MIDCOAST ENERGY RESOURCES INC, SB-2/A, 1996-07-23

MIDCOAST ENERGY RESOURCES INC
SB-2/A, 1996-07-23
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1

As filed with the Securities and Exchange Commission on July 23, 1996

Registration No. 333-4643

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NUMBER 1

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
MIDCOAST ENERGY RESOURCES, INC.
(Name of small business issuer in its charter)

<TABLE>
<S> <C> <C>
NEVADA 4922 76-0378638
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>

1100 LOUISIANA, SUITE 2950
HOUSTON, TEXAS 77002
PHONE: (713) 650-8900
FAX: (713) 650-3232
(Address and telephone number of principal executive office and principal place
of business)

DAN C. TUTCHER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MIDCOAST ENERGY RESOURCES, INC.
1100 LOUISIANA, SUITE 2950
HOUSTON, TEXAS 77002
PHONE: (713) 650-8900
FAX: (713) 650-3232
(Name, address and telephone number of agent for service)
---------------------

Copies to:

<TABLE>
<S> <C>
ROBERT G. REEDY, ESQ. HENRY I. ROTHMAN, ESQ.
PORTER & HEDGES, L.L.P. PARKER CHAPIN FLATTAU & KLIMPL, L.L.P.
700 LOUISIANA, 35TH FLOOR 1211 AVENUE OF THE AMERICAS
HOUSTON, TEXAS 77002-2764 NEW YORK, NEW YORK 10036
PHONE: (713) 226-0600 PHONE: (212) 704-6000
FAX: (713) 228-1331 FAX: (212) 704-6288
</TABLE>

---------------------

Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(2)................... 1,150,000 $11.00 $12,650,000 $4,362.07
- --------------------------------------------------------------------------------------------------
Representative's Warrants(3)(4)... -- -- -- (5)
- --------------------------------------------------------------------------------------------------
Common Stock Underlying
Representative's Warrants(4).... 100,000 $13.20 $1,320,000 $455.17
- --------------------------------------------------------------------------------------------------
TOTAL................... $4,817.24
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- --------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(2) Includes a maximum of 150,000 shares that may be issued to the Underwriters
pursuant to an over-allotment option.
(3) The Representative's Warrants allow the holder to purchase 100,000 shares of
Common Stock.
(4) The registration statement also covers any additional securities which may
become issuable pursuant to anti-dilution provisions of the Representative's
Warrants.
(5) Pursuant to Rule 457(g), no registration fee is required for the
Representative's Warrants.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

MIDCOAST ENERGY RESOURCES, INC.

Cross-reference sheet pursuant to Rule 404(a) of Regulation C

<TABLE>
<CAPTION>
ITEM
NUMBER FORM SB-2 CAPTION LOCATION IN PROSPECTUS
- ------ ----------------- ----------------------
<S> <C> <C>
1. Front of Registration Statement and
Outside Front Cover Page of
Prospectus............................. Facing Page; Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.......................... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors..... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Use of Proceeds
5. Determination of Offering Price.......... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution................................. Dilution
7. Selling Security Holders................. Not applicable
8. Plan of Distribution..................... Outside Front Cover Page of Prospectus;
Underwriting
9. Legal Proceedings........................ Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons.................... Management; Principal Stockholders
11. Security Ownership of Certain Beneficial
Owners and Management.................. Management; Principal Stockholders
12. Description of Securities................ Description of Securities
13. Interest of Named Experts and Counsel.... Not applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Description of Securities
15. Organization Within Last Five Years...... Business and Properties
16. Description of Business.................. Business and Properties
17. Management's Discussion and Analysis or
Plan of Operation...................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property.................. Business and Properties
19. Certain Relationships and Related
Transactions........................... Management
20. Market for Common Equity and Related
Stockholder Matters.................... Market for the Company's Common Stock;
Description of Securities
21. Executive Compensation................... Management
22. Financial Statements..................... Consolidated Financial Statements
23. Changes in and Disagreements With
Accountants and Financial Disclosure... Not applicable
</TABLE>

<PAGE> 3
*******************************************************************************
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
*******************************************************************************

SUBJECT TO COMPLETION -- DATED JULY 23, 1996

PROSPECTUS

[MIDCOAST LOGO]

1,000,000 Shares
MIDCOAST ENERGY RESOURCES, INC.

Common Stock
---------------------------

ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY (THE "COMMON STOCK") ARE BEING
SOLD BY THE COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE COMMON STOCK. IT IS CURRENTLY ANTICIPATED THAT THE PUBLIC OFFERING
PRICE WILL BE BETWEEN $10.00 AND $11.00 PER SHARE. SEE "UNDERWRITING" FOR
A DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE OFFERING
PRICE. SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, THE COMMON STOCK OF
THE COMPANY HAS BEEN APPROVED FOR LISTING ON THE AMERICAN STOCK
EXCHANGE ("AMEX") UNDER THE SYMBOL "MRS."

---------------------------

SEE "RISK FACTORS" ON PAGE 7 FOR CERTAIN INFORMATION
THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
---------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------

<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
-----------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... 10.00 1.00 9.00
Total(3)....................................... 10,000,000 1,000,000 9,000,000
</TABLE>

(1) Does not include additional compensation to Coleman and Company Securities,
Inc. (the "Representative") in the form of a non-accountable expense
allowance payable to the Representative. In addition, the Company has agreed
to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."

(2) Before deducting offering expenses payable by the Company, estimated at
$462,500, including the Representative's non-accountable expense allowance.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
150,000 additional shares of Common Stock on the same terms as set forth
above for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
11,500,000, 1,150,000, and 10,350,000, respectively. See "Underwriting."

---------------------------

The Common Stock is offered by the several Underwriters subject to prior
sale, when, as and if issued to and accepted by the Underwriters and on the
approval of certain legal matters by counsel for the Underwriters, and subject
to certain other conditions. It is expected that delivery of certificates
representing the securities will be made in New York, New York against payment
therefor on or about , 1996.
---------------------------

COLEMAN AND COMPANY SECURITIES, INC.

GAINES, BERLAND INC.

NOLAN SECURITIES CORPORATION

The date of this Prospectus is , 1996

<PAGE> 4

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE AMERICAN STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements filed
by the Company with the Commission pursuant to the informational requirements of
the Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission, at Room 1024, Judiciary Plaza Building, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048, and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained at prescribed rates from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza
Building, 450 Fifth St., N.W. Washington, D.C. 20549. The Company has applied
for listing of the Common Stock on American Stock Exchange and, if listed, its
reports and other Company information will be available for inspection at the
offices of the American Stock Exchange, Inc., 86 Trinity Place, New York, New
York 10006-1881.

The Company has filed with the Commission a Registration Statement on Form
SB-2 (the "Registration Statement") under the Securities Act, with respect to
the Common Stock offered hereby. This Prospectus, filed as a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and to the
exhibits and schedules thereto, which may be inspected at the Commission's
offices without charge or copies of which may be obtained from the Commission
upon payment of the prescribed fees. Statements made in the Prospectus as to the
contents of any contract, agreement or document referred to are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, and each
such statement is qualified in its entirety by such reference.

The Company will provide its stockholders with annual reports containing
audited financial statements and interim quarterly reports containing unaudited
financial information. The Company will provide without charge to each person
who receives a copy of this Prospectus, upon written or oral request of such
person, a copy of any of the information that is incorporated by reference in
this Prospectus (not including exhibits to the information that is incorporated
by reference unless the exhibits are themselves specifically incorporated by
reference). Such request should be directed to: Midcoast Energy Resources, Inc.,
Attn: Dan C. Tutcher, 1100 Louisiana, Suite 2950, Houston, Texas 77002, (713)
650-8900.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and consolidated financial
statements and related notes appearing elsewhere in this Prospectus. Unless
otherwise indicated, all information in this Prospectus gives effect to a
4.460961 for 1 split in the Company's Common Stock that will be effected
immediately prior to the effective date of the Offering and assumes that the
Underwriters' over-allotment option is not exercised. For definitions of certain
terms used in this Prospectus see "Glossary."

THE COMPANY

The Company is a rapidly growing pipeline company primarily engaged in the
construction, acquisition, disposition, and operation of pipelines for
end-users, as well as the transmission and gathering of natural gas and crude
oil. Thirty-nine intrastate pipeline systems are owned or operated by the
Company in Alabama, Alaska, Kansas, Louisiana, Mississippi, New York, Oklahoma,
Tennessee and Texas, with 26 of the Company's pipelines being acquired or
constructed since June 1994. Natural gas marketing operations and, to a lesser
degree, oil and gas production supplement the Company's pipeline business. The
Company's principal growth and business strategy is to acquire or build
pipelines to serve the end-user market while also continuing to pursue
acquisition and divestiture opportunities in transmission and gathering of
natural gas, other hydrocarbons and nonhydrocarbon fluids or gases.

The natural gas industry has undergone dramatic change over the past decade
largely due to the course of deregulation by the federal government. This has
resulted in increased competition in the natural gas industry. The impact of
these changes has been particularly felt in the natural gas pipeline industry
over the last several years. The key part of this regulatory shift, to ensure a
more competitive natural gas market, was the implementation of the Federal
Energy Regulatory Commission's ("FERC") Order 636. This order generally opened
previously restricted access to interstate pipelines by requiring the operators
of such pipelines to "unbundle" their transportation services from their sales
services, allowing customers to choose their provider for such services as
gathering, storage, and transportation. This unbundling essentially eliminated
the pipeline's traditional merchant function and caused a major restructuring of
this relationship between the major interstate pipelines and their customers.
For the most part, regulators at the state level have followed the FERC's lead
and allowed increased competition with local distribution companies ("LDCs"),
and allowed the phenomenon of the construction of bypass pipelines to end-users.
In addition to the issuance of Order 636, the implementation of more stringent
environmental laws, such as the Clean Air Act of 1990 and the Energy Policy Act
of 1992, has also affected the overall demand for natural gas by encouraging the
use of cleaner burning fuels, such as natural gas. Accordingly, these regulatory
changes have impacted the growth in domestic consumption of natural gas which
has increased from approximately 16,200 billion cubic feet in 1986 to an
estimated 21,600 billion cubic feet in 1995. See "Business and
Properties -- Markets and Major Customers."

The Company believes that its experience in the strategic location, design,
engineering, construction and operation of pipelines, as well as in federal,
state and local regulatory matters involving pipelines, makes it well positioned
to continue to take full advantage of these changes in the natural gas industry,
primarily through aggressively pursuing the industrial end-user market by
acquiring and constructing new pipeline systems. The Company is currently one of
the few independent companies in the industry which has pursued supplying the
industrial end-user market by providing new pipeline connections to this market.
As more chemical and manufacturing companies seek alternative natural gas
suppliers other than their LDC's, the Company and its personnel will continue to
offer the expertise they have gained through their involvement in the regulatory
permitting, construction and operation of 15 end-user pipelines reaching
customers in six states. The Company will also continue to expand its current
market base by working with many of its existing customers, such as Mid-America
Pipeline Company ("Mapco"), a publicly traded company, Owens-Corning Fiberglas
Corporation ("Owens"), a publicly traded company, and Tyson Foods, Inc.
("Tyson"), a publicly traded company, to provide natural gas service to
additional facilities operated by these customers.

3
<PAGE> 6

quickly increase their volumes with little capital expenditure should additional
demand develop in these areas. The Company also benefits from lower overhead
than major interstate carriers and LDCs and the resultant ability to offer
reduced rates which should allow it to compete effectively with entrenched LDCs
and gas transmission carriers for their existing and new end-user customers.

A secondary impact of these regulatory changes has been an overall
consolidation of the gathering and transmission pipeline segments in the
industry. These consolidations have resulted in increased opportunities for
pipeline acquisitions by the Company as major pipeline companies divest
themselves of pipeline systems only incidentally acquired by them in connection
with larger acquisitions or as a result of their divestitures of such pipeline
systems due to internal changes in their strategic focus. For example, in 1995
and 1996, the Company acquired ownership of, or interests in, 19 pipeline
systems, including gathering systems and transmission lines, from major pipeline
companies. Moreover, the Company's recent acquisitions of Magnolia Pipeline
Company ("Magnolia" or the "Magnolia System"), a former subsidiary of The
Williams Companies, Inc. ("Williams"), a publicly traded company, and Five Flags
Pipe Line Company ("Five Flags" or the "Five Flags System"), from an affiliate
of The Coastal Corporation ("Coastal"), a publicly traded company, the
acquisition, by an affiliate, of six pipeline systems from Seahawk Natural Gas
Company ("Seahawk"), a wholly-owned subsidiary of Tejas Power Corporation
("Tejas"), a publicly traded company, as well as the acquisition by the Company,
through its wholly-owned subsidiary, Magnolia, of ten pipeline systems from
Texas Southeastern Gas Gathering Company ("TSGGC") further illustrate the
existence of such opportunities in the market place and the Company's ability to
rapidly capitalize on them. Not only has the industry trend to consolidate
increased the availability of attractive acquisitions in the market place but
the overall consolidation in the industry has also presented the Company with
advantageous opportunities to sell pipeline systems which the Company owns, such
as the Five Flags System and the Tasco Cavasos System, which were divested by
the Company on favorable terms. The Company will continue to consider and
evaluate such divestiture opportunities as the Company receives favorable offers
for their existing systems or assets which are suited to other companys'
strategic focus. See "Business and Properties -- Pipeline Construction,
Acquisition and Disposition" and "Business and Properties -- Pipeline Systems."

The Company's principal executive offices are located at Suite 2950, 1100
Louisiana Street, Houston, Texas 77002, and its telephone number and fax numbers
are (713) 650-8900 and (713) 650-3232, respectively.

THE OFFERING

SECURITIES OFFERED...................... 1,000,000 shares of Common Stock

COMMON STOCK OUTSTANDING

PRIOR TO THE OFFERING................. 1,500,000

AFTER THE OFFERING.................... 2,500,000(1)

USE OF PROCEEDS......................... The Company anticipates that the
net proceeds of this offering (the
"Offering") will be used for: (i)
the purchase of the Olmitos System,
(ii) the repayment of interim
financing incurred in connection
with recent acquisitions, (iii) the
repayment of certain outstanding
indebtedness, and (iv) working
capital including the future
acquisition of pipelines and
related assets. See "Use of
Proceeds."

AMEX Symbol............................. MRS

- ---------------

(1) Does not include (i) 100,000 shares of Common Stock issuable upon the
exercise of the Representative's Warrants, (ii) 34,349 shares issuable upon
exercise of outstanding warrants to purchase Common Stock exercisable at
$7.85 per share ("Outstanding Warrants"), (iii) the issuance of up to
200,000 shares of Common Stock reserved for issuance in connection with the
Company's stock option plan, or (iv) the issuance of shares of Common Stock
on exercise of the over-allotment option granted to the Underwriters. See
"Management -- Executive Compensation," "Description of
Securities -- Outstanding Warrants," and "Underwriting."

4
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA(1)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Gas marketing,
transportation and
production sales.......... $13,029,421 $14,908,124 $11,529,440 $2,904,840 $5,141,266
Sale of pipeline............ 2,400,000 60,586 4,092,850 -- 22,500
Refined products revenue.... 2,327,258 -- -- -- --
----------- ----------- ----------- ---------- ----------
Total.................. 17,756,679 14,968,710 15,622,290 2,904,840 5,163,766
----------- ----------- ----------- ---------- ----------
Cost and Expenses:
Cost of natural gas,
transportation and
production................ 11,796,711 13,462,248 9,907,337 2,502,063 4,326,969
Cost of pipeline sold....... 1,244,217 48,606 1,909,624 -- 2,153
Cost of refined products.... 2,289,103 -- -- -- --
Depreciation, depletion and
amortization.............. 264,249 259,440 451,551 85,320 136,328
General and
administrative............ 888,965 849,002 784,653 181,809 190,720
----------- ----------- ----------- ---------- ----------
Total.................. 16,483,245 14,619,296 13,053,165 2,769,192 4,656,170
----------- ----------- ----------- ---------- ----------
Operating Income............... 1,273,434 349,414 2,569,125 135,648 507,596
Non-operating Expense.......... 455,635 201,689 375,724 70,259 133,914
----------- ----------- ----------- ---------- ----------
Income before income taxes and
cumulative effect of a
change in accounting
principle................... 817,799 147,725 2,193,401 65,389 373,682
Provision for income
taxes(6).................... (52,833) -- -- -- --
Cumulative effect of a change
in accounting
principle(2)................ -- (120,936) -- -- --
----------- ----------- ----------- ---------- ----------
Net Income..................... $ 764,966 $ 26,789 $ 2,193,401 $ 65,389 $ 373,682
=========== =========== =========== ========== ==========
5% Cumulative Preferred Stock
Dividends................... (59,183) (59,183) (59,183) (14,593) (14,755)
----------- ----------- ----------- ---------- ----------
Net Income (Loss) applicable to
Common Shareholders......... $ 705,783 $ (32,394) $ 2,134,218 $ 50,796 $ 358,927
=========== =========== =========== ========== ==========
Net Income (Loss) per common
share(3):
Operations..................... $ 0.52 $ 0.07 $ 1.48 $ 0.04 $ .24
Change in accounting
principle................... -- (0.09) -- -- --
----------- ----------- ----------- ---------- ----------
Net Income per common share.... $ 0.52 $ (0.02) $ 1.48 $ 0.04 $ .24
=========== =========== =========== ========== ==========
Weighted average number of
common shares
outstanding(3).............. 1,359,839 1,390,553 1,439,606 1,402,334 1,465,827
=========== =========== =========== ========== ==========
</TABLE>

5
<PAGE> 8

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
---------------------------------------- -----------------------------
1993 1994 1995 ACTUAL AS ADJUSTED(4)
---------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit).... $ (392,738) $(1,104,829) $ (98,870) $ (441,129) $ 5,078,556
Total assets................. $6,438,791 $ 7,272,330 $11,088,588 $11,887,041 $ 17,929,401
Long-term debt, excluding
current portion(5)........ $ 669,560 $ 1,780,771 $ 3,960,769 $ 3,442,410 $ 1,749,961
Shareholders' equity(6)...... $2,028,809 $ 2,006,555 $ 4,157,436 $ 4,522,363 $ 12,941,497
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------- ----------
1993 1994 1995 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Data:
Miles of pipeline (end of period)(7).... 39.0 51.1 162.1 247.2
Volumes transported and sold, net
(MMBtu)(8)........................... 5,077,538 9,577,787 14,602,371 10,303,579(9)
Number of operating systems
(end of period)...................... 15 20 21 27
</TABLE>

- ---------------

(1) The summary historical consolidated financial information for the fiscal
years ended December 31, 1993, 1994 and 1995, and for the three month
periods ended March 31, 1995 and 1996, set forth above is derived from and
should be read in conjunction with the Company's Consolidated Financial
Statements and accompanying notes appearing elsewhere in this Prospectus.
The data for the three month periods ended March 31, 1995 and 1996 are
derived from and qualified by reference to the Company's consolidated
financial statements appearing elsewhere herein and, in the opinion of
management of the Company includes all adjustments that are of a normal
recurring nature and necessary for a fair presentation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Consolidated Financial Statements."

(2) See Note 3 to the Company's "Consolidated Financial Statements."

(3) Share amounts have been adjusted for the 4.460961 to 1 stock split which
will be completed prior to the effective date of the Offering.

(4) As adjusted gives effect to the Offering, the 4.460961 to 1 stock split,
the application of the net proceeds of the Offering (assuming a public
offering price of $10.00 per share), and the redemption of the Company's 5%
cumulative preferred stock for $118,367 in May 1996, but excludes the
exercise of the Underwriter's over-allotment option. See "Use of Proceeds,"
"Capitalization," and "Underwriting."

(5) See Note 7 to the Company's "Consolidated Financial Statements."

(6) As of December 31, 1995, the Company had net operating loss ("NOL")
carryforwards of approximately $15,071,000 expiring in various amounts from
1999 through 2008, and investment tax credit ("ITC") carryforwards of
approximately $354,000 which principally expire in 1997. These
carryforwards were generated by the Company's predecessor. The Company
believes, however, that the amount of the NOL carryforwards will be reduced
after consideration of the income generated by the Company for the tax year
ending April 30, 1996. The ability of the Company to utilize the
carryforwards is dependent upon the Company generating sufficient taxable
income and avoiding limitations on the use of such carryforwards due to a
change in stockholder control under the Internal Revenue Code. See "Risk
Factors -- Limits of Use of Net Operating Losses and Credit Carryovers."

(7) Includes all of the miles of pipeline of the various pipelines that the
Company owns an interest in or operates. However, such amounts do not
include the ten systems comprising 113 miles of pipeline acquired by the
Company through its wholly-owned subsidiary, Magnolia, from TSGGC or the
Company's two systems presently under construction.

(8) Includes only volumes transported or sold through the Company's pipeline
systems since the Company's ownership of any system. Transported oil
volumes have been converted to an equivalent unit basis which is 6 MMBtu to
1 bbl, consistent with industry standards.

(9) Includes only volumes transported or sold through the Company's pipeline

systems for the three month period ended March 31, 1996.

6
<PAGE> 9

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider each of the following risk
factors in evaluating an investment in the Company.

Dependence on Key Systems. The Company derived over 32%, 18% and 14%,
respectively, of its operating income for the three month period ended March 31,
1996 from the Magnolia System, Lake Charles System and Cook Inlet System. The
loss of operating income from any one of these systems for any appreciable
period, whether or not from insured causes, could have an immediate and adverse
effect on the Company's business and financial condition. See "Business and
Properties -- Pipeline Systems."

Integration of Acquired and Constructed Pipelines. The Company has
experienced substantial growth since June 1994 due to its acquisition and
construction of a number of pipelines. The Company's growth strategy is capital
intensive in nature and depends in large measure on its ability to successfully
acquire or construct additional pipeline systems. The financial position and
results of operations of the Company will depend to a large extent on the
Company's ability to integrate these acquired operations effectively and to
realize expected efficiencies and economies of scale. There can be no assurance
that the Company's efforts to integrate these acquired operations will be
effective, or that expected efficiencies and economies of scale will be
realized. Failure to effectively integrate acquired operations could have a
material adverse effect on the Company's future results of operations. As the
Company continues to pursue its acquisition and construction strategy in the
future, its financial position and results of operations may fluctuate
significantly from period to period. See "Business and Properties -- Business
Growth and Strategy" and "Business and Properties -- Pipeline Construction,
Acquisition and Disposition."

Reliance on Officers, Directors and Key Employees. The Company is dependent
on the services of certain key management personnel, the loss of whose services
could have a material adverse effect on the Company. In particular, the Company
depends on the services of Dan C. Tutcher, Chairman of the Board, Chief
Executive Officer and President, Richard A. Robert, Chief Financial Officer and
Treasurer, and I. J. Berthelot, II, Vice President of Operations and Chief
Engineer, with whom the Company has employment contracts. There can be no
assurance that any of these persons will remain employed by the Company, or that
these persons will not participate in businesses that compete with the Company
in the future. In seeking qualified personnel, the Company will be required to
compete with companies having greater financial and other resources than the
Company. Since the Company's future success will be dependent on its ability to
attract and retain qualified personnel, the inability to do so could have a
materially adverse affect on its business. See "Management."

Limits of Use of Net Operating Losses and Credit Carryovers. As of December
31, 1995, the Company had NOL carryforwards of approximately $15,071,000
expiring in various amounts from 1999 through 2008, and ITC carryforwards of
approximately $354,000 which principally expire in 1997. These NOLs were
generated by the Company's predecessor. The Company believes, however, that the
amount of the NOL carryforwards will be reduced after consideration of the
income generated by the Company for the tax year ending April 30, 1996. The
ability of the Company to utilize the carryforwards is dependent upon the
Company generating sufficient taxable income and avoiding limitations on the use
of such carryforwards due to a change in stockholder control under the Internal
Revenue Code. The Offering is not expected to result in a limitation on the
Company's annual use of its NOL and credit carryovers under Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"). However, the Company's
future issuances of equity securities beyond the requirements of the Offering
could trigger such a limitation, which might allow all or a material part of
such carryovers to expire unused. Thus, there is no assurance that the Company
will be able to utilize its NOL and credit carryovers prior to expiration, due
to the lack of sufficient income to absorb such carryovers, a future limitation
under Section 382 of the Code, or both.

Hazards and Operating Risks of Pipeline Operations. The Company's
operations are subject to the many hazards inherent in the natural gas
transmission industry. These include damage to pipelines, related equipment and
surrounding properties caused by hurricanes, floods, fires and other acts of
God, inadvertent damage from construction and farm equipment, leakage of natural
gas and other hydrocarbons, fires and explosions, and other hazards that could
also result in personal injury and loss of life, pollution and suspension

7
<PAGE> 10

of operations. The Company maintains such insurance protection as it believes to
be adequate against normal risks in its operations. There is no assurance that
any such insurance protection will be sufficient or effective under all
circumstances or against all hazards to which the Company may be subject. The
occurrence of a significant event not fully insured against could materially and
adversely affect the Company's operations and financial condition. No assurance
can be given that the Company will be able to maintain adequate insurance in the
future at rates it considers reasonable. See "Business and
Properties -- Insurance." Should catastrophic conditions occur which interrupt
delivery of gas for any reason, such occurrence could have a material impact on
the profitability of the Company's operations. See "Business and
Properties -- Markets and Major Customers."

Risks of Inadequate Gas Supplies. The Company has historically purchased
substantially all of its gas from unaffiliated third parties. These purchase
contracts may be affected by factors beyond both the Company's and the gas
suppliers' control such as capacity restraints, temporary regional supply
shortages, and with regard to its gathering systems, other parties having
control over the drilling of new wells, inability of wells to deliver gas at
required pipeline quality and pressure, and depletion of reserves. The future
performance of the Company will depend to a great extent on the throughput
levels achieved by the Company with respect to its existing pipelines and the
pipelines acquired or constructed by it in the future. In order to maintain its
throughput at currently adequate levels, the Company must access new natural gas
supplies to offset the natural decline in reserves as such supplies are
utilized. See "Business and Properties -- Gas Supply."

Risks of Competition from Larger Competitors. The Company's competitors
include major integrated oil companies, affiliates of major interstate and
intrastate pipelines and national and local natural gas gatherers, brokers,
marketers and distributors. Many of these competitors, particularly those
affiliated with major integrated oil and interstate and intrastate pipeline
companies, have financial resources substantially greater than those of the
Company and have access to supplies of natural gas substantially greater than
those available to the Company. See "Business and Properties -- Competition."

Risk of Adverse Price Changes or Gas Imbalancing on Gas Marketing
Operations. The Company buys natural gas on the spot market for customers served
by pipeline systems owned by the Company and for sales to those customers.
Generally, gas is purchased under contracts that contain terms allowing prices
to be determined by prevailing market conditions. Concurrently, the Company
resells the gas at higher prices under sales contracts which are compatible as
to term, price escalation, renegotiation and other material matters. The Company
earns the difference between the gas purchase price it pays and the sales price
it receives. Gas marketing is characterized by a high degree of competition and
narrow margins. The profitability of the natural gas marketing operations of the
Company depends in large part on the ability of the Company's management to
assess and respond to changing market conditions in negotiating these natural
gas purchase and sales agreements. As a consequence of the increase in
competition in the industry and volatility of natural gas prices there has been
a reluctance of end-users to enter into long-term purchase contracts. Moreover,
consumers have shown an increased willingness to switch fuels between gas and
oil in response to relative price fluctuations in the market. To adapt there has
been a growing use of gas purchase contracts that require price adjustments in
response to market conditions. The inability of management to respond
appropriately to changing market conditions could have a negative effect on the
Company's profitability. The Company's gas marketing activities which utilize
third-party transporters also exposes the Company to economic risk resulting
from imbalances or nominated volume discrepancies which can result either in
penalties having a negative impact on earnings or a transaction gain, depending
on how and when imbalances are corrected. See "Business and
Properties -- Markets and Major Customers."

Fluctuations in Demand Due to Weather. The Company has had quarter to
quarter fluctuations in its results in the past due to the fact that the
Company's natural gas sales and transportation fees can be affected by changes
in demand for natural gas primarily because of weather. There can be no
assurances that the Company's efforts to minimize such effects will have any
impact on future quarter to quarter fluctuations occurring from time to time due
to changes in demand resulting from adverse weather conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- General."

8
<PAGE> 11

Broad Discretion in Application of Proceeds. Approximately $4,988,000 (58%)
of the estimated net proceeds from this Offering has been allocated to working
capital. Accordingly, the Company's management will have broad discretion as to
the application of such proceeds.

Risks of Changes in Government Regulation and Continuing Industry
Transition. Recent changes in the regulatory environment for the natural gas
transportation industry, most notably FERC Order 636, have profoundly affected
the economics and structure of the natural gas transmission industry, and may
continue to do so in the future. There can be no assurance that such evolution
will ultimately result in greater opportunities for smaller gas pipeline
companies. Although FERC's present intention, as promulgated in Order 636, is to
stimulate industry competition and to create a level playing field for all
natural gas buyers and sellers, there can be no assurance that such regulations
will be effective in meeting these goals. FERC could issue new regulations which
may subject the Company or some portion of the Company's business activity to
FERC regulation or adversely affect the conduct of the Company's business. The
construction, operation, maintenance and safety of the Company's pipelines are
typically regulated by the state regulatory commissions with jurisdictional
authority. As in the case of potential federal regulatory changes, there can be
no assurances that state regulatory measures will not adversely affect the
Company's business and financial condition. In such events, the state's
regulatory authorities could temporarily suspend or hinder operations in a
particular state, depending on the authority's view of its jurisdiction.
Regulators at the state level have generally followed the FERC's lead by
allowing increased competition behind LDCs. There can be no assurance that every
state will follow this practice without the pressure of litigation. See
"Business and Properties -- Government Regulation."

Risks of Liabilities and Costs Under Environmental Laws. The Company is
subject to federal, state and local laws, regulations and ordinances relating to
the environment, health and safety, waste management, and transportation of
hydrocarbons and chemical products. Various governmental authorities have the
power to enforce compliance with these regulations and the permits issued
pursuant to them, and violators are subject to civil and criminal penalties,
including civil fines, injunctions, or both. Private parties, including the
owners of property through which the Company's pipelines pass, may also have the
right to pursue legal actions to enforce compliance and seek damages for
noncompliance with environmental laws and regulations. The Company will make
expenditures in connection with environmental matters as part of its normal
operations and capital expenditures and the possibility exists that stricter
laws, regulations or enforcement policies could significantly increase the
Company's compliance costs and the cost of any remediation which may become
necessary. There is inherent risk of the incurrence of environmental costs and
liabilities in the Company's business due to its handling of oil, gas and
petroleum products. There can be no assurance that material environmental costs
and liabilities will not be incurred by the Company. Furthermore, there can be
no assurance that the Company's environmental impairment insurance will provide
sufficient coverage in the event an environmental claim were made against the
Company. An uninsured or underinsured claim of sufficient magnitude could have a
material adverse effect on the Company's financial condition. See "Business and
Properties -- Government Regulation" and "Business and Properties -- Insurance."

Absence of Dividends. The Company has historically paid dividends on its 5%
cumulative preferred stock which was redeemed in May 1996, but has not paid
dividends on its Common Stock since its inception. The Board of Directors (the
"Board") intends to declare a dividend of $.08 per share of Common Stock for the
first fiscal quarter after the completion of the Offering. While it is the
intention of the Board to continue to pay a quarterly dividend, the ability of
the Company to pay regular quarterly dividends will depend on the earnings and
financial condition of the Company, and payment of future dividends may be
restricted by the Company's financial condition and the Company's credit
agreements. Therefore, there can be no assurances that future dividends will be
paid. Under Magnolia's revolving line of credit with Compass Bank, N.A.
("Compass"), Magnolia is precluded from declaring or making dividend payments
unless consent is obtained by Compass. See "Dividend Policy," and "Description
of Securities -- Common Stock."

No Assurance of Market for Common Stock; Arbitrary Offering Price. There
has been no public market for the Common Stock before this Offering. Subject to
official notice of issuance, the Common Stock of the Company has been approved
for listing on AMEX under the symbol "MRS." There can be no assurance as to the
liquidity of any markets that may develop for the Common Stock, or the price at
which holders may be

9
<PAGE> 12

able to sell Common Stock. The public offering price of the Common Stock was
determined by negotiations between the Company and the Representative and may
not be indicative of the prices that may prevail in the public market. The
factors considered in determining the public offering price and such terms, in
addition to prevailing market conditions, were the history of and prospects for
the industry in which the Company competes, the market for the Company's Common
Stock, an assessment of the Company's management, the prospects of the Company,
and the demand for similar securities of comparable companies. See "Market for
the Company's Common Stock" and "Underwriting."

Control by Certain Stockholders. Prior to the Offering, approximately 86.4%
of the Common Stock is owned by members of the Board, officers or their
affiliates. All such stockholders, if they vote together, will likely be able to
influence the outcome of all matters submitted to a vote of the Company's
stockholders. See "Description of Securities," "Potential Effect of Shares
Eligible for Future Sale on Price of Common Stock" and "Underwriting."

Issuance of Representative's Warrants and Effect on Future Financing. The
Company will sell to the Representative, for nominal consideration, warrants to
purchase up to an amount equal to 10% of the total number of shares of Common
Stock sold in this Offering for a period of three and one-half years, commencing
18 months from the effective date of the Registration Statement, at an exercise
price of 120% of the public offering price per share of Common Stock. The
holders of the Representative's Warrants are likely to exercise or convert them
at a time when the Company would be able to obtain additional equity capital on
terms more favorable than those provided by such Representative's Warrants. The
Representative's Warrants also grant to the holders certain demand registration
rights and "piggy back" registration rights. These obligations may hinder the
Company's ability to obtain future financing. See "Underwriting."

Potential Effect of Shares Eligible for Future Sale on Price of Common
Stock. A substantial number of outstanding shares of Common Stock and shares of
Common stock issuable upon exercise of Outstanding Warrants will become eligible
for future sale in the public market at prescribed times. Sales of significant
amounts of Common Stock in the public market following this Offering could
adversely affect prevailing market prices. Holders of approximately 92% of the
outstanding Common Stock and the Company (including all officers and directors
of the Company), have agreed not to sell such shares for 18 months after the
date of this Prospectus. Upon the expiration of such agreements, approximately
1,352,530 shares will be eligible for sale pursuant to Rule 144 under the
Securities Act and 32,697 and 4,014 shares will be eligible for sale pursuant to
Rule 144 after 24 and 30 months, respectively, from the date of this Prospectus.
Certain holders of Common Stock also have piggyback registration rights, subject
to underwriters' limitations. Additionally, holders of 110,759 shares of Common
Stock not subject to such lockup agreements may be sold pursuant to Rule 144 or
144(k) under the Securities Act. See "Description of Securities", "Shares
Eligible for Future Sale" and "Underwriting."

Dilution. Purchasers of shares of Common Stock offered hereby will incur
immediate and substantial dilution of $4.79 per share in the net tangible book
value of their investments. See "Dilution."

[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

10
<PAGE> 13

USE OF PROCEEDS

The estimated net proceeds to the Company after deducting underwriting
commissions and the other expenses of this Offering will be approximately
$8,538,000 (or $9,861,000 if the Underwriter's over-allotment option is
exercised in full). The Company expects to apply these proceeds approximately as
follows:

<TABLE>
<CAPTION>
APPLICATION AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
Purchase of Olmitos System -- See "Business and Properties -- Pipeline
Construction, Acquisition and Disposition"............................. $ 707,000
Repayment of interim financing obtained in connection with recent
acquisitions(1)........................................................ 943,000
Repayment of certain outstanding indebtedness(2)......................... 1,900,000
Working capital including any future acquisition of pipelines and related
assets................................................................. 4,988,000
----------
Total.......................................................... $8,538,000
==========
</TABLE>

- ---------------

(1) The interim financing includes:

(i) $343,000 of debt incurred in connection with the Company's construction
costs of both the South Fulton System in Obion County, Tennessee and the
Power Paper System in Roane County, Tennessee. The note payable to a
bank bears interest at the prime rate plus 1% and is payable in 60
monthly installments of $7,185 including accrued interest beginning
August 15, 1996 with a final maturity of July 15, 2001. The note is
secured by an assignment of revenues from both the Power Paper and South
Fulton Systems, with a negative pledge on the systems.

(ii) $100,000 of debt incurred in connection with the Company's equity
contribution in March 1996 to Pan Grande Pipeline L.L.C. ("Pan Grande")
evidenced by a note payable to Rainbow Investments Company, a Texas
corporation ("Rainbow") which is controlled by Stevens G. Herbst, a
former director of the Company. The note, as amended, bears interest at
the prime rate plus 2.5% and is payable in 59 installments of $1,667 and
accrued interest and a final installment at March 15, 2001 in the amount
of the remaining principal plus accrued interest then outstanding and
unpaid. The note is secured by the Company's interest in Pan Grande. See
"Management -- Certain Transactions."

(iii) $150,000 to repurchase the 5% net revenue interest in Magnolia's
earnings before interest, income taxes and depreciation granted to
Rainbow in connection with financing provided by Rainbow to the Company
for the Company's acquisition of Magnolia. See "Management -- Certain
Transactions."

(iv) $350,000 of debt incurred in connection with Magnolia's acquisition of
ten gas gathering systems from TSGGC in May 1996. See "Business and
Properties -- Pipeline Construction, Acquisition and Disposition." The
funds were obtained by amending the Company's existing credit facility
with a bank to reflect an increase in availability from $1,500,000 to
$1,778,560. The credit facility, as amended, provides for a $23,000
monthly reduction in the amount of available credit. Interest accrues at
the prime rate plus 1%. Upon maturity at January 15, 1999, the balance
of principal plus accrued interest then remaining outstanding is payable
in full. The credit facility is secured by a $50,000 certificate of
deposit, all of the Magnolia stock owned by the Company, and all of
Magnolia's assets.

(2) The Company anticipates repayment of the following outstanding indebtedness:

(i) Note payable to a bank entered into in October 1994 under a term loan
bearing interest at the bank's prime rate plus 1% (9.25% at March 31,
1996); principal and accrued interest are payable in 59 monthly
installments of $6,915 with a final estimated payment at maturity of
$8,364 on October 13, 1999; note secured by the Quindaro System's
transportation revenues. The estimated balance to be repaid from
proceeds of the Offering approximates $259,073.

(ii) Note payable to a bank entered into in November 1994, and amended in
1995 and 1996, under a term loan bearing interest at the bank's prime
rate plus 1% (9.25% at March 31, 1996); principal of $3,438 and accrued
interest are payable in monthly installments, with a final lump sum
payment of the remaining unpaid principal due on February 15, 1998; note
secured by the Albany System's

11
<PAGE> 14

transportation revenue. The estimated balance to be repaid from proceeds
of the Offering approximates $110,000.

(iii) Note payable to a bank entered into in December 1994 under a term
loan bearing interest at the bank's prime rate plus 1.5% (9.75% at March
31, 1996); principal of $27,778 and accrued interest are payable in 35
monthly installments, with a final payment due at maturity of $27,998
plus accrued interest on December 15, 1997; note secured by the Cook
Inlet System's transportation revenues. The estimated balance to be
repaid from proceeds of the Offering approximates $583,375.

(iv) Revolving credit line with a bank entered into in October 1995 under a
$1.25 million reducing promissory note bearing interest at the bank's
prime rate plus 1.5% (9.75% at March 31, 1996). Available credit is
reduced monthly by $20,833 beginning December 1, 1995. Accrued interest
and any principal amounts as may be required to cause the outstanding
principal to not exceed the amount of credit then available are payable
monthly, with a final maturity of November 1, 1998; note secured by
transportation revenues on eight of the Company's pipeline systems. The
estimated balance to be repaid from proceeds of the Offering
approximates $607,504 after which an outstanding principal balance of
$500,000 will remain under this revolving credit line.

(v) Note payable to Texline Gas Company, a Texas corporation ("Texline"),
which is controlled by Stevens G. Herbst and Kenneth B. Holmes, Jr.,
former directors of the Company, entered into in December 1994, and as
amended, bears interest at the Mercantile Bank, Corpus Christi prime
rate plus 1.5% (10.75% at March 31, 1996); accrued interest is payable
monthly and principal and remaining accrued interest are due in full at
maturity on April 1, 1997; note is unsecured. The proceeds of such
indebtedness were used by the Company for general corporate purposes
including the repayment of indebtedness associated with project
financings for the construction of certain pipeline systems and for
various pipeline system acquisitions. The estimated balance to be repaid
from proceeds of the Offering approximates $200,000. See
"Management -- Certain Transactions."

(vi) Note payable to Texline, entered into in May 1995, and amended in
March 1996 bearing interest at the Mercantile Bank, Corpus Christi prime
rate plus 1% (10.25% at March 31, 1996); monthly payments equal to 25%
of the net revenue derived from the Exxon oil and gas production
acquisition. Any remaining principal and accrued interest is due in full
at maturity on April 1, 1997. The proceeds of such indebtedness were
used by the Company for the acquisition of the Exxon oil and gas
production property located in Starr County, Texas. The estimated
balance to be repaid from proceeds of the Offering approximates
$173,822. See "Management -- Certain Transactions."

The Company continues to evaluate numerous projects for development or
acquisition, however, at the present time, it does not have any understandings,
agreements or on-going negotiations with respect to any such projects other than
those noted above. Accordingly, the actual application of the remaining proceeds
of this Offering will be subject to the continuing evaluation of such
opportunities and the Company's determination of the best use of such proceeds
which will likely include the construction or acquisition of new end-user,
gathering or transmission pipelines.

Exact allocation of the proceeds for such purposes and timing of the
expenditures will vary depending on numerous factors, including the ability to
identify systems for acquisition or construction meeting the Company's financial
and operating criteria, purchasing those systems at acceptable prices, the cost
and timing of governmental approvals to conduct operations, the Company's
ability to design and complete construction of pipelines in a timely manner
without material cost overruns, the terms of any collaborative arrangements
entered into by the Company and the status of competition in the market. Such
expenditures are likely to be substantial and to exceed the proceeds of this
Offering. Accordingly, the Company may find it necessary or advisable to
reallocate some of the proceeds within the above-described categories or to use
portions thereof for other purposes. Pending ultimate application, the net
proceeds will be invested in interest-bearing securities issued or guaranteed by
the U.S. government or its agencies. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Capital Resources and
Liquidity."

12
<PAGE> 15

MARKET FOR THE COMPANY'S COMMON STOCK

The Company is a successor to Nugget Oil Corporation ("Nugget") which was
traded on The Nasdaq National Market until October 30, 1986 when Nugget's stock
was delisted from The Nasdaq National Market. See "Business and
Properties -- General." There has been no market for the Company's Common Stock
since October 30, 1986. The public offering price of the Common Stock was
determined by negotiations between the Company and the Representative and may
not be indicative of the prices that may prevail in the public market. The
factors considered in determining the public offering price and such terms, in
addition to prevailing market conditions, were the history of and prospects for
the industry in which the Company competes, the market for the Company's Common
Stock, an assessment of the Company's management, the prospects of the Company,
and the demand for similar securities of comparable companies. Subject to
official notice of issuance, the Common Stock of the Company has been approved
for listing on AMEX under the symbol "MRS." Despite the increase in the number
of shares of Common Stock to be publicly held as a result of this Offering,
there can be no assurance that trading in the Common Stock will develop. See
"Risk Factors -- No Assurance of Market For Common Stock."

DIVIDEND POLICY

The Company has historically paid dividends on its 5% cumulative preferred
stock, which was redeemed in May 1996, but has never paid dividends on its
Common Stock. However, holders of shares of Common Stock are entitled to receive
cash dividends out of funds of the Company legally available therefor, subject
to the qualification that dividends need not be declared or paid by the Board if
to do so would be in violation of law or of restrictions under contractual
arrangements (including credit agreements) to which the Company is, or may
hereafter become, a party. The Board intends to declare a dividend of $.08 per
share of Common Stock for the first fiscal quarter after the completion of the
Offering. While it is the intention of the Board to continue to pay a quarterly
dividend, the ability of the Company to pay regular quarterly dividends will
depend on the earnings and financial condition of the Company, and payment of
future dividends may be restricted by the Company's financial condition and the
Company's credit agreements. Therefore, there can be no assurances that future
dividends will be paid. Under Magnolia's revolving line of credit with Compass,
Magnolia is precluded from declaring or making dividend payments unless consent
is obtained by Compass. Except for Compass' line of credit restriction on
Magnolia, there are no other restrictions, contractual or otherwise, on the
Company's right to declare and pay dividends to the holders of Common Stock in
accordance with applicable state laws. The Company had $706,493 of unrestricted
cash as of March 31, 1996, which management believes was available as of such
date for the payment of dividends. See "Risk Factors -- Payment of Dividends."

[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

13
<PAGE> 16

DILUTION

The net tangible book value of the Company's Common Stock at March 31, 1996
was $4,176,084 or $2.84 per share. Net tangible book value per share represents
the total tangible assets of the Company reduced by its total liabilities and
divided by the number of outstanding shares of Common Stock after giving effect
to the 4.460961 for 1 stock split of the outstanding Common Stock. After giving
effect to the sale of the Common Stock offered hereby (assuming a public
offering price of $10.00 per share and no exercise of the over-allotment
option), the 4.460961 to 1 stock split, and the redemption of the Company's 5%
cumulative preferred stock in May 1996 for $118,367, the as adjusted net
tangible book value of the Common Stock at March 31, 1996 would have been $5.21
per share. This represents an immediate increase in net tangible book value of
$2.37 per share to existing holders of Common Stock and an immediate dilution of
$4.79 per share to new investors purchasing shares of Common Stock in this
Offering. "Dilution per share" represents the difference between the price per
share of Common Stock sold in this Offering, and the as adjusted net tangible
book value per share at March 31, 1996.

The following table illustrates the dilution per share described above:

<TABLE>
<S> <C> <C>
Assumed public offering price per share.................................... $10.00
Net tangible book value per share at March 31, 1996............ $2.84
Increase attributable to purchases of Common Stock by new
investors..................................................... 2.37
-----
As adjusted net tangible book value at March 31, 1996 after giving effect
to
this Offering, the stock split, and redemption of 5% cumulative preferred
stock.................................................................... 5.21
------
Dilution to new investors.................................................. $ 4.79
======
</TABLE>

Utilizing the foregoing assumptions, the following table summarizes on a
pro forma basis, at March 31, 1996, the number of shares purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing holders of Common Stock and by new investors purchasing
shares of Common Stock in this Offering.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
POSITION NUMBER PERCENT AMOUNT PERCENT PER SHARE
- ---------------------------------------- --------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders................... 1,470,141(1) 60% $ 1,201,765(2) 11% $ 0.82
New Investors........................... 1,000,000 40% 10,000,000 89 $ 10.00
--------- --- ----------- --- -----
Total......................... 2,470,141 100% $11,201,765 100% 4.53
========= === =========== === =====
</TABLE>

- ---------------

(1) Share number represents the outstanding shares of Common Stock at March 31,
1996, as adjusted for the 4.460961 to 1 stock split, which will be
completed prior to the effective date of the Offering.

(2) Amount represents total consideration paid by existing stockholders, in
cash, property or services rendered, including $95,414 in notes payable
forgiven or converted to Common Stock pursuant to Nugget's plan of
reorganization and as adjusted for a deduction of the cash payment of
$118,367 in May 1996 for the redemption of the 5% cumulative preferred
stock. This amount does not include consideration paid by the original
Nugget stockholders prior to Nugget's plan of reorganization. See "Business
and Properties -- General."

The foregoing tables assume that (i) the Underwriters do not exercise their
over-allotment option, (ii) Outstanding Warrants and the Representative's
Warrants are not exercised, and (iii) none of the 200,000 shares of Common Stock
reserved for issuance in connection with the Company's stock option plan are
issued. New investors purchasing shares of Common Stock will experience further
dilution as a result of the exercise of any such options or warrants. See
"Management -- Executive Compensation," "Description of
Securities -- Outstanding Warrants" and "Underwriting."

14
<PAGE> 17

CAPITALIZATION

The following table sets forth (a) the capitalization of the Company as of
March 31, 1996; and (b) the adjusted capitalization of the Company after giving
effect to (i) the issuance and sale of 1,000,000 shares of the Company's Common
Stock pursuant to this Offering (but no exercise of the over-allotment option);
(ii) the effect of a 4.460961 to 1 stock split to be effected immediately prior
to the effective date of the Offering; (iii) the receipt of the estimated
$8,538,000 in net proceeds of this Offering; (iv) the redemption of the 5%
cumulative preferred stock in May 1996 for $118,367; (v) issuance of 30,021
shares of the Company's Common Stock during April and July 1996, and (vi) the
effect of fractional shares of Common Stock. This table should be read in
conjunction with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Consolidated Financial
Statements."

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
LONG-TERM DEBT PAYABLE(1):
Long-term notes payable to banks.............................. $ 2,988,588 $ 1,749,961
Shareholders and affiliates................................... 453,822 --
------------ ------------
Total......................................................... $ 3,442,410 $ 1,749,961
------------ ------------
SHAREHOLDERS' EQUITY(2):
5% Cumulative Preferred Stock; $1.00 par value; 1,000,000
shares authorized; 200,000 shares issued and outstanding
($1,183,665 liquidation preference)(3)..................... $ 200,000 $ --
Common Stock, $.01 par value; 6,000,000 shares authorized;
1,470,141 shares issued and outstanding, 2,500,000 issued
and outstanding as adjusted(4)(5).......................... 14,701 25,000
Paid-in capital............................................... 18,830,637 27,439,472
Accumulated deficit........................................... (14,416,175) (14,416,175)
Unearned compensation......................................... (106,800) (106,800)
------------ ------------
Total shareholders' equity.................................... $ 4,522,363 $ 12,941,497
------------ ------------
Total capitalization.................................. $ 7,964,773 $ 14,691,458
============ ============
</TABLE>

- ---------------

(1) See Note 7 to the Company's "Consolidated Financial Statements."

(2) See Note 10 to the Company's "Consolidated Financial Statements."

(3) In May 1996, all shares of the 5% cumulative preferred stock were redeemed
by the Company for $118,367. Subsequent to the redemption of the 5%
cumulative preferred stock, a majority of the stockholders approved an
amendment to the Articles of Incorporation to reflect only one class of
outstanding securities, the Company's Common Stock.

(4) In May 1996, a majority of the stockholders approved an amendment to the
Articles of Incorporation to increase the authorized number of shares of
Common Stock, $.01 par value to 10,000,000 shares of Common Stock, $.01 par
value.

(5) Share number represents the outstanding shares of Common Stock at March 31,
1996, as adjusted for the 4.460961 to 1 stock split, which will be completed
prior to the effective date of the Offering.

15
<PAGE> 18

SELECTED FINANCIAL DATA

The selected historical consolidated financial information for the fiscal
years ended December 31, 1993, 1994 and 1995, and for the three month periods
ended March 31, 1995 and 1996, set forth below is derived from and should be
read in conjunction with the Company's consolidated financial statements and
accompanying notes appearing elsewhere in this Prospectus. The data for the
three month periods ended March 31, 1995 and 1996 are derived from and qualified
by reference to the Company's consolidated financial statements appearing
elsewhere herein and, in the opinion of management of the Company includes all
adjustments that are of a normal recurring nature and necessary for a fair
presentation.

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------- -----------
1993 1994 1995 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital deficit................. $ (392,738) $(1,104,829) $ (98,870) $ (441,129)
Property and equipment, net............. $2,780,325 $ 4,994,416 $ 8,206,161 $ 8,171,207
Total assets............................ $6,438,791 $ 7,272,330 $11,088,508 $11,887,041
Long-term debt, net of current
portion(1)........................... $ 669,560 $ 1,780,771 $ 3,960,769 $ 3,442,410
Shareholders' equity(2)................. $2,028,809 $ 2,006,555 $ 4,157,436 $ 4,522,363
</TABLE>

- ---------------

(1) See Note 7 to the Company's "Consolidated Financial Statements."

(2) As of December 31, 1995, the Company had NOL carryforwards of approximately
$15,071,000 expiring in various amounts from 1999 through 2008, and ITC
carryforwards of approximately $354,000 which principally expire in 1997.
These loss carryforwards were generated by the Company's predecessor. The
Company believes, however, that the amount of the NOL carryforwards will be
reduced after consideration of the income generated by the Company for the
tax year ending April 30, 1996. The ability of the Company to utilize the
carryforwards is dependent upon the Company generating sufficient taxable
income and avoiding limitations on the use of such carryforwards due to a
change in stockholder control under the Code. See "Risk Factors -- Limits of
Use of Net Operating Losses and Credit Carryovers."

16
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with "Selected
Financial Data" and the Company's "Consolidated Financial Statements" and the
notes thereto, included elsewhere herein.

GENERAL

Since its formation the Company has grown significantly as a result of the
construction and acquisition of new pipeline facilities. The Company's long term
strategy is to continue this expansion by capitalizing on changing regulatory
and industry dynamics to construct or acquire new end-user, gathering and
transmission pipelines, market natural gas, as well as to take advantage of
favorable opportunities to sell pipeline systems which the Company owns. In
pursuit of this strategy, the Company has since June 1994 acquired or
constructed 26 pipelines. "See Business and Properties -- Pipeline Construction,
Acquisition and Disposition." All acquisitions were accounted for under the
purchase method for business combinations and, accordingly, the results of
operations for such acquired businesses are included in the Company's financial
statements only from the applicable date of acquisition. As a result, the
Company believes its historical results of operations for the periods presented
are not directly comparable. The Company believes the acquisitions will have a
positive impact on its future results of operations, and more importantly, the
Company believes that the historical results of operations do not fully reflect
the operating efficiencies and improvements that are expected to be achieved by
integrating the acquired and newly constructed pipeline systems and realizing
other synergies. "See Business and Properties -- Pipeline Construction,
Acquisition and Disposition."

The Company's results of operations are determined primarily by the volumes
of gas transported or purchased and sold through its pipeline systems and the
results of its divestiture activities. Most of the Company's operating costs do
not vary directly with volume on existing systems, thus increases or decreases
in transported volumes on existing systems generally have a direct effect on net
income. Also, the addition of new pipeline systems should result in a larger
percentage of revenues being added to operating income because fixed overhead
components are allocated over more systems. The Company derives its revenues
from three primary sources: (i) transportation fees from pipeline systems owned
by the Company; (ii) the marketing of natural gas and, (iii) the purchase and
resale of pipeline systems.

Transportation fees are received by the Company for transporting gas owned
by other parties through the Company's pipeline systems. Typically, there is
very little incremental operating or administrative overhead cost incurred by
the Company to transport gas through its pipeline systems and thus, a
substantial portion of transportation revenues can be recognized as operating
income by the Company.

The Company's gas marketing revenues are realized through the purchase and
resale of natural gas to the Company's customers. Generally, gas marketing
activities will generate higher revenues and correspondingly higher expenses,
than those revenues and expenses associated with transportation activities. This
relationship exists because, unlike revenues derived from transportation
activities, gas marketing revenues, and associated expenses, include the full
commodity price of the natural gas acquired. The operating income the Company
recognizes from its gas marketing efforts is the difference between the price at
which the gas was purchased and the price at which it was sold to the Company's
customers. It is the Company's strategy to focus its marketing activities where
the Company has a fixed asset investment rather than on third party off-systems
sales. The Company's marketing activities have historically varied greatly in
response to market fluctuations.

The Company also derives its revenues by capitalizing upon opportunities in
the industry to sell pipeline systems or assets associated with the Company's
pipeline systems on favorable terms as the Company receives offers for such
systems which are suited to another company's pipeline network. The Company will
from time to time solicit bids for selected properties which are no longer
suited to its business strategy. Although no substantial divestitures are
currently under consideration, the Company does hold one pipeline system, the
H&W System, for resale. See "Business and Properties -- Revenue Components" and
"Business and Properties -- Pipeline Systems."

17
<PAGE> 20

The Company has also had quarter to quarter fluctuations in its results in
the past due to the fact that the Company's natural gas sales and transportation
fees can be affected by changes in demand for natural gas primarily because of
weather.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995.

Operating Revenues. Operating revenues generated during the three months
ended March 31, 1996 totaled approximately $5.2 million as compared to $2.9
million in 1995 which represents a 78% increase in 1996. The increase is
primarily attributable to increased marketing opportunities where the Company
has a fixed asset investment. Marketing of gas to the Company's pipeline
customers increased from $1.9 million to $3.6 million during the three months
ended March 31, 1995 and 1996, respectively. In addition, Magnolia was acquired
in August 1995, and contributed $413,548 in transportation revenue for the first
quarter of 1996. Magnolia's impact, however, is more evident with respect to
earnings as discussed in the "Earnings" section below.

Operating Expenses. Operating expenses for the three months ended March 31,
1996 totaled approximately $4.7 million, or 68% higher than the comparable 1995
period, primarily due to increased gas marketing transactions where the Company
has a fixed asset investment.

Depreciation, depletion, and amortization expense was approximately
$136,000 in 1996, as compared to approximately $85,000 in 1995. The increase in
1996 can be attributed to the acquisition of Magnolia, effective August 1, 1995.

General and administrative expenses incurred for the three months ended
March 31, 1996 were approximately $191,000, or 5% higher than for the same
period in the first quarter of 1995. The small increase in general and
administrative expenses in 1996, despite the Company's significant growth, is a
result of the Company's ongoing effort to control expenses and effectively
assimilate new business using existing resources.

Interest expense for the first quarter of 1996 and 1995, was approximately
$115,000 and $64,000, respectively. The Company was servicing an average of
approximately $4.3 million in debt during the first quarter of 1996 as compared
to an average of $2.8 million in debt during the first quarter of 1995. The
increased debt service in 1996 is attributable to the acquisition of Magnolia,
effective August 1995.

Earnings. The Company recognized operating income and net income of
$507,596 and $358,927 respectively, for the three months ended March 31, 1996 as
compared to operating income and net income of $135,648 and $50,796 for the
three months ended March 31, 1995. Despite a 60% increase in depreciation,
depletion and amortization expense in 1996 operating income increased by
$371,948 over 1995. The primary factor which contributed to the increase in
operating earnings in 1996 was the transportation revenue generated by Magnolia.
During the three months ended March 31, 1996, Magnolia generated income (before
depreciation, general and administrative expenses, and interest) of
approximately $267,000. The Company anticipates Magnolia's income levels to be
seasonal in nature with the greatest income to be generated during the winter
months.

Another factor which contributed to higher earnings in 1996 versus 1995
were the increased gas sales to customers where the Company has a fixed asset
investment. The colder than expected winter temperatures forced gas prices and
demand higher. As a result, the Company was able to sell gas at slightly higher
margins than is typical of gas marketing transactions.

COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994.

Operating Revenues. Operating revenues generated during the twelve months
ended December 31, 1995 totaled approximately $15.6 million dollars as compared
to $15 million dollars in 1994 which represented a 4% increase in 1995. The
increase was primarily attributable to the acquisition and subsequent sale of
the Five Flags System mitigated by a 23% decrease in sales of natural gas and
transportation fees during 1995.

18
<PAGE> 21

In September 1995, the Company and an affiliate owned by a former officer
and director of the Company jointly acquired 100% of the outstanding capital
stock of Five Flags, which the Company had previously owned until September
1993, from a non-affiliated company. Total cash consideration of $2,052,000 was
paid on September 13, 1995 of which The Company's share was $1,872,450 for
91.25% of Five Flags' capital stock and the affiliate's share was $179,550 for
8.75% of Five Flags' capital stock.

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. On October 2, 1995, the Company and the
affiliate jointly sold 100% of the capital stock of Five Flags for cash
consideration of which the Company's share was $4,092,850.

The decrease in sales of natural gas and transportation fees in 1995 was
primarily attributable to a decline in gas marketing transactions. The decrease
in gas marketing transactions in 1995 was in response to declining profit
margins and the Company's decision to focus its marketing activities on
servicing customer gas requirements where the Company has a fixed asset
investment, rather than on off-system transactions. Despite the decline in sales
of natural gas, the Company's operating income increased by $2.2 million dollars
over 1994 as discussed in the Earnings section below.

Operating Expenses. Operating expenses for the year ended December 31, 1995
totaled approximately $13.1 million dollars, or 11% lower than the comparable
1994 period. As explained in the preceding section, the primary explanation for
the decrease can be attributed to reduced gas marketing transactions mitigated
by the cost of purchasing and subsequently selling Five Flags.

Depreciation, depletion, and amortization expense was approximately
$452,000 in 1995, as compared to $259,000 in 1994. The increase in 1995 can be
attributed to the acquisition of Magnolia, effective August 1995, the
construction of two new pipelines during the fourth quarter of 1994 and the
Company's investment in Alaska which has been depreciated since July 1994.

General and administrative expenses incurred for the year ended December
31, 1995 were approximately $785,000, or 8% lower than 1994. The reduction of
general and administrative expenses in 1995 was a result of the Company's
ongoing effort to control expenses and effectively assimilate new business using
existing resources.

Interest expense totaled approximately $339,000 and $189,000 for 1995 and
1994, respectively. The Company was servicing an average of approximately $3.3
million in debt during 1995 as compared to an average of $2.1 million in debt
during 1994. The increased debt service in 1995 was attributable to the
construction of two new pipelines during the fourth quarter of 1994, investing
in the Cook Inlet Systems in Alaska during the second quarter of 1994 and the
acquisition of Magnolia, effective August 1995. 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 $2,569,125 and $2,134,218, respectively, for the year ended
December 31, 1995 as compared to operating income of $349,414 and a net loss of
$32,394 for the year ended December 31, 1994. Despite a 74% increase in
depreciation, depletion and amortization expense in 1995 and despite sales of
natural gas decreasing by 23% in 1995, operating income increased by $2,219,711
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. Furthermore, 1995 earnings were not adversely affected, as in 1994, by
a non-recurring charge of $120,936 when the Company changed the method of
accounting for its transportation and exchange gas imbalances. The primary
factors which contributed to the increase in operating earnings in 1995 were the
revenue generated by the Company's investment in Alaska, five months of revenue
derived from the acquisition of Magnolia and a $2,183,226 gain on the sale of
Five Flags as discussed in the Operating Revenue section above.

19
<PAGE> 22

COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993.

Operating Revenues. Operating revenues generated during the twelve months
ended December 31, 1994 totaled approximately $14.9 million as compared to $16.5
million in 1993 which represents a 10% decrease in 1994. The decrease in 1994
revenues was primarily attributable to two factors: there were no sales of
refined products and a significant difference in the amount of income generated
from sales of pipelines. These two factors were mitigated by a 15% increase in
sales of natural gas and transportation fees during 1994.

The sale of refined products accounted for approximately $2.3 million
dollars in revenue during 1993 whereas in 1994 there were no sales of refined
products. During the latter part of 1993 and during 1994, the Company ceased its
efforts in the sale of refined products in response to limited marketing
opportunities as well as declining profit margins and product supply problems.

The sale of Five Flags in September 1993 contributed approximately $2.4
million to operating revenue in 1993 compared with the Company's sale of its 40%
interest in a gathering system which contributed approximately $12,000 in 1994.

On the other hand, the sale of natural gas and transportation fees in 1994
posted a 15% increase over 1993. This increase in 1994 can be attributed to: (i)
the throughput fees received since July 1994 on the Company's investment in
Alaska; (ii) the construction of two new facilities late in 1993; (iii)
increased gas usage at a customer's fractionation facility; and (iv) an increase
in the volume of gas required to fuel the pump stations of a major customer
(further discussed in the Earnings section below).

Operating Expenses. Operating expenses for the year ended December 31, 1994
totaled approximately $14.6 million, or 4% lower than the comparable 1993
period. As explained in the preceding section, the explanation for the decrease
can be attributed to no refined products purchases offset by an increase in gas
marketing transactions.

Depreciation, depletion, and amortization expense was approximately
$259,000 in 1994, as compared to $264,000 in 1993. The slightly lower 1994
amount can be attributed to the absence of the Five Flags subsidiary which was
sold in September 1993. Five Flags contributed approximately $49,000 of
depreciation, depletion, and amortization in the first three quarters of 1993.
The Five Flags reduction was largely offset in 1994 by increases related to
construction of new pipelines during the latter part of 1993, and the Company's
investment in Alaska during the second quarter of 1994.

General and administrative expenses incurred for the year ended December
31, 1994 were approximately $849,000, or 5% lower than the 1993 period. The
reduction of general and administrative expenses in 1994 was a result of the
sale of Five Flags and the Company's ongoing effort to control expenses. The
reduction in expenses as a result of the Five Flags sale was offset by an
increase in personnel costs.

Interest expense of approximately $189,000 and $178,000 was incurred during
the years ended December 31, 1994 and 1993, respectively. The relatively small
difference is primarily attributable to the timing of debt additions and
repayments related to Five Flags in 1993 and the investment in transmission
facilities in 1994. Debt related to the acquisition of Five Flags was
outstanding between January 1, 1993 through September 2, 1993. Approximately an
equal amount of debt related to the Company's investment in transmission
facilities has been outstanding since May 1, 1994, although rising interest
rates in 1994 resulted in a slightly higher interest expense.

Earnings. The Company recognized a loss of approximately $32,000 for the
year ended December 31, 1994 as compared to net income of approximately $706,000
for the 1993 period. In September 1993, all of the outstanding capital stock of
Five Flags was sold to Sunshine Interstate Pipeline Partners ("Sunshine") for
cash consideration of $2,400,000. During the Company's eight months of
ownership, Five Flags contributed approximately $96,000 of income before income
taxes, from normal operations, as well as contributing a net gain of $1,155,783
from the sale of the capital stock.

This large gain was partially offset when the Company elected to write-off
its investment in a pipeline located in Tuscaloosa County, Alabama due to
regulatory problems and write-off an inactive gas gathering

20
<PAGE> 23

system. See Note 16 of the Notes to the Company's "Consolidated Financial
Statements." The write-offs lowered the Company's income in 1993 by
approximately $247,000.

Another factor which reduced earnings during the latter half of 1993 and
through May 1994 was lower volumes of gas liquids transported by the Company's
largest customer due primarily to ethane rejection in the Rocky Mountain area.
Ethane rejection occurs when natural gas pricing makes extraction of ethane from
the natural gas stream uneconomical due to either a decline in the price of
ethane or an increase in the price of natural gas. Through May 1994, ethane
prices were low in comparison to natural gas prices, and therefore, the amount
of natural gas transported by the Company to fuel five of the ten Seminole pump
stations was reduced. However, the fuel requirements of the Seminole pump
stations improved during the remainder of 1994. See "Business and
Properties -- Pipeline Systems."

As discussed in Note 3 to the Notes to the Consolidated Financial
Statements, another one time charge which adversely affected earnings during
1994 occurred when the Company changed the method of accounting for its
transportation and exchange gas imbalances. As a result, approximately a
$121,000 reduction in income for the current year was recorded which related to
prior year transactions.

As discussed in the Operating Revenue section, sales of natural gas
increased by 15% in 1994 over 1993. This increase, however, did not have a
significant impact on earnings because the increase related to gas marketing
activities which are characterized by large dollar volume sales figures but
small earnings margins.

CAPITAL RESOURCES AND LIQUIDITY

Historically, the Company has funded its capital requirements through cash
flow from operations and borrowings from affiliates and commercial lenders. For
the year ended December 31, 1995, the Company generated cash flow from
operations of approximately $2,361,000. For the three months ended March 31,
1996, the Company generated cash flow from operations of approximately
$1,308,201 and had an aggregate of approximately $809,164 available to the
Company through two of its credit facilities at March 31, 1996.

In December 1992, the Company entered into a financing agreement which
included a $400,000 line of credit. The line of credit was renewed in September
1994, and amended in May 1996, with an available line of $750,000. The line of
credit expires on August 1, 1996, however, the Company expects that it will be
renewed or a new facility will be in place prior to that date, as discussed
below. Borrowings under this credit facility are collateralized by the Company's
non-transportation based accounts receivable and the entire facility has been
personally guaranteed by Dan C. Tutcher, Chairman of the Board, President and
Chief Executive Officer, Stevens G. Herbst and Kenneth B. Holmes, Jr.,
stockholders of the Company. At March 31, 1996, the Company had $750,000 of
available funds under this credit facility.

In October 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 beginning December 1, 1995. Upon maturity at November 1, 1998,
the balance of principal plus accrued interest then remaining outstanding and
unpaid is payable in full. The note is secured by transportation revenues from
eight of the Company's pipeline systems which are also subject to a negative
pledge to keep the pipelines free and clear of all liens and encumbrances. The
facility has been personally guaranteed by Dan C. Tutcher, Chairman of the
Board, President and Chief Executive Officer, Stevens G. Herbst, and Kenneth B.
Holmes, Jr., stockholders of the Company. At March 31, 1996, the Company had
$59,164 of available funds under this credit facility.

In December 1995, the Company entered into a new financing agreement with a
bank. The agreement provided for an initial $1,500,000 revolving line of credit
with the amount of available credit being reduced by $17,860 per month beginning
February 1, 1996. In May 1996, the agreement was amended to increase the
available credit and adjust the monthly reduction of availability from $17,860
to $23,000. The Company used $350,000 under this facility to fund the
acquisition of ten gas gathering pipelines from TSGGC in May 1996. Upon maturity
at January 15, 1999, the balance of principal plus accrued interest then
remaining outstanding and unpaid is payable in full. In connection with this
financing agreement, a $50,000 certificate of deposit, 100% of Magnolia's stock
owned by the Company, and all assets of Magnolia have been pledged as
collateral.

21
<PAGE> 24

The Magnolia System is subject to a negative pledge to keep the pipeline free
and clear of all liens and encumbrances and Dan C. Tutcher, Chairman of the
Board, President and Chief Executive Officer, Stevens G. Herbst and Kenneth B.
Holmes, Jr., stockholders of the Company, have personally guaranteed the
facility. At March 31, 1996, the Company had no funds available under this
credit facility.

The Company believes that its existing credit facilities and funds provided
by operations are sufficient for it to meet its operating cash needs for the
foreseeable future. At March 31, 1996, the Company was committed to make capital
expenditures of $265,000 during 1996. The Company has historically arranged for
project financing with various banks to fund between 75% and 90% of the
construction or acquisition costs of its new projects. Management of the Company
believes that project financing and funds from operations will continue to be
available to the Company to fund pipeline acquisition and construction
opportunities which exceed the capital available after the Offering. The Company
is presently negotiating with several commercial banks to obtain a comprehensive
credit facility which will facilitate financing of future construction projects
or acquisitions. Such facility will likely include a working capital line of
credit and a revolving facility. There can, however, be no assurance that the
Company will be able to obtain such financing.

Forward looking statements made herein are based on current expectations of
the Company that involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are made under
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The factors that could cause actual results to differ materially include
interruption or cancellation of existing contracts, the impact of competitive
products and services and pricing of and demand for such products and services,
market acceptance risks and the presence of competitors with greater financial
resources.

[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

22
<PAGE> 25

BUSINESS AND PROPERTIES

GENERAL

The natural gas industry has undergone dramatic change over the past decade
largely due to the course of deregulation by the federal government. This has
resulted in increased competition in the natural gas industry. The impact of
these changes has been particularly felt in the natural gas pipeline industry
over the last several years. The key part of this regulatory shift, to ensure a
more competitive natural gas market, was the implementation of the FERC Order
636. This order generally opened previously restricted access to interstate
pipelines by requiring the operators of such pipelines to "unbundle" their
transportation services from their sales services, allowing customers to choose
their provider for such services as gathering, storage, and transportation. This
unbundling essentially eliminated the pipeline's traditional merchant function
and caused a major restructuring of this relationship between the major
interstate pipelines and their customers. For the most part, regulators at the
state level have followed the FERC's lead and allowed increased competition with
LDCs, and allowed the phenomenon of the construction of bypass pipelines to
end-users. In addition to the issuance of Order 636, the implementation of more
stringent environmental laws, such as the Clean Air Act of 1990 and the Energy
Policy Act of 1992, has also affected the overall demand for natural gas by
encouraging the use of cleaner burning fuels, such as natural gas. Accordingly,
these regulatory changes have impacted the growth in domestic consumption of
natural gas which has increased from approximately 16,200 billion cubic feet in
1986 to an estimated 21,600 billion cubic feet in 1995. See "-- Markets and
Major Customers."

The Company believes that its experience in the strategic location, design,
engineering, construction and operation of pipelines, as well as in federal,
state and local regulatory matters involving pipelines, makes it well positioned
to continue to take full advantage of these changes in the natural gas industry,
primarily through aggressively pursuing the industrial end-user market by
acquiring and constructing new pipeline systems. The Company is currently one of
the few independent companies in the industry which has pursued supplying the
industrial end-user market by providing new pipeline connections to this market.
As more chemical and manufacturing companies seek alternative natural gas
suppliers other than their LDC's, the Company and its personnel will continue to
offer the expertise they have gained through their involvement in the regulatory
permitting, construction and operation of 15 end-user pipelines reaching
customers in six states. The Company will also continue to expand its current
market base by working with many of its existing customers, such as Mapco, Owens
and Tyson, to provide natural gas service to additional facilities operated by
these customers.

The Company typically designs its systems to transport greater volumes than
needed in the immediate future to provide capacity to accommodate growth in
natural gas consumption and production in proximity to the pipeline systems. As
a result, the Company believes that under existing conditions, its pipeline
systems can quickly increase their volumes with little capital expenditure
should additional demand develop in these areas. The Company also benefits from
lower overhead than major interstate carriers and LDCs and the resultant ability
to offer reduced rates which should allow it to compete effectively with
entrenched LDCs and gas transmission carriers for their existing and new
end-user customers.

23
<PAGE> 26

Company acquired ownership of, or interests in, 19 pipeline systems, including
gathering systems and transmission lines, from major pipeline companies.
Moreover, the Company's recent acquisitions of Magnolia and Five Flags, as well
as the acquisition, by an affiliate, of six pipeline systems from Seahawk and
the acquisition by the Company, through its wholly-owned subsidiary, Magnolia,
of ten pipeline systems from TSGGC, further illustrate the existence of such
opportunities in the market place and the Company's ability to rapidly
capitalize on them. Not only has the industry trend to consolidate increased the
availability of attractive acquisitions in the market place but the overall
consolidation in the industry has also presented the Company with advantageous
opportunities to sell pipeline systems which the Company owns, such as the Five
Flags System and the Tasco Cavasos System, which were divested by the Company on
favorable terms. The Company will continue to consider and evaluate such
divestiture opportunities as the Company receives favorable offers for their
existing systems or assets which are suited to other companies' strategic focus.
See "-- Pipeline Construction, Acquisition and Disposition" and "-- Pipeline
Systems."

In November 1989, Dan C. Tutcher, Stevens G. Herbst and Kenneth B. Holmes,
Jr. formed Midcoast Venture I (the "Venture"), as a joint venture by and between
Midcoast Transmission Company ("Transmission"), a Texas corporation controlled
by Stevens G. Herbst and Kenneth B. Holmes, Jr., former directors of the
Company, and Magic Gas Corp., a Texas corporation controlled by Dan C. Tutcher,
("Magic") (f/k/a Midcoast Natural Gas, Inc.). The founders of the Venture agreed
in 1992 to contribute their respective interests in the Venture to the Company
which was formed as a Nevada corporation in May 1992. The purpose of the
formation of the Company was to acquire Nugget by means of a merger. At the time
of the merger, Mr. Tutcher, Mr. Herbst and Mr. Holmes had been directors of
Nugget since 1990.

Nugget was a publicly-held Minnesota corporation, incorporated in 1976,
that had previously been involved in the oil and gas industry and which had
filed for protection under federal bankruptcy laws in April 1992. The principal
asset of Nugget was an NOL of approximately $15,230,000 prior to Nugget's
reorganization. In September 1992, the Company became the successor to Nugget
through a merger pursuant to the Nugget reorganization (the "Plan") as approved
by the United States Bankruptcy Court for the Southern District of Texas, Corpus
Christi Division. In accordance with the terms of the Plan, 130,335 shares of
Company's Common Stock were issued to the then existing stockholders of Nugget
who tendered their Nugget stock for exchange. Additionally, 1,222,481 shares of
the Company's Common Stock were issued to Nugget's then existing note holders in
exchange for the cancellation of their notes payable totaling $32,000. All other
creditors under the Plan were paid ninety to one-hundred cents on the dollar
pursuant to the Plan. Furthermore, all of the outstanding common stock of Nugget
which had been issued prior to the Plan was cancelled as specified in the Nugget
Plan.

The Plan also authorized a merger with Transmission. Under the terms of the
merger with Transmission (the "Transmission Merger"), the Company issued 100,000
shares of 5% cumulative preferred stock to the then existing stockholders of
Transmission, Mr. Herbst and Mr. Holmes, in exchange for all the issued and
outstanding common stock of Transmission. The principal asset of Transmission
was its 50% joint venture interest in Venture. Concurrent with the Transmission
Merger, Magic contributed the remaining 50% joint venture interest in the
Venture to the Company, in exchange for the issuance of 100,000 shares of the
Company's 5% cumulative preferred stock and the assumption of Magic's joint
venture obligations with respect to the Venture. Prior to the redemption of the
Company's 5% cumulative preferred stock by the Company, all such shares were
held by Magic (beneficially owned by Mr. Tutcher), Mr. Herbst and Mr. Holmes.
See "Certain Transactions." These contributed assets represented substantially
all of the Company's assets upon completion of the merger and the Company then
embarked on its current business strategy.

REVENUE COMPONENTS

The Company derives its revenues from three primary sources: (i)
transportation fees from pipeline systems owned by the Company; (ii) the
marketing of natural gas and, (iii) the purchase and resale of pipeline systems.

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<PAGE> 27

The Company's gas marketing revenues are realized through the purchase and
resale of natural gas to the Company's customers. Generally, gas marketing
activities will generate higher revenues, and correspondingly higher expenses,
than those revenues and expenses associated with transportation activities. This
relationship exists because, unlike revenues derived from transportation
activities, gas marketing revenues, and associated expenses, include the full
commodity price of the natural gas acquired. The operating income the Company
recognizes from its gas marketing efforts is the difference between the price at
which the gas was purchased and the price at which it was sold to the Company's
customers.

CONSTRUCTION OF SYSTEMS

In most instances, the Company contracts for the construction of its
pipeline projects on the basis of a competitive bidding process. The bids
received are usually based on a price per foot for the installation of the
pipeline, boring under roads or railroads, other directional bores and
environmental restoration services. Usually, the same contractor is also
retained on most construction projects to install the meter stations for volume
measurements at either end of the pipeline system on a cost plus basis.

During the actual construction phase of a project, the Company has at least
one and in most instances two Company project managers or inspectors at the
construction site, who are in charge of ensuring that the engineering
specifications are implemented and managing the day-to-day construction
activities. Depending on the size of the particular construction project, the
Company may hire additional contract inspectors to support and work with the
Company's personnel in the management of the construction project.

BUSINESS AND GROWTH STRATEGY

The Company's principal business and growth strategy is to acquire or build
pipelines to serve the end-user market while also continuing to pursue
acquisition, construction or disposition opportunities in transmission and
gathering of natural gas, other hydrocarbons and nonhydrocarbon fluids. The
Company will continue to seek to implement its strategy by taking advantage of a
number of market conditions and competitive factors, including: (i) pursuing
natural gas users in the chemical and manufacturing industries who are seeking
alternative suppliers to their LDCs, due to new opportunities that may arise,
based on regulatory changes, and (ii) capitalizing on the fact that many of the
Company's existing pipeline systems have the capacity to deliver increased
volumes of natural gas which enable it to meet natural gas demand increases in
the area, or to enable electrical generation facilities to utilize gas turbines
to satisfy peak loads without requiring construction of additional capacity. The
various operations of the Company, whether involving acquisitions, construction
or dispositions involve the following activities:

End-Users. A large portion of the Company's revenue is derived from
contracting with industrial end-users or electrical generating facilities to
provide natural gas transportation services to their facilities through
interconnect or bypass gas pipelines constructed by the Company. End-user
pipelines provide the Company's customers with a natural gas supply as an
alternative to their current energy source, which are usually LDCs. Frequently,
the Company is able to offer its end-user customers rates lower than the
customer's LDC. The Company's contracts with end-user customers typically
provide for the payment of a transportation fee by the customer based on the
volume of gas transported through the Company's pipeline. In many of the
Company's contracts the customer has guaranteed a minimum amount of natural gas
to be transported. The Company also offers its end-user customers gas marketing
services enabling them to purchase their gas supply from the Company but without
any obligation to do so. The Company strives to structure the terms and
transportation

25
<PAGE> 28

fees for its end-user systems in such a way as to provide an acceptable rate of
return regardless of any gas marketing revenues. Fifteen of the Company's
systems are end-user pipelines.

Transmission. The Company's three transmission pipelines primarily receive
and deliver natural gas to and from other pipelines, but may also involve some
gathering functions. Effective August 1995, the Company significantly expanded
its gas transmission pipeline activities by acquiring Magnolia, the principal
asset of which was the Magnolia System, an approximately 111-mile natural gas
transmission line and compressor station located in central Alabama.

Gathering. The Company's gathering systems typically consist of a network
of small diameter pipelines which collect gas or crude oil from points near
producing wells and transport it to larger pipelines for further transmission.
Gathering systems may include meters, separators, dehydration facilities, and
other treating equipment owned by the Company or others. The Company derives
revenues from gathering systems by transporting gas or crude oil owned by others
through its pipelines for a transportation fee, by purchasing gas and utilizing
its pipelines to transport the gas to a customer in another location where the
gas is resold or, in certain instances, by purchasing gas and arranging for the
delivery and resale of an equivalent quantity of gas to a customer not directly
served by the Company's pipelines. Transactions with customers not directly
served by the Company's pipelines are typically accomplished by entering into
agreements whereby the Company exchanges gas in its pipelines for gas in the
pipelines of other transmission companies. The Company currently owns an
interest in or operates 21 gathering systems.

Gas Marketing. The majority of the Company's gas marketing activities occur
on pipeline systems owned by the Company and for those customers served by the
Company's pipeline systems. The Company's marketing activities include providing
gas supply and sales services to some of its end-user customers by purchasing
the gas supply from other marketers or pipeline affiliates and reselling the gas
to the end-user. The Company also purchases gas directly from well operators on
many of the Company's gathering systems and resells the gas to other marketers
or pipeline affiliates. Typically, there are more marketing opportunities
associated with the Company's gathering systems since many of the well operators
wish to only obtain the prevailing market price for their gas and because they
lack the desire or expertise to effectively market their product. Many of the
contracts pertaining to the Company's gas marketing activities are
month-to-month spot market transactions with numerous gas suppliers or producers
in the industry. Such contracts contain no ongoing obligation by the Company to
provide for or purchase future gas supplies from any party.

Generally, the Company purchases the gas under contracts that contain terms
which provide for a price determination based upon prevailing market conditions.
Simultaneous with the purchase of gas by the Company, the Company resells the
gas at a higher price under a sales contract which is comparable in its terms to
the purchase contract, including the price escalation provision. The Company
earns a margin on such contracts equal to the difference between the purchase
price paid by the Company for such gas supply and the price at which the gas is
then sold. Typically, gas marketing is characterized by narrow margins since
there are numerous companies of greatly varying size and financial capacity who
compete with the Company in the marketing of natural gas. Accordingly,
historical operating income associated with this revenue stream has varied
greatly depending on market conditions. The Company believes gas marketing will
become a more significant component of the Company's business because the
Company believes the marketing of gas is an important complement to its
transportation services, and many of the Company's recent acquisitions have been
gathering pipelines which historically carry more marketing opportunities.

PIPELINE CONSTRUCTION, ACQUISITION AND DISPOSITION

Since June 1994, the Company constructed or acquired ownership of, or
interests in, 26 pipelines, 19 of which were gathering systems, two of which
were transmission lines and five of which were end-user pipelines. See
"-- Pipeline Systems." The Company remains actively engaged in seeking pipeline
acquisitions and construction opportunities. The Company plans to evaluate
investments in pipelines which involve not only natural gas, but also liquefied
petroleum gas, as well as both hydrocarbon and non-hydrocarbon finished
products, such as nitrogen. Management believes that more acquisition
opportunities will become available as major pipeline companies divest systems
due to regulatory considerations or need to spin-off smaller non-

26
<PAGE> 29

strategic systems acquired in connection with larger acquisitions. The Company
believes it can capitalize on these opportunities due to the strategic locations
of its pipelines and proximity to other companies' pipeline systems and in large
part to the Company's experience and relationships with others in the pipeline
industry.

The Company's recent activities in pursuit of acquisition, construction or
disposition opportunities in transmission and gathering of natural gas include
the following:

Magnolia System Acquisition. Effective August 1995, the Company acquired
100% of the outstanding capital stock of Magnolia. Magnolia's principal asset
consists of approximately 111 miles of 6 inch to 24 inch gas pipelines and an
approximately 4000 horsepower compressor station, located in central Alabama.
Magnolia was purchased from a subsidiary of Williams for a total purchase price
of $3,200,000, and the Company assumed the operations of the pipeline in
September 1995. Williams had acquired Magnolia as part of its acquisition of
Transco Energy Company ("Transco"), a publicly traded company, earlier in 1995.
The Magnolia System is primarily a transmission pipeline with interconnections
to one major interstate pipeline and one major intrastate pipeline. The system
also includes some gathering lines which connect coal-seam gas production in the
Black Warrior Basin with the Magnolia System. There is the potential for several
interconnections to other pipelines in the area which could provide additional
supply or market options for gas on the Magnolia System. These additional
interconnections could enhance Magnolia's revenues and will be pursued by the
Company. See "Management -- Certain Transactions" for information relating to
the financing of the Magnolia System Acquisition. See also "-- Pipeline Systems.

Five Flags System Acquisition and Disposition. In September 1995, the
Company and Rainbow jointly re-acquired 100% of the outstanding capital stock of
Five Flags, which the Company had previously owned until September 1993, from
Five Flags Holding Company, an affiliate of Coastal. Total cash consideration of
$2,052,000 was paid to Five Flags Holding Company, of which the Company's share
was $1,872,450 for 91.25% of Five Flags' capital stock. In October 1995, the
Company and Rainbow jointly sold 100% of the capital stock of Five Flags to Koch
Gateway Pipeline Company ("Koch") for cash consideration of $4,664,865. After
retiring the purchase money note, the net proceeds to the Company from the sale
of Five Flags was $2,183,226. See "Management -- Certain Transactions."

Seahawk Acquisition. In February 1996, the Company formed Pan Grande with
Resource Energy Development Company, L.L.C., a North Carolina limited liability
company ("Resource") which is affiliated with Piedmont Natural Gas Co., Inc., a
publicly traded company. The Company and Resource each own 50% of Pan Grande.
Subsequent to its formation, Pan Grande entered into an agreement with Seahawk
to acquire six onshore gas gathering and transmission systems. Seahawk was
acquired by Tejas, as part of Tejas' acquisition of substantially all of the
pipeline systems owned by Seagull Energy Corporation, a publicly traded company.
The six systems, (including the Allen Hill, Chapa, Guadalupe, Guerra, Loma
Novia, and Puckett Systems), are located in Tom Green, Live Oak, Culberson and
Loving, Webb and Duval, Duval and McMullen and Pecos counties, Texas,
respectively. A seventh system, the Salt Creek, located in Kent and Scurry
counties in Texas, is also under contract to be acquired by Pan Grande pending
completion of satisfactory due diligence. Together the seven systems comprise
approximately 116 miles of natural gas gathering and transmission lines with a
design throughput of 200 million cubic feet of natural gas per day. The purchase
of the six systems by Pan Grande was financed with capital contributions from
the Company and Resource and with a five-year note from a bank to Pan Grande at
the prime rate plus 1%, secured by each of the systems and their associated
contracts. Each of the Company and Resource has guaranteed 50% of the note, and
personal guarantees were also obtained from Dan C. Tutcher, Chairman of the
Board, President and Chief Executive Officer, Stevens G. Herbst and Kenneth B.
Holmes, Jr., stockholders of the Company. See "-- Pipeline Systems" and
"Management -- Certain Transactions."

Flores System. In January 1996, the Company entered into a joint venture
with Esenjay Petroleum Corporation, Trijon Gas Pipeline Corporation, and Brazos
Resources, Inc. Shortly after its formation, the joint venture, Starr County
Gathering System, acquired a pipeline which has connections to ten wells with a
capacity of 5,000 MMBtu/d and has pipeline connections to Valero Transmission
Company ("Valero"), a subsidiary of Valero Energy Corporation, a publicly traded
company, Tennessee Gas Pipeline Company ("Tennessee Gas"), a subsidiary of
Tenneco, Inc. ("Tenneco"), a publicly traded company, Florida Gas

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<PAGE> 30

Transmission Co. ("Florida Gas"), a subsidiary of Enron Corp., a publicly traded
company, and Tejas Gas Corporation ("Tejas Gas"), a publicly traded company,
(the "Flores System"), from Gulfstream Pipeline Company. The Flores System is
operated by the Company and consists of approximately 9.9 miles of pipeline
located in southeast Starr County, Texas. The system purchases and transports
gas from five producers in the Rincon and Flores fields. See "-- Pipeline
Systems."

Texas Southeastern Gas Gathering Corporation. In May 1996, the Company,
through its wholly-owned subsidiary, Magnolia, acquired nine gathering pipeline
systems and one transmission pipeline system from TSGGC. The systems were
acquired pursuant to a purchase and sales agreement dated March 12, 1996 for a
total purchase price of $390,000 less purchase price adjustments giving effect
to operating income since the effective date of January 1, 1996. These systems
total approximately 113 miles of 2 inch to 10 inch diameter pipeline with
associated equipment. Five systems (Fayette, Happy Hill, Moores Bridge, Detroit
and Sizemore) are located in Alabama, and five systems (Millbrook, Greenwood
Springs, Heidelberg-TGP, Heidelberg-Koch and Baxterville) are located in
Mississippi. The bulk of the systems are located within 100 miles of the
Magnolia System and it is the Company's intention to integrate the operation of
these systems with the Magnolia System. TSGGC had acquired these systems in 1994
as part of a larger acquisition package.

South Fulton System. The South Fulton System in Obion County, Tennessee is
currently being constructed and is anticipated to be placed in service in
September 1996 to supply 100% of Tyson's natural gas requirements to Tyson's
newly constructed feedmill in South Fulton, Tennessee. The pipeline has a
capacity of 1,500 MMBtu/d and consists of .6 miles of 4 inch pipeline connecting
the feedmill to the City of South Fulton's local gas distribution system. The
City of South Fulton, as the owner, operates and maintains the pipeline. The
agreement between Tyson and the Company (the "Tyson Agreement") guarantees a
minimum monthly transportation fee to the Company until such time as Tyson has
transported 300,000 MMBtus of natural gas under the Tyson Agreement (the
"Primary Term") as well as a monthly service fee to be paid to the Company
during the same period. More particularly, the Tyson Agreement provides for a
monthly fee to be paid to the Company for all volumes transported by the Company
amounting to or in excess of 60,000 MMBtu annually through the end of the
Primary Term. For years under the Primary Term where less than 60,000 MMBtus are
transported annually, the Company is guaranteed a minimum fee for the difference
in volumes transported. The agreement is cancelable by Tyson, with written
notice to the Company, but such cancellation will not relieve Tyson's obligation
of payment under the Tyson Agreement for amounts due under the Primary Term.
Tyson's anticipated gas requirements are approximately 60,000 MMBtu per year and
as of March 31, 1996, 300,000 MMBtu remain to be transported under the Primary
Term of the Tyson Agreement. The Tyson Agreement does not provide for a
secondary term. See "-- Pipeline Systems."

Power Paper. The Power Paper System in Roane County, Tennessee is currently
being constructed and is anticipated to be placed in service in August 1996 to
supply natural gas to Power Paper Company's ("Power Paper") paper plant. The
pipeline has a capacity of 5,000 MMBtu/d and consists of 2.1 miles of 3 inch
pipeline connecting East Tennessee Natural Gas Company's pipeline ("East
Tennessee"), a subsidiary of Tenneco, to Power Paper's paper plant in Roane
County under an agreement by which Power Paper has agreed to transport 100% of
their gas requirements with certain minimum guaranteed volumes. See "-- Pipeline
Systems."

Tasco Cavasos Disposition. In March 1996, the Company sold the Tasco
Cavasos System, an inactive system consisting of 1.6 miles of 2 inch pipeline
along with a second inactive system which consisted primarily of a meter station
to an unrelated third party for consideration of $22,500.

Olmitos System. The Olmitos System is a 16.8 mile 8 inch and 4 inch gas
gathering pipeline system located in Webb County, Texas which gathers and
transports gas for Texaco Exploration and Production, Inc., a subsidiary of
Texaco, Inc. ("Texaco"), a publicly traded company, Conoco, Inc., a subsidiary
of E. I. Nemours & Co., a publicly traded company, and Cox Exploration, Inc.
with delivery interconnections to Valero, Houston Pipe Line Company ("Houston
Pipe Line"), a subsidiary of Enron Corp., a publicly traded company, and
MidCon-Texas Pipeline Corp., a subsidiary of MidCon Corporation ("MidCon"), a
publicly traded company. The system is owned by Olmitos System Joint Venture
("OSJV") which is currently wholly-

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<PAGE> 31

owned by Texline. Texline owned a 34% interest in OSJV until December 1995 and
March 1996 when Texline acquired the remaining 66% joint venture interest from
the other two nonaffiliated joint venture partners, based on a system valuation
of $700,000. Texline has an original cost basis in the property of approximately
$795,000. The Company has agreed to acquire the Olmitos System, subject to Board
approval, for $700,000 based on the same system valuation and on the same terms
as Texline's purchase of the system from the other nonaffiliated joint venture
partners, plus approximately $7,000 in due diligence and closing costs incurred
by Texline related to this acquisition. Texline will recognize a tax gain on the
sale of the Olmitos System to the Company of approximately $117,000 attributable
to the reduction in the historical cost basis due to depreciation charges of
approximately $205,000 through the date of disposition. The purchase price will
be paid with the net proceeds of the Offering. See "Use of Proceeds."

PIPELINE SYSTEMS

The Company owns an interest in or operates thirty-nine intrastate end-user
pipelines, gathering systems and gas transmission systems situated in the states
of Alabama, Alaska, Kansas, Louisiana, Mississippi, New York, Oklahoma,
Tennessee, and Texas. Certain information concerning the Company's pipelines is
summarized in the table below:

<TABLE>
<CAPTION>
DATE OF AVERAGE DAILY PERCENTAGE
ACQUISITION DAILY VOLUME OWNERSHIP OR
OR INITIAL LENGTH VOLUME(1) CAPACITY(1) INTEREST
PIPELINE SYSTEM OPERATION LOCATION IN MILES (MMBTU/d) (MMBTU/d) IN SYSTEM
- ------------------------ --------------- ---------------------------------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
END-USER:
Burnet................ December 1989 Burnet Co., TX 1.3 498 3,000 100%
Conway................ December 1989 Rice Co., KS --(2) 8,574 14,000 100%
Turkey Creek.......... January 1991 Fort Bend Co., TX 15.6 833 5,000 100%
OCPL.................. June 1991 Wyandotte Co., KS 1.0 2,363 6,500 100%
Cat Springs........... December 1991 Austin Co., TX 1.1 54 3,000 100%
Clemens Dome.......... February 1992 Brazoria Co., TX --(2) 100 3,000 100%
Stratton Ridge........ February 1992 Brazoria Co., TX 1.2 132 3,000 100%
Tuscaloosa(3)......... September 1992 Tuscaloosa, AL 2.6 -- (3) 1,500 100%
Augusta............... July 1993 Butler Co., KS 0.5 245 5,000 100%
Lake Charles.......... November 1993 Calcasieu Parish, LA 1.3 4,104 50,000 100%
Quindaro.............. November 1994 Wyandotte Co., KS 3.1 505 60,000 100%
Albany................ December 1994 Albany Co., NY 0.5 1,199 3,000 100%
Guadalupe............. February 1996 Culberson & Loving 9.1 307 10,000 50%(4)
Cos., TX
South Fulton.......... September 1996 Obion Co., TN 0.6 NAV 1,200 -- (5)
Power Paper........... August 1996 Roane Co., TN 2.1 NAV 5,000 100%
-------- ------- --------
40.0 18,914 173,200
TRANSMISSION:
H&W................... October 1993 Escambia Co., AL 9.0 Inactive 15,000 100%
Magnolia.............. September 1995 Central AL 111.0 28,628 120,000 100%
Moores Bridge......... May 1996 Tuscaloosa Co., AL 4.5 630 4,000 100%
------- ------- --------
124.5 29,258 139,000
GATHERING:
Sinton................ July 1992 San Patricio Co., TX 2.8 Inactive 3,000 100%
Fitzsimmons........... April 1993 Duval Co., TX --(2) 111 3,000 100%
Zmeskal............... June 1994 Victoria Co., TX --(2) 216 3,000 100%
Cook Inlet Gas........ July 1994 Cook Inlet, AK 2.7 Inactive 15,000 -- (5)
Cook Inlet Oil........ July 1994 Cook Inlet, AK 2.7 3,164 (6) 20,000(6) -- (5)
Foss.................. December 1994 Custer Co., OK 4.1 448 5,000 100%
Flores................ January 1996 Starr Co., TX 9.9 1,555 5,000 60%(7)
Allen Hill............ February 1996 Tom Green Co., TX 5.5 304 10,000 50%(4)
Chapa................. February 1996 Live Oak Co., TX 24.7 1,769 50,000 50%(4)
Guerra................ February 1996 Webb & Duval Cos., TX 18.8 7,930 50,000 50%(4)
Loma Novia............ February 1996 Duval & McMullen Cos., TX 15.2 3,843 25,000 50%(4)
Puckett............... February 1996 Pecos Co., TX 3.5 810 10,000 50%(4)
Baxterville........... May 1996 Lamar Co., MS 1.4 Inactive 2,000 100%
Detroit............... May 1996 Lamar Co., AL 16.5 101 3,000 100%
Fayette............... May 1996 Fayette Co., AL 62.8 1,195 10,000 100%
Greenwood Springs..... May 1996 Monroe Co., MS 7.9 140 5,000 100%
Happy Hill............ May 1996 Fayette Co., AL 5.5 117 3,000 100%
Heidelberg-Koch....... May 1996 Jasper Co., MS 1.0 158 3,000 100%
Heidelberg-TGP........ May 1996 Jasper Co., MS 3.5 523 2,500 100%
Millbrook............. May 1996 Wilkinson Co., MS 8.9 241 5,000 100%
Sizemore.............. May 1996 Lamar Co., AL 1.0 153 3,000 100%
------- ------- --------
198.4 22,778 235,500
------- ------- --------
Total 362.9 70,950 547,700
======= ======= ========
</TABLE>

(See notes on following page)

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<PAGE> 32

- ---------------

(1) All volume and capacity information is approximate. Average daily volumes
are based on total volumes transported during the twelve month period ended
March 31, 1996, except for certain systems noted on the above table which
were acquired or placed in service after March 31, 1995, in which case such
average daily volumes are based on total volumes transported from the date
of acquisition or initial operation through March 31, 1996. NAV means that
the information is not available since the pipeline is currently under
construction.

(2) This system is less than a quarter-mile in length.

(3) Construction suspended pursuant to an injunction prohibiting the completion
of the pipeline.

(4) This system is owned by Pan Grande, of which the Company owns a 50% interest
in and is operated by the Company.

(5) The Company receives throughput charges from these systems.

(6) Volume is reflected in barrels of oil production per day.

(7) This system is owned by Starr County Gathering System, a joint venture of
which the Company owns a 60% interest and is operated by the Company.

The Burnet System supplies Seminole Pipeline Company's ("Seminole"), an
affiliate of Mapco, LPG mainline pump station in Burnet County, Texas with 100%
of their gas requirements through a 1.3 mile 3 inch pipeline system containing
two measuring stations and pressure regulating equipment, which connects the
Seminole mainline pump station to Lone Star Gas Co.'s intrastate pipeline ("Lone
Star"), a subsidiary of Enserch Corporation, a publicly traded company. The
system was constructed and placed in service during December 1989 by the
Company's predecessor and provides gas supply to the pump station under an
agreement entered into in May 1993. Seminole has also frequently purchased its
gas supply from the Company since the inception of the contract. As of March 31,
1996 approximately 1,083,940 MMBtus remain to be transported under the
agreement's guaranteed minimum cumulative volume requirements.

The Conway System supplies a Mapco LPG Fractionation facility in Rice
County, Kansas with 100% of their gas requirements through a 4 inch pipeline
from an interconnection with Williams Natural Gas Company's interstate pipeline
("Williams Pipeline"), a subsidiary of Williams. The system began serving Mapco
during December 1989 and currently provides gas supply to the facility under an
agreement entered into in December 1995. In August 1993 the Conway System also
began serving a Koch Industries Incorporated's Isomerization unit on a month to
month basis.

The Turkey Creek System supplies Seminole's LPG mainline pump station in
Fort Bend County, Texas with 100% of their gas requirements through a 15.6 mile
6 inch and 4 inch pipeline system containing eight measuring stations and
pressure regulating equipment. The Company also sells a small volume of gas
through this system to a local rice farmer. Additionally, the system gathers,
transports and redelivers natural gas from several producing wells to Gulf Coast
Natural Gas Company's intrastate pipeline. The system was acquired during
January 1991 by the Company's predecessor and provides gas supply to the pump
station under an agreement entered into in May 1993. Seminole has also
frequently purchased its gas supply from the Company since the inception of the
contract. As of March 31, 1996 approximately 1,305,861 MMBtus remain to be
transported under the agreement's guaranteed minimum cumulative volume
requirements.

The OCPL System supplies an Owens plant in Wyandotte County, Kansas with
minimum of 80% of their gas requirements through a 1 mile 6 inch pipeline system
connected to Williams Pipeline. The system was constructed by the Company's
predecessor and placed in service during June 1991 and provides gas supply to
the plant under an agreement entered into in September 1990. The plant is
located in an industrial park with other similar plants nearby which could be
potential customers for the system. The note payable to a bank entered into in
October 1995 is secured by all transportation revenues pertaining to this
system.

The Cat Springs System supplies Seminole's LPG mainline pump station in
Austin County, Texas with 100% of their gas requirements through a 1.1 mile 2
inch pipeline system containing two measuring stations and pressure regulating
equipment, connecting the Seminole LPG mainline pump station to Tennessee Gas'

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<PAGE> 33

interstate pipeline. The system was constructed and placed in service during
December 1991 by the Company's predecessor and provides gas supply to the pump
station under an agreement entered into in July 1993. Seminole has also
frequently purchased its gas supply from the Company since the inception of the
contract. As of March 31, 1996 approximately 480,175 MMBtus remain to be
transported under the agreement's guaranteed minimum cumulative volume
requirements.

The Clemens Dome System supplies a Seminole plant in Brazoria County, Texas
with 100% of their gas requirements through a 3 inch pipeline system containing
a measuring station and pressure regulating equipment, which connects a Seminole
LPG mainline pump station to Seagas Pipeline Company's pipeline, a subsidiary of
Phillips Petroleum Company ("Phillips"), a publicly traded company. The system
also includes 3,000 feet of 6 inch pipeline that was deeded to Phillips, as part
of the construction contract. The system was constructed and placed in service
during February 1992 by the Company's predecessor and provides gas supply to the
pump station under an agreement entered into in August 1993. Seminole has also
frequently purchased its gas supply from the Company since the inception of the
contract. As of March 31, 1996 approximately 157,019 MMBtus remain to be
transported under the agreement's guaranteed minimum cumulative volume
requirements.

The Stratton Ridge System supplies a Seminole plant in Brazoria County,
Texas with 100% of their gas requirements through a 1.2 mile 2 inch pipeline
system containing a measuring station and pressure regulating equipment, which
connects a Seminole LPG mainline pump station to a pipeline owned by Amoco Gas
Company, a subsidiary of Amoco Corporation, a publicly traded company. The
system was constructed and placed in service during February 1992 by the
Company's predecessor and provides gas supply to the pump station under an
agreement entered into in May 1993. Seminole has also frequently purchased its
gas supply from the Company since the inception of the contract. As of March 31,
1996 approximately 1,098,812 MMBtus remain to be transported under the
agreement's guaranteed minimum cumulative volume requirements.

The agreements under which the Burnet, Conway, Turkey Creek, Cat Springs,
Clemens Dome, and Stratton Ridge Systems operate provide for five-year terms
commencing upon the initial delivery of natural gas, with the exception of the
Conway System agreement which provides for a seven month term. The various
agreements continue thereafter on a year-to-year basis unless terminated by
either party upon 90 days written notice with the exception of the Conway System
agreement which, unless otherwise notified, will expire on June 30, 1996. These
agreements also provide for guaranteed minimum cumulative volumes which can
serve to extend the contracts should the minimum volumes not be met within the
particular contract term, with the exception of the Conway System agreement
which provides for a fixed price for one year and a reduced transportation rate
after certain volumes have been transported by the Company. The note payable to
a bank entered into in October 1995 is secured by all transportation revenues
pertaining to these systems.

The Tuscaloosa System is a substantially completed 2.6 mile 2.5 inch
pipeline in Tuscaloosa County, Alabama constructed by the Company in September
1992 which connects Lawter International, Inc.'s chemical plant in Moundsville,
Alabama to the Magnolia System. The system is subject to a five-year agreement,
under which the Company plans to provide the facility plant 100% of its gas
requirements. Because of litigation which ensued during the construction phase
of the project, the Company did not receive certification of this pipeline, and
as a result, the Company elected to write-off its investment in this system in
1993. See Note 16 to the Company's "Consolidated Financial Statements."

The Augusta System supplies the City of Augusta's #2 electric generating
power plant in Butler County, Kansas with 100% of their gas requirements through
a .5 mile 3 inch pipeline system connected to Williams Pipeline. The system was
constructed by the Company and placed in service during July 1993 and provides
gas supply to the plant under an agreement entered into in April 1992 and
amended in November 1992 and April 1993. The agreement provides for a five-year
primary term commencing upon the initial delivery of natural gas. The agreement
continues thereafter on a year-to-year basis unless terminated by either party
upon 30 days written notice. The agreement provides for a higher transportation
fee in the first two years of the contract and a reduced transportation rate for
the remaining term. The #2 plant is primarily used for peaking

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<PAGE> 34

and back-up power generation utilizing gas-fired reciprocating engines. The load
has historically been seasonal with peak loads during the summer months.

The Lake Charles System supplies a Westlake Petrochemicals Corporation
("Westlake") ethylene/styrene plant complex in Calcasieu Parish, Louisiana with
a portion of their gas requirements through a 1.3 mile 8 inch pipeline system
connected to Sabine Pipeline Company's interstate pipeline, a subsidiary of
Texaco. The system was constructed by the Company and placed in service during
November 1993 and provides gas supply to the plant under an agreement entered
into in June 1993. The agreement provides for a three-year primary term
commencing upon the initial delivery of natural gas, followed by a seven-year
secondary term. At the expiration of the secondary term, Westlake retains
ownership of the pipeline. The agreement also provides for a guaranteed minimum
volume of 7,500 MMBtu/day and an option to purchase the pipeline for a nominal
fee at the end of the primary term, with notice to the Company, should an event
impair Westlake's ability to transport gas to their facilities. The agreement
also provides that Westlake pay a monthly operations fee to the Company. In
addition, Westlake has periodically purchased a portion of its gas supply from
the Company. The note payable to a bank entered into in October 1995 is secured
by all transportation revenues pertaining to this system.

The Quindaro System supplies the Kansas City Board of Public Utilities
Quindaro Power Plant ("BPU") in Wyandotte County, Kansas through a 3.1 mile 8
inch pipeline system connected to Williams Pipeline. The system was constructed
by the Company and placed in service during November 1994 under an agreement
entered into in January 1993. The agreement provides for a five-year primary
term commencing upon the initial delivery of natural gas, followed by a second
five-year optional term at a reduced transportation rate. The agreement will
continue thereafter on a year-to-year basis unless terminated by either party
upon 30 days written notice. The agreement provides that the Company shall
supply 100% of BPU's natural gas requirements up to 250,000 MMBtu per year and a
guaranteed minimum of 80% of BPU's natural gas requirements in excess of 250,000
MMBtus, subject to certain usage ceilings provided for in the agreement. The
note payable to a bank entered into in October 1994 is secured by all
transportation revenues pertaining to this system.

The Quindaro Power Plant is primarily coal-fired with natural gas typically
being utilized for start-up or, in the event of disruptions in coal-handling
equipment or the supply of coal. However, as a result of the Quindaro system's
ability to deliver gas at a higher pressure than the previous supplier, BPU has
recently initiated utilization of a peaking gas turbine at the facility for
supplemental power generation. BPU also has plans to convert two oil fired
turbines to natural gas which could significantly increase the overall gas
requirements for the facility.

The Albany System supplies an Owens plant in Albany County, New York
through a .5 mile 3 inch pipeline system connected to Tennessee Gas' pipeline.
The system was constructed by the Company and placed in service during December
1994 and provides gas supply to the plant under an agreement entered into in
July 1994, and amended in March 1996. The note payable to a bank entered into in
November 1994, and amended in November 1995 and in April 1996 is secured by all
transportation revenues pertaining to this system.

The agreements under which the OCPL System and the Albany Systems operate
provide for six and seven-year primary terms, respectively, commencing upon the
initial delivery of natural gas. The Albany System agreement also provides for
an eight-year secondary term. Both agreements continue after their primary and
secondary terms, respectively, on a year-to-year basis unless terminated by
either party upon 30 days written notice. The Albany System agreement also
provides for a quarterly amortization fee to be paid over the primary term as
well as an operation and maintenance fee to be paid for the life of the
contract, adjusted annually by the percentage increase or decrease in the
Producer Price Index for Intermediate Materials, Supplies and Components. Under
the Albany System agreement, the party terminating the agreement prior to the
expiration of the primary and secondary terms shall be obligated to pay a lump
sum amount, varying from year to year, as set forth in the agreement.

The Guadalupe System supplies one of the largest Sulfur Recovery mines in
North America, which is located in Culberson and Loving Counties, Texas. The
mine was developed by Pennzoil Company, a publicly

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<PAGE> 35

traded company, and is now owned by Freeport-McMoRan. This system was built in
1986 and was acquired by Pan Grande in February 1996. The system supplies a
portion of Freeport-McMoRan's gas requirements through approximately 2 miles of
8 inch pipeline transporting those volumes for producers and marketers having
sales contracts with the plant. The system also includes two interconnect
pipelines consisting of 3 miles of 4 inch and 4 miles of 8 inch pipeline,
respectively, which deliver gas to or from Western Gas Resources Inc.'s
pipelines, a publicly traded company. The note payable to a bank entered into by
Pan Grande in March 1996 in connection with the acquisition of this system and
the Allen Hill, Chapa, Guerra, Loma Novia and Puckett Systems is secured by all
of the assets of each respective system and all transportation revenues
pertaining to such systems. See "-- Pipeline Construction, Acquisition and
Disposition."

The South Fulton System in Obion County, Tennessee is currently being
constructed and is expected to be placed in service in September 1996 to supply
100% of Tyson's natural gas requirements to Tyson's newly constructed feedmill
in South Fulton, Tennessee. The pipeline has a capacity of 1,200 MMBtu/d and
consists of .6 miles of 4 inch pipeline connecting to the City of South Fulton's
local gas distribution system. The City of South Fulton, as the owner, operates
and maintains the pipeline. The note payable to a bank entered into in March
1996 is secured by all transportation revenues pertaining to this system. See
"-- Pipeline Construction, Acquisition and Disposition."

The Power Paper System in Roane County, Tennessee is currently being
constructed and is expected to be placed in service in August 1996 to supply
natural gas to Power Paper's paper plant. The pipeline has a capacity of 5,000
MMBtu/d and consists of 2.1 miles of 3 inch pipeline connecting East Tennessee's
pipeline to Power Paper's paper plant in Roane County under an agreement by
which Power Paper has agreed to transport 100% of their gas requirements. The
note payable to a bank entered into in March 1996 is secured by all
transportation revenues pertaining to this system. See "-- Pipeline
Construction, Acquisition and Disposition."

The H&W System in Escambia County, Alabama connects a gas sweetening plant
with a liquids extraction plant through a 9 mile 6 inch pipeline. The system has
been inactive since its acquisition. The Company has no contracts with customers
to transport gas through this system. The Company is engaged in finding a buyer
for the system as it has the potential to transport gas between the two plants,
transport gas to or for a local gas utility who has a system adjacent to the
east end of the pipeline, or make deliveries to an industrial end-user who has a
pipeline that culminates at the west end of the pipeline system. As a result,
this pipeline is classified as an asset held for resale in the Consolidated
Financial Statements and valued at the lower of cost or market in the amount of
$210,447. See the Company's "Consolidated Financial Statements."

Magnolia System transports gas for Sonat Marketing Company ("Sonat
Marketing"), a subsidiary of Sonat, Inc. ("Sonat"), a publicly traded company,
Transco Energy Marketing Company ("Transco Marketing"), a subsidiary of Transco,
Meridian Oil, Inc. ("Meridian"), a subsidiary of Burlington Resources, Inc., a
publicly traded company, and Perry Gas Companies, Inc. ("Perry Gas") in the
Black Warrior Basin, Alabama through a system consisting of 81 miles of 24 inch
pipeline, 18 miles of 16 inch pipeline, and 12 miles of 6 inch, 8 inch and 12
inch pipeline. The Magnolia System is located in central Alabama and also
includes a compressor station which has three Solar gas turbines with C160 gas
compressors, each rated at 1,340 horsepower. The system was acquired by the
Company from Williams pursuant to an agreement with an effective date of August
1995. The Company assumed the operations of the pipeline during September 1995.
The system also connects coal-seam gas production in the Black Warrior Basin
with Transco's interstate pipeline. The note payable to a bank entered into in
December 1995 is secured by all of the capital stock of Magnolia. See "Back
Cover" of the Prospectus.

Magnolia currently has long-term contracts with Transco Marketing and
Meridian as well as contracts with Sonat Marketing and Perry Gas. The Company
transports gas for Sonat Marketing under an agreement entered into in July 1990
(the "Sonat Agreement"), for Transco Marketing under an agreement entered into
in July 1990 and amended in August 1995 (the "Transco Agreement"), for Meridian
under an agreement entered into in August 1991 (the "Meridian Agreement") and
for Perry Gas under an agreement entered into in November 1995 (the "Perry Gas
Agreement"). The Sonat and Perry Gas Agreements provide for one-year primary
terms commencing upon the initial delivery of natural gas and continue
thereafter on a month-to-month basis unless terminated by either party upon 30
days written notice. The Transco Agreement, as

33
<PAGE> 36

amended, provides for a ten-year term from the date of amendment, and the
Meridian Agreement provides for a twelve-year term, commencing upon the initial
delivery of natural gas. The Transco Agreement continues thereafter on a
month-to-month basis.

The Moores Bridge System is a 4.5 mile 10 inch transmission pipeline with a
130 horsepower compressor, located in Tuscaloosa County, Alabama. The system has
a receipt point with Northwest Alabama Gas District ("NWAGD") and delivery
interconnections with both Alagasco, a subsidiary of Energen Corp., a publicly
traded company, and Sonat. The system was built in 1976 and was acquired by
Magnolia in May 1996. The note payable to a bank entered into in December 1995
and amended in May 1996 is secured by the capital stock of Magnolia.

The Sinton System is an inactive 2.8 mile 3 inch gas gathering pipeline
located in San Patricio County, Texas. The prospect for placing this line in
service is uncertain, and is dependent on an increase in gas exploration in the
area.

The Fitzsimmons System consists of gas delivery facilities located in Duval
County, Texas which connect a gas well to Valero's intrastate system. The
Company purchases the gas from the producer and resells the gas to a third
party.

The Zmeskal System consists of delivery facilities in Victoria County,
Texas which connect three producing gas wells to an intrastate gathering system.
The Company purchases and resells the wells' production to a third party.

The Cook Inlet Gas and Crude Oil Systems consists of two separate lines, a
2.7 mile 6 inch natural gas gathering pipeline and a 2.7 mile 8 inch crude oil
gathering pipeline. The pipeline was placed in service during July 1994 and
connects the West McArthur River Unit ("WMRU") Production Facility, operated by
Stewart Petroleum Company ("Stewart"), to a delivery point at the Unocal Oil
Trading Bay Production Facility on the west side of Cook Inlet near Anchorage,
Alaska. The Company receives a throughput charge from Stewart for all oil and
gas transported through the system for the life of the WMRU wells, subject to
guaranteed minimum volumes, by Stewart for the first two years the pipeline is
in service. All gas is presently utilized on site as fuel for production
equipment and as such, the gas gathering system is presently inactive. Stewart
has a development program to identify several other potential locations which
would be dedicated to the Company's pipeline, if commercially productive. The
note payable to a bank entered into in December 1994 is secured by the
throughput fees pertaining to this system.

The Foss System gathers gas from four Anadarko Basin gas wells in Custer
County, Oklahoma through a 4.1 mile 2 and 4 inch pipeline system connected to
ANR Pipeline Company's interstate pipeline, a subsidiary of Coastal. The system
was acquired by the Company in December 1994. A portion of the gas is purchased
and resold while the remainder is transported for a fee.

The Flores System purchases or transports gas for five operators from ten
wells in Starr County, Texas, through 9.9 miles of pipeline system consisting of
2.5 inch to 4.5 inch pipe. The system has receipt points with Merit Energy
Company ("Merit Energy"), Carl Oil & Gas Company, Tasca Exploration Company,
Hanson Production Company, and Marquee Corporation with delivery
interconnections to Valero, Tennessee Gas, Florida Gas, and Tejas Gas. The
system was acquired, effective January 1, 1996, by Starr County Gathering
System, a joint venture, of which the Company owns 60%. The note payable to a
bank entered into by Starr County Gathering System in January 1996 is secured by
all of the assets of this system and all transportation revenues pertaining to
the system. See "-- Pipeline Construction, Acquisition and Disposition."

The Allen Hill System gathers and transports gas for one operator from one
lease and purchases and resells gas from one other operator in Tom Green County,
Texas through a 5.5 mile pipeline system consisting of 4 inch pipe. The system
has receipt points with Merit Energy, and Charter Petroleum Company with
delivery interconnections to Lone Star. The system was built in 1981 and was
acquired by Pan Grande in February 1996. See "-- Pipeline Construction,
Acquisition and Disposition."

The Chapa System gathers and transports gas for three operators from eight
wells in Live Oak County, Texas through a 24.7 mile pipeline system consisting
of 2 inch to 10 inch pipe. The system has receipt points

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<PAGE> 37

with Midstates Corporation, Hunter Petroleum, Inc. and Phillips, with delivery
interconnections to Valero and Houston Pipe Line. The system was built in 1978
and was acquired by Pan Grande in February 1996. See "-- Pipeline Construction,
Acquisition and Disposition."

The Guerra System gathers and transports gas for two operators from wells
in Webb and Duval Counties, Texas through an 18.8 mile pipeline system
consisting of 3 inch to 6 inch pipe. The system has receipt points with Marquee
Corporation, Phillips, Tri-C Resources, Inc. and Amerac Energy Corporation with
delivery interconnections to Valero and Houston Pipe Line. The system was built
in 1978 and was acquired by Pan Grande in February 1996. See "-- Pipeline
Construction, Acquisition and Disposition."

The Loma Novia System gathers and transports gas for three parties from
wells located in Duval and McMullen Counties, Texas through a 15.2 mile pipeline
system consisting of 4 inch and 6 inch pipe. The system has numerous wellhead
receipt points and delivery interconnections with Houston Pipe Line and Natural
Gas Pipeline Company of America, a subsidiary of MidCon. The system was acquired
by Pan Grande in February 1996. See "-- Pipeline Construction, Acquisition and
Disposition."

The Puckett System gathers and transports gas for one operator from one
well in Pecos County, Texas through a 3.5 mile pipeline system consisting of 4
inch pipe. The system has receipt points with Maynard Oil Company, a publicly
traded company, with delivery interconnections to El Paso Natural Gas Company, a
publicly traded company. The system was built in 1983 and was acquired by Pan
Grande in February 1996. See "-- Pipeline Construction, Acquisition and
Disposition."

The Baxterville System is a presently inactive 1.4 mile gathering pipeline
system consisting of 2 inch to 3 inch pipeline, located in Lamar County,
Mississippi. The system was built in 1990 and was acquired by Magnolia in May
1996. The note payable to a bank entered into in December 1995 in connection
with the acquisition of this system and the Detroit, Fayette, Greenwood Springs,
Happy Hills, Heidelberg-Koch, Heidelberg-TGP, Millbrook and Sizemore Systems and
amended in May 1996 is secured by the capital stock of Magnolia. See
"-- Pipeline Construction, Acquisition and Disposition."

The Detroit System gathers and transports gas from three wells in Lamar
County, Alabama through a 16.5 mile pipeline system consisting of 2 inch to 8
inch pipe. The system has a delivery interconnection with NWAGD. The system was
built in 1981 and was acquired by Magnolia in May 1996. See "-- Pipeline
Construction, Acquisition and Disposition."

The Fayette System gathers and transports gas from 18 wells in Fayette
County, Alabama through a 62.8 mile pipeline system consisting of 2 inch to 6
inch pipe. The system has delivery interconnections with the City of Fayette
municipal gas system, NWAGD, Associated Natural Gas Company, a subsidiary of
PanEnergy, Inc., a publicly traded company, and Sonat Intrastate Alabama, Inc.,
a subsidiary of Sonat. The system was built in various stages between 1976 and
1985 and was acquired by Magnolia in May 1996. See "-- Pipeline Construction,
Acquisition and Disposition."

The Greenwood Springs System gathers and transports gas from 2 wells in
Monroe County, Mississippi through a 7.9 mile pipeline system consisting of 2
inch to 6 inch pipe. The system has a delivery interconnection with Tennessee
Gas. The system was built in 1982 and was acquired by Magnolia in May 1996. See
"-- Pipeline Construction, Acquisition and Disposition."

The Happy Hill System gathers and transports gas from producing wells in
Fayette County, Alabama through a 5.5 mile 4 inch pipeline. The system has
delivery interconnections with NWAGD and the Fayette System. The system was
built in 1986 and was acquired by Magnolia in May 1996. See "-- Pipeline
Construction, Acquisition and Disposition."

The Heidelberg-Koch System gathers and transports gas from 2 wells in
Jasper County, Mississippi through a 1 mile pipeline system consisting of 3 inch
to 4 inch pipe. The system has a delivery interconnection with Koch. The system
was built in 1990 and was acquired by Magnolia in May 1996. See "-- Pipeline
Construction, Acquisition and Disposition."

The Heidelberg-TGP System gathers and transports gas from 4 wells in Jasper
County, Mississippi through a 3.5 mile pipeline system consisting of 2 inch and
4 inch pipe with a 225 horsepower compressor. The

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<PAGE> 38

system has a delivery interconnection with Tennessee Gas. The system was built
in 1990 and was acquired by Magnolia in May 1996. See "-- Pipeline Construction,
Acquisition and Disposition."

The Millbrook System is an 8.9 mile pipeline system consisting of 2 inch to
6 inch pipe located in Wilkinson County, Mississippi. The system is currently
under lease to a producer through 1997. The lease requires payments based on the
system volumes subject to a monthly minimum, and the producer has the option to
purchase the system for $450,000 less the sum of any previous lease payments.
The lessee also has an option to extend the lease for an additional five years
on the same terms. The system was built in 1982 and was acquired by Magnolia in
May 1996. See "-- Pipeline Construction, Acquisition and Disposition."

The Sizemore System gathers and transports gas from producing wells in
Lamar County, Alabama through a 1 mile, 2 inch pipeline. The system has a
delivery interconnection with NWAGD. The system was built in 1989 and was
acquired by Magnolia in May 1996. See "-- Pipeline Construction, Acquisition and
Disposition."

TITLE TO PROPERTIES

The Company, as part of its construction process, must obtain certain right
of way agreements from landowners whose property the proposed pipeline will
cross. The terms and cost of these agreements can vary greatly due to a number
of factors. In addition, as part of its acquisition process, the Company will
typically evaluate the underlying right of way agreements for the particular
pipeline to be acquired to determine that the pipeline owner has met all terms
and conditions of the underlying right of way agreement and that the agreement
is still in full force and effect.

The Company typically relies upon outside service organizations to review
the right-of-way agreements and to make suggestions to the seller as to any
curative work required before closing. The Company typically does not receive a
title opinion or title policy as to these right-of-way agreements due to the
complexity of the records and attendant expense. Occasionally, the Company may
seek to initiate condemnation proceedings where permitted under state law, to
obtain a right-of-way necessary for pipeline construction projects. The Company
believes that this process is consistent with standards in the pipeline
industry, and that it holds good title to its pipeline systems, subject only to
defects which the Company believes are not material to the ownership of its
properties or results of operations. Substantially all of the Company's pipeline
systems are pledged to secure loans obtained to finance the purchase or
construction of the respective system. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Capital Resources and
Liquidity."

[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

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<PAGE> 39

MARKETS AND MAJOR CUSTOMERS

The natural gas industry has undergone major transformations, which have
included significant changes in government regulation. These regulatory changes
have impacted growth in the domestic consumption of natural gas as seen in the
chart below:

UNITED STATES NATURAL GAS CONSUMPTION BY END-USER SECTOR(1)

<TABLE>
<CAPTION>
DELIVERED TO CONSUMERS
-------------------------------------------------------
LEASE AND PIPELINE ELECTRIC TOTAL
PLANT FUEL FUEL(2) RESIDENTIAL COMMERCIAL(3) INDUSTRIAL UTILITIES TOTAL CONSUMPTION
---------- -------- ----------- ------------- ---------- --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986 Total........... 923 485 4,314 2,318 5,579 2,602 14,814 16,221
1987 Total........... 1,149 519 4,315 2,430 5,953 2,844 15,542 17,211
1988 Total........... 1,096 614 4,630 2,670 6,383 2,636 16,320 18,030
1989 Total........... 1,070 629 4,781 2,718 6,816 2,787 17,102 18,801
1990 Total........... 1,236 660 4,391 2,623 7,018 2,787 16,820 18,716
1991 Total........... 1,129 601 4,556 2,729 7,231 2,789 17,305 19,035
1992 Total........... 1,171 588 4,690 2,803 7,527 2,766 17,785 19,544
1993 Total........... 1,172 624 4,956 2,862 7,981 2,682 18,482 20,278
1994 Total........... 1,161 685 4,848 2,895 8,178 2,987 18,908 20,754
1995 Total........... 1,228 713 4,844 3,096 8,520 3,194 19,654 21,596
</TABLE>

Sources: 1973-1988: Energy Information Administration ("EIA"), Natural Gas
Annual 1994, Volume 1, Table 101; 1989 forward: EIA, Natural Gas Monthly, March
1996, Table 3.
- ---------------

(1) Measured in billion cubic feet.

(2) Natural gas consumed in the operation of pipelines, primarily in
compressors.

(3) Small quantities of natural gas delivered for use as vehicle fuel are
included in the 1993 and 1994 annual totals.

As a consequence, the industry has experienced a marked increase in
competition and volatility in natural gas prices. The result has been an
increase in gas sold directly to end-users by producers and other nontraditional
suppliers, and an increasing reluctance of end-users to enter into long-term
contracts. Consumers have shown an increased willingness to switch fuels between
gas and oil in response to their relative price fluctuations, and there is a
growing use of gas purchase contracts that require price adjustments in response
to market conditions.

During the three month period ended March 31, 1996, the Company derived
approximately 31% and 34% of its revenues from Mapco and Westlake, respectively.
Mapco is a Fortune 500 natural gas liquids pipeline company. The Company
furnishes natural gas to Mapco and its affiliates through various pipeline
systems in several states for fuel to ten turbine pump stations and a main
fractionation facility of Mapco under several long-term agreements. Westlake is
an international petrochemicals company. The Company supplies Westlake's
ethylene/styrene plant complex in Louisiana through the Lake Charles System
under an agreement entered into in June 1993 containing a three-year primary and
seven-year secondary term, respectively. A majority of the Mapco and Westlake
agreements provide for guaranteed minimum cumulative volume restrictions and
additional transportation fees to be paid to the Company for actual volumes
transported, except for the Conway System agreement. The Westlake agreement also
provides for an option to purchase the pipeline for a nominal fee at the end of
the primary term, with notice to the Company, should an event impair Westlake's
ability to transport gas to their facilities. Furthermore, the Westlake
agreement provides that Westlake pay a fixed monthly operations fee to the
Company, adjusted annually by current price indices. In addition, Westlake has
periodically purchased a portion of its gas supply from the Company. The Company
has many other long-term commitments with significant customers. See
"-- Pipeline Systems."

SALES AND MARKETING

The Company aggressively pursues end-user customers. As such, the Company
relies on its management team to identify suitable construction or acquisition
projects involving end-user customers either through

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<PAGE> 40

direct sales efforts, referrals, or existing relationships within the industry.
The Company has two full-time employees whose primary responsibilities are to
identify and develop new end-user pipeline projects. Furthermore, the Company's
senior management devotes much of its time and effort to develop such projects
and works with both new and existing customers to meet their gas supply needs.
Management also benefits from their relationships with others in the industry
who often notify the Company of assets which are being offered for sale, or of
new gathering or end-user construction opportunities in addition to those
opportunities, sought after by management.

NATURAL GAS SUPPLY

The Company's end-user pipelines have connections with major interstate and
intrastate pipelines which management believes have ample supplies of natural
gas in excess of the volumes required for these systems. In connection with the
construction and acquisition of its gathering systems, evaluations were made of
well and reservoir data furnished by producers to determine the availability of
gas supply for the systems. Based on those evaluations, it is management's
belief that there should be adequate gas supply for the Company to recoup its
investment with an adequate rate of return. As such, management does not
routinely obtain independent evaluation of reserves dedicated to its systems due
to the cost of such evaluations. Accordingly, the Company does not have
estimates of total reserves dedicated to its systems or estimates of the
anticipated life of such producing reserves.

COMPETITION

The gas transmission, gathering and marketing industries are highly
competitive. In marketing gas, the Company has numerous competitors, including
marketing affiliates of interstate pipelines, the major integrated oil
companies, and local and national gas gatherers, brokers and marketers of widely
varying sizes, financial resources and experience. Local utilities and
distributors of gas are, in some cases, engaged directly, and through
affiliates, in marketing activities that compete with the Company.

The Company competes against other companies in the transmission, gathering
and marketing businesses for supplies of gas and for sales customers.
Competition for gas supplies is primarily based on efficiency, reliability,
availability of transportation and the ability to offer a competitive price for
the gas. Competition for customers is primarily based upon reliability and price
of deliverable gas. For customers that have the capability of using alternative
fuels, such as oil and coal, the Company also competes against companies capable
of providing these alternative fuels at a competitive price.

OIL AND GAS PROPERTIES

The Company owns a number of minor non-operated working interests in
producing and non-producing oil and gas properties. For the three month period
ended March 31, 1996, revenues from the Company's oil and gas properties were
less than 1% of its total revenues and for the same period the Company's oil and
gas properties represented less than 3% of its total assets. The Company owns
working interests in 3,560 gross acres of oil and gas leases and interests in 13
producing wells. In 1995, the Company acquired a 23% working interest in two
leases together covering approximately 1,700 gross acres in Starr County, Texas
on which are located eight active and one shut-in wells previously owned by
Exxon Corporation ("Exxon"), a publicly traded company. The Company anticipates
that the operator of the property may recommend further developmental drilling
or remedial work on the leases, although the extent, timing and cost to the
Company of any such operations is presently unknown. Although it is not expected
to become a major line of business for the Company, management expects that
acquisition and ownership of non-operated oil and gas interests will remain a
facet of the Company's business for the foreseeable future.

GOVERNMENT REGULATION

Various aspects of the transportation, sale and marketing of natural gas
are subject to or affected by extensive federal regulation under the Natural Gas
Act ("NGA"), the Natural Gas Policy Act of 1978

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<PAGE> 41

("NGPA"), the Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol Act") and
regulations promulgated by FERC.

Natural Gas Transmission Industry. Historically, interstate pipeline
companies acted as wholesale merchants by purchasing natural gas from producers,
transporting that natural gas from the fields to their markets, and reselling
the natural gas to LDCs and large end-users. Prior to the enactment of the NGPA
in 1978 and the Decontrol Act of 1989, all sales of natural gas for resale in
interstate commerce, including sales by producers, were subject to the rates and
service jurisdiction of the FERC under the NGA and NGPA. However, as a result of
the NGPA and the Decontrol Act, all so-called "first sales" of natural gas were
federally deregulated, thus allowing all types of non-pipeline and non-local
distribution sellers to market their natural gas free from federal controls.
Moreover, pursuant to Section 311 of the NGPA, the FERC promulgated regulations
by which wholly-intrastate natural gas pipeline companies could engage in
interstate transactions without becoming subject to the FERC's full rates and
service jurisdiction under the NGA. At the same time, however, the FERC has
retained its traditional jurisdiction over the activities of interstate
pipelines. Thus, under the NGA and NGPA, the transportation and sale of natural
gas by interstate pipeline companies have been subject to extensive regulation,
and the construction of new facilities, the extension of existing facilities and
the commencement and cessation of sales or transportation services by pipeline
companies generally have required prior FERC authorization.

The NGA exempts gas gathering facilities from the direct jurisdiction of
FERC. Interstate transmission facilities, on the other hand, remain subject to
FERC jurisdiction. FERC has historically distinguished between these two types
of facilities on a fact-specific basis. The Company believes that its gathering
facilities and operations meet the current tests that FERC uses to grant
nonjurisdictional gathering facility status. Some of the recent cases applying
these tests in a manner favorable to the determination of the Company's
nonjurisdictional status are, however, still subject to rehearing and appeal. In
addition, FERC's articulation and application of the tests used to distinguish
between jurisdictional pipelines and nonjurisdictional gathering facilities have
varied over time. While the Company believes the current definitions create
nonjurisdictional status for the Company's gathering facilities, no assurance is
available that such facilities will not, in the future, be classified as
regulated transmission facilities and thus, the rates, terms, and conditions of
the services rendered by those facilities would become subject to regulation by
FERC.

Commencing in 1985, the FERC adopted regulatory changes that have
significantly altered the transportation, sale and marketing of natural gas.
These changes were intended to foster competition in the natural gas industry
by, among other things, transforming the role of the interstate pipeline
companies from wholesale marketers of natural gas to primarily natural gas
transporters, and mandating that interstate pipeline companies provide open and
nondiscriminatory transportation services to all producers, distributors,
marketers and other shippers that seek such services (so-called "open access"
requirements). As an incentive to cause the interstate pipeline companies to
revamp their services, the FERC also sought to expedite the certification
process for new services, facilities and operations of those pipeline companies
providing "open access" services. Throughout the early years of this process,
the FERC's actions in these areas were subject to extensive judicial review and
generated significant industry comment and proposals for modification to
existing regulations.

In April 1992, the FERC issued its most comprehensive restructuring ruling,
Order 636, a complex regulation that has had a major impact on natural gas
pipeline operations, services and rates. Among other things, Order 636 generally
required each interstate pipeline company to "unbundle" its traditional
wholesale services and make available on an open and nondiscriminatory basis
numerous constituent services (such as gathering services, storage services and
firm and interruptible transportation services) and to adopt a new rate making
methodology to determine appropriate rates for those services. To the extent the
pipeline company or its sales affiliate makes natural gas sales as a merchant in
the future, it will do so pursuant to a blanket sales certificate that puts
those entities in direct competition with all other sellers pursuant to private
contracts, however, pipeline companies were not required by Order 636 to remain
merchants of natural gas, and several of the interstate pipeline companies have
elected to become transporters only. The FERC required that each pipeline
company develop the specific terms of service in individual restructuring
proceedings by means of a compliance filing that set forth the pipeline
company's new, detailed procedures. In subsequent orders, the

39
<PAGE> 42

FERC largely affirmed the significant features of Order 636 and denied requests
for stay of the implementation of the new rules pending judicial review. Order
636, as well as the FERC orders approving the individual pipeline restructuring
proceedings, are the subject of numerous appeals to the United States Courts of
Appeals. The outcome of such proceedings and the ultimate impact that they may
have on the Company's business is uncertain.

Regulation of the Company's Facilities. The Company's operations can be
affected significantly by government regulation. Its pipeline systems are
regulated by federal, state and local regulatory agencies. These regulations are
extremely complex and subject to changing administrative interpretations. The
Company's pipeline operations are generally not subject to regulation by the
FERC which is an independent commission within the Department of Energy that has
authority over the transportation and marketing of various categories of natural
gas sold in interstate commerce. The production and sale of oil and gas is
subject to federal, state and local governmental regulations including the
imposition of excise taxes, the prevention of waste, pollution controls,
conservation of natural resources and maximum daily production allowables for
oil and gas wells.

The Company's operations are further subject to regulation by various
agencies of the states in which the Company operates. As in the case of
potential federal regulatory changes, there can be no assurances that state
regulatory measures will not adversely affect the Company's business and
financial condition. In such events, the state's regulatory authorities could
temporarily suspend or hinder operations in a particular state, depending on the
authority's view of its jurisdiction. Although, regulators at the state level
have generally followed the FERC's lead by allowing increased competition behind
LDCs, there can be no assurance that every state will follow this practice
without the pressure of litigation. State regulatory requirements and policies
vary from state to state. The regulatory requirements of Texas, Kansas,
Louisiana, Mississippi, New York, Alabama and Tennessee have the greatest impact
on the Company due to the concentration of the Company's operations in those
states. See "Risk Factors."

The Company's operations in Texas are subject to the Texas Gas Utility
Regulatory Act, as implemented by the Texas Railroad Commission. Generally, the
Texas Railroad Commission is vested with authority to ensure that rates charged
for natural gas sales and transportation services are just and reasonable. The
Company must make filings with the Texas Railroad Commission for all new and
increased rates.

The Company's operations in Kansas are subject to the jurisdiction of the
Kansas Corporation Commission (the "KCC") with regard to pipeline safety
standards and certification procedures. The KCC has granted the Company
Certificates of Public Convenience and Necessity for its pipelines in Kansas.

The State of Louisiana Office of Conservation, Pipeline Division has safety
and certification jurisdiction over the Company's operations in Louisiana. The
Company was granted Certificates of Transportation, to Interconnect, and to
Construct and Operate its system in Louisiana.

The State of New York Public Service Commission has safety and
certification jurisdiction over the Company's New York operations and has
granted a Certificate of Public Necessity and Convenience for the Albany system.

The Magnolia System in Alabama is subject to the jurisdiction of the FERC
with respect to the transportation rates under Section 311(a)(2) of the NGA.
This pipeline and the Company's other pipelines in Alabama are subject to the
jurisdiction of the Alabama Public Service Commission-Pipeline Safety Section
with regard to operational, environmental and safety considerations.

The Company's operations in Mississippi, Oklahoma and Tennessee are subject
to the jurisdiction of these state's respective Public Service Commissions with
regard to operational, environmental and safety considerations.

Environmental and Safety Matters. The Company's activities in connection
with the operation and construction of pipelines and other facilities for
transporting, processing, treating or storing natural gas and other products are
subject to environmental and safety regulation by numerous federal, state and
local authorities. This can include ongoing oversight regulation as well as
construction or other permits and

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<PAGE> 43

clearances which must be granted in connection with new projects or expansions.
On the federal level, these agencies can include the Environmental Protection
Agency ("EPA"), the Occupational Safety and Health Administration, the U.S. Army
Corp of Engineers, the U.S. Fish and Wildlife Service and others. State
regulatory agencies or boards can include various air and water quality control
boards, historical and cultural resources offices, fish and game services and
others. These regulations can increase the cost of planning, designing, initial
installation and the operations of such facilities. Sanctions for violation of
these regulations include a variety of civil and criminal enforcement measures
including monetary penalties, assessment and remediation requirements and
injunctions as to future compliance. The following is a discussion of certain
environmental and safety concerns related to the Company. It is not intended to
constitute a complete discussion of the various federal, state and local
statutes, rules, regulations, or orders to which the Company's operations may be
subject.

In most instances, the regulatory requirements of, including, without
limitation, those state agencies mentioned above and the EPA, relate to the
release of substances into the environment and include measures to control water
and air pollution. Moreover, the Company, without regard to fault, could incur
liability under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or state counterparts, in connection with the
disposal or other releases of hazardous substances. Further, the recent trend in
environmental legislation and regulations is toward stricter standards, and this
will likely continue in the future.

Environmental laws and regulations may also require the acquisition of a
permit before certain activities may be conducted by the Company. Further, these
laws and regulations may limit or prohibit activities on certain lands lying
within wilderness areas, wetlands, areas providing habitat for certain species
or other protected areas. As an employer, the Company is required to maintain a
workplace free of recognized hazards likely to cause death or serious injury and
to comply with specific safety standards. The Company is also subject to other
federal, state and local laws covering the handling, storage or discharge of
materials used by the Company, or otherwise relating to protection of the
environment, safety and health.

Management believes, based on its current knowledge, that the Company has
obtained and is in current compliance with all necessary and material permits
and that the Company is in substantial compliance with applicable material
environmental and safety regulations.

The Company maintains insurance coverages that it believes are customary in
the industry, although it is not fully insured against all environmental and
safety risks. The Company is not aware of any existing environmental or safety
claims that would have a material impact upon its financial position or results
of operations. See "-- Insurance."

INSURANCE

The Company presently maintains general comprehensive liability insurance
coverage with aggregate policy limits of $21,000,000 and per accident policy
limits of $11,000,000 which includes, among other items and subject to certain
conditions, coverage for pollution and waste disposal. The Company maintains
property insurance considered to be customary in the industry. There can be no
assurance, though, that insurance coverage will be available or adequate for any
particular risk or loss. Although, management believes that the Company's assets
are adequately covered by insurance, a substantial uninsured loss could have a
materially adverse impact on the Company and its financial position.

LEGAL PROCEEDINGS

The Company is currently involved in certain routine litigation. Management
believes that all such litigation arose in the ordinary course of business and
that costs of settlements or judgments arising from such suits will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.

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<PAGE> 44

EMPLOYEES, CONTRACT EMPLOYEES AND CONTRACT SERVICE ORGANIZATIONS

As of May 15, 1996, the Company had 14 full-time employees, one part-time
employee, and two month-to-month contract employees. The Company also has
arrangements with ten other nonaffiliated independent pipeline operating
companies, or individuals performing a similar service, who service and operate
the Company's extensive field operations and provide for emergency response
measures. The Company is not party to any collective bargaining agreements.
There have been no significant labor disputes in the past and the Company
considers its relations with employees to be excellent.

[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

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<PAGE> 45

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning the directors
and executive officers of the Company. Each director holds office until the
first annual meeting of stockholders is held after his election or until his
successor is elected or appointed and qualified.

<TABLE>
<CAPTION>
OFFICER OR
DIRECTOR
NAME AGE POSITION SINCE
-------------------------------- --- -------------------------------- ----------
<S> <C> <C> <C>
Dan C. Tutcher.................. 47 Chairman of the Board, President 1992
and Chief Executive Officer
E.P. Marinos.................... 53 Director 1996
Richard N. Richards............. 49 Director 1996
Duane S. Herbst................. 32 Secretary 1992
I.J. Berthelot, II.............. 36 Vice President of Operations and 1995
Chief Engineer
Richard A. Robert............... 30 Chief Financial Officer and 1996
Treasurer
</TABLE>

Dan C. Tutcher has been Chairman of the Board, President and Chief
Executive Officer since the Company's incorporation in 1992 and Treasurer from
1995 to 1996. Since 1989 Mr. Tutcher has also been President and Chief Executive
Officer of Magic Gas. Prior to its merger into the Company, in 1992, Mr. Tutcher
served as a Director of Nugget, from 1990 to 1992. See "Business and
Properties -- General." He also has held various positions in companies which
constructed pipelines and marketed gas, such as Gulf Gas Utilities, Inc. and
Wildhorn Corporation, where he served as Vice President from 1987 through 1989
and as President from 1984 through 1993, respectively. Mr. Tutcher holds a
Bachelors of Business Administration degree in General Business from Washburn
University.

E. P. Marinos has served as a director of the Company since July 1996. Mr.
Marinos is currently the Chief Executive Officer and Director of Arrhythmia
Research Technology, Inc., a publicly traded medical device manufacturing
company. From 1991 to 1994, Mr. Marinos was President and Chief Executive
Officer of AMT/EMP Associates, a consulting company which provided strategic
planning, mergers and acquisition consulting and organizational restructuring
consulting services to its clients. Prior to 1991, he served as Senior Vice
President of Finance and Administration of Cornerstone Natural Gas, Inc.
(formerly Endevco, Inc.), a publicly traded integrated natural gas gathering,
transmission and marketing pipeline company. Mr. Marinos was also a partner in
the accounting firm of Deloitte & Touche LLP (formerly Touche Ross & Co.) from
1975 to 1982. He holds a Bachelors of Science degree Finance and Accounting from
Wayne State University. Mr. Marinos is a certified public accountant and is a
member of the Texas Society of Certified Public Accountants and the Michigan
Society of Certified Public Accountants. Mr. Marinos has provided consulting
services to the Company from time to time.

Richard N. Richards, Captain, U.S. Navy (retired), has served as a director
of the Company since July 1996. Mr. Richards has been with NASA since 1980. Mr.
Richards was an astronaut with NASA until 1995 and flew one mission as pilot and
commanded three missions of the space shuttles Discovery and Columbia. Since
1995, Mr. Richards has been designated as the Mission Director/Manager for the
second Hubbel Space Telescope Servicing Space Shuttle Mission and Mission
Manager for the second Tethered Satellite System Space Shuttle Mission. He holds
a Bachelors of Science degree in Chemical Engineering from University of
Missouri and a Masters of Science in Aeronautical Systems from the University of
West Florida.

Duane S. Herbst is an officer of the Company in a part-time capacity. As
such, he has been Secretary of the Company since its incorporation in 1992. From
April 1992 until its merger with the Company in September 1992 he held the
office of President of Nugget. See "Business and Properties -- General." From
1989 to the date hereof he has been Vice President of Rainbow. Mr. Herbst has
also held the office of

43
<PAGE> 46

Secretary of Texline since 1993. He holds a Masters of Business Administration
from the University of Texas and a Bachelors of Science degree in Finance from
Trinity University.

I. J. "Chip" Berthelot, II is Vice President of Operations and Chief
Engineer and has been with the Company since the Company's incorporation in
1992. Mr. Berthelot joined the Company as Chief Engineer and became Vice
President of Operations and Chief Engineer in 1995. From 1991 to 1992 he was a
gas contracts representative with Mitchell Energy & Development Co., a publicly
traded company. Prior to 1991 Mr. Berthelot was with Texline as a gas contracts
representative and engineer for the period from 1990 to 1991. He is a
Professional Engineer, licensed in Texas and holds a Bachelors of Science degree
in Petroleum and Natural Gas Engineering from Texas A&I University.

Richard A. Robert is Chief Financial Officer and Treasurer and has been
with the Company since 1992. Mr. Robert joined the Company as Controller and
became Chief Financial Officer and Treasurer in 1996. From 1988 to 1992 Mr.
Robert was an audit associate in the energy audit division of Arthur Anderson
and Co. Mr. Robert is a certified public accountant and is a member of the Texas
Society of Certified Public Accountants. He holds a Bachelors of Business
Administration degree in Accounting from Southwest Texas State University.

EXECUTIVE COMPENSATION

The following table reflects all forms of compensation for services to the
Company for the years ended December 31, 1995, 1994 and 1993 of the Chief
Executive Officer of the Company. During 1993 and 1994 the only executive
officer to receive a salary was Mr. Tutcher. During 1995, 1994 and 1993 no other
executive officers received compensation, including bonuses, which exceeded
$100,000.

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
NAME AND PRINCIPAL ----------------
POSITION YEAR SALARY
------------------------------------------------------------------- ---- --------
<S> <C> <C>
Dan C. Tutcher,
(Chief Executive Officer)(1)..................................... 1995 $125,000
1994 $125,000
1993 $ 62,500
</TABLE>

- ---------------

(1) The Company provides Mr. Tutcher certain personal benefits including
payments for a car allowance. Since the value of such benefits did not
exceed the lesser of $50,000 or 10% of annual compensation, the amounts are
omitted.

Additionally, the Company has not granted any options to any officers or
directors of the Company. Furthermore, the Company does not propose to issue any
such options in the foreseeable future, other than those options that may be
granted pursuant to the 1996 Incentive Stock Plan.

Pursuant to separate shareholder's agreements dated April 30, 1994 by and
between the Company and I.J. Berthelot, II, Richard A. Robert and Duane S.
Herbst, each officer was respectively, issued 11,152, 11,152, and 6,691 shares,
of the Company's Common Stock as additional consideration for their services to
the Company. Such shares, reduced each year pursuant to a vesting schedule, are
subject to the Company's repurchase upon the termination of the respective
officer's employment, for any reason, after a 30-day notice period.

Executive Employment Contracts. In January 1993, and as subsequently
amended in April 1993, Mr. Tutcher, the Chief Executive Office and President of
the Company, entered into a five-year employment agreement with the Company
pursuant to which he is to receive an annual base salary of $125,000, beginning
July 1, 1993, and may participate in any such executive level bonuses or salary
increases as the Board may approve. Mr. Tutcher is also entitled to
reimbursement for reasonable automobile expenses not to exceed $500 each month
and is eligible for participation in the Company's group insurance plans. Mr.
Tutcher is required to devote his full business time and attention to the
Company.

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<PAGE> 47

In April 1995, and subsequently amended in December 1995, I.J. Berthelot,
II, Vice President of Operations and Chief Engineer, entered into a four-year
employment agreement with the Company. Pursuant to the employment agreement Mr.
Berthelot is to receive an annual base salary of $55,200, to be increased a
minimum of 10% annually, beginning on April 17, 1996. Mr. Berthelot was also
awarded 57,992 shares of the Company's Common Stock as consideration for
executing the agreement. Such shares, reduced each year pursuant to a vesting
schedule, are subject to the Company's repurchase upon the termination of Mr.
Berthelot's employment with the Company for any reason. Mr. Berthelot is
required to devote his full business time and attention to the Company.

In April 1994, and subsequently amended in April 1996, Richard A. Robert,
Chief Financial Officer and Treasurer, entered into a three-year employment
agreement with the Company. Pursuant to the employment agreement, Mr. Robert is
to receive an annual base salary of $69,000, to be increased a minimum of 10%
annually, beginning on April 8, 1997. Mr. Robert was also awarded 8,921 shares
of the Company's Common Stock as consideration for executing the agreement. Such
shares, reduced each year pursuant to a vesting schedule, are subject to the
Company's repurchase upon the termination of Mr. Robert's employment with the
Company for any reason. Mr. Robert is required to devote his full business time
and attention to the Company.

In May 1996, Duane S. Herbst, Secretary, began receiving an annual salary
from the Company of $24,000 per year for his part-time services as Secretary.
Previously, the Company had a month-to-month arrangement which provided a
monthly payment of $1,050 to compensate Rainbow for the Company's use of the
time of Mr. Herbst.

DIRECTOR COMPENSATION AND BOARD COMMITTEES

During the year ended December 31, 1995, the Board met 13 times. Each
director attended all Board meetings either in person or by telephonic
conference. In the past directors have not received any compensation for serving
as directors. However, in July 1996, Messrs. Marinos and Richards were each
issued a stock grant, in consideration for their future services, of 2,007
shares of the Company's Common Stock. These stock grants will vest ratably over
a three-year period. Subsequent to the effective date of the Offering, the
Company intends to pay quarterly and meeting fees to the directors for their
services.

Audit Committee. The Company's Board has established an Audit Committee.
The Committee's functions will include reviewing internal controls and
recommending to the Board the engagement of the Company's independent certified
public accountants, reviewing with such accountants a plan for and results of
their examination of the financial statements, and determining the independence
of such accountants. The Audit Committee members consist of Messrs. Marinos and
Richards.

Compensation Committee. The Company's Board has established a Compensation
Committee. The Compensation Committee will propose and administer the Company's
1996 Incentive Stock Plan. In this capacity, the Compensation Committee will
recommend all option grants or awards to Company officers, executives,
consultants and employees. The Compensation Committee will also recommend the
establishment of policies dealing with various compensation, including
compensation of executive officers, and pension and profit sharing plans,
although at this time no such plans have been created. The Compensation
Committee members consist of Messrs. Marinos and Richards.

1996 Incentive Stock Plan. In 1996, the Board adopted the Midcoast Energy
Resources, Inc. 1996 Incentive Stock Plan (the "Incentive Plan"). The purpose of
the Incentive Plan is to (i) align the personal financial incentives of the
employees and consultants of the Company and its subsidiaries ("Participants")
with the long-term growth of the Company and the interests of the Company's
stockholders through the ownership and performance of the Company's Common Stock
and (ii) enhance the ability of the Company and its subsidiaries to attract and
retain employees who share primary responsibility for the Company's management
and growth. All employees, including officers (whether or not directors) and
consultants of the Company and its subsidiaries are currently eligible to
participate in the Incentive Plan. Persons who are not in an employment or
consulting relationship with the Company or any of its subsidiaries, including
non-employee directors, are not eligible to participate in the Incentive Plan.

45
<PAGE> 48

Under the Incentive Plan, the Compensation Committee may grant Participants
incentive awards (the "Incentive Awards") with respect to a number of shares of
Common Stock that in the aggregate does not exceed 200,000 shares of Common
Stock, subject to adjustment upon the occurrence of certain recapitalizations of
the Company.

The Incentive Plan provides for the grant of (i) options, both incentive
stock options and non-qualified options, (ii) shares of restricted stock, (iii)
performance awards payable in cash or Common Stock, (iv) shares of phantom
stock, and (v) stock bonuses (collectively, the "Incentive Awards"). In
addition, the Incentive Plan provides for the grant of cash bonuses payable when
a Participant is required to recognize income for federal income tax purposes in
connection with the vesting of shares of restricted stock or the issuance of
shares of Common Stock upon the grant of a performance award or a stock bonus,
provided, that such cash bonus may not exceed the fair market value (as defined)
of the shares of Common Stock received on the grant or exercise, as the case may
be, of an Incentive Award. No Incentive Award may be granted under the Incentive
Plan after ten years from the Incentive Plan adoption date. All options granted
to consultants shall be non-qualified options.

The Compensation Committee is authorized to make Incentive Awards under the
Incentive Plan to all Participants, including officers (whether or not they are
also directors), of the Company and its subsidiaries. The Compensation Committee
determines which persons receive grants of Incentive Awards, the type of
Incentive Award granted and the number of shares subject to each Incentive
Award. The Incentive Plan does not prescribe, and the Compensation Committee has
not adopted, any fixed criteria to be evaluated in determining the number of
shares of Common Stock subject to any Incentive Award; provided, however, that
the maximum number of shares of Common Stock which can be granted to any one
individual during any calendar year is 50,000 shares. This maximum limitation is
intended to comply with Section 162(m) of the Code, so as to preserve the
deductibility by the Company of compensation generated by the exercise of non-
qualified stock options (or a disqualifying disposition of incentive stock
options) granted to certain executive officers of the Company. Subject to the
terms of the Incentive Plan, the Compensation Committee also determines the
prices, expiration dates, vesting schedules and other material features of the
Incentive Awards granted under the Incentive Plan.

The Compensation Committee has the authority to interpret and construe any
provision of the Incentive Plan and to adopt such rules and regulations for
administering the Incentive Plan as it deems necessary. All decisions and
determinations of the Compensation Committee are final and binding on all
parties. The Company has agreed to indemnify each member of the Compensation
Committee against any cost, expense or liability arising out of any action,
omission or determination relating to the Incentive Plan, unless such action,
omission or determination was taken or made in bad faith and without reasonable
belief that it was in the best interest of the Company.

Each stock option is exercisable on such date or dates as determined by the
Compensation Committee at the time of grant (subject to earlier termination
under the Incentive Plan); provided, however, no option is exercisable prior to
six months from the date of grant or after ten years from such date of grant.
The exercise price of each stock option is determined by the Compensation
Committee, but such price may not be less than the fair market value (as
defined) of the shares of Common Stock as of the date of grant. On the
occurrence of a change in control (as defined), each such option becomes
immediately exercisable.

A grant of shares of restricted stock represents the promise of the Company
to issue shares of Common Stock on a predetermined date, which shares vest on a
second predetermined date. On the occurrence of a change in control (as
defined), any unvested grants will vest automatically. A grant of a Performance
Award (as defined) represents the promise of the Company to pay a certain amount
in cash or Common Stock (as determined by the Committee), which award is
contingent upon the future performance of the Company, its subsidiaries or any
division, department, or combination thereof. The Committee establishes (i) the
maximum value to be granted pursuant to such Performance Award (as defined),
(ii) the performance period to which the award relates and (iii) the performance
measures and targets associated with the applicable performance period. A share
of phantom stock represents the right to receive the economic equivalent of a
grant of restricted stock and is subject to the same vesting requirements. The
value of a share of phantom

46
<PAGE> 49

stock is payable immediately on the occurrence of a change in control (as
defined). Bonuses payable in stock may be granted by the Compensation Committee
and may be payable at such times and subject to such conditions as the
Compensation Committee determines.

The Incentive Plan provides for an adjustment in the number of shares of
Common Stock to be issued under the Incentive Plan, the number of shares subject
to any Incentive Award and the exercise prices of certain Incentive Awards on a
subdivision or consolidation of shares of the Company or the payment of a stock
dividend without receipt of consideration by the Company. The Incentive Plan
provides for certain other adjustments and rights to cash out holders of
Incentive Awards on the occurrence of certain transactions involving the Company
including, without limitation, a merger, consolidation or recapitalization of
the Company, or other similar event that affects the issued and outstanding
shares of Common Stock.

CERTAIN TRANSACTIONS

The Company has obtained financing from former officers, directors and
affiliates in connection with the acquisition and construction of pipelines.
This financing enabled the Company to take advantage of pipeline acquisition
opportunities that would have otherwise been unavailable to the Company because
no other source or no less costly source of financing may have been available to
the Company at the time such opportunities arose. It is management's belief that
under such circumstances these transactions with affiliates were fair and
equitable to the Company. All indebtedness to non-affiliated third parties has
been personally guaranteed by Dan C. Tutcher, Chairman of the Board, President
and Chief Executive Officer, Stevens G. Herbst and Kenneth B. Holmes, Jr.,
stockholders of the Company. No future transaction will be entered into between
the Company and members of management or affiliates. Set forth below are
descriptions of such transactions:

Five Flags System. In December 1992, the Company acquired 100% of the
outstanding capital stock of Five Flags from Harbert Holdings No. One, Inc. for
a cash payment of $1,078,409. The principal assets of Five Flags consisted of
approximately 57 miles of natural gas pipelines located in Escambia and Santa
Rosa Counties, Florida. In September 1993, all of the outstanding capital stock
of Five Flags was sold to Sunshine. In 1995, the Company and Rainbow jointly
re-acquired 100% of the outstanding capital stock of Five Flags from Five Flags
Holding Company. Total cash consideration of $2,052,000 was paid for the stock,
of which the Company's share representing 91.25% interest in Five Flags capital
stock was acquired for $1,872,450. Rainbow's ownership interest amounted to an
8.75% interest in the stock acquired for $179,550. To finance this transaction,
the Company borrowed funds from Stevens G. Herbst, a former officer and director
of the Company (the "Herbst Note"). The promissory note between the Company and
Mr. Herbst called for monthly payments of interest beginning April 1, 1996
through December 31, 1996 at which time both principal and all accrued interest
would be due in full. Interest on the Herbst Note accrued at the prime rate plus
2%. Shortly after acquiring Five Flags stock the Company and Rainbow sold 100%
of the capital stock of Five Flags to Koch for $4,664,865. A portion of the
proceeds from the sale were used to repay the Herbst Note of $1,872,450 plus
accrued interest and certain other notes associated with the acquisition of
Magnolia. See "Business and Properties -- Pipeline Construction, Acquisition and
Disposition."

Project Refinancing. In December, 1994, Texline loaned the Company $275,000
pursuant to an unsecured promissory note between Texline and the Company (as
amended, the "Texline Note"). The Texline Note provides for monthly payments of
accrued interest at Mercantile Bank, N.A. -- Corpus Christi prime plus 1.5%
(10.75% at March 31, 1996). The Texline Note matures on April 1, 1997. Total
payments of principal and interest amounted to $75,000 and $30,057 in 1995 and
1996, respectively. The principal balance due to Texline at March 31, 1996, was
$200,000. The proceeds of such indebtedness were used by the Company for general
corporate purposes, including the repayment of indebtedness associated with
project financings for the construction of certain pipeline systems and for
various pipeline system acquisitions. All amounts outstanding under this note
will be repaid with the net proceeds of this Offering. See "Use of Proceeds."

Cook Inlet Pipeline Construction. In addition to the Texline Note, Texline
provided short-term loans to fund the Company's investment in Alaska until the
Company could obtain long-term bank financing. During 1994, short-term loans
were made by Texline for such purpose, accruing at the prime rate plus 5%. A
total of

47
<PAGE> 50

$316,250 in principal was loaned to the Company which was subsequently repaid to
Texline in 1994, including interest in the amount of $4,005.

Texline and Rainbow also provided approximately $1,000,000 in certificates
of deposit and U.S. Treasury Bills as security for obtaining the initial
long-term bank financing for the Company's Alaska investment. In consideration
for providing such security, the Company assigned a 3% and a 2% net revenue
interest to Texline and Rainbow, respectively, on the net income derived from
the Company's investment in the Cook Inlet Systems. However, the net revenue
interests apply only after all costs associated with the investment have been
recouped by the Company. As a result, at the date hereof, no amounts have been
paid under either assignment of the net revenue interests. The collateral was
subsequently released after approximately eight months when the Company obtained
new bank financing in December 1994.

Magnolia System Acquisition. In connection with the acquisition of Magnolia
in 1995, the Company borrowed $1,200,000 from Rainbow (the "Rainbow Note") to
finance the purchase price of the stock of Magnolia. Funds from the Rainbow Note
together with proceeds from the sale of the Five Flags stock to Koch, were used
to repay the owner financing from Williams, for the purchase of Magnolia. See
"Business and Properties -- Pipeline Construction, Acquisition and Disposition."
The Rainbow Note provided for interest at the prime rate plus 5% and was due and
payable monthly beginning April 1, 1996, with a final maturity of January 31,
1997. As additional consideration for extending the funds borrowed under the
Rainbow Note, the Company granted Rainbow a 5% net revenue interest in
Magnolia's earnings before interest, income taxes and depreciation, to be paid
on a monthly basis. The net revenue interest, as amended in May 1996, applies
only after all costs associated with the acquisition have been recouped by the
Company. The Company has the right to repurchase this net revenue interest from
Rainbow for a cash payment of $25,000. However, the repurchase amount is
increased an additional $25,000 on November 1, 1995 and each following month up
to a maximum of $500,000. The Rainbow Note was paid in full on December 20,
1995, including accrued interest in the amount of $35,260. To date, no payments
have been made towards the net revenue interest. The Company intends to
repurchase this net revenue interest from Rainbow with net proceeds of this
Offering. See "Use of Proceeds."

Additional Project Refinancing. Rainbow also loaned the Company a total of
$660,000 in December 1995 for general corporate purposes pursuant to an
unsecured promissory note accruing interest at the prime rate plus 5%. All
amounts under this note were due and payable on January 1, 1997. On January 12,
1996 the Company repaid all principal amounts due under the note to Rainbow as
well as accrued interest in the amount of $4,039. The proceeds of such
indebtedness were used by the Company for general corporate purposes including
the repayment of indebtedness associated with project financings for the
construction of certain pipeline systems and for various pipeline system
acquisitions.

Seahawk Acquisition. In connection with the acquisition of certain pipeline
systems in March 1996, the Company borrowed $100,000 from Rainbow for its equity
contribution to Pan Grande pursuant to a promissory note between the Company and
Rainbow (as amended, the "Pan Grande Note"). The Pan Grande Note bears interest
at the prime rate plus 2.5%. The Pan Grande Note is secured by the Company's
interest in Pan Grande and is payable in 59 monthly installments of $1,667 and
accrued interest and a final installment at March 15, 2001 in the amount of the
remaining principal plus accrued interest. All amounts outstanding under the Pan
Grande Note will be repaid with the net proceeds of this Offering. See "Use of
Proceeds." Rainbow has committed to loan up to an additional $75,000 in the
event the Salt Creek System is purchased. In consideration for the financing of
the equity contribution and the commitment for additional financing, the Company
issued Rainbow 4,460 shares of the Company's Common Stock. See "Business and
Properties -- Pipeline Construction, Acquisition and Disposition."

Exxon Production Acquisition. In May 1995, Texline provided a $173,822 loan
to partially finance the acquisition of a working interest in oil and gas
production from two leases located in Starr County, Texas from Exxon. The loan,
as amended in March 1996, matures on April 1, 1997. No collateral was required
to obtain this loan, although, as additional consideration for obtaining the
loan, Texline was assigned a .5% working interest in the oil and gas properties.
Monthly note payments in the amount of 25% of the Company's net revenue from the
production from these properties are paid to Texline. An additional .5% working
interest in

48
<PAGE> 51

the properties will be assigned to Texline if all principal and interest amounts
due under the loan are not paid by August 1, 1996. Total payments of interest
amounted to $3,346 and $7,477 in 1995 and through March 31, 1996, respectively.
All amounts outstanding under this note will be repaid with the net proceeds of
this Offering. See "Use of Proceeds."

Redemption of 5% Cumulative Preferred Stock. In May 1996, the Board
approved the redemption of the 5% cumulative preferred stock for $118,367, which
was 10% of the liquidation value, held by Magic (Dan Tutcher is the beneficial
owner of such shares), Stevens G. Herbst and Kenneth B. Holmes, Jr. As a result
of the redemption of the 5% cumulative preferred stock by the Company, Magic,
Mr. Herbst and Mr. Holmes were paid $59,183, $29,592, and $29,592 for the
redemption of 100,000, 50,000 and 50,000 shares, respectively. Subsequently, no
shares of the Company's preferred stock remain outstanding. Following the
redemption of the Company's 5% cumulative preferred stock, a majority of the
stockholders approved an amendment to the Articles of Incorporation to reflect
only one class of outstanding securities, the Company's Common Stock.

[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

49
<PAGE> 52

PRINCIPAL STOCKHOLDERS

The following table sets forth information based upon the records of the
Company and filings with the Commission as of May 15, 1996, with respect to (i)
each person known to be the beneficial owner of more than 5% of the Company's
Common Stock, (ii) each executive officer and director of the Company, and (iii)
all directors and executive officers as a group.

<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS SHARES OUTSTANDING PERCENTAGE AFTER
OF BENEFICIAL OWNER OWNED(1) SHARES OFFERING(2)
----------------------------------------------- --------- ------------- ----------------
<S> <C> <C> <C>
Magic Gas Corp.(3)............................. 611,240 40.7 24.4
1100 Louisiana, Suite 2950
Houston, Texas 77002
Dan C. Tutcher(4).............................. 611,240 40.7 24.4
1100 Louisiana, Suite 2950
Houston, Texas 77002
Stevens G. Herbst(5)(6)........................ 285,902 19.1 11.4
710 Buffalo, Suite 800
Corpus Christi, Texas 78401
Kenneth B. Holmes, Jr.(6)...................... 283,195 18.9 11.3
710 Buffalo, Suite 800
Corpus Christi, Texas 78401
I.J. Berthelot, II(7)(8)....................... 78,064 5.2 3.1
1100 Louisiana, Suite 2950
Houston, Texas 77002
Richard A. Robert(9)........................... 22,303 1.5 *
1100 Louisiana, Suite 2950
Houston, Texas 77002
Duane S. Herbst(10)............................ 11,151 * *
710 Buffalo, Suite 800
Corpus Christi, Texas 78401
E.P. Marinos(11)............................... 2,007 * *
2901 Sargent Street
Seabrook, Texas 77586
Richard N. Richards(11)........................ 2,007 * *
18610 Upper Bay Road
Houston, Texas 77058
All Directors and Executive Officers as a group
(6 persons).................................. 1,295,869 86.4 51.8
</TABLE>

- ---------------

* Denotes less than 1%.

(1) Except as otherwise noted, shares beneficially owned by each person as of
the record date were owned of record and each person had sole voting and
investment power with respect to all shares beneficially held by such
person.

(2) Excludes the issuance of shares of Common Stock on exercise of the
over-allotment option granted to the Underwriters.

(3) All of the outstanding stock of Magic is owned by Dan C. Tutcher and
Kimberly Tutcher as husband and wife.

(4) Includes 611,240 shares of Common Stock held of record by Magic, an
affiliate of Mr. Tutcher.

(5) Includes 4,460 shares held of record by Rainbow which is controlled by
Stevens G. Herbst.

(6) Stevens G. Herbst and Kenneth B. Holmes, Jr. are parties to an irrevocable
five-year voting trust agreement pursuant to which all voting power of such
shares owned of record and beneficially by Messrs. Herbst and Holmes will
be voted by the trust department of a banking institution.

(7) Includes 50,185 shares which are subject to certain vesting requirements.

(8) Mr. Berthelot holds 1,338 shares as custodian for minor children under the
Uniform Gift to Minors Act.

(9) Includes 15,613 shares which are subject to certain vesting requirements.

(10) Includes 4,014 shares which are subject to certain vesting requirements.

(11) Messrs. Marinos and Richards were issued a stock grant of 2,007 shares on
July 1, 1996, the effective date of their service as directors. Such shares
are subject to certain vesting requirements. See "-- Directors Compensation
and Board Committees."

50
<PAGE> 53

VOTING TRUST AGREEMENT

In July 1996, Stevens G. Herbst, Kenneth B. Holmes, Jr. and the Company
entered into an irrevocable five-year voting trust agreement. Pursuant to the
voting trust agreement, all shares owned of record and beneficially by Messrs.
Herbst and Holmes will be voted by the trust department of a banking
institution. Pursuant to this agreement, the appointed trustee is empowered and
authorized to represent Messrs. Herbst and Holmes and to vote their shares in
the judgment of the appointed trustee for the best interest of the Company.
Messrs. Herbst and Holmes have retained the power to receive dividends and sell
their shares.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have outstanding
2,500,000 shares of Common Stock. A substantial number of outstanding shares of
Common Stock and shares of Common Stock issuable upon exercise of Outstanding
Warrants will become eligible for future sale in the public market at prescribed
times. Sales of significant amounts of Common Stock in the public market
following this Offering could adversely affect prevailing market prices. Holders
of approximately 92% of the outstanding Common Stock and the Company (including
all officers and directors of the Company), have agreed not to sell such shares
for 18 months after the date of this Prospectus. Upon the expiration of such
agreements, approximately 1,352,530 shares will be eligible for sale pursuant to
Rule 144 under the Securities Act and 32,697 and 4,014 shares will be eligible
for sale pursuant to Rule 144 after 24 and 30 months, respectively, from the
date of this Prospectus. Additionally, holders of 110,759 shares of Common Stock
not subject to such lockup agreements may be sold pursuant to Rule 144 or 144(k)
under the Securities Act. See "Description of Securities" and "Underwriting."

Rule 144 governs resales of "restricted securities" for the account of any
person (other than an issuer), and restricted and unrestricted securities for
the account of an "affiliate" of the issuer. Restricted securities generally
include any securities acquired directly or indirectly from an issuer or its
affiliate which were not issued or sold in connection with a registered public
offering under the Securities Act. An affiliate of the issuer is any person who
directly or indirectly controls, is controlled by, or is under common control
with, the issuer. Affiliates of the Company generally include its directors,
executive officers, and persons directly or indirectly owning 10% or more of the
outstanding Common Stock. Under Rule 144, unregistered resales of restricted
Common Stock cannot be made until it has been held two years from the later of
its acquisition from the Company or an affiliate of the Company. Thereafter,
shares of restricted Common stock may be resold without registration subject to
Rule 144's volume limitation, aggregation, broker transaction, notice-filing
requirements, and requirements concerning publicly available information about
the Company (the "Applicable Requirements"). Resales by the Company's affiliates
of restricted and unrestricted Common Stock are subject to the Applicable
Requirements. The volume limitations provide that a person (or persons who must
aggregate their sales) cannot, within any three-month period, sell more than the
greater of 1% of then outstanding shares, or the average weekly reported trading
volume during the four calendar weeks preceding each such sale. A nonaffiliate
may resell restricted Common stock which has been held for three years free of
the Applicable Requirements.

The Company intends to register securities reserved for issuance under the
Incentive Plan on a Form S-8 filed with the Commission after the Registration
Statement on which this Prospectus is a part is declared effective by the
Commission. The registration statement on Form S-8 will automatically become
effective upon filing. Thus, shares registered under the registration statement
on Form S-8 will be available for sale in the open market, unless such shares
are subject to vesting restrictions with the Company. Any options held by
officer and directors of the Company will be subject to the contractual lockup
restrictions described above. Stevens G. Herbst and Kenneth B. Holmes, Jr. each
have certain piggyback registration rights with regard to shares of Common Stock
held by them, subject to underwriter's limitations. The Company will bear the
expenses of such registrations of the Common Stock, except for any underwriting
discounts and commissions.

51
<PAGE> 54

DESCRIPTION OF SECURITIES

GENERAL

In May 1996, a majority of the stockholders approved an amendment to the
Articles of Incorporation (the "Articles") to increase the authorized number of
shares from 6,000,000 shares of Common Stock, to 10,000,000 shares of Common
Stock and to eliminate all of the authorized number of shares of preferred
stock, par value $1.00 per share ("Preferred Stock"). The following summary
description of the Company's capital stock is not intended to be complete and is
subject to, and is qualified in its entirety by reference to, the Company's
Articles, as amended, and the Company's Bylaws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus forms a part.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company. Except as may be
required by applicable law, holders of Common Stock will not vote separately as
a class, but will vote together with the holders of outstanding shares of other
classes of capital stock. A majority of the issued and outstanding Common Stock
constitutes a quorum at any meeting of stockholders and the vote by the holders
of a majority of the outstanding shares is required to effect certain
fundamental corporate changes such as liquidation, merger or amendment of the
Articles.

Holders of shares of Common Stock are entitled to receive dividends, if,
as, and when declared by the Board out of funds legally available therefore,
after payment of dividends required to be paid on any outstanding shares of
Preferred Stock. Upon liquidation of the Company, holders of shares of Common
Stock are entitled to share ratably in all assets of the Company remaining after
payment of liabilities, subject to the liquidation preferences rights of any
outstanding shares of Preferred Stock. Holders of shares of Common Stock have no
preemptive rights or other rights to subscribe for unissued or treasury shares
or securities convertible into shares. The outstanding shares of Common Stock
are fully paid and nonassessable.

PREFERRED STOCK

In May 1996, the Board approved the redemption of all outstanding shares of
the Preferred Stock for $118,367, which represents 10% of the liquidation value.
In May 1996, a majority of the stockholders approved an amendment to the
Articles to eliminate the Preferred Stock as authorized capital stock of the
Company.

OUTSTANDING WARRANTS

The Company has issued Outstanding Warrants to purchase 34,349 shares of
Common Stock at $7.85 per share, to be adjusted for any future split in the
shares of Common Stock, that expire in February 1999 in consideration for
services which have been and will continue to be provided by a consultant in
connection with the conventional, commercial financing or sale/leaseback of
certain Magnolia assets. The Outstanding Warrants are the subject of an 18 month
lockup agreement and have certain "piggyback" registration rights.

In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, Representative's Warrants to purchase
from the Company up to an amount equal to 10% of the total number of shares of
Common Stock sold in this Offering for a period of three and one-half years,
commencing 18 months from the effective date of the registration statement, at
an exercise price equal to 120% of the public offering price. See
"Underwriting."

CERTAIN CORPORATE GOVERNANCE PROVISIONS

Limitation on Director Liability. As permitted by Section 78.037 of the
General Corporation Law of Nevada (the "NGCL"), the Company's Articles of
Incorporation eliminate the liability of its directors and officers to the
Company and its stockholders for damages for breach of fiduciary duty, except
for acts or omissions which involve intentional misconduct, fraud of a knowing
violation of law, or for the payment of dividends in violation of the NGCL; if
such a violation is willful or grossly negligent. To the extent that this
provision limits the remedies of the Company and its stockholders to equitable
remedies it might reduce the

52
<PAGE> 55

likelihood of derivative litigation and discourage the Company's management or
stockholders from initiating litigation against its directors or officers for
breach of their fiduciary duties. Additionally, equitable remedies may not be
effective in many situations. If a stockholder's only remedy is to enjoin the
completion of an action, such remedy would be ineffective if the stockholder
does not become aware of a transaction or event until after it has been
completed. In such a situation, it is possible that the Company and its
stockholders would have no effective remedy against the directors and officers.

Indemnification. To the maximum extent permitted by law, the Articles
provide for mandatory indemnification of directors and officers of the Company
against all expenses, liabilities and losses to which they may become subject or
which they may incur as a result of being or having been a director or officer
of the Company. The Company may also indemnify any employee or agent of the
Company to the fullest extent permitted by law. In addition, the Company must
advance or reimburse directors and officers and may advance or reimburse
employees and agents for expenses incurred by them in connection with
indemnifiable claims.

Insofar as indemnification for liabilities arising out of the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is KeyCorp
Shareholder Services, Inc., which will also be the initial transfer agent,
registrar and dividend disbursing agent for the Common Stock.

[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

53
<PAGE> 56

UNDERWRITING

Subject to the terms and conditions set forth in the underwriting agreement
by and among the Company and the Underwriters (the "Underwriting Agreement"),
each of the Underwriters named below, has severally agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the aggregate
number of shares of Common Stock set forth below opposite each such
Underwriter's name, at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this Prospectus.

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITERS COMMON STOCK
--------------------------------------------------------------------- ------------
<S> <C>
Coleman and Company Securities, Inc..................................
Gaines, Berland Inc. ................................................
Nolan Securities Corporation.........................................
------------
Total...................................................... 1,000,000
===========
</TABLE>

The Underwriting agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of shares of Common Stock are
subject to certain conditions precedent, and that the several Underwriters will
purchase all of the Common Stock shown above if any of such shares of Common
Stock are purchased.

The Representative has advised the Company that the Underwriters propose
initially to offer the shares of Common Stock directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the
Offering, the public offering price, concession and re-allowance may be changed.

The Company has granted to the Underwriters an option exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 150,000 additional shares of Common Stock at the public offering
price set forth on the cover page of the Prospectus, less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. The
Underwriters may exercise this option only to cover over-allotments, if any,
made in connection with the sale of the shares of Common Stock offered hereby.
To the extent that the Underwriters exercise this option, each Underwriter will
be obligated, subject to certain conditions, to purchase the number of the
additional shares of Common Stock proportionate to such Underwriters initial
commitment reflected in the foregoing table.

The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 1.75% of the gross proceeds of this Offering, $35,000 of
which has already been paid to cover some of the underwriting costs and due
diligence expenses related to this Offering.

The Company has agreed to permit the Representative to have an observer
attend the meetings of the Company's Board for a period of three years from the
date hereof.

The Company and the Underwriters have agreed to indemnify each other
against, or to contribute to losses arising out of, certain civil liabilities in
connection with this Offering, including liabilities under the Securities Act.

The Company and all current officers, directors, certain stockholders of
the Company and the holder of the Outstanding Warrants have agreed not to
publicly offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire shares of Common Stock without the prior
written consent of the Representative for a period of 18 months after the date
of this Prospectus. See "Risk Factors."

Prior to this Offering there has been no public trading market for the
Company's shares of Common Stock. The public offering price of the shares of
Common Stock has been determined by negotiation between the Company and the
Representative. Factors considered in determining the public offering price, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which the Company

54
<PAGE> 57

competes, an assessment of the Company's management, the prospects of the
Company, its capital structure and such other factors as were deemed relevant.

The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement that is on filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

REPRESENTATIVE'S WARRANTS

The Company has agreed to sell the Representative's Warrants to the
Representative at a price of $.001 per warrant for each share of Common Stock
covered by the Representative's Warrants. The Representative's Warrants entitle
the Representative to purchase shares of Common Stock in an amount equal to 10%
of the total number of shares of Common Stock sold in this Offering (excluding
the Underwriter's over-allotment option). The shares of Common Stock subject to
the Representative's Warrants will be in all respects identical to the shares of
Common Stock offered to the public hereby. The Representative's Warrants will be
limited to a term of five years from the effective date of the Offering and will
be exercisable for a three and one-half year period commencing 18 months after
the effective date of the Registration Statement, of which this Prospectus is a
part, at a per share exercise price equal to 120% of the public offering price
set forth on the cover page of this Prospectus. The Representative's Warrants
may not be sold, assigned, transferred, pledged or hypothecated for a period of
12 months from the effective date of the Registration Statement except to the
Representative or its officers. Pursuant to the terms of the Underwriting
Agreement, the Company is registering the shares of Common Stock issuable upon
exercise of the Representative's Warrants on the Registration Statement of which
this Prospectus is a part.

The Company has agreed to file, at its expense, during the period beginning
one year from the effective date of the Registration Statement of which this
Prospectus is a part, and ending five years after such date, on no more than one
occasion at the request of the holders of a majority of the Representative's
Warrants and the underlying shares of Common Stock, and to use its best efforts
to cause to become effective, a post-effective amendment to the Registration
Statement or a new registration statement under the Securities Act, as required
to permit the public sale of the shares of Common Stock issued or issuable upon
exercise of the Representative's Warrants. In addition, the Company has agreed
to give advance notice to holders of the Representative's Warrants of its
intention to file certain registration statements commencing one year and ending
five years after the effective date of the Registration Statement, and in such
case, holders of such Representative's Warrants or underlying shares of Common
Stock shall have the right to require the Company to include all or part of such
Common Stock underlying such Representative's Warrants in such registration
statement at the Company's expense.

For the life of the Representative's Warrants, the holders thereof are
given the opportunity to profit from a rise in the market price of the shares of
Common Stock, which may result in a dilution of the interests of other
stockholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Representative's Warrants are outstanding. The holders of the
Representative's Warrants might be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain additional equity capital on
terms more favorable to the Company than those provided by the Representative's
Warrants. Any profit realized on the sale of the shares of Common Stock issuable
upon the exercise of the Representative's Warrants may be deemed additional
underwriting compensation.

LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby has been
passed on for the Company by Porter & Hedges, L.L.P., Houston, Texas. Certain
legal matters related to this Offering will be passed on for the Underwriters by
Parker Chapin Flattau & Klimpl, LLP of New York, New York.

EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by Hein + Associates LLP,
certified public accountants, as set forth in their report and is included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.

55
<PAGE> 58

GLOSSARY

Certain terms used in this Prospectus have the meanings set forth below:

"Barrel or Bbl" means one stock tank barrel, or 42 U.S. gallons liquid
volume, and represents the basis unit for measuring crude oil or other
liquid hydrocarbons.

"BOPD" means barrels of oil per day.

"Bypass pipeline" means a pipeline built to provide an end-user of
quantities of natural gas, typically a chemical or manufacturing plant, an
alternative natural gas supply source to that offered by the local
distribution company or "LDC" by connecting the end-user to major
pipelines, thus by passing the LDC.

"Gross acre" means an acre in which a working interest is owned.

"Gross well" means a well in which a working interest is owned.

"LPG" means liquefied petroleum gas.

"Mcf" means thousand cubic feet of natural gas expressed, where gas
sales contracts are in effect, in terms of contractual temperature and
pressure bases and, where contracts are nonexistent, at 60 degrees
Fahrenheit and 14.65 pounds per square inch absolute.

"Mcf/d" means thousand cubic feet per day.

"MMBtu" means million British Thermal Units.

"MMBtu/d" means million British Thermal Units per day.

"MMcf" means million cubic feet.

"Mmcf/d" means million cubic feet per day.

"NASDAQ" means the National Association of Securities Dealers, Inc.
Automated Quotation system.

"Net" when used in connection with the transportation of a quantity of
natural gas, means the total amount of gas transported multiplied by the
Company's interest in the joint venture or other entity that owns the
gathering and transportation system.

"Net acres or net wells" means the sum of the fractional working
interests owned in gross acres or gross wells.

"Oil" means crude oil and condensate.

"Spot" means purchase or sale arrangements which are "best efforts" or
"interruptible" in nature and are typically for 30 days or less.

"Throughput" means the volume of gas transported or passing through a
pipeline or other facility.

"Volumes" as used herein means the amount of gas sold or transported
by the Company, unless otherwise stated. All volumes of natural gas
referred to in this Prospectus are stated at a pressure base of 14.65
pounds per square inch and a 60 degrees Fahrenheit and in most instances
are rounded to the nearest major multiple.

"Working interest" means the operating interest under an oil and gas
lease which gives the owner the right to drill, produce and conduct
operating activities on the property and a share of production, subject to
all royalties, overriding royalties and other burdens and to all costs of
exploration, development and operations and all risks in connection
therewith.

56
<PAGE> 59

MIDCOAST ENERGY RESOURCES, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report.......................................................... F-2

Consolidated Balance Sheets, December 31, 1994, 1995 and unaudited as of March 31,
1996................................................................................ F-3

Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994,
1995 and unaudited for the three months ended March 31, 1995 and 1996............... F-4

Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1993,
1994, 1995 and unaudited for the three months ended March 31, 1996.................. F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994,
1995 and unaudited for the three months ended March 31, 1995 and 1996............... F-6

Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 60

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Shareholders
Midcoast Energy Resources, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Midcoast
Energy Resources, Inc. and subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Midcoast
Energy Resources, Inc., and subsidiaries as of December 31, 1994 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for transportation and exchange
imbalances.

HEIN + ASSOCIATES LLP
Certified Public Accountants

Houston, Texas
February 12, 1996

F-2
<PAGE> 61

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 65,921 $ 106,152 $ 939,500
Accounts receivable, no allowance for doubtful
accounts...................................... 1,996,087 2,319,667 2,116,775
Asset held for resale............................ -- 210,447 210,447
------------ ------------ ------------
Total current assets..................... 2,062,008 2,636,266 3,266,722
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities.............. 3,990,406 7,365,421 7,422,770
Investment in transmission facilities............ 1,284,609 1,284,609 1,284,609
Oil and gas properties, using the full-cost
method of accounting.......................... 69,499 302,293 309,556
Other property and equipment..................... 84,679 85,819 108,167
------------ ------------ ------------
5,429,193 9,038,142 9,125,102
ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION..................................... (434,777) (831,981) (953,895)
------------ ------------ ------------
4,994,416 8,206,161 8,171,207
DEFERRED CONTRACT COSTS AND OTHER ASSETS, net of
amortization..................................... 215,906 246,081 449,112
------------ ------------ ------------
Total assets............................. $ 7,272,330 $ 11,088,508 $ 11,887,041
============ ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities......... $ 1,943,145 $ 2,086,138 $ 2,726,206
Current portion of deferred income............... 83,000 83,000 83,000
Short-term borrowing from bank................... 210,000 25,000 --
Current portion of long-term debt payable to:
Banks......................................... 930,692 540,998 878,645
Shareholders and affiliates................... -- -- 20,000
------------ ------------ ------------
Total current liabilities................ 3,166,837 2,735,136 3,707,851
------------ ------------ ------------
LONG-TERM DEBT PAYABLE TO:
Banks............................................ 1,505,771 2,926,947 2,988,588
Shareholders and affiliates...................... 275,000 1,033,822 453,822
------------ ------------ ------------
Total long-term debt..................... 1,780,771 3,960,769 3,442,410
------------ ------------ ------------
DEFERRED INCOME.................................... 318,167 235,167 214,417
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY (Note 10):
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...................... 200,000 200,000 200,000
Common stock, $.01 par value, 6 million shares
authorized, 1,402,334, 1,465,680 and 1,470,141
shares issued and outstanding at December 31,
1994, 1995 and March 31, 1996, respectively... 14,023 14,657 14,701
Paid-in capital.................................. 18,740,252 18,824,681 18,830,637
Accumulated deficit.............................. (16,909,320) (14,775,102) (14,416,175)
Unearned compensation............................ (38,400) (106,800) (106,800)
------------ ------------ ------------
Total shareholders' equity............... 2,006,555 4,157,436 4,522,363
------------ ------------ ------------
Total liabilities and shareholders'
equity................................. $ 7,272,330 $ 11,088,508 $ 11,887,041
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE> 62

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Sale of natural gas and transportation
fees.................................... $13,010,776 $14,901,222 $11,469,394 $ 2,903,098 $ 5,090,497
Sale of pipelines.......................... 2,400,000 60,586 4,092,850 -- 22,500
Sale of refined products................... 2,327,258 -- -- -- --
Oil and gas revenue........................ 18,645 6,902 60,046 1,742 50,769
----------- ----------- ----------- ----------- ----------
Total operating revenues........... 17,756,679 14,968,710 15,622,290 2,904,840 5,163,766
----------- ----------- ----------- ----------- ----------
OPERATING EXPENSES:
Cost of natural gas and transportation
charges................................. 11,792,889 13,459,465 9,895,793 2,501,151 4,304,681
Cost of pipelines sold..................... 1,244,217 48,606 1,909,624 -- 2,153
Cost of refined products................... 2,289,103 -- -- -- --
Production of oil and gas.................. 3,822 2,783 11,544 912 22,288
Depreciation, depletion and amortization... 264,249 259,440 451,551 85,320 136,328
General and administrative................. 888,965 849,002 784,653 181,809 190,720
----------- ----------- ----------- ----------- ----------
Total operating expenses........... 16,483,245 14,619,296 13,053,165 2,769,192 4,656,170
----------- ----------- ----------- ----------- ----------
Operating income................... 1,273,434 349,414 2,569,125 135,648 507,596
NON-OPERATING ITEMS:
Abandonment of pipelines (Note 16)......... (246,668) -- -- -- --
Interest expense........................... (177,566) (188,623) (339,324) (64,424) (114,669)
Other income (expense), net................ (31,401) (13,066) (36,400) (5,835) (19,245)
----------- ----------- ----------- ----------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE.................................. 817,799 147,725 2,193,401 65,389 373,682
PROVISION FOR INCOME TAXES (Note 11)......... (52,833) -- -- -- --
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (Note 3)......................... -- (120,936) -- -- --
----------- ----------- ----------- ----------- ----------
Net income......................... 764,966 26,789 2,193,401 65,389 373,682
5% CUMULATIVE PREFERRED STOCK DIVIDENDS...... (59,183) (59,183) (59,183) (14,593) (14,755)
----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS............................... $ 705,783 $ (32,394) $ 2,134,218 $ 50,796 $ 358,927
=========== =========== =========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE (Note 2)
Operations................................. $ .52 $ .07 $ 1.48 $ .04 $ .24
Accounting principle change................ -- (.09) -- -- --
----------- ----------- ----------- ----------- ----------
$ .52 $ (.02) $ 1.48 $ .04 $ .24
=========== =========== =========== =========== ==========
PRO FORMA AMOUNTS ASSUMING THE CHANGE IN
ACCOUNTING PRINCIPLE IS APPLIED
RETROACTIVELY:
Net income................................. $ 644,030 $ 147,725
Net income to common shareholders.......... $ 584,847 $ 88,542
Net income per common share................ $ .43 $ .06
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Note 2)....................... 1,359,839 1,390,553 1,439,606 1,402,334 1,465,827
=========== =========== =========== =========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE> 63

MIDCOAST ENERGY RESOURCES INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTHS ENDED MARCH 31, 1996

<TABLE>
<CAPTION>
5%
CUMULATIVE TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED UNEARNED SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT COMPENSATION EQUITY
---------- ------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993.............. $200,000 $13,528 $18,683,957 $(17,582,709) $ -- $ 1,314,776
Issuance of 13,381 shares in
connection with employee stock
bonuses............................. -- 134 8,116 -- -- 8,250
Net income............................ -- -- -- 764,966 -- 764,966
5% cumulative preferred stock
dividends........................... -- -- -- (59,183) -- (59,183)
-------- ------- ----------- ------------ ---------- -----------
BALANCE, December 31, 1993............ $200,000 $13,662 $18,692,073 $(16,876,926) $ -- $ 2,028,809
Issuance of 35,686 shares of which
7,137 shares are vested in
connection with employee shareholder
agreements (Note 15)................ -- 357 47,643 -- (38,400) 9,600
Issuance of 446 shares in connection
with an employee stock bonus........ -- 4 536 -- -- 540
Net income............................ -- -- -- 26,789 -- 26,789
5% cumulative preferred stock
dividends........................... -- -- -- (59,183) -- (59,183)
-------- ------- ----------- ------------ ---------- -----------
BALANCE, December 31, 1994............ $200,000 $14,023 $18,740,252 $(16,909,320) $ (38,400) $ 2,006,555
Issuance of 57,991 shares which are
subject to a four year vesting
schedule in connection with an
employment agreement (Note 15)...... -- 580 77,420 -- (78,000) --
Issuance of 5,352 shares in connection
with employee stock bonuses......... -- 54 7,009 -- -- 7,063
Vesting of 7,137 shares in connection
with employee shareholder agreements
(Note 15)........................... -- -- -- -- 9,600 9,600
Net income............................ -- -- -- 2,193,401 -- 2,193,401
5% cumulative preferred stock
dividends........................... -- -- -- (59,183) -- (59,183)
-------- ------- ----------- ------------ ---------- -----------
BALANCE, December 31, 1995............ $200,000 $14,657 $18,824,681 $(14,775,102) $ (106,800) $ 4,157,436
Issuance of 4,460 shares in connection
with a financing agreement with an
affiliate (Note 8).................. -- 44 5,956 -- -- 6,000
Net income (Unaudited)................ -- -- -- 373,682 -- 373,682
5% cumulative preferred stock
dividends........................... -- -- -- (14,755) -- (14,755)
-------- ------- ----------- ------------ ---------- -----------
BALANCE, March 31, 1996 (Unaudited)... $200,000 $14,701 $$18,830,637 $(14,416,175) $ (106,800) $ 4,522,363
======== ======= =========== ============ ========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE> 64

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED THREE MONTHS ENDED MARCH
DECEMBER 31, 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) applicable to common
shareholders.................................. $ 705,783 $ (32,394) $ 2,134,218 $ 50,796 $ 358,927
Adjustments to arrive at net cash provided (used)
in operating activities --
Depreciation, depletion and amortization...... 264,249 259,440 451,551 85,320 136,328
Gain on sale of operating pipelines........... (1,155,783) (11,980) -- -- (20,347)
Abandonment of pipelines...................... 246,668 -- -- -- --
Recognition of deferred income................ -- 401,167 (83,000) (20,750) (20,750)
Increase in deferred tax asset................ -- -- (43,868) -- --
Cumulative effect of a change in accounting
principle................................... -- 120,936 -- -- --
(Income) loss from partnership investments.... 14,839 (5,575) -- -- (26,300)
Issuance of common stock to employees......... 8,250 10,140 16,663 -- --
Changes in working capital accounts --
(Increase) decrease in accounts
receivable............................... (903,508) 339,787 (321,155) 629,202 227,967
Increase (decrease) in accounts payable and
accrued liabilities...................... 1,634,494 (1,596,036) 206,455 (272,138) 652,376
----------- ----------- ----------- ---------- -----------
Net cash provided (used) in operating
activities............................. 814,992 (514,515) 2,360,864 472,430 1,308,201
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of operating pipelines...................... 2,400,000 -- -- -- --
Investment in transmission facilities............ -- (1,284,609) -- -- --
Capital expenditures............................. (955,237) (1,088,117) (3,885,282) (248,929) (104,823)
Other............................................ (91,604) (5,917) (40,655) -- (184,318)
----------- ----------- ----------- ---------- -----------
Net cash provided (used) in investing
activities............................. 1,353,159 (2,378,643) (3,925,937) (248,929) (289,141)
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank debt borrowings............................. 1,899,000 5,448,000 5,857,505 715,000 1,653,000
Bank debt repayments............................. (2,395,303) (3,836,317) (5,011,023) (933,777) (1,278,712)
Proceeds from notes payable to shareholders and
affiliates.................................... -- 591,250 3,906,272 -- 100,000
Repayments on notes payable to shareholders and
affiliates.................................... (1,041,047) (316,250) (3,147,450) -- (660,000)
Issuance of notes payable........................ -- -- 3,200,000 -- --
Repayments on notes payable...................... -- -- (3,200,000) -- --
----------- ----------- ----------- ---------- -----------
Net cash provided (used) in financing
activities............................. (1,537,350) 1,886,683 1,605,304 (218,777) (185,712)
----------- ----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 630,801 (1,006,475) 40,231 4,724 833,348
----------- ----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS,
beginning of period.............................. 441,595 1,072,396 65,921 65,921 106,152
----------- ----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS,
end of period.................................... $ 1,072,396 $ 65,921 $ 106,152 $ 70,645 $ 939,500
=========== =========== =========== ========== ===========
CASH PAID FOR INTEREST............................. $ 180,271 $ 177,355 $ 323,376 $ 74,586 $ 137,722
=========== =========== =========== ========== ===========
CASH PAID FOR INCOME TAXES......................... $ 48,834 $ -- $ -- $ -- $ --
=========== =========== =========== ========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE> 65

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying financial information as of March 31, 1996 and for the
three months ended March 31, 1995 and 1996 has been prepared, without audit,
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. The financial information reflects all adjustments,
consisting of normal recurring accruals, which are, in the opinion of
management, necessary to fairly present such information in accordance with
generally accepted accounting principles.

1. BACKGROUND AND INFORMATION:

Midcoast Energy Resources, Inc. ("Midcoast" or "the Company") was formed on
May 11, 1992, as a Nevada corporation and, in September 1992, became the
successor to Nugget Oil Corporation. The merger was accounted for as a pooling
of interests.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly-owned subsidiaries. Certain reclassification
entries were made to the 1993 Consolidated Financial Statements so that the
presentation of the information is consistent with reporting for the 1994 and
1995 Consolidated Financial Statements. As of December 31, 1995, the Company's
subsidiaries include Magnolia Pipeline Corporation ("Magnolia"), H&W Pipeline
Corporation, Midcoast Holdings No. One, Inc. ("Midcoast Holdings"), Midcoast
Marketing, Inc. and Nugget Drilling Corporation, of which Magnolia and Midcoast
Holdings are currently active. All significant intercompany transactions and
balances have been eliminated. Investments (reported in other assets) that are
20% to 50% owned are accounted for using the equity method of accounting.
Investments that are greater than 50% owned are consolidated.

INCOME TAXES

Midcoast and its subsidiaries file a consolidated federal income tax
return. Midcoast accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109 -- "Accounting for Income Taxes."
Under SFAS 109, the Company recognizes deferred income taxes for the differences
between the financial and income tax bases of its assets and liabilities.

PROPERTY, PLANT AND EQUIPMENT

Natural gas transmission and distribution facilities and other equipment
are depreciated by the straight-line method at rates based on the following
estimated useful lives of the assets:

<TABLE>
<S> <C>
Natural gas transmission facilities................................... 15 -- 25 years
Pipeline right-of-ways................................................ 17.5 years
Other property and equipment.......................................... 3 -- 7 years
</TABLE>

Repairs and maintenance are charged to expense as incurred; renewals and
betterments are capitalized.

The Company accounts for its oil and gas production activities using the
full cost method of accounting. Under this method of accounting, all costs,
including indirect costs related to exploration and development activities, are
capitalized as oil and gas property costs. No gains or losses are recognized on
the sale or disposition of oil and gas reserves, except for sales which include
a significant portion of the total remaining reserves.

F-7
<PAGE> 66

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers
short-term, highly liquid investments that have a maturity of three months or
less as of the date of purchase as cash equivalents except for a $50,000
certificate of deposit which is pledged as collateral on the $1.5 million credit
facility (see Note 7).

ASSET HELD FOR RESALE

Assets for which the Company anticipates consummating a sales transaction
within one year of the balance sheet date are valued at the lower of cost or
market and classified as current assets.

TRANSPORTATION AND EXCHANGE IMBALANCES

Transportation and exchange gas imbalance volumes are accounted for using
the sales method of accounting (see Note 3). Transportation and exchange gas
imbalances are not material as of December 31, 1994 and 1995 and March 31, 1996.

DEFERRED CONTRACT COSTS

Costs incurred to construct natural gas transmission facilities pursuant to
long-term natural gas sales or transportation contracts, which upon completion
of construction are assigned to the contracting party, are capitalized as
deferred contract costs. These costs are amortized over the life of the initial
contract on a straight-line basis.

DEFERRED STOCK ISSUANCE COSTS

Direct costs incurred by the Company in connection with its offering of
securities (see Note 17) have been deferred and will be applied as a reduction
of the offering proceeds.

REVENUE RECOGNITION

Customers are invoiced and the related revenue is recorded as natural gas
deliveries are made. Pipeline sales are recognized upon closing the sale
transaction. Oil and gas revenue from the Company's interests in producing wells
is recognized as oil and gas is produced from those wells.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") issued SFAS No. 121
entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" which is effective for fiscal years beginning after
December 15, 1995. SFAS No. 121 specifies certain events and circumstances which
indicate the cost of an asset or assets may be impaired, the method by which the
evaluation should be performed, and the method by which writedowns, if any, of
the asset or assets are to be determined and recognized. Management does not
believe that adoption of this pronouncement in 1996 will have a material impact
on the Company's financial condition or operating results.

The FASB also issued SFAS No. 123, "Accounting for Stock Based
Compensation," effective for fiscal years beginning after December 15, 1995.
This statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies who
choose not to adopt the new rules, the statement requires disclosures as to what
earnings per share would have been if the new rules had been adopted. Management
intends to adopt the disclosure requirements of this statement in 1996.

USE OF ESTIMATES

The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the Company's
management to make estimates and assumptions that effect the amounts reported in
these financial statements and accompanying notes. Actual results could differ
from those estimates.

F-8
<PAGE> 67

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EARNINGS PER COMMON SHARE

Net income (loss) per share was computed by dividing net income (loss)
applicable to common shareholders by the weighted average common shares
outstanding. All share and per share amounts in the accompanying consolidated
financial statements have been adjusted to reflect an approximate 4.46 to 1
stock split authorized by the Board of Directors ("Board") in May 1996 (see Note
17). The effect of the change in accounting principle is reflected separately in
the earnings per share information.

3. ACCOUNTING POLICY CHANGE:

Transportation and exchange imbalances occur when volumes delivered to a
pipeline for transportation are different than those delivered by the pipeline
to its ultimate destination or during an exchange of gas where amounts exchanged
differ. Parties to imbalances include producers, marketers, customers and other
pipelines. Transportation and exchange gas imbalance volumes were being
accounted for using the entitlements method of accounting. The Company has
elected to change its accounting to the sales method. Under the sales method of
accounting, the Company recognizes sales revenue as the customer uses the gas
and recognizes cost of sales as the Company delivers gas to the pipeline. The
effect of this change was to decrease net income by $120,936 in 1994 and is
reflected in the Statement of Operations on a separate line item labeled
"Cumulative Effect of a Change in Accounting Principle."

4. PIPELINE ACQUISITION AND SUBSEQUENT SALE:

In December 1992, the Company agreed to acquire 100% of the outstanding
capital stock of Five Flags Pipe Line Company, a Florida corporation ("Five
Flags"), from an unaffiliated company for cash consideration of $1,078,409. This
acquisition, pursuant to the Agreement for Purchase and Sale of Stock dated
November 20, 1992, was effective as of January 1, 1993. The principal assets of
Five Flags consisted of approximately 57 miles of natural gas pipelines located
in Escambia and Santa Rosa Counties, Florida.

In September 1993, all of the outstanding capital stock of Five Flags was
sold to an unaffiliated partnership. Pursuant to the Agreement for Purchase and
Sale of Stock dated July 15, 1993, Midcoast received cash consideration of
$2,400,000 for the capital stock of Five Flags. During the Company's eight
months of ownership in 1993, Five Flags contributed approximately $96,000 of
income before income taxes.

In September 1995, the Company and an affiliate owned by a former officer
and director of the Company jointly reacquired 100% of the outstanding capital
stock of Five Flags from an unaffiliated 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 affiliate's share was
$179,550 for 8.75% of Five Flags capital stock. The investment was financed by a
former officer and director of the Company (see Note 8).

The acquisition of Five Flags' stock was made as an investment to be resold
to another unaffiliated company pursuant to an agreement for purchase and sale
of stock dated September 6, 1995. On October 2, 1995, Midcoast and the affiliate
jointly sold 100% of the capital stock of Five Flags for cash consideration of
which the Company's share was $4,092,850. A portion of the proceeds from the
sale were used to repay a related party promissory note of $1,872,450 plus
accrued interest (see Note 8). The remainder of the proceeds were used to
partially finance Midcoast's acquisition of Magnolia (see Note 5).

5. PIPELINE CONSTRUCTION AND ACQUISITIONS:

Construction of a three-mile pipeline in Kansas City, Kansas commenced in
July 1994. The pipeline was constructed pursuant to a long-term transportation
agreement and was completed in November 1994 at a cost of $1,114,000. The
project is being partially funded by the customer through prepaid transportation
fees of $415,000 with the remainder being funded through long-term bank
financing (see Note 7) and cash generated from operations. The prepaid
transportation fees are classified as liabilities on the Company's balance sheet
under the caption "Deferred Income." The fees are being recognized as income
over the life of the contract.

F-9
<PAGE> 68

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In April 1994, the New York Public Service Commission gave approval for the
issuance of a certificate of public convenience and necessity which allows for
the construction of a pipeline providing natural gas transportation to an
industrial customer in Albany, New York pursuant to a long-term transportation
agreement. The pipeline was completed in December 1994 at a cost of $294,000.
The construction was financed through cash generated from operations and
long-term bank financing (see Note 7).

In June 1995, Midcoast acquired a 23% working interest in two oil and gas
production leases located in Starr County, Texas, which together comprise
approximately 1,700 acres. The $194,000 purchase price was partially funded by a
$173,822 loan from an affiliated company owned by certain former officers and
directors of the Company (see Note 8). As consideration for advising the Company
in the acquisition of the working interest, a consultant to the Company was
assigned one percent of the Company's working interest. In addition, a one-half
percent working interest was assigned to the affiliated company which extended
the loan for the acquisition.

In September 1995, Midcoast acquired 100% of the outstanding capital stock
of Magnolia, an Alabama corporation, from Williams Holdings of Delaware, Inc.
("Williams") an unaffiliated 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 acquisition was accounted for under the
purchase method of accounting. The total purchase price of $3,200,000 was
allocated to property, plant, and equipment as the principal asset of Magnolia
consists of approximately 111 miles of natural gas pipeline located in central
Alabama. Initially, the acquisition was financed by Midcoast issuing a $500,000
subordinated debenture ("Debenture") and a $2,700,000 nonrecourse promissory
note ("Note") to Williams. The Debenture accrued interest at 10% 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 using the proceeds
from the sale of Five Flags (see Note 4) and borrowings of $1,200,000 from an
affiliate owned by a former officer and director of the Company (see Note 8). In
December 1995, the $1,200,000 related party note was repaid using a new
$1,500,000 credit facility with a commercial lender (see Note 7).

In January 1996, the Company and three unaffiliated parties jointly formed
Starr County Gathering System, a Joint Venture (the "Joint Venture"). The
companies joined together for the purpose of acquiring, owning and operating
pipelines. Effective January 1, 1996, the Joint Venture acquired a gas gathering
system consisting of approximately 10 miles of pipeline located in Starr County,
Texas from an unaffiliated third party. The Joint Venture paid cash
consideration of $164,400 for the system. The Joint Venture financed the entire
purchase price with a credit facility obtained from a commercial lender.
Midcoast as 60% owner of the Joint Venture has guaranteed 60% of the loan value.
Midcoast will act as manager of the Joint Venture and operate the systems.

On February 28, 1996, the Company and Resource Energy Development Company,
L.L.C. ("Resource"), an unaffiliated third party, jointly formed Pan Grande
Pipeline, L.L.C. ("Pan Grande") a Texas Limited Liability Company each owning a
50% interest. The companies joined together for the purpose of acquiring, owning
and operating pipelines. On March 1, 1996, Pan Grande acquired six pipeline
systems consisting of approximately 77 miles of pipeline located in Texas from
an unaffiliated third party. Cash consideration of $1,000,000 was paid by Pan
Grande for the systems. Pan Grande financed $800,000 of the acquisition with a
credit facility obtained from a commercial lender. Midcoast as 50% owner of Pan
Grande has guaranteed 50% of the loan value. The remaining $200,000 of the
purchase price was obtained through equal $100,000 capital contributions from
Midcoast and Resource. Midcoast's $100,000 capital contribution was financed
through a loan from an affiliate owned by a former officer and director of the
Company (see Note 8). Midcoast will act as manager of Pan Grande and operate the
systems.

Construction of a one-half mile pipeline in Obion County, Tennessee
commenced in March 1996. The pipeline is being constructed pursuant to a
long-term transportation agreement with an industrial customer

F-10
<PAGE> 69

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and is expected to be completed in September 1996. Construction costs are
estimated to be $65,000. The construction is being financed through cash
generated from operations and long-term bank financing (see Note 7).

Construction of a two-mile pipeline in Roane County, Tennessee commenced in
March 1996. The pipeline is being constructed pursuant to a long-term
transportation agreement with an industrial customer and is expected to be
completed in August 1996. Construction costs are estimated to be $370,000. The
construction is being financed from cash generated from operations and long-term
bank financing (see Note 7).

6. INVESTMENTS:

In March 1994, the Company signed an agreement to fund $1,265,000 which
represents half of the construction costs of a crude oil gathering pipeline and
a natural gas gathering pipeline near Cook Inlet, Alaska. The agreement provided
for the funds to be advanced in five payments due upon the completion of certain
stages of the pipeline construction. In consideration for the Company's
contribution of funds for construction, Midcoast receives a throughput fee based
on the volumes of barrels/MCF transported through the pipelines. These fees are
subject to certain minimum guaranteed volumes for the first two years which
began upon completion of the pipeline in July 1994. The payments were being
financed with available cash on hand and through short-term loans with an
affiliated company owned by certain former officers and directors of the
Company. The short-term loans were replaced with long-term bank financing in May
1994 (see Note 7).

7. DEBT OBLIGATIONS:

At December 31, 1994 and 1995 and March 31, 1996, the Company had
outstanding debt obligations as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
------------------- ------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Note payable to a bank under a term loan bearing
interest at the bank's prime rate plus 1%, principal
of $30,435 and accrued interest are payable in 35
monthly installments, with a final lump sum payment
of the remaining unpaid principal and interest due on
December 1, 1995..................................... $ 365 $ 304 $ -- $ -- $ -- $ --
Note payable to a bank under a $750,000 working capital
line of credit expiring August 1, 1996. Advanced and
unpaid principal bears interest at the bank's prime
rate plus 1% (10.25% at March 31, 1996) which is
accrued and paid monthly............................. 210 -- 25 -- -- --
Note payable to a bank under a term loan bearing
interest at the bank's prime rate plus 1%, principal
and accrued interest are payable in 32 monthly
installments of $12,720, with a final maturity of
December 15, 1996.................................... 134 145 -- -- -- --
Note payable to a bank under a term loan bearing
interest at the bank's prime rate plus 1% (9.25% at
March 31, 1996), principal and accrued interest are
payable in 59 monthly installments of $6,915, with a
final lump sum payment of the remaining unpaid
principal and interest due on
October 13, 1999..................................... 57 270 59 215 62 197
Note payable to a bank under a term loan bearing
interest at the bank's prime rate plus 1% (9.25% at
March 31, 1996), principal of $3,438 and accrued
interest are payable in monthly installments with a
final lump sum payment of the remaining unpaid
principal and interest due on February 15, 1998...... 42 120 41 79 42 68
</TABLE>

F-11
<PAGE> 70

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
CURRENT LONG-TERM CURRENT LONG-TERM CURRENT LONG-TERM
------ ------ ---- ------ ---- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Note payable to a bank under a term loan bearing
interest at the bank's prime rate plus 1.5% (9.75% at
March 31, 1996), principal of $27,778 and accrued
interest are payable in 35 monthly installments, with
a final lump sum payment of the remaining unpaid
principal and interest due on December 15, 1997...... 333 667 333 333 333 250
Revolving credit line with a bank under a $1.25 million
reducing promissory note bearing interest at the
bank's prime rate plus 1.5% (9.75% at March 31,
1996). Available credit is reduced monthly by $20,833
beginning December 1, 1995. Accrued interest and any
principal amounts as may be required to cause the
outstanding principal to not exceed the amount of
credit then available are payable monthly, with a
final maturity of November 1, 1998................... -- -- 108 1,000 191 917
Revolving credit line with a bank under a $1.5 million
reducing promissory note bearing interest at the
bank's prime rate plus 1% (9.25% at March 31, 1996).
Available credit is reduced monthly by $17,860
beginning February 1, 1996. Accrued interest and any
principal amounts as may be required to cause the
outstanding principal to not exceed the amount of
credit then available are payable monthly, with a
final maturity of January 15, 1999 (Amended in May
1996. See Note 17)................................... -- -- -- 1,300 214 1,250
Note payable to a bank under a term loan bearing
interest at the bank's prime rate plus 1% (9.25% at
March 31, 1996), principal and accrued interest are
payable in 60 monthly payments of $7,185, with a
final maturity of July 15, 2001...................... -- -- -- -- 37 306
Note payable to an affiliate owned by certain former
officers and directors bearing interest at the
Mercantile Bank, Corpus Christi prime rate plus 1.5%
(10.75% at March 31, 1996). Principal and accrued
interest are due in full at maturity on April 1,
1997................................................. -- 275 -- 200 -- 200
Note payable to an affiliate owned by certain former
officers and directors bearing interest at the
Mercantile Bank, Corpus Christi prime rate plus 1%
(10.25% at March 31, 1996). Monthly payments equal to
25% of the net revenue derived from the oil and gas
production acquisition (see Note 5) shall be
allocated to interest then principal. Any remaining
principal and accrued interest shall be due in full
at maturity on April 1, 1997......................... -- -- -- 174 -- 174
Note payable to an affiliate owned by a former officer
and director bearing interest at the Mercantile Bank,
Corpus Christi prime rate plus 5% (14.5% at December
31, 1995). Principal and accrued interest are due in
full at maturity on January 1, 1997.................. -- -- -- 660 -- --
Note payable to an affiliate owned by a former officer
and director bearing interest at the prime rate plus
2.5% (10.75% at March 31, 1996), principal of $1,667
and accrued interest are payable in 59 monthly
installments with a final lump sum payment of the
remaining unpaid principal and interest due on March
15, 2001............................................. -- -- -- -- 20 80
------ ------ ---- ------ ---- ------
$1,141 $ 1,781 $ 566 $ 3,961 $ 899 $ 3,442
====== ====== ==== ====== ==== ======
</TABLE>

In December 1992, the Company entered into a financing agreement with a
bank under which the Company could borrow up to $1,800,000. This credit facility
included a term loan of $1,400,000 which was payable in 36 monthly installments,
the first 35 installments being the amount of $30,435 principal plus accrued
interest, and the 36th and final installment being the amount of the balance of
principal ($334,775) plus accrued interest then remaining outstanding and
unpaid. In conjunction with obtaining a new debt facility

F-12
<PAGE> 71

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with another bank as discussed in a subsequent paragraph, the term loan was
repaid in full on October 31, 1995.

In addition to the term loan discussed above, the Company had a line of
credit of $400,000 under the bank financing agreement. In September 1994, the
line of credit was renewed and the available line raised to $750,000. The line
of credit, as amended in May 1996, expires on August 1, 1996. Borrowings under
this credit facility are collateralized by the Company's non-transportation
based accounts receivable. At March 31, 1996, the Company had $750,000 of
available funds under this credit facility.

In July 1993, the same bank provided the Company with an additional
$360,000 facility under which the Company obtained advances of funds as needed
for construction of pipelines. In conjunction with obtaining a new debt facility
with another bank as discussed in a subsequent paragraph, the term loan was
repaid in full on October 31, 1995.

In May 1994, the Company obtained a $1,000,000 credit facility for
financing of the Company's investment in transmission facilities in Alaska.
Under this facility, the Company was able to repay the short-term loans of
$316,250 advanced by an affiliate owned by certain former officers and
directors, as discussed in Note 8 herein, as well as obtain the funds as needed
for the Company's investment in Alaska. The agreement called for monthly
payments of accrued interest with the principal due in full at maturity on
January 15, 1996. Borrowings under this facility bore interest at the bank's
prime rate. Affiliates owned by certain former officers and directors of the
Company pledged U.S. Treasury Bills and Certificates of Deposit as collateral
for this facility for which they were compensated as discussed in Note 8. In
December 1994, this facility was repaid and replaced with a long-term financing
agreement with a new bank. Under the new agreement, principal and accrued
interest are paid in 35 monthly installments of $27,778 plus accrued interest
with a final lump sum payment of the remaining unpaid principal and interest due
on December 15, 1997. This facility is secured by the throughput fee the Company
is receiving on its investment in Alaska (see Note 6).

In October 1994, the Company obtained $335,000 under a long-term financing
from a bank. The funds were utilized to partially finance the construction of a
three-mile pipeline in Kansas City, Kansas. In connection with this financing
agreement, one of the Company's pipeline systems is subject to a negative pledge
to keep the pipeline free and clear of all liens and encumbrances.

In November 1994, $165,000 was extended by a bank to partially finance the
construction of a pipeline in Albany, New York. Under this agreement, the term
loan, as amended, is payable in monthly installments of $3,438 principal plus
accrued interest and the final installment on February 15, 1998 being the amount
of the balance of principal and accrued interest of $34,653 then remaining
outstanding and unpaid. In connection with this financing agreement, one of the
Company's pipeline systems is subject to a negative pledge to keep the pipeline
free and clear of all liens and encumbrances.

In October 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 beginning December 1, 1995. Upon maturity at November 1, 1998,
the balance of principal plus accrued interest then remaining outstanding and
unpaid is payable on full. The funds were used to repay existing bank debt. In
connection with this financing agreement, eight of the Company's pipeline
systems are subject to a negative pledge to keep the pipelines free and clear of
all liens and encumbrances. At March 31, 1996, the Company had $59,164 of
available funds under this credit facility.

In December 1995, the Company entered into a new financing agreement with a
bank lender. The agreement provided for an initial $1,500,000 revolving line of
credit with the amount of available credit being reduced by $17,860 per month
(amended in May 1996. See Note 17). Upon maturity at January 15, 1999, the
balance of principal plus accrued interest then remaining outstanding and unpaid
is payable in full. The funds were used to repay $1,200,000 in debt owed to an
affiliate for partially financing the Magnolia acquisition (see Note 5) and
other working capital needs. In connection with this financing agreement, a
$50,000 certificate of

F-13
<PAGE> 72

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deposit and all of Magnolia's stock has been pledged as collateral. Also,
Magnolia's pipeline system is subject to a negative pledge to keep the pipeline
free and clear of all liens and encumbrances. At March 31, 1996, the Company had
no available funds under this credit facility.

In March 1996, $343,000 was extended by a bank to partially finance the
construction of two pipelines in Tennessee. Under this agreement, the term loan
is payable in 60 monthly installments of principal and accrued interest of
$7,185 beginning August 15, 1996. In connection with this financing agreement,
all proceeds from the transportation agreements with the industrial customers on
the two pipelines to be constructed are pledged as collateral.

All of the above referenced bank debt has been personally guaranteed by the
three largest stockholders of the Company, one of which is also an officer and
director of the Company.

In December 1994, an affiliate owned by former officers and directors of
the Company provided a loan of $275,000 of which $75,000 was repaid during 1995.
The loan, as amended, accrues interest at the prime rate plus 2.5% and matures
on April 1, 1997. The proceeds of the loan were used for general corporate
purposes including the repayment of other indebtedness. No collateral was
required to obtain this loan.

In December 1995, an affiliate owned by a former officer and director of
the Company provided a loan of $660,000. The proceeds of the loan were used for
general corporate purposes including the repayment of other indebtedness. No
collateral was required to obtain this loan. In January 1996, the loan was
repaid in full.

In March 1996, an affiliate owned by a former officer and director of the
Company provided a loan commitment of $175,000. The Company drew $100,000 to
fund its equity contribution in a new entity (Pan Grande) in which the Company
has a 50% interest (see Note 5). The note, as amended, bears interest at the
prime rate plus 2.5% and is payable in 59 monthly installments of $1,667 plus
accrued interest and a final installment at March 15, 2001 in the amount of the
remaining principal and accrued interest then outstanding and unpaid. The note
is secured by the Company's interest in Pan Grande.

The Company is in compliance with various normal covenants and certain
financial ratios as required by its financing agreements.

The aggregate maturities of long-term debt for the five years following
December 31, 1995 are as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31 (IN THOUSANDS)
- ------------------- --------------
<S> <C> <C>
1996.......................................... $ 541
1997.......................................... 1,972
1998.......................................... 1,036
1999.......................................... 953
2000.......................................... --
------
Total............................... $4,502
======
</TABLE>

8. RELATED PARTY TRANSACTIONS:

During 1994, an affiliate owned by certain former officers and directors of
the Company provided short-term loans to fund the Company's investment in Alaska
(see Note 6) until long-term bank financing was obtained. Short-term loans of
$316,250 were extended and subsequently repaid during 1994 including interest

F-14
<PAGE> 73

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of $4,005 which was accrued at the prime rate plus 5%. In addition, a $275,000
loan was provided in 1994 which, as amended, bears interest at the Mercantile
Bank, Corpus Christi prime rate plus 1.5%. Interest is payable monthly and
principal and remaining accrued interest are due in full at maturity on April 1,
1997. The proceeds of the loan were used for general corporate purposes
including the repayment of other indebtedness. Principal of $75,000 was repaid
in November 1995 and cash payments of $30,057 were made for interest as of March
31, 1996.

Affiliates owned by former officers and directors of the Company extended
the collateral to obtain the long-term bank financing for the Alaska investment.
The collateral was outstanding for a period of approximately eight months at
which point the Company replaced the loan with another commercial lender and the
collateral requirement was extinguished. In consideration for extending the
collateral on the initial loan, the Company assigned a five percent net revenue
interest on the net income derived from the Company's investment in the oil and
natural gas gathering pipelines near Cook Inlet, Alaska. However, the five
percent net revenue interest applies only after all costs associated with the
investment have been recouped by the Company. As a result, no amounts have yet
been paid under the assignment of the net revenue interest.

In May 1995, an affiliate owned by former officers and directors of the
Company provided a $173,822 loan to partially finance the acquisition of a 23%
working interest in oil and gas production from two leases located in Starr
County, Texas. The loan, as amended in March 1996, bears interest at the
Mercantile Bank, Corpus Christi prime rate plus 1% and matures on April 1, 1997.
Cash payments of interest amounting to $3,346 and $7,477 were made during the
twelve months ended December 31, 1995 and three months ended March 31, 1996,
respectively. No collateral was required to obtain this loan, although, as
additional consideration for extending the loan, the affiliated company was
assigned a one-half percent working interest in the oil and gas properties. An
additional one-half percent working interest in the properties will be assigned
to Texline if all principal and interest amounts due under the loan are not paid
by August 1, 1996.

The Five Flags acquisition discussed in Note 4 above was financed by a
former 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 accrued
interest would be due in full. Interest accrued at the prime rate plus 2%.
However, the note plus accrued interest of approximately $10,500 was repaid in
full on October 2, 1995 using the proceeds from the sale of the Five Flags
investment.

In addition to the $660,000 general corporate purposes loan provided in
December 1995 and repaid in January 1996 (including accrued interest of $4,039)
as discussed in Note 7 herein, $1,200,000 was borrowed from an affiliate owned
by a former officer and director of the Company on October 2, 1995. 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 the seller of
Magnolia. The loan agreement called for interest to be accrued at the prime rate
plus 5% and was due monthly beginning April 1, 1996. The loan was to mature on
January 31, 1997, however, upon consummation of the new $1,500,000 bank credit
facility in December 1995, the note plus accrued interest of $35,260 was repaid
in full.

As additional consideration for extending the $1,200,000 loan, Midcoast
granted the affiliate a 5% net revenue interest in Magnolia's earnings before
interest, income taxes and depreciation to be paid on a monthly basis. The net
revenue interest, as amended in May 1996, applies only after Magnolia's
acquisition cost has been recouped by the Company. At March 31, 1996, no amounts
have yet been paid under the assignment of the net revenue interest. Midcoast
has the right to repurchase this net revenue interest from the affiliate for a
cash payment of $25,000. However, the repurchase amount is increased an
additional $25,000 on November 1, 1995 and each following month up to a maximum
of $500,000.

In March 1996, the Company borrowed $100,000 from an affiliate owned by a
former officer and director of the Company for its equity contribution in Pan
Grande (in which the Company owns a 50% interest, see

F-15
<PAGE> 74

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Note 5) pursuant to a promissory note. The note, as amended, bears interest at
the prime rate plus 2.5% and is payable in 59 monthly installments of $1,667
plus accrued interest and a final installment at March 15, 2001 in the amount of
the remaining principal and accrued interest then outstanding and unpaid. The
note is secured by the Company's interest in Pan Grande. The affiliate has
committed to lend up to an additional $75,000 in the event an additional system
is purchased by Pan Grande. In consideration for the financing of the equity
contribution and the commitment for additional financing, the Company issued the
affiliate 4,460 shares of the Company's common stock.

9. COMMITMENTS AND CONTINGENCIES:

EMPLOYMENT CONTRACTS

The Chief Executive Officer and President of the Company, has an employment
agreement with the Company which terminates in December 1997 pursuant to which
he receives a base annual salary of $125,000 adjusted for salary increases the
Board may approve. In 1994 and 1995, two key employees of the Company entered
into three and four year employment agreements, respectively. These agreements
may be terminated by mutual consent or at the option of the Company for cause,
death or disability. In the event termination is due to death, disability or
defined changes in the ownership of the Company, the full amount of compensation
remaining to be paid during the term of the agreement will be paid to the
employee or their estate, after discounting at 12% to reflect the current value
of unpaid amounts.

CONSULTING AGREEMENT

In February 1996, the Company executed an engagement letter with Triumph
Resources Corporation for the purpose of assisting the Company with a
contemplated sale transaction involving certain Magnolia assets. The agreement
calls for a monthly retainer of $8,000 for a period of twelve months in addition
to three year warrants to purchase 34,349 shares of the Company's common stock
at $7.85 per share.

LEASES

In March 1996, Midcoast entered into a new noncancelable operating lease
for its office space which expires on January 31, 1999. Previously, Midcoast had
another noncancelable lease which expired in June 1995 and converted to a
month-to-month arrangement until the new lease was executed. Rent expense of
$45,400, $50,500, and $50,600 was incurred during the years ended 1993, 1994 and
1995, respectively under these operating leases. During the three months ended
March 31, 1995 and 1996, $12,500 in rent expense was incurred in both periods.
As of March 31, 1996, future minimum lease payments due under this lease are
approximately $53,068 in 1996, $73,125 in 1997, $77,859 in 1998, and $6,488 in
1999.

10. CAPITAL STOCK:

At March 31, 1996, the Company had authorized 6 million shares of common
stock of which 1,470,141 shares were issued and outstanding. There are 79,403
shares issued and outstanding at March 31, 1996 which are subject to a vesting
schedule in conjunction with employee shareholder agreements entered into during
1994 and 1995 (see Note 15).

There were 1 million shares authorized and 200,000 shares outstanding of
the Company's 5% cumulative preferred stock ("5% Preferred") at March 31, 1996.
The 5% Preferred paid quarterly dividends based on an annual rate of 5% of the
stated liquidation value and was redeemable in whole or in part at the Company's
option at a price per share based on the liquidation value ($5.91 per share).
The 5% Preferred voted as a separate class with respect to any change in the
preferences or other rights attributable to the 5% Preferred. Upon the failure
to declare or pay quarterly dividends for two consecutive quarterly periods, the
holders of the 5% Preferred also had the right to elect one director until such
time as all accrued dividends had been paid.

F-16
<PAGE> 75

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Subsequent to March 31, 1996, the Board approved increasing the authorized
number of common shares to 10 million, authorizing an approximate 4.46 to 1
stock split, redeeming the 5% Preferred and amending the Company's Articles of
Incorporation to reflect only one class of outstanding securities, the Company's
common stock (see Note 17).

11. INCOME TAXES:

The Company has a net operating loss ("NOL") carry forward of approximately
$15.1 million expiring in various amounts from 1999 through 2008. In addition,
the Company has an investment tax credit (ITC) carry forward of approximately
$354,000 which expires primarily in 1997. These loss carryforwards were
generated by the Company's predecessor. The ability of the Company to utilize
the carry forwards is dependent upon the Company maintaining profitable
operations and staying in compliance with certain Internal Revenue Service
("IRS") code provisions and regulations associated with a change in shareholder
control. Failure to adhere to these IRS requirements could result in a
significant limitation of the Company's ability to utilize its NOL and ITC
carryforwards and could also result in a loss of utilization altogether.

The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1994 and 1995, are as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Net operating and capital loss carry forwards.................... $ 5,183 $ 5,124
Investment tax credit carryforwards.............................. 354 354
Alternative minimum tax credit................................... -- 44
Financial basis of assets in excess of tax basis................. (644) (644)
Valuation allowance.............................................. (4,893) (4,834)
------- -------
Net deferred tax assets.......................................... $ -- $ 44
======= =======
</TABLE>

A reconciliation of the 1993, 1994 and 1995 provision for income taxes to
the statutory United States tax rate is as follows (in thousands):

<TABLE>
<CAPTION>
1993 1994 1995
----- ---- -----
<S> <C> <C> <C>
Federal tax computed at statutory rate...................... $ 278 $ 50 $ 771
Utilization of net operating loss carryforwards............. (278) (50) (771)
Federal alternative minimum tax............................. 16 -- --
Provision for state income taxes............................ 37 -- --
----- ---- -----
Actual provision............................................ $ 53 $ -- $ --
===== ==== =====
</TABLE>

12. MAJOR CUSTOMERS:

For the year ended December 31, 1993, the Company derived over 10% of its
sale of natural gas and transportation fees from Mid-America Pipeline Company,
Petro PSC, L.P. , and Seminole Pipeline Company. They accounted for 32%, 14%,
and 12%, respectively.

For the years ended December 31, 1994 and 1995, the Company derived over
10% of its sales of natural gas and transportation fees from Mid-America
Pipeline Company and Westlake Petrochemicals Corporation. They accounted for 42%
and 21% during 1994, and 40% and 14% during 1995, respectively.

F-17
<PAGE> 76

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. CONCENTRATION OF CREDIT RISK:

The Company derives revenue from gas transmission and gathering services
for commercial companies located in Alabama, Alaska, Kansas, Louisiana, New
York, Oklahoma, and Texas. Two of Midcoast's largest customers account for 49%
or approximately $1.13 million of the outstanding accounts receivable at
December 31, 1995 (42% or approximately $895,000 at March 31, 1996). These
accounts receivable were subsequently collected under normal credit terms and
the Company believes that future accounts receivable with these companies will
continue to be collected under normal credit terms based on previous experience
which spans several years. The Company performs ongoing evaluations of its
customers and generally does not require collateral. The Company assesses its
credit risk and provides an allowance for doubtful accounts for any accounts
which it deems doubtful of collection. At December 31, 1995 and March 31, 1996,
no provision for doubtful accounts was provided.

The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management periodically assesses the
financial condition of the institutions and believes that any possible deposit
loss is minimal.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of trade receivables and
liabilities, notes payable to affiliates and various banks. The Company believes
the carrying value of these financial instruments approximate their estimated
fair value.

15. EMPLOYEE BENEFITS:

The Company issued a total of 13,381, 36,132 and 63,343 common shares of
the Company's common stock to certain key employees in 1993, 1994 and 1995,
respectively. Of the shares issued in 1994 and 1995, 35,686 and 57,991
respectively were issued in connection with shareholder agreements with certain
employees. The shares vest in equal amounts: the 35,686 shares over a five year
period and the 57,991 shares over a four year period. The shares were valued at
the estimated fair market value on the date of issuance. Compensation expense is
being recognized rateably over the vesting period.

In May 1996, the Board of the Company adopted the Midcoast Energy
Resources, Inc. 1996 Incentive Stock Plan (the "Incentive Plan"). All employees,
including officers (whether or not directors) of the Company and its
subsidiaries are currently eligible to participate in the Incentive Plan.
Persons who are not in an employment relationship with the Company or any of its
subsidiaries, including non-employee directors, are not eligible to participate
in the Incentive Plan. Under the Incentive Plan, the Compensation Committee may
grant incentive awards (the "Incentive Awards") with respect to a number of
shares of Common Stock that in the aggregate does not exceed 200,000 shares of
Common Stock, subject to adjustment upon the occurrence of certain
recapitalizations of the Company.

The Incentive Plan provides for the grant of (i) options, both incentive
stock options and non-qualified options, (ii) shares of restricted stock, (iii)
performance awards payable in cash or Common Stock, (iv) shares of phantom
stock, and (v) stock bonuses (collectively, the "Incentive Awards"). In
addition, the Incentive Plan provides for the grant of cash bonuses payable when
a participant is required to recognize income for federal income tax purposes in
connection with the vesting of shares of restricted stock or the issuance of
shares of Common Stock upon the grant of a performance award or a stock bonus,
provided, that such cash bonus may not exceed the fair market value (as defined)
of the shares of Common Stock received on the grant or exercise, as the case may
be, of an Incentive Award. No Incentive Award may be granted under the Incentive
Plan after ten (10) years from the Incentive Plan adoption date.

F-18
<PAGE> 77

MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. ABANDONMENT OF PIPELINES:

In 1992, a complaint was filed before the Alabama Public Service Commission
("APSC") by a local distribution company alleging that Gas Utilities or its
assignees were required to obtain a certificate of necessity and public
convenience before the pipeline may be operated. As a result, an injunction was
ordered by the Circuit Court of Hale County, Alabama, on October 8, 1992,
against further construction on the pipeline until the matter was resolved
before the APSC.

Based upon the complaint filing, the APSC asserted jurisdiction, thereby
requiring their certification of the pipeline, which would be extremely
difficult and costly to obtain; therefore, the Company elected to write-off its
investment in the pipeline ($210,687) during the third quarter of 1993. The
Company pursued relief through the Alabama judicial system but did not prevail.
The Company is currently considering other regulatory alternatives but no
assurances can be made that the Company will recover its investment in the
pipeline.

Also in 1993, the Company disposed of most of the recoverable assets of an
inactive gas gathering system and wrote-off the remaining net book value of
$35,981.

17. SUBSEQUENT EVENTS:

The Board and a majority of the existing shareholders have authorized
increasing the number of authorized common shares from 6,000,000 shares to
10,000,000 shares. In addition, the Board authorized an approximate 4.46 for 1
stock split in anticipation of the Company registering with the United States
Securities and Exchange Commission 1,150,000 shares (after consideration of the
stock split) of its common stock, including the Company's grant of an option to
the underwriters to purchase up to 150,000 shares to satisfy over-allotments in
the sale of the Company's common stock. Under the terms of the underwriting
agreement, the underwriters will also receive warrants to acquire 100,000 shares
at 120% of the initial offering price per share. The securities underlying these
warrants are subject to piggyback registration rights.

In May 1996, the Board approved the redemption of the 5% Preferred for
$118,367 held by a director and officer and two former directors and officers of
the Company. The shares were redeemed for ten percent (10%) of the stated
liquidation value ($1,183,665). Subsequently, no shares of the Company's
preferred stock remain outstanding. Following redemption of the Company's 5%
Preferred, a majority of the shareholders approved an amendment to the Articles
of Incorporation to reflect only one class of outstanding securities, the
Company's common stock.

In May 1996, Magnolia acquired nine gathering pipeline systems and one
transmission pipeline system from TSGGC. The systems were acquired pursuant to a
purchase and sale agreement dated March 12, 1996 for a total purchase price of
$390,000 less purchase price adjustments giving effect to operating income since
the effective date of January 1, 1996. These systems total approximately 113
miles of 2 inch to 10 inch diameter pipeline with associated equipment. Five
systems (Fayette, Happy Hill, Moores Bridge, Detroit and Sizemore) are located
in Alabama, and five systems (Millbrook, Greenwood Springs, Heidelberg-TGP,
Heidelberg-Koch and Baxterville) are located in Mississippi. The bulk of the
systems are located within 100 miles of the Magnolia System and it is the
Company's intention to integrate the operation of these systems with the
Magnolia System. TSGGC had acquired these systems in 1994 as part of a larger
acquisition package. The acquisition was financed by amending an existing credit
facility with a bank as discussed below.

In May 1996, the Company's $1,500,000 revolving line of credit with a bank
was amended to increase the available credit by $350,000 and adjust the monthly
reduction of availability from $17,860 to $23,000. This amendment was made to
finance the TSGGC acquisition discussed in the preceding paragraph.

F-19
<PAGE> 78

================================================================================

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 2
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 11
Market for the Company's Common Stock
and Dividend Policy.................. 13
Dilution............................... 14
Capitalization......................... 15
Selected Financial Data................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business and Properties................ 23
Management............................. 43
Principal Stockholders................. 50
Shares Eligible for Future Sale........ 51
Description of Securities.............. 52
Underwriting........................... 54
Legal Matters.......................... 55
Experts................................ 55
Glossary............................... 56
Index to Financial Statements.......... F-1
</TABLE>

=============================================================

=============================================================
1,000,000 SHARES

[MIDCOAST LOGO] MIDCOAST ENERGY RESOURCES, INC.

COMMON STOCK
---------------------------

PROSPECTUS
----------------------
COLEMAN AND COMPANY
SECURITIES, INC.

GAINES, BERLAND INC.

NOLAN SECURITIES
CORPORATION
, 1996
=============================================================

<PAGE> 79

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Articles contain indemnification provisions which are
consistent with those contained in the NGCL. Accordingly, the Company generally
may indemnify its directors and officers against liabilities and expenses to
which they may become subject or which they may incur as a result of being or
having been a director, officer, employee or agent of the Company.

Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act, and will be governed by the final adjudication
of such issue.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated cash expenses to be incurred in connection with the
registration and distribution of the securities covered by this Registration
Statement are set forth below.

<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 4,817
AMEX Application and Listing Fees......................................... 15,000
NASD Filing Fee........................................................... 1,897
Printing Expenses......................................................... 35,000
Legal Fees and Expenses................................................... 150,000
Blue Sky Fees and Expenses (including legal expenses)..................... 30,000
Accounting Fees and Expenses.............................................. 25,000
Transfer Agent and Registrar Fees and Expenses............................ 5,000
Miscellaneous Expenses.................................................... 20,786
---------
TOTAL........................................................... $287,500
=========
</TABLE>

II-1
<PAGE> 80

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

The following table reflects sales by the Company of unregistered
securities within the past three years. Share amounts have been adjusted for the
4.460961 to 1 stock split effective prior to the date of this Prospectus. Except
as otherwise disclosed, the issuances by the Company of the securities sold in
the transactions referenced below were not registered under the Securities Act,
pursuant to the exemption contemplated in Section 4(2) thereof, for transactions
not involving a public offering. No underwriter was involved in the transactions
and no commissions were paid. The consideration for which the shares of Common
Stock were issued is indicated below:

<TABLE>
<CAPTION>
DATE SHARES CONSIDERATION PURCHASER
-------------------------- ------ ------------- --------------------------
<S> <C> <C> <C>
August 17, 1993 892 Services Duane S. Herbst
1,338 Services I.J. Berthelot II
1,338 Services Richard A. Robert
446 Services Patricia R. Ashbrook
1,338 Services Bill G. Bray
446 Services Donna J. Haddock
446 Services Barbara A. Jordan
446 Services Kathy C. Smith

April 30, 1993 6,691 Services I.J. Berthelot II

April 30, 1994 6,691 Services Duane S. Herbst
11,152 Services I.J. Berthelot II
11,152 Services Richard A. Robert
6,691 Services Bill G. Bray
446 Services Mike Wissink

April 17, 1995 44,609 Services I.J. Berthelot II

April 30, 1995 446 Services I.J. Berthelot II
446 Services Richard A. Robert
446 Services Bill G. Bray

August 1, 1995 446 Services Duane S. Herbst
446 Services Donna J. Haddock
446 Services Barbara A. Jordan
446 Services Kathy C. Smith

September 20, 1995 13,382 Services I.J. Berthelot II

December 1, 1995 446 Services Duane S. Herbst
446 Services I.J. Berthelot II
446 Services Richard A. Robert
446 Services Bill G. Bray
446 Services Ronald Harris

March 29, 1996 4,460 Financing Rainbow

April 8, 1996 892 Services Karen Callaway
334 Services Donna J. Haddock
446 Services Ronald Harris
2,676 Services Duane S. Herbst
446 Services Barbara A. Jordan
8,921 Services Richard A. Robert
557 Services Kathy C. Smith

April 17, 1996 7,275 Services Bill G. Bray
4,460 Services Mark W. Fuqua
</TABLE>

II-2
<PAGE> 81

ITEM 27. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<S> <C>
1.1 -- Form of Underwriting Agreement by and among the Underwriters and Midcoast
Energy Resources, Inc.
*1.2 -- Agreement among Underwriters.
*1.3 -- Selected dealer agreement.
3.1 -- Certificate of Incorporation of Midcoast Energy Resources, Inc. (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1992).
3.2 -- Bylaws of Midcoast Energy Resources, Inc. (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1992).
4.1 -- Shareholder Agreement by and between Midcoast Energy Resources, Inc. and Bill
G. Bray dated April 30, 1994 (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1994).
4.2 -- Shareholder Agreement by and between Midcoast Energy Resources, Inc., and Duane
S. Herbst dated April 30, 1994 (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1994).
4.3 -- Shareholder Agreement by and between Midcoast Energy Resources, Inc., and
Richard A. Robert dated April 30, 1994 (Incorporated by reference from Midcoast
Form 10-KSB for the fiscal year ended December 31, 1994).
4.4 -- Shareholder Agreement by and between Midcoast Energy Resources, Inc., and Iris
J. Berthelot, II dated April 30, 1994 (Incorporated by reference from Midcoast
Form 10-KSB for the fiscal year ended December 31, 1994).
**4.5 -- Specimen Certificate for Shares of Common Stock, par value $.01 per share.
**4.6 -- Representative's Warrants.
4.7 -- Termination Agreement dated May 13, 1996 to terminate the Shareholder Agreement
by and between Magic Gas Corp. (f/k/a Midcoast Natural Gas, Inc.), Stevens G.
Herbst and Kenneth B. Holmes, Jr. dated November 16, 1992.
**5.1 -- Form of Opinion of Porter & Hedges, L.L.P. respecting legality of securities
being offered.
**9.1 -- Form of Voting Trust Agreement by and between Midcoast Energy Resources, Inc.,
Stevens G. Herbst, Kenneth B. Holmes, Jr. and Trustee.
10.1 -- Employment Agreement by and between Midcoast Energy Resources, Inc., and Dan C.
Tutcher dated January 1, 1993 (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1992).
10.2 -- Amendment dated April 1, 1993 to the Employment Agreement by and between
Midcoast Energy Resources, Inc., and Dan C. Tutcher dated January 1, 1993
(Incorporated by reference from Midcoast Form 10-KSB for the fiscal year ended
December 31, 1993).
10.3 -- Employment Agreement by and between Midcoast Energy Resources, Inc., and
Richard A. Robert dated April 30, 1994 (Incorporated by reference from Midcoast
Form 10-KSB for the fiscal year ended December 31, 1994).
10.4 -- Employment Agreement by and between Midcoast Energy Resources, Inc., and Bill
G. Bray dated July 1, 1994 (Incorporated by reference from Midcoast Form 10-KSB
for the fiscal year ended December 31, 1994).
10.5 -- Revolving Loan and Credit Agreement dated December 8, 1992, by and between New
First City, Texas -- Corpus Christi and Midcoast Energy Resources, Inc.
(Incorporated by reference from Midcoast Form 8-K dated January 1, 1993).
</TABLE>

II-3
<PAGE> 82

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- -----------
<S> <C>
10.6 -- First Amendment to Revolving Loan and Credit Agreement dated December 8, 1992
by and between New First City, Texas -- Corpus Christi, N.A. and Midcoast
Energy Resources, Inc. dated January 6, 1993 (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1993).

10.7 -- Second Amendment to Revolving Loan and Credit Agreement dated December 8, 1992
by and between Mercantile Bank, N.A. (formerly known as New First City,
Texas -- Corpus Christi, N.A.) and Midcoast Energy Resources, Inc. dated August
15, 1993 (Incorporated by reference from Midcoast Form 10-KSB for the fiscal
year ended December 31, 1993).

10.8 -- Third Amendment to Revolving Loan and Credit Agreement dated December 8, 1992
by and between Mercantile Bank, N.A. (formerly known as New First City,
Texas -- Corpus Christi, N.A.) and Midcoast Energy Resources, Inc. dated
September 1, 1994 (Incorporated by reference from Midcoast Form 10-KSB for the
fiscal year ended December 31, 1994).

10.9 -- Allonge and Amendment No. One to Promissory Note dated December 8, 1992 by and
between Mercantile Bank, N.A. (formerly known as New First City,
Texas -- Corpus Christi, N.A.) and Midcoast Energy Resources, Inc. dated April
29, 1993 (Incorporated by reference from Midcoast Form 10-KSB for the fiscal
year ended December 31, 1993).

10.10 -- Allonge and Amendment No. Two to Promissory Note dated December 8, 1992 by and
between Mercantile Bank, N.A. (formerly known as New First City,
Texas -- Corpus Christi, N.A.) and Midcoast Energy Resources, Inc. dated June
16, 1993 (Incorporated by reference from Midcoast Form 10-KSB for the fiscal
year ended December 31, 1993).

10.11 -- Allonge and Amendment No. Three to Promissory Note dated December 8, 1992 by
and between Mercantile Bank, N.A. (formerly known as New First City,
Texas -- Corpus Christi, N.A.) and Midcoast Energy Resources, Inc. dated August
15, 1993 (Incorporated by reference from Midcoast Form 10-KSB for the fiscal
year ended December 31, 1993).

10.12 -- Promissory Note dated July 1, 1993 by and between Mercantile Bank, N.A. and
Midcoast Energy Resources, Inc. including related Security Agreement and
Continuing Unlimited Guaranty Agreements also dated July 1, 1993 (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1993).

10.13 -- First Amendment to Security Agreement dated July 1, 1993 by and between
Midcoast Energy Resources, Inc. and Mercantile Bank, N.A. dated September 1,
1994 (Incorporated by reference from Midcoast Form 10-KSB for the fiscal year
ended December 31, 1994).

10.14 -- Promissory Note dated April 19, 1994 by and between Mercantile Bank, N.A. and
Midcoast Energy Resources, Inc., including related Security Agreements also
dated April 19, 1994 (Incorporated by reference from Midcoast Form 10-KSB for
the fiscal year ended December 31, 1994).

10.15 -- Revolving Credit Promissory Note dated September 1, 1994 by and between
Mercantile Bank, N.A. and Midcoast Energy Resources, Inc. (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1994).

10.16 -- Promissory Note dated December 1, 1994 by and between American National Bank
including related Non-Standard Financing Statement, Security Agreement and
Commercial Guarantee Agreements also dated December 1, 1994 (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1994).

10.17 -- Promissory Note dated March 21, 1994 by and between Texline Gas Company and
Midcoast Energy Resources, Inc. (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1994).

10.18 -- Promissory Note dated April 1, 1994 by and between Texline Gas Company and
Midcoast Energy Resources, Inc. (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1994).
</TABLE>

II-4
<PAGE> 83

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- -----------
<S> <C>
10.19 -- Promissory Note dated December 30, 1994 by and between Texline Gas Company and
Midcoast Energy Resources, Inc. (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1994).

10.20 -- Assignment of Net Revenue Interest dated July 1, 1994 by and between Texline
Gas Company and Midcoast Energy Resources, Inc. (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1994).

10.21 -- Assignment of Net Revenue Interest dated July 1, 1994 by and between Rainbow
Investments Co. and Midcoast Energy Resources, Inc. (Incorporated by reference
from Midcoast Form 10-KSB for the fiscal year ended December 31, 1994).

10.22 -- Agreement for Purchase and Sale of Stock dated November 20, 1992, by and
between Harbert Holdings No. One, Inc., and Midcoast Energy Resources, Inc.
(Incorporated by reference from Midcoast Form 8-K dated January 1, 1993, as
Exhibit 2.1).

10.23 -- Agreement for Purchase and Sale of Stock dated July 15, 1993 by and between
Midcoast Holdings No. One, Inc. and Sunshine Interstate Pipeline Partners
(Incorporated by reference from Midcoast Form 8-K dated September 2, 1993).

10.24 -- Agreement dated March 31, 1994 by and between Midcoast Energy Resources, Inc.,
and Stewart Petroleum Company (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1993).

10.25 -- Agreement for Purchase and Sale of Stock dated September 6, 1995, by and
between Midcoast Holdings No. One, Inc. and Koch Gateway Pipeline Company
(Incorporated by reference from Midcoast Form 10-KSB for the fiscal year ended
December 31, 1995).

10.26 -- First Amendment to Agreement for Purchase and Sale of Stock dated September 6,
1995, by and between Midcoast Holdings No. One, Inc. and Koch Gateway Pipeline
Company dated October 2, 1995 (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1995).

10.27 -- Agreement for Purchase and Sale of Stock dated September 13, 1995, by and
between Five Flags Holding Company and Midcoast Holdings No. One, Inc.
(Incorporated by reference from Midcoast Form 10-KSB for the fiscal year ended
December 31, 1995).

10.28 -- Agreement for Purchase of Stock dated September 13, 1995, by and between
Midcoast Holdings No. One, Inc. and Rainbow Investments Company (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1995).

10.29 -- Agreement for Purchase and Sale of Stock dated July 27, 1995, by and between
Williams Holdings of Delaware, Inc. and Midcoast Holdings No. One, Inc.
(Incorporated by reference from Midcoast Form 8-K dated September 22, 1995).

10.30 -- Subordinated Debenture dated September 8, 1995 by and between Midcoast Energy
Resources, Inc. and Williams Holdings of Delaware, Inc. (Incorporated by
reference from Midcoast Form 8-K dated September 22, 1995).

10.31 -- Nonrecourse Promissory Note dated September 8, 1995 by and between Midcoast
Holdings No. One, Inc. and Williams Holdings of Delaware, Inc. (Incorporated by
reference from Midcoast Form 8-K dated September 22, 1995).

10.32 -- Allonge and Amendment No. One to Revolving Credit Promissory Note dated
September 1, 1994, by and between Mercantile Bank, N.A. and Midcoast Energy
Resources, Inc. dated September 22, 1995 (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1995).

10.33 -- Allonge and Amendment No. Two to Revolving Credit Promissory Note dated
September 1, 1994, by and between Mercantile Bank, N.A. and Midcoast Energy
Resources, Inc. dated November 1, 1995 (Incorporated by reference from Midcoast
Form 10-KSB for the fiscal year ended December 31, 1995).
</TABLE>

II-5
<PAGE> 84

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- -----------
<S> <C>
10.34 -- Fourth Amendment to Revolving Loan and Credit Agreement dated December 8, 1992
by and between Mercantile Bank, N.A. (formerly known as New First City,
Texas -- Corpus Christi, N.A.) and Midcoast Energy Resources, Inc. dated
November 1, 1995 (Incorporated by reference from Midcoast Form 10-KSB for the
fiscal year ended December 31, 1995).

10.35 -- Revolving Credit Agreement dated October 31, 1995 by and between American
National Bank and Midcoast Energy Resources, Inc. including related Revolving
Credit Promissory Note, Security Agreement, Non-Standard Financing Statement
and Commercial Guarantee Agreements also dated October 31, 1995 (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1995).

10.36 -- Loan Agreement dated October 3, 1995 by and between Midcoast Energy Resources,
Inc. and Rainbow Investments Company including related Promissory Note, and
Security Agreement also dated October 3, 1995 (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1995).

10.37 -- Assignment of Net Revenue Interest dated October 3, 1995, by and between
Midcoast Energy Resources, Inc. and Rainbow Investments Company (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1995).

10.38 -- Loan Agreement dated September 13, 1995, by and between Midcoast Energy
Resources, Inc. and Stevens G. Herbst, including related Promissory Note dated
September 11, 1995, and, Security Agreements and Guaranty Agreement also dated
September 13, 1995 (Incorporated by reference from Midcoast Form 10-KSB for the
fiscal year ended December 31, 1995).

10.39 -- Promissory Note dated May 30, 1995 by and between Midcoast Energy Resources,
Inc. and Texline Gas Company (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1995).

10.40 -- Employment Agreement by and between Midcoast Energy Resources, Inc. and I.J.
Berthelot, II dated April 17, 1995 (Incorporated by reference from Midcoast
Form 10-KSB for the fiscal year ended December 31, 1995).

10.41 -- Amendment to Employment Agreement dated April 17, 1995 by and between Midcoast
Energy Resources, Inc. and I.J. Berthelot, II, dated December 8, 1995
(Incorporated by reference from Midcoast Form 10-KSB for the fiscal year ended
December 31, 1995).

10.42 -- Credit Agreement dated December 20, 1995 by and between Compass Bank -- Houston
and Magnolia Pipeline Corporation including related Financing Statement,
Subordination Agreement, Security Agreements, Promissory Note and Guaranty
Agreements (Incorporated by reference from Midcoast Form 10-KSB for the fiscal
year ended December 31, 1995).

10.43 -- Operating Agreement of Pan Grande Pipeline, L.L.C. by and between Midcoast
Holdings No. One, Inc. and Resource Energy Development, L.L.C. dated February
28, 1996 (Incorporated by reference from Midcoast Form 10-KSB for the fiscal
year ended December 31, 1995).

10.44 -- Amendment dated April 8, 1996 to the Employment Agreement by and between
Midcoast Energy Resources, Inc. and Richard A. Robert dated April 30, 1994
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).

10.45 -- First Amendment dated March 1, 1996 to the Promissory Note by and between
Texline Gas Company and Midcoast Energy Resources, Inc. dated December 30, 1994
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).

10.46 -- Second Amendment dated May 1, 1996 to the Promissory Note by and between
Texline Gas Company and Midcoast Energy Resources, Inc. dated December 30, 1994
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).

10.47 -- First Amendment dated March 1, 1996 to the Promissory Note by and between
Texline Gas Company and Midcoast Energy Resources, Inc. dated May 30, 1995
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).
</TABLE>

II-6
<PAGE> 85

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<S> <C>
10.48 -- Promissory Note dated March 1, 1996 by and between Rainbow Investments Company
and Midcoast Energy Resources, Inc., including related Security Agreement
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).
10.49 -- First Amendment dated May 1, 1996 to the Promissory Note by and between Rainbow
Investments Company and Midcoast Energy Resources, Inc. dated March 1, 1996
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).
10.50 -- Purchase and Sale Agreement dated March 12, 1996 by and between Texas
Southeastern Gas Gathering Company and Magnolia Pipeline Corporation
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).
10.51 -- Amendment dated May 8, 1996 to the Purchase and Sale Agreement by and between
Texas Southeastern Gas Gathering Company and Magnolia Pipeline Corporation
dated March 12, 1996 (Incorporated by reference from Midcoast Form 10-QSB for
the three month period ended March 31, 1996).
10.52 -- First Amendment and Supplement dated May 8, 1996 to the Credit Agreement by and
between Compass Bank -- Houston and Magnolia Pipeline Corporation dated
December 20, 1995 including related amendments to the Security Agreement,
Promissory Note, and Guaranty Agreements. (Incorporated by reference from
Midcoast Form 10-QSB for the three-month period ended March 31, 1996).
*10.53 -- First Amendment to the Assignment of Net Revenue Interest dated October 3, 1995
by and between Midcoast Energy Resources, Inc. and Rainbow Investments Company
dated May 15, 1996.
*10.54 -- Allonge and Amendment No. One to Promissory Note dated November 1, 1995 by and
between Mercantile Bank, N.A. and Midcoast Energy Resources, Inc. dated May 14,
1996.
**10.55 -- Form of Warrant by and between Triumph Resources Corporation and Midcoast
Energy Resources, Inc.
*10.56 -- Midcoast Energy Resources, Inc. 1996 Incentive Stock Plan.
*10.57 -- Second Amendment dated May 21, 1996 to the Promissory Note by and between
Texline Gas Company and Midcoast Energy Resources, Inc. dated May 30, 1995.
16.1 -- Letter dated March 22, 1994, from Arthur Andersen & Co. as to change in
certifying accountant (Incorporated by reference from Midcoast Form 8-K dated
March 17, 1994).
18.1 -- Preferability letter from Hein + Associates LLP, independent public
accountants, regarding change in accounting principle (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1995).
21.1 -- Schedule listing subsidiaries of Midcoast Energy Resources, Inc.
*23.1 -- Consent of Hein + Associates LLP.
**23.2 -- Consent of Porter & Hedges, L.L.P. (included in its opinion filed as Exhibit
5.1 hereto).
24.1 -- Power of Attorney (included on signature page to originally filed Registration
Statement)
27.1 -- Financial Data Schedule for the three month period ended March 31, 1996
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).
</TABLE>

- ---------------

* Filed herewith.

** To be filed by Amendment.

II-7
<PAGE> 86

ITEM 28. UNDERTAKINGS

The undersigned Registrant hereby undertakes:

(1) To file during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:

(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and

(iii) Include any additional or changed material information on the
plan of distribution.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.

(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the Offering.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

That: (i) for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of the
registration statement in reliance on Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective; and (ii) for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

II-8
<PAGE> 87

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Amendment No. 1 to a Registration Statement on
Form SB-2 and authorized this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, in the City of Houston, State of
Texas on this th day of July, 1996.

MIDCOAST ENERGY RESOURCES, INC.

By: /s/ DAN C. TUTCHER
---------------------------------------
Dan C. Tutcher, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)

In accordance with the Requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on this th day of July, 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<S> <C>
/s/ DAN C. TUTCHER Chairman of the Board, Chief Executive Officer
- --------------------------------------------- and President (Principal Executive Officer)
Dan C. Tutcher

* Treasurer, Principal Financial Officer and
- --------------------------------------------- Principal Accounting Officer
Richard A. Robert

* Director
- ---------------------------------------------
E. P. Marinos

* Director
- ---------------------------------------------
Richard N. Richards

*By /s/ DAN C. TUTCHER
- ---------------------------------------------
Dan C. Tutcher
(Attorney-In-Fact)
</TABLE>

II-9
<PAGE> 88

INDEX TO EXHIBITS

<PAGE> 89

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<S> <C>
10.6 -- First Amendment to Revolving Loan and Credit Agreement dated December 8, 1992
by and between New First City, Texas -- Corpus Christi, N.A. and Midcoast
Energy Resources, Inc. dated January 6, 1993 (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1993).

10.16 -- Promissory Note dated December 1, 1994 by and between American National Bank
including related Non-Standard Financing Agreement, Security Agreement and
Commercial Guarantee Agreements also dated December 1, 1994 (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1994).

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<S> <C>
10.19 -- Promissory Note dated December 30, 1994 by and between Texline Gas Company and
Midcoast Energy Resources, Inc. (Incorporated by reference from Midcoast Form
10-KSB for the fiscal year ended December 31, 1994).

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<S> <C>
10.34 -- Fourth Amendment to Revolving Loan and Credit Agreement dated December 8, 1992
by and between Mercantile Bank, N.A. (formerly known as New First City,
Texas -- Corpus Christi, N.A.) and Midcoast Energy Resources, Inc. dated
November 1, 1995 (Incorporated by reference from Midcoast Form 10-KSB for the
fiscal year ended December 31, 1995).

<PAGE> 92

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<S> <C>
10.48 -- Promissory Note dated March 1, 1996 by and between Rainbow Investments Company
and Midcoast Energy Resources, Inc., including related Security Agreement
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).
10.49 -- First Amendment dated May 1, 1996 to the Promissory Note by and between Rainbow
Investments Company and Midcoast Energy Resources, Inc. (Incorporated by
reference from Midcoast Form 10-QSB for the three month period ended March 31,
1996).
10.50 -- Purchase and Sale Agreement dated March 12, 1996 by and between Texas
Southeastern Gas Gathering Company and Magnolia Pipeline Corporation
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).
10.51 -- Amendment dated May 8, 1996 to the Purchase and Sale Agreement by and between
Texas Southeastern Gas Gathering Company and Magnolia Pipeline Corporation
dated March 12, 1996 (Incorporated by reference from Midcoast Form 10-QSB for
the three month period ended March 31, 1996).
10.52 -- First Amendment and Supplement dated May 8, 1996 to the Credit Agreement by and
between Compass Bank -- Houston and Magnolia Pipeline Corporation dated
December 20, 1995 including related amendments to the Security Agreement,
Promissory Note, and Guaranty Agreements. (Incorporated by reference from
Midcoast Form 10-QSB for the three-month period ended March 31, 1996).
*10.53 -- First Amendment to the Assignment of Net Revenue Interest dated October 3, 1995
by and between Midcoast Energy Resources, Inc. and Rainbow Investments Company
dated May 15, 1996.
*10.54 -- Allonge and Amendment No. One to Promissory Note dated November 1, 1995 by and
between Mercantile Bank, N.A. and Midcoast Energy Resources, Inc. dated May 14,
1996.
**10.55 -- Form of Warrant by and between Triumph Resources Corporation and Midcoast
Energy Resources, Inc.
*10.56 -- Midcoast Energy Resources, Inc. 1996 Incentive Stock Plan.
*10.57 -- Second Amendment dated May 21, 1996 to the Promissory Note by and between
Texline Gas Company and Midcoast Energy Resources, Inc. dated May 30, 1995.
16.1 -- Letter dated March 22, 1994, from Arthur Andersen & Co. as to change in
certifying accountant (Incorporated by reference from Midcoast Form 8-K dated
March 17, 1994).
18.1 -- Preferability letter from Hein + Associates LLP, independent public
accountants, regarding change in accounting principle (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1995).
21.1 -- Schedule listing subsidiaries of Midcoast Energy Resources, Inc.
*23.1 -- Consent of Hein + Associates LLP.
**23.2 -- Consent of Porter & Hedges, L.L.P. (included in its opinion filed as Exhibit
5.1 hereto).
24.1 -- Power of Attorney (included on signature page of this Registration Statement)
27.1 -- Financial Data Schedule for the three month period ended March 31, 1996
(Incorporated by reference from Midcoast Form 10-QSB for the three month period
ended March 31, 1996).
</TABLE>

- ---------------

* Filed herewith.

** To be filed by Amendment.

<PAGE> 1
EXHIBIT 1.2

MASTER AGREEMENT AMONG UNDERWRITERS

July 17, 1996

Coleman and Company Securities, Inc.
666 Fifth Avenue
New York, New York 10103

Dear Sirs or Madams:

From time to time after the date hereof you may act as
representative or as one of the representatives of the members of an
underwriting syndicate for offerings of securities of various issuers. This
will confirm our agreement as to the general terms and conditions applicable to
our participation in any such underwriting syndicate.

1. Applicability of this Agreement. This agreement
shall apply to any offering of securities in which we elect to act as an
underwriter after receipt of an invitation from you identifying the issuer and
the names of the other representatives, if any, containing information
regarding certain terms of the securities to be offered, stating that our
participation as an underwriter in the offering shall be subject to the
provisions of this agreement and, at your option, specifying the amount of our
proposed participation. Your invitation will include instructions for our
acceptance of such invitation. At or prior to the time of an offering, you
will advise us, to the extent applicable, as to the expected offering date, the
expected closing date, the initial public offering price, the interest or
dividend rate (or the method by which such rate is to be determined), the
conversion price, the underwriting discount, the management fee, the selling
concession and the reallowance, except that if the public offering price of the
securities is to be determined by a formula based upon the market price of
certain securities (such procedure being hereinafter referred to as a "Formula
Pricing"), you shall so advise us and shall specify the maximum underwriting
discount, management fee and selling concession. The foregoing information may
be conveyed by you in one or more communications by telegram, telex, telecopier
or other written form of communication and is hereinafter collectively referred
to as the "Invitation". If the Underwriting Agreement (as hereinafter defined)
provides for the granting to the underwriters of an option to purchase
additional securities to cover over-allotments, if any, you will notify us, in
the Invitation, of such option and of our maximum obligation upon exercise of
such option. The Invitation may also contain additional provisions that
supplement or amend the terms of this agreement.

This agreement, as amended or supplemented by the
Invitation, shall become effective with respect to our participation in an
offering of securities if your syndicate department receives our written
acceptance prior to the time and date specified in the Invitation, which
acceptance shall consist of our return to you of one or more executed copies of
(i) an underwriters' questionnaire and (ii) a power of attorney, each of which
relates to the offering of securities described in the Invitation (our
acceptance being hereinafter referred to as our

<PAGE> 2
"Acceptance"). The issuer of the securities in any offering of securities made
pursuant to this agreement is hereinafter referred to as the "Issuer." If the
Underwriting Agreement does not provide for an over- allotment option, the
securities to be purchased are hereinafter referred to as the Securities; if
the Underwriting Agreement provides for an over-allotment option, the
securities the Underwriters (as herein defined) are initially obligated to
purchase pursuant to the Underwriting Agreement are hereinafter called the Firm
Securities and any additional securities that may be purchased upon exercise of
the over-allotment option are hereinafter called the "Additional Securities,"
with the Firm Securities and all or any part of the Additional Securities being
hereinafter collectively referred to as the "Securities." Any underwriters of
Securities under this agreement, including the representatives (as hereinafter
defined), are hereinafter collectively referred to as the "Underwriters." All
references herein to "you" or to the "representatives" shall mean Coleman and
Company Securities, Inc. and the other firms, if any, that are named as
representatives in the Invitation. It is understood and agreed that Coleman
and Company Securities, Inc. may act on behalf of all representatives. The
Securities to be offered may, but need not, be registered for a delayed or
continuous offering pursuant to Rule 415 under the Securities Act of 1933 (the
"1933 Act").

This agreement shall apply separately to each offering of
Securities. This agreement may be supplemented or amended by you by written
notice to us and, except for supplements or amendments set forth in an
Invitation relating to a particular offering of Securities, any such supplement
or amendment to this agreement shall be effective with respect to any offering
of Securities to which this agreement applies after this agreement is so
amended or supplemented.

2. Offering Documents. In the case of an Invitation
regarding an offering of Securities registered under the 1933 Act (a
"Registered Offering"), you will furnish to us, to the extent made available to
you by the Issuer, copies of the registration statement relating to the
Securities filed with the Securities and Exchange Commission (the "Commission")
pursuant to the 1933 Act and each amendment thereto (excluding exhibits but
including any documents incorporated by reference therein). If the registration
statement relates to securities to be offered on a delayed or continuous basis
pursuant to Rule 415 under the 1933 Act, the term "Registration Statement"
means such registration statement as amended to the date of the Underwriting
Agreement. Otherwise, the term "Registration Statement" means such
registration statement as amended at the time when it becomes effective
(including the information, if any, deemed to be a part of such registration
statement at the time of effectiveness pursuant to Rule 430A under the 1933
Act). The term "Prospectus" means the prospectus, together with a final
prospectus supplement, if any, relating to the offering of the Securities, and
in the form first used to confirm sales of the Securities. The term
"preliminary prospectus" means any preliminary prospectus relating to the
offering of the Securities or any preliminary prospectus supplement together
with a prospectus relating to the offering of the Securities. As used herein
the terms Registration Statement, Prospectus and preliminary prospectus shall
include in each case the material, if any, incorporated by reference therein.

-2-
<PAGE> 3
With respect to Securities for which no Registration
Statement is filed with the Commission, you will furnish to us, to the extent
made available to you by the Issuer, copies of any offering circular or other
offering materials to be used in connection with the offering of the Securities
and of each amendment thereto (the "Offering Circular").

We understand that it is our responsibility to examine the
Registration Statement, the Prospectus, the Offering Circular, any amendment or
supplement thereto relating to the offering of the Securities, any preliminary
prospectus or offering circular and the material, if any, incorporated by
reference therein and we will familiarize ourselves with the terms of the
Securities and the other terms of the offering thereof which are to be
reflected in the Prospectus or Offering Circular and the Invitation. You are
authorized, with the approval of counsel for the Underwriters, to approve on
our behalf any amendments or supplements to the Registration Statement or the
Prospectus or Offering Circular.

3. Underwriting Agreement. We authorize you to
execute and deliver an underwriting or purchase agreement and any amendment or
supplement thereto and any associated terms agreement or other similar
agreement (collectively, the "Underwriting Agreement") on our behalf with the
Issuer and any selling securityholder with respect to the Securities in such
form as you determine. We will be bound by all terms of the Underwriting
Agreement as executed. The term "original underwriting commitment," as used in
this agreement with respect to any Underwriter, shall refer to the amount of
Firm Securities set forth opposite such Underwriter's name in the Underwriting
Agreement plus any additional Firm Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of the Underwriting Agreement
or section 13 hereof. The ratio that such original underwriting commitment
bears to the aggregate amount of Firm Securities to be purchased by all the
Underwriters is referred to in this agreement as the "underwriting proportion"
of such Underwriter.

It is understood that, if so specified in the Invitation,
arrangements may be made for the sale of the Securities by the Issuer pursuant
to delayed delivery contracts (herein referred to as "Delayed Delivery
Contracts"). References herein to "delayed delivery" and Delayed Delivery
Contracts apply only to offerings to which delayed delivery is applicable.

If the Securities consist in whole or in part of debt
obligations maturing serially, the serial Securities being purchased by each
Underwriter pursuant to the Underwriting Agreement will consist, subject to
adjustment as provided in the Underwriting Agreement, of serial Securities of
each maturity in a principal amount that bears the same proportion to the
aggregate principal amount of the serial Securities of the maturity to be
purchased by all the Underwriters as the principal amount of serial Securities
set forth opposite the Underwriter's name in the Underwriting Agreement bears
to the aggregate principal amount of the serial Securities to be purchased by
all the Underwriters.

-3-
<PAGE> 4
4. Authority of Representative. You are also
authorized in your sole discretion to take the following action with respect to
the Underwriting Agreement: (a) to postpone any closing date or option closing
date or to extend any other time or date specified in the Underwriting
Agreement; (b) to exercise any right of cancellation or termination; (c) to
arrange for the purchase by other persons (including yourselves or any other
Underwriters) of any of the Securities not taken up by any defaulting
Underwriter or by the other Underwriters as provided in the Underwriting
Agreement; (d) to give notice on our behalf of the determination to purchase
any Additional Securities; (e) with respect to offerings using Formula Pricing,
to determine the initial public offering price and the price at which the
Securities are to be purchased in accordance with the Underwriting Agreement;
(f) to consent to any other additions to, changes in or waivers of provisions
of the Underwriting Agreement; and (g) to take such other action in connection
with the offering of the Securities, as may seem advisable to you in respect
thereof.

5. Method of Offering. We authorize you to manage
the underwriting and the public offering of the Securities and to take such
action in connection therewith and in connection with the purchase, carrying
and resale of the Securities, including without limitation the following, as
you in your sole discretion deem appropriate or desirable: (a) to determine
the time of the initial public offering of the Securities, the initial public
offering price and the Underwriters' gross spread and whether to purchase any
Additional Securities and the amount, if any, of Additional Securities to be so
purchased; (b) to make any changes in the public offering price or other terms
of the offering; (c) to make changes in those who are to be Underwriters and in
the respective amounts of the Firm Securities to be purchased by them, provided
that our original underwriting commitment shall not be changed without our
consent; (d) to determine all matters relating to advertising and
communications with dealers or others; (e) to reserve for sale and to sell to
institutions or other retail purchasers, for our account, such of our
Securities as you may determine; provided, however, that such reservations and
sales shall be made for the respective accounts of the several Underwriters as
nearly as practicable in their respective underwriting proportions, except for
such sales for the account of a particular Underwriter designated by such a
purchaser; (f) to reserve for sale and to sell to dealers, for our account,
such of our Securities as you may determine; provided, however, that such
dealers shall be actually engaged in the investment banking or securities
business and shall be either members in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") or dealers with their
principal place of business located outside the United States, its territories
or its possessions and not registered as a broker-dealer under section 15 of
the Securities Exchange Act of 1934 (the "1934 Act") who agree to make no sales
within the United States, its territories or its possessions or to persons who
are nationals thereof or residents therein; and provided, further, that each
dealer shall agree to comply with the provisions of section 24 of article III
of the Rules of Fair Practice of the NASD, and each foreign dealer who is not a
member of the NASD also shall agree to comply with the NASD's interpretation
with respect to free-riding and withholding, to comply as though it were a
member of the NASD, with the provisions of sections 8 and 36 of article III of
such Rules of Fair Practice, and to comply with section 25 of article III
thereof as that section applies to a nonmember foreign dealer; (g) to apportion
such sales to dealers among the Underwriters as nearly as practicable in the
ratio that Securities of each Underwriter so

-4-
<PAGE> 5
reserved bear to the total amount of Securities of all Underwriters so
reserved; provided, however, that if such ratio is to be revised by reason of
the release for direct sale as hereinafter provided, sales may be apportioned
by you from day to day on the basis of the ratio existing at the end of the
preceding day; (h) to fix the concession to dealers and the reallowance to
dealers and, after the initial public offering of the Securities, to make
changes in the concession and reallowance, (i) at any time with respect to
unsold Securities retained by us: (A) to reserve any of such Securities for
sale by you for our account or (B) to purchase any of such Securities that in
your opinion are needed to enable you to make deliveries for the accounts of
the several Underwriters pursuant to this agreement. Such purchases may be
made at the public offering price or, at your option, at such price less all or
any part of the concession to dealers.

We understand that you will advise us when the Securities
are released for public offering and of the amount of Securities sold or
reserved for sale for our account. We shall retain for direct sale any
Securities purchased by us and not so sold or reserved. Direct sales will be
made in accordance with the terms of offering set forth in the Prospectus or
Offering Circular. With your consent, we may obtain release from you for
direct sale of any Securities held by you for sale pursuant to subparagraphs
(e) and (f) above but not sold and paid for. To the extent Securities so
released had been reserved for sale to dealers, the amount of Securities
reserved for our account for sale to dealers shall be correspondingly reduced.
We will advise you from time to time, at your request, of the amount of
Securities retained by us that remain unsold and of the amount of Securities
remaining unsold that were delivered to us pursuant to the last paragraph of
this section 5.

If so directed in the Invitation, we agree that without
your consent we will not sell any of our Securities to any account over which
we exercise discretionary authority. We will also comply with any other
restriction that may be set forth in the Invitation.

If, prior to the termination of this agreement with respect
to the offering of the Securities, you shall purchase or contract to purchase
any of the Securities sold directly by us, in your discretion you may (i) sell
for our account the Securities so purchased and debit or credit our account for
the loss or profit resulting from such sale, (ii) charge our account with an
amount equal to the concession to dealers with respect thereto and credit such
amount against the cost thereof or (iii) require us to purchase such Securities
at a price equal to the total cost of such purchase, including commissions,
accrued interest, amortization of original issue discount or dividends and
transfer taxes on redelivery.

6. Delayed Delivery Arrangements. We authorize you
to act on our behalf in making all arrangements for the solicitation of offers
to purchase Securities from the Issuer pursuant to Delayed Delivery Contracts,
and we agree that all such arrangements will be made only through you (directly
or through Underwriters or dealers). You may allow to dealers in respect of
such Securities a commission equal to the concession allowed to dealers
pursuant to section 5.

-5-
<PAGE> 6
The commitments of the Underwriters shall be reduced in the
aggregate by the principal amount of Securities covered by Delayed Delivery
Contracts made by the Issuer, the commitment of each Underwriter to be reduced
by the principal amount of such Securities, if any, allocated by you to such
Underwriter. Your determination of the allocation of Securities covered by
Delayed Delivery Contracts among the several Underwriters shall be final and
conclusive, and we agree to be bound by any notice delivered by you to the
Issuer setting forth the amount of the reduction in our commitment as a result
of Delayed Delivery Contracts.

Upon receiving payment from the Issuer of the fee for
arranging Delayed Delivery Contracts, you will credit our account with the
portion of such fee applicable to the Securities covered by Delayed Delivery
Contracts allocated to us. You will charge our account with any commission
allocated to dealers in respect of Securities covered by Delayed Delivery
Contracts allocated to us.

7. Trading Authorization. We authorize Coleman and
Company Securities, Inc. during the term of this agreement relating to the
offering of the Securities, in its discretion: (a) To make purchases and sales
of Securities, any securities into which the Securities are convertible or for
which the Securities are exchangeable and any other securities of the Issuer or
any guarantor of the Securities specified in the Invitation, in the open market
or otherwise (in addition to purchases and sales made under the authority of
section 5), either for long or short account, on such terms and at such prices
as it may determine; and (b) in arranging for sales of the Securities pursuant
to section 5, to over-allot, and to make purchases for the purpose of covering
any over-allotment so made.

It is understood that, in connection with the offering of
the Securities, Coleman and Company Securities, Inc. may have made purchases of
any such securities for stabilizing purposes prior to the time when we became
one of the Underwriters and we agree that any such securities so purchased
shall be treated as having been purchased for the respective accounts of the
Underwriters pursuant to the foregoing authorization.

All such purchases and sales and over-allotments shall be
made for the respective accounts of the several Underwriters as nearly as
practicable in their respective underwriting proportions; provided, however,
that at no time shall our net commitment resulting from such purchases and
sales, either for long or short account, or pursuant to such over-allotments,
exceed 15% (or such other amount as may be specified in the Invitation) of our
original underwriting commitment and provided, further, that in determining our
net commitment for short account there shall be subtracted the maximum amount
of Additional Securities that we are entitled to purchase. We agree to take up
at cost on demand any securities so purchased for our account and to deliver on
demand any securities so sold or so over-allotted for our account. Without
limiting the generality of the foregoing, Coleman and Company Securities, Inc.
may buy or take over for the respective accounts of the several Underwriters,
all in the proportion and within the limits set forth, at the price at which
reserved, any of the Securities reserved for sale by

-6-
<PAGE> 7
it but not sold and paid for, for such purposes as it may determine, including,
but not limited to, the covering of over-allotments and short sales.

If Coleman and Company Securities, Inc. engages in any
stabilization transaction pursuant to this section, it will notify us promptly
of the date and time of the first stabilizing purchase and the date and time of
termination of stabilization. Coleman and Company Securities, Inc. shall
prepare and maintain such records as are required to be maintained by it as
manager pursuant to Rule 17a-2 under the 1934 Act.

8. Limitation on Transactions by Underwriters. If
the Securities are shares of common stock ("Common Stock") of the Issuer or
securities of the Issuer that may be exchanged for or converted into Common
Stock, we agree that we will not, without the prior consent of Coleman and
Company Securities, Inc., buy, sell, deal or trade in (i) any Common Stock,
(ii) any security of the Issuer convertible into Common Stock or (iii) any
right or option to acquire or sell Common Stock or any security of the Issuer
convertible into Common Stock, for our own account or for the account of a
customer, except: (a) as provided for in this agreement or the Underwriting
Agreement; (b) that we may convert any security of the Issuer convertible into
Common Stock owned by us and sell the Common Stock acquired upon such
conversion and that we may deliver Common Stock owned by us upon the exercise
of any option written by us as permitted by the provisions set forth herein;
(c) in brokerage transactions on unsolicited orders that have not resulted from
activities on our part in connection with the solicitation of purchases and
that are executed by us in the ordinary course of our brokerage business; and
(d) that on or after the date of the initial public offering of the Securities,
we may execute covered writing transactions in options to acquire Common Stock,
when such transactions are covered by Securities, for the accounts of
customers.

An opening uncovered writing transaction in options to
acquire Common Stock for our account or for the account of a customer shall be
deemed, for purposes of this section 8, to be a sale of Common Stock that is
not unsolicited. The term "opening uncovered writing transaction in options to
acquire" as used above means a transaction where the seller intends to become a
writer of an option to purchase any Common Stock that he does not own. An
opening uncovered purchase transaction in options to sell Common Stock for our
account or for the account of a customer shall be deemed, for purposes of this
paragraph, to be a sale of Common Stock that is not unsolicited. The term
"opening uncovered purchase transaction in options to sell" as used above means
a transaction where the purchaser intends to become an owner of an option to
sell Common Stock that he does not own.

If the Securities are not shares of Common Stock or
securities of the Issuer that may be exchanged for or converted into Common
Stock, we agree that we will not bid for or purchase, or attempt to induce any
other person to purchase, any Securities or any other securities of the Issuer
designated in the Invitation other than (i) as provided for in this agreement
or the Underwriting Agreement, (ii) as approved by Coleman and Company
Securities, Inc. or (iii) as a broker in executing unsolicited orders.

-7-
<PAGE> 8
We represent that we have not participated in any
transaction prohibited by the preceding paragraphs in this section 8 and that
we have at all times complied with and will at all times comply with the
provisions of Rule 10b-6 of the Commission applicable to the offering of the
Securities.

We may, with your prior consent, make purchases of the
Securities from and sales to other Underwriters at the public offering price,
less all or any part of the concession to dealers.

9. Delivery and Payment. At or before such time, on
such dates and at such places as you may specify in the Invitation, we will
deliver to you a certified or official bank check in such funds as are
specified in the Invitation, payable to the order of Coleman and Company
Securities, Inc. (unless otherwise specified in the Invitation) in an amount
equal to, as you direct, (i) the public offering price or prices plus accrued
interest, amortization of original issue discount or dividends, if any, set
forth in the Prospectus or Offering Circular less the selling concession to
dealers in respect of the amount of Securities to be purchased by us in
accordance with the terms of this agreement, or (ii) the public offering price
or prices plus accrued interest, amortization of original issue discount or
dividends, if any, set forth in the Prospectus or Offering Circular less the
selling concession in respect of such of the Securities to be purchased by us
as shall have been retained by or released to us for direct sale, or (iii) the
amount set forth in the Invitation with respect to the Securities to be
purchased by us. You shall use such funds to make payment on our behalf of the
purchase price for the Securities to be purchased by us. Any balance shall be
held by you for our account. If you have not received our funds as requested
you may in your discretion make any such payment on our behalf and we will
promptly deliver funds to you in the amount so requested. Any such payment by
you will not relieve us from any of our obligations under this agreement or
under the Underwriting Agreement.

We authorize you, in carrying out the provisions of this
agreement, in your discretion, to arrange loans for our account, to advance
your funds for our account, charging current interest rates, and to hold or
pledge as security therefor all or any part of the Securities that you may be
holding for our account. Any lender is hereby authorized to accept your
instructions with respect to such loans, and we authorize you to execute and
deliver notes or other instruments in connection therewith.

You shall promptly remit to us or credit to our account (i)
the proceeds of any loan taken down on our behalf and (ii) upon payment to you
for any Securities sold for our account, an amount equal either to the purchase
price paid by us or the price received by you therefor, as you may determine.
If the Underwriting Agreement for an offering provides for the payment of a
commission or other compensation to the Underwriters, we authorize you to
receive such commission or other compensation for our account.

We authorize you to take delivery of certificates for our
Securities (which may, in the case of Securities that are debt obligations, be
in temporary form), registered as you may

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<PAGE> 9
direct in order to facilitate deliveries, and to deliver any Securities
reserved for us against sales. You will deliver to us certificates of our
unreserved Securities and certificates for our reserved but unsold Securities
as soon as practicable after the termination of the provisions referred to in
section 11. If we are a member of the Depositary Trust Company, you may at
your discretion arrange for payment for and/or delivery of our participation
through the facilities of such Company or, if we are not a member, such
settlement may be made through our ordinary correspondent who is a member.

Certificates for all other Securities that you then hold
for our account shall be delivered to us upon termination of this agreement
with respect to the offering of the Securities, or prior thereto in your
discretion, and certificates for any such Securities may at any time be
delivered to us for carrying purposes only, subject to redelivery upon demand.
If, upon termination of this agreement with respect to the offering of the
Securities, an aggregate of not more than 10% of the Securities remains unsold,
Coleman and Company Securities, Inc. may, in its discretion, sell such
Securities at such prices as it may determine.

10. Indemnification and Certain Claims. With respect
to each offering of Securities pursuant to this agreement, we agree to
indemnify and hold harmless each of the other Underwriters, and each person, if
any, who controls any other Underwriter within the meaning of section 15 of the
1933 Act or section 20 of the 1934 Act and to reimburse their expenses, all to
the extent, if any, and upon the terms that we agree to indemnify and hold
harmless the Issuer and other specified persons and to reimburse their
expenses, as set forth in the Underwriting Agreement.

With respect to each offering of Securities pursuant to
this agreement, we agree that in respect of any matters connected with or
action taken by you pursuant to this agreement you shall act only as agent of
the Underwriters and you shall be under no liability to us in any such respect
or in respect of the form of, or the statements contained in, or the validity
of, any preliminary prospectus or offering circular or the Registration
Statement or the Prospectus or Offering Circular, or any amendment or
supplement to any of them, or for any report or other filing made by you for us
on our behalf under this agreement, except for lack of good faith and for
obligations expressly assumed by you herein and no obligations on your part
will be implied or inferred from confirmation or acceptance of this agreement.

With respect to each offering of Securities pursuant to
this agreement, we will pay our proportionate share (based on our underwriting
proportion) of (a) all expenses incurred by you in investigating or defending
against any claim or proceeding that is asserted or instituted by any party
(including any governmental or regulatory body) other than an Underwriter based
upon the claim that the Underwriters constitute an association, unincorporated
business or other separate entity, or relating to the Registration Statement or
the Prospectus or Offering Circular (or any amendment or supplement to any of
them) or any preliminary prospectus or offering circular and (b) any liability
incurred by you in respect of any such claim or proceeding, whether such
liability shall be the result of a judgment or as a result of any settlement
agreed to by you,

-9-
<PAGE> 10
other than any such liability as to which you actually receive indemnity
pursuant to the first paragraph of this section 10 or indemnity or contribution
pursuant to the Underwriting Agreement.

11. Termination and Settlement. With respect to each
offering of Securities pursuant to this agreement, this agreement shall
terminate (i) on the 30th business day after the initial public offering of the
Securities, (ii) on such earlier date as you may determine or (iii) on the
termination of the Underwriting Agreement if the Underwriting Agreement shall
be terminated as permitted by its terms. You may at your discretion, on notice
to us prior to the termination of this agreement with respect to the offering
of the Securities, terminate or suspend the effectiveness of sections 5, 7 and
8 hereof or any part of them, or alter any of the terms or conditions of
offering determined pursuant to section 5 hereof. No termination or suspension
pursuant to this section shall affect your authority under section 7 hereof to
cover any short position under this agreement.

Upon termination of this agreement with respect to the
offering of the Securities, all authorizations, rights and obligations
hereunder shall cease, except (i) the mutual obligations to settle accounts
hereunder, (ii) our obligation to pay any transfer taxes that may be assessed
and paid on account of any sales hereunder for our account, (iii) our
obligation with respect to purchases that may be made by you from time to time
thereafter to cover any short position incurred under this agreement, (iv) our
agreements contained in the first and third paragraphs of section 10 hereof and
(v) the obligations of any defaulting Underwriter, all of which shall continue
until fully discharged.

The accounts arising pursuant to this agreement with
respect to the offering of the Securities shall be settled and paid as soon as
practicable after termination hereof with respect to such offering, except that
you may reserve such amount as you deem advisable to cover any additional
contingent expenses.

You are authorized at any time: (a) to make partial
distributions of credit balances or call for the payment of debit balances; (b)
to determine the amounts to be paid to or by us, which determination will be
final and conclusive; (c) as compensation for your services in connection with
this agreement with respect to the offering of the Securities, to charge our
account and pay to yourselves, when final accounting is made, an amount per
security to be determined by you (not to exceed the amount or the percentage of
the Underwriters' gross spread per security specified in the Invitation) for
each Security that we have agreed or shall become committed to purchase
pursuant to the Underwriting Agreement; (d) to charge our account with (i) all
transfer taxes on sales made for our account and (ii) our underwriting
proportion of all expenses (other than transfer taxes) incurred by you, as
representatives of the several Underwriters, in connection with the
transactions contemplated by this agreement with respect to the offering of the
Securities; (e) to hold any of our funds at any time in your hands with your
general funds without accountability for interest.

-10-
<PAGE> 11
12. Blue Sky Qualification. Upon request, you will
inform us as to the jurisdictions in which you have been advised by counsel
that the Securities have been registered or qualified for sale under the
respective securities or Blue Sky laws, but you do not assume any
responsibility or obligation as to our right to sell the Securities in any
jurisdiction.

You are authorized to file or cause to be filed a Further
State Notice with the Department of State of New York.

13. Default by Underwriters. Default by any
Underwriter in respect of its obligations hereunder or under the Underwriting
Agreement shall not release us from any of our obligations or in any way affect
the liability of such defaulting Underwriter to the other Underwriters for
damages resulting from such default. If one or more Underwriters or selected
dealers default under the Underwriting Agreement, if provided in the
Underwriting Agreement you may (but shall not be obligated to) arrange for the
purchase by others, which may include yourselves or other nondefaulting
Underwriters, of all or a portion of the Securities not taken up by the
defaulting Underwriters.

If such arrangements are made, the respective original
underwriting commitments of the non-defaulting Underwriters and the amounts of
the Securities to be purchased by others, if any, shall be taken as the basis
for all rights and obligations hereunder, but this shall not in any way affect
the liability of any defaulting Underwriter to the other Underwriters for
damages resulting from its default, nor shall any such default relieve any
other Underwriter of any of its obligations hereunder or under the Underwriting
Agreement except as herein or therein provided. In addition, in the event of
default by one or more Underwriters or selected dealers in respect of their
obligations under the Underwriting Agreement to purchase the Securities agreed
to be purchased by them thereunder and, to the extent that arrangements shall
not have been made by you for any person to assume the obligations of such
defaulting Underwriter or Underwriters, we agree, if provided in the
Underwriting Agreement, to assume our proportionate share, based upon our
original underwriting commitment, of the obligations of each such defaulting
Underwriter (subject to the limitations contained in the Underwriting
Agreement) or selected dealer without relieving such defaulting Underwriter of
its liability therefor.

In the event of default by one or more Underwriters in
respect of their obligations under this agreement to take up and pay for any
securities purchased, or to deliver any securities sold or over-allotted, by
you for the respective accounts of the Underwriters, or to bear their
proportion of expenses or liabilities pursuant to this agreement, and to the
extent that arrangements shall not have been made by you (or arrangements
acceptable to you have not been made by the issuer, if so provided in the
Underwriting Agreement) for any persons to assume the obligations of such
defaulting Underwriter or Underwriters, we agree to assume our proportionate
share, based upon our original underwriting commitment, of the obligations of
each defaulting Underwriter without relieving any such defaulting Underwriter
of its liability therefor.

-11-
<PAGE> 12
14. Distribution of Prospectuses; Offering Circulars.
We are familiar with Securities Act of 1933 Release No. 4968 and Rule 15c2-8
under the 1934 Act, relating to the distribution of preliminary and final
prospectuses, and we confirm that we will comply therewith, to the extent
applicable, in connection with any sale of Securities. You shall cause to be
made available to us, to the extent made available to you by the Issuer, such
number of copies of the Prospectus as we may reasonably request for purposes
contemplated by the 1933 Act, the 1934 Act and the rules and regulations
thereunder.

If an Invitation states that the offering is subject to the
48-hour prospectus delivery requirement set forth in Rule 15c2-8(b), our
Acceptance of the Invitation shall be deemed to constitute confirmation that we
have delivered (or we will deliver) a copy of the preliminary prospectus to all
persons to whom we expect to confirm a sale of Securities and that such
delivery was effected (or will be effected) at least 48 hours prior to the
mailing of such confirmations of sale.

We will keep an accurate record of the names and addresses
of all persons to whom we give copies of the Registration Statement, the
Prospectus, the Offering Circular or any preliminary prospectus or offering
circular (or any amendment or supplement to any of them), and, when furnished
with any subsequent amendment to the Registration Statement, any subsequent
prospectus or offering circular or any memorandum outlining changes in the
Registration Statement or any prospectus or offering circular, we will, upon
your request, promptly forward copies thereof to such persons.

Our Acceptance of an Invitation relating to an offering
made pursuant to an Offering Circular shall constitute our agreement that, if
requested by you, we will furnish a copy of any amendment to a preliminary or
final Offering Circular to each person to whom we shall have furnished a
previous preliminary or final Offering Circular. Our Acceptance shall
constitute our confirmation that we have delivered, and our agreement that we
will deliver, all preliminary and final Offering Circulars required for
compliance with the applicable federal and state laws and the applicable rules
and regulations of any regulatory body promulgated thereunder governing the use
and distribution of offering circulars by underwriters and, to the extent
consistent with such laws, rules and regulations, our Acceptance shall
constitute our confirmation that we have delivered, and our agreement that we
will deliver, all preliminary and final Offering Circulars that would be
required if the provisions of Rule 15c2-8 (or any successor provision) under
the 1934 Act applied to such offering.

15. Miscellaneous. Nothing in this agreement shall
constitute us as partners with you or with the other Underwriters and the
obligations of ourselves and each of the other Underwriters are several and not
joint. Each Underwriter elects to be excluded from the application of
subchapter K, chapter 1, subtitle A, of the Internal Revenue Code of 1986.
Default by any Underwriter with respect to the Underwriting Agreement shall not
release us from any of the obligations thereunder or hereunder.

-12-
<PAGE> 13
Unless we have promptly notified you in writing otherwise,
our name as it should appear in the Prospectus or Offering Circular and our
address are set forth below.

Any notice from you to us shall be deemed to have been
given if mailed, telegraphed or hand delivered, or telephoned and subsequently
confirmed in writing, to our address appearing below.

We confirm that we are a member in good standing of the
NASD or that we are a foreign bank or dealer, not eligible for membership in
the NASD. In making sales of Securities, if we are such a member, we agree to
comply with all applicable rules of the NASD, including, without limitation,
the NASD's interpretation with respect to free-riding and withholding and
section 24 of article III of the NASD's Rules of Fair Practice, or, if we are
such a foreign bank or dealer, we agree to comply with such interpretation,
sections 8, 24 and 36 of such article as though we were such a member and
section 25 of such article as it applies to a non-member broker or dealer in a
foreign country.

If we are a foreign bank or dealer and we are not
registered as a broker-dealer under section 15 of the 1934 Act, we agree that
while we are acting as an Underwriter in respect of the Securities and in any
event during the term of this agreement with respect to the offering of the
Securities, we will not directly or indirectly effect in, or with persons who
are nationals or residents of, the United States any transactions (except for
the purchases provided for in the Underwriting Agreement and transactions
contemplated by sections 5, 7 and 8 hereof) in (i) Securities, (ii) Common
Stock, if the Securities are Common Stock or securities of the Issuer that may
be exchanged for or converted into Common Stock, or (iii) any other securities
of the Issuer designated in the Invitation.

If we are a foreign bank or dealer, we represent that in
connection with sales and offers to sell Securities made by us outside the
United States (a) we will not offer or sell any Securities in any jurisdiction
except in compliance with applicable laws and (b) we will either furnish to
each person to whom any such sale or offer is made a copy of the then current
preliminary prospectus or offering circular, if any, of the Prospectus or
Offering Circular (as then amended or supplemented), as the case may be, or
inform such person that such preliminary prospectus or offering circular, if
any, or Prospectus or Offering Circular will be available upon request. Any
offering material in addition to the then current preliminary prospectus or
offering circular or the Prospectus or Offering Circular furnished by us to any
person in connection with any offers or sales referred to in the preceding
sentence (i) shall be prepared and so furnished at our sole risk and expense
and (ii) shall not contain information relating to the Securities or the Issuer
that is inconsistent in any respect with the information contained in the then
current preliminary prospectus or offering circular, if any, or in the
Prospectus or Offering Circular (as then amended or supplemented), as the case
may be. It is understood that no action has been taken by you or the Issuer or
any seller of the Securities to permit a public offering in any jurisdiction
other than the United States where action would be required for such purpose.

-13-
<PAGE> 14
We also confirm that our commitment to purchase Securities
pursuant to the Underwriting Agreement will not result in a violation of Rule
15c3-1 under the 1934 Act or of any similar provisions of any applicable rules
of any securities exchange to which we are subject or of any restriction
imposed upon us by any such exchange or any governmental authority.

This agreement shall be governed by and construed in
accordance with the laws of the state of New York.

Please confirm this agreement and deliver a copy to us.

Very truly yours,

NAME OF FIRM:

By:
----------------------------------
Authorized Officer of Partner

Address:

Confirmed as of the date first above written.

COLEMAN AND COMPANY SECURITIES, INC.

By:
-----------------------------------
Stanley L. Bartels
Executive Vice President

-14-

<PAGE> 1
Exhibit 1.3

1,000,000 Shares
MIDCOAST ENERGY RESOURCES, INC.
Common Stock
(par value $0.01 per share)

SELECTED DEALER AGREEMENT

July 17, 1996

Dear Sirs or Madams:

1. As the underwriter named in the prospectus dated June
19, 1996 (the "Prospectus") relating to the offering by Midcoast Energy
Resources, Inc., a Nevada corporation (the "Company"), of 1,000,000 shares (the
"Firm Shares") of the Company's common stock, par value $0.01 per share (the
"Common Stock"), we have agreed to purchase from the Company the Firm Shares as
set forth in the Prospectus, subject to the terms and conditions of the
underwriting agreement between us and the Company (the "Underwriting
Agreement"). In addition, we have been granted an option to purchase from the
Company up to an aggregate of an additional 150,000 shares (the "Option
Shares") of Common Stock to cover over-allotments in connection with the sale
of the Firm Shares. The Firm Shares and any Option Shares are collectively
referred to herein as the "Shares." The Shares are more particularly described
in the Prospectus.

2. The Shares are to be offered to the public by us at
an initial public offering price of $______ per share (the "Public Offering
Price") and in accordance with the terms of offering set forth in the
Prospectus.

3. We are offering a portion of the Shares, subject to
the terms and conditions hereof, to (i) certain dealers that are members of the
National Association of Securities Dealers, Inc. (the "NASD") and that agree to
comply with the provisions of section 24 of article III of the Rules of Fair
Practice of the NASD or (ii) foreign dealers or institutions ineligible for
membership in the NASD that agree (x) not to resell any Shares (A) to
purchasers in, or to persons who are nationals of, the United States of America
or (B) when there is a public demand for the Shares, to persons specified as
those to whom members of the NASD participating in a distribution may not sell
and (y) to comply, as though such foreign dealer or institution were a member
of the NASD, with sections 8, 24 and 25 of article III of such Rules to the
extent applicable for foreign non-member brokers or dealers and with section 36
thereof (such dealers and institutions agreeing to purchase Shares hereunder
being hereinafter referred to as "Selected Dealers") at the Public Offering
Price less a selling concession of $.__ per share, payable as hereinafter
provided, out of which concession an amount not exceeding $.__ per share may be
reallowed by Selected Dealers to members of the NASD or to foreign dealers or
institutions ineligible for membership therein that agree as aforesaid.

4. We shall have full authority to take such action as
we may deem advisable in respect of all matters pertaining to the public
offering of the Shares.
<PAGE> 2
5. If you desire to apply to act as a Selected Dealer
and purchase any of the Shares, your application therefor should reach us
promptly by telephone, telegraph or facsimile at Coleman and Company
Securities, Inc., 666 Fifth Avenue, New York, New York 10103, (212) 262-1414
(telephone), (212) 506-0517 (facsimile), and we will use our best efforts to
fill the same. We reserve the right to reject all subscriptions in whole or in
part, to make allotments and to close the subscription books at any time
without notice. The Shares allotted to you will be confirmed, subject to the
terms and conditions of this agreement.

6. Any of the Shares purchased by you under the terms of
this agreement may be immediately reoffered to the public in accordance with
the terms of offering thereof set forth herein and in the Prospectus, subject
to the securities laws of the various states. Neither you nor any other person
is or has been authorized to give any information or to make any
representations in connection with the sale of the Shares other than as
contained in the Prospectus.

7. This agreement will terminate when we shall have
determined that the public offering of the Shares has been completed and upon
notice to you of such termination, but, if not previously terminated, this
agreement will terminate at the close of business on the 30th full business day
after the date hereof, unless extended by us for an additional period or
periods not exceeding 30 full business days in the aggregate upon notice to
you; provided, however, whether extended or not, we shall have the right to
terminate this agreement at any time. Such termination shall not affect your
obligation to pay for any Shares purchased by you or any of the provisions of
section 14 hereof.

8. For the purpose of stabilizing the market in the
Shares, we have been authorized to make purchases and sales thereof, in the
open market or otherwise, and, in arranging for sale of the Firm Shares, to
over- allot. If we agree to purchase or contract to purchase any Shares that
shall have been purchased by you hereunder, in the open market or otherwise
(except pursuant to section 9 hereof), for our account, you agree to pay us on
demand an amount equal to the selling concession with respect to the Shares.

Your attention is directed to Rule 10b-6 of the General Rules and
Regulations under the Securities Exchange Act of 1934 (the "Exchange Act"),
which contains certain prohibitions against trading by a person interested in a
distribution until such person has completed his participation in such
distribution.

9. You agree to advise us from time to time upon
request, prior to the termination of this agreement, of the number of Shares
purchased by you hereunder and remaining unsold at the time of such request,
and, if in our opinion, any such Shares shall be needed to make delivery of the
Shares sold or over-allotted for our account, you will, forthwith upon our
request, grant to us the right, exercisable promptly after receipt of notice
from you that such right has been granted, to purchase, at the Public Offering
Price less the selling concession or such part thereof as we shall determine,
such number of Shares owned by you as shall have been specified in our request.

-2-
<PAGE> 3
10. On becoming a Selected Dealer, and in offering and
selling the Shares, you agree to comply with all applicable requirements of the
Securities Act of 1933 (the "Act") and the Exchange Act, including the delivery
of the Prospectus in connection with sales of the Shares.

11. Upon acceptance of your application, you will be
informed as to the jurisdictions in which we have been advised that the Shares
have been qualified for sale under the respective securities or blue sky laws
of such jurisdictions, but we assume no obligation or responsibility as to the
right of any Selected Dealer to sell the Shares in any jurisdiction or as to
any sale therein.

12. Additional copies of the Prospectus will be supplied
to you in reasonable quantities upon request.

13. It is expected that public advertisement of the
Shares will be made on the first day after the effective date of the
Registration Statement. Twenty-four hours after such advertisement shall have
appeared, but not before, you will be free to advertise at your own expense,
over your own name, subject to any restrictions of local laws, but your
advertisement must conform in all respects to the requirements of the Act, and
we shall not be under any obligation or liability in respect of your
advertisement.

14. No Selected Dealer is authorized to act as our agent,
or otherwise on our behalf, in offering or selling the Shares to the public or
otherwise. Nothing shall constitute the Selected Dealers as an association,
unincorporated business or other separate entity or partners with us or with
each other, but you shall be liable for our proportionate share of any tax,
liability or expense based on any claim to the contrary.

15. We shall not be under any liability for or in respect
of the value, validity or form of the Shares, or delivery of the certificates
representing the Shares, or the performance by anyone of any agreement on his
part, or the qualification of the Shares for sale under the laws of any
jurisdiction, or for or in respect of any matter connected with this agreement,
except for lack of good faith and for obligations expressly assumed by us in
this agreement. The foregoing provisions shall not be deemed a waiver of any
liability imposed under the Act.

16. Payment for the Shares sold to you hereunder is to be
made at the Public Offering Price less the selling concession, on or before
____________, 1996 or such later date as we may advise, by certified or
official bank check payable to the order of Coleman and Company Securities,
Inc., in next day funds at such place as we shall specify on one day notice to
you against delivery of certificates for the Shares.

You agree that delivery of any Shares purchased by you shall be made
through the facilities of the Depository Trust Company if you are a member
thereof, unless you are otherwise notified by us in our discretion. If you are
not a member of the Depository Trust Company, such delivery shall be made
through a correspondent who is such a member if you shall have furnished

-3-
<PAGE> 4
instructions to us (in connection with the purchase of Shares) naming such
correspondent, unless you are otherwise notified by us in our discretion.

17. Notice to us should be addressed to 666 Fifth Avenue,
New York, New York 10103. Notices to you shall be deemed to have been duly
given if sent by facsimile, telegraphed or mailed to you at the address set
forth on your confirmation of this agreement.

18. If you desire to purchase any of the Shares, please
confirm your application by signing and returning to us your confirmation on
the duplicate copy of this letter of agreement enclosed herewith, even though
you have previously advised us thereof by telephone, teletype, telegraph or
facsimile.

Very truly yours,

COLEMAN AND COMPANY SECURITIES, INC.

By:
-----------------------------------
Name: Stanley L. Bartels
Title: Executive Vice President

-4-
<PAGE> 5

COLEMAN AND COMPANY SECURITIES, INC.
666 Fifth Avenue
New York, New York 10103

Dear Sirs or Madams:

We hereby agree to purchase shares of common stock
of Midcoast Energy Resources, Inc., a Nevada corporation, in accordance with
all the terms and conditions stated in the foregoing Selected Dealer Agreement
(the "Shares"). We hereby acknowledge receipt of the Prospectus referred to in
the first paragraph thereof relating to such Shares. We further state that in
purchasing such Shares we have relied upon such Prospectus and upon no other
statement whatsoever, written or oral. We hereby confirm that (i) we are a
member in good standing of the National Association of Shares Dealers, Inc.
(the "NASD") and agree to comply with the provisions of section 24 of article
III of the Rules of Fair Practice of the NASD or (ii) we are a foreign dealer
or institution ineligible for membership in the NASD, and we hereby agree (x)
not to resell any Shares (A) to purchasers in, or to persons who are nationals
of, the United States of America or (B) when there is a public demand for the
Shares, to persons specified as those to whom members of the NASD participating
in a distribution may not sell, and (y) to comply, as though we were a member
of the NASD, with sections 8, 24 and 25 of such Rules to the extent applicable
to foreign non-member brokers or dealers and with section 36 thereof. We
hereby further confirm that our net capital is such that we may, in accordance
with Rule 15c3-1 under the Securities Exchange Act of 1934, agree to purchase
the number of Shares we may become obligated to purchase under the provisions
of this agreement.

By:
---------------------------------------------
Authorized Representative

Address:

Dated:___________, 1996

<PAGE> 1

EXHIBIT 10.53

Amendment #1 to
Assignment of Net Revenue Interest

This amendment is to modify the terms of the Assignment of Net Revenue
Interest in Magnolia Pipeline Corporation ("Magnolia") to Rainbow Investments
Company ("Rainbow") dated October 3, 1995 by Midcoast Energy Resources, Inc.
("Midcoast").

It is hereafter mutually agreed that the net revenue interest assigned
to Rainbow shall apply only after payout of the purchase price paid by Midcoast
for Magnolia. Payout shall be defined as such time as the sum of net revenues
derived from the earnings of Magnolia, before deduction of interest, taxes,
depreciation, amortization and general and administrative charges, equals
$3,200,000. For the purposes of calculating payout, net revenue shall include
the gross proceeds from the sale of any and all assets, regardless if said
assets are subsequently leased back to Magnolia.

DATED this the 15 of May, 1996

RAINBOW INVESTMENTS COMPANY

By:______________________________
Stevens G. Herbst, President

MIDCOAST ENERGY RESOURCES, INC.

By:______________________________
Dan C. Tutcher, President

<PAGE> 1

EXHIBIT 10.54

ALLONGE AND AMENDMENT NO.ONE TO PROMISSORY NOTE

MAKER: Midcoast Energy Resources, Inc.

ORIGINAL PRINCIPAL: $750,000.00

DATE OF NOTE: November 1, 1995

PAYEE: MERCANTILE BANK, N.A.

This is an amendment and allonge to the Promissory Note described above. The
said Promissory Note is hereby amended as follows:

The maturity date on the above mentioned note will be extended from
06-01-96 to 08-01-96.

All other terms of the note will continue in full force as originally
contracted.

THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

EXECUTED effective this 14th day of May 1996.

HOLDER: MAKER:

MERCANTILE BANK, N.A. Midcoast Energy Resources, Inc.

________________________ _______________________________
BY:Edward J. Bacak, II
Executive Vice Pres.

GUARANTORS:

_______________________________
Steven G. Herbst

_______________________________
Kenneth B. Holmes, Jr.

_______________________________
Dan C. Tutcher

<PAGE> 1
MIDCOAST ENERGY RESOURCES, INC.

1996 INCENTIVE STOCK PLAN

1. PURPOSE OF THE PLAN

This Midcoast Energy Resources, Inc. 1996 Incentive Stock Plan is
intended to provide a means through which the Company and its Subsidiaries may
attract able persons to enter into the employ of the Company or its
Subsidiaries, and to promote the interests of the Company by providing the
employees and consultants and consultants of the Company or any Subsidiary
corporation, who are largely responsible for the management, growth and
protection of the business of the Company, with a proprietary interest in the
Company, thereby strengthening their concern for the welfare of the Company
and their desire to remain in its employ. A further purpose of the Plan is to
provide such persons with additional incentive and reward opportunities to
enhance the profitable growth of the Company.

2. DEFINITIONS

As used in the Plan, the following definitions apply to the terms
indicated below:

(a) "Board of Directors" shall mean the Board of Directors of Midcoast
Energy Resources, Inc.

(b) "Cause," when used in connection with the termination of a
Participant's employment with the Company, shall mean the termination of the
Participant's employment by the Company by reason of (i) the conviction of the
Participant by a court of competent jurisdiction as to which no further appeal
can be taken of a crime involving moral turpitude; (ii) the proven commission
by the Participant of an act of fraud upon the Company; (iii) the willful and
proven misappropriation of any funds or property of the Company by the
Participant; (iv) the willful, continued and unreasonable failure by the
Participant to perform duties assigned to him and agreed to by him; (v) the
knowing engagement by the Participant in any direct, material conflict of
interest with the Company without compliance with the Company's conflict of
interest policy, if any, then in effect; (vi) the knowing engagement by the
Participant, without the written approval of the Board of Directors of the
Company, in any activity which competes with the business of the Company or
which would result in a material injury to the Company; or (vii) the knowing
engagement in any activity which would constitute a material violation of the
provisions of the Company's Policies and Procedures Manual, if any, then in
effect.

<PAGE> 2

(d) "Change in Control" shall mean:

(i) a "change in control" of the Company, as that term is
contemplated in the federal securities laws; or

(ii) the occurrence of any of the following events:

(1) any Person becomes, after the effective date of
this Plan, the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly,
of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding
securities; provided, that the Board of Directors (as
constituted immediately prior to such person becoming such a
beneficial owner) may determine, in its sole discretion,
that a Change in Control has not occurred; and provided
further, that the acquisition of additional voting
securities, after the effective date of this Plan, by any
Person who is, as of the effective date of this Plan, the
beneficial owner, directly or indirectly, of 20% or more of
the combined voting power of the Company's then outstanding
securities, shall not constitute a "Change in Control" of
the Company for purposes of this Section 2(d).

(2) a majority of individuals who are nominated by
the Board of Directors for election to the Board of
Directors on any date, fail to be elected to the Board of
Directors as a direct or indirect result of any proxy fight
or contested election for positions on the Board of
Directors; or

(3) the Board of Directors determines in its sole
and absolute discretion that there has been a change in
control of the Company.

(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time. Reference in the Plan to any Section of the Code shall be
deemed to include any amendments or successor provisions to any Section and
any treasury regulations thereunder.

(e) "Committee" shall mean the Compensation Committee of the Board of
Directors or such other committee as the Board of Directors shall appoint from
time to time to administer the Plan.

(f) "Common Stock" shall mean the Company's common stock, par value
$.01 per share.

(g) "Company" shall mean Midcoast Energy Resources, Inc., a Nevada
corporation, and each of its Subsidiaries, and its successors.

(h) "Consultant" shall mean any person who is engaged by the Company
or any Subsidiary to render consulting services and is compensated for such
services.

<PAGE> 3

(i) "Employee" shall mean any person who is an employee of the
Company or any Subsidiary within the meaning of Section 3401(c) of the Code
and the applicable interpretive authority thereunder.

(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

(k) the "Fair Market Value" of a share of Common Stock on any date
shall be (i) the closing sales price on the immediately preceding business day
of a share of Common Stock as reported on the principal securities exchange on
which shares of Common Stock are then listed or admitted to trading or (ii) if
not so reported, the average of the closing bid and asked prices for a share
of Common Stock on the immediately preceding business day as quoted on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") or (iii) if not quoted on NASDAQ, the average of the closing bid
and asked prices for a share of Common Stock as quoted by the National
Quotation Bureau's "Pink Sheets" or the National Association of Securities
Dealers' OTC Bulletin Board System. If the price of a share of Common Stock
shall not be so reported, the Fair Market Value of a share of Common Stock
shall be determined by the Committee in its absolute discretion.

(l) "Incentive Award" shall mean an Option, a share of Restricted
Stock, a Performance Award, a share of Phantom Stock, a Stock Bonus or Cash
Bonus granted pursuant to the terms of the Plan.

(m) "Incentive Stock Option" shall mean an Option which is an
"incentive stock option" within the meaning of Section 422 of the Code and
which is identified as an Incentive Stock Option in the agreement by which it
is evidenced.

(n) "Issue Date" shall mean the date established by the Committee on
which certificates representing shares of Restricted Stock shall be issued by
the Company pursuant to the terms of Section 7(d) hereof.

(o) "Non-Qualified Stock Option" shall mean an Option which is not an
Incentive Stock Option and which is identified as a Non-Qualified Stock Option
in the agreement by which it is evidenced.

(p) "Option" shall mean an option to purchase shares of Common Stock
of the Company granted pursuant to Section 6 hereof. Each Option shall be
identified as either an Incentive Stock Option or a Non-Qualified Stock Option
in the agreement by which it is evidenced.

(q) "Parent" shall mean a "parent corporation" of the Company,
whether now or hereafter existing, as defined in Section 424(e) of the Code.

<PAGE> 4

(r) "Participant" shall mean an Employee or Consultant who is
eligible to participate in the Plan and to whom an Incentive Award is granted
pursuant to the Plan, and, upon his death, his successors, heirs, executors
and administrators, as the case may be, to the extent permitted hereby.

(s) "Performance Award" shall mean an award payable in cash or Common
Stock, which award is granted pursuant to Section 8 hereof and subject to the
terms and conditions contained therein.

(t) "Person" shall mean a "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act, and the rules and regulations in effect
from time to time thereunder.

(u) a share of "Phantom Stock" shall represent the right to receive
in cash the Fair Market Value of a share of Common Stock of the Company, which
right is granted pursuant to Section 9 hereof and subject to the terms and
conditions contained therein.

(v) "Plan" shall mean the Midcoast Energy Resources, Inc. 1996
Incentive Stock Plan, as it may be amended from time to time.

(w) a share of "Restricted Stock" shall mean a share of Common Stock
which is granted pursuant to the terms of Section 7 hereof and which is
subject to the restrictions set forth in Section 7(c) hereof for so long as
such restrictions continue to apply to such share.

(x) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.

(y) "Stock Bonus" shall mean a grant of a bonus payable in shares of
Common Stock pursuant to Section 10 hereof.

(z) "Subsidiary" or "Subsidiaries" shall mean any and all
corporations in which at the pertinent time the Company owns, directly or
indirectly, stock vested with more than 50% of the total combined voting power
of all classes of stock of such corporations within the meaning of Section
424(f) of the Code.

(aa) "Vesting Date" shall mean the date established by the Committee
on which a share of Restricted Stock or Phantom Stock may vest.

3. STOCK SUBJECT TO THE PLAN

Under the Plan, the Committee may grant to Participants: (i) Options;
(ii) shares of Restricted Stock; (iii) Performance Awards; (iv) shares of
Phantom Stock; (v) Stock Bonuses; and (vi) Cash Bonuses.

The Committee may grant Options, shares of Restricted Stock,
Performance Awards, shares of Phantom Stock and Stock Bonuses under the Plan
with respect to a number of shares of Common

<PAGE> 5

Stock that in the aggregate at any time does not exceed 200,000 shares of
Common Stock, subject to adjustment pursuant to Section 12 hereof. The grant
of a Cash Bonus shall not reduce the number of shares of Common Stock with
respect to which Options, shares of Restricted Stock, Performance Awards,
shares of Phantom Stock or Stock Bonuses may be granted pursuant to the Plan.
Notwithstanding any provision in the Plan to the contrary, the maximum number
of shares of Common Stock that may be subject to Incentive Awards granted to
any one individual during any calendar year shall be 50,000 shares of Common
Stock, subject to adjustment under Section 12 hereof. The limitation set forth
in the preceding sentence shall be applied in a manner which will permit
compensation generated in connection with the exercise of Options and the
payment of Performance Awards to constitute "qualified performance-based
compensation" for purposes of Section 162(m) of the Code, including, without
limitation, counting against such maximum number of shares, to the extent
required under Section 162(m) of the Code and applicable interpretive
authority thereunder, any shares subject to Options that are canceled or
repriced.

If any outstanding Option expires, terminates or is canceled for any
reason, the shares of Common Stock subject to the unexercised portion of such
Option shall again be available for grant under the Plan. If any shares of
Restricted Stock or Phantom Stock, or any shares of Common Stock granted as a
Performance Award or a Stock Bonus are forfeited or canceled for any reason,
such shares shall again be available for grant under the Plan.

Shares of Common Stock issued under the Plan may be either newly
issued or treasury shares, at the discretion of the Committee.

4. ADMINISTRATION OF THE PLAN

The Plan shall be administered by a Committee of the Board of
Directors consisting of two or more persons, each of whom shall be both (i) a
"disinterested person" within the meaning of Rule 16b-3(c)(2)(i) promulgated
under Section 16 of the Exchange Act and (ii) an "outside director" within the
meaning of Section 162(m) of the Code and applicable interpretive authority
thereunder. The Committee shall from time to time designate the key Employees
and Consultants of the Company who shall be granted Incentive Awards and the
amount and type of such Incentive Awards.

The Committee shall have full authority to administer the Plan,
including authority to interpret and construe any provision of the Plan and
the terms of any Incentive Award issued under it and to adopt such rules and
regulations for administering the Plan as it may deem necessary. Decisions of
the Committee shall be final and binding on all parties.

The Committee may, in its absolute discretion (i) accelerate the date
on which any Option granted under the Plan becomes exercisable, (ii) extend
the date on which any Option granted under the Plan ceases to be exercisable,
(iii) accelerate the Vesting Date or Issue Date, or waive any condition
imposed pursuant to Section 7(b) hereof, with respect to any share of
Restricted Stock granted under the Plan and (iv) accelerate the Vesting Date
or waive any condition imposed pursuant to Section 9 hereof, with respect to
any share of Phantom Stock granted under the Plan.

<PAGE> 6

In addition, the Committee may, in its absolute discretion, grant
Incentive Awards to Participants on the condition that such Participants
surrender to the Committee for cancellation such other Incentive Awards
(including, without limitation, Incentive Awards with higher exercise prices)
as the Committee specifies. Notwithstanding Section 3 hereof, Incentive Awards
granted on the condition of surrender of outstanding Incentive Awards shall
not count against the limits set forth in such Section 3 until such time as
such Incentive Awards are surrendered.

Except as provided in Section 6(e)(4) hereof, whether an authorized
leave of absence, or absence in military or government service, shall
constitute termination of employment shall be determined by the Committee in
its absolute discretion.

No member of the Committee shall be liable for any action, omission,
or determination relating to the Plan, and the Company shall indemnify and
hold harmless each member of the Committee and each other director or employee
of the Company to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated from and against any cost or
expense (including attorneys' fees) or liability (including any sum paid in
settlement of a claim with the approval of the Committee) arising out of any
action, omission or determination relating to the Plan, unless, in either
case, such action, omission or determination was taken or made by such member,
director or employee in bad faith and without reasonable belief that it was in
the best interests of the Company.

5. ELIGIBILITY

The persons who shall be eligible to receive Incentive Awards
pursuant to the Plan shall be those Employees who are largely responsible for
the management, growth and protection of the business of the Company or any
Subsidiary (including officers of the Company, whether or not they are
directors of the Company) or (ii) any Consultant, as the Committee, in its
absolute discretion, shall select from time to time; provided, however,
Incentive Stock Options may only be granted to Employees.

6. OPTIONS

The Committee may grant Options pursuant to the Plan, which Options
shall be evidenced by agreements in such form as the Committee shall from time
to time approve. Options shall comply with and be subject to the following
terms and conditions:

(a) Identification of Options

All Options granted under the Plan shall be clearly identified in the
agreement evidencing such Options as either Incentive Stock Options or as
Non-Qualified Stock Options.

<PAGE> 7

(b) Exercise Price

The exercise price of any Option granted under the Plan shall be such
price as the Committee shall determine on the date on which such Option is
granted; provided, that such price shall be not less than 100% of the Fair
Market Value of a share of Common Stock on the date on which such Option is
granted, subject to (i) the restrictions provided in Section 6(d) hereof and
(ii) the adjustments provided in Section 12 hereof.

(1) Each Option shall be exercisable on such date or dates,
during such period and for such number of shares of Common Stock as
shall be determined by the Committee on the day on which such Option
is granted and set forth in the agreement evidencing the Option;
provided, however, that (A) subject to the restrictions provided in
Section 6(d) hereof, no Option shall be exercisable after the
expiration of ten years from the date such Option was granted and (B)
no Option shall be exercisable until six months after the date of
grant; and, provided, further, that each Option shall be subject to
earlier termination, expiration or cancellation as provided in the
Plan.

(2) Each Option shall be exercisable in whole or in part
with respect to whole shares of Common Stock. The partial exercise of
an Option shall not cause the expiration, termination or cancellation
of the remaining portion thereof. Upon the partial exercise of an
Option, the agreement evidencing such Option shall be returned to the
Participant exercising such Option together with the delivery of the
certificates described in Section 6(c)(5) hereof.

(3) An Option shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no
fewer than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the agreement
evidencing the Option, shall specify the number of shares of Common
Stock with respect to which the Option is being exercised and the
effective date of the proposed exercise, and shall be signed by the
Participant. The Participant may withdraw such notice at any time
prior to the close of business on the business day immediately
preceding the effective date of the proposed exercise, in which case
such agreement shall be returned to the Participant. Payment for
shares of Common Stock purchased upon the exercise of an Option shall
be made on the effective date of such exercise either (i) in cash, by
certified check, bank cashier's check or wire transfer, (ii) subject
to the approval of the Committee, in shares of Common Stock owned by
the Participant and valued at their Fair Market Value on the
effective date of such exercise, (iii) subject to the approval of the
Committee, in the form of a "cashless exercise" (as described below)
or (iv) subject to the approval of the Committee, in any combination
of the foregoing. Any payment in shares of Common Stock shall be
effected by the delivery of such shares to the Secretary of the
Company, duly endorsed in blank or

<PAGE> 8

accompanied by stock powers duly executed in blank, together with any
other documents and evidences as the Secretary of the Company shall
require from time to time.

The cashless exercise of an Option shall be pursuant to
procedures whereby the Participant by written notice, directs (i) an
immediate market sale or margin loan respecting all or a part of the
shares of Common Stock to which he is entitled upon exercise pursuant
to an extension of credit by the Company to the Participant of the
exercise price, (ii) the delivery of the shares of Common Stock
directly from the Company to a brokerage firm and (iii) delivery of
the exercise price from the sale or the margin loan proceeds from the
brokerage firm directly to the Company.

(4) Any Option granted under the Plan may be exercised by a
broker-dealer acting on behalf of a Participant if (i) the
broker-dealer has received from the Participant or the Company a duly
endorsed agreement evidencing such Option and instructions signed by
the Participant requesting the Company to deliver the shares of
Common Stock subject to such Option to the broker-dealer on behalf of
the Participant and specifying the account into which such shares
should be deposited, (ii) adequate provision has been made with
respect to the payment of any withholding taxes due upon such
exercise and (iii) the broker-dealer and the Participant have
otherwise complied with Section 220.3(e)(4) of Regulation T, 12 CFR
Part 220.

(5) Certificates for shares of Common Stock purchased upon
the exercise of an Option shall be issued in the name of the
Participant and delivered to the Participant as soon as practicable
following the effective date on which the Option is exercised;
provided, however, that such delivery shall be effected for all
purposes when a stock transfer agent of the Company shall have
deposited such certificates in the United States mail, addressed to
the Participant.

(6) During the lifetime of a Participant each Option granted
to him shall be exercisable only by him or a broker-dealer acting on
behalf of such Participant pursuant to Section 6(c)(4) hereof. No
Option shall be assignable or transferable otherwise than by will or
by the laws of descent and distribution.

(d) Limitations on Grant of Incentive Stock Options

(1) The aggregate Fair Market Value of shares of Common
Stock with respect to which "incentive stock options" (within the
meaning of Section 422 without regard to Section 422(d) of the Code)
are exercisable for the first time by a Participant during any
calendar year under the Plan (and any other stock option plan of the
Company, or of its Parent or any Subsidiary) shall not exceed
$100,000. Such Fair Market Value shall be determined as of the date
on which each such Incentive Stock Option is granted. If such
aggregate Fair Market Value of shares of Common Stock underlying such
Incentive Stock Options exceeds $100,000, then Incentive Stock
Options granted hereunder to such Participant shall, to the

<PAGE> 9

extent and in the order required by regulations promulgated under the
Code (or any other authority having the force of such regulations),
automatically be deemed to be Non-Qualified Stock Options, but all
other terms and provisions of such Incentive Stock Options shall
remain unchanged. In the absence of such regulations promulgated
under the Code (and authority), or if such regulations (or authority)
require or permit a designation of the options which shall cease to
constitute Incentive Stock Options, Incentive Stock Options shall, to
the extent of such excess and in the order in which they were
granted, automatically be deemed to be Non-Qualified Stock Options,
but all other terms and provisions of such Incentive Stock Options
shall remain unchanged.

(2) No Incentive Stock Option may be granted to an
individual if, at the time of the proposed grant, such individual
owns stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company or of its Parent
or any Subsidiary, unless (i) the exercise price of such Incentive
Stock Option is at least 110% of the Fair Market Value of a share of
Common Stock at the time such Incentive Stock Option is granted and
(ii) such Incentive Stock Option is not exercisable after the
expiration of five years from the date such Incentive Stock Option is
granted.

(e) Effect of Termination of Employment

(1) If the employment of a Participant with the Company
shall terminate for any reason other than Cause, "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) or
the death of the Participant (i) Options granted to such Participant,
to the extent that they were exercisable at the time of such
termination, shall remain exercisable until the expiration of one
month after such termination, on which date they shall expire, and
(ii) Options granted to such Participant, to the extent that they
were not exercisable at the time of such termination, shall expire at
the close of business on the date of such termination; provided,
however, that no Option shall be exercisable after the expiration of
its term.

(2) If the employment of a Participant with the Company
shall terminate as a result of the "permanent and total disability"
(within the meaning of Section 22(e)(3) of the Code) or the death of
the Participant (i) Options granted to such Participant, to the
extent that they were exercisable at the time of such termination,
shall remain exercisable until the expiration of one year after such
termination, on which date they shall expire, and (ii) Options
granted to such Participant, to the extent that they were not
exercisable at the time of such termination, shall expire at the
close of business on the date of such termination; provided, however,
that no Option shall be exercisable after the expiration of its term.

(3) In the event of the termination of a Participant's
employment for Cause, all outstanding Options granted to such
Participant shall expire at the commencement of business on the date
of such termination.

<PAGE> 10

(4) A Participant's employment with the Company shall be
deemed terminated if the Participant's leave of absence (including
military or such leave or other bona fide leave of absence) extends
for more than 90 days and the Participant's continued employment with
the Company is not guaranteed by contract or statute.

(f) Acceleration of Exercise Date Upon Change in Control

Upon the occurrence of a Change in Control, each Option granted under
the Plan and outstanding at such time shall become fully and immediately
exercisable and shall remain exercisable until its expiration, termination or
cancellation pursuant to the terms of the Plan.

7. RESTRICTED STOCK

The Committee may grant shares of Restricted Stock pursuant to the
Plan. Each grant of shares of Restricted Stock shall be evidenced by an
agreement in such form as the Committee shall from time to time approve. Each
grant of shares of Restricted Stock shall comply with and be subject to the
following terms and conditions:

(a) Issue Date and Vesting Date

At the time of the grant of shares of Restricted Stock, the Committee
shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting
Dates with respect to such shares. The Committee may divide such shares into
classes and assign a different Issue Date and/or Vesting Date for each class.
Except as provided in Sections 7(c) and 7(f) hereof, upon the occurrence of
the Issue Date with respect to a share of Restricted Stock, a share of
Restricted Stock shall be issued in accordance with the provisions of Section
7(d) hereof. Provided that all conditions to the vesting of a share of
Restricted Stock imposed pursuant to Section 7(b) hereof are satisfied, and
except as provided in Sections 7(c) and 7(f) hereof, upon the occurrence of
the Vesting Date with respect to a share of Restricted Stock, such share shall
vest and the restrictions of Section 7(c) hereof shall cease to apply to such
share.

(b) Conditions to Vesting

At the time of the grant of shares of Restricted Stock, the Committee
may impose such restrictions or conditions, not inconsistent with the
provisions hereof, to the vesting of such shares as it in its absolute
discretion deems appropriate. By way of example and not by way of limitation,
the Committee may require, as a condition to the vesting of any class or
classes of shares of Restricted Stock, that (i) the Participant or the Company
achieve certain performance criteria, such criteria to be specified by the
Committee at the time of the grant of such shares and (ii) prohibiting an
election by the Participant under Section 83(b) of the Code.

<PAGE> 11

Prior to the vesting of a share of Restricted Stock, no transfer of a
Participant's rights with respect to such share, whether voluntary or
involuntary, by operation of law or otherwise, shall vest the transferee with
any interest or right in or with respect to such share, but immediately upon
any attempt to transfer such rights, such share, and all of the rights related
thereto, shall be forfeited by the Participant and the transfer shall be of no
force or effect.

(d) Issuance of Certificates

(1) Except as provided in Sections 7(c) or 7(f) hereof,
reasonably promptly after the Issue Date with respect to shares of
Restricted Stock, the Company shall cause to be issued a stock
certificate, registered in the name of the Participant to whom such
shares were granted, evidencing such shares; provided, that the
Company shall not cause to be issued such a stock certificates unless
it has received a stock power duly endorsed in blank with respect to
such shares. Each such stock certificate shall bear the following
legend:

The transferability of this certificate and the shares of
stock represented hereby are subject to the restrictions,
terms and conditions (including forfeiture and restrictions
against transfer) contained in the Midcoast Energy
Resources, Inc. 1996 Incentive Stock Plan and an Agreement
entered into between the registered owner of such shares and
Midcoast Energy Resources, Inc. A copy of the Plan and
Agreement is on file in the office of the Secretary of
Midcoast Energy Resources, Inc., 1100 Louisiana, Suite 2950,
Houston, Texas 77002.

Such legend shall not be removed from the certificate evidencing such
shares until such shares vest pursuant to the terms hereof.

(2) Each certificate issued pursuant to Paragraph 7(d)(1)
hereof, together with the stock powers relating to the shares of
Restricted Stock evidenced by such certificate, shall be held by the
Company. The Company shall issue to the Participant a receipt
evidencing the certificates held by it which are registered in the
name of the Participant.

(e) Consequences Upon Vesting

Upon the vesting of a share of Restricted Stock pursuant to the terms
hereof, the restrictions of Section 7(c) hereof shall cease to apply to such
share. Reasonably promptly after a share of Restricted Stock vests pursuant to
the terms hereof, the Company shall cause to be issued and delivered to the
Participant to whom such shares were granted, a certificate evidencing such
share, free of the legend set forth in Paragraph 7(d)(1) hereof, together with
any other property of the Participant held by Company pursuant to Section
12(a) hereof; provided, however, that such delivery

<PAGE> 12

shall be effected for all purposes when the Company shall have deposited such
certificate and other property in the United States mail, addressed to the
Participant.

(f) Effect of Termination of Employment

(1) If the employment of a Participant with the Company
shall terminate for any reason other than Cause prior to the vesting
of shares of Restricted Stock granted to such Participant, a portion
of such shares, to the extent not forfeited or canceled on or prior
to such termination pursuant to any provision hereof, shall vest on
the date of such termination. The portion referred to in the
preceding sentence shall be determined by the Committee at the time
of the grant of such shares of Restricted Stock and may be based on
the achievement of any conditions imposed by the Committee with
respect to such shares pursuant to Section 7(b) hereof. Such portion
may equal zero.

(2) In the event of the termination of a Participant's
employment for Cause, all shares of Restricted Stock granted to such
Participant which have not vested as of the commencement of business
on the date of such termination shall immediately be forfeited.

(g) Effect of Change in Control

Upon the occurrence of a Change in Control, all shares of Restricted
Stock which have not theretofore vested (including those with respect to which
the Issue Date has not yet occurred) shall immediately vest.

8. PERFORMANCE AWARDS

The Committee may grant Performance Awards pursuant to the Plan. Each
grant of Performance Awards shall be evidenced by an agreement in such form as
the Committee shall from time to time approve. Each grant of Performance
Awards shall comply with and be subject to the following terms and conditions:

(a) Performance Period and Performance Award

(1) With respect to each grant of a Performance Award, the
Committee shall establish a performance period over which the
performance of the applicable Participant shall be measured.

(2) In determining the amount of the Performance Award to be
granted to a particular Participant, the Committee may take into
account such factors as the Participant's responsibility level and
growth potential, the amount of other Incentive Awards granted or
received by such Participant, and such other considerations as the
Committee deems appropriate. Each Performance Award shall be subject
to a maximum value as established by the Committee at the time of
grant of such award; provided, however, the maximum value

<PAGE> 13

that can be granted as a Performance Award to any one individual
during any calendar year is $1,000,000.

(b) Performance Measures

A Performance Award shall be awarded to a Participant contingent upon
future performance of the Company (or any Subsidiary, division or department
thereof) by or in which the Participant is employed or responsible during the
performance period. The Committee shall establish, in writing, the performance
measures applicable to such performance within 90 days after the commencement
of the performance period, to which such measures relate, and at a time when
the outcome of such performance measures are substantially uncertain within
the meaning of Section 162(m) of the Code, subject to such later revisions as
the Committee shall deem appropriate to reflect significant unforeseen events
or changes.

Upon the expiration of the performance period relating to a
Performance Award granted to a Participant, such Participant shall be entitled
to receive payment of an amount not exceeding the maximum value of the
Performance Award, based on the achievement of the performance measures for
such performance period, as determined by the Committee. The Committee shall
certify in writing prior to the payment of a Performance Award that the
applicable performance measures and any other material terms of the grant have
been satisfied. Subject to Section 3 hereof, payment of a Performance Award
may be made in cash, Common Stock or a combination thereof, as determined by
the Committee. Payment shall be made in a lump sum or in installments as
prescribed by the Committee. Any payment to be made in Common Stock shall be
based on the Fair Market Value of the Common Stock on the payment date.

(d) Effect of Termination of Employment

If the employment of a Participant shall terminate for any reason
prior to the expiration of the applicable performance period, the Performance
Awards relating to such performance period, shall immediately be forfeited as
of the commencement of business on the date of such termination, except as may
be determined by the Committee in its sole and absolute discretion, or as may
be otherwise provided in the agreement evidencing such Performance Award.

(e) Effect of Change in Control

Upon the occurrence of a Change in Control, the Committee (as
constituted immediately prior to such Change in Control) shall determine, in
its sole discretion, whether Performance Awards, which have not theretofore
satisfied the requisite performance measure or for which the performance
period has not expired, shall immediately be paid or whether such Performance
Awards shall remain outstanding according to its respective terms.

<PAGE> 14

9. PHANTOM STOCK

The Committee may grant shares of Phantom Stock pursuant to the Plan.
Each grant of shares of Phantom Stock shall be evidenced by an agreement in
such form as the Committee shall from time to time approve. Each grant of
shares of Phantom Stock shall comply with and be subject to the following
terms and conditions:

(a) Vesting Date

At the time of the grant of shares of Phantom Stock, the Committee
shall establish a Vesting Date or Vesting Dates with respect to such shares.
The Committee may divide such shares into classes and assign a different
Vesting Date for each class. Provided that all conditions to the vesting of a
share of Phantom Stock imposed pursuant to Section 9(c) hereof are satisfied,
and except as provided in Section 9(d) hereof, upon the occurrence of the
Vesting Date with respect to a share of Phantom Stock, such share shall vest.

(b) Benefit Upon Vesting

Upon the vesting of a share of Phantom Stock, a Participant shall be
entitled to receive in cash, within 90 days of the date on which such share
vests, an amount in cash in a lump sum equal to the sum of (i) the Fair Market
Value of a share of Common Stock of the Company on the date on which such
share of Phantom Stock vests and (ii) the aggregate amount of cash dividends
paid with respect to a share of Common Stock of the Company during the period
commencing on the date on which the share of Phantom Stock was granted and
terminating on the date on which such share vests.

At the time of the grant of shares of Phantom Stock, the Committee
may impose such restrictions or conditions, not inconsistent with the
provisions hereof, to the vesting of such shares as it, in its absolute
discretion deems appropriate. By way of example and not by way of limitation,
the Committee may require, as a condition to the vesting of any class or
classes of shares of Phantom Stock, that the Participant or the Company
achieve certain performance criteria, such criteria to be specified by the
Committee at the time of the grant of such shares.

(d) Effect of Termination of Employment

(1) If the employment of a Participant with the Company
shall terminate for any reason other than Cause prior to the vesting
of shares of Phantom Stock granted to such Participant a portion of
such shares, to the extent not forfeited or canceled on or prior to
such termination pursuant to any provision hereof, shall vest on the
date of such termination. The portion referred to in the preceding
sentence shall be determined by the Committee at the time of the
grant of such shares of Phantom Stock and may be based on the
achievement of any

<PAGE> 15

conditions imposed by the Committee with respect to such shares
pursuant to Section 9(c) hereof. Such portion may equal zero.

(2) In the event of the termination of a Participant's
employment for Cause, all shares of Phantom Stock granted to such
Participant which have not vested as of the date of such termination
shall immediately be forfeited.

(e) Effect of Change in Control

Upon the occurrence of a Change in Control, all shares of Phantom
Stock which have not theretofore vested shall immediately vest.

10. STOCK BONUSES

The Committee may, in its absolute discretion, grant Stock Bonuses in
such amounts as it shall determine from time to time. A Stock Bonus shall be
paid at such time and subject to such conditions as the Committee shall
determine at the time of the grant of such Stock Bonus. Certificates for
shares of Common Stock granted as a Stock Bonus shall be issued in the name of
the Participant to whom such grant was made and delivered to such Participant
as soon as practicable after the date on which such Stock Bonus is required to
be paid.

11. CASH BONUSES

The Committee may, in its absolute discretion, grant in connection
with any grant of Restricted Stock or shares of Common Stock granted as a
Performance Award or Stock Bonus or at any time thereafter, a cash bonus,
payable promptly after the date on which the Participant is required to
recognize income for federal income tax purposes in connection with such
Restricted Stock, Performance Award or Stock Bonus, in such amounts as the
Committee shall determine from time to time; provided, however, that in no
event shall the amount of a Cash Bonus exceed the Fair Market Value of the
related shares of Restricted Stock or shares of Common Stock granted pursuant
to a Performance Award or Stock Bonus on such date. A Cash Bonus shall be
subject to such conditions as the Committee shall determine at the time of the
grant of such Cash Bonus.

12. ADJUSTMENT UPON CHANGES IN COMMON STOCK

(a) Outstanding Restricted Stock, Performance Awards, and Phantom Stock

Unless the Committee in its absolute discretion otherwise determines,
if a Participant receives any securities or other property (including
dividends paid in cash) with respect to a share of Restricted Stock, the Issue
Date with respect to which occurs prior to such event, but which has not
vested as of the date of such event, as a result of any dividend, stock split
recapitalization, merger, consolidation, combination, exchange of shares or
otherwise, such securities or other property will not vest until such share of
Restricted Stock vests, and shall be held by the Company pursuant to

<PAGE> 16

Paragraph 7(d)(2) hereof as if such securities or other property were unvested
shares of Restricted Stock.

The Committee may, in its absolute discretion, adjust any grant of
shares of Restricted Stock, the Issue Date with respect to which has not
occurred as of the date of the occurrence of any of the following events, any
shares of Common Stock upon the grant of a Performance Award or any grant of
shares of Phantom Stock, to reflect any dividend, stock split,
recapitalization, merger, consolidation, combination, exchange of shares or
similar corporate change as the Committee may deem appropriate to prevent the
enlargement or dilution of rights of Participants under the grant.

(b) Stock Subject to Plan, Outstanding Options, Increase or Decrease
in Issued Shares Without Consideration

Subject to any required action by the stockholders of the Company, in
the event of any increase or decrease in the number of issued shares of Common
Stock resulting from a subdivision or consolidation of shares of Common Stock
or the payment of a stock dividend (but only on the shares of Common Stock),
or any other increase or decrease in the number of such shares effected
without receipt of consideration by the Company, the Committee shall
proportionally adjust (i) the number of shares of Common Stock for which
Incentive Awards may be granted under the Plan and (ii) the number of shares
and the exercise price per share of Common Stock subject to each outstanding
Option.

Subject to any required action by the stockholders of the Company, if
the Company shall be the surviving corporation in any merger or consolidation
(except a merger or consolidation as a result of which the holders of shares
of Common Stock receive securities of another corporation), each Option
outstanding on the date of such merger or consolidation shall entitle the
Participant to acquire upon exercise the securities which a holder of the
number of shares of Common Stock subject to such Option would have received in
such merger or consolidation.

(d) Outstanding Options, Certain Other Transactions

In the event of a dissolution or liquidation of the Company, a sale
of all or substantially all of the Company's assets, a merger or consolidation
involving the Company in which the Company is not the surviving corporation or
a merger or consolidation involving the Company in which the Company is the
surviving corporation but the holders of shares of Common Stock receive
securities of another corporation and/or other property, including cash, the
Committee shall, in its absolute discretion, have the power to:

(i) cancel, effective immediately prior to the occurrence of
such event, each Option outstanding immediately prior to such event
(whether or not then exercisable), and, in full consideration of such
cancellation, pay to the Participant to whom such Option was granted

<PAGE> 17

an amount in cash, for each share of Common Stock subject to such
Option equal to the excess of (A) the value, as determined by the
Committee in its absolute discretion, of the property (including
cash) received by the holder of a share of Common Stock as a result
of such event over (B) the exercise price of such Option; or

(ii) provide for the exchange of each Option outstanding
immediately prior to such event (whether or not then exercisable) for
an option on some or all of the property for which such Option is
exchanged and, incident thereto, make an equitable adjustment as
determined by the Committee in its absolute discretion in the
exercise price of the option, or the number of shares or amount of
property subject to the option or, if appropriate, provide for a cash
payment to the Participant to whom such Option was granted in partial
consideration for the exchange of the Option.

(e) Outstanding Options, Other Changes

In the event of any change in the capitalization of the Company or
corporate change other than those specifically referred to in Sections 12(b),
(c) or (d) hereof, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Options outstanding
on the date on which such change occurs and in the per share exercise price of
each such Option as the Committee may consider appropriate to prevent dilution
or enlargement of rights.

(f) No Other Rights

Except as expressly provided in the Plan, no Participant shall have
any rights by reason of any subdivision or consolidation of shares of stock of
any class, the payment of any dividend, any increase or decrease in the number
of shares of stock of any class or any dissolution, liquidation, merger or
consolidation of the Company or any other corporation. Except as expressly
provided in the Plan, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Common Stock subject to an Incentive Award or the exercise
price of any Option.

13. RIGHTS AS A STOCKHOLDER

No person shall have any rights as a stockholder with respect to any
shares of Common Stock covered by or relating to any Incentive Award granted
pursuant to this Plan until the date of the issuance of a stock certificate
with respect to such shares. Except as otherwise expressly provided in Section
12 hereof, no adjustment to any Incentive Award shall be made for dividends or
other rights for which the record date occurs prior to the date such stock
certificate is issued.

<PAGE> 18

14. NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO INCENTIVE AWARD

Nothing contained in the Plan or any Incentive Award shall confer
upon any Participant any right with respect to the continuation of his
employment by the Company or interfere in any way with the right of the
Company, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such employment or to increase or decrease
the compensation of the Participant from the rate in existence at the time of
the grant of an Incentive Award.

No person shall have any claim or right to receive an Incentive Award
hereunder. The Committee's granting of an Incentive Award to a Participant at
any time shall neither require the Committee to grant an Incentive Award to
such Participant or any other Participant or other person at any time nor
preclude the Committee from making subsequent grants to such Participant or
any other Participant or other person.

15. SECURITIES MATTERS

(a) The Company shall be under no obligation to effect the
registration pursuant to the Securities Act of any shares of Common Stock to
be issued hereunder or to effect similar compliance under any state laws.
Notwithstanding anything herein to the contrary, the Company shall not be
obligated to cause to be issued or delivered any certificates evidencing
shares of Common Stock pursuant to the Plan unless and until the Company is
advised by its counsel that the issuance and delivery of such certificates is
in compliance with all applicable laws, regulations of governmental authority
and the requirements of any securities exchange on which shares of Common
Stock are traded. The Committee may require, as a condition of the issuance
and delivery of certificates evidencing shares of Common Stock pursuant to the
terms hereof, that the recipient of such shares make such covenants,
agreements and representations, and that such certificates bear such legends,
as the Committee, in its sole discretion, deems necessary or desirable.

(b) The exercise of any Option granted hereunder shall only be
effective at such time as counsel to the Company shall have determined that
the issuance and delivery of shares of Common Stock pursuant to such exercise
is in compliance with all applicable laws, regulations of governmental
authorities and the requirements of any securities exchange on which shares of
Common Stock are traded. The Company may, in its sole discretion, defer the
effectiveness of any exercise of an Option granted hereunder in order to allow
the issuance of shares of Common Stock pursuant thereto to be made pursuant to
registration or an exemption from registration or other methods for compliance
available under federal or state securities laws. The Company shall inform the
Participant in writing of its decision to defer the effectiveness of the
exercise of an Option granted hereunder. During the period that the
effectiveness of the exercise of an Option has been deferred, the Participant
may, by written notice, withdraw such exercise and obtain the refund of any
amount paid with respect thereto.

(c) It is intended that the Plan and any grant of an Incentive Award
made to a person subject to Section 16 of the Exchange Act meet all of the
requirements of Rule 16b-3 promulgated thereunder. If any provision of the
Plan or any such Incentive Award would disqualify the Plan or

<PAGE> 19

such Incentive Award under, or would otherwise not comply with, Rule 16b-3,
such provision or Incentive Award shall be construed or deemed amended to
conform to Rule 16b-3 to the extent permitted by applicable law and deemed
advisable by the Board of Directors.

16. QUALIFIED PERFORMANCE-BASED COMPENSATION

It is intended that the Plan comply fully with and meet all the
requirements of Section 162(m) of the Code so that Options granted hereunder
with an exercise price not less than Fair Market Value of a share of Common
Stock on the date of grant and (ii) the payment of a Performance Award granted
hereunder, shall constitute "qualified performance based compensation" within
the meaning of such Section and the interpretive authority thereunder. If any
provision of the Plan would disqualify the Plan or would not otherwise permit
the Plan to comply with Section 162(m) as so intended, such provision shall be
construed or deemed amended to conform to the requirements or provisions of
Section 162(m) to the extent permitted by applicable law and deemed advisable
by the Board of Directors; provided that no such construction or amendment
shall have an adverse effect on the economic value to a Participant of any
Incentive Award previously granted hereunder.

17. WITHHOLDING TAXES

Whenever shares of Common Stock are to be issued upon the exercise of
an Option, the occurrence of the Issue Date or Vesting Date with respect to a
share of Restricted Stock, the payment of a Performance Award in shares of
Common Stock or the payment of a Stock Bonus, the Company shall have the right
to require the Participant to remit to the Company in cash an amount
sufficient to satisfy federal, state and local withholding tax requirements,
if any, attributable to such exercise, occurrence or payment prior to the
delivery of any certificate or certificates for such shares. In addition, upon
the grant of a Cash Bonus, the payment of a Performance Award or the making of
a payment with respect to a share of Phantom Stock, the Company shall have the
right to withhold from any cash payment required to be made pursuant thereto
an amount sufficient to satisfy the federal, state and local withholding tax
requirements, if any, attributable to such exercise or grant.

18. AMENDMENT OF THE PLAN

The Board of Directors may at any time suspend or discontinue the
Plan or revise or amend it in any respect whatsoever, provided, however, that
without approval of the stockholders no revision or amendment shall (i) except
as provided in Section 12 hereof, increase the number of shares of Common
Stock that may be issued under the Plan, (ii) except as provided in Section 12
hereof, increase the maximum number of shares of Common Stock that may be
subject to an Incentive Award granted to any one individual for any calendar
year, (iii) increase the maximum value that can be awarded as a Performance
Award, (iv) materially increase the benefits accruing to individuals holding
Incentive Awards granted pursuant to the Plan, (v) materially modify the
requirements as to eligibility for participation in the Plan, (vi) extend the
term of the Plan or (vii) decrease any authority granted to the Committee
under the Plan in contravention of Rule 16b-3 under the Exchange Act.

<PAGE> 20

19. NO OBLIGATION TO EXERCISE

The grant to a Participant of an Option shall impose no obligation
upon such Participant to exercise such Option.

20. TRANSFERS UPON DEATH

Upon the death of a Participant, outstanding Incentive Awards granted
to such Participant may be exercised only by the executors or administrators
of the Participant's estate or by any person or persons who shall have
acquired such right to exercise by will or by the laws of descent and
distribution. No transfer by will or the laws of descent and distribution of
any Incentive Award, or the right to exercise any Incentive Award, shall be
effective to bind the Company unless the Committee shall have been furnished
with (a) written notice thereof and with a copy of the will and/or such
evidence as the Committee may deem necessary to establish the validity of the
transfer and (b) an agreement by the transferee to comply with all the terms
and conditions of the Incentive Award that are or would have been applicable
to the Participant and to be bound by the acknowledgments made by the
Participant in connection with the grant of the Incentive Award.

21. EXPENSES AND RECEIPTS

The expenses of the Plan shall be paid by the Company. Any proceeds
received by the Company in connection with any Incentive Award will be used
for general corporate purposes.

22. FAILURE TO COMPLY

In addition to the remedies of the Company elsewhere provided for
herein, failure by a Participant to comply with any of the terms and
conditions of the Plan or the agreement executed by such Participant
evidencing an Incentive Award, unless such failure is remedied by such
Participant within ten days after having been notified of such failure by the
Committee, shall be grounds for the cancellation and forfeiture of such
Incentive Award, in whole or in part as the Committee, in its absolute
discretion, may determine.

23. EFFECTIVE DATE AND TERM OF PLAN

The Plan was adopted by the Board of Directors on May 13, 1996,
subject to approval by the stockholders of the Company in accordance with
applicable law, the requirements of Sections 422 and 162(m) of the Code and
the requirements of Rule 16b-3 under Section 16(b) of the Exchange Act. No
Incentive Award may be granted under the Plan after May 12, 2006. Incentive
Awards may be granted under the Plan at any time prior to the receipt of such
stockholder approval; provided, however, that each such grant shall be subject
to such approval. Without limitation on the foregoing, no Option may be
exercised prior to the receipt of such approval, no share certificate shall be
issued pursuant to a grant of Restricted Stock, Performance Award or Stock
Bonus prior to the receipt of such approval and no Cash Bonus or payment with
respect to a Performance Award or a share of

<PAGE> 21

Phantom Stock shall be paid prior to the receipt of such approval. If the Plan
is not so approved prior to May 13, 1997, then the Plan and all Incentive
Awards then outstanding hereunder shall forthwith automatically terminate and
be of no force and effect.

<PAGE> 1

EXHIBIT 10.57

AMENDMENT TO #2
PROMISSORY NOTE DATED 5/30/95

This amendment is to modify terms of payment in the original
promissory note by and between Texline Gas Company ("Texline") and Midcoast
Energy Resources, Inc. ("Midcoast") dated May 30, 1995, in the amount of
$173,822.16.

It is hereafter mutually agreed that Texline shall extend until August
1, 1996, the deadline for repayment of the note before Midcoast must assign
Texline an additional one-half percent (.5%) working interest in the Sun Field
properties in Starr County, Texas as outlined in the Letter Agreement dated May
31, 1995 by and between Texline and Midcoast.

DATED May 21, 1996

TEXLINE GAS COMPANY

BY:_________________________

MIDCOAST ENERGY RESOURCES, INC.

BY:_________________________

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use of our report dated February 12, 1996 included
herein, and to the reference to our Firm under the heading "Experts" in the
Prospectus and the Registration Statement on Form SB-2.

/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants

Houston, Texas
July 22, 1996