U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 1997
[ ] 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 2950
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, 1997, there were outstanding 4,815,000 shares of the
Company's common stock, par value $.01 per share.
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1997
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and September 30, 1997
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1996 and September 30, 1997
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30, 1997
Consolidated Statements of Cash Flows for the three months
and nine months ended September 30, 1996 and September 30, 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
SIGNATURE
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MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, September 30,
1996 1997
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,167,825 $ 42,254
Accounts receivable, no allowance for doubtful accounts 8,891,808 10,156,051
Materials and supplies, at average cost - 556,248
Total current assets 10,059,633 10,757,553
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities 11,939,173 48,582,341
Investment in transmission facilities 1,302,303 1,341,506
Natural gas processing facilities 3,735,262 3,948,870
Oil and gas properties, using the full-cost method
of accounting 1,274,436 1,343,765
Other property and equipment 264,842 2,316,789
18,516,016 57,533,271
ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION (1,550,670) (2,440,636)
16,965,346 55,092,635
OTHER ASSETS, net of amortization 278,235 1,057,629
Total assets $27,303,214 $66,907,817
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,464,395 $ 8,602,375
Current portion of deferred income 83,000 83,000
Short-term borrowing from bank 180,000 -
Current portion of long-term debt payable to banks 196,831 196,831
Total current liabilities 8,924,226 8,882,206
LONG-TERM DEBT PAYABLE TO BANKS 4,015,146 7,192,896
OTHER LIABILITIES AND DEFERRED CREDITS 152,167 289,375
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 618,591 679,870
SHAREHOLDERS' EQUITY: (Note 4)
Common stock, $.01 par value, 10 million shares authorized,
2,499,999 and 4,815,000 shares issued and outstanding at
December 31, 1996 and September 30, 1997, respectively 25,000 48,150
Paid-in capital 26,941,660 60,978,536
Accumulated deficit (13,283,876) (11,132,016)
Unearned compensation (89,700) (31,200)
Total shareholders' equity 13,593,084 49,863,470
Total liabilities and shareholders' equity $27,303,214 $66,907,817
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Sale of natural gas and transportation fees $ 4,353,551 $21,401,341 $14,403,671 $42,268,114
Transportation revenue 456,740 1,907,845 1,474,470 3,934,347
Natural gas processing revenue 756,347 1,154,243 756,347 3,734,793
Sale of pipelines 139,388 - 211,888 -
Oil and gas revenues 41,901 59,754 141,691 211,552
Total operating revenues 5,747,927 24,523,183 16,988,067 50,148,806
OPERATING EXPENSES:
Cost ofnatural gas and transportation charges 4,052,259 20,938,812 13,554,833 40,749,439
Natural gas processing costs 366,883 889,060 366,883 2,789,260
Cost of pipelines sold 124,375 - 126,528 -
Production of oil and gas 7,292 10,919 47,148 39,115
Depreciation, depletion and amortization 227,397 413,726 539,389 982,504
General and administrative 301,293 522,200 821,039 1,477,220
Total operating expenses 5,079,49 22,774,717 15,455,820 46,037,538
Operating income 668,428 1,748,466 1,532,247 4,111,268
NON-OPERATING ITEMS:
Interast expense (94,724) (183,713) (332,649) (680,379)
Minority interest in consolidated subsidiaries (76,773) (55,024) (148,384) (169,638)
Other income (expense), net 8,488 (42,857) (18,959) (39,117)
Total Non-Operating Items (163,009) (281,594) (499,992) (889,134)
INCOME BEFORE INCOME TAXES 505,419 1,466,872 1,032,255 3,222,134
PROVISION FOR INCOME TAXES - (285,074) - (285,074)
Net income 505,419 1,181,798 1,032,255 2,937,060
5% CUMULATIVE PREFERRED STOCK DIVIDENDS - - (22,863) -
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 505,419 $ 1,181,798 $ 1,009,392 $ 2,937,060
NET INCOME PER COMMON SHARE $ .24 $ .25 $ .58 $ .90
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,076,150 4,789,837 1,728,449 3,171,666
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.<PAGE>
<TABLE>
MIDCOAST ENERGY RESOURCES INC., and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
5%
Cumulative Total
Preferred Common Paid-in Accumulated Unearned Shareholders'
Stock Stock Capital Deficit Compensation Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 $200,000 $14,657 $18,824,681 $(14,775,102) $(106,800) $ 4,157,436
Shares issued in connection with
a financing agreement with an affiliate - 45 5,955 - - 6,000
Shares issued or vested under various
stock-based compensation arrangements - 298 38,401 - 17,100 55,799
Redemption of 200,000 shares of 5%
cumulative preferred stock (200,000) - 81,634 - - (118,366)
Sale of 1,000,000 shares of common
stock - 10,000 7,990,989 - - 8,000,989
Net income - - - 1,914,089 - 1,914,089
5% cumulative preferred stock dividends - - - (22,863) - (22,863)
Common stock dividends, $.08 per share - - - (400,000) - (400,000)
BALANCE, DECEMBER 31, 1996 - 25,000 26,941,660 (13,283,876) (89,700) 13,593,084
Sale of 2,315,000 shares of common
stock (Note 4) - 23,150 34,036,876 - - 34,060,026
Shares vested under various stock-based
compensation arrangements - - - - 58,500 58,500
Net income - - - 2,937,060 - 2,937,060
Common stock dividends, $.08 per share - - - (785,200) - (785,200)
BALANCE, SEPTEMBER 30, 1997 (Unaudited) $ - $48,150 $60,978,536 $(11,132,016) $ (31,200) $49,863,470
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income applicable to common shareholders $ 505,419 $ 1,181,798 $ 1,009,392 $ 2,937,060
Adjustments to arrive at net cash provided (used) in
operating activities-
Depreciation, depletion and amortization 227,397 413,726 539,389 982,504
Gain on sale of operating pipeline - - (20,347) -
Recognition of deferred income (20,750) (20,750) (62,250) (62,250)
Increase in deferred tax asset (40,000) 24,000 (40,000) 32,500
Minority interest in consolidated subsidiaries 76,772 55,025 148,384 169,639
Issuance of common stock to employees - - 38,886 17,875
Other - (1,341) - 183,382
Changes in working capital accounts-
(Increase) in accounts receivable (1,264,799) (1,797,383) (1,578,325) (3,062,100)
(Increase) in other current assets - (162,922) - (715,342)
Increase (decrease) in accounts payable and
accrued liabilities (122,165) 1,471,786 867,697 1,960,326
Net cash provided (used) by operating activities (638,126) 1,163,939 902,826 2,443,594
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,594,621) 695,999 (3,464,873) (38,678,525)
Other (370,800) 11,339 (63,052) (1,111,816)
Net cash provided (used) by investing activities (1,965,421) 707,338 (4,127,925) (39,790,341)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank debt borrowings 1,250,000 1,567,000 5,258,000 41,242,000
Bank debt repayments (5,458,698) (37,159,420) (7,993,353) (38,064,250)
Proceeds from notes payable to shareholders
and affiliates - - 100,000 -
Repayments on notes payable to shareholders and
affiliates (473,822) - (1,133,822) -
Contributions from (distributions to) joint
venture partners 650,000 - 935,000 (228,400)
Net proceeds from equity offering (Note 4) 8,203,275 34,060,026 8,203,275 34,060,026
Dividends on common stock (200,000) (385,200) (200,000) (785,200)
Net cash provided (used) by financing activities 3,970,755 (1,917,594) 5,169,100 36,224,176
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,367,208 (46,317) 1,944,001 (1,122,571)
CASH AND CASH EQUIVALENTS, beginning of period 682,945 91,571 106,152 1,167,825
CASH AND CASH EQUIVALENTS, end of period $ 2,050,153 $ 42,254 $ 2,050,153 $ 45,254
CASH PAID FOR INTEREST $ 87,963 $ 198,285 $ 346,553 $ 408,578
CASH PAID FOR INCOME TAXES $ - $ 89,190 $ - $ 142,030
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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-Q. The unaudited 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. Certain reclassification entries were
made with regard to the Consolidated Financial Statements for the periods
presented in 1996 so that the presentation of the information is consistent
with reporting for the Consolidated Financial Statements in 1997. 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, 1996.
2. ACQUISITIONS
In May 1997, the Company consummated the acquisition of the stock of three
subsidiaries of Atrion Corporation ( the "Atrion Acquisition") for cash
consideration of approximately $39.4 million subject to post closing
adjustments and up to $2 million of deferred contingent payments to be paid
over an eight-year period. In September 1997, approximately $1.2 million was
reimbursed to the Company pursuant to post closing adjustments. The three
subsidiaries acquired include Midcoast Interstate Transmission, Inc.
("MIT")(f/k/a Alabama Tennessee Natural Gas Company), Tennessee River
Intrastate Gas Company, Inc. ("TRIGAS") and Midcoast Marketing, Inc.
("MMI")(f/k/a AlaTenn Energy Marketing Company, Inc.) (collectively the
"Atrion Subsidiaries").MIT owns and operates a 288 mile interstate pipeline,
with two compressor stations, that runs from Selmer,Tennessee to Huntsville,
Alabama. TRIGAS owns and operates a 38 mile pipeline extending from Barton,
Alabama to Courtland, Alabama and a one mile pipeline in Morgan County,
Alabama, which transport gas to two industrial customers. MMI is a natural
gas marketing company which primarily services the natural gas needs of the
customers on MIT and TRIGAS. The acquisition was initially financed through
the Company's credit facility, and subsequently repaid with the proceeds of
its common stock offering on July 2, 1997 (see Note 4).
The following table presents selected financial data on a pro forma basis
assuming (i) the purchase of the Harmony gas processing plant and gathering
system ("Harmony System") (ii) the acquisition of the Atrion Subsidiaries, and
(iii) the issuance and sale of 2,315,000 shares of the Company's common stock
at $16.00 per share as if these events had occurred as of the beginning of the
period presented. The pro forma data reflect estimated asset, liability,
revenue and expense values of the Harmony System and the Atrion Subsidiaries
and other assumptions which are based on estimates and subject to revision.
The pro forma combined results presented are not necessarily indicative of
actual results that would have been achieved had the acquisitions occurred at
the beginning of the periods presented, or of future results.
Three Months EndedNine Months Ended
September 30, September 30,
1996 1997 1996 1997
Operating Revenues (000) $27,891 $ N/A $104,525 $93,031
Net Income (000) $ 1,542 $ N/A $ 5,361 $ 4,553
Net Income Per Share $ .35 $ N/A $ 1.33 $ .95
For further information regarding the acquisition of the Harmony System or the
Atrion Subsidiaries, refer to the Company's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on June 26, 1997.
3. BANK DEBT
In May 1997, the Company's borrowing availability under its bank financing
agreements with Bank One, Texas N.A.(the "Credit Agreements") was increased
to $46.5 million in anticipation of acquiring the Atrion Subsidiaries. On
October 31, 1997, additional amendments to the Credit Agreements were entered
into which increased the Company's borrowing availability from $46.5 million
to $80.0 million. The amendments also eliminated principal reduction
requirements, lowered the interest rate on borrowings, and extended the
maturity on the facility one year to August 22, 2000.
Bank One has committed to lending, in the aggregate, up to $60.0 million of
the $80.0 million in borrowing availability. If required, the additional
$20.0 million may be accessed with the inclusion of an another bank lender in
a bank syndication. The increase was attributable to both a re-evaluation of
the cash flows generated from the Atrion and other Midcoast assets and, the
completion of the Company's acquisition of Republic Gas Partners L.L.C. (the
"MIDLA Acquisition")(see Note 7). The Company borrowed $21.8 million under
its amended Credit Agreements to partially finance the MIDLA Acquisition. The
amended Credit Agreements provide borrowing availability as follows: (i) a
$15.0 million LC Line of Credit Facility, of which $3.0 million can be used
for working capital needs and $12.0 million is available for issuance
of letters of credit, (ii) a $60.0 million Revolver which expires in August
2000 and (iii) a $5.0 million MIT Revolver expiring August 2000.
When borrowings under the amended Credit Agreements are less than 50% of the
$80.0 million borrowing base, at the Company's option, interest will accrue
at the London Interbank Offering Rate ("LIBOR") plus 1.5% per annum or the
Bank One base rate. When borrowings are greater than 50% of available credit,
an additional .25% will be added to the above rates. These rates reflect a 1%
reduction in the LIBOR option and a .25% reduction in the Bank One base rate
option, which became effective September 2, 1997. All other terms and
conditions of the Credit Agreements remained substantially the same.
4. CAPITAL STOCK
On June 27, 1997, the Company's Regristration Statement on Form S-1 was
declared effective by the Securities and Exchange Commission. On July 2,
1997, after considering the underwriters exercising the over-allotment option,
the Company sold 2,315,000 shares of its common stock at an offering price
of $16.00 per share. After deducting the underwriting discounts of $1.04 per
share, net proceeds to the Company were $34,632,400. The proceeds were used
to repay the indebtedness incurred on the Atrion Acquisition.
5. COMMITMENTS AND CONTINGENCIES
In January 1997, the Compensation Committee approved an amendment to the
Employment Agreement of Dan C. Tutcher, the Chief Executive Officer and
President of the Company extending the term to December 2001 and pursuant to
which he receives a base annual salary of $95,000 in 1997, $125,000 in 1998
and 1999 and $150,000 in 2000 and 2001. He may further participate in any
such executive level bonuses or salary increases as the Compensation Committee
may approve, is entitled to reimbursement for reasonable automobile expenses
not to exceed $500 each month and is eligible for participation in the
Company's group insurance plans. Mr. Tutcher is required to devote his full
business time and attention to the Company.
In September 1996, an involuntary petition for relief under Chapter 11 of the
United States Bankruptcy Code was filed against Stewart Petroleum Company
("Stewart") in the United States Bankruptcy Court for the District of Alaska
(the "Court") by certain working interest owners in the West McArthur River
Unit ("WMRU"), which was operated by Stewart. The Company receives a
throughput fee for all oil and natural gas transported through the WMRU
pipeline; however, payment of the Company's throughput fee was suspended by
the Court, and only those claims deemed to be necessary to avoid immediate and
irreparable harm to the Stewart estate were paid. Stewart consented to an
order for relief in January 1997 and subsequently filed a Disclosure
Statement and Plan of Reorganization, as amended (the "Stewart Plan"). In May
1997, the Court approved the sale to a third party of substantially all
Stewart's assets, including the WMRU. The sale, which was completed in June
1997, was effective January 1, 1997. Subsequent to the sale, the Company
negotiated an assumption agreement with the purchaser for the Company's
throughput interest, wherein the purchaser paid the Company for all accrued
but unpaid throughput fees subsequent to the effective date and agreed to pay
the Company for all future throughput fees as they become due. An order
approving the Stewart Plan was granted by the Court on August 4, 1997 and
pursuant to the Stewart Plan, the Company was paid in full for all throughput
fees which were accrued prior to January 1, 1997.
6. STOCK OPTION PLANS
In February 1997, the Company's Compensation Committee approved the granting
of 160,000 incentive stock options to certain key employees. The options were
issued at an exercise price equal to the fair market value on the date of
grant which was $10.50. The options vest in equal amounts over a five-year
period and expire in ten years from the date of grant. However, those options
issued to employees who own 10% or more of the Company's common stock were
valued at 110% of fair market value on the date of grant ($11.55), vest in
equal amounts over a four and one-half year period, and expire five years from
the date of grant.
In April 1997, the Board approved the adoption of the 1997 Non-Employee
Director Stock Option Plan (the "Director Plan"), which was subsequently
approved by the Company's shareholders in May 1997. The Director Plan
provides for the grant to non-employee: (i) Existing Directors (as defined)
on the Effective Date (as defined) a non-qualified stock option ("NQO") to
purchase 5,000 shares of common stock and (ii) New Directors (as defined) on
their initial election a NQO to purchase 15,000 shares of common stock, both
at an exercise price equal to the fair market value of the common stock on the
date of grant. The Director Plan also entitles each non-employee director to
receive a NQO to purchase 5,000 shares of common stock on each date he is
reelected to the Board.
The Compensation Committee has no discretion as to the selection of the non-
employee directors to whom NQOs are to be granted or Cash Fee Awards (as
defined) paid, the number of shares subject to any NQO granted, the exercise
price to any NQO granted or the ten-year maximum term of any NQO granted
thereunder. The Compensation Committee has the authority to interpret and
construe any provision of the Director Plan and to adopt such rules and
regulations for administering the Director Plan as it deems necessary. All
decisions and determinations of the Compensation Committee are final and
binding on all parties. The Company has agreed to indemnify each member of
the Compensation Committee against any cost, expense or liability arising out
of any action, omission or determination relating to the Director Plan, unless
such action, omission or determination was taken or made in bad faith and
without reasonable belief that it was in the best interest of the Company.
The Director Plan provides for the adjustment of the number of shares or
exercise price of any option awarded thereunder, in conjunction with any stock
dividend, any subdivision or combination of the outstanding shares of common
stock and any merger, consolidation, recapitalization of the Company or other
similar event which affects the issued and outstanding shares of common stock.
Pursuant to the Director Plan, 5,000 NQOs were granted to the only Existing
Director in May 1997. The NQOs were issued at an exercise price equal to the
fair market value on the date of grant which was $15.125, and which expires
ten years from the date of grant.
7. SUBSEQUENT EVENTS
On October 31, 1997, the Company completed its acquisition through merger of
Republic Gas Partners , L.L.C. ("Republic"), which owned Mid Louisiana Gas
Company ("MIDLA"), Mid Louisiana Gas Transportation Company ("MLTC") and Mid
Louisiana Marketing Company ("MLMC"). Under the terms of the agreement, the
Republic partners received $3,210,000 cash, 350,000 shares of Midcoast common
stock, warrants for 100,000 common shares and an additional 25,000 warrants
to be issued subject to certain contingencies. The Company has also repaid
approximately $19.1 million in Republic bank debt. The acquisition was
partially funded with $21.8 million of additional borrowings under the
Company's Credit Agreements with Bank One (see Note 3).
MIDLA owns a 386 mile 22" interstate pas pipeline which runs from the Monroe
gas field in northern Louisiana, southward through Mississippi to Baton Rouge,
Louisiana. The system includes two compressor stations with a total of 5,875
horsepower, and has a throughput capacity of 200 Mmcf/day. MIDLA serves a
number of large industrial markets and municipalities including Entergy Gulf
States, Inc., the local distribution company for Baton Rouge; Mississippi
Valley Gas Company, the local distribution company for Natchez, Mississippi
and several surrounding communities; International Paper's facility near
Natchez and Exxon's Baton Rouge Complex. In addition, MIDLA has an agreement
to expand its natural gas service in the Baton Rouge area to serve a new
cogeneration facility. The agreement calls for MIDLA to transport a minimum
of 50,000 Mcf/Day and will require an approximate $10.0 million expansion for
a high pressure pipeline. The pipeline is expected to be completed no later
than the fourth quarter of 1998. MIDLA also owns four offshore gathering
systems. MLTC is an intrastate pipeline company which owns two offshore
pipelines which serve two industrial customers. MLMC is a natural gas
marketing company which provides gas supply, transportation, storage and
related services primarily for customers on the MIDLA and MLTC systems.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Third quarter operating revenues increased 327%, from $5.7 million in 1996 to
$24.5 million in 1997. The increased revenues were primarily the result of
numerous pipeline acquisitions made during the second half of 1996, the
purchase of the Harmony System effective August 1, 1996 and the Atrion
Acquisition effective May 29, 1997. The Atrion Acquisition produced $19.6
million in operating revenue during the third quarter of 1997. The Harmony
System generated $1.2 million in operating revenue during the third quarter.
Operating revenues for the nine months ended September 30, 1997 totaled $50.1
million, a 195% increase over the $17.0 million in operating revenue generated
for the nine months ended September 30, 1996. As previously stated, the
acquisitions made in the second half of 1996 and the Atrion Acquisition were
the primary causes of the increased revenues.
Operating Expenses:
Third quarter operating expenses increased 348%, from $5.1 million in 1996 to
$22.8 million in 1997. Operating expenses for the nine months ended September
30, 1997 totaled $46.0 million, as compared to $15.5 million for the same
period in 1996. The acquisitions explained in the previous section caused
this 198% increase.
Depreciation, depletion and amortization expense was approximately $983,000
for the nine months ended September 30, 1997 with $413,000 of the expense
incurred during the third quarter. These amounts represent an 82% increase
when compared to the same periods in 1996. The pipeline acquisitions and the
purchase of the Harmony System in 1996 caused the increased depreciation.
General and administrative expenses were approximately $522,000 for the third
quarter and $1.5 million for the nine months ended September 30, 1997, as
compared to $301,000 and $821,000 for the same periods in 1996, respectively.
The chief cause of the increased expenses was the Atrion Acquisition. Despite
the Company's rapid growth in revenues, the Company's general and
administrative expenses increased only 73% in 1997 over 1996 for the third
quarter and 80% for the nine months ended September 30. The Company has
controlled its general and administrative expenses by capitalizing on
synergies between its existing businesses and its acquisitions.
Third quarter interest expense increased 94% from approximately $95,000 in
1996 to $184,000 in 1997. Interest expense increased 105% from approximately
$333,000 for the nine months ended September 30, 1996 to $680,000 for the same
period in 1997. The additional debt the Company incurred to complete the
Atrion Acquisition resulted in the increased interest expense.
Earnings:
The Company recognized third quarter operating income and net income in 1997
of $1.8 million and $1.2 million, respectively, as compared to $0.7 million
in operating income and $0.5 million in net income for the third quarter of
1996. Third quarter earnings per share ("EPS") increased 4.2% from $0.24 in
1996 to $0.25 in 1997. The Company achieved the increased EPS despite the
dilutive effects of issuing additional shares in the August 1996 and July 1997
stock offerings.
The Company recognized operating income and net income of $4.1 million and
$2.9 million, respectively, for the nine months ended September 30, 1997 as
compared to operating income of $1.5 million and net income of $1.0 million
for the same period in 1996. The Company realized a $0.90 EPS for the first
nine months of 1997 as compared to $0.58 for the same period in 1996. The
significant improvement in EPS is attributable to the positive impact of
numerous pipeline acquisitions in the second half of 1996, the Harmony System
acquisition, and the Atrion Acquisition.
Capital Resources and Liquidity
The Company has historically funded its capital requirements through cash flow
from operations and borrowings from affiliates and various commercial lenders.
As a result of improved operations, cash flow provided by operations
increased $1.5 million for the nine month period ended September 30, 1997 when
compared to the same period in 1996. In addition, the Company's working
capital increased $.8 million at September 30, 1997 when compared to its
position at December 31, 1996.
The Company's combined stock offerings in August 1996 and July 1997 have
increased the Company's financial flexibility. This increased flexibility
will allow the Company to pursue future growth opportunities utilizing lower
cost conventional bank debt financing. At September 30, 1997, the Company's
long-term debt to total capitalization ratio was reduced to 13% from 72% at
June 30, 1997. This decline was achieved by reducing bank indebtedness with
the net proceeds from the July 1997 equity offering.
Based on a re-evaluation of the cash flows generated from the Atrion
Acquisition and other Midcoast assets, and the completion of the Company's
MIDLA Acquisition, the Company has increased its borrowing availability under
its bank financing agreements with Bank One. On October 31, 1997,
amendments to the Credit Agreements were entered into which increased the
Company's borrowing availability from $46.5 million to $80.0 million,
eliminated principal reduction requirements, lowered the interest rate on
borrowings, and extended the maturity of the facility one year to August 22,
2000.
Bank One has committed to lending, in the aggregate, up to $60.0 million of
the $80.0 million in borrowing availability, . If required, the additional
$20.0 million may be accessed with the inclusion of an another bank lender in
a bank syndication. The amended Credit Agreements provide borrowing
availability as follows: (i) a $15.0 million LC Line of Credit Facility, of
which $3.0 million can be used for working capital needs and $12.0 million is
available for issuance of letters of credit, (ii) a $60.0 million Revolver
which expires in August 2000 and (iii) a $5.0 million MIT Revolver expiring
August 2000.
When borrowings under the amended Credit Agreements are less than 50% of the
$80.0 million borrowing base, at the Company's option, interest will accrue
at LIBOR plus 1.5% or the Bank One base rate. When borrowings are greater
than 50% of available credit, an additional .25% will be added to the above
rates. These rates reflect a 1% reduction in the LIBOR option and a .25%
reduction in the Bank One base rate option. These reduced rates became
effective September 2, 1997. In addition, the Company is subject to a non-
recurring 1% facility fee as funds are borrowed, as well as a .375% commitment
fee payable quarterly on the unused portion of borrowing availability. The
Credit Agreement is secured by all accounts receivable, contracts, the pledge
of the stock of MIT, the pledge of the stock of Magnolia Pipeline Corporation
and a first lien security interest in the Company's pipeline systems.
The borrowing availability under each line is subject to revision, on a
monthly basis for the LC Line of Credit Facility and a semi-annual basis for
the Revolver's, based on the performance of the Company's existing assets and
any asset dispositions or additions from new construction or acquisitions.
The Credit Agreements contains a number of customary covenants that require
the Company to maintain certain financial ratios, and limit the Company's
ability to incur additional indebtedness, transfer or sell assets, create
liens, or enter into a merger or consolidation.
As of December 31, 1996, the Company had net operating loss ("NOL")
carryforwards of approximately $11.0 million expiring in various amounts from
1999 through 2008. These NOLs were generated by the Company's predecessor.
The ability of the Company to utilize the carryforwards is dependent upon the
Company generating sufficient taxable income and will be affected by annual
limitations on the use of such carryforwards due to a change in stockholder
control under the Internal Revenue Code triggered by the Company's July 1997
common stock offering. The Company believes, however, that the limitation
will not materially impact the Company's ability to utilize the NOL
carryforwards prior to their expiration.
Excluding the cost of the Atrion and MIDLA acquisitions, the Company expects
to have $1.3 million of capital expenditures in 1997. The Company believes
that funds provided by operations will be sufficient forit to meet its
expected capital expenditures and operating cash needs for the foreseeable
future.
This report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act of 1934. All statements other than statements of historical fact
included in this report are forward looking statements. Such forward looking
statements include, without limitation, statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources and Liquidity" regarding Midcoast's estimate of the
sufficiency of existing capital resources, whether funds provided by
operations will be sufficient to meet its operational needs in the foreseeable
future, and its ability to utilize NOL carryforwards prior to their
expiration. Although Midcoast believes that the expectations reflected in such
forward looking statements are reasonable, it can give no assurance that such
expectations reflected in such forward looking statements will prove to be
correct. The ability to achieve Midcoast's expectations is contingent upon
a number of factors which include (i) timely approval of Midcoast's
acquisition candidates by appropriate governmental and regulatory agencies,
(ii) the effect of any current or future competition, (iii) retention of key
personnel and (iv) obtaining and timing of sufficient financing to fund
operations and/or construction or acquisition opportunities. Important
factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are disclosed in this report,
including without limitation those statements made in conjunction with the
forward looking statements included in this report. All subsequent written
and oral forward looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
2.1 Stock Purchase Agreement dated March 18, 1997 by and between
Midcoast Energy Resources, Inc. and Atrion Corporation
(Incorporated by reference from Midcoast Form 10-KSB for the
fiscal year ended December 31, 1996, as Exhibit 2.7).
2.2 Agreement and plan of merger dated October 31, 1997 by and
between Republic Gas Partners, L.L.C. and Midcoast Energy
Resources, Inc. (Incorporated by reference from Midcoast Form
8-K dated November 13, 1997).
10.1 Amendment to Employment Agreement dated April 17, 1995 by and
between Midcoast Energy Resources, Inc. and I.J. Berthelot, II
dated April 25, 1997. (Incorporated by reference from Midcoast
Form 10-QSB for the three months ended March 31, 1997)
10.2 Amendment to Employment Agreement dated April 1, 1993 by and
between Midcoast Energy Resources, Inc. and Dan C. Tutcher dated
April 14, 1997. (Incorporated by reference from Midcoast Form
10-QSB for the three months ended March 31, 1997)
10.3 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and Richard A. Robert. (Incorporated by
reference from Midcoast Registration Statement on Form S-1 (No.
333-27885) dated June 26, 1997)
10.4 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and Dan C. Tutcher. (Incorporated by reference
from Midcoast Registration Statement on Form S-1 (No. 333-27885)
dated June 26, 1997)
10.5 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and I.J. Berthelot, II. (Incorporated by
reference from Midcoast Registration Statement on Form S-1 (No.
333-27885) dated June 26, 1997)
10.6 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and Duane S. Herbst. (Incorporated by
reference from Midcoast Registration Statement on Form S-1 (No.
333-27885) dated June 26, 1997)
10.7 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and Richard N. Richards. (Incorporated by
reference from Midcoast Registration Statement on Form S-1 (No.
333-27885) dated June 26, 1997)
10.8 Indemnity Agreement dated April 3, 1997 between Midcoast Energy
Resources, Inc. and E.P. Marinos (Incorporated by reference
from Midcoast Registration Statement on Form S-1 (No. 333-27885)
dated June 26, 1997)
10.9 1997 Non-Employee Director Stock Option Plan. (Incorporated by
reference from Midcoast Form 10-QSB for the three months ended
March 31, 1997)
10.10 First Amendment to Credit Agreement dated May 30, 1997 by and
between Bank One, Texas N.A. and Midcoast Energy Resources, Inc.,
Magnolia Pipeline Corporation, H&W Pipeline Corporation,
Magnolia Resources, Inc., Magnolia Gathering Inc., Midcoast
Holdings No. One, Inc., Midcoast Gas Pipeline, Inc., Nugget
Drilling Corporation, Midcoast Marketing, Inc., AlaTenn Energy
Marketing Company, and Tennessee River Intrastate Gas Co.
(Incorporated by reference from Midcoast Registration Statement
on Form S-1 (No. 333-27885) dated June 26, 1997)
10.11 Second Amendment to Credit Agreement dated October 31, 1997 by
and between Bank One, Texas N.A. and Midcoast Energy Resources,
Inc. , Magnolia Pipeline Corporation, H&W Pipeline Corporation,
Magnolia Resources, Inc., Magnolia Gathering Inc., Midcoast
Holdings No. One, Inc., Midcoast Gas Pipeline, Inc., Nugget
Drilling Corporation, Midcoast Marketing, Inc., AlaTenn Energy
Marketing Company, Tennessee river Intrastate Gas Co., Mid
Louisiana Gas Company, Mid Louisiana Gas Transmission Company
and MIDLA Energy Services Company. (Incorporated by reference
from Midcoast Form 8-K dated November 13, 1997).
10.12 First Amendment to Credit Agreement dated Octoner 31, 1997 by
and between Bank One, Texas N.A. and Midcoast Interstate
Transmission, Inc. (f/k/a/ Alabama Tennessee Natural Gas
Company). (Incorporated by reference from Midcoast Form 8-K
dated November 13, 1997).
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
Principal Financial Officer
Treasurer
Principal Accounting Officer
Date: November 14, 1997
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