U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-8898
Midcoast Energy Resources, Inc.
(Exact name of Registrant as Specified in Its Charter)
Nevada 76-0378638
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 Louisiana, Suite 2050
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 650-8900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
On September 30, 1996, there were outstanding 2,499,999 shares of the
Company's common stock, par value $.01 per share.
Transitional Small Business Disclosure Format. Yes No X
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
Quarterly Report on Form 10-QSB for the
Quarter Ended September 30, 1996
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995
Consolidated Statements of Operations for the nine months
ended September 30, 1996 and September 30, 1995
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30, 1996
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and September 30, 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of Operations
PART II. OTHER INFORMATION
SIGNATURE
<PAGE>
<TABLE>
<CAPTION>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
1996 1995
<S> --------------- -----------------
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 1,951,152 $ 106,152
Accounts receivable, no allowance for doubtful accounts 3,322,185 2,319,667
Asset held for resale 210,447 210,447
--------------- ---------------
Total current assets 5,483,784 2,636,266
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities 8,717,605 7,365,421
Investment in transmission facilities 1,287,887 1,284,609
Oil and gas properties, using the full cost method of accounting 444,556 302,293
Other property and equipment 218,483 85,819
--------------- ---------------
10,668,531 9,038,142
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION (1,214,520) (831,981)
--------------- ---------------
9,454,011 8,206,161
DEFERRED CONTRACT COSTS AND OTHER ASSETS, net of amortization 992,385 246,081
--------------- ---------------
Total assets $ 15,930,180 $ 11,088,508
--------------- ---------------
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,643,671 $ 2,086,138
Current portion of deferred income 83,000 83,000
Short-term borrowing from bank - 25,000
Current portion of long-term debt payable to banks - 540,998
--------------- ---------------
Total current liabilities 2,726,671 2,735,136
--------------- ---------------
LONG-TERM DEBT PAYABLE TO:
Bank - 2,926,947
Shareholders and affiliates - 1,033,822
--------------- ---------------
Total long-term debt - 3,960,769
--------------- ---------------
DEFERRED INCOME 172,917 235,167
SHAREHOLDERS' EQUITY: (Note 3)
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
Common stock, $.01 par value, 10 million shares authorized,
2,499,999 and 1,465,680 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively 25,000 14,657
Paid-in capital 27,070,602 18,824,681
Accumulated deficit (13,965,710) (14,775,102)
Unearned compensation (99,300) (106,800)
--------------- ---------------
Total shareholders' equity 13,030,592 4,157,436
--------------- ---------------
Total liabilities and shareholders' equity $ 15,930,180 $ 11,088,508
--------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Nine Months Ended
----------------------------------
September 30, September 30,
1996 1995
--------------- ---------------
<S> <C> <C>
OPERATING REVENUES:
Sale of natural gas and transportation fees $ 14,876,117 $ 8,217,478
Sale of pipeline 22,500 -
Oil and gas revenue 141,691 31,324
--------------- ---------------
Total operating revenues 15,040,308 8,248,802
--------------- ---------------
OPERATING EXPENSES:
Cost of natural gas and transportation charges 12,421,814 6,995,382
Cost of pipeline sold 2,153 -
Production of oil and gas 47,148 3,447
Depreciation, depletion, and amortization 456,775 289,459
General and administrative 778,055 565,571
--------------- ---------------
Total operating expenses 13,705,945 7,853,859
--------------- ---------------
Operating income 1,334,363 394,943
NON-OPERATING ITEMS:
Interest expense (283,269) (227,636)
Other income(expense), net (18,839) (19,143)
--------------- ---------------
INCOME BEFORE INCOME TAXES 1,032,255 148,164
PROVISION FOR INCOME TAXES - -
--------------- ---------------
Net income 1,032,255 148,164
5% CUMULATIVE PREFERRED STOCK DIVIDENDS (22,863) (44,265)
--------------- ---------------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 1,009,392 $ 103,899
--------------- ---------------
NET INCOME PER COMMON SHARE $ 0.58 $ 0.07
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,728,449 1,431,317
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
5% Cumulative Total
Preferred Common Paid-in Accumulated Unearned Shareholders'
Stock Stock Capital Deficit Compensation Equity
-------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
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 7) - 45 5,955 - - 6,000
Vesting of 14,498 shares in connection
with an employment contract entered
into in April 1995 - - - - 19,500 19,500
Issuance of 8,921 shares which are
subject to a three year vesting
schedule in connection with an
employment agreement - 89 11,911 - (12,000) -
Issuance of 20,931 shares in connection
with employee and director stock bonuses - 209 26,483 - - 26,692
Redemption of 200,000 shares of 5%
cumulative preferred stock (Note 3) (200,000) - 81,634 - - (118,366)
Sale of 1,000,000 shares of common
stock (Note 3 ) - 10,000 8,119,938 - - 8,129,938
Net income - - - 1,032,255 - 1,032,255
5% cumulative preferred stock dividends - - - (22,863) - (22,863)
Common stock dividends - - - (200,000) - (200,000)
------------- ------------- ------------- ------------- ------------ -------------
BALANCE, September 30, 1996 $ - $ 25,000 $27,070,602 $(13,965,710) $ (99,300) $ 13,030,592
------------- ------------- ------------- ------------- ------------ -------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For TheNine Months Ended
----------------------------------
September 30, September 30,
1996 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income applicable to common shareholders $ 1,009,392 $ 103,899
Adjustments to arrive at net cash provided (used) in
operating activities-
Depreciation, depletion and amortization 456,775 289,459
Gain on sale of operating pipeline (20,347) -
Recognition of deferred income (62,250) (62,250)
Increase in deferred tax asset (40,000) -
Income on partnership investments (157,302) -
Issuance of common stock to employees 38,886 4,475
Changes in working capital accounts-
(Increase) decrease in accounts receivable (1,004,943) 377,004
Increase in accounts payable and
accrued liabilities 453,373 66,698
--------------- ---------------
Net cash provided by operating activities 673,584 779,285
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,611,474) (3,794,472)
Investment held for resale - (1,873,654)
Investments in partnerhips and other (693,618) (3,472)
--------------- ---------------
Net cash used in investing activities (2,305,092) (5,671,598)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank debt borrowings 4,283,000 3,290,000
Bank debt repayments (7,775,945) (3,458,712)
Proceeds from notes payable to
shareholders & affiliates 100,000 2,046,272
Repayments on notes payable to
shareholders & affiliates (1,133,822) -
Proceeds from notes payable - 3,200,000
Net proceeds from equity offering 8,203,275 -
Dividends on common stock (200,000) -
--------------- ---------------
Net cash provided by financing activities 3,476,508 5,077,560
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,845,000 185,247
--------------- ---------------
CASH AND CASH EQUIVALENTS, beginning of period 106,152 65,921
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 1,951,152 $ 251,168
--------------- ---------------
CASH PAID FOR INTEREST $ 297,173 $ 202,536
--------------- ---------------
CASH PAID FOR INCOME TAXES $ - $ -
--------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial information has been prepared by Midcoast
Energy Resources, Inc. ("Midcoast" or "the Company") in accordance with the
instructions to Form 10-QSB. The information furnished reflects all adjustments,
all of which were of a normal recurring nature, which are, in the opinion of the
Company, necessary for a fair presentation of the results for the interim
periods presented. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, certain information
and footnote disclosures, including significant accounting policies, normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.It is suggested that the financial information be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
2. BACKGROUND
Midcoast was formed on May 11, 1992, as a Nevada corporation and, in September
1992, became the successor to Nugget Oil Corporation ("Nugget") through a merger
pursuant to the Nugget Plan of Reorganization. The merger was accounted for as
a pooling of interests.
3. CAPITAL STOCK
In May 1996, the Board approved the redemption of the 5% cumulative preferred
stock ("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, the Company's articles of
incorporation were amended to reflect only one class of outstanding securities,
the Company's common stock.
In July 1996, the Company's articles of incorporation were amended to increase
the number of authorized common shares from 6,000,000 shares to 10,000,000
shares. In addition, the Board of Directors ("Board") authorized an approximate
4.46 for 1 stock split in connection with the Company's common stock offering
discussed below.
On August 9, 1996, the Company's Registration Statement on Form SB-2 was
declared effective by the U.S. Securities and Exchange Commission ("SEC"). On
August 14, 1996, the Company sold 1,000,000 shares of its common stock at an
offering price of $10.00 per share. The Company's stock is listed on the
American Stock Exchange under the symbol "MRS". Under the terms of the
underwriting agreement, the underwriters received warrants to acquire 100,000
shares at 142% of the initial offering price per share. The securities
underlying these warrants are subject to piggyback registration rights. After
deducting underwriting commissions and other underwriting expenses of the
offering, proceeds of approximately $8,841,000 were received by the Company
from the underwriter. The proceeds were used to repay indebtedness
with the remainder applied to or acquisitions of pipelines and related assets.
4. PIPELINE CONSTRUCTION AND ACQUISITIONS
In May 1996, Magnolia Pipeline Corporation ("Magnolia"), a wholly-owned
subsidiary, acquired nine gathering pipeline systems and one transmission
pipeline system from Texas Southeastern Gas Gathering Company ("TSGGC"). The
TSGGC 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. These systems total approximately 113 miles of 2 inch to 10 inch
diameter pipeline with associated equipment. Five systems are located in
Alabama, and five systems are located in Mississippi. The bulk of the systems
are located within 100 miles of Magnolia's existing system and it is the
Company's intention to integrate the operation of these systems with Magnolias'
systems. The acquisition was financed by amending a credit facility with a
bank which was subsequently repaid as discussed in Note 6.
Construction of a two mile pipeline in Roane County, Tennessee was completed in
August 1996 at a cost of approximately $425,000. The pipeline was constructed
pursuant to a long-term transportation agreement with an industrial customer.
The construction was financed from cash generated from operations and long-term
bank financing which was repaid as discussed in Note 6.
In September 1996, Midcoast acquired the Quivera Gas Gathering System ("Quivera
System") from Quivera Gas Company, a subsidiary of KOCH Industries, Inc., for
cash consideration of approximately $270,000. The Quivera System, located in
Mississippi and Louisiana, consists of approximately 16 miles of pipeline which
gathers natural gas from three producing areas. The acquisition was funded from
the proceeds of the common stock offering described in Note 3.
5. PARTNERSHIP INVESTMENTS
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 $164,000 for the system. The Joint Venture financed the entire
purchase price with a credit facility obtained from a commercial lender.
Midcoast will act as manager of the Joint Venture and operate the systems.
On February 28, 1996, the Company and Resources Energy Development Company,
L.L.C. ("Resource"), an unaffiliated third party, jointly formed Pan Grande,
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 gathering 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 bank. 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 an officer and director of the Company which was
repaid in August 1996 (see Note 8).
In September 1996, Pan Grande acquired the Salt Creek natural gas pipeline
system ("Salt Creek System") from Seahawk Natural Gas Company. Cash
consideration of $650,000 was paid by Pan Grande of which Midcoast's share of
$325,000 was funded from the proceeds of the common stock offering described in
Note 3. The Salt Creek System consists of approximately 39 miles of pipeline in
Texas and currently transports gas for fuel use at the Salt Creek carbon dioxide
injection plant and oil lifting unit operated by Mobil Exploration and Producing
U.S.. Midcoast will act as manager of Pan Grande and operate all the systems.
6. BANK DEBT
In August 1996, the Company repaid all outstanding bank indebtedness totaling
approximately $4,700,000 including accrued interest with proceeds from the
common stock offering described in Note 3 and established a new $40 million
credit facility with Bank One,Texas N.A.. The new credit facility provides for
an initial borrowing availability of $10.5 million comprised of a $1.5 million
working capital line of credit and a $9.0 million revolving line of credit
(collectively the "Credit Agreement").Available credit under the revolving line
will be reduced by $107,150 per month beginning October 1, 1996. However, the
borrowing availability under each line will be subject to revision, on a
semi-annual basis, based on the performance of the Company's existing assets
and any asset dispositions or additions from new construction or acquisitions.
When borrowings under the Credit Agreement are less than 50% of available
credit, at the Company's option, interest will accrue at the London Interbank
Offering Rate plus 2.5% or the Bank One, Texas N.A. Base rate (currently 8.25%)
plus .5%. When borrowings are greater than 50% of available credit, an
additional .25% will be added to the above interest rates. In addition, the
Company is subject to a non-recurring 1% facility fee as funds are borrowed, as
well as, a 3/8% commitment fee payable quarterly on the unused portion of
borrowing availability. The facility is secured by all accounts receivable,
contracts, and a first lien security interest in the pipeline systems.
7. CONTINGENCIES
In September 1996, an involuntary bankruptcy petition was filed against Stewart
Petroleum Company ("Stewart") who operates the West McArthur River (WMRU)
production field and pipeline in Alaska in which Midcoast invested. The Company
receives a throughput fee for all oil and natural gas transported through the
WMRU pipeline. The Bankruptcy Court has not ruled on the petition, nor on the
validity of any claims against Stewart. The payment of the Company's throughput
fees since August production have been suspended, and only those claims which
are"necessary to avoid immediate and irreparable harm to the Stewart estate"
have been allowed to be paid by the court. However, it is the Company's belief
that its position is adequately protected and as such is continuing to accrue
revenue for the throughput fees during August and September 1996 which amount to
$46,222.
8. RELATED PARTY TRANSACTIONS
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
(see Note 5) pursuant to a promissory note. The note bore interest at the prime
rate plus 2.5% and was 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
was secured by the Company's interest in Pan Grande. The affiliate committed to
lend up to an additional $75,000 in the event an additional system was 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. As discussed below, the note was
repaid in August 1996.
In July and August 1996, Midcoast repaid all outstanding related party
indebtedness which included three notes with an aggregate principal balance of
$473,822 and accrued interest of $10,849 using cash flow generated from
operations and the proceeds from the common stock offering described in Note 3.
In July 1996, $250,000 was paid to a related party to repurchase a 5% net
revenue interest in Magnolia's earnings before interest, income taxes and
depreciation granted to the related party as additional consideration for
providing financing to Midcoast for the acquisition of Magnolia in 1995.
9. SUBSEQUENT EVENTS
In October 1996, Midcoast consummated the acquisition of the Harmony gas
processing plant and pipeline system ("Harmony System") from KOCH Hydrocarbons
Company, a division of KOCH Industries, Inc. for cash consideration of
approximately $3,640,000, subject to purchase price adjustments. The effective
date of the acquisition was August 1, 1996. The Harmony system gathers gas from
producing fields located in Mississippi. It consists of over 150 miles of high
and low pressure gas gathering pipeline with 4620 horsepower of field and inlet
compression. The processing plant is a refrigerated propane natural gas liquid
extraction plant with design capacity of over 20 MMCF/d. The plant has sulfur
extraction as well as full fractionation facilities and markets propane,
butanes, natural gasoline, condensate and sulfur. The acquisition was partially
funded with proceeds from the Company's sale of common stock described in Note 3
and the remainder was financed through the revolving line of credit on the new
$40 million credit facility discussed in Note 6.
In October 1996, Midcoast acquired four natural gas gathering pipelines from
Esperanza Transmission Corporation for cash consideration of $810,000. All four
pipelines are located in southern Texas and collectively include 19.5 miles of
pipeline which gather natural gas from producing fields in the area. The
acquisition was financed using the new revolving line of credit with Bank One,
Texas N.A. discussed in Note 6.
In October 1996, Midcoast acquired three natural gas pipeline systems from Libra
Energies, Inc. for cash consideration of $280,000. Two of the pipeline systems
supply natural gas to industrial customers in Texas and the third gathers
natural gas from two producing wells in Mississippi. The three pipeline systems
are collectively approximately 20 miles in length. The acquisition was financed
using the new revolving line of credit with Bank One, Texas N.A. discussed
in Note 6.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS
Results of Operations
Operating Revenues:
Operating revenues generated during the nine months ended September 30, 1996
totaled approximately $15.0 million as compared to $8.2 million through
September 30, 1995 which represents an 82% increase in 1996. The numerous
pipeline acquisitions made during the second half of 1995 and during 1996 are
partially responsible for the increase. The primarily reason is related
to increased gas marketing opportunities where the Company has a fixed asset
investment. Natural gas sales on Company owned pipeline systems increased from
$5.4 million through September 30, 1995 to $10.3 million during the nine months
ended September 30, 1996.
Operating Expenses:
Operating expenses for the nine months ended September 30, 1996 totaled
approximately $13.7 million, or 75% higher than the comparable 1995 period. As
explained in the preceding section, the primary explanation for the increase can
be attributed to increased gas marketing transactions where the Company has a
fixed asset investment.
Depreciation, depletion, and amortization expense was approximately $457,000 in
1996, as compared to approximately $289,000 in 1995. The increase in 1996
is primarily attributable to the acquisition of Magnolia on August 1, 1995.
General and administrative expenses incurred for the nine months ended September
30, 1996 were approximately $778,000 or $212,000 (38%) higher than for the same
period in 1995. Of the total $212,000 increase in 1996, approximately $181,000
is related to higher personnel costs. During 1996, the Company hired an
employee with extensive business development experience in the energy industry
in order to further develop the Company's current and future pipeline systems.
Furthermore, three additional field operations personnel were hired in 1996 to
ensure the proper maintenance of the numerous pipelines constructed or acquired
in late 1995 and 1996. Also, approximately $39,000 in stock compensation was
granted to employees in April 1996. All other general and administrative
expenses in 1996 have not been significantly affected by the Company's
tremendous growth due to the Company's ongoing effort to control expenses and
effectively assimilate new business using existing resources.
Interest expense through nine months of 1996 and 1995, was approximately
$283,000 and $228,000, respectively. The Company was servicing an average of
approximately $3.8 million in debt through September 30, 1996 as compared to an
average of $3.1 million in debt through September 30, 1995.
The increased debt service in 1996 is attributable to the acquisition of
Magnolia in August 1995 and the TSGGC pipelines in May 1996.
Earnings:
The Company recognized operating income and net income of $1,334,363 and
$1,009,392 respectively, for the nine months ended September 30, 1996 as
compared to operating income and net income of $394,943 and $103,899 for the
nine months ended September 30, 1995. Despite a 58% increase in depreciation,
depletion and amortization expense in 1996, operating income increased by
$939,420 over 1995. The primary factors which contributed to the increase
in operating earnings in 1996 was the transportation revenue generated by
Magnolia and gas processing revenue generated from the acquisition of the
Harmony Gas Processing Plant effective August 1, 1996. 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 was 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.
Capital Resources and Liquidity
As a result of the common stock offering discussed in Note 3, the Company was
able to repay all outstanding debt and accrued interest of approximately
$5,185,000 and retain approximately $3,019,000 of additional working capital to
fund the construction and/or acquisition of new pipeline systems. In addition,
the Company has historically been able to fund 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 before changes in working capital accounts of approximately
$2,476,000. For the nine months ended September 30, 1996, the Company generated
cash flow from operations before changes in working capital accounts of
approximately $1,225,000. Furthermore, considering the numerous pipeline
additions the Company has made during 1996, the Company expects its cash flow
generated from operations to continue to improve.
In August 1996, a new $40 million credit facility was established with Bank One,
Texas N.A.. The new credit facility provides for an initial borrowing
availability of $10.5 million comprised of a $1.5 million working capital line
of credit and a $9.0 million revolving line of credit (collectively the "Credit
Agreement"). Available credit under the revolving line will be reduced by
$107,150 per month beginning October 1, 1996. However, the borrowing
availability under each line will be subject to revision, on a semi-annual
basis, based on the performance of the Company's existing assets and any asset
dispositions or additions from new construction or acquisitions. As a result of
the numerous acquisitions made since inception of the new credit facility
in August 1996, the Company anticipates that the borrowing availability will
be raised after the first semi-annual review in the first quarter of 1997.
The Company believes that with its existing credit facility and funds provided
by operations, the Company will be able to meet its operating cash needs for
the foreseeable future.<PAGE>
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities
Information regarding changes in securities has been provided in Part I of this
Form 10-QSB. Note 3 of the Notes to Consolidated Financial Statements
specifically describes changes which affected both the preferred and common
stock shareholders.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
2.1 Agreement for Sale and Purchase of Harmony Gas Processing Plant and
Related Gathering System dated October 3, 1996 by and between KOCH
Hydrocarbon Company, Division of KOCH Industries, Inc. and Midcoast
Holdings No. One, Inc. (Incorporated by reference from Midcoast Form
8-K dated October 21, 1996)
3.1 Articles 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 Certificate of Amendment of Articles of Incorporation of Midcoast
Energy Resources, Inc. (Incorporated by reference from Midcoast
Registration Statement on Form SB-2 (No. 333-4643)).
3.3 Bylaws of Midcoast Energy Resources, Inc. (Incorporated by reference
from Midcoast Form 10-KSB for the fiscal year ended December 31,
1992.)
4.1 Specimen Certificate for Share of Common Stock, par value $.01 per
share (Incorporated by reference from Midcoast Registration
Statement on Form SB-2 (No. 333-4643)).
4.2 Representative's Warrants (Incorporated by reference from Midcoast
Registration Statement on Form SB-2 (No. 333-4643)).
4.3 Termination Agreement dated May 13, 1996 to terminate the
Shareholders 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. (Incorporated by reference from
Midcoast Registration Statement on Form SB-2 (No. 333-4643)).
4.4 Voting Proxy Agreement by and between Midcoast Energy Resources,
Inc. Stevens G, Herbst, Kenneth B. Holmes, Jr., Rainbow Investments
Company and Texas Commerce Bank National Association. (Incorporated
by reference from Midcoast Registration Statement on Form SB-2 (No.
333-4643)).
4.5 Registration Rights Agreement by and between Midcoast Energy
Resources, Inc.and Stevens G. Herbst. (Incorporated by reference
from Midcoast Registration Statement on Form SB-2 (No. 333-4643)).
4.6 Registration Rights Agreement by and between Midcoast Energy
Resources, Inc. and Kenneth B. Holmes, Jr. (Incorporated by
reference from Midcoast Registration Statement on Form SB-2 (No.
333-4643)).
4.7 Registration Rights Agreement by and between Midcoast Energy
Resources, Inc. and Rainbow Investments Company. (Incorporated by
reference from Midcoast Registration Statement on Form SB-2 (No.
333-4643)).
10.1 Credit Agreement dated August 22, 1996 by and between Bank One,
Texas N.A. and Midcoast Energy Resources, Inc.; Magnolia Pipeline
Corporation and H&W Pipeline Corporation.
10.2 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 March 31, 1996
Form 10-QSB dated May 15, 1996)
10.3 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 March 31, 1996 Form 10-QSB dated May 15,
1996)
27.1 Financial Data Schedule
b. Reports on Form 8-K:
None
<PAGE>
Signature
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MIDCOAST ENERGY RESOURCES, INC.
(Registrant)
BY: /s/ Richard A. Robert
Richard A. Robert
Treasurer
Principal Accounting Officer
Principal Financial Officer
Date: November 14, 1996
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made and entered into this 22nd
day of August, 1996, by and between MIDCOAST ENERGY RESOURCES,
INC., a Nevada corporation ("Midcoast"), MAGNOLIA PIPELINE
CORPORATION, an Alabama corporation ("Magnolia"), H&W PIPELINE
CORPORATION, an Alabama corporation ("H&W," together with Midcoast
and Magnolia, collectively the "Borrower"), and BANK ONE, TEXAS,
NATIONAL ASSOCIATION, a national banking association (the
"Lender").
W I T N E S S E T H:
In consideration of the mutual covenants and agreements
herein contained, the Borrower and the Lender hereby agree as
follows, amending and restating in its entirety the Credit
Agreement dated as of December 20, 1995, by and between Magnolia
Pipeline Corporation and Compass Bank-Houston (the "Existing
Lender"), as heretofore amended, restated, or supplemented (the
"Existing Credit Agreement"):
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1 Terms Defined Above. As used in this Credit
Agreement, the terms "Borrower", "Existing Credit Agreement",
"Existing Lender" and "Lender" shall have the meaning assigned to
them hereinabove.
1.2 Additional Defined Terms. As used in this Credit
Agreement, each of the following terms shall have the meaning
assigned thereto in this Section, unless the context otherwise
requires:
"Additional Costs" shall mean costs which the Lender
determines are attributable to its obligation to make or
its making or maintaining any Fixed Rate Loan, or any
reduction in any amount receivable by the Lender in
respect of any such obligation or any Fixed Rate Loan,
resulting from any Regulatory Change which (a) changes
the basis of taxation of any amounts payable to the
Lender under this Agreement or the Note in respect of any
Fixed Rate Loan (other than taxes imposed on the overall
net income of the Lender), (b) imposes or modifies any
reserve, special deposit, minimum capital, capital rates,
or similar requirements relating to any extensions of
credit or other assets of, or any deposits with or other
liabilities of, the Lender (including Fixed Rate Loans
and Dollar deposits in the London interbank market in
connection with LIBO Rate Loans), or any commitments of
the Lender hereunder, or (c) imposes any other condition
affecting this Agreement or any of such extensions of
credit, liabilities, or commitments.
"Adjusted LIBO Rate" shall mean, for any LIBO Rate
Loan, an interest rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) to be equal to the
sum of the LIBO Rate for such Loan plus the Applicable
Margin, but in no event exceeding the Highest Lawful
Rate.
"Affiliate" shall mean any Person directly or
indirectly controlling, or under common control with, the
Borrower and includes any Subsidiary of the Borrower and
any "affiliate" of the Borrower within the meaning of
Reg. 240.12b-2 of the Securities Exchange Act of 1934,
as amended, with "control," as used in this definition,
meaning possession, directly or indirectly, of the power
to direct or cause the direction of management, policies
or action through ownership of voting securities,
contract, voting trust, or membership in management or in
the group appointing or electing management or otherwise
through formal or informal arrangements or business
relationships.
"Agreement" shall mean this Credit Agreement, as it
may be amended, supplemented, or restated from time to
time.
"Applicable Lending Office" shall mean, for each
type of Loan, the lending office of the Lender (or an
affiliate of the Lender) designated for such type of Loan
on the signature pages hereof or such other office of the
Lender (or an affiliate of the Lender) as the Lender may
from time to time specify to the Borrower as the office
by which Loans of such type are to be made and
maintained.
"Applicable Margin" shall mean for the Reducing
Revolving Line of Credit as to each LIBO Rate Loan, two
and one-half percent (2-1/2%) when the Loan Balance is
less than 50% of the Borrowing Base for the Reducing
Revolving Line of Credit under this Agreement and two and
three-quarters percent (2-3/4%) when the Loan Balance is
greater than 50% of the Borrowing Base for the Reducing
Revolving Line of Credit under this Agreement and for the
Revolving Line of Credit, two and three-quarters percent
(2-3/4%).
"Assignment" shall mean the Assignment of Notes,
Liens, Security Interests, and Other Rights, in form and
substance satisfactory to the Lender, executed by the
Existing Lender, assigning to the Lender the Existing
Notes, the indebtedness evidenced thereby, the Liens
securing the Existing Notes, and the rights of the
Existing Lender under the Existing Loan Documents, and
financing statement changes constituent thereto.
"Available Commitment" shall mean, at any time, an
amount equal to the total Borrowing Base for both the
Revolving Line of Credit and the Reducing Revolving Line
of Credit less the total Loan Balance and the L/C
Exposure at such time.
"Base Rate" shall mean the interest rate announced
or published by the Lender from time to time as its
general reference rate of interest, which Base Rate shall
change upon any change in such announced or published
general reference interest rate and which Base Rate may
not be the lowest interest rate charged by the Lender.
"Borrowing Base" shall mean, at any time, the amount
determined by the Lender in accordance with Section 2.8
and then in effect.
"Borrowing Request" shall mean each written request,
in substantially the form attached hereto as Exhibit II,
by the Borrower to the Lender for a borrowing,
conversion, or prepayment pursuant to Sections 2.1 or
2.10, each of which shall:
(a) be signed by a Responsible Officer of
the Borrower;
(b) specify the amount and type of Loan
requested, and, as applicable, the Loan to be
converted or prepaid and the date of the
borrowing, conversion, or prepayment (which
shall be a Business Day);
(c) when requesting a Floating Rate Loan,
be delivered to the Lender no later than 10:00
a.m., Central Standard or Daylight Savings
Time, as the case may be, on the Business Day
of the requested borrowing, conversion, or
prepayment;
(d) when requesting a LIBO Rate Loan, be
delivered to the Lender no later than 10:00
a.m., Central Standard or Daylight Savings
Time, as the case may be, two Business Days
preceding the requested borrowing, conversion,
or prepayment and designate the Interest
Period requested with respect to such Loan.
"Business Day" shall mean (a) for all purposes other
than as covered by clause (b) of this definition, a day
other than a Saturday, Sunday, legal holiday for
commercial banks under the laws of the State of Texas, or
any other day when banking is suspended in the State of
Texas, and (b) with respect to all requests, notices, and
determinations in connection with, and payments of
principal and interest on, LIBO Rate Loans, a day which
is a Business Day described in clause (a) of this
definition and which is a day for trading by and between
banks for Dollar deposits in the London interbank market.
"Cash Flow" shall mean, for any period, net income
of the Borrowers from operations for such period plus
depreciation, amortization, depletion, and other non-cash
expenses of the Borrowers for such period.
"Closing Date" shall mean the effective date of this
Agreement.
"Code" shall mean the United States Internal Revenue
Code of 1986, as amended from time to time.
"Collateral" shall mean the Mortgaged Properties and
any other Property now or at any time used or intended as
security for the payment or performance of all or any
portion of the Obligations.
"Commitment" shall mean the obligation of the
Lender, subject to applicable provisions of this
Agreement, to make Loans to or for the benefit of the
Borrower pursuant to Section 2.1 and to issue Letters of
Credit pursuant to Section 2.2.
"Commitment Amount" shall mean the aggregate amount
of the Borrowing Base for the Revolving Line of Credit
and the Reducing Revolving Line of Credit.
"Commitment Fee" shall mean each fee payable to the
Lender by the Borrower pursuant to Section 2.11.
"Commitment Period" shall mean the period from and
including the Closing Date to but not including the
Commitment Termination Date.
"Commitment Termination Date" shall mean three years
after the Closing Date.
"Commonly Controlled Entity" shall mean any Person
which is under common control with the Borrower within
the meaning of Section 4001 of ERISA.
"Compliance Certificate" shall mean each
certificate, substantially in the form attached hereto as
Exhibit III, executed by a Responsible Officer of the
Borrower and furnished to the Lender from time to time in
accordance with Section 5.2.
"Contingent Obligation" shall mean, as to any
Person, any obligation of such Person guaranteeing or in
effect guaranteeing any Indebtedness, leases, dividends,
or other obligations of any other Person (for purposes of
this definition, a "primary obligation") in any manner,
whether directly or indirectly, including, without
limitation, any obligation of such Person, regardless of
whether such obligation is contingent, (a) to purchase
any primary obligation or any Property constituting
direct or indirect security therefor, (b) to advance or
supply funds (i) for the purchase or payment of any
primary obligation, or (ii) to maintain working or equity
capital of any other Person in respect of any primary
obligation, or otherwise to maintain the net worth or
solvency of any other Person, (c) to purchase Property,
securities or services primarily for the purpose of
assuring the owner of any primary obligation of the
ability of the Person primarily liable for such primary
obligation to make payment thereof, or (d) otherwise to
assure or hold harmless the owner of any such primary
obligation against loss in respect thereof, with the
amount of any Contingent Obligation being deemed to be
equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof as
determined by such Person in good faith.
"Current Assets" shall mean all assets which would,
in accordance with GAAP, be included as current assets on
a consolidated balance sheet of the Borrower and its
Subsidiaries after eliminating any intercompany items, as
of the date of calculation, after deducting adequate
reserves in each case in which a reserve is proper in
accordance with GAAP plus an amount equal to the
Available Commitment.
"Current Liabilities" shall mean all liabilities
which would, in accordance with GAAP, be included as
current liabilities on a consolidated balance sheet of
the Borrower and its Subsidiaries as of the date of
calculation, but excluding current maturities in respect
of the Obligations.
"Default" shall mean any event or occurrence which
with the lapse of time or the giving of notice or both
would become an Event of Default.
"Default Rate" shall mean a per annum interest rate
equal to the Base Rate plus five percent (5%), but in no
event exceeding the Highest Lawful Rate.
"Dollars" and "$" shall mean dollars in lawful
currency of the United States of America.
"Engineering Fee" shall mean each fee payable to the
Lender by the Borrower pursuant to Section 2.12.
"Environmental Complaint" shall mean any written or
oral complaint, order, directive, claim, citation, notice
of environmental report or investigation, or other notice
by any Governmental Authority or any other Person with
respect to (a) air emissions, (b) spills, releases, or
discharges to soils, any improvements located thereon,
surface water, groundwater, or the sewer, septic, waste
treatment, storage, or disposal systems servicing any
Property of the Borrower, (c) solid or liquid waste
disposal, (d) the use, generation, storage,
transportation, or disposal of any Hazardous Substance,
or (e) other environmental, health, or safety matters
affecting any Property of the Borrower or the business
conducted thereon.
"Environmental Laws" shall mean (a) the following
federal laws as they may be cited, referenced, and
amended from time to time: the Clean Air Act, the Clean
Water Act, the Safe Drinking Water Act, the Comprehensive
Environmental Response, Compensation and Liability Act,
the Endangered Species Act, the Resource Conservation and
Recovery Act, the Occupational Safety and Health Act, the
Hazardous Materials Transportation Act, the Superfund
Amendments and Reauthorization Act, and the Toxic
Substances Control Act; (b) any and all equivalent
environmental statutes of any state in which Property of
the Borrower is situated, as they may be cited,
referenced and amended from time to time; (c) any rules
or regulations promulgated under or adopted pursuant to
the above federal and state laws; and (d) any other
equivalent federal, state, or local statute or any
requirement, rule, regulation, code, ordinance, or order
adopted pursuant thereto, including, without limitation,
those relating to the generation, transportation,
treatment, storage, recycling, disposal, handling, or
release of Hazardous Substances.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time, and
the regulations thereunder and interpretations thereof.
"Event of Default" shall mean any of the events
specified in Section 7.1.
"Existing Notes" shall mean the Notes, as such term
is defined in the Existing Credit Agreement, in existence
on the Closing Date immediately prior to the Assignment.
"Existing Loan Documents" shall mean the Loan
Documents, as such term is defined in the Existing Credit
Agreement, in existence on the Closing Date immediately
prior to the Assignment.
"Existing Security Instruments" shall mean the
Security Instruments, as such term is defined in the
Existing Credit Agreement.
"Facility Fee" shall mean the fee payable to the
Lender by the Borrower pursuant to Section 2.13.
"Federal Funds Rate" shall mean, for any day, the
rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) equal to the weighted average of the
rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal
funds brokers on such day, as published by the Federal
Reserve Bank of Dallas, Texas, on the Business Day next
succeeding such day, provided that (a) if the day for
which such rate is to be determined is not a Business
Day, the Federal Funds Rate for such day shall be such
rate on such transactions on the next preceding Business
Day as so published on the next succeeding Business Day,
and (b) if such rate is not so published for any day, the
Federal Funds Rate for such day shall be the average rate
charged to Lender on such day on such transactions as
determined by the Lender.
"Final Maturity" shall mean three years after the
Closing Date.
"Financial Statements" shall mean statements of the
financial condition of the Borrower as at the point in
time and for the period indicated and consisting of at
least a balance sheet and related statements of
operations, common stock and other stockholders' equity,
and cash flows for the Borrower and, when required by
applicable provisions of this Agreement to be audited,
accompanied by the unqualified certification of a
nationally-recognized firm of independent certified
public accountants or other independent certified public
accountants acceptable to the Lender and footnotes to any
of the foregoing, all of which shall be prepared in
accordance with GAAP consistently applied and in
comparative form with respect to the corresponding period
of the preceding fiscal period.
"Fixed Rate Loan" shall mean any LIBO Rate Loan.
"Floating Rate" shall mean, for the Reducing
Revolving Line of Credit, an interest rate per annum
equal to the Base Rate from time to time in effect plus
one-fourth percent (1/4%) when the Loan Balance is less
than 50% of the Borrowing Base for the Reducing Revolving
Line of Credit under this Agreement and one-half percent
(1/2%) when the Loan Balance is greater than 50% of the
Borrowing Base for the Reducing Revolving Line of Credit
under this Agreement and for the Revolving Line of
Credit, Base Rate plus one-half percent (1/2%), but in no
event exceeding the Highest Lawful Rate.
"Floating Rate Loan" shall mean any Loan and any
portion of the Loan Balance which the Borrower has
requested, in the initial Borrowing Request for such Loan
or a subsequent Borrowing Request for such portion of the
Loan Balance, bearing interest at the Floating Rate, or
which pursuant to the terms hereof is otherwise required
to bear interest at the Floating Rate.
"GAAP" shall mean generally accepted accounting
principles established by the Financial Accounting
Standards Board or the American Institute of Certified
Public Accountants and in effect in the United States
from time to time.
"Governmental Authority" shall mean any nation,
country, commonwealth, territory, government, state,
county, parish, municipality, or other political
subdivision and any entity exercising executive,
legislative, judicial, regulatory, or administrative
functions of or pertaining to government.
"Hazardous Substances" shall mean flammables,
explosives, radioactive materials, hazardous wastes,
asbestos, or any material containing asbestos,
polychlorinated biphenyls (PCBs), toxic substances or
related materials, petroleum, petroleum products,
associated oil or natural gas exploration, production,
and development wastes, or any substances defined as
"hazardous substances," "hazardous materials," "hazardous
wastes," or "toxic substances" under the Comprehensive
Environmental Response, Compensation and Liability Act,
as amended, the Superfund Amendments and Reauthorization
Act, as amended, the Hazardous Materials Transportation
Act, as amended, the Resource Conservation and Recovery
Act, as amended, the Toxic Substances Control Act, as
amended, or any other law or regulation now or hereafter
enacted or promulgated by any Governmental Authority.
"Highest Lawful Rate" shall mean the maximum non-usurious interest rate,
if any (or, if the context so requires, an amount calculated at such rate),
that at any time or from time to time may be contracted for, taken,
reserved, charged, or received under applicable laws of
the State of Texas or the United States of America,
whichever authorizes the greater rate, as such laws are
presently in effect or, to the extent allowed by
applicable law, as such laws may hereafter be in effect
and which allow a higher maximum non-usurious interest
rate than such laws now allow.
"Indebtedness" shall mean, as to any Person, without
duplication, (a) all liabilities (excluding reserves for
deferred income taxes, deferred compensation liabilities,
and other deferred liabilities and credits) which in
accordance with GAAP would be included in determining
total liabilities as shown on the liability side of a
balance sheet, (b) all obligations of such Person
evidenced by bonds, debentures, promissory notes, or
similar evidences of indebtedness, and (c) all other
indebtedness of such Person for borrowed money.
"Insolvency Proceeding" shall mean application
(whether voluntary or instituted by another Person) for
or the consent to the appointment of a receiver, trustee,
conservator, custodian, or liquidator of any Person or of
all or a substantial part of the Property of such Person,
or the filing of a petition (whether voluntary or
instituted by another Person) commencing a case under
Title 11 of the United States Code, seeking liquidation,
reorganization, or rearrangement or taking advantage of
any bankruptcy, insolvency, debtor's relief, or other
similar law of the United States, the State of Texas, or
any other jurisdiction.
"Insolvent" or "Insolvency" shall mean, with respect
to any Multiemployer Plan, that such Plan is insolvent
within the meaning of such term as used in Section 4245
of ERISA.
"Intellectual Property" shall mean patents, patent
applications, trademarks, tradenames, copyrights,
technology, know-how, and processes.
"Interest Period" shall mean, subject to the
limitations set forth in Section 2.21, with respect to
any LIBO Rate Loan, a period commencing on the date such
Loan is made or converted from a Loan of another type
pursuant to this Agreement or the last day of the next
preceding Interest Period with respect to such Loan and
ending on the numerically corresponding day in the
calendar month that is one, two, or three months
thereafter, as the Borrower may request in the Borrowing
Request for such Loan.
"Investment" in any Person shall mean any stock,
bond, note, or other evidence of Indebtedness, or any
other security (other than current trade and customer
accounts) of, investment or partnership interest in or
loan to, such Person.
"L/C Exposure" shall mean, at any time, the
aggregate maximum amount available to be drawn under
outstanding Letters of Credit at such time.
"Letter of Credit" shall mean any commercial letter
of credit issued by the Lender for the account of the
Borrower pursuant to Section 2.2.
"Letter of Credit Application" shall mean the
standard letter of credit application employed by the
Lender from time to time in connection with letters of
credit.
"Letter of Credit Fee" shall mean each fee payable
to the Lender by the Borrower pursuant to Section 2.14
upon or in connection with the issuance of a Letter of
Credit.
"LIBO Rate" shall mean, with respect to any Interest
Period for any LIBO Rate Loan, the lesser of (a) the rate
per annum (rounded upwards, if necessary, to the nearest
1/16 of 1%) equal to the average of the offered
quotations appearing on Telerate Page 3750 (or if such
Telerate Page shall not be available, any successor or
similar service selected by the Lender and the Borrower)
as the London interbank offered rate as of approximately
11:00 a.m., Central Standard or Daylight Savings Time, as
the case may be, on the day two Business Days prior to
the first day of such Interest Period for Dollar deposits
in an amount comparable to the principal amount of such
LIBO Rate Loan and having a term comparable to the
Interest Period for such LIBO Rate Loan, or (b) the
Highest Lawful Rate. If neither such Telerate Page 3750
nor any successor or similar service is available, the
term "LIBO Rate" shall mean, with respect to any Interest
Period for any LIBO Rate Loan, the lesser of (a) the rate
per annum (rounded upwards if necessary, to the nearest
1/16 of 1%) quoted by the Lender at approximately 11:00
a.m., London time (or as soon thereafter as practicable)
two Business Days prior to the first day of the Interest
Period for such LIBO Rate Loan for the offering by the
Lender to leading banks in the London interbank market of
Dollar deposits in an amount comparable to the principal
amount of such LIBO Rate Loan and having a term
comparable to the Interest Period for such LIBO Rate
Loan, or (b) the Highest Lawful Rate.
"LIBO Rate Loan" shall mean any Loan and any portion
of the Loan Balance which the Borrower has requested, in
the initial Borrowing Request for such Loan or a
subsequent Borrowing Request for such portion of the Loan
Balance, bear interest at the Adjusted LIBO Rate and
which is permitted by the terms hereof to bear interest
at the Adjusted LIBO Rate.
"Lien" shall mean any interest in Property securing
an obligation owed to, or a claim by, a Person other than
the owner of such Property, whether such interest is
based on common law, statute, or contract, and including,
but not limited to, the lien or security interest arising
from a mortgage, ship mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt, or
a lease, consignment, or bailment for security purposes
(other than true leases or true consignments), liens of
mechanics, materialmen, and artisans, maritime liens and
reservations, exceptions, encroachments, easements,
rights of way, covenants, conditions, restrictions,
leases, and other title exceptions and encumbrances
affecting Property which secure an obligation owed to, or
a claim by, a Person other than the owner of such
Property (for the purpose of this Agreement, the Borrower
shall be deemed to be the owner of any Property which it
has acquired or holds subject to a conditional sale
agreement, financing lease, or other arrangement pursuant
to which title to the Property has been retained by or
vested in some other Person for security purposes), and
the filing or recording of any financing statement or
other security instrument in any public office.
"Limitation Period" shall mean any period during
which any amount remains owing on the Note and interest
on such amount, calculated at the applicable interest
rate, plus any fees or other sums payable under any Loan
Document and deemed to be interest under applicable law,
would exceed the amount of interest which would accrue at
the Highest Lawful Rate.
"Loan" shall mean any loan made by the Lender to or
for the benefit of the Borrower pursuant to this
Agreement and any payment made by the Lender under a
Letter of Credit.
"Loan Balance" shall mean, at any time, the
outstanding principal balance of the Note at such time.
"Loan Documents" shall mean this Agreement, the
Note, the Letter of Credit Applications, the Letters of
Credit, the Security Instruments, and all other documents
and instruments now or hereafter delivered pursuant to
the terms of or in connection with this Agreement, the
Note, the Letter of Credit Applications, the Letters of
Credit, or the Security Instruments, and all renewals and
extensions of, amendments and supplements to, and
restatements of, any or all of the foregoing from time to
time in effect.
"Material Adverse Effect" shall mean (a) any
material adverse effect on the business, operations,
properties, condition (financial or otherwise), or
prospects of the Borrower, (b) any adverse effect upon
the business operations, properties, condition (financial
or otherwise), or prospects of the Borrower which
increases the risk that any of the Obligations will not
be repaid as and when due, or (c) any adverse effect upon
the Collateral.
"Mortgaged Properties" shall mean all pipeline
systems of the Borrower together with all contract rights
in connection with such pipeline systems subject to a
perfected first-priority Lien in favor of the Lender,
subject only to Permitted Liens, as security for the
Obligations.
"Multiemployer Plan" shall mean a Plan which is a
multiemployer plan as defined in Section 4001(a)(3) of
ERISA.
"Net Income" shall mean, for any period, the net
income of the Borrower for such period, determined in
accordance with GAAP.
"Note" shall mean the promissory note of the
Borrower, in the form attached hereto as Exhibit I,
together with all renewals, extensions for any period,
increases, and rearrangements thereof.
"Obligations" shall mean, without duplication, (a)
all Indebtedness evidenced by the Note, (b) the
Reimbursement Obligations, (c) the undrawn, amount of all
outstanding, unexpired Letters of Credit, (d) the
obligation of the Borrower for the payment of Commitment
Fees, Facility Fees, Letter of Credit Fees, and
Engineering Fees, and (e) all other obligations and
liabilities of the Borrower to the Lender, now existing
or hereafter incurred, under, arising out of or in
connection with any Loan Document, and to the extent that
any of the foregoing includes or refers to the payment of
amounts deemed or constituting interest, only so much
thereof as shall have accrued, been earned and which
remains unpaid at each relevant time of determination.
"PBGC" shall mean the Pension Benefit Guaranty
Corporation established pursuant to Subtitle A of Title
IV of ERISA or any entity succeeding to any or all of its
functions under ERISA.
"Permitted Liens" shall mean (a) Liens for taxes,
assessments, or other governmental charges or levies not
yet due or which (if foreclosure, distraint, sale, or
other similar proceedings shall not have been initiated)
are being contested in good faith by appropriate
proceedings, and such reserve as may be required by GAAP
shall have been made therefor, (b) Liens in connection
with workers' compensation, unemployment insurance or
other social security (other than Liens created by
Section 4068 of ERISA), old-age pension, or public
liability obligations which are not yet due or which are
being contested in good faith by appropriate proceedings,
and such reserve as may be required by GAAP shall have
been made therefor, (c) Liens in favor of vendors,
carriers, warehousemen, repairmen, mechanics, workmen,
materialmen, construction, or similar Liens arising by
operation of law in the ordinary course of business in
respect of obligations which are not yet due or which are
being contested in good faith by appropriate proceedings,
and such reserve as may be required by GAAP shall have
been made therefor, (d) Liens assigned by the Existing
Lender to the Lender pursuant to the Assignment, other
Liens in favor of the Lender and other Liens expressly
permitted under the Security Instruments, (e) Liens on
property securing purchase money debt permitted by
Section 6.1 incurred solely for the purpose of financing
the acquisition of such property, (f) Encumbrances
consisting of minor easements, zoning restrictions, or
other restrictions on the use of property that do not
(individually or in the aggregate) materially affect the
value of assets encumbered thereby or materially impair
the ability of the Borrower to use such assets in its
business, and none of which is violated in any material
respect by existing or proposed structures or land use,
and (g) Liens resulting from good faith deposits to
secure the performance of statutory obligations, surety
and appeal bonds, bids, or contracts, or leases made in
the ordinary course of business.
"Person" shall mean an individual, corporation,
partnership, trust, unincorporated organization,
government, any agency or political subdivision of any
government, or any other form of entity.
"Plan" shall mean, at any time, any employee benefit
plan which is covered by ERISA and in respect of which
the Borrower or any Commonly Controlled Entity is (or, if
such plan were terminated at such time, would under
Section 4069 of ERISA be deemed to be) an "employer" as
defined in Section 3(5) of ERISA.
"Principal Office" shall mean the principal office
of the Lender in Houston, Texas, presently located at 910
Travis, Houston, Texas 77002.
"Prohibited Transaction" shall have the meaning
assigned to such term in Section 4975 of the Code.
"Property" shall mean any interest in any kind of
property or asset, whether real, personal or mixed,
tangible or intangible.
"Reducing Revolving Line of Credit" shall mean the
line of credit with the initial Borrowing Base of
$9,000,000 and reducing at $107,150 per month beginning
October 1, 1996.
"Reorganization" shall mean, with respect to any
Multiemployer Plan, that such Plan is in reorganization
within the meaning of such term in Section 4241 of ERISA.
"Reportable Event" shall mean any of the events set
forth in Section 4043(b) of ERISA, other than those
events as to which the thirty-day notice period is waived
under subsections .13, .14, .16, .18, .19 or .20 of PBGC
Reg. 2615.
"Revolving Line of Credit" shall mean the line of
credit up to $1,500,000 which shall include up to
$1,000,000 of Letters of Credit.
"Regulation D" shall mean Regulation D of the Board
of Governors of the Federal Reserve System, as the same
may be amended or supplemented from time to time.
"Regulatory Change" shall mean the passage,
adoption, institution, or amendment of any federal,
state, local, or foreign Requirement of Law (including,
without limitation, Regulation D), or any interpretation,
directive, or request (whether or not having the force of
law) of any Governmental Authority or monetary authority
charged with the enforcement, interpretation, or
administration thereof, occurring after the Closing Date
and applying to a class of banks including the Lender or
its Applicable Lending Office.
"Reimbursement Obligation" shall mean the obligation
of the Borrower to provide to the Lender or reimburse the
Lender for any amounts payable, paid, or incurred by the
Lender with respect to Letters of Credit.
"Release of Hazardous Substances" shall mean any
emission, spill, release, disposal, or discharge, except
in accordance with a valid permit, license, certificate,
or approval of the relevant Governmental Authority, of
any Hazardous Substance into or upon (a) the air, (b)
soils or any improvements located thereon, (c) surface
water or groundwater, or (d) the sewer or septic system,
or the waste treatment, storage, or disposal system
servicing any Property of the Borrower .
"Requirement of Law" shall mean, as to any Person,
the certificate or articles of incorporation and by-laws
or other organizational or governing documents of such
Person, and any applicable law, treaty, ordinance, order,
judgment, rule, decree, regulation, or determination of
an arbitrator, court, or other Governmental Authority,
including, without limitation, rules, regulations,
orders, and requirements for permits, licenses,
registrations, approvals, or authorizations, in each case
as such now exist or may be hereafter amended and are
applicable to or binding upon such Person or any of its
Property or to which such Person or any of its Property
is subject.
"Responsible Officer" shall mean, as to any Person,
its President, Chief Executive Officer, Chief Financial
Officer or any Vice President.
"Security Instruments" shall mean the Existing
Security Instruments, the security instruments executed
and delivered in satisfaction of the condition set forth
in Section 3.1(g), and all other documents and
instruments at any time executed as security for all or
any portion of the Obligations, as such instruments may
be amended, restated, or supplemented from time to time.
"Single Employer Plan" shall mean any Plan which is
covered by Title IV of ERISA, but which is not a
Multiemployer Plan.
"Subsidiary" shall mean, as to any Person, a
corporation of which shares of stock having ordinary
voting power (other than stock having such power only by
reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of
such corporation are at the time owned, or the management
of which is otherwise controlled, directly or indirectly
through one or more intermediaries, or both, by such
Person.
"Superfund Site" shall mean those sites listed on
the Environmental Protection Agency National Priority
List and eligible for remedial action or any comparable
state registries or list in any state of the United
States.
"Tangible Net Worth" shall mean (a) total assets, as
would be reflected on a balance sheet of the Borrower
prepared on a consolidated basis and in accordance with
GAAP, exclusive of Intellectual Property, experimental or
organization expenses, franchises, licenses, permits, and
other intangible assets, treasury stock, unamortized
underwriters' debt discount and expenses, and goodwill
minus (b) total liabilities, as would be reflected on a
balance sheet of the Borrower prepared on a consolidated
basis and in accordance with GAAP.
"Transferee" shall mean any Person to which the
Lender has sold, assigned, transferred, or granted a
participation in any of the Obligations, as authorized
pursuant to Section 8.1, and any Person acquiring, by
purchase, assignment, transfer, or participation, from
any such purchaser, assignee, transferee, or participant,
any part of such Obligations.
"UCC" shall mean the Uniform Commercial Code as from
time to time in effect in the State of Texas.
1.3 Undefined Financial Accounting Terms. Undefined
financial accounting terms used in this Agreement shall be defined
according to GAAP at the time in effect.
1.4 References. References in this Agreement to
Exhibit, Article, or Section numbers shall be to Exhibits,
Articles, or Sections of this Agreement, unless expressly stated to
the contrary. References in this Agreement to "hereby," "herein,"
"hereinafter," "hereinabove," "hereinbelow," "hereof," "hereunder"
and words of similar import shall be to this Agreement in its
entirety and not only to the particular Exhibit, Article, or
Section in which such reference appears.
1.5 Articles and Sections. This Agreement, for
convenience only, has been divided into Articles and Sections; and
it is understood that the rights and other legal relations of the
parties hereto shall be determined from this instrument as an
entirety and without regard to the aforesaid division into Articles
and Sections and without regard to headings prefixed to such
Articles or Sections.
1.6 Number and Gender. Whenever the context requires,
reference herein made to the single number shall be understood to
include the plural; and likewise, the plural shall be understood to
include the singular. Definitions of terms defined in the singular
or plural shall be equally applicable to the plural or singular, as
the case may be, unless otherwise indicated. Words denoting sex
shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration
shall not exclude the general but shall be construed as cumulative.
1.7 Incorporation of Exhibits. The Exhibits attached to
this Agreement are incorporated herein and shall be considered a
part of this Agreement for all purposes.
ARTICLE II
TERMS OF FACILITY
2.1 Revolving Line of Credit and Reducing Revolving Line
of Credit. (a) Upon the terms and conditions (including, without
limitation, the right of the Lender to decline to make any Loan so
long as any Default or Event of Default exists) and relying on the
representations and warranties contained in this Agreement, the
Lender agrees, during the Commitment Period, to make Loans, in an
aggregate principal amount outstanding at any time up to the lesser
of $40,000,000 or the then existing Available Commitment, in
immediately available funds at the Applicable Lending Office or the
Principal Office, to or for the benefit of the Borrower, from time
to time on any Business Day designated by the Borrower following
receipt by the Lender of a Borrowing Request; provided, however, no
Loan shall exceed the then existing Available Commitment.
(b) Subject to the terms of this Agreement, during the
Commitment Period, the Borrower may borrow, repay, and reborrow and
convert Loans of one type or with one Interest Period into Loans of
another type or with a different Interest Period. Except for
prepayments made pursuant to Section 2.9, each borrowing,
conversion, and prepayment of principal of Loans shall be in an
amount at least equal to $25,000 for the Revolving Line of Credit
and $100,000 for the Reducing Revolving Line of Credit. Each
borrowing, prepayment, or conversion of or into a Loan of a
different type or, in the case of a Fixed Rate Loan, having a
different Interest Period, shall be deemed a separate borrowing,
conversion, and prepayment for purposes of the foregoing, one for
each type of Loan or Interest Period. Anything in this Agreement
to the contrary notwithstanding, the aggregate principal amount of
LIBO Rate Loans having the same Interest Period shall be at least
equal to $100,000; and if any LIBO Rate Loan would otherwise be in
a lesser principal amount for any period, such Loan shall be a
Floating Rate Loan during such period.
(c) The Loans shall be made and maintained at the
Applicable Lending Office or the Principal Office and shall be
evidenced by the Note.
2.2 Letter of Credit Facility. (a) Upon the terms and
conditions (including, without limitation, the right of the Lender
to decline to issue any Letter of Credit so long as any Default or
Event of Default exists) and relying on the representations and
warranties contained in this Agreement, the Lender agrees, during
the Commitment Period, to issue Letters of Credit following the
receipt not less than one Business Day prior to the requested date
for issuance of the relevant Letter of Credit, of a Letter of
Credit Application executed by the Borrower; provided, however, (a)
no Letter of Credit shall have an expiration date which is more
than 60 days after the issuance thereof or subsequent to the
Commitment Termination Date except up to $75,000 of appeal bonds
with maturities up to one year, and (b) the Lender shall not be
obligated to issue any Letter of Credit if (i) the face amount
thereof would exceed the Available Commitment, or (ii) after giving
effect to the issuance thereof, (A) the L/C Exposure, when added to
the Loan Balance then outstanding, would exceed the lesser of the
Commitment Amount or the Borrowing Base for the Revolving Line of
Credit then in effect, or (B) the L/C Exposure would exceed
$1,000,000.
(b) Should the Lender be called upon by the beneficiary
of any Letter of Credit to honor all or any portion of the
commitment thereunder, whether upon the presentation of drafts or
otherwise, such payment by the Lender on account of such Letter of
Credit shall be treated, for all purposes, as a Floating Rate Loan
and an advance against the Note.
2.3 Use of Loan Proceeds and Letters of Credit. (a)
Proceeds of all Loans shall be used solely for general corporate
purposes including working capital needs, to refinance existing
debt and for acquisitions and payment of shareholder loans not to
exceed $400,000 in the aggregate.
(b) Letters of Credit shall be used solely for gas
marketing activities on existing pipeline systems of the Borrower.
2.4 Interest. Subject to the terms of this Agreement
(including, without limitation, Section 2.17), interest on the
Loans shall accrue and be payable at a rate per annum equal to the
Floating Rate for each Floating Rate Loan and the Adjusted LIBO
Rate for each LIBO Rate Loan. Interest on all Floating Rate Loans
shall be computed on the basis of a year of 365 or 366 days, as the
case may be, and actual days elapsed (including the first day but
excluding the last day) during the period for which payable.
Interest on all LIBO Rate Loans shall be computed on the basis of
a year of 360 days, and actual days elapsed (including the first
day but excluding the last day) during the period for which
payable. Notwithstanding the foregoing, interest on past-due
principal and, to the extent permitted by applicable law, past-due
interest, shall accrue at the Default Rate, computed on the basis
of a year of 365 or 366 days, as the case may be, and actual days
elapsed (including the first day but excluding the last day) during
the period for which payable, and shall be payable upon demand by
the Lender at any time as to all or any portion of such interest.
In the event that the Borrower fails to select the duration of any
Interest Period for any Fixed Rate Loan within the time period and
otherwise as provided herein, such Loan (if outstanding as a Fixed
Rate Loan) will be automatically converted into a Floating Rate
Loan on the last day of the then current Interest Period for such
Loan or (if outstanding as a Floating Rate Loan) will remain as, or
(if not then outstanding) will be made as, a Floating Rate Loan.
Interest provided for herein shall be calculated on unpaid sums
actually advanced and outstanding pursuant to the terms of this
Agreement and only for the period from the date or dates of such
advances until repayment.
2.5 Repayment of Loans and Interest. Accrued and unpaid
interest on each outstanding Floating Rate Loan shall be due and
payable monthly commencing on the first day of September, 1996, and
continuing on the first day of each calendar month thereafter while
any Floating Rate Loan remains outstanding, the payment in each
instance to be the amount of interest which has accrued and remains
unpaid in respect of the relevant Loan. Accrued and unpaid
interest on each outstanding Fixed Rate Loan shall be due and
payable on the last day of the Interest Period for such Fixed Rate
Loan and, in the case of any Interest Period in excess of three
months, on the day of the third calendar month following the
commencement of such Interest Period corresponding to the day of
the calendar month on which such Interest Period commenced, the
payment in each instance to be the amount of interest which has
accrued and remains unpaid in respect of the relevant Loan. The
Loan Balance on the Revolving Line of Credit and the Reducing
Revolving Line of Credit, together with all accrued and unpaid
interest thereon, shall be due and payable at Final Maturity. At
the time of making each payment hereunder or under the Note, the
Borrower shall specify to the Lender the Loans or other amounts
payable by the Borrower hereunder to which such payment is to be
applied. In the event the Borrower fails to so specify, or if an
Event of Default has occurred and is continuing, the Lender may
apply such payment as it may elect in its sole discretion provided,
however, the Lender will apply the payments to the loans in the
descending order of interest costs.
2.6 Outstanding Amounts. The outstanding principal
balance of the Note reflected by the notations by the Lender on its
records be deemed rebuttably presumptive evidence of the principal
amount owing on the Note. The liability for payment of principal
and interest evidenced by the Note shall be limited to principal
amounts actually advanced and outstanding pursuant to this
Agreement and interest on such amounts calculated in accordance
with this Agreement.
2.7 Time, Place, and Method of Payments. All payments
required pursuant to this Agreement or the Note shall be made in
lawful money of the United States of America and in immediately
available funds, shall be deemed received by the Lender on the next
Business Day following receipt if such receipt is after 2:00 p.m.,
Central Standard or Daylight Savings Time, as the case may be, on
any Business Day, and shall be made at the Principal Office.
Except as provided to the contrary herein, if the due date of any
payment hereunder or under the Note would otherwise fall on a day
which is not a Business Day, such date shall be extended to the
next succeeding Business Day, and interest shall be payable for any
principal so extended for the period of such extension.
2.8 Borrowing Base Determinations. (a) The Borrowing
Base as of the Closing Date is acknowledged by the Borrower and the
Lender to be $1,326,000 for the Revolving Line of Credit and
$9,000,000 for the Reducing Revolving Line of Credit. The
Borrowing Base for the Revolving Line of Credit is limited to 80%
of accounts receivable of the Borrower not in excess of 90 days and
acceptable to the Lender in its sole discretion. The Borrowing
Base for the Reducing Revolving Line of Credit is determined by the
Lender in its sole discretion and based on contracts that are
acceptable to the Lender. Commencing on October 1, 1996, and
continuing thereafter on the first day of each calendar month
through the Commitment Termination Date, the amount of the
Borrowing Base on the Reducing Revolving Line of Credit shall be
reduced by $107,150, provided, however, that such amount is subject
to redetermination under Section 2.8(b).
(b) The Borrowing Base shall be redetermined monthly for
the Revolving Line of Credit and semi-annually beginning February
1, 1997, for the Reducing Revolving Line of Credit on the basis of
information supplied by the Borrower in compliance with the
provisions of this Agreement, including, without limitation,
engineering reports as available, contracts in connection with
Borrower's pipeline systems, and all other information available to
the Lender. Notwithstanding the foregoing, the Lender may at its
discretion redetermine the Borrowing Base and the amount by which
the Borrowing Base for the Reducing Revolving Line of Credit shall
be reduced each calendar month as set forth in Section 2.8 (a) at
any time and from time to time and the Borrower may request a
Borrowing Base review at any time.
(c) Upon each determination of the Borrowing Base by the
Lender, the Lender shall notify the Borrower orally (confirming
such notice promptly in writing) of such determination, and the
Borrowing Base and the amount by which the Borrowing Base on the
Reducing Revolving Line of Credit shall be reduced so communicated
to the Borrower shall become effective upon such oral notification
and shall remain in effect until the next subsequent determination
of the Borrowing Base and the amount by which the Borrowing Base on
the Reducing Revolving Line of Credit shall be reduced.
(d) The Borrowing Base shall represent the determination
by the Lender, in accordance with the applicable definitions and
provisions herein contained and its customary lending practices for
loans of this nature, of the value, for loan purposes, of the
Mortgaged Properties, subject, in the case of any increase in the
Borrowing Base, to the credit approval process of the Lender.
Furthermore, the Borrower acknowledges that the determination of
the Borrowing Base contains an equity cushion (market value in
excess of loan value), which is acknowledged by the Borrower to be
essential for the adequate protection of the Lender.
2.9 Mandatory Prepayments. If at any time the sum of
the Loan Balance and the L/C Exposure exceeds the lesser of the
Commitment Amount or the combined Borrowing Base on the Revolving
Line of Credit and on the Reducing Revolving Line of Credit then in
effect, the Borrower shall, within 30 days of notice from the
Lender of such occurrence, (a) prepay, or make arrangements
acceptable to the Lender for the prepayment of, the amount of such
excess for application on the Loan Balance, (b) provide additional
collateral, of character and value satisfactory to the Lender in
its sole discretion, to secure the Obligations by the execution and
delivery to the Lender of security instruments in form and
substance satisfactory to the Lender, or (c) effect any combination
of the alternatives described in clauses (a) and (b) of this
Section and acceptable to the Lender in its sole discretion. In
the event that a mandatory prepayment is required under this
Section and the Loan Balance is less than the amount required to be
prepaid, the Borrower shall repay the entire Loan Balance and, in
accordance with the provisions of the relevant Letter of Credit
Applications executed by the Borrower or otherwise to the
satisfaction of the Lender, deposit with the Lender, as additional
collateral securing the Obligations, an amount of cash, in
immediately available funds, equal to the L/C Exposure minus the
lesser of the Commitment Amount or the Borrowing Base. The cash
deposited with the Lender in satisfaction of the requirement
provided in this Section may be invested, at the sole discretion of
the Lender and then only at the express direction of the Borrower
as to investment vehicle and maturity (which shall be no later than
the latest expiry date of any then outstanding Letter of Credit),
for the account of the Borrower in cash or cash equivalent
investments offered by or through the Lender.
2.10 Voluntary Prepayments and Conversions of Loans.
Subject to applicable provisions of this Agreement, the Borrower
shall have the right at any time or from time to time to prepay
Loans and to convert Loans of one type or with one Interest Period
into Loans of another type or with a different Interest Period;
provided, however, that (a) the Borrower shall give the Lender
notice of each such prepayment or conversion of all or any portion
of a Fixed Rate Loan no less than two Business Days prior to
prepayment or conversion, (b) any Fixed Rate Loan may be prepaid or
converted only on the last day of an Interest Period for such Loan,
(c) the Borrower shall pay all accrued and unpaid interest on the
amounts prepaid or converted, and (d) no such prepayment or
conversion shall serve to postpone the repayment when due of any
Obligation.
2.11 Commitment Fee. In addition to interest on the Note
as provided herein and the Engineering Fees, Facility Fees, and
Letter of Credit Fees payable hereunder and to compensate the
Lender for maintaining funds available, the Borrower shall pay to
the Lender, in immediately available funds, on the 1st day of
October, 1996, and on the first day of each third calendar month
thereafter during the Commitment Period, a fee in the amount of
three-eighths percent (3/8%) per annum, calculated on the basis of
a year of 365 or 366 days, as the case may be, and actual days
elapsed (including the first day but excluding the last day), on
the average daily amount of the Available Commitment during the
preceding quarterly period.
2.12 Engineering Fee. In addition to interest on the
Note as provided herein and the Commitment Fees, Facility Fees, and
Letter of Credit Fees payable hereunder and to compensate the
Lender for the costs of evaluating the Mortgaged Properties, the
Borrower shall pay to the Lender, in immediately available funds,
on the date of each redetermination of the Borrowing Base during
the term hereof, an engineering fee in the amount of $5,000. The
initial Engineering Fee of $5,000 was paid upon the acceptance of
the proposal of terms.
2.13 Facility Fee. In addition to interest on the Note
as provided herein and Commitment Fees, Engineering Fees, and
Letter of Credit Fees payable hereunder and to compensate the
Lender for the costs of the extension of credit hereunder, the
Borrower shall pay to the Lender on the Closing Date, in
immediately available funds, a facility fee in the amount of
$15,000 for the Revolving Line of Credit and 1% of any increase
above $1,500,000 for the Revolving Line of Credit and 1% for the
initial borrowing under the Reducing Revolving Line of Credit and
1% for any incremental borrowing thereafter (not to include amounts
paid and reborrowed) plus 1% on any Borrowing Base increase above
$9,000,000 for the Reducing Revolving Line of Credit and payable
when each borrowing occurs not to include amounts paid or
reborrowed.
2.14 Letter of Credit Fee. In addition to interest on
the Note as provided herein and Commitment Fees and Facility Fees
payable hereunder, the Borrower agrees to pay to the Lender, on the
date of issuance of each Letter of Credit, a fee equal to one
percent (1%) per annum, calculated on the basis of a year of 365 or
366 days, as the case may be, and actual days elapsed (including
the first day but excluding the last day), on the face amount of
such Letter of Credit during the period for which such Letter of
Credit is issued; provided, however, in the event such Letter of
Credit is canceled prior to its original expiry date or a payment
is made by the Lender with respect to such Letter of Credit, the
Lender shall, within ten days after such cancellation or the making
of such payment, rebate to the Borrower the unearned portion of
such fee. The Borrower also agrees to pay to the Lender on demand
its customary letter of credit transactional fees, including,
without limitation, amendment fees, payable with respect to each
Letter of Credit.
2.15 Loans to Satisfy Obligations of Borrower. The
Lender may, but shall not be obligated to, make Loans for the
benefit of the Borrower and apply proceeds thereof to the
satisfaction of any condition, warranty, representation, or
covenant of the Borrower contained in this Agreement or any other
Loan Document. Any such Loan shall be evidenced by the Note and
shall be made as a Floating Rate Loan.
2.16 Security Interest in Accounts; Right of Offset. As
security for the payment and performance of the Obligations, the
Borrower hereby transfers, assigns, and pledges to the Lender and
grants to the Lender a security interest in all funds of the
Borrower now or hereafter or from time to time on deposit with the
Lender, with such interest of the Lender to be retransferred,
reassigned, and/or released by the Lender, as the case may be, at
the expense of the Borrower upon payment in full and complete
performance by the Borrower of all Obligations. All remedies as
secured party or assignee of such funds shall be exercisable by the
Lender upon the occurrence of any Event of Default, regardless of
whether the exercise of any such remedy would result in any penalty
or loss of interest or profit with respect to any withdrawal of
funds deposited in a time deposit account prior to the maturity
thereof. Furthermore, the Borrower hereby grants to the Lender the
right, exercisable at such time as any Obligation shall mature,
whether by acceleration of maturity or otherwise, of offset or
banker's lien against all funds of the Borrower now or hereafter or
from time to time on deposit with the Lender, regardless of whether
the exercise of any such remedy would result in any penalty or loss
of interest or profit with respect to any withdrawal of funds
deposited in a time deposit account prior to the maturity thereof.
2.17 General Provisions Relating to Interest. (a) It is
the intention of the parties hereto to comply strictly with the
usury laws of the State of Texas and the United States of America.
In this connection, there shall never be collected, charged, or
received on the sums advanced hereunder interest in excess of that
which would accrue at the Highest Lawful Rate. For purposes of
Article 5069-1.04, Vernon's Texas Civil Statutes, as amended, the
Borrower agrees that the Highest Lawful Rate shall be the
"indicated (weekly) rate ceiling" as defined in such Article,
provided that the Lender may also rely, to the extent permitted by
applicable laws of the State of Texas or the United States of
America, on alternative maximum rates of interest under other laws
of the State of Texas or the United States of America applicable to
the Lender, if greater.
(b) Notwithstanding anything herein or in the Note to the
contrary, during any Limitation Period, the interest rate to be
charged on amounts evidenced by the Note shall be the Highest
Lawful Rate, and the obligation, if any, of the Borrower for the
payment of fees or other charges deemed to be interest under
applicable law shall be suspended. During any period or periods of
time following a Limitation Period, to the extent permitted by
applicable laws of the State of Texas or the United States of
America, the interest rate to be charged hereunder shall remain at
the Highest Lawful Rate until such time as there has been paid to
the Lender (i) the amount of interest in excess of that accruing at
the Highest Lawful Rate that the Lender would have received during
the Limitation Period had the interest rate remained at the
otherwise applicable rate, and (ii) all interest and fees otherwise
payable to the Lender but for the effect of such Limitation Period.
(c) If, under any circumstances, the aggregate amounts
paid on the Note or under this Agreement or any other Loan Document
include amounts which by law are deemed interest and which would
exceed the amount permitted if the Highest Lawful Rate were in
effect, the Borrower stipulates that such payment and collection
will have been and will be deemed to have been, to the extent
permitted by applicable laws of the State of Texas or the United
States of America, the result of mathematical error on the part of
the Borrower and the Lender; and the Lender shall promptly refund
the amount of such excess (to the extent only of such interest
payments in excess of that which would have accrued and been
payable on the basis of the Highest Lawful Rate) upon discovery of
such error by the Lender or notice thereof from the Borrower. In
the event that the maturity of any Obligation is accelerated, by
reason of an election by the Lender or otherwise, or in the event
of any required or permitted prepayment, then the consideration
constituting interest under applicable laws may never exceed the
Highest Lawful Rate; and excess amounts paid which by law are
deemed interest, if any, shall be credited by the Lender on the
principal amount of the Obligations, or if the principal amount of
the Obligations shall have been paid in full, refunded to the
Borrower.
(d) All sums paid, or agreed to be paid, to the Lender
for the use, forbearance and detention of the proceeds of any
advance hereunder shall, to the extent permitted by applicable law,
be amortized, prorated, allocated, and spread throughout the full
term hereof until paid in full so that the actual rate of interest
is uniform but does not exceed the Highest Lawful Rate throughout
the full term hereof.
2.18 Limitation on Types of Loans. Anything herein to
the contrary notwithstanding, no more than four separate Loans
shall be outstanding at any one time, with, for purposes of this
Section, all Floating Rate Loans constituting one Loan. Anything
herein to the contrary notwithstanding, if, on or prior to the
determination of any interest rate for any LIBO Rate Loan for any
Interest Period therefor:
(a) the Lender determines (which determination shall
be conclusive) that quotations of interest rates for the
deposits referred to in the definition of "LIBO Rate" in
Section 1.2 are not being provided in the relevant
amounts or for the relevant maturities for purposes of
determining the rate of interest for such Loan as
provided in this Agreement; or
(b) the Lender determines (which determination shall
be conclusive) that the rates of interest referred to in
the definition of "LIBO Rate" in Section 1.2 upon the
basis of which the rate of interest for such Loan for
such Interest Period is to be determined do not
accurately reflect the cost to the Lender of making or
maintaining such Loan for such Interest Period,
then the Lender shall give the Borrower prompt notice thereof; and
so long as such condition remains in effect, the Lender shall be
under no obligation to make LIBO Rate Loans or to convert Loans of
any other type into LIBO Rate Loans, and the Borrower shall, on the
last day of the then current Interest Period for each outstanding
LIBO Rate Loan, either prepay such LIBO Rate Loan or convert such
Loan into another type of Loan in accordance with Section 2.10.
Before giving such notice pursuant to this Section, the Lender will
designate a different available Applicable Lending Office for LIBO
Rate Loans or take such other action as the Borrower may request if
such designation or action will avoid the need to suspend the
obligation of the Lender to make LIBO Rate Loans hereunder and will
not, in the opinion of the Lender, be disadvantageous to the
Lender.
2.19 Illegality. Notwithstanding any other provision of
this Agreement, in the event that it becomes unlawful for the
Lender or its Applicable Lending Office to (a) honor its obligation
to make any type of Fixed Rate Loans hereunder, or (b) maintain any
type of Fixed Rate Loans hereunder, then the Lender shall promptly
notify the Borrower thereof; and the obligation of the Lender
hereunder to make such type of Fixed Rate Loans and to convert
other types of Loans into Fixed Rate Loans of such type shall be
suspended until such time as the Lender may again make and maintain
Fixed Rate Loans of such type, and the outstanding Fixed Rate Loans
of such type shall be converted into Floating Rate Loans in
accordance with Section 2.10. Before giving such notice pursuant
to this Section, the Lender will designate a different available
Applicable Lending Office for Fixed Rate Loans or take such other
action as the Borrower may request if such designation or action
will avoid the need to suspend the obligation of the Lender to make
Fixed Rate Loans and will not, in the opinion of the Lender, be
disadvantageous to the Lender.
2.20 Regulatory Change. In the event that by reason of
any Regulatory Change, the Lender (a) incurs Additional Costs based
on or measured by the excess above a specified level of the amount
of a category of deposits or other liabilities of the Lender which
includes deposits by reference to which the interest rate on any
Fixed Rate Loan is determined as provided in this Agreement or a
category of extensions of credit or other assets of such Lender
which includes any Fixed Rate Loan, or (b) becomes subject to
restrictions on the amount of such a category of liabilities or
assets which it may hold, then, at the election of the Lender with
notice to the Borrower, the obligation of the Lender to make such
Fixed Rate Loans and to convert Floating Rate Loans into such Fixed
Rate Loans shall be suspended until such time as such Regulatory
Change ceases to be in effect, and all such outstanding Fixed Rate
Loans shall be converted into Floating Rate Loans in accordance
with Section 2.10.
2.21 Limitations on Interest Periods. Each Interest
Period selected by the Borrower (a) which commences on the last
Business Day of a calendar month (or, with respect to any LIBO Rate
Loan, any day for which there is no numerically corresponding day
in the appropriate subsequent calendar month) shall end on the last
Business Day of the appropriate subsequent calendar month, (b)
which would otherwise end on a day which is not a Business Day
shall end on the next succeeding Business Day (or, if such next
succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day), (c) which would
otherwise commence before and end after Final Maturity shall end on
Final Maturity, and (d) shall have a duration of one month, as to
any LIBO Rate Loan, and, if any Interest Period would otherwise be
a shorter period, the relevant Loan shall be a Floating Rate Loan
during such period.
ARTICLE III
CONDITIONS
The obligations of the Lender to enter into this
Agreement and to make Loans and issue Letters of Credit are subject
to the satisfaction of the following conditions precedent:
3.1 Receipt of Loan Documents and Other Items. The
Lender shall have no obligation under this Agreement unless and
until all matters incident to the consummation of the transactions
contemplated herein, shall be satisfactory to the Lender, and the
Lender shall have received, reviewed, and approved the following
documents and other items, appropriately executed when necessary
and, where applicable, acknowledged by one or more authorized
officers of the Borrower, all in form and substance satisfactory to
the Lender and dated, where applicable, of even date herewith or a
date prior thereto and acceptable to the Lender:
(a) multiple counterparts of this Agreement and the
Assignment, as requested by the Lender;
(b) the Existing Note, endorsed payable to the Lender;
(c) the Note;
(d) copies of the Articles of Incorporation or
Certificate of Incorporation and all amendments thereto
and the bylaws and all amendments thereto of the Borrower
accompanied by a certificate issued by the secretary or
an assistant secretary of the Borrower to the effect that
each such copy is correct and complete;
(e) certificates of incumbency and signatures of all
officers of the Borrower who are authorized to execute
Loan Documents on behalf of the Borrower, each such
certificate being executed by the secretary or an
assistant secretary of the Borrower;
(f) copies of corporate resolutions approving the
Loan Documents and authorizing the transactions
contemplated herein and therein, duly adopted by the
board of directors of the Borrower accompanied by
certificates of the secretary or an assistant secretary
of the Borrower to the effect that such copies are true
and correct copies of resolutions duly adopted at a
meeting or by unanimous consent of the board of directors
of the Borrower and that such resolutions constitute all
the resolutions adopted with respect to such
transactions, have not been amended, modified, or revoked
in any respect, and are in full force and effect as of
the date of such certificate;
(g) multiple counterparts, as requested by the
Lender, of the following documents ratifying, amending,
and/or restating the Existing Security Instruments and
otherwise establishing Liens in favor of the Lender in
and to the Collateral:
(i) Ratification of and Amendment to
Security Agreement covering accounts,
inventory, equipment, chattel paper,
documents, instruments, general intangibles
and other property of Magnolia;
(ii) Ratification of and Amendment to
Mortgage, Assignment of Proceeds, Security
Agreement and Financing Statement from
Magnolia covering certain designated pipelines
of Magnolia situated in the State of Alabama
and covered by certain of the Existing
Security Instruments;
(iii) Mortgage, Deed of Trust, Indenture,
Security Agreement and Financing Statement
from Midcoast and H&W covering certain
designated pipelines of Midcoast and H&W
situated in the States of Alabama, Kansas,
Mississippi, New York, Oklahoma and Texas, and
all improvements, personal property, and
fixtures related thereto;
(iv) Act of Mortgage and Security
Agreement from Midcoast covering certain
designated pipelines of Midcoast situated in
the State of Louisiana;
(v) Credit Line Mortgage, Security
Agreement and Financing Statement from
Midcoast and H&W covering certain designated
pipelines of Midcoast situated in the State of
New York, and all improvements, personal
property, and fixtures related thereto;
(vi) Deed of Trust, Security Agreement
and Financing Statement from Midcoast and H&W
covering certain designated pipelines of
Midcoast situated in the State of Tennessee,
and all improvements, personal property, and
fixtures related thereto;
(vii) Financing Statements from Midcoast,
as debtors, constituent to the instruments
described in clauses (i) and (ii) above; and
(viii) Security Agreement from Midcoast in
favor of Lender covering all accounts, and
general intangibles, together with Financing
Statements constituent thereto;
(h) audited Financial Statements of the Borrower as
of December 31, 1995;
(i) certificates dated as of a recent date from the
Secretary of State or other appropriate Governmental
Authority evidencing the existence or qualification and
good standing of the Borrower in its jurisdiction of
incorporation and in any other jurisdictions where any
Borrower does business other than those jurisdictions
where failure to qualify would not have a Material
Adverse Effect;
(j) results of searches of the UCC Records of the
Secretary of State of the States of Texas, Louisiana and
Alabama from a source acceptable to the Lender and
reflecting no Liens against any of the Collateral as to
which perfection of a Lien is accomplished by the filing
of a financing statement other than in favor of the
Lender;
(k) the opinion of Porter & Hedges, L.L.P., counsel
to the Borrower, in the form attached hereto as Exhibit
IV, with such changes thereto as may be approved by the
Lender;
(l) certificates evidencing the insurance coverage
required pursuant to Section 5.16; and
(m) such other agreements, documents, instruments,
opinions, certificates, waivers, consents, and evidence
as the Lender may reasonably request.
3.2 Each Loan and Letter of Credit. In addition to the
conditions precedent stated elsewhere herein, the Lender shall not
be obligated to make any Loan or issue any Letter of Credit unless:
(a) the Borrower shall have delivered to the Lender
a Borrowing Request at least the requisite time prior to
the requested date for the relevant Loan, or a Letter of
Credit Application at least one Business Day prior to the
requested issuance date for the relevant Letter of
Credit; and each statement or certification made in such
Borrowing Request or Letter of Credit Application, as the
case may be, shall be true and correct in all material
respects on the requested date for such Loan or the
issuance of such Letter of Credit;
(b) no Event of Default or Default shall exist or
will occur as a result of the making of the requested
Loan or the issuance of the requested Letter of Credit;
(c) if requested by the Lender, the Borrower shall
have delivered evidence satisfactory to the Lender
substantiating any of the matters contained in this
Agreement which are necessary to enable the Borrower to
qualify for such Loan or the issuance of such Letter of
Credit;
(d) the Lender shall have received, reviewed, and
approved such additional documents and items as described
in Section 3.1 as may be requested by the Lender with
respect to such Loan or Letter of Credit;
(e) no event shall have occurred which, in the
reasonable opinion of the Lender, could have a Material
Adverse Effect;
(f) each of the representations and warranties
contained in this Agreement shall be true and correct and
shall be deemed to be repeated by the Borrower as if made
on the requested date for such Loan or the issuance of
such Letter of Credit;
(g) all of the Security Instruments shall be in full
force and effect and provide to the Lender the security
intended thereby;
(h) neither the consummation of the transactions
contemplated hereby nor the making of such Loan the
issuance of such Letter of Credit shall contravene,
violate, or conflict with any Requirement of Law;
(i) the Borrower shall hold full legal title to the
Collateral and be the sole beneficial owner thereof;
(j) the Lender shall have received the payment of
all Engineering Fees, Facility Fees, Letter of Credit
Fees, and other fees payable to the Lender hereunder and
reimbursement from the Borrower, or special legal counsel
for the Lender shall have received payment from the
Borrower, for (i) all reasonable fees and expenses of
counsel to the Lender for which the Borrower is
responsible pursuant to applicable provisions of this
Agreement and for which invoices have been presented as
of or prior to the date of the relevant Loan or Letter of
Credit Application, and (ii) estimated fees charged by
filing officers and other public officials incurred or to
be incurred in connection with the filing and recordation
of any Security Instruments, for which invoices have been
presented as of or prior to the date of the requested
Loan or Letter of Credit Application; and
(k) all matters incident to the consummation of the
transactions hereby contemplated shall be satisfactory to
the Lender.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement and to
make the Loans and issue Letters of Credit, the Borrower represents
and warrants to the Lender (which representations and warranties
shall survive the delivery of the Note) that:
4.1 Due Authorization. The execution and delivery by
the Borrower of this Agreement and the borrowings hereunder, the
execution and delivery by the Borrower of the Note, the repayment
of the Note and interest and fees provided for in the Note and this
Agreement, the execution and delivery of the Security Instruments
by the Borrower and the performance of all obligations of the
Borrower under the Loan Documents are within the power of the
Borrower, have been duly authorized by all necessary corporate
action by the Borrower, and do not and will not (a) require the
consent of any Governmental Authority, (b) contravene or conflict
with any Requirement of Law, (c) contravene or conflict with any
indenture, instrument, or other agreement to which the Borrower is
a party or by which any Property of the Borrower may be presently
bound or encumbered, or (d) result in or require the creation or
imposition of any Lien in, upon or of any Property of the Borrower
under any such indenture, instrument, or other agreement, other
than the Loan Documents.
4.2 Corporate Existence. The Borrower is a corporation
duly organized, legally existing, and in good standing under the
laws of its state of incorporation and is duly qualified as a
foreign corporation and is in good standing in all jurisdictions
wherein the ownership of Property or the operation of its business
necessitates same, other than those jurisdictions wherein the
failure to so qualify will not have a Material Adverse Effect.
4.3 Valid and Binding Obligations. All Loan Documents,
when duly executed and delivered by the Borrower, will be the
legal, valid, and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms.
4.4 Security Instruments. The provisions of each
Security Instrument are effective to create in favor of the Lender,
a legal, valid, and enforceable Lien in all right, title, and
interest of the Borrower in the Collateral described therein, which
Liens, assuming the accomplishment of recording and filing in
accordance with applicable laws prior to the intervention of rights
of other Persons, shall constitute fully perfected first-priority
Liens on all right, title, and interest of the Borrower in the
Collateral described therein.
4.5 Title to Assets. The Borrower has good and
indefeasible title to all of its Properties, free and clear of all
Liens except Permitted Liens.
4.6 Scope and Accuracy of Financial Statements. The
Financial Statements of the Borrower as of December 31, 1995,
present fairly the financial position and results of operations and
cash flows of the Borrower in accordance with GAAP as at the
relevant point in time or for the period indicated, as applicable.
No event or circumstance has occurred since December 31, 1995,
which could reasonably be expected to have a Material Adverse
Effect.
4.7 No Material Misstatements. No information, exhibit,
statement, or report furnished to the Lender by or at the direction
of the Borrower in connection with this Agreement contains any
material misstatement of fact or omits to state a material fact or
any fact necessary to make the statements contained therein not
misleading as of the date made or deemed made.
4.8 Liabilities, Litigation, and Restrictions. Other
than as listed under the heading "Liabilities" on Exhibit V
attached hereto, the Borrower has no liabilities, direct, or
contingent, which may materially and adversely affect its business
or operations or its ownership of the Collateral. Except as set
forth under the heading "Litigation" on Exhibit V hereto, no
litigation or other action of any nature affecting the Borrower is
pending before any Governmental Authority or, to the best knowledge
of the Borrower, threatened against or affecting the Borrower which
might reasonably be expected to result in any impairment of its
ownership of any Collateral or have a Material Adverse Effect. To
the best knowledge of the Borrower, after due inquiry, no unusual
or unduly burdensome restriction, restraint or hazard exists by
contract, Requirement of Law, or otherwise relative to the business
or operations of the Borrower or the ownership and operation of the
Collateral other than such as relate generally to Persons engaged
in business activities similar to those conducted by the Borrower.
4.9 Authorizations; Consents. Except as expressly
contemplated by this Agreement, no authorization, consent,
approval, exemption, franchise, permit, or license of, or filing
with, any Governmental Authority or any other Person is required to
authorize or is otherwise required in connection with the valid
execution and delivery by the Borrower of the Loan Documents or any
instrument contemplated hereby, the repayment by the Borrower of
the Note and interest and fees provided in the Note and this
Agreement, or the performance by the Borrower of the Obligations.
4.10 Compliance with Laws. The Borrower and its
Property, including, without limitation, the Mortgaged Property,
are in compliance with all applicable Requirements of Law,
including, without limitation, Environmental Laws, the Natural Gas
Policy Act of 1978, as amended, and ERISA, except to the extent
non-compliance with any such Requirements of Law could not
reasonably be expected to have a Material Adverse Effect.
4.11 ERISA. No Reportable Event has occurred with
respect to any Single Employer Plan, and each Single Employer Plan
has complied with and been administered in all material respects in
accordance with applicable provisions of ERISA and the Code. To
the best knowledge of the Borrower, (a) no Reportable Event has
occurred with respect to any Multiemployer Plan, and (b) each
Multiemployer Plan has complied with and been administered in all
material respects with applicable provisions of ERISA and the Code.
The present value of all benefits vested under each Single Employer
Plan maintained by the Borrower or any Commonly Controlled Entity
(based on the assumptions used to fund such Plan) did not, as of
the last annual valuation date applicable thereto, exceed the value
of the assets of such Plan allocable to such vested benefits.
Neither the Borrower nor any Commonly Controlled Entity has had a
complete or partial withdrawal from any Multiemployer Plan for
which there is any withdrawal liability. As of the most recent
valuation date applicable to any Multiemployer Plan, neither the
Borrower nor any Commonly Controlled Entity would become subject to
any liability under ERISA if the Borrower or such Commonly
Controlled Entity were to withdraw completely from such
Multiemployer Plan. Neither the Borrower nor any Commonly
Controlled Entity has received notice that any Multiemployer Plan
is Insolvent or in Reorganization. To the best knowledge of the
Borrower, no such Insolvency or Reorganization is reasonably likely
to occur. Based upon GAAP existing as of the date of this
Agreement and current factual circumstances, the Borrower has no
reason to believe that the annual cost during the term of this
Agreement to the Borrower and all Commonly Controlled Entities for
post-retirement benefits to be provided to the current and former
employees of the Borrower and all Commonly Controlled Entities
under Plans which are welfare benefit plans (as defined in Section
3(1) of ERISA) will, in the aggregate, have a Material Adverse
Effect.
4.12 Environmental Laws. To the best knowledge and
belief of the Borrower, except as would not have a Material Adverse
Effect, or as described on Exhibit V under the heading
"Environmental Matters:"
(a) no Property of the Borrower is currently on or
has ever been on, or is adjacent to any Property which is
on or has ever been on, any federal or state list of
Superfund Sites;
(b) no Hazardous Substances have been generated,
transported, and/or disposed of by the Borrower at a site
which was, at the time of such generation,
transportation, and/or disposal, or has since become, a
Superfund Site;
(c) except in accordance with applicable
Requirements of Law or the terms of a valid permit,
license, certificate, or approval of the relevant
Governmental Authority, no Release of Hazardous
Substances by the Borrower or from, affecting, or related
to any Property of the Borrower or adjacent to any
Property of the Borrower has occurred; and
(d) no Environmental Complaint has been received by
the Borrower.
4.13 Compliance with Federal Reserve Regulations. No
transaction contemplated by the Loan Documents is in violation of
any regulations promulgated by the Board of Governors of the
Federal Reserve System, including, without limitation, Regulations
G, T, U, or X.
4.14 Investment Company Act Compliance. The Borrower is
not, nor is the Borrower directly or indirectly controlled by or
acting on behalf of any Person which is, an "investment company" or
an "affiliated person" of an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
4.15 Public Utility Holding Company Act Compliance. The
Borrower is not a "holding company," or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
4.16 Proper Filing of Tax Returns; Payment of Taxes
Due. The Borrower has duly and properly filed its United States
income tax return and all other tax returns which are required to
be filed and has paid all taxes due except such as are being
contested in good faith and as to which adequate provisions and
disclosures have been made. The respective charges and reserves on
the books of the Borrower with respect to taxes and other
governmental charges are adequate.
4.17 Refunds. Except as described on Exhibit V under the
heading "Refunds," no orders of, proceedings pending before, or
other requirements of, the Federal Energy Regulatory Commission,
the Texas Railroad Commission, or any Governmental Authority exist
which could result in the Borrower being required to refund any
material portion of the proceeds received or to be received from
the sale of hydrocarbons constituting part of the Mortgaged
Property and such refund would have a Material Adverse Effect.
4.18 Intellectual Property. The Borrower owns or is
licensed to use all Intellectual Property necessary to conduct all
business material to its condition (financial or otherwise),
business, or operations as such business is currently conducted.
No claim has been asserted or is pending by any Person with the
respect to the use of any such Intellectual Property or challenging
or questioning the validity or effectiveness of any such
Intellectual Property that would have a Material Adverse Effect;
and the Borrower knows of no valid basis for any such claim. The
use of such Intellectual Property by the Borrower does not infringe
on the rights of any Person, except for such claims and
infringements as do not, in the aggregate, give rise to any
material liability on the part of the Borrower.
4.19 Casualties or Taking of Property. Except as
disclosed on Exhibit V under the heading "Casualties," since
December 31, 1995, neither the business nor any Property of the
Borrower has been materially adversely affected as a result of any
fire, explosion, earthquake, flood, drought, windstorm, accident,
strike or other labor disturbance, embargo, requisition or taking
of Property, or cancellation of contracts, permits, or concessions
by any Governmental Authority, riot, activities of armed forces, or
acts of God.
4.20 Locations of Borrower. The principal place of
business and chief executive office of the Borrower is located at
the address of the Borrower set forth in Section 8.3 or at such
other location as the Borrower may have, by proper written notice
hereunder, advised the Lender, provided that such other location is
within a state in which appropriate financing statements from the
Borrower in favor of the Lender have been filed.
4.21 Subsidiaries. Midcoast Energy Resources, Inc. has
no Subsidiaries except those described on Exhibit V under the
heading "Subsidiaries".
ARTICLE V
AFFIRMATIVE COVENANTS
So long as any Obligation remains outstanding or unpaid
or any Commitment exists, the Borrower shall:
5.1 Maintenance and Access to Records. Keep adequate
records, in accordance with GAAP, of all its transactions so that
at any time, and from time to time, its true and complete financial
condition may be readily determined, and promptly following the
reasonable request of the Lender, make such records available for
inspection by the Lender and, at the expense of the Borrower, allow
the Lender to make and take away copies thereof.
5.2 Quarterly Financial Statements; Compliance
Certificates. Deliver to the Lender, (a) on or before the 90th day
after the close of each of the first three quarterly periods of
each fiscal year of the Borrower, a copy of the unaudited
consolidated Financial Statements of the Borrower, Magnolia
Pipeline Corporation and Pan Grande Pipeline Joint Venture as at
the close of such quarterly period and from the beginning of such
fiscal year to the end of such period, such Financial Statements to
be certified by a Responsible Officer of the Borrower, Magnolia
Pipeline Corporation, and Pan Grande Pipeline Joint Venture as
having been prepared in accordance with GAAP consistently applied
and as a fair presentation of the condition of the Borrower,
Magnolia Pipeline Corporation, and Pan Grande Pipeline Joint
Venture subject to changes resulting from normal year-end audit
adjustments, and (b) on or before the 60th day after the close of
each fiscal quarter, a Compliance Certificate.
5.3 Annual Financial Statements. Deliver to the Lender,
on or before the 120th day after the close of each fiscal year of
the Borrower, a copy of the annual audited consolidated Financial
Statements of the Borrower. Also deliver company prepared annual
Financial Statements of Magnolia Pipeline Corporation and Pan
Grande Pipeline Joint Venture on the same date.
5.4 Monthly Accounts Receivable and Accounts Payable
Report. Deliver to the Lender 60 days after the close of each
month during the term of this Agreement, a report listing all
accounts receivable and accounts payable by name, date and amount,
and on such date deliver to the Lender a Borrowing Base Certificate
in a form as set forth on Exhibit VI.
5.5 Notices of Certain Events. Deliver to the Lender,
immediately upon having knowledge of the occurrence of any of the
following events or circumstances, a written statement with respect
thereto, signed by a Responsible Officer of the Borrower and
setting forth the relevant event or circumstance and the steps
being taken by the Borrower with respect to such event or
circumstance:
(a) any Default or Event of Default;
(b) any default or event of default under any
contractual obligation of the Borrower, or any
litigation, investigation, or proceeding between the
Borrower and any Governmental Authority which, in either
case, if not cured or if adversely determined, as the
case may be, could reasonably be expected to have a
Material Adverse Effect;
(c) any litigation or proceeding involving the
Borrower as a defendant or in which any Property of the
Borrower is subject to a claim and in which the amount
involved is $100,000 or more and which is not covered by
insurance or in which injunctive or similar relief is
sought;
(d) the receipt by the Borrower of any Environmental
Complaint;
(e) any actual, proposed, or threatened testing or
other investigation by any Governmental Authority or
other Person reasonably likely to have a Material Adverse
Effect concerning the environmental condition of, or
relating to, any Property of the Borrower or adjacent to
any Property of the Borrower following any allegation of
a violation of any Requirement of Law;
(f) any Release of Hazardous Substances by the
Borrower or from, affecting, or related to any Property
of the Borrower or adjacent to any Property of the
Borrower reasonably likely to have a Material Adverse
Effect except in accordance with applicable Requirements
of Law or the terms of a valid permit, license,
certificate, or approval of the relevant Governmental
Authority, or the violation of any Environmental Law, or
the revocation, suspension, or forfeiture of or failure
to renew, any permit, license, registration, approval, or
authorization which could reasonably be expected to have
a Material Adverse Effect;
(g) any change in the senior management of the
Borrower;
(h) any other event or condition which could
reasonably be expected to have a Material Adverse Effect;
and
(i) any Reportable Event or imminently expected
Reportable Event with respect to any Plan; any withdrawal
from, or the termination, Reorganization or Insolvency
of, any Multiemployer Plan; the institution of
proceedings or the taking of any other action by the
PBGC, the Borrower or any Commonly Controlled Entity or
Multiemployer Plan with respect to the withdrawal from,
or the termination, Reorganization or Insolvency of, any
Single Employer Plan or Multiemployer Plan; or any
Prohibited Transaction in connection with any Plan or any
trust created thereunder and the action being taken by
the Internal Revenue Service with respect thereto; and
5.6 Additional Information. Furnish to the Lender,
within five days after any material report (other than financial
statements) or other communication is sent by the Borrower to its
stockholders or filed by the Borrower with the Securities and
Exchange Commission or any successor or analogous Governmental
Authority, copies of such report or communication and, promptly
upon the request of the Lender, such additional financial or other
information concerning the assets, liabilities, operations, and
transactions of the Borrower as the Lender may from time to time
request; and notify the Lender not less than ten Business Days
prior to the occurrence of any condition or event that may change
the proper location for the filing of any financing statement or
other public notice or recording for the purpose of perfecting a
Lien in any Collateral, including, without limitation, any change
in its name or the location of its principal place of business or
chief executive office; and upon the request of the Lender, execute
such additional Security Instruments as may be necessary or
appropriate in connection therewith.
5.7 Compliance with Laws. Except to the extent the
failure to comply or cause compliance would not have a Material
Adverse Effect, comply with all applicable Requirements of Law,
including, without limitation, (a) the Natural Gas Policy Act of
1978, as amended, (b) ERISA, (c) Environmental Laws, and (d) all
permits, licenses, registrations, approvals, and authorizations (i)
related to any natural or environmental resource or media located
on, above, within, in the vicinity of, related to or affected by
any Property of the Borrower, (ii) required for the performance of
the operations of the Borrower, or (iii) applicable to the use,
generation, handling, storage, treatment, transport, or disposal of
any Hazardous Substances; and cause all employees, crew members,
agents, contractors, subcontractors, and future lessees (pursuant
to appropriate lease provisions) of the Borrower, while such
Persons are acting within the scope of their relationship with the
Borrower, to comply with all such Requirements of Law as may be
necessary or appropriate to enable the Borrower to so comply.
5.8 Payment of Assessments and Charges. Pay all taxes,
assessments, governmental charges, rent, and other Indebtedness
which, if unpaid, might become a Lien against the Property of the
Borrower, except any of the foregoing being contested in good faith
and as to which adequate reserve in accordance with GAAP has been
established or unless failure to pay would not have a Material
Adverse Effect.
5.9 Maintenance of Corporate Existence and Good
Standing. Maintain its corporate existence or qualification and
good standing in its jurisdictions of incorporation and in all
jurisdictions wherein the Property now owned or hereafter acquired
or business now or hereafter conducted necessitates same.
5.10 Payment of Note; Performance of Obligations. Pay
the Note according to the reading, tenor, and effect thereof, as
modified hereby, and do and perform every act and discharge all of
its other Obligations.
5.11 Further Assurances. Promptly cure any defects in
the execution and delivery of any of the Loan Documents and all
agreements contemplated thereby, and execute, acknowledge, and
deliver such other assurances and instruments as shall, in the
opinion of the Lender, be necessary to fulfill the terms of the
Loan Documents.
5.12 Initial Fees and Expenses of Counsel to
Lender. Upon request by the Lender, promptly reimburse the Lender
for all reasonable fees and expenses of Jackson & Walker, L.L.P.,
special counsel to the Lender, in connection with the preparation
of this Agreement and all documentation contemplated hereby, the
satisfaction of the conditions precedent set forth herein, the
filing and recordation of Security Instruments, and the
consummation of the transactions contemplated in this Agreement.
5.13 Subsequent Fees and Expenses of Lender. Upon
request by the Lender, promptly reimburse the Lender (to the
fullest extent permitted by law) for all amounts reasonably
expended, advanced, or incurred by or on behalf of the Lender to
satisfy any obligation of the Borrower under any of the Loan
Documents; to collect the Obligations; to ratify, amend, restate,
or prepare additional Loan Documents, as the case may be; for the
filing and recordation of Security Instruments; to enforce the
rights of the Lender under any of the Loan Documents; and to
protect the Properties or business of the Borrower including,
without limitation, the Collateral, which amounts shall be deemed
compensatory in nature and liquidated as to amount upon notice to
the Borrower by the Lender and which amounts shall include, but not
be limited to (a) all court costs, (b) reasonable attorneys' fees,
(c) reasonable fees and expenses of auditors and accountants
incurred to protect the interests of the Lender, (d) fees and
expenses incurred in connection with the participation by the
Lender as a member of the creditors' committee in a case commenced
under any Insolvency Proceeding, (e) fees and expenses incurred in
connection with lifting the automatic stay prescribed in 362 Title
11 of the United States Code, and (f) fees and expenses incurred in
connection with any action pursuant to 1129 Title 11 of the United
States Code all reasonably incurred by the Lender in connection
with the collection of any sums due under the Loan Documents,
together with interest at the per annum interest rate equal to the
Floating Rate, calculated on a basis of a calendar year of 365 or
366 days, as the case may be,, counting the actual number of days
elapsed, on each such amount from the date of notification that the
same was expended, advanced, or incurred by the Lender until the
date it is repaid to the Lender, with the obligations under this
Section surviving the non-assumption of this Agreement in a case
commenced under any Insolvency Proceeding and being binding upon
the Borrower and/or a trustee, receiver, custodian, or liquidator
of the Borrower appointed in any such case.
5.14 Operation of Properties. Develop, maintain, and
operate its Properties in a prudent and workmanlike manner in
accordance with industry standards.
5.15 Maintenance and Inspection of Properties. Maintain
all of its tangible Properties in good repair and condition,
ordinary wear and tear excepted; make all necessary replacements
thereof; and permit any authorized representative of the Lender to
visit and inspect, at the expense of the Borrower, any tangible
Property of the Borrower.
5.16 Maintenance of Insurance. Maintain insurance with
respect to its Properties and businesses against such liabilities,
casualties, risks, and contingencies as is customary in the
relevant industry and sufficient to prevent a Material Adverse
Effect, all such insurance to be in amounts and from insurers
acceptable to the Lender and, naming the Lender as loss payee, and,
upon any renewal of any such insurance and at other times upon
request by the Lender, furnish to the Lender evidence, satisfactory
to the Lender, of the maintenance of such insurance. The Lender
shall have the right to collect, and the Borrower hereby assigns to
the Lender, any and all monies that may become payable under any
policies of insurance relating to business interruption or by
reason of damage, loss, or destruction of any of the Collateral.
In the event of any damage, loss, or destruction for which
insurance proceeds relating to business interruption or Collateral
exceed $100,000, the Lender may, at its option, apply all such sums
or any part thereof received by it toward the payment of the
Obligations, whether matured or unmatured, application to be made
first to interest and then to principal, and shall deliver to the
Borrower the balance, if any, after such application has been made.
In the event of any such damage, loss, or destruction for which
insurance proceeds are $100,000 or less, provided that no Default
or Event of Default has occurred and is continuing, the Lender
shall deliver any such proceeds received by it to the Borrower. In
the event the Lender receives insurance proceeds not attributable
to Collateral or business interruption, the Lender shall deliver
any such proceeds to the Borrower.
5.17 INDEMNIFICATION. INDEMNIFY AND HOLD THE LENDER AND
ITS SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT, AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT
OF THE LENDER UNDER ANY SECURITY INSTRUMENT (THE "INDEMNIFIED
PARTIES") HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES,
DAMAGES, LIABILITIES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND
JUDICIAL PROCEEDINGS AND ORDERS, JUDGMENTS, REMEDIAL ACTIONS,
REQUIREMENTS AND ENFORCEMENT ACTIONS OF ANY KIND, AND ALL COSTS AND
EXPENSES INCURRED IN CONNECTION THEREWITH (INCLUDING, WITHOUT
LIMITATION, ATTORNEYS' FEES AND EXPENSES), ARISING DIRECTLY OR
INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE PRESENCE OF ANY
HAZARDOUS SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE
BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY
ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY PROPERTY OF THE
BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND WHETHER
BY THE BORROWER OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER OR ANY OTHER PERSON AT
ANY TIME OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH
THE HANDLING, TREATMENT, REMOVAL, STORAGE, DECONTAMINATION,
CLEANUP, TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT
ANY TIME LOCATED OR PRESENT ON OR UNDER SUCH PROPERTY, (C) ANY
RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE BORROWER,
(D) ANY CONTAMINATION OF ANY PROPERTY OR NATURAL RESOURCES ARISING
IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE,
TRANSPORTATION OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE
BORROWER OR ANY EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF
THE BORROWER WHILE SUCH PERSONS ARE ACTING WITHIN THE SCOPE OF
THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF WHETHER ANY
OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH
APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND
ENFORCEMENT OF ANY LOAN DOCUMENT, ANY ALLEGATION BY ANY BENEFICIARY
OF A LETTER OF CREDIT OF A WRONGFUL DISHONOR BY THE LENDER OF A
CLAIM OR DRAFT PRESENTED THEREUNDER, OR ANY OTHER ACT OR OMISSION
IN CONNECTION WITH OR RELATED TO ANY LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT LIMITATION,
ANY OF THE FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE,
WHETHER SOLE OR CONCURRENT, ON THE PART OF THE LENDER OR ANY OF ITS
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR
AFFILIATES OR ANY TRUSTEE FOR THE BENEFIT OF THE LENDER
UNDER ANY SECURITY INSTRUMENT, PROVIDED THAT BORROWER SHALL NOT BE
LIABLE TO THE INDEMNIFIED PARTIES AND THIS INDEMNITY SHALL NOT
EXTEND TO ANY PORTION OF THE FOREGOING CAUSED BY OR RESULTING FROM
THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF THE INDEMNIFIED
PARTIES; WITH THE FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL
OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT, UNLESS ALL SUCH
OBLIGATIONS HAVE BEEN SATISFIED WHOLLY IN CASH FROM THE BORROWER
AND NOT BY WAY OF REALIZATION AGAINST ANY COLLATERAL OR THE
CONVEYANCE OF ANY PROPERTY IN LIEU THEREOF, PROVIDED THAT SUCH
INDEMNITY SHALL NOT EXTEND TO ANY ACT OR OMISSION BY THE LENDER
WITH RESPECT TO ANY PROPERTY SUBSEQUENT TO THE LENDER BECOMING THE
OWNER OF SUCH PROPERTY AND WITH RESPECT TO WHICH PROPERTY SUCH
CLAIM, LOSS, DAMAGE, LIABILITY, FINE, PENALTY, CHARGE, PROCEEDING,
ORDER, JUDGMENT, ACTION, OR REQUIREMENT ARISES SUBSEQUENT TO THE
ACQUISITION OF TITLE THERETO BY THE LENDER.
ARTICLE VI
NEGATIVE COVENANTS
So long as any Obligation remains outstanding or unpaid
or any Commitment exists, the Borrower will not:
6.1 Indebtedness. Except as otherwise provided in
Section 6.2, create, incur, assume, or suffer to exist any
Indebtedness, whether by way of loan or otherwise; provided,
however, the foregoing restriction shall not apply to (a) the
Obligations, (b) unsecured accounts payable incurred in the
ordinary course of business, which are not unpaid in excess of 60
days beyond invoice date or are being contested in good faith and
as to which such reserve as is required by GAAP has been made, (c)
purchase money Indebtedness not to exceed $100,000 in the aggregate
incurred solely for the purpose of financing the acquisition of
fixed assets, including any extensions, renewals and replacements
thereof, (d) Indebtedness in the form of reimbursement obligations
(whether contingent or otherwise) in respect of letters of credit,
bankers' acceptances, surety or other bonds and similar instruments
incurred in the ordinary course of business, (e) Indebtedness which
has been subordinated to the Obligations in form and substance and
upon terms satisfactory to the Lender; and [(f) existing
Indebtedness (including any inter-company indebtedness)].
6.2 Contingent Obligations. Create, incur, assume, or
suffer to exist any Contingent Obligation; provided, however, the
foregoing restriction shall not apply to (a) performance guarantees
and performance surety or other bonds provided in the ordinary
course of business, (b) trade credit incurred or operating leases
entered into in the ordinary course of business, or (c) existing
guaranties to Pan Grande joint venture and Starr County Gathering
System, which guaranties cannot be increased.
6.3 Liens. Create, incur, assume, or suffer to exist
any Lien on any of its Properties, whether now owned or hereafter
acquired; provided, however, the foregoing restrictions shall not
apply to Permitted Liens.
6.4 Sales of Assets. Without the prior written consent
of the Lender, sell, transfer, or otherwise dispose of, assets,
whether now owned or hereafter acquired, except for sales,
transfers or dispositions in the ordinary course of business not to
exceed $100,000.
6.5 Leasebacks. Enter into any agreement to sell or
transfer any Property and thereafter rent or lease as lessee such
Property or other Property intended for the same use or purpose as
the Property sold or transferred.
6.6 Loans or Advances. Except as otherwise provided in
Section 6.7, make or agree to make or allow to remain outstanding
any loans or advances to any Person; provided, however, the
foregoing restrictions shall not apply to (a) advances or
extensions of credit in the form of accounts receivable incurred in
the ordinary course of business and upon terms common in the
industry for such accounts receivable, (b) advances to employees of
the Borrower for the payment of expenses in the ordinary course of
business, (c) loans or advances by one Borrower to another Borrower
or to any of its Subsidiaries, or (d) loans of advances to joint
ventures in amounts not to exceed $100,000.
6.7 Investments. Except as otherwise provided in
Section 6.6, acquire Investments in, or purchase or otherwise
acquire all or substantially all of the assets of, any Person;
provided, however, the foregoing restriction shall not apply to the
purchase or acquisition of (a) stock or assets of pipeline or
gathering line entities and oil and gas properties, (b) Investments
in the form of (i) debt securities issued or directly and fully
guaranteed or insured by the United States Government or any agency
or instrumentality thereof, with maturities of no more than one
year, (ii) commercial paper of a domestic issuer rated at the date
of acquisition at least P-2 by Moody's Investor Service, Inc. or A-2 by
Standard & Poor's Corporation and with maturities of no more
than one year from the date of acquisition, or (iii) repurchase
agreements covering debt securities or commercial paper of the type
permitted in this Section, certificates of deposit, demand
deposits, eurodollar time deposits, overnight bank deposits and
bankers' acceptances, with maturities of no more than one year from
the date of acquisition, issued by or acquired from or through the
Lender or any bank or trust company organized under the laws of the
United States or any state thereof and having capital surplus and
undivided profits aggregating at least $100,000,000, (c) other
short-term Investments similar in nature and degree of risk to
those described in clause (b) of this Section, (d) money-market
funds, (e) stocks, bonds, notes or other securities accepted from
customers in connection with good faith work-outs of past due
receivables or in bankruptcy or insolvency proceedings, or (f)
interests in joint ventures as to which the Borrower is a venturer,
so long as such joint venture is engaged in the same line of
business as the Borrower as of the date hereof.
6.8 Dividends and Distributions. Declare, pay, or make,
whether in cash or Property of the Borrower, any dividend or
distribution on, or purchase, redeem, or otherwise acquire for
value, any share of any class of its capital stock at any time that
a Default or Event of Default exists.
6.9 Issuance of Stock; Changes in Corporate
Structure. Issue or agree to issue additional shares of capital
stock, in one or any series of transactions except for stock issued in
connection with (a) acquisitions permitted under this Credit
Agreement, (b) the 1996 Incentive Stock Plan for employees or other
employee compensatory plans, or (c) the exercise of warrants which
are outstanding on the Closing Date or enter into any transaction
of consolidation, merger, or amalgamation; liquidate, wind up, or
dissolve (or suffer any liquidation or dissolution).
6.10 Transactions with Affiliates. Directly or
indirectly, enter into any transaction (including the sale, lease,
or exchange of Property or the rendering of service) with any of
its Affiliates, other than upon fair and reasonable terms no less
favorable than could be obtained in an arm's length transaction
with a Person which was not an Affiliate.
6.11 Lines of Business. Expand, on its own or through
any Subsidiary, into any line of business other than those in which
the Borrower is engaged as of the date hereof and other businesses
reasonably related thereto.
6.12 ERISA Compliance. To the extent that a Material
Adverse Effect would result, permit any Plan maintained by it or
any Commonly Controlled Entity to (a) engage in any Prohibited
Transaction, (b) incur any "accumulated funding deficiency," as
such term is defined in Section 302 of ERISA, or (c) terminate in
a manner which could result in the imposition of a Lien on any
Property of the Borrower pursuant to Section 4068 of ERISA; or
assume an obligation to contribute to any Multiemployer Plan; or
acquire any Person or the assets of any Person which has now or has
had at any time an obligation to contribute to any Multiemployer
Plan.
6.13 Cash Flow Coverage. Permit Cash Flow for any fiscal
year to be less than 1.40 times the sum of interest plus current
maturities of funded long term bank debt. Such test shall begin
September 30, 1996 and for the immediately preceding four quarters
and shall continue on a quarterly basis thereafter looking back to
the immediately preceding four quarters.
6.14 Total Debt. Permit total debt including current
maturities to be more than 60% of total capitalization. Total
capitalization shall mean the sum of total debt plus stockholder
equity as determined in accordance with GAAP.
6.15 Current Ratio. Permit the ratio of Current Assets
to Current Liabilities to be less than 1.00 to 1.00 at any time.
6.16 Tangible Net Worth. Permit Tangible Net Worth as of
the close of any fiscal quarter to be less than the sum of (a)
$4,157,436 (which was the Net Worth as of December 31, 1995), plus
(b) 50% of positive Net Income for all fiscal periods ending
subsequent to December 31, 1995, plus (c) the net proceeds of
Midcoast Energy Resources, Inc.'s equity offering which was
effective as of August 9, 1996.
ARTICLE VII
EVENTS OF DEFAULT
7.1 Enumeration of Events of Default. Any of the
following events shall constitute an Event of Default:
(a) default shall be made in the payment when due of
any installment of principal or interest under this
Agreement or the Note or in the payment when due of any
fee or other sum payable under any Loan Document and such
default as to interest or fees only shall have continued
for three days;
(b) default shall be made by the Borrower in the due
observance or performance of any of its obligations under
the Loan Documents, and such default shall continue for
30 days after the earlier of notice thereof to the
Borrower by the Lender or knowledge thereof by the
Borrower;
(c) any representation or warranty made by the
Borrower in any of the Loan Documents proves to have been
untrue in any material respect or any representation,
statement (including Financial Statements), certificate,
or data furnished or made to the Lender in connection
herewith proves to have been untrue in any material
respect as of the date the facts therein set forth were
stated or certified;
(d) default shall be made by the Borrower (as
principal or guarantor or other surety) in the payment or
performance of any bond, debenture, note, or other
Indebtedness or under any credit agreement, loan
agreement, indenture, promissory note, or similar
agreement or instrument executed in connection with any
of the foregoing, and such default shall remain
unremedied for in excess of the period of grace, if any,
with respect thereto;
(e) the Borrower shall be unable to satisfy any
condition or cure any circumstance specified in Article
III, the satisfaction or curing of which is precedent to
the right of the Borrower to obtain a Loan or the
issuance of a Letter of Credit, and such inability shall
continue for a period in excess of 30 days;
(f) the Borrower shall (i) apply for or consent to
the appointment of a receiver, trustee, or liquidator of
it or all or a substantial part of its assets, (ii) file
a voluntary petition commencing an Insolvency Proceeding,
(iii) make a general assignment for the benefit of
creditors, (iv) be unable, or admit in writing its
inability, to pay its debts generally as they become due,
or (v) file an answer admitting the material allegations
of a petition filed against it in any Insolvency
Proceeding;
(g) an order, judgment, or decree shall be entered
against the Borrower by any court of competent
jurisdiction or by any other duly authorized authority,
on the petition of a creditor or otherwise, granting
relief in any Insolvency Proceeding or approving a
petition seeking reorganization or an arrangement of its
debts or appointing a receiver, trustee, conservator,
custodian, or liquidator of it or all or any substantial
part of its assets, and such order, judgment, or decree
shall not be dismissed or stayed within 60 days;
(h) the levy against any significant portion of the
Property of the Borrower, or any execution, garnishment,
attachment, sequestration, or other writ or similar
proceeding which is not permanently dismissed or
discharged within 30 days after the levy;
(i) a final and non-appealable order, judgment, or
decree shall be entered against the Borrower for money
damages and/or Indebtedness due in an amount in excess of
$100,000, and such order, judgment, or decree shall not
be dismissed or stayed within 30 days;
(j) any charges are filed or any other action or
proceeding is instituted by any Governmental Authority
against the Borrower under the Racketeering Influence and
Corrupt Organizations Statute (18 U.S.C. 1961 et seq.),
the result of which could be the forfeiture or transfer
of any material Property of the Borrower subject to a
Lien in favor of the Lender without (i) satisfaction or
provision for satisfaction of such Lien, or (ii) such
forfeiture or transfer of such Property being expressly
made subject to such Lien;
(k) the Borrower shall have (i) concealed, removed,
or diverted, or permitted to be concealed, removed, or
diverted, any part of its Property, with intent to
hinder, delay, or defraud its creditors or any of them,
(ii) made or suffered a transfer of any of its Property
which may be fraudulent under any bankruptcy, fraudulent
conveyance, or similar law, (iii) made any transfer of
its Property to or for the benefit of a creditor at a
time when other creditors similarly situated have not
been paid, or (iv) shall have suffered or permitted,
while insolvent, any creditor to obtain a Lien upon any
of its Property through legal proceedings or distraint
which is not vacated within 30 days from the date
thereof;
(l) any Security Instrument shall for any reason
not, or cease to, create valid and perfected
first-priority Liens against the Collateral purportedly
covered thereby; or
(m) the occurrence of a Material Adverse Effect and
the same shall remain unremedied for in excess of 30 days
after notice given by the Lender.
7.2 Remedies. (a) Upon the occurrence of an Event of
Default specified in Sections 7.1(f) or 7.1(g), immediately and
without notice, (i) all Obligations shall automatically become
immediately due and payable, without presentment, demand, protest,
notice of protest, default, or dishonor, notice of intent to
accelerate maturity, notice of acceleration of maturity, or other
notice of any kind, except as may be provided to the contrary
elsewhere herein, all of which are hereby expressly waived by the
Borrower; (ii) the Commitment shall immediately cease and terminate
unless and until reinstated by the Lender in writing; and (iii) the
Lender is hereby authorized at any time and from time to time,
without notice to the Borrower (any such notice being expressly
waived by the Borrower), to set-off and apply any and all deposits
(general or special, time or demand, provisional or final) held by
the Lender and any and all other indebtedness at any time owing by
the Lender to or for the credit or account of the Borrower against
any and all of the Obligations.
(b) Upon the occurrence of any Event of Default other
than those specified in Sections 7.1(f) or 7.1(g), (i) the Lender
may, by notice to the Borrower, declare all Obligations immediately
due and payable, without presentment, demand, protest, notice of
protest, default, or dishonor, notice of intent to accelerate
maturity, notice of acceleration of maturity, or other notice of
any kind, except as may be provided to the contrary elsewhere
herein, all of which are hereby expressly waived by the Borrower;
(ii) the Commitment shall immediately cease and terminate unless
and until reinstated by the Lender in writing; and (iii) the Lender
is hereby authorized at any time and from time to time, without
notice to the Borrower (any such notice being expressly waived by
the Borrower), to set-off and apply any and all deposits (general
or special, time or demand, provisional or final) held by the
Lender and any and all other indebtedness at any time owing by the
Lender to or for the credit or account of the Borrower against any
and all of the Obligations although such Obligations may be
unmatured.
(c) Upon the occurrence of any Event of Default, the
Lender may, in addition to the foregoing in this Section, exercise
any or all of its rights and remedies provided by law or pursuant
to the Loan Documents.
ARTICLE VIII
MISCELLANEOUS
8.1 Transfers; Participations. The Lender may, at any
time, sell, transfer, assign, or grant participations in the
Obligations or any portion thereof; and the Lender may forward to
each Transferee and prospective Transferee all documents and
information relating to such Obligations, whether furnished by the
Borrower or otherwise obtained, as the Lender determines necessary
or desirable. The Borrower agrees that each Transferee, regardless
of the nature of any transfer to it, may exercise all rights
(including, without limitation, rights of set-off) with respect to
the portion of the Obligations held by it as fully as if such
Transferee were the direct holder thereof, subject to any
agreements between such Transferee and the transferor to such
Transferee.
8.2 Survival of Representations, Warranties, and
Covenants. All representations and warranties of the Borrower and
all covenants and agreements herein made shall survive the
execution and delivery of the Note and the Security Instruments and
shall remain in force and effect so long as any Obligation is
outstanding or any Commitment exists.
8.3 Notices and Other Communications. Except as to oral
notices expressly authorized herein, which oral notices shall be
confirmed in writing, all notices, requests, and communications
hereunder shall be in writing (including by telecopy). Unless
otherwise expressly provided herein, any such notice, request,
demand, or other communication shall be deemed to have been duly
given or made when delivered by hand, or, in the case of delivery
by mail, when deposited in the mail, certified mail, return receipt
requested, postage prepaid, or, in the case of telecopy notice,
when receipt thereof is acknowledged orally or by written
confirmation report, addressed as follows:
(a) if to the Lender, to:
Bank One, Texas, National Association
910 Travis, 6th Floor
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
(or for notice by mail, to:
P.O. Box 2629
Houston, Texas 77252-2629
Attention: Energy Group, 6th Floor
Telecopy: (713) 751-7894
(b) if to the Borrower, to:
Midcoast Energy Resources, Inc.
1100 Louisiana, Suite 2950
Houston, Texas 77002
Attention: Richard A. Robert
Telecopy: (713) 650-3232
Any party may, by proper written notice hereunder to the
others, change the individuals or addresses to which such notices
to it shall thereafter be sent.
8.4 Parties in Interest. Subject to the restrictions on
changes in corporate structure set forth in Section 6.9 and other
applicable restrictions contained herein, all covenants and
agreements herein contained by or on behalf of the Borrower or the
Lender shall be binding upon and inure to the benefit of the
Borrower or the Lender, as the case may be, and their respective
legal representatives, successors, and assigns.
8.5 Rights of Third Parties. All provisions herein are
imposed solely and exclusively for the benefit of the Lender and
the Borrower. No other Person shall have any right, benefit,
priority, or interest hereunder or as a result hereof or have
standing to require satisfaction of provisions hereof in accordance
with their terms, and any or all of such provisions may be freely
waived in whole or in part by the Lender at any time if in its sole
discretion it deems it advisable to do so.
8.6 Renewals; Extensions. All provisions of this
Agreement relating to the Note shall apply with equal force and
effect to each promissory note hereafter executed which in whole or
in part represents a renewal or extension of any part of the
Indebtedness of the Borrower under this Agreement, the Note, or any
other Loan Document.
8.7 No Waiver; Rights Cumulative. No course of dealing
on the part of the Lender, its officers or employees, nor any
failure or delay by the Lender with respect to exercising any of
its rights under any Loan Document shall operate as a waiver
thereof. The rights of the Lender under the Loan Documents shall
be cumulative and the exercise or partial exercise of any such
right shall not preclude the exercise of any other right. Neither
the making of any Loan nor the issuance of a Letter of Credit shall
constitute a waiver of any of the covenants, warranties, or
conditions of the Borrower contained herein. In the event the
Borrower is unable to satisfy any such covenant, warranty, or
condition, neither the making of any Loan nor the issuance of a
Letter of Credit shall have the effect of precluding the Lender
from thereafter declaring such inability to be an Event of Default
as hereinabove provided.
8.8 Survival Upon Unenforceability. In the event any
one or more of the provisions contained in any of the Loan
Documents or in any other instrument referred to herein or executed
in connection with the Obligations shall, for any reason, be held
to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any
other provision of any Loan Document or of any other instrument
referred to herein or executed in connection with such Obligations.
8.9 Amendments; Waivers. Neither this Agreement nor any
provision hereof may be amended, waived, discharged, or terminated
orally, but only by an instrument in writing signed by the party
against whom enforcement of the amendment, waiver, discharge, or
termination is sought.
8.10 Controlling Agreement. In the event of a conflict
between the provisions of this Agreement and those of any other
Loan Document, the provisions of this Agreement shall control.
8.11 Disposition of Collateral. Notwithstanding any term
or provision, express or implied, in any of the Security
Instruments, upon the occurrence of an Event of Default, the
realization, liquidation, foreclosure, or any other disposition on
or of any or all of the Collateral by the Lender shall be in the
order and manner and determined in the sole discretion of the
Lender; provided, however, that in no event shall the Lender
violate applicable law or exercise rights and remedies other than
those provided in such Security Instruments or otherwise existing
at law or in equity.
8.12 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE
DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS
OF LAW; PROVIDED, HOWEVER, THAT VERNON'S TEXAS CIVIL STATUTES,
ARTICLE 5069, CHAPTER 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT
LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY.
8.13 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS
WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH,
OUT OF, RELATED TO, OR FROM THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF
THE LENDER, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY,
TEXAS. THE BORROWER HEREBY SUBMITS TO THE JURISDICTION OF ANY
LOCAL, STATE, OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY,
TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR
CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST
IT BY THE LENDER IN ACCORDANCE WITH THIS SECTION.
8.14 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE
ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE
SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE
PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT
HEREOF, INCLUDING, WITHOUT LIMITATION, THE CORRESPONDENCE DATED
JUNE 24, 1996, FROM THE LENDER TO THE BORROWER AND THE TERM SHEET
ENCLOSED THEREWITH. FURTHERMORE, IN THIS REGARD, THIS AGREEMENT
AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE
FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG SUCH PARTIES.
8.15 Counterparts. For the convenience of the parties,
this Agreement may be executed in multiple counterparts, each of
which for all purposes shall be deemed to be an original, and all
such counterparts shall together constitute but one and the same
Agreement.
IN WITNESS WHEREOF, this Agreement is deemed executed
effective as of the date first above written.
BORROWER:
MIDCOAST ENERGY RESOURCES, INC.
By:
Richard Robert
Chief Financial Officer and
Treasurer
MAGNOLIA PIPELINE CORPORATION
By:
Richard Robert
Treasurer
(Signatures Continued on Next Page)
H & W PIPELINE CORPORATION
By:
Richard Robert
Treasurer
LENDER:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By:
Jeffrey W. Baker
Vice President<PAGE>
EXHIBIT I
[FORM OF NOTE]
PROMISSORY NOTE
$40,000,000 Houston, Texas August 22, 1996
FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned
("Maker") promises to pay to the order of BANK ONE, TEXAS, NATIONAL
ASSOCIATION ("Payee"), at its banking quarters in Houston, Harris
County, Texas, the sum of FORTY MILLION DOLLARS ($40,000,000) or
so much thereof as may be advanced against this Note pursuant to
the Credit Agreement dated of even date herewith by and between
Maker and Payee (as amended, restated, or supplemented from time to
time, the "Credit Agreement"), together with interest at the rates
and calculated as provided in the Credit Agreement.
Reference is hereby made to the Credit Agreement for
matters governed thereby, including, without limitation, certain
events which will entitle the holder hereof to accelerate the
maturity of all amounts due hereunder. Capitalized terms used but
not defined in this Note shall have the meanings assigned to such
terms in the Credit Agreement.
This Note is issued pursuant to, is the "Note" under, and
is payable as provided in the Credit Agreement. Subject to
compliance with applicable provisions of the Credit Agreement,
Maker may at any time pay the full amount or any part of this Note
without the payment of any premium or fee, but such payment shall
not, until this Note is fully paid and satisfied, excuse the
payment as it becomes due of any payment on this Note provided for
in the Credit Agreement.
Without being limited thereto or thereby, this Note is
secured by the Security Instruments.
THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF
THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF
RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT VERNON'S
TEXAS CIVIL STATUTES, ARTICLE 5069, CHAPTER 15 (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY
ACCOUNTS) SHALL NOT APPLY TO THIS NOTE.
MIDCOAST ENERGY RESOURCES, INC.
By:
Printed Name:
Title:
MAGNOLIA PIPELINE CORPORATION
By:
Printed Name:
Title:
H & W PIPELINE CORPORATION
By:
Printed Name:
Title:
<PAGE>
EXHIBIT II
[FORM OF BORROWING REQUEST]
Bank One, Texas, National Association
910 Travis
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
Re: Credit Agreement dated as of August 22, 1996, by
and between Bank One, Texas, National Association
and Midcoast Energy Resources, Inc., Magnolia
Pipeline Corporation and H & W Pipeline Corporation
(as amended, restated, or supplemented from time to
time, the "Credit Agreement")
Ladies and Gentlemen:
Pursuant to the Credit Agreement, the Borrower hereby
makes the requests indicated below:
1. Loans
(a) Amount of new Loan: $
(b) Requested funding date: , 19
(c) $ of such Loan is to be a Floating Rate
Loan;
and
$________________ of such Loan is to be a LIBO Rate Loan.
(d) Requested Interest Period for LIBO Rate Loan: ____
months.
2. Continuation or conversion of LIBO Rate Loan maturing on
:
(a) Amount to be continued as a LIBO Rate Loan is $
, with an Interest Period of months;
(b) Amount to be converted to a Floating Rate Loan is $
; and
3. Conversion of Floating Rate Loan:
(a) Requested conversion date: , 19 .
(b) Amount to be converted to a LIBO Rate Loan is $ ,
with an Interest Period of _____ months.
The undersigned certifies that [s]he is the [ ]
of the Borrower, has obtained all consents necessary, and as such
[s]he is authorized to execute this request on behalf of the
Borrower. The undersigned further certifies, represents, and
warrants on behalf of the Borrower that the Borrower is entitled to
receive the requested borrowing, continuation, or conversion under
the terms and conditions of the Credit Agreement.
Each capitalized term used but not defined herein shall
have the meaning assigned to such term in the Credit Agreement.
Very truly yours,
MIDCOAST ENERGY RESOURCES, INC.
By:
Printed Name:
Title:
MAGNOLIA PIPELINE CORPORATION
By:
Printed Name:
Title:
H & W PIPELINE CORPORATION
By:
Printed Name:
Title:
<PAGE>
EXHIBIT III
[FORM OF COMPLIANCE CERTIFICATE]
, 19
Bank One, Texas, National Association
910 Travis
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
Re: Credit Agreement dated as of August 22, 1996, by
and between Bank One, Texas, National Association
and Midcoast Energy Resources, Inc., Magnolia
Pipeline Corporation and H & W Pipeline Corporation
(as amended, restated, or supplemented from time to
time, the "Credit Agreement")
Ladies and Gentlemen:
Pursuant to applicable requirements of the Credit
Agreement, the undersigned, as a Responsible Officer of the
Borrower, hereby certifies to you the following information as true
and correct as of the date hereof or for the period indicated, as
the case may be:
[1. To the best of the knowledge of the undersigned, no
Default or Event of Default exists as of the date hereof or
has occurred since the date of our previous certification to
you, if any.]
[1. To the best of the knowledge of the undersigned, the
following Defaults or Events of Default exist as of the date
hereof or have occurred since the date of our previous
certification to you, if any, and the actions set forth below
are being taken to remedy such circumstances:]
2. The compliance of the Borrower with the financial
covenants of the Credit Agreement, as of the close of business
on , is evidenced by the following:
(a) Section 6:14: Cash Flow Coverage.
Permit total debt including current maturities to be more
than 60% of total capitalization. Total capitalization
shall mean the sum of total debt plus stockholder equity
as determined in accordance with GAAP.
Actual
(b) Section 6:15: Total Debt.
Permit the ratio of Current Assets to Current Liabilities
to be less than 1.00 to 1.00 at any time.
Actual
(c) Section 6:16: Current Ratio.
Permit the ratio of Current Assets to Current Liabilities
to be less than 1.00 to 1.00 at any time.
Actual
(d) Section 6:17: Tangible Net Worth.
Permit Tangible Net Worth as of the close of any fiscal
quarter to be less than the sum of (a) $4,157,436 (which
was the Net Worth as of December 31, 1995), plus (b) 50%
of positive Net Income for all fiscal periods ending
subsequent to December 31, 1995, plus (c) the net
proceeds of Midcoast Energy Resources, Inc.'s equity
offering which was effective as of August 9, 1996.
Actual
3. No Material Adverse Effect has occurred since the date of
the Financial Statements dated as of .
Each capitalized term used but not defined herein shall
have the meaning assigned to such term in the Credit Agreement.
Very truly yours,
MIDCOAST ENERGY RESOURCES, INC.
By:
Printed Name:
Title:
MAGNOLIA PIPELINE CORPORATION
By:
Printed Name:
Title:
H & W PIPELINE CORPORATION
By:
Printed Name:
Title: <PAGE>
EXHIBIT IV
[FORM OF OPINION OF COUNSEL]
[Closing Date]
Bank One, Texas, National Association
910 Travis
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
Re: Credit Agreement dated as of August 22, 1996, among
Bank One, Texas, National Association and Midcoast
Energy Resources, Inc., Magnolia Pipeline
Corporation and H & W Pipeline Corporation (as
amended, restated, or supplemented from time to
time, the "Credit Agreement")
Ladies and Gentlemen:
We have acted as counsel to Midcoast Energy Resources,
Inc. ("Midcoast"), Magnolia Pipeline Corporation ("Magnolia") and
H & W Pipeline Corporation ("H&W," together with Midcoast and
Magnolia, collectively the "Borrower") in connection with the
transactions contemplated in the Credit Agreement. This Opinion is
delivered pursuant to Section 3.1(k) of the Credit Agreement, and
the Lender is hereby authorized to rely upon this Opinion in
connection with the transactions contemplated in the Credit
Agreement. Each capitalized term used but not defined herein shall
have the meaning assigned to such term in the Credit Agreement.
In rendering the opinions expressed below, we have
examined a draft of the Credit Agreement dated July 31, 1996,
together with drafts of Exhibits I, II, III, and VI thereto, and we
have given to the Borrower our comments and revision requests with
respect to such drafts. In addition, we have examined originals or
conformed copies of such corporate records, agreements, and
instruments of the Borrower, certificates of public officials and
of officers of such Persons, and such other documents and records,
and such matters of law, as we have deemed appropriate. We have
assumed (i) the authenticity of the draft Credit Agreement and
Exhibits thereto submitted to us and the conformity of such drafts
(together with our comments and revision requests incorporated
therein) with the originals to be executed by the Borrower, (ii)
the due execution and delivery of the Credit Agreement by the
Borrower, (iii) the due authorization, execution, and delivery of
the Credit Agreement by the parties thereto other than the
Borrower, (iv) that all documents, books, and records made
available to us by the Borrower are accurate and complete, and (v)
that the Borrower has title to the Mortgaged Property.
We are qualified to practice law in the State of Texas
and our opinion is restricted to the laws of such State, and the
federal law of the United States of America.
Based upon the foregoing, we are of the opinion that:
1. The execution and delivery by the Borrower of
the Credit Agreement and the borrowings thereunder and
the payment and performance of all Obligations of the
Borrower thereunder are within the power of the Borrower,
and have been duly authorized by all necessary corporate
action.
2. The Credit Agreement constitutes the legal,
valid, and binding obligations of the Borrower,
enforceable against the Borrower in accordance with its
terms.
The foregoing opinions are subject to the following
assumptions, limitations, and qualifications:
a. The enforceability of the Credit Agreement may be subject
to (i) bankruptcy, insolvency, reorganization, moratorium
fraudulent transfer, or similar laws effecting the
enforcement of creditors' rights generally; (ii) general
principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in
equity); (iii) matters of public policy; and (iv) other
applicable laws and procedures which may affect the
remedies provided therein, but which do not, in our
judgment, make such remedies as a whole inadequate for the
practical realization of the rights and benefits provided
thereby, although they may result in delays thereof (and
we express no opinion as to the economic consequences, if
any, of any such delays).
b. You are advised that our engagement by the Borrower has
been limited to specific matters; consequently, there may
exist matters of a legal nature involving the Borrower
about which we have not advised or represented the
Borrower and of which we have no knowledge.
c. We express no opinion with respect to (i) the
enforceability of any provisions in the Credit Agreement
permitting the Lender to exercise voting or corporate
rights with respect to pledged stock or other instruments
prior to the Lender's foreclosing on such pledged stock or
other instruments; (ii) the enforceability of any
provisions in the Credit Agreement relating to delay or
omission of enforcement of rights or remedies, or waivers
of defenses, or waivers of benefits of appraisement,
valuation, stay, extension, moratorium redemption,
statutes of limitation, or other nonwaivable benefits
bestowed by operation of law; (iii) the lawfulness or
enforceability of any exculpation clauses, clauses
relating to releases of unmatured claims, clauses
purporting to waive unmatured rights, severability
clauses, and clauses similar in substance or nature to the
foregoing clauses in the Credit Agreement; or (iv) the
perfection or priority of any Lien,
d. We have assumed that (i) each and every usury savings
clause contained in the Credit Agreement will be complied
with by the Lender, (ii) no fees, sums, or other benefits,
direct or indirect, including any compensating balance
requirements or fees in lieu thereof, have been paid to or
received by or are, or may be, payable to or receivable by
the Lender in connection with the loans contemplated by
the Credit Agreement, except as set forth in the Credit
Agreement, (iii) any expenses reimbursable to the Lender
in connection with the Credit Agreement have been and will
be limited to the actual costs incurred and paid to third
parties or have been and will be for services rendered
separate and apart from the lending of money, and (iv) the
Borrower has rights in the property in which it is
granting a security interest or lien pursuant to the
Credit Agreement.
e. Provisions of the Credit Agreement which permit the Lender
to take action or make determinations may be subject to a
requirement that such action be taken or such
determinations be made on a reasonable basis and in good
faith.
This letter is furnished solely for your benefit in
connection with the transaction referred to in the Credit Agreement
and may not without our permission be circulated to, or relied upon
by, any other Person, except bank supervisory authorities and your
auditors, attorneys, loan participants, and assignees or as
required by law or order of a court or other legal process.
Very truly yours,
PORTER & HEDGES, L.L.P.
<PAGE>
EXHIBIT V
DISCLOSURES
Section 4.8 Liabilities
None
Litigation
None
Section 4.12 Environmental Matters
None
Section 4.17 Refunds
None
Section 4.19 Casualties
None
Section 4.21 Subsidiaries
Midcoast Marketing, Inc. (inactive)
Midcoast Holdings No. One, Inc.
Nugget Drilling Corporation
(inactive)<PAGE>
EXHIBIT VI
[FORM OF BORROWING BASE CERTIFICATE]
_______________, 19__
1. Total acceptable accounts receivable $_________
2. Total acceptable accounts receivable, less
than 90 days in age $_________
3. 80% of Line 2 equals total Borrowing Base $_________
MIDCOAST ENERGY RESOURCES, INC.
By:
Printed Name:
Title:
MAGNOLIA PIPELINE CORPORATION
By:
Printed Name:
Title:
H & W PIPELINE CORPORATION
By:
Printed Name:
Title:
<PAGE>
CREDIT AGREEMENT
BETWEEN
MIDCOAST ENERGY RESOURCES, INC.
MAGNOLIA PIPELINE CORPORATION
H & W PIPELINE CORPORATION
AND
BANK ONE, TEXAS, NATIONAL ASSOCIATION
August 22, 1996
REDUCING REVOLVING LINE OF CREDIT OF UP TO $9,000,000
AND REVOLVING LINE OF CREDIT OF UP TO $1,500,000
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS AND INTERPRETATION
1.1 Terms Defined Above . . . . . . . . . . . . . . . . 1
1.2 Additional Defined Terms. . . . . . . . . . . . . . 1
1.3 Undefined Financial Accounting Terms. . . . . . . . 17
1.4 References. . . . . . . . . . . . . . . . . . . . . 17
1.5 Articles and Sections . . . . . . . . . . . . . . . 17
1.6 Number and Gender . . . . . . . . . . . . . . . . . 17
1.7 Incorporation of Exhibits . . . . . . . . . . . . . 17
ARTICLE II TERMS OF FACILITY
2.1 Revolving Line of Credit and Reducing
Revolving Line of Credit. . . . . . . . . . . . . . 18
2.2 Letter of Credit Facility . . . . . . . . . . . . . 18
2.3 Use of Loan Proceeds and Letters of Credit. . . . . 19
2.4 Interest. . . . . . . . . . . . . . . . . . . . . . 19
2.5 Repayment of Loans and Interest . . . . . . . . . . 20
2.6 Outstanding Amounts . . . . . . . . . . . . . . . . 20
2.7 Time, Place, and Method of Payments . . . . . . . . 20
2.8 Borrowing Base Determinations . . . . . . . . . . . 21
2.9 Mandatory Prepayments . . . . . . . . . . . . . . . 22
2.10 Voluntary Prepayments and Conversions of
Loans . . . . . . . . . . . . . . . . . . . . . . . 22
2.11 Commitment Fee. . . . . . . . . . . . . . . . . . . 23
2.12 Engineering Fee . . . . . . . . . . . . . . . . . . 23
2.13 Facility Fee. . . . . . . . . . . . . . . . . . . . 23
2.14 Letter of Credit Fee. . . . . . . . . . . . . . . . 23
2.15 Loans to Satisfy Obligations of Borrower. . . . . . 24
2.16 Security Interest in Accounts; Right of
Offset. . . . . . . . . . . . . . . . . . . . . . . 24
2.17 General Provisions Relating to Interest . . . . . . 24
2.18 Limitation on Types of Loans. . . . . . . . . . . . 25
2.19 Illegality. . . . . . . . . . . . . . . . . . . . . 26
2.20 Regulatory Change . . . . . . . . . . . . . . . . . 27
2.21 Limitations on Interest Periods . . . . . . . . . . 27
ARTICLE III CONDITIONS
3.1 Receipt of Loan Documents and Other Items . . . . . 27
3.2 Each Loan and Letter of Credit. . . . . . . . . . . 30
ARTICLE IV REPRESENTATIONS AND WARRANTIES
4.1 Due Authorization . . . . . . . . . . . . . . . . . 32
4.2 Corporate Existence . . . . . . . . . . . . . . . . 32
4.3 Valid and Binding Obligations . . . . . . . . . . . 32
4.4 Security Instruments. . . . . . . . . . . . . . . . 32
4.5 Title to Assets . . . . . . . . . . . . . . . . . . 33
4.6 Scope and Accuracy of Financial Statements. . . . . 33
4.7 No Material Misstatements . . . . . . . . . . . . . 33
4.8 Liabilities, Litigation, and Restrictions . . . . . 33
4.9 Authorizations; Consents. . . . . . . . . . . . . . 33
4.10 Compliance with Laws. . . . . . . . . . . . . . . . 33
4.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . 34
4.12 Environmental Laws. . . . . . . . . . . . . . . . . 34
4.13 Compliance with Federal Reserve Regulations . . . . 35
4.14 Investment Company Act Compliance . . . . . . . . . 35
4.15 Public Utility Holding Company Act
Compliance. . . . . . . . . . . . . . . . . . . . . 35
4.16 Proper Filing of Tax Returns; Payment of
Taxes Due . . . . . . . . . . . . . . . . . . . . . 35
4.17 Refunds . . . . . . . . . . . . . . . . . . . . . . 35
4.18 Intellectual Property . . . . . . . . . . . . . . . 36
4.19 Casualties or Taking of Property. . . . . . . . . . 36
4.20 Locations of Borrower . . . . . . . . . . . . . . . 36
4.21 Subsidiaries. . . . . . . . . . . . . . . . . . . . 36
ARTICLE V AFFIRMATIVE COVENANTS
5.1 Maintenance and Access to Records . . . . . . . . . 36
5.2 Quarterly Financial Statements; Compliance
Certificates. . . . . . . . . . . . . . . . . . . . 37
5.3 Annual Financial Statements . . . . . . . . . . . . 37
5.4 Monthly Accounts Receivable and Accounts
Payable Report. . . . . . . . . . . . . . . . . . . 37
5.5 Notices of Certain Events . . . . . . . . . . . . . 37
5.6 Additional Information. . . . . . . . . . . . . . . 38
5.7 Compliance with Laws. . . . . . . . . . . . . . . . 39
5.8 Payment of Assessments and Charges. . . . . . . . . 39
5.9 Maintenance of Corporate Existence and Good
Standing. . . . . . . . . . . . . . . . . . . . . . 39
5.10 Payment of Note; Performance of Obligations . . . . 39
5.11 Further Assurances. . . . . . . . . . . . . . . . . 40
5.12 Initial Fees and Expenses of Counsel to
Lender. . . . . . . . . . . . . . . . . . . . . . . 40
5.13 Subsequent Fees and Expenses of Lender. . . . . . . 40
5.14 Operation of Properties . . . . . . . . . . . . . . 41
5.15 Maintenance and Inspection of Properties. . . . . . 41
5.16 Maintenance of Insurance. . . . . . . . . . . . . . 41
5.17 INDEMNIFICATION . . . . . . . . . . . . . . . . . . 41
ARTICLE VI NEGATIVE COVENANTS
6.1 Indebtedness. . . . . . . . . . . . . . . . . . . . 43
6.2 Contingent Obligations. . . . . . . . . . . . . . . 43
6.3 Liens . . . . . . . . . . . . . . . . . . . . . . . 43
6.4 Sales of Assets . . . . . . . . . . . . . . . . . . 43
6.5 Leasebacks. . . . . . . . . . . . . . . . . . . . . 43
6.6 Loans or Advances . . . . . . . . . . . . . . . . . 44
6.7 Investments . . . . . . . . . . . . . . . . . . . . 44
6.8 Dividends and Distributions . . . . . . . . . . . . 44
6.9 Issuance of Stock; Changes in Corporate
Structure . . . . . . . . . . . . . . . . . . . . . 44
6.10 Transactions with Affiliates. . . . . . . . . . . . 45
6.11 Lines of Business . . . . . . . . . . . . . . . . . 45
6.12 ERISA Compliance. . . . . . . . . . . . . . . . . . 45
6.13 Cash Flow Coverage. . . . . . . . . . . . . . . . . 45
6.14 Total Debt. . . . . . . . . . . . . . . . . . . . . 45
6.15 Current Ratio . . . . . . . . . . . . . . . . . . . 45
6.16 Tangible Net Worth. . . . . . . . . . . . . . . . . 45
ARTICLE VII EVENTS OF DEFAULT
7.1 Enumeration of Events of Default. . . . . . . . . . 46
7.2 Remedies. . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE VIII MISCELLANEOUS
8.1 Transfers; Participations . . . . . . . . . . . . . 49
8.2 Survival of Representations, Warranties, and
Covenants . . . . . . . . . . . . . . . . . . . . . 49
8.3 Notices and Other Communications. . . . . . . . . . 49
8.4 Parties in Interest . . . . . . . . . . . . . . . . 50
8.5 Rights of Third Parties . . . . . . . . . . . . . . 50
8.6 Renewals; Extensions. . . . . . . . . . . . . . . . 50
8.7 No Waiver; Rights Cumulative. . . . . . . . . . . . 50
8.8 Survival Upon Unenforceability. . . . . . . . . . . 51
8.9 Amendments; Waivers . . . . . . . . . . . . . . . . 51
8.10 Controlling Agreement . . . . . . . . . . . . . . . 51
8.11 Disposition of Collateral . . . . . . . . . . . . . 51
8.12 GOVERNING LAW . . . . . . . . . . . . . . . . . . . 51
8.13 JURISDICTION AND VENUE. . . . . . . . . . . . . . . 51
8.14 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . 52
8.15 Counterparts. . . . . . . . . . . . . . . . . . . . 52
LIST OF EXHIBITS
Exhibit I - Form of Note
Exhibit II - Form of Borrowing Request
Exhibit III - Form of Compliance Certificate
Exhibit IV - Form of Opinion of Counsel
Exhibit V - Disclosures
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,951,152
<SECURITIES> 0
<RECEIVABLES> 3,322,185
<ALLOWANCES> 0
<INVENTORY> 210,447
<CURRENT-ASSETS> 5,483,784
<PP&E> 10,668,531
<DEPRECIATION> 1,214,520
<TOTAL-ASSETS> 15,930,180
<CURRENT-LIABILITIES> 2,643,671
<BONDS> 0
<COMMON> 25,000
0
0
<OTHER-SE> 13,030,592
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<NET-INCOME> 1,009,392
<EPS-PRIMARY> .58
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</TABLE>
