any, of each Borrower; (g) promptly after delivery or receipt thereof, a copy of each material notice, demand or other communication (not to include routine correspondence) delivered or received by any Borrower or any General Partner pursuant to any Basic Document, including without limitation, the certificate delivered to Marketing pursuant to Paragraph 11.1 of the Supply Agreement, the reports delivered to Marketing pursuant to Section 3 of Exhibit A of the Service Agreement and each report delivered to Pipeline pursuant to paragraphs (a) and (c) of Section 4 of Exhibit A to the Management Agreement; (h) promptly, such additional financial and other information with respect to the Borrowers or any other Reporting Party or the Assets as the Lender may from time to time reasonably request; (i) with respect to any Single Employer Plan adopted or amended by any Borrower or any Commonly Controlled Entity on or after the date hereof, any determination letters received from the IRS with respect to the qualification for such Plan, as initially adopted or amended under Section 401(a) of the Code; (j) copies of each Governmental Approval or other consent or approval obtained or made by any Borrower; (k) promptly after any material diminution in (other than ordinary month to month variations of volume), or interruption of, the supply of Natural Gas to Marketing, or the flow of Natural Gas through the Pipeline Assets, a notice describing the circumstances of such diminution or interruption; and LOAN AGREEMENT - Page 27 (l) as soon as practicable, but in any event within 15 days after the end of each Operating Year (or, in the event that the Lone Star Contract terminates prior to the end of an Operating Year, within 15 days from the date of such termination), Marketing shall deliver to the Lender a certificate (together with such back-up information as may be reasonably requested to confirm the information contained in such certificate) of a Responsible Officer of Marketing setting forth the quantity of gas that Lone Star purchased during such Operating Year (or such shorter period if applicable) under the Lone Star Contract together with an itemized statement setting forth whether Lone Star purchased the quantity of gas required to be purchased under the Lone Star Contract for such period. In the event that Lone Star shall fail to purchase the quantity of gas required to be purchased under the Lone Star Contract for any Operating Year (or shorter period if applicable) then, simultaneously with the delivery of the certificate referred to in this paragraph (l), Marketing shall notify Lone Star in writing (with a copy to the Lender) of such failure in accordance with paragraph 7.2 of the Lone Star Contract. 5.9 Taxes. Each Borrower and each General Partner shall, and shall cause each Limited Partner and each Tax Affiliate to, pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property or on the transportation or sale of Hydrocarbons or on the receipt of proceeds therefrom prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien upon the property of such Borrower, General Partner, Limited Partner or Tax Affiliate; provided, that, if no Event of Default shall have occurred and be continuing, such Borrower, General Partner, Limited Partner or Tax Affiliate may contest in good faith the validity or amount of any such tax, assessment, charge, levy or claim by proper proceedings timely instituted, and may permit the taxes, assessments, charges, levies or claims so contested to remain unpaid during the period of such contest if: (a) such Borrower, diligently prosecutes such contest, (b) such Borrower, sets aside adequate cash reserves with respect to the contested items, (c) during the period of such contest the enforcement of any contested item is effectively stayed, and (d) in the reasonable opinion of the Lender, such contest will not involve any material danger of the sale, forfeiture or loss of any part of the Collateral, title thereto or any interest therein and will not interfere with the performance of the Basic Documents. Each Borrower will promptly pay or cause to be paid any valid, final judgment enforcing any such tax, assessment, charge, levy or claim and cause the same to be satisfied of record. The foregoing notwithstanding, this subsection 5.9 shall only apply in the case of a Tax Affiliate with respect to those taxes for which any Borrower, any General Partner or any Limited Partner could be held liable. 5.10 Maintenance of Property. At its expense, keep all property useful and necessary in its business in good working order and condition and make all repairs, replacements and renewals with respect thereto. 5.11 Notices. Promptly give notice to the Lender: (a) of the occurrence of any Default, Event of Default or Event of Loss; (b) of any default or event of default under any Project Document; LOAN AGREEMENT - Page 28 (c) of any litigation, investigation or proceeding which may exist at any time between any Borrower or any General Partner and any Governmental Authority including, without limitation, any litigation, investigation or proceeding to revoke or modify any license or Governmental Approval required for the ownership or operation of such Person's business; (d) of any litigation or proceeding affecting any Borrower in which the amount involved is $50,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (e) of any litigation, investigation or proceeding affecting any Borrower or, if it knows or has reason to know thereof, affecting any other Person party to a Project Document which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; (f) of the following events, as soon as possible and in any event within 30 days after any Borrower or any General Partner knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, or any withdrawal from, or the termination, Reorganization or Insolvency of any Multiemployer Plan, or (ii) the institution of proceedings or the taking or expected taking of any other action by PBGC or any Borrower to terminate, withdraw or partially withdraw from any Plan, or (iii) the reorganization or insolvency of any Multiemployer Plan, and, in addition to such notice, deliver to the Lender whichever of the following may be applicable: (A) a certificate of a Responsible Officer of such Borrower, setting forth details as to such Reportable Event and the action that such Borrower proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed with PBGC, or (B) any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated, or (C) any notice of Reorganization or Insolvency of a Multiemployer Plan received by such Borrower; (g) of any Material Adverse Effect or any event which could result in a Material Adverse Effect or of any change of law, rule or regulation which has or could have a Material Adverse Effect; (h) of any loss or damage to the Collateral in excess of $50,000; (i) of the proposed execution and delivery of any Additional Contract; (j) of the cancellation or expiration (without renewal or replacement) of any insurance required to be maintained under subsection 5.4; (k) of the initiation of any condemnation proceedings against any of the Collateral; (l) of any Lien or claim against any Collateral other than Permitted Liens; LOAN AGREEMENT - Page 29 (m) of any event constituting force majeure under any of the Basic Documents or any claim by any party to any Basic Document alleging that a force majeure event thereunder has occurred; (n) the failure by Marketing on any day to supply Lone Star with the quantity of gas which Lone Star has requested (and which Marketing is required to deliver) for such day pursuant to the Lone Star Contract; (o) of any notice sent to Marketing pursuant to Section 7.6 of the Supply Agreement (in each case, with a copy of such notice received by Marketing); (p) of discovery of any Hazardous Materials at any Borrower's property that is in violation of any Relevant Environmental Law or that could reasonably be expected to require remediation or similar action at any time in the reasonably foreseeable future under any Relevant Environmental Law or of any litigation or proceeding relating to environmental matters concerning any of the Borrowers or their respective assets and properties (including receipt by such Borrower of any notice of any proceeding involving a Relevant Environmental Law or any discharge of Hazardous Materials); and (q) of the receipt by any General Partner or Borrower of any notice or declaration by any Governmental Authority or of any assertion by any Governmental Authority or any written assertion by any other Person which relates to, or could result in, the Assets, or any portion thereof, becoming subject to the jurisdiction of FERC. Each notice pursuant to this subsection 5.11 shall be accompanied by a statement of a Responsible Officer of the applicable Borrower setting forth details of the occurrence referred to therein and stating what action such Borrower proposes to take with respect thereto and, with respect to a notice given pursuant to clause (i), shall be accompanied by a copy of the Additional Contract. For all purposes of clause (f) of this subsection, the Borrowers shall be deemed to have all knowledge or knowledge of all facts attributable to the administrator of such Plan. 5.12 Employee Plans. For each Plan adopted by a Borrower, (a) use its best efforts to seek and receive determination letters from the IRS to the effect that such Plan is qualified within the meaning of Section 401(a) of the Code; and (b) from and after the date of adoption of any Plan, cause such Plan to be qualified within the meaning of Section 401(a) of the Code and to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the Code. 5.13 Management Letters. Promptly deliver to the Lender a copy of each report delivered to any Borrower by its independent public accountants in connection with any annual or interim audit of its books, including, without limitation, any letters or reports addressed to such Borrower or any of its officers or partners relating to internal controls, adequacy of records or the like. LOAN AGREEMENT - Page 30 5.14 Easements. Submit to the Lender for the Lender's approval, which shall not be unreasonably withheld, copies of all prospective easements, licenses, restrictive covenants or other similar agreements affecting the Assets prior to their execution, together with a drawing or survey showing the location thereof. 5.15 Hazardous Materials. (a) Provide such information as is reasonably requested by the Lender about all Hazardous Materials and the storage, handling or disposal thereof which may exist at any Borrower's properties. (b) Comply with, and undertake all reasonable efforts to ensure that all tenants and subtenants, if any, comply with, all Relevant Environmental Laws. (c) Defend, indemnify and hold harmless the Lender, its Affiliates, successors and assigns, and any of their respective employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Relevant Environmental Laws applicable to any of the Borrowers, their operations or the Mortgaged Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorneys' and consultants' fees, investigation and laboratory fees, environmental audits, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. This indemnity shall continue in full force and effect regardless of the termination of this Agreement and the payment of the Term Note and all other amounts payable hereunder. (d) Operate, and cause each Servicer to operate, any property owned or operated by the Borrowers (whether or not such property constitutes a "facility" as defined by CERCLA) so that no clean up or other obligation arises in respect of CERCLA or other in respect of any Applicable Law. 5.16 Use of Proceeds. Use the proceeds of the Term Loan for the purposes set forth in subsection 2.3. 5.17 Servicers. (a) Cause each applicable Servicer to provide services with respect to the Pipeline Assets in a manner substantially similar to other prudent managers of similar Projects or providers of such services. Pipeline shall, and shall cause each applicable Servicer to, give immediate notice to the Lender of any problem which may result in a significant diminution in, or cessation of, transportation of Natural Gas by, or involve a significant risk of loss to, the Pipeline Assets. (b) Cause each applicable Servicer to administer the Gas Contracts in accordance with prudent business practices. Marketing shall, and shall cause each applicable Servicer to, give immediate notice to the Lender of any problem which is reasonably likely to involve a significant risk of loss relating to the Gas Contracts. LOAN AGREEMENT - Page 31 (c) Cause, and cause each applicable Servicer to: (i) maintain the Pipeline Assets and the Gas Contracts in full force and effect in accordance with prudent operator standards and comply with all express and implied covenants with respect thereto; (ii) use its best efforts to pay or cause to be paid all costs and expenses incurred in connection with the Pipeline Assets or the Gas Contracts before they become delinquent; and (iii) furnish the Lender with copies of all authorizations for expenditures on material operations prior to the commencement thereof. (d) Upon the Lender's request, obtain opinions from independent consultants (or, if appropriate, legal counsel) reasonably satisfactory to the Lender that each Servicer has all of the necessary Environmental Protection Agency permits and other Governmental Approvals and licenses and that the planned operation of the Pipeline Assets is in compliance with Applicable Laws. (e) In the event of a failure by any Servicer to perform its obligations under any Project Service Agreement which is not cured within the applicable cure period, immediately, upon the request of the Lender, remove such Servicer, seek indemnification or damages from such Servicer and its successors or assigns under the Project Service Agreements for any loss or liability incurred by it in accordance with the terms and conditions of the Project Service Agreements and cause such Servicer to deliver to the successor operator all books, agreements, contracts, papers, records, and any and all documents, written, printed or computerized, which may be pertinent in any way to the operations to be conducted by such successor, or which may have formerly been conducted by such Servicer, and shall cause such Servicer to fully cooperate with such successor to ensure that no portion of the Assets serviced are terminated or their value diminished by virtue of such resignation or removal, and cause such Servicer to take all steps necessary to ensure such results as may be directed by such successor. 5.18 Intentionally Left Blank. 5.19 Further Assurances. Cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances as may be necessary or as the Lender from time to time may reasonably request in order to carry out more effectively the intent and purposes of this Agreement and the other Basic Documents, and the transactions contemplated hereby and thereby. 5.20 Assignment of Additional Contracts; Future Mortgages. (a) Upon entering into any Additional Contract, each Borrower will use reasonable efforts to obtain any required consent to the assignment by such Borrower to the Lender of such Additional Contract (as security for the Obligations) and of all of the right, title, interest, privilege and benefit of such Borrower under such Additional Contract. Such Borrower shall grant such assignment to the Lender promptly upon receipt of such required consent. (b) If any Borrower shall at any time acquire any property or leasehold or other interest in real property, such Borrower shall promptly notify the Lender of such acquisition and shall promptly execute, deliver, record and file LOAN AGREEMENT - Page 32 instruments and documents (including, without limitation, a supplement to the applicable Deed of Trust and the Borrower Security Agreement) as the Lender shall request in order to create a perfected Lien thereon in favor of the Lender. 5.21 Annual Opinion of Counsel. The Borrowers shall furnish to the Lender within 90 days after the end of each calendar year, beginning with the calendar year ending December 31, 1996, an opinion of counsel addressed to the Lender (i) stating that such action has been taken with respect to the filing, recording, re-filing and re-recording of the Collateral Security Documents and/or financing statements and continuation statements with respect thereto as is necessary to protect and preserve the Lender's liens on and security interests in and to the Collateral created by the Collateral Security Documents and reciting the details of such action or referring to prior opinions of counsel in which such details are given and (ii) stating what, if any, action of the foregoing nature may reasonably be expected to become necessary during the next succeeding twelve months in order to protect and preserve the Lender's liens on and security interests in the Collateral created by the Collateral Security Documents. 5.22 Fiscal Year. The fiscal year of each Borrower shall be the twelve-month period ending on September 30 of each year. 5.23 Environmental Compliance and Management Program. Pipeline shall maintain an environmental program to (i) ensure that it, its Assets and its operations are and remain in compliance with all Relevant Environmental Laws, and (ii) minimize prudently any liabilities or potential liabilities that it, its Assets or operations may have under any Relevant Environmental law. The program shall include the following: (a) By each anniversary following the Closing Date until all other obligations under this Agreement are discharged, Pipeline shall, at its expense, have arranged for and received from an Environmental Consultant an updated and reasonably comprehensive review of its operations, similar in scope and nature to the ENSR Consulting and Engineering Report and expected to involve approximately 70 hours of the Environmental Consultant's professional time, identifying issues that could give rise to Pipeline's noncompliance with or liability under any Relevant Environmental Law. In addition, at any reasonable time following written notice to Pipeline, the Lender (or any environmental consultant that the Lender in its sole discretion may designate) may have reasonable access to any property owned or operated by Pipeline and to any documents in the possession or control of Pipeline, Pipeline's agents or other representatives, and may interview knowledgeable Pipeline employees, agents, or other representatives, for the purpose of reviewing Pipeline's compliance with or potential liability under any Relevant Environmental Law, provided that Pipeline shall not be responsible for any of the costs of the Lender or the Lender's environmental consultant in connection with such additional review, and provided further that no more than one such review shall take place per calendar year unless Pipeline consents to any additional reviews, which consent shall not be unreasonably withheld. (b) Following each review identified in (a) of this section, Pipeline shall (i) promptly implement any measures that it has LOAN AGREEMENT - Page 33 reasonably determined through such review to be necessary to comply with any Relevant Environmental Laws, and (ii) prudently implement any other measures to minimize its liability under any Relevant Environmental Laws. (c) Pipeline shall provide the Lender with quarterly reports addressing the status of its environmental program. At the reasonable request of the Lender, Pipeline shall make available to the Lender or its designated representative any information, any documents, or any of Pipeline's employees, agents, or other representatives, relating to such quarterly reports. 5.24 FERC Jurisdiction. (a) Marketing shall sell all gas, including all gas sold to Lone Star under the Lone Star Contract, only in sales that do not constitute a sale in interstate commerce for resale subject to the jurisdiction of the FERC under the NGA. (b) Marketing shall purchase all of its gas, including from MGNG, only in sales that do not constitute a sale in interstate commerce for resale subject to the jurisdiction of the FERC under the NGA. 5.25 Cover Damages. With respect to any Delivery Default (as defined in the Supply Agreement), Marketing shall, upon consulting with the Lender, obtain Cover Supplies (as defined in the Supply Agreement). 5.26 Proceeds from the Production Payment and Receivables from Lone Star Contract. All proceeds received (i) by Exploration from the Production Payment after April 1, 1996, and (ii) by Marketing under the Lone Star Contract after the Senior Loan Termination Date, shall be payable directly to a lockbox under the control of Lender which shall then be deposited by Lender into a lockbox account in accordance with the terms of the Lockbox Operating Agreement. Unless an Event of Default has occurred, all such amounts so deposited shall be transferred to such Borrower's operating account maintained with Lender within two Business Days of the deposit thereof in the lockbox account. On each Installment Payment Date prior to the Senior Loan Termination Date, Lender will make the required payment by debiting Exploration's and Production's operating accounts in the aggregate amount of such payment. Following the Senior Loan Termination Date, Lender may debit the Borrowers' operating accounts in the aggregate amount of such payment. In the event the aggregate amount on deposit in such operating accounts is insufficient to make the required payment on any Installment Payment Date, the Borrowers shall, subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, remain liable for the deficiency and agree to promptly pay same. If an Event of Default has occurred, Lender may, subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, apply all such amounts on deposit in the lockbox account or the operating accounts to the Obligations in such order and manner as it may elect in its sole discretion. Exploration and Marketing shall each execute and deliver notices to the applicable Persons with respect to the Production Payment and the Lone Star Contract to effectuate the direct payment thereunder to the lockbox established pursuant to the Lockbox Agreement. LOAN AGREEMENT - Page 34 5.27 Post-Closing Title Opinions. Within thirty (30) days after the Closing Date, Borrowers shall deliver to Lender title opinions in form and substance satisfactory to Lender with respect to the Mortgaged Properties identified on Schedule 7 hereto. SECTION 6. NEGATIVE COVENANTS Each Borrower and each General Partner (as to each General Partner, only as to subsections 6.1, 6.2 and 6.6(b)) covenants and agrees that, so long as the Term Note remains outstanding and unpaid or any other amount is owing to Lender hereunder or under any Collateral Security Document, it shall not: 6.1 Merger, Sale of Assets, Etc. Merge into or consolidate with any other Person, change its form of organization or its business, or liquidate or dissolve itself (or suffer any liquidation or dissolution), or sell, lease, transfer or otherwise dispose of any assets other than (i) Hydrocarbons in the ordinary course of such Borrower's business and pursuant to the Project Documents and (ii) obsolete or worn-out equipment. 6.2 Purchases of Assets. Purchase or acquire any assets other than the purchase of assets in the ordinary course of business of such Borrower required in connection with the operation and maintenance of such Borrower's business in accordance with the Basic Documents and the Operating Budget of such Borrower. 6.3 Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness arising under the Basic Documents (as in existence on the date hereof); and (b) Permitted Indebtedness. 6.4 Distributions, Etc. Without the prior written consent of the Lender, make any distributions to its General Partner, to its Limited Partner or to any other Person in respect of any partnership interest in such Borrower or any payments of management fees to its General Partner or its Limited Partner, whether in cash, securities or other property, or redeem, purchase or otherwise acquire any interest of its General Partner or its Limited Partner, or permit its General Partner or its Limited Partner to withdraw any capital from such Borrower. 6.5 Liens. Create or suffer to exist any Lien on any of its properties or assets securing any Indebtedness or other ligation of such Borrower or any other Person, other than (i) Liens in favor of the Lender created pursuant to the Collateral Security Documents and (ii) Permitted Liens. The Borrowers agree that they will, at their own cost and expense, take such action as may be necessary to duly discharge and satisfy in full any such Lien. LOAN AGREEMENT - Page 35 6.6 Nature of Business. (a) With respect to the Borrowers, engage in any business other than the transportation, purchase or sale of, Natural Gas, as the case may be, as contemplated by and in accordance with the Basic Documents. (b) With respect to the General Partners and the Limited Partners, engage in any business other than being the general partner or the limited partner, as the case may be, of its respective Borrower. 6.7 Amendment of Contracts, Etc. Without the prior written consent of the Lender, agree to or permit (a) the cancellation, suspension or termination of any Basic Document (other than any OWI Contract), except upon the expiration of the stated term thereof, (b) the assignment of the rights or obligations of any party to any Basic Document (other than any OWI Contract), except (i) as contemplated by this Agreement or the Collateral Security Documents or (ii) as permitted without the consent of such Borrower by the terms of such Basic Document or (c) any amendment, supplement, or modification of, or waiver with respect to any of the provisions of, any Basic Document. 6.8 Investments. Make any investments (whether by purchase of stock, bonds, notes or other securities, loan, advance or otherwise). 6.9 Leases. Enter into, or be or become liable under, any agreement for the lease, hire or use of any real property or of any personal property, except for (a) pipeline-related leases, or any extensions or renewals thereof, entered into in the ordinary course of business and (b) other leases of personal property in the ordinary course of business of such Borrower which are not Capital Leases the aggregate annual rental under which shall not exceed, in the aggregate for all Borrowers, $25,000 per Operating Year. 6.10 Change of Office. Change the location of its chief executive office or principal place of business or the office where it keeps its records concerning its property and assets and all contracts relating thereto from that existing on the date of this Agreement and specified in subsection 3.22. 6.11 Change of Name. Change its name. 6.12 Compliance with ERISA. (a) Terminate any Single Employer Plan so as to result in any material liability to PBGC, (b) engage in or permit any Affiliate to engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan which would subject such Person, to any material tax, penalty or other liability, (c) incur or suffer to exist any material "accumulated funding deficiency" (as defined in section 302 of ERISA), whether or not waived, involving any Plan subject to Section 412 of the Code or Part 3 of Title I(b) of ERISA, (d) allow or permit to exist any event (including a Reportable Event) or condition which represents a material risk of incurring a material liability to PBGC, or (e) permit the present value of all benefits vested under all Single Employer Plans subject to LOAN AGREEMENT - Page 36 Title IV of ERISA, based on those assumptions used to fund the Plans, as of any valuation date with respect to such Plans to exceed the value of the assets of the Plans allocable to such benefits. 6.13 Transactions with Affiliates and Others. Directly or indirectly, purchase, acquire, exchange or lease any property from, or sell, transfer or lease any property to, or borrow any money from, or enter into any management or similar fee arrangement with, any Affiliate of such Borrower (or of any partner of such Borrower) or any officer, director or employee of such Borrower (or of any partner of such Borrower) except for (a) the transactions contemplated by the Basic Documents and (b) transactions in the ordinary course of business and upon fair and reasonable terms no less favorable than such Borrower could obtain, or could become entitled to, in an arm's length transaction with a Person which is not an Affiliate of such Borrower (or any partner of such Borrower). 6.14 Approval of Additional Contracts. Without the consent of the Lender, enter into any Additional Contract. 6.15 Alteration or Abandonment. (a) Alter, remodel, add to, reconstruct, improve or demolish any part of the Assets or any other Collateral covered by the Collateral Security Documents, in any manner that could impair the value of the security provided by the Collateral Security Documents, or (b) release or abandon the Assets or any other Collateral covered by the Collateral Security Documents, or (c) allow the Assets to be developed, maintained, operated or administered in a manner less favorable than with prior operations, or (d) enter into any agreement for the sale, disposition, encumbrance or assignment of any of the Assets or any of the services or oil and gas production attributable thereto, except in the ordinary course of business. 6.16 Capital Expenditures; Operating Expenses, Etc. (a) Directly or indirectly, make or commit to make any expenditure in respect of the purchase or other acquisition (including installment purchases or financing leases) of fixed or capital assets (excluding normal replacements and maintenance which are properly charged to current operations), except for expenditures in the ordinary course of business of such Borrower not exceeding, in the aggregate for all Borrowers, the amount allocated therefor in the Operating Budget for the then current operating Year. (b) Allow, or permit any Servicer to allow, without the prior written consent of the Lender, the commencement of any operation with respect to the Pipeline Assets which is anticipated to exceed fifty thousand dollars ($50,000.00) (except for operations provided for in the Operating Budget for the then current Operating Year, emergency operations, operations required under the Basic Documents in existence on the date hereof and under any applicable governmental agreement or order). 6.17 Sale and Leaseback. Enter into any arrangement with any Person providing for the leasing by any Borrower of real or personal property which has been or is to be sold or transferred by such Borrower to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of such Borrower. LOAN AGREEMENT - Page 37 6.18 Sale of Partnership Interests. (a) With respect to the Borrowers, sell or create any partnership interest, of whatever nature, not in existence on the date hereof. (b) With respect to the General Partners, transfer, sign sell or otherwise encumber any of its interests in any Borrower, except as provided in the Collateral Security Documents. 6.19 Servicers; Service Agreements. Without the prior written consent of the Lender, (i) remove, replace or substitute any Servicer, (ii) enter into any Project Service Agreement not in existence on the date hereof and (iii) permit (to the extent such Person can influence) the resignation, replacement or withdrawal of any Servicer as such, unless a new Servicer satisfactory to the Lender has been appointed. 6.20 Hazardous Materials. Use or permit the Pipeline Assets or any part thereof to be used to generate, treat, store, handle, transport or dispose of Hazardous Materials except in strict compliance with all applicable Relevant Environmental Laws. Upon the occurrence of any release of Hazardous Materials, the Borrowers shall promptly commence and perform, or cause to be promptly commenced and performed, without cost to the Lender, all investigations, studies, sampling and testing, and all remedial, removal and other actions necessary to clean up and remove all Hazardous Materials so released, in compliance with the requirements of all applicable Relevant Environmental Laws. 6.21 Intentionally Left Blank. 6.22 Executive Offices. Transfer its executive offices or transfer its registered office in the State of Texas (if any) or change its corporate or partnership name or keep Collateral at any locations other than those at which the same are presently kept or maintained. 6.23 Fiscal Year. Change its fiscal year. 6.24 FERC Jurisdiction. Take any action, or omit to take any action, which will subject any Borrower, the Assets, or any portion thereof, to the jurisdiction of the FERC under the NGA. 6.25 Lone Star Contract. Without the consent of Lender, Marketing shall not, nor shall it permit any Servicer to, seek to redetermine the price under the Lone Star Contract. SECTION 7. EVENTS OF DEFAULT If any of the Events of Default listed below in this Section 7 shall occur and be continuing, the Lender may (x) declare the entire unpaid principal amount of the Term Loan and the then outstanding Term Note, all interest accrued and unpaid thereon, and all other Obligations to be forthwith due and payable, whereupon such amounts shall become and be forthwith due and payable, without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by each of the Borrowers; and/or (y) subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, foreclose on LOAN AGREEMENT - Page 38 any or all of the Collateral; and/or (z) subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, proceed to enforce all other remedies available to it under applicable law. Notwithstanding the foregoing, if an Event of Default referred to in paragraph (h) or (i) below shall occur, automatically and without notice, the actions described in clause (x) above shall be deemed to have occurred. Such Events of Default are the following: (a) Any principal of or interest on the Term Loan shall not be paid when due; or any fee or any other amount payable to Lender hereunder, under the Term Note or under any other Loan Document shall not be paid when due and shall remain unpaid for five or more days; or (b) Any representation or warranty made or deemed made by any Borrower, any General Partner or Castle in any Basic Document to which such Person is a party, or any representation, warranty or statement in any certificate, financial statement or other document furnished to the Lender by or on behalf of the Borrowers or any such other Person hereunder or under any Basic Document, shall prove to have been false or misleading in any material respect as of the time made or deemed made; or (c) (i) Any Borrower or any General Partner shall fail to perform or observe any of its covenants in subsection 5.4 or in Section 6 of this Agreement or (ii) any Borrower or any General Partner shall fail to perform or observe any other of its covenants contained in this Agreement (other than those referred to in paragraphs (a) and (b) above or in clause (i) of this paragraph (c)) and such failure shall continue unremedied or unwaived for a period for 30 days after written notice thereof from the Lender to such party; or (d) Any Borrower, any General Partner or Castle shall fail to perform or observe any of its covenants or obligations (other than the covenants and obligations referred to in paragraphs (a), (b) and (c) above) contained in any of the Basic Documents and such failure shall continue unremedied for a period of 30 days after written notice thereof from the Lender to such party; or (e) Any Borrower or any General Partner shall (i) default in any payment of principal of or interest on any Indebtedness (other than the Term Note) or in the payment of any Guarantee Obligation, for a period in excess of the period of grace, if any, provided in the instrument and agreement under which such Indebtedness or Guarantee Obligation was created; or (ii) default in the observance or performance of any other agreement or condition contained in any agreement or instrument relating to any such other Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such other Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable or to realize upon any collateral given as security therefor; or LOAN AGREEMENT - Page 39 (f) Any material provision of any Basic Document (other than any OWI Contract) shall at any time for any reason cease to be valid and binding or in full force and effect or any party thereto shall so assert in writing; or any material provision of any Basic Document (other than any OWI Contract) shall be declared to be null and void or the validity or enforceability thereof shall be contested by any party thereto (other than the Lender) or any Governmental Authority; or any party to any Basic Document (other than any OWI Contract), other than the Lender, shall deny that it has any liability or obligation under any Basic Document (other than any OWI Contract), except upon fulfillment of its obligations thereunder; provided that with respect to any Project Document (other than the Supply Agreement and the Lone Star Contract) it shall not be a default under this paragraph (f) if the Borrowers shall obtain a replacement agreement reasonably satisfactory in form and substance to the Lender with a Person reasonably satisfactory to the Lender within 30 days after such invalidity, contest or denial shall have occurred; or (g) Lone Star, MGNG or MGCC shall fail to perform or observe any of its material covenants or obligations contained in any of the Basic Documents to which it is a party within the grace period, if any, provided for in such Basic Documents which failure shall continue unremedied for a period of 30 days after notice by Lender to the Borrowers; or (h) Any Borrower, any General Partner, Castle, MGNG, MGAG, MGCC, Lone Star (or Enserch) shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its assets or property, (ii) admit in writing its inability, or be generally unable, to pay its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Bankruptcy Code (as now or hereafter in effect), (v) file or consent to the filing of a petition seeking to take advantage of any other law (domestic or foreign law or existing in future law) relating to bankruptcy, insolvency, reorganization, winding up, or composition or readjustment of debts, (vi) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against such Person in an involuntary case under the Bankruptcy Code, or (vii) take any partnership or corporate action for the purpose of effecting any of the foregoing; or (i) A proceeding or case shall be commenced without the application or consent of any Borrower, any General Partner, Castle, MGNG, MGAG, MGCC, Lone Star (or Enserch) in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution, winding-up, or the composition or readjustment of debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of such Person under any law (domestic or foreign law or existing or future law) relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts or (iii) a warrant of attachment, execution or similar process against all or a substantial part of the LOAN AGREEMENT - Page 40 assets or property of such Person, and such proceeding or case shall continue undismissed, or any order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days, or any order for relief against such Person shall be entered in an involuntary case under the Bankruptcy Code; or (j) A judgment or judgments for the payment of money in excess of $150,000 shall be rendered against any Borrower or any General Partner, and such judgment or judgments shall remain in effect and unstayed and unbonded for a period of 30 or more consecutive days; or (k) Any Collateral Security Document shall cease, for any reason, to be in full force and effect or any party thereto shall so assert in writing; any Collateral Security Document shall cease to be effective to grant a perfected Lien to the Lender on the Collateral described therein with the priority purported to be created thereby; or (l) Any General Partner shall at any time cease to be the General Partner of the Borrower of which it is general partner or, shall transfer, sell, assign, mortgage, pledge or otherwise dispose of its equity interest in such Borrower except in accordance with the Collateral Security Documents or with the Lender's prior written consent; or (m) Castle shall, at any time, transfer, sell, assign, mortgage, pledge or otherwise dispose of its equity interests in any General Partner or any Limited Partner, except in accordance with the Collateral Security Documents or with the Lender's prior written consent; or (n) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, or (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate any Single Employer Plan, which Reportable Event or institution of proceedings is, in the reasonable opinion of the Lender, likely to result in the termination of such Plan for purposes of Title IV of ERISA, or (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, or (v) any Borrower, any General Partner or any Commonly Controlled Entity shall, or is, in the reasonable opinion of the Lender, likely to incur any liability in connection with a withdrawal from, or the insolvency or reorganization of, a Multiemployer Plan, or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject any Borrower or any General Partner to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of any Borrower or any General Partner; or (o) An Event of Loss shall have occurred; or LOAN AGREEMENT - Page 41 (p) (i) Any Governmental Approval required to be obtained by any Borrower pursuant to subsection 5.6 shall be revoked, terminated, withdrawn, suspended, modified or withheld or shall cease to be in full force and effect, and Lender shall have determined that such revocation, termination, withdrawal, suspension, modification, withholding or cessation could reasonably be expected to have a Material Adverse Effect; or (ii) any proceeding which could reasonably be expected to have a Material Adverse Effect shall be commenced by or before any Governmental Authority for the purpose of so revoking, terminating, withdrawing, suspending, modifying or withholding any such Governmental Approval and the Lender shall have determined that such proceeding could reasonably be expected to have a Material Adverse Effect and such proceeding shall not have been dismissed or stayed within 90 days, or notice shall be given by such Governmental Authority for such purpose and shall have remained uncontested for 30 days; or (q) The sale of gas by Marketing under the Lone Star Contract, or any of Marketing, Lone Star and/or its facilities, or Pipeline and/or the Pipeline Assets, shall become subject to regulation pursuant to the NGA, or any rules or regulations promulgated pursuant thereto; or Upon the occurrence of and during the continuance of any Event of Default, but subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, the rights, powers and privileges provided in this Section and all other remedies available to the Lender under this Agreement or any Collateral Security Document or by statute or by rule of law may be exercised by the Lender at any time and from time to time whether or not the Term Loan shall be due and payable, and whether or not the Lender shall have instituted any foreclosure or other action for the enforcement of any of the Basic Documents. For the purpose of carrying out the provisions and exercising the rights, powers and privileges granted by this paragraph, each of the Borrowers hereby irrevocably constitutes and appoints the Lender its true and lawful attorney-in-fact to execute, acknowledge and deliver any instruments and to do and to perform, subject to the terms of the Intercreditor Agreement, any acts such as are referred to in this paragraph in the name and on behalf of such Borrower. This power of attorney is a power coupled with an interest and cannot be revoked. SECTION 8. MISCELLANEOUS 8.1 Amendments and Waivers. No provision of this Agreement or of any other Loan Document to which the Lender is a party may be amended, supplemented or modified, except in writing and signed by the parties hereto. 8.2 Notices. (a) All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing, by telecopier or, if available, by telex and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, first class postage prepaid, or in the case of transmission by telecopier, when confirmation of receipt is obtained, or in the case of telex notice, when sent, answerback received, addressed as follows in the case of the LOAN AGREEMENT - Page 42 Borrowers, the Lender and the other parties below, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Term Note: If to a Borrower: Castle Texas Pipeline Limited Partnership, CEC Gas Marketing Limited Partnership or Castle Texas Production Limited Partnership 2410 State Highway, 322 North Henderson, Texas 75652 Attention: Richard E. Staedtler Telecopy: (215) 542-8065 Castle Exploration Company, Inc. 512 Township Line Road Blue Bell, Pennsylvania 19422 Attention: Richard E. Staedtler Telecopy: (215) 542-1496 with a copy to the applicable General Partner If to a General Partner: Castle Pipeline Company, CEC Marketing Company or Castle Production Company 2410 State Highway, 322 North Henderson, Texas 75652 Attention: Richard E. Staedtler Telecopy: (215) 542-8065 with copies to: Castle Energy Corporation One Radnor Corporate Center-Suite 250 100 Matsonford Road Radnor, Pennsylvania 19087 Attention: Richard E. Staedtler Telecopy: (610) 995-0409 If to Castle: Castle Energy Corporation One Radnor Corporate Center-Suite 250 100 Matsonford Road Radnor, Pennsylvania 19087 Attention: Richard E. Staedtler Telecopy: (610) 995-0409 If to the Lender: Commercial National Bank In Shreveport 333 Texas Street Post Office Box 21119 Shreveport, Louisiana 71152 Attention: Martin W. Wilson Assistant Vice President Telecopy: (318) 429-1864 LOAN AGREEMENT - Page 43 (b) Any notice, request or demand duly given or made upon any Borrower in accordance with the provisions of subsection 8.2(a), shall be deemed to have been duly given or made upon all Borrowers. 8.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. When the Lender is pursuing its rights and remedies hereunder against any Borrower, the Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against any other Borrower or Person or against any collateral security or guaranty for the Obligations or any right of offset with respect thereto, and any failure by the Lender to pursue such other rights or remedies or to collect any payments from such other Borrower or Person or to realize any such right of offset, or any release of such other Borrower or any such other Person or of any such collateral security, guaranty or right of offset, shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Lender against such Borrower. 8.4 Survival. All representations and warranties made in this Agreement and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Term Note. 8.5 Expenses and Taxes. Whether or not the Term Loan is made or any of the other transactions contemplated by this Agreement are consummated, the Borrowers shall, on a joint and several basis: (a) pay all reasonable out-of-pocket expenses incurred by Lender in connection with the negotiation, preparation, execution and delivery of this Agreement and the other Basic Documents, any and all transactions contemplated hereby or thereby and the preparation of any document reasonably required hereunder or thereunder, including, without limiting the generality of the foregoing, all reasonable fees and expenses of Winstead Sechrest & Minick P.C., counsel for Lender, all title and conveyancing charges, recording and filing fees and taxes, mortgage taxes, intangible personal property taxes, escrow fees, revenue and tax stamp expenses, insurance premiums (including title insurance premiums), placement and other fees of investment bankers of the Borrowers, court costs, and surveyors', appraisers', architects', engineers', environmental, gas and other consultants' and accountants' reasonable fees and disbursements; LOAN AGREEMENT - Page 44 (b) pay all reasonable out-of-pocket expenses incurred by the Lender with respect to (i) any amendments, waivers or supplements to any of the Basic Documents or (ii) any request of the Borrowers for a consent, waiver or other action in connection with the Assigned Contracts and with respect to enforcement of their rights and remedies hereunder; (c) pay the Lender for all their reasonable out-of-pocket costs and expenses incurred in connection with, and to pay, indemnify and hold the Lender harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever arising out of or in connection with, the enforcement or preservation of any rights under this Agreement and the other Basic Documents and any such other documents, including without limitation, reasonable fees and disbursements of counsel to the Lender incurred in connection with the foregoing and in connection with advising the Lender with respect to its rights and responsibilities under this Agreement, the other Basic Documents and the documentation relating thereto; and (d) pay, indemnify, and hold the Lender harmless from and against, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or the consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement and the other Basic Documents and any such other documents; provided, that the Borrower, shall have no obligation hereunder with respect to indemnified liabilities of the Lender or its Affiliates or any of their respective officers and directors to the extent that such indemnified liability resulted from the gross negligence or willful misconduct of the Lender. The Lender may pay or deduct from the Term Loan proceeds any of such expenses and any Term Loan proceeds so applied shall be deemed advances under this Agreement and secured by the Collateral Security Documents. The agreements in this subsection 8.5 shall survive repayment of the Term Note and all other amounts payable hereunder. 8.6 INDEMNIFICATION. EACH BORROWER AGREES TO PAY, INDEMNIFY AND HOLD THE LENDER AND ITS AFFILIATES, DIRECTORS AND OFFICERS HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND WHATSOEVER WHICH MAY AT ANY TIME (INCLUDING, WITHOUT LIMITATION, AT ANY TIME FOLLOWING THE PAYMENT OF THE TERM NOTE) BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY SUCH PERSON BY A THIRD PARTY IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR THE OTHER BASIC DOCUMENTS, OR ANY DOCUMENTS CONTEMPLATED BY OR REFERRED TO HEREIN OR THEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (ALL OF THE FOREGOING, COLLECTIVELY, THE "INDEMNIFIED LIABILITIES"), PROVIDED, LOAN AGREEMENT - Page 45 THAT SUCH PERSON SHALL HAVE NO OBLIGATION HEREUNDER TO THE LENDER WITH RESPECT TO INDEMNIFIED LIABILITIES ARISING FROM (I) THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY SUCH PERSON, OR (II) LEGAL PROCEEDINGS COMMENCED AGAINST ANY SUCH PERSON BY ANY SECURITY HOLDER OR CREDITOR OF ANY SUCH PERSON ARISING OUT OF AND BASED UPON RIGHTS AFFORDED ANY SUCH SECURITY HOLDER OR CREDITOR SOLELY IN ITS CAPACITY AS SUCH. THE AGREEMENTS IN THIS SUBSECTION SHALL SURVIVE REPAYMENT OF THE TERM NOTE AND ALL OTHER AMOUNTS PAYABLE HEREUNDER. 8.7 Successors and Assigns; Transferees; Transferred Interests. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto, all future holders of the Term Note and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Lender. (b) The Borrowers acknowledge that Lender may at any time grant participations in this Agreement and the Collateral Security Documents (collectively, "Participations") to one or more Persons (such Persons being herein called "Transferees"); provided, however, that (i) Lender's obligations under this Agreement and under any Collateral Security Document shall remain unchanged, (ii) Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the Transferees shall be entitled to the benefit of the provisions contained in subsection 2.8, and (iv) the Borrowers shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations under this Agreement and under any Collateral Security Document. (c) The Borrowers authorize Lender to disclose to any prospective Transferee pursuant to paragraph (b) of this subsection 8.7 which has entered into a confidentiality agreement all financial or other necessary information in Lender's possession concerning the Borrowers, any General Partner, Lone Star, Castle, MGAG or any MG Affiliate which has been delivered to Lender pursuant to this Agreement or any other Basic Document or which has been delivered to Lender by or on behalf of the Borrowers or any such other party in connection with such Lender's credit evaluation of the Borrowers and the transactions contemplated hereby prior to or after entering into this Agreement. (d) The Borrowers shall not bear the costs of due diligence of any Transferee. 8.8 Severability. Any provision hereof which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and without affecting the validity or enforceability of any provision in any other jurisdiction. 8.9 Headings. The headings of the various sections and paragraphs of this Agreement are for convenience of reference only, do not constitute a part hereof and shall not affect the meaning or construction of any provision hereof. LOAN AGREEMENT - Page 46 8.10 Counterparts. This Agreement may be executed by one or more of the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 8.11 GOVERNING LAW. THIS AGREEMENT AND THE TERM NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE TERM NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF LOUISIANA. 8.12 Submission to Jurisdiction; Waivers. (a) Each of the parties hereto hereby irrevocably and unconditionally: (i) Submits for itself and its property in any legal action or proceeding relating to this Agreement or any other Basic Document, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of Louisiana, the courts of the United States of America for the Western District of Louisiana, and Appellate Courts from any thereof; (ii) Consents that any such action or proceeding may be brought in such courts, and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in any inconvenient court and agrees not to plead or claim the same; (iii) Agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Borrower at its address set forth in subsection 8.2 or at such other address of which the Lender shall have been notified pursuant thereto; and (iv) Agrees that nothing herein shall affect the right to effect service of process in any-other manner permitted by law or shall limit the right to sue in any other jurisdiction. (b) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. 8.13 Maximum Interest Rate. Anything to the contrary notwithstanding, the Lender shall not charge, take or receive and the Borrowers shall not be obligated to pay to the Lender, any amounts constituting interest on the Term Loan in excess of the maximum rate permitted by applicable law. The Term Loan is made for commercial and business purposes as contemplated by La. R.S. 9:3509. LOAN AGREEMENT - Page 47 8.14 Release of Collateral. Following the payment in full of all obligations, the Lender shall release the Collateral under the Collateral Security Documents. 8.15 Publicity. Each party hereto agrees to consult in good faith with the other parties hereto before disseminating any publicity which is related to this Agreement and the transactions contemplated hereby and which mentions such other party by name; provided, however, the Lender shall have the right to publish "tombstone" advertisements regarding this Agreement and the transactions contemplated hereby without the obligation to consult with any other party hereto. 8.16 Recourse to Borrowers. Subject to the terms of the Intercreditor Agreement, there shall be full recourse to the Borrowers and all of their assets for the liabilities and obligations of the Borrowers under this Agreement and the Term Note, but in no event shall there be any recourse against any partners or any officer, director, employee, shareholder or holder of any equity interest in any Borrower or any partner, or any affiliate thereof, nor shall any partners or any officer, director, employee, shareholder or holder of any equity interest in any Borrower or any partner, or any affiliate thereof, be personally liable or obligated for such liabilities and obligations of the Borrowers, except that each party hereto shall be liable for (i) any representations and warranties made by it and (ii) any obligations of such party specifically provided for in any other Loan Document to which such Person is a party. Subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, nothing herein contained shall limit or be construed to limit the liabilities and obligations of any such Person for any representations made by it or limit such Person's obligations and liabilities set forth in any other Basic Document creating such liabilities and obligations to which such Person is a party. 8.17 No Release. No payment or payments made by any Borrower or any other Person or received or collected by the Lender from any Borrower or any other Person by virtue of any action or proceeding, at any time or from time to time, in reduction of or in payment of the obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Borrower hereunder which shall remain obligated hereunder, notwithstanding any such payment or payments, until the obligations are paid in full. 8.18 Collateral Security. As to any Borrower, such Borrower agrees that any collateral security or guaranty to the extent provided by any other Person (including any other Borrower), at any time held by the Lender for the payment of the obligations, may be sold, exchanged, waived, surrendered or released without the giving of notice to, or obtaining the consent of, such Borrower. 8.19 Intercreditor Agreement. Anything to the contrary contained in this Agreement notwithstanding, certain of the rights of the Lender (including any successor or assignee thereof) hereunder and under applicable law are subject to the terms of the Intercreditor Agreement. The Intercreditor Agreement provides, among other things (a) that all obligations of Pipeline, Pipeline GP, Pipeline LP, Marketing, Marketing GP and Marketing LP hereunder and under the other Loan Documents (whether in respect of any obligation hereunder or thereunder, the breach of any covenant or representation or warranty, any indemnity claim or otherwise, or whether in respect of its several obligations or in respect of another Person's obligations hereunder or thereunder) are LOAN AGREEMENT - Page 48 subordinated and junior in right of payment to the prior payment in full of the Senior Obligations, and (b) limitations with respect to the Lender's ability to exercise certain rights hereunder, under any other Loan Document or under applicable law with respect to the obligations hereunder or thereunder of Pipeline, Pipeline GP, Pipeline LP, Marketing, Marketing GP and Marketing LP (and each such Person's joint and several obligations with respect to another Person's obligations), and the Subject Party Collateral. LOAN AGREEMENT - Page 49 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By: CASTLE PIPELINE COMPANY, its General Partner By: --------------------------------- Richard E. Staedtler Vice President CASTLE PIPELINE COMPANY By: --------------------------------------- Richard E. Staedtler Vice President CEC GAS MARKETING LIMITED PARTNERSHIP By: CEC MARKETING COMPANY, its General Partner By: ---------------------------------- Richard E. Staedtler Vice President CEC MARKETING COMPANY By: --------------------------------------- Richard E. Staedtler Vice President LOAN AGREEMENT - Page 50 CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By: CASTLE PRODUCTION COMPANY By: ----------------------------------- Richard E. Staedtler Vice President CASTLE PRODUCTION COMPANY By: --------------------------------------- Richard E. Staedtler Vice President CASTLE EXPLORATION COMPANY, INC. By: --------------------------------------- Richard E. Staedtler Vice President CASTLE ENERGY CORPORATION By: --------------------------------------- Richard E. Staedtler Vice President LOAN AGREEMENT - Page 51 COMMERCIAL NATIONAL BANK IN SHREVEPORT By: --------------------------------------- Martin W. Wilson Assistant Vice President LOAN AGREEMENT - Page 52 EX-10.118 3 FIRST AMENDMENT TO LOAN Exhibit 10.118 FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT (the "Amendment"), dated as of November 8, 1996, is among CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership ("Pipeline"), CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership ("Marketing"), CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation ("Exploration"), CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership ("Production," and together with Pipeline, Marketing and Exploration, the "Borrowers"), CASTLE PIPELINE COMPANY, a Texas corporation, CASTLE PRODUCTION COMPANY, a Texas corporation, CEC MARKETING COMPANY, a Texas corporation (collectively, the "General Partners"), CASTLE ENERGY CORPORATION, a Delaware corporation ("Castle") and COMMERCIAL NATIONAL BANK IN SHREVEPORT ("Lender"). RECITALS: A. Borrowers, the General Partners, Castle and Lender entered into that certain Loan Agreement dated as of April 30, 1996 (as the same may be amended or otherwise modified from time to time, the "Agreement"). B. Pursuant to the Agreement, Castle executed that certain Guaranty Agreement (the "Castle Guaranty") dated as of April 30, 1996 which guaranteed to Lender the payment and performance of the Obligations (as defined in the Agreement). C. The Borrowers, General Partners, Castle and Lender now desire to amend the Agreement as herein set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions 1.1 Definitions. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Agreement, as amended hereby. FIRST AMENDMENT TO LOAN AGREEMENT - Page 1 ARTICLE II Amendments 2.1 Amendment to Agreement. Effective as of the date hereof, the Agreement is hereby amended to add the following section thereto to read in its entirety as follows: SECTION 2A AMOUNT AND TERM OF SECOND TERM LOAN 2.1A Second Term Loan. Subject to and upon the terms and conditions set forth herein, Lender agrees to make a second term loan (the "Second Term Loan") to the Borrowers, on a joint and several basis, in one or more advances to be made on or prior to December 6, 1996 in the aggregate principal amount of up to Three Million Dollars ($3,000,000). Amounts borrowed and repaid under the Second Term Loan cannot be reborrowed. 2.2A Second Term Note. The Second Term Loan made by Lender shall be evidenced by a single promissory note of the Borrowers, substantially in the form of Exhibit A-1 (the "Second Term Note"), with appropriate insertions, payable to the order of Lender and in the aggregate principal amount equal to the Second Term Loan. The Second Term Note shall (i) be dated November 8, 1996, (ii) represent the joint and several obligations of the Borrowers to pay the principal amount of and interest on the Second Term Loan, (iii) provide for the payment of interest in accordance with subsection 2.5A, (iv) be entitled to the benefit of this Agreement and the Collateral Security Documents, (v) mature on August 29, 1997, and (vi) be payable in five (5) consecutive monthly installments in an amount equal to the lesser of (a) the outstanding principal balance of the Second Term Note, plus accrued and unpaid interest thereon, or (b) Five Hundred Thousand Dollars ($500,000) each, plus accrued and unpaid interest thereon, commencing on March 4, 1997, and continuing on each Installment Payment Date thereafter until and including July 4, 1997, with a final installment in the amount of all outstanding principal of the Second Term Loan, plus all accrued and unpaid interest thereon due and payable on August 29, 1997. 2.3A Use of Proceeds. The proceeds of the Second Term Loan shall be used by the Borrowers to make a loan to Castle, the proceeds of which will be used by Castle to repurchase outstanding shares of its common stock. With reference to Sections 6.8 and 6.13, Lender hereby consents to such loan to Castle on such terms as the Borrowers may, in their discretion, approve. 2.4A Prepayments. (a) Mandatory Prepayments. (i) If an Event of Loss shall occur, the Borrowers shall prepay in full the unpaid principal amount of the then outstanding Second Term Note, together with accrued interest thereon to the date of prepayment and all other amounts owing hereunder and under FIRST AMENDMENT TO LOAN AGREEMENT - Page 2 the Collateral Security Documents, on the earlier of (A) the date occurring 60 days after the date of such Event of Loss and (B) the date on which insurance proceeds are received with respect to such Event of Loss. (ii) Notwithstanding anything to the contrary otherwise contained in this Agreement, in the event that (A) the Senior Loan Termination Date has not occurred on or before September 4, 1997, (B) the principal amount of the Senior Obligations is increased (other than in accordance with the terms of the Senior Loan Agreement as in effect on the date hereof) to an amount in excess of the principal amount of the Senior Obligations outstanding on the Closing Date, or (C) the Term Loan Interest Rate (as defined in the GE Capital Loan Agreement) is modified such that it is greater than 8.33%, the Obligations shall become immediately due and payable and the Borrowers shall, within three (3) days of such event, prepay in full the unpaid principal amount of the then outstanding Second Term Note, together with accrued and unpaid interest thereon to the date of prepayment and all other amounts owing hereunder and under the Collateral Security Documents. (iii) Notwithstanding anything to the contrary otherwise contained in this Agreement, in the event that the Borrowers and the Lender consummate the transactions contemplated by that certain commitment letter dated October 17, 1996, Lender's commitment to make advances under the Second Term Loan shall terminate and the Obligations shall be refinanced pursuant to the revolving credit facility described in such commitment letter. (b) Optional Prepayments. The Borrowers may on at least three (3) Business Days prior notice to Lender, at any time and from time to time prepay the Second Term Loan, in whole or in part, without premium or penalty but with accrued and unpaid interest to the date of prepayment on the amount so prepaid. Partial prepayments shall be in a principal amount of $100,000.00 or an integral multiple thereof. (c) Partial Prepayments. Partial prepayment of the Second Term Loan shall be applied to the installments thereof in the inverse order of maturity. 2.5A Interest Rate and Payment Dates. (a) The Second Term Loan shall bear interest on the unpaid principal amount thereof at the Term Loan Interest Rate. (b) If all or a portion of the principal amount of the Second Term Loan made hereunder or any other amount due and payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), the Second Term Loan or other amount shall bear interest at a rate per annum which is 2% above the Term Loan Interest Rate from the date of such non-payment until paid in full (as well after as before judgment). FIRST AMENDMENT TO LOAN AGREEMENT - Page 3 (c) Interest on the unpaid principal amount of the Second Term Loan shall be payable monthly in arrears on each Installment Payment Date and on the date the Second Term Loan is paid in full; provided that interest accruing pursuant to subsection 2.5A(b) shall be payable from time to time on demand. 2.6A Payments and Payment Dates. (b) All payments (including prepayments hereunder) due hereunder or under the Second Term Note on account of principal, interest, fees, or any other obligation incurred hereunder shall be paid to the Lender at its office at 333 Texas Street, P.O. Box 21119, Shreveport, Louisiana 71152, in freely transferable Dollars and in immediately available funds without set-off or counterclaim. Borrowers shall, at the time of making each such payment, specify to Lender the sums payable by Borrowers under this Agreement, the Second Term Note or other Loan Documents to which such payment is to be applied (and in the event Borrowers fail to so specify or if an Event of Default has occurred and is continuing, Lender may apply such payment to the Obligations in such order and manner as it may elect in its sole discretion). All payments hereunder shall be made without any presentment of the Second Term Note to the Borrowers, but upon payment in full of the Second Term Note, the holder thereof shall cancel it and return it to the Borrowers. (b) If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. 2.7A Computation of Interest and Fees. Interest on the Second Term Loan and all fees hereunder shall be calculated on the basis of a 360-day year and the actual number of days elapsed (including the first day but excluding the last day of any relevant period). 2.8A Applicable Law. In the event that Lender shall have determined that any change in any Applicable Law regarding capital adequacy or in the interpretation or application thereof or compliance by Lender or any corporation controlling Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which Lender or such corporation could have achieved but for such change or compliance (taking into consideration Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by Lender to be material, then from time to time, after submission by Lender to the Borrowers of a written request therefor, the Borrowers shall pay to Lender such additional amount or amounts as will compensate Lender for such reduction. A certificate as to any additional amounts payable pursuant to this subsection 2.8A submitted by Lender to the Borrowers shall be conclusive in the absence of manifest error. FIRST AMENDMENT TO LOAN AGREEMENT - Page 4 2.9A Joint and Several Obligations. The Borrowers shall, subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, be jointly and severally liable for all payments of principal and interest on the Second Term Note and for the observance and performance of all obligations, covenants, conditions, indemnities and other terms and provisions hereunder applicable to the Borrowers or to any Borrower. 2.10A Commitment Fee. The Borrowers have agreed to pay to Lender a non-refundable commitment fee in the aggregate amount of $60,000, which shall be payable on January 2, 1997. 2.11A Maximum Interest Rate. Anything to the contrary notwithstanding, the Lender shall not charge, take or receive and the Borrowers shall not be obligated to pay to the Lender, any amounts constituting interest on the Second Term Loan in excess of the maximum rate permitted by applicable law. The Second Term Loan is made for commercial and business purposes as contemplated by La. R.S. 9:3509. 2.12A Recourse to Borrowers. Subject to the terms of the Intercreditor Agreement, there shall be full recourse to the Borrowers and all of their assets for the liabilities and obligations of the Borrowers under this Agreement and the Second Term Note, but in no event shall there be any recourse against any partners or any officer, director, employee, shareholder or holder of any equity interest in any Borrower or any partner, or any affiliate thereof, nor shall any partners or any officer, director, employee, shareholder or holder of any equity interest in any Borrower or any partner, or any affiliate thereof, be personally liable or obligated for such liabilities and obligations of the Borrowers, except that each party hereto shall be liable for (i) any representations and warranties made by it and (ii) any obligations of such party specifically provided for in any other Loan Document to which such Person is a party. Subject to the terms of the Intercreditor Agreement with respect to Pipeline and Marketing, nothing herein contained shall limit or be construed to limit the liabilities and obligations of any such Person for any representations made by it or limit such Person's obligations and liabilities set forth in any other Basic Document creating such liabilities and obligations to which such Person is a party. 2.13A Borrowing Procedure. The Borrowers shall give the Lender notice of each requested advance under the Second Term Loan by means of an Advance Request Form substantially in the form of Exhibit L attached hereto ("Advance Request Form") containing the information therein required on at least one Business Day before the requested date of each FIRST AMENDMENT TO LOAN AGREEMENT - Page 5 such advance. At its option the Lender may accept telephonic requests for advances, provided that such acceptance shall not constitute a waiver of the Lender's right to delivery of an Advance Request Form in connection with subsequent advances. Any telephonic request for an advance by the Borrowers shall be promptly confirmed by submission of a properly completed Advance Request Form to Lender. 2.2 Amendment to Section 7. Effective as of the date hereof, clause (i) of subsection 7(e) of the Agreement is hereby amended in its entirety to read as follows: (e) Any Borrower or any General Partner shall (i) default in any payment of principal or interest on any Indebtedness (other than the Term Note or the Second Term Note) or in the payment of any Guarantee Obligation, for a period in excess of the period of grace, if any, provided in the instrument and agreement under which such Indebtedness or Guarantee Obligation was created; 2.3 Amendment to Agreement. Effective as of the date hereof, the Agreement is hereby amended to add Exhibits A-1 and L thereto to read in their respective entireties as set forth on Annexes 1 and 2 attached hereto. 2.4 Amendments to Appendix A. (a) Effective as of the date hereof, Appendix A to the Agreement is hereby amended to add the following definitions thereto to read in their respective entireties as follows: "Second Term Loan" shall have the meaning assigned to such term in subsection 2.1A of the Loan Agreement. "Second Term Note" shall have the meaning assigned to such term in subsection 2.2A of the Loan Agreement. (b) Effective as of the date hereof, the definitions of Loan Documents and Obligations set forth in Appendix A to the Agreement are hereby amended and restated to read in their entireties as follows: "Loan Documents" shall be the collective reference to the Loan Agreement, the Term Note, the Second Term Note and the Collateral Security Documents. "Obligations" shall mean all the unpaid principal amount of, and accrued and unpaid interest on, the Term Note, the Second Term Note and all other obligations and liabilities of the Borrowers or any other Person to the Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of or in connection with the Loan Agreement, the Term Note, the Second Term Note, the Collateral Security FIRST AMENDMENT TO LOAN AGREEMENT - Page 6 Documents, or any other Loan Document whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to Lender) or otherwise. ARTICLE III Conditions Precedent 3.1 Conditions. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent: (a) Lender shall have received all of the following, each dated (unless otherwise indicated) the date of this Amendment, in form and substance satisfactory to Lender: (1) Resolutions. Resolutions of the Board of Directors of each General Partner certified by its Secretary or an Assistant Secretary which authorize the execution, delivery, and performance by such General Partner and the relevant Borrower of this Amendment and the other Loan Documents to which such General Partner and the relevant Borrower are or are to be parties hereunder; (2) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of each General Partner certifying the names of the officers of such Person authorized to sign this Amendment and each of the other Loan Documents to which such Person or the relevant Borrower is or is to be a party hereunder (including the certificates contemplated herein) together with specimen signatures of such officers; (3) Second Term Note. The Second Term Note executed by the Borrowers in substantially the form of Annex 1 attached hereto; (4) Consents. Any and all consents, waivers, authorizations and approvals from third parties necessary for the execution, delivery and performance of this Amendment and the Second Term Note by Borrowers shall have been obtained; (5) Opinion of Counsel. A favorable opinion of Akin, Gump, Strauss, Hauer & Feld L.L.P., legal counsel to the Borrowers, the General Partners and Castle, addressing the matters set forth on Annex II attached hereto; (6) Additional Information. Lender shall have received such additional documents, instruments and information as Lender or its legal counsel, Winstead Sechrest & Minick P.C., may request; and FIRST AMENDMENT TO LOAN AGREEMENT - Page 7 (a) The representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made on the date hereof; (b) No Event of Default shall have occurred and be continuing and no event or condition shall have occurred that with the giving of notice or lapse of time or both would be an Event of Default. (c) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments, and other legal matters incident thereto shall be satisfactory to Lender and its legal counsel, Winstead Sechrest & Minick P.C. ARTICLE IV Ratifications, Representations and Warranties 4.1 Ratifications. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Borrower and Lender agree that the Agreement as amended hereby and the other Loan Documents shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. Each of the Borrowers and the General Partners acknowledge and agree that the indebtedness, liabilities and obligations of the Borrowers under the Second Term Note constitute a portion of the Obligations and are secured by the Collateral Security Documents. 4.2 Representations and Warranties. Each Borrower hereby represents and warrants to Lender that (i) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of such Borrower and will not violate the articles of incorporation or bylaws of such Borrower or breach the terms of any material agreement to which such Borrower is a party, (ii) the representations and warranties contained in the Agreement, as amended hereby, and any other Loan Document are true and correct on and as of the date hereof as though made on and as of the date hereof, (iii) no Event of Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be an Event of Default, and (iv) such Borrower is in full compliance with all covenants and agreements contained in the Agreement as amended hereby. FIRST AMENDMENT TO LOAN AGREEMENT - Page 8 ARTICLE V Miscellaneous 5.1 Survival of Representations and Warranties. All representations and warranties made in this Amendment or any other Loan Document including any Loan Document furnished in connection with this Amendment shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. 5.2 Reference to Agreement. Each of the Loan Documents, including the Agreement and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement shall mean a reference to the Agreement as amended hereby. 5.3 Expenses of Lender. As provided in the Agreement, the Borrowers agree to pay on demand all costs and expenses incurred by Lender in connection with the preparation, negotiation, and execution of this Amendment and the other Loan Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including without limitation the costs and fees of Lender's legal counsel, and all costs and expenses incurred by Lender in connection with the enforcement or preservation of any rights under the Agreement, as amended hereby, or any other Loan Document, including without limitation the costs and fees of Lender's legal counsel. 5.4 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 5.5 Applicable Law. This Amendment and all other Loan Documents executed pursuant hereto shall be deemed to have been made and to be performable in Shreveport, Caddo Parish, Louisiana and shall be governed by and construed in accordance with the laws of the State of Louisiana. 5.6 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Lender, Borrowers, the General Partners and Castle and their respective successors and assigns, except no Borrower may assign or transfer any of its rights or obligations hereunder without the prior written consent of Lender. 5.7 Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. FIRST AMENDMENT TO LOAN AGREEMENT - Page 9 5.8 Effect of Waiver. No consent or waiver, express or implied, by Lender to or for any breach of or deviation from any covenant, condition or duty by any Borrower, any General Partner or Castle shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. 5.9 Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. 5.10 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. Executed as of the date first written above. Borrowers: CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By: Castle Pipeline Company, its General Partner By: ------------------------------------- Richard E. Staedtler, Vice President CEC GAS MARKETING LIMITED PARTNERSHIP By: CEC Marketing Company, its General Partner By: --------------------------------------- Richard E. Staedtler, Vice President FIRST AMENDMENT TO LOAN AGREEMENT - Page 10 CASTLE EXPLORATION COMPANY, INC. By: --------------------------------------- Richard E. Staedtler, Vice President CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By: Castle Production Company, its General Partner By: --------------------------------------- Richard E. Staedtler, Vice President CASTLE PIPELINE COMPANY By: --------------------------------------- Richard E. Staedtler, Vice President CASTLE PRODUCTION COMPANY By: --------------------------------------- Richard E. Staedtler, Vice President CEC MARKETING COMPANY By: --------------------------------------- Richard E. Staedtler, Vice President CASTLE ENERGY CORPORATION By: --------------------------------------- Richard E. Staedtler, Vice President FIRST AMENDMENT TO LOAN AGREEMENT - Page 11 Lender: COMMERCIAL NATIONAL BANK IN SHREVEPORT By: --------------------------------------- Martin W. Wilson Assistant Vice President Each of the undersigned hereby consents and agrees to this Amendment and agrees that the Loan Documents executed by such Person shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of such Person enforceable against such Person in accordance with their respective terms. Each of the undersigned hereby further acknowledges and agrees that the indebtedness, obligations and liabilities of the Borrowers under the Second Term Note constitute a portion of the Obligations and are secured by the Collateral Security Documents. CASTLE ENERGY CORPORATION CASTLE PRODUCTION RESOURCES COMPANY CASTLE PIPELINE RESOURCES COMPANY CEC MARKETING RESOURCES COMPANY By: --------------------------------------- Richard E. Staedtler Vice President of each of the above DEERLICK CREEK FIELD LIMITED PARTNERSHIP By: Pennsylvania Castle Energy Corporation Its: General Partner By: ---------------------------------- Richard E. Staedtler Vice President FIRST AMENDMENT TO LOAN AGREEMENT - Page 12 ANNEX 1 Second Term Note ANNEX 2 Advance Request Form EX-10.119 4 AMENDED AND RESTATED LOAN AGREEMENT Exhibit 10.119 ****************************************************************************** AMENDED AND RESTATED LOAN AGREEMENT among COMMERCIAL NATIONAL BANK IN SHREVEPORT, AS AGENT, THE SEVERAL FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTY THERETO, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, CEC GAS MARKETING LIMITED PARTNERSHIP, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, CASTLE EXPLORATION COMPANY, INC., CASTLE PIPELINE COMPANY, CASTLE PRODUCTION COMPANY, CEC MARKETING COMPANY, and CASTLE ENERGY CORPORATION Dated as of November 26, 1996 ****************************************************************************** TABLE OF CONTENTS
Page ---- ARTICLE I Definitions..............................................................................................2 Section 1.1 Definitions..........................................................................2 Section 1.2 Other Definitional Provisions.......................................................19 ARTICLE II Revolving Credit Loans..................................................................................19 Section 2.1 Revolving Credit Commitments........................................................19 Section 2.2 Revolving Credit Notes..............................................................19 Section 2.3 Repayment of Revolving Credit Loans.................................................19 Section 2.4 Interest............................................................................19 Section 2.5 Use of Proceeds.....................................................................20 Section 2.6 Facility Fee........................................................................20 Section 2.7 [Intentionally Omitted].............................................................20 Section 2.8 Borrowing Base......................................................................20 Section 2.9 Mandatory Prepayments or Addition of Collateral.....................................20 Section 2.10 Required Date and Amount of Mandatory Prepayment....................................21 Section 2.11 Borrowers' Option to Increase Collateral in Lieu of Prepayment......................21 Section 2.12 Evidence of Title...................................................................21 ARTICLE III Term Loans..............................................................................................22 Section 3.1 Term Loans..........................................................................22 Section 3.2 The Term Notes......................................................................22 Section 3.3 Repayment of Term Loans.............................................................22 Section 3.4 Interest............................................................................22 Section 3.5 Request for Term Loans..............................................................22 Section 3.6 Use of Proceeds.....................................................................22 Section 3.7 Mandatory Prepayment................................................................23 ARTICLE IV Borrowing Procedure; Payments...........................................................................23 Section 4.1 Borrowing Procedure.................................................................23 Section 4.2 Method of Payment...................................................................23 Section 4.3 Voluntary Prepayment................................................................24 Section 4.4 Pro Rata Treatment..................................................................24
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Page ---- Section 4.5 Non-Receipt of Funds by the Agent...................................................24 Section 4.6 Computation of Interest.............................................................24 ARTICLE V Security................................................................................................25 Section 5.1 Collateral..........................................................................25 Section 5.2 Setoff..............................................................................26 ARTICLE VI Conditions Precedent....................................................................................27 Section 6.1 Initial Loan........................................................................27 Section 6.2 All Loans...........................................................................29 ARTICLE VII Representations and Warranties..........................................................................30 Section 7.1 Corporate Existence.................................................................30 Section 7.2 Financial Statements................................................................31 Section 7.3 Corporate Action; No Breach.........................................................31 Section 7.4 Operation of Business...............................................................31 Section 7.5 Litigation and Judgments............................................................32 Section 7.6 Rights in Properties; Liens.........................................................32 Section 7.7 Enforceability......................................................................32 Section 7.8 Approvals...........................................................................32 Section 7.9 Debt................................................................................32 Section 7.10 Taxes...............................................................................32 Section 7.11 Use of Proceeds; Margin Securities..................................................32 Section 7.12 ERISA...............................................................................33 Section 7.13 Disclosure..........................................................................33 Section 7.14 Subsidiaries........................................................................33 Section 7.15 Agreements..........................................................................33 Section 7.16 Compliance with Laws................................................................33 Section 7.17 Investment Company Act..............................................................34 Section 7.18 Public Utility Holding Company Act..................................................34 Section 7.19 Environmental Matters...............................................................34 Section 7.20 Pipeline Contracts..................................................................35 Section 7.21 No Obligations......................................................................35 Section 7.22 Prepayment..........................................................................35
-ii- TABLE OF CONTENTS (Continued)
Page ---- Section 7.23 Gas Contracts.......................................................................35 Section 7.24 FERC Jurisdiction...................................................................35 Section 7.25 Lone Star Contract..................................................................36 ARTICLE VIII Positive Covenants......................................................................................36 Section 8.1 Reporting Requirements..............................................................36 Section 8.2 Maintenance of Existence; Conduct of Business.......................................39 Section 8.3 Maintenance of Properties...........................................................39 Section 8.4 Taxes and Claims....................................................................40 Section 8.5 Insurance...........................................................................40 Section 8.6 Inspection Rights...................................................................40 Section 8.7 Keeping Books and Records...........................................................40 Section 8.8 Compliance with Laws................................................................40 Section 8.9 Compliance with Agreements..........................................................40 Section 8.10 Further Assurances..................................................................40 Section 8.11 ERISA...............................................................................41 Section 8.12 [Intentionally omitted.]............................................................41 Section 8.13 Pledge of Additional Contracts; Future Mortgages....................................41 Section 8.14 FERC Jurisdiction...................................................................41 Section 8.15 Cover Damages.......................................................................41 Section 8.16 Proceeds from the Production Payment and Receivables from Lone Star Contract.......................................................................................41 ARTICLE IX Negative Covenants......................................................................................42 Section 9.1 Debt................................................................................42 Section 9.2 Limitation on Liens.................................................................42 Section 9.3 Mergers, Etc........................................................................44 Section 9.4 Sale of Partnership Interests.......................................................44 Section 9.5 Investments.........................................................................44 Section 9.6 Transactions With Affiliates........................................................45 Section 9.7 Disposition of Assets...............................................................45 Section 9.8 Sale and Leaseback..................................................................45 Section 9.9 Prepayment of Debt..................................................................45 Section 9.10 Nature of Business..................................................................45 Section 9.11 Environmental Protection............................................................45 Section 9.12 Accounting..........................................................................46
-iii- TABLE OF CONTENTS (Continued)
Page ---- Section 9.13 Executive Offices...................................................................46 Section 9.14 Fiscal Year.........................................................................46 Section 9.15 FERC Jurisdiction...................................................................46 Section 9.16 Lone Star Contract..................................................................46 Section 9.17 Additional Contracts................................................................46 Section 9.18 Distribution, Etc...................................................................46 ARTICLE X Financial Covenants.....................................................................................47 Section 10.1 Consolidated Tangible Net Worth.....................................................47 Section 10.2 Cash Flow Coverage Ratio............................................................47 Section 10.3 Net Working Capital.................................................................47 ARTICLE XI Default.................................................................................................47 Section 11.1 Events of Default...................................................................47 Section 11.2 Remedies............................................................................50 Section 11.3 Performance by the Agent............................................................50 ARTICLE XII The Agent...............................................................................................51 Section 12.1 Appointment, Powers and Immunities..................................................51 Section 12.2 Rights of Agent as a Bank...........................................................52 Section 12.3 Sharing of Payments, Etc............................................................53 Section 12.4 INDEMNIFICATION.....................................................................53 Section 12.5 Independent Credit Decisions........................................................54 Section 12.6 Several Commitments.................................................................54 Section 12.7 Successor Agent.....................................................................54 Section 12.8 Nonconsenting Bank..................................................................55 ARTICLE XIII Miscellaneous...........................................................................................55 Section 13.1 Expenses............................................................................55 Section 13.2 INDEMNIFICATION.....................................................................55 Section 13.3 LIMITATION OF LIABILITY.............................................................56 Section 13.4 No Duty.............................................................................57
-iv- TABLE OF CONTENTS (Continued)
Page ---- Section 13.5 No Fiduciary Relationship...........................................................57 Section 13.6 Equitable Relief....................................................................57 Section 13.7 No Waiver; Cumulative Remedies......................................................57 Section 13.8 Successors and Assigns..............................................................57 Section 13.9 Survival............................................................................60 Section 13.10 ENTIRE AGREEMENT....................................................................60 Section 13.11 Amendments, Etc.....................................................................60 Section 13.12 Maximum Interest Rate...............................................................60 Section 13.13 Notices.............................................................................61 Section 13.14 GOVERNING LAW; VENUE; SERVICE OF PROCESS............................................61 Section 13.15 Counterparts........................................................................62 Section 13.16 Severability........................................................................62 Section 13.17 Headings............................................................................62 Section 13.18 Construction........................................................................62 Section 13.19 Independence of Covenants...........................................................62 Section 13.20 Treatment of Certain Information; Confidentiality...................................62 Section 13.21 WAIVERS OF JURY TRIAL...............................................................63
-v- AMENDED AND RESTATED LOAN AGREEMENT THIS AMENDED AND RESTATED LOAN AGREEMENT (the "Agreement"), dated as of November 26, 1996, is among CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership ("Pipeline"), CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership ("Marketing"), CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership ("Production"), CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation ("Exploration," and together with Pipeline, Marketing and Production, the "Borrowers"), CASTLE PIPELINE COMPANY, a Texas corporation, CASTLE PRODUCTION COMPANY, a Texas corporation, CEC MARKETING COMPANY, a Texas corporation (collectively, the "General Partners"), CASTLE ENERGY CORPORATION, a Delaware corporation ("Castle"), each of the banks or other lending institutions which is or which may from time to time become a signatory hereto or any successor or assignee thereof (individually, a "Bank" and, collectively, the "Banks"), and COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking association, as agent for itself and the other Banks (in such capacity, together with its successors in such capacity, the "Agent"). R E C I T A L S: A. The Borrowers, the General Partners, Castle and Commercial National Bank In Shreveport ("CNB") previously entered into that certain Loan Agreement dated as of April 30, 1996, as amended pursuant to that certain First Amendment to Loan Agreement dated as of November 8, 1996, pursuant to which the Borrowers borrowed from CNB $6,800,000 (the "Prior Loan Agreement"). B. The Borrowers have requested that the Banks renew, extend, refinance and increase the debt of the Borrowers outstanding under the Prior Loan Agreement in the form of (i) revolving credit advances not to exceed an aggregate principal amount of $10,000,000 outstanding at any time, and (ii) a term loan in the principal amount of $15,000,000. The Banks are willing to make such extensions of credit to the Borrowers upon the terms and conditions hereinafter set forth. C. The Borrowers and CNB intend that all outstanding indebtedness of Borrowers under the Prior Loan Agreement as of the date hereof remain outstanding under this Agreement and that the terms and conditions of this Agreement hereinafter apply to such indebtedness. D. The Borrowers and the Banks intend that the repayment of the outstanding indebtedness of Pipeline and Marketing to GE Capital (as hereinafter defined) be deemed to have occurred simultaneously with the initial Loan (as hereinafter defined) hereunder. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: AMENDED AND RESTATED LOAN AGREEMENT - Page 1 ARTICLE I Definitions Section 1.1 Definitions. As used in this Agreement, the following terms have the following meanings: "Additional Contract" shall mean, with respect to any Borrower, any contract entered into by such Borrower after the Closing Date (other than employment contracts and contracts requiring payments of less than, in the aggregate, $100,000 annually). "Affiliate" means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such Person; (b) that directly or indirectly beneficially owns or holds five percent or more of any class of voting stock of such Person; or (c) five percent or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question. The term "control" means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall the Agent or any Bank be deemed an Affiliate of any Borrower. "Applicable Rate" means at any time an annual rate equal to (i) the prime rate (as most recently reported in the Wall Street Journal under the "Money Rates" section or, if no longer published therein, as reported in a similar publication as selected by the Agent), plus (ii) three-quarters of one percent (3/4%). "Assigned Contracts" shall be the collective reference to the Project Documents from and after the date of execution thereof by any Borrower, and each Additional Contract that the Agent has requested to be pledged as collateral to it pursuant to Section 8.13 of this Agreement. "Assignee" has the meaning assigned to it in Section 13.8(b). "Assigning Bank" has the meaning assigned to it in Section 13.8(b). "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and its assignee and accepted by the Agent pursuant to Section 13.8, in substantially the form of Exhibit "G" hereto. "Basic Documents" shall be the collective reference to the Loan Documents, and the Project Documents. "Borrower(s)" shall mean the singular or collective reference, as appropriate, to Marketing, Pipeline, Production and Exploration. AMENDED AND RESTATED LOAN AGREEMENT - Page 2 "Borrower Security Agreement" means the Amended and Restated Security Agreement of the Borrowers in favor of the Agent for the benefit of the Agent and the Banks, in substantially the form of Exhibit "D-1" hereto, as the same may be amended, supplemented, or modified. "Borrowing Base" means, at any particular time, the sum of (a) an amount established at least annually by the Agent and the Banks equal to fifty percent (50%) of the net present value, discounted at ten percent (10%) per annum of the proved developed producing reserves owned directly or indirectly by Borrowers and Castle in which the Agent holds a perfected, first priority Lien, as outlined, subject to the review and adjustment by the Banks, in independent consulting engineers' reports prepared by Ryder Scott Company, Huntley and Huntley and/or other engineering firms reasonably acceptable to the Agent and the Banks under the then applicable SEC Case for the reserves of the Borrowers, as the same may be reviewed and adjusted by the Banks, plus (b) the Lone Star Contract Value. In calculating the Borrowing Base, the Banks may make adjustments to the amount of the borrowing base established based on the SEC Case of the Borrowers' reserves as presented in engineering reports prepared by Ryder Scott & Associates, Huntley and Huntley or other engineering firm, which may include any or all of the following: (a) Banks may use a price forecast and discount rate different from the SEC price forecast; (b) Banks may adjust volume projections made by Ryder Scott & Associates, Huntley and Huntley or other such engineering firm to conform to the volume projections of their own engineers or their consulting engineers; and (c) Banks may adjust lease operating expenses and taxes to conform to the estimates of their own engineers or their consulting engineers. "Borrowing Base Overage" shall have the meaning specified in Section 2.10. "Business Day" means a day other than Saturday or Sunday, or day on which any Bank is not authorized or required to close. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property, which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP. For purposes of this Agreement, the amount of such Capital Lease Obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Cash Flow" means, for any period, the sum of the following for Castle, without duplication: (i) Net Income for such period, plus (ii) depreciation, depletion and amortization of goodwill and non-cash expenses (including, without limitation, write-offs), AMENDED AND RESTATED LOAN AGREEMENT - Page 3 which in determining Net Income for such period were deducted from gross income, less (iii) non-cash income for such period, determined on a consolidated basis in accordance with GAAP to the extent included in Net Income for such period. "Cash Flow Coverage Ratio" means, at any particular time, the ratio of Cash Flow to Debt Service. "Castle" shall mean Castle Energy Corporation, a Delaware corporation. "Castle Deeds of Trust" shall mean each Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of April 30, 1996, made by Castle in favor of the Agent for the benefit of the Agent and the Banks, as the same may be amended, supplemented or otherwise modified from time to time. "Castle Guaranty" shall mean the Amended and Restated Guaranty, dated as of the Closing Date, executed by Castle in favor of the Agent for the benefit of the Agent and the Banks, substantially in the form of Exhibit "C" attached hereto, as the same may be amended, supplemented or otherwise modified from time to time. "Castle Mortgages" shall mean each Open End Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of April 30, 1996, made by Castle in favor of the Agent for the benefit of the Agent and the Banks, as the same may be amended, supplemented or otherwise modified from time to time. "Castle Pledge Agreement" shall mean the Amended and Restated Pledge Agreement, dated as of the Closing Date, made by Castle in favor of the Agent for the benefit of the Agent and the Banks, substantially in the form of Exhibit "E-1" attached hereto, as the same may be amended, supplemented or otherwise modified from time to time. "Closing Date" shall mean November 26, 1996. "CNB" has the meaning specified in the Recitals hereto. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. "Collateral" has the meaning specified in Section 5.1. "Collateral Security Documents" shall be the collective reference to the Borrower Security Agreement, the Security Agreement, the Deeds of Trust, the Castle Guaranty, the Utility Security Notice, the Lockbox Operating Agreement and the Pledge Agreements. "Commitments" means, as to each Bank, its Revolving Credit Commitment and its Term Loan Commitment. AMENDED AND RESTATED LOAN AGREEMENT - Page 4 "Consents" shall be the collective reference to each consent and agreement with respect to the assignment of an Additional Contract, each of which shall be in form and substance reasonably satisfactory to the Agent. "Consolidated Liabilities" means, at any particular time, all amounts which, in conformity with GAAP, would be included as liabilities on a consolidated balance sheet of Castle and the Subsidiaries, including all accruable contingent liabilities (as defined in FAS #5). "Consolidated Net Worth" means, at any particular time, all amounts which, in conformity with GAAP, would be included as stockholders' equity on a consolidated balance sheet of Castle and the Subsidiaries. "Consolidated Tangible Net Worth" means, at any particular time, the book value of the Gas Contracts, oil and gas properties, pipelines, furniture and fixtures and all other amounts which, in conformity with GAAP, would be included as Consolidated Net Worth; provided, however, there shall be excluded therefrom: (a) any amount at which shares of capital stock of Castle appear as an asset on Castle's balance sheet, (b) goodwill, including any amounts, however designated, that represent the excess of the purchase price paid for assets or stock over the value assigned thereto, (c) patents, trademarks, trade names, and copyrights, (d) deferred expenses and deferred taxes, (e) loans and advances, other than travel and expense related advances to any stockholder, director, officer, or employee of Castle or any Affiliate of Castle not made in the ordinary course of business, and (f) all other assets which are properly classified as intangible assets. "Debt" means as to any Person at any time (without duplication): (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, notes, debentures, or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than 90 days, (d) all Capital Lease Obligations of such Person, (e) all obligations secured by a Lien existing on property owned by such Person, whether or not the obligations secured thereby have been assumed by such Person or are non-recourse to the credit of such Person, (f) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers' acceptances, surety or other bonds and similar instruments, and (g) all liabilities of such Person in respect of unfunded vested benefits under any Plan; provided, however, that Debt as to any Person shall not include (i) trade accounts payable of such Person that are being contested in good faith by such Person and (ii) production payments and similar obligations of such Person provided such obligations are non-recourse to such Person. "Debt Service" means, for any period, the sum of the current portion of scheduled payments of long-term Debt of Castle and its Subsidiaries (determined on a consolidated basis) for such period (determined on a consolidated basis). AMENDED AND RESTATED LOAN AGREEMENT - Page 5 "Deeds of Trust" shall mean collectively, the Pipeline Deed of Trust, the Exploration Deed of Trust, the Exploration Mortgages, the Production Deed of Trust, the Castle Mortgages and the Castle Deeds of Trust. "Default" means an Event of Default or the occurrence of an event or condition which with notice or lapse of time or both would become an Event of Default. "Default Rate" means the lesser of (i) the Maximum Rate, or (ii) the sum of the Applicable Rate in effect from day to day, plus two percent. "Dollars" and "$" mean lawful money of the United States of America. "Eligible Assignee" means any commercial bank, savings and loan association, savings bank, finance company, insurance company, pension fund, mutual fund, or other financial institution (whether a corporation, partnership, or other entity) acceptable to the Agent and unless an Event of Default has occurred and is continuing, reasonably approved by the Borrowers to the extent required in Section 13.8, such approval by Borrowers not to be unreasonably withheld or delayed. "Enserch" shall mean ENSERCH Corporation, a Texas corporation. "Environmental Laws" means any and all federal, state, and local laws, regulations, and requirements pertaining to health, safety, or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et seq., and the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., as such laws, regulations, and requirements may be amended or supplemented from time to time. "Environmental Liabilities" means as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs, and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including any Environmental Law, permit, order or agreement with any Governmental Authority or other Person, arising from environmental, health or safety conditions or the Release or threatened Release of a Hazardous Material into the environment, resulting from the past or present operations of such Person or its Affiliates. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder. AMENDED AND RESTATED LOAN AGREEMENT - Page 6 "ERISA Affiliate" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Borrowers or is under common control (within the meaning of Section 414(c) of the Code) with the Borrowers. "Event of Default" has the meaning specified in Section 11.1. "Event of Loss" shall mean (i) the actual or constructive total loss of the Pipeline Assets; or (ii) the loss, theft, destruction or damage of a portion of the Pipeline Assets rendering the Pipeline Assets unable to meet the Specified Delivery Requirements, unless (x) no Default or Event of Default shall have occurred and be continuing and (y) in the reasonable opinion of the Required Banks, sufficient funds are or will be available to Pipeline to restore the Pipeline Assets such that it will be able to meet the Specified Delivery Requirements within 90 days after the occurrence of such event; or (iii) the condemnation, confiscation or seizure of, or requisition of title to, or requisition for a period exceeding 90 days of the use of such portion of, the Pipeline Assets as shall render the Pipeline Assets unable to meet the Specified Delivery Requirements. "Exploration Mortgages" shall mean each Open End Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of April 30, 1996, made by Exploration in favor of the Agent for the benefit of the Agent and the Banks, as amended, supplemented or otherwise modified from time to time. "Exploration Deed of Trust" shall mean the Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of April 30, 1996, made by Exploration in favor of the Agent for the benefit of the Agent and the Banks, as amended, supplemented or otherwise modified from time to time. "Exploration Pledge Agreement" shall mean the Amended and Restated Pledge Agreement, dated as of the Closing Date, made by Exploration in favor of the Agent for the benefit of the Agent and the Banks, as amended, supplemented or otherwise modified from time to time. "Fee Letter" means the letter agreement dated October 15, 1996, between the Agent and Castle. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next proceeding Business Day as so published on the next succeeding Business Day, and (b) if such rate is not so published on such next succeeding AMENDED AND RESTATED LOAN AGREEMENT - Page 7 Business Day, the Federal Funds Rate for any day shall be the average rate charged to the Agent on such day on such transactions as determined by the Agent. "FERC" shall mean the Federal Energy Regulatory Commission or any successor or analogous United States Federal Governmental Authority. "Fiscal Year" shall mean the twelve month period beginning on October 1st of each year and ending on September 30th of the next succeeding year. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "GAAS" shall mean generally accepted auditing standards in the United States of America in effect from time to time. "GE Capital" shall mean General Electric Capital Corporation, a New York corporation or its successors or assigns. "General Partner(s)" shall mean the individual or collective reference, as the case may be, to Pipeline GP, Marketing GP and Production GP. "Governmental Authority" means any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government. "GP Pledge Agreement" shall mean the Amended and Restated Pledge Agreement, dated as of the Closing Date, made by Pipeline GP, Marketing GP and Production GP in favor of the Agent for the benefit of the Agent and the Banks, as amended, supplemented or otherwise modified from time to time. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect the obligee against loss in respect thereof (in AMENDED AND RESTATED LOAN AGREEMENT - Page 8 whole or in part), provided that the term "Guarantee" shall not include (i) endorsements for collection or deposit in the ordinary course of business and (ii) operating leases entered into in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Material" means any substance, product, waste, pollutant, material, chemical, contaminant, constituent, or other material which is or becomes listed, regulated, or addressed under any Environmental Law, including, without limitation, asbestos, petroleum, and polychlorinated biphenyls. "Hydrocarbons" shall mean all crude oil, Natural Gas, distillate and sulphur, natural gas liquids and all products recovered in the processing of natural gas liquids, including, without limitation, natural gasoline, iso-butane, normal butane, propane and ethane (including such methane allowable in commercial ethane). "Interconnect Agreement" shall mean the Interconnect Agreement, dated June 15, 1992, by and between Tabasco and Lone Star, as assigned by Tabasco to Pipeline pursuant to the Assignment Agreement (Pipeline Assets), as such Interconnect Agreement may be amended, supplemented or otherwise modified from time to time. "Interest Expense" means, for any period, all interest on Debt (including the interest portion of payments under Capital Lease Obligations and any capitalized interest) of Castle and its Subsidiaries (determined on a consolidated basis) paid or accrued during such period. "Lien" means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation, assignment, preference, priority, or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise. "Limited Partner(s)" shall mean the individual or collective reference, as the case may be, to Pipeline LP, Marketing LP and Production LP. "Loan Documents" means this Agreement, the Collateral Security Documents and all promissory notes, security agreements, pledge agreements, deeds of trust, mortgages, fee letters, assignments, guaranties, letters of credit, letter of credit applications and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement or the Collateral Security Documents, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time. "Loan Request Form" means a certificate, in substantially the form of Exhibit "B" hereto, properly completed and signed by the Borrowers requesting a Loan. "Loans" means the Revolving Credit Loans and the Term Loans. AMENDED AND RESTATED LOAN AGREEMENT - Page 9 "Lockbox Operating Agreement" shall mean the Lockbox Operating Agreement dated as of April 30, 1996, among the Agent and Exploration, as the same may be amended, supplemented or otherwise modified from time to time. "Lone Star" shall mean Lone Star Gas Company, a division of Enserch. "Lone Star Contract" shall mean the Replacement Gas Purchase Contract, dated October 22, 1992, by and between ARCO and Lone Star, as assigned by ARCO to Marketing, as such contract may be amended, supplemented or otherwise modified from time to time. "Lone Star Contract Value" shall initially mean $25,000,000, which amount shall be reviewed and may be redetermined by the Banks on an annual basis or more frequently as the Agent and the Banks deem necessary. In the absence of such redetermination, such amount shall be reduced by 1/30 of such initial value per month; provided, however, that the Lone Star Contract Value shall never be less than $0.00. "LP Pledge Agreement" shall mean the Amended and Restated Pledge Agreement, dated as of the Closing Date, made by the Limited Partners in favor of the Agent for the benefit of the Agent and the Banks, substantially in the form of Exhibit "E-4" attached hereto, as the same may be amended, supplemented or otherwise modified from time to time. "Marketing" shall mean CEC Gas Marketing Limited Partnership, a Texas limited partnership. "Marketing GP" shall mean CEC Marketing Company, a Texas corporation. "Marketing LP" shall mean CEC Marketing Resources Company, a Pennsylvania corporation. "Marketing Partnership Agreement" shall mean the Agreement of Limited Partnership of Marketing, dated as of November 25, 1992, between Marketing GP and Marketing LP, as amended by Amendment No. 1 thereto and as may further be amended, supplemented or otherwise modified from time to time. "Maximum Rate" means, at any time the maximum rate of interest permitted by applicable law. "MGAC" shall mean Metallgesellchaft, AG, an Aktiengesellschaft, organized under the laws of the Federal Republic of Germany. "MGC" shall mean MetallgeSellschaft Corp., a Delaware corporation. "MGCC" shall mean Metallgesellschaft Capital Corp., a Delaware corporation. AMENDED AND RESTATED LOAN AGREEMENT - Page 10 "MGG" shall mean MG Gathering Corp., a Texas corporation. "MGNG" shall mean MG Natural Gas Corp., a Texas corporation. "MGTF" shall mean MG Trade Finance Corp., a Delaware corporation. "Mortgaged Properties" shall be the reference to the properties subject to the Deeds of Trust. "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Borrowers or any ERISA Affiliate and which is covered by Title IV of ERISA. "Natural Gas" shall mean, in its gaseous state, all natural gas, and any natural gas liquids and all products recovered in the processing of natural gas. "Net Cash Flow" means, for any period, with respect to any Person, the Net Income of such Person for such period, plus without duplication and to the extent reflected as a charge in the statement of Net Income for such period, the sum of (i) amortization, (ii) depreciation, and (iii) other non-cash charges and minus, without duplication and to the extent reflected as a credit or gain in Net Income for such period, other non-cash credits or gains. "Net Income" means, for any period, with respect to any Person, the consolidated net income of such Person and its Subsidiaries for such period determined in accordance with GAAP provided that there shall be excluded therefrom: (a) any net income (or net loss) of any Person in which such Person has an ownership interest other than the Subsidiaries, except to the extent that any such income has actually been received by such Person in the form of cash dividends or similar distributions; (b) any net gain (or net loss) on the sale or other disposition, not in the ordinary course of business, of investments and other capital assets, provided that there shall also be excluded any related items for taxes thereon and other costs associated with the sale or other disposition thereof; (c) any net gain (or net loss) arising from the collection of proceeds of any insurance policy; and (d) changes in deferred taxes. "New Properties" shall have the meaning specified in Section 2.10. "NGA" shall mean the Natural Gas Act of 1938, as amended, or any successor act. "Notes" means the Revolving Credit Notes and the Term Notes. "Obligated Party" means any Person who is or becomes party to any agreement that guarantees or secures payment and performance of the Obligations or any part thereof. AMENDED AND RESTATED LOAN AGREEMENT - Page 11 "Obligations" means all obligations, indebtedness, and liabilities of the Borrowers and the Obligated Parties to the Agent and the Banks, or any of them, arising pursuant to any of the Loan Documents, now existing or hereafter arising, whether direct, indirect, related, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, including, without limitation, the obligations, indebtedness, and liabilities of the Borrowers under this Agreement and the other Loan Documents, and all interest accruing thereon and all attorneys' fees and other expenses incurred in the enforcement or collection thereof. "Operating Lease" means any lease (other than a lease constituting a Capital Lease Obligation) of real or personal property. "OWI Contracts" shall be the collective reference to the Owner OWI Contracts and the Production $2.90 Contract. "Owner OWI Contracts" shall be the collective reference to the contracts covering the wells listed in Exhibit D to the Supply Agreement. "Partnership(s)" shall mean the singular or collective reference, as appropriate, to Pipeline, Marketing and Production. "Partnership Agreements" shall be the collective reference to the Pipeline Partnership Agreement, the Marketing Partnership Agreement and the Production Partnership Agreement. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Payment Notice" has the meaning specified in Section 2.9. "Payor" has the meaning assigned to it in Section 4.5. "Permitted Debt" has the meaning specified in Section 9.1. "Permitted Liens" has the meaning specified in Section 9.2. "Person" means any individual, corporation, business trust, association, company, partnership, joint venture, Governmental Authority, or other entity. "Pipeline" shall mean Castle Texas Pipeline Limited Partnership, a Texas limited partnership. "Pipeline Assets" shall mean all of Pipeline's right, title and interest in and to the assets and interests comprising a part of or utilized in connection with Pipeline's intrastate pipeline system located in Rusk County, Texas, including, without limitation, the following: AMENDED AND RESTATED LOAN AGREEMENT - Page 12 (a) real property, whether owned of record or beneficially, and the improvements, buildings and fixtures located thereon, including, without limitation, those that are described on Exhibit A to the Pipeline Deed of Trust; (b) easements, rights-of-way, licenses and permits, whether owned of record or beneficially, and all prescriptive rights, titles, interests and claims, together with the improvements, buildings and fixtures located thereon, including, without limitation, those that are described on Exhibit A to the Pipeline Deed of Trust; (c) leases of real property, whether owned of record or beneficially, and the improvements, buildings and fixtures located thereon, including, without limitation, those that are described on Exhibit A to the Pipeline Deed of Trust; (d) pipelines, storage, compressor and other facilities, whether above or below ground, and all appurtenances thereto, including, without limitation, compressor stations, metering stations, valves, cathodic protection systems, improvements, buildings and fixtures; (e) certificates of authority, licenses and permits to construct, own, maintain, operate and remove pipeline facilities within the boundaries of various federal, state, municipal and local governmental and quasi-governmental jurisdictions; (f) licenses, permits, authorizations, registrations and exemptions relating to the handling, treatment, disposal and discharge of pollutants, contaminants and environmentally sensitive materials and substances; (g) computer hardware and software, including all leases and licenses thereof; (h) radios and other communication equipment; (i) governmental permits, licenses, franchises, registrations and similar rights; (j) contracts, contract rights, agreements and other instruments including, without limitation, the Transportation Agreement (Marketing), the Transportation Agreement (MGNG) and the Interconnect Agreement to the extent such indemnity agreements cover or relate to the Mortgaged Properties described in paragraphs (a) through (i) hereof; (k) materials, supplies and parts and personal property used or useful in connection with the assets described as a part of this defined term; and AMENDED AND RESTATED LOAN AGREEMENT - Page 13 (1) books of account, customer lists, files, papers, records and computer data bases, together with related file layouts, and any other relevant files, documents and records relating to any and all of the properties described in clauses (a)-(k) above. "Pipeline Deed of Trust" shall mean the Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of April 30, 1996, made by Pipeline in favor of the Agent for the benefit of the Agent and the Banks, as amended, supplemented or otherwise modified from time to time. "Pipeline GP" shall mean Castle Pipeline Company, a Texas corporation. "Pipeline Interests" shall mean the real property interests (including easements, rights of way and similar interests), constituting a part of the Pipeline Assets. "Pipeline LP" shall mean Castle Pipeline Resources Company, a Pennsylvania corporation. "Pipeline Partnership Agreement" shall mean the Agreement of Limited Partnership of Pipeline, dated as of November 25, 1992, between Pipeline GP and Pipeline LP, as amended by Amendment No. 1 thereto and as may be further amended, supplemented or otherwise modified from time to time. "Plan" means any employee benefit or other plan established or maintained by any Borrower, General Partner or any ERISA Affiliate and which is covered by Title IV of ERISA. "Pledge Agreements" shall be the collective reference to the GP Pledge Agreement, the LP Pledge Agreement, the Exploration Pledge Agreement and the Castle Pledge Agreement. "Principal Office" means the principal office of the Agent, presently located at 333 Texas Street, Shreveport, Louisiana 71101. "Production" shall mean Castle Texas Production Limited Partnership, a Texas limited partnership. "Production Deed of Trust" shall mean the Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of April 30, 1996, made by Production in favor of Agent for the benefit of the Agent and the Banks, as the same may be amended, supplemented or otherwise modified from time to time. "Production GP" shall mean Castle Production Company, a Texas corporation. AMENDED AND RESTATED LOAN AGREEMENT - Page 14 "Production LP" shall mean Castle Production Resources Company, a Pennsylvania corporation. "Production Partnership Agreement" shall mean the Agreement of Limited Partnership of Production dated as of November 25, 1992, between Production GP and Production LP, as the same may be amended, supplemented or otherwise modified from time to time. "Production Payment" shall mean the production payment reserved and created under that certain Assignment and Bill of Sale (Oil and Gas Assets) dated effective as of 7:00 a.m. Central Standard Time on February 1, 1992 from ARCO to Exploration, as recorded in Volume 1799, Page 713 of the Official Records of Rusk County, Texas, and as conveyed by ARCO to Exploration under that certain Conveyance of Production Payment dated as of November 28, 1994 from ARCO to Exploration. "Production $2.90 Contract" shall be the reference to the contract listed on Exhibit E to the Supply Agreement. "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. "Project Documents" shall be the collective reference to the Partnership Agreements, the Lone Star Contract, the Supply Agreement, the Interconnect Agreement and the Suspension Agreement. "Register" has the meaning assigned to it in Section 13.8(d). "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulatory Change" means, with respect to any Bank, any change after the date of this Agreement in United States federal, state, or foreign laws or regulations (including Regulation D) or the adoption or making after such date of any interpretations, directives, or requests applying to a class of banks including such Bank of or under any United States federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Release" means, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, disbursement, leaching, or migration of Hazardous Materials into or out of property owned by such Person, including, without limitation, the movement of Hazardous Materials through or in the air, soil, surface water, ground water, or property. AMENDED AND RESTATED LOAN AGREEMENT - Page 15 "Remedial Action" means all actions required under Environmental Laws to (a) clean up, remove, treat, or otherwise address Hazardous Materials in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, or (c) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Reporting Party" shall have the meaning specified in Section 8.1(a). "Representing Parties" shall have the meaning specified in Article VII. "Required Banks" means at any time while no Loans are outstanding, Banks having at least 66-2/3% of the aggregate amount of the Commitments and, at any time while Loans are outstanding, Banks holding at least 66-2/3% of the outstanding aggregate principal amount of the Loans. "Required Payment" has the meaning assigned to it in Section 4.5. "Responsible Officer" means, with respect to any Person, in the case of a Person which is a partnership, the president or any vice president of the general partner of such Person, or with respect to financial matters, the chief financial officer or chief accounting officer of the general partner of such Person and in the case of any Person which is a corporation, the president or any vice president of such Person or with respect to financial matters, the chief financial officer of such Person. "Revolving Credit Commitment" means, as to each Bank, the obligation of such Bank to make Revolving Credit Loans in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite the name of such Bank on the signature pages hereto under the heading "Revolving Credit Commitment," or in the Assignment and Acceptance pursuant to which such Bank assumed its Revolving Credit Commitment, as applicable as the same may be (a) reduced pursuant to Section 2.7 or terminated pursuant to Section 2.7 or 11.2 and (b) reduced or increased from time to time pursuant to assignments by or to such Bank pursuant to Section 13.8. "Revolving Credit Loan" means, as to each Bank, the loans to be made by such Bank pursuant to Section 2.1. "Revolving Credit Note" means a promissory note of the Borrowers payable to the order of a Bank, in substantially the form of Exhibit "A-1" hereto, and all extensions, renewals, and modifications thereof and all substitutions therefor. AMENDED AND RESTATED LOAN AGREEMENT - Page 16 "Revolving Credit Termination Date" means 11:00 A.M. Shreveport, Louisiana time on December 31, 1997 (unless extended pursuant to a written agreement among the parties hereto), or such earlier date and time on which the Revolving Credit Commitments terminate as provided in this Agreement. "RICO" means the Racketeer Influenced and Corrupt Organization Act of 1970, as amended from time to time. "SEC" means the Securities and Exchange Commission. "Security Agreement" shall mean the Amended and Restated Security Agreement and Assignment of Production, dated as of the Closing Date, made by Deerlick Creek Field Limited Partnership in favor of the Agent for the benefit of the Agent and the Banks, substantially in the form of Exhibit "D-2" attached hereto, as the same may be amended, supplemented or otherwise modified from time to time. "Specified Delivery Requirements" shall mean, with respect to the Pipeline Assets, the capability of such Pipeline Assets to receive, transport and deliver the quantities of gas necessary for Marketing to fully perform its obligations under the Lone Star Contract, in each case assuming that Lone Star purchases the maximum amount of gas which it is entitled to purchase (and Marketing is required to deliver) pursuant to the Lone Star Contract. "Stock Repurchase Commitment Amount" means (i) from the Closing Date until February 1, 1997, $4,000,000, and (ii) commencing on February 1, 1997 and on the first day of each calendar month thereafter, such amount shall reduce by $333,334 until and including the Revolving Credit Termination Date. "Subsidiary" means any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by any Borrower or one or more of the Subsidiaries or by a Borrower and one or more of the Subsidiaries. "Supply Agreement" shall mean the Gas Purchase Contract, dated as of December 1, 1992, as amended and restated by the Amended and Restated Supply Agreement, dated as of August 1, 1993, between MGNG and Marketing, as the same may be further amended, supplemented or otherwise modified from time to time. "Supply Agreement Amendment" shall mean the Amended and Restated Gas Purchase Contract, dated as of August 1, 1993, between MGNG and Marketing. AMENDED AND RESTATED LOAN AGREEMENT - Page 17 "Suspension Agreement" shall mean the Suspension Agreement, dated as of August 1, 1993, between MGNG and Marketing, as amended, supplemented or otherwise modified from time to time. "Tabasco" shall mean Tabasco Gas Pipeline Company, a Delaware corporation and a subsidiary of ARCO. "Term Loan" means as to each Bank, the term loan to be made by such Bank pursuant to Section 3.1. "Term Loan Commitments" means, as to each Bank, the obligation of such Bank to make a Term Loan hereunder in the principal amount set forth opposite the name of such Bank on the signature pages hereto under the heading "Term Loan Commitment" or on the signature pages of an Assignment and Acceptance, as the case may be. "Term Loan Maturity Date" means 11:00 A.M. Shreveport, Louisiana time on May 31, 1999. "Term Loan Termination Date" means 11:00 A.M. Shreveport, Louisiana time on April 10, 1997. "Term Note" means a promissory note of the Borrowers payable to the order of a Bank, in substantially the form of Exhibit "A-2" hereto, and all extensions, renewals, and modifications thereof and all substitutions therefor. "Termination Date" means, with respect to the Revolving Credit Commitments, the Revolving Credit Termination Date, and with respect to the Term Loan Commitments, the Term Loan Termination Date. "Transportation Agreement" shall mean the Transportation Agreement (Marketing). "Transportation Agreement (Marketing)" shall mean the Gas Transportation Agreement, dated as of July 1, 1992, by and between ARCO and Tabasco, as assigned by ARCO to Marketing pursuant to the Assignment Agreement (Lone Star Agreement and Transportation Agreement) and by Tabasco to Pipeline pursuant to the Assignment Agreement (Pipeline Assets), as the same may be amended, supplemented or otherwise modified from time to time. "UCC" means the Uniform Commercial Code as in effect in the State of Louisiana. "Utility Security Notice" shall mean the Notice of Utility Security Instrument Affecting Real Property, dated as of April 30, 1996, made by Pipeline, as the same may be amended, supplemented or otherwise modified from time to time. AMENDED AND RESTATED LOAN AGREEMENT - Page 18 Section 1.2 Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof," "herein," and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Terms used herein that are defined in the UCC, unless otherwise defined herein, shall have the meanings specified in the UCC. ARTICLE II Revolving Credit Loans Section 2.1 Revolving Credit Commitments. Subject to the terms and conditions of this Agreement, each Bank severally agrees to make one or more Revolving Credit Loans to the Borrowers on a joint and several basis, from time to time from the date hereof to and including the Revolving Credit Termination Date in an aggregate principal amount at any time outstanding up to but not exceeding the amount of such Bank's Revolving Credit Commitment as then in effect, provided that the aggregate amount of all Revolving Credit Loans at any time outstanding shall not exceed the lesser of (i) the aggregate amount of the Revolving Credit Commitments or (ii) the Borrowing Base less the aggregate outstanding principal balance of the Term Loans. Notwithstanding the foregoing, the aggregate amount of Revolving Credit Loans at any time outstanding, the proceeds of which were used to make loans to Castle to repurchase outstanding shares of common stock of Castle pursuant to Section 2.5 shall not at any time exceed the Stock Repurchase Commitment Amount. Subject to the foregoing limitations, and the other terms and provisions of this Agreement, the Borrowers may borrow, repay, and reborrow hereunder the amount of the Revolving Credit Commitments until the Revolving Credit Termination Date. Section 2.2 Revolving Credit Notes. The obligation of the Borrowers to repay each Bank for Revolving Credit Loans made by such Bank and interest thereon shall be evidenced by a Revolving Credit Note executed by the Borrowers, payable to the order of such Bank, in the principal amount of such Bank's Revolving Credit Commitment, and dated the date hereof or such later date as may be required with respect to transactions contemplated by Section 13.8. Section 2.3 Repayment of Revolving Credit Loans. The outstanding principal balance of the Revolving Credit Loans shall be due and payable on the Revolving Credit Termination Date. Section 2.4 Interest. The unpaid principal amount of the Revolving Credit Loans shall bear interest at a varying rate per annum equal from day to day to the lesser of (a) the Maximum Rate, or (b) the Applicable Rate. If at any time the Applicable Rate for any Revolving Credit Loan shall exceed the Maximum Rate, thereby causing the interest accruing on such Revolving Credit Loan to be limited to the Maximum Rate, then any subsequent reduction in the Applicable Rate for such Revolving Credit Loan shall not reduce the rate of interest on such Revolving Credit Loan below the Maximum Rate until the aggregate amount of interest accrued on such Revolving Credit Loan equals the aggregate amount of interest which would have accrued on such Revolving Credit AMENDED AND RESTATED LOAN AGREEMENT - Page 19 Loan if the Applicable Rate had at all times been in effect. Accrued and unpaid interest on the Revolving Credit Loans shall be due and payable on the first day of each month commencing January 1, 1997 and on the Revolving Credit Termination Date. Notwithstanding the foregoing, any outstanding principal of any Revolving Credit Loan and (to the fullest extent permitted by law) any other amount payable by the Borrowers under this Agreement or any other Loan Document that is not paid in full when due (whether at stated maturity, by acceleration, or otherwise) shall bear interest at the Default Rate for the period from and including the due date thereof to but excluding the date the same is paid in full. Interest payable at the Default Rate shall be payable from time to time on demand. Section 2.5 Use of Proceeds. The proceeds of Revolving Credit Loans shall be used by the Borrowers (i) to finance the development of Oak Hill Field, Rusk County, Texas, (ii) up to $4,000,000 may be used to loan to Castle to repurchase outstanding shares of common stock of Castle, and (iii) for other purposes reasonably approved by the Agent and the Banks. Section 2.6 Facility Fee. The Borrowers agree to pay to the Agent on the date hereof for the account of the Banks a facility fee in the aggregate amount of $125,000. In the event that the Banks in their sole discretion elect to extend the Revolving Credit Termination Date, the Borrowers shall not be required to pay an additional facility fee to the Banks in connection therewith. Notwithstanding the foregoing, the Banks have no obligation or commitment to so extend the Revolving Credit Termination Date and nothing contained herein shall be construed as such. Section 2.7 [Intentionally Omitted] Section 2.8 Borrowing Base. The Borrowing Base shall be cumulative of all other limitations contained in this Agreement and the other Loan Documents. On or prior to the date hereof, the Banks shall have determined the amount of the Borrowing Base to be in effect during the period from the date hereof to the date of the first redetermination of the Borrowing Base pursuant to the provisions of this Section 2.8. The Borrowing Base shall be redetermined annually by the Banks on each December 31 as of September 30 of the same calendar year, which redetermination shall be made by the Banks in accordance with their customary practices and standards for oil and gas loans and as contemplated by this Agreement. The Borrowers shall pay to the Agent for the account of the Banks $15,000 for each annual redetermination of the Borrowing Base, which shall be used by the Banks to pay for the cost of the annual redetermination. The Banks shall have the right to redetermine the Borrowing Base more frequently than annually; however, the Borrowers shall have no obligation to reimburse the Banks for the cost of any such additional redetermination of the Borrowing Base. The Borrowers shall have the right to request that the Agent and the Banks redetermine the Borrowing Base more frequently than annually and upon such request the Agent and the Banks shall do so, provided that in connection with such a redetermination of the Borrowing Base, the Borrowers shall pay to the Agent for the account of the Banks $15,000 for any such additional redetermination of the Borrowing Base. Section 2.9 Mandatory Prepayments or Addition of Collateral. If the outstanding principal balance of the Revolving Credit Loans at any time exceeds the difference of the Borrowing AMENDED AND RESTATED LOAN AGREEMENT - Page 20 Base, as determined pursuant to Section 2.8, less the aggregate outstanding principal balance of the Term Loans, the Agent may request the Borrowers by a notice ("Payment Notice") in writing to pay any such excess amount in the manner provided below or to increase the Collateral in lieu of such payment, as provided below. Section 2.10 Required Date and Amount of Mandatory Prepayment. Within 35 days after the Borrowers have received a Payment Notice, the Borrowers shall make a prepayment of principal on the Revolving Credit Notes equal to the amount by which the outstanding principal balance of the Revolving Credit Notes as of the date of the Payment Notice exceeds the Borrowing Base less the aggregate outstanding principal balance of the Term Loans (such amount is hereinafter referred to as the "Borrowing Base Overage"), as of such date, unless either (a) the Borrowers have notified the Agent in writing (within 10 days after the Borrowers have received the Payment Notice) of the Borrowers' election to comply with Section 2.11 hereof and have provided the Agent with complete descriptions of other properties or interests ("New Properties") which the Borrowers shall add to the Collateral and subject to Liens in favor of the Agent for the benefit of itself and the Banks for purposes of Section 2.11 hereof, or (b) the Required Banks determine that the Borrowers are proceeding diligently with appropriate actions which will enable the Borrowers to make the prepayment required by this Section 2.10, then the Required Banks may grant to the Borrowers an additional period of time within which to make such prepayment. Section 2.11 Borrowers' Option to Increase Collateral in Lieu of Prepayment. Within 30 days after the date on which the Agent receives notice of the Borrowers' election to comply with this Section 2.11, the Borrowers shall grant to the Agent for the benefit of itself and the Banks, valid, enforceable, perfected, first priority Liens (subject to Permitted Liens) in the New Properties, pursuant to security documents in form and substance reasonably satisfactory to the Agent. In addition, the Borrowers shall deliver to the Agent upon request such other information, data, and reports describing the New Properties and the reserves and production related thereto, as the Agent shall reasonably request. Within a reasonable period of time after the date on which the Agent receives notice of the Borrowers' election to comply with this Section 2.11, the Banks shall redetermine and notify the Borrowers of the Borrowing Base determined as if the New Properties were part of the Collateral as of the date of the last redetermination of the Borrowing Base. Within 10 Business Days after receipt of such notice, the Borrowers shall make a prepayment of principal on the Revolving Credit Notes equal to the amount (if any) by which the outstanding principal balance of the Revolving Credit Loans, as of the date of such redetermination, exceeds the difference of the applicable Borrowing Base as of such date as determined by the Banks pursuant to Section 2.8 less the aggregate outstanding principal balance of the Term Loans. Section 2.12 Evidence of Title. In the event any New Properties become a part of the Collateral pursuant to Section 2.11 hereof, at the Agent's request and option, the Borrowers shall deliver to the Agent title data, landman reports or title opinions covering such properties or provide such other evidence of title to such New Properties as the Agent may reasonably require. AMENDED AND RESTATED LOAN AGREEMENT - Page 21 ARTICLE III Term Loans Section 3.1 Term Loans. Subject to the terms and conditions of this Agreement, each Bank agrees to make a Term Loan to the Borrowers on a joint and several basis, in the amount of its Term Loan Commitment in one or more advances on or before the Term Loan Termination Date. Section 3.2 The Term Notes. The obligation of the Borrowers to repay the Term Loans and interest thereon shall be evidenced by the Term Notes executed by the Borrowers, payable to the order of a Bank, in the principal amount of such Bank's Term Loan Commitment and dated the date hereof or such later date as may be required with respect to transactions contemplated by Section 13.8. Section 3.3 Repayment of Term Loans. The Borrower shall repay the unpaid principal amount of the Term Loans in twenty-nine (29) equal consecutive monthly installments in the aggregate amount of the lesser of (i) the aggregate outstanding principal balance of the Term Loans, or (ii) $500,000.00 each, payable on the first day of each month, commencing on December 1, 1996, until and including April 1, 1999, with a final installment in the amount of all outstanding principal of the Term Loans payable on May 31, 1999. Section 3.4 Interest. The unpaid principal amount of the Term Loans shall bear interest at a varying rate per annum equal from day to day to the lesser of (a) the Maximum Rate, or (b) the Applicable Rate. If at any time the Applicable Rate for any Term Loan shall exceed the Maximum Rate, thereby causing the interest accruing on such Term Loan to be limited to the Maximum Rate, then any subsequent reduction in the Applicable Rate for such Term Loan shall not reduce the rate of interest on such Term Loan below the Maximum Rate until the aggregate amount of interest accrued on such Term Loan equals the aggregate amount of interest which would have accrued on such Term Loan if the Applicable Rate had at all times been in effect. Accrued and unpaid interest on the Term Loans shall be due and payable on the first day of each month commencing December 1, 1996 and continuing on the first day of each month thereafter until and including the Term Loan Maturity Date. Notwithstanding the foregoing, any outstanding principal of any Term Loan and (to the fullest extent permitted by law) any other amount payable by the Borrowers under this Agreement or any other Loan Document that is not paid in full when due (whether at stated maturity, by acceleration, or otherwise) shall bear interest at the Default Rate for the period from and including the due date thereof to but excluding the date the same is paid in full. Interest payable at the Default Rate shall be payable from time to time on demand. Section 3.5 Request for Term Loans. The Term Loans shall be made on at least one Business Day's prior notice from Borrowers to the Agent by means of a Loan Request Form containing the information required therein. Section 3.6 Use of Proceeds. The proceeds of the Term Loans shall be used by Borrowers to (i) refinance the outstanding indebtedness of Pipeline and Marketing to GE Capital, (ii) renew, AMENDED AND RESTATED LOAN AGREEMENT - Page 22 extend and modify the outstanding indebtedness of the Borrowers to CNB, (iii) the balance of the proceeds of the Term Loans may be used to make loans to Castle for the purpose of repurchasing outstanding shares of common stock of Castle, (iv) to finance the development of Oak Hill Field, Rusk County, Texas, and (v) for other purposes approved by the Agent and the Banks. Section 3.7 Mandatory Prepayment. If an Event of Loss shall occur, the Borrowers shall prepay in full the unpaid principal amount of the Term Loans, together with accrued interest thereon to the date of prepayment and all other amounts owing hereunder and under the Loan Documents, on the earlier of (A) the date occurring 60 days after the date of such Event of Loss and (B) the date on which insurance proceeds are received with respect to such Event of Loss. ARTICLE IV Borrowing Procedure; Payments Section 4.1 Borrowing Procedure. The Borrowers shall give the Agent notice by means of a Loan Request Form of each requested Loan at least one Business Day before the requested date of the Loan, specifying: (a) the requested date of such Loan (which shall be a Business Day), (b) the amount of such Loan, and (c) whether such Loan is a Revolving Credit Loan or a Term Loan. Each Revolving Credit Loan and each Term Loan shall be in a minimum principal amount of $250,000. The Agent shall notify each Bank in writing of the contents of each such notice. Not later than 12:00 P.M. Shreveport, Louisiana time on the date specified for each Loan hereunder, each Bank will make available to the Agent at the Principal Office in immediately available funds, for the account of the Borrowers, its pro rata share of each Loan. After the Agent's receipt of such funds and subject to the other terms and conditions of this Agreement, the Agent will make each Loan available to the Borrowers by depositing the same, in immediately available funds, in an account of the Borrowers (designated by the Borrowers) maintained with the Agent at the Principal Office. All notices under this Section shall be irrevocable and shall be given not later than noon Shreveport, Louisiana, time on the day which is not less than the number of Business Days specified above for such notice. Section 4.2 Method of Payment. All payments of principal, interest, and other amounts to be made by the Borrowers under this Agreement and the other Loan Documents shall be made to the Agent at the Principal Office for the account of each Bank in Dollars and in immediately available funds, without setoff, deduction, or counterclaim, not later than 1:00 P.M., Shreveport, Louisiana time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). The Borrowers shall, at the time of making each such payment, specify to the Agent the sums payable by the Borrowers under this Agreement and the other Loan Documents to which such payment is to be applied (and in the event that the Borrowers fail to so specify, or if an Event of Default has occurred and is continuing, the Agent may apply such payment to the Obligations in such order and manner as it may elect in its sole discretion, subject to Section 4.4 hereof). Each payment received by the Agent under this Agreement or any other Loan Document for the account of a Bank shall be paid promptly to such Bank, in immediately available funds. Whenever any AMENDED AND RESTATED LOAN AGREEMENT - Page 23 payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest. Section 4.3 Voluntary Prepayment. The Borrowers may prepay the Loans in whole at any time or from time to time in part without premium or penalty but with accrued interest to the date of prepayment on the amount so prepaid, provided that each partial prepayment shall be in the principal amount of $250,000 or an integral multiple thereof. All notices under this Section shall be irrevocable and shall be given not later than 1:00 P.M. Shreveport, Louisiana, time on the day of such prepayment. Section 4.4 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each Loan shall be made by the Banks under Section 2.1 and 3.1; (b) the payment of the facility fee under Section 2.6 and the engineering fees under Section 2.8 shall be made for the account of the Banks; and (c) each termination or reduction of the Revolving Credit Commitments under Section 2.7 shall be applied to the Revolving Credit Commitments of the Banks, pro rata according to the respective unused Revolving Credit Commitments. Section 4.5 Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified by a Bank or the Borrowers (the "Payor") prior to the date on which such Bank is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or the Borrowers are to make a payment to the Agent for the account of one or more of the Banks, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment shall, on demand, pay to the Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Rate (or, in the case of the Borrowers, the Applicable Rate) for such period. Section 4.6 Computation of Interest. Interest on the Loans and all other amounts payable by the Borrowers hereunder shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. AMENDED AND RESTATED LOAN AGREEMENT - Page 24 ARTICLE V Security Section 5.1 Collateral. To secure full and complete payment and performance of the Obligations, the Borrowers shall execute and deliver or cause to be executed and delivered the documents described below covering the property described in this Section 5.1 (which, together with any other property which may now or hereafter secure the Obligations or any part thereof, is sometimes herein called the "Collateral"): (a) Each Borrower shall grant to the Agent for the benefit of itself and the Banks a first priority (subject only to Permitted Liens) security interest in all of its accounts, accounts receivable, equipment, machinery, fixtures, inventory, chattel paper, documents, instruments, and general intangibles, whether now owned or hereafter acquired, and all products and proceeds thereof, pursuant to the Borrower Security Agreement; provided, such security interest shall not attach to (i) funds in possession of the Borrower constituting trust funds owned by third parties, (ii) capital lease obligations and property subject to a purchase money security interest to the extent it is subject to a Permitted Lien, which Permitted Lien prohibits the imposition of other Liens, (iii) operating leases, licenses and other agreements (but excluding oil and gas leases) entered in the ordinary course of business to the extent such agreements prohibit assignment or the imposition of Liens, (iv) all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, claims, orders, judgments and decrees, licenses, exemptions, franchises, registrations, publications, filings, notices to and declarations of, or with, any Governmental Authority, including, without limitation, all construction, siting, environmental and operating permits and licenses that are required for the use and operation of the Pipeline Assets, to that extent that any of the above would, by its terms or operation of law, become void, voidable, terminable or revocable if mortgaged, pledged or assigned or if a security interest therein were granted hereunder, (v) all licenses, permits, authorizations, registrations and exemptions relating to the handling, treatment, disposal and discharge of pollutants, contaminants and environmentally sensitive materials and substances which are not assignable by law or in accordance with their terms, (vi) leases, licenses and other agreements relating to computer hardware and software which are not assignable by law or in accordance with their terms, (vii) contracts, contract rights, agreements and other instruments including, without limitation, the Transportation Agreement (Marketing) and the Interconnect Agreement, which are not assignable by law or in accordance with their terms, and (viii) all other consents, licenses and permits which are not assignable by law or in accordance with their terms. (b) Each Borrower shall grant to the Agent for the benefit of itself and the Banks and confirm its prior grant of a Lien on all of its real property, Hydrocarbons and all interests therein and proceeds thereof pursuant to the Deeds of Trust. AMENDED AND RESTATED LOAN AGREEMENT - Page 25 (c) Castle shall pledge and grant to the Agent for the benefit of itself and the Banks a first priority security interest in (i) all of the outstanding capital stock of Exploration and each of the General Partners and the Limited Partners, and all products and proceeds thereof, pursuant to the Castle Pledge Agreement. The Agent shall retain possession in Louisiana of the certificates evidencing the capital stock of such Subsidiaries, together with stock powers duly executed in blank by Castle. (d) Each of the General Partners shall pledge and grant to the Agent for the benefit of itself and the Banks a first priority security interest in its general partnership interest in the relevant Borrower for which it is the general partner, and all products and proceeds thereof, pursuant to the GP Pledge Agreement. (e) Each of the Limited Partners shall pledge and grant to the Agent for the benefit of itself and the Banks a first priority security interest in its limited partnership interest in the relevant Borrower for which it is the limited partner, and all products and proceeds thereof, pursuant to the LP Pledge Agreement. (f) Exploration shall pledge and grant to the Agent for the benefit of itself and the Banks a first priority security interest in Exploration's entire limited partnership interest in Deerlick Creek Field Limited Partnership and all products and proceeds thereof pursuant to the Exploration Pledge Agreement. (g) Castle shall grant to the Agent for the benefit of itself and the Banks and confirm its prior grant of a Lien on the Mortgaged Properties owned by Castle pursuant to the Castle Mortgages and the Castle Deeds of Trust. (h) The Borrowers, Castle, the General Partners and the Limited Partners shall execute and cause to be executed such further documents and instruments, including without limitation, Uniform Commercial Code financing statements, as the Agent, in its sole discretion, deems necessary or desirable to evidence and perfect its liens and security interests in the Collateral. Section 5.2 Setoff. If an Event of Default shall have occurred and is continuing, the Agent and each Bank are hereby authorized at any time and from time to time, without notice to the Borrowers (any such notice being hereby expressly waived by the Borrowers), to set off and apply any and all deposits (general, time or demand, provisional or final, other than deposits constituting trust funds belonging to third parties) at any time held and other indebtedness at any time owing by the Agent or such Bank to or for the credit or the account of any Borrower against any and all of the obligations of the Borrowers now or hereafter existing under this Agreement, the Notes, or any other Loan Document, irrespective of whether or not the Agent or such Bank shall have made any demand under this Agreement, the Notes or any other Loan Document and although such obligations may be unmatured. The rights and remedies of the Agent and each Bank hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Agent and such Bank may have. AMENDED AND RESTATED LOAN AGREEMENT - Page 26 ARTICLE VI Conditions Precedent Section 6.1 Initial Loan. The obligation of each Bank to make its initial Loan is subject to the condition precedent that the Agent shall have received on or before the day of such Loan of all of the following, each dated (unless otherwise indicated) the date hereof, in form and substance satisfactory to the Agent: (a) Resolutions. Resolutions of the Board of Directors of Castle, Exploration, each General Partner and each Limited Partner certified by its Secretary or an Assistant Secretary which authorize the execution, delivery, and performance by such Person (and in the case of each General Partner, the relevant Borrower) of the Loan Documents to which such Person is or is to be a party; (b) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of Castle, Exploration, each General Partner and each Limited Partner certifying the names of the officers of such Person authorized to sign each of the Loan Documents to which such Person (or the relevant Borrower) is or is to be a party (including the certificates contemplated herein) together with specimen signatures of such officers; (c) Articles of Incorporation. The articles of incorporation of Castle, Exploration, each General Partner and each Limited Partner certified by the Secretary or Assistant Secretary of each such Person; (d) Bylaws. The bylaws of Castle, Exploration, each General Partner and each Limited Partner certified by the Secretary or an Assistant Secretary of such Person; (e) Governmental Certificates. Certificates of (i) the appropriate government officials of the state of incorporation of Castle, Exploration, each General Partner and each Limited Partner as to the existence and good standing of such Person, and (ii) certificates of existence of each Borrower (other than Exploration) in the State of Texas, certified by the Secretary of State of Texas, each dated within ten (10) days prior to the date of the initial Loan; (f) Certificates of Limited Partnership. Copies of each Borrower's (other than Exploration) Certificate of Limited Partnership certified by the Secretary of State of the State of Texas, dated within ten (10) days prior to the date of the initial Loan; (g) Revolving Credit Notes. The Revolving Credit Notes executed by the Borrowers; (h) Term Notes. The Term Notes executed by the Borrowers; AMENDED AND RESTATED LOAN AGREEMENT - Page 27 (i) Borrower Security Agreement. The Borrower Security Agreement executed by the Borrowers; (j) Security Agreement. The Security Agreement executed by Exploration; (k) Financing Statements. Uniform Commercial Code financing statements executed by the Borrowers, Castle, the General Partners and the Limited Partners covering the Collateral; (l) Castle Pledge Agreement. The Castle Pledge Agreement executed by Castle; (m) Stock Certificates. The original certificates evidencing the stock pledged by Castle pursuant to the Castle Pledge Agreement, together with stock powers duly executed in blank by Castle; (n) Exploration Pledge Agreement. The Exploration Pledge Agreement executed by Exploration; (o) GP Pledge Agreement. The GP Pledge Agreement executed by the General Partners; (p) LP Pledge Agreement. The LP Pledge Agreement executed by the Limited Partners; (q) Modifications. Modifications of the Deeds of Trust and such other of the Collateral Security Documents as the Agent deems necessary, executed by the respective Obligated Parties; (r) Repayment of Debt. Evidence that Borrowers shall have satisfied (or upon funding of the Term Loans will satisfy) in full all amounts owing to GE Capital; (s) Material Adverse Change. No material adverse change shall have occurred since the date of the most recent financial statements delivered by Castle to the Agent, in the financial condition, business, operations, or prospects of Castle, any Borrower, any General Partner, any Limited Partner or Lone Star or in any of their respective assets, liabilities or properties and there shall be no material threatened or pending litigation adversely affecting any of their respective property; (t) Insurance Policies. Copies or other evidence of all insurance policies required by Section 8.5; (u) UCC Searches. The results of a Uniform Commercial Code search showing all financing statements and other documents or instruments on file against Castle, the Borrowers, the General Partners and the Limited Partners in such jurisdictions as the Agent AMENDED AND RESTATED LOAN AGREEMENT - Page 28 shall determine, such searches to be as of a date no more than 10 days prior to the date of the initial Loan; (v) Lien Releases. Executed UCC-3 Termination Statements and other Lien releases that release or assign to the Agent all Liens held by holders of Debt not constituting Permitted Debt (including, without limitation, all Liens in favor of GE Capital) and all other Liens that do not constitute Permitted Liens; (w) Opinion of Counsel. A favorable opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., legal counsel to Castle, the General Partners, the Limited Partners and the Borrowers, as to the matters set forth in Exhibit "F" hereto, and such other matters as the Agent may reasonably request; (x) Engineering Report. Engineering reports updated on an annual basis acceptable to the Agent in form and substance from the Ryder Scott & Associates and Huntley and Huntley; (y) Project Documents. Each of the Project Documents shall be in full force and effect and no material default shall exist or be continuing under any Project Document; and (z) Attorneys' Fees and Expenses. Evidence that the costs, fees and expenses referred to in the Fee Letter, Section 2.6 and in Section 13.1, to the extent incurred, shall have been paid in full by the Borrowers. Section 6.2 All Loans. The obligation of each Bank to make any Loan (including the initial Loan) is subject to the following additional conditions precedent: (a) Request for Loan. The Agent shall have received, in accordance with Section 4.1, a Loan Request Form executed by an authorized officer of the Borrowers; (b) No Default. No Default shall have occurred and be continuing, or would result from such Loan; (c) Representations and Warranties. All of the representations and warranties contained in Article VII hereof and in the other Loan Documents shall be true and correct on and as of the date of such Loan with the same force and effect as if such representations and warranties had been made on and as of such date except (i) to the extent such representations and warranties relate to an earlier date, in which case they were true and correct as of such date, and (ii) as such representations and warranties are modified to give effect to transactions expressly permitted hereby; and (d) Additional Documentation. The Agent shall have received such additional approvals, opinions, or documents as the Agent or its legal counsel, Winstead Sechrest & Minick P.C., may reasonably request. AMENDED AND RESTATED LOAN AGREEMENT - Page 29 ARTICLE VII Representations and Warranties To induce the Agent and the Banks to enter into this Agreement, each Borrower, each General Partner, and Castle (collectively, the "Representing Parties") represent and warrant to the Agent and the Banks that: Section 7.1 Corporate Existence. (a) Each Borrower (other than Exploration) is a limited partnership duly organized and validly existing under the laws of the State of Texas. Exploration is a corporation duly organized and validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. Each Borrower is duly qualified to do business under the laws of each jurisdiction in which the conduct of its business or the ownership, lease or operation of its property so requires, except where failure to so qualify would not have a material adverse effect on its business, financial condition, or operations. The Certificate of Limited Partnership of each Borrower (other than Exploration) has been duly filed in the office of the Secretary of State of Texas; the Certificate of Incorporation of Exploration has been duly filed in the Office of the Secretary of State of the Commonwealth of Pennsylvania; and no other filing, recording, publishing or other act is necessary or appropriate in connection with the existence of any Borrower except those which have been duly made or performed. (b) Each General Partner is duly organized and validly existing and in good standing under the laws of Texas, is duly qualified to do business under the laws of each jurisdiction in which the conduct of its business so requires (except where the failure to so qualify would not have a material adverse effect on its business, financial conditions or operations) and has the corporate power and authority and the legal right to own and operate its property and to conduct the business in which it is currently engaged. (c) Pipeline GP is the sole general partner of Pipeline. Marketing GP is the sole general partner of Marketing. Production GP is the sole general partner of Production. Pipeline GP, Marketing GP and Production GP are engaged solely in the business of being the general partners of Pipeline, Marketing and Production, respectively, and activities incident thereto. (d) Each Limited Partner is duly organized and validly existing and in good standing under the laws of Pennsylvania, is duly qualified to do business under the law of each jurisdiction in which the conduct of its business so requires (except where the failure to so qualify would not have a material adverse effect on its business, financial conditions or operations) and has the corporate power and authority and the legal right to own and operate its property and to conduct the business in which it is currently engaged. (e) Pipeline LP is the sole limited partner of Pipeline. Marketing LP is the sole limited partner of Marketing. Production LP is the sole limited partner of Production. AMENDED AND RESTATED LOAN AGREEMENT - Page 30 Section 7.2 Financial Statements. Castle has delivered to the Agent audited consolidated financial statements (Form 10-K) of Castle and its Subsidiaries as at and for the fiscal year ended September 30, 1995, and unaudited consolidated financial statements (Form 10-Q) of Castle and its Subsidiaries for the nine month period ended June 30, 1996. Such financial statements have been prepared in accordance with GAAP, and fairly present, in all material respects, on a consolidated basis, the financial condition of Castle and its Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither Castle nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments except as scheduled or referred to or reflected in such financial statements. There has been no material adverse change in the business, condition (financial or otherwise), operations, prospects, or properties of Castle, any Borrower, any General Partner or any Limited Partner since the effective date of the most recent financial statements referred to in this Section. Section 7.3 Corporate Action; No Breach. The execution, delivery, and performance by Castle, each General Partner, each Limited Partner and each Borrower of the Loan Documents to which such Person is or may become a party and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite corporate or partnership action on the part of such Person and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent that has not been obtained under (i) the articles of incorporation or certificate of limited partnership, as the case may be, or bylaws or agreement of limited partnership, as the case may be, of such Person, (ii) any applicable law, rule, or regulation or any order, writ, injunction, or decree of any Governmental Authority or arbitrator in any way that would reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects or properties of such Person or the ability of such Person to perform its obligations under the Loan Documents, or (iii) any agreement or instrument to which such Person is a party or by which it or any of its property is bound or subject in any way that would reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects or properties of such person or the ability of such Person to perform its obligations under the Loan Documents, or (b) constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien (except as provided in Article V) upon any of the revenues or assets of any such Person in any way that would reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects or properties of such Person or the ability of such person to perform its obligations under the Loan Documents. Section 7.4 Operation of Business. Each of Castle, each General Partner, each Limited Partner and each Borrower possesses all licenses, permits, franchises, patents, copyrights, trademarks, and tradenames, or rights thereto, necessary to conduct its business substantially as now conducted and as presently proposed to be conducted, and no such Person is in violation of any valid rights of others with respect to any of the foregoing except in each case to the extent that any such failure or violation would not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects or properties of such Person or the ability of such Person to perform its obligations under the Loan Documents. AMENDED AND RESTATED LOAN AGREEMENT - Page 31 Section 7.5 Litigation and Judgments. Except as disclosed on Schedule 1 hereto, there is no action, suit, investigation, or proceeding before or by any Governmental Authority or arbitrator pending, or to the knowledge of any Representing Party, threatened against or affecting Castle, any General Partner, Limited Partner or Borrower, that would, if adversely determined, have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of such Person or the ability of any such Person to perform its obligations under the Loan Documents. There are no outstanding judgments against any such Person. Section 7.6 Rights in Properties; Liens. Castle, each General Partner, each Limited Partner and each Borrower have good and indefeasible title to or valid leasehold interests in their respective properties and assets, real and personal, including the properties, assets, and leasehold interests reflected in the financial statements described in Section 7.2, and none of the properties, assets, or leasehold interests of any such Person is subject to any Lien, except the Permitted Liens. Section 7.7 Enforceability. This Agreement constitutes, and the other Loan Documents to which Castle, any General Partner, Limited Partner or Borrower is party, when delivered, shall constitute the legal, valid, and binding obligations of such Person, enforceable against such Person in accordance with their respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditors' rights. Section 7.8 Approvals. No authorization, approval, or consent of, and no filing or registration with, any Governmental Authority or third party is or will be necessary for the execution, delivery, or performance by Castle, any General Partner, Limited Partner or Borrower of the Loan Documents to which such Person is or may become a party or for the validity or enforceability thereof, except (a) routine corporate and limited partnership filings, (b) UCC-1, UCC-3, and similar filings, (c) filings in connection with the exercise of remedies by the Banks, and (d) routine filings in connection with conducting business in the ordinary course. Section 7.9 Debt. The Borrowers have no Debt, except Permitted Debt. Section 7.10 Taxes. Each Borrower, each General Partner, each Limited Partner and Castle has filed all material tax returns (federal, state, and local) required to be filed, including all income, franchise, employment, property, and sales tax returns, and have paid all material respective liabilities for taxes, assessments, governmental charges, and other levies that are due and payable. No Representing Party knows of any pending investigation of any such Person by any taxing authority or of any pending but unassessed tax liability of any such Person. Section 7.11 Use of Proceeds; Margin Securities. No Borrower, General Partner or Limited Partner is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. AMENDED AND RESTATED LOAN AGREEMENT - Page 32 Section 7.12 ERISA. Each Borrower, each General Partner and each Limited Partner are in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan. No notice of intent to terminate a Plan has been filed, nor has any Plan been terminated. No circumstances exist which constitute grounds entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings. No Borrower, General Partner, Limited Partner or any ERISA Affiliate has completely or partially withdrawn from a Multiemployer Plan. Each Borrower, each General Partner and each Limited Partner and each ERISA Affiliate have met their minimum funding requirements under ERISA with respect to all of their Plans, and the present value of all vested benefits under each Plan do not exceed the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation date of the Plan and in accordance with ERISA. No Borrower, General Partner, Limited Partner or any ERISA Affiliate has incurred any liability to the PBGC under ERISA. Section 7.13 Disclosure. No statement, information, report, representation, or warranty made by any Representing Party in this Agreement or in any other Loan Document or furnished to the Agent or any Bank in connection with this Agreement or any transaction contemplated hereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to such Representing Party which has a material adverse effect, or which might in the future have a material adverse effect, on the business, condition (financial or otherwise), operations, prospects, or properties of such Representing Party that has not been disclosed in writing to the Agent and the Banks. Section 7.14 Subsidiaries. Castle has no Subsidiaries other than those listed on Schedule 3 hereto, and Schedule 3 sets forth the jurisdiction of incorporation of each Subsidiary and the percentage of the Borrower's ownership of the outstanding voting stock of each Subsidiary. All of the outstanding capital stock of each Subsidiary has been validly issued, is fully paid, and is nonassessable. Section 7.15 Agreements. Neither Castle, any Borrower, any General Partner nor any Limited Partner is a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction which would reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of such Persons, or the ability of such Person to pay and perform its obligations under the Loan Documents to which it is a party. Neither Castle, any Borrower, any General Partner nor any Limited Partner is in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party. Section 7.16 Compliance with Laws. Neither Castle, any Borrower, any General Partner nor any Limited Partner is in violation in any material respect of any law, rule, regulation, order, or decree of any Governmental Authority or arbitrator. AMENDED AND RESTATED LOAN AGREEMENT - Page 33 Section 7.17 Investment Company Act. Neither Castle, any Borrower, any General Partner nor any Limited Partner is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 7.18 Public Utility Holding Company Act. None of the Borrowers, the General Partners nor the Limited Partners is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.19 Environmental Matters. Except as disclosed on Schedule 4 hereto: (a) The Borrowers, the General Partners, the Limited Partners and Castle, and all of their respective properties, assets, and operations are in compliance in all material respects with all Environmental Laws. No Representing Party is aware of, nor has any Representing Party received notice of, any past, present, or future conditions, events, activities, practices, or incidents which may interfere with or prevent the compliance or continued compliance of any such Person with all Environmental Laws; (b) To the best of such Representing Party's knowledge, the Borrowers, the General Partners, the Limited Partners and Castle have obtained all permits, licenses, and authorizations that are required under applicable Environmental Laws, and have received no notice that any such permit is not in good standing, or that any such Person is not in compliance with all of the terms and conditions of such permits; (c) To the best of such Representing Party's knowledge, no Hazardous Materials exist on, about, or within or have been used, generated, stored, transported, disposed of on, or Released from any of the Mortgaged Properties except in amounts that would not violate applicable law; (d) None of the Borrowers nor any of their respective currently or previously owned or leased properties or operations is subject to any outstanding or, to the best of such Borrower's knowledge, threatened order from or agreement with any Governmental Authority or other Person or subject to any judicial or docketed administrative proceeding with respect to (i) failure to comply with Environmental Laws, (ii) Remedial Action, or (iii) any Environmental Liabilities arising from a Release or threatened Release; (e) To the best of such Representing Party's knowledge, there are no conditions or circumstances associated with the currently or previously owned or leased properties or operations of any Borrower that could reasonably be expected to give rise to any Environmental Liabilities; (f) None of the Borrowers is a treatment, storage, or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., regulations thereunder or any comparable provision of state law. Each of the Borrowers is AMENDED AND RESTATED LOAN AGREEMENT - Page 34 in substantial compliance with all applicable financial responsibility requirements of all Environmental Laws; and (g) No Borrower has received any notice that a Lien arising under any Environmental Law has attached to any property or revenues of such Borrower. Section 7.20 Pipeline Contracts. Pipeline, with respect to the Pipeline Assets, has fulfilled all requirements for filings, certificates, disclosures of parties in interest, and other similar matters contained in (or otherwise applicable thereto by law, rule or regulation) any Basic Document or other document granting or governing the operation or maintenance of such interests and assets, and Pipeline is qualified to own, hold and exercise such rights under such lease unit agreements, Basic Documents or other documents. Section 7.21 No Obligations. Except for obligations pursuant to the Project Documents, no Borrower has any obligation or Debt owing to MGTF or any other MGC Affiliate except in connection with the termination by the Borrowers of certain management and service agreements to which MGTF, MGC or an Affiliate thereof is a party. Section 7.22 Prepayment. Marketing has fully and irrevocably prepaid a quantity of Natural Gas (a) from Production pursuant to the Production $2.90 Contract equal to the aggregate sum of the Tier II Minuends (as defined in the Supply Agreement) for each day in the period from August 1, 1993 through May 31, 1999, inclusive, as set forth in Exhibit B to the Supply Agreement, and (b) from MGNG pursuant to the Supply Agreement equal to all Tier II and Tier III Gas (as defined therein) to be delivered thereunder. Section 7.23 Gas Contracts. (a) Except pursuant to the Supply Agreement and the OWI Contracts, Marketing is not a party to any contract providing for the purchase of gas by it nor is it otherwise obligated to purchase gas from any other source. (b) Marketing has no obligation to purchase any specified minimum quantity of gas pursuant to any OWI Contract, nor does it have any other obligations under any OWI Contract other than the obligation to pay for any gas actually taken thereunder in the case of the Owner OWI Contracts, at a price of $2.90 per MMBtu fixed for the life of such contract and (ii) in the case of the Production $2.90 Contract, at a price of $2.90 per MMBtu fixed for the life of such contract, such price having been irrevocably prepaid; provided, however, that Marketing is not permitted to discriminate against producers within any field from which it purchases Natural Gas or unjustly and unreasonably discriminate between fields. Section 7.24 FERC Jurisdiction. (a) None of the Assets, nor any portion thereof, is subject to the jurisdiction of FERC. AMENDED AND RESTATED LOAN AGREEMENT - Page 35 (b) No Representing Party is aware of any assertion by any Governmental Authority or any other Person, or any proceeding asserting, that the Pipeline Assets, or any portion thereof, are subject to the jurisdiction of FERC. (c) No transportation of Natural Gas by Pipeline or Marketing constitutes transportation of Natural Gas in interstate commerce subject to the jurisdiction of FERC under the NGA. (d) No Natural Gas sales by Marketing, including the gas sold to Lone Star under the Lone Star Contract, or by Production or Exploration are sales in interstate commerce for resale subject to the jurisdiction of the FERC under the NGA. (e) The Natural Gas which MGNG or any Affiliate of Marketing purchases and subsequently sells to Marketing for resale to Lone Star is purchased by MGNG or such Affiliate only in sales that are not a sale in interstate commerce for resale subject to FERC jurisdiction under the NGA and that sales of such gas by MGNG or such Affiliate to Marketing do not constitute a sale in interstate commerce for resale subject to FERC jurisdiction under the NGA. (f) The purchase of gas by Marketing from any other source does not constitute a sale in interstate commerce for resale subject to FERC jurisdiction under the NGA. Section 7.25 Lone Star Contract. As of the date hereof, Lone Star has not made a payment under the Lone Star Contract during the current Operating Year in respect of any Natural Gas which it has not already taken, nor does it have any outstanding credit thereunder permitting it to take any natural gas in the future without paying for the same. ARTICLE VIII Positive Covenants Each Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder, such Borrower will perform and observe the following positive covenants: Section 8.1 Reporting Requirements. The Borrowers will furnish to the Agent and each Bank: (a) Annual Financial Statements. As soon as available, but in any event within 105 days (or, in the case of Enserch, as soon as publicly available) after the end of each fiscal year of each Borrower and Castle (each a "Reporting Party"), a copy of the balance sheet of such Reporting Party as of the end of such fiscal year and the related statements of income, retained earnings (or partners' capital) and changes in cash flows of such Reporting Party (which, in the case of Pipeline, Marketing and Production, may be combined) for such fiscal AMENDED AND RESTATED LOAN AGREEMENT - Page 36 year, setting forth in each case in comparative form the figures for the previous fiscal year, certified without qualification or exception as to the scope of its audit by independent public accountants of national standing; and (b) Quarterly Financial Statements. As soon as available, but in any event within 45 days after the end of each of the first three (3) quarterly periods of each fiscal year of each Reporting Party, the unaudited balance sheet of such Reporting Party as of the end of such quarterly period and the related unaudited statements of income and retained earnings (or partners' capital) and changes in cash flows of such Reporting Party for such quarterly period and for the portion of the fiscal year then ended, setting forth in each case in comparative form the figures for the previous period, certified by a Responsible Officer of such Reporting Party as being fairly presented in all material respects (subject to normal audit adjustments); All such financial statements (other than the financial statements of Enserch, which shall be the financial statements in the form filed by Enserch on Form 10-K with the Securities and Exchange Commission) shall be fairly presented in all material respects as to the matters contained therein and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except for changes approved or required by the independent public accountants certifying such statements and disclosed therein). (c) Certificate of No Default. Within 45 days after the end of each fiscal quarter, a certificate of an authorized officer of each Borrower (i) stating that to the best of such officer's knowledge, no Default has occurred and is continuing, or if a Default has occurred and is continuing, a statement as to the nature thereof and the action that is proposed to be taken with respect thereto, and (ii) showing in reasonable detail the calculations demonstrating compliance with Article X; (d) Management Letters. Promptly upon receipt thereof, a copy of any management letter or written report submitted to any Borrower by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or any Subsidiary; (e) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any Governmental Authority or arbitrator affecting any Borrower which, if determined adversely to such Borrower, could reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of such Borrower; (f) Annual Reserve Report. On or before November 15th of each fiscal year at the Borrowers' expense, an annual report in form and substance satisfactory to the Agent prepared by an independent third party engineering firm acceptable to the Agent and the Banks dated as of September 30th of the same calendar year, reflecting the quantity of existing proven and producing oil and gas reserves attributable to the Mortgaged Properties AMENDED AND RESTATED LOAN AGREEMENT - Page 37 and any New Properties since the last such annual report submitted to the Agent and the Banks, a projection of the rate of production and net operating income with respect thereto as of such date, and such other information as is customarily obtained from and provided in such reports, each as prepared in accordance with the SEC Case. (g) Notice of Default. As soon as possible and in any event within five (5) days after the occurrence of each Default, a written notice setting forth the details of such Default and the action that the Borrowers have taken and propose to take with respect thereto; (h) ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which any Borrower files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon as possible and in any event within 5 days after such Borrower knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC or such Borrower has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, a certificate of the chief financial officer of such Borrower setting forth the details as to such Reportable Event or Prohibited Transaction or Plan termination and the action that such Borrower proposes to take with respect thereto; (i) Reports to Other Creditors. Promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to the Agent and the Banks pursuant to any other clause of this Section; (j) Notice of Material Adverse Change. As soon as possible and in any event within 5 days after the occurrence thereof, written notice of any matter that could have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of Castle, any General Partner, Limited Partner or Borrower, other than matters affecting the Natural Gas marketing business or the oil and gas industry generally; (k) Proxy Statements, Etc. As soon as available and in any event within 10 days of sending or filing with the Securities and Exchange Commission or successor agency, one copy of each financial statement, report, press release, notice or proxy statement sent by Castle to its stockholders generally as published by Castle and one copy of each regular, periodic or special report, form (including, without limitation, all 10-K and 10-Q filings), registration statement, or prospectus filed by Castle with any securities exchange or the Securities and Exchange Commission or any successor agency; (l) Operating Reports. As soon as practicable, but in any event within 45 days after the end of each calendar month, an operating report of each Borrower as at the end of such period and for the period of such Fiscal Year then ended, setting forth the revenues of such Borrower received during such month and the expenses and extraordinary items disbursed during such month and containing, (i) with respect to Pipeline, a summary AMENDED AND RESTATED LOAN AGREEMENT - Page 38 transportation statement, (ii) with respect to Marketing, a summary of Natural Gas sales and purchases, and such other information as shall be agreed to by the Agent and the Borrowers setting forth in comparative form the corresponding figures for the corresponding periods in the preceding Fiscal Year (if applicable) and the corresponding figures for the corresponding periods contained in the current operating budget of the Borrowers, accompanied by a certificate of a responsible officer of such Borrower, which certificate shall state that such report is true and correct to the best of his knowledge, and (iii) with respect to Production a Summary Operating Statement identifying the most recent information available regarding the gross volumes of Hydrocarbons produced from the Mortgaged Properties and a statement of revenues and expenses attributable to the Mortgaged properties for such calendar month then ended, such reports to be in form and substance reasonably satisfactory to the Agent; (m) Diminution of Natural Gas. Promptly after any material diminution in (other than ordinary month to month variations of volume), or interruption of, the supply of Natural Gas to Marketing, or the flow of Natural Gas through the Pipeline Assets, a notice describing the circumstances of such diminution or interruption; and (n) Lone Star Contract. As soon as practicable, but in any event within 30 days after the end of each Fiscal Year (or, in the event that the Lone Star Contract terminates prior to January 31 in any year, within 30 days from the date of such termination), Marketing shall deliver to the Agent a certificate (together with such back-up information as may be reasonably requested to confirm the information contained in such certificate) of a responsible officer of Marketing setting forth the quantity of gas that Lone Star purchased during such Operating Year (or such shorter period if applicable) under the Lone Star Contract together with an itemized statement setting forth whether Lone Star purchased the quantity of gas required to be purchased under the Lone Star Contract for such period. In the event that Lone Star shall fail to purchase the quantity of gas required to be purchased under the Lone Star Contract for any Operating Year (or shorter period if applicable) then, simultaneously with the delivery of the certificate referred to in this paragraph (m), Marketing shall notify Lone Star in writing (with a copy to the Agent) of such failure in accordance with paragraph 7.2 of the Lone Star Contract. (o) General Information. Promptly, such other information concerning the Borrowers, the General Partners, the Limited Partners or Castle as the Agent or any Bank may from time to time reasonably request. Section 8.2 Maintenance of Existence; Conduct of Business. Each Borrower will preserve and maintain its existence and all of its leases, privileges, licenses, permits, franchises, qualifications, and rights that are necessary or desirable in such Borrower's reasonable business judgment, and in the ordinary conduct of its business. Each Borrower will conduct its business in an orderly and efficient manner in accordance with good business practices. Section 8.3 Maintenance of Properties. Each Borrower will maintain, keep, and preserve all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business AMENDED AND RESTATED LOAN AGREEMENT - Page 39 in good working order and condition, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted. Section 8.4 Taxes and Claims. Each Borrower will pay or discharge at or before maturity or before becoming delinquent (a) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its property, and (b) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its property; provided, however, that the Borrower shall not be required to pay or discharge any tax, levy, assessment, or governmental charge which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves have been established. Section 8.5 Insurance. Each Borrower will maintain, and will cause each of the Subsidiaries to maintain, insurance with financially sound and reputable insurance companies in such amounts and covering such risks as is usually carried by Persons engaged in similar businesses and owning similar properties in the same general areas in which such Borrower operates, provided that in any event such Borrower will maintain workmen's compensation insurance, property insurance, $25,000,000 in comprehensive general liability insurance, products liability insurance, and business interruption insurance reasonably satisfactory to the Agent and the Banks. Each insurance policy covering Collateral shall provide that such policy will not be cancelled or reduced without 30 days' prior written notice to the Agent. Each Borrower will cause each insurance policy covering Collateral to name the Agent as additional assured and loss payee for the benefit of itself and the Banks. Section 8.6 Inspection Rights. The Borrowers will permit representatives of the Agent and each Bank to examine, copy, and make extracts from its books and records, to visit and inspect its properties during normal business hours (unless a Default or an Event of Default has occurred and is then continuing), and to discuss its business, operations, and financial condition with its officers and independent certified public accountants. Section 8.7 Keeping Books and Records. Each Borrower will maintain proper books of record and account in which entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. Section 8.8 Compliance with Laws. Each Borrower will comply in all material respects with all applicable laws, rules, regulations, orders, and decrees of any Governmental Authority or arbitrator. Section 8.9 Compliance with Agreements. Each Borrower will comply in all material respects with all agreements, contracts, and instruments binding on it or affecting its properties or business. Section 8.10 Further Assurances. Each Borrower will execute and deliver such further agreements and instruments and take such further action as may be requested by the Agent to carry out the provisions and purposes of this Agreement and the other Loan Documents and, subject to AMENDED AND RESTATED LOAN AGREEMENT - Page 40 Section 5.1, to create, preserve, and perfect the Liens of the Agent for the benefit of itself and the Banks in the Collateral. Section 8.11 ERISA. Each Borrower will comply, and will cause each Subsidiary to comply, with all minimum funding requirements, and all other material requirements, of ERISA, if applicable, so as not to give rise to any liability thereunder. Section 8.12 [Intentionally omitted.] Section 8.13 Pledge of Additional Contracts; Future Mortgages. (a) Upon entering into any Additional Contract, each Borrower will use reasonable efforts to obtain any required consent to the pledge as collateral by such Borrower to the Agent of such Additional Contract (as security for the Obligations). Such Borrower shall pledge such Additional Contract to the Agent as collateral promptly upon receipt of such required consent. (b) Prior to January 1, 1997 and continuing for each year thereafter so long as the Obligations are outstanding, each Borrower shall notify the Agent of the acquisition of any property or leasehold or other interest in real property during the preceding year valued at the lower of cost or fair market value in excess of $100,000, and shall execute, deliver, record and file instruments and documents (including, without limitation, a supplement to the applicable Deed of Trust and the Borrower Security Agreement) as the Agent shall request in order to create a perfected Lien thereon in favor of the Agent. Section 8.14 FERC Jurisdiction. (a) Marketing shall sell all gas, including all gas sold to Lone Star under the Lone Star Contract, only in sales that do not constitute a sale in interstate commerce for resale subject to the jurisdiction of the FERC under the NGA. (b) Marketing shall purchase all of its gas, including from MGNG, only in sales that do not constitute a sale in interstate commerce for resale subject to the jurisdiction of the FERC under the NGA. Section 8.15 Cover Damages. With respect to any Delivery Default (as defined in the Supply Agreement), Marketing shall, upon consulting with the Banks, obtain Cover Supplies (as defined in the Supply Agreement). Section 8.16 Proceeds from the Production Payment and Receivables from Lone Star Contract. All proceeds received (i) by Exploration from the Production Payment, and (ii) by Marketing under the Lone Star Contract, shall be payable directly to a lockbox under the control of the Agent which shall then be deposited by the Agent into a lockbox account in accordance with the terms of the Lockbox Operating Agreement. Unless an Event of Default has occurred and is AMENDED AND RESTATED LOAN AGREEMENT - Page 41 continuing, all such amounts so deposited shall be transferred to such Borrower's operating account maintained with the Agent within two Business Days of the deposit thereof in the lockbox account. If an Event of Default has occurred and is continuing, the Agent may apply all such amounts on deposit in the lockbox account or the operating accounts to the Obligations pursuant to the terms hereof. Exploration and Marketing have each executed and delivered notices to the applicable Persons with respect to the Production Payment and the Lone Star Contract to effectuate the direct payment thereunder to the lockbox established pursuant to the Lockbox Agreement. ARTICLE IX Negative Covenants Each Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder, such Borrower will perform and observe the following negative covenants: Section 9.1 Debt. Such Borrower will not incur, create, assume, or permit to exist any Debt exceeding $100,000 in the aggregate, except the following (herein referred to as "Permitted Debt"): (a) Debt to the Agent and the Banks pursuant to the Loan Documents; (b) Net oil and gas balancing positions arising in the ordinary course of business; (c) Debt to Castle, the General Partners, the Limited Partners and other Borrowers; (d) Debt arising under oil and/or gas hedging agreements; (e) Debt incurred in connection with or necessarily incidental to commitments for the purchase or sale of, or the transportation or distribution of, products derived from oil and/or gas producing properties; and (f) Existing Debt described on Schedule 2 hereto. Section 9.2 Limitation on Liens. Such Borrower will not incur, create, assume, or permit to exist any Lien upon any of its property, assets, or revenues, whether now owned or hereafter acquired, except the following (herein referred to as "Permitted Liens"): (a) Liens on the property described on Schedule 5 hereto to secure Permitted Debt; (b) Liens in favor of the Agent for the benefit of itself and the Banks; AMENDED AND RESTATED LOAN AGREEMENT - Page 42 (c) Encumbrances consisting of minor easements, zoning restrictions, or other restrictions on the use of real property that do not (individually or in the aggregate) materially affect the value of the assets encumbered thereby or materially impair the ability of such Borrower to use such assets in its business, and none of which encumbrances is violated in any material respect by existing or proposed structures or land use; (d) Liens for taxes, assessments, or other governmental charges which are not delinquent or which are being contested in good faith and for which adequate reserves have been established; (e) Liens of mechanics, materialmen, warehousemen, carriers, or other similar statutory Liens securing obligations that are incurred in the ordinary course of business and are not yet due or are being contested in good faith; (f) Liens resulting from good faith deposits to secure payments of workmen's compensation or other social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, contracts (other than for payment of Debt), or leases made in the ordinary course of business; (g) Liens created under pooling orders, operating agreements, and similar agreements relating to the Mortgaged Properties with respect to obligations of a Borrower or Castle which are not delinquent or are being contested in good faith, by appropriate proceedings diligently pursued and for which adequate reserves have been established and other Liens incidental to the conduct of its business or the ownership of its property and assets which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of his business; (h) Defects or irregularities of title arising from events or transactions which have been barred by limitations or that are acceptable to a reasonable and prudent oil and gas operator; (i) Royalties, overriding royalties, production payments and other burdens relating to the Mortgaged Properties that do not cause a Borrower or Castle to have an interest in production under any oil and gas lease, or unit to which such lease may be contributed, which is materially less than the interest in production from the Mortgaged Properties as specified in the Deeds of Trust; (j) Liens on pipelines or pipeline facilities that arise by operation of law; (k) Liens under the Marketing Partnership Agreement, Pipeline Partnership Agreement, and Production Partnership Agreement, including all rights of first refusal thereunder; and (l) Liens securing oil and/or gas hedging agreements. AMENDED AND RESTATED LOAN AGREEMENT - Page 43 Section 9.3 Mergers, Etc. Such Borrower will not become a party to a merger or consolidation, or wind-up, dissolve, or liquidate itself. Section 9.4 Sale of Partnership Interests. Such Borrower shall not sell (other than to an Affiliate) any partnership interest or create any partnership interest not in existence on the date hereof. Section 9.5 Investments. The Borrowers will not make any advance, loan, extension of credit, or capital contribution to or investment in, or purchase or own any stock, bonds, notes, debentures, or other securities of, any Person in excess of $100,000 in the aggregate at any one time outstanding, except: (a) readily marketable direct obligations of the United States of America or any agency thereof with maturities of one year or less from the date of acquisition; (b) fully insured certificates of deposit with maturities of one year or less from the date of acquisition issued by any commercial bank operating in the United States of America having capital and surplus in excess of $50,000,000; (c) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest rating categories of Standard & Poor's Rating Services or Moody's Investors Service, Inc.; (d) loans to Castle as contemplated by Sections 2.5 and 3.6 to repurchase outstanding shares of common stock of Castle; (e) loans to Castle as permitted by Sections 2.5, 3.6 and 9.18 and to any of the other Borrowers; (f) loans or other extensions of credit to customers in the ordinary course of business; (g) oil and/or gas hedging agreements; (h) investments in the Subsidiaries and partnership interests owned on the Closing Date; (i) investments in deposits available for withdrawal on demand with any commercial bank; (j) repurchase and reverse repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a); and AMENDED AND RESTATED LOAN AGREEMENT - Page 44 (k) investments and expenditures made in the ordinary course of, and of a nature that is or shall have become customary in, the oil and gas business as a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, storing, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit one to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of oil and gas business jointly with third parties, including, without limitation, (i) ownership interests in oil and gas properties or gathering, transportation, processing, storage or related systems and (ii) investments and expenditures in the form of or pursuant to operating agreements, process agreements, farm-in agreements, farm-out agreements, development agreements, area of mutual interest agreements, unitization agreements, pooling arrangements, join bidding agreements, service contracts, joint venture agreements, partnership agreements, limited liability company agreements, subscription agreements, stock purchase agreements and other similar agreements with third parties. Section 9.6 Transactions With Affiliates. Such Borrower will not enter into any transaction (other than with another Borrower), including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate of the Borrower, except pursuant to the reasonable requirements of such Borrower's business and upon fair and reasonable terms no less favorable to such Borrower than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate of such Borrower. Section 9.7 Disposition of Assets. Such Borrower will not without the prior written consent of the Required Banks, sell, lease, assign, transfer, or otherwise dispose of any of its assets except dispositions in the ordinary course of business. Section 9.8 Sale and Leaseback. Such Borrower will not enter into any arrangement with any Person pursuant to which it leases from such Person real or personal property that has been or is to be sold or transferred, directly or indirectly, by it to such Person. Section 9.9 Prepayment of Debt. Such Borrower will not prepay any Debt, except the Obligations and Permitted Debt, excluding Permitted Debt set forth on Schedule 2. Section 9.10 Nature of Business. Such Borrower will not, without the prior written consent of the Required Banks, engage in any business other than the businesses in which they are engaged on the date hereof. The General Partners and the Limited Partners shall not engage in any business other than being the general partner or the limited partner, as the case may be, of its respective Borrower. Section 9.11 Environmental Protection. Such Borrower will not (a) use (or permit any tenant to use) any of their respective properties or assets for the handling, processing, storage, transportation, or disposal of any Hazardous Material except in amounts that will not violate applicable law, (b) generate any Hazardous Material in violation of applicable law, (c) conduct any activity that is likely to cause a Release or threatened Release of any Hazardous Material in violation AMENDED AND RESTATED LOAN AGREEMENT - Page 45 of applicable law, or (d) otherwise conduct any activity or use any of their respective properties or assets in any manner that is likely to violate any Environmental Law or create any Environmental Liabilities for which such Borrower would be responsible except for any such violations or Environmental Liabilities that would not individually or in the aggregate have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of such Borrower. Section 9.12 Accounting. Such Borrower will not change its fiscal year or make any change (a) in accounting treatment or reporting practices, except as required or permitted by GAAP and disclosed to the Agent, or (b) in tax reporting treatment, except as required or permitted by law and disclosed to the Agent. Section 9.13 Executive Offices. Such Borrower shall not transfer its executive offices or transfer its registered office in the State of Texas (if any) or change its corporate or partnership name or keep Collateral at any locations other than those at which the same are presently kept or maintained. Section 9.14 Fiscal Year. Such Borrower shall not change its fiscal year. Section 9.15 FERC Jurisdiction. Such Borrower shall not take any action, or omit to take any action, which will subject any Borrower, the Pipeline Assets, or any portion thereof, to the jurisdiction of the FERC under the NGA. Section 9.16 Lone Star Contract. Without the consent of Required Banks, Marketing shall not seek to redetermine the price or modify any other material term or provision under the Lone Star Contract or the Supply Agreement. Section 9.17 Additional Contracts. Without the prior consent of Required Banks, such Borrower will not enter into any Additional Contract. Section 9.18 Distribution, Etc. Without the prior written consent of Required Banks, such Borrower shall not make any distributions to its General Partner, to its Limited Partner or to any other Person in respect of any partnership interest in such Borrower or any payments of management fees to its General Partner or its Limited Partner, whether in cash, securities or other property, or redeem, purchase or otherwise acquire any interest of its General Partner or its Limited Partner, or permit its General Partner or its Limited Partner to withdraw any capital from such Borrower; provided, however, so long as no Event of Default then exists or would result therefrom, the Borrowers shall have the right to make monthly distributions to the General Partners, Limited Partners or parent corporation, as the case may be, in an aggregate amount not to exceed 25% of the Borrowers' Net Cash Flow on a combined basis as of the end of any such month for the preceding four quarter period then ended such rolling four quarter period shall commence as of January 1, 1997. AMENDED AND RESTATED LOAN AGREEMENT - Page 46 ARTICLE X Financial Covenants The Borrowers or Castle, as the case may be, covenant and agree that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder, the Borrowers will perform and observe the following financial covenants: Section 10.1 Consolidated Tangible Net Worth. Castle will maintain Consolidated Tangible Net Worth in an amount not less than $45,000,000, plus 50% of positive Net Income of Castle, plus 100% of the net proceeds obtained from the issuance of equity securities by Castle, calculated quarterly (commencing December 31, 1996) as of the last day of each March, June, September and December. Notwithstanding the foregoing, the minimum required Consolidated Tangible Net Worth shall be reduced (a) up to $11,000,000 in connection with the repurchase of Castle common stock, (b) up to an additional $10,000,000 in connection with any required write-down of the note receivable from MG as determined pursuant to binding arbitration, and (c) up to an additional $5,400,000 in connection with any writedown of the note receivable from the purchasers of the Indian Refinery. Section 10.2 Cash Flow Coverage Ratio. Castle will not permit its Cash Flow Coverage Ratio to be less than 1.25 to 1.0, calculated quarterly as of the last day of each March, June, September and December for the four fiscal quarters of Castle then ended. Section 10.3 Net Working Capital. Each Borrower will maintain positive net working capital as of the last day of each March, June, September and December . For the purposes hereof, net working capital shall mean the amount by which consolidated current assets exceed consolidated current liabilities, less the current maturities of long-term debt, as determined in accordance with GAAP. ARTICLE XI Default Section 11.1 Events of Default. Each of the following shall be deemed an "Event of Default": (a) Any principal of or interest on any Loan shall not be paid when due; or any fee or any other amount payable hereunder, under any Note or under any other Loan Document shall not be paid when due and shall remain unpaid for five or more days. (b) Any representation or warranty made or deemed made by any Borrower or any Obligated Party (or any of their respective officers) in any Loan Document or in any certificate, report, notice, or financial statement furnished at any time in connection with this AMENDED AND RESTATED LOAN AGREEMENT - Page 47 Agreement shall be false, misleading, or erroneous in any material respect when made or deemed to have been made. (c) Any Borrower, General Partner or Castle shall fail to perform, observe, or comply with any covenant, agreement, or term contained in Section 8.1(e), (f), (h) or (i), Article IX, or Article X of this Agreement; or any Borrower or any Obligated Party shall fail to perform, observe, or comply with any other covenant, agreement, or term contained in this Agreement or any other Loan Document (other than covenants to pay the Obligations) and such failure shall continue for a period of 30 days after notice thereof to the Borrowers by the Agent or any Bank (through the Agent). (d) Any Borrower, any General Partner, Limited Partner or Castle shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its property or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing. (e) An involuntary proceeding shall be commenced against any Borrower, any General Partner, Limited Partner or Castle seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of sixty (60) days. (f) Any Borrower, any General Partner, Limited Partner or Castle shall fail to discharge within a period of 30 days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess of $100,000 against any of its assets or properties. (g) A final judgment or judgments for the payment of money in excess of $100,000 in the aggregate shall be rendered by a court or courts against any Borrower, any General Partner, Limited Partner or Castle and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and such Borrower, General Partner, Limited Partner or Castle shall not, within said period of thirty (30) days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. (h) The Borrower, any General Partner, Limited Partner or Castle shall fail to pay when due any principal of or interest on any Debt (other than the Obligations) aggregating AMENDED AND RESTATED LOAN AGREEMENT - Page 48 $100,000 or more, or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment. (i) This Agreement or any other Basic Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by any Borrower, any Obligated Party, any other party thereto or any of their respective shareholders, or any Borrower, any Obligated Party or, any other party thereto shall deny that it has any further liability or obligation under any of the Basic Documents, or any lien or security interest created by the Loan Documents shall for any reason (other than any Bank's gross negligence or willful misconduct) cease to be a valid, first priority perfected security interest in and lien upon any of the Collateral purported to be covered thereby, subject only to the Permitted Liens. (j) Any of the following events shall occur or exist with respect to any Borrower or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Plan, or the institution by the PBGC of any such proceedings; or (v) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization, insolvency, or termination of any Multiemployer Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of Required Banks subject any Borrower to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed $100,000. (k) Any Borrower or any of their material properties, revenues, and assets, shall become the subject of an order of forfeiture, seizure, or divestiture (whether under RICO or otherwise) and the same shall not have been discharged (or provisions shall not be made for such discharge) within 30 days from the date of entry thereof. (l) Lone Star or MGNG shall fail to perform or observe any of its material covenants or obligations contained in any of the Basic Documents to which it is a party within the grace period, if any, provided for in such Basic Documents which failure shall continue unremedied for a period of 30 days after notice by the Agent to the Borrowers. (m) Any General Partner shall at any time cease to be the General Partner of the Borrower of which it is general partner or, shall transfer, sell, assign, mortgage, pledge or AMENDED AND RESTATED LOAN AGREEMENT - Page 49 otherwise dispose of its equity interest in such Borrower except in accordance with the Collateral Security Documents or with the Required Banks' prior written consent. (n) Castle shall, at any time, transfer, sell, assign, mortgage, pledge or otherwise dispose of its equity interests in any General Partner or any Limited Partner, except (i) to any Borrower, General Partner or Limited Partner, (ii) in accordance with the Collateral Security Documents, or (iii) with the Required Banks' prior written consent. Section 11.2 Remedies. If any Event of Default shall occur and be continuing, the Agent may (and if directed by Required Banks, shall) do any one or more of the following: (a) Acceleration. Declare all outstanding principal of and accrued and unpaid interest on the Notes and all other obligations of the Borrowers under the Loan Documents immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest, or other formalities of any kind, all of which are hereby expressly waived by the Borrowers. (b) Termination of Commitments. Terminate the Commitments hereunder without notice to the Borrowers. (c) Judgment. Reduce any claim to judgment. (d) Foreclosure. Foreclose or otherwise enforce any Lien granted to the Agent for the benefit of itself and the Banks to secure payment and performance of the Obligations in accordance with the terms of the Loan Documents. (e) Rights. Exercise any and all rights and remedies afforded by applicable laws, by any of the Loan Documents, by equity, or otherwise. Provided, however, that upon the occurrence of an Event of Default under Subsection (d) or (e) of Section 11.1, the Commitments of all of the Banks shall automatically terminate, and the outstanding principal of and accrued and unpaid interest on the Notes and all other obligations of the Borrowers under the Loan Documents shall thereupon become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest, or other formalities of any kind, all of which are hereby expressly waived by the Borrowers. Section 11.3 Performance by the Agent. If any Borrower shall fail to perform any covenant or agreement in accordance with the terms of the Loan Documents, the Agent may, at the direction of Required Banks, perform or attempt to perform such covenant or agreement on behalf of such Borrower. In such event, the Borrowers shall, at the request of the Agent, promptly pay any amount expended by the Agent or the Banks in connection with such performance or attempted performance to the Agent at the Principal Office, together with interest thereon at the lesser of the Applicable Rate and the Maximum Rate prior to demand and at the lesser of the Default Rate and the Maximum Rate AMENDED AND RESTATED LOAN AGREEMENT - Page 50 subsequent to demand from and including the date of such expenditure to but excluding the date such expenditure is paid in full. Notwithstanding the foregoing, it is expressly agreed that neither the Agent nor any Bank shall have any liability or responsibility for the performance of any obligation of the Borrowers under this Agreement or any of the other Loan Documents. ARTICLE XII The Agent Section 12.1 Appointment, Powers and Immunities. In order to expedite the various transactions contemplated by this agreement, the Banks hereby irrevocably appoint and authorize CNB to act as their Agent hereunder and under each of the other Loan Documents. CNB consents to such appointment and agrees to perform the duties of the Agent as specified herein. The Banks authorize and direct the Agent to take such action in their name and on their behalf under the terms and provisions of the Loan Documents and to exercise such rights and powers thereunder as are specifically delegated to or required of the Agent for the Banks, together with such rights and powers as are reasonably incidental thereto. The Agent is hereby expressly authorized to act as the Agent on behalf of itself and the other Banks: (a) To receive on behalf of each of the Banks any payment of principal, interest, fees or other amounts paid pursuant to this Agreement and the Notes and to distribute to each Bank its share of all payments so received as provided in this Agreement; (b) To receive all documents and items to be furnished under the Loan Documents; (c) To act as nominee for and on behalf of the Banks in and under the Loan Documents; (d) To arrange for the means whereby the funds of the Banks are to be made available to the Borrowers; (e) To distribute to the Banks information, requests, notices, payments, prepayments, documents and other items received from the Borrowers, the other Obligated Parties, and other Persons; (f) To execute and deliver to the Borrowers, the other Obligated Parties, and other Persons, all requests, demands, approvals, notices, and consents received from the Banks; (g) To the extent permitted by the Loan Documents, to exercise on behalf of each Bank all rights and remedies of Banks upon the occurrence of any Event of Default; AMENDED AND RESTATED LOAN AGREEMENT - Page 51 (h) To accept, execute, and deliver the Collateral Security Documents and any other security documents as the secured party, including, without limitation all UCC financing statements; and (i) To take such other actions as may be requested by Required Banks. Neither the Agent nor any of its Affiliates, officers, directors, employees, attorneys, or agents shall be liable for any action taken or omitted to be taken by any of them hereunder or otherwise in connection with this Agreement or any of the other Loan Documents except for its or their own gross negligence or willful misconduct. Without limiting the generality of the preceding sentence, the Agent (i) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (ii) shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Bank; (iii) shall not be required to initiate any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by Required Banks; (iv) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, enforceability, or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Person to perform any of its obligations hereunder or thereunder; (v) may consult with legal counsel, independent public accountants, and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants, or experts; and (vi) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate, or other instrument or writing believed by it to be genuine and signed or sent by the proper party or parties. As to any matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by Required Banks, and such instructions of Required Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or any other Loan Document or applicable law. Section 12.2 Rights of Agent as a Bank. With respect to its Commitment, the Loans made by it and the Notes issued to it, CNB in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, act as trustee under indentures of, provide merchant banking services to, and generally engage in any kind of business with the Borrowers, any of its Subsidiaries, any other Obligated Party, and any other Person who may do business with or own securities of the Borrowers or any other Obligated Party, all as if it were not acting as the Agent and without any duty to account therefor to the Banks. AMENDED AND RESTATED LOAN AGREEMENT - Page 52 Section 12.3 Sharing of Payments, Etc. If any Bank shall obtain any payment of any principal of or interest on any Loan made by it under this Agreement or payment of any other obligation under the Loan Documents then owed by the Borrowers or any other Obligated Party to such Bank, whether voluntary, involuntary, through the exercise of any right of setoff, banker's lien, counterclaim or similar right, or otherwise, in excess of its pro rata share, such Bank shall promptly purchase from the other Banks participations in the Loans held by them hereunder in such amounts, and make such other adjustments from time to time as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of the other Banks in accordance with its pro rata portion thereof. To such end, all of the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if all or any portion of such excess payment is thereafter rescinded or must otherwise be restored. The Borrowers agree, to the fullest extent they may effectively do so under applicable law, that any Bank so purchasing a participation in the Loans made by the other Banks may exercise all rights of setoff, banker's lien, counterclaim, or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans to the Borrowers in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrowers. Section 12.4 INDEMNIFICATION. THE BANKS HEREBY AGREE TO INDEMNIFY THE AGENT FROM AND HOLD THE AGENT HARMLESS AGAINST (TO THE EXTENT NOT REIMBURSED UNDER SECTIONS 13.1 AND 13.2, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE BORROWERS UNDER SECTIONS 13.1 AND 13.2), RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE COMMITMENTS, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES), AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY THE AGENT UNDER OR IN RESPECT OF ANY OF THE LOAN DOCUMENTS; PROVIDED, FURTHER, THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF THE FOREGOING TO THE EXTENT CAUSED BY THE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, IT IS THE EXPRESS INTENTION OF THE BANKS THAT THE AGENT SHALL BE INDEMNIFIED HEREUNDER FROM AND HELD HARMLESS AGAINST ALL OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES), AND DISBURSEMENTS OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE AGENT. WITHOUT LIMITING ANY OTHER PROVISION OF THIS SECTION, EACH BANK AGREES TO REIMBURSE THE AGENT PROMPTLY UPON DEMAND FOR ITS PRO RATA SHARE (CALCULATED ON THE BASIS OF THE COMMITMENTS) OF ANY AND ALL OUT-OF-POCKET EXPENSES (INCLUDING AMENDED AND RESTATED LOAN AGREEMENT - Page 53 ATTORNEYS' FEES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THE LOAN DOCUMENTS, TO THE EXTENT THAT THE AGENT IS NOT REIMBURSED FOR SUCH EXPENSES BY THE BORROWERS. Section 12.5 Independent Credit Decisions. Each Bank agrees that it has independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrowers and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself informed as to the performance or observance by the Borrowers or any Obligated Party of this Agreement or any other Loan Document or to inspect the properties or books of the Borrowers or any Obligated Party. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other financial information concerning the affairs, financial condition or business of the Borrowers or any Obligated Party (or any of their Affiliates) which may come into the possession of the Agent or any of its Affiliates. Section 12.6 Several Commitments. The Commitments and other obligations of the Banks under this Agreement are several. The default by any Bank in making a Loan in accordance with its Commitment shall not relieve the other Banks of their obligations under this Agreement. In the event of any default by any Bank in making any Loan, each nondefaulting Bank shall be obligated to make its Loan but shall not be obligated to advance the amount which the defaulting Bank was required to advance hereunder. In no event shall any Bank be required to advance an amount or amounts which shall in the aggregate exceed such Bank's Commitment. No Bank shall be responsible for any act or omission of any other Bank. Section 12.7 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Borrowers. Upon any such resignation, Required Banks will have the right to appoint a successor Agent with the consent of Borrowers unless the successor Agent is then a Bank in which case, the Borrowers' consent shall not be required. If no successor Agent shall have been so appointed by Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or any State thereof and having combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges, immunities, and duties of the resigning Agent, and the resigning Agent shall be discharged from its duties and obligations under this Agreement and the AMENDED AND RESTATED LOAN AGREEMENT - Page 54 other Loan Documents, except as set forth in Section 13.9. After any Agent's resignation as Agent, the provisions of this Article XII shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was the Agent. Section 12.8 Nonconsenting Bank. In the event that (a) the Borrower or the Agent has requested the Banks to consent to a departure or waiver of any provisions of the Loan Documents or to agree to any amendment thereto, (b) the consent, waiver or amendment in question requires the agreement of all Banks in accordance with the terms of Section 13.11 and (c) Required Banks have agreed to such consent, waiver or amendment, then any Bank that does not agree to such consent, waiver or amendment shall be deemed a "Nonconsenting Bank." If at any time any Bank becomes a Nonconsenting Bank, then the Agent may but shall have no obligation to, on ten Business Day's prior written notice to the Borrowers and such Bank, replace such Bank by causing such Bank to (and such Bank shall) assign pursuant to 13.8 all of its rights and obligations under this Agreement to one or more Banks or other Person(s) selected by the Agent and consented to by the Borrowers for a purchase price equal to the outstanding principal amount of such Bank's Loans and all accrued interest and fees and other amounts payable to such Bank hereunder. ARTICLE XIII Miscellaneous Section 13.1 Expenses. The Borrowers hereby agree to pay on demand: (a) all reasonable costs and expenses of the Agent in connection with the preparation, negotiation, execution, and delivery of this Agreement and the other Loan Documents (up to the amount as agreed to by the Agent and the Borrowers) and any and all amendments, modifications, renewals, extensions, and supplements thereof and thereto, including, without limitation, the reasonable fees and expenses of legal counsel for the Agent, (b) all costs and expenses of the Agent and the Banks in connection with any Default and the enforcement of this Agreement or any other Loan Document, including, without limitation, the reasonable fees and expenses of legal counsel for the Agent and the Banks, up to the amount agreed upon under the Fee Letter, (c) all transfer, stamp, documentary, or other similar taxes, assessments, or charges levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents, (d) all costs, expenses, assessments, and other charges incurred in connection with any filing, registration, recording, or perfection of any security interest or Lien contemplated by this Agreement or any other Loan Document, and (e) all other reasonable costs and expenses incurred by the Agent and the Banks in connection with this Agreement or any other Loan Document, including, without limitation, all reasonable costs, expenses, and other charges incurred following the occurrence of a Default in connection with obtaining any audit or appraisal in respect of the Collateral. Section 13.2 INDEMNIFICATION. THE BORROWERS SHALL JOINTLY AND SEVERALLY INDEMNIFY THE AGENT AND EACH BANK AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, AMENDED AND RESTATED LOAN AGREEMENT - Page 55 JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY ANY BORROWER OR OBLIGATED PARTY OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF THE BORROWERS OR ANY OBLIGATED PARTY, OR (E) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES, BUT EXCLUDING THE LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES OF SUCH PERSON TO BE INDEMNIFIED ARISING FROM SUCH PERSON'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON. Section 13.3 LIMITATION OF LIABILITY. NONE OF THE AGENT, ANY BANK, OR ANY AFFILIATE, OFFICER, DIRECTOR, EMPLOYEE, ATTORNEY, OR AGENT THEREOF SHALL HAVE ANY LIABILITY WITH RESPECT TO, AND EACH BORROWER HEREBY WAIVES, RELEASES, AND AGREES NOT TO SUE ANY OF THEM UPON, ANY CLAIM FOR ANY SPECIAL OR PUNITIVE DAMAGES SUFFERED OR INCURRED BY SUCH BORROWER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH BORROWER HEREBY WAIVES, RELEASES, AND AGREES NOT TO SUE THE AGENT OR ANY BANK OR ANY OF THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, OR AGENTS FOR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. AMENDED AND RESTATED LOAN AGREEMENT - Page 56 Section 13.4 No Duty. All attorneys, accountants, appraisers, and other professional Persons and consultants retained by the Agent and the Banks shall have the right to act exclusively in the interest of the Agent and the Banks and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to the Borrowers, any Obligated Party or any of the Borrower's shareholders or any other Person. Section 13.5 No Fiduciary Relationship. The relationship among the Borrowers and each Bank is solely that of debtor and creditor, and neither the Agent nor any Bank has any fiduciary or other special relationship with any Borrower or Obligated Party, and no term or condition of any of the Loan Documents shall be construed so as to deem the relationship between the Borrowers and any Bank to be other than that of debtor and creditor. Section 13.6 Equitable Relief. The Borrowers recognize that in the event the Borrowers fail to pay, perform, observe, or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to the Agent and the Banks. The Borrowers therefore agree that the Agent and the Banks, if the Agent or the Banks so request, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Section 13.7 No Waiver; Cumulative Remedies. No failure on the part of the Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. Section 13.8 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The Borrowers may not assign or transfer any of their rights or obligations hereunder without the prior written consent of the Agent and all of the Banks. Any Bank may sell participations to one or more banks or other institutions in or to all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitments and the Loans owing to it); provided, however, that (i) any transfer to a bank that is not a U.S. Person may be made only with the prior written consent of Borrower, (ii) such Bank's obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitments) shall remain unchanged, (iii) such Bank shall remain solely responsible to the Borrowers for the performance of such obligations, (iv) such Bank shall remain the holder of its Notes for all purposes of this Agreement, (v) the Borrowers shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and the other Loan Documents, and (vi) such Bank shall not sell a participation that conveys to the participant the right to vote or give or withhold consents under this Agreement or any other Loan Document, other than the right to vote AMENDED AND RESTATED LOAN AGREEMENT - Page 57 upon or consent to (A) any increase of such Bank's Commitments, (B) any reduction of the principal amount of, or interest to be paid on, the Loans of such Bank, (C) any reduction of any commitment fee or other amount payable to such Bank under any Loan Document, or (D) any postponement of any date for the payment of any amount payable in respect of the Loans of such Bank. (b) The Borrowers and each of the Banks agree that any Bank (the "Assigning Bank") may, upon thirty days prior written notice to the Agent and with the Agent's consent and unless an Event of Default has occurred, the Borrowers' consent which consent of the Borrowers shall not be unreasonably withheld or delayed, at any time assign to one or more Eligible Assignees all of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitments and Loans) (each an "Assignee"); provided, however, that (i) each such assignment shall be of a consistent, and not a varying, percentage of all of the assigning Bank's Commitments, rights and obligations under this Agreement and the other Loan Documents, and (ii) the parties to each such assignment shall execute and deliver to the Agent for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with the Notes subject to such assignment, and a processing and recordation fee of $2,500, to be paid by the Assignee. Upon such execution, delivery, acceptance, and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, or, if so specified in such Assignment and Acceptance, the date of acceptance thereof by the Agent, (x) the assignee thereunder shall be a party hereto as a "Bank" and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and under the Loan Documents and (y) the Bank that is an assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a Bank's rights and obligations under the Loan Documents, such Bank shall cease to be a party thereto). (c) By executing and delivering an Assignment and Acceptance, the Bank that is an assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties, or representations made in or in connection with the Loan Documents or the execution, legality, validity, and enforceability, genuineness, sufficiency, or value of the Loan Documents or any other instrument or document furnished pursuant thereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or any Obligated Party or the performance or observance by the Borrowers or any Obligated Party of its obligations under the Loan Documents; (iii) such assignee confirms that it has received a copy of the other Loan Documents, together with copies of the financial AMENDED AND RESTATED LOAN AGREEMENT - Page 58 statements referred to in Section 7.2 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent or such assignor and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Bank. (d) The Agent shall maintain at its Principal Office a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Loans owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes under the Loan Documents. The Register shall be available for inspection by the Borrowers or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and assignee representing that it is an Eligible Assignee, together with any Note subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit "G" hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt written notice thereof to the Borrowers. Within five (5) Business Days after its receipt of such notice, the Borrowers, at their expense, shall execute and deliver to the Agent in exchange for the surrendered Notes new Notes to the order of such Eligible Assignee in an amount equal to the Commitments assumed by it pursuant to such Assignment and Acceptance (each such promissory note shall constitute a "Note" for purposes of the Loan Documents). Such new Notes shall be in an aggregate principal amount of the surrendered Notes, shall be dated the effective date of such Assignment and Acceptance, and shall otherwise be in substantially the form of Exhibits "A-1" and "A-2" hereto. (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrowers furnished to such Bank by or on behalf of the Borrowers, subject, however, to the provisions of Section 13.20. AMENDED AND RESTATED LOAN AGREEMENT - Page 59 Section 13.9 Survival. All representations and warranties made in this Agreement or any other Loan Document or in any document, statement, or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents, and no investigation by the Agent or any Bank or any closing shall affect the representations and warranties or the right of the Agent or any Bank to rely upon them. Without prejudice to the survival of any other obligation of the Borrowers hereunder, the obligations of the Borrowers under Article IV and Sections 13.1 and 13.2 and the obligations of the Agent and the Banks under Section 13.20 shall survive repayment of the Notes and termination of the Commitments. Section 13.10 ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. Section 13.11 Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Notes, or any other Loan Document to which the Borrowers are a party, nor any consent to any departure by the Borrowers or Obligated Parties therefrom, shall in any event be effective unless the same shall be agreed or consented to by Required Banks and the Borrowers, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that no amendment, waiver, or consent shall, unless in writing and signed by all of the Banks and the Borrowers, do any of the following: (a) increase the Commitments of the Banks or subject the Banks to any additional obligations; (b) reduce the principal of, or interest on, the Notes or any fees or other amounts payable to the Banks hereunder; (c) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable to the Banks hereunder; (d) waive any of the conditions specified in Article VI; (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes or the number of Banks which shall be required for the Banks or any of them to take any action under this Agreement; (f) change any provision contained in this Section 13.11; (g) release any Collateral having a present worth discounted at 10% of greater than $100,000 as reflected in the most recent independent consultant's report provided by Borrowers; or (h) change the definition of the Borrowing Base. Notwithstanding anything to the contrary contained in this Section, no amendment, waiver, or consent shall be made with respect to Article XII hereof without the prior written consent of the Agent. Section 13.12 Maximum Interest Rate. No provision of this Agreement or of any other Loan Document shall require the payment or the collection of interest in excess of the maximum amount permitted by applicable law. If any excess of interest in such respect is hereby provided for, or shall be adjudicated to be so provided, in any Loan Document or otherwise in connection with this loan AMENDED AND RESTATED LOAN AGREEMENT - Page 60 transaction, the provisions of this Section shall govern and prevail and neither the Borrowers nor the sureties, guarantors, successors, or assigns of the Borrowers shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of sums loaned pursuant hereto. In the event any Bank ever receives, collects, or applies as interest any such sum, such amount which would be in excess of the maximum amount permitted by applicable law shall be applied as a payment and reduction of the principal of the indebtedness evidenced by the Notes; and, if the principal of the Notes has been paid in full, any remaining excess shall forthwith be paid to the Borrowers. In determining whether or not the interest paid or payable exceeds the Maximum Rate, the Borrowers and each Bank shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by the Notes so that interest for the entire term does not exceed the Maximum Rate. Section 13.13 Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which the Borrowers are a party shall be given or made by telecopy or mailed by overnight courier or certified mail return receipt requested, or delivered to the intended recipient at the "Address for Notices" specified below their names on the signature pages hereof; or, as to any party at such other address as shall be designated by such party in a notice to each other party given in accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy, subject to telephone confirmation of receipt, or when personally delivered or, in the case of a mailed notice, when duly deposited in the mails, in each case given or addressed as aforesaid; provided, however, notices to the Agent pursuant to Article II and III shall not be effective until received by the Agent. Section 13.14 GOVERNING LAW; VENUE; SERVICE OF PROCESS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS AGREEMENT HAS BEEN ENTERED INTO IN CADDO PARISH, LOUISIANA, AND IT SHALL BE PERFORMABLE FOR ALL PURPOSES IN CADDO PARISH, LOUISIANA. ANY ACTION OR PROCEEDING AGAINST ANY OBLIGATED PARTY OR THE BORROWERS UNDER OR IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN CADDO PARISH, LOUISIANA. EACH OBLIGATED PARTY AND EACH BORROWER HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. THE OBLIGATED PARTIES AND THE BORROWERS AGREE THAT SERVICE OF PROCESS UPON THEM MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT THE ADDRESS SPECIFIED OR DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 13.13. NOTHING HEREIN OR IN ANY OF THE OTHER LOAN AMENDED AND RESTATED LOAN AGREEMENT - Page 61 DOCUMENTS SHALL AFFECT THE RIGHT OF THE AGENT OR ANY BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW SHALL LIMIT THE RIGHT OF THE AGENT OR ANY BANK TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER OR ANY OBLIGATED PARTY OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTIONS. ANY ACTION OR PROCEEDING BY ANY BORROWER OR OBLIGATED PARTY AGAINST THE AGENT OR ANY BANK SHALL BE BROUGHT ONLY IN A COURT LOCATED IN CADDO PARISH, LOUISIANA. Section 13.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13.16 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Section 13.17 Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 13.18 Construction. The Borrowers, the Agent and each Bank acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the parties hereto. Section 13.19 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition exists. Section 13.20 Treatment of Certain Information; Confidentiality. Each Bank and the Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees, attorneys, agents and representatives) to keep confidential any non-public information supplied to it by Borrowers pursuant to this Agreement that the Borrowers identify to such Bank or the Agent (as the case may be) as confidential at the time the Borrowers so supply such information, provided, that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Banks or the Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Agent or any other Bank, (v) in connection with any litigation to which any one or more of the Banks or the Agent is a party, (vi) to a subsidiary or affiliate of such Bank, or (vii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Bank an acknowledgement to the effect that it is bound by the provisions of this Section 13.20, which acknowledgement may be included as part of the respective assignment AMENDED AND RESTATED LOAN AGREEMENT - Page 62 or participation agreement pursuant to which such assignee or participant acquires an interest in the Loans hereunder; and provided, further, that in no event shall any Bank or the Agent be obligated or required to return any materials furnished to it by the Borrowers. Section 13.21 WAIVERS OF JURY TRIAL. EACH BORROWER, GENERAL PARTNER, CASTLE, THE AGENT, AND EACH BANK HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING BETWEEN ONE OR MORE PARTIES HERETO RELATING TO THIS AGREEMENT OR ANY OF THE NOTES OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWERS: CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By:________________________________ Richard E. Staedtler Vice President CEC GAS MARKETING LIMITED PARTNERSHIP By:________________________________ Richard E. Staedtler Vice President CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By:________________________________ Richard E. Staedtler Vice President AMENDED AND RESTATED LOAN AGREEMENT - Page 63 CASTLE EXPLORATION COMPANY, INC. By:_______________________________ Richard E. Staedtler Vice President Address for Notices: 2410 State Highway, 322 North Henderson, Texas 75652 Fax No.: (903) 657-5620 Telephone No.: (903) 657-0700 Attention: Richard E. Staedtler With a copy to: 512 Township Line Road Blue Bell, Pennsylvania 19422 Fax No.: (610) 995-0409 Telephone No.: (610) 995-9400 Attention: Richard E. Staedtler GENERAL PARTNERS: CASTLE PIPELINE COMPANY CASTLE PRODUCTION COMPANY CEC MARKETING CORPORATION By:_________________________________ Richard E. Staedtler Vice President AMENDED AND RESTATED LOAN AGREEMENT - Page 64 CASTLE: CASTLE ENERGY CORPORATION By:________________________________ Richard E. Staedtler Vice President AMENDED AND RESTATED LOAN AGREEMENT - Page 65 AGENT: COMMERCIAL NATIONAL BANK IN SHREVEPORT, as Agent By:________________________________ Martin W. Wilson Assistant Vice President Address for Notices: 333 Texas Street Shreveport, Louisiana 71101 Fax No.: (318) 429-1864 Telephone No.: (318) 429-1561 Attention: Mr. Martin W. Wilson AMENDED AND RESTATED LOAN AGREEMENT - Page 66 BANKS: COMMERCIAL NATIONAL BANK IN SHREVEPORT Revolving Credit Commitment: By:__________________________________ Name: Martin W. Wilson $3,400,000 Title: Assistant Vice President Term Loan Commitment: Address for Notices: $5,100,000 333 Texas Street Shreveport, Louisiana 71101 Fax No.: (318) 429-1864 Telephone No.: (318) 429-1561 Attention: Mr. Martin W. Wilson AMENDED AND RESTATED LOAN AGREEMENT - Page 67 COMERICA BANK-TEXAS Revolving Credit Commitment: By:__________________________________ Elizabeth W. Falco $3,300,000 Vice President Term Loan Commitment: Address for Notices: $4,950,000 1601 Elm Street Dallas, Texas 75201 Fax No.: (214) 965-8990 Telephone No.: (214) 965-8992 Attention: Elizabeth Falco AMENDED AND RESTATED LOAN AGREEMENT - Page 68 COMPASS BANK Revolving Credit Commitment: By:__________________________________ Dorothy Marchand Wilson $3,300,000 Vice President Term Loan Commitment: Address for Notices: $4,950,000 24 Greenway Plaza, Suite 1401 Houston, Texas 77046 Fax No.: (713) 968-2222 Telephone No.: (713) 968-8272 Attention: Energy Lending Group DA963160385 120296 v22 351:3087-29 AMENDED AND RESTATED LOAN AGREEMENT - Page 69 REVOLVING CREDIT NOTE $3,300,000.00 Shreveport, Louisiana November 26, 1996 FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership (collectively, the "Makers"), hereby jointly and severally promise to pay to the order of COMERICA BANK-TEXAS ("Payee"), at the offices of COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking association (together with any successor as provided in the Agreement, as hereinafter defined, the "Agent"), at its offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo Parish, Louisiana, or at such other location as the Agent may designate in writing to Maker, in lawful money of the United States of America, the principal sum of Three Million Three Hundred Thousand and No/100 Dollars ($3,300,000.00), or so much thereof as may be advanced and outstanding hereunder, together with interest on the outstanding principal balance from day to day remaining as herein specified. The principal balance from time to time outstanding hereunder shall be due and payable in full on the Revolving Credit Termination Date. Accrued and unpaid interest on the principal balance from day to day outstanding shall be due and payable on the first day of each month, commencing January 1, 1997, and on the first day of each month thereafter until and including the Revolving Credit Termination Date. The outstanding principal balance hereof shall bear interest prior to maturity at a varying rate per annum which shall from day to day be equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) the Applicable Rate (as defined in the Agreement referred to below) in effect from day to day, each such change in the rate of interest charged hereunder to become effective, without notice to Makers, on the effective date of each change in the Applicable Rate or the maximum rate permitted by applicable law, as the case may be. All past due principal and interest shall bear interest at the rate set forth in Article II of the Agreement referred to below. Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day). This Note is a Revolving Credit Note provided for in that certain Amended and Restated Loan Agreement dated of even date herewith among Makers, Castle Production Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy Corporation, each of the banks or other lending institutions or other Eligible Assignees (as defined therein) which is or may become a REVOLVING CREDIT NOTE - Page 1 signatory thereto and any successors or assigns thereof (collectively, the "Lenders") and Agent (such Amended and Restated Loan Agreement as the same may be amended, supplemented or otherwise modified from time to time is hereinafter referred to as the "Agreement"). All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Agreement. Reference is hereby made to the Agreement for provisions affecting this Note including provisions regarding repayments, prepayments, Events of Default and Payee's rights as a result of the occurrence thereof. Maker may borrow, repay and reborrow under the terms and conditions specified in the Agreement. If default be made in the payment of principal or interest under this Note, or upon the occurrence of any other Event of Default, the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, and the holder hereof shall have the right to foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, and offset against this Note any sum or sums owed by the holder hereof to Makers. Failure of the holder hereof to exercise this option shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Makers agree to pay all collection costs and fees incurred by the holder, including reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA. Each Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. REVOLVING CREDIT NOTE - Page 2 Each Maker hereby authorizes the holder hereof to record in its internal records all advances made to Makers hereunder and all payments made on account of the principal hereof, which recordings shall be prima facie evidence as to the outstanding principal amount of this Note; provided, however, any failure by the holder hereof to make any recording shall not limit or otherwise affect the obligations of Makers under the Agreement or this Note. CASTLE EXPLORATION COMPANY, INC. By:______________________________________ Richard E. Staedtler Vice President CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By: CASTLE PRODUCTION COMPANY, Its General Partner By:____________________________ Richard E. Staedtler Vice President CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By: CASTLE TEXAS PIPELINE COMPANY, Its General Partner By:_____________________________ Richard E. Staedtler Vice President REVOLVING CREDIT NOTE - Page 3 CEC GAS MARKETING LIMITED PARTNERSHIP By: CEC MARKETING COMPANY, Its General Partner By:____________________________ Richard E. Staedtler Vice President DA963310149 112696 v2 393:3087-29 REVOLVING CREDIT NOTE - Page 4 REVOLVING CREDIT NOTE $3,400,000.00 Shreveport, Louisiana November 26, 1996 FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership (collectively, the "Makers"), hereby jointly and severally promise to pay to the order of COMMERCIAL NATIONAL BANK IN SHREVEPORT ("Payee"), at the offices of COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking association (together with any successor as provided in the Agreement, as hereinafter defined, the "Agent"), at its offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo Parish, Louisiana, or at such other location as the Agent may designate in writing to Maker, in lawful money of the United States of America, the principal sum of Three Million Four Hundred Thousand and No/100 Dollars ($3,400,000.00), or so much thereof as may be advanced and outstanding hereunder, together with interest on the outstanding principal balance from day to day remaining as herein specified. The principal balance from time to time outstanding hereunder shall be due and payable in full on the Revolving Credit Termination Date. Accrued and unpaid interest on the principal balance from day to day outstanding shall be due and payable on the first day of each month, commencing January 1, 1997, and on the first day of each month thereafter until and including the Revolving Credit Termination Date. The outstanding principal balance hereof shall bear interest prior to maturity at a varying rate per annum which shall from day to day be equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) the Applicable Rate (as defined in the Agreement referred to below) in effect from day to day, each such change in the rate of interest charged hereunder to become effective, without notice to Makers, on the effective date of each change in the Applicable Rate or the maximum rate permitted by applicable law, as the case may be. All past due principal and interest shall bear interest at the rate set forth in Article II of the Agreement referred to below. Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day). This Note is a Revolving Credit Note provided for in that certain Amended and Restated Loan Agreement dated of even date herewith among Makers, Castle Production Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy Corporation, each of the banks or other lending institutions or other Eligible Assignees (as defined therein) which is or may become a signatory thereto and any successors or assigns thereof (collectively, the "Lenders") and Agent (such Amended REVOLVING CREDIT NOTE - Page 1 and Restated Loan Agreement as the same may be amended, supplemented or otherwise modified from time to time is hereinafter referred to as the "Agreement"). All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Agreement. Reference is hereby made to the Agreement for provisions affecting this Note including provisions regarding repayments, prepayments, Events of Default and Payee's rights as a result of the occurrence thereof. Maker may borrow, repay and reborrow under the terms and conditions specified in the Agreement. If default be made in the payment of principal or interest under this Note, or upon the occurrence of any other Event of Default, the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, and the holder hereof shall have the right to foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, and offset against this Note any sum or sums owed by the holder hereof to Makers. Failure of the holder hereof to exercise this option shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Makers agree to pay all collection costs and fees incurred by the holder, including reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA. Each Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. Each Maker hereby authorizes the holder hereof to record in its internal records all advances made to Makers hereunder and all payments made on account of the principal hereof, which REVOLVING CREDIT NOTE - Page 2 recordings shall be prima facie evidence as to the outstanding principal amount of this Note; provided, however, any failure by the holder hereof to make any recording shall not limit or otherwise affect the obligations of Makers under the Agreement or this Note. CASTLE EXPLORATION COMPANY, INC. By:___________________________________ Richard E. Staedtler Vice President CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By: CASTLE PRODUCTION COMPANY, Its General Partner By:__________________________ Richard E. Staedtler Vice President CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By: CASTLE TEXAS PIPELINE COMPANY, Its General Partner By:___________________________ Richard E. Staedtler Vice President REVOLVING CREDIT NOTE - Page 3 CEC GAS MARKETING LIMITED PARTNERSHIP By: CEC MARKETING COMPANY, Its General Partner By:_____________________________ Richard E. Staedtler Vice President DA963310140 112696 v2 351:3087-29 REVOLVING CREDIT NOTE - Page 4 REVOLVING CREDIT NOTE $3,300,000.00 Shreveport, Louisiana November 26, 1996 FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership (collectively, the "Makers"), hereby jointly and severally promise to pay to the order of COMPASS BANK ("Payee"), at the offices of COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking association (together with any successor as provided in the Agreement, as hereinafter defined, the "Agent"), at its offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo Parish, Louisiana, or at such other location as the Agent may designate in writing to Maker, in lawful money of the United States of America, the principal sum of Three Million Three Hundred Thousand and No/100 Dollars ($3,300,000.00), or so much thereof as may be advanced and outstanding hereunder, together with interest on the outstanding principal balance from day to day remaining as herein specified. The principal balance from time to time outstanding hereunder shall be due and payable in full on the Revolving Credit Termination Date. Accrued and unpaid interest on the principal balance from day to day outstanding shall be due and payable on the first day of each month, commencing January 1, 1997, and on the first day of each month thereafter until and including the Revolving Credit Termination Date. The outstanding principal balance hereof shall bear interest prior to maturity at a varying rate per annum which shall from day to day be equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) the Applicable Rate (as defined in the Agreement referred to below) in effect from day to day, each such change in the rate of interest charged hereunder to become effective, without notice to Makers, on the effective date of each change in the Applicable Rate or the maximum rate permitted by applicable law, as the case may be. All past due principal and interest shall bear interest at the rate set forth in Article II of the Agreement referred to below. Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day). This Note is a Revolving Credit Note provided for in that certain Amended and Restated Loan Agreement dated of even date herewith among Makers, Castle Production Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy Corporation, each of the banks or other lending institutions or other Eligible Assignees (as defined therein) which is or may become a signatory thereto and any successors or assigns thereof (collectively, the "Lenders") and Agent (such Amended REVOLVING CREDIT NOTE - Page 1 and Restated Loan Agreement as the same may be amended, supplemented or otherwise modified from time to time is hereinafter referred to as the "Agreement"). All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Agreement. Reference is hereby made to the Agreement for provisions affecting this Note including provisions regarding repayments, prepayments, Events of Default and Payee's rights as a result of the occurrence thereof. Maker may borrow, repay and reborrow under the terms and conditions specified in the Agreement. If default be made in the payment of principal or interest under this Note, or upon the occurrence of any other Event of Default, the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, and the holder hereof shall have the right to foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, and offset against this Note any sum or sums owed by the holder hereof to Makers. Failure of the holder hereof to exercise this option shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Makers agree to pay all collection costs and fees incurred by the holder, including reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA. Each Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. Each Maker hereby authorizes the holder hereof to record in its internal records all advances made to Makers hereunder and all payments made on account of the principal hereof, which REVOLVING CREDIT NOTE - Page 2 recordings shall be prima facie evidence as to the outstanding principal amount of this Note; provided, however, any failure by the holder hereof to make any recording shall not limit or otherwise affect the obligations of Makers under the Agreement or this Note. CASTLE EXPLORATION COMPANY, INC. By:___________________________________ Richard E. Staedtler Vice President CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By: CASTLE PRODUCTION COMPANY, Its General Partner By:_____________________________ Richard E. Staedtler Vice President CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By: CASTLE TEXAS PIPELINE COMPANY, Its General Partner By:___________________________ Richard E. Staedtler Vice President REVOLVING CREDIT NOTE - Page 3 CEC GAS MARKETING LIMITED PARTNERSHIP By: CEC MARKETING COMPANY, Its General Partner By:____________________________ Richard E. Staedtler Vice President DA963310142 112696 v2 393:3087-29 REVOLVING CREDIT NOTE - Page 4 TERM NOTE $4,950,000.00 Shreveport, Louisiana November 26, 1996 FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership (collectively, the "Makers"), hereby jointly and severally promise to pay to the order of COMERICA BANK-TEXAS ("Payee"), at the offices of COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking association (together with any successor as provided in the Agreement, as hereinafter defined, the "Agent"), at its offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo Parish, Louisiana, in lawful money of the United States of America, the principal sum of Four Million Nine Hundred Fifty Thousand and No/100 Dollars ($4,950,000.00), or so much thereof as may be advanced and outstanding hereunder, together with interest on the outstanding principal balance from day to day remaining at the rates specified herein, and on the dates provided in the Agreement referred to below. The outstanding principal balance hereof shall bear interest prior to maturity at a varying rate per annum which shall from day to day be equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) the Applicable Rate (as defined in the Agreement referred to below) in effect from day to day, each such change in the rate of interest charged hereunder to become effective, without notice to Makers, on the effective date of each change in the Applicable Rate or the maximum rate permitted by applicable law, as the case may be. All past due principal and interest shall bear interest at the rate set forth in Article III of the Agreement referred to below. Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day). This Note is a Term Note provided for in that certain Amended and Restated Loan Agreement dated of even date herewith among Makers, Castle Production Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy Corporation, each of the banks or other lending institutions or other Eligible Assignees (as defined therein) which is or may become a signatory thereto and any successors or assigns thereof (collectively, the "Lenders") and Agent (such Amended and Restated Loan Agreement as the same may be amended, supplemented or otherwise modified from time to time is hereinafter referred to as the "Agreement"). All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Agreement. Reference is hereby made to the Agreement for provisions affecting this Note including, but not limited to, provisions regarding interest rates, repayments, prepayments, Events of Default and Payee's rights as a result thereof. Maker may prepay the principal of this Note upon the terms and conditions specified in the Agreement. TERM NOTE - Page 1 If default be made in the payment of principal or interest under this Note, or upon the occurrence of any other Event of Default, the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, and the holder hereof shall have the right to foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, and offset against this Note any sum or sums owed by the holder hereof to Makers. Failure of the holder hereof to exercise this option shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Makers agree to pay all collection costs and fees incurred by the holder, including reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA. Each Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. CASTLE EXPLORATION COMPANY, INC. By:___________________________________ Richard E. Staedtler Vice President TERM NOTE - Page 2 CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By: CASTLE PRODUCTION COMPANY, Its General Partner By:____________________________ Richard E. Staedtler Vice President CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By: CASTLE PIPELINE COMPANY, Its General Partner By:____________________________ Richard E. Staedtler Vice President CEC GAS MARKETING LIMITED PARTNERSHIP By: CEC MARKETING COMPANY, Its General Partner By:_____________________________ Richard E. Staedtler Vice President DA963310175 112696 v1 393:3087-29 TERM NOTE - Page 3 TERM NOTE $5,100,000.00 Shreveport, Louisiana November 26, 1996 FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership (collectively, the "Makers"), hereby jointly and severally promise to pay to the order of COMMERCIAL NATIONAL BANK IN SHREVEPORT ("Payee"), at the offices of COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking association (together with any successor as provided in the Agreement, as hereinafter defined, the "Agent"), at its offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo Parish, Louisiana, in lawful money of the United States of America, the principal sum of Five Million One Hundred Thousand and No/100 Dollars ($5,100,000.00), or so much thereof as may be advanced and outstanding hereunder, together with interest on the outstanding principal balance from day to day remaining at the rates specified herein, and on the dates provided in the Agreement referred to below. The outstanding principal balance hereof shall bear interest prior to maturity at a varying rate per annum which shall from day to day be equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) the Applicable Rate (as defined in the Agreement referred to below) in effect from day to day, each such change in the rate of interest charged hereunder to become effective, without notice to Makers, on the effective date of each change in the Applicable Rate or the maximum rate permitted by applicable law, as the case may be. All past due principal and interest shall bear interest at the rate set forth in Article III of the Agreement referred to below. Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day). This Note is a Term Note provided for in that certain Amended and Restated Loan Agreement dated of even date herewith among Makers, Castle Production Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy Corporation, each of the banks or other lending institutions or other Eligible Assignees (as defined therein) which is or may become a signatory thereto and any successors or assigns thereof (collectively, the "Lenders") and Agent (such Amended and Restated Loan Agreement as the same may be amended, supplemented or otherwise modified from time to time is hereinafter referred to as the "Agreement"). All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Agreement. Reference is hereby made to the Agreement for provisions affecting this Note including, but not limited to, provisions regarding interest rates, repayments, prepayments, Events of Default and Payee's rights as a result thereof. Maker may prepay the principal of this Note upon the terms and conditions specified in the Agreement. TERM NOTE - Page 1 If default be made in the payment of principal or interest under this Note, or upon the occurrence of any other Event of Default, the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, and the holder hereof shall have the right to foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, and offset against this Note any sum or sums owed by the holder hereof to Makers. Failure of the holder hereof to exercise this option shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Makers agree to pay all collection costs and fees incurred by the holder, including reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA. Each Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. CASTLE EXPLORATION COMPANY, INC. By:________________________________ Richard E. Staedtler Vice President TERM NOTE - Page 2 CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By: CASTLE PRODUCTION COMPANY, Its General Partner By:_______________________________ Richard E. Staedtler Vice President CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By: CASTLE PIPELINE COMPANY, Its General Partner By:_______________________________ Richard E. Staedtler Vice President CEC GAS MARKETING LIMITED PARTNERSHIP By: CEC MARKETING COMPANY, Its General Partner By:________________________________ Richard E. Staedtler Vice President DA963310179 112696 v1 351:3087-29 TERM NOTE - Page 3 TERM NOTE $4,950,000.00 Shreveport, Louisiana November 26, 1996 FOR VALUE RECEIVED, the undersigned, CASTLE EXPLORATION COMPANY, INC., a Pennsylvania corporation, CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP, a Texas limited partnership, CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP, a Texas limited partnership, CEC GAS MARKETING LIMITED PARTNERSHIP, a Texas limited partnership (collectively, the "Makers"), hereby jointly and severally promise to pay to the order of COMPASS BANK ("Payee"), at the offices of COMMERCIAL NATIONAL BANK IN SHREVEPORT, a national banking association (together with any successor as provided in the Agreement, as hereinafter defined, the "Agent"), at its offices at 333 Texas Street, Post Office Box 21119, Shreveport, Caddo Parish, Louisiana, in lawful money of the United States of America, the principal sum of Four Million Nine Hundred Fifty Thousand and No/100 Dollars ($4,950,000.00), or so much thereof as may be advanced and outstanding hereunder, together with interest on the outstanding principal balance from day to day remaining at the rates specified herein, and on the dates provided in the Agreement referred to below. The outstanding principal balance hereof shall bear interest prior to maturity at a varying rate per annum which shall from day to day be equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) the Applicable Rate (as defined in the Agreement referred to below) in effect from day to day, each such change in the rate of interest charged hereunder to become effective, without notice to Makers, on the effective date of each change in the Applicable Rate or the maximum rate permitted by applicable law, as the case may be. All past due principal and interest shall bear interest at the rate set forth in Article III of the Agreement referred to below. Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day). This Note is a Term Note provided for in that certain Amended and Restated Loan Agreement dated of even date herewith among Makers, Castle Production Company, Castle Pipeline Company, CEC Marketing Company, Castle Energy Corporation, each of the banks or other lending institutions or other Eligible Assignees (as defined therein) which is or may become a signatory thereto and any successors or assigns thereof (collectively, the "Lenders") and Agent (such Amended and Restated Loan Agreement as the same may be amended, supplemented or otherwise modified from time to time is hereinafter referred to as the "Agreement"). All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Agreement. Reference is hereby made to the Agreement for provisions affecting this Note including, but not limited to, provisions regarding interest rates, repayments, prepayments, Events of Default and Payee's rights as a result thereof. Maker may prepay the principal of this Note upon the terms and conditions specified in the Agreement. TERM NOTE - Page 1 If default be made in the payment of principal or interest under this Note, or upon the occurrence of any other Event of Default, the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, and the holder hereof shall have the right to foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, and offset against this Note any sum or sums owed by the holder hereof to Makers. Failure of the holder hereof to exercise this option shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Makers agree to pay all collection costs and fees incurred by the holder, including reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN CADDO PARISH, LOUISIANA. Each Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. CASTLE EXPLORATION COMPANY, INC. By:___________________________________ Richard E. Staedtler Vice President TERM NOTE - Page 2 CASTLE TEXAS PRODUCTION LIMITED PARTNERSHIP By: CASTLE PRODUCTION COMPANY, Its General Partner By:______________________________ Richard E. Staedtler Vice President CASTLE TEXAS PIPELINE LIMITED PARTNERSHIP By: CASTLE PIPELINE COMPANY, Its General Partner By:______________________________ Richard E. Staedtler Vice President CEC GAS MARKETING LIMITED PARTNERSHIP By: CEC MARKETING COMPANY, Its General Partner By:______________________________ Richard E. Staedtler Vice President DA963310183 112696 v2 351:3087-29 TERM NOTE - Page 3 EX-11 5 EXHIBIT 11.1 Exhibit 11.1 Castle Energy Corporation Statement of Computation of Earnings Per Share (Dollars in thousands, except per share amounts) (Unaudited)
Three Months Ended September 30, ---------------------------------------------------------------------- 1996 1995 ------------------------------ ------------------------------- Fully Fully Primary Diluted Primary Diluted I. Weighted Shares Outstanding, Net of Treasury Stock Outstanding - Beginning of Period: 6,693,646 6,693,646 6,683,646 6,683,646 Options and warrants exercised 9,451 9,451 II. Weighted Equivalent Shares: Assumed options and warrants exercised 29,041 21,773 28,646 30,883 ---------- ---------- ---------- ---------- III. Weighted Average Shares and Equivalent Shares 6,722,687 6,715,419 6,721,743 6,723,980 ========== ========== ========== ========== IV. Net Income (Loss): Continuing operations $ 12,630 $ 12,630 ($ 2,464) ($ 2,464) Discontinued operations 5,114 5,114 ------------ ----------- ------------- ------------- $ 12,630 $ 12,630 $ 2,650 $ 2,650 ============ =========== ============= ============= V. Net Income (Loss) Per Share: Continuing operations $ 1.88 $ 1.88 ($ .37) ($ .37) Discontinued operations, as adjusted - - .76 .76 ------------ ----------- ------------- ------------- $ 1.88 $ 1.88 $ .39 $ .39 ============ =========== ============= =============
Exhibit 11.1 Castle Energy Corporation Statement of Computation of Earnings Per Share (Dollars in thousands, except per share amounts) (Unaudited)
Twelve Months Ended September 30, ---------------------------------------------------------------------- 1996 1995 ------------------------------ ------------------------------- Fully Fully Primary Diluted Primary Diluted I. Weighted Shares Outstanding, Net of Treasury Stock Outstanding - Beginning of Period: 6,693,646 6,693,646 7,627,646 7,627,646 Stock, net - - (929,174) (929,174) Options and warrants exercised - - 11,986 11,986 II. Weighted Equivalent Shares: Assumed options and warrants exercised 25,191 21,506 47,890 37,988 Assumed debenture conversion - - 19,200 19,200 ------------ ----------- ------------- ------------- III. Weighted Average Shares and Equivalent Shares 6,718,837 6,715,152 6,777,548 6,767,646 ============ ============ ============= ============= IV. Net Income (Loss): Continuing operations $ 25,074 $ 25,074 ($ 26,040) ($ 26,040) Discontinued operations: Before adjustment - - 40,937 40,937 Assumed interest savings as if convertible debentures exercised and retired - - 12 12 ------------ ------------ ------------- ------------- $ 25,074 $ 25,074 $ 14,909 $ 14,909 ============ ============ ============= ============= V. Net Income (Loss) Per Share: Continuing operations $ 3.73 $ 3.73 ($ 3.84) ($ 3.84) Discontinued operations, as adjusted - - 6.04 6.04 ------------ ------------ ------------- ------------- $ 3.73 $ 3.73 $ 2.20 $ 2.20 ============ ============ ============= =============
EX-21 6 EXHIBIT 21 Exhibit 21 CASTLE ENERGY CORPORATION Listing of Parent and Subsidiaries As of November 30, 1996
Relationship Company's to Ownership Entity Company Business Percentage ------ ------------ -------- ----------- Parent Castle Energy Corporation Parent Holding Company N/A Refining Indian Oil Company Subsidiary Inactive 100% Indian Refining I. L.P. Subsidiary- Inactive 100% Limited Partnership Indian Refining & Marketing I. Inc. Subsidiary General Partner of IRLP - Inactive 100% Natural Gas Marketing Castle Pipeline Company Subsidiary General Partner - Pipeline 100% Partnership Castle Pipeline Resources Company Subsidiary Limited Partner - Pipeline 100% Partnership Castle Texas Pipeline L.P. Subsidiary Natural Gas Transmission 100% Limited Partnership CEC Marketing Company Subsidiary General Partner - Gas Marketing 100% Partnership CEC Marketing Resources Company Subsidiary Limited Partner - Gas Marketing 100% Partnership CEC Gas Marketing L.P. Subsidiary- Gas Marketing 100% Limited Partnership Exploration and Production Castle Exploration Company, Inc. Subsidiary Oil and gas development, drilling 100% and well operations Castle Production Company Subsidiary General Partner - Production 100% Partnership Castle Production Resources Subsidiary Limited Partner - Production 100% Company Partnership Castle Texas Production L.P. Subsidiary- Oil and gas production 100% Limited Partnership Holding CEC, Inc. Subsidiary Passive Activities 100%
(1) Division of Castle Energy Corporation (2) Inactive EX-23.1 7 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-88760) of Castle Energy Corporation of our report dated January 9, 1997 appearing on page 59 of this Form 10-K. Price Waterhouse LLP Philadelphia, PA January 9, 1997 EX-23.2 8 EXHIBIT 23.2 Exhibit 23.2 RYDER SCOTT COMPANY - ------------------- PETROLEUM ENGINEERS FAX: (303) 623-4258
600 SEVENTEENTH STREET SUITE 900N DENVER, COLORADO 80202 TELEPHONE (303) 623-9147
December 27, 1996 Mr. Richard E. Staedtler Chief Financial Officer Castle Energy Corporation One Radnor Corporate Center, Suite 250 Radnor, Pennsylvania 19087 Dear Rick, We hereby consent to the use of our name and the reference to our reports dated November 5, 1996 in the Form 10-K of Castle Energy Corporation for the year ended September 30, 1996. Sincerely, /s/ Ryder Scott Company -------------------------- Authorized Signature 12-27-96 - ------------------------- Date EX-23.3 9 EXHIBIT 23.3 Exhibit 23.3 HUNTLEY & HUNTLEY, INC GEOLOGISTS AND ENGINEERS L.G. HUNTLEY 1912-1970 ESTABLISHED 1912 340 MANSFIELD AVENUE J.R. WYLIE, JR. 1927-1974 PITTSBURGH, PA 15220 R.S. STEWART 1948-1988 ---- T. BARTHOLOMEW, II AREA CODE 412 1988-1994 920-0800 Fax Number (412) 920-2972 December 29, 1996 Mr. Richard E. Staedtler Chief Financial Officer Castle Energy Corporation One Radnor Corporate Center, Suite 250 Radnor, PA 19087 Dear Mr. Staedtler: We hereby consent to the use of our name and reference to our report in the Form 10-K of Castle Energy Corporation for the year ended September 30, 1996. Sincerely, /s/ Keith N. Mangini - -------------------------- By: Keith N. Mangini President December 29, 1996 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 INCLUDED IN ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR SEP-30-1996 SEP-30-1996 5,200 0 10,217 0 0 24,151 28,540 7,331 101,230 28,603 5,834 0 0 3,347 63,364 101,130 68,695 68,695 34,223 56,805 0 0 1,959 13,815 (11,259) 25,074 0 0 0 25,074 3.73 3.73
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