SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange
Act of 1934 for the Quarterly Period Ended September 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-8898
Midcoast Energy Resources, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 76-0378638
(State or Other Jurisdiction of I.R.S. Employer Incorporation or
Organization) Identification No.)
1100 Louisiana, Suite 3030
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 650-8900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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
On September 30, 1995, there were outstanding 328,057 shares of the Company's
common stock, par value $.01 per share.
Transitional Small Business Disclosure Format. Yes No X
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
Quarterly Report on Form 10-QSB for the
Quarter Ended September 30, 1995
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheet as of September 30, 1995
and December 31, 1994 3
Consolidated Statements of Operations for the nine months
ended September 30, 1995 and September 30, 1994 4
Consolidated Statements of Stockholders' Equity for
the nine months ended September 30, 1995 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1995 and September 30, 1994 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations 9
PART II. OTHER INFORMATION 11
SIGNATURE 12
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
ASSETS September 30, December 31,
1995 1994
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 251,168 $ 65,921
Accounts receivable, no allowance for doubtful accounts 1,619,083 1,996,087
Investment held for resale (Note 3) 1,900,510 -
--------------- ---------------
Total current assets 3,770,761 2,062,008
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities 7,539,173 3,990,406
Investment in transmission facilities 1,284,609 1,284,609
Oil and gas properties, using the full cost method of accounting 281,639 69,499
Other property and equipment 85,369 84,679
--------------- ---------------
9,190,790 5,429,193
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION (676,019) (434,777)
--------------- ---------------
8,514,771 4,994,416
DEFERRED CONTRACT COSTS AND OTHER ASSETS, net of amortization 171,161 215,906
--------------- ---------------
Total assets $ 12,456,693 $ 7,272,330
--------------- ---------------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,036,796 $ 1,943,145
Current portion of deferred income 83,000 83,000
Short-term borrowing from bank 730,000 210,000
Current portion of long-term debt payable to banks 930,806 930,692
Notes payable (Note 4) 3,200,000 -
--------------- ---------------
Total current liabilities 6,980,602 3,166,837
--------------- ---------------
LONG-TERM DEBT PAYABLE TO:
Bank 816,945 1,505,771
Shareholders and affiliates 2,321,272 275,000
--------------- ---------------
Total long-term debt 3,138,217 1,780,771
--------------- ---------------
DEFERRED INCOME 255,917 318,167
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
5% cumulative preferred stock, $1 par value, 1 million
shares authorized, 200,000 shares issued and outstanding
with a liquidation preference of $1,183,665 200,000 200,000
Common stock, $.01 par value, 6 million shares authorized,
328,057 and 314,357 shares issued and outstanding at
September 30, 1995 and December 31, 1994, respectively 3,281 3,144
Paid-in capital 18,833,057 18,751,131
Retained deficit (16,805,421) (16,909,320)
Unearned compensation (148,960) (38,400)
--------------- ---------------
Total stockholders' equity 2,081,957 2,006,555
--------------- ---------------
Total liabilities and stockholders' equity $ 12,456,693 $ 7,272,330
--------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For The Nine Months Ended
---------------------------------
September 30, September 30,
1995 1994
--------------- ---------------
OPERATING REVENUES:
<S> <C> <C>
Sale of natural gas and transportation fees $ 8,217,478 $ 11,703,070
Oil and gas revenue 31,324 5,544
--------------- ---------------
Total operating revenues 8,248,802 11,708,614
--------------- ---------------
OPERATING EXPENSES:
Cost of natural gas and transportation charges 6,995,382 10,729,595
Production of oil and gas 3,447 2,367
Depreciation, depletion, and amortization 289,459 184,106
General and administrative 565,571 620,076
--------------- ---------------
Total operating expenses 7,853,859 11,536,144
--------------- ---------------
Operating income 394,943 172,470
NON-OPERATING ITEMS:
Interest expense (227,636) (121,715)
Other income(expense), net (19,143) 15,436
--------------- ---------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 148,164 66,191
PROVISION FOR INCOME TAXES - -
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE - (120,936)
--------------- ---------------
Net income (loss) 148,164 (54,745)
5% CUMULATIVE PREFERRED STOCK DIVIDENDS (44,265) (44,265)
--------------- ---------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 103,899 $ (99,010)
--------------- ---------------
NET INCOME (LOSS) PER COMMON SHARE:
OPERATIONS $ 0.32 $ 0.07
CHANGE IN ACCOUNTING PRINCIPLE 0.00 (0.39)
--------------- ---------------
$ 0.32 $ (0.32)
--------------- ---------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 320,854 306,257
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
5% Cumulative Total
Preferred Common Paid-in Retained Unearned Stockholders'
Stock Stock Capital Deficit Compensation Equity
------------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 200,000 3,144 18,751,131 (16,909,320) (38,400) 2,006,555
Issuance of 13,000 shares which are
subject to a four year vesting schedule
in connection with an employment agreement - 130 77,870 - (110,560) (32,560)
Issuance of 700 shares in connection with
employee stock bonuses - 7 4,056 - - 4,063
Net income - - - 148,164 - 148,164
5% cumulative preferred stock dividends - - - (44,265) - (44,265)
------------- ---------- ----------- ------------- ---------- -----------
BALANCE, September 30, 1995 200,000 3,281 18,833,057 (16,805,421) (148,960) 2,081,957
------------- ---------- ----------- ------------- ---------- -----------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For The Nine Months Ended
---------------------------------
September 30, September 30,
1995 1994
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) applicable to common shareholders $ 103,899 $ (99,010)
Adjustments to arrive at net cash provided (used) in
operating activities:
Depreciation, depletion and amortization 289,459 184,106
Recognition of deferred income (62,250) 415,000
Issuance of common stock to employees 4,475 -
Cumulative effect of a change in accounting principle - 120,936
Changes in working capital accounts-
Decrease in accounts receivable 377,004 280,431
Increase (decrease) in accounts payable and
accrued liabilities 66,698 (1,355,103)
--------------- ---------------
Net cash provided (used) by operating activities 779,285 (453,640)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,794,472) (582,666)
Investment held for resale (1,873,654) -
Investment in transmission facilities - (1,284,609)
Other (3,472) (6,249)
--------------- ---------------
Net cash used in investing activities (5,671,598) (1,873,524)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank debt borrowings 3,290,000 2,940,000
Bank debt repayments (3,458,712) (1,474,202)
Proceeds from notes payable to
shareholders & affiliates 2,046,272 316,250
Repayments on notes payable to
shareholders & affiliates - (316,250)
Proceeds from notes payable 3,200,000 -
--------------- ---------------
Net cash provided by financing activities 5,077,560 1,465,798
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 185,247 (861,366)
--------------- ---------------
CASH AND CASH EQUIVALENTS, beginning of year 65,921 1,072,396
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 251,168 $ 211,030
--------------- ---------------
CASH PAID FOR INTEREST $ 202,536 $ 120,436
--------------- ---------------
CASH PAID FOR INCOME TAXES $ - $ 6,000
--------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial information has been prepared
by Midcoast Energy Resources, Inc. ("Midcoast" or "the Company") in
accordance with the instructions to Form 10-QSB. The information
furnished reflects all adjustments, all of which were of a normal
recurring nature, which are, in the opinion of the Company,
necessary for a fair presentation of the results for the interim
periods presented. Although the Company believes that the
disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures, including
significant accounting policies, normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations. It is suggested that the financial
information be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994.
2. BACKGROUND
Midcoast was formed on May 11, 1992, as a Nevada corporation and,
in September 1992, became the successor to Nugget Oil Corporation
("Nugget") through a merger pursuant to the Nugget Plan of
Reorganization. The merger was accounted for as a pooling of
interests.
3. INVESTMENT HELD FOR RESALE
Pursuant to a letter agreement dated June 16, 1995, the Company and
an affiliate owned by an officer and director of the Company
jointly acquired 100% of the outstanding capital stock of Five
Flags Pipe Line Company ("Five Flags") from a non-affiliated
company. Total cash consideration of $2,052,000 was paid on
September 13, 1995 of which Midcoast's share was $1,872,450 for
91.25% of Five Flags capital stock and the affiliates share was
$179,550 for 8.75% of Five Flags capital stock. The investment was
financed by an officer and director of the Company as discussed in
Note 5. Related Party Transaction below.
The acquisition of Five Flags stock was made as an investment to be
resold to another non-affiliated company pursuant to an agreement
for purchase and sale of stock dated September 6, 1995.
Consummation of the transaction occurred on October 2, 1995 (see
Note 7. Subsequent Events).
4. ACQUISITION
On September 8, 1995, Midcoast acquired 100% of the outstanding
capital stock of Magnolia Pipeline Corporation, an Alabama
corporation ("Magnolia"), from Williams Holdings of Delaware, Inc.
("Williams") a non-affiliated company. The acquisition was made
pursuant to the Agreement for Sale and Purchase of Stock dated July
27, 1995 and had an effective date of August 1, 1995. The
principal asset of Magnolia consists of approximately 109 miles of
natural gas pipeline located in central Alabama.
In consideration for Magnolia's stock, Midcoast issued a $500,000
subordinated debenture ("Debenture") and a $2,700,000 nonrecourse
promissory note ("Note") to Williams which are both reflected as
notes payable on Midcoast's September 30, 1995 balance sheet. The
Debenture accrued interest at ten percent per annum and had a final
maturity of September 15, 1996 but was redeemable at the option of
Midcoast. The Note was non-interest bearing and was due on October
9, 1995. However, the Debenture and the Note were paid in full on
October 2, 1995 (see Note 7. Subsequent Events).
5. RELATED PARTY TRANSACTION
The Five Flags investment discussed in Note 3 above was financed by
an officer and director of the Company. A $1,872,450 promissory
note was executed by the Company and called for monthly payments of
interest beginning April 1, 1996 until December 31, 1996 at which
time both principal and any accrued interest would be due in full.
Interest accrued at the prime rate plus 2%. However, the note was
repaid in full on October 2, 1995 (see Note 7. Subsequent Events).
6. COMMITMENTS
As of September 30, 1995, the Company had an executed gas
transportation contract requiring the construction of a pipeline
and related facilities which, if constructed, would cost
approximately $360,000. This construction obligation is subject to
the Company's obtaining necessary regulatory approvals and
financing. The Company expects construction of this project to
begin during the fourth quarter of 1995. Financing of this project
is expected to be derived from one of the Company's existing bank
lenders.
7. SUBSEQUENT EVENTS
On October 2, 1995, Midcoast and an affiliate owned by an officer
and director of the Company jointly sold 100% of the capital stock
of Five Flags Pipe Line Company to a non-affiliated company for
cash
consideration. A portion of the proceeds from the sale were used to
repay the related party promissory note of $1,872,450 plus accrued
interest.
On October 2, 1995, $1,200,000 was borrowed from an affiliate owned
by an officer and director of the Company. These funds were used
in conjunction with the remainder of the sales proceeds of Five
Flags to fully retire the $500,000 Debenture and $2,700,000 Note
due Williams for the acquisition of Magnolia.
On October 31, 1995, the Company entered into a new financing
agreement with an existing bank lender. The new agreement provides
for an initial $1,250,000 revolving line of credit with the amount
of available credit being reduced by $20,833 per month and has a
maturity of November 1, 1998. Interest will accrue at the banks
prime rate plus 1.5%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS
Results of Operations
Operating Revenues:
Operating revenues generated during the nine months ended September
30, 1995 totaled approximately $8.2 million dollars, or 30% lower
than generated in the same 1994 period. The decrease in 1995
revenues is primarily attributable to a decline in gas marketing
transactions during 1995. A decrease in gas marketing transactions
in 1995 is in response to declining profit margins and a focus on
servicing customer gas requirements where the Company has a fixed
asset investment. Despite the decline in operating revenue, the
Company's operating income increased 129% over 1994 as discussed in
the Earnings section below.
Operating Expenses:
Operating expenses for the nine months ended September 30, 1995
totaled approximately $7.9 million dollars, or 34% lower than the
comparable 1994 period. As explained in the preceding section, the
explanation for the decrease can be attributed to reduced gas
marketing transactions.
Depreciation, depletion, and amortization expense was approximately
$289,000 in the first nine months of 1995, as compared to $184,000
in the first nine months of 1994. The increase in 1995 can be
attributed to the acquisition of Magnolia effective August 1, 1995,
the construction of two new pipelines during the fourth quarter of
1994 and the Company's investment in Alaska which has been depleted
since July 1994.
General and administrative expenses incurred during the nine months
ended September 30, 1995 were approximately $566,000, or 9% lower
than the comparable 1994 period. The reduction of general and
administrative expenses in 1995 is a result of the Company's
ongoing effort to control expenses.
Interest expense totaled approximately $228,000 and $122,000
through September 30, 1995 and September 30, 1994, respectively.
The Company was servicing an average of approximately $2.6 million
in term debt through the first nine months of 1995 as compared to
an average of $1.4 million through the first nine months of 1994.
The increased debt service in 1995 is attributable to the
construction of two new pipelines during the fourth quarter of 1994
and investing in the Alaskan transmission facility during the
second quarter of 1994. Additionally, the interest rates on the
Company's debt are adjusted for any changes to the Prime Rate, and
therefore, the increase in interest rates during 1994 and 1995
adversely affected interest costs.
Earnings:
The Company recognized operating income and net income of
approximately $395,000 and $104,000, respectively through September
30, 1995 as compared to operating income of $172,000 and a net loss
of $99,000 for the first nine months of 1994. Despite a 57%
increase in depreciation, depletion and amortization expense in
1995 and despite sales of natural gas decreasing by 30% in the
first half of 1995 operating income increased by 129% over 1994.
The decrease in natural gas sales did not have a significant impact
on operating earnings because the decrease is related to gas
marketing activities which are characterized by large dollar sales
but small earnings margins. The primary factors which contributed
to the increase in operating earnings in 1995 is the revenue
generated by the Company's investment in Alaska and two months of
revenue derived from the acquisition of Magnolia.
Net income was adversely affected by an 87% increase in interest
expense in 1995 versus 1994. The principal reasons for this
increase are discussed in the Operating Expenses section above.
Capital Resources and Liquidity
Through September 30, 1995, the Company generated cash flow from
operations of 779,285, had cash on hand of $251,168 and had $20,000
available to the Company through its short-term credit facility
with its bank lender. On October 31, 1995, the Company obtained a
new $1,250,000 revolving credit facility with an existing bank
lender. As a result, the debt structure of the Company as
reflected in the Consolidated Balance Sheet has changed since
September 30, 1995. Also, the Company is currently negotiating
with a lending institution to obtain another new financing
agreement.
The Company estimates that capital expenditures for the remainder
of 1995 could range between $360,000 and $5,000,000 based on the
status of various agreements and proposals that were in process as
of September 30, 1995. At September 30, 1995, the Company was
committed to make capital expenditures of $360,000 during 1995.
The remaining uncommitted, but planned, 1995 capital expenditures
are entirely discretionary in nature and will be made only if
adequate financing is arranged.
The Company has historically arranged for project financing with
various banks to fund between 75% and 90% of the construction costs
of its new pipeline projects. Management of the Company believes
that project financing will be available to the Company to fund at
least 75% of the committed 1995 expenditures. The Company intends
for the 1995 planned but uncommitted capital expenditures to be
funded from sources discussed below; however, no assurances can be
given that any additional financing will be available to the
Company.
As growth opportunities present themselves, management has utilized
and will continue to utilize investment banking firms as
consultants to seek sources of additional funds through new debt or
equity financing. There can be no assurance, however, that the
Company's efforts to raise additional capital or obtain new
financing will be successful.
Certain of the officers and shareholders have provided financing to
the Company in the past and during the third quarter financed the
Company's investment in Five Flags and in October partially
financed the acquisition of Magnolia. Based on this experience, it
is management's opinion that additional loans may be available from
certain shareholders if additional capital cannot be arranged from
other sources.
The Company believes that it will be able to meet its obligations
as they become due during 1995 and 1996 from cash generated from
operations, existing lines of credit, additional project loans to
be arranged or from the other sources discussed above.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K
A report on Form 8-K was filed during the quarter covered by
this report. Such report was filed on September 22, 1995 and
reported the purchase acquisition of the stock of Magnolia Pipeline
Corporation from Williams Holdings of Delaware, Inc.
Signature
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDCOAST ENERGY RESOURCES, INC.
(Registrant)
BY: /s/ Dan C. Tutcher
Dan C. Tutcher
Chairman of the Board
Chief Executive Officer
and President
Date: November 14, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 251,168
<SECURITIES> 0
<RECEIVABLES> 1,619,083
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,770,761
<PP&E> 9,190,790
<DEPRECIATION> 676,019
<TOTAL-ASSETS> 12,456,693
<CURRENT-LIABILITIES> 6,980,602
<BONDS> 0
<COMMON> 3,281
0
200,000
<OTHER-SE> 1,878,676
<TOTAL-LIABILITY-AND-EQUITY> 12,456,693
<SALES> 8,217,478
<TOTAL-REVENUES> 8,248,802
<CGS> 6,995,382
<TOTAL-COSTS> 7,853,859
<OTHER-EXPENSES> 19,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227,636
<INCOME-PRETAX> 148,164
<INCOME-TAX> 0
<INCOME-CONTINUING> 148,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,899
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
